dick the bank boy or a missing fortune by frank v. webster author of "only a farm boy," "bob the castaway," "comrades of the saddle," "airship andy," etc. illustrated new york cupples & leon company publishers books for boys * * * * * by frank v. webster * * * * * mo. cloth. illustrated. * * * * * only a farm boy tom, the telephone boy the boy from the ranch the young treasure hunter bob, the castaway the young firemen of lakeville the newsboy partners the boy pilot of the lakes two boy gold miners jack, the runaway comrades of the saddle the boys of bellwood school the high school rivals airship andy bob chester's grit ben hardy's flying machine dick, the bank boy darry, the life saver copyright, , by cupples & leon company * * * * * dick, the bank boy [illustration: turning to dick he continued to question him. _dick the bank boy_ _page _] contents chapter page i. the meeting on the road ii. a mother worth fighting for iii. dick's first wages iv. in search of a job v. mr. graylock receives a surprise vi. bound for the old fishing hole vii. dick makes a gallant rescue viii. the coming of a letter ix. great news x. the meeting in the bank xi. friendly advise xii. gathering clouds xiii. wanted in the cashier's office xiv. under suspicion xv. mr. graylock seems disappointed xvi. fortune's favors xvii. the investigation xviii. the receiving teller frees his mind xix. not for sale xx. a red letter day xxi. good words on every side xxii. a remarkable bit of intelligence xxiii. nearing a climax xxiv. mr. graylock meets his waterloo xxv. conclusion dick, the bank boy chapter i the meeting on the road "get out of my way, dick morrison!" the boy who had been trudging along the narrow road looked up in surprise at hearing himself spoken to so suddenly, though he recognized the domineering voice even before catching sight of the speaker. "you already have half of the road, ferd graylock; to give you more i'd have to back down in the ditch, and i don't care to do that," he replied, standing perfectly still and watching with some amusement the zigzag movements of the other, now close upon him. ferd was mounted on a new motor-cycle, purchased with savings out of his pocket money, and with which machine he had been of late scouring the surrounding country. evidently the little motor had broken down while he was some distance away from home, necessitating considerable walking up hill and hard pedalling on the levels. weary, and over-heated by his exertions, he was naturally in an ugly temper at the time he met dick on the narrowest place along the entire road, where a ditch on one side and a fence on the other, left only enough room for a single vehicle at a time to pass. just then, judging from his erratic swinging from side to side, ferd needed the whole road, and seeing this, the other lad stood by, ready to guard himself if the cumbersome machine headed his way. his suspicions as to the intentions of ferd to run him down seemed well founded, for, pretending to be unable to control the heavy machine, the rider came lunging directly at the standing boy, who would have been struck only for a quick leap to one side, by means of which he avoided a collision. but alas! the edge of the road was closer than ferd had calculated on when maliciously endeavoring to give the pedestrian a scare, and as a consequence the motor-cycle plunged down into the ditch. ferd managed through a quick effort to leap off his seat just in time to avoid being overwhelmed in the disaster. he scrambled to his feet choking with both dust and anger. his beautiful machine lay with its front buried in the water of the ditch, and the sight was so disagreeable that ferd seemed to lose what little discretion he generally boasted. "there, see what you've done, dick morrison!" he exclaimed, fiercely. "well, now, i like that," answered the other, hardly knowing whether to laugh or show indignation; "you try to run me down, and when i step out of the way to avoid an upset you accuse me of having had a hand in the mess. why did you jump off when by a twist of the handlebars you could have saved the machine? suppose you blame yourself, not me." "but you saw that i had lost control, and if you'd only wanted you could have stopped its plunge; but you'd rather see me get into a peck of trouble. how d'ye suppose i'm ever going to lug that heavy thing back up to the road now?" demanded ferd, spitefully. "oh! i don't mind giving you a hand at that. i hate to see such a fine machine lying in the mud like a mired cow," declared dick, cheerfully. ferd looked at him dubiously, as though his spirit urged him to decline the generous offer of assistance made by one he chose to regard as his enemy; but the road was lonely, no one might come along for some time to help him, and the motor-cycle was too heavy for him to drag out of the hole unassisted. so he swallowed his pride, and grudgingly allowed dick to take hold on one side while he dragged at the other, and in this fashion the machine was speedily placed once more on dry land. of course it was pretty well soiled, and did not look very much like the spick-and-span new wheel that a few days back had been the envy of every boy in riverview. dick, who could not bear to see anything abused, immediately snatched up a handful of grass from the side of the road under the fence, and commenced to wipe the worst of the muck away. "never mind bothering yourself about that; i guess i can attend to it when i get home. it wouldn't have happened anyway if i hadn't met you on the road," said ferd, with a return of his bitterness. dick looked at him queerly, and then threw down the rough wiper he had been using. "i guess you're right. and as i didn't do anything to trouble you it looks as if you just wanted to knock me into the ditch. it's a case of the biter bitten, ferd. when you see me helping you pull your old machine out of the ditch again you'll know it." filled with indignation he turned and walked rapidly away, leaving the other looking after him, still angry and yet perhaps somewhat ashamed in the bargain. this was not the first time these two lads found themselves facing one another with fire in their eyes. in school they seemed to be constantly ranged on opposite sides, and the rivalry had extended into many of the natural pastimes indulged in by growing boys, from baseball in the summer to football in the autumn and skating and hockey in the winter. the rivalry seemed unequal from one point of view, since ferd was the only son of archibald graylock, proprietor of the big department store in the town, and known as a wealthy man; while dick lived in an humble cottage with his mother, a widow, and their circumstances had been growing more and more straightened during the last year, so that our hero was seriously contemplating giving up all hope of attending school again in the fall, and seeking a position. dick's father had been a carpenter known for his many good qualities; he had by frugality and prudence saved a sum which had been invested as he thought judiciously, and would serve as a means of support to his little family in case anything happened to him. seriously injured in an accident he had lingered for nearly a year and then been taken, leaving the mother and son to face the world. for several years things went along smoothly, for mrs. morrison was an excellent housekeeper, and could make a dollar go a great ways without appearing to be niggardly; but unexpected misfortune overtook them, and the company in which most of the carpenter's savings had been invested struck a reef, so that not only did the little income cease from this source but there was danger that the principal might also be lost. this was the serious condition of affairs in dick's home at the time he met his bitter rival on the road; he had been buried in thought, trying to see what his duty might be, and as he continued on after leaving ferd he endeavored to forget the unpleasant incident, and resume his planning. chances for work were not very abundant in and around riverview. dick knew little about farming, and besides, even though he should secure a job in that line he was aware that most farmers insisted upon their help being on the ground all the time, as they had to get out long before daylight to feed the stock, and since he could not leave his mother alone he had to pass any such opportunity by. there was the bank of which mr. gibbs was president; he had always yearned to do something along that line; but having no experience he had never dared apply for a position there, though envying charles doty, who ran messages and made himself generally useful in the bank, "learning the ropes, so that in time he could step into mr. gibbs' shoes," as he used often to say with pride. for a lad with business ambitions there remained only the two grocery stores, and the grand emporium conducted by mr. graylock, an institution he chose to call a department store, and which covered quite a large space of ground. strange to say dick had just been making up his mind to call on this latter enterprising merchant and solicit an opening, at the time he met the hopeful son on the road, and had another disagreeable experience with ferd; indeed, it seemed as though they could never come together without some trouble arising, though dick had resolved time and again that he would not be the first to pick a quarrel. now he reflected that it was almost useless approaching mr. graylock, for he felt sure that the gentleman must have heard about the time when he and ferd engaged in a rough and tumble fight on the baseball field, after the other had deliberately struck him, and called him a coward because he was so slow to take off his coat and engage in a combat that proved to be rather gory for ferd--yes, he _knew_ this must be the case, for his mother had looked serious for some little time, and he heard that the rich man was seen leaving their humble cottage one afternoon while he was away. so he felt undecided as to what he should attempt, and all the way home he pondered over the situation, determined to do something to chase away the look of concern which every now and then he saw gathering on his mother's gentle face, when she did not dream that he was observing her. "she doesn't want me to know how hard things are growing," he mused. "she thinks of me all the time, and is the dearest little mother in the world. i'd give up anything for her, and i'm going to find a position somewhere, somehow. that's settled. there's got to be more money coming in through the door of the morrisons, and it's up to richard to set the stream in motion." his resolution was all very well, but it was not so easy to decide where this fountain could be tapped that was to pour its tiny golden stream into their almost empty reservoir. again and again he shook his head resolutely as he trudged along, and the expression on his face was that of one who has made up his mind and will not allow himself to be turned aside by any obstacle; it was the look of a _winner_, and when his mates saw dick morrison set his teeth in that determined way they knew he was bound to lead his side to victory, no matter what the opposition. dick presently drew near the little cottage in which he and his mother had lived ever since he could remember, and which, with its flower garden, was as pretty a spot as one could find along the river road just outside the town. thinking only of showing a cheery face to the one who had ever been his best friend and counsellor on earth he tried to forget his worries, and starting to whistle merrily opened the gate and passed up the walk. chapter ii a mother worth fighting for perhaps had dick been less noisy as he came up the walk he might have caught his mother in tears; for he felt sure he detected the signs of recent weeping upon her thin face as he entered and threw the package he was carrying on the table. "i'm glad you found mrs. oliver at home," said mrs. morrison, "and she had the work ready. i can start on it to-night, and perhaps finish the whole thing this week," and she opened the package, and examined the goods that had been in the wrapper. "you're working too hard as it is, mother," said dick, putting an arm around her and looking up into her face, "and i've determined that this sort of thing just can't go on any longer." "what do you mean, my son?" she asked. "you know that since i am a good needle-woman and the times are so hard with us just at present, i am fortunate to be able to get work from several of the ladies around riverview. perhaps it will not have to be for long, dick, dear." "i know it won't if i have any say in the matter. you're sitting up every night sewing long after i've gone to bed. why, one night, you remember i woke up and it was after twelve, yet you were still sewing. you are getting thin and careworn, mother. do you think i don't notice it? and do you imagine i can stand it right along? there has got to be a change, that's all. i've made my mind up." she looked into his resolute face, and seeing the love that shone in his eyes felt that after all her burdens could not be so hard when heaven had given her such a stalwart son to be the staff of her old age. "and what have you decided, dick? will you get after that company and force them to begin paying dividends again? i think that would be a blessing to more widows than one; but i'm afraid it would prove a task beyond your strength, dear," she said, patting him on the head as he stood beside her, almost three inches taller than his mother. "no, i don't think i could manage that, but there is one thing i can and will do and that is to find a job, so that i can be bringing in something every week to help out. then you needn't sit up at night as you do. please don't say anything against it, mother. i've made up my mind to it. the vacation has begun, and unless things take a turn for the better, school and dick morrison have parted company for good. i'm only sorry i don't seem to have inherited any of father's genius for tools, or i could get a position as an assistant to mr. plane, the carpenter. but i've been considering the situation, and i'm going to find some way to bring in a few dollars each week, even if i have to set out to be a fisherman." she smiled with pride, and in that moment the fond mother did not envy the wife of the rich department store keeper who rode about in her carriage and delighted to let other people realize just how small and mean they appeared in her sight. "well, it is nice to hear you say all that, richard, for it tells me that your heart is true, and that no matter what befalls i can depend on my boy's love. but there's no use crossing a river before we come to it. i shall offer no opposition to you doing any honest work that comes your way during vacation; and if times have not improved when school opens again, i suppose i must endure the thought of your continuing on. you have always been a lucky fisherman, and what you bring home has been so sweet and palatable that it seems to me you could easily find purchasers for all you could catch," she said, leaving him, to begin to look after the supper that was cooking on the stove. "only if everything else fails can i try that," he explained. "you see one can't depend on the fish to do their part of the contract. some days they refuse to bite at all, and then other days are stormy. but i've got several ideas that i'm bound to try out, and i'm going to start to-morrow." that was all he said, for dick never liked to boast in advance of what he expected to accomplish, having learned from sad experience that very often a snag is apt to sink the craft freighted with hopes, and when least expected. he busied himself setting the table, while his mother lighted the lamp and prepared to serve their frugal meal. it was a time of year when very little came in from the small garden that lay back of the house, and which they took care of in common, dick doing all the hard work and his mother some of the weeding; later on they expected that the proceeds from this patch would provide many a good meal, should the weather smile upon their united efforts. being naturally a boy who looked upon the bright side of things, as a healthy lad might be expected to do, dick had proved a blessing to his mother times without number. he laughed and chatted as they sat at the table, and for the time being the poor little woman really forgot that there was such a thing as anxiety in this world. even the little encounter with ferd was related with more or less humor; and yet while mrs. morrison found herself compelled to smile at dick's quaint description of the way in which ferd over-leaped himself, at the same time a shade of worry crept over her face. "oh! i hope he will not tell his father about it and try to lay the blame on your shoulders," she said, sighing. "but why should he, mother? i had nothing to do with it, and never even touched his old motor-cycle until i offered to help him get it out of the ditch? now you never told me that mr. graylock came around to complain about me that other time, but i guessed it all the same. it was just like him to threaten that he would do something awful if i ever put a hand on his precious son again. poor little fellow, he's only three inches taller than me. you know i told you all about that trouble at the time, mother?" he expostulated, indignantly. "yes, yes, so you did, my son, and i told mr. graylock that you could not have been to blame--that after all it was only a boyish dispute, and no serious damage had been done. he called you a bully and a terror, and said he would make an example of you if it ever happened again. oh! he frightened me so." "the old wretch, to come and talk that way to a lady, and she a widow, too. what do you suppose father would have done to him if he had been alive? nearly every boy there will tell you i refused to fight up to the time he struck me in the face and called me mean names. then i commenced. perhaps i did hit him a little harder than i should, but i was stirred up, and meant to teach him to leave me alone after that. i guess i did it all right," and dick, boy-like, smiled grimly as, in imagination he could see the deplorable condition of his antagonist when ferd humbly admitted that he had had enough. "but you see it happened that his father met him on the road while his face was all covered with blood. it was only because he had been struck on the nose; but it looked terrible to his father, and angered him. i hope you will not have any trouble with that ill-natured boy again, son," she said, earnestly. "i never want to, mother, nor with any fellow; but there's a limit even to the patience of job. father always taught me never to seek a quarrel; but at the same time never to run away from one like a coward. i try to follow his advice, mother." "yes, i am sure you do. and your father was a peaceable man; yet i can remember once or twice when he took off his coat and thrashed a bully until he howled for mercy. in fact, to tell the truth, that was the way i first made his acquaintance as a boy, for he came to my assistance when a big ruffian of an overgrown coward had stopped me on the road and declared he was going to kiss me. of course i screamed and your father, then a lad learning the carpenter trade, jumped from the roof of a kitchen near by and came to my rescue." she laughed as the recollection came back to her mind, and once again she could see the young man she had loved for many years standing up as her knight; dick too looked pleased at hearing how the father he remembered so well had been ready to defend the right. "i don't think ferd will say anything about this last little adventure. you see his father was opposed to his getting that motor-cycle, for he said it would be just like ferd to have an accident, and perhaps get his neck broken. and to tell the truth, a little later on if nothing else turns up i mean to try and get work in mr. graylock's store. it's a busy place, and he might give me a chance. he's a deacon in the church, and i've often heard him tell how all of us ought to heap coals of fire on our enemy's head by doing him a good turn. i'm going to put him to the test, mother. perhaps he may turn out better than we think, who knows?" "i hope so, dear. i like to think the best of all men; but mr. graylock is most unreasonable when angered." after supper dick insisted upon his mother sitting down to rest while he washed the few dishes; it was a regular employment with him; not that he liked the job, but it gave him satisfaction to know that he was relieving her from some of the drudgery of the housework. later on he busied himself in looking over a lot of fishlines and hooks, since he was bent upon carrying out his scheme for business in case nothing better came up on the morrow. no one knew better than dick where the fish lay, and his success in securing a string of the finny beauties had long been the envy of his mates; he had always loved to study the habits of the bass and other denizens of the little river that gave the pretty town its name; and it was really this knowledge that brought about his reward when others went home almost empty-handed. he lay awake a long time that night, looking out of his window at the bright star that had for many a year peeped in through the window of his little room, and in some way cheered him by its twinkling; he laid many plans for the immediate future, and somehow just the thought of the smile upon the careworn face of his little mother seemed an inspiration, urging him to greater efforts. thus he pictured the day when he would be successful in business, and when want would no longer confront them at the door; when he could surround this dear one with all the comforts and perhaps some of the luxuries that other women delighted in, and with such noble ambitions soothing him dick finally fell asleep. chapter iii dick's first wages immediately after breakfast on the following morning dick started out upon his search for employment. he did not know how far he might have to tramp in scouring the surrounding country, and so asked his mother to let him put him up a "snack" which would help to tide him over the noon hour, if he happened to be at a distance from home. as he turned and looking back waved his hand to her just as he had always done since the first day he went to school, she felt that it was hard indeed that her boy should have to be thrown on the world to make a living when others among his schoolmates had pleasant homes, and well-to-do parents to care for them. but dick never allowed himself to look at things in that way; he felt within him the spirit to do and dare that leads to success if persisted in, and he was grimly determined not to allow himself feel any discouragement even should he meet with failure right and left. he had heard just the preceding day that the miller down the river road was looking for a boy to assist him, since his son was sick, and it was toward the quaint old mill, driven by water from the little river, that he first of all turned his steps. as he trudged along about half a mile beyond the outskirts of the town he discovered a vehicle some little distance ahead, apparently stalled. something had happened, for the driver was on the ground and appeared to be busy trying to mend a break in the harness, or something still more serious. as he drew nearer dick saw first of all that the man was mr. cartwright, the miller, the very man he was intending to see, and the next thing he noticed was that the loaded wagon was tilted on one side, showing that a wheel must have given away, threatening a complete collapse. he hurried up, wondering if his lucky star might not be in the ascendant just then, the opportunity to get in the good graces of the miller seeming so good. the dusty miller was scratching his head in puzzled wonder at just the minute dick arrived on the scene. "good morning, mr. cartwright. you seem to have met with an accident," remarked the boy, as he came alongside. the man looked up with interest, to show more or less disappointment when he found that it was only a boy who had arrived. "it's you, is it, dick? yes, i've broken down at last. twenty years more or less i've carried loads back and forth between my mill and the town, and never once in all that time have i had such an accident. the wheel is giving way. if i try to go on it will smash entirely, and perhaps part of my load be thrown off. how to get home is a question i am trying to decide. i hate to unload. if i had another wheel and a jack here i might get around the trouble." "i could get them for you, sir; or if you thought best we could take a rail from the fence here and use it to hold up the load while you crept home. it isn't a great way off, you know," remarked dick, quickly. "do you think we could fix it with a rail lashed under the axle? i've seen it done with an empty wagon but never with a full one," exclaimed the miller, brightening up. "by changing a part of the load, and throwing it over on the side where there are two sound wheels i think it could be managed, sir," replied dick, and there was such an air of conviction about his smiling face that the miller seemed to be convinced even against his own judgment. "well, now, it might go, and i've half a mind to try it. can you give me a hand, dick, or are you in a hurry?" he asked. [illustration: "can you give me a hand, dick, or are you in a hurry?" he asked. _dick the bank boy_ _page _] "no hurry at all, sir, and only too glad to help you if i can," and in a jiffy he had hurried to the fence, selected the stoutest rail in sight, and was back again at the side of the man who was in trouble. they first of all shifted the cargo as much as possible, so as to throw the greater part of the weight on the left side of the wagon, thus relieving the strain on the broken wheel. fortunately the miller had plenty of rope along under his seat, and after they had united their strength to raise that end of the wagon by means of other rails, the one that had been selected as a drag was securely lashed into place. thus the broken wheel did not come in contact with the road, and when the patient old horse was set in motion the vehicle shuffled along after a fashion. "the missus'll think i'm coming home like a whipped dog with his tail between his legs, but it's a case of any port in a storm, and i'm glad to get back without throwing off this whole load. i'm sure obliged to you, dick, for the lift you gave me, and i won't forget it either. p'raps some day i can pay it back." of course that was the proper time to strike, while the iron was hot, and dick knew it well enough. "why, i was just on my way here to see you, mr. cartwright. i heard that you wanted some one to assist you, and as i'm looking for work i thought i'd apply for the job. i'm strong, and i think able to do what you want," he hastened to say. the miller looked at him with a smile. "well, now, i'd like to give you work first rate, dick, boy; after the way you fixed me up this morning i reckon you're a right handy sort of a boy to have around. but you see i expect my son toby to be well enough in a few days to get onto his regular business again. if you cared to tackle the work till then i'd sure be glad to have you. it's my busy time, and i'm falling behind every day. you could be a great help to me, only the job is apt to be a short one," he remarked. "it might help out, mr. cartwright. you know my mother is in trouble over that investment, and times are going hard with us. i mean to get to work at once, and try to make it easier for her. i'll take the job while it lasts, sir," and he threw off his coat with a business-like air that pleased the old miller. "but see here, dick, we ain't made no terms. i paid toby twenty a month, and his board. would a dollar and a quarter a day satisfy you, son? a special job like this always commands higher wages, you know," he inquired, eagerly, for he had been wondering how he could keep up with his orders while shorthanded. "it suits me first-rate, sir. only wish it would keep right along--not that i would like to have toby sick you understand. and, now if you will show me just what i'm to start on i'll get to work." "say, i like that kind of talk. i reckon you and me will pull together all right, dick. i knowed your father many years, and if so be the boy has got some of his grit and go in his make-up there ain't no fear but he'll get there." it filled dick with a sense of deepest satisfaction to realize that he was actually earning real money; and again and again he pictured the look of happiness that he knew would flash over the face of his mother when he told her of his success; of course the job was only a temporary one, but then it certainly seemed like the harbinger of other good things to come. he whistled at his work, and the miller thought this merry-hearted lad was worth having around as an inspiration, even though he might not be as sturdy a worker as his big-muscled toby. but dick was possessed of indomitable pluck, and after he grew a little accustomed to the work he thoroughly satisfied his employer. at noon he heard a conch shell blown, and washing up as mr. cartwright had directed him, he proceeded to the house, where he sat down to a bountiful spread that was certainly a joyous sight in the eyes of a hungry boy. he only wished the little mother were sitting beside him instead of big toby, now well on the road to recovery. and all that afternoon, when he felt tired from the unusual employment of his muscles, he cheered himself up with the thought of how proud he would be to place that first dollar and a quarter in the hand of the waiting little woman in the cottage by the river bank--for it was one of the miller's peculiarities to do a cash business, and pay any one working for him each day after the hour for stopping arrived. it was a tiresome walk back to town and then out home, but dick strode along with a light heart, and having changed his mind about his homecoming stopped in town to buy something in the way of groceries which he knew would fill a long-felt want at home. in the gloaming then he arrived, to find his mother beginning to grow nervous over his long absence; and only when her arms were about his neck he told of his success in obtaining work. doubly sweet was the humble fare that night, for he felt that he had really done his part toward the support of the morrison family, and that he was in a fair road toward filling that place at the head made vacant by the death of his father. chapter iv in search of a job the job with the miller lasted just five days. then toby, having declared himself ready to take up his duties, mr. cartwright was compelled to let dick go, for he really had no need of his help, since things were running in their natural channel, all the back work having been cleaned up under the energetic push of young morrison. "i'm really sorry to lose you, dick, boy. you've done all right, and if i ever have need of a helper again i'd like nothing better than to call on you. if i hear of an opening i'll sure let you know," the miller said, that evening as he placed the last pay in the boy's hand. mrs. cartwright had taken considerable interest in all she had heard about dick from her husband, and being a woman of discernment she knew that a boy who was so fond of his mother as he seemed to be could not go very far wrong in life. she came out to shake hands with him, and she carried a package too that she gave into his charge. "it's a new kind of cake i've been trying lately. my sister away out in boston sent me the recipe. tell her i want her to try it, and if she wants the directions i'll be glad to send 'em to her. good-bye, dick. i hope you find a good steady job soon. come in and see us whenever you happen to be passing, and if it's nigh dinner time we'll be glad to have you jine us." dick felt that he had indeed made good friends in this, his first position, and the thought brought with it such solid satisfaction that he determined to profit by the circumstance in the future; he was young in years but already he had begun to see that one cannot have too many friends and well wishers in life. once again he was grappling with the problem as to what he should do in order to continue this method of assisting to lighten the many burdens that had fallen on the shoulders of his mother. just as he neared the town he heard a great spluttering behind him and stepped aside to allow the party on the motor-cycle to pass; as he suspected it was ferd graylock returning from a little whirl around the country, and cutting his customary wide swathe along the road. he happened to recognize dick as he swept by with a popping from the exhaust, and shutting off power applied the brake so that he came to a stop. dick was surprised and a little annoyed. he hoped that ferd did not mean to be as disagreeable as usual, and perhaps force him into a war of words, or even worse; and remembering what he had promised the anxious little inmate of the rose cottage, he shut his teeth hard with the firm determination not to be drawn into a row if it could possibly be avoided. as he walked on he presently came up to where the other stood, with one foot on the ground, balancing his machine and ready to go on again slowly, pedalling as dick tramped. "hello! dick. thought that was you. you jumped just in time or i might have hit you a nasty blow. fact is i was forgetting that the beastly old town was so close by. hear you've been working down at old cartwright's mill. got a steady job?" dick was surprised at being spoken to in this fashion by the one whom he had grown to look upon as his inveterate enemy, and who in the past had never addressed him save to utter some sneering insult; could it be that after all there was a spark of decency in ferd, and that when he came to reflect on how shabbily he had treated the boy who had shown such willingness to help him drag his motor-cycle out of the ditch, he was a little ashamed of his actions? dick was quick to seize the olive branch, though rather skeptical with regard to what it could really mean. "i have been working there five days, and would like to keep right along only toby has got well enough to go on his job again. now i must look around and see if i can find something else to do, for i've got to bring in some money to help out at home, you know," he replied. he could see the sneer upon ferd's lip, for that young man had never earned one cent in all his life, and foolishly looked down upon the unfortunate boy whom fortune compelled to face the world and wrest his living from it. "i was thinking of you when i heard my governor say he wanted more help. perhaps you might strike a job there. i'll even put in a good word for you to-night. of course you understand that i'm not doing this because i like you any better than before, but you did me a half decent turn yesterday, and i'm not the one to forget it. besides i don't want to see a dog starve if i can help him by raising my hand. come around and see the old man to-morrow, and perhaps he'll offer you something." the cool patronizing manner of the fellow when he said this galled dick exceedingly, and had it been only himself whom he had to consider he would have snapped his fingers in ferd's face. but then he reflected that the other was doing him what he considered a very great favor, and that of late he had had that old saying to the effect that "beggars should not be choosers" rubbed into his soul. so he crushed down the natural feeling of resentment that arose in his heart, and tried to act as though he were really grateful for the crumb thrown down to him with such scorn. "that's good of you to think of me at all, ferd. i'll see your father to-morrow without fail. i hope he can offer me a job that will give me something like the sum mr. cartwright has been paying me," he replied, quietly. "how much was that?" asked the other, contemptuously. "at the rate of seven dollars and a half a full week," answered dick. ferd whistled to signify his skepticism. "you're yarning, dick. i don't believe he gave you half that. anyhow, i'm dead sure dad'll never think of paying such big wages. he can get all the help he needs at three dollars a week," remarked ferd, preparing to start up his machine and go ahead, since his object had been accomplished, and he had the peculiar satisfaction of knowing that he had after a fashion put that upstart dick morrison down a peg or two even while making himself out to be a generous, forgiving fellow. dick saw him speed away with a renewed splutter and a cloud of dust, while to himself he was saying: "three dollars a week will never satisfy me just now. i am strong enough to be earning a dollar a day on a farm, and we have too big a need of the money to take a position at less. i can make more than that fishing, counting the good days and the bad as they run. and i'm afraid there might be trouble for me if once archibald graylock had me under his thumb. he would find some opportunity to accuse me of something i hadn't done and discharge me in disgrace. i'll go and see him all right, but if we fail to come to terms i won't be much disappointed. i'll keep everlastingly at it until i strike my gait, just as grant did when he was fighting the battles of the wilderness. and i'm going to get there, i must, _i will_!" again he stopped in town to make some purchases. the store of ezra squires was well patronized, for he kept a pretty fair assortment of necessities in the line of groceries, sometimes exchanging tea and coffee with the country people for butter and eggs, which he shipped into boston when he had a quantity. ezra and dick had never gotten on very well together somehow. to tell the truth, the grocer had once played a very small game with the widow, and when dick learned of it he had come and told mr. squires just what he thought of such contemptible actions; at the time several persons heard all that was said, and ezra felt that he was in rather bad odor in certain circles. that was a good while back, and people had forgotten the circumstances; but he had never quite forgiven the lad who in defense of his mother had so boldly taken him to task before some of his customers. ezra had a small nature, and it harbored the spirit of a mean revenge; so that he was forever looking for a chance to get even with the boy. "you don't happen to want any help, mr. squires," asked dick, as he was about to leave the store, and the old man came to the door to open it, seeing how the boy was laden down with bundles. "not just now. i might be changing any time, though, that abner is sore tryin' on a man's patience. he never does anything right, it seems," replied the other, looking at dick keenly. "what wages do you pay, in case you needed anyone, and i applied for the job?" "four dollars and find yourself, and no snacking in the store out of the cracker barrel and cheese bin," came the quick response. "it strikes me that's pretty small pay for the long hours here, and the heavy work you require," remarked dick. "kin get lots of help at that price. this ain't boston, you understand, and wages is low in riverview. i'm not askin' anybody to come here. if abner goes there'll be jest a dozen arter his job in an hour," replied the grocer, sarcastically. "perhaps there will, but you won't find me among them, mr. squires. i'm willing to work and work hard, but i think a fellow deserves a living wage. you can't get a woman to come and wash for you at less than a dollar a day, and they talk of putting the price up a quarter. what are the hours here?" "i guess it don't interest you any, young feller. seems like you be too high-toned fur this sorter work. might try the bank and see what mr. harvey gibbs kin offer you," and so saying ezra slammed the door shut behind dick, thus bringing to a termination the interview that was not proving very pleasant to him personally. "perhaps i am too high in my notions; perhaps my first job has spoiled me for a three dollar a week position, but it does seem as though all the chances open to me are going to come from the few men i'd hate to be with above all others. well, i'll make a try of it to-morrow, and if there's nothing in sight i know where i can dig some good bait, and the weather promises to be fine for fishing." so talking to himself dick set out for home, fairly well satisfied with his beginning as a business man; it was an humble opening to be sure, assisting a miller run his grist, but the work was interesting and the pay had not only been good but he had made friends that might prove of benefit to him at some future day. chapter v mr. graylock receives a surprise while they were eating supper that evening and dick had told his mother all that had happened during the day, not forgetting the contemptible words of the close-fisted grocer, he noticed that she looked even a shade sadder than usual. "what has happened to make you feel badly, mother?" he asked, catching her eyes at last. "i did not mean to tell you until after supper, my boy, but since you have been so observing i suppose i must do it now," she replied, turning a bit red. "then i was right, and something has upset you. have you had a letter?" she nodded her head in the affirmative. "from the lawyer you engaged to look up that company?" "yes, from mr. brief. he writes that so far as he can see just at present there is no prospect for the company resuming the paying of dividends. he says that it is a dull time in the manufacturing business, and it may be months, perhaps a year or so before things come around again," she replied, trying hard to keep the tears back. "still, there is no fear of the company going to smash, is there, so that you would lose all you have invested there?" persisted dick. "mr. brief says he does not really fear that. he also writes that we might be able to sell our stock, but since it would have to be sacrificed just now most shamefully he advised that we hold on as long as we can. if it comes to a point of desperation i am to let him know, and he will do the best he can for me." "well, i wouldn't let that worry me, mother. i consider it so much better news than i expected that i feel like shouting. we will hold out! i'm going to help you right along now. and some fine day we'll wake up to hear that the old company has blossomed out again bigger than ever, and that our stock is worth just twice what it was before. i've read about these games they play to freeze people out. if i'm going to take father's place you must let me see that letter. i want to be posted on all that is going on." after that sort of talk mrs. morrison could no longer feel that new trouble had descended upon them; so bringing out the lawyer's letter she and her boy talked it all over, and between the lines she now discovered many a ray of hope that had not appeared there when she sat, alone and dispirited, reading it for the first time. it was really impossible to give way to despondency while dick morrison was in close touch with one; he had such a sunny nature and always chose to look on the bright side of things that somehow he seemed to transfer some of his optimism to those with whom he came in contact. and so the little woman, when she retired, felt that the spirit of his father had indeed descended to the son, and that she need not have any fear with regard to dick making his way in the world. as he had promised himself, dick applied to mr. graylock in the morning for a position. the big store was not very busy at that time, most of their trade coming in the afternoon and evening, so that he found the proprietor in his office engaged in dictating letters to a girl stenographer. when he had finished he beckoned to dick to come into his cubby-hole den where an opening afforded him a chance to keep his eye on all that was going on in the store, from bookkeepers to the clerks behind the various counters. mr. archibald graylock was a very stern and harsh man, with an eye that seemed to penetrate to the very soul of the party with whom he held converse. those in his employ led a dog's life of it, for he would brook no trifling, and from the time they entered the door until they left not one minute could they call their own; no one might tell just when that cold, calculating green eye was fixed upon them; so there never was the least sign of skylarking or even friendly communion in that big establishment while the proprietor was present, and that meant pretty much the live-long day, and every day in the week. dick had never liked him; no one else did for that matter, though many people toadied to mr. graylock simply because he was reputed to be one of the richest merchants in riverview. and since he had heard how this man had, like a big bully, frightened his poor little mother with his ugly threats, dick disliked him more than ever; but since he had come here seeking employment he knew that it would be foolish for him to give any indication of such a feeling. "sit down there, boy," said the big man, indicating with a lordly gesture a chair so placed that while he talked he could also keep an eye on the store by means of that special opening. when he spoke in a bragging or a bullying tone archibald graylock was accustomed to elevating his voice so that the men at the bookkeepers' desk could easily hear all he said; perhaps he could not help being loud in his ways, but there were those who said he did it simply to make an impression on his employees, and show the groveling worms what a great man they served. dick sat down, holding his hat between his hands, and not feeling at all confident that he would have even a chance to accept any offer at the hands of this nabob of riverview, for he fancied that mr. graylock, by his frown, meant to simply make use of the opportunity to read him a lecture, haul him over the coals, and then perhaps publicly insult him. "my son tells me you are in want of employment, and also that he magnanimously chose to overlook the many times you have gone out of your way to do spiteful things to him, to tell you to come and see me. is this so, boy?" exclaimed the magnate, tapping his pencil savagely on his desk as though he were pounding in a moral lesson that it would well pay dick to heed. "he told me to see you, yes, sir; and i am looking for some employment so that i can assist my mother meet expenses. you know the circumstances, perhaps, mr. graylock, and how nearly all we have is tied up in a big manufacturing company that has closed its plant for a season, so that our dividends are cut off. that makes it hard for mother, and i am determined to get a job somewhere that will go part way toward paying our bills." dick spoke as respectfully as he possibly could, although there was not the least sign of encouragement in the manner of the other. "yes, i happen to know more about that circumstance than most people, for i did my best to induce morrison to go in with me and found this lucrative business. if he had done so he might to-day have been a wealthy man; or at least his widow would be beyond all want. but every one isn't gifted with the same amount of business acumen. a few will always find their way to the top. now, i consider that you are showing a spirit of humility in coming to me to beg a position in my employ. probably you regret that you have in the past been such a rowdy, and will endeavor to change your ways once you come under my jurisdiction. we have a reputation to sustain in this establishment, young man. you would have to try and be a gentleman here. take a lesson from my son, who so nobly forgave your boorish actions, and hearing that you and your mother were in want kindly interceded with me to forget the past. i cannot disappoint such a charitable spirit, and i am about to take you into my employ at the advice of ferdinand. can you start to work at once, richard?" the boy had turned red and then white as he heard these phrases uttered in the loud voice of the magnate. of course those men at the long desk caught every word, and perhaps half the clerks in the store as well, though no one dared so much as raise their eyes to glance that way. indignant at his treatment dick arose from his seat. "what wages do you pay, mr. graylock?" he asked, though positive that he could never under any circumstances work for this pompous and cruel man. "we have been giving two and a half a week, but since you are older than the last boy we had i shall make your wages three. you will ask for mr. jones, and he can put you to work?" replied the other, with a wave of the hand meant to indicate that the interview was ended, and that he could spare no more of his valuable time on so trivial a subject. "i guess i won't take the job, mr. graylock. i have been getting seven and a half working for mr. cartwright, the miller. if i meet any boy who will fill your bill i'll send him in to see you. good day, sir," and so saying dick walked out of the office, leaving the big man staring after him as though he had received a severe shock. as he passed by the row of busy bookkeepers dick caught a chuckle from one, while another, under cover of his big open ledger thrust out his hand and seizing on the sleeve of dick's coat gave it several little nudges as if trying to indicate how thoroughly they enjoyed his independent way of taking the supercilious nabob down a peg, for no one in his employ dared to call his soul his own; if he had, he would never have remained there a single day. dick had not intended to be impudent, even though the arrogant manner in which mr. graylock had patronized him, and compared him to his disadvantage with his paragon of a son, had cut him to the quick. he felt certain he would have been even more unhappy in that establishment than if he had taken service with ezra squires. still dick would not allow himself to feel cast down; these two men did not constitute the whole business section of riverview, and somehow he believed that in good time he would surely come upon a congenial place where he might receive living wages for his best work, and not feel that he was in the employ of a tyrant. chapter vi bound for the old fishing hole while he was at it dick visited every place where he fancied there was the least chance of finding an opening. the result was not very encouraging. in nearly every instance he was greeted with a negative shake of the head, and the information that since the dull summer season was at hand, instead of taking on more help the chances were there would be less required. when he came to the substantial stone building in which the bank of harvey gibbs had its quarters, he hesitated, and heaved a sigh, for it seemed folly to think of venturing in there, much as he yearned to go. and as he stood taking a longing look through the fine plate glass windows where he could see several men at work on the books, and the cashier just getting ready to wait on the first customer of the morning, who should come tripping along the street but consequential charles doty, the boy who ran messages for the bank, and made himself generally useful between times, looking toward the time when he was to be elevated to the president's chair, as he often whimsically declared. charles was prone to indulge in early morning naps, and there were times when he could be seen sneaking into the bank long after he was supposed to be at work. still, he could stir himself when the necessity arose, and thus far had managed to hold his position. at sight of dick looking so longingly into the bank he was brought to a sudden halt, and something like suspicion flashed into his eyes. doubtless he knew of the other's yearning toward the life of a bank clerk, and it may be that he feared dick was about to try and supplant him in the job he had been holding so long. at any rate charles, though already late, thought it good policy to stop and engage his friend in a brief conversation, meaning to convince dick as to the utter folly of ever thinking _he_ could obtain a situation under so strict a business man as mr. gibbs. "hello! dick. what you thinking about now? look like you meant to come around here some fine night and swipe the entire business. beware of bulldogs and traps for the unwary, my boy. we keep a heavy guard over our millions," he laughed. dick showed no signs of resentment, knowing that this was only boyish badinage, and he understood charles even better than the other imagined. "don't lie awake nights for fear of _my_ breaking in and running off with your whole establishment, charlie. i haven't even got the price of the wagon that might be needed to cart away the gold. but i did have designs on the place, in one way. do you happen to know how business is just now, and whether the bank has need of any more help? i'd be willing to act as porter, or anything else for the sake of getting started in there," with a wistful look through the open window toward the busy interior of the enclosure where the cashier and teller were working like a hive of busy bees. "i guess the porter racket hasn't a leg to stand on, for you see they've got a man and his family on the payroll, and he looks after the furnace in the winter, as well as does all the sweeping out and such menial tasks. but it might be possible that they could make room for you as my assistant. you see duties have kept piling up on me all the time, and i'm the hardest worked man in the institution just at the present minute." charles did not even smile as he made this monstrous assertion; he saw his opportunity for tying the hands of the other, and was slyly playing his little game with that idea in view. dick did not believe one half that the other said, and yet he was so anxious to get in touch with some one in this place of business that he could not see any harm in pretending to take charles seriously. "will you put in a good word for me, then, charlie?" he asked. "sure i will. i don't forget that you did me a bully favor one time when i was trying some fancy stunts backward on my skates, and tumbled through a hole in the ice. say, i'll watch for a chance to speak to mr. gibbs the first time he calls me in to talk over business matters. if he's in a pleasant frame of mind he may tell me to get help, and i'll speak of you. but see here, old fellow, you mustn't expect to have the salary i receive in the beginning. i don't suppose they'd think of paying more than ten dollars to start with." "a week?" asked dick, smiling in spite of himself. "to be sure. you didn't think i meant a month, did you. but i'm really too busy to spare any more time just now, dick. you leave it to me and i'll try and do all i can to get you in. don't be impatient. these things sometimes take time to work up, you know. a man in our line of business has to learn to be cautious, and not make mistakes. so-long, dick," and the bank messenger flew up the steps of the stone building, his countenance changing as he stepped in through the door, for he saw the cashier looking at him with a frown. that interview with dick, entered into from purely selfish motives, might yet cost charles dear. as for dick, he turned away with the smile still upon his face, showing that he had not been deceived to any great extent by the argument of his boy friend. as dick had now reached the end of his string, so far as applications for work went, for that day at least, he started for home. mrs. morrison met him at the door, and her eyes searched anxiously to discover the true feeling that might lie back of dick's cheery smile; he was so prone to put on a brave face, no matter what the difficulty, that she found it hard to tell just when things were going wrong with him. "nothing doing to-day, mother. better luck to-morrow, perhaps. i've got a few irons heating in the fire, and one of them may get hot at any time. but just as soon as i can get into my old regimentals i'm going to dig some bait, and then me to the fishing bank. wish me luck! at any rate i can get probably enough bass for our supper, and if things turn out well i may have some to sell." he was off in a hurry, for time was passing and the best hours for fishing had really gone by; to-morrow he would be up at daylight, and while other boys might be yawning at being called to breakfast dick would be found hovering over his favorite hole, tempting the finny tribe with the fattest of worms and grubs. when he came in a short time later from getting his bait mrs. morrison had some lunch prepared, knowing that he had to go quite a little distance up the river to do his fishing, and might not want to tramp all the way home at noon. "i would have done that myself; but you are the dearest little mother on earth. look for me about supper time. i wouldn't stay so late, but you know the fish sometimes take to biting again just near sundown; and a fellow hates to give up when they act as if they were hungry. if i have too heavy a load i might make some arrangement with old ben carberry to loan me his rig; so don't be surprised if you see it backing up to the door," and with a laugh he ran off. as the antiquated horse and dilapidated vehicle owned by old ben had been the joke of the town for many a year his allusion was understood by mrs. morrison; so that she found herself also laughing as she in imagination saw the astonishment of the neighbors should such a thing occur, which, of course, was about as likely as a gold mine being discovered in their back garden. whistling as he went, dick proceeded along the road. boy-like he was always on the watch for a chance to get a ride, and being overtaken by a farmer's wagon on the way home from early market he asked permission to climb in behind. "get up here along with me, dick," replied the old gray-whiskered countryman, making room on the seat, for he happened to know the lad, perhaps because mr. morrison had plied his trade as carpenter around the entire section years ago. of course dick gladly took advantage of the opportunity, and the farmer soon engaged him in conversation, asking about his mother, and telling several things in connection with his father that the boy had never heard before. they were of a character to make him proud, for no one ever had anything but good words to say of the honest and thrifty carpenter, whose work always bore the most rigid scrutiny, and could be depended on. "where are ye goin' fishin', son?" finally asked the old man, possibly thinking of days long since gone by when he too used to take advantage of every chance to slip away from the heavy work of the farm, and, with pole over his shoulder seek the quiet retreats along that same river to coax the timid bass from the depths. "i've got a hole just around the eddy below the big shelf of rocks. you see it's so far away the boys in town never get up there, and i generally have great luck. then i know of half a dozen other spots nearly as good. i'm going to try and get some fish to sell to-day. you see, mr. prentice, i've got to bring in some money to help out at home until i get a position in some store," replied dick. "i'd like to have you work for me, boy, only if you came you'd have to be there all the time. our chores must be did before daylight. sometimes we get up at one or two in the mornin' so as to get an early start in to market. i calculate that you wouldn't wanter leave your mam alone all the time. does ye credit, dick. i remember tom's wife right well, and she was allers a right good housekeeper. ye can't do too much for her, son. but about that ere fishin' hole, dye know i believe 'twas the same i used to hook 'em out of thirty-odd year ago. is it the ripple just back o' banker gibbs' place?" "why, yes, that's it. and you used to catch bass there that far back? i'd just like to see all the fish that have come out of there then, in all these years. i reckon they'd stack up pretty high, and bring a good price peddled around at the doors of riverview folks. but here's where i must get down. i take a short-cut through the meadow and the woods right to the hole." "same short-cut, same hole, same kind of boy, allers ready to go fishin'. good luck, dick. i calculate you'll come out all right. any boy of tom morrison couldn't help hittin' the mark in time," called out the genial old farmer, waving his whip cheerily after the active lad. "thank you for the lift, mr. prentice. if i can't make a go of it any other way i may look up that job you spoke about," dick called out; and then turning hurriedly climbed a fence that brought him to the meadow. chapter vii dick makes a gallant rescue the fish did not seem in any great humor for taking hold that morning, although the weather conditions were just perfect for the sport, from the view of the boy who had his several poles in favorite places along the bank. when he first threw in he had a bite before he could get his second hook baited, and the prize was a good pound fish, a beauty that made him exclaim with delight, and consider it a good omen. but after that the nibbles were few and far between. the summer sun mounted high in the heavens, and snowy clouds floated across the blue expanse; tired of sitting and watching his various bobs dick finally settled back with his head on a bunch of grass and watched the beautiful picture above, his thoughts taking flight, as frequently happens with a boy who possesses an imagination. perhaps he dreamed day dreams as he watched the fleecy clouds sailing past, each an argosy of boyish hopes; perhaps he saw in imagination a delightful future when he and his mother would be placed beyond anxieties, and surrounded by all that could go to make up happiness in this material world. now and then he would arouse himself and examine his lines to see whether the bait were properly adjusted so as to present a tempting display to the bass; and occasionally he would pull in a capture, though they seemed to run in small comparison with the first prize. unless business picked up during the afternoon he rather guessed he would have to be satisfied with only a mess for the morrow's dinner. "i'll get after the rascals bright and early to-morrow morning. no use talking, just after daylight at this time of year is the time to haul in these fellows. but i'm going to stick it out if it takes all day." so saying he began to look around to discover if there was any other kind of bait he could offer the big fellows he knew were loitering around deep down in that dark water. he had brought along a piece of mosquito netting to use as a little seine, by means of which he could possibly pick up a few minnows in a certain shallow they liked to frequent. this he had done on the preceding season, and the change of diet had tempted the bass to take hold with gratifying results. so he got the net out and was soon endeavoring to trap a few small fry. he had made a miniature pond a foot or two in width along the side of the river, and into this he meant to drop any bait secured, to keep them alive until wanted. but even the minnows had almost entirely forsaken that shallow at this time of day, for after working industriously a whole hour he had only succeeded in trapping three. one of these he used at once, but it brought no success, for the hour was now near noon. dick munched at his lunch and watched his floats pensively as the time crept on. up to three o'clock he had had only one more bite, but he managed to land the late diner, which proved to be at least the equal of his first capture. then came another long wait. about four he concluded to try another minnow, hoping that the bass were arousing from their mid-day nap and would feel like partaking of a bite. the river was very pretty just here, and the current rather slow, for the banks had widened; only for this deep hole the stream was shallow, and since the rains had been few and far between of late dick fancied he could almost wade across to the opposite shore should the occasion arise. strange to say the idea of taking a swim had not occurred to him, as it certainly must have done had there been another boy along; he was too much engrossed in his fishing, and the laying out of plans for the future to think of these material joys so dear to the heart of the ordinary boy. just as he had fastened the minnow to his hook, and gently floated this out to the most promising place in the pool he thought he heard voices somewhere close by. when he listened again he learned that it was a girl's voice he heard. and strange to say it seemed to come from up the river a little, just around the bend; indeed, as he listened he certainly heard the sound of oars working in the rowlocks, and again a merry voice called out. then dick nodded his head and smiled. "i know now. it's bessie gibbs in her boat. i remember that last year i saw her out rowing once when i was going home. she may come down this way. i wonder who is with her. seems as if i can't catch any other voice, and yet she is laughing and talking as if somebody was along. i'll soon know, for she seems to be just around the bend, and coming down-stream." it was curious to see the boy look down at his rather patched garments just then when there was a possibility of a girl coming on the scene. "wonder if bessie would know me with my old regimentals on? i'm rigged out for fishing, and i can't afford to wear the only decent suit i own for this sort of thing. perhaps she won't want to know me. all right, who cares? but she never seemed that sort of girl at school. i always thought bessie the prettiest one in the whole bunch. great caesar! what's that mean?" he cried, for a shrill scream suddenly smote his ears. he sprang to his feet and immediately started to run along the bank, heading up the stream, for the point of land with its clump of trees cut off his view. the screams still continued, accompanied by a splashing of water that alarmed dick more than ever, for he was now sure that bessie gibbs must have fallen overboard, and was in danger of drowning. he burst through the bushes and stood on the shore. his first sight of the river at this point relieved him greatly, for he discovered the rowboat half way across, with a little maid in it frantically trying to recover one of her oars that had slipped away in the excitement of the moment. there was also something struggling furiously in the water at a little distance, and which dick could not make out at first; but when he shouted at the top of his voice and started to wade out toward the spot the girl turned toward him and wildly beckoned, at the same time crying out: "oh! save him, save my poor benjy--he will drown! dick! _please_ get him for me!" it was not a human being in peril at all, only bessie's pet angora cat, a fuzzy little creature dick remembered seeing on the seat of the gibbs carriage one day when he met bessie on the road, and she nodded to him, just as friendly as ever. he pushed resolutely out to where the wretched little beast, having fallen overboard through a miscalculation, was being carried down-stream by the current and in sore peril of meeting death by drowning, since cats are but poor swimmers at best. dick was not a cruel boy by nature, and while he might have hesitated about placing his own life in jeopardy in order to save a cat, still, this one was the especial pet of a girl who had been his classmate in school for several years. the water grew deeper, and soon he had to swim, which, considering the fact that he was burdened with his clothes was not the easiest thing in the world to do. but dick had always been noted for his ability to look out for himself in the water, and he was not long in reaching the struggling creature. [illustration: dick managed to catch the little terror by the nape of the neck. _dick the bank boy_ _page _] he received one scratch from its claw as the frightened cat tried to secure a lodging on his head, but by a little cautious work dick finally managed to catch the little terror by the nape of the neck, and finding lodgment against a sunken boulder for his feet he waited until the boat containing the little miss floated down to him, when he tossed poor benjy over the gunwale, a ridiculous looking object to be sure, but at least safe and sound. "oh! dick, climb in; you may be drowned yourself!" cried bessie, making as if to seize hold of the lad who had so promptly gone to the rescue of her pet. at that dick laughed aloud. "i'm too much of a waterdog for that, bessie. but while i'm in i might as well do the whole thing. now watch me go after that floating oar of yours," and so saying he started to move down-stream again. this time he drew the boat after him, and just opposite his fishing hole he managed to overtake the runaway oar, now held against a jutting rock, and speedily placed it in the possession of the girl. "won't you go home with me to get dried out, dick?" asked bessie, looking at him in sincere admiration as he stood up in the water, and pulled the boat toward the shore. "what, me? why, this is a picnic for a boy at this time of year. i'm going to wring the worst of it out, and then row your boat back up the river for you. why, long before i go home my luxurious fishing suit will be dried on me. saves pressing, you know, bessie. and by cutting a few sticks like clothes-pins i can snap them on along the front and get a beautiful crease!" she laughed at his merry conceit, for dick had always been a favorite of hers among the school companions of other days. he was as good as his word, and persisted in rowing the boat back to the landing from which she had started out; while bessie sat there fondling her angora kitten, and rubbing its bedraggled hairy form with her little handkerchief. dick went back to his fishing, amused at his little adventure, and never once suspecting what a tremendous influence such a small thing was destined to have on his whole future. to his delight he found another captive tugging furiously at the line on which he had placed his minnow, and it proved to be by far the largest prize of the day, very little short of two pounds. "to-morrow i will try and get a lot of live bait. i believe they fancy them at this season of the year. what, that last one hardly sank down before it was taken and this seems to be a jim-dandy of a boy too by the way he pulls. i hope i don't lose him now," and he began to play the captive as cautiously as his experience in landing tricky bass had taught him how. after successfully tiring the fish out he managed to get him on the string with the others, but he had no more minnows, and as the fastidious bass would not look at common earth worms after that dick was compelled to give up for the day, take his fair-sized string of fish and poles, and start trudging homeward. chapter viii the coming of a letter perhaps dick did not walk quite as briskly as usual while trudging homeward, for he was certainly pretty well tired out, and what with the poles and fish he had quite a burden to carry. but he felt pleased to think that the day had been so filled with little happenings, from his unsuccessful search for work, the ride with the friendly farmer who had offered him a place, the fishing-hole industry, and last, but not far from least, the rescue of benjy and succeeding gratitude of pretty bessie gibbs. he was glad it had been _her_ cat; he would sooner do a favor for bessie than any girl he knew; for while her father was probably the richest man in riverview she had never put on any airs like the harkness girls, who passed him in the street and looked right through him without a smile. about half way home he met a carriage coming out from town. it contained several people, and dick quickly recognized it as the gibbs vehicle--yes, and that bessie was one of those who made up the party. he stepped out of the road to let it pass; and had it been possible dick would have tried to conceal himself behind a tree; but he feared bessie must have already seen him, and would laugh at his desire to avoid being thanked for his afternoon's rescue. just as he feared, the carriage came to a stop before reaching him, and he saw bessie leaning forward, beckoning wildly to him. "dick, please come here. mamma wants to thank you for saving our poor little benjy. he has dried off beautifully, and looks whiter than ever. i don't believe his swim hurt him a little bit. i hope you didn't catch cold, dick," was what he heard her saying. there was nothing for it then but to advance to the side of the carriage. mrs. gibbs was a refined lady, and perhaps a little given to believing that there are few things in this world that cannot be settled by a money consideration. she felt grateful to the boy for saving the pet of her daughter; she knew who he was and that his father had been a carpenter, an honest man and with a reputation for respectability around riverview, but she could not imagine for a moment that she would hurt the feelings of a boy by offering him a reward for wading into the river and taking a drowning cat out. "yes, i hope you will not suffer from your immersion, richard. it was very kind, indeed, of you to go to such trouble for the sake of a poor cat. and, perhaps, something might have happened to bessie too, she is so excitable when anything occurs. i hope you will let me reward you in some way. won't you accept this, please? you must have quite ruined your clothes by your brave act, and perhaps this will purchase another suit," said the lady, holding out what dick saw was a ten dollar bill. he felt the blood fly to his face. then he looked down at his old garments, which he only donned for garden work or fishing, and afterwards glanced up at bessie, to laugh aloud. "i guess i'm like benjy, mrs. gibbs, and that the ducking did my clothes more good than harm. these are my fishing duds, ma'm. and if you please i'd rather not take any reward for pulling the poor little kitten in out of the wet. it was only sport for me, and i was glad to be there to save him for bessie. besides, i know my mother would not like it if i took pay for doing so small a thing," he said. "what did i tell you, mamma?" exclaimed bessie, impulsively, as though she had begged her mother not to offer the boy money. the lady looked at dick seriously for a minute, as if unable to exactly understand the motives that influenced him to act as he did. then she smiled and remarked: "just as you say, richard. i suppose you know best; but even though you will not let us recompense you in any manner, we still feel that we are under obligations to you for what you did. you seem to have had good success in fishing?" noticing the fine string he was holding at his side. "it has not been a good day. i hope to do better to-morrow, for i have an idea of going into the business for a while, and supplying families with fresh caught fish, while waiting to secure a position. it is necessary that i do something to help out at home, since my mother has all she owns invested where it happens to be tied up just at present, ma'm." had he dared, dick would have liked to have mentioned the fact that it was the secret hope of his heart some day to find an humble opening in the bank of which the lady's husband was the head; but he lacked the boldness to speak. "i am sure the spirit you show is commendable enough, my boy. your mother has need of feeling proud of so affectionate a son. i have often wished we had a boy to follow in the footsteps of archibald; but heaven saw fit to take three from us when they were babies. perhaps in some way we can show you that we do appreciate what you did for bessie this afternoon, richard," the lady remarked. "she thanked me, mrs. gibbs; that was enough for me," he replied, and somehow bessie blushed as she met his laughing eyes. then the carriage drove on, and dick stood there looking after it with a queer feeling in his heart; he was wondering what the uncertain future had in store for him, and if his dear little mother would ever see the day when she could ride in her own vehicle. he heaved a long sigh, and once more plodded along the road; but somehow he did not seem quite so tired as before meeting the carriage that contained bessie gibbs and her mother. he found supper ready, and the usual warm welcome from his waiting mother. and over the meal he described in detail all that had happened during that rather eventful day. she hung upon his every word, for like most fond mothers she believed there could be no boy like her own; and when dick told in as dramatic a manner as possible how he had chased across the point upon hearing those shrill screams, she waited in real suspense until he described what really met his view upon bursting forth, and the change from impending tragedy to a farce was so great that mrs. morrison sank back in her chair, smiling, but looking a little pale. "i remember bessie very well. last winter she sang in the church choir with a number of your school companions; and i think i recollect that you saw her home one night when some accident happened to the horse, and no vehicle came after her," she mused, looking roguishly at dick, who blushed as he turned the subject. before going to bed dick spent half an hour digging more bait, and then even enlarged the little homely seine made of mosquito netting; if the fish must be tempted with minnows it was up to him to give them what they wanted, and in order to make a decent haul of live bait he knew that a larger net was necessary. he was up before dawn, and gone before his mother came downstairs to get breakfast; but this did not surprise the good woman, for she knew dick's ways, and that if his heart was set on anything he never let the grass grow under his feet. so shortly after sunrise the boy was settled at his old stamping ground alongside the favorite hole, and had his lines out ready for an early prize; while he worked his little seine and scooped up many fine minnows to be transplanted into the shallow pond made ready for their occupancy. and his prediction seemed in a fair way of being fulfilled, for he was kept busy baiting his lines, so fast and furious became the rush on the part of the finny denizens of the pool behind the big eddy for a breakfast. he seemed to have come at just the right time, and offered them the very bait they were eager for. his string increased at a surprising rate, and after the sun had been up a couple of hours dick saw that he had a mighty fine lot of beauties to dispose of. later on as the bites grew fewer, and he found he had some time on his hands, he proceeded to dress his fish, and cover them with cool leaves in the basket he had brought along for this very purpose. before noon he started back to town, resolved to dispose of his catch. he could not expect to do as well as this every day, but there was certainly twenty pounds of fine fresh fish in his basket, and he believed he could readily sell them for a couple of dollars. he had already picked out certain houses where he meant to offer his wares; and it can be readily guessed that the gibbs mansion was _not_ one of the number, although it stood not far away from his starting point; just why this should be so the reader must be left to imagine--perhaps it was because he was afraid he would be thanked again by mrs. gibbs for saving the life of the pet angora; perhaps he somehow did not fancy appearing again in his old clothes before bessie; perhaps,--but surely every boy must understand how dick felt about it. just as he expected, he met with flattering success in disposing of the contents of his basket; for while riverview was situated on a stream that seemed bountifully supplied with fish few persons made it a business to secure enough of them to offer any for sale; and what could be found on the stands in the markets had come from boston, and were packed in ice, so that their delicate flavor had been much impaired. at about three, then dick headed toward home, quite satisfied with his day's work. he jingled a handful of change in his pocket with the cheerful air of one who has earned every penny of it--just two dollars and twenty cents, surely enough to pay him for his early rising. his mother was out when he got home, probably having just stepped over to see a sick neighbor; and dick, entering the house, dropped into a chair to rest a little before going out to dig more worms for the morning. it was while he was stretching himself out that his eyes chanced to fall upon a letter on the table, and to his surprise it was addressed to "richard morrison." he snatched it up filled with wonder, for he could hardly remember ever having received a letter before, though once a former boy friend had written him from florida where his father had gone for his health. and his eyes distended still more when he saw up in the corner of the envelope the printed words: "first national bank of riverview." with trembling fingers dick tore the envelope open. chapter ix great news sitting there in the easy chair dick read the few lines that composed the letter which his mother must have taken from the rural delivery man at the door. it was in typewriting too, and signed with the name of harvey gibbs. "richard morrison: i understand that you are seeking a position. will you call upon me friday morning about half-past ten." that was all; but it could not have given that boy more of an electric shock had it been a communication of a thousand words. what did it mean? he read it again and again, and gradually the only explanation that could be attached to so clear a request came into his mind--why, they meant to offer him a position in the bank--his dream seemed in a fair way of being realized. was it charles who had done this--could it be possible that the boasting one really did have more or less influence with the president? he smiled at the thought. then his mind roved in another direction, and he realized that after all his humane act of the previous day must be bearing fruit; bessie and her mother had told mr. gibbs about the saving of the wonderful benjy from a watery grave, and no doubt also related how the boy had declined to take any money as a reward for his kind deed; then one of them must have mentioned the fact that dick had said he was looking for work, and this had led the banker to write to him. it was glorious, and he jumped up to meet his mother, whom he discovered coming through the back garden just then. she was surprised to see him home. "no use telling me you have been successful, my boy, for your face tells the story better than words," she declared, laying down a dish in which she had doubtless carried some little tempting dainty to the sick woman; they might not have much themselves; but there were always others worse off. dick put his hand in his pocket and drawing it out, said: "guess how much for my morning's catch?" "a dollar," she replied, always entering into the spirit of his pleasantry. "more." "and a half then?" "still short, mom, try again." "not two, dick?" with delight in her eyes. he emptied his hand into her waiting ones. "two dollars and twenty cents. i consider that i had pretty fair luck for bass fishing. you know how freakish they are about biting. i had made up my mind i'd give them a whirl to-morrow, but now i find it will be impossible. my other engagements are too pressing." she looked at him as though puzzled to guess his meaning, whereupon dick, unable to restrain himself any longer, snatched up the precious letter and held it for her to see. when she managed to make out its contents she stared at him, half laughing and crying at the same time. "how splendid! and just what you have always wished, dick. oh! i'm so glad! how nice of mrs. gibbs, and--bessie!" she exclaimed; for her woman's intuition had instantly jumped at the truth which dick had only reached after more or less floundering in the mire. her dear arms were immediately around his neck, and dick knew that, pleased as he might be at the fortunate happening, his feelings could never keep pace with hers. he could think of nothing else the balance of the day, while doing some little work in the garden; and scores of times he figuratively hugged himself in congratulation over his good luck. dick did not dig any more bait; in fact he was careful to put away his poles and lines, because, as he said to his mother, if he expected to go into the business harness now he would have little time for fishing. that evening was a long one to him. he thought it would never come time to retire; and after he snuggled down in bed it seemed as if he could not settle to sleep, so many things kept popping up in his mind to engage his attention. but morning came at last. dick was up early, and started to dig some more ground in the garden, for the last planting of vegetables, beans and late corn. "at any rate," he said at breakfast, as he leaned back and looked at his mother happily, "the hours are not early in a bank, so that i shall have plenty of time to do the chores around, and even look after my part of the garden before going to work." "there will not be a great deal to do from now on that i cannot manage, my boy. i shall want you to keep your mind principally on your business, and, whatever it may be, do it with your whole soul. i expect to live to see you at the top rung of the ladder some day, dick. you have your father's perseverance, and the desire to do everything as well as any person could possibly do it. i do not fear for your future," she said, proudly. about ten o'clock dick started out. he was trembling a little as he kissed his mother, and there was a tear of sympathy in her eye when she waved him goodbye as he turned around down the road to look back. if ever a mother's prayers and good wishes went out after her boy those of mrs. morrison followed him as he strode manfully along, with his head held erect and the light of determination in his eyes. when he drew near the bank he swerved and passed along, but not from timidity; it lacked seven minutes of the time mr. gibbs had set, and dick had learned that a busy man is often almost as much annoyed by a premature caller as by one who keeps him waiting. so the town clock was just striking the half hour when he walked into the bank. dick had been inside the place more than once, on some errand for his mother; but it had never looked just as it did on this morning, when he surveyed it as the possible field of his future industries. he went over to the teller's window. "good morning, mr. winslow, can i see mr. gibbs?" he asked. the receiving teller glanced quickly up, for when any one asked to see the president personally it usually meant particular business. to his surprise the speaker was only a boy; and as he recognized dick he shook his head a little dubiously in the negative. "mr. gibbs is a busy man, generally, and unless you have some very important business with him i hardly think he could see you," he replied. "but my business is important, to me anyway. i have come to see him about a position here," said dick, calmly. "then you had better see mr. goodwyn, the cashier. he has charge of all the employing; mr. gibbs never troubles himself in that line. first window around the corner there." "but i have an engagement with mr. gibbs. he expects me at half-past ten this morning, sir," pursued dick, beginning to feel a trifle alarmed lest after all something happen to disturb his rosy dreams of the future. mr. winslow opened his eyes and once more condescended to peer out of his little window at the boy who made this astonishing statement. "an engagement with mr. gibbs--well, of course, that alters the complexion of things considerably. we have no one to show you in just now. open that door yonder and rap on the first one you see to the right. it will have the words 'president's office, private,' on it," he observed, looking more closely at dick, and then smiling as though some thought gave him pleasure. as the boy moved along mr. winslow turned to the other teller and said something in a low tone that caused him to grin broadly; and then give a quick look around in the direction of the desk where dick had been told the cashier, mr. goodwyn, was stationed. dick found the door and the inscription, just as the teller had told him. he drew in a long breath, set his teeth together, and then knocked boldly. "come in," some one said, and opening the door he found himself in the presence of the biggest magnate of riverview, mr. gibbs, the banker. of course dick had seen him many times before; but somehow he had always viewed harvey gibbs as one placed upon a pedestal, far removed from the common herd; as a boy he could understand such people as ezra squires and mr. graylock, but a silent man, known as a shrewd financier, was far beyond his ken. mr. gibbs had been writing, but looking up as the boy entered he smiled pleasantly as though pleased with his appearance. "sit down here a minute or two, richard, until i finish this paper, which is of importance, and requires my signature later. i will be ready to talk with you presently," he said, moving a chair out in a kindly way. so dick waited, meanwhile looking curiously around him at the luxurious office, which, in his eyes was as finely furnished as any palace could be. he was pleased to think that his business was to be transacted with mr. gibbs in person rather than through the medium of the teller, ross goodwyn, a small keen-eyed young-old man with a bald head, and doubtless the capacity to fit him for his responsible job, but whom dick had never liked; twice he had talked with him on matters connected with his mother's affairs, and each time the cashier had seemed to take a cruel pleasure in making him "feel small," as dick himself expressed it. still, if he was to come into this institution as an employee he would have to get over this feeling toward mr. goodwyn, who undoubtedly would have considerable to do with him. that three minutes seemed an age to poor dick, settled on the anxious seat. finally the banker sat up and rang a bell, whereupon one of the tellers made his appearance, the document was signed, and then as mr. payson went out dick found himself alone with the head of the firm. "now i can give you a few minutes' time, richard. please move your chair a little closer, so that we need not talk so loud. it is rather a peculiar combination that is responsible for your appearance here this morning," he said, pleasantly; and somehow the boy lost all his former fear for the usually austere banker. chapter x the meeting in the bank "am i right in assuming that you are looking for a position, richard?" was the first thing the banker said. "yes, sir. you probably know the trouble my mother is having with her investment, for she has conducted all negotiations through your bank. until that company resumes the payment of dividends we shall have rather a hard time to get on. and i have made up my mind to give up school, for the present, at least, and get work of some kind," said the boy, clearly. "good for you. your object is surely commendable. i understand that you have already been making a start in that line?" pursued mr. gibbs. "do you mean with mr. cartwright, sir?" asked dick, wondering how the other had managed to hear of this. "yes. he was in here doing some business yesterday, and spoke of you." "that was mighty nice of him, sir. i would gladly have continued on with him, but you see his son, who had been sick, got well enough to come back, and that knocked me out of a job." "very inconsiderate of toby, too. but mr. cartwright, who is one of our directors, and a heavy stockholder in this bank, recommended you to me as a trustworthy young fellow who could be depended on to do your best always. that is the rule we follow here; no matter how menial the task, do it as near perfect as lies in your power." "it was mr. cartwright, then--i thought--" began dick, and stopped short. "what did you think, richard; tell me?" asked mr. gibbs, smiling. "i thought that perhaps charles might have said something. he promised to recommend me if you ever needed an assistant to help him out, he was so busy." "oh! yes, just so, you mean charles doty. unfortunately he was not able to save himself, much less use his powerful influence toward getting another in here. in fact, my boy, it is to fill his place that i am now engaging you," observed the gentleman, pointedly. "then charlie has gone--i expected he would not last. he likes to sleep too much in the morning. i used to have to go and pull him out of bed whenever we went fishing last year," remarked dick, nodding significantly. "that was just the trouble--it took charles too long to get started. he may find more congenial employment in some other line; but he would never do for the financial business. but i spoke of a curious coincidence. you are doubtless wondering what i mean by that. someone else recommended that i give you a trial. can you guess who it was?" the reddening face of the boy announced that he at least had a suspicion. "that was only such a small thing to do, mr. gibbs. any fellow could pull a poor little kitten out of the water. it wasn't really deep enough to drown me, anyhow; and i guess it would take more than that to do the business, for i'm a duck in the water, sir." "all right, but i've known many boys who would take a fiendish delight in seeing a kitten drown," retorted the gentleman. "but--that was bessie's kitten!" said dick, hastily. "oh! yes, so i see. well, at any rate you did a good thing all around, richard, pleased my wife and daughter, and opened the way to a situation for yourself in the bank here. mr. cartwright tells me you have always wanted to be connected with an establishment of this kind, and he says that you are unusually quick and accurate with figures--in fact, he calls you a wonder in that line; but all our employees would seem such to him, doubtless. can you go to work to-day, richard? we let charles off yesterday, and while the porter is doing some of his usual work there are many errands that should be attended to." "i am ready to commence right now, sir," responded dick, getting up with his usual alacrity. "good. i like to hear a lad talk that way. but by the way, you have not asked anything about wages." "i'm willing to leave that entirely to you, sir. i am sure you will pay me all i am worth to the bank," said dick, simply. he could not have made a more diplomatic reply had he been a schemer instead of a frank single-minded lad. "good again. i begin to think that it was a fine thing for all of us that charles overslept so frightfully yesterday. we paid him eight dollars a week to begin with, richard." "yes, sir. i shall be very glad to receive that, if you consider that i can fill the bill." "but, for the last two months we have been paying charles ten. now, i am of the opinion that you are going to be even more valuable in the start than he was at the finish of his banking career, so i shall instruct the bookkeeper to put you on the payroll at ten dollars. that will do for the present, richard. i am going to take a personal interest in your progress. i knew your father, my boy, and respected him highly." "thank you, sir," said dick, as he withdrew; and there were tears in his eyes which he had to wink very hard to dry out; but it was not the fact that he was to receive such splendid wages at the beginning of his business career that affected him half so much as this constant allusion to the honorable name his father had left behind as a heritage for his son. thomas morrison might not have been able to lay up a fortune before he was called to another world; but he had at least won for himself the regard and esteem of his neighbors during all the years he labored in and around riverview. presently dick was being instructed in his duties by one of the friendly tellers. while this was going on the cashier came out of his little room. "who's this boy, payson?" he asked, frowning at dick. "i think you know me, mr. goodwyn; i am mrs. morrison's son. i have been in to see you several times on business," returned dick, calmly. "but what are you doing inside the railing now?" continued the cashier. "mr. gibbs has given him the place of the messenger boy, charles, mr. goodwyn," remarked the teller, a little vindictively, dick thought. the cashier frowned. "why, i spoke only yesterday to mr. gibbs about a nephew of mine i could recommend for that position; i don't understand how it comes he has taken this thing out of my hands. he seldom interferes with the hiring of help. i must see him about it at once," and he hurried away to interview the president. "much good it will do him," remarked payson to his fellow teller; "i've seen the fellow he wants to put in here, and so has mr. gibbs; and i must say i didn't like his looks. goodwyn has to help support his family, i understand, and it's more his wish to lighten his own load than to get us a clever messenger, that impels him to recommend his nephew. make your mind easy, dick; there will be nothing doing." and apparently there was not much satisfaction in the brief interview which the cashier had with mr. gibbs, for when he came back presently he hastened into his little den, nor did he have a word to say to anyone. only dick feared that he would find mr. goodwyn a hard taskmaster, on account of this incident; and he regretted it very much, believing it would handicap him more or less in his work. but the others soon came to like the new messenger exceedingly, he was so clever, so obliging, and withal so bright; both tellers declared at the close of the day's business that they had never known so little trouble in getting their errands executed in a lucid manner. at noon dick bought himself a little luncheon, for he was too far away from home to spend half an hour walking to and fro each day; after this he meant to bring something with him; no matter if it were only bread and butter, it would be much better than this "sawdust," as he contemptuously called the cake he had purchased at the town bakery. it was just at two o'clock that a most peculiar incident occurred, and one that gave dick considerable amusement. he was waiting in the outer room for a paper which the president intended sending to the post office to go by registered mail, when who should come in but ferd graylock, accompanied by his father; who, as one of the officers of the bank, went straight back to the room of the president without ceremony, leaving his son in the public waiting-room. of course ferd immediately spied dick there and sauntered over, with his customary air of importance. "hello! morrison, what are you doing here? i didn't you know you were a depositor in our bank," he said, with a patronizing manner that at first made dick grit his teeth, and then caused him to smile as a sudden suspicion flashed across into his mind. "oh! i drift in occasionally to drop a few hundred thousand for safe keeping," he replied, in a spirit of irony. "what _are_ you here for anyway?" demanded ferd, eyeing the other with a sneer. "just waiting for something at present." "oh! i see, your mother has probably been making arrangements to borrow on her tied-up investments. it's hard lines, old fellow. now, you ought to do something in the way of business, instead of spending your time fishing, as i hear you are doing. i expect to branch out that way myself. my old man says my school days are over, because my report was so very depressing this term. he believes i would make a splendid banker; and he's just gone back to consult with gibbs about starting me in here." "oh!" was all dick trusted himself to say. apparently that position formerly occupied by the departed charles was not going around begging for applicants; nor was the cashier the only one who had his eye upon it. "of course i will have to begin low down so as to get a grasp upon the details and technical points of the financial side of the business; but i'm willing to learn. here comes the governor now; i guess he has it clinched." if he did he certainly showed little signs of satisfaction as he came up, for he simply glared at dick. "come on, son, back to the store. i think you'll have to begin your mercantile career behind a dry goods counter after all," he snarled. "but the position that was open to me here, with a chance to rise?" exclaimed ferd, looking aghast at this unexpected explosion of his hopes. "it is open no longer, mr. gibbs himself filled it. and that young interloper has stepped into your place," pointing his trembling finger at dick. "what! _you?_" cried ferd, hardly able to believe his ears, "impossible!" just then the paying-teller called out. "richard, here is the letter to be sent registered; and on the way back stop in at underwoods and leave this notice of a note coming due to-morrow." "yes, sir," said dick, hurrying out; while ferd followed more slowly, a frown on his face and his teeth gritting with anger. chapter xi friendly advise being quick to learn, it did not take dick long to grasp the scope of his new duties, and by the end of the second week he had gained the good will of every person connected with the bank, from the president down to the porter--with one single exception. this was ross goodwyn, the cashier. somehow that individual seemed to take it as a personal affront that dick had been chosen to fill the vacancy caused by the discharge of charles. he had figured on filling it with his nephew, and since as a rule these things were left to his discretion he felt very much aggrieved because mr. gibbs had for once gone over his head. being a sensitive man he imagined that the other employees were forever chuckling in their sleeves over his defeat, and hence he misconstrued every little incident that arose to be a slur aimed at his vanished authority. it made him most unhappy. and certainly dick did not enjoy the thought of having this clever man classed as his enemy, for in the course of his duties about the bank he necessarily came into frequent contact with the cashier, and it was unpleasant to feel that the other was eyeing him constantly, as though ready to pick a flaw in his conduct. perhaps it also made dick more careful than he might ordinarily have been, and in this way worked for good. the bookkeeper's assistant, a young man named kassam, frequently ate lunch with dick, as his people lived at a distance, and he did not scorn to bring a bite to the office with him daily. there was a little room back of the offices where some papers and books were kept, such as the big safe could not accommodate, and here the two would often sit and chat as they disposed of their luncheon. pliny kassam was a diligent fellow, who meant to make his mark some day; he had a mother and a raft of little sisters at home, for whom he seemed to entertain a sincere affection. it was the similarity in their conditions that first drew the boys together; for each of them had lost a good father, though kassam's people were in comfortable circumstances. it was one noon hour when dick had been with the bank about three weeks, that his friend for the first time mentioned a subject that had a distinct bearing on the messenger's personal affairs. in the course of the general talk dick chanced to mention the name of the cashier, as having sent him upon a certain errand. pliny glanced around and unconsciously lowered his voice as he said: "i'd advise you to keep your eye on mr. goodwyn, dick, and when he asks you to do anything make sure that you carry out his wishes to a dot. he has it in for you on account of his disappointment about this position he wanted for that nephew of his." "i always try to do exactly as i am told, no matter whether it is the cashier who gives the order or the bookkeeper. but i don't believe mr. goodwyn would stoop so low as to try and injure a fellow who had never done him any harm. i knew nothing about his nephew. the place was offered to me, and as i had to work i accepted it only too gladly. i hope mr. goodwyn will soon be as good a friend to me as anyone else in the bank," replied dick, earnestly. "oh! don't mistake me, now, old fellow. i wouldn't for the world hint that our clever cashier would dream of doing you any harm, or trumping up a false charge against you. those things happen often enough in the stories we read, but in real life very seldom. but there are other ways of getting into trouble, you know." "just how?" asked his companion, puzzled and not a little worried by the mysterious manner of kassam. "well, suppose that something happened, as it frequently does, when things go wrong, and some careless person has misplaced a valuable paper--we know that after a certain amount of hunting it will be found, for it could hardly get out of _our_ department; but in your case it would be different, for your work takes you outside. if the circumstances looked in the least suspicious, i mean that mr. goodwyn would be apt to condemn you off-hand. just make up your mind to be unusually careful, that's all." "see here, pliny, you have some reason for telling me this, haven't you," demanded the other, anxiously. again his companion cast that instinctive hasty look around him, and the reason was obvious, for mr. goodwyn's little department was just at the other side of the thin partition, and if he happened to be in at this hour, which would be unusual, he could possibly hear voices raised above the ordinary, and as his decision was generally the controlling factor in the matter of employment, pliny might find himself looking for another job. "well, to tell the truth i have. you were out yesterday at noon when i was eating my lunch, and he happened to be in his room when mr. graylock called to see about some business matter. they talked rather loud, for you remember archibald is a trifle deaf, and raises his voice at all times. i couldn't help but hear, although i paid no particular attention to what they were saying until i happened to catch your name mentioned." "my name?" echoed dick, anxiously. "yes, and of course that caused me to sit up and take notice, for i thought it kind of queer that two business men in consultation should think about a boy who had nothing to do with their affairs at all," went on pliny, lowering his voice still more, until its mysterious character affected dick seriously, and he even found himself quivering with eagerness. "who brought me into the conversation first?" he asked. "i think it was graylock, for i heard him ask how you were making good, and from the plain sneer in his tone when he spoke i knew the old fellow was just hoping mr. goodwyn would say not at all, and that he would have to make a change." "but he didn't--don't tell me he said _i_ was a failure?" "oh! no; on the contrary he admitted that you seemed to be getting along pretty well, though he also spoke about the new broom sweeping clean, and that no doubt when the novelty had wore off you would show up just as many faults as charlie had." dick breathed easier. "i am glad he said a good word for me, anyhow. wait and see if i go backward. i'm more determined than ever to make good here, for i believe that the one chance i wanted has come to me. what did mr. graylock say to that, pliny?" he asked. "he sneered at it in that nasty way he has, and he was mighty bitter when he declared that he had no faith in you. he even said you had come to him to ask for a job, and he felt constrained to turn you down because he had heard certain things in various quarters that reflected on your honesty--nothing positive, but just little straws that generally show which way the wind blows." dick half sprang out of his seat, and his face grew red with anger and mortification. "i haven't liked mr. graylock from way back, but it never entered my head that he was a man who would descend to actual lies to get even with a boy who happened to cut his son out of a job. that was about as mean a thing as any man could ever hint at--no proof, but only general suspicion, and on that he would ruin my reputation with my employers. it's hard to stand that, pliny, mighty hard!" he breathed, clinching his hands and looking as though he had half a mind to hurry around to the big department store and demand an explanation and an apology from the owner. "just what i said to myself at the time--old graylock is a cur, a mean, mangy cur, that's what he is. and because i detest him so i made up my mind you should hear what happened to come to my ears. mind you, i'm not a listener, and under ordinary circumstances i'd have stopped up my ears." "it was kind of you to tell me, pliny. i'll be more careful than ever how i do things now. mr. graylock offered me a position in his store, and told me to take off my coat and go to work; but as he only gave three dollars a week i had to decline. i suppose he can't quite forgive me for walking out. perhaps i did say something a little sarcastic at the time, but who could help it when a man had even gone so far as to sneer at my father for declining to put his money into that store business of his?" "served him just right--three dollars a week, eh? and they do say he works his help like a mule driver. if that man doesn't get to be a millionaire it will be because he is so small he makes mistakes that a larger grained man never would. that is the law of compensation, my boy. and i hate to say it, but graylock ended up by warning mr. goodwyn that if he were in his shoes he would keep a sharp eye on a boy who had had no father these many years to train him right. that kind of hit me too, and i couldn't help shaking my fist at the old curmudgeon through that partition." "it was a mean trick, if i do say it. i ought to be glad, i suppose, that i happen to have nothing to do with mr. graylock. even if he had offered me living wages i hated to think of working for him. but let's drop the subject. i'm glad you told me this, pliny, unpleasant as it has been." "you won't say anything to a living soul?" "of course not, not even to my mother, though it's little i ever keep from her. she would only worry about it, and what's the use? i must look out for myself. depend on me to keep mum," replied dick, quickly, reaching out a hand and shaking that of the assistant bookkeeper heartily. "you know there is a knothole in that partition over there, and if a fellow cared to he could look in and see what mr. goodwyn was doing; but i wouldn't want to be guilty of that low trick. hearing what was said in a loud voice was another matter; i couldn't help that," declared pliny. then they talked of other things; though dick was unusually sober the balance of that day, and every time pliny caught his eye he gave a little shake of his head as though warning the messenger not to show his feelings so plainly. perhaps mr. goodwyn may have noticed the look on dick's face when he had occasion to talk with him, and it may have given his conscience a little stab or so, for he seemed more than ordinarily pleasant to the lad. poor dick was already learning that there may be a cloud upon the horizon ready to darken the bright skies, no matter how cheerful things may have looked heretofore; he had secured the situation that was the dream of his heart, but already a fly had dropped in the ointment. the baneful influence of mr. graylock seemed capable of reaching him through the dislike of the cashier, and sooner or later he was apt to suffer because of that unnatural combination. even his fond mother noticed that he was dull that evening, but he said nothing, and hence she concluded that the duties of his new position were proving exacting. but even dick could not foresee the shadow that in the immediate future was destined to cast its blight upon his promising young business career. chapter xii gathering clouds another week passed. dick had recovered his natural spirits, since it was impossible for a boy of his buoyant disposition to hug worry to his heart for any great length of time. mr. goodwyn could find no fault in his conduct; he was intelligent, quick, respectful and accurate; and yet the cashier kept tabs of his movements as though constantly looking for a weak place in his armor. would he find it after a while; could the boy continue to be as perfect right along as he seemed just now, and should the time come, was mr. goodwyn mean enough to look upon an accidental mistake as a crime? this was what made dick anxious; anyone was apt to make a slip once in a while--in the bookkeeping department it happened every month when they were taking off their trial balance, and then hours had to be consumed, and midnight gas burned until the error was found and rectified; but what was an ordinary mistake with one person might be magnified into an enormous blunder in another. accordingly, having this uneasy feeling in connection with mr. graylock's vindictive animosity, dick was put on his guard one day when the cashier sent him with a note to the department store. he had not been in it since that day when pliny told him about the talk between archibald graylock and the cashier. as he entered the big building it seemed to him that there was a difference in the air of things somehow; the clerks behind the counter were actually taking things easier than he had ever known them to do, and several were even conversing together--why, he actually heard a low laugh as he passed along, something that had hitherto been unknown in the graylock store. apparently the proprietor must have been relaxing his eternal vigilance for some reason or other. dick began to take notice, and somehow a thought flashed into his brain that he would not have communicated to anyone else for a king's ransom, lest he be accused of betraying the secrets that were connected with his trusted position in the bank. he remembered now that mr. graylock had been in consultation with the bank officials daily of late, and there seemed to be a look on his face that was more than the keen, shrewd business expression people were accustomed to seeing there. could it be that he was having troubles financially? dick knew that there were some heavy notes out against the man whose genius as an organizer had built up that big department store, so long a credit to the good name of riverview. yes, and he had been in to see mr. gibbs twice personally, which was a rather unusual proceeding, since the cashier was the one with whom all ordinary affairs were transacted. and now that he thought of it, might there be a reason in his setting ferd to work to earn his own living. he discovered the object of his last thought behind a counter, looking disconsolate, though when ferd saw him he tried to brace up and assume his former patronizing air, beckoning dick to approach. actually he offered to shake hands, which was a sure indication that ferd had suffered a fall in his pride. "how d'ye do, dick? getting along all right in the bank? i had an idea i'd like to take up the financial end of the game, but when i discovered what slaves all bank clerks are nowadays, i changed my mind. it's a heap better to work into the ropes here, and learn how the governor manages things; because you understand, before a great while i expect to see my name on the sign with his. archibald graylock & son, won't look half bad, eh? after that i can take it easier, you see. and when the whole business comes my way, after the old man cashes in his checks, why i expect to travel and enjoy life. i'm thinking of investing in a car the very day i get to be a partner here; yes, and i've been having stacks of catalogues sent me of the different makes. don't suppose you feel any interest in such things; perhaps you may ten or twenty years from now, when you get to be cashier." it amused dick to hear ferd boast, and never changed his own ideas a particle. just now he wondered deep down in his heart what effect it would have on the fellow if his father did make a grand smash, and it actually became a necessity for ferd to get out and hustle for his daily bread--it might prove the making of him in the end. "oh! i sometimes dream of having such a thing, some fine day; but just as you say, i rather guess that time is a long way off. it doesn't bother me a particle. i'm satisfied to get along day by day, and leave the future to itself. but i must be on my way, ferd. glad you like your berth. be sure and invite me to a ride in that car when you conclude to get it." mr. graylock was pacing up and down in that little room of his, with a plainly perturbed face; he started as dick entered, and looked relieved to see him, just as if he had been entertaining a fear of having some impatient debtor call upon him to demand an immediate settlement of his claim under penalty of closing up his business. and the lookout hole was closed, which accounted for the unusual commotion in the store among the employees; plainly mr. graylock, in anticipation of disagreeable interviews, had chosen to cut off his means of communication with the outer offices. he tore open the envelope dick carried from the cashier and hastily scanned the contents. there was a strained look on his seamed face, and a glitter in his eyes that dick could not but think boded ill toward some one, and he rejoiced that fortune had not thrown his daily lot under the finger of this petty tyrant. "tell mr. goodwyn that i will be right over, and bring the securities with me," he said, in a voice that seemed to tremble a little with eagerness or some emotion. "yes, sir. anything else?" asked the boy, respectfully. mr. graylock looked at him long and earnestly; it seemed to dick that something cruel and sinister was creeping over his hard face, and despite himself he shivered as though a piece of ice had suddenly been applied to his flesh. "that is all," said the merchant, finally, like a man making up his mind. dick went out. he could not understand his feelings, but it seemed as though he must have had some connection with the thoughts passing through that shrewd mind of mr. graylock while the other was standing there a full minute and looking directly at him. why should that be? how could so humble a personage as the bank messenger boy have anything to do with the financial standing of a big merchant like mr. graylock? surely it was entirely out of the question that the former dislike which this man had entertained toward him could have any place in his thoughts now, if, as dick imagined, he were wrestling with financial difficulties. he had one more errand to attend to before returning to the bank. it was the noon hour, and he expected to eat lunch before business picked up again. in these country banks things are not run on the same rigid regulations as in great city institutions. sometimes for half an hour business is virtually suspended and all the employees may be found out at dinner save possibly a single exception, which may be one of the tellers, or on occasion the cashier himself. as a rule depositors, aware of these conditions, do not come to transact any business between these hours, but if there should happen to be any especial need of money being paid out or taken in, the lone occupant of the desk attends to it. dick had noticed that several times mr. graylock seemed to have timed his visits at just this particular hour. it may have been accident, or he possibly wished to catch the cashier at leisure, and as the building was empty for a short season, so far as they knew, they could confer without a chance of being overheard. on this particular day, which was fated to be marked with a white stone in the history of dick morrison, mr. graylock entered the bank at the time he was eating his lunch in the little room back of the offices. from where he sat he could see the merchant as he came in the open door. he noticed mr. graylock cast a quick look around as if to size up the situation, and what would appear to be a pleased expression flashed over his thin face when he saw that the coast seemed clear, and that the cashier was the only one present, besides the boy eating in the back room. passing immediately into the section reserved for the bank workers he entered mr. goodwyn's den; the door being open so that the cashier could command a full view of the outer offices, and jump up if any customer should happen to apply at the windows for attention. there followed the murmur of voices from within; but for once mr. graylock saw fit to graduate his tones to a lower pitch, so that beyond an occasional word dick heard nothing that passed, nor did he wish to listen. then someone entered through the front door, and he heard the cashier get up to pass through into the main offices to wait on the customer. what impelled dick to step gently over to that knothole pliny had spoken of and take one quick glance he could never have explained, for surely he had no particular desire to look upon the disturbed and crafty face of archibald graylock. the merchant was just sitting down in his chair again as though he had stood up after the cashier's hurried departure from the little office, and he seemed to be buttoning up his coat; dick had one scant look at his face as he turned away again to resume his lunch, and he could never again forget the expression he saw there, it seemed to be so full of fear, of nervous strain, of malicious triumph. chapter xiii wanted in the cashier's office five minutes later a bell rang. it was from the cashier's office, and was meant to summon dick if he were about the premises. accordingly he at once presented himself in the little department adjoining the main offices, where he found the cashier still sitting with mr. graylock. the latter was watching for his coming, since his little eyes fastened upon the boy immediately. it appeared that he had mentioned something to mr. goodwyn pertaining to a matter that dick would be apt to know about; which of course had resulted in the boy being called upon to explain. this he was able to do in a satisfactory manner, for after all it was a trivial matter, though considering the feeling that animated the merchant it might have become serious had dick been less careful how he handled the messages entrusted to his charge. "that is all right, richard. i can see that you did the proper thing. if there is any fault it does not lie at your door," remarked mr. goodwyn, smiling. dick was more than pleased at these few words of praise from this source, the very first he had ever received from mr. goodwyn; his face flushed, and he drew a long breath as if inclined to thank the cashier, but realizing that this was not called for he turned to depart. "by the way, mr. goodwyn, don't you think it would be wise to have this packet placed in the safe right away? it represents too much to me just now to take any possible chance of losing it," exclaimed mr. graylock, eagerly. "why, certainly, if it will ease your mind any, archibald. i meant to do it myself just as soon as you had gone. here, richard, be sure and place this in the vault just where you put that package for me yesterday," and dick, turning at the door accepted the large buff envelope that had a stout rubber band around it to keep the contents intact. he was impelled somehow to look quickly up at mr. graylock as he turned to pass out of the door. again that strange shiver shot through him from head to feet as he saw the grim smile that appeared for just a single instant on that thin face, and then vanished. he went immediately into the bank vault, which was open, though the inner one had been fastened when the tellers left their stations, and carefully placed the packet in the exact spot he had been told. then he returned to the little room back of the offices to finish his lonely lunch; for pliny was away from his desk three days now with an attack of summer complaint--nothing serious, but keeping him at home for a short season. five minutes later he saw mr. graylock pass out. then one of the tellers returned and the cashier went home to his dinner. during the balance of the day dick often thought of what had occurred during the noon hour, and wondered whether the owner of the big store could really be getting into deep water financially. already he had learned that those in the bank must never talk about what they happen to learn or suspect, and so he made up his mind to keep his suspicions to himself. at any rate it was none of his business, and while he had no affection for mr. graylock he certainly did not feel like exulting over the fact that impending trouble hovered over his devoted head. once, when he had occasion to pass into the vault he saw that someone, possibly the teller, had taken pains to remove the packet from the shelf, and that it was undoubtedly now safely reposing in the inner receptacle of the big vault; indeed, the door of this being ajar dick fancied he could see the buff envelope with the heavy rubber band sticking out of one of the various pigeon-holes. after that it passed entirely from his mind. three more days passed by. there were now rumors abroad that all was not rosy with the firm of archibald graylock; everybody was talking of it, for in a small town such a thing is a calamity affecting many households; for should the big store close its doors scores must be thrown out of employment, for it had been doing a rushing business off and on. dick heard of it in half a dozen places; indeed, it seemed as though everyone must be talking about the visits of creditors, and the hustling of the worried proprietor to get accommodation in order to tide over the storm. there were no more consultations between the cashier and mr. graylock; for somehow the merchant seemed to avoid the bank, sending ferd several times with notes, when it became necessary to communicate. it seemed to dick as though there was a muttering in the air, just as he used to notice before a summer storm broke on a sultry day. surely something was going to happen. and now a new week had come around, the beginning of his second week with the bank. dick was even more pleased than ever with his position. it was an absolute delight for him to dabble with figures, and finding how very quick and accurate he was, the bookkeeper and tellers did not hesitate to give him many a task in that line. the more he did the better they were pleased, and many a joke passed around the inner circle that was aimed at poor charles, and his blundering ways. it was about a quarter after eleven when dick saw mr. graylock come in. he had a most determined look on his face, as though his mind was set upon doing something he had endeavored to hold aloof for some time. "looks to me as though the climax is close at hand," observed pliny, who was once more back at his desk; dick happened to be standing near by waiting for some notices that were being gotten together by the bookkeeper to be delivered on his regular morning round of the business houses of riverview. "i think myself we shall hear something drop before long," replied that functionary, in a low confidential tone, intended only for the ears of his assistant. never were words spoken half in jest more speedily made to come true. loud voices could be heard coming from the little den of the cashier, whither mr. graylock had immediately hastened upon entering. then in the doorway appeared the trim figure of mr. goodwyn, showing evident signs of excitement. "it is impossible, incredible, sir! such a thing could never happen in this institution. there must be some mistake; your informant was in error," he was saying, forgetting that other ears than those of the merchant were open, and could hear all he was saying. "my informant is a responsible man, and he declares that there can be no mistake. it was positively one of my securities that was offered to him by an unknown party, who, upon being questioned refused to tell where he had obtained the same, and left before he could be detained. i only trust that there is a mistake, mr. goodwyn. it would be a most serious thing for me just now to be crippled when i have need all of my available resources." "we will prove it to be a mistake, and you can breathe freely again, mr. graylock." with that the cashier stepped into the safe. mr. graylock stood in the doorway of the inner sanctuary, an eager look on his face that told of expectancy and dread, either real or assumed. every one in the enclosure had their eyes riveted upon the vault; although they were not supposed to have any interest in this matter it was only human nature to be overwhelmed with curiosity concerning anything that happened in connection with archibald graylock, who just now seemed to occupy a prominent place in the talk of the town, particularly with regard to his financial standing. five seconds later the cashier came out of the vault again. he was smiling now, and holding up the big buff envelope that was held with the heavy rubber band. both he and the merchant passed within the smaller office, and the door of communication was immediately closed. tellers and bookkeepers started back to work, with various significant smiles and nods. "has to put his long hand down at last in his bag and get out the securities he had intended keeping for his old age," whispered pliny, turning to dick, and then immediately adding: "why, what's the matter, dick, you look pale?" "nothing," replied the other; but somehow he found himself still listening as if he really expected to hear further sounds from the interior of the cashier's retreat. voices reached them as if the two men were in earnest consultation. then the door opened and mr. goodwyn poked his head out. he looked worried, much more so than dick had ever seen him before. yes, something had indeed happened, and a vague sense of impending peril seemed to overwhelm the boy, so that his knees actually quivered while he stood there, not through fear, for he had done nothing to bring about such a feeling, but simply nervous excitement. "mr. payson, kindly step in here," said the cashier. the paying teller did so with alacrity, and remained inside some five minutes, finally returning to his desk without saying a word to any of his associates, and looking rather mystified and uneasy. then mr. winslow was asked to join the two who were in the other apartment, and when he too came out his face was white, and in his eyes there seemed to be something bordering on dread, such as suspicion cast upon his good name must always breed in the mind of a bank employee. next the bookkeeper had his inning. dick still waited, knowing that sooner or later he was apt to have his turn. just as he expected, pliny kassam was not called upon; that must be because he had been absent up to the morning of this same day. as the bookkeeper resumed his work he did not look quite so jolly as usual; in fact a line as of new anxiety had come between his eyes, and dick imagined he gave a quick glance toward him as though something that was said had caused suspicion to be aroused toward the new messenger. "it's coming, whatever it all means!" dick was saying mentally, as he tried to get a grip upon his pulses and fortify himself for the ordeal. then his bell rang--he was wanted in the cashier's office. chapter xiv under suspicion one thing struck dick as singular. as the bell rang that summoned him to the carpet in the cashier's office it seemed as though the eye of everyone of his associates was raised from the work that had employed their attention and was focussed upon him. he even thought he could detect something akin to pity in these looks. he walked steadily over to the door, pushed it open and entered the small compartment of the head official of the bank, under the president. "please close the door again, richard," said mr. goodwyn, solemnly. why, it sounded like a funeral, and the cashier looked as though he might be taken for the chief mourner; as for mr. graylock, he sat there apparently wrought up to a high pitch of excitement, and drumming with his fingers on the table. dick gulped something down that seemed to be inclined to half strangle him, and then set his teeth together, resolved to put a brave face on it, no matter what difficulty might arise. "sit down here, richard, where i can talk with you," continued mr. goodwyn. the boy did as he was told, and looked calmly into the face of the cashier; if the other had anticipated discovering anything shifty in his manner he certainly received as great a surprise as at any time in his life. "richard, do you remember the day mr. graylock was in here, and i called you to ask about that classon matter, which you explained quite satisfactorily--let me see, what day was it?" he said, turning to the eager merchant, who was devouring dick with his eyes, and looking actually savage. "thursday of last week. i made a note of it naturally in my memorandum book, for i might wish to substantiate the occasion when i called for the securities again," replied the merchant, grimly. then it was about that packet after all; dick had suspected something of the kind ever since he knew that mr. graylock seemed to be aroused over something, and had mentioned the word while standing in the doorway. "yes, sir, i remember," he replied, calmly, even while his heart was fluttering with an unknown dread. "you also recall the fact that i handed you a packet, a buff envelope in fact, secured with a rubber band and requested you to immediately place it in the vault?" "yes, sir, i do," answered the boy, respectfully. "was this the package i gave you?" holding up the bulky envelope. "it looks very much like it, sir." "take hold of it, richard; tell me does it seem quite as full as when i first placed it in your hands?" "i do not notice any difference, sir, though of course i paid little attention to the fact at the time," replied dick. "you went straight into the vault, because i can remember seeing you. then my attention being attracted by something this gentleman was saying i turned my head away, and did not think of you again. just how long do you think you were in there on that occasion, richard?" continued the cashier, enunciating plainly, as if he wished to impress the seriousness of the occasion upon the consciousness of the one he addressed. "i think not more than a few seconds, sir; only long enough to put the packet on the shelf where mr. payson would be sure to see it as soon as he came in, and place it in the inner safe." "yes, i remember, i explained to you that anything placed on that particular shelf was intended to be lodged in the fireproof safe when mr. winslow had it open. a few seconds, you say, richard. i wish i could make sure of that, my boy," and he looked severely at the messenger. "did you see that packet again after that?" asked mr. graylock, taking a hand in the examination. "no, sir. when i carried the books in at the close of business the shelf was empty, so i guessed mr. payson had put it away as soon as he returned from lunch." "oh! you noticed that, did you? take pains to stick a pin in that, mr. goodwyn, please; the boy was enough interested in that particular packet to look and see if it was still there! now, tell me just why you thought anything about it, boy?" exclaimed mr. graylock, scowling as he bent forward the better to stare into the face of the one under suspicion. "i don't know why i should, but just happened to remember having placed it there. the books fit in a rack under that shelf. i suppose it was only natural for me to remember the incident, and give one look up there." "just so," said the cashier, slowly, as if trying to grasp the tangled ends to the mystery with which he so unexpectedly found himself confronted; "you appear to be wondering what all this means, and i will tell you. that buff envelope contained negotiable securities worth fully one hundred thousand dollars. i saw them with my own eyes and even handled them, putting them back with the other papers myself just before you were called in. i have taken this envelope out of the safe just now, and when mr. graylock scattered the contents on my table the securities were missing!" so, that was what had happened, was it? and suspicion had already pointed its finger in the direction of the bank boy, simply because he had held the buff envelope in his hands a brief time! somehow, now that the worst was known, dick did not feel anything like a tremor pass through his frame. strong in the consciousness of his own innocence he could not see where he had been at all to blame; they could certainly not accuse him of a misdemeanor on the strength of mere suspicion in the mind of mr. graylock, who had shown so plainly the strange and unreasonable dislike he bore dick. "i am sorry to hear that, sir; but i assure you that i know absolutely nothing about the matter. i placed the packet on the shelf; someone put it away a short time later, and i have not touched it since. that is all i can say, mr. goodwyn," he went on, with an expression on his young face that might either mean sincerity or brazen boldness, according to the way one chose to look at it. "but no one saw you come out of the safe that day. you may have been there a full minute; that would be long enough to open the envelope, extract part of the contents and put the rest away--that is, if you were so minded," said mr. graylock, vindictively. dick grew very white, and a burning answer trembled on his tongue at this direct accusation, but he wisely held himself in restraint, remembering that under the circumstances the distracted merchant could hardly be blamed for what he was saying. "stop and look at the matter a minute, sir. it hardly seems reasonable that a green boy at the business should know all about negotiable securities, and take only such out of the envelope, leaving all others. in what way could i attempt to dispose of such things, since i have never been out of riverview in all my life? if these papers have been stolen and are being offered for sale somewhere, it looks to me as though some pretty clever man must have done the stealing, instead of a bank boy." the cashier looked interested at what he said. "at least the boy talks sense, graylock. if there is a leak in this bank we are bound to discover it in short order. you need not worry about it, sir, since you are protected by our assurance that we will do all in our power to recover your securities; and if it can be proven conclusively that any one in our employ took them the bank is bound to remunerate you, even though its resources be badly crippled in so doing. mr. gibbs is unfortunately away to-day, but i shall wire to him immediately. until he comes nothing more can be done," he remarked, positively. "and about this boy--what will you do?" asked the merchant, turning to frown at dick, as though in spite of all he either could not or would not allow himself to get rid of the idea that the messenger knew something about the missing papers. "nothing just now. there is really no tangible evidence that he took the securities, sir; you must admit that it is only suspicion as yet with you?" returned the cashier, gloomily, gnawing at his upper lip nervously, and playing with his pencil by tapping it on the table. "but he handled the packet, you admit?" declared mr. graylock, stubbornly. "so did mr. payson, who declares he put it away on that day as soon as he returned from lunch; so did i right here before your eyes. i have been trying to recall the exact circumstances of that day, but i seem to be a little hazy, which, however, is not to be wondered at under the circumstances, for this thing has given me a terrible shock, sir. it will be your duty to have some one find the man who offered one of the stolen securities to your friend, and in that way discover the identity of the guilty person. i shall be sorry for him when found; mr. gibbs is a martinet when it comes to duty, and the one who took those papers will undoubtedly have occasion to repent behind the bars." he looked at dick as he said those last words, but the boy did not quail in the least, his calm eyes meeting those of the nervous cashier steadily. "innocent, or hardened, which," was what was passing through the mind of mr. goodwyn, as he noted this unflinching behavior of the suspected youth. "do you wish to ask me anything more, sir?" "are you in the habit of corresponding with anyone in boston, richard?" "not until a week ago, when a friend of mine who was in florida the last time i heard from him wrote me from boston. he addressed his letter to the bank because he said he understood from another fellow in riverview he corresponded with that i was now employed here." "have you this letter?" continued the cashier, quietly. dick put his hand to his pocket and drew out an envelope, which he started to open, and then turned scarlet with mortification. "i remember now that i was reading his letter again this morning while down near the river on an errand, a sudden gust of wind carried it out of my hand and over the fence. i had no time to hunt for it, and besides concluded it had blown into the river. but i kept the envelope to remember his address," he said. mr. graylock laughed scornfully, almost triumphantly, dick thought. "let me see that envelope, young man," he snarled, and having fairly snatched it out of dick's hand he gave one glance and then held it up. "just what i thought! look at that, will you, mr. goodwyn; up in the corner is this firm address: 'cassidy and prime, stock brokers, boston!'" the cashier took the envelope, and then said huskily: "this begins to appear like a serious thing for you, morrison. i really feel sorry for your mother. sit down again; i am not yet through with you!" chapter xv mr. graylock seems disappointed somehow or other dick did not seem to be greatly alarmed by these significant words of mr. goodwyn. perhaps it was because he did not fully understand their import, or catch the tremendous importance of that broker's address upon the empty envelope; then again the consciousness of his entire innocence may have had something to do with it. had he been asked, however, it is very possible the boy would have imputed his bold front to the fact that he saw the look of almost savage delight on the vindictive countenance of mr. graylock, and was determined that he would give that gentleman little cause to gloat over his apparent downfall. so he smiled as he sat down again and faced the uneasy cashier. "i don't see why you should be sorry for my mother, mr. goodwyn. i have done nothing that i need be ashamed of, and she will believe me, no matter what happens. i have been like other boys, in their sports and in playing pranks, but mr. goodwyn, i never deceived her in my life," he said, with some show of feeling. "that sounds very nice, richard. i wish i could believe you. of course you can see that this envelope needs immediate explanation; for your story about having a boy friend in that office is rather far-fetched, to say the least," the cashier went on. "i should say it did--fishy, i should call it," muttered mr. graylock, with a shake of his head. "all the same it is true. his name is frank patterson, and he used to live here in riverview," asserted the boy. "i remember such a boy; but that does not prove your assertion by any means. do you know i can telegraph to that office and discover the truth?" he was watching the face of the other closely, expecting him to look anxious; on the contrary dick smiled broadly as he immediately answered: "i wish you would, then, mr. goodwyn, or get them on the long distance 'phone. i would like to ask you one thing, first, sir; it might save you the expense of such a call." "well, what is it?" coldly. "i said that the letter was torn out of my hand by a sudden gust of wind, and carried over the fence toward the river, and that i had no time just then to try and find it again?" "yes, that is what you told us as near as i can remember--go on." "if that letter could be found on the meadow somewhere, and brought to you, sir, would it help clear me in your eyes?" anxiously. the cashier considered. "it might go a long ways toward making me believe you spoke the truth about having a friend in that office; the contents of the letter might also help. but i could not think of letting you go after it by yourself, you understand," as a sudden suspicion flashed into his mind that dick might manufacture some sort of letter and try and palm it off for the original. "of course not. i was just going to ask if you would have some one you could _fully_ trust go with me, sir," the boy went on, laying an emphasis on that word that somehow made the gentleman wince. "very well, richard. i will take the place of mr. winslow for a time, and he can accompany you down to the river. i shall instruct him not to leave you alone for a minute--for your sake as well as my own satisfaction. if you are going to be cleared of this suspicion it must be thoroughly done." "thank you, sir," was all dick said, but the smile he gave mr. graylock seemed to irritate that gentleman more than a little. so the receiving teller was called in and put in possession of such facts as seemed necessary for him to know, and in another minute he and dick left the bank, heading down the street toward the river, and leaving mr. graylock still sitting there, trying to pour poison into the ears of the cashier concerning the wily ways of all boys in general, though in so doing he rather disgusted mr. goodwyn, who it happened had a couple of little kids at home himself. mr. winslow seemed to be worried as he strode along at the side of the messenger. "i really hope there's nothing in this affair, dick," he said, kindly. "make your mind easy on that, sir; there isn't an atom of truth about it. i know nothing about the package or what it contained, any more than you do. i may have my suspicions about what happened to those securities, but without any proof i don't dare speak about it. as to this letter business it can be easily cleared up, even if they have to call the boston firm and ask particulars." "where were you when the letter was snatched out of your hand by the wind?" "just a little ways further along; i think it was where that old boat lies pulled up on the shore by the creek. the road takes a bend there, and the letter was carried across the creek and into the meadow. if it went on far enough it must have gone to the river; but i have an idea it fell down to the ground, and may have caught somewhere," returned dick. the other took an observation and saw that it looked reasonable, especially as the wind was still blowing rather stiffly, and came from a quarter that would have carried any piece of paper just as dick declared. they crossed the creek by a little footbridge used by those who kept boats near by, climbed the fence by the meadow, and then started straight across, dick keeping his eyes eagerly on the alert for any sign of a white paper. before they had more than half crossed the field, with the river half hidden in the trees and brushwood beyond he gave an exclamation of delight. "look over there, sir, just where that oak stands; there is something white in the scrub at its butt. perhaps that may be what we are looking for." "i hope so, richard, i truly hope so," replied the tender-hearted teller, who had taken a great fancy for the boy, and felt deeply grieved over the calamity that seemed to be hovering over his head, for if dick turned out to be a rogue mr. winslow believed he would never be able to trust any lad again. hurrying forward they were soon at the base of the tree, dick having his eyes fixed upon the white paper that had become caught in the twigs of the brush. "it's the letter, all right, sir. please take it out yourself. mr. goodwyn would not trust me to touch it, i'm afraid," he said, a little bitterly. so the teller immediately reached into the copse and gently but eagerly drew the paper out; he scanned its entire contents before saying a word, while dick watched the look of pleasure that began to steal across his face. presently the teller gave a big sigh of relief, and his first act was to snatch the boy's hand and squeeze it fiercely. "it's all right, dick, and i'm delighted more than i can tell you. what you say is fully proven in this letter. let them call up the firm if they want; you have nothing to fear from any exposure. come, we will get back to the bank as fast as possible. i want to see the face of that old reptile when he learns that the letter has been found, just as you said," by which rather severe epithet he undoubtedly meant mr. graylock, whose evident animosity toward the bank boy he must have noticed. "i am glad the letter didn't blow further, and get in the water, for then we never could have found it; but after all it wouldn't have mattered much in the end. they would have learned that i never sent a single letter to that firm, and that i was unknown to them," remarked dick, as he trudged along at the side of the teller, whose eagerness to produce the proof of the boy's innocence in so far as his accounting for that envelope went was urging him to walk unusually fast. so they came presently to the bank. mr. goodwyn jumped up out of his chair when the two burst into his little room. the teller was waving the paper ahead of him, but his eyes were fixed upon the face of mr. graylock, and he was quick to see the look of keen disappointment that passed over it. "you found it, then?" asked the cashier, reaching out his hand eagerly. "yes, lodged in the bushes, just as dick said. and i think it will fully substantiate all he claimed, sir," replied the teller. "like enough he wrote it himself, and all this is a dodge gotten up by a clever young scamp," grumbled the merchant. "for shame, mr. graylock; at least give the boy the benefit of the doubt," said the teller, indignantly. "if he didn't take the securities, then who did?" snapped the other, angrily. "time will prove that, sir," remarked mr. winslow, slowly, and it interested him to see the old man look confused, as though he saw in the answer a sterling reproof. meanwhile the cashier had read the letter from beginning to end. he now looked up, and there was an expression of relief on his face as he said: "this letter seems to be genuine beyond the shadow of a doubt, richard, and it proves your assertion that you have a friend in the employ of this broker; but to make assurance doubly certain i think i had better call them up on the 'phone and ask if they have ever had any dealings with any one by the name of richard morrison. you have the numbers of those securities with you, of course, mr. graylock, for i may as well ask them at the same time whether they have had any of them in their hands for disposal. please give them to me, sir." but mr. graylock did not appear to be very sanguine that this would lead to any definite result. "here are the numbers on this slip of paper, goodwyn; but i don't think you will learn anything that way. the fellow who would be clever enough to slip those negotiable securities out of the envelope and leave the others is going to be too smart to leave his trail exposed. this thing is bound to bring calamity down on my business, and i fear it will soon pass into the hands of my creditors; but remember, sir, if it turns out that any one in your employ took those documents i shall hold this bank responsible to the last dollar," and so saying he hurried away. chapter xvi fortune's favors the cashier looked relieved after the departure of mr. graylock. as for the teller, he took occasion to shake his fist after the retreating storekeeper, and shake his head as though he bore the man anything but brotherly love. dick stood there waiting for the cashier to speak. "you can go about your regular duties, dick, and say nothing about what has happened, to any one outside of the bank." "then i am not discharged, sir?" asked the boy, a sign of moisture coming into his eyes as he looked into the face of the cashier. "certainly not. there has been nothing proven as yet. others as well as you have had access to the safe, and could, if they wished, have opened the envelope and abstracted those papers. i must have time to think this over. first i shall call up the boston firm and settle that point. then, when mr. gibbs gets here he and i will try to find out just what could have come of those securities. while you were out, mr. winslow, i searched the safe thoroughly, in the hope that in some unaccountable way they might have slipped out of the envelope, but they are certainly not there. i am in a fog just now; but depend upon it, we will find out the thief." "i hope so, sir. come, dick, i have an errand for you," and the kindly teller threw his arm about the shoulder of the boy, and in this way walked into the outer office. every eye was immediately fastened on them, and the attitude of mr. winslow was enough in itself to assure mr. payson, the bookkeeper, and pliny that at least he was convinced of the boy's innocence. the balance of the day dragged heavily to every one. business was almost at a standstill in the bank, for when the cashier was not in evidence some of them were bound to drift together and converse in whispers about the strange and terrible thing that had happened. each one seemed to feel the weight resting upon his shoulders, for until the truth came out there must always be an uncertainty as to the entire innocence of the employees of the bank. mr. winslow had to tell his part in the investigation several times, and the letter was passed around until every one had read it; but mr. winslow insisted that it should not leave his sight until the banker himself had had a chance to see it. finally, when released for the day from his duties dick went straight home. he held his head erect and walked as firmly as though honors had been showered upon him, instead of his being under suspicion of having stolen valuable securities held in trust by the bank. mr. graylock had claimed that he intended to borrow enough on these papers to tide him through his present difficulties; personally, however, the cashier knew that he was in so deep that even this large amount would only have stayed the inevitable for a short time. dick, of course, did not know this fact, and having heard the owner of the big store declare that he would be ruined by his loss, he could not help but feel a certain amount of pity for him. his mind was in a whirl as he walked home, and in the maze he seemed to be trying to grasp _something_ that continually eluded him, something that if he could only capture it might give him a clue as to the solution of the mystery. like mr. goodwyn, the sudden shock had disconcerted him, and he seemed to be in somewhat of a fog as to the happenings of that day; resolutely he set himself to the task of straightening things out, and going over every little incident that had occurred while he was eating his lunch and the two men were talking in the adjoining room. he had not dared mention this fact as yet to mr. goodwyn, for, on its face, he feared that it would only serve to make his case more serious; since the fact would become evident that he knew the value of the papers in the packet. he had just reached the point where he took that one peep through the little knothole, and saw mr. graylock buttoning up his coat, with that inscrutable look on his thin face, when he arrived home, and found his mother awaiting him. to his surprise she was smiling as though unusually happy, and this was so unexpected that it gave him a pang to remember how he must bring new shadows upon her heart by telling how he was suspected of having done a terrible thing. "good news, dick, guess what it is?" she exclaimed, as she fondly caught him in her arms and kissed him. "not the resumption of paying dividends by that company?" he asked. "no, something as unexpected as a meteor falling out of the heavens. i have received word from a lawyer in boston that a relative whom i hardly knew belonged to the family has died, and left me quite a little fortune--the lawyer could not say the exact amount, but it brings in something like a thousand dollars a year." dick could hardly believe his ears. what a day this had been, the evil mingled with the good; would he ever forget it as long as he lived? of course, being a boy he immediately forgot all about his own troubles, and hugged his little mother until she begged for mercy. "say, isn't that great? did you ever hear of such luck, and just when it looked as if we were near the bottom of the heap, too? ain't it just bully? i feel as if i could whoop like a wild indian. now, mother, no more worry for you, and a rest from all that miserable sewing that makes your eyes red. hurrah for the morrisons! they're sure it right now." his boyish enthusiasm was bubbling over in this fashion when he suddenly remembered the distressing news he had brought with him; still, in the light of his mother's glorious good fortune dick somehow felt that he could stand the odium of being under suspicion for a little while; for, of course, the truth must come out sooner or later. his friends at the bank believed in him, and if the cashier still harbored any doubts he at least was a square man and meant to do the right thing; as for what mr. graylock chose to think, that could not matter a great deal, for he had plainly shown that he was very much prejudiced against dick--in fact, come to think of it, he had by every means in his power striven to make it appear that the crime must lie at his door. why should this be? it was what puzzled dick, and seemed to be the subject of much of his pondering. he waited until they were through supper before speaking of the ugly matter. trust a fond mother's eyes for discovering that her boy had something on his mind that even the glorious news received that day was unable to dissipate. "now tell me what ails you, son," she said, as he snuggled down beside her on the settee on the porch; for the evening was balmy and the stars so bright they could not bear to sit inside by a lamp. she did not once interrupt while he told the story, beginning with the day he happened to be alone in the storeroom back of the offices eating his lunch when mr. graylock brought over the securities he wished to leave in the bank looking to the day he would have to borrow on them. when he had finished mrs. morrison sighed deeply. "i cannot see how any one could imagine that you had anything to do with the disappearance of the papers," she said. "i should say that some one who was perfectly familiar with their marketable value must have taken them. but it is evident that mr. graylock has made up his mind you are guilty, though it is incomprehensible to me why he should do so, rather than one of the tellers, or the bookkeeper; and he means to give you all the trouble he can. oh! how i fear that man. there is something about his face that makes me shiver whenever i look at him--something so crafty, so cruel. i do not believe he has the feelings of other men, or cares for a living soul beyond himself." "now, don't feel so badly over this affair, mother dear. it will all come out right, just as mr. winslow says. mr. graylock may find that after all he did not put the negotiable papers in the envelope--but no, that couldn't be, for the cashier owns to having handled them at the time. perhaps mr. graylock--" and there he abruptly came to a stop as a dazzling thought flashed through his mind almost staggering him with its immensity, so that he fairly gasped for breath. "what was it you were about to say, dick?" asked the lady. "never mind, mother, i had better not finish my sentence. a sudden thought came to me, perhaps a foolish one, but anyhow i shall mention it to mr. winslow in the morning. let us forget this trouble to-night, and only talk about the wonderful fortune that has come to you. i want to take that letter from the lawyer with me to-morrow to show mr. goodwyn. you see if he heard we had come suddenly into some money he might think it looked very suspicious." she laughed at that. "i can see how your bank training is already making you very shrewd, my boy. i should never have thought of that, and how suggestive it might seem, coming as it has just now. you shall have the letter, and now let us plan what improvements we can make in our little home when some of this bonanza comes in," she said. chapter xvii the investigation when dick arrived at the bank on the following morning at his usual hour he found that a sense of gloom had descended upon the inmates of the institution. every one seemed to be depressed. in answer to his pleasant greeting the tellers and bookkeeper nodded and went on with the work that held their attention, as though endeavoring to catch up with a press of business. at first dick wondered whether there could have been any further developments linking his name with the mysterious disappearance of the securities; then he wisely came to the conclusion that all of his fellow employees were simply nervous over the coming interview with the head of the establishment, who might find some cause to suspect that the guilt lay with one of them. he went about his duties as quietly as though nothing had happened, and mr. winslow, looking over the top of his desk allowed himself to give a little nod of appreciation when he saw how determined dick was not to look like a guilty person. "that boy has grit, all right," he said to his associate, when they came together in getting out the cash to begin the day's business; "most lads in his condition would be scared half to death, and ready to break down. dick is a chap after my own heart. here comes mr. gibbs, and the cashier is with him. i believe he must have met him at the station, and has told the whole story on the way here. now for it, payson. this is a nasty piece of bad luck for us all, and i only hope we get out of it decently." the two gentlemen were in the president's room for some time before any one was called; then one of the tellers was summoned and remained there for about five minutes, after which the other went in, followed by the bookkeeper. "now it is my turn," said dick to himself as he saw this last gentleman come out again, and beckon to him to enter. he found mr. gibbs looking very grave indeed. if the bank finally had to stand the loss it would make a big hole in the resources of the institution; as the securities had simply been placed in the safe of the bank for security, at the risk of the department store keeper, of course they could not be held accountable for their loss unless it was proven that some one in their employ had taken them--mr. graylock assumed the chances of fire or any ordinary burglary up to the time he actually gave them in charge of the bank and accepted a loan on the papers, when the risk would be transferred to the institution. still it reflected upon the good name of his bank, even though mr. gibbs might never be compelled by law to redeem their value to the owner. of course, mr. gibbs had heard all about the letter from the brokers in boston, and that matter was easily disposed of, for the cashier had been in touch with a member of the firm by long distance phone, and learned that they neither knew of a customer by the name of morrison, nor had they ever handled any of the listed missing securities. mr. gibbs was desirous of learning all about the events of that day when dick put the packet on the shelf in the vault. evidently the cashier had not yet been able to distinctly recall every little incident that had happened on that occasion, and mr. gibbs laid particular stress upon the fact that besides mr. goodwyn, dick and the merchant, there had been no one in the bank while the transaction was going on. "you are quite positive about that, richard--you three were the only ones in the building during that noon half-hour, you say--not another soul about?" he continued to say, watching the boy keenly. "except mr. hollister, sir," replied dick. the cashier started as if he had been shot, and turned red; he had apparently quite forgotten that little point, which, after all, might have some bearing on the explanation of the puzzle. "mr. hollister, you say--one of our best customers, and a man of unimpeachable honesty; in fact, a director in this bank; surely we cannot imagine for a moment that he could have anything to do with the disappearance of these securities!" exclaimed the president, frowning at dick. "oh! i did not mean that, sir, indeed, i had no thought of such a thing. only you asked me if there was any other person in the building during that half hour when the rest were out to lunch. mr. hollister did not come back of the railing; he only wanted to get change for a large bill, i believe, sir," returned dick. mr. gibbs glanced toward the cashier, who immediately nodded. "the boy is right, though i had really forgotten the circumstance. as i was the only one present to wait on him i made him the change. it only took me half a minute, sir," replied mr. goodwyn, hastily. "h'm, at the time he came in you were seated with mr. graylock in your room. i understand?" said the president. "yes, sir." "with the securities still on the table?" "done up in this buff envelope, just as you see them here, sir," replied the cashier. the president looked at him as though he may have had a sudden inspiration; but remembering that another was present he refrained from saying what was on his mind. turning to dick he continued to question him. "richard, you understand that while circumstances may put you under a cloud for a brief time, if you are innocent of wrong doing, as i firmly believe, you have nothing to fear. such a bold crime cannot be committed without the thief leaving some trace of his identity behind him. i shall doubtless find it necessary to send to the city for an officer to come up here and take up the investigation. you will not hesitate to tell him everything he wishes to know, will you?" "i have nothing to hide, mr. gibbs. some one certainly took those securities, and i would give a great deal to be the one to find them. i have told my mother all about this trouble, sir. of course, she believes that it would be impossible for me to take anything that did not belong to me, and especially such valuable papers as these were; but she is my mother, you know, sir." "yes, i understand that, richard. of course the only temptation that might urge a boy, brought up as you have been, to do something of this sort would be the desire to place his mother beyond want. i have no doubt the officer will lay considerable stress upon the fact that you have found yourselves in straightened circumstances of late, and that you could not bear to see her suffer." "that is all ended, sir," said dick, smiling, for he knew what a bolt he was about to launch in another moment. "how do you mean, richard?" asked the president, curiously. "we have come into some money, left by a relative in boston so far removed that my mother hardly remembered her name, sir." "what! come into some money? indeed!" and the president, just as dick expected, shot an alarmed glance across at mr. goodwyn, who also looked very serious. "yes, sir, and you can well believe that it was welcome, too," dick went on. "about how much did this sudden and surprising inheritance amount to, richard?" coldly. "we do not know yet, but it will bring something like a thousand dollars a year, which is enough to support us handsomely, sir," returned the boy, smiling now at the mysterious looks exchanged between the two gentlemen. "interest at four per cent, on about twenty-five thousand dollars. that is quite a lucky windfall, richard; but, my boy, don't you realize what a terribly significant fact it would appear in the eyes of any one bent upon investigating the mysterious disappearance of these valuable documents?" and he laid a trembling hand on dick's shoulder as he spoke. "yes, sir; i thought of that," replied the boy, cheerfully. "so that i sincerely trust you are in a position to show us some evidence that bears you out in your remarkable assertion. fortunes do sometimes come to people, but seldom under such conditions as surround you at present." "that was just what i was telling mother, mr. gibbs." "yes, and what did she say?" "she declared that my month in the bank was making me a shrewd business man, just because i suggested that she let me take the letter from the boston lawyer, and bring it down here to show you when i told of our good luck, sir!" "a letter--you have a letter from a lawyer then, and with you?" exclaimed the president, his face lighting up suddenly. dick put his hand in his pocket and drew the letter out. "here it is, sir; just as it was received yesterday by my mother." mr. gibbs immediately glued his face to the pages, type written, and filled with legal phrases, but perfectly intelligible to his trained mind. when he had finished he only said one word, "wonderful!" but kept repeating it as he watched the cashier devouring the contents of the letter. "did you ever hear of such a marvelous coincidence in your life, goodwyn? here, just after these papers are lost, and suspicion is turned upon richard, he and his mother fall heir to a neat little sum of money. my boy, i want to beg your pardon for suspecting that this incident only added to the weight of circumstantial evidence against you. you have proven entirely innocent in so far as this money is concerned. we will forget all about that now, and answer me a few more questions, if you please, about that fatal day when this deplorable accident came about that threatens to cause us so much trouble. depend upon it we shall straighten it out, and no matter who is guilty they will be punished." still, when mr. gibbs said this, he did not frown and look at dick as though the threat was meant for him at all; no matter what the cashier thought, the head of the establishment seemed to be ready to pin his faith on the messenger boy, as though his ability to read character told him there could be no guile in those clear eyes that looked straight into his own. after a little while dick was allowed to go. he had answered every question to the best of his ability, and he wondered if after all the suspicions of the president could have been directed in the same quarter as his own. all that day he held his counsel, and said nothing to any one about what was passing in his mind. matters went on just as usual in the bank, for not a whisper about the missing securities had gotten out; though this immunity could not be expected to continue long; for mr. graylock would have to explain to his creditors, who were gathering like a flock of buzzards about the carcass of a dead cow, how it came he could not raise the large sum of money he had promised to have ready to liquidate a proportion of their claims, and then the public must know what had happened. dick wondered also if he would be able to hold his head just as erect when he fancied people on the street were pointing at him and whispering significantly. chapter xviii the receiving teller frees his mind the day dragged its course along, but it seemed as though closing time would never come to dick. he knew that mr. gibbs was busily engaged, and that he held several talks with some one over the wire; the cashier looked solemn enough to make people imagine he had lost some of his family, for this was a serious piece of business with mr. goodwyn, and he felt it keenly, perhaps more than dick imagined. the boy had determined that he would speak to mr. winslow about the suspicion he was harboring, for he believed he was sure to find more or less sympathy in that quarter, after hearing what the teller had thought of mr. graylock. as the other got away some time before his duties were done he thought it best to approach him after the luncheon period--and a new rule had been put in force now to the effect that one of the tellers must remain in the bank all the time, so that business might not be interrupted--it is easy to shut the stable door after the horse is stolen; but at least by such an act a second robbery may be prevented. "i would like to ask your opinion and advice about something, mr. winslow, if i could see you somewhere after closing hours," dick said, coming up to the teller's window. the other thought a few seconds, as though he might be wondering whether it would be good policy for them to be seen conferring together; then he nodded and said: "come around to the post-office. i sometimes drop in there to give stavers a lift with his books, as he is a poor hand at keeping accounts. glad to hear what you have to say, dick. no more unexpected fortunes dropping down out of the skies, eh?" for of course dick had told the others about the good luck that had befallen his mother, and even shown them the lawyer's letter. "not that i know of; but then i haven't been home yet. once these things get to coming they say it never rains but it pours. we can stand all that comes our way, i guess. wait for me then at the post-office, please. it is mighty important--to me anyway, sir." the bank closed at three, but the tellers did not get away for another hour, and sometimes dick had to stay even later. when he did finally get out he hastened to the centre of the town where the post-office was located, and asked for mr. winslow, who speedily appeared, he having been watching for the lad. "let us walk up this quiet street, richard, and we can talk as we go. now, what is it you want to tell me, and in what way can i give you advice? we are all more or less worried at the bank again because mr. gibbs informed us that the government bank examiner may drop in on us to-morrow on his regular tour of the financial institutions, though we did not expect him for another month. go on, dick." there was at least a promise of sympathy in the tone of the teller. "perhaps you will think me foolish to imagine such a thing, sir, but somehow, if you had only seen his face that day you might have a little suspicion too," he said, half hesitatingly. "meaning whom, richard?" asked mr. winslow, encouragingly. "mr. graylock, sir." "and what day do you mean--the time he brought the securities over, and it fell to your lot to place them in the vault?" "yes, sir. mr. hollister came into the bank to get a bill changed, and there was no one to attend to him but mr. goodwyn, who had to come out of his room for a minute and count out a lot of small change." "yes, yes, i see, leaving graylock there during that time; go on, richard," said the teller, suddenly beginning to show signs of excitement, as the idea dick was advancing gradually began to take hold on him. "i don't know what caused me to do it, sir, and i suppose i should be ashamed of yielding to the sudden impulse; but that man always interested me strangely; why, in church i have sat and watched his face working as he listened to the sermon, and could hardly take my eyes off him. anyhow, no matter, i confess that when i heard mr. goodwyn out in the tellers' department speaking with the customer, i just stepped on my tiptoes and put my eye to a little knothole in the partition." "yes, i'm following you, richard; it was hardly the right thing to do, but boys seldom think of such matters. you peeked through and saw--what." mr. winslow had by this time become so excited that he caught hold of dick's arm and actually gripped him as though he might be afraid the boy would suddenly decamp, and leave his thrilling story but half told. "i saw mr. graylock. he was standing up and buttoning his coat nervously. i saw him turn his head and look around as though he fancied he had heard a noise. perhaps i did kick a book that was lying on the floor; but he didn't look at that little knothole, only toward the door that led to the outside office. then he sat down again. i could see that he was smiling as if pleased. mr. goodwyn came back just then, and i moved away." the two looked at each other for a moment without another word being said. evidently the teller was allowing the information he had just received to soak in, where he could turn it around and begin to grasp the true significance of the incident. "dick, i believe, my boy, you have struck on the true secret of this mysterious robbery," the teller exclaimed. "it seems almost unthinkable that any man could descend so low as to plan such a diabolical thing, and then try as best he could to throw it on the shoulders of an innocent lad. if it turns out to be true nothing could be too severe a punishment for that rascal!" "then you don't blame me for thinking such a thing, sir? i was afraid you might laugh at me, or even worse, accuse me of inventing something that could never have happened. oh! if you could only have seen the look on his face as he stood there buttoning his coat up, you would never forget it. i have dreamed of him every night since, and always with that terrible look in his eyes. but, mr. winslow, could a man do such a thing? i never heard of any one robbing himself before." "ah! you have a good deal to learn yet, my boy. it would not be the first time a clever and unscrupulous rascal laid a plan to have it appear as though he had been robbed, so that he could profit from the consequences. mr. graylock is in a bad box. his creditors are pushing him hard, and i think that to-morrow his house will be in the hands of the courts. he declares that he was holding those securities to prop up his business at the last hour; but mr. goodwyn has admitted to me that they would have been only a drop in the bucket; that the failure was bound to come. now you can see what object he would have in taking the papers after they had been examined by the cashier; and in getting his envelope hurriedly in the vault without its being looked into again." "yes, that is what i thought, though i hardly dared put it into words, sir. you mean that when i saw him he was buttoning up his coat because he had hurriedly taken those negotiable securities from the package and thrust them in his pocket?" gasped dick, trembling with the excitement. "it could be easily done. stop and consider, boy, almost immediately afterward, as if he feared lest the cashier might want to look at the contents of his packet again, he suggested that they be placed in the safe, and it fell to you to do this part of the work. immediately his wicked mind must have conceived the idea of casting suspicion on you. in that way he would kill two birds with one stone, satisfy his feeling of vindictiveness toward you, and at the same time start suspicion in another quarter. i have no doubt he had covered his tracks well, and if one of his securities was offered for sale to a friend of his as he claims, it was so arranged that it could never be traced as coming from him. but even the most cunning of rogues usually overdo the thing. his savage desire to place the blame on you instead of some one else in the bank looks suspicious, and may be the rock on which he will founder." "oh! i can hardly believe such a terrible thing of any man; and yet, sir, the more i think of that expression i saw on his face, while the cashier was out of the booth, the more terrible it seems. but what can you do to prove the truth? you could not accuse him of it openly? he might have us put in jail for slandering him." "i rather think we had better go a little slow, and see what turns up. graylock is certainly in a hard box just now, and i imagine in a desperate frame of mind. any man must be who would descend to play such a scurvy trick, and see some innocent party suffer for his crime. what does he care if your mother's heart were broken by the fact of her boy being accused of this deed? nothing. he is a cold-blooded old scoundrel, and i hope that if it should turn out to be as we suspect, mr. gibbs will have no mercy on him." mr. winslow was certainly deeply aroused. "i am so glad i made up my mind to tell you about this, sir. it first struck me hard while i was talking to my mother last night," and dick related the incident. they continued to talk as they walked along, and for half an hour conferred as to many plans whereby the truth might be discovered. chapter xix not for sale on the way home that day dick even mustered up enough courage to whistle again, something he had not thought of doing ever since this black shadow had fallen across his path. the mere fact that a man as astute as mr. winslow should agree that his suspicion was founded on something worth looking into gave him considerable comfort. it was a terrible thought, but just as the teller had declared, he could see that things must have come to a bad pass indeed with the merchant, and that anticipating a smash in the near future he had possibly conceived the scheme of making way with those negotiable securities in order to defraud his creditors; when the storm had blown over he might go to some city, dispose of the valuable papers by degrees, and in this way have enough to live on comfortably the balance of his days. on the way home dick considered whether it were best to tell his mother; and as he had always made it a habit to keep nothing of any importance from her he determined to do so. she had ever been his best friend and adviser in the many difficulties that beset a boy, and more than once he had found that her wisdom far excelled his own in bringing about a settlement of his boyish disputes. he found her anxiously awaiting his coming, for the strain had been great, and every minute beyond his customary time for returning was torture to her fond heart, since, in imagination, she could see him being possibly arrested for something that any one with half a heart must know he would never be guilty of doing. and so dick told her what had passed during the day, winding up with his conference with mr. winslow. to this latter mrs. morrison listened with bated breath, and a look of alarm not unmixed with horror in her gentle eyes. she was unused to anything bordering on crime, and could hardly believe that a man might bring himself to such a point where he would rob himself. "but that isn't the point, mother," said dick, when the lady spoke of this fact. "if he did take those securities he wasn't stealing from himself but from his creditors; for you see they were part of his resources, and would have to be produced in case of a failure, to help pay off his indebtedness." "yes, i think i manage to grasp that part of it now, dick, though you financial men should be more careful to explain such things to greenhorns. do you suppose he will be arrested and made to produce the missing documents, son?" she asked, with a little laugh. "oh! i do not think so. mr. winslow said we hadn't a bit of evidence against him more than suspicion, and that is a poor thing to go on. you thought so in my case mother, anyway. he told me to leave it to him, and in some way he'd find a chance to learn the truth." "what would mr. graylock do with the papers in case he did take them out of the envelope that day?" she asked. "why, i suppose he would be apt to carry them home and hide them. perhaps if some one could only watch him without his knowing it, the truth might come out. if he does go under to-morrow, as mr. winslow thinks possible, he will be apt to stay around here for some time settling up his affairs; and all the while the missing securities would be safe in the place he has hidden them. but how can anybody get into his house to find them? ferd wouldn't think of asking _me_ there; and if his father found me under his roof there would be a row at once." "better leave all that to mr. winslow, my boy. from what you tell me i fancy he is a keen young man, and surely he will think of some way whereby the truth may be made known. at least i hope and pray that it may be so. if that wicked man has been guilty of this terrible thing he deserves to suffer." so presently they fell to talking of happier things, and the plans spoken of on the preceding night in connection with certain needful repairs about the cottage were again taken up and discussed. in anticipation of the coming good fortune mrs. morrison was already beginning to feel that happiness lay before them; and had it not been for this one cloud on the horizon of dick's young business career she would have believed herself without a wish ungratified. as chance would have it while they were still talking some one drove up to the gate in a little buggy and climbed down from the seat. "i think it must be lawyer cheatham," said dick, looking beyond the porch; "i wonder what he wants here at this time of night." his mother laughed softly. "i think i can give a guess, dick. a week ago when things looked so dark for us i went to see him about selling our little home. i really believed that it might be necessary for us to leave riverview and go to the city, where i could find customers who would pay me better for my dressmaking than here, and if necessary you could get a place, for there seemed no chance here. i went to see him and we discussed terms. he was very hard, and offered me much less than i thought the place ought to bring. so i came away determined to try and hold out a little longer. i fancy he is coming now to make me a better offer." "oh! he is, eh? well, this place isn't on the market now, is it mother. you don't want to sell it, the house father built?" said dick, earnestly. "no, no, not that, only as a very last resort, and thank heaven we do not have to think of it now," she answered, as the dark figure shuffled up the walk. "good evening, mr. cheatham. walk right inside, please. we were just sitting out here talking, richard and i. have a chair, won't you?" she said, hospitably. the lawyer was also a money-lender, and accounted a very shrewd customer. he was a dried-up specimen of humanity, and mumbled in talking as though never certain how long he could hold his false upper set of teeth in place; dick had known him for years, but never fancied the old bachelor, who was said to be even richer than mr. gibbs, though he wore shabby clothes and drove a rig that would have shamed most men. "ahem! i have just dropped in to see you about the sale, mrs. morrison. i offered you twelve hundred for the place, counting the mortgages, and you held out for fourteen hundred. now, circumstances have arisen whereby i am enabled to raise my bid to thirteen hundred. there is about eight hundred due on the place, which will leave you an equity of five hundred. shall we call it a go, madam?" "no, sir, i have changed my mind since i saw you," replied the widow, smiling at his eagerness; for knowing his crafty ways she felt positive he had found a chance to dispose of the pretty cottage at a very much greater sum, if he could only get possession of it. "well, though the property is hardly worth it i must accept your terms then, and give you the full fourteen hundred, though it will leave me a scant chance to come out even after i have made certain repairs, and put it on the market again," he said. she shook her head in the negative. "you did not understand me, mr. cheatham when i said i had changed my mind." "why, certainly, madam, every woman is given that privilege. i suppose you have concluded to put the price up to fifteen hundred. it is a ridiculous sum; but rather than disappoint a client who has set his heart on securing this same house, i suppose i must submit to the inevitable and consent to pay that exorbitant price," he went on. dick could stand it no longer. he felt that since he was a man of business now, and the head of the house, he ought to have something to say about such a transaction as this. "mr. cheatham, let me explain to you just what my mother means. this house is not for sale," he said, in positive tones that made the old money-lender stare at him. "not for sale, young man, when your mother came to me and begged me to take it off her hands? it was only a question of price, and i have even gone a hundred above her own figure. surely she would not be so foolish as to lose such a golden opportunity, which may never occur again. not for sale--you must be mistaken, boy." "as she said to you, circumstances have also changed with us since she called on you. my mother has come into some money, enough to keep her in comfort all her life, and she does not mean to let this house, which my father himself built, go out of her possession. you could not buy it sir, at double the price you offer." the lawyer and money shark jumped up from his chair as though he had been fixed upon a spring like a jack-in-the-box. "madam, is what your son tells me true?" he demanded, hotly. "every word of it, mr. cheatham; i have been trying to say the same thing but somehow could not get you to understand me. we do not intend to leave riverview, and the property is withdrawn from sale," she replied. "then i have been a fool to come out here to-night," he growled, and shuffled out toward the gate. "a good riddance, and i hope he never comes here again. when he really got it through his head that you had fallen into a fortune the old beast looked at you as if he could eat you, mother. if he ever comes courting around here i'll be tempted to do something desperate, the old skinflint. he's the worst-hated man in all riverview, even if he is the richest," declared dick, as he heard the vehicle moving down the road with sundry creakings and groanings, for they said hezekiah cheatham was too stingy to buy axle grease. "richard, don't speak of such a thing again, even in fun. like our little cottage home i am not in the market. now let us talk again of things more pleasant than mr. cheatham, or the missing securities. when we put that new wing on, you shall have a den of your own; and i expect to enjoy the comfort of an up-to-date bathroom, something i have always wanted. but not a penny shall we spend until that delightful little inheritance is safely in our hands. what a paradise we can make of our dear home in time, eh, dick?" and so they talked on as the time flew, picturing happy scenes, and more of comfort than they had ever known; really it seemed to dick that the shadow he had felt hovering over his devoted head did not appear so formidable after all, with a mother's love to take away its bitter sting. chapter xx a red letter day the following morning was very damp and depressing. lowering skies and a drizzling rain made a combination that must have its effect upon even the cheeriest nature; and while dick laughed as usual up to the time he left home for town, it was not long before his spirits began to sink to a lower ebb. the situation that confronted him was far from reassuring. even though there were germs of truth in the suggestion that mr. winslow had seized upon with such alacrity, how could they ever hope to prove it, since there seemed to be no way in which either of them could enter the home of archibald graylock, and make a search for the missing securities. he had to pass the big department store on his way to the bank; or rather, having a little time to spare he went out of his way a few paces in order to ascertain what the crowd that he saw standing around meant. something out of the usual run must have happened, for a score of people with umbrellas over their heads could be seen in what seemed to be attitudes of curiosity, necks being craned and eyes turned toward the store. among them he saw several whom he knew had held positions in mr. graylock's employ, and this was a very suspicious fact. seeing a young fellow he happened to know very well, and who had been a clerk in the place, dick asked the usual question: "what's going on here, dud?" the other shrugged his shoulders as he replied: "the old man is in the hands of his creditors. they've shut him up, and i understand that it's a bad business all around--may not pay twenty cents on the dollar. meanwhile we're out of a job, and they do say the store may never go on again." dick looked surprised, as though he were hearing news; for it was hardly policy to let it be known that the failure of archibald graylock had been discounted at the bank for several days. he stood around talking for a short time, until he was nearly due at the bank, and then hastened to his work. if anything it seemed even more depressing there than on the street. the atmosphere was so dense that lights were actually needed in the bookkeeping department in order that business might go on unimpeded; while the employees kept their heads bent down over their work, and not one had a smile to spare. indeed, it seemed to dick as if every one purposely avoided saying good morning to him as usual, though the chances were his imagination deceived him there. the truth was every one felt a weight resting upon his shoulders. a calamity had befallen the bank in the loss of the securities, and until this mystery was made clear suspicion must attach to every man in mr. gibbs' employ. already the president was in his room, a most unprecedented occurrence at this early hour, and from time to time other gentlemen gathered there, so that it was evident that to a limited extent the bank was bound to feel the fall of the leading merchant of the town, having doubtless granted mr. graylock favors from time to time. mr. goodwyn dodged in and out, a look of deepest concern on his smooth face, as if the cares of a great state rested upon him. who could be cheerful under such conditions? dick sometimes felt a lump rising in his throat as the thought of his being positively accused of stealing the lost papers came before his mind's eye; and it was with more or less difficulty that he carried on his work. everybody was nervous, and surely he had cause to feel so. to cap the climax there was a stranger in the bank, and at first sight of him dick felt a chilly sensation, the man looked so keenly at him; for he really fancied that mr. gibbs had put his threat into execution, and brought an officer of the law into consultation, in order to clear up the mystery. presently, however, he noticed that the stranger was looking over the books, and seemed to have free access to the safe, as though his authority to do just as he pleased was unquestioned. and when dick also noticed how ungrudgingly the bookkeeper waited on him, and was only too pleased to be called into consultation, he suddenly grasped the truth. the government bank examiner, to be sure! mr. winslow had said they expected a visit from one of these officials, who make periodical visits to all national banks, to see that they are complying strictly with the government requirements. it seemed too bad that he should time his visit just when there were so many things happening to cause anxiety among the bank officials; but that was the way it often happened. of course he had nothing to do with the fact of the securities being gone; since that was a private affair between mr. gibbs and mr. graylock, and the bank could not be held accountable unless it was clearly shown that one of the employees were guilty. about ten o'clock dick's bell rang, and he went into the president's room. here he found half a dozen gentlemen, all connected with the affairs of the bank, sitting about the directors' table as though they had been in serious consultation. mr. gibbs was at the head. the others looked very sober, but dick rejoiced to see that the president apparently was as clear-headed as usual; and whether his smile was forced or natural it certainly gave the messenger boy new hope that the affairs of the bank could not be in such grave peril after all. for that was what he was beginning to fear from the grave looks of so many people around him. "richard, i wish you to go to the stable where my horse is kept, tell jerry to hitch him up for you, and then drive as fast as you can to my house with this note. give it to my wife, and wait until she hands you a package. be very careful, my boy to get that safely here without delay. i would send the porter with you but he is sick, and the others are very busy, with the bank examiner in charge. i can trust you to perform this service promptly, richard, can i not?" dick felt his heart in his throat, so to speak, as the president thus publicly announced the faith he had in his integrity; coming as it did on the heels of that strange disappearance of mr. graylock's securities, and the suspicion that for a brief time had fallen on his shoulders, it almost unmanned the messenger, so that there were actually tears in his eyes as he looked straight at mr. gibbs and said as resolutely as he could: "yes, sir; i would do anything for you." "i believed as much, richard, or i would not send you, for it is very important that you get the package to me without loss of time," said the president, kindly. and dick, as he hastened after his cap and umbrella was saying to himself that harvey gibbs could read a boy's soul better than any man in the world. "where away, dick?" asked mr. winslow as he saw the boy pass his window. "on an errand for mr. gibbs, sir," replied the boy. "can you take these notices with you, dick?" asked the bookkeeper, holding up a bunch of papers, such as the bank messenger was in the habit of delivering on his rounds. "not just now, sir. i am in a great hurry." he waited no longer to explain things, but hastened around the corner to the livery stable where, as he knew, mr. gibbs kept his horse whenever he drove in alone; sometimes his wife or bessie came with him, and when this occurred the vehicle of course, was driven home again. dick knew the livery-stable keeper well, and jerry, understanding that he was now employed in the bank had no hesitation in giving him the rig which mr. gibbs had driven to town that morning. in a few minutes dick was off, and hurrying the animal along as much as seemed consistent; fortunately the boy loved horses, though he had very few chances to exhibit his skill in managing them, and when he found that the animal between the shafts was capable of putting up considerable speed his pulses thrilled with satisfaction. many a time had he tramped over that road while going out to his favorite fishing hole; but never did it seem one half so short as when he dashed along behind that high stepper. one of the first persons he met on the road was ferd graylock, who stopped to stare after him; he also called out, but dick was unable to hear what he said, so rapid was his pace--he could only wave his hand backward in recognition, and continue to urge the horse along. in this fashion he reached the fine country place of the banker, which, as has been said before, extended over quite a number of acres, and ran down to the river at the point just above the fishing hole dick so dearly loved. he sprang out and tied the steaming horse to the hitching post. then he ran up to the front door, which appeared to be wide open, as though one of the maids might have been doing some cleaning that morning. dick reached out his hand to press the button that would summon a servant to the door when he was thrilled to hear a sudden scream from some portion of the house. it was so full of terror that the boy did not hesitate an instant about entering without an invitation. the screams continuing led him in the direction of the trouble, which seemed to be on the second floor. he passed a maid as he ran, who seemed to be fairly paralyzed with fear, for she stood there like a post, with her hands clasped, and her lips moving, as though calling on her patron saint to take care of her. dick chanced to be a boy who in an emergency acted first and then considered afterwards; and it proved that he had need of this characteristic just then if ever in his whole life. he scented smoke even before he burst through the half open door of a room and saw mrs. gibbs frantically slapping at the garments of her daughter with a wet towel, while the window curtain and shade were burning fiercely. [illustration: dick sprang forward. _dick the bank boy_ _page _] dick sprang forward. he never once considered that this might be an opportunity to distinguish himself; but only remembered that human life and the home of his employer seemed in jeopardy. chapter xxi good words on every side tearing down the blazing curtains, of which there were only a few shreds left, dick trampled them underfoot until he had seen that there was really no more danger to be feared from that source. in extinguishing the fire he had used his hands as well as his feet, and if he received a number of painful burns in doing this, at the time he did not know it. then turning swiftly he helped mrs. gibbs and bessie slap out the last vestige of smouldering fire in the ruined dress of the girl. bessie was as pale as death, and her mother quite as bad; the latter kept saying anxiously as she hugged her pretty daughter: "oh! are you sure you are not badly burned, dearest, are you positive?" "nothing to speak of, mother, only a trifle on my hands. oh! what a terrible accident, and what would have happened to the house and perhaps all of us if dick had not just happened to come," said bessie, turning a look on the boy that thrilled him to the heart, and which he could never again forget. "god bless him! it was a miracle that he chanced to be here. harvey said he might send some one to the house. how thankful i am for the blessings that have been poured out upon us. oh! how did it happen, my child? you frightened me nearly out of my senses, and when i ran in here to see you in flames it gave me the worst shock of my life. tell me what happened." "it was that little liquid alcohol stove, mother. i was pressing some lace with a hot iron, and it upset, the burning alcohol flying over the curtain, which flashed up instantly. some must have splattered on my dress, for though i sprang back it seemed to be on fire in several places. but it is all over, and there has been no great damage done. dick, this is the second time you seem to have come like magic when i needed you most. first benjy's life was in danger, and now my own," and the impulsive girl seized his hand and squeezed it, nor did the boy care just then how vigorously she showed her gratitude. the servants now came running up, looking frightened; and remembering his message dick handed his note to the agitated lady. when she had read it she asked him to wait down in the drawing room for a short time, for her mind was still so distracted by what she had gone through that she could hardly remember what it was her husband wished her to do in case he sent a messenger out to the home place. here dick was presently joined by bessie, who had donned another frock in place of the one ruined by the various holes burned by the flaming alcohol. it had been a mercy that as it happened she was wearing a dress made of a material not readily inflammable, or the result might have been much more serious. and when bessie joined him she brought with her some soft linen and a salve particularly good for burns, which dick was not sorry to see, for by this time he was conscious of a stinging sensation about his hands that proved he had suffered considerably from the fire at the time he so swiftly tore down the burning curtains and shade to trample them underfoot. "let me look at your hands, dick," said the girl, with solicitude in her voice. he held them out rather shyly, for they were somewhat blackened, as well as inflamed. immediately she showed the utmost concern. "you poor fellow, you are burned twice as badly as myself, and you the innocent party in the bargain. just let me go and get a basin of water and a towel. i'm to be the doctor for the present. you must do what you are told, sir." he laughed, for after the excitement was over he found that it was mighty nice to be looked upon as a hero, though he did not think he deserved all this fuss being made over him, just for stepping on a few little burning rags; why, he had been burned worse than that once when with some boys in the woods, and nobody bothered about it until he got home and his mother found out. so bessie bathed his hands, and tenderly wrapped the left one in soft linen, after greasing the inner cloth with the soothing ointment; why, this was just fine, and dick thought he could stand such an experience every day in the week; although of course he would not like to know that bessie was placed in peril again. the time slipped past, and dick began to grow uneasy, for he had been fully half an hour at the house, and he knew a party of anxious gentlemen were waiting in the president's room at the bank, for his return. finally, when he was about to beg bessie to go in search of her mother, the lady appeared, carrying a little package in her hands. "be very careful of this, richard, for it contains valuable securities which my husband brought out from the city with him recently in anticipation of a sudden need. here, let me fasten it inside your coat--yes, it will just go in that pocket nicely, and i can pin it there--a woman's device, but securing safety. and i have taken the trouble to write a few lines to harvey, explaining the delay. give it to him with the package. my boy, we can never cease to be grateful to you for your bravery. god alone knows what might have happened here had you not chanced to be at the door. your mother has reason to be proud of her boy," and with tears in her eyes she kissed him. and bessie did the same. it was with a tumultuously beating heart that dick morrison ran out of the house, down the front steps, and hastily untying the horse, jumped into the buggy and was off like the wind. this was another red letter day in his life, one he could never forget. if he had made fast time in going out to the banker's home he certainly fairly flew on the return trip, using the whip in a manner that surprised the horse, and sending him galloping madly along the road. he reached the bank, jumped out, threw the lines over a hitching-post, and fairly flew up the steps. as he burst into the president's room without even the formality of knocking he found himself the object of frowns on all sides, showing that his prolonged absence had been the subject of unfavorable comment. even mr. gibbs had his watch in his hand and looked at him reproachfully as he entered; perhaps the president may even have begun to fear that he had shown a lack of wisdom in sending a mere lad, already under the ban of suspicion on account of one robbery, to get another precious package of securities. "you have been a very long time, richard," he said, as the boy stood before him, breathing hard from his exertions. "yes, sir," was all dick said, unfastening the package, and taking it with the note, from his pocket. as the president eagerly took them from him he naturally noticed the bandage which bessie had so solicitously tied about his left hand. "an accident, richard?" he inquired, still frowning, but evidently relieved to have the expected papers safely in his possession, for matters were getting critical in riverview just then, and it was necessary that the bank show a strong financial front to weather the storm. "yes, sir," replied the boy again, standing there, waiting to be dismissed. "gentlemen, here are the securities i spoke to you about. they are my private property, but i am determined that no reproach shall fall upon the bank, and it is my intention that they shall be placed at your disposal. kindly examine them. richard, you may go--but stay, what is this? great heavens!" evidently his eyes had roamed down the page his wife had written, even while he was speaking, and something had caught his eye that gave him a terrible shock. dick waited. he saw the banker continue to read, his eyes enlarged, and his breath suspended for the moment. then he felt his hand tenderly taken, and himself brought face to face with the agitated banker, who looked at him as dick had never seen a man look before. "god bless you, my dear boy!" he said, in trembling and hoarse tones; "it must have been a premonition that caused me to believe in you, and send you on that message. gentlemen, listen to me. i wish you to do honor to this brave lad, but for whose valor and promptness i might at this moment be mourning the loss of my house, and perhaps even worse, for both the wife and daughter were in peril. did you ever know of a more especial favor of providence than the fact of his being at the door of my house just when an explosion and a fire imperiled all i hold dear in the world?" they crowded around, asking questions, and reading, the note which mrs. gibbs had sent; for the time being even the peril of the bank was a secondary consideration. dick was confused by the clamor, and blushed like a schoolboy giving his first declamation, so that he was really glad when mr. gibbs, seeing his uneasiness, told him gently that he could go. that was a proud moment for the bank boy; he felt that he had every reason to rejoice that a strange providence had sent him to the assistance of bessie and her mother just when they most needed a quick eye and a ready hand to prevent the fire from spreading; for in a few minutes, before the servants could have summoned courage enough to appear in force, it must have gotten beyond control. he found that there was considerable curiosity shown by the others in the bank, who had seen his hurried entrance; but dick had learned to keep a still tongue, and he said not a word; even when pliny asked about his bandaged hand he simply answered that he had burned it a little. the other looked down and took hold of the outer covering, with a chuckle. "what's this, a lady's soft handkerchief, with an initial in the corner--b; now that stands for bessie, eh?" he said, looking expectant; but all he had in return was one of dick's smiles that might stand for either yes or no. but when the bank boy returned from taking the horse to the stable and then going his regular rounds he found that the directors had left the bank, apparently in a good humor, for they were smiling and joking among themselves; and also that every one knew of his recent adventure, showing that mr. gibbs or the cashier had taken pains to relate the story. chapter xxii a remarkable bit of intelligence "you certainly beat anything i ever saw when it comes to downright luck, and that's the truth, dick," said mr. winslow, as he stepped out and joined the other when banking hours were done; which on this day was not until an unusually late hour. "i am beginning to think so myself. there was that incident of the precious kitten which i saved from drowning, and through that secured my position in the bank; and to-day i was fortunate enough just to be johnny on the spot when some one was needed to jump on that little blaze and put it out," returned the boy, wondering why the teller had waited to see him, and anticipating some news in connection with the matter they were planning in common. "you are evidently monopolizing all the talent in that line just at present, so there is hardly any show for the rest of us. hurry up and get through, dick, so the field will be open. i can see easily enough that the firm name will some day be changed to 'gibbs & morrison'" went on mr. winslow, laughing. "don't look so far into the future, please; but tell me what there is new. i've been so busy to-day that i couldn't find time to see you. i understand that mr. graylock is in the hands of the assignee, and that his creditors will be lucky to get thirty cents on the dollar. do you know anything about the missing securities, mr. winslow?" asked dick, wishing to draw the conversation into a channel less personal. "i only wish i did. but nevertheless, there's a chance that something may be done before long. i've interested mr. cheever in the matter," remarked the teller, looking down at his companion slily as he spoke, to see what effect his words had. dick appeared startled. "why, that's the bank examiner, isn't it? what on earth interest could he have in the matter at all? it would hardly be a part of his business to go around hunting up lost securities; and besides, was it wise to let him know that we have been careless in handling such things? it might give the bank a bad name, don't you think, mr. winslow?" he asked, quickly. the teller laughed outright at this. "you are showing wonderfully discreet abilities richard, and i can easily prophesy a great future for you. it happened by the merest chance that i had met mr. cheever before, down in boston, when he was known under another name," he said, mysteriously. "what? mr. cheever--isn't that his real name, and he a bank examiner?" "so-called just at present. dick, he begged me not to say a word to any one in the bank, but i told him i _must_ take you into my confidence, since we were working this thing together. he also declared that your suspicions might be well founded, and that he would take measures to investigate the interior of mr. graylock's home without that gentleman's knowledge." then light suddenly burst in upon dick. "i begin to see what you are hinting at--he is no bank examiner at all, but the officer mr. gibbs said he would have to send for!" he exclaimed. "exactly; a detective who is accustomed to handling such cases, and who was once a genuine bank examiner, so that he knows just how to go about these things so as not to excite the suspicions of bookkeeper or tellers. payson does not suspect the truth, nor do any of the others. indeed, i am not sure that even the cashier knows it. so you see he is able to work inside the bank without suspicion being aroused as to his real character. of course, his idea was that it had been an inside job, for it really seemed impossible that any one outside could have taken the papers from the vault. as i said it happened that i knew him, and he immediately bound me to secrecy. but after i had a chance to talk with him this noon he drew around to _our_ opinion, to the effect that the securities which mr. graylock claims were stolen from his packet never went into the safe at all!" dick was vastly interested in all this news. he had never seen a real live detective in his whole life, and the way in which this smooth gentleman seemed to be working in his capacity as a regular bank examiner was simply wonderful, in his opinion. "if all this is so i don't wonder that you told him what we suspected. and you say, mr. winslow that he took to the idea at once?" he asked, breathlessly. "like a hungry dog does to a bone. said he was up a tree, for it didn't seem as if the thief could be any one in the bank, for not a trace had been left behind. he has met mr. graylock--the president attended to that, and i think that his opinion of the gentleman agrees with our own, and that he would not put it past one of his showing, under the peculiar conditions existing, to carry out such a clever little scheme to feather his own nest at the expense of his creditors. more than that mr. cheever says it is rather a chestnut, and has been worked often." "but he did not happen to think of it?" interjected dick. "oh! he says he would have come around to that idea after he had made positive that none of us poor beggars in the bank had purloined mr. graylock's bundle; but all the same he was mighty greedy to hear every detail of what happened that day. he said he would have a talk with you to-morrow, when he found a chance, seeing that i was bound to tell you about his dual character. it's a dead secret, remember, richard." "certainly, sir; i shall not speak of it to any one, but my mother." the teller looked doubtful at first, and then smiled. "i guess it will be all right to take _her_ into your confidence, since she seems to be a woman in ten thousand who can keep a secret; but be sure and impress this fact on her, richard. you've had a great day of it, my boy, a wonderful day. really i envy you the pleasure of telling how you received those honorable burns; and i'd give something to have a pretty girl tie up my hand in her own dainty kerchief." "now you're joshing me again, mr. winslow. of course she and her mother felt as if they couldn't do enough for me; but then you know, that's the way with the women folks. i'd like to have run away you see, but i had to wait for the package mr. gibbs sent me after." "you're altogether too modest, dick. most boys would have puffed out with pride after doing such a thing; but i like you all the better for it, my boy. now, if that bank examiner finds a chance to talk with you to-morrow, just put him wise to all you know about the happenings of that day, especially as to what you saw at the time you peeked in through that blessed knothole--i use that word, you understand, because it is going to figure a whole lot in the final discovery of those missing securities. don't forget, now." "i certainly won't," replied dick, accepting the hand of the friendly teller in his one good palm, and yet wincing with the pressure he received. he anticipated with keenest pleasure his meeting with his mother, and wondered if those wise eyes of hers would note his color when she discovered the dainty kerchief of bessie gibbs pinned around his left hand--he meant to keep it always as a souvenir of that exciting time. and so he came home at last. just as he expected she immediately discovered the fact of his having his hand bound up; for little news reached the rather secluded home of the widow, and no neighbor had chanced to hear the story of what had happened at the home of the banker. "what is the matter--have you had an accident, son?" she exclaimed, taking his hand in hers. then she looked more closely, and he knew that she had noticed the kerchief. "don't worry, mother; it's only a little burn, nothing serious at all," he said. "but who put this here--a lady's handkerchief, too? something has happened, i can see it in your eyes. tell me at once, dick. what new danger have you been in now?" she went on, putting her arm around him as they walked toward the door. "none at all, mother. there was just the littlest bit of fire, and i tore down the curtains and shade, never thinking of my hands. why, it was all over in three seconds, i believe." "curtains--shade--where was this?" she asked, anxiously. "at mr. gibbs' house. he sent me up after some papers, and i was just in time to jump in and play volunteer fireman. you see they insisted on doing my hand up in this ridiculous way, and made me promise not to take it off until you could dress it again to-night. but it doesn't amount to much, i give you my word, mother." "oh! come and sit down and tell me all about it. supper can wait. i believe you have been in danger and won't say so for fear of frightening me. did their beautiful home burn down--what a pity that would be? and what caused it all." "one question at a time, mom. i might as well tell you the whole story, because i know i won't get a bite of supper until i do. but they made too much of such a little thing, sure they did." so dick in his own modest way related how he had happened to be at the door of the banker's house when the terrible accident occurred that might have caused a severe loss if the fire had been allowed to run riot; he even declared that he believed the flames would have died out even though no one had come; but the fond mother, reading between the lines, knew that she had good reason to feel proud of her boy that night, and in her heart she undoubtedly sent up prayers of gratitude that he had come through the incident with so little harm. dick kept his other news until the time when, as usual, they sat together on the little porch, mrs. morrison having bound up his hand again, and pretending not to notice how eagerly the lad secreted the little kerchief that was now in sore need of cleansing. then he told of the events of the day, and mrs. morrison hung on his words as if they thrilled her to the core; her boy was an actor in this strange little drama that was being gradually unfolded, and when the final scene was reached it would be found that dick had had more than his share to do with the solving of the riddle as to what had become of mr. graylock's missing securities. chapter xxiii nearing a climax just as mr. winslow had said, the suave gentleman who was making himself so much at home in the bank managed to get out at a time dick had an errand, and the boy was not very greatly surprised to find himself waylaid on the road back. "dick, mr. winslow tells me that you know all about the reason i am here. now, i like your looks, my boy, and i can see that you are able to keep a still tongue between your lips, so i feel positive no one will be any the wiser on account of your knowing my real character," he said, drawing the other to one side, where they could chat without any one overhearing what was said. "yes, sir; i'm ready to answer whatever questions you ask, though i don't think i can tell you anything new." "that remains to be seen. but at any rate it will give me a chance to hear what i want at first hands, and put my own construction on it. there is a good deal in that, you know." thereupon he began to fire away with his questions, and bit by bit drew out the entire story of that one day's happening; now and then he would go over some point and try to see if dick would contradict himself, but the result was always the same. "you are a gilt-edged witness, dick. you never changed your story a particle. i think i have learned all i want now," the other said, in conclusion. "and what do you think, sir--was my later suspicion founded on anything like fact, or did i allow my imagination to have too big a grip on me when i peeped through that little hole and saw that look on his face?" asked the boy. the man smiled and shook his head. "we have to keep our ideas pretty close, dick. what i think i might not like to say; only that you were far from being a fool when you allowed yourself to think as you did. time will tell. i will begin to lay my plans, although days may go by, and i will vanish from this region before i find the chance to carry out the last desperate part of my little scheme. thank you for all you have told me. it has helped me very, very much, my boy." later on dick saw the gentleman once more at work in the bank. he acted his part to perfection, and not even the bookkeeper seemed to have the slightest suspicion that mr. cheever could be anything other than he claimed. of course, the fact that he had formerly been a bank examiner before taking up his present profession of investigation made it easy for him to play the game. but it promised to be the easiest similar task the anxious bookkeeper had ever gone through with; for at the end of the second day the gentleman complimented him on his accurate accounts, and the bank on its solvent condition; after which he was closeted with mr. gibbs and the cashier in the president's room for an hour, came out, gravely shook hands all around, and departed. the bookkeeper heaved a mighty sigh of relief. "that job's off my hands for six months or more," he said, with evident satisfaction. dick could just catch the little chuckle that the receiving teller allowed to escape him upon hearing this remark; but by no look did mr. winslow betray his consciousness of a knowledge of the truth. things went on for two days just about as usual. the failure of archibald graylock proved to be worse than was at first supposed possible, and it was now declared that after the affairs of the bankrupt firm had been adjusted the creditors might receive even less than twenty cents on the dollar. mr. graylock went about looking quite forlorn, as a man whose business was ruined might be expected to appear; but once when he was passing out of the bank dick, watching closely, felt sure that he saw a little sneer pass over his angular face, as though some sudden thought had pleased him. dick was treated with the utmost kindness by every one for all knew the story of the fire, and pliny never ceased to deplore the wretched fate that seemed to debar him from playing so heroic a role. when he could do so dick sought out the teller, for he was anxious to know whether mr. cheever was at work, even though unseen by those in the bank. "what news?" he asked in a low tone, stopping by mr. winslow's desk as if waiting for some document to place in the vault. the other glanced hastily around before replying. "nothing as yet, but i saw _him_ last night, and he gave me reason to believe he might have something to show for his work to-day," he replied in a low tone. dick understood what this meant. mr. cheever had been prowling around the graylock home, and believed he saw a way to effect an entrance during the absence of the owner, whose habits he had carefully studied. would he be able to discover anything there? might not mr. graylock, granting that he was guilty of abstracting those securities with the intention of defrauding his creditors out of their just dues, be cunning enough to conceal them where no one would think of looking? he advanced this theory to the teller in a whisper. mr. winslow smiled encouragingly. "you don't know our friend as well as i do, dick. he is a wonderfully gifted man for prying into secret places, and seems to know just by intuition where one would be apt to hide anything. don't worry about him. if he gets in he'll rummage that house from top to bottom, and ten to one there'll be something doing, too. i'm expecting to see him walking through that door at any minute now, and passing back into the president's room." dick moved away, for the bookkeeper was approaching, with a look of concern on his face. "say, winslow, do you know, the porter was telling me just now that he believes he saw that bank examiner in town last night. i told him he must have been mistaken, but he vowed he was positive. now, what do you suppose that fellow has come back here for, and after he publicly complimented me on the admirable manner in which my books were kept, too?" and the industrious knight of the ledger and the daybook had such a look of worry on his face that it was all mr. winslow could do to keep from laughing outright. "the porter may have been mistaken after all; or even if he did see the gentleman that fact need not give you any alarm. possibly he is doing something for mr. gibbs; or else has been engaged to straighten out the books of the defunct firm across the way. forget it, and be happy," he said; and the other went back to his desk shaking his head as if he did not fully like the situation. dick found himself looking toward the door every time any one came in, and fervently hoping that mr. cheever might show up; for if he came it would doubtless signify that he had been successful in his hunt for the missing securities. every time he went out he could see the same crowd about the closed doors of the big store; people could not get over the novelty of the failure, possibly the first that had come to riverview these many years, and certainly the worst by long odds. many in town had also suffered as well as the foreign creditors; and the name of archibald graylock was being held up to execration in many quarters where he had borrowed small sums, or else bought goods to fill a gap, and for which he had never settled. once he was seized upon by ferd who had been hovering around, possibly at his father's desire, to hear what was being said of the man who had gone down with such a smash. ferd looked doleful enough, and dick did not have the heart to feel glad. knowing what he did of the graylock son and heir, dick had before now decided in his own mind that this failure of his father might be the making of ferd; certainly it was not going to do him any particular harm to be thrown out on his own resources, and there was a chance that it would arouse a slumbering spark of ambition that may have never awakened only for this sudden change. "this is a mighty rough deal we're up against, dick. the old man seems to think you know something about those securities he lost the other day. if you do you've played the meanest trick on him that ever was; for he says they would have kept his head above water. but between you and me i believe the old man is getting a bit looney, and that he has pawned them long ago. i'll be glad to get away from this miserable little place, that's what," said ferd, with disgust plainly shown on his face. "then you expect to go away?" asked dick. "yes, in a day or two, to boston. an uncle has offered me a job in his office; and as he is a broker i think i see myself getting to the top of the heap before long," replied the other, braggingly. "is your father going with you?" questioned dick, thinking that the movements of archibald graylock held something of interest for him under the circumstances. "no, you see he has to stay around here for some weeks yet, settling up. he says he will be as poor as job's turkey when they get through with him; but if he is, then he was never the keen and clever man i always took him to be. i suppose he will come down to the city after its all done, and begin there over again." "well, i must get on. wish you luck when you go, ferd." "you're in an awful hurry. i wanted to ask you about that affair up at old gibbs' place; they say you saved bessie's life?" demanded the other, catching his sleeve. "all a big yarn. i just happened around in time to jerk down a few curtains and stamp on the fire. they were nearly in ashes anyhow. anybody could have done the same thing. why, it was a picnic, you know. good-bye, ferd," and jerking loose he ran off, leaving the other looking after him, and shaking his head, as if unable to understand why any fellow could resist the chance to play the part of a hero when the chance came to him as it had to dick. when he got back to the bank dick was just settling down to some work he wished to get through with before noon when he saw the bookkeeper staring at the door as if he had seen a ghost; and looking up the boy discovered a familiar figure crossing over in the direction of mr. gibbs' private room. it was the supposed bank examiner! and he carried a little bundle under his arm at which he glanced significantly, and followed this with a smile and a nod as he passed mr. winslow's window. dick was thrilled with the belief that he had found the missing securities! chapter xxiv mr. graylock meets his waterloo mr. winslow beckoned to dick to come near his desk, as it happened there were no customers in front at the time, wishing to make deposits. by bending down, and talking in a low tone he could say what he wished without being overheard; indeed, the bookkeeper had called mr. payson over as if to confer with him as to what this unexpected return of the bank examiner might signify; for although he certainly had nothing to fear, still it seemed to make him exceedingly nervous. "what did i tell you, son?" said the teller, with a broad grin on his face, as he jerked his thumb over his shoulder in the direction of the president's room. "do you really think he has found them?" asked dick, eagerly. "the signs all point that way; you noticed yourself that he was carrying a neat little package under his arm, which he seemed to fondle lovingly; and if looks count for anything the grin he gave me said 'success' as plainly as two and two make four. i can see the complete finish of our tricky friend a. g. say, i'd give something to see his face when the old man opens that package before him. it would be better than a picnic!" exclaimed the teller, enthusiastically. "do you think they'll send for mr. graylock, then?" "surely. it was his fortune that was supposed to be lost, and which has now come limping home like little bo-peep's sheep; or the prodigal son, as you please. oh, yes; they would not think of keeping the poor old fellow in agony any longer than is necessary. hark! there goes the summons for mr. goodwyn to cross over and confer with the boss. told you so. he's to be taken into the scheme, and have a chance to look happy again." sure enough the cashier did pass into the room of the head of the bank, and the murmur of voices told that the three were engaged in an animated discussion. payson was still trying to soothe the agitated bookkeeper, who was on needles and pins because of this surprising second visit from the man he had believed to be the regular examiner; with mr. cheever closeted with the president, and now the cashier called into conference, there seemed to be something in the wind that might reflect upon his capacity as a bank book custodian. winslow would have liked easing his mind strain, but he believed it best not to attempt it until events had shaped themselves so that the whole truth could be explained. just then dick's bell rang. "the morrison luck again," groaned mr. winslow; "now you're going to see and hear the dramatic denouement, while i shall have to be content with taking it second-hand." when dick opened the door and entered the room he found the three gentlemen sitting around the table, upon which were numerous papers and packages, as if mr. gibbs might have been going over his personal assets to find out just how hard he had been hit by the failure of graylock. both he and mr. goodwyn looked pleased, though they tried hard not to show it; as for the bank examiner, when dick shot a look in his direction, mr. cheever gave a very perceptible wink that might stand for a host of things, though dick knew very well how to interpret it. the securities had been found! in some way the detective had managed to gain access to the graylock house, and his search had not been without its reward; evidently archibald, never dreaming that any one would suspect him, had not taken the pains to hide the packet beyond thrusting it into his safe. and that carelessness was fated to be his undoing. "richard, have you noticed mr. graylock around this morning; he has not been in the bank, but you have gone out several times, i believe?" asked mr. gibbs. "yes, sir. only an hour ago i saw him going into the store in company with the gentleman they say is the assignee in charge of the bankrupt stock." "very well; please go over to the store and ask him to come back with you; if he demurs tell him it is some very important business that has to be transacted." "yes, sir," and dick was off like a flash. he never undertook an errand with more animation, and mr. winslow, watching him from the window smiled broadly when he saw what his destination must be. there was a man at the door of the big store, who would not let dick in until he declared he was the bank boy, and that he had a very important message for mr. graylock. he found that gentleman in the offices, with several others around him, going over the books, explaining what the different accounts meant and looking most abject and forlorn. indeed, dick must have felt sorry for the man in his seeming distress of mind did he not know that this was but a part and parcel of the deep plan which mr. graylock was pursuing in order to gull the public; no doubt when at home and free from observation he was in the habit of shaking hands with himself because of the clever little dodge he had played looking to provision for the future. "mr. graylock," said dick, to attract his attention, for he was busily engaged in dispute with a severe looking gentleman. when the bankrupt storekeeper looked up and saw who had spoken he scowled in a most savage manner. "well, boy, what do you want here?" he demanded. "mr. gibbs sent me over to bring you back to the bank, sir." "i'm very busy just now. tell him i'll drop in later in the day," returned the other, a little mollified when he heard the name of the bank president. "he said to tell you that it was a very important matter, and that you must come now," continued the messenger. "oh! well, i suppose i shall have to go. gentlemen, excuse me for a short time, please. perhaps it may be good news; possibly those lost securities have been discovered; although too late to save me; or it may be they have some offer to make as a recompense for their disappearance while in their charge. that would be a good thing for my creditors, gentleman. a few minutes and i expect to be with you again." he picked up his hat and walked out of the office, with dick trotting along close at his heels; though mr. graylock would not deign to notice him. when they entered the door of the bank together dick could see that every eye became focussed upon them; and as for mr. winslow, there was an expression of actual distress upon his face, as though he realized that he was about to lose the greatest spectacle of the whole affair in being debarred from that room when archibald graylock was ushered in. dick managed to precede the broken-down merchant, and opening the door allowed him to enter. he was about to go out himself, when mr. gibbs said: "don't go, richard. i may have need of you." he knew that this was hardly so, and suspected that the president intended that he should be a witness of what followed; possibly believing that since mr. graylock had done all he could to cast suspicion on the messenger it was only fair that dick should be present at his downfall. at any rate, the boy was only too glad to have the opportunity, and he thought mr. winslow's assertion regarding his luck must have some basis after all. mr. graylock looked around him as if surprised that there should be a stranger present; he had met mr. cheever, as a bank examiner, but he certainly could not understand how the other could have any interest in his private affairs. he turned, therefore, with an expression of surprise upon his thin face, as if he would ask mr. gibbs what he might understand by this gathering. "have a chair, mr. graylock, please," said the president, and he certainly looked as solemn as though circumstances had arisen whereby he felt it necessary, for the honor of the bank, to hand over to the gentleman the equal of the securities that had so mysteriously vanished while in the vault of the institution. mr. graylock dropped into a seat and waited; if he was agitated, he did not show it in his face or manner, as yet. "i have sent for you, mr. graylock," began the president, "in connection with the securities which you brought to this bank some time ago, and which were strangely missing from the packet which was handed out when you demanded them." "yes," said the other, licking his dry lips, and fixing his small, rat-like eyes on the face of mr. gibbs, as though he would read there in advance just what the bank official was about to say. "i understood you to declare, sir, that it was your positive intention to devote the proceeds of the sale of those securities to bolstering up your business; and even yesterday you assured me that if they could only be found you would of course hand them over to the assignee, to be devoted to the liquidation of your debts. am i correct in this surmise, mr. graylock?" the merchant started, and half rose from his chair as a sudden fear struck him; then he sank back again with a smile, undoubtedly reassured. "such was my intention, mr. gibbs; indeed, there could now be no other course open to me. have you found them, sir; were they mislaid; or did some one in your employ take them after all, so that you feel disposed to make their loss good?" and he had the audacity as he spoke to send a bitter glance in the direction of the bank boy. the president frowned, and the look of pity that was beginning to steal over his face vanished. "then, sir, i have a piece of news for you that will undoubtedly bring you great joy. the missing securities have been found, mr. graylock!" he said, emphatically. "impossible!" gasped the wretched man, turning still more pallid. "not at all, mr. graylock, not at all. if you will take the trouble to cast your eye over these you will find they are all here save one for a small figure, which somehow was offered for sale in boston lately, i believe you said," and as he spoke the president tossed a little package upon the directors' table, upon which the eyes of the broken-down merchant were instantly glued with incredulity and horror. his crime had arisen like a ghost of the past to confront him. chapter xxv conclusion mr. graylock half rose from his chair, and bent low over the table to stare at the documents; then as if unable to believe that his sight told him the truth he dug his knuckles into his eyes and stared again. every eye was fastened upon him, and he seemed to realize that his sin had indeed found him out, for finally with a groan that welled up from the depths of his tortured heart he fell back into his chair. then he heard the clear voice of the president saying: "we all deserve to be congratulated, mr. graylock--the bank, at the recovery of the valuable papers entrusted to its care; and you, sir, because your good name has been saved, and your creditors will receive all that your estate will produce. it is a great thing to be able to look your friends and neighbors in the face, mr. graylock, when such a misfortune overtakes a man in business, although every one may not think so." surely this was gall and wormwood to the defeated trickster, who had been caught trying to defraud those who had trusted him. he writhed and twisted in his chair, until a shred of his former assurance came back to him; when he managed to look up with a sickly smile, and almost whispered: "yes, it is a great thing. i suppose i ought to thank you, gibbs, for saving me the added humiliation of exposure. and the strange discovery of the securities, where they must have been placed during a temporary fit of absent mindedness, will, of course, clear the air, so that no one now need be suspected of any criminal intent." it was a bold bid for secrecy, and while mr. gibbs might feel a contempt for the wretched man now before him, at the same time he believed it would be policy to keep the story quiet for a short time. "how long before you leave riverview, mr. graylock?" he asked, quietly. "i think i can say in three days more; yes, by monday evening i shall have departed," replied the other, eagerly, catching at a straw. "very well, then, for three days those of us in the secret will agree not to whisper one word of this sad affair. after you have departed the promise holds no longer. there will be no prosecution, mr. graylock, though perhaps i am doing wrong to promise that; but i shall walk over with these securities in half an hour, and hand them to the assignee with the simple remark that they have been found. i think there is nothing further to say, sir." it was a polite way of telling mr. graylock that they could dispense with his company, and getting unsteadily to his feet he made for the door. before going out he had the decency to turn his face toward them, and say: "i thank you all, gentlemen; you have been more considerate with me than i deserve. good-day." mr. gibbs turned to dick. "now richard, you can go, and please remember that while the finding of the securities may be announced, not one word to a living soul about the truth until after mr. graylock has left town for good. he does not deserve it, but we will spare him that added humiliation. just now i presume he is the most wretched man in the state. and richard, please ask mr. winslow to step in here for a minute, since i believe he knows what mr. cheever intended doing." the teller obeyed the summons with alacrity, and doubtless heard all about the outcome of the little game he and dick had planned; at the same time being bound to secrecy until the limited time had passed. of course there was great rejoicing among the creditors of the defunct firm when the fact was made known that the missing securities had come to light, and that there would be another hundred thousand dollars divided up among them; but no matter how curious they might be they were unable to learn where the papers had been hidden; though some who knew mr. graylock best had their suspicions. and three days later, as he had said, mr. graylock vanished from riverview, with his wife and son, going to boston; nor did any of them ever show their faces again in the town where for years the merchant had held his head so high. the story soon became common property, and for a long time his name was held up to ridicule and execration by those he had swindled. some years later dick learned that the graylocks had gone south, and with some money advanced by a relative purchased a few acres of land in florida, where they devoted their attention to raising celery for the northern market; but just how successful they were, or what progress ferd was making toward overcoming his faults, he never knew. they had passed out of the life of the little river town; and after a time the name of graylock was seldom mentioned; for another firm had taken up the big store, and was making it a success by honest dealing. some years have passed since the events narrated in this story occurred. most of those with whom we have come in contact still remain in riverview, and the town has prospered quite in proportion to others in the state. mrs. morrison still lives happily in her rose embowered cottage, which of course has been enlarged and vastly improved; for the legacy came to hand in due time, and dick had his den, while she enjoyed the luxury of a fine bathroom. she has never dreamed of marrying again. two or three times old hezekiah cheatham drove around that way to drop in and chat with the buxom widow, whose charms he could now appreciate since she had fallen heir to a neat little fortune; but dick took him gently aside and gave him plainly to understand that his mother disliked his attentions very much; and that as for himself he was averse to having a step-father; so the old bachelor ceased his pilgrimages in that quarter. mr. gibbs is still the head of the bank, and his right hand man is ross goodwyn, the clever cashier, who will soon step into the position of his employer, when the latter retires. mr. payson is the paying teller, but mr. winslow finding his health failing him, and being warned by his physician that he had better seek a climate that was dry, intends leaving for colorado in another month. it is pretty generally understood that he will be succeeded by richard morrison, who has been acting as his under-study for some time. dick is a tall, manly looking fellow now, the pride of his mother's heart; and prosperity has not changed his genial, straight-forward nature a particle. one of his best friends is mr. cartwright, the old miller, and frequently they sit and chat of the days long since gone by when dick found his first job in the employ of the other. occasionally dick has found an opportunity, on holidays, to go out to the dear old fishing hole, and interview a few of his friends, the bass; his ability to capture the wily finny denizens of the river still holds good, and usually he returns home with a full string. he never visits the old place without thinking of that day when he heard bessie gibbs raising her voice in laments over the impending fate of her darling angora kitten, and the memory always brings a smile to dick's face. bessie is now finishing her schooling at a college; but she and dick correspond faithfully, and during vacation times they seem inseparable. he still thinks her the prettiest and sweetest of her sex, and as for bessie--well, it hardly seems fair to peep into the sacred recesses of a young girl's heart, but she is never one half so happy as when with dick, and whenever she looks at the little scar on the back of his left hand she shudders, remembering that fearful day when he burst in upon them just in the nick of time, and in his usual energetic way quickly extinguished what might have been a serious conflagration. mr. gibbs, of course, has his eyes about him and understands what this intimacy is bound to end in eventually; but he seems perfectly satisfied that it should be so. he cannot expect to keep his darling child with him always, and since these things must be he is content with the way events have come about. the wise man who could read boy character as well as he did on that never-to-be-forgotten day when he sent dick, still resting under suspicion in connection with the missing securities, out to his home to bring back a valuable packet, feels confident that he has made no mistake, and that he can trust the happiness of bessie to his keeping. mr. gibbs always declares that he never made an investment in his whole life that brought him in such quick and magnificent returns as his decision that day to put a boy upon his honor; and he hardly dares picture what might have happened had he failed to read the truth lying back of those clear eyes of dick, the bank boy. the end. * * * * * transcriber's notes: obvious punctuation errors repaired. page , "ofter" changed to "often". (i've often heard) page , "down" changed to "done". (always done since) page , "women" changed to "woman". (get a woman to). page , "endeaver" changed to "endeavor". (endeavor to change) page , "dilipidated" changed to "dilapidated". (and dilapidated vehicle) page , "seldoms" changed to "seldom". (he seldom interferes) page , duplicated word "as" removed. (just as you say) page , "imposible" changed to "impossible". (it is impossible, incredible,) page , "furtune" changed to "fortune". (glorious good fortune) page , "winlow" changed to "winslow". (winslow thinks possible) page , "hear" changed to "heard". (he heard the vehicle) page , "unbrellas" changed to "umbrellas". (with umbrellas over) page , duplicated word "down" removed. (down in the drawing) page , "forunate" changed to "fortunate". (was fortunate enough) page , "neecssary" changed to "necessary". (necessary. hark!) page , "physican" changed to physician". (his physician that) page , "colordo" changed to "colorado". (for colorado in) lombard street a description of the money market. by walter bagehot chapter i. introductory. i venture to call this essay 'lombard street,' and not the 'money market,' or any such phrase, because i wish to deal, and to show that i mean to deal, with concrete realities. a notion prevails that the money market is something so impalpable that it can only be spoken of in very abstract words, and that therefore books on it must always be exceedingly difficult. but i maintain that the money market is as concrete and real as anything else; that it can be described in as plain words; that it is the writer's fault if what he says is not clear. in one respect, however, i admit that i am about to take perhaps an unfair advantage. half, and more than half, of the supposed 'difficulty' of the money market has arisen out of the controversies as to 'peel's act,' and the abstract discussions on the theory on which that act is based, or supposed to be based. but in the ensuing pages i mean to speak as little as i can of the act of ; and when i do speak of it, i shall deal nearly exclusively with its experienced effects, and scarcely at all, if at all, with its refined basis. for this i have several reasons,--one, that if you say anything about the act of , it is little matter what else you say, for few will attend to it. most critics will seize on the passage as to the act, either to attack it or defend it, as if it were the main point. there has been so much fierce controversy as to this act of parliament--and there is still so much animosity--that a single sentence respecting it is far more interesting to very many than a whole book on any other part of the subject. two hosts of eager disputants on this subject ask of every new writer the one question--are you with us or against us? and they care for little else. of course if the act of really were, as is commonly thought, the _primum mobile_ of the english money market, the source of all good according to some, and the source of all harm according to others, the extreme irritation excited by an opinion on it would be no reason for not giving a free opinion. a writer on any subject must not neglect its cardinal fact, for fear that others may abuse him. but, in my judgment, the act of is only a subordinate matter in the money market; what has to be said on it has been said at disproportionate length; the phenomena connected with it have been magnified into greater relative importance than they at all deserve. we must never forget that a quarter of a century has passed since , a period singularly remarkable for its material progress, and almost marvellous in its banking development. even, therefore, if the facts so much referred to in had the importance then ascribed to them, and i believe that in some respects they were even then overstated, there would be nothing surprising in finding that in a new world new phenomena had arisen which now are larger and stronger. in my opinion this is the truth: since , lombard street is so changed that we cannot judge of it without describing and discussing a most vigorous adult world which then was small and weak. on this account i wish to say as little as is fairly possible of the act of , and, as far as i can, to isolate and dwell exclusively on the 'post-peel' agencies, so that those who have had enough of that well-worn theme (and they are very many) may not be wearied, and that the new and neglected parts of the subject may be seen as they really are. the briefest and truest way of describing lombard street is to say that it is by far the greatest combination of economical power and economical delicacy that the world has even seen. of the greatness of the power there will be no doubt. money is economical power. everyone is aware that england is the greatest moneyed country in the world; everyone admits that it has much more immediately disposable and ready cash than any other country. but very few persons are aware how much greater the ready balance--the floating loan-fund which can be lent to anyone or for any purpose--is in england than it is anywhere else in the world. a very few figures will show how large the london loan-fund is, and how much greater it is than any other. the known deposits--the deposits of banks which publish their accounts--are, in london ( st december, ) , , l paris ( th february, ) , , l new york (february, ) , , l german empire ( st january, ) , , l and the unknown deposits--the deposits in banks which do not publish their accounts--are in london much greater than those many other of these cities. the bankers' deposits of london are many times greater than those of any other city--those of great britain many times greater than those of any other country. of course the deposits of bankers are not a strictly accurate measure of the resources of a money market. on the contrary, much more cash exists out of banks in france and germany, and in all non-banking countries, than could be found in england or scotland, where banking is developed. but that cash is not, so to speak, 'money-market money:' it is not attainable. nothing but their immense misfortunes, nothing but a vast loan in their own securities, could have extracted the hoards of france from the custody of the french people. the offer of no other securities would have tempted them, for they had confidence in no other securities. for all other purposes the money hoarded was useless and might as well not have been hoarded. but the english money is 'borrowable' money. our people are bolder in dealing with their money than any continental nation, and even if they were not bolder, the mere fact that their money is deposited in a bank makes it far more obtainable. a million in the hands of a single banker is a great power; he can at once lend it where he will, and borrowers can come to him, because they know or believe that he has it. but the same sum scattered in tens and fifties through a whole nation is no power at all: no one knows where to find it or whom to ask for it. concentration of money in banks, though not the sole cause, is the principal cause which has made the money market of england so exceedingly rich, so much beyond that of other countries. the effect is seen constantly. we are asked to lend, and do lend, vast sums, which it would be impossible to obtain elsewhere. it is sometimes said that any foreign country can borrow in lombard street at a price: some countries can borrow much cheaper than others; but all, it is said, can have some money if they choose to pay enough for it. perhaps this is an exaggeration; but confined, as of course it was meant to be, to civilised governments, it is not much of an exaggeration. there are very few civilised governments that could not borrow considerable sums of us if they choose, and most of them seem more and more likely to choose. if any nation wants even to make a railway--especially at all a poor nation--it is sure to come to this country--to the country of banks--for the money. it is true that english bankers are not themselves very great lenders to foreign states. but they are great lenders to those who lend. they advance on foreign stocks, as the phrase is, with 'a margin;' that is, they find eighty per cent of the money, and the nominal lender finds the rest. and it is in this way that vast works are achieved with english aid which but for that aid would never have been planned. in domestic enterprises it is the same. we have entirely lost the idea that any undertaking likely to pay, and seen to be likely, can perish for want of money; yet no idea was more familiar to our ancestors, or is more common now in most countries. a citizen of london in queen elizabeth's time could not have imagined our state of mind. he would have thought that it was of no use inventing railways (if he could have understood what a railway meant), for you would not have been able to collect the capital with which to make them. at this moment, in colonies and all rude countries, there is no large sum of transferable money; there is no fund from which you can borrow, and out of which you can make immense works. taking the world as a whole--either now or in the past--it is certain that in poor states there is no spare money for new and great undertakings, and that in most rich states the money is too scattered, and clings too close to the hands of the owners, to be often obtainable in large quantities for new purposes. a place like lombard street, where in all but the rarest times money can be always obtained upon good security or upon decent prospects of probable gain, is a luxury which no country has ever enjoyed with even comparable equality before. but though these occasional loans to new enterprises and foreign states are the most conspicuous instances of the power of lombard street, they are not by any means the most remarkable or the most important use of that power. english trade is carried on upon borrowed capital to an extent of which few foreigners have an idea, and none of our ancestors could have conceived. in every district small traders have arisen, who 'discount their bills' largely, and with the capital so borrowed, harass and press upon, if they do not eradicate, the old capitalist. the new trader has obviously an immense advantage in the struggle of trade. if a merchant have , l. all his own, to gain per cent on it he must make , l. a year, and must charge for his goods accordingly; but if another has only , l., and borrows , l. by discounts (no extreme instance in our modern trade), he has the same capital of , l. to use, and can sell much cheaper. if the rate at which he borrows be per cent., he will have to pay , l. a year; and if, like the old trader, he make , l. a year, he will still, after paying his interest, obtain , l. a year, or per cent, on his own , l. as most merchants are content with much less than per cent, he will be able, if he wishes, to forego some of that profit, lower the price of the commodity, and drive the old-fashioned trader--the man who trades on his own capital--out of the market. in modern english business, owing to the certainty of obtaining loans on discount of bills or otherwise at a moderate rate of interest, there is a steady bounty on trading with borrowed capital, and a constant discouragement to confine yourself solely or mainly to your own capital. this increasingly democratic structure of english commerce is very unpopular in many quarters, and its effects are no doubt exceedingly mixed. on the one hand, it prevents the long duration of great families of merchant princes, such as those of venice and genoa, who inherited nice cultivation as well as great wealth, and who, to some extent, combined the tastes of an aristocracy with the insight and verve of men of business. these are pushed out, so to say, by the dirty crowd of little men. after a generation or two they retire into idle luxury. upon their immense capital they can only obtain low profits, and these they do not think enough to compensate them for the rough companions and rude manners they must meet in business. this constant levelling of our commercial houses is, too, unfavourable to commercial morality. great firms, with a reputation which they have received from the past, and which they wish to transmit to the future, cannot be guilty of small frauds. they live by a continuity of trade, which detected fraud would spoil. when we scrutinise the reason of the impaired reputation of english goods, we find it is the fault of new men with little money of their own, created by bank 'discounts.' these men want business at once, and they produce an inferior article to get it. they rely on cheapness, and rely successfully. but these defects and others in the democratic structure of commerce are compensated by one great excellence. no country of great hereditary trade, no european country at least, was ever so little 'sleepy,' to use the only fit word, as england; no other was ever so prompt at once to seize new advantages. a country dependent mainly on great 'merchant princes' will never be so prompt; their commerce perpetually slips more and more into a commerce of routine. a man of large wealth, however intelligent, always thinks, more or less 'i have a great income, and i want to keep it. if things go on as they are i shall certainly keep it; but if they change i may not keep it.' consequently he considers every change of circumstance a 'bore,' and thinks of such changes as little as he can. but a new man, who has his way to make in the world, knows that such changes are his opportunities; he is always on the look-out for them, and always heeds them when he finds them. the rough and vulgar structure of english commerce is the secret of its life; for it contains 'the propensity to variation,' which, in the social as in the animal kingdom, is the principle of progress. in this constant and chronic borrowing, lombard street is the great go-between. it is a sort of standing broker between quiet saving districts of the country and the active employing districts. why particular trades settled in particular places it is often difficult to say; but one thing is certain, that when a trade has settled in any one spot, it is very difficult for another to oust it--impossible unless the second place possesses some very great intrinsic advantage. commerce is curiously conservative in its homes, unless it is imperiously obliged to migrate. partly from this cause, and partly from others, there are whole districts in england which cannot and do not employ their own money. no purely agricultural county does so. the savings of a county with good land but no manufactures and no trade much exceed what can be safely lent in the county. these savings are first lodged in the local banks, are by them sent to london, and are deposited with london bankers, or with the bill brokers. in either case the result is the same. the money thus sent up from the accumulating districts is employed in discounting the bills of the industrial districts. deposits are made with the bankers and bill brokers in lombard street by the bankers of such counties as somersetshire and hampshire, and those bill brokers and bankers employ them in the discount of bills from yorkshire and lancashire. lombard street is thus a perpetual agent between the two great divisions of england, between the rapidly-growing districts, where almost any amount of money can be well and easily employed, and the stationary and the declining districts, where there is more money than can be used. this organisation is so useful because it is so easily adjusted. political economists say that capital sets towards the most profitable trades, and that it rapidly leaves the less profitable and non-paying trades. but in ordinary countries this is a slow process, and some persons who want to have ocular demonstration of abstract truths have been inclined to doubt it because they could not see it. in england, however, the process would be visible enough if you could only see the books of the bill brokers and the bankers. their bill cases as a rule are full of the bills drawn in the most profitable trades, and _caeteris paribus_ and in comparison empty of those drawn in the less profitable. if the iron trade ceases to be as profitable as usual, less iron is sold; the fewer the sales the fewer the bills; and in consequence the number of iron bills in lombard street is diminished. on the other hand, if in consequence of a bad harvest the corn trade becomes on a sudden profitable, immediately 'corn bills' are created in great numbers, and if good are discounted in lombard street. thus english capital runs as surely and instantly where it is most wanted, and where there is most to be made of it, as water runs to find its level. this efficient and instantly-ready organisation gives us an enormous advantage in competition with less advanced countries--less advanced, that is, in this particular respect of credit. in a new trade english capital is instantly at the disposal of persons capable of understanding the new opportunities and of making good use of them. in countries where there is little money to lend, and where that little is lent tardily and reluctantly, enterprising traders are long kept back, because they cannot at once borrow the capital, without which skill and knowledge are useless. all sudden trades come to england, and in so doing often disappoint both rational probability and the predictions of philosophers. the suez canal is a curious case of this. all predicted that the canal would undo what the discovery of the passage to india round the cape effected. before that all oriental trade went to ports in the south of europe, and was thence diffused through europe. that london and liverpool should be centres of east indian commerce is a geographical anomaly, which the suez canal, it was said, would rectify. 'the greeks,' said m. de tocqueville, 'the styrians, the italians, the dalmatians, and the sicilians, are the people who will use the canal if any use it.' but, on the contrary, the main use of the canal has been by the english. none of the nations named by tocqueville had the capital, or a tithe of it, ready to build the large screw steamers which alone can use the canal profitably. ultimately these plausible predictions may or may not be right, but as yet they have been quite wrong, not because england has rich people--there are wealthy people in all countries--but because she possesses an unequalled fund of floating money, which will help in a moment any merchant who sees a great prospect of new profit. and not only does this unconscious 'organisation of capital,' to use a continental phrase, make the english specially quick in comparison with their neighbours on the continent at seizing on novel mercantile opportunities, but it makes them likely also to retain any trade on which they have once regularly fastened. mr. macculloch, following ricardo, used to teach that all old nations had a special aptitude for trades in which much capital is required. the interest of capital having been reduced in such countries, he argued, by the necessity of continually resorting to inferior soils, they can undersell countries where profit is high in all trades needing great capital. and in this theory there is doubtless much truth, though it can only be applied in practice after a number of limitations and with a number of deductions of which the older school of political economists did not take enough notice. but the same principle plainly and practically applies to england, in consequence of her habitual use of borrowed capital. as has been explained, a new man, with a small capital of his own and a large borrowed capital, can undersell a rich man who depends on his own capital only. the rich man wants the full rate of mercantile profit on the whole of the capital employed in his trade, but the poor man wants only the interest of money (perhaps not a third of the rate of profit) on very much of what he uses, and therefore an income will be an ample recompense to the poor man which would starve the rich man out of the trade. all the common notions about the new competition of foreign countries with england and its dangers--notions in which there is in other aspects much truth require to be reconsidered in relation to this aspect. england has a special machinery for getting into trade new men who will be content with low prices, and this machinery will probably secure her success, for no other country is soon likely to rival it effectually. there are many other points which might be insisted on, but it would be tedious and useless to elaborate the picture. the main conclusion is very plain--that english trade is become essentially a trade on borrowed capital, and that it is only by this refinement of our banking system that we are able to do the sort of trade we do, or to get through the quantity of it. but in exact proportion to the power of this system is its delicacy i should hardly say too much if i said its danger. only our familiarity blinds us to the marvellous nature of the system. there never was so much borrowed money collected in the world as is now collected in london. of the many millions in lombard street, infinitely the greater proportion is held by bankers or others on short notice or on demand; that is to say, the owners could ask for it all any day they please: in a panic some of them do ask for some of it. if any large fraction of that money really was demanded, our banking system and our industrial system too would be in great danger. some of those deposits too are of a peculiar and very distinct nature. since the franco-german war, we have become to a much larger extent than before the bankers of europe. a very large sum of foreign money is on various accounts and for various purposes held here. and in a time of panic it might be asked for. in we held only a much smaller sum of foreign money, but that smaller sum was demanded and we had to pay it at great cost and suffering, and it would be far worse if we had to pay the greater sums we now hold, without better resources than we had then. it may be replied, that though our instant liabilities are great, our present means are large; that though we have much we may be asked to pay at any moment, we have very much always ready to pay it with. but, on the contrary, there is no country at present, and there never was any country before, in which the ratio of the cash reserve to the bank deposits was so small as it is now in england. so far from our being able to rely on the proportional magnitude of our cash in hand, the amount of that cash is so exceedingly small that a bystander almost trembles when he compares its minuteness with the immensity of the credit which rests upon it. again, it may be said that we need not be alarmed at the magnitude of our credit system or at its refinement, for that we have learned by experience the way of controlling it, and always manage it with discretion. but we do not always manage it with discretion. there is the astounding instance of overend, gurney, and co. to the contrary. ten years ago that house stood next to the bank of england in the city of london; it was better known abroad than any similar firm known, perhaps, better than any purely english firm. the partners had great estates, which had mostly been made in the business. they still derived an immense income from it. yet in six years they lost all their own wealth, sold the business to the company, and then lost a large part of the company's capital. and these losses were made in a manner so reckless and so foolish, that one would think a child who had lent money in the city of london would have lent it better. after this example, we must not confide too surely in long-established credit, or in firmly-rooted traditions of business. we must examine the system on which these great masses of money are manipulated, and assure ourselves that it is safe and right. but it is not easy to rouse men of business to the task. they let the tide of business float before them; they make money or strive to do so while it passes, and they are unwilling to think where it is going. even the great collapse of overends, though it caused a panic, is beginning to be forgotten. most men of business think--'anyhow this system will probably last my time. it has gone on a long time, and is likely to go on still.' but the exact point is, that it has not gone on a long time. the collection of these immense sums in one place and in few hands is perfectly new. in the liabilities of the four great london joint stock banks were , , l.; they now are more than , , l. the private deposits of the bank of england then were , , l.; they now are , , l. there was in throughout the country but a fraction of the vast deposit business which now exists. we cannot appeal, therefore, to experience to prove the safety of our system as it now is, for the present magnitude of that system is entirely new. obviously a system may be fit to regulate a few millions, and yet quite inadequate when it is set to cope with many millions. and thus it may be with 'lombard street,' so rapid has been its growth, and so unprecedented is its nature. i am by no means an alarmist. i believe that our system, though curious and peculiar, may be worked safely; but if we wish so to work it, we must study it. we must not think we have an easy task when we have a difficult task, or that we are living in a natural state when we are really living in an artificial one. money will not manage itself, and lombard street has a great deal of money to manage. chapter ii. a general view of lombard street. i. the objects which you see in lombard street, and in that money world which is grouped about it, are the bank of england, the private banks, the joint stock banks, and the bill brokers. but before describing each of these separately we must look at what all have in common, and at the relation of each to the others. the distinctive function of the banker, says ricardo, 'begins as soon as he uses the money of others;' as long as he uses his own money he is only a capitalist. accordingly all the banks in lombard street (and bill brokers are for this purpose only a kind of bankers) hold much money belonging to other people on running account and on deposit. in continental language, lombard street is an organization of credit, and we are to see if it is a good or bad organization in its kind, or if, as is most likely, it turn out to be mixed, what are its merits and what are its defects? the main point on which one system of credit differs from another is 'soundness.' credit means that a certain confidence is given, and a certain trust reposed. is that trust justified? and is that confidence wise? these are the cardinal questions. to put it more simply--credit is a set of promises to pay; will those promises be kept? especially in banking, where the 'liabilities,' or promises to pay, are so large, and the time at which to pay them, if exacted, is so short, an instant capacity to meet engagements is the cardinal excellence. all which a banker wants to pay his creditors is a sufficient supply of the legal tender of the country, no matter what that legal tender may be. different countries differ in their laws of legal tender, but for the primary purposes of banking these systems are not material. a good system of currency will benefit the country, and a bad system will hurt it. indirectly, bankers will be benefited or injured with the country in which they live; but practically, and for the purposes of their daily life, they have no need to think, and never do think, on theories of currency. they look at the matter simply. they say 'i am under an obligation to pay such and such sums of legal currency; how much have i in my till, or have i at once under my command, of that currency?' in america, for example, it is quite enough for a banker to hold 'greenbacks,' though the value of these changes as the government chooses to enlarge or contract the issue. but a practical new york banker has no need to think of the goodness or badness of this system at all; he need only keep enough 'greenbacks' to pay all probable demands, and then he is fairly safe from the risk of failure. by the law of england the legal tenders are gold and silver coin (the last for small amounts only), and bank of england notes. but the number of our attainable bank notes is not, like american 'greenbacks,' dependent on the will of the state; it is limited by the provisions of the act of . that act separates the bank of england into two halves. the issue department only issues notes, and can only issue , , l. on government securities; for all the rest it must have bullion deposited. take, for example an account, which may be considered an average specimen of those of the last few years--that for the last week of : _an account pursuant to the act th and th victoria, cap. , for the week ending on wednesday, the th day of december, ._ issue department. notes issued , , l| government debt , , l | other securities , , l | gold coin and bullion , , l | silver bullion , , | , , l banking department. proprietors' capital , , l| government securities , , l rest , , l| other securities , , l public deposits, | notes , , l including exchequer, | gold and silver coins , l savings' banks, | commissioners of | national debt, | and dividend | accounts , , l| other deposits , , l| seven-day and other | bills , l| , , l| , , l geo. forbes, chief cashier. dated the th december, . there are here , , l. bank notes issued on securities, and , , l. represented by bullion. the bank of england has no power by law to increase the currency in any other manner. it holds the stipulated amount of securities, and for all the rest it must have bullion. this is the 'cast iron' system--the 'hard and fast' line which the opponents of the act say ruins us, and which the partizans of the act say saves us. but i have nothing to do with its expediency here. all which is to my purpose is that our paper 'legal tender,' our bank notes, can only be obtained in this manner. if, therefore, an english banker retains a sum of bank of england notes or coin in due proportion to his liabilities, he has a sufficient amount of the legal tender of this country, and he need not think of anything more. but here a distinction must be made. it is to be observed that properly speaking we should not include in the 'reserve' of a bank 'legal tenders,' or cash, which the bank keeps to transact its daily business. that is as much a part of its daily stock-in-trade as its desks or offices; or at any rate, whatever words we may choose to use, we must carefully distinguish between this cash in the till which is wanted every day, and the safety-fund, as we may call it, the special reserve held by the bank to meet extraordinary and unfrequent demands. what then, subject to this preliminary explanation, is the amount of legal tender held by our bankers against their liabilities? the answer is remarkable, and is the key to our whole system. it may be broadly said that no bank in london or out of it holds any considerable sum in hard cash or legal tender (above what is wanted for its daily business) except the banking department of the bank of england. that department had on the th day of december, , liabilities as follows: public deposits , , l private deposits , , l seven-day and other bills , l ------------ total , , l and a cash reserve of , , l. and this is all the cash reserve, we must carefully remember, which, under the law, the banking department of the bank of england--as we cumbrously call it the bank of england for banking purposes--possesses. that department can no more multiply or manufacture bank notes than any other bank can multiply them. at that particular day the bank of england had only , , l. in its till against liabilities of nearly three times the amount. it had 'consols' and other securities which it could offer for sale no doubt, and which, if sold, would augment its supply of bank notes--and the relation of such securities to real cash will be discussed presently; but of real cash, the bank of england for this purpose--the banking bank--had then so much and no more. and we may well think this a great deal, if we examine the position of other banks. no other bank holds any amount of substantial importance in its own till beyond what is wanted for daily purposes. all london banks keep their principal reserve on deposit at the banking department of the bank of england. this is by far the easiest and safest place for them to use. the bank of england thus has the responsibility of taking care of it. the same reasons which make it desirable for a private person to keep a banker make it also desirable for every banker, as respects his reserve, to bank with another banker if he safely can. the custody of very large sums in solid cash entails much care, and some cost; everyone wishes to shift these upon others if he can do so without suffering. accordingly, the other bankers of london, having perfect confidence in the bank of england, get that bank to keep their reserve for them. the london bill brokers do much the same. indeed, they are only a special sort of bankers who allow daily interest on deposits, and who for most of their money give security. but we have no concern now with these differences of detail. the bill brokers lend most of their money, and deposit the remnant either with the bank of england or some london banker. that london banker lends what he chooses of it, the rest he leaves at the bank of england. you always come back to the bank of england at last. but those who keep immense sums with a banker gain a convenience at the expense of a danger. they are liable to lose them if the bank fail. as all other bankers keep their banking reserve at the bank of england, they are liable to fail if it fails. they are dependent on the management of the bank of england in a day of difficulty and at a crisis for the spare money they keep to meet that difficulty and crisis. and in this there is certainly considerable risk. three times 'peel's act' has been suspended because the banking department was empty. before the act was broken-- in , the banking department was reduced to l , , " " l , , " " l , , in fact, in none of those years could the banking department of the bank of england have survived if the law had not been broken. nor must it be fancied that this danger is unreal, artificial, and created by law. there is a risk of our thinking so, because we hear that the danger can be cured by breaking an act; but substantially the same danger existed before the act. in , when only coin was a legal tender, and when there was only one department in the bank, the bank had reduced its reserve to , , l., and was within an ace of stopping payment. but the danger to the depositing banks is not the sole or the principal consequence of this mode of keeping the london reserve. the main effect is to cause the reserve to be much smaller in proportion to the liabilities than it would otherwise be. the reserve of the london bankers being on deposit in the bank of england, the bank always lends a principal part of it. suppose, a favourable supposition, that the banking department holds more than two-fifths of its liabilities in cash--that it lends three-fifths of its deposits and retains in reserve only two-fifths. if then the aggregate of the bankers' deposited reserve be , , l., , , l. of it will be lent by the banking department, and , , l. will be kept in the till. in consequence, that , , l. is all which is really held in actual cash as against the liabilities of the depositing banks. if lombard street were on a sudden thrown into liquidation, and made to pay as much as it could on the spot, that , , l. would be all which the bank of england could pay to the depositing banks, and consequently all, besides the small cash in the till, which those banks could on a sudden pay to the persons who have deposited with them. we see then that the banking reserve of the bank of england--some , , l. on an average of years now, and formerly much less--is all which is held against the liabilities of lombard street; and if that were all, we might well be amazed at the immense development of our credit system--in plain english, at the immense amount of our debts payable on demand, and the smallness of the sum of actual money which we keep to pay them if demanded. but there is more to come. lombard street is not only a place requiring to keep a reserve, it is itself a place where reserves are kept. all country bankers keep their reserve in london. they only retain in each country town the minimum of cash necessary to the transaction of the current business of that country town. long experience has told them to a nicety how much this is, and they do not waste capital and lose profit by keeping more idle. they send the money to london, invest a part of it in securities, and keep the rest with the london bankers and the bill brokers. the habit of scotch and irish bankers is much the same. all their spare money is in london, and is invested as all other london money now is; and, therefore, the reserve in the banking department of the bank of england is the banking reserve not only of the bank of england, but of all london--and not only of all london, but of all england, ireland, and scotland too. of late there has been a still further increase in our liabilities. since the franco-german war, we may be said to keep the european reserve also. deposit banking is indeed so small on the continent, that no large reserve need be held on account of it. a reserve of the same sort which is needed in england and scotland is not needed abroad. but all great communities have at times to pay large sums in cash, and of that cash a great store must be kept somewhere. formerly there were two such stores in europe, one was the bank of france, and the other the bank of england. but since the suspension of specie payments by the bank of france, its use as a reservoir of specie is at an end. no one can draw a cheque on it and be sure of getting gold or silver for that cheque. accordingly the whole liability for such international payments in cash is thrown on the bank of england. no doubt foreigners cannot take from us our own money; they must send here 'value in some shape or other for all they take away. but they need not send 'cash;' they may send good bills and discount them in lombard street and take away any part of the produce, or all the produce, in bullion. it is only putting the same point in other words to say that all exchange operations are centering more and more in london. formerly for many purposes paris was a european settling-house, but now it has ceased to be so. the note of the bank of france has not indeed been depreciated enough to disorder ordinary transactions. but any depreciation, however small--even the liability to depreciation without its reality--is enough to disorder exchange transactions. they are calculated to such an extremity of fineness that the change of a decimal may be fatal, and may turn a profit into a loss. accordingly london has become the sole great settling-house of exchange transactions in europe, instead of being formerly one of two. and this pre-eminence london will probably maintain, for it is a natural pre-eminence. the number of mercantile bills drawn upon london incalculably surpasses those drawn on any other european city; london is the place which receives more than any other place, and pays more than any other place, and therefore it is the natural 'clearing house.' the pre-eminence of paris partly arose from a distribution of political power, which is already disturbed; but that of london depends on the regular course of commerce, which is singularly stable and hard to change. now that london is the clearing-house to foreign countries, london has a new liability to foreign countries. at whatever place many people have to make payments, at that place those people must keep money. a large deposit of foreign money in london is now necessary for the business of the world. during the immense payments from france to germany, the sum _in transitu_--the sum in london has perhaps been unusually large. but it will ordinarily be very great. the present political circumstances no doubt will soon change. we shall soon hold in lombard street far less of the money of foreign governments; but we shall hold more and more of the money of private persons; for the deposit at a clearing-house necessary to settle the balance of commerce must tend to increase as that commerce itself increases. and this foreign deposit is evidently of a delicate and peculiar nature. it depends on the good opinion of foreigners, and that opinion may diminish or may change into a bad opinion. after the panic of , especially after the suspension of peel's act (which many foreigners confound with a suspension of cash payments), a large amount of foreign money was withdrawn from london. and we may reasonably presume that in proportion as we augment the deposits of cash by foreigners in london, we augment both the chances and the disasters of a 'run' upon england. and if that run should happen, the bullion to meet it must be taken from the bank. there is no other large store in the country. the great exchange dealers may have a little for their own purposes, but they have no store worth mentioning in comparison with this. if a foreign creditor is so kind as to wait his time and buy the bullion as it comes into the country, he may be paid without troubling the bank or distressing the money market. the german government has recently been so kind; it was in no respect afraid. but a creditor who takes fright will not wait, and if he wants bullion in a hurry he must come to the bank of england. in consequence all our credit system depends on the bank of england for its security. on the wisdom of the directors of that one joint stock company, it depends whether england shall be solvent or insolvent. this may seem too strong, but it is not. all banks depend on the bank of england, and all merchants depend on some banker. if a merchant have , l. at his bankers, and wants to pay it to some one in germany, he will not be able to pay it unless his banker can pay him, and the banker will not be able to pay if the bank of england should be in difficulties and cannot produce his 'reserve.' the directors of the bank are, therefore, in fact, if not in name, trustees for the public, to keep a banking reserve on their behalf; and it would naturally be expected either that they distinctly recognized this duty and engaged to perform it, or that their own self-interest was so strong in the matter that no engagement was needed. but so far from there being a distinct undertaking on the part of the bank directors to perform this duty, many of them would scarcely acknowledge it, and some altogether deny it. mr. hankey, one of the most careful and most experienced of them, says in his book on the bank of england, the best account of the practice and working of the bank which anywhere exists--'i do not intend here to enter at any length on the subject of the general management of the bank, meaning the banking department, as the principle upon which the business is conducted does not differ, as far as i am aware, from that of any well-conducted bank in london.' but, as anyone can see by the published figures, the banking department of the bank of england keeps as a great reserve in bank notes and coin between and per cent of its liabilities, and the other banks only keep in bank notes and coin the bare minimum they need to open shop with. and such a constant difference indicates, i conceive, that the two are not managed on the same principle. the practice of the bank has, as we all know, been much and greatly improved. they do not now manage like the other banks in lombard street. they keep an altogether different kind and quantity of reserve; but though the practice is mended the theory is not. there has never been a distinct resolution passed by the directors of the bank of england, and communicated by them to the public, stating even in the most general manner, how much reserve they mean to keep or how much they do not mean, or by what principle in this important matter they will be guided. the position of the bank directors is indeed most singular. on the one side a great city opinion--a great national opinion, i may say, for the nation has learnt much from many panics--requires the directors to keep a large reserve. the newspapers, on behalf of the nation, are always warning the directors to keep it, and watching that they do keep it; but, on the other hand, another less visible but equally constant pressure pushes the directors in exactly the reverse way, and inclines them to diminish the reserve. this is the natural desire of all directors to make a good dividend for their shareholders. the more money lying idle the less, _caeteris paribus_, is the dividend; the less money lying idle the greater is the dividend. and at almost every meeting of the proprietors of the bank of england, there is a conversation on this subject. some proprietor says that he does not see why so much money is kept idle, and hints that the dividend ought to be more. indeed, it cannot be wondered at that the bank proprietors do not quite like their position. theirs is the oldest bank in the city, but their profits do not increase, while those of other banks most rapidly increase. in , the dividend on the stock of the bank of england was per cent, and the price of the stock itself ; the dividend now is per cent, and the price of the stock . but in the same time the shares of the london and westminster bank, in spite of an addition of per cent to the capital, have risen from to , and the dividend from per cent to per cent. that the bank proprietors should not like to see other companies getting richer than their company is only natural. some part of the lowness of the bank dividend, and of the consequent small value of bank stock, is undoubtedly caused by the magnitude of the bank capital; but much of it is also due to the great amount of unproductive cash--of cash which yields no interest--that the banking department of the bank of england keeps lying idle. if we compare the london and westminster bank--which is the first of the joint-stock banks in the public estimation and known to be very cautiously and carefully managed--with the bank of england, we shall see the difference at once. the london and westminster has only per cent of its liabilities lying idle. the banking department of the bank of england has over per cent. so great a difference in the management must cause, and does cause, a great difference in the profits. inevitably the shareholders of the bank of england will dislike this great difference; more or less, they will always urge their directors to diminish (as far as possible) the unproductive reserve, and to augment as far as possible their own dividend. in most banks there would be a wholesome dread restraining the desire of the shareholders to reduce the reserve; they would fear to impair the credit of the bank. but fortunately or unfortunately, no one has any fear about the bank of england. the english world at least believes that it will not, almost that it cannot, fail. three times since the banking department has received assistance, and would have failed without it. in , the entire concern almost suspended payment; in , it actually did so. but still there is a faith in the bank, contrary to experience, and despising evidence. no doubt in every one of these years the condition of the bank, divided or undivided, was in a certain sense most sound; it could ultimately have paid all its creditors all it owed, and returned to its shareholders all their own capital. but ultimate payment is not what the creditors of a bank want; they want present, not postponed, payment; they want to be repaid according to agreement; the contract was that they should be paid on demand, and if they are not paid on demand they may be ruined. and that instant payment, in the years i speak of, the bank of england certainly could not have made. but no one in london ever dreams of questioning the credit of the bank, and the bank never dreams that its own credit is in danger. somehow everybody feels the bank is sure to come right. in , when it had scarcely any money left, the government said not only that it need not pay away what remained, but that it must not. the 'effect of letters of licence' to break peel's act has confirmed the popular conviction that the government is close behind the bank, and will help it when wanted. neither the bank nor the banking department have ever had an idea of being put 'into liquidation;' most men would think as soon of 'winding up' the english nation. since then the bank of england, as a bank, is exempted from the perpetual apprehension that makes other bankers keep a large reserve the apprehension of discredit--it would seem particularly necessary that its managers should be themselves specially interested in keeping that reserve, and specially competent to keep it. but i need not say that the bank directors have not their personal fortune at stake in the management of the bank. they are rich city merchants, and their stake in the bank is trifling in comparison with the rest of their wealth. if the bank were wound up, most of them would hardly in their income feel the difference. and what is more, the bank directors are not trained bankers; they were not bred to the trade, and do not in general give the main power of their minds to it. they are merchants, most of whose time and most of whose real mind are occupied in making money in their own business and for themselves. it might be expected that as this great public duty was cast upon the banking department of the bank, the principal statesmen (if not parliament itself) would have enjoined on them to perform it. but no distinct resolution of parliament has ever enjoined it; scarcely any stray word of any influential statesman. and, on the contrary, there is a whole _catena_ of authorities, beginning with sir robert peel and ending with mr. lowe, which say that the banking department of the bank of england is only a bank like any other bank--a company like other companies; that in this capacity it has no peculiar position, and no public duties at all. nine-tenths of english statesmen, if they were asked as to the management of the banking department of the bank of england, would reply that it was no business of theirs or of parliament at all; that the banking department alone must look to it. the result is that we have placed the exclusive custody of our entire banking reserve in the hands of a single board of directors not particularly trained for the duty--who might be called 'amateurs,' who have no particular interest above other people in keeping it undiminished--who acknowledge no obligation to keep it undiminished who have never been told by any great statesman or public authority that they are so to keep it or that they have anything to do with it who are named by and are agents for a proprietary which would have a greater income if it was diminished, who do not fear, and who need not fear, ruin, even if it were all gone and wasted. that such an arrangement is strange must be plain; but its strangeness can only be comprehended when we know what the custody of a national banking reserve means, and how delicate and difficult it is. ii. such a reserve as we have seen is kept to meet sudden and unexpected demands. if the bankers of a country are asked for much more than is commonly wanted, then this reserve must be resorted to. what then are these extra demands? and how is this extra reserve to be used? speaking broadly, these extra demands are of two kinds--one from abroad to meet foreign payments requisite to pay large and unusual foreign debts, and the other from at home to meet sudden apprehension or panic arising in any manner, rational or irrational. no country has ever been so exposed as england to a foreign demand on its banking reserve, not only because at present england is a large borrower from foreign nations, but also (and much more) because no nation has ever had a foreign trade of such magnitude, in such varied objects, or so ramified through the world. the ordinary foreign trade of a country requires no cash; the exports on one side balance the imports on the other. but a sudden trade of import like the import of foreign corn after a bad harvestor (what is much less common, though there are cases of it) the cessation of any great export, causes a balance to become due, which must be paid in cash. now, the only source from which large sums of cash can be withdrawn in countries where banking is at all developed, is a 'bank reserve.' in england especially, except a few sums of no very considerable amount held by bullion dealers in the course of their business, there are no sums worth mentioning in cash out of the banks; an ordinary person could hardly pay a serious sum without going to some bank, even if he spent a month in trying. all persons who wish to pay a large sum in cash trench of necessity on the banking reserve. but then what is 'cash?' within a country the action of a government can settle the quantity, and therefore the value, of its currency; but outside its own country, no government can do so. bullion is the cash' of international trade; paper currencies are of no use there, and coins pass only as they contain more or less bullion. when then the legal tender of a country is purely metallic, all that is necessary is that banks should keep a sufficient store of that 'legal tender.' but when the 'legal tender' is partly metal and partly paper, it is necessary that the paper 'legal tender'--the bank note--should be convertible into bullion. and here i should pass my limits, and enter on the theory of peel's act if i began to discuss the conditions of convertibility. i deal only with the primary pre-requisite of effectual foreign payments--a sufficient supply of the local legal tender; with the afterstep--the change of the local legal tender into the universally acceptable commodity cannot deal. what i have to deal with is, for the present, ample enough. the bank of england must keep a reserve of 'legal tender' to be used for foreign payments if itself fit, and to be used in obtaining bullion if itself unfit. and foreign payments are sometimes very large, and often very sudden. the 'cotton drain,' as it is called--the drain to the east to pay for indian cotton during the american civil war took many millions from this country for a series of years. a bad harvest must take millions in a single year. in order to find such great sums, the bank of england requires the steady use of an effectual instrument. that instrument is the elevation of the rate of interest. if the interest of money be raised, it is proved by experience that money does come to lombard street, and theory shows that it ought to come. to fully explain the matter i must go deep into the theory of the exchanges, but the general notion is plain enough. loanable capital, like every other commodity, comes where there is most to be made of it. continental bankers and others instantly send great sums here, as soon as the rate of interest shows that it can be done profitably. while english credit is good, a rise of the value of money in lombard street immediately by a banking operation brings money to lombard street. and there is also a slower mercantile operation. the rise in the rate of discount acts immediately on the trade of this country. prices fall here; in consequence imports are diminished, exports are increased, and, therefore, there is more likelihood of a balance in bullion coming to this country after the rise in the rate than there was before. whatever persons--one bank or many banks--in any country hold the banking reserve of that country, ought at the very beginning of an unfavourable foreign exchange at once to raise the rate of interest, so as to prevent their reserve from being diminished farther, and so as to replenish it by imports of bullion. this duty, up to about the year , the bank of england did not perform at all, as i shall show farther on. a more miserable history can hardly be found than that of the attempts of the bank--if indeed they can be called attempts--to keep a reserve and to manage a foreign drain between the year (when cash payments were resumed by the bank, and when our modern money market may be said to begin) and the year . the panic of that year for the first time taught the bank directors wisdom, and converted them to sound principles. the present policy of the bank is an infinite improvement on the policy before : the two must not be for an instant confounded; but nevertheless, as i shall hereafter show, the present policy is now still most defective, and much discussion and much effort, will be wanted before that policy becomes what it ought to be. a domestic drain is very different. such a drain arises from a disturbance of credit within the country, and the difficulty of dealing with it is the greater, because it is often caused, or at least often enhanced, by a foreign drain. times without number the public have been alarmed mainly because they saw that the banking reserve was already low, and that it was daily getting lower. the two maladies--an external drain and an internal--often attack the money market at once. what then ought to be done? in opposition to what might be at first sight supposed, the best way for the bank or banks who have the custody of the bank reserve to deal with a drain arising from internal discredit, is to lend freely. the first instinct of everyone is the contrary. there being a large demand on a fund which you want to preserve, the most obvious way to preserve it is to hoard it--to get in as much as you can, and to let nothing go out which you can help. but every banker knows that this is not the way to diminish discredit. this discredit means, 'an opinion that you have not got any money,' and to dissipate that opinion, you must, if possible, show that you have money: you must employ it for the public benefit in order that the public may know that you have it. the time for economy and for accumulation is before. a good banker will have accumulated in ordinary times the reserve he is to make use of in extraordinary times. ordinarily discredit does not at first settle on any particular bank, still less does it at first concentrate itself on the bank or banks holding the principal cash reserve. these banks are almost sure to be those in best credit, or they would not be in that position, and, having the reserve, they are likely to look stronger and seem stronger than any others. at first, incipient panic amounts to a kind of vague conversation: is a. b. as good as he used to be? has not c. d. lost money? and a thousand such questions. a hundred people are talked about, and a thousand think,--'am i talked about, or am i not?' 'is my credit as good as it used to be, or is it less?' and every day, as a panic grows, this floating suspicion becomes both more intense and more diffused; it attacks more persons; and attacks them all more virulently than at first. all men of experience, therefore, try to strengthen themselves,' as it is called, in the early stage of a panic; they borrow money while they can; they come to their banker and offer bills for discount, which commonly they would not have offered for days or weeks to come. and if the merchant be a regular customer, a banker does not like to refuse, because if he does he will be said, or may be said, to be in want of money, and so may attract the panic to himself. not only merchants but all persons under pecuniary liabilities--present or imminent--feel this wish to 'strengthen themselves,' and in proportion to those liabilities. especially is this the case with what may be called the auxiliary dealers in credit. under any system of banking there will always group themselves about the main bank or banks (in which is kept the reserve) a crowd of smaller money dealers, who watch the minutae of bills, look into special securities which busy bankers have not time for, and so gain a livelihood. as business grows, the number of such subsidiary persons augments. the various modes in which money may be lent have each their peculiarities, and persons who devote themselves to one only lend in that way more safely, and therefore more cheaply. in time of panic, these subordinate dealers in money will always come to the principal dealers. in ordinary times, the intercourse between the two is probably close enough. the little dealer is probably in the habit of pledging his 'securities' to the larger dealer at a rate less than he has himself charged, and of running into the market to lend again. his time and brains are his principal capital, and he wants to be always using them. but in times of incipient panic, the minor money dealer always becomes alarmed. his credit is never very established or very wide; he always fears that he may be the person on whom current suspicion will fasten, and often he is so. accordingly he asks the larger dealer for advances. a number of such persons ask all the large dealers--those who have the money--the holders of the reserve. and then the plain problem before the great dealers comes to be 'how shall we best protect ourselves? no doubt the immediate advance to these second-class dealers is annoying, but may not the refusal of it even be dangerous? a panic grows by what it feeds on; if it devours these second-class men, shall we, the first class, be safe?' a panic, in a word, is a species of neuralgia, and according to the rules of science you must not starve it. the holders of the cash reserve must be ready not only to keep it for their own liabilities, but to advance it most freely for the liabilities of others. they must lend to merchants, to minor bankers, to 'this man and that man,' whenever the security is good. in wild periods of alarm, one failure makes many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them. the way in which the panic of was stopped by advancing money has been described in so broad and graphic a way that the passage has become classical. 'we lent it,' said mr. harman, on behalf of the bank of england, 'by every possible means and in modes we had never adopted before; we took in stock on security, we purchased exchequer bills, we made advances on exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the bank, and we were not on some occasions over-nice. seeing the dreadful state in which the public were, we rendered every assistance in our power.' after a day or two of this treatment, the entire panic subsided, and the 'city' was quite calm. the problem of managing a panic must not be thought of as mainly a 'banking' problem. it is primarily a mercantile one. all merchants are under liabilities; they have bills to meet soon, and they can only pay those bills by discounting bills on other merchants. in other words, all merchants are dependent on borrowing money, and large merchants are dependent on borrowing much money. at the slightest symptom of panic many merchants want to borrow more than usual; they think they will supply themselves with the means of meeting their bills while those means are still forthcoming. if the bankers gratify the merchants, they must lend largely just when they like it least; if they do not gratify them, there is a panic. on the surface there seems a great inconsistency in all this. first, you establish in some bank or banks a certain reserve; you make of it or them a kind of ultimate treasury, where the last shilling of the country is deposited and kept. and then you go on to say that this final treasury is also to be the last lending-house; that out of it unbounded, or at any rate immense, advances are to be made when no once else lends. this seems like saying--first, that the reserve should be kept, and then that it should not be kept. but there is no puzzle in the matter. the ultimate banking reserve of a country (by whomsoever kept) is not kept out of show, but for certain essential purposes, and one of those purposes is the meeting a demand for cash caused by an alarm within the country. it is not unreasonable that our ultimate treasure in particular cases should be lent; on the contrary, we keep that treasure for the very reason that in particular cases it should be lent. when reduced to abstract principle, the subject comes to this. an 'alarm' is an opinion that the money of certain persons will not pay their creditors when those creditors want to be paid. if possible, that alarm is best met by enabling those persons to pay their creditors to the very moment. for this purpose only a little money is wanted. if that alarm is not so met, it aggravates into a panic, which is an opinion that most people, or very many people, will not pay their creditors; and this too can only be met by enabling all those persons to pay what they owe, which takes a great deal of money. no one has enough money, or anything like enough, but the holders of the bank reserve. not that the help so given by the banks holding that reserve necessarily diminishes it. very commonly the panic extends as far, or almost as far, as the bank or banks which hold the reserve, but does not touch it or them at all. in this case it is enough if the dominant bank or banks, so to speak, pledge their credit for those who want it. under our present system it is often quite enough that a merchant or a banker gets the advance made to him put to his credit in the books of the bank of england; he may never draw a cheque on it, or, if he does, that cheque may come in again to the credit of some other customer, who lets it remain on his account. an increase of loans at such times is often an increase of the liabilities of the bank, not a diminution of its reserve. just so before , an issue of notes, as in to quell a panic entirely internal did not diminish the bullion reserve. the notes went out, but they did not return. they were issued as loans to the public, but the public wanted no more; they never presented them for payment; they never asked that sovereigns should be given for them. but the acceptance of a great liability during an augmenting alarm, though not as bad as an equal advance of cash, is the thing next worst. at any moment the cash may be demanded. supposing the panic to grow, it will be demanded, and the reserve will be lessened accordingly. no doubt all precautions may, in the end, be unavailing. 'on extraordinary occasions,' says ricardo, 'a general panic may seize the country, when every one becomes desirous of possessing himself of the precious metals as the most convenient mode of realising or concealing his property, against such panic banks have no security _on any system_.' the bank or banks which hold the reserve may last a little longer than the others; but if apprehension pass a certain bound, they must perish too. the use of credit is, that it enables debtors to use a certain part of the money their creditors have lent them. if all those creditors demand all that money at once, they cannot have it, for that which their debtors have used, is for the time employed, and not to be obtained. with the advantages of credit we must take the disadvantages too; but to lessen them as much as we can, we must keep a great store of ready money always available, and advance out of it very freely in periods of panic, and in times of incipient alarm. the management of the money market is the more difficult, because, as has been said, periods of internal panic and external demand for bullion commonly occur together. the foreign drain empties the bank till, and that emptiness, and the resulting rise in the rate of discount, tend to frighten the market. the holders of the reserve have, therefore, to treat two opposite maladies at once--one requiring stringent remedies, and especially a rapid rise in the rate of interest; and the other, an alleviative treatment with large and ready loans. before we had much specific experience, it was not easy to prescribe for this compound disease; but now we know how to deal with it. we must look first to the foreign drain, and raise the rate of interest as high as may be necessary. unless you can stop the foreign export, you cannot allay the domestic alarm. the bank will get poorer and poorer, and its poverty will protract or renew the apprehension. and at the rate of interest so raised, the holders--one or more-of the final bank reserve must lend freely. very large loans at very high rates are the best remedy for the worst malady of the money market when a foreign drain is added to a domestic drain. any notion that money is not to be had, or that it may not be had at any price, only raises alarm to panic and enhances panic to madness. but though the rule is clear, the greatest delicacy, the finest and best skilled judgment, are needed to deal at once with such great and contrary evils. and great as is the delicacy of such a problem in all countries, it is far greater in england now than it was or is elsewhere. the strain thrown by a panic on the final bank reserve is proportional to the magnitude of a country's commerce, and to the number and size of the dependent banks--banks, that is, holding no cash reserve--that are grouped around the central bank or banks. and in both respects our system causes a stupendous strain. the magnitude of our commerce, and the number and magnitude of the banks which depend on the bank of england, are undeniable. there are very many more persons under great liabilities than there are, or ever were, anywhere else. at the commencement of every panic, all persons under such liabilities try to supply themselves with the means of meeting those liabilities while they can. this causes a great demand for new loans. and so far from being able to meet it, the bankers who do not keep an extra reserve at that time borrow largely, or do not renew large loans--very likely do both. london bankers, other than the bank of england, effect this in several ways. first, they have probably discounted bills to a large amount for the bill brokers, and if these bills are paid, they decline discounting any others to replace them. the directors of the london and westminster bank had, in the panic of , discounted millions of such bills, and they justly said that if those bills were paid they would have an amount of cash far more than sufficient for any demand. but how were those bills to be paid? some one else must lend the money to pay them. the mercantile community could not on a sudden bear to lose so large a sum of borrowed money; they have been used to rely on it, and they could not carry on their business without it. least of all could they bear it at the beginning of a panic, when everybody wants more money than usual. speaking broadly, those bills can only be paid by the discount of other bills. when the bills (suppose) of a manchester warehouseman which he gave to the manufacturer become due, he cannot, as a rule, pay for them at once in cash; he has bought on credit, and he has sold on credit. he is but a middleman. to pay his own bill to the maker of the goods, he must discount the bills he has received from the shopkeepers to whom he has sold the goods; but if there is a sudden cessation in the means of discount, he will not be able to discount them. all our mercantile community must obtain new loans to pay old debts. if some one else did not pour into the market the money which the banks like the london and westminster bank take out of it, the bills held by the london and westminster bank could not be paid. who then is to pour in the new money? certainly not the bill brokers. they have been used to re-discount with such banks as the london and westminster millions of bills, and if they see that they are not likely to be able to re-discount those bills, they instantly protect themselves and do not discount them. their business does not allow them to keep much cash unemployed. they give interest for all the money deposited with them--an interest often nearly approaching the interest they can charge; as they can only keep a small reserve a panic tells on them more quickly than on anyone else. they stop their discounts, or much diminish their discounts, immediately. there is no new money to be had from them, and the only place at which they can have it is the bank of england. there is even a simpler case: the banker who is uncertain of his credit, and wants to increase his cash, may have money on deposit at the bill brokers. if he wants to replenish his reserve, he may ask for it, suppose, just when the alarm is beginning. but if a great number of persons do this very suddenly, the bill brokers will not at once be able to pay without borrowing. they have excellent bills in their case, but these will not be due for some days; and the demand from the more or less alarmed bankers is for payment at once and to-day. accordingly the bill broker takes refuge at the bank of england the only place where at such a moment new money is to be had. the case is just the same if the banker wants to sell consols, or to call in money lent on consols. these he reckons as part of his reserve. and in ordinary times nothing can be better. according to the saying, you 'can sell consols on a sunday.' in a time of no alarm, or in any alarm affecting that particular banker only, he can rely on such reserve without misgiving. but not so in a general panic. then, if he wants to sell , l. worth of consols, he will not find , l. of fresh money ready to come into the market. all ordinary bankers are wanting to sell, or thinking they may have to sell. the only resource is the bank of england. in a great panic, consols cannot be sold unless the bank of england will advance to the buyer, and no buyer can obtain advances on consols at such a time unless the bank of england will lend to him. the case is worse if the alarm is not confined to the great towns, but is diffused through the country. as a rule, country bankers only keep so much barren cash as is necessary for their common business. all the rest they leave at the bill brokers, or at the interest-giving banks, or invest in consols and such securities. but in a panic they come to london and want this money. and it is only from the bank of england that they can get it, for all the rest of london want their money for themselves. if we remember that the liabilities of lombard street payable on demand are far larger than those of any like market, and that the liabilities of the country are greater still, we can conceive the magnitude of the pressure on the bank of england when both lombard street and the country suddenly and at once come upon it for aid. no other bank was ever exposed to a demand so formidable, for none ever before kept the banking reserve for such a nation as the english. the mode in which the bank of england meets this great responsibility is very curious. it unquestionably does make enormous advances in every panic in the loans on 'private securities' increased from , , l to , , l ditto ditto , , l to , , l ditto ditto , , l to , , l but, on the other hand, as we have seen, though the bank, more or less, does its duty, it does not distinctly acknowledge that it is its duty. we are apt to be solemnly told that the banking department of the bank of england is only a bank like other banks--that it has no peculiar duty in times of panic--that it then is to look to itself alone, as other banks look. and there is this excuse for the bank. hitherto questions of banking have been so little discussed in comparison with questions of currency, that the duty of the bank in time of panic has been put on a wrong ground. it is imagined that because bank notes are a legal tender, the bank has some peculiar duty to help other people. but bank notes are only a legal tender at the issue department, not at the banking department, and the accidental combination of the two departments in the same building gives the banking department no aid in meeting a panic. if the issue department were at somerset house, and if it issued government notes there, the position of the banking department under the present law would be exactly what it is now. no doubt, formerly the bank of england could issue what it pleased, but that historical reminiscence makes it no stronger now that it can no longer so issue. we must deal with what is, not with what was. and a still worse argument is also used. it is said that because the bank of england keeps the 'state account' and is the government banker, it is a sort of 'public institution' and ought to help everybody. but the custody of the taxes which have been collected and which wait to be expended is a duty quite apart from panics. the government money may chance to be much or little when the panic comes. there is no relation or connection between the two. and the state, in getting the bank to keep what money it may chance to have, or in borrowing of it what money it may chance to want, does not hire it to stop a panic or much help it if it tries. the real reason has not been distinctly seen. as has been already said--but on account of its importance and perhaps its novelty it is worth saying again--whatever bank or banks keep the ultimate banking reserve of the country must lend that reserve most freely in time of apprehension, for that is one of the characteristic uses of the bank reserve, and the mode in which it attains one of the main ends for which it is kept. whether rightly or wrongly, at present and in fact the bank of england keeps our ultimate bank reserve, and therefore it must use it in this manner. and though the bank of england certainly do make great advances in time of panic, yet as they do not do so on any distinct principle, they naturally do it hesitatingly, reluctantly, and with misgiving. in , even in --the latest panic, and the one in which on the whole the bank acted the best--there was nevertheless an instant when it was believed the bank would not advance on consols, or at least hesitated to advance on them. the moment this was reported in the city and telegraphed to the country, it made the panic indefinitely worse. in fact, to make large advances in this faltering way is to incur the evil of making them without obtaining the advantage. what is wanted and what is necessary to stop a panic is to diffuse the impression, that though money may be dear, still money is to be had. if people could be really convinced that they could have money if they wait a day or two, and that utter ruin is not coming, most likely they would cease to run in such a mad way for money. either shut the bank at once, and say it will not lend more than it commonly lends, or lend freely, boldly, and so that the public may feel you mean to go on lending. to lend a great deal, and yet not give the public confidence that you will lend sufficiently and effectually, is the worst of all policies; but it is the policy now pursued. in truth, the bank do not lend from the motives which should make a bank lend. the holders of the bank reserve ought to lend at once and most freely in an incipient panic, because they fear destruction in the panic. they ought not to do it to serve others; they ought to do it to serve themselves. they ought to know that this bold policy is the only safe one, and for that reason they ought to choose it. but the bank directors are not afraid. even at the last moment they say that 'whatever happens to the community, they can preserve themselves.' both in and (i believe also in , though there is no printed evidence of it) the bank directors contended that the banking department was quite safe though its reserve was nearly all gone, and that it could strengthen itself by selling securities and by refusing to discount. but this is a complete dream. the bank of england could not sell 'securities,' for in an extreme panic there is no one else to buy securities. the bank cannot stay still and wait till its bills are paid, and so fill its coffers, for unless it discounts equivalent bills, the bills which it has already discounted will not be paid. 'when the reserve in the ultimate bank or banks--those keeping the reserve--runs low, it cannot be augmented by the same means that other and dependent banks commonly adopt to maintain their reserve, for the dependent banks trust that at such moments the ultimate banks will be discounting more than usual and lending more than usual. but ultimate banks have no similar rear-guard to rely upon. i shall have failed in my purpose if i have not proved that the system of entrusting all our reserve to a single board, like that of the bank directors, is very anomalous; that it is very dangerous; that its bad consequences, though much felt, have not been fully seen; that they have been obscured by traditional arguments and hidden in the dust of ancient controversies. but it will be said--what would be better? what other system could there be? we are so accustomed to a system of banking, dependent for its cardinal function on a single bank, that we can hardly conceive of any other. but the natural system--that which would have sprung up if government had let banking alone--is that of many banks of equal or not altogether unequal size. in all other trades competition brings the traders to a rough approximate equality. in cotton spinning, no single firm far and permanently outstrips the others. there is no tendency to a monarchy in the cotton world; nor, where banking has been left free, is there any tendency to a monarchy in banking either. in manchester, in liverpool, and all through england, we have a great number of banks, each with a business more or less good, but we have no single bank with any sort of predominance; nor is there any such bank in scotland. in the new world of joint stock banks outside the bank of england, we see much the same phenomenon. one or more get for a time a better business than the others, but no single bank permanently obtains an unquestioned predominance. none of them gets so much before the others that the others voluntarily place their reserves in its keeping. a republic with many competitors of a size or sizes suitable to the business, is the constitution of every trade if left to itself, and of banking as much as any other. a monarchy in any trade is a sign of some anomalous advantage, and of some intervention from without. i shall be at once asked--do you propose a revolution? do you propose to abandon the one-reserve system, and create anew a many-reserve system? my plain answer is that i do not propose it. i know it would be childish. credit in business is like loyalty in government. you must take what you can find of it, and work with it if possible. a theorist may easily map out a scheme of government in which queen victoria could be dispensed with. he may make a theory that, since we admit and we know that the house of commons is the real sovereign, any other sovereign is superfluous; but for practical purposes, it is not even worth while to examine these arguments. queen victoria is loyally obeyed--without doubt, and without reasoning--by millions of human beings. if those millions began to argue, it would not be easy to persuade them to obey queen victoria, or anything else. effectual arguments to convince the people who need convincing are wanting. just so, an immense system of credit, founded on the bank of england as its pivot and its basis, now exists. the english people, and foreigners too, trust it implicitly. every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone: but what we have requires no proof. the whole rests on an instinctive confidence generated by use and years. nothing would persuade the english people to abolish the bank of england; and if some calamity swept it away, generations must elapse before at all the same trust would be placed in any other equivalent. a many-reserve system, if some miracle should put it down in lombard street, would seem monstrous there. nobody would understand it, or confide in it. credit is a power which may grow, but cannot be constructed. those who live under a great and firm system of credit must consider that if they break up that one they will never see another, for it will take years upon years to make a successor to it. on this account, i do not suggest that we should return to a natural or many-reserve system of banking. i should only incur useless ridicule if i did suggest it. nor can i propose that we should adopt the simple and straightforward expedient by which the french have extricated themselves from the same difficulty. in france all banking rests on the bank of france, even more than in england all rests on the bank of england. the bank of france keeps the final banking reserve, and it keeps the currency reserve too. but the state does not trust such a function to a board of merchants, named by shareholders. the nation itself--the executive government--names the governor and deputy-governor of the bank of france. these officers have, indeed, beside them a council of 'regents,' or directors, named by the shareholders. but they need not attend to that council unless they think fit; they are appointed to watch over the national interest, and, in so doing, they may disregard the murmurs of the 'regents' if they like. and in theory, there is much to be said for this plan. the keeping the single banking reserve being a national function, it is at least plausible to argue that government should choose the functionaries. no doubt such a political intervention is contrary to the sound economical doctrine that 'banking is a trade, and only a trade.' but government forgot that doctrine when, by privileges and monopolies, it made a single bank predominant over all others, and established the one-reserve system. as that system exists, a logical frenchman consistently enough argues that the state should watch and manage it. but no such plan would answer in england. we have not been trained to care for logical sequence in our institutions, or rather we have been trained not to care for it. and the practical result for which we do care would in this case be bad. the governor of the bank would be a high parliamentary official, perhaps in the cabinet, and would change as chance majorities and the strength of parties decide. a trade peculiarly requiring consistency and special attainment would be managed by a shifting and untrained ruler. in fact, the whole plan would seem to an englishman of business palpably absurd; he would not consider it, he would not think it worth considering. that it works fairly well in france, and that there are specious arguments of theory for it, would not be sufficient to his mind. all such changes being out of the question, i can propose only three remedies. first. there should be a clear understanding between the bank and the public that, since the bank hold out ultimate banking reserve, they will recognise and act on the obligations which this implies; that they will replenish it in times of foreign demand as fully, and lend it in times of internal panic as freely and readily, as plain principles of banking require. this looks very different from the french plan, but it is not so different in reality. in england we can often effect, by the indirect compulsion of opinion, what other countries must effect by the direct compulsion of government. we can do so in this case. the bank directors now fear public opinion exceedingly; probably no kind of persons are so sensitive to newspaper criticism. and this is very natural. our statesmen, it is true, are much more blamed, but they have generally served a long apprenticeship to sharp criticism. if they still care for it (and some do after years of experience much more than the world thinks), they care less for it than at first, and have come to regard it as an unavoidable and incessant irritant, of which they shall never be rid. but a bank director undergoes no similar training and hardening. his functions at the bank fill a very small part of his time; all the rest of his life (unless he be in parliament) is spent in retired and mercantile industry. he is not subjected to keen and public criticism, and is not taught to bear it. especially when once in his life he becomes, by rotation, governor, he is most anxious that the two years of office shall 'go off well.' he is apt to be irritated even by objections to principles on which he acts, and cannot bear with equanimity censure which is pointed and personal. at present i am not sure if this sensitiveness is beneficial. as the exact position of the bank of england in the money market is indistinctly seen, there is no standard to which a bank governor can appeal. he is always in fear that 'something may be said;' but not quite knowing on what side that 'something' may be, his fear is but an indifferent guide to him. but if the cardinal doctrine were accepted, if it were acknowledged that the bank is charged with the custody of our sole banking reserve, and is bound to deal with it according to admitted principles, then a governor of the bank could look to those principles. he would know which way criticism was coming. if he was guided by the code, he would have a plain defence. and then we may be sure that old men of business would not deviate from the code. at present the board of directors are a sort of semi-trustees for the nation. i would have them real trustees, and with a good trust deed. secondly. the government of the bank should be improved in a manner to be explained. we should diminish the 'amateur' element; we should augment the trained banking element; and we should ensure more constancy in the administration. thirdly. as these two suggestions are designed to make the bank as strong as possible, we should look at the rest of our banking system, and try to reduce the demands on the bank as much as we can. the central machinery being inevitably frail, we should carefully and as much as possible diminish the strain upon it. but to explain these proposals, and to gain a full understanding of many arguments that have been used, we must look more in detail at the component parts of lombard street, and at the curious set of causes which have made it assume its present singular structure. chapter iii. how lombard street came to exist, and why it assumed its present form. in the last century, a favourite subject of literary ingenuity was 'conjectural history,' as it was then called. upon grounds of probability a fictitious sketch was made of the possible origin of things existing. if this kind of speculation were now applied to banking, the natural and first idea would be that large systems of deposit banking grew up in the early world, just as they grow up now in any large english colony. as soon as any such community becomes rich enough to have much money, and compact enough to be able to lodge its money in single banks, it at once begins so to do. english colonists do not like the risk of keeping their money, and they wish to make an interest on it. they carry from home the idea and the habit of banking, and they take to it as soon as they can in their new world. conjectural history would be inclined to say that all banking began thus: but such history is rarely of any value. the basis of it is false. it assumes that what works most easily when established is that which it would be the most easy to establish, and that what seems simplest when familiar would be most easily appreciated by the mind though unfamiliar. but exactly the contrary is true. many things which seem simple and which work well when firmly established, are very hard to establish among new people, and not very easy to explain to them. deposit banking is of this sort. its essence is that a very large number of persons agree to trust a very few persons, or some one person. banking would not be a profitable trade if bankers were not a small number, and depositors in comparison an immense number. but to get a great number of persons to do exactly the same thing is always very difficult, and nothing but a very palpable necessity will make them on a sudden begin to do it. and there is no such palpable necessity in banking. if you take a country town in france, even now, you will not find any such system of banking as ours. cheque-books are unknown, and money kept on running account by bankers is rare. people store their money in a caisse at their houses. steady savings, which are waiting for investment, and which are sure not to be soon wanted, may be lodged with bankers; but the common floating cash of the community is kept by the community themselves at home. they prefer to keep it so, and it would not answer a banker's purpose to make expensive arrangements for keeping it otherwise. if a 'branch,' such as the national provincial bank opens in an english country town, were opened in a corresponding french one, it would not pay its expenses. you could not get any sufficient number of frenchmen to agree to put their money there. and so it is in all countries not of british descent, though in various degrees. deposit banking is a very difficult thing to begin, because people do not like to let their money out of their sight, especially do not like to let it out of sight without security--still more, cannot all at once agree on any single person to whom they are content to trust it unseen and unsecured. hypothetical history, which explains the past by what is simplest and commonest in the present, is in banking, as in most things, quite untrue. the real history is very different. new wants are mostly supplied by adaptation, not by creation or foundation. something having been created to satisfy an extreme want, it is used to satisfy less pressing wants, or to supply additional conveniences. on this account, political government--the oldest institution in the world--has been the hardest worked. at the beginning of history, we find it doing everything which society wants done, and forbidding everything which society does not wish done. in trade, at present, the first commerce in a new place is a general shop, which, beginning with articles of real necessity, comes shortly to supply the oddest accumulation of petty comforts. and the history of banking has been the same. the first banks were not founded for our system of deposit banking, or for anything like it. they were founded for much more pressing reasons, and having been founded, they, or copies from them, were applied to our modern uses. the earliest banks of italy, where the name began, were finance companies. the bank of st. george, at genoa, and other banks founded in imitation of it, were at first only companies to make loans to, and float loans for, the governments of the cities in which they were formed. the want of money is an urgent want of governments at most periods, and seldom more urgent than it was in the tumultuous italian republics of the middle ages. after these banks had been long established, they began to do what we call banking business; but at first they never thought of it. the great banks of the north of europe had their origin in a want still more curious. the notion of its being a prime business of a bank to give good coin has passed out of men's memories; but wherever it is felt, there is no want of business more keen and urgent. adam smith describes it so admirably that it would be stupid not to quote his words:--'the currency of a great state, such as france or england, generally consists almost entirely of its own coin. should this currency, therefore, be at any time worn, clipt, or otherwise degraded below its standard value, the state by a reformation of its coin can effectually re-establish its currency. but the currency of a small state, such as genoa or hamburgh, can seldom consist altogether in its own coin, but must be made up, in a great measure, of the coins of all the neighbouring states with which its inhabitants have a continual intercourse. such a state, therefore, by reforming its coin, will not always be able to reform its currency. if foreign bills of exchange are paid in this currency, the uncertain value of any sum, of what is in its own nature so uncertain, must render the exchange always very much against such a state, its currency being, in all foreign states, necessarily valued even below what it is worth. 'in order to remedy the inconvenience to which this disadvantageous exchange must have subjected their merchants, such small states, when they began to attend to the interest of trade, have frequently enacted, that foreign bills of exchange of a certain value should be paid, not in common currency, but by an order upon, or by a transfer in, the books of a certain bank, established upon the credit, and under the protection of the state, this bank being always obliged to pay, in good and true money, exactly according to the standard of the state. the banks of venice, genoa, amsterdam, hamburgh and nuremburg, seem to have been all originally established with this view, though some of them may have afterwards been made subservient to other purposes. the money of such banks, being better than the common currency of the country, necessarily bore an agio, which was greater or smaller, according as the currency was supposed to be more or less degraded below the standard of the state. the agio of the bank of hamburgh, for example, which is said to be commonly about fourteen per cent, is the supposed difference between the good standard money of the state, and the clipt, worn, and diminished currency poured into it from all the neighbouring states. 'before the great quantity of clipt and worn foreign coin, which the extensive trade of amsterdam brought from all parts of europe, reduced the value of its currency about per cent below that of good money fresh from the mint. such money no sooner appeared than it was melted down or carried away, as it always is in such circumstances. the merchants, with plenty of currency, could not always find a sufficient quantity of good money to pay their bills of exchange; and the value of those bills, in spite of several regulations which were made to prevent it, became in a great measure uncertain. 'in order to remedy these inconveniences, a bank was established in under the guarantee of the city. this bank received both foreign coin, and the light and worn coin of the country at its real intrinsic value in the good standard money of the country, deducting only so much as was necessary for defraying the expense of coinage, and the other necessary expense of management. for the value which remained, after this small deduction was made, it gave a credit in its books. this credit was called bank money, which, as it represented money exactly according to the standard of the mint, was always of the same real value, and intrinsically worth more than current money. it was at the same time enacted, that all bills drawn upon or negotiated at amsterdam of the value of six hundred guilders and upwards should be paid in bank money, which at once took away all uncertainty in the value of those bills. every merchant, in consequence of this regulation, was obliged to keep an account with the bank in order to pay his foreign bills of exchange, which necessarily occasioned a certain demand for bank money.' again, a most important function of early banks is one which the present banks retain, though it is subsidiary to their main use; viz. the function of remitting money. a man brings money to the bank to meet a payment which he desires to make at a great distance, and the bank, having a connection with other banks, sends it where it is wanted. as soon as bills of exchange are given upon a large scale, this remittance is a very pressing requirement. such bills must be made payable at a place convenient to the seller of the goods in payment of which they are given, perhaps at the great town where his warehouse is. but this may be very far from the retail shop of the buyer who bought those goods to sell them again in the country. for these, and a multitude of purposes, the instant and regular remittance of money is an early necessity of growing trade; and that remittance it was a first object of early banks to accomplish. these are all uses other than those of deposit banking which banks supplied that afterwards became in our english sense deposit banks. by supplying these uses, they gained the credit that afterwards enabled them to gain a living as deposit banks. being trusted for one purpose, they came to be trusted for a purpose quite different, ultimately far more important, though at first less keenly pressing. but these wants only affect a few persons, and therefore bring the bank under the notice of a few only. the real introductory function which deposit banks at first perform is much more popular, and it is only when they can perform this more popular kind of business that deposit banking ever spreads quickly and extensively. this function is the supply of the paper circulation to the country, and it will be observed that i am not about to overstep my limits and discuss this as a question of currency. in what form the best paper currency can be supplied to a country is a question of economical theory with which i do not meddle here. i am only narrating unquestionable history, not dealing with an argument where every step is disputed. and part of this certain history is that the best way to diffuse banking in a community is to allow the banker to issue bank-notes of small amount that can supersede the metal currency. this amounts to a subsidy to each banker to enable him to keep open a bank till depositors choose to come to it. the country where deposit banking is most diffused is scotland, and there the original profits were entirely derived from the circulation. the note issue is now a most trifling part of the liabilities of the scotch banks, but it was once their mainstay and source of profit. a curious book, lately published, has enabled us to follow the course of this in detail. the bank of dundee, now amalgamated with the royal bank of scotland, was founded in , and had become before its amalgamation, eight or nine years since, a bank of considerable deposits. but for twenty-five years from its foundation it had no deposits at all. it subsisted mostly on its note issue, and a little on its remittance business. only in , after nearly thirty years, it began to gain deposits, but from that time they augmented very rapidly. the banking history of england has been the same, though we have no country bank accounts in detail which go back so far. but probably up to in england, or thereabouts, the main profit of banks was derived from the circulation, and for many years after that the deposits were treated as very minor matters, and the whole of so-called banking discussion turned on questions of circulation. we are still living in the debris of that controversy, for, as i have so often said, people can hardly think of the structure of lombard street, except with reference to the paper currency and to the act of , which regulates it now. the french are still in the same epoch of the subject. the great enquete of is almost wholly taken up with currency matters, and mere banking is treated as subordinate. and the accounts of the bank of france show why. the last weekly statement before the german war showed that the circulation of the bank of france was as much as , , l., and that the private deposits were only , , l. now the private deposits are about the same, and the circulation is , , l. so difficult is it in even a great country like france for the deposit system of banking to take root, and establish itself with the strength and vigour that it has in england. the experience of germany is the same. the accounts preceding the war in north germany showed the circulation of the issuing banks to be , , l., and the deposits to be , , l. while the corresponding figures at the present moment are--circulation, , , l. and deposits , , l. it would be idle to multiply instances. the reason why the use of bank paper commonly precedes the habit of making deposits in banks is very plain. it is a far easier habit to establish. in the issue of notes the banker, the person to be most benefited, can do something. he can pay away his own 'promises' in loans, in wages, or in payment of debts. but in the getting of deposits he is passive. his issues depend on himself; his deposits on the favour of others. and to the public the change is far easier too. to collect a great mass of deposits with the same banker, a great number of persons must agree to do something. but to establish a note circulation, a large number of persons need only do nothing. they receive the banker's notes in the common course of their business, and they have only not to take those notes to the banker for payment. if the public refrain from taking trouble, a paper circulation is immediately in existence. a paper circulation is begun by the banker, and requires no effort on the part of the public; on the contrary, it needs an effort of the public to be rid of notes once issued; but deposit banking cannot be begun by the banker, and requires a spontaneous and consistent effort in the community. and therefore paper issue is the natural prelude to deposit banking. the way in which the issue of notes by a banker prepares the way for the deposit of money with him is very plain. when a private person begins to possess a great heap of bank-notes, it will soon strike him that he is trusting the banker very much, and that in re turn he is getting nothing. he runs the risk of loss and robbery just as if he were hoarding coin. he would run no more risk by the failure of the bank if he made a deposit there, and he would be free from the risk of keeping the cash. no doubt it takes time before even this simple reasoning is understood by uneducated minds. so strong is the wish of most people to see their money that they for some time continue to hoard bank-notes: for a long period a few do so. but in the end common sense conquers. the circulation of bank-notes decreases, and the deposit of money with the banker increases. the credit of the banker having been efficiently advertised by the note, and accepted by the public, he lives on the credit so gained years after the note issue itself has ceased to be very important to him. the efficiency of this introduction is proportional to the diffusion of the right of note issue. a single monopolist issuer, like the bank of france, works its way with difficulty through a country, and advertises banking very slowly. even now the bank of france, which, i believe, by law ought to have a branch in each department, has only branches in sixty out of eighty-six. on the other hand, the swiss banks, where there is always one or more to every canton, diffuse banking rapidly. we have seen that the liabilities of the bank of france stand thus: notes l , , deposits l , , but the aggregate swiss banks, on the contrary, stand: notes l , deposits l , , the reason is that a central bank which is governed in the capital and descends on a country district, has much fewer modes of lending money safely than a bank of which the partners belong to that district, and know the men and things in it. a note issue is mainly begun by loans; there are then no deposits to be paid. but the mass of loans in a rural district are of small amount; the bills to be discounted are trifling; the persons borrowing are of small means and only local repute; the value of any property they wish to pledge depends on local changes and local circumstances. a banker who lives in the district, who has always lived there, whose whole mind is a history of the district and its changes, is easily able to lend money safely there. but a manager deputed by a single central establishment does so with difficulty. the worst people will come to him and ask for loans. his ignorance is a mark for all the shrewd and crafty people thereabouts. he will have endless difficulties in establishing the circulation of the distant bank, because he has not the local knowledge which alone can teach him how to issue that circulation with safety. a system of note issues is therefore the best introduction to a large system of deposit banking. as yet, historically, it is the only introduction: no nation as yet has arrived at a great system of deposit banking without going first through the preliminary stage of note issue, and of such note issues the quickest and most efficient in this way is one made by individuals resident in the district, and conversant with it. and this explains why deposit banking is so rare. such a note issue as has been described is possible only in a country exempt from invasion, and free from revolution. during an invasion note-issuing banks must stop payment; a run is nearly inevitable at such a time, and in a revolution too. in such great and close civil dangers a nation is always demoralised; everyone looks to himself, and everyone likes to possess himself of the precious metals. these are sure to be valuable, invasion or no invasion, revolution or no revolution. but the goodness of bank-notes depends on the solvency of the banker, and that solvency may be impaired if the invasion is not repelled or the revolution resisted. hardly any continental country has been till now exempt for long periods both from invasion and revolution. in holland and germany--two countries where note issue and deposit banking would seem as natural as in england and scotland--there was never any security from foreign war. a profound apprehension of external invasion penetrated their whole habits, and men of business would have thought it insane not to contemplate a contingency so frequent in their history, and perhaps witnessed by themselves. france indeed, before , was an exception. for many years under the old regime she was exempt from serious invasion or attempted revolution. her government was fixed, as was then thought, and powerful; it could resist any external enemy, and the prestige on which it rested seemed too firm to fear any enemy from within. but then it was not an honest government, and it had shown its dishonesty in this particular matter of note issue. the regent in law's time had given a monopoly of note issue to a bad bank, and had paid off the debts of the nation in worthless paper. the government had created a machinery of ruin, and had thriven on it. among so apprehensive a race as the french the result was fatal. for many years no attempt at note issue or deposit banking was possible in france. so late as the foundation of the caisse d'escompte, in turgot's time, the remembrance of law's failure was distinctly felt, and impeded the commencement of better attempts. this therefore is the reason why lombard street exists; that is, why england is a very great money market, and other european countries but small ones in comparison. in england and scotland a diffused system of note issues started banks all over the country; in these banks the savings of the country have been lodged, and by these they have been sent to london. no similar system arose elsewhere, and in consequence london is full of money, and all continental cities are empty as compared with it. ii. the monarchical form of lombard street is due also to the note issue. the origin of the bank of england has been told by macaulay, and it is never wise for an ordinary writer to tell again what he has told so much better. nor is it necessary, for his writings are in everyone's hands. still i must remind my readers of the curious story. of all institutions in the world the bank of england is now probably the most remote from party politics and from 'financing.' but in its origin it was not only a finance company, but a whig finance company. it was founded by a whig government because it was in desperate want of money, and supported by the 'city' because the 'city' was whig. very briefly, the story was this. the government of charles ii. (under the cabal ministry) had brought the credit of the english state to the lowest possible point. it had perpetrated one of those monstrous frauds, which are likewise gross blunders. the goldsmiths, who then carried on upon a trifling scale what we should now call banking, used to deposit their reserve of treasure in the 'exchequer,' with the sanction and under the care of the government. in many european countries the credit of the state had been so much better than any other credit, that it had been used to strengthen the beginnings of banking. the credit of the state had been so used in england: though there had lately been a civil war and several revolutions, the honesty of the english government was trusted implicitly. but charles ii. showed that it was trusted undeservedly. he shut up the 'exchequer,' would pay no one, and so the 'goldsmiths' were ruined. the credit of the stuart government never recovered from this monstrous robbery, and the government created by the revolution of could hardly expect to be more trusted with money than its predecessor. a government created by a revolution hardly ever is. there is a taint of violence which capitalists dread instinctively, and there is always a rational apprehension that the government which one revolution thought fit to set up another revolution may think fit to pull down. in , the credit of william iii.'s government was so low in london that it was impossible for it to borrow any large sum; and the evil was the greater, because in consequence of the french war the financial straits of the government were extreme. at last a scheme was hit upon which would relieve their necessities. 'the plan,' says macaulay, 'was that twelve hundred thousand pounds should be raised at what was then considered as the moderate rate of per cent.' in order to induce the subscribers to advance the money promptly on terms so unfavourable to the public, the subscribers were to be incorporated by the name of the governor and company of the bank of england. they were so incorporated, and the , , l. was obtained. on many succeeding occasions, their credit was of essential use to the government. without their aid, our national debt could not have been borrowed; and if we had not been able to raise that money we should have been conquered by france and compelled to take back james ii. and for many years afterwards the existence of that debt was a main reason why the industrial classes never would think of recalling the pretender, or of upsetting the revolution settlement. the 'fund-holder' is always considered in the books of that time as opposed to his 'legitimate' sovereign, because it was to be feared that this sovereign would repudiate the debt which was raised by those who dethroned him, and which was spent in resisting him and his allies. for a long time the bank of england was the focus of london liberalism, and in that capacity rendered to the state inestimable services. in return for these substantial benefits the bank of england received from the government, either at first or afterwards, three most important privileges. first. the bank of england had the exclusive possession of the government balances. in its first period, as i have shown, the bank gave credit to the government, but afterwards it derived credit from the government. there is a natural tendency in men to follow the example of the government under which they live. the government is the largest, most important, and most conspicuous entity with which the mass of any people are acquainted; its range of knowledge must always be infinitely greater than the average of their knowledge, and therefore, unless there is a conspicuous warning to the contrary, most men are inclined to think their government right, and, when they can, to do what it does. especially in money matters a man might fairly reason--'if the government is right in trusting the bank of england with the great balance of the nation, i cannot be wrong in trusting it with my little balance.' second. the bank of england had, till lately, the monopoly of limited liability in england. the common law of england knows nothing of any such principle. it is only possible by royal charter or statute law. and by neither of these was any real bank (i do not count absurd schemes such as chamberlayne's land bank) permitted with limited liability in england till within these few years. indeed, a good many people thought it was right for the bank of england, but not right for any other bank. i remember hearing the conversation of a distinguished merchant in the city of london, who well represented the ideas then most current. he was declaiming against banks of limited liability, and some one asked--'why, what do you say, then, to the bank of england, where you keep your own account?' 'oh!' he replied, 'that is an exceptional case.' and no doubt it was an exception of the greatest value to the bank of england, because it induced many quiet and careful merchants to be directors of the bank, who certainly would not have joined any bank where all their fortunes were liable, and where the liability was not limited. thirdly. the bank of england had the privilege of being the sole joint stock company permitted to issue bank notes in england. private london bankers did indeed issue notes down to the middle of the last century, but no joint stock company could do so. the explanatory clause of the act of sounds most curiously to our modern ears. 'and to prevent any doubt that may arise concerning the privilege or power given to the said governor and company' that is, the bank of england' of exclusive banking; and also in regard to creating any other bank or banks by parliament, or restraining other persons from banking during the continuance of the said privilege granted to the governor and company of the bank of england, as before recited; it is hereby further enacted and declared by the authority aforesaid, that it is the true intent and meaning of the said act that no other bank shall be created, established, or allowed by parliament, and that it shall not be lawful for any body politic or corporate whatsoever created or to be created, or for any other persons whatsoever united or to be united in covenants or partnership exceeding the number of six persons in that part of great britain called england, to borrow, owe, or take up any sum or sums of money on their bills or notes payable on demand or at any less time than six months from the borrowing thereof during the continuance of such said privilege to the said governor and company, who are hereby declared to be and remain a corporation with the privilege of exclusive banking, as before recited.' to our modern ears these words seem to mean more than they did. the term banking was then applied only to the issue of notes and the taking up of money on bills on demand. our present system of deposit banking, in which no bills or promissory notes are issued, was not then known on a great scale, and was not called banking. but its effect was very important. it in time gave the bank of england the monopoly of the note issue of the metropolis. it had at that time no branches, and so it did not compete for the country circulation. but in the metropolis, where it did compete, it was completely victorious. no company but the bank of england could issue notes, and unincorporated individuals gradually gave way, and ceased to do so. up to london private bankers might have issued notes if they pleased, but almost a hundred years ago they were forced out of the field. the bank of england has so long had a practical monopoly of the circulation, that it is commonly believed always to have had a legal monopoly. and the practical effect of the clause went further: it was believed to make the bank of england the only joint stock company that could receive deposits, as well as the only company that could issue notes. the gift of 'exclusive banking' to the bank of england was read in its most natural modern sense: it was thought to prohibit any other banking company from carrying on our present system of banking. after joint stock banking was permitted in the country, people began to inquire why it should not exist in the metropolis too? and then it was seen that the words i have quoted only forbid the issue of negotiable instruments, and not the receiving of money when no such instrument is given. upon this construction, the london and westminster bank and all our older joint stock banks were founded. but till they began, the bank of england had among companies not only the exclusive privilege of note issue, but that of deposit banking too. it was in every sense the only banking company in london. with so many advantages over all competitors, it is quite natural that the bank of england should have far outstripped them all. inevitably it became the bank in london; all the other bankers grouped themselves round it, and lodged their reserve with it. thus our one reserve system of banking was not deliberately founded upon definite reasons; it was the gradual consequence of many singular events, and of an accumulation of legal privileges on a single bank which has now been altered, and which no one would now defend. chapter iv. the position of the chancellor of the exchequer in the money market. nothing can be truer in theory than the economical principle that banking is a trade and only a trade, and nothing can be more surely established by a larger experience than that a government which interferes with any trade injures that trade. the best thing undeniably that a government can do with the money market is to let it take care of itself. but a government can only carry out this principle universally if it observe one condition: it must keep its own money. the government is necessarily at times possessed of large sums in cash. it is by far the richest corporation in the country; its annual revenue payable in money far surpasses that of any other body or person. and if it begins to deposit this immense income as it accrues at any bank, at once it becomes interested in the welfare of that bank. it cannot pay the interest on its debt if that bank cannot produce the public deposits when that interest becomes due; it cannot pay its salaries, and defray its miscellaneous expenses, if that bank fail at any time. a modern government is like a very rich man with very great debts which he cannot well pay; its credit is necessary to its prosperity, almost to its existence, and if its banker fail when one of its debts becomes due its difficulty is intense. another banker, it will be said, may take up the government account. he may advance, as is so often done in other bank failures, what the government needs for the moment in order to secure the government account in future. but the imperfection of this remedy is that it fails in the very worst case. in a panic, and at a general collapse of credit, no such banker will probably be found. the old banker who possesses the government deposit cannot repay it, and no banker not having that deposit will, at a bad crisis, be able to find the , , l. or , , l. which the quarter day of a government such as ours requires. if a finance minister, having entrusted his money to a bank, begins to act strictly, and say he will in all cases let the money market take care of itself, the reply is that in one case the money market will take care of him too, and he will be insolvent. in the infancy of banking it is probably much better that a government should as a rule keep its own money. if there are not banks in which it can place secure reliance, it should not seem to rely upon them. still less should it give peculiar favour to any one, and by entrusting it with the government account secure to it a mischievous supremacy above all other banks. the skill of a financier in such an age is to equalise the receipt of taxation, and the outgoing of expenditure; it should be a principal care with him to make sure that more should not be locked up at a particular moment in the government coffers than is usually locked up there. if the amount of dead capital so buried in the treasury does not at any time much exceed the common average, the evil so caused is inconsiderable: it is only the loss of interest on a certain sum of money, which would not be much of a burden on the whole nation; the additional taxation it would cause would be inconsiderable. such an evil is nothing in comparison with that of losing the money necessary for inevitable expence by entrusting it to a bad bank, or that of recovering this money by identifying the national credit with the bad bank and so propping it up and perpetuating it. so long as the security of the money market is not entirely to be relied on, the government of a country had much better leave it to itself and keep its own money. if the banks are bad, they will certainly continue bad and will probably become worse if the government sustains and encourages them. the cardinal maxim is, that any aid to a present bad bank is the surest mode of preventing the establishment of a future good bank. when the trade of banking began to be better understood, when the banking system was thoroughly secure, the government might begin to lend gradually; especially to lend the unusually large sums which even under the most equable system of finance will at times accumulate in the public exchequer. under a natural system of banking it would have every facility. where there were many banks keeping their own reserve, and each most anxious to keep a sufficient reserve, because its own life and credit depended on it, the risk of the government in keeping a banker would be reduced to a minimum. it would have the choice of many bankers, and would not be restricted to any one. its course would be very simple, and be analogous to that of other public bodies in the country. the metropolitan board of works, which collects a great revenue in london, has an account at the london and westminster bank, for which that bank makes a deposit of consols as a security. the chancellor of the exchequer would have no difficulty in getting such security either. if, as is likely, his account would be thought to be larger than any single bank ought to be entrusted with, the public deposits might be divided between several. each would give security, and the whole public money would be safe. if at any time the floating money in the hands of government were exceptionally large, he might require augmented security to be lodged, and he might obtain an interest. he would be a lender of such magnitude and so much influence, that he might command his own terms. he might get his account kept safe if anyone could. if, on the other hand, the chancellor of the exchequer were a borrower, as at times he is, he would have every facility in obtaining what he wanted. the credit of the english government is so good that he could borrow better than anyone else in the world. he would have greater facility, indeed, than now, for, except with the leave of parliament, the chancellor of the exchequer cannot borrow by our present laws in the open market. he can only borrow from the bank of england on what are called 'deficiency bills.' in a natural system, he would borrow of any one out of many competing banks, selecting the one that would lend cheapest; but under our present artificial system, he is confined to a single bank, which can fix its own charge. if contrary to expectation a collapse occurred, the government might withdraw, as the american government actually has withdrawn, its balance from the bankers. it might give its aid, lend exchequer bills, or otherwise pledge its credit for the moment, but when the exigency was passed it might let the offending banks suffer. there would be a penalty for their misconduct. new and better banks, who might take warning from that misconduct, would arise. as in all natural trades, what is old and, rotten would perish, what is new and good would replace it. and till the new banks had proved, by good conduct, their fitness for state confidence, the state need not give it. the government could use its favour as a bounty on prudence, and the withdrawal of that favour as a punishment for culpable folly. under a good system of banking, a great collapse, except from rebellion or invasion, would probably not happen. a large number of banks, each feeling that their credit was at stake in keeping a good reserve, probably would keep one; if any one did not, it would be criticised constantly, and would soon lose its standing, and in the end disappear. and such banks would meet an incipient panic freely, and generously; they would advance out of their reserve boldly and largely, for each individual bank would fear suspicion, and know that at such periods it must 'show strength,' if at such times it wishes to be thought to have strength. such a system reduces to a minimum the risk that is caused by the deposit. if the national money can safely be deposited in banks in any way, this is the way to make it safe. but this system is nearly the opposite to that which the law and circumstances have created for us in england. the english government, far from keeping cash from the money market till the position of that market was reasonably secure, at a very early moment, and while credit of all kinds was most insecure, for its own interests entered into the money market. in order to effect loans better, it gave the custody and profit of its own money (along with other privileges) to a single bank, and therefore practically and in fact it is identified with the bank of this hour. it cannot let the money market take care of itself because it has deposited much money in that market, and it cannot pay its way if it loses that money. nor would any english statesman propose to 'wind up' the bank of england. a theorist might put such a suggestion on paper, but no responsible government would think of it. at the worst crisis and in the worst misconduct of the bank, no such plea has been thought of: in when its till was empty, in when it had to ask aid from the bank of france, no such idea was suggested. by irresistible tradition the english government was obliged to deposit its money in the money market and to deposit with this particular bank. and this system has plain and grave evils. st. because being created by state aid, it is more likely than a natural system to require state help. ndly. because, being a one-reserve system, it reduces the spare cash of the money market to a smaller amount than any other system, and so makes that market more delicate. there being a less hoard to meet liabilities, any error in the management of that reserve has a proportionately greater effect. rdly. because, our one reserve is, by the necessity of its nature, given over to one board of directors, and we are therefore dependent on the wisdom of that one only, and cannot, as in most trades, strike an average of the wisdom and the folly, the discretion and the indiscretion, of many competitors. lastly. because that board of directors is, like every other board, pressed on by its shareholders to make a high dividend, and therefore to keep a small reserve, whereas the public interest imperatively requires that they shall keep a large one. these four evils were inseparable from the system, but there is besides an additional and accidental evil. the english government not only created this singular system, but it proceeded to impair it, and demoralise all the public opinion respecting it. for more than a century after its creation (notwithstanding occasional errors) the bank of england, in the main, acted with judgment and with caution. its business was but small as we should now reckon, but for the most part it conducted that business with prudence and discretion. in , it had been involved in the most serious difficulties, and had been obliged to refuse to pay some of its notes. for a long period it was in wholesome dread of public opinion, and the necessity of retaining public confidence made it cautious. but the english government removed that necessity. in , mr. pitt feared that he might not be able to obtain sufficient species for foreign payments, in consequence of the low state of the bank reserve, and he therefore required the bank not to pay in cash. he removed the preservative apprehension which is the best security of all banks. for this reason the period under which the bank of england did not pay gold for its notes--the period from to --is always called the period of the bank restriction. as the bank during that period did not perform, and was not compelled by law to perform, its contract of paying its notes in cash, it might apparently have been well called the period of bank license. but the word 'restriction' was quite right, and was the only proper word as a description of, the policy of . mr. pitt did not say that the bank of england need not pay its notes in specie; he 'restricted' them from doing so; he said that they must not. in consequence, from to (when a new era begins), there never was a proper caution on the part of the bank directors. at heart they considered that the bank of england had a kind of charmed life, and that it was above the ordinary banking anxiety to pay its way. and this feeling was very natural. a bank of issue, which need not pay its notes in cash, has a charmed life; it can lend what it wishes, and issue what it likes, with no fear of harm to itself, and with no substantial check but its own inclination. for nearly a quarter of a century, the bank of england was such a bank, for all that time it could not be in any danger. and naturally the public mind was demoralised also. since , the public have always expected the government to help the bank if necessary. i cannot fully discuss the suspensions of the act of in , , and ; but indisputably one of their effects is to make people think that government will always help the bank if the bank is in extremity. and this is the sort of anticipation which tends to justify itself, and to cause what it expects. on the whole, therefore, the position of the chancellor of the exchequer in our money market is that of one who deposits largely in it, who created it, and who demoralised it. he cannot, therefore, banish it from his thoughts, or decline responsibility for it. he must arrange his finances so as not to intensify panics, but to mitigate them. he must aid the bank of england in the discharge of its duties; he must not impede or prevent it. his aid may be most efficient. he is, on finance, the natural exponent of the public opinion of england. and it is by that opinion that we wish the bank of england to be guided. under a natural system of banking we should have relied on self-interest, but the state prevented that; we now rely on opinion instead; the public approval is a reward, its disapproval a severe penalty, on the bank directors; and of these it is most important that the finance minister should be a sound and felicitous exponent. chapter v. the mode in which the value of money is settled in lombard street. many persons believe that the bank of england has some peculiar power of fixing the value of money. they see that the bank of england varies its minimum rate of discount from time to time, and that, more or less, all other banks follow its lead, and charge much as it charges; and they are puzzled why this should be. 'money,' as economists teach, 'is a commodity, and only a commodity;' why then, it is asked, is its value fixed in so odd a way, and not the way in which the value of all other commodities is fixed? there is at bottom, however, no difficulty in the matter. the value of money is settled, like that of all other commodities, by supply and demand, and only the form is essentially different. in other commodities all the large dealers fix their own price; they try to underbid one another, and that keeps down the price; they try to get as much as they can out of the buyer, and that keeps up the price. between the two what adam smith calls the higgling of the market settles it. and this is the most simple and natural mode of doing business, but it is not the only mode. if circumstances make it convenient another may be adopted. a single large holder--especially if he be by far the greatest holder--may fix his price, and other dealers may say whether or not they will undersell him, or whether or not they will ask more than he does. a very considerable holder of an article may, for a time, vitally affect its value if he lay down the minimum price which he will take, and obstinately adhere to it. this is the way in which the value of money in lombard street is settled. the bank of england used to be a predominant, and is still a most important, dealer in money. it lays down the least price at which alone it will dispose of its stock, and this, for the most part, enables other dealers to obtain that price, or something near it. the reason is obvious. at all ordinary moments there is not money enough in lombard street to discount all the bills in lombard street without taking some money from the bank of england. as soon as the bank rate is fixed, a great many persons who have bills to discount try how much cheaper than the bank they can get these bills discounted. but they seldom can get them discounted very much cheaper, for if they did everyone would leave the bank, and the outer market would have more bills than it could bear. in practice, when the bank finds this process beginning, and sees that its business is much diminishing, it lowers the rate, so as to secure a reasonable portion of the business to itself, and to keep a fair part of its deposits employed. at dutch auctions an upset or maximum price used to be fixed by the seller, and he came down in his bidding till he found a buyer. the value of money is fixed in lombard street in much the same way, only that the upset price is not that of all sellers, but that of one very important seller, some part of whose supply is essential. the notion that the bank of england has a control over the money market, and can fix the rate of discount as it likes, has survived from the old days before , when the bank could issue as many notes as it liked. but even then the notion was a mistake. a bank with a monopoly of note issue has great sudden power in the money market, but no permanent power: it can affect the rate of discount at any particular moment, but it cannot affect the average rate. and the reason is, that any momentary fall in money, caused by the caprice of such a bank, of itself tends to create an immediate and equal rise, so that upon an average the value is not altered. what happens is this. if a bank with a monopoly of note issue suddenly lends (suppose) , , l. more than usual, it causes a proportionate increase of trade and increase of prices. the persons to whom that , , l. was lent, did not borrow it to lock it up; they borrow it, in the language of the market, to 'operate with' that is, they try to buy with it; and that new attempt to buy--that new demand raises prices. and this rise of prices has three consequences. first. it makes everybody else want to borrow money. money is not so efficient in buying as it was, and therefore operators require more money for the same dealings. if railway stock is per cent dearer this year than last, a speculator who borrows money to enable him to deal must borrow per cent more this year than last, and in consequence there is an augmented demand for loans. secondly. this is an effectual demand, for the increased price of railway stock enables those who wish it to borrow more upon it. the common practice is to lend a certain portion of the market value of such securities, and if that value increases, the amount of the usual loan to be obtained on them increases too. in this way, therefore, any artificial reduction in the value of money causes a new augmentation of the demand for money, and thus restores that value to its natural level. in all business this is well known by experience: a stimulated market soon becomes a tight market, for so sanguine are enterprising men, that as soon as they get any unusual ease they always fancy that the relaxation is greater than it is, and speculate till they want more than they can obtain. in these two ways sudden loans by an issuer of notes, though they may temporarily lower the value of money, do not lower it permanently, because they generate their own counteraction. and this they do whether the notes issued are convertible into coin or not. during the period of bank restriction, from to , the bank of england could not absolutely control the money market, any more than it could after , when it was compelled to pay its notes in coin. but in the case of convertible notes there is a third effect, which works in the same direction, and works more quickly. a rise of prices, confined to one country, tends to increase imports, because other countries can obtain more for their goods if they send them there, and it discourages exports, because a merchant who would have gained a profit before the rise by buying here to sell again will not gain so much, if any, profit after that rise. by this augmentation of imports the indebtedness of this country is augmented, and by this diminution of exports the proportion of that indebtedness which is paid in the usual way is decreased also. in consequence, there is a larger balance to be paid in bullion; the store in the bank or banks keeping the reserve is diminished, and the rate of interest must be raised by them to stay the efflux. and the tightness so produced is often greater than, and always equal to, the preceding unnatural laxity. there is, therefore, no ground for believing, as is so common, that the value of money is settled by different causes than those which affect the value of other commodities, or that the bank of england has any despotism in that matter. it has the power of a large holder of money, and no more. even formerly, when its monetary powers were greater and its rivals weaker, it had no absolute control. it was simply a large corporate dealer, making bids and much influencing--though in no sense compelling--other dealers thereby. but though the value of money is not settled in an exceptional way, there is nevertheless a peculiarity about it, as there is about many articles. it is a commodity subject to great fluctuations of value, and those fluctuations are easily produced by a slight excess or a slight deficiency of quantity. up to a certain point money is a necessity. if a merchant has acceptances to meet to-morrow, money he must and will find to-day at some price or other. and it is this urgent need of the whole body of merchants which runs up the value of money so wildly and to such a height in a great panic. on the other hand, money easily becomes a 'drug,' as the phrase is, and there is soon too much of it. the number of accepted securities is limited, and cannot be rapidly increased; if the amount of money seeking these accepted securities is more than can be lent on them the value of money soon goes down. you may often hear in the market that bills are not to be had, meaning good bills of course, and when you hear this you may be sure that the value of money is very low. if money were all held by the owners of it, or by banks which did not pay an interest for it, the value of money might not fall so fast. money would, in the market phrase, be 'well held.' the possessors would be under no necessity to employ it all; they might employ part at a high rate rather than all at a low rate. but in lombard street money is very largely held by those who do pay an interest for it, and such persons must employ it all, or almost all, for they have much to pay out with one hand, and unless they receive much with the other they will be ruined. such persons do not so much care what is the rate of interest at which they employ their money: they can reduce the interest they pay in proportion to that which they can make. the vital points to them is to employ it at some rate. if you hold (as in lombard street some persons do) millions of other people's money at interest, arithmetic teaches that you will soon be ruined if you make nothing of it even if the interest you pay is not high. the fluctuations in the value of money are therefore greater than those on the value of most other commodities. at times there is an excessive pressure to borrow it, and at times an excessive pressure to lend it, and so the price is forced up and down. these considerations enable us to estimate the responsibility which is thrown on the bank of england by our system, and by every system on the bank or banks who by it keep the reserve of bullion or of legal tender exchangeable for bullion. these banks can in no degree control the permanent value of money, but they can completely control its momentary value. they cannot change the average value, but they can determine the deviations from the average. if the dominant banks manage ill, the rate of interest will at one time be excessively high, and at another time excessively low: there will be first a pernicious excitement, and next a fatal collapse. but if they manage well, the rate of interest will not deviate so much from the average rate; it will neither ascend so high nor descend so low. as far as anything can be steady the value of money will then be steady, and probably in consequence trade will be steady too--at least a principal cause of periodical disturbance will have been withdrawn from it. chapter vi. why lombard street is often very dull, and sometimes extremely excited. any sudden event which creates a great demand for actual cash may cause, and will tend to cause, a panic in a country where cash is much economised, and where debts payable on demand are large. in such a country an immense credit rests on a small cash reserve, and an unexpected and large diminution of that reserve may easily break up and shatter very much, if not the whole, of that credit. such accidental events are of the most various nature: a bad harvest, an apprehension of foreign invasion, the sudden failure of a great firm which everybody trusted, and many other similar events, have all caused a sudden demand for cash. and some writers have endeavoured to classify panics according to the nature of the particular accidents producing them. but little, however, is, i believe, to be gained by such classifications. there is little difference in the effect of one accident and another upon our credit system. we must be prepared for all of them, and we must prepare for all of them in the same way--by keeping a large cash reserve. but it is of great importance to point out that our industrial organisation is liable not only to irregular external accidents, but likewise to regular internal changes; that these changes make our credit system much more delicate at some times than at others; and that it is the recurrence of these periodical seasons of delicacy which has given rise to the notion that panics come according to a fixed rule, that every ten years or so we must have one of them. most persons who begin to think of the subject are puzzled on the threshold. they hear much of 'good times' and 'bad times,' meaning by 'good' times in which nearly everyone is very well off, and by 'bad' times in which nearly everyone is comparatively ill off. and at first it is natural to ask why should everybody, or almost everybody, be well off together? why should there be any great tides of industry, with large diffused profit by way of flow, and large diffused want of profit, or loss, by way of ebb? the main answer is hardly given distinctly in our common books of political economy. these books do not tell you what is the fund out of which large general profits are paid in good times, nor do they ex plain why that fund is not available for the same purpose in bad times. our current political economy does not sufficiently take account of time as an element in trade operations; but as soon as the division of labour has once established itself in a community, two principles at once begin to be important, of which time is the very essence. these are: first. that as goods are produced to be exchanged, it is good that they should be exchanged as quickly as possible. secondly. that as every producer is mainly occupied in producing what others want, and not what he wants himself, it is desirable that he should always be able to find, without effort, without delay, and without uncertainty, others who want what he can produce. in themselves these principles are self-evident. everyone will admit it to be expedient that all goods wanting to be sold should be sold as soon as they are ready; that every man who wants to work should find employment as soon as he is ready for it. obviously also, as soon as the 'division of labour' is really established, there is a difficulty about both of these principles. a produces what he thinks b wants, but it may be a mistake, and b may not want it. a may be able and willing to produce what b wants, but he may not be able to find b--he may not know of his existence. the general truth of these principles is obvious, but what is not obvious is the extreme greatness of their effects. taken together, they make the whole difference between times of brisk trade and great prosperity, and times of stagnant trade and great adversity, so far as that prosperity and that adversity are real and not illusory. if they are satisfied, everyone knows whom to work for, and what to make, and he can get immediately in exchange what he wants himself. there is no idle labour and no sluggish capital in the whole community, and, in consequence, all which can be produced is produced, the effectiveness of human industry is augmented, and both kinds of producers--both capitalists and labourers--are much richer than usual, because the amount to be divided between them is also much greater than usual. and there is a partnership in industries. no single large industry can be depressed without injury to other industries; still less can any great group of industries. each industry when prosperous buys and consumes the produce probably of most (certainly of very many) other industries, and if industry a fail and is in difficulty, industries b, and c, and d, which used to sell to it, will not be able to sell that which they had produced in reliance on a's demand, and in future they will stand idle till industry a recovers, because in default of a there will be no one to buy the commodities which they create. then as industry b buys of c, d, &c., the adversity of b tells on c, d, &c., and as these buy of e, f, &c., the effect is propagated through the whole alphabet. and in a certain sense it rebounds. z feels the want caused by the diminished custom of a, b, & c, and so it does not earn so much; in consequence, it cannot lay out as much on the produce of a, b, & c, and so these do not earn as much either. in all this money is but an instrument. the same thing would happen equally well in a trade of barter, if a state of barter on a very large scale were not practically impossible, on account of the time and trouble which it would necessarily require. as has been explained, the fundamental cause is that under a system in which everyone is dependent on the labour of everyone else, the loss of one spreads and multiplies through all, and spreads and multiplies the faster the higher the previous perfection of the system of divided labour, and the more nice and effectual the mode of interchange. and the entire effect of a depression in any single large trade requires a considerable time before it can be produced. it has to be propagated, and to be returned through a variety of industries, before it is complete. short depressions, in consequence, have scarcely any discernible consequences; they are over before we think of their effects. it is only in the case of continuous and considerable depressions that the cause is in action long enough to produce discernible effects. the most common, and by far the most important, case where the depression in one trade causes depression in all others, is that of depressed agriculture. when the agriculture of the world is ill off, food is dear. and as the amount of absolute necessaries which a people consumes cannot be much diminished, the additional amount which has to be spent on them is so much subtracted from what used to be spent on other things. all the industries, a, b, c, d, up to z, are somewhat affected by an augmentation in the price of corn, and the most affected are the large ones, which produce the objects in ordinary times most consumed by the working classes. the clothing trades feel the difference at once, and in this country the liquor trade (a great source of english revenue) feels it almost equally soon. especially when for two or three years harvests have been bad, and corn has long been dear, every industry is impoverished, and almost every one, by becoming poorer, makes every other poorer too. all trades are slack from diminished custom, and the consequence is a vast stagnant capital, much idle labour, and a greatly retarded production. it takes two or three years to produce this full calamity, and the recovery from it takes two or three years also. if corn should long be cheap, the labouring classes have much to spend on what they like besides. the producers of those things become prosperous, and have a greater purchasing power. they exercise it, and that creates in the class they deal with another purchasing power, and so all through society. the whole machine of industry is stimulated to its maximum of energy, just as before much of it was slackened almost to its minimum. a great calamity to any great industry will tend to produce the same effect, but the fortunes of the industries on which the wages of labour are expended are much more important than those of all others, because they act much more quickly upon a larger mass of purchasers. on principle, if there was a perfect division of labour, every industry would have to be perfectly prosperous in order that any one might be so. so far, therefore, from its being at all natural that trade should develop constantly, steadily, and equably, it is plain, without going farther, from theory as well as from experience, that there are inevitably periods of rapid dilatation, and as inevitably periods of contraction and of stagnation. nor is this the only changeable element in modern industrial societies. credit--the disposition of one man to trust another--is singularly varying. in england, after a great calamity, everybody is suspicious of everybody; as soon as that calamity is forgotten, everybody again confides in everybody. on the continent there has been a stiff controversy as to whether credit should or should not be called capital:' in england, even the little attention once paid to abstract economics is now diverted, and no one cares in the least for refined questions of this kind: the material practical point is that, in m. chevalier's language, credit is 'additive,' or additional--that is, in times when credit is good productive power is more efficient, and in times when credit is bad productive power is less efficient. and the state of credit is thus influential, because of the two principles which have just been explained. in a good state of credit, goods lie on hand a much less time than when credit is bad; sales are quicker; intermediate dealers borrow easily to augment their trade, and so more and more goods are more quickly and more easily transmitted from the producer to the consumer. these two variable causes are causes of real prosperity. they augment trade and production, and so are plainly beneficial, except where by mistake the wrong things are produced, or where also by mistake misplaced credit is given, and a man who cannot produce anything which is wanted gets the produce of other people's labour upon a false idea that he will produce it. but there is another variable cause which produces far more of apparent than of real prosperity and of which the effect is in actual life mostly confused with those of the others. in our common speculations we do not enough remember that interest on money is a refined idea, and not a universal one. so far indeed is it from being universal, that the majority of saving persons in most countries would reject it. most savings in most countries are held in hoarded specie. in asia, in africa, in south america, largely even in europe, they are thus held, and it would frighten most of the owners to let them out of their keeping. an englishman--a modern englishman at least--assumes as a first principle that he ought to be able to 'put his money into something safe that will yield per cent;' but most saving persons in most countries are afraid to 'put their money' into anything. nothing is safe to their minds; indeed, in most countries, owing to a bad government and a backward industry, no investment, or hardly any, really is safe. in most countries most men are content to forego interest; but in more advanced countries, at some times there are more savings seeking investment than there are known investments for; at other times there is no such superabundance. lord macaulay has graphically described one of the periods of excess. he says--'during the interval between the restoration and the revolution the riches of the nation had been rapidly increasing. thousands of busy men found every christmas that, after the expenses of the year's housekeeping had been defrayed out of the year's income, a surplus remained; and how that surplus was to be employed was a question of some difficulty. in our time, to invest such a surplus, at something more than three per cent, on the best security that has ever been known in the world, is the work of a few minutes. but in the seventeenth century, a lawyer, a physician, a retired merchant, who had saved some thousands, and who wished to place them safely and profitably, was often greatly embarrassed. three generations earlier, a man who had accumulated wealth in a profession generally purchased real property, or lent his savings on mortgage. but the number of acres in the kingdom had remained the same; and the value of those acres, though it had greatly increased, had by no means increased so fast as the quantity of capital which was seeking for employment. many too wished to put their money where they could find it at an hour's notice, and looked about for some species of property which could be more readily transferred than a house or a field. a capitalist might lend on bottomry or on personal security; but, if he did so, he ran a great risk of losing interest and principal. there were a few joint stock companies, among which the east india company held the foremost place; but the demand for the stock of such companies was far greater than the supply. indeed the cry for a new east india company was chiefly raised by persons who had found difficulty in placing their savings at interest on good security. so great was that difficulty that the practice of hoarding was common. we are told that the father of pope, the poet, who retired from business in the city about the time of the revolution, carried to a retreat in the country a strong box containing near twenty thousand pounds, and took out from time to time what was required for household expenses; and it is highly probable that this was not a solitary case. at present the quantity of coin which is hoarded by private persons is so small, that it would, if brought forth, make no perceptible addition to the circulation. but, in the earlier part of the reign of william the third, all the greatest writers on currency were of opinion that a very considerable mass of gold and silver was hidden in secret drawers and behind wainscots. 'the natural effect of this state of things was that a crowd of projectors, ingenious and absurd, honest and knavish, employed themselves in devising new schemes for the employment of redundant capital. it was about the year that the word stockjobber was first heard in london. in the short space of four years a crowd of companies, every one of which confidently held out to subscribers the hope of immense gains, sprang into existence--the insurance company, the paper company, the lutestring company, the pearl fishery company, the glass bottle company, the alum company, the blythe coal company, the swordblade company. there was a tapestry company, which would soon furnish pretty hangings for all the parlours of the middle class, and for all the bed-chambers of the higher. there was a copper company, which proposed to explore the mines of england, and held out a hope that they would prove not less valuable than those of potosi. there was a diving company, which undertook to bring up precious effects from shipwrecked vessels, and which announced that it had laid in a stock of wonderful machines resembling complete suits of armour. in front of the helmet was a huge glass eye like that of a cyclops; and out of the crest went a pipe through which the air was to be admitted. the whole process was exhibited on the thames. fine gentlemen and fine ladies were invited to the show, were hospitably regaled, and were delighted by seeing the divers in their panoply descend into the river and return laden with old iron and ship's tackle. there was a greenland fishing company, which could not fail to drive the dutch whalers and herring busses out of the northern ocean. there was a tanning company, which promised to furnish leather superior to the best that was brought from turkey or russia. there was a society which undertook the office of giving gentlemen a liberal education on low terms, and which assumed the sounding name of the royal academies company. in a pompous advertisement it was announced that the directors of the royal academies company had engaged the best masters in every branch of knowledge, and were about to issue twenty thousand tickets at twenty shillings each. there was to be a lottery--two thousand prizes were to be drawn; and the fortunate holders of the prizes were to be taught, at the charge of the company, latin, greek, hebrew, french, spanish, conic sections, trigonometry, heraldry, japaning, fortification, bookkeeping, and the art of playing the theorbo.' the panic was forgotten till lord macaulay revived the memory of it. but, in fact, in the south sea bubble, which has always been remembered, the form was the same, only a little more extravagant; the companies in that mania were for objects such as these:--' "wrecks to be fished for on the irish coast--insurance of horses and other cattle (two millions)--insurance of losses by servants--to make salt water fresh--for building of hospitals for bastard children--for building of ships against pirates--for making of oil from sun-flower seeds--for improving of malt liquors--for recovery of seamen's wages--for extracting of silver from lead--for the transmuting of quicksilver into a malleable and fine metal--for making of iron with pit-coal--for importing a number of large jack asses from spain--for trading in human hair--for fatting of hogs--for a wheel of perpetual motion." but the most strange of all, perhaps, was "for an undertaking which shall in due time be revealed." each subscriber was to pay down two guineas, and hereafter to receive a share of one hundred, with a disclosure of the object; and so tempting was the offer, that , of these subscriptions were paid the same morning, with which the projector went off in the afternoon.' in there were speculations in companies nearly as wild, and just before there were some of a like nature, though not equally extravagant. the fact is, that the owners of savings not finding, in adequate quantities, their usual kind of investments, rush into anything that promises speciously, and when they find that these specious investments can be disposed of at a high profit, they rush into them more and more. the first taste is for high interest, but that taste soon becomes secondary. there is a second appetite for large gains to be made by selling the principal which is to yield the interest. so long as such sales can be effected the mania continues; when it ceases to be possible to effect them, ruin begins. so long as the savings remain in possession of their owners, these hazardous gamblings in speculative undertakings are almost the whole effect of an excess of accumulation over tested investment. little effect is produced on the general trade of the country. the owners of the savings are too scattered and far from the market to change the majority of mercantile transactions. but when these savings come to be lodged in the hands of bankers, a much wider result is produced. bankers are close to mercantile life; they are always ready to lend on good mercantile securities; they wish to lend on such securities a large part of the money entrusted to them. when, therefore, the money so entrusted is unusually large, and when it long continues so, the general trade of the country is, in the course of time, changed. bankers are daily more and more ready to lend money to mercantile men; more is lent to such men; more bargains are made in consequence; commodities are more sought after; and, in consequence, prices rise more and more. the rise of prices is quickest in an improving state of credit. prices in general are mostly determined by wholesale transactions. the retail dealer adds a percentage to the wholesale prices, not, of course, always the same percentage, but still mostly the same. given the wholesale price of most articles, you can commonly tell their retail price. now wholesale transactions are commonly not cash transactions, but bill transactions. the duration of the bill varies with the custom of the trade; it may be two, three months, or six weeks, but there is always a bill. times of credit mean times in which the bills of many people are taken readily; times of bad credit, times when the bills of much fewer people are taken, and even of those suspiciously. in times of good credit there are a great number of strong purchasers, and in times of bad credit only a smaller number of weak ones; and, therefore, years of improving credit, if there be no disturbing cause, are years of rising price, and years of decaying credit, years of falling price. this is the meaning of the saying 'john bull can stand many things, but he cannot stand two per cent:' it means that the greatest effect of the three great causes is nearly peculiar to england; here, and here almost alone, the excess of savings over investments is deposited in banks; here, and here only, is it made use of so as to affect trade at large; here, and here only, are prices gravely affected. in these circumstances, a low rate of interest, long protracted, is equivalent to a total depreciation of the precious metals. in his book on the effect of the great gold discoveries, professor jevons showed, and so far as i know, was the first to show, the necessity of eliminating these temporary changes of value in gold before you could judge properly of the permanent depreciation. he proved, that in the years preceding both and there was a general rise of prices; and in the years succeeding these years, a great fall. the same might be shown of the years before and after , _mutatis mutandis_. and at the present moment we have a still more remarkable example, which was thus analysed in the economist of the th december, , in an article which i venture to quote as a whole: 'the great rise in the price of commodities. 'most persons are aware that the trade of the country is in a state of great activity. all the usual tests indicate that--the state of the revenue, the bankers' clearing-house figures, the returns of exports and imports are all plain, and all speak the same language. but few have, we think, considered one most remarkable feature of the present time, or have sufficiently examined its consequences. that feature is the great rise in the price of most of the leading articles of trade during the past year. we give at the foot of this paper a list of articles, comprising most first-rate articles of commerce, and it will be seen that the rise of price, though not universal and not uniform, is nevertheless very striking and very general. the most remarkable cases are-- january december l, s. d. l, s. d. wool--south down hogs per pack cotton--upland ordinary per lb. - / - / no. mule yarn, &c. per lb. - / - / iron--bars, british per ton pig, no. clyde per ton lead per ton tin per ton copper--sheeting per ton wheat (gazette average) per qr. --and in other cases there is a tendency upwards in price much more often than there is a tendency downwards. 'this general rise of price must be due either to a diminution in the supply of the quoted articles, or to an increased demand for them. in some cases there has no doubt been a short supply. thus in wool, the diminution in the home breed of sheep has had a great effect on the price-- in the home stock of sheep was , , in , , ---------- diminution , , equal to . per cent and in the case of some other articles there may be a similar cause operating. but taking the whole mass of the supply of commodities in this country, as shown by the plain test of the quantities imported, it has not diminished, but augmented. the returns of the board of trade prove this in the most striking manner, and we give below a table of some of the important articles. the rise in prices must, therefore, be due to an increased demand, and the first question is, to what is that demand due? 'we believe it to be due to the combined operation of three causes cheap money, cheap corn, and improved credit. as to the first indeed, it might be said at first sight that so general an increase must be due to a depreciation of the precious metals. certainly in many controversies facts far less striking have been alleged as proving it. and indeed there plainly is a diminution in the purchasing power of money, though that diminution is not general and permanent, but local and temporary. the peculiarity of the precious metals is that their value depends for unusually long periods on the quantity of them which is in the market. in the long run, their value, like that of all others, is determined by the cost at which they can be brought to market. but for all temporary purposes, it is the supply in the market which governs the price, and that supply in this country is exceedingly variable. after a commercial crisis, for example, two things happen: first, we call in the debts which are owing to us in foreign countries; and we require these debts to be paid to us, not in commodities, but in money. from this cause principally, and omitting minor causes, the bullion in the bank of england, which was , , l. in may , rose to , , l. in january , being an increase of over , , l. and then there comes also a second cause, tending in the same direction. during a depressed period the savings of the country increase considerably faster than the outlet for them. a person who has made savings does not know what to do with them. and this new unemployed saving means additional money. till a saving is invested or employed it exists only in the form of money: a farmer who has sold his wheat and has l. 'to the good,' holds that l. in money, or some equivalent for money, till he sees some advantageous use to be made of it. probably he places it in a bank, and this enables it to do more work. if , , l. of coin be deposited in a bank, and it need only keep , , l. as a reserve, that sets , , l. free, and is for the time equivalent to an increase of so much coin. as a principle it may be laid down that all new unemployed savings require _either an increased stock of the precious metals, or an increase in the efficiency of the banking expedients by which these metals are economised_. in other words, in a saving and uninvesting period of the national industry, we accumulate gold, and augment the efficiency of our gold. if therefore such a saving period follows close upon an occasion when foreign credits have been diminished and foreign debts called in, the augmentation in the effective quantity of gold in the country is extremely great. the old money called in from abroad and the new money representing the new saving co-operate with one another. and their natural tendency is to cause a general rise in price, and what is the same thing, a diffused diminution in the purchasing power of money. 'up to this point there is nothing special in the recent history of the money market. similar events happened both after the panic of , and after that of . but there is another cause of the same kind, and acting in the same direction, which is peculiar to the present time; this cause is the amount of the foreign money, and especially of the money of foreign governments, now in london. no government probably ever had nearly as much at its command as the german government now has. speaking broadly, two things happened: during the war england was the best place of shelter for foreign money, and this made money more cheap here than it would otherwise have been; after the war england became the most convenient paying place, and the most convenient resting place for money, and this again has made money cheaper. the commercial causes, for which there are many precedents, have been aided by a political cause for the efficacy of which there is no precedent. 'but though plentiful money is necessary to high prices, and though it has a natural tendency to produce these prices, yet it is not of itself sufficient to produce them. in the cases we are dealing with, in order to lower prices there must not only be additional money, but a satisfactory mode of employing that additional money. this is obvious if we remember whence that augmented money is derived. it is derived from the savings of the people, and will only be invested in the manner which the holders for the time being consider suitable to such savings. it will not be used in mere expenditure; it would be contrary to the very nature of it so to use it. a new channel of demand is required to take off the new money, or that new money will not raise prices. it will lie idle in the banks, as we have often seen it. we should still see the frequent, the common phenomenon of dull trade and cheap money existing side by side. 'the demand in this case arose in the most effective of all ways. in and the first half of corn was dear, as the following figures show: gazette average price of wheat. s. d. december, january, february march april may june july august september october november december january, february march april may june july from that time it fell, and it was very cheap during the whole of and . the effect of this cheapness is great in every department of industry. the working classes, having cheaper food, need to spend so much less on that food, and have more to spend on other things. in consequence, there is a gentle augmentation of demand through almost all departments of trade. and this almost always causes a great augmentation in what may be called the instrumental trades--that is, in the trades which deal in machines and instruments used in many branches of commerce, and in the materials for such. take, for instance, the iron trade-- in the year we exported , , tons " " , , tons -------------- , , tons " " , , tons " " , , tons -------------- , , tons -------------- increase , , tons that is to say, cheap corn operating throughout the world, created a new demand for many kinds of articles; the production of a large number of such articles being aided by iron in some one of its many forms, iron to that extent was exported. and the effect is cumulative. the manufacture of iron being stimulated, all persons concerned in that great manufacture are well off, have more to spend, and by spending it encourage other branches of manufacture, which again propagate the demand; they receive and so encourage industries in a third degree dependent and removed. 'it is quite true that corn has not been quite so cheap during the present year. but even if it had been dearer than it is, it would not all at once arrest the great trade which former cheapness had created. the "ball," if we may so say, "was set rolling" in and , and a great increase of demand was then created in certain trades and propagated through all trades. a continuance of very high prices would produce the reverse effect; it would slacken demand in certain trades, and the effect would be gradually diffused through all trades. but a slight rise such as that of this year has no perceptible effect. 'when the stimulus of cheap corn is added to that of cheap money, the full conditions of a great and diffused rise of prices are satisfied. this new employment supplies a mode in which money can be invested. bills are drawn of greater number and greater magnitude, and through the agencies of banks and discount houses, the savings of the country are invested in such bills. there is thus a new want and a new purchase-money to supply that want, and the consequence is the diffused and remarkable rise of price which the figures show to have occurred. 'the rise has also been aided by the revival of credit. this, as need not be at length explained, is a great aid to buying, and consequently a great aid to a rise of price. since , credit has been gradually, though very slowly, recovering, and it is probably as good as it is reasonable or proper that it should be. we are now trusting as many people as we ought to trust, and as yet there is no wild excess of misplaced confidence which would make us trust those whom we ought not to trust.' the process thus explained is the common process. the surplus of loanable capital which lies in the hands of bankers is not employed by them in any original way; it is almost always lent to a trade already growing and already improving. the use of it develops that trade yet farther, and this again augments and stimulates other trades. capital may long lie idle in a stagnant condition of industry; the mercantile securities which experienced bankers know to be good do not augment, and they will not invent other securities, or take bad ones. in most great periods of expanding industry, the three great causes--much loanable capital, good credit, and the increased profits derived from better-used labour and better-used capital--have acted simultaneously; and though either may act by itself, there is a permanent reason why mostly they will act together. they both tend to grow together, if you begin from a period of depression. in such periods credit is bad, and industry unemployed; very generally provisions are high in price, and their dearness was one of the causes which made the times bad. whether there was or was not too much loanable capital when that period begins, there soon comes to be too much. quiet people continue to save part of their incomes in bad times as well as in good; indeed, of the two, people of slightly-varying and fixed incomes have better means of saving in bad times because prices are lower. quiescent trade affords no new securities in which the new saving can be invested, and therefore there comes soon to be an excess of loanable capital. in a year or two after a crisis credit usually improves, as the remembrance of the disasters which at the crisis impaired credit is becoming fainter and fainter. provisions get back to their usual price, or some great industry makes, from some temporary cause, a quick step forward. at these moments, therefore, the three agencies which, as has been explained, greatly develope trade, combine to develope it simultaneously. the certain result is a bound of national prosperity; the country leaps forward as if by magic. but only part of that prosperity has a solid reason. as far as prosperity is based on a greater quantity of production, and that of the right articles--as far as it is based on the increased rapidity with which commodities of every kind reach those who want them--its basis is good. human industry is more efficient, and therefore there is more to be divided among mankind. but in so far as that prosperity is based on a general rise of prices, it is only imaginary. a general rise of prices is a rise only in name; whatever anyone gains on the article which he has to sell he loses on the articles which he has to buy, and so he is just where he was. the only real effects of a general rise of prices are these: first, it straitens people of fixed incomes, who suffer as purchasers, but who have no gain to correspond; and secondly, it gives an extra profit to fixed capital created before the rise happened. here the sellers gain, but without any equivalent loss as buyers. thirdly, this gain on fixed capital is greatest in what may be called the industrial 'implements,' such as coal and iron. these are wanted in all industries, and in any general increase of prices, they are sure to rise much more than other things. everybody wants them; the supply of them cannot be rapidly augmented, and therefore their price rises very quickly. but to the country as a whole, the general rise of prices is no benefit at all; it is simply a change of nomenclature for an identical relative value in the same commodities. nevertheless, most people are happier for it; they think they are getting richer, though they are not. and as the rise does not happen on all articles at the same moment, but is propagated gradually through society, those to whom it first comes gain really; and as at first every one believes that he will gain when his own article is rising, a buoyant cheerfulness overflows the mercantile world. this prosperity is precarious as far as it is real, and transitory in so far as it is fictitious. the augmented production, which is the reason of the real prosperity, depends on the full working of the whole industrial organisation--of all capitalists and labourers; that prosperity was caused by that full working, and will cease with it. but that full working is liable to be destroyed by the occurrence of any great misfortune to any considerable industry. this would cause misfortune to the industries dependent on that one, and, as has been explained, all through society and back again. but every such industry is liable to grave fluctuations, and the most important--the provision industries--to the gravest and the suddenest. they are dependent on the casualties of the seasons. a single bad harvest diffused over the world, a succession of two or three bad harvests, even in england only, will raise the price of corn exceedingly, and will keep it high. and a great and protracted rise in the price of corn will at once destroy all the real part of the unusual prosperity of previous good times. it will change the full working of the industrial machine into an imperfect working; it will make the produce of that machine less than usual instead of more than usual; instead of there being more than the average of general dividend to be distributed between the producers, there will immediately be less than the average. and in so far as the apparent prosperity is caused by an unusual plentifulness of loanable capital and a consequent rise in prices, that prosperity is not only liable to reaction, but certain to be exposed to reaction. the same causes which generate this prosperity will, after they have been acting a little longer, generate an equivalent adversity. the process is this: the plentifulness of loanable capital causes a rise of prices; that rise of prices makes it necessary to have more loanable capital to carry on the same trade. , l. will not buy as much when prices are high as it will when prices are low, it will not be so effectual for carrying on business; more money is necessary in dear times than in cheap times to produce the same changes in the same commodities. even supposing trade to have remained stationary, a greater capital would be required to carry it on after such a rise of prices as has been described than was necessary before that rise. but in this case the trade will not have remained stationary; it will have increased--certainly to some extent, probably to a great extent. the 'loanable capital,' the lending of which caused the rise of prices, was lent to enable it--to augment. the loanable capital lay idle in the banks till some trade started into prosperity, and then was lent in order to develope that trade; that trade caused other secondary developments; those secondary developments enabled more loanable capital to be lent; and that lending caused a tertiary development of trade; and so on through society. in consequence, a long-continued low rate of interest is almost always followed by a rapid rise in that rate. till the available trade is found it lies idle, and can scarcely be lent at all; some of it is not lent. but the moment the available trade is discovered--the moment that prices have risen--the demand for loanable capital becomes keen. for the most part, men of business must carry on their regular trade; if it cannot be carried on without borrowing per cent more capital, per cent more capital they must borrow. very often they have incurred obligations which must be met; and if that is so the rate of interest which they pay is comparatively indifferent. what is necessary to meet their acceptances they will borrow, pay for it what they may; they had better pay any price than permit those acceptances to be dishonoured. and in less extreme eases men of business have a fixed capital, which cannot lie idle except at a great loss; a set of labourers which must be, if possible, kept together; a steady connection of customers, which they would very unwillingly lose. to keep all these, they borrow; and in a period of high prices many merchants are peculiarly anxious to borrow, because the augmentation of the price of the article in which they deal makes them really see, or imagine that they see, peculiar opportunities of profit. an immense new borrowing soon follows upon the new and great trade, and the rate of interest rises at once, and generally rises rapidly. this is the surer to happen that lombard street is, as has been shown before, a very delicate market. a large amount of money is held there by bankers and by bill-brokers at interest: this they must employ, or they will be ruined. it is better for them to reduce the rate they charge, and compensate themselves by reducing the rate they pay, rather than to keep up the rate of charge, if by so doing they cannot employ all their money. it is vital to them to employ all the money on which they pay interest. a little excess therefore forces down the rate of interest very much. but if that low rate of interest should cause, or should aid in causing, a great growth of trade, the rise is sure to be quick, and is apt to be violent. the figures of trade are reckoned by hundreds of millions, where those of loanable capital count only by millions. a great increase in the borrowing demands of english commerce almost always changes an excess of loanable capital above the demand to a greater deficiency below the demand. that deficiency causes adversity, or apparent adversity, in trade, just as, and in the same manner, that the previous excess caused prosperity, or apparent prosperity. it causes a fall of price that runs through society; that fall causes a decline of activity and a diminution of profits--a painful contraction instead of the previous pleasant expansion. the change is generally quicker because some check to credit happens at an early stage of it. the mercantile community will have been unusually fortunate if during the period of rising prices it has not made great mistakes. such a period naturally excites the sanguine and the ardent; they fancy that the prosperity they see will last always, that it is only the beginning of a greater prosperity. they altogether over-estimate the demand for the article they deal in, or the work they do. they all in their degree--and the ablest and the cleverest the most--work much more than they should, and trade far above their means. every great crisis reveals the excessive speculations of many houses which no one before suspected, and which commonly indeed had not begun or had not carried very far those speculations, till they were tempted by the daily rise of price and the surrounding fever. the case is worse, because at most periods of great commercial excitement there is some mixture of the older and simpler kind of investing mania. though the money of saving persons is in the hands of banks, and though, by offering interest, banks retain the command of much of it, yet they do not retain the command of the whole, or anything near the whole; all of it can be used, and much of it is used, by its owners. they speculate with it in bubble companies and in worthless shares, just as they did in the time of the south sea mania, when there were no banks, and as they would again in england supposing that banks ceased to exist. the mania of and the mania of were striking examples of this; in their case to a great extent, as in most similar modern periods to a less extent, the delirium of ancient gambling co-operated with the milder madness of modern overtrading. at the very beginning of adversity, the counters in the gambling mama, the shares in the companies created to feed the mania, are discovered to be worthless; down they all go, and with them much of credit. the good times too of high price almost always engender much fraud. all people are most credulous when they are most happy; and when much money has just been made, when some people are really making it, when most people think they are making it, there is a happy opportunity for ingenious mendacity. almost everything will be believed for a little while, and long before discovery the worst and most adroit deceivers are geographically or legally beyond the reach of punishment. but the harm they have done diffuses harm, for it weakens credit still farther. when we understand that lombard street is subject to severe alternations of opposite causes, we should cease to be surprised at its seeming cycles. we should cease too to be surprised at the sudden panics. during the period of reaction and adversity, just even at the last instant of prosperity, the whole structure is delicate. the peculiar essence of our banking system is an unprecedented trust between man and man: and when that trust is much weakened by hidden causes, a small accident may greatly hurt it, and a great accident for a moment may almost destroy it. now too that we comprehend the inevitable vicissitudes of lombard street, we can also thoroughly comprehend the cardinal importance of always retaining a great banking reserve. whether the times of adversity are well met or ill met depends far more on this than on any other single circumstance. if the reserve be large, its magnitude sustains credit; and if it be small, its diminution stimulates the gravest apprehensions. and the better we comprehend the importance of the banking reserve, the higher we shall estimate the responsibility of those who keep it. chapter vii. a more exact account of the mode in which the bank of england has discharged its duty of retaining a good bank reserve, and of administering it effectually. the preceding chapters have in some degree enabled us to appreciate the importance of the duties which the bank of england is bound to discharge as to its banking reserve. if we ask how the bank of england has discharged this great responsibility, we shall be struck by three things: first, as has been said before, the bank has never by any corporate act or authorised utterance acknowledged the duty, and some of its directors deny it; second (what is even more remarkable), no resolution of parliament, no report of any committee of parliament (as far as i know), no remembered speech of a responsible statesman, has assigned or enforced that duty on the bank; third (what is more remarkable still), the distinct teaching of our highest authorities has often been that no public duty of any kind is imposed on the banking department of the bank; that, for banking purposes, it is only a joint stock bank like any other bank; that its managers should look only to the interest of the proprietors and their dividend; that they are to manage as the london and westminster bank or the union bank manages. at first, it seems exceedingly strange that so important a responsibility should be unimposed, unacknowledged, and denied; but the explanation is this. we are living amid the vestiges of old controversies, and we speak their language, though we are dealing with different thoughts and different facts. for more than fifty years--from down to --there was a keen controversy as to the public duties of the bank. it was said to be the 'manager' of the paper currency, and on that account many expected much good from it; others said it did great harm; others again that it could do neither good nor harm. but for the whole period there was an incessant and fierce discussion. that discussion was terminated by the act of . by that act the currency manages itself; the entire working is automatic. the bank of england plainly does not manage--cannot even be said to manage--the currency any more. and naturally, but rashly, the only reason upon which a public responsibility used to be assigned to the bank having now clearly come to an end, it was inferred by many that the bank had no responsibility. the complete uncertainty as to the degree of responsibility acknowledged by the bank of england is best illustrated by what has been said by the bank directors themselves as to the panic of . the panic of that year, it will be remembered, happened, contrary to precedent, in the spring, and at the next meeting of the court of bank proprietors--the september meeting--there was a very remarkable discussion, which i give at length below, and of which all that is most material was thus described in the 'economist': 'the great importance of the late meeting of the proprietors of the bank of england. 'the late meeting of the proprietors of the bank of england has a very unusual importance. there can be no effectual inquiry now into the history of the late crisis. a parliamentary committee next year would, unless something strange occur in the interval, be a great waste of time. men of business have keen sensations but short memories, and they will care no more next february for the events of last may than they now care for the events of october . a _pro forma_ inquiry, on which no real mind is spent, and which everyone knows will lead to nothing, is far worse than no inquiry at all. under these circumstances the official statements of the governor of the bank are the only authentic expositions we shall have of the policy of the bank directors, whether as respects the past or the future. and when we examine the proceedings with care, we shall find that they contain matter of the gravest import. 'this meeting may be considered to admit and recognise the fact that the bank of england keeps the sole banking reserve of the country. we do not now mix up this matter with the country circulation, or the question whether there should be many issuers of notes or only one. we speak not of the currency reserve, but of the banking reserve--the reserve held against deposits, and not the reserve held against notes. we have often insisted in these columns that the bank of england does keep the sole real reserve--the sole considerable unoccupied mass of cash in the country; but there has been no universal agreement about it. great authorities have been unwilling to admit it. they have not, indeed, formally and explicitly contended against it. if they had, they must have pointed out some other great store of unused cash besides that at the bank, and they could not find such store. but they have attempted distinctions; have said that the doctrine that the bank of england keeps the sole banking reserve of the country was "not a good way of putting it," was exaggerated, and was calculated to mislead. 'but the late meeting is a complete admission that such is the fact. the governor of the bank said: "'a great strain has within the last few months been put upon the resources of this house, and of the whole banking community of london; and i think i am entitled to say that not only this house, but the entire banking body, acquitted themselves most honourably and creditably throughout that very trying period. banking is a very peculiar business, and it depends so much upon credit that the least blast of suspicion is sufficient to sweep away, as it were, the harvest of a whole year. but the manner in which the banking establishments generally in london met the demands made upon them during the greater portion of the past half-year affords a most satisfactory proof of the soundness of the principles on which their business is conducted. this house exerted itself to the utmost--and exerted itself most successfully--to meet the crisis. we did not flinch from our post. when the storm came upon us, on the morning on which it became known that the house of overend and co. had failed, we were in as sound and healthy a position as any banking establishment could hold, and on that day and throughout the succeeding week we made advances which would hardly be credited. i do not believe that anyone would have thought of predicting, even at the shortest period beforehand, the greatness of those advances. it was not unnatural that in this state of things a certain degree of alarm should have taken possession of the public mind, and that those who required accommodation from the bank should have gone to the chancellor of the exchequer and requested the government to empower us to issue notes beyond the statutory amount, if we should think that such a measure was desirable. but we had to act before we could receive any such power, and before the chancellor of the exchequer was perhaps out of his bed we had advanced one-half of our reserves, which were certainly thus reduced to an amount which we could not witness without regret. but we would not flinch from the duty which we conceived was imposed upon us of supporting the banking community, and i am not aware that any legitimate application made for assistance to this house was refused. every gentleman who came here with adequate security was liberally dealt with, and if accommodation could not be afforded to the full extent which was demanded, no one who offered proper security failed to obtain relief from this house." 'now this is distinctly saying that the other banks of the country need not keep any such banking reserve--any such sum of actual cash--of real sovereigns and bank notes, as will help them through a sudden panic. it acknowledges a "duty" on the part of the bank of england to "support the banking community," to make the reserve of the bank of england do for them as well as for itself. 'in our judgment this language is most just, and the governor of the bank could scarcely have done a greater public service than by using language so business-like and so distinct. let us know precisely who is to keep the banking reserve. if the joint stock banks and the private banks and the country banks are to keep their share, let us determine on that; mr. gladstone appeared not long since to say in parliament that it ought to be so. but at any rate there should be no doubt whose duty it is. upon grounds which we have often stated, we believe that the anomaly of one bank keeping the sole banking reserve is so fixed in our system that we cannot change it if we would. the great evil to be feared was an indistinct conception of the fact, and that is now avoided. 'the importance of these declarations by the bank is greater, because after the panic of the bank did not hold exactly the same language. a person who loves concise expressions said lately "that overends broke the bank in because it went, and in because it was not let go." we need not too precisely examine such language; the element of truth in it is very plain--the great advances made to overends were a principal event in the panic of ; the bill-brokers were then very much what the bankers were lately they were the borrowers who wanted sudden and incalculable advances. but the bill-brokers were told not to expect the like again. but alderman salomons, on the part of the london bankers, said, "he wished to take that opportunity of stating that he believed nothing could be more satisfactory to the managers and shareholders of joint stock banks than the testimony which the governor of the bank of england had that day borne to the sound and honourable manner in which their business was conducted. it was manifestly desirable that the joint stock banks and the banking interest generally should work in harmony with the bank of england; and he sincerely thanked the governor of the bank for the kindly manner in which he had alluded to the mode in which the joint stock banks had met the late monetary crisis." the bank of england agrees to give other banks the requisite assistance in case of need, and the other banks agree to ask for it. 'secondly. the bank agrees, in fact, if not in name, to make limited advances on proper security to anyone who applies for it. on the present occasion , , l. was so advanced in three months. and the bank do not say to the mercantile community, or to the bankers, "do not come to us again. we helped you once. but do not look upon it as a precedent. we will not help you again." on the contrary, the evident and intended implication is that under like circumstances the bank would act again as it has now acted.' this article was much disliked by many of the bank directors, and especially by some whose opinion is of great authority. they thought that the 'economist' drew 'rash deductions' from a speech which was in itself 'open to some objection--'which was, like all such speeches, defective in theoretical precision, and which was at best only the expression of an opinion by the governor of that day, which had not been authorised by the court of directors, which could not bind the bank. however the article had at least this use, that it brought out the facts. all the directors would have felt a difficulty in commenting upon, or limiting, or in differing from, a speech of a governor from the chair. but there was no difficulty or delicacy in attacking the 'economist.' accordingly mr. hankey, one of the most experienced bank directors, not long after, took occasion to observe: 'the "economist" newspaper has put forth what in my opinion is the most mischievous doctrine ever broached in the monetary or banking world in this country; viz, that it is the proper function of the bank of england to keep money available at all times to supply the demands of bankers who have rendered their own assets unavailable. until such a doctrine is repudiated by the banking interest, the difficulty of pursuing any sound principle of banking in london will be always very great. but i do not believe that such a doctrine as that bankers are justified in relying on the bank of england to assist them in time of need is generally held by the bankers in london. 'i consider it to be the undoubted duty of the bank of england to hold its banking deposits (reserving generally about one-third in cash) in the most available securities; and in the event of a sudden pressure in the money market, by whatever circumstance it may be caused, to bear its full share of a drain on its resources. i am ready to admit, however, that a general opinion has long prevailed that the bank of england ought to be prepared to do much more than this, though i confess my surprise at finding an advocate for such an opinion in the "economist." if it were practicable for the bank to retain money unemployed to meet such an emergency, it would be a very unwise thing to do so. but i contend that it is quite impracticable, and if it were possible, it would be most inexpedient; and i can only express my regret that the bank, from a desire to do everything in its power to afford general assistance in times of banking or commercial distress, should ever have acted in a way to encourage such an opinion. the more the conduct of the affairs of the bank is made to assimilate to the conduct of every other well-managed bank in the united kingdom, the better for the bank, and the better for the community at large.' i am scarcely a judge, but i do not think mr. hankey replies to the 'economist' very conclusively. first. he should have observed that the question is not as to what 'ought to be,' but as to what is. the 'economist' did not say that the system of a single bank reserve was a good system, but that it was the system which existed, and which must be worked, as you could not change it. secondly. mr. hankey should have shown 'some other store of unused cash' except the reserve in the banking department of the bank of england out of which advances in time of panic could be made. these advances are necessary, and must be made by someone. the 'reserves' of london bankers are not such store; they are used cash, not unused; they are part of the bank deposits, and lent as such. thirdly. mr. hankey should have observed that we know by the published figures that the joint stock banks of london do not keep one-third, or anything like one-third, of their liabilities in 'cash' even meaning by 'cash' a deposit at the bank of england. one-third of the deposits in joint stock banks, not to speak of the private banks, would be , , l.; and the private deposits of the bank of england are , , l. according to his own statement, there is a conspicuous contrast. the joint stock banks, and the private banks, no doubt, too, keep one sort of reserve, and the bank of england a different kind of reserve altogether. mr. hankey says that the two ought to be managed on the same principle; but if so, he should have said whether he would assimilate the practice of the bank of england to that of the other banks, or that of the other banks to the practice of the bank of england. fourthly. mr. hankey should have observed that, as has been explained, in most panics, the principal use of a 'banking reserve' is not to advance to bankers; the largest amount is almost always advanced to the mercantile public and to bill-brokers. but the point is, that by our system all extra pressure is thrown upon the bank of england. in the worst part of the crisis of , , l. 'fresh money' could not be borrowed, even on the best security--even on consols except at the bank of england. there was no other lender to new borrowers. but my object now is not to revive a past controversy, but to show in what an unsatisfactory and uncertain condition that controversy has left a most important subject. mr. hankey's is the last explanation we have had of the policy of the bank. he is a very experienced and attentive director, and i think expresses, more or less, the opinions of other directors. and what do we find? setting aside and saying nothing about the remarkable speech of the governor in , which at least (according to the interpretation of the 'economist') was clear and excellent, mr. hankey leaves us in doubt altogether as to what will be the policy of the bank of england in the next panic, and as to what amount of aid the public may then expect from it. his words are too vague. no one can tell what a 'fair share' means; still less can we tell what other people at some future time will say it means. theory suggests, and experience proves, that in a panic the holders of the ultimate bank reserve (whether one bank or many) should lend to all that bring good securities quickly, freely, and readily. by that policy they allay a panic; by every other policy they intensify it. the public have a right to know whether the bank of england--the holders of our ultimate bank reserve--acknowledge this duty, and are ready to perform it. but this is now very uncertain. if we refer to history, and examine what in fact has been the conduct of the bank directors, we find that they have acted exactly as persons of their type, character, and position might have been expected to act. they are a board of plain, sensible, prosperous english merchants; and they have both done and left undone what such a board might have been expected to do and not to do. nobody could expect great attainments in economical science from such a board; laborious study is for the most part foreign to the habits of english merchants. nor could we expect original views on banking, for banking is a special trade, and english merchants, as a body, have had no experience in it. a 'board' can scarcely ever make improvements, for the policy of a board is determined by the opinions of the most numerous class of its members--its average members--and these are never prepared for sudden improvements. a board of upright and sensible merchants will always act according to what it considers 'safe' principles--that is, according to the received maxims of the mercantile world then and there--and in this manner the directors of the bank of england have acted nearly uniformly. their strength and their weakness were curiously exemplified at the time when they had the most power. after the suspension of cash payments in , the directors of the bank of england could issue what notes they liked. there was no check; these notes could not come back upon the bank for payment; there was a great temptation to extravagant issue, and no present penalty upon it. but the directors of the bank withstood the temptation; they did not issue their inconvertible notes extravagantly. and the proof is, that for more than ten years after the suspension of cash payments the bank paper was undepreciated, and circulated at no discount in comparison with gold. though the bank directors of that day at last fell into errors, yet on the whole they acted with singular judgment and moderation. but when, in , they came to be examined as to their reasons, they gave answers that have become almost classical by their nonsense. mr. pearse, the governor of the bank, said: 'in considering this subject, with reference to the manner in which bank-notes are issued, resulting from the applications made for discounts to supply the necessary want of bank-notes, by which their issue in amount is so controlled that it can never amount to an excess, i cannot see how the amount of bank-notes issued can operate upon the price of bullion, or the state of the exchanges; and therefore i am individually of opinion that the price of bullion, or the state of the exchanges, can never be a reason for lessening the amount of bank-notes to be issued, always understanding the control which i have already described. 'is the governor of the bank of the same opinion which has now been expressed by the deputy-governor? 'mr. whitmore, i am so much of the same opinion, that i never think it necessary to advert to the price of gold, or the state of the exchange, on the days on which we make our advances. 'do you advert to these two circumstances with a view to regulate the general amount of your advances?--i do not advert to it with a view to our general advances, conceiving it not to bear upon the question. and mr. harman, another bank director, expressed his opinion in these terms: 'i must very materially alter my opinions before i can suppose that the exchanges will be influenced by any modifications of our paper currency.' very few persons perhaps could have managed to commit so many blunders in so few words. but it is no disgrace at all to the bank directors of that day to have committed these blunders. they spoke according to the best mercantile opinion of england. the city of london and the house of commons both approved of what they said; those who dissented were said to be abstract thinkers and unpractical men. the bank directors adopted the ordinary opinions, and pursued the usual practice of their time. it was this 'routine' that caused their moderation. they believed that so long as they issued 'notes' only at per cent, and only on the discount of good bills, those notes could not be depreciated. and as the number of 'good' bills--bills which sound merchants know to be good--does not rapidly increase, and as the market rate of interest was often less than per cent, these checks on over-issue were very effective. they failed in time, and the theory upon which they were defended was nonsense; but for a time their operation was powerful and excellent. unluckily, in the management of the matter before us--the management of the bank reserve--the directors of the bank of england were neither acquainted with right principles, nor were they protected by a judicious routine. they could not be expected themselves to discover such principles. the abstract thinking of the world is never to be expected from persons in high places; the administration of first-rate current transactions is a most engrossing business, and those charged with them are usually but little inclined to think on points of theory, even when such thinking most nearly concerns those transactions. no doubt when men's own fortunes are at stake, the instinct of the trader does somehow anticipate the conclusions of the closet. but a board has no instincts when it is not getting an income for its members, and when it is only discharging a duty of office. during the suspension of cash payments--a suspension which lasted twenty-two years--all traditions as to a cash reserve had died away. after the bank directors had to discharge the duty of keeping a banking reserve, and (as the law then stood) a currency reserve also, without the guidance either of keen interests, or good principles, or wise traditions. under such circumstances, the bank directors inevitably made mistakes of the gravest magnitude. the first time of trial came in . in that year the bank directors allowed their stock of bullion to fall in the most alarming manner: on dec. , , the coin and bullion in the bank was l , , on dec. , , it was reduced to l , , and the consequence was a panic so tremendous that its results are well remembered after nearly fifty years. in the next period of extreme trial--in - --the bank was compelled to draw for , , l. on the bank of france; and even after that aid the directors permitted their bullion, which was still the currency reserve as well as the banking reserve, to be reduced to , , l.: a great alarm pervaded society, and generated an eager controversy, out of which ultimately emerged the act of . the next trial came in , and then the bank permitted its banking reserve (which the law had now distinctly separated) to fall to , , l.; and so intense was the alarm, that the executive government issued a letter of licence, permitting the bank, if necessary, to break the new law, and, if necessary, to borrow from the currency reserve, which was full, in aid of the banking reserve, which was empty. till there was an unusual calm in the money market, but in the autumn of that year the bank directors let the banking reserve, which even in october was far too small, fall thus: oct. , , l " , , l " , , l " , , l nov. , , l " , l and then a letter of licence like that of was not only issued, but used. the ministry of the day authorised the bank to borrow from the currency reserve in aid of the banking reserve, and the bank of england did so borrow several hundred pounds till the end of the month of november. a more miserable catalogue than that of the failures of the bank of england to keep a good banking reserve in all the seasons of trouble between and is scarcely to be found in history. but since there has been a great improvement. by painful events and incessant discussions, men of business have now been trained to see that a large banking reserve is necessary, and to understand that, in the curious constitution of the english banking world, the bank of england is the only body which could effectually keep it. they have never acknowledged the duty; some of them, as we have seen, deny the duty; still they have to a considerable extent begun to perform the duty. the bank directors, being experienced and able men of business, comprehended this like other men of business. since they have always kept, i do not say a sufficient banking reserve, but a fair and creditable banking reserve, and one altogether different from any which they kept before. at one period the bank directors even went farther: they made a distinct step in advance of the public intelligence; they adopted a particular mode of raising the rate of interest, which is far more efficient than any other mode. mr. goschen observes, in his book on the exchanges: 'between the rates in london and paris, the expense of sending gold to and fro having been reduced to a minimum between the two cities, the difference can never be very great; but it must not be forgotten that, the interest being taken at a percentage calculated per annum, and the probable profit having, when an operation in three-month bills is contemplated, to be divided by four, whereas the percentage of expense has to be wholly borne by the one transaction, a very slight expense becomes a great impediment. if the cost is only / per cent, there must be a profit of per cent in the rate of interest, or / per cent on three months, before any advantage commences; and thus, supposing that paris capitalists calculate that they may send their gold over to england for / per cent expense, and chance their being so favoured by the exchanges as to be able to draw it back without any cost at all, there must nevertheless be an excess of more than per cent in the london rate of interest over that in paris, before the operation of sending gold over from france, merely for the sake of the higher interest, will pay.' accordingly, mr. goschen recommended that the bank of england should, as a rule, raise their rate by steps of per cent at a time when the object of the rise was to affect the 'foreign exchanges.' and the bank of england, from onward, have acted upon that principle. before that time they used to raise their rate almost always by steps of / per cent, and there was nothing in the general state of mercantile opinion to compel them to change their policy. the change was, on the contrary, most unpopular. on this occasion, and, as far as i know, on this occasion alone, the bank of england made an excellent alteration of their policy, which was not exacted by contemporary opinion, and which was in advance of it. the beneficial results of the improved policy of the bank were palpable and speedy. we were enabled by it to sustain the great drain of silver from europe to india to pay for indian cotton in the years between . in the autumn of there was especial danger; but, by a rapid and able use of their new policy, the bank of england maintained an adequate reserve, and preserved the country from calamities which, if we had looked only to precedent, would have seemed inevitable. all the causes which produced the panic of were in action in --the drain of silver in and the preceding year was beyond comparison greater than in and the years before it--and yet in there was no panic. the bank of england was almost immediately rewarded for its adoption of right principles by finding that those principles, at a severe crisis, preserved public credit. in undoubtedly a panic occurred, but i do not think that the bank of england can be blamed for it. they had in their till an exceedingly good reserve according to the estimate of that time--a sufficient reserve, in all probability, to have coped with the crises of and . the suspension of overend and gurney--the most trusted private firm in england caused an alarm, in suddenness and magnitude, without example. what was the effect of the act of on the panic of is a question on which opinion will be long divided; but i think it will be generally agreed that, acting under the provisions of that law, the directors of the bank of england had in their banking department in that year a fairly large reserve quite as large a reserve as anyone expected them to keep--to meet unexpected and painful contingencies. from to there was almost an unbroken calm on the money market. the bank of england had no difficulties to cope with; there was no opportunity for much discretion. the money market took care of itself. but in the bank of france suspended specie payments, and from that time a new era begins. the demands on this market for bullion have been greater, and have been more incessant, than they ever were before, for this is now the only bullion market. this has made it necessary for the bank of england to hold a much larger banking reserve than was ever before required, and to be much more watchful than in former times lest that banking reserve should on a sudden be dangerously diminished. the forces are greater and quicker than they used to be, and a firmer protection and a surer solicitude are necessary. but i do not think the bank of england is sufficiently aware of this. all the governing body of the bank certainly are not aware of it. the same eminent director to whom i have before referred, mr. hankey, published in the 'times' an elaborate letter, saying again that one-third of the liabilities were, even in these altered times, a sufficient reserve for the banking department of the bank of england, and that it was no part of the business of the bank to keep a supply of 'bullion for exportation,' which was exactly the most mischievous doctrine that could be maintained when the banking department of the bank of england had become the only great repository in europe where gold could at once be obtained, and when, therefore, a far greater store of bullion ought to be kept than at any former period. and besides this defect of the present time, there are some chronic faults in the policy of the bank of england, which arise, as will be presently explained, from grave defects in its form of government. there is almost always some hesitation when a governor begins to reign. he is the prime minister of the bank cabinet; and when so important a functionary changes, naturally much else changes too. if the governor be weak, this kind of vacillation and hesitation continues throughout his term of office. the usual defect then is, that the bank of england does not raise the rate of interest sufficiently quickly. it does raise it; in the end it takes the alarm, but it does not take the alarm sufficiently soon. a cautious man, in a new office, does not like strong measures. bank governors are generally cautious men; they are taken from a most cautious class; in consequence they are very apt to temporise and delay. but almost always the delay in creating a stringency only makes a greater stringency inevitable. the effect of a timid policy has been to let the gold out of the bank, and that gold must be recovered. it would really have been far easier to have maintained the reserve by timely measures than to have replenished it by delayed measures; but new governors rarely see this. secondly. those defects are apt, in part, or as a whole, to be continued throughout the reign of a weak governor. the objection to a decided policy, and the indisposition to a timely action, which are excusable in one whose influence is beginning, and whose reign is new, is continued through the whole reign of one to whom those defects are natural, and who exhibits those defects in all his affairs. thirdly. this defect is enhanced, because, as has so often been said, there is now no adequate rule recognised in the management of the banking reserve. mr. weguelin, the last bank governor who has been examined, said that it was sufficient for the bank to keep from one-fourth to one-third of its banking liabilities as a reserve. but no one now would ever be content if the banking reserve were near to one-fourth of its liabilities. mr. hankey, as i have shown, considers 'about a third' as the proportion of reserve to liability at which the bank should aim; but he does not say whether he regards a third as the minimum below which the reserve in the banking department should never be, or as a fair average, about which the reserve may fluctuate, sometimes being greater, or at others less. in a future chapter i shall endeavour to show that one-third of its banking liabilities is at present by no means an adequate reserve for the banking department--that it is not even a proper minimum, far less a fair average; and i shall allege what seem to me good reasons for thinking that, unless the bank aim by a different method at a higher standard, its own position may hereafter be perilous, and the public may be exposed to disaster. ii. but, as has been explained, the bank of england is bound, according to our system, not only to keep a good reserve against a time of panic, but to use that reserve effectually when that time of panic comes. the keepers of the banking reserve, whether one or many, are obliged then to use that reserve for their own safety. if they permit all other forms of credit to perish, their own will perish immediately, and in consequence. as to the bank of england, however, this is denied. it is alleged that the bank of england can keep aloof in a panic; that it can, if it will, let other banks and trades fail; that if it chooses, it can stand alone, and survive intact while all else perishes around it. on various occasions, most influential persons, both in the government of the bank and out of it, have said that such was their opinion. and we must at once see whether this opinion is true or false, for it is absurd to attempt to estimate the conduct of the bank of england during panics before we know what the precise position of the bank in a panic really is. the holders of this opinion in its most extreme form say, that in a panic the bank of england can stay its hand at any time; that, though it has advanced much, it may refuse to advance more; that though the reserve may have been reduced by such advances, it may refuse to lessen it still further; that it can refuse to make any further dis counts; that the bills which it has discounted will become due; that it can refill its reserve by the payment of those bills; that it can sell stock or other securities, and so replenish its reserve still further. but in this form the notion scarcely merits serious refutation. if the bank reserve has once become low, there are, in a panic, no means of raising it again. money parted with at such a time is very hard to get back; those who have taken it will not let it go--not, at least, unless they are sure of getting other money in its place. and at such instant the recovery of money is as hard for the bank of england as for any one else, probably even harder. the difficulty is this: if the bank decline to discount, the holders of the bills previously discounted cannot pay. as has been shown, trade in england is largely carried on with borrowed money. if you propose greatly to reduce that amount, you will cause many failures unless you can pour in from elsewhere some equivalent amount of new money. but in a panic there is no new money to be had; everybody who has it clings to it, and will not part with it. especially what has been advanced to merchants cannot easily be recovered; they are under immense liabilities, and they will not give back a penny which they imagine that even possibly they may need to discharge those liabilities. and bankers are in even greater terror. in a panic they will not discount a host of new bills; they are engrossed with their own liabilities and those of their own customers, and do not care for those of others. the notion that the bank of england can stop discounting in a panic, and so obtain fresh money, is a delusion. it can stop discounting, of course, at pleasure. but if it does, it will get in no new money; its bill case will daily be more and more packed with bills 'returned unpaid.' the sale of stock, too, by the bank of england in the middle of a panic is impossible. the bank at such a time is the only lender on stock, and it is only by loans from a bank that large purchases, at such a moment, can be made. unless the bank of england lend, no stock will be bought. there is not in the country any large sum of unused ready money ready to buy it. the only unused sum is the reserve in the banking department of the bank of england: if, therefore, in a panic that department itself attempt to sell stock, the failure would be ridiculous. it would hardly be able to sell any at all. probably it would not sell fifty pounds' worth. the idea that the bank can, during a panic, replenish its reserve in this or in any other manner when that reserve has once been allowed to become empty, or nearly empty, is too absurd to be steadily maintained, though i fear that it is not yet wholly abandoned. the second and more reasonable conception of the independence of the bank of england is, however, this: it may be said, and it is said, that if the bank of england stop at the beginning of a panic, if it refuse to advance a shilling more than usual, if it begin the battle with a good banking reserve, and do not diminish it by extra loans, the bank of england is sure to be safe. but this form of the opinion, though more reasonable and moderate, is not, therefore, more true. the panic of is the best instance to test it. as everyone knows, that panic began quite suddenly, on the fall of 'overends.' just before, the bank had , , l. in its reserve; in fact, it advanced , , l. of new money in the next few days, and its reserve went down to nothing, and the government had to help. but if the bank had not made these advances, could it have kept its reserve? certainly it could not. it could not have retained its own deposits. a large part of these are the deposits of bankers, and they would not consent to help the bank of england in a policy of isolation. they would not agree to suspend payments themselves, and permit the bank of england to survive, and get all their business. they would withdraw their deposits from the bank; they would not assist it to stand erect amid their ruin. but even if this were not so, even if the banks were willing to keep their deposits at the bank while it was not lending, they would soon find that they could not do it. they are only able to keep those deposits at the bank by the aid of the clearing-house system, and if a panic were to pass a certain height, that system, which rests on confidence, would be destroyed by terror. the common course of business is this. a b having to receive , l. from c d takes c d's cheque on a banker crossed, as it is called, and, therefore, only payable to another banker. he pays that cheque to his own credit with his own banker, who presents it to the banker on whom it is drawn, and if good it is an item between them in the general clearing or settlement of the afternoon. but this is evidently a very refined machinery, which a panic will be apt to destroy. at the first stage a b may say to his debtor c d, 'i cannot take your cheque, i must have bank-notes.' if it is a debt on securities, he will be very apt to say this. the usual practice--credit being good--is for the creditor to take the debtor's cheque, and to give up the securities. but if the 'securities' really secure him in a time of difficulty, he will not like to give them up, and take a bit of paper--a mere cheque, which may be paid or not paid. he will say to his debtor, 'i can only give you your securities if you will give me bank-notes.' and if he does say so, the debtor must go to his bank, and draw out the , l. if he has it. but if this were done on a large scale, the bank's 'cash in house' would soon be gone; as the clearing-house was gradually superseded it would have to trench on its deposit at the bank of england; and then the bankers would have to pay so much over the counter that they would be unable to keep much money at the bank, even if they wished. they would soon be obliged to draw out every shilling. the diminished use of the clearing-house, in consequence of the panic, would intensify that panic. by far the greater part of the bargains of the country in moneyed securities is settled on the stock exchange twice a month, and the number of securities then given up for mere cheques, and the number of cheques then passing at the clearing-house are enormous. if that system collapse, the number of failures would be incalculable, and each failure would add to the discredit that caused the collapse. the non-banking customers of the bank of england would be discredited as well as other people; their cheques would not be taken any more than those of others; they would have to draw out bank-notes, and the bank reserve would not be enough for a tithe of such payments. the matter would come shortly to this: a great number of brokers and dealers are under obligations to pay immense sums, and in common times they obtain these sums by the transfer of certain securities. if, as we said just now, no. has borrowed , l. of no. on exchequer bills, he, for the most part, cannot pay no. till he has sold or pledged those bills to some one else. but till he has the bills he cannot pledge or sell them; and if no. will not give them up till he gets his money, no. will be ruined, because he cannot pay it. and if no. has no. to pay, as is very likely, he may be ruined because of no. 's default, and no. only on account of no. 's default; and so on without end. on settling day, without the clearing-house, there would be a mass of failures, and a bundle of securities. the effect of these failures would be a general run on all bankers, and on the bank of england particularly. it may indeed be said that the money thus taken from the banking department of the bank of england would return there immediately; that the public who borrowed it would not know where else to deposit it; that it would be taken out in the morning, and put back in the evening. but, in the first place, this argument assumes that the banking department would have enough money to pay the demands on it; and this is a mistake: the banking department would not have a hundredth part of the necessary funds. and in the second, a great panic which deranged the clearing-house would soon be diffused all through the country. the money therefore taken from the bank of england could not be soon returned to the bank; it would not come back on the evening of the day on which it was taken out, or for many days; it would be distributed through the length and breadth of the country, wherever there were bankers, wherever there was trade, wherever there were liabilities, wherever there was terror. and even in london, so immense a panic would soon impair the credit of the banking department of the bank of england. that department has no great prestige. it was only created in , and it has failed three times since. the world would imagine that what has happened before will happen again; and when they have got money, they will not deposit it at an establishment which may not be able to repay it. this did not happen in former panics, because the case we are considering never arose. the bank was helping the public, and, more or less confidently, it was believed that the government would help the bank. but if the policy be relinquished which formerly assuaged alarm, that alarm will be protracted and enhanced, till it touch the banking department of the bank itself. i do not imagine that it would touch the issue department. i think that the public would be quite satisfied if they obtained bank-notes. generally nothing is gained by holding the notes of a bank instead of depositing them at a bank. but in the bank of england there is a great difference: their notes are legal tender. whoever holds them can always pay his debts, and, except for foreign payments, he could want no more. the rush would be for bank-notes; those that could be obtained would be carried north, south, east, and west, and, as there would not be enough for all the country, the banking department would soon pay away all it had. nothing, therefore, can be more certain than that the bank of england has in this respect no peculiar privilege; that it is simply in the position of a bank keeping the banking reserve of the country; that it must in time of panic do what all other similar banks must do; that in time of panic it must advance freely and vigorously to the public out of the reserve. and with the bank of england, as with other banks in the same case, these advances, if they are to be made at all, should be made so as if possible to obtain the object for which they are made. the end is to stay the panic; and the advances should, if possible, stay the panic. and for this purpose there are two rules: first. that these loans should only be made at a very high rate of interest. this will operate as a heavy fine on unreasonable timidity, and will prevent the greatest number of applications by persons who do not require it. the rate should be raised early in the panic, so that the fine may be paid early; that no one may borrow out of idle precaution without paying well for it; that the banking reserve may be protected as far as possible. secondly. that at this rate these advances should be made on all good banking securities, and as largely as the public ask for them. the reason is plain. the object is to stay alarm, and nothing therefore should be done to cause alarm. but the way to cause alarm is to refuse some one who has good security to offer. the news of this will spread in an instant through all the money market at a moment of terror; no one can say exactly who carries it, but in half an hour it will be carried on all sides, and will intensify the terror everywhere. no advances indeed need be made by which the bank will ultimately lose. the amount of bad business in commercial countries is an infinitesimally small fraction of the whole business. that in a panic the bank, or banks, holding the ultimate reserve should refuse bad bills or bad securities will not make the panic really worse; the 'unsound' people are a feeble minority, and they are afraid even to look frightened for fear their unsoundness may be detected. the great majority, the majority to be protected, are the 'sound' people, the people who have good security to offer. if it is known that the bank of england is freely advancing on what in ordinary times is reckoned a good security--on what is then commonly pledged and easily convertible--the alarm of the solvent merchants and bankers will be stayed. but if securities, really good and usually convertible, are refused by the bank, the alarm will not abate, the other loans made will fail in obtaining their end, and the panic will become worse and worse. it may be said that the reserve in the banking department will not be enough for all such loans. if that be so, the banking department must fail. but lending is, nevertheless, its best expedient. this is the method of making its money go the farthest, and of enabling it to get through the panic if anything will so enable it. making no loans as we have seen will ruin it; making large loans and stopping, as we have also seen, will ruin it. the only safe plan for the bank is the brave plan, to lend in a panic on every kind of current security, or every sort on which money is ordinarily and usually lent. this policy may not save the bank; but if it do not, nothing will save it. if we examine the manner in which the bank of england has fulfilled these duties, we shall find, as we found before, that the true principle has never been grasped; that the policy has been inconsistent; that, though the policy has much improved, there still remain important particulars in which it might be better than it is. the first panic of which it is necessary here to speak, is that of : i hardly think we should derive much instruction from those of and ; the world has changed too much since; and during the long period of inconvertible currency from to , the problems to be solved were altogether different from our present ones. in the panic of , the bank of england at first acted as unwisely as it was possible to act. by every means it tried to restrict its advances. the reserve being very small, it endeavoured to protect that reserve by lending as little as possible. the result was a period of frantic and almost inconceivable violence; scarcely any one knew whom to trust; credit was almost suspended; the country was, as mr. huskisson expressed it, within twenty-four hours of a state of barter. applications for assistance were made to the government, but though it was well known that the government refused to act, there was not, as far as i know, until lately any authentic narrative of the real facts. in the 'correspondence' of the duke of wellington, of all places in the world, there is a full account of them. the duke was then on a mission at st. petersburg, and sir r. peel wrote to him a letter of which the following is a part: 'we have been placed in a very unpleasant predicament on the other question--the issue of exchequer bills by government. the feeling of the city, of many of our friends, of some of the opposition, was decidedly in favour of the issue of exchequer bills to relieve the merchants and manufacturers. 'it was said in favour of the issue, that the same measure had been tried and succeeded in and . our friends whispered about that we were acting quite in a different manner from that in which mr. pitt did act, and would have acted had he been alive. 'we felt satisfied that, however plausible were the reasons urged in favour of the issue of exchequer bills, yet that the measure was a dangerous one, and ought to be resisted by the government. 'there are thirty millions of exchequer bills outstanding. the purchases lately made by the bank can hardly maintain them at par. if there were a new issue to such an amount as that contemplated--viz., five millions--there would be a great danger that the whole mass of exchequer bills would be at a discount, and would be paid into the revenue. if the new exchequer bills were to be issued at a different rate of interest from the outstanding ones--say bearing an interest of five per cent--the old ones would be immediately at a great discount unless the interest were raised. if the interest were raised, the charge on the revenue would be of course proportionate to the increase of rate of interest. we found that the bank had the power to lend money on deposit of goods. as our issue of exchequer bills would have been useless unless the bank cashed them, as therefore the intervention of the bank was in any event absolutely necessary, and as its intervention would be chiefly useful by the effect which it would have in increasing the circulating medium, we advised the bank to take the whole affair into their own hands at once, to issue their notes on the security of goods, instead of issuing them on exchequer bills, such bills being themselves issued on that security. 'they reluctantly consented, and rescued us from a very embarrassing predicament.' the success of the bank of england on this occasion was owing to its complete adoption of right principles. the bank adopted these principles very late; but when it adopted them it adopted them completely. according to the official statement which i quoted before, 'we,' that is, the bank directors, 'lent money by every possible means, and in modes which we had never adopted before; we took in stock on security, we purchased exchequer bills, we made advances on exchequer bills, we not only discounted outright, but we made advances on deposits of bills of exchange to an immense amount--in short, by every possible means consistent with the safety of the bank.' and for the complete and courageous adoption of this policy at the last moment the directors of the bank of england at that time deserve great praise, for the subject was then less understood even than it is now; but the directors of the bank deserve also severe censure, for previously choosing a contrary policy; for being reluctant to adopt the new one; and for at last adopting it only at the request of, and upon a joint responsibility with, the executive government. after , there was not again a real panic in the money market till . both of the crises of and were severe, but neither terminated in a panic: both were arrested before the alarm reached its final intensity; in neither, therefore, could the policy of the bank at the last stage of fear be tested. in the three panics since --in , , and --the policy of the bank has been more or less affected by the act of , and i cannot therefore discuss it fully within the limits which i have pre scribed for myself. i can only state two things: first, that the directors of the bank above all things maintain, that they have not been in the earlier stage of panic prevented by the act of from making any advances which they would otherwise have then made. secondly, that in the last stage of panic, the act of has been already suspended, rightly or wrongly, on these occasions; that no similar occasion has ever yet occurred in which it has not been suspended; and that, rightly or wrongly, the world confidently expects and relies that in all similar cases it will be suspended again. whatever theory may prescribe, the logic of facts seems peremptory so far. and these principles taken together amount to saying that, by the doctrine of the directors, the bank of england ought, as far as they can, to manage a panic with the act of , pretty much as they would manage one without it--in the early stage of the panic because then they are not fettered, and in the latter because then the fetter has been removed. we can therefore estimate the policy of the bank of england in the three panics which have happened since the act of , without inquiring into the effect of the act itself. it is certain that in all of these panics the bank has made very large advances indeed. it is certain, too, that in all of them the bank has been quicker than it was in ; that in all of them it has less hesitated to use its banking reserve in making the advances which it is one principal object of maintaining that reserve to make, and to make at once. but there is still a considerable evil. no one knows on what kind of securities the bank of england will at such periods make the advances which it is necessary to make. as we have seen, principle requires that such advances, if made at all for the purpose of curing panic, should be made in the manner most likely to cure that panic. and for this purpose, they should be made on everything which in common times is good 'banking security.' the evil is, that owing to terror, what is commonly good security has ceased to be so; and the true policy is so to use the banking reserve, that if possible the temporary evil may be stayed, and the common course of business be restored. and this can only be effected by advancing on all good banking securities. unfortunately, the bank of england do not take this course. the discount office is open for the discount of good bills, and makes immense advances accordingly. the bank also advances on consols and india securities, though there was, in the crisis of , believed to be for a moment a hesitation in so doing. but these are only a small part of the securities on which money in ordinary times can be readily obtained, and by which its repayment is fully secured. railway debenture stock is as good a security as a commercial bill, and many people, of whom i own i am one, think it safer than india stock; on the whole, a great railway is, we think, less liable to unforeseen accidents than the strange empire of india. but i doubt if the bank of england in a panic would advance on railway debenture stock, at any rate no one has any authorised reason for saying that it would. and there are many other such securities. the amount of the advance is the main consideration for the bank of england, and not the nature of the security on which the advance is made, always assuming the security to be good. an idea prevails (as i believe) at the bank of england that they ought not to advance during a panic on any kind of security on which they do not commonly advance. but if bankers for the most part do advance on such security in common times, and if that security is indisputably good, the ordinary practice of the bank of england is immaterial. in ordinary times the bank is only one of many lenders, whereas in a panic it is the sole lender, and we want, as far as we can, to bring back the unusual state of a time of panic to the common state of ordinary times. in common opinion there is always great uncertainty as to the conduct of the bank: the bank has never laid down any clear and sound policy on the subject. as we have seen, some of its directors (like mr. hankey) advocate an erroneous policy. the public is never sure what policy will be adopted at the most important moment: it is not sure what amount of advance will be made, or on what security it will be made. the best palliative to a panic is a confidence in the adequate amount of the bank reserve, and in the efficient use of that reserve. and until we have on this point a clear understanding with the bank of england, both our liability to crises and our terror at crises will always be greater than they would otherwise be. chapter viii. the government of the bank of england. the bank of england is governed by a board of directors, a governor, and a deputy-governor; and the mode in which these are chosen, and the time for which they hold office, affect the whole of its business. the board of directors is in fact self-electing. in theory a certain portion go out annually, remain out for a year, and are subject to re-election by the proprietors. but in fact they are nearly always, and always if the other directors wish it, re-elected after a year. such has been the unbroken practice of many years, and it would be hardly possible now to break it. when a vacancy occurs by death or resignation, the whole board chooses the new member, and they do it, as i am told, with great care. for a peculiar reason, it is important that the directors should be young when they begin; and accordingly the board run over the names of the most attentive and promising young men in the old-established firms of london, and select the one who, they think, will be most suitable for a bank director. there is a considerable ambition to fill the office. the status which is given by it, both to the individual who fills it and to the firm of merchants to which he belongs, is considerable. there is surprisingly little favour shown in the selection; there is a great wish on the part of the bank directors for the time being to provide, to the best of their ability, for the future good government of the bank. very few selections in the world are made with nearly equal purity. there is a sincere desire to do the best for the bank, and to appoint a well-conducted young man who has begun to attend to business, and who seems likely to be fairly sensible and fairly efficient twenty years later. the age is a primary matter. the offices of governor and deputy-governor are given in rotation. the deputy-governor always succeeds the governor, and usually the oldest director who has not been in office becomes deputy-governor. sometimes, from personal reasons, such as ill-health or special temporary occupation, the time at which a director becomes deputy-governor may be a little deferred, and, in some few cases, merchants in the greatest business have been permitted to decline entirely. but for all general purposes, the rule may be taken as absolute. save in rare cases, a director must serve his time as governor and deputy-governor nearly when his turn comes, and he will not be asked to serve much before his turn. it is usually about twenty years from the time of a man's first election that he arrives, as it is called, at the chair. and as the offices of governor and deputy-governor are very important, a man who fills them should be still in the vigour of life. accordingly, bank directors, when first chosen by the board, are always young men. at first this has rather a singular effect; a stranger hardly knows what to make of it. many years since, i remember seeing a very fresh and nice-looking young gentleman, and being struck with astonishment at being told that he was a director of the bank of england. i had always imagined such directors to be men of tried sagacity and long experience, and i was amazed that a cheerful young man should be one of them. i believe i thought it was a little dangerous. i thought such young men could not manage the bank well. i feared they had the power to do mischief. further inquiry, however, soon convinced me that they had not the power. naturally, young men have not much influence at a board where there are many older members. and in the bank of england there is a special provision for depriving them of it if they get it. some of the directors, as i have said, retire annually, but by courtesy it is always the young ones. those who have passed the chair--that is, who have served the office of governor--always remain. the young part of the board is the fluctuating part, and the old part is the permanent part; and therefore it is not surprising that the young part has little influence. the bank directors may be blamed for many things, but they cannot be blamed for the changeableness and excitability of a neocracy. indeed, still better to prevent it, the elder members of the board--that is, those who have passed the chair--form a standing committee of indefinite powers, which is called the committee of treasury. i say 'indefinite powers,' for i am not aware that any precise description has ever been given of them, and i doubt if they can be precisely described. they are sometimes said to exercise a particular control over the relations and negotiations between the bank and the government. but i confess that i believe that this varies very much with the character of the governor for the time being. a strong governor does much mainly upon his own responsibility, and a weak governor does little. still the influence of the committee of treasury is always considerable, though not always the same. they form a a cabinet of mature, declining, and old men, just close to the executive; and for good or evil such a cabinet must have much power. by old usage, the directors of the bank of england cannot be themselves by trade bankers. this is a relic of old times. every bank was supposed to be necessarily, more or less, in opposition to every other bank--banks in the same place to be especially in opposition. in consequence, in london, no banker has a chance of being a bank director, or would ever think of attempting to be one. i am here speaking of bankers in the english sense, and in the sense that would surprise a foreigner. one of the rothschilds is on the bank direction, and a foreigner would be apt to think that they were bankers if any one was. but this only illustrates the essential difference between our english notions of banking and the continental. ours have attained a much fuller development than theirs. messrs. rothschild are immense capitalists, having, doubtless, much borrowed money in their hands. but they do not take l. payable on demand, and pay it back in cheques of l. each, and that is our english banking. the borrowed money which they have is in large sums, borrowed for terms more or less long. english bankers deal with an aggregate of small sums, all of which are repayable on short notice, or on demand. and the way the two employ their money is different also. a foreigner thinks 'an exchange business'--that is, the buying and selling bills on foreign countries--a main part of banking. as i have explained, remittance is one of the subsidiary conveniences which early banks subserve before deposit banking begins. but the mass of english country bankers only give bills on places in england or on london, and in london the principal remittance business has escaped out of the hands of the bankers. most of them would not know how to carry through a great 'exchange operation,' or to 'bring home the returns.' they would as soon think of turning silk merchants. the exchange trade is carried on by a small and special body of foreign bill-brokers, of whom messrs. rothschild are the greatest. one of that firm may, therefore, well be on the bank direction, notwithstanding the rule forbidding bankers to be there, for he and his family are not english bankers, either by the terms on which they borrow money, or the mode in which they employ it. but as to bankers in the english sense of the word, the rule is rigid and absolute. not only no private banker is a director of the bank of england, but no director of any joint stock bank would be allowed to become such. the two situations would be taken to be incompatible. the mass of the bank directors are merchants of experience, employing a considerable capital in trades in which they have been brought up, and with which they are well acquainted. many of them have information as to the present course of trade, and as to the character and wealth of merchants, which is most valuable, or rather is all but invaluable, to the bank. many of them, too, are quiet, serious men, who, by habit and nature, watch with some kind of care every kind of business in which they are engaged, and give an anxious opinion on it. most of them have a good deal of leisure, for the life of a man of business who employs only his own capital, and employs it nearly always in the same way, is by no means fully employed. hardly any capital is enough to employ the principal partner's time, and if such a man is very busy, it is a sign of something wrong. either he is working at detail, which subordinates would do better, and which he had better leave alone, or he is engaged in too many speculations, is incurring more liabilities than his capital will bear, and so may be ruined. in consequence, every commercial city abounds in men who have great business ability and experience, who are not fully occupied, who wish to be occupied, and who are very glad to become directors of public companies in order to be occupied. the direction of the bank of england has, for many generations, been composed of such men. such a government for a joint stock company is very good if its essential nature be attended to, and very bad if that nature be not attended to. that government is composed of men with a high average of general good sense, with an excellent knowledge of business in general, but without any special knowledge of the particular business in which they are engaged. ordinarily, in joint stock banks and companies this deficiency is cured by the selection of a manager of the company, who has been specially trained to that particular trade, and who engages to devote all his experience and all his ability to the affairs of the company. the directors, and often a select committee of them more especially, consult with the manager, and after hearing what he has to say, decide on the affairs of the company. there is in all ordinary joint stock companies a fixed executive specially skilled, and a somewhat varying council not specially skilled. the fixed manager ensures continuity and experience in the management, and a good board of directors ensures general wisdom. but in the bank of england there is no fixed executive. the governor and deputy-governor, who form that executive, change every two years. i believe, indeed, that such was not the original intention of the founders. in the old days of few and great privileged companies, the chairman, though periodically elected, was practically permanent so long as his policy was popular. he was the head of the ministry, and ordinarily did not change unless the opposition came in. but this idea has no present relation to the constitution of the bank of england. at present, the governor and deputy-governor almost always change at the end of two years; the case of any longer occupation of the chair is so very rare, that it need not be taken account of. and the governor and deputy-governor of the bank cannot well be shadows. they are expected to be constantly present; to see all applicants for advances out of the ordinary routine; to carry on the almost continuous correspondence between the bank and its largest customer--the government; to bring all necessary matters before the board of directors or the committee of treasury, in a word, to do very much of what falls to the lot of the manager in most companies. under this shifting chief executive, there are indeed very valuable heads of departments. the head of the discount department is especially required to be a man of ability and experience. but these officers are essentially subordinate; no one of them is like the general manager of an ordinary bank--the head of all action. the perpetually present executive--the governor and deputy-governor--make it impossible that any subordinate should have that position. a really able and active-minded governor, being required to sit all day in the bank, in fact does, and can hardly help doing, its principal business. in theory, nothing can be worse than this government for a bank a shifting executive; a board of directors chosen too young for it to be known whether they are able; a committee of management, in which seniority is the necessary qualification, and old age the common result; and no trained bankers anywhere. even if the bank of england were an ordinary bank, such a constitution would be insufficient; but its inadequacy is greater, and the consequences of that inadequacy far worse, because of its greater functions. the bank of england has to keep the sole banking reserve of the country; has to keep it through all changes of the money market, and all turns of the exchanges; has to decide on the instant in a panic what sort of advances should be made, to what amounts, and for what dates; and yet it has a constitution plainly defective. so far the government of the bank of england being better than that of any other bank--as it ought to be, considering that its functions are much harder and graver--any one would be laughed at who proposed it as a model for the government of a new bank; and that government, if it were so proposed, would on all hands be called old-fashioned, and curious. as was natural, the effects--good and evil--of its constitution are to be seen in every part of the bank's history. on one vital point the bank's management has been excellent. it has done perhaps less 'bad business,' certainly less very bad business, than any bank of the same size and the same age. in all its history i do not know that its name has ever been connected with a single large and discreditable bad debt. there has never been a suspicion that it was 'worked' for the benefit of any one man, or any combination of men. the great respectability of the directors, and the steady attention many of them have always given the business of the bank, have kept it entirely free from anything dishonorable and discreditable. steady merchants collected in council are an admirable judge of bills and securities. they always know the questionable standing of dangerous persons; they are quick to note the smallest signs of corrupt transactions; and no sophistry will persuade the best of them out of their good instincts. you could not have made the directors of the bank of england do the sort of business which 'overends' at last did, except by a moral miracle--except by changing their nature. and the fatal career of the bank of the united states would, under their management, have been equally impossible. of the ultimate solvency of the bank of england, or of the eventual safety of its vast capital, even at the worst periods of its history, there has not been the least doubt. but nevertheless, as we have seen, the policy of the bank has frequently been deplorable, and at such times the defects of its government have aggravated if not caused its calamities. in truth the executive of the bank of england is now much such as the executive of a public department of the foreign office or the home office would be in which there was no responsible permanent head. in these departments of government, the actual chief changes nearly, though not quite, as often as the governor of the bank of england. the parliamentary under-secretary--the deputy-governor, so to speak, of that office--changes nearly as often. and if the administration solely, or in its details, depended on these two, it would stop. new men could not carry it on with vigour and efficiency; indeed they could not carry it on at all. but, in fact, they are assisted by a permanent under-secretary, who manages all the routine business, who is the depository of the secrets of the office, who embodies its traditions, who is the hyphen between changing administrations. in consequence of this assistance, the continuous business of the department is, for the most part, managed sufficiently well, notwithstanding frequent changes in the heads of administration. and it is only by such assistance that such business could be so managed. the present administration of the bank is an attempt to manage a great, a growing, and a permanently continuous business without an adequate permanent element, and a competent connecting link. in answer, it may be said that the duties which press on the governor and deputy-governor of the bank are not so great or so urgent as those which press upon the heads of official departments. and perhaps, in point of mere labour, the governor of the bank has the advantage. banking never ought to be an exceedingly laborious trade. there must be a great want of system and a great deficiency in skilled assistance if extreme labour is thrown upon the chief. but in importance, the functions of the head of the bank rank as high as those of any department. the cash reserve of the country is as precious a deposit as any set of men can have the care of. and the difficulty of dealing with a panic (as the administration of the bank is forced to deal with it) is perhaps a more formidable instant difficulty than presses upon any single minister. at any rate, it comes more suddenly, and must be dealt with more immediately, than most comparable difficulties; and the judgment, the nerve, and the vigour needful to deal with it are plainly rare and great. the natural remedy would be to appoint a permanent governor of the bank. nor, as i have said, can there be much doubt that such was the intention of its founders. all the old companies which have their beginning in the seventeenth century had the same constitution, and those of them which have lingered down to our time retain it. the hudson's bay company, the south sea company, the east india company, were all founded with a sort of sovereign executive, intended to be permanent, and intended to be efficient. this is, indeed, the most natural mode of forming a company in the minds of those to whom companies are new. such persons will have always seen business transacted a good deal despotically; they will have learnt the value of prompt decision and of consistent policy; they will have often seen that business is best managed when those who are conducting it could scarcely justify the course they are pursuing by distinct argument which others could understand. all 'city' people make their money by investments, for which there are often good argumentative reasons; but they would hardly ever be able, if required before a parliamentary committee, to state those reasons. they have become used to act on them without distinctly analysing them, and, in a monarchical way, with continued success only as a test of their goodness. naturally such persons, when proceeding to form a company, make it upon the model of that which they have been used to see successful. they provide for the executive first and above all things. how much this was in the minds of the founders of the bank of england may be judged of by the name which they gave it. its corporate name is the 'governor and company of the bank of england.' so important did the founders think the executive that they mentioned it distinctly, and mentioned it first. and not only is this constitution of a company the most natural in the early days when companies were new, it is also that which experience has shown to be the most efficient now that companies have long been tried. great railway companies are managed upon no other. scarcely any instance of great success in a railway can be mentioned in which the chairman has not been an active and judicious man of business, constantly attending to the affairs of the company. a thousand instances of railway disaster can be easily found in which the chairman was only a nominal head--a nobleman, or something of that sort--chosen for show. 'railway chairmanship' has become a profession, so much is efficiency valued in it, and so indispensable has ability been found to be. the plan of appointing a permanent 'chairman' at the bank of england is strongly supported by much modern experience. nevertheless, i hesitate as to its expediency; at any rate, there are other plans which, for several reasons, should, i think, first be tried in preference. first. this plan would be exceedingly unpopular. a permanent governor of the bank of england would be one of the greatest men in england. he would be a little 'monarch' in the city; he would be far greater than the 'lord mayor.' he would be the personal embodiment of the bank of england; he would be constantly clothed with an almost indefinite prestige. everybody in business would bow down before him and try to stand well with him, for he might in a panic be able to save almost anyone he liked, and to ruin almost anyone he liked. a day might come when his favour might mean prosperity, and his distrust might mean ruin. a position with so much real power and so much apparent dignity would be intensely coveted. practical men would be apt to say that it was better than the prime ministership, for it would last much longer, and would have a greater jurisdiction over that which practical men would most value, over money. at all events, such a governor, if he understood his business, might make the fortunes of fifty men where the prime minister can make that of one. scarcely anything could be more unpopular in the city than the appointment of a little king to reign over them. secondly. i do not believe that we should always get the best man for the post; often i fear that we should not even get a tolerable man. there are many cases in which the offer of too high a pay would prevent our obtaining the man we wish for, and this is one of them. a very high pay of prestige is almost always very dangerous. it causes the post to be desired by vain men, by lazy men, by men of rank; and when that post is one of real and technical business, and when, therefore, it requires much previous training, much continuous labour, and much patient and quick judgment, all such men are dangerous. but they are sure to covet all posts of splendid dignity, and can only be kept out of them with the greatest difficulty. probably, in every cabinet there are still some members (in the days of the old close boroughs there were many) whose posts have come to them not from personal ability or inherent merit, but from their rank, their wealth, or even their imposing exterior. the highest political offices are, indeed, kept clear of such people, for in them serious and important duties must constantly be performed in the face of the world. a prime minister, or a chancellor of the exchequer, or a secretary of state must explain his policy and defend his actions in parliament, and the discriminating tact of a critical assembly--abounding in experience, and guided by tradition--will soon discover what he is. but the governor of the bank would only perform quiet functions, which look like routine, though they are not, in which there is no immediate risk of success or failure; which years hence may indeed issue in a crop of bad debts, but which any grave persons may make at the time to look fair and plausible. a large bank is exactly the place where a vain and shallow person in authority, if he be a man of gravity and method, as such men often are, may do infinite evil in no long time, and before he is detected. if he is lucky enough to begin at a time of expansion in trade, he is nearly sure not to be found out till the time of contraction has arrived, and then very large figures will be required to reckon the evil he has done. and thirdly, i fear that the possession of such patronage would ruin any set of persons in whose gift it was. the election of the chairman must be placed either in the court of proprietors or that of the directors. if the proprietors choose, there will be something like the evils of an american presidential election. bank stock will be bought in order to confer the qualification of voting at the election of the 'chief of the city.' the chairman, when elected, may well find that his most active supporters are large borrowers of the bank, and he may well be puzzled to decide between his duty to the bank and his gratitude to those who chose him. probably, if he be a cautious man of average ability, he will combine both evils; he will not lend so much money as he is asked for, and so will offend his own supporters; but will lend some which will be lost, and so the profits of the bank will be reduced. a large body of bank proprietors would make but a bad elective body for an office of great prestige; they would not commonly choose a good person, and the person they did choose would be bound by promises that would make him less good. the court of directors would choose better; a small body of men of business would not easily be persuaded to choose an extremely unfit man. but they would not often choose an extremely good man. the really best man would probably not be so rich as the majority of the directors, nor of so much standing, and not unnaturally they would much dislike to elevate to the headship of the city, one who was much less in the estimation of the city than themselves. and they would be canvassed in every way and on every side to appoint a man of mercantile dignity or mercantile influence. many people of the greatest prestige and rank in the city would covet so great a dignity; if not for themselves, at least for some friend, or some relative, and so the directors would be set upon from every side. an election so liable to be disturbed by powerful vitiating causes would rarely end in a good choice. the best candidate would almost never be chosen; often, i fear, one would be chosen altogether unfit for a post so important. and the excitement of so keen an election would altogether disturb the quiet of the bank. the good and efficient working of a board of bank directors depends on its internal harmony, and that harmony would be broken for ever by the excitement, the sayings, and the acts of a great election. the board of directors would almost certainly be demoralised by having to choose a sovereign, and there is no certainty, nor any great likelihood, indeed, that they would choose a good one. in france the difficulty of finding a good body to choose the governor of the bank has been met characteristically. the bank of france keeps the money of the state, and the state appoints its governor. the french have generally a logical reason to give for all they do, though perhaps the results of their actions are not always so good as the reasons for them. the governor of the bank of france has not always, i am told, been a very competent person; the sub-governor, whom the state also appoints, is, as we might expect, usually better. but for our english purposes it would be useless to inquire minutely into this. no english statesman would consent to be responsible for the choice of the governor of the bank of england. after every panic, the opposition would say in parliament that the calamity had been 'grievously aggravated,' if not wholly caused, by the 'gross misconduct' of the governor appointed by the ministry. or, possibly, offices may have changed occupants and the ministry in power at the panic would be the opponents of the ministry which at a former time appointed the governor. in that case they would be apt to feel, and to intimate, a 'grave regret' at the course which the nominee of their adversaries had 'thought it desirable to pursue.' they would not much mind hurting his feelings, and if he resigned they would have themselves a valuable piece of patronage to confer on one of their own friends. no result could be worse than that the conduct of the bank and the management should be made a matter of party politics, and men of all parties would agree in this, even if they agreed in almost nothing else. i am therefore afraid that we must abandon the plan of improving the government of the bank of england by the appointment of a permanent governor, because we should not be sure of choosing a good governor, and should indeed run a great risk, for the most part, of choosing a bad one. i think, however, that much of the advantage, with little of the risk, might be secured by a humbler scheme. in english political offices, as was observed before, the evil of a changing head is made possible by the permanence of a dignified subordinate. though the parliamentary secretary of state and the parliamentary under-secretary go in and out with each administration, another under-secretary remains through all such changes, and is on that account called 'permanent.' now this system seems to me in its principle perfectly applicable to the administration of the bank of england. for the reasons which have just been given, a permanent ruler of the bank of england cannot be appointed; for other reasons, which were just before given, some most influential permanent functionary is essential in the proper conduct of the business of the bank; and, mutatis mutandis, these are the very difficulties, and the very advantages which have led us to frame our principal offices of state in the present fashion. such a deputy-governor would not be at all a 'king' in the city. there would be no mischievous prestige about the office; there would be no attraction in it for a vain man; and there would be nothing to make it an object of a violent canvass or of unscrupulous electioneering. the office would be essentially subordinate in its character, just like the permanent secretary in a political office. the pay should be high, for good ability is wanted--but no pay would attract the most dangerous class of people. the very influential, but not very wise, city dignitary who would be so very dangerous is usually very opulent; he would hardly have such influence he were not opulent: what he wants is not money, but 'position.' a governorship of the bank of england he would take almost without salary; perhaps he would even pay to get it: but a minor office of essential subordination would not attract him at all. we may augment the pay enough to get a good man, without fearing that by such pay we may tempt--as by social privilege we should tempt--exactly the sort of man we do not want. undoubtedly such a permanent official should be a trained banker. there is a cardinal difference between banking and other kinds of commerce; you can afford to run much less risk in banking than in commerce, and you must take much greater precautions. in common business, the trader can add to the cost price of the goods he sells a large mercantile profit, say to per cent; but the banker has to be content with the interest of money, which in england is not so much as per cent upon the average. the business of a banker therefore cannot bear so many bad debts as that of a merchant, and he must be much more cautious to whom he gives credit. real money is a commodity much more coveted than common goods: for one deceit which is attempted on a manufacturer or a merchant, twenty or more are attempted on a banker. and besides, a banker, dealing with the money of others, and money payable on demand, must be always, as it were, looking behind him and seeing that he has reserve enough in store if payment should be asked for, which a merchant dealing mostly with his own capital need not think of. adventure is the life of commerce, but caution, i had almost said timidity, is the life of banking; and i cannot imagine that the long series of great errors made by the bank of england in the management of its reserve till after , would have been possible if the merchants in the bank court had not erroneously taken the same view of the bank's business that they must properly take of their own mercantile business. the bank directors have almost always been too cheerful as to the bank's business, and too little disposed to take alarm. what we want to introduce into the bank court is a wise apprehensiveness, and this every trained banker is taught by the habits of his trade, and the atmosphere of his life. the permanent governor ought to give his whole time to the business of the bank. he ought to be forbidden to engage in any other concern. all the present directors, including the governor and deputy-governor, are engaged in their own business, and it is very possible, indeed it must perpetually have happened, that their own business as merchants most occupied the minds of most of them just when it was most important that the business of the bank should occupy them. it is at a panic and just before a panic that the business of the bank is most exacting and most engrossing. but just at that time the business of most merchants must be unusually occupying and may be exceedingly critical. by the present constitution of the bank, the attention of its sole rulers is most apt to be diverted from the bank's affairs just when those affairs require that attention the most. and the only remedy is the appointment of a permanent and influential man, who will have no business save that of the bank, and who therefore presumably will attend most to it at the critical instant when attention is most required. his mind, at any rate, will in a panic be free from pecuniary anxiety, whereas many, if not all, of the present directors must be incessantly thinking of their own affairs and unable to banish them from their minds. the permanent deputy-governor must be a director and a man of fair position. he must not have to say 'sir' to the governor. there is no fair argument between an inferior who has to exhibit respect and a superior who has to receive respect. the superior can always, and does mostly, refute the bad arguments of his inferior; but the inferior rarely ventures to try to refute the bad arguments of his superior. and he still more rarely states his case effectually; he pauses, hesitates, does not use the best word or the most apt illustration, perhaps he uses a faulty illustration or a wrong word, and so fails because the superior immediately exposes him. important business can only be sufficiently discussed by persons who can say very much what they like very much as they like to one another. the thought of the speaker should come out as it was in his mind, and not be hidden in respectful expressions or enfeebled by affected doubt. what is wanted at the bank is not a new clerk to the directors--they have excellent clerks of great experience now--but a permanent equal to the directors, who shall be able to discuss on equal terms with them the business of the bank, and have this advantage over them in discussion, that he has no other business than that of the bank to think of. the formal duties of such a permanent officer could only be defined by some one conversant with the business of the bank, and could scarcely be intelligibly discussed before the public. nor are the precise duties of the least importance. such an officer, if sound, able, and industrious, would soon rule the affairs of the bank. he would be acquainted better than anyone else, both with the traditions of the past and with the facts of the present; he would have a great experience; he would have seen many anxious times; he would always be on the watch for their recurrence. and he would have a peculiar power of guidance at such moments from the nature of the men with whom he has most to deal. most governors of the bank of england are cautious merchants, not profoundly skilled in banking, but most anxious that their period of office should be prosperous and that they should themselves escape censure. if a 'safe' course is pressed upon them they are likely to take that course. now it would almost always be 'safe' to follow the advice of the great standing 'authority'; it would always be most 'unsafe' not to follow it. if the changing governor act on the advice of the permanent deputy-governor, most of the blame in case of mischance would fall on the latter; it would be said that a shifting officer like the governor might very likely not know what should be done, but that the permanent official was put there to know it and paid to know it. but if, on the other hand, the changing governor should disregard the advice of his permanent colleague, and the consequence should be bad, he would be blamed exceedingly. it would be said that, 'being without experience, he had taken upon him to overrule men who had much experience; that when the constitution of the bank had provided them with skilled counsel, he had taken on himself to act of his own head, and to disregard that counsel;' and so on ad infinitum. and there could be no sort of conversation more injurious to a man in the city; the world there would say, rightly or wrongly, 'we must never be too severe on errors of judgment; we are all making them every day; if responsible persons do their best we can expect no more. but this case is different: the governor acted on a wrong system; he took upon himself an unnecessary responsibility:' and so a governor who incurred disaster by disregarding his skilled counsellor would be thought a fool in the city for ever. in consequence, the one skilled counsellor would in fact rule the bank. i believe that the appointment of the new permanent and skilled authority at the bank is the greatest reform which can be made there, and that which is most wanted. i believe that such a person would give to the decision of the bank that foresight, that quickness, and that consistency in which those decisions are undeniably now deficient. as far as i can judge, this change in the constitution of the bank is by far the most necessary, and is perhaps more important even than all other changes. but, nevertheless, we should reform the other points which we have seen to be defective. first, the london bankers should not be altogether excluded from the court of directors. the old idea, as i have explained, was that the london bankers were the competitors of the bank of england, and would hurt it if they could. but now the london bankers have another relation to the bank which did not then exist, and was not then imagined. among private people they are the principal depositors in the bank; they are therefore particularly interested in its stability; they are especially interested in the maintenance of a good banking reserve, for their own credit and the safety of their large deposits depend on it. and they can bring to the court of directors an experience of banking itself, got outside the bank of england, which none of the present directors possess, for they have learned all they know of banking at the bank itself. there was also an old notion that the secrets of the bank would be divulged if they were imparted to bankers. but probably bankers are better trained to silence and secrecy than most people. and there is only a thin partition now between the bankers and the secrets of the bank. only lately a firm failed of which one partner was a director of the london and westminster bank, and another a director of the bank of england. who can define or class the confidential communications of such persons under such circumstances? as i observed before, the line drawn at present against bankers is very technical and exclusively english. according to continental ideas, messrs. rothschild are bankers, if any one is a banker. but the house of rothschild is represented on the bank direction. and it is most desirable that it should be represented, for members of that firm can give if they choose confidential information of great value to the bank. but, nevertheless, the objection which is urged against english bankers is at least equally applicable to these foreign bankers. they have, or may have, at certain periods an interest opposite to the policy of the bank. as the greatest exchange dealers, they may wish to export gold just when the bank of england is raising its rate of interest to prevent anyone from exporting gold. the vote of a great exchange dealer might be objected to for plausible reasons of contrary interest, if any such reasons were worth regarding. but in fact the particular interest of single directors is not to be regarded; almost all directors who bring special information labour under a suspicion of interest; they can only have acquired that information in present business, and such business may very possibly be affected for good or evil by the policy of the bank. but you must not on this account seal up the bank hermetically against living information; you must make a fair body of directors upon the whole, and trust that the bias of some individual interests will disappear and be lost in the whole. and if this is to be the guiding principle, it is not consistent to exclude english bankers from the court. objection is often also taken to the constitution of the committee of treasury. that body is composed of the governor and deputy-governor and all the directors who have held those offices; but as those offices in the main pass in rotation, this mode of election very much comes to an election by seniority, and there are obvious objections to giving, not only a preponderance to age, but a monopoly to age. in some cases, indeed, this monopoly i believe has already been infringed. when directors have on account of the magnitude of their transactions, and the consequent engrossing nature of their business, declined to fill the chair, in some cases they have been asked to be members of the committee of treasury notwithstanding. and it would certainly upon principle seem wiser to choose a committee which for some purposes approximates to a committee of management by competence rather than by seniority. an objection is also taken to the large number of bank directors. there are twenty-four directors, a governor and a deputy-governor, making a total court of twenty-six persons, which is obviously too large for the real discussion of any difficult business. and the case is worse because the court only meets once a week, and only sits a very short time. it has been said, with exaggeration, but not without a basis of truth, that if the bank directors were to sit for four hours, there would be 'a panic solely from that.' 'the court,' says mr. tooke, 'meets at half-past eleven or twelve; and, if the sitting be prolonged beyond half-past one, the stock exchange and the money market become excited, under the idea that a change of importance is under discussion; and persons congregate about the doors of the bank parlour to obtain the earliest intimation of the decision.' and he proceeds to conjecture that the knowledge of the impatience without must cause haste, if not impatience, within. that the decisions of such a court should be of incalculable importance is plainly very strange. there should be no delicacy as to altering the constitution of the bank of england. the existing constitution was framed in times that have passed away, and was intended to be used for purposes very different from the present. the founders may have considered that it would lend money to the government, that it would keep the money of the government, that it would issue notes payable to bearer, but that it would keep the 'banking reserve' of a great nation no one in the seventeenth century imagined. and when the use to which we are putting an old thing is a new use, in common sense we should think whether the old thing is quite fit for the use to which we are setting it. 'putting new wine into old bottles' is safe only when you watch the condition of the bottle, and adapt its structure most carefully. chapter ix. the joint stock banks. the joint stock banks of this country are a most remarkable success. generally speaking the career of joint stock companies in this country has been chequered. adam smith, many years since, threw out many pregnant hints on the difficulty of such undertakings--hints which even after so many years will well repay perusal. but joint stock banking has been an exception to this rule. four years ago i threw together the facts on the subject and the reasons for them; and i venture to quote the article, because subsequent experience suggests, i think, little to be added to it. 'the main classes of joint stock companies which have answered are three:-- st. those in which the capital is used not to work the business but to guarantee the business. thus a banker's business--his proper business--does not begin while he is using his own money: it commences when he begins to use the capital of others. an insurance office in the long run needs no capital; the premiums which are received ought to exceed the claims which accrue. in both cases, the capital is wanted to assure the public and to induce it to trust the concern. ndly. those companies have answered which have an exclusive privilege which they have used with judgment, or which possibly was so very profitable as to enable them to thrive with little judgment. rdly. those which have undertaken a business both large and simple--employing more money than most individuals or private firms have at command, and yet such that, in adam smith's words, "the operations are capable of being reduced to a routine or such an uniformity of method as admits of no variation." 'as a rule, the most profitable of these companies are banks. indeed, all the favouring conditions just mentioned concur in many banks. an old-established bank has a "prestige," which amounts to a "privileged opportunity"; though no exclusive right is given to it by law, a peculiar power is given to it by opinion. the business of banking ought to be simple; if it is hard it is wrong. the only securities which a banker, using money that he may be asked at short notice to repay, ought to touch, are those which are easily saleable and easily intelligible. if there is a difficulty or a doubt, the security should be declined. no business can of course be quite reduced to fixed rules. there must be occasional cases which no pre-conceived theory can define. but banking comes as near to fixed rules certainly as any existing business, perhaps as any possible business. the business of an old-established bank has the full advantage of being a simple business, and in part the advantage of being a monopoly business. competition with it is only open in the sense in which competition with "the london tavern" is open; anyone that has to do with either will pay dear for it. 'but the main source of the profitableness of established banking is the smallness of the requisite capital. being only wanted as a "moral influence," it need not be more than is necessary to secure that influence. although, therefore, a banker deals only with the most sure securities, and with those which yield the least interest, he can nevertheless gain and divide a very large profit upon his own capital, because the money in his hands is so much larger than that capital. 'experience, as shown by plain figures, confirms these conclusions. we print at the end of this article the respective profits of banks in england, and scotland, and ireland, being all in those countries of which we have sufficient information--the bank of england excepted. there are no doubt others, but they are not quoted even on local stock exchange lists, and in most cases publish no reports. the result of these banks, as regards the dividends they pay, is-- no. of companies capital l above per cent , , between and per cent , , " and per cent , , " and per cent , , under per cent , , ----------------- , , that is to say, above per cent of the capital employed in these banks pays over per cent, and / per cent of the capital pays more than per cent. so striking a result is not to be shown in any other joint stock trade. 'the period to which these accounts refer was certainly not a particularly profitable one--on the contrary, it has been specially unprofitable. the rate of interest has been very low, and the amount of good security in the market small. many banks--to some extent most banks--probably had in their books painful reminiscences of . the fever of excitement which passed over the nation was strongest in the classes to whom banks lent most, and consequently the losses of even the most careful banks (save of those in rural and sheltered situations) were probably greater than usual. but even tried by this very unfavourable test banking is a trade profitable far beyond the average of trades. 'there is no attempt in these banks on the whole and as a rule to divide too much--on the contrary, they have accumulated about , , l., or nearly / rd of their capital, principally out of undivided profits. the directors of some of them have been anxious to put away as much as possible and to divide as little as possible. 'the reason is plain; out of the banks which pay more than per cent, all but one were old-established banks, and all those paying between and per cent were old banks too. the "privileged opportunity" of which we spoke is singularly conspicuous in such figures; it enables banks to pay much, which without it would not have paid much. the amount of the profit is clearly proportional to the value of the "privileged opportunity." all the banks which pay above per cent, save one, are banks more than years old; all those which pay between and are so too. a new bank could not make these profits, or even by its competition much reduce these profits; in attempting to do so, it would simply ruin itself. not possessing the accumulated credit of years, it would have to wind up before it attained that credit. 'the value of the opportunity too is proportioned to what has to be paid for it. some old banks have to pay interest for all their money; some have much for which they pay nothing. those who give much to their customers have of course less left for their shareholders. thus scotland, where there is always a daily interest, has no bank in the lists paying over per cent. the profits of scotch banks run thus: capital dividend l bank of scotland , , british linen company , , caledonian , clydesdale , commercial bank of scotland , , national bank of scotland , , north of scotland , union bank of scotland , , city of glasgow , royal bank , , --------- , , good profits enough, but not at all like the profits of the london and westminster, or the other most lucrative banks of the south. 'the bank of england, it is true, does not seem to pay so much as other english banks in this way of reckoning. it makes an immense profit, but then its capital is immense too. in fact, the bank of england suffers under two difficulties. being much older than the other joint stock banks, it belongs to a less profitable era. when it was founded, banks looked rather to the profit on their own capital, and to the gains of note issue than to the use of deposits. the first relations with the state were more like those of a finance company than of a bank, as we now think of banking. if the bank had not made loans to the government, which we should now think dubious, the bank would not have existed, for the government would never have permitted it. not only is the capital of the bank of england relatively greater, but the means of making profit in the bank of england are relatively less also. by custom and understanding the bank of england keep a much greater reserve in unprofitable cash than other banks; if they do not keep it, either our whole system must be changed or we should break up in utter bankruptcy. the earning faculty of the bank of england is in proportion less than that of other banks, and also the sum on which it has to pay dividend is altogether greater than theirs. 'it is interesting to compare the facts of joint stock banking with the fears of it which were felt. in , lord overstone observed: "i think that joint stock banks are deficient in everything requisite for the conduct of the banking business except extended responsibility; the banking business requires peculiarly persons attentive to all its details, constantly, daily, and hourly watchful of every transaction, much more than mercantile or trading business. it also requires immediate prompt decisions upon circumstances when they arise, in many cases a decision that does not admit of delay for consultation; it also requires a discretion to be exercised with reference to the special circumstances of each case. joint stock banks being of course obliged to act through agents and not by a principal, and therefore under the restraint of general rules, cannot be guided by so nice a reference to degrees of difference in the character of responsibility of parties; nor can they undertake to regulate the assistance to be granted to concerns under temporary embarrassment by so accurate a reference to the circumstances, favourable or unfavourable, of each case." 'but in this very respect, joint stock banks have probably improved the business of banking. the old private banks in former times used to lend much to private individuals; the banker, as lord overstone on another occasion explained, could have no security, but he formed his judgment of the discretion, the sense, and the solvency of those to whom he lent. and when london was by comparison a small city, and when by comparison everyone stuck to his proper business, this practice might have been safe. but now that london is enormous and that no one can watch anyone, such a trade would be disastrous; at present, it would hardly be safe in a country town. the joint stock banks were quite unfit for the business lord overstone meant, but then that business is quite unfit for the present time. this success of joint stock banking is very contrary to the general expectation at its origin. not only private bankers, such as lord overstone then was, but a great number of thinking persons feared that the joint stock banks would fast ruin themselves, and then cause a collapse and panic in the country. the whole of english commercial literature between and is filled with that idea. nor did it cease in . so late as , sir r. peel thought the foundation of joint stock banks so dangerous that he subjected it to grave and exceptional difficulty. under the act of , which he proposed, no such companies could be founded except with shares of l. with l.; paid up on each; which effectually checked the progress of such banks, for few new ones were established for many years, or till that act had been repealed. but in this, as in many other cases, perhaps sir r. peel will be found to have been clear-sighted rather than far-sighted. he was afraid of certain joint stock banks which he saw rising around him; but the effect of his legislation was to give to these very banks, if not a monopoly, at any rate an exemption from new rivals. no one now founds or can found a new private bank, and sir r. peel by law prevented new joint stock banks from being established. though he was exceedingly distrustful of the joint stock banks founded between and , yet in fact he was their especial patron, and he more than any other man encouraged and protected them. but in this wonderful success there are two dubious points, two considerations of different kinds, which forbid us to say that in other countries, even in countries with the capacity of co-operation, joint stock banks would succeed as well as we have seen that they succeed in england. st. these great banks have not had to keep so large a reserve against their liabilities as it was natural that they should, being of first-rate magnitude, keep. they were at first, of course, very small in comparison with what they are now. they found a number of private bankers grouped round the bank of england, and they added themselves to the group. not only did they keep their reserve from the beginning at the bank of england, but they did not keep so much reserve as they would have kept if there had been no bank of england. for a long time this was hardly noticed. for many years questions of the 'currency,' particularly questions as to the act of , engrossed the attention of all who were occupied with these subjects. even those who were most anxious to speak evil of joint stock banks, did not mention this particular evil. the first time, as far as i know, that it was commented on in any important document, was in an official letter written in by mr. weguelin, who was then governor of the bank, to sir george lewis, who was then chancellor of the exchequer. the governor and the directors of the bank of england had been asked by sir george lewis severally to give their opinions on the act of , and all their replies were published. in his, mr. weguelin says: 'if the amount of the reserve kept by the bank of england be contrasted with the reserve kept by the joint stock banks, a new and hitherto little considered source of danger to the credit of the country will present itself. the joint stock banks of london, judging by their published accounts, have deposits to the amount of , , l. their capital is not more than , , l., and they have on an average , , l., invested in one way or another, leaving only , , l. as a reserve against all this mass of liabilities.' but these remarkable words were little observed in the discussions of that time. the air was obscured by other matters. but in this work i have said so much on the subject that i need say little now. the joint stock banks now keep a main part of their reserve on deposit with the bill-brokers, or in good and convertible interest-bearing securities. from these they obtain a large income, and that income swells their profits. if they had to keep a much larger part than now of that reserve in barren cash, their dividends would be reduced, and their present success would become less conspicuous. the second misgiving, which many calm observers more and more feel as to our largest joint stock banks, fastens itself on their government. is that government sufficient to lend well and keep safe so many millions? they are governed, as every one knows, by a board of directors, assisted by a general manager, and there are in london unrivalled materials for composing good boards of directors. there are very many men of good means, of great sagacity and great experience in business, who are obliged to be in the city every day, and to remain there during the day, but who have very much time on their hands. a merchant employing solely or principally his own capital has often a great deal of leisure. he is obliged to be on the market, and to hear what is doing. every day he has some business to transact, but his transactions can be but few. his capital can bear only a limited number of purchases; if he bought as much as would fill his time from day to day he would soon be ruined, for he could not pay for it. accordingly, many excellent men of business are quite ready to become members of boards of directors, and to attend to the business of companies, a good deal for the employment's sake. to have an interesting occupation which brings dignity and power with it pleases them very much. as the aggregation of commerce in great cities grows, the number of such men augments. a council of grave, careful, and experienced men can, without difficulty, be collected for a great bank in london, such as never could have been collected before, and such as cannot now be collected elsewhere. there are facilities, too, for engaging a good banker to be a manager such as there never were before in the world. the number of such persons is much on the increase. any careful person who is experienced in figures, and has real sound sense, may easily make himself a good banker. the modes in which money can be safely lent by a banker are not many, and a clear-headed, quiet, industrious person may soon learn all that is necessary about them. our intricate law of real property is an impediment in country banking, for it requires some special study even to comprehend the elements of a law which is full of technical words, and which can only be explained by narrating its history. but the banking of great cities is little concerned with loans on landed property. and all the rest of the knowledge requisite for a banker can easily be obtained by anyone who has the sort of mind which takes to it. no doubt there is a vast routine of work to be learned, and the manager of a large bank must have a great facility in transacting business rapidly. but a great number of persons are now bred from their earliest manhood in the very midst of that routine; they learn it as they would learn a language, and come to be no more able to unlearn it than they could unlearn a language. and the able ones among them acquire an almost magical rapidity in effecting the business connected with that routine. a very good manager and very good board of directors can, without unreasonable difficulty, be provided for a bank at present in london. it will be asked, what more can be required? i reply, a great deal. all which the best board of directors can really accomplish, is to form a good decision on the points which the manager presents to them, and perhaps on a few others which one or two zealous members of their body may select for discussion. a meeting of fifteen or eighteen persons is wholly unequal to the transaction of more business than this; it will be fortunate, and it must be well guided, if it should be found to be equal to so much. the discussion even of simple practical points by such a number of persons is a somewhat tedious affair. many of them will wish to speak on every decision of moment, and some of them--some of the best of them perhaps--will only speak with difficulty and slowly. very generally, several points will be started at once, unless the discussion is strictly watched by a rigid chairman; and even on a single point the arguments will often raise grave questions which cannot be answered, and suggest many more issues than can be advantageously decided by the meeting. the time required by many persons for discussing many questions, would alone prevent an assembly of many persons from overlooking a large and complicated business. nor is this the only difficulty. not only would a real supervision of a large business by a board of directors require much more time than the board would consent to occupy in meeting, it would also require much more time and much more thought than the individual directors would consent to give. these directors are only employing on the business of the bank the vacant moments of their time, and the spare energies of their minds. they cannot give the bank more; the rest is required for the safe conduct of their own affairs, and if they diverted it from these affairs they would be ruined. a few of them may have little other business, or they may have other partners in the business, on whose industry they can rely, and whose judgment they can trust; one or two may have retired from business. but for the most part, directors of a company cannot attend principally and anxiously to the affairs of a company without so far neglecting their own business as to run great risk of ruin; and if they are ruined, their trustworthiness ceases, and they are no longer permitted by custom to be directors. nor, even if it were possible really to supervise a business by the effectual and constant inspection of fifteen or sixteen rich and capable persons, would even the largest business easily bear the expense of such a supervision. i say rich, because the members of a board governing a large bank must be men of standing and note besides, or they would discredit the bank; they need not be rich in the sense of being worth millions, but they must be known to possess a fair amount of capital and be seen to be transacting a fair quantity of business. but the labour of such persons, i do not say their spare powers, but their principal energies, fetches a high price. business is really a profession often requiring for its practice quite as much knowledge, and quite as much skill, as law and medicine; and requiring also the possession of money. a thorough man of business, employing a fair capital in a trade, which he thoroughly comprehends, not only earns a profit on that capital, but really makes of his professional skill a large income. he has a revenue from talent as well as from money; and to induce sixteen or eighteen persons to abandon such a position and such an income in order to devote their entire attention to the affairs of a joint stock company, a salary must be given too large for the bank to pay or for anyone to wish to propose. and an effectual supervision by the whole board being impossible, there is a great risk that the whole business may fall to the general manager. many unhappy cases have proved this to be very dangerous. even when the business of joint stock banks was far less, and when the deposits entrusted to them were very much smaller, a manager sometimes committed frauds which were dangerous, and still oftener made mistakes that were ruinous. actual crime will always be rare; but, as an uninspected manager of a great bank has the control of untold millions, sometimes we must expect to see it: the magnitude of the temptation will occasionally prevail over the feebleness of human nature. but error is far more formidable than fraud: the mistakes of a sanguine manager are, far more to be dreaded than the theft of a dishonest manager. easy misconception is far more common than long-sighted deceit. and the losses to which an adventurous and plausible manager, in complete good faith, would readily commit a bank, are beyond comparison greater than any which a fraudulent manager would be able to conceal, even with the utmost ingenuity. if the losses by mistake in banking and the losses by fraud were put side by side, those by mistake would be incomparably the greater. there is no more unsafe government for a bank than that of an eager and active manager, subject only to the supervision of a numerous board of directors, even though that board be excellent, for the manager may easily glide into dangerous and insecure transactions, nor can the board effectually check him. the remedy is this: a certain number of the directors, either those who have more spare time than others, or those who are more ready to sell a large part of their time to the bank, must be formed into a real working committee, which must meet constantly, must investigate every large transaction, must be acquainted with the means and standing of every large borrower, and must be in such incessant communication with the manager that it will be impossible for him to engage in hazardous enterprises of dangerous magnitude without their knowing it and having an opportunity of forbidding it. in almost all cases they would forbid it; all committees are cautious, and a committee of careful men of business, picked from a large city, will usually err on the side of caution if it err at all. the daily attention of a small but competent minor council, to whom most of the powers of the directors are delegated, and who, like a cabinet, guide the deliberations of the board at its meetings, is the only adequate security of a large bank from the rash engagements of a despotic and active general manager. fraud, in the face of such a committee, would probably never be attempted, and even now it is a rare and minor evil. some such committees are vaguely known to exist in most, if not all, our large joint stock banks. but their real constitution is not known. no customer and no shareholder knows the names of the managing committee, perhaps, in any of these large banks. and this is a grave error. a large depositor ought to be able to ascertain who really are the persons that dispose of his money; and still more a large shareholder ought not to rest till he knows who it is that makes engagements on his behalf, and who it is that may ruin him if they choose. the committee ought to be composed of quiet men of business, who can be ascertained by inquiry to be of high character and well-judging mind. and if the public and the shareholder knew that there was such a committee, they would have sufficient reasons for the confidence which now is given without such reasons. a certain number of directors attending daily by rotation is, it should be said, no substitute for a permanent committee. it has no sufficient responsibility. a changing body cannot have any responsibility. the transactions which were agreed to by one set of directors present on the monday might be exactly those which would be much disapproved by directors present on the wednesday. it is essential to the decisions of most business, and not least of the banking business, that they should be made constantly by the same persons; the chain of transactions must pass through the same minds. a large business may be managed tolerably by a quiet group of second-rate men if those men be always the same; but it cannot be managed at all by a fluctuating body, even of the very cleverest men. you might as well attempt to guide the affairs of the nation by means of a cabinet similarly changing. our great joint stock bands are imprudent in so carefully concealing the details of their government, and in secluding those details from the risk of discussion. the answer, no doubt will be, 'let well alone; as you have admitted, there hardly ever before was so great a success as these banks of ours: what more do you or can you want?' i can only say that i want further to confirm this great success and to make it secure for the future. at present there is at least the possibility of a great reaction. supposing that, owing to defects in its government, one even of the greater london joint stock banks failed, there would be an instant suspicion of the whole system. one _terra incognita_ being seen to be faulty, every other _terra incognita_ would be suspected. if the real government of these banks had for years been known, and if the subsisting banks had been known not to be ruled by the bad mode of government which had ruined the bank that had fallen, then the ruin of that bank would not be hurtful. the other banks would be seen to be exempt from the cause which had destroyed it. but at present the ruin of one of these great banks would greatly impair the credit of all. scarcely any one knows the precise government of any one; in no case has that government been described on authority; and the fall of one by grave misgovernment would be taken to show that the others might as easily be misgoverned also. and a tardy disclosure even of an admirable constitution would not much help the surviving banks: as it was extracted by necessity, it would be received with suspicion. a sceptical world would say 'of course they say they are all perfect now; it would not do for them to say anything else.' and not only the depositors and the shareholders of these large banks have a grave interest in their good government, but the public also. we have seen that our banking reserve is, as compared with our liabilities, singularly small; we have seen that the rise of these great banks has lessened the proportion of that reserve to those liabilities; we have seen that the greatest strain on the banking reserve is a 'panic.' now, no cause is more capable of producing a panic, perhaps none is so capable, as the failure of a first-rate joint stock bank in london. such an event would have something like the effect of the failure of overend, gurney and co.; scarcely any other event would have an equal effect. and therefore, under the existing constitution of our banking system the government of these great banks is of primary importance to us all. chapter x. the private banks. perhaps some readers of the last part of the last chapter have been inclined to say that i must be a latent enemy to joint stock banking. at any rate, i have pointed out what i think grave defects in it. but i fear that a reader of this chapter may, on like grounds, suppose that i am an enemy to private banking. and i can only hope that the two impressions may counteract one another, and may show that i do not intend to be unfair. i can imagine nothing better in theory or more successful in practice than private banks as they were in the beginning. a man of known wealth, known integrity, and known ability is largely entrusted with the money of his neighbours. the confidence is strictly personal. his neighbours know him, and trust him because they know him. they see daily his manner of life, and judge from it that their confidence is deserved. in rural districts, and in former times, it was difficult for a man to ruin himself except at the place in which he lived; for the most part he spent his money there, and speculated there if he speculated at all. those who lived there also would soon see if he was acting in a manner to shake their confidence. even in large cities, as cities then were, it was possible for most persons to ascertain with fair certainty the real position of conspicuous persons, and to learn all which was material in fixing their credit. accordingly the bankers who for a long series of years passed successfully this strict and continual investigation, became very wealthy and very powerful. the name 'london banker' had especially a charmed value. he was supposed to represent, and often did represent, a certain union of pecuniary sagacity and educated refinement which was scarcely to be found in any other part of society. in a time when the trading classes were much ruder than they now are, many private bankers possessed variety of knowledge and a delicacy of attainment which would even now be very rare. such a position is indeed singularly favourable. the calling is hereditary; the credit of the bank descends from father to son: this inherited wealth soon begins inherited refinement. banking is a watchful, but not a laborious trade. a banker, even in large business, can feel pretty sure that all his transactions are sound, and yet have much spare mind. a certain part of his time, and a considerable part of his thoughts, he can readily devote to other pursuits. and a london banker can also have the most intellectual society in the world if he chooses it. there has probably very rarely ever been so happy a position as that of a london private banker; and never perhaps a happier. it is painful to have to doubt of the continuance of such a class, and yet, i fear, we must doubt of it. the evidence of figures is against it. in there were private banks in lombard street admitted to the clearing-house: there now are only . though the business of banking has increased so much since , this species of banks is fewer in number than it was then. nor is this the worst. the race is not renewed. there are not many recognised impossibilities in business, but everybody admits 'that you cannot found a new private bank.' no such has been founded in london, or, as far as i know, in the country, for many years. the old ones merge or die, and so the number is lessened; but no new ones begin so as to increase that number again. the truth is that the circumstances which originally favoured the establishment of private banks have now almost passed away. the world has become so large and complicated that it is not easy to ascertain who is rich and who is poor. no doubt there are some enormously wealthy men in england whose means everybody has heard of, and has no doubt of. but these are not the men to incur the vast liabilities of private banking. if they were bred in it they might stay in it; but they would never begin it for themselves. and if they did, i expect people would begin to doubt even of their wealth. it would be said, 'what does a b go into banking for? he cannot be as rich as we thought.' a millionaire commonly shrinks from liability, and the essence of great banking is great liability. no doubt there are many 'second-rate' rich men, as we now count riches, who would be quite ready to add to their income the profit of a private bank if only they could manage it. but unluckily they cannot manage it. their wealth is not sufficiently familiar to the world; they cannot obtain the necessary confidence. no new private bank is founded in england because men of first-rate wealth will not found one, and men not of absolutely first-rate wealth cannot. in the present day, also, private banking is exposed to a competition against which in its origin it had not to struggle. owing to the changes of which i have before spoken, joint stock banking has begun to compete with it. in old times this was impossible; the bank of england had a monopoly in banking of the principle of association. but now large joint stock banks of deposit are among the most conspicuous banks in lombard street. they have a large paid-up capital and intelligible published accounts; they use these as an incessant advertisement, in a manner in which no individual can use his own wealth. by their increasing progress they effectually prevent the foundation of any new private bank. the amount of the present business of private banks is perfectly unknown. their balance sheets are effective secrets--rigidly guarded. but none of them, except a few of the largest, are believed at all to gain business. the common repute of lombard street might be wrong in a particular case, but upon the general doctrine it is almost sure to be right. there are a few well-known exceptions, but according to universal belief the deposits of most private bankers in london tend rather to diminish than to increase. as to the smaller banks, this naturally would be so. a large bank always tends to become larger, and a small one tends to become smaller. people naturally choose for their banker the banker who has most present credit, and the one who has most money in hand is the one who possesses such credit. this is what is meant by saying that a long established and rich bank has a 'privileged opportunity'; it is in a better position to do its business than any one else is; it has a great advantage over old competitors and an overwhelming superiority over new comers. new people coming into lombard street judge by results; they give to those who have: they take their money to the biggest bank because it is the biggest. i confess i cannot, looking far forward into the future, expect that the smaller private banks will maintain their ground. their old connections will not leave them; there will be no fatal ruin, no sudden mortality. but the tide will gently ebb, and the course of business will be carried elsewhere. sooner or later, appearances indicate, and principle suggests, that the business of lombard street will be divided between the joint stock banks and a few large private banks. and then we have to ask ourselves the question, can those large private banks be permanent? i am sure i should be very sorry to say that they certainly cannot, but at the same time i cannot be blind to the grave difficulties which they must surmount. in the first place, an hereditary business of great magnitude is dangerous. the management of such a business needs more than common industry and more than common ability. but there is no security at all that these will be regularly continued in each generation. the case of overend, gurney and co., the model instance of all evil in business, is a most alarming example of this evil. no cleverer men of business probably (cleverer i mean for the purposes of their particular calling) could well be found than the founders and first managers of that house. but in a very few years the rule in it passed to a generation whose folly surpassed the usual limit of imaginable incapacity. in a short time they substituted ruin for prosperity and changed opulence into insolvency. such great folly is happily rare; and the business of a bank is not nearly as difficult as the business of a discount company. still much folly is common, and the business of a great bank requires a great deal of ability, and an even rarer degree of trained and sober judgment. that which happened so marvelously in the green tree may happen also in the dry. a great private bank might easily become very rotten by a change from discretion to foolishness in those who conduct it. we have had as yet in london, happily, no example of this; indeed, we have hardly as yet had the opportunity. till now private banks have been small; small as we now reckon banks. for their exigencies a moderate degree of ability and an anxious caution will suffice. but if the size of the banks is augmented and greater ability is required, the constant difficulty of an hereditary government will begin to be felt. 'the father had great brains and created the business: but the son had less brains and lost or lessened it.' this is the history of all great monarchies, and it may be the history of great private banks. the peculiarity in the case of overend, gurney and co. at least, one peculiarity is that the evil was soon discovered. the richest partners had least concern in the management; and when they found that incredible losses were ruining them, they stopped the concern and turned it into a company. but they had done nothing; if at least they had only prevented farther losses, the firm might have been in existence and in the highest credit now. it was the publicity of their losses which ruined them. but if they had continued to be a private partnership they need not have disclosed those losses: they might have written them off quietly out of the immense profits they could have accumulated. they had some ten millions of other people's money in their hands which no one thought of disturbing. the perturbation through the country which their failure caused in the end, shows how diffused and how unimpaired their popular reputation was. no one in the rural districts (as i know by experience) would ever believe a word against them, say what you might. the catastrophe came because at the change the partners in the old private firm--the gurney family especially--had guaranteed the new company against the previous losses: those losses turned out to be much greater than was expected. to pay what was necessary the 'gurneys' had to sell their estates, and their visible ruin destroyed the credit of the concern. but if there had been no such guarantee, and no sale of estates, if the great losses had slept a quiet sleep in a hidden ledger, no one would have been alarmed, and the credit and the business of 'overends' might have existed till now, and their name still continued to be one of our first names. the difficulty of propagating a good management by inheritance for generations is greatest in private banks and discount firms because of their essential secrecy. the danger may indeed be surmounted by the continual infusion of new and able partners. the deterioration of the old blood may be compensated by the excellent quality of the fresh blood. but to this again there is an objection, of little value perhaps in seeming, but of much real influence in practice. the infusion of new partners requires from the old partners a considerable sacrifice of income; the old must give up that which the new receive, and the old will not like this. the effectual remedy is so painful that i fear it often may be postponed too long. i cannot, therefore, expect with certainty the continuance of our system of private banking. i am sure that the days of small banks will before many years come to an end, and that the difficulties of large private banks are very important. in the mean time it is very important that large private banks should be well managed. and the present state of banking makes this peculiarly difficult. the detail of the business is augmenting with an overwhelming rapidity. more cheques are drawn year by year; not only more absolutely, but more by each person, and more in proportion to his income. the payments in, and payments out of a common account are very much more numerous than they formerly were. and this causes an enormous growth of detail. and besides, bankers have of late begun almost a new business. they now not only keep people's money, but also collect their incomes for them. many persons live entirely on the income of shares, or debentures, or foreign bonds, which is paid in coupons, and these are handed in for the bank to collect. often enough the debenture, or the certificate, or the bond is in the custody of the banker, and he is expected to see when the coupon is due, and to cut it off and transmit it for payment. and the detail of all this is incredible, and it needs a special machinery to cope with it. a large joint stock bank, if well-worked, has that machinery. it has at the head of the executive a general manager who was tried in the detail of banking, who is devoted to it, and who is content to live almost wholly in it. he thinks of little else, and ought to think of little else. one of his first duties is to form a hierarchy of inferior officers, whose respective duties are defined, and to see that they can perform and do perform those duties. but a private bank of the type usual in london has no such officer. it is managed by the partners; now these are generally rich men, are seldom able to grapple with great business of detail, and are not disposed to spend their whole lives and devote their entire minds to it if they were able. a person with the accumulated wealth, the education and the social place of a great london banker would be a 'fool so to devote himself. he would sacrifice a suitable and a pleasant life for an unpleasant and an unsuitable life. but still the detail must be well done; and some one must be specially chosen to watch it and to preside over it, or it will not be well done. until now, or until lately, this difficulty has not been fully felt. the detail of the business of a small private bank was moderate enough to be superintended effectually by the partners. but, as has been said, the detail of banking--the proportion of detail to the size of the bank--is everywhere increasing. the size of the private banks will have to augment if private banks are not to cease; and therefore the necessity of a good organisation for detail is urgent. if the bank grows, and simultaneously the detail grows in proportion to the bank, a frightful confusion is near unless care be taken. the only organisation which i can imagine to be effectual is that which exists in the antagonistic establishments. the great private banks will have, i believe, to appoint in some form or other, and under some name or other, some species of general manager who will watch, contrive, and arrange the detail for them. the precise shape of the organisation is immaterial; each bank may have its own shape, but the man must be there. the true business of the private partners in such a bank is much that of the directors in a joint stock bank. they should form a permanent committee to consult with their general manager, to watch him, and to attend to large loans and points of principle. they should not themselves be responsible for detail; if they do there will be two evils at once: the detail will be done badly, and the minds of those who ought to decide principal things will be distracted from those principal things. there will be a continual worry in the bank, and in a worry bad loans are apt to be made and money is apt to be lost. a subsidiary advantage of this organisation is that it would render the transition from private banking to joint stock banking easier, if that transition should be necessary. the one might merge in the other as convenience suggested and as events required. there is nothing intrusive in discussing this subject. the organisation of the private is just like that of the joint stock banks; all the public are interested that it should be good. the want of a good organisation may cause the failure of one or more of these banks; and such failure of such banks may intensify a panic, even if it should not cause one. chapter xi. the bill-brokers. under every system of banking, whether that in which the reserve is kept in many banks, or one in which it is kept in a single bank only, there will always be a class of persons who examine more carefully than busy bankers can the nature of different securities; and who, by attending only to one class, come to be particularly well acquainted with that class. and as these specially qualified dealers can for the most part lend much more than their own capital, they will always be ready to borrow largely from bankers and others, and to deposit the securities which they know to be good as a pledge for the loan. they act thus as intermediaries between the borrowing public and the less qualified capitalist; knowing better than the ordinary capitalist which loans are better and which are worse, they borrow from him, and gain a profit by charging to the public more than they pay to him. many stock brokers transact such business upon a great scale. they lend large sums on foreign bonds or railway shares or other such securities, and borrow those sums from bankers, depositing the securities with the bankers, and generally, though not always, giving their guarantee. but by far the greatest of these intermediate dealers are the bill-brokers. mercantile bills are an exceedingly difficult kind of security to understand. the relative credit of different merchants is a great 'tradition'; it is a large mass of most valuable knowledge which has never been described in books and is probably incapable of being so described. the subject matter of it, too, is shifting and changing daily; an accurate representation of the trustworthiness of houses at the beginning of a year might easily be a most fatal representation at the end of it. in all years there are great changes; some houses rise a good deal and some fall. and in some particular years the changes are immense; in years like many active men make so much money that at the end of the year they are worthy of altogether greater credit than anyone would have dreamed of giving to them at the beginning. on the other hand, in years like a contagious ruin destroys the trustworthiness of very many firms and persons, and often, especially, of many who stood highest immediately before. such years alter altogether an important part of the mercantile world: the final question of bill-brokers, 'which bills will be paid and which will not? which bills are second-rate and which first-rate?' would be answered very differently at the beginning of the year and at the end. no one can be a good bill-broker who has not learnt the great mercantile tradition of what is called 'the standing of parties' and who does not watch personally and incessantly the inevitable changes which from hour to hour impair the truth of that tradition. the 'credit' of a person--that is, the reliance which may be placed on his pecuniary fidelity--is a different thing from his property. no doubt, other things being equal, a rich man is more likely to pay than a poor man. but on the other hand, there are many men not of much wealth who are trusted in the market, 'as a matter of business,' for sums much exceeding the wealth of those who are many times richer. a firm or a person who have been long known to 'meet their engagements,' inspire a degree of confidence not dependent on the quantity of his or their property. persons who buy to sell again soon are often liable for amounts altogether much greater than their own capital; and the power of obtaining those sums depends upon their 'respectability,' their 'standing,' and their 'credit,' as the technical terms express it, and more simply upon the opinion which those who deal with them have formed of them. the principal mode in which money is raised by traders is by 'bills of exchange;' the estimated certainty of their paying those bills on the day they fall due is the measure of their credit; and those who estimate that liability best, the only persons indeed who can estimate it exceedingly well, are the bill-brokers. and these dealers, taking advantage of their peculiar knowledge, borrow immense sums from bankers and others; they generally deposit the bills as a security; and they generally give their own guarantee of the goodness of the bill: but neither of such practices indeed is essential, though both are the ordinary rule. when overends failed, as i have said before, they had borrowed in this way very largely. there are others now in the trade who have borrowed quite as much. as is usually the case, this kind of business has grown up only gradually. in the year there was no such business precisely answering to what we now call bill-broking in london. mr. richardson, the principal 'bill-broker' of the time, as the term was then understood, thus described his business to the 'bullion committee:' 'what is the nature of the agency for country banks?--it is twofold: in the first place to procure money for country bankers on bills when they have occasion to borrow on discount, which is not often the case; and in the next place, to lend the money for the country bankers on bills on discount. the sums of money which i lend for country bankers on discount are fifty times more than the sums borrowed for country bankers. 'do you send london bills into the country for discount?--yes. 'do you receive bills from the country upon london in return, at a date, to be discounted?--yes, to a very considerable amount, from particular parts of the country. 'are not both sets of bills by this means under discount?--no, the bills received from one part of the country are sent down to another part for discount. 'and they are not discounted in london?--no. in some parts of the country there is but little circulation of bills drawn upon london, as in norfolk, suffolk, essex, sussex, &c.; but there is there a considerable circulation in country bank-notes, principally optional notes. in lancashire there is little or no circulation of country bank-notes; but there is a great circulation of bills drawn upon london at two or three months' date. i receive bills to a considerable amount from lancashire in particular, and remit them to norfolk, suffolk, &c., where the bankers have large lodgments, and much surplus money to advance on bills for discount.' mr. richardson was only a broker who found money for bills and bills for money. he is further asked: 'do you guarantee the bills you discount, and what is your charge per cent?--no, we do not guarantee them; our charge is one-eighth per cent brokerage upon the bill discounted, but we make no charge to the lender of the money. 'do you consider that brokerage as a compensation for the skill which you exercise in selecting the bills which you thus get discounted?--yes, for selecting of the bills, writing letters, and other trouble. 'does the party who furnishes the money give you any kind of compensation?--none at all. 'does he not consider you as his agent, and in some degree responsible for the safety of the bills which you give him?--not at all. 'does he not prefer you on the score of his judging that you will give him good intelligence upon that subject?--yes, he relies upon us. 'do you then exercise a discretion as to the probable safety of the bills?--yes; if a bill comes to us which we conceive not to be safe, we return it. 'do you not then conceive yourselves to depend in a great measure for the quantity of business which you can perform on the favour of the party lending the money?--yes, very much so. if we manage our business well, we retain our friends; if we do not, we lose them.' it was natural enough that the owners of the money should not pay, though the owner of the bill did, for in almost all ages the borrower has been a seeker more or less anxious; he has always been ready to pay for those who will find him the money he is in search of. but the possessor of money has rarely been willing to pay anything; he has usually and rightly believed that the borrower would discover him soon. notwithstanding other changes, the distribution of the customers of the bill-brokers in different parts of the country still remains much as mr. richardson described it sixty years ago. for the most part, agricultural counties do not employ as much money as they save; manufacturing counties, on the other hand, can employ much more than they save; and therefore the money of norfolk or of somersetshire is deposited with the london bill-brokers, who use it to discount the bills of lancashire and yorkshire. the old practice of bill-broking, which mr. richardson describes, also still exists. there are many brokers to be seen about lombard street with bills which they wish to discount but which they do not guarantee. they have sometimes discounted these bills with their own capital, and if they can re-discount them at a slightly lower rate they gain a difference which at first seems but trifling, but with which they are quite content, because this system of lending first and borrowing again immediately enables them to turn their capital very frequently, and on a few thousand pounds of capital to discount hundreds of thousands of bills; as the transactions are so many, they can be content with a smaller profit on each. in other cases, these non-guaranteeing brokers are only agents who are seeking money for bills which they have undertaken to get discounted. but in either case, as far as the banker or other ultimate capitalist is concerned, the transaction is essentially that which mr. richardson describes. the loan by such banker is a re-discount of the bill; that banker cannot obtain repayment of that loan, except by the payment of the bill at maturity. he has no claim upon the agent who brought him the bill. bill-broking, in this which we may call its archaic form, is simply one of the modes in which bankers obtain bills which are acceptable to them and which they re-discount. no reference is made in it to the credit of the bill-broker; the bills being discounted 'without recourse' to him are as good if taken from a pauper as if taken from a millionaire. the lender exercises his own judgment on the goodness of the bill. but in modern bill-broking the credit of the bill-broker is a vital element. the lender considers that the bill-broker--no matter whether an individual, a company, or a firm--has considerable wealth, and he takes the 'bills,' relying that the broker would not venture that wealth by guaranteeing them unless he thought them good. the lender thinks, too, that the bill-broker being daily conversant with bills and bills only, knows probably all about bills: he lends partly in reliance on the wealth of the broker and partly in reliance on his skill. he does not exercise much judgment of his own on the bills deposited with him: he often does not watch them very closely. probably not one-thousandth part of the creditors on security of overend, gurney and co., had ever expected to have to rely on that security, or had ever given much real attention to it. sometimes, indeed, the confidence in the bill-brokers goes farther. a considerable number of persons lend to them, not only without much looking at the security but even without taking any security. this is the exact reverse of the practice which mr. richardson described in ; then the lender relied wholly on the goodness of the bill, now, in these particular cases, he relies solely on the bill-broker, and does not take a bill in any shape. nothing can be more natural or more inevitable than this change. it was certain that the bill-broker, being supposed to understand bills well, would be asked by the lenders to evince his reliance on the bills he offered by giving a guarantee for them. it was also most natural that the bill-brokers, having by the constant practice of this lucrative trade obtained high standing and acquired great wealth, should become, more or less, bankers too, and should receive money on deposit without giving any security for it. but the effects of the change have been very remarkable. in the practice as mr. richardson described it, there is no peculiarity very likely to affect the money market. the bill-broker brought bills to the banker, just as others brought them; nothing at all could be said as to it except that the bank must not discount bad bills, must not discount too many bills, and must keep a good reserve. but the modern practice introduces more complex considerations. in the trade of bill-broking, as it now exists, there is one great difficulty; the bill-broker has to pay interest for all the money which he receives. how this arose we have just seen. the present lender to the bill-broker at first always used to discount a bill, which is as much as saying that he was always a lender at interest. when he came to take the guarantee of the broker, and only to look at the bills as a collateral security, naturally he did not forego his interest: still less did he forego it when he ceased to take security at all. the bill-broker has, in one shape or other, to pay interest on every sixpence left with him, and that constant habit of giving interest has this grave consequence: the bill-broker cannot afford to keep much money unemployed. he has become a banker owing large sums which he may be called on to repay, but he cannot hold as much as an ordinary banker, or nearly as much, of such sums in cash, because the loss of interest would ruin him. competition reduces the rate which the bill-broker can charge, and raises the rate which the bill-broker must give, so that he has to live on a difference exceedingly narrow. and if he constantly kept a large hoard of barren money he would soon be found in the 'gazette.' the difficulty is aggravated by the terms upon which a great part of the money at the bill-brokers is deposited with them. very much of it is repayable at demand, or at very short notice. the demands on a broker in periods of alarm may consequently be very great, and in practice they often, are so. in times of panic there is always a very heavy call, if not a run upon them; and in consequence of the essential nature of their business, they cannot constantly keep a large unemployed reserve of their own in actual cash, they are obliged to ask help of some one who possesses that cash. by the conditions of his trade, the bill-broker is forced to belong to a class of 'dependent money-dealers,' as we may term them, that is, of dealers who do not keep their own reserve, and must, therefore, at every crisis of great difficulty revert to others. in a natural state of banking, that in which all the principal banks kept their own reserve, this demand of the bill-brokers and other dependent dealers would be one of the principal calls on that reserve. at every period of incipient panic the holders of it would perceive that it was of great importance to themselves to support these dependent dealers. if the panic destroyed those dealers it would grow by what it fed upon (as is its nature), and might probably destroy also the bankers, the holders of the reserve. the public terror at such times is indiscriminate. when one house of good credit has perished, other houses of equal credit though of different nature are in danger of perishing. the many holders of the banking reserve would under the natural system of banking be obliged to advance out of that reserve to uphold bill-brokers and similar dealers. it would be essential to their own preservation not to let such dealers fail, and the protection of such dealers would therefore be reckoned among the necessary purposes for which they retained that reserve. nor probably would the demands on the bill-brokers in such a system of banking be exceedingly formidable. considerable sums would no doubt be drawn from them, but there would be no special reason why money should be demanded from them more than from any other money dealers. they would share the panic with the bankers who kept the reserve, but they would not feel it more than the bankers. in each crisis the set of the storm would be determined by the cause which had excited it, but there would not be anything in the nature of bill-broking to attract the advance of the alarm peculiarly to them. they would not be more likely to suffer than other persons; the only difference would be that when they did suffer, having no adequate reserve of their own, they would be obliged to ask the aid of others. but under a one-reserve system of banking, the position of the bill-brokers is much more singular and much more precarious. in fact, in lombard street, the principal depositors of the bill-brokers are the bankers, whether of london, or of provincial england, or of scotland, or ireland. such deposits are, in fact, a portion of the reserve of these bankers; they make an essential part of the sums which they have provided and laid by against a panic. accordingly, in every panic these sums are sure to be called in from the bill-brokers; they were wanted to be used by their owners in time of panic, and in time of panic they ask for them. 'perhaps it may be interesting,' said alderman salomons, speaking on behalf of the london and westminster bank, after the panic of , to the committee, 'to know that, on november , we held discounted bills for brokers to the amount of , , l. out of these bills , , l. matured between november and december ; , , l. more between december and december ; consequently we were prepared merely by the maturing of our bills of exchange for any demand that might come upon us.' this is not indeed a direct withdrawal of money on deposit, but its principal effect is identical. at the beginning of the time the london and westminster bank had lent , , l. more to the bill-brokers than they had at the end of it; and that , , l. the bank had added to its reserve against a time of difficulty. the intensity of the demand on the bill-broker is aggravated therefore by our peculiar system of banking. just at the moment when, by the nature of their business, they have to resort to the reserves of bankers for necessary support, the bankers remove from them large sums in order to strengthen those reserves. a great additional strain is thrown upon them just at the moment when they are least able to bear it; and it is thrown by those who under a natural system of banking would not aggravate the pressure on the bill-brokers, but relieve it. and the profits of bill-broking are proportionably raised. the reserves of the bankers so deposited with the bill-broker form a most profitable part of his business; they are on the whole of very large amount, and at all times, except those of panic, may well be depended upon. the bankers are pretty sure to keep them there, just because they must keep a reserve, and they consider it one of the best places in which to keep it. under a more natural system, no part of the banking reserve would ever be lodged at the brokers. bankers would deposit with the brokers only their extra money, the money which they considered they could safely lend, and which they would not require during a panic. in the eye of the banker, money at the brokers would then be one of the investments of cash, it would not be a part of such cash. the deposits of bill-brokers and the profits of bill-broking are increased by our present system, just in proportion as the dangers of bill-brokers during a panic are increased by it. the strain, too, on our banking reserve which is caused by the demands of the bill-brokers, is also more dangerous than it would be under a natural system, because that reserve is in itself less. the system of keeping the entire ultimate reserve at a single bank, undoubtedly diminishes the amount of reserve which is kept. and exactly on that very account the danger of any particular demand on that reserve is augmented, because the magnitude of the fund upon which that demand falls is diminished. so that our one-reserve system of banking combines two evils: first, it makes the demand of the brokers upon the final reserve greater, because under it so many bankers remove so much money from the brokers; and under it also the final reserve is reduced to its minimum point, and the entire system of credit is made more delicate, and more sensitive. the peculiarity, indeed, of the effects of the one reserve is indeed even greater in this respect. under the natural system, the bill-brokers would be in no respect the rivals of the bankers which kept the ultimate reserve. they would be rather the agents for these bankers in lending upon certain securities which they did not themselves like, or on which they did not feel competent to lend safely. the bankers who in time of panic had to help them would in ordinary times derive much advantage from them. but under our present system all this is reversed. the bank of england never deposits any money with the bill-brokers; in ordinary times it never derives any advantage from them. on the other hand, as the bank carries on itself a large discount business, as it considers that it is itself competent to lend on all kinds of bills, the bill-brokers are its most formidable rivals. as they constantly give high rates for money it is necessary that they should undersell the bank, and in ordinary times they do undersell it. but as the bank of england alone keeps the final banking reserve, the bill-brokers of necessity have to resort to that final reserve; so that at every panic, and by the essential constitution of the money market, the bank of england has to help, has to maintain in existence, the dealers, who never in return help the bank at any time, but who are in ordinary times its closest competitors and its keenest rivals. it might be expected that such a state of things would cause much discontent at the bank of england, and in matter of fact there has been much discussion about it, and much objection taken to it. after the panic of , this was so especially. during that panic, the bank of england advanced to the bill-brokers more than , , l., though their advances to bankers, whether london or country, were only , , l.; and, not unnaturally, the bank thought it unreasonable that so large an inroad upon their resources should be made by their rivals. in consequence, in they made a rule that they would only advance to the bill-brokers at certain seasons of the year, when the public money is particularly large at the bank, and that at other times any application for an advance should be considered exceptional, and dealt with accordingly. and the object of that regulation was officially stated to be 'to make them keep their own reserve, and not to be dependent on the bank of england.' as might be supposed, this rule was exceedingly unpopular with the brokers, and the greatest of them, overend, gurney and co., resolved on a strange policy in the hope of abolishing it. they thought they could frighten the bank of england, and could show that if they were dependent on it, it was also dependent on them. they accordingly accumulated a large deposit at the bank to the amount of , , l., and then withdrew it all at once. but this policy had no effect, except that of exciting a distrust of 'overends': the credit of the bank of england was not diminished; overends had to return the money in a few days, and had the dissatisfaction of feeling that they had in vain attempted to assail the solid basis of everyone's credit, and that everyone disliked them for doing so. but though this un-conceived attempt failed as it deserved, the rule itself could not be maintained. the bank does, in fact, at every period of pressure, advance to the bin-brokers; the case may be considered 'exceptional,' but the advance is always made if the security offered is really good. however much the bank may dislike to aid their rivals, yet they must aid them; at a crisis they feel that they would only be aggravating incipient demand, and be augmenting the probable pressure on themselves if they refused to do so. i shall be asked if this anomaly is inevitable, and i am afraid that for practical purposes we must consider it to be so. it may be lessened; the bill-brokers may, and should, discourage as much as they can the deposit of money with them on demand, and encourage the deposit of it at distant fixed dates or long notice. this will diminish the anomaly, but it will not cure it. practically, bin-brokers cannot refuse to receive money at call. in every market a dealer must conduct his business according to the custom of the market, or he will not be able to conduct it at all. all the bin-brokers can do is to offer better rates for more permanent money, and this (though possibly not so much as might be wished) they do at present. in its essence, this anomaly is, i believe, an inevitable part of the system of banking which history has given us, and which we have only to make the best of, since we cannot alter it. chapter xii. the principles which should regulate the amount of the banking reserve to be kept by the bank of england. there is a very common notion that the amount of the reserve which the bank of england ought to keep can be determined at once from the face of their weekly balance sheet. it is imagined that you have only to take the liabilities of the banking department, and that a third or some other fixed proportion will in all cases be the amount of reserve which the bank should keep against those liabilities. but to this there are several objections, some arising from the general nature of the banking trade, and others from the special position of the bank of england. that the amount of the liabilities of a bank is a principal element in determining the proper amount of its reserve is plainly true; but that it is the only element by which that amount is determined is plainly false. the intrinsic nature of these liabilities must be considered, as well as their numerical quantity. for example, no one would say that the same amount of reserve ought to be kept against acceptances which cannot be paid except at a certain day, and against deposits at call, which may be demanded at any moment. if a bank groups these liabilities together in the balance-sheet, you cannot tell the amount of reserve it ought to keep. the necessary information is not given you. nor can you certainly determine the amount of reserve necessary to be kept against deposits unless you know something as to the nature of these deposits. if out of , , l. of money, one depositor has , , l. to his credit, and may draw it out when he pleases, a much larger reserve will be necessary against that liability of , , l. than against the remaining , , l. the intensity of the liability, so to say, is much greater; and therefore the provision in store must be much greater also. on the other hand, supposing that this single depositor is one of calculable habits--suppose that it is a public body, the time of whose demands is known, and the time of whose receipts is known also--this single liability requires a less reserve than that of an equal amount of ordinary liabilities. the danger that it will be called for is much less; and therefore the security taken against it may be much less too. unless the quality of the liabilities is considered as well as their quantity, the due provision for their payment cannot be determined. these are general truths as to all banks, and they have a very particular application to the bank of england. the first application is favourable to the bank; for it shows the danger of one of the principal liabilities to be much smaller than it seems. the largest account at the bank of england is that of the english government; and probably there has never been any account of which it was so easy in time of peace to calculate the course. all the material facts relative to the english revenue, and the english expenditure, are exceedingly well known; and the amount of the coming payments to and from this account are always, except in war times, to be calculated with wonderful accuracy. in war, no doubt, this is all reversed; the account of a government at war is probably the most uncertain of all accounts, especially of a government of a scattered empire, like the english, whose places of outlay in time of war are so many and so distant, and the amount of whose payments is therefore so incalculable. ordinarily, however, there is no account of which the course can be so easily predicted; and therefore no account which needs in ordinary times so little reserve. the principal payments, when they are made, are also of the most satisfactory kind to a banker; they are, to a great extent, made to another account at his bank. these largest ordinary payments of the government are the dividends on the debt, and these are mostly made to bankers who act as agents for the creditors of the nation. the payment of the dividends for the government is, therefore, in great part a transfer from the account of the government to the accounts of the various bankers. a certain amount no doubt goes almost at once to the non-banking classes; to those who keep coin and notes in house, and have no account at any bank. but even this amount is calculable, for it is always nearly the same. and the entire operation is, to those who can watch it, singularly invariable time after time. but it is important to observe, that the published accounts of the bank give no such information to the public as will enable them to make their own calculations. the account of which we have been speaking is the yearly account of the english government--what we may call the budget account, that of revenue and expenditure. and the laws of this are, as we have shown, already known. but under the head 'public deposits' in the accounts of the bank, are contained also other accounts, and particularly that of the secretary for india in council, the laws of which must be different and are quite unknown. the secretary for india is a large lender on its account. if any one proposed to give such power to the chancellor of the exchequer, there would be great fear and outcry. but so much depends on habit and tradition, that the india office on one side of downing street can do without remark, and with universal assent, what it would be thought 'unsound' and extravagant to propose that the other side should do. the present india office inherits this independence from the old board of the company, which, being mercantile and business-like, used to lend its own money on the stock exchange as it pleased; the council of india, its successor, retains the power. nothing can be better than that it should be allowed to do as it likes; but the mixing up the account of a body which has such a power, and which draws money from india, with that of the home government clearly prevents the general public from being able to draw inferences as to the course of the combined account from its knowledge of home finance only. the account of 'public deposits' in the bank return includes other accounts too, as the savings' bank balance, the chancery funds account, and others; and in consequence, till lately the public had but little knowledge of the real changes of the account of our government, properly so called. but mr. lowe has lately given us a weekly account, and from this, and not from the bank account, we are able to form a judgment. this account and the return of the bank of england, it is true, unhappily appear on different days; but except for that accident our knowledge would be perfect; and as it is, for almost all purposes what we know is reasonably sufficient. we can now calculate the course of the government account nearly as well as it is possible to calculate it. so far, as we have said, an analysis of the return of the bank of england is very favourable to the bank. so great a reserve need not usually be kept against the government account as if it were a common account. we know the laws of its changes peculiarly well: we can tell when its principal changes will happen with great accuracy; and we know that at such changes most of what is paid away by the government is only paid to other depositors at the bank, and that it will really stay at the bank, though under another name. if we look to the private deposits of the bank of england, at first sight we may think that the result is the same. by far the most important of these are the 'bankers' deposits'; and, for the most part, these deposits as a whole are likely to vary very little. each banker, we will suppose, keeps as little as he can, but in all domestic transactions payment from one is really payment to the other. all the most important transactions in the country are settled by cheques; these cheques are paid in to the 'clearing-house,' and the balances resulting from them are settled by transfers from the account of one banker to another at the bank of england. payments out of the bankers' balances, therefore, correspond with payments in. as a whole, the deposit of the bankers' balances at the bank of england would at first sight seem to be a deposit singularly stable. indeed, they would seem, so to say, to be better than stable. they augment when everything else tends to diminish. at a panic, when all other deposits are likely to be taken away, the bankers' deposits, augment; in fact they did so in , though we do not know the particulars; and it is natural that they should so increase. at such moments all bankers are extremely anxious, and they try to strengthen themselves by every means in their power; they try to have as much money as it is possible at command; they augment their reserve as much as they can, and they place that reserve at the bank of england. a deposit which is not likely to vary in ordinary times, and which is likely to augment in times of danger, seems, in some sort, the model of a deposit. it might seem not only that a large proportion of it might be lent, but that the whole of it might be so. but a further analysis will, as i believe, show that this conclusion is entirely false; that the bankers' deposits are a singularly treacherous form of liability; that the utmost caution ought to be used in dealing with them; that, as a rule, a less proportion of them ought to be lent than of ordinary deposits. the easiest mode of explaining anything is, usually, to exemplify it by a single actual case. and in this subject, fortunately, there is a most conspicuous case near at hand. the german government has lately taken large sums in bullion from this country, in part from the bank of england, and in part not, according as it chose. it was in the main well advised, and considerate in its action; and did not take nearly as much from the bank as it might, or as would have been dangerous. still it took large sums from the bank; and it might easily have taken more. how then did the german government obtain this vast power over the bank? the answer is, that it obtained it by means of the bankers' balances, and that it did so in two ways. first, the german government had a large balance of its own lying at a particular joint stock bank. that bank lent this balance at its own discretion, to bill-brokers or others, and it formed a single item in the general funds of the london market. there was nothing special about it, except that it belonged to a foreign government, and that its owner was always likely to call it in, and sometimes did so. as long as it stayed unlent in the london joint stock bank, it increased the balances of that bank at the bank of england; but so soon as it was lent, say, to a bill-broker, it increased the bill-broker's balance; and as soon as it was employed by the bill-broker in the discount of bills, the owners of those bills paid it to their credit at their separate banks, and it augmented the balances of those bankers at the bank of england. of course if it were employed in the discount of bills belonging to foreigners, the money might be taken abroad, and by similar operations it might also be transferred to the english provinces or to scotland. but, as a rule, such money when deposited in london, for a considerable time remains in london; and so long as it does so, it swells the aggregate balances of the body of bankers at the bank of england. it is now in the balance of one bank, now of another, but it is always dispersed about those balances somewhere. the evident consequence is that this part of the bankers' balances is at the mercy of the german government when it chooses to apply for it. supposing, then, the sum to be three or four millions and i believe that on more than one occasion in the last year or two it has been quite as much, if not more--that sum might at once be withdrawn from the bank of england. in this case the bank of england is in the position of a banker who is liable for a large amount to a single customer, but with this addition, that it is liable for an unknown amount. the german government, as is well known, keeps its account (and a very valuable one it must be) at the london joint stock bank; but the bank of england has no access to the account of the german government at that bank; they cannot tell how much german money is lying to the credit there. nor can the bank of england infer much from the balance of the london joint stock bank in their bank, for the german money was probably paid in various sums to that bank, and lent out again in other various sums. it might to some extent augment that bank's balance at the bank of england, or it might not, but it certainly would not be so much added to that balance; and inspection of that bank's balance would not enable the bank of england to determine even in the vaguest manner what the entire sum was for which it might be asked at any moment. nor would the inspection of the bankers' balances as a whole lead to any certain and sure conclusions. something might be inferred from them, but not anything certain. those balances are no doubt in a state of constant fluctuation; and very possibly during the time that the german money was coming in some other might be going out. any sudden increase in the bankers' balances would be a probable indication of new foreign money, but new foreign money might come in without causing an increase, since some other and contemporaneous cause might effect a counteracting decrease. this is the first, and the plainest way in which the german government could take, and did take, money from this country; and in which it might have broken the bank of england if it had liked. the german government had money here and took it away, which is very easy to understand. but the government also possessed a far greater power, of a somewhat more complex kind. it was the owner of many debts from england. a large part of the 'indemnity' was paid by france to germany in bills on england, and the german government, as those bills became due, acquired an unprecedented command over the market. as each bill arrived at maturity, the german government could, if it chose, take the proceeds abroad; and it could do so in bullion, as for coinage purposes it wanted bullion. this would at first naturally cause a reduction in the bankers' balances; at least that would be its tendency. supposing the german government to hold bill a, a good bill, the banker at whose bank bill a was payable would have to pay it; and that would reduce his balance; and as the sum so paid would go to germany, it would not appear to the credit of any other banker: the aggregate of the bankers' balances would thus be reduced. but this reduction would not be permanent. a banker who has to pay , l. cannot afford to reduce his balance at the bank of england , l.; suppose that his liabilities are , , l., and that as a rule he finds it necessary to keep at the bank one-tenth of these liabilities, or , l., the payment of , l. would reduce his reserve to , l.; but his liabilities would be still , , l. and therefore to keep up his tenth he would have , l. to find. his process for finding it is this: he calls in, say, a loan to the bill-brokers; and if no equal additional money is contemporaneously carried to these brokers (which in the case of a large withdrawal of foreign money is not probable), they must reduce their business and discount less. but the effect of this is to throw additional business on the bank of england. they hold the ultimate reserve of the country, and they must discount out of it if no one else will: if they declined to do so there would be panic and collapse. as soon, therefore, as the withdrawal of the german money reduces the bankers' balances, there is a new demand on the bank for fresh discounts to make up those balances. the drain on the bank is twofold: first, the banking reserve is reduced by exportation of the german money, which reduces the means of the bank of england; and then out of those reduced means the bank of england has to make greater advances. the same result may be arrived at more easily. supposing any foreign government or person to have any sort of securities which he can pledge in the market, that operation gives it, or him, a credit on some banker, and enables it, or him, to take money from the banking reserve at the bank of england, and from the bankers' balances; and to replace the bankers' balances at their inevitable minimum, the bank of england must lend. every sudden demand on the country causes, in proportion to its magnitude, this peculiar effect. and this is the reason why the bank of england ought, i think, to deal most cautiously and delicately with their banking deposits. they are the symbol of an indefinite liability: by means of them, as we see, an amount of money so great that it is impossible to assign a limit to it might be abstracted from the bank of england. as the bank of england lends money to keep up the bankers' balances, at their usual amount, and as by means of that usual amount whatever sum foreigners can get credit for may be taken from us, it is not possible to assign a superior limit (to use the scientific word) to the demands which by means of the bankers' balances may be made upon the bank of england. the result comes round to the simple point, on which this book is a commentary: the bank of england, by the effect of a long history, holds the ultimate cash reserve of the country; whatever cash the country has to pay comes out of that reserve, and therefore the bank of england has to pay it. and it is as the bankers' bank that the bank of england has to pay it, for it is by being so that it becomes the keeper of the final cash reserve. some persons have been so much impressed with such considerations as these, that they have contended that the bank of england ought never to lend the 'bankers' balances' at all, that they ought to keep them intact, and as an unused deposit. i am not sure, indeed, that i have seen that extreme form of the opinion in print, but i have often heard it in lombard street, from persons very influential and very qualified to judge; even in print i have seen close approximations to it. but i am satisfied that the laying down such a 'hard and fast' rule would be very dangerous; in very important and very changeable business rigid rules are apt to be often dangerous. in a panic, as has been said, the bankers' balances greatly augment. it is true the bank of england has to lend the money by which they are filled. the banker calls in his money from the bill-broker, ceases to re-discount for that broker, or borrows on securities, or sells securities; and in one or other of these ways he causes a new demand for money which can only at such times be met from the bank of england. every one else is in want too. but without inquiring into the origin of the increase at panics, the amount of the bankers' deposits in fact increases very rapidly; an immense amount of unused money is at such moments often poured by them into the bank of england. and nothing can more surely aggravate the panic than to forbid the bank of england to lend that money. just when money is most scarce you happen to have an unusually large fund of this particular species of money, and you should lend it as fast as you can at such moments, for it is ready lending which cures panics, and non-lending or niggardly lending which aggravates them. at other times, particularly at the quarterly payment of the dividends, an absolute rule which laid down that the bankers' balances were never to be lent, would be productive of great inconvenience. a large sum is just then paid from the government balance to the bankers' balances, and if you permitted the bank to lend it while it was still in the hands of the government, but forbad them to lend it when it came into the hands of the bankers, a great tilt upwards in the value of money would be the consequence, for a most important amount of it would suddenly have become ineffective. but the idea that the bankers' balances ought never to be lent is only a natural aggravation of the truth that these balances ought to be used with extreme caution; that as they entail a liability peculiarly great and singularly difficult to foresee, they ought never to be used like a common deposit. it follows from what has been said that there are always possible and very heavy demands on the bank of england which are not shown in the account of the banking department at all: these demands may be greatest when the liabilities shown by that account are smallest, and lowest when those liabilities are largest. if, for example, the german government brings bills or other good securities to this market, obtains money with them, and removes that money from the market in bullion, that money may, if the german government choose, be taken wholly from the bank of england. if the wants of the german government be urgent, and if the amount of gold 'arrivals,' that is, the gold coming here from the mining countries, be but small, that gold will be taken from the bank of england, for there is no other large store in the country. the german government is only a conspicuous example of a foreign power which happens lately to have had an unusual command of good securities, and an unusually continuous wish to use them in england. any foreign state hereafter which wants cash will be likely to come here for it; so long as the bank of france should continue not to pay in specie, a foreign state which wants it must of necessity come to london for it. and no indication of the likelihood or unlikelihood of that want can be found in the books of the bank of england. what is almost a revolution in the policy of the bank of england necessarily follows: no certain or fixed proportion of its liabilities can in the present times be laid down as that which the bank ought to keep in reserve. the old notion that one-third, or any other such fraction, is in all cases enough, must be abandoned. the probable demands upon the bank are so various in amount, and so little disclosed by the figures of the account, that no simple and easy calculation is a sufficient guide. a definite proportion of the liabilities might often be too small for the reserve, and sometimes too great. the forces of the enemy being variable, those of the defence cannot always be the same. i admit that this conclusion is very inconvenient. in past times it has been a great aid to the bank and to the public to be able to decide on the proper policy of the bank from a mere inspection of its account. in that way the bank knew easily what to do and the public knew easily what to foresee. but, unhappily, the rule which is most simple is not always the rule which is most to be relied upon. the practical difficulties of life often cannot be met by very simple rules; those dangers being complex and many, the rules for encountering them cannot well be single or simple. a uniform remedy for many diseases often ends by killing the patient. another simple rule often laid down for the management of the bank of england must now be abandoned also. it has been said that the bank of england should look to the market rate, and make its own rate conform to that. this rule was, indeed, always erroneous. the first duty of the bank of england was to protect the ultimate cash of the country, and to raise the rate of interest so as to protect it. but this rule was never so erroneous as now, because the number of sudden demands upon that reserve was never formerly so great. the market rate of lombard street is not influenced by those demands. that rate is determined by the amount of deposits in the hands of bill-brokers and bankers, and the amount of good bills and acceptable securities offered at the moment. the probable efflux of bullion from the bank scarcely affects it at all; even the real efflux affects it but little; if the open market did not believe that the bank rate would be altered in consequence of such effluxes the market rate would not rise. if the bank choose to let its bullion go unheeded, and is seen to be going so to choose, the value of money in lombard street will remain unaltered. the more numerous the demands on the bank for bullion, and the more variable their magnitude, the more dangerous is the rule that the bank rate of discount should conform to the market rate. in former quiet times the influence, or the partial influence, of that rule has often produced grave disasters. in the present difficult times an adherence to it is a recipe for making a large number of panics. a more distinct view of abstract principle must be taken before we can fix on the amount of the reserve which the bank of england ought to keep. why should a bank keep any reserve? because it may be called on to pay certain liabilities at once and in a moment. why does any bank publish an account? in order to satisfy the public that it possesses cash--or available securities--enough to meet its liabilities. the object of publishing the account of the banking department of the bank of england is to let the nation see how the national reserve of cash stands, to assure the public that there is enough and more than enough to meet not only all probable calls, but all calls of which there can be a chance of reasonable apprehension. and there is no doubt that the publication of the bank account gives more stability to the money market than any other kind of precaution would give. some persons, indeed, feared that the opposite result would happen; they feared that the constant publication of the incessant changes in the reserve would terrify and harass the public mind. an old banker once told me: 'sir, i was on lord althorp's committee which decided on the publication of the bank account, and i voted against it. i thought it would frighten people. but i am bound to own that the committee was right and i was wrong, for that publication has given the money market a greater sense of security than anything else which has happened in my time.' the diffusion of confidence through lombard street and the world is the object of the publication of the bank accounts and of the bank reserve. but that object is not attained if the amount of that reserve when so published is not enough to tranquillise people. a panic is sure to be caused if that reserve is, from whatever cause, exceedingly low. at every moment there is a certain minimum which i will call the apprehension minimum,' below which the reserve cannot fall without great risk of diffused fear; and by this i do not mean absolute panic, but only a vague fright and timorousness which spreads itself instantly, and as if by magic, over the public mind. such seasons of incipient alarm are exceedingly dangerous, because they beget the calamities they dread. what is most feared at such moments of susceptibility is the destruction of credit; and if any grave failure or bad event happens at such moments, the public fancy seizes on it, there is a general run, and credit is suspended. the bank reserve then never ought to be diminished below the 'apprehension point.' and this is as much as to say, that it never ought very closely to approach that point; since, if it gets very near, some accident may easily bring it down to that point and cause the evil that is feared. there is no 'royal road' to the amount of the 'apprehension minimum': no abstract argument, and no mathematical computation will teach it to us. and we cannot expect that they should. credit is an opinion generated by circumstances and varying with those circumstances. the state of credit at any particular time is a matter of fact only to be ascertained like other matters of fact; it can only be known by trial and inquiry. and in the same way, nothing but experience can tell us what amount of 'reserve' will create a diffused confidence; on such a subject there is no way of arriving at a just conclusion except by incessantly watching the public mind, and seeing at each juncture how it is affected. of course in such a matter the cardinal rule to be observed is, that errors of excess are innocuous but errors of defect are destructive. too much reserve only means a small loss of profit, but too small a reserve may mean 'ruin.' credit may be at once shaken, and if some terrifying accident happen to supervene, there may be a run on the banking department that may be too much for it, as in and , and may make it unable to pay its way without assistance--as it was in those years. and the observance of this maxim is the more necessary because the 'apprehension minimum' is not always the same. on the contrary, in times when the public has recently seen the bank of england exposed to remarkable demands, it is likely to expect that such demands may come again. conspicuous and recent events educate it, so to speak; it expects that much will be demanded when much has of late often been demanded, and that little will be so, when in general but little has been so. a bank like the bank of england must always, therefore, be on the watch for a rise, if i may so express it, in the apprehension minimum; it must provide an adequate fund not only to allay the misgivings of to-day, but also to allay what may be the still greater misgivings of to-morrow. and the only practical mode of obtaining this object is--to keep the actual reserve always in advance of the minimum 'apprehension' reserve. and this involves something much more. as the actual reserve is never to be less, and is always, if possible, to exceed by a reasonable amount the 'minimum' apprehension reserve, it must when the bank is quiet and taking no precautions very considerably exceed that minimum. all the precautions of the bank take time to operate. the principal precaution is a rise in the rate of discount, and such a rise certainly does attract money from the continent and from all the world much faster than could have been anticipated. but it does not act instantaneously; even the right rate, the ultimately attractive rate, requires an interval for its action, and before the money can come here. and the right rate is often not discovered for some time. it requires several 'moves,' as the phrase goes, several augmentations of the rate of discount by the bank, before the really effectual rate is reached, and in the mean time bullion is ebbing away and the 'reserve' is diminishing. unless, therefore, in times without precaution the actual reserve exceed the 'apprehension minimum' by at least the amount which may be taken away in the inevitable interval, and before the available precautions begin to operate, the rule prescribed will be infringed, and the actual reserve will be less than the 'apprehension' minimum. in time the precautions taken may attract gold and raise the reserve to the needful amount, but in the interim the evils may happen against which the rule was devised, diffused apprehension may arise, and then any unlucky accident may cause many calamities. i may be asked, 'what does all this reasoning in practice come to? at the present moment how much reserve do you say the bank of england should keep? state your recommendation clearly (i know it will be said) if you wish to have it attended to.' and i will answer the question plainly, though in so doing there is a great risk that the principles i advocate may be in some degree injured through some mistake i may make in applying them. i should say that at the present time the mind of the monetary world would become feverish and fearful if the reserve in the banking department of the bank of england went below , , l. estimated by the idea of old times, by the idea even of ten years ago, that sum, i know, sounds extremely large. my own nerves were educated to smaller figures, because i was trained in times when the demands on us were less, when neither was so much reserve wanted nor did the public expect so much. but i judge from such observations as i can make of the present state of men's minds, that in fact, and whether justifiably or not, the important and intelligent part of the public which watches the bank reserve becomes anxious and dissatisfied if that reserve falls below , , l. that sum, therefore, i call the 'apprehension minimum' for the present times. circumstances may change and may make it less or more, but according to the most careful estimate i can make, that is what i should call it now. it will be said that this estimate is arbitrary and these figures are conjectures. i reply that i only submit them for the judgment of others. the main question is one of fact--does not the public mind begin to be anxious and timorous just where i have placed the apprehension point? and the deductions from that are comparatively simple questions of mixed fact and reasoning. the final appeal in such cases necessarily is to those who are conversant with and who closely watch the facts. i shall perhaps be told also that a body like the court of the directors of the bank of england cannot act on estimates like these: that such a body must have a plain rule and keep to it. i say in reply, that if the correct framing of such estimates is necessary for the good guidance of the bank, we must make a governing body which can correctly frame such estimates. we must not suffer from a dangerous policy because we have inherited an imperfect form of administration. i have before explained in what manner the government of the bank of england should, i consider, be strengthened, and that government so strengthened would, i believe, be altogether competent to a wise policy. then i should say, putting the foregoing reasoning into figures, that the bank ought never to keep less than , , l.. or , , l. since experience shows that a million, or a million and a half, may be taken from us at any time. i should regard this as the practical minimum at which, roughly of course, the bank should aim, and which it should try never to be below. and, in order not to be below , , l., the bank must begin to take precautions when the reserve is between , , l. and , , l.; for experience shows that between , , l. and , , l. may, probably enough, be withdrawn from the bank store before the right rate of interest is found which will attract money from abroad, and before that rate has had time to attract it. when the reserve is between , , l. and , , l., and when it begins to be diminished by foreign demand, the bank of england should, i think, begin to act, and to raise the rate of interest. chapter xiii. conclusion. i know it will be said that in this work i have pointed out a deep malady, and only suggested a superficial remedy. i have tediously insisted that the natural system of banking is that of many banks keeping their own cash reserve, with the penalty of failure before them if they neglect it. i have shown that our system is that of a single bank keeping the whole reserve under no effectual penalty of failure. and yet i propose to retain that system, and only attempt to mend and palliate it. i can only reply that i propose to retain this system because i am quite sure that it is of no manner of use proposing to alter it. a system of credit which has slowly grown up as years went on, which has suited itself to the course of business, which has forced itself on the habits of men, will not be altered because theorists disapprove of it, or because books are written against it. you might as well, or better, try to alter the english monarchy and substitute a republic, as to alter the present constitution of the english money market, founded on the bank of england, and substitute for it a system in which each bank shall keep its own reserve. there is no force to be found adequate to so vast a reconstruction, and so vast a destructions and therefore it is useless proposing them. no one who has not long considered the subject can have a notion how much this dependence on the bank of england is fixed in our national habits. i have given so many illustrations in this book that i fear i must have exhausted my reader's patience, but i will risk giving another. i suppose almost everyone thinks that our system of savings' banks is sound and good. almost everyone would be surprised to hear that there is any possible objection to it. yet see what it amounts to. by the last return the savings' banks--the old and the post office together--contain about , , l. of deposits, and against this they hold in the funds securities of the best kind. but they hold no cash whatever. they have of course the petty cash about the various branches necessary for daily work. but of cash in ultimate reserve--cash in reserve against a panic--the savings' banks have not a sixpence. these banks depend on being able in a panic to realise their securities. but it has been shown over and over again, that in a panic such securities can only be realised by the help of the bank of england--that it is only the bank with the ultimate cash reserve which has at such moments any new money, or any power to lend and act. if in a general panic there were a run on the savings' banks, those banks could not sell , l. of consols without the help of the bank of england; not holding themselves a cash reserve for times of panic, they are entirely dependent on the one bank which does hold that reserve. this is only a single additional instance beyond the innumerable ones given, which shows how deeply our system of banking is fixed in our ways of thinking. the government keeps the money of the poor upon it, and the nation fully approves of their doing so. no one hears a syllable of objection. and every practical man--every man who knows the scene of action--will agree that our system of banking, based on a single reserve in the bank of england, cannot be altered, or a system of many banks, each keeping its own reserve, be substituted for it. nothing but a revolution would effect it, and there is nothing to cause a revolution. this being so, there is nothing for it but to make the best of our banking system, and to work it in the best way that it is capable of. we can only use palliatives, and the point is to get the best palliative we can. i have endeavoured to show why it seems to me that the palliatives which i have suggested are the best that are at our disposal. i have explained why the french plan will not suit our english world. the direct appointment of the governor and deputy-governor of the bank of england by the executive government would not lessen our evils or help our difficulties. i fear it would rather make both worse. but possibly it may be suggested that i ought to explain why the american system, or some modification, would not or might not be suitable to us. the american law says that each national bank shall have a fixed proportion of cash to its liabilities (there are two classes of banks, and two different proportions; but that is not to the present purpose), and it ascertains by inspectors, who inspect at their own times, whether the required amount of cash is in the bank or not. it may be asked, could nothing like this be attempted in england? could not it, or some modification, help us out of our difficulties? as far as the american banking system is one of many reserves, i have said why i think it is of no use considering whether we should adopt it or not. we cannot adopt it if we would. the one-reserve system is fixed upon us. the only practical imitation of the american system would be to enact that the banking department of the bank of england should always keep a fixed proportion--say one-third of its liabilities--in reserve. but, as we have seen before, a fixed proportion of the liabilities, even when that proportion is voluntarily chosen by the directors, and not imposed by law, is not the proper standard for a bank reserve. liabilities may be imminent or distant, and a fixed rule which imposes the same reserve for both will sometimes err by excess, and sometimes by defect. it will waste profits by over-provision against ordinary danger, and yet it may not always save the bank; for this provision is often likely enough to be insufficient against rare and unusual dangers. but bad as is this system when voluntarily chosen, it becomes far worse when legally and compulsorily imposed. in a sensitive state of the english money market the near approach to the legal limit of reserve would be a sure incentive to panic; if one-third were fixed by law, the moment the banks were close to one-third, alarm would begin, and would run like magic. and the fear would be worse because it would not be unfounded--at least, not wholly. if you say that the bank shall always hold one-third of its liabilities as a reserve, you say in fact that this one-third shall always be useless, for out of it the bank cannot make advances, cannot give extra help, cannot do what we have seen the holders of the ultimate reserve ought to do and must do. there is no help for us in the american system; its very essence and principle are faulty. we must therefore, i think, have recourse to feeble and humble palliatives such as i have suggested. with good sense, good judgment, and good care, i have no doubt that they may be enough. but i have written in vain if i require to say now that the problem is delicate, that the solution is varying and difficult, and that the result is inestimable to us all. appendix. note a. liabilities and cash reserve of the chief banking systems. the following is a comparison of the liabilities to the public, and of the cash reserve, of the banking systems of the united kingdom, france, germany, and the united states. for the united kingdom the figures are the most defective, as they only include the deposits of the bank of england, and of the london joint stock banks, and the banking reserve of the bank of england, which is the only cash available against these liabilities is also the only cash reserve against the similar liabilities of the london private banks, the provincial english banks, and the scotch and irish banks. in the case of england, therefore, the method of comparison exhibits a larger proportion of cash to liabilities than what really exists. ( ) english banking. liabilities. deposits of bank of england, less estimated joint stock bank balances, at december , l , , deposits of london joint stock banks at december (see 'economist,' february , ) l , , ------------ total liabilities l , , ============= reserve of cash banking reserve in bank of england. l , , ============= making proportion of cash reserve to liabilities to the public about ' per cent. ( ) bank of france (february, ). liabilities circulation l , , deposits l , , ------------- total liabilities l , , ============= reserve of cash. coin and bullion in hand l , , making proportion of cash reserve to liabilities to the public about per cent. ( ) banks of germany (january, ). liabilities circulation l , , deposits l , , acceptances and indorsements l , , ------------ total liabilities l , , ============ reserves of cash cash in hand l , , ============ making proportion of cash reserve to liabilities to the public about per cent. ( ) national banks of united states (october , ). liabilities circulation l , , deposits l , , ------------- total liabilities l , , ============= reserve of cash coin and legal tenders in hand l , , ============ making proportion of cash reserve to liabilities to the public about . per cent. summary liabilities cash held proportion of cash to the public to liabilities per cent bank of england and london joint stock banks , , , , . bank of france , , , , . banks of germany , , , , . national banks of united states , , , , . note b. extract from evidence given by mr. alderman salomons before house of commons select committee in . . [chairman.] the effect upon yourselves of the pressure in november was, i presume, to induce you to increase your reserve in your own hands, and also to increase your deposits with the bank of england?--yes, that was so; but i wish to tell the committee that that was done almost entirely by allowing the bills of exchange which we held to mature, and not by raising any money, or curtailing our accommodation to our customers. perhaps it may be interesting to the committee to know that on the th of november we held discounted bills for brokers to the amount of , , l. out of those bills, , , l. matured between the th of november and the th of december, and , , l. more between the th of december and the st. so that about , , l. of bills matured between the th of november and the st of december; consequently we were prepared, merely by the maturing of our bills of exchange, for any demands that might possibly come upon us. . i understand you to say that you did not withdraw your usual accommodation from your own customers, but that you ceased to have in deposit with the bill-brokers so large a sum of money as you had before?--not exactly that; the bills which we had discounted were allowed to mature, and we discounted less; we kept a large reserve of cash. . that is to say, you withdrew from the commercial world a part of that accommodation which you had previously given, and at the same time you increased your deposits with the bank of england?--yes, our deposits with the bank of england were increased. we did not otherwise withdraw accommodation. . [mr. weguelin.] had you any money at call with the bill-brokers?--a small amount; perhaps about , l. or less, which we did not call in. . [chairman.] what i understand you to say is, that the effect of the commercial pressure upon you was to induce you upon the whole to withdraw from commerce an amount of accommodation which in other times you had given, and at the same time to increase your deposits with the bank of england?--so far only as ceasing to discount with strangers, persons not having current accounts with us. . or to give the same amount to the bill-broker?--for a while, instead of discounting for brokers and strangers, we allowed our bills to mature, and remained quiescent with a view to enable us to meet any demand that might be made on ourselves. . except what you felt bound to your own customers to continue to give, you ceased to make advances?--quite so; perhaps i might say at the same time, that besides a large balance which we kept at the bank of england, which of course was as available as in our own tills, we increased our notes in our tills at the head office and at all the branches. . i suppose at that time large sales of public securities were made by the london joint stock banks, which securities were purchased by the public?--it is understood that some joint stock and other banks sold, but i believe it is quite certain that the public purchased largely, because they always purchase when the funds fall. . are you prepared to give the committee any opinion of your own as to the effect, one way or the other, which the system of the joint stock banks may have produced with regard to aggravating or diminishing the commercial pressure in the autumn of last year?--i should state, generally, that the joint stock banks, as well as all other banks, in london, by collecting money from those who had it to spare, must of necessity have assisted, and could not do otherwise than assist commerce, both then and at all other times. . you say that your discounts, either at your own counter or through the bill-brokers, are ordinarily very large, but that at the time of severest pressure you contracted them so far as you thought was just to your own immediate customers?--yes; but the capital was still there, because it was at the bank of england, and it was capable of being used for short periods; if we did not want it, others might have used it. . [mr. weguelin.] in fact, it was used by the bank of england?-- undoubtedly; i should suppose so; there is no question about it. . you, of course, felt quite certain that your deposits in the bank of england might be had upon demand?--we had no doubt about it. you did not take into consideration the effect of the law of , which might have placed the banking department of the bank of england in such a position as not to be able to meet the demands of its depositors? i must say that that never gave us the smallest concern. . you therefore considered that, if the time should arrive, the government would interfere with some measure as they had previously done to enable the bank to meet the demands upon it?--we should always have thought that if the bank of england had stopped payment, all the machinery of government would have stopped with it, and we never could have believed that so formidable a calamity would have arisen if the government could have prevented it. . [chairman.] the notion of the convertibility of the note being in danger never crossed your mind?--never for a moment; nothing of the kind. . [mr. weguelin.] i refer not to the convertibility of the note, but to the state of the banking department of the bank of england?--if we had thought that there was any doubt whatever about it, we should have taken our bank-notes and put them in our own strong chest. we could never for a moment believe an event of that kind as likely to happen. . therefore you think that the measure taken by the government, of issuing a letter authorising the bank of england to increase their issues of notes upon securities, was what was generally expected by the commercial world, and what in future the commercial world would look to in such a conjunction of circumstances?--we looked for some measure of that nature. that, no doubt, was the most obvious one. we had great doubts whether it would come when it did, until the very last moment. . have you ever contemplated the possibility of the bank refusing to advance, under circumstances similar to those which existed in november, , upon good banking securities?--of course i have, and it is a very difficult question to answer as to what its effect might be; but the notion appears to me to be so thoroughly ingrained in the minds of the commercial world, that whenever you have good security it ought to be convertible at the bank in some shape or way, that i have very great doubt indeed whether the bank can ever take a position to refuse to assist persons who have good commercial securities to offer. . [mr. cayley.] when you say that you have come to some fresh arrangement with regard to your allowance of interest upon deposits, do you speak of yourselves as the london and westminster bank, or of some of the other banks in combination with yourselves?--i think all the banks have come to an understanding that it is not desirable, either for their proprietors or for the public, to follow closely at all times the alterations of the bank. i believe it is understood amongst them all that they do not intend following that course in future. . is that from a feeling that it is rather dangerous under particular circumstances?--i cannot admit as to its being dangerous, but there can be no doubt of this, that there is a notion in the public mind which we ought not to contend against, that when you offer a high rate of interest for money, you rather do it because you want the person's money, than because you are obeying the market rate; and i think it is desirable that we should show that if persons wish to employ their money, and want an excessive rate, they may take it away and employ it themselves. . you think that there is now a general understanding amongst the banks which you have mentioned, to act upon a different principle from that on which they acted during last october and november?--i think i may say that i know that to be the case. . was not it the fact that this system of giving so high a rate of interest upon money at call commenced very much with the establishment of some banks during the last year or two, which, instead of demanding days' or a month's notice, were willing to allow interest upon only three days' notice; did not that system begin about two years ago?--i do not think it began with the new banks; i think it began with one of the older banks; i know that as regards my own bank, that we were forced into it; i forgot to say, that with regard to ourselves in taking money on deposit, the parties must leave the money a month, or they lose interest. we do not take money from any depositor at interest unless upon the understanding and condition that it remains a month with us; he may withdraw it within the month, but then he forfeits interest; it will not carry interest unless it is with us a month, and then it is removable on demand without notice. . is it or is it not a fact that some of the banks pay interest upon their current accounts?--yes, i think most of the new banks do so; and the union bank of london does it. . at a smaller rate than upon their deposits, i presume?--i think at a smaller rate, but i believe it is a fixed rate on the minimum balance for some period, either six months or one month, i do not exactly know the period. i think i ought to add (and i believe it is the case with all the banks) that the london and westminster bank, from the day of its first institution until the present day, has never re-discounted a bill. no bill has ever left our bank unless it has been for payment. . is not that generally the case with the london joint stock banks?--i believe it is the case. . [mr. weguelin.] but you sometimes lend money upon bills deposited with you by bill-brokers?--yes. . and you occasionally call in that money and re-deliver those securities?--yes; but that we do to a very small extent. . is not that equivalent to a re-discount of bills?--no; the discount of a bill and the lending money on bills are very different things. when we discount a bill, that bill becomes our property; it is in our control, and we keep it and lock it up until it falls due; but when brokers come to us and want to borrow, say , l. on a deposit of bills, and we let them have the money and afterwards return those bills to them and we get back our money, surely that is not a re-discount. . when you want to employ your money for a short period, do you not frequently take bills of long date, and advance upon them?--but that is not a re-discount on our part. very often brokers in borrowing money send in bills of long date, and afterwards we call in that loan; but that is no more a re-discount than lending money upon consols and calling in that money again. it is not an advance of ours; we do not seek it; they come to us and borrow our money, and give us a security; when we want our money we call for that money, and return their security. surely that is not a re-discount. . [mr. hankey.] is there not this clear distinction between returning a bill on which you have made an advance and discounting a bill, that if you have discounted a bill your liability continues upon the bill until that bill has come to maturity?--yes. . in the other case you have no further liability whatever?--certainly. . should you not consider that a very important distinction?--i think it is an important distinction. take this case: suppose a party comes to us and borrows , l., and we lend it him, and when the loan becomes due we take our money back again. surely that is not a discount on our part. . is there not this distinction, that if you re-discount you may go on pledging the liability of your bank to an almost unlimited amount, whereas in the other case you only get back that money which you have lent?--undoubtedly. . [mr. cayley.] the late chancellor of the exchequer stated before the adjournment, in a speech in the house of commons, that during the monday, tuesday, wednesday, and thursday of the panic, the bank was almost, if not entirely, the only body that discounted commercial bills; how can you reconcile that with what you have said, that you gave as much accommodation as usual to your customers?--i am not responsible for what the chancellor of the exchequer said; i am responsible for what i am now stating as to the course of our bank, that our advances to our customers on the st of december were nearly , l. higher than they were on the st of october. with regard to our not discounting for other parties, it was in consequence of the discredit which prevailed, that it was necessary we should hold a portion of our deposits in order that they should be available in case persons called for them; a certain number of persons did so; in the month of november we had a reduction of our deposits, and if we had gone on discounting for brokers we should have had to go into the market ourselves to raise money on our government securities, but we avoided that by not discounting, and leaving our money at the bank of england. . then you did not discount as much as usual for your customers during that period?--yes, we did, and more. . but not to strangers?--not to strangers; i make a distinction between our transactions with our customers, who of course expect us to give accommodation, and discounts for brokers, which is entirely voluntary, depending upon our having money to employ. . how would it have been if the letter had not issued at the last moment? that is a question which i can hardly answer. . what do you mean by that general expression of yours?--it is impossible to predicate what may happen in time of panic and alarm. a great alarm prevailed certainly amongst the commercial world, and it could never have been alleviated, except by some extraordinary means of relief. we might probably have been in the state in which hamburg was, where they have no bank-notes in circulation. . [mr. spooner.] what did you mean by the expression, 'the last moment'? you said that the letter came out at the last moment; the last moment of what?--it was late in the day; it was a day of great distress. for two days there was a great deal of anxiety, and everybody expected that there would be some relief; and it was when expectation, i suppose, was highly excited that the letter came, and it gave relief. . cannot you tell us what your opinion would have been, if that last moment had happened to have elapsed, and the letter had not come?--it is very difficult to say; it is too much to say that it could not have been got over. there can be no doubt whatever that what created the difficulty existed out of london, and not in it; and therefore it is much more difficult for me to give an opinion. i believe that the banking interest, both private and joint stock, was in a perfectly sound condition, and able to bear any strain which might have been brought upon it in london. . [mr. hankey.] can you give the committee any idea as to what proportion of deposits you consider generally desirable to keep in reserve?--you must be very much guided by circumstances. in times of alarm, when there are failures, of course all bankers strengthen their reserves; our reserve then is larger. in times of ordinary business we find, both as regards our deposits at interest as well as those which are not at interest, that there is a constant circulation; that the receipts of money very nearly meet the payments. . you probably keep at all times a certain amount of your deposits totally unemployed; in reserve?--yes. . in a normal state of commercial affairs, is there any fixed proportion, or can you give the committee any idea of what you would consider about a fair and desirable proportion which should be so kept unemployed?--i think the best idea which i can give upon that subject is to give our annual statement, or balance sheet, for the st of december. . does that show what amount of unemployed money you had on that day?--yes. i will put in a statement, which perhaps will be the best means of meeting the question, showing the cash in hand on the th of june and the st of december in every year, as shown by our published accounts, together with our money at call and our government securities; that will be perhaps the best and most convenient way of giving the information you desire to have. (see table below.) . do you consider that when your deposits are materially on the increase it is necessary to keep a larger amount of money in reserve than you would keep at other times?--i may say that, as a general rule, our reserve would always bear some proportion to our deposits. _total lodgments with london and westminster bank; also amount of cash in hand, moneys with bill-brokers at call, and government securities held by the bank._ date deposits cash money government total. in hand at call securities l l l l l december , , , , , , , , december , , , , , , , december , , , , , , , , june , , , , , , , , december , , , , , , , , june , , , , , , , december , , , , , , , june , , , , , , , december , , , , , , , , june , , , , , , , , december , , , , , , , , june , , , , , , , , december , , , , , , , , june , , , , , , , , december , , , , , , , , june , , , , , , , , december , , , , , , , , june , , , , , , , , december , , , , , , , , june , , , , , , , , december , , , , , , , , , june , , , , , , , , december , , , , , , , , , , . do you employ your money in the discounting of bills for other persons than your own customers?--discount brokers. . only to discount brokers? yes. . not to strangers who are in the habit of bringing you in bills; commercial houses?--i should say generally not. we have one or two houses for whom we discount who have not accounts with us as bankers, but generally we do not discount except for our customers or for bill-brokers. . do you consider that any advantage can arise to the public by the bank of england advancing to a greater extent than can be considered strictly prudent on the soundest principle of banking, under the idea of their affording aid to the commercial world?--as i said before, as long as there are good bills in circulation, that is, bills about which there would be no doubt of their being paid at maturity, there should be some means by which those bills could be discounted. . and do you think that it is part of the functions of the bank of england to discount a bill for anybody, merely because the party holding the bill wishes to convert it into cash?--as i said before, the bank of england will have great difficulty in getting rid of that inconvenient idea which there is in the mind of the public, that the bank of england is something more than an ordinary joint stock bank. i think it must depend very much upon circumstances whether you can or cannot refuse the discount of good bills which are offered to you. note c. statement of circulation and deposits of the bank of dundee at intervals of ten years between and . year circulation deposits l l , -- , -- , -- , -- , , , , , , , , , , , , , , the bank did not begin to receive deposits until , in which year they amounted to , l. note d. meeting of the proprietors of the bank of england. september , . (from 'economist,' september , .) a general court of the bank of england was held at the bank at twelve o'clock on the th instant, for the purpose of declaring a dividend for the past half-year. mr. launcelot holland, the governor of the bank, who presided upon the occasion, addressed the proprietors as follows: this is one of the quarterly general courts appointed by our charter, and it is also one of our half-yearly general courts, held under our bye-laws, for the purpose of declaring a dividend. from a statement which i hold in my hand it appears that the net profits of the bank for the half-year ending on the st of august last amounted to , l. s. d.; making the amount of the rest on that day, , , l. s. d.; and after providing for a dividend at the rate of l. s. per cent, the rest will stand at , , l.. s. d. the court of directors, therefore, propose that a half-yearly dividend of interest and profits, to the amount of l. s. per cent, without deduction on account of income tax, shall be made on the th of october next. that is the proposal i have now to lay before the general court; but as important events have occurred since we last met, i think it right i should briefly advert to them upon this occasion. a great strain has within the last few months been put upon the resources of this house, and of the whole banking community of london; and i think i am entitled to say that not only this house but the entire banking body acquitted themselves most honourably and creditably throughout that very trying period. banking is a very peculiar business, and it depends so much upon credit that the least blast of suspicion is sufficient to sweep away, as it were, the harvest of a whole year. but the manner in which the banking establishments generally of london met the demands made upon them during the greater portion of the past half-year affords a most satisfactory proof of the soundness of the principles on which their business is conducted. this house exerted itself to the utmost--and exerted itself most successfully--to meet the crisis. we did not flinch from our post. when the storm came upon us, on the morning on which it became known that the house of overend and co. had failed, we were in as sound and healthy a position as any banking establishment could hold; and on that day and throughout the succeeding week, we made advances which would hardly be credited. i do not believe that any one would have thought of predicting, even at the shortest period beforehand, the greatness of those advances. it was not unnatural that in this state of things a certain degree of alarm should have taken possession of the public mind, and that those who required accommodation from the bank should have gone to the chancellor of the exchequer and requested the government to empower us to issue notes beyond the statutory amount, if we should think that such a measure was desirable. but we had to act before we could receive any such power, and before the chancellor of the exchequer was perhaps out of his bed we had advanced one-half of our reserves, which were certainly thus reduced to an amount which we could not witness without regret. but we could not flinch from the duty which we conceived was imposed upon us of supporting the banking community, and i am not aware that any legitimate application for assistance made to this house was refused. every gentleman who came here with adequate security was liberally dealt with, and if accommodation could not be afforded to the full extent which was demanded, no one who offered proper security failed to obtain relief from this house. i have perhaps gone a little more into details than is customary upon these occasions, but the times have been unusually interesting, and i thought it desirable to say this much in justification of the course adopted by this house of running its balances down to a point which some gentlemen may consider dangerous. looking back, however, upon recent events, i cannot take any blame to this court for not having been prepared for such a tornado as that which burst upon us on the th of may; and i hope the court of proprietors will feel that their directors acted properly upon that occasion, and that they did their best to meet a very extraordinary state of circumstances. i have now only to move that a dividend be declared at the rate of l. s. per cent for the past half-year. mr. hyam said that before the question was put he wished to offer a few observations to the court. he believed that the statement of accounts which had just been laid before them was perfectly satisfactory. he also thought that the directors had done their best to assist the commercial classes throughout the late monetary crisis; but it appeared to him at the same time that they were in fault in not having applied at an earlier period to the chancellor of the exchequer for a suspension of the bank act. it was well known that the demand on the bank was materially lessened in the earlier part of the day, in consequence of a rumour which had been extensively circulated that permission to overstep the limits laid down in the act had been granted. that concession, however, had only been made after the most urgent representations had been addressed to the chancellor of the exchequer at a late hour in the night, and if it had then been refused he felt persuaded that the state of affairs would have been much worse on the saturday than it had been on the friday. the fact was that the act of was totally unsuited to the present requirements of the country, which since that period had tripled or quadrupled its commerce; and he was sorry to know that the measure seemed to meet with the approval of many of their directors. any one who read the speeches made in the course of the discussion on mr. watkins' motion must see that the subject called for further inquiry; and he trusted that the demand for that inquiry would yet be conceded. mr. jones said he entirely dissented from the views with respect to the bank act entertained by the hon. proprietor who had just addressed the court. in his opinion the main cause of the recent monetary crisis was that, while we had bought , , l. worth of foreign produce in the year , the value of our exports had only been , , l., so that we had a balance against us to the amount of , , l. he believed that the bank acted wisely in resisting every attempt to increase the paper currency, and he felt convinced that the working classes would be the people least likely to benefit by the rise in prices which would take place under such a change. mr. moxon said he should be glad to know what was the amount of bad debts made by the bank during the past half-year. it was stated very confidently out of doors that during that period the directors had between , , l. and , , l. of bills returned to them. the governor of the bank.--may i ask what is your authority for that statement? we are rather amused at hearing it, and we have never been able to trace any rumour of the kind to an authentic source. mr. moxon continued--whether the bad debts were large or small, he thought it was desirable that they should all know what was their actual amount. they had been told at their last meeting that the bank held a great many railway debentures; and he should like to know whether any of those debentures came from railway companies that had since been unable to meet their obligations. he understood that a portion of their property was locked up in advances made on account of the thames embankment, and in other ways which did not leave the money available for general banking and commercial purposes; and if that were so, he should express his disapproval of such a policy. there was another important point to which he wished to advert. he was anxious to know what was the aggregate balance of the joint stock banks in the bank of england. he feared that some time or other the joint stock banks would be in a position to command perhaps the stoppage of the bank of england. if that were not so, the sooner the public were full & informed upon the point the better. but if ten or twelve joint stock banks had large balances in the bank of england, and if the bank balances were to run very low, people would naturally begin to suspect that the joint stock banks had more power over the bank of england than they ought to have. he wished further to ask whether the directors had of late taken into consideration the expediency of paying interest on deposits. he believed that under their present mode of carrying on their business they were foregoing large profits which they might receive with advantage to themselves and to the public; and he would recommend that they should undertake the custody of securities after the system adopted by the bank of france. in conclusion, he proposed to move three resolutions, for the purpose of providing, first, that a list of all the proprietors of bank stock should be printed, with a separate entry of the names of all those persons not entitled to vote from the smallness of their stock, or from the shortness of time during which they held it; secondly, that a copy of the charter of the bank, with the rules, orders, and bye-laws passed for the good government of their corporation, should be printed for the use of the shareholders; and thirdly, that auditors should be appointed to make detailed audits of their accounts. mr. gerstenberg recommended that the directors should take some step for the purpose of preventing the spread of such erroneous notions as that which lately prevailed on the continent, that the bank was about to suspend specie payments. mr. w. botly said he wished to see the directors taking into their consideration the expediency of allowing interest on deposits. mr. alderman salomons said he wished to take that opportunity of stating that he believed nothing could be more satisfactory to the managers and shareholders of joint stock banks than the testimony which the governor of the bank of england had that day borne to the sound and honourable manner in which their business was conducted. it was mainfestly desirable that the joint stock banks and the banking interest generally should work in harmony with the bank of england; and he sincerely thanked the governor of the bank for the kindly manner in which he had alluded to the mode in which the joint stock banks had met the late monetary crisis. the governor of the bank said--before putting the question for the declaration of a dividend, i wish to refer to one or two points that have been raised by the gentlemen who have addressed the court on this occasion. the most prominent topic brought under our notice is the expediency of allowing interest on deposits; and upon that point i must say that i believe a more dangerous innovation could not be made in the practice of the bank of england. the downfall of overend and gurney, and of many other houses, must be traced to the policy which they adopted of paying interest on deposits at call, while they were themselves tempted to invest the money so received in speculations in ireland or in america, or at the bottom of the sea, where it was not available when a moment of pressure arrived. mr. botly said he did not mean deposits on call. the governor of the bank of england continued--that is only a matter of detail; the main question is whether we ought to pay interest on deposits, and of such policy i must express my entire disapproval. mr. moxon has referred to the amount of our debts, but, as i stated when i took the liberty of interrupting him, we could never trace the origin of any rumour which prevailed upon that subject. as far as it can be said to have ever existed it had its origin most probably in the vast amount advanced by the bank. it must, however, be remembered that we did not make our advances without ample security, and the best proof of that is the marvelously small amount of bad debts which we contracted. it has never been a feature of the bank to state what was the precise amount of those debts; but i believe that if i were to mention it upon the present occasion, it would be found to be so inconsiderable that i should hardly obtain credence for the announcement i should have to make. i am convinced that our present dividend has been as honestly and as hardly earned as any that we have ever realised; but it has been obtained by means of great vigilance and great anxiety on the part of each and all of your directors; and i will add that i believe you would only diminish their sense of responsibility, and introduce confusion into the management of your business, if you were to transfer to auditors the making up of your accounts. if your directors deserve your confidence they are surely capable of performing that duty, and if they do not deserve it you ought not to continue them in their present office. with regard to the supposed lock-up of our capital, i must observe that, with , , l. on our hands, we must necessarily invest it in a variety of securities; but there is no ground for imagining that our money is locked up and is not available for the purpose of making commercial advances. we advanced in the space of three months the sum of , , l.; and what more than that do you want? it has been recommended that we should take charge of securities; but we have found it necessary to refuse all securities except those of our customers; and i believe the custody of securities is becoming a growing evil. with regard to railway debentures, i do not believe we have one of a doubtful character. we have no debentures except those of first-class railway companies and companies which we know are acting within their parliamentary limits. having alluded to those subjects, i will now put the motion for the declaration of the dividend. the motion was accordingly put and unanimously adopted. the chairman then announced that that resolution should be confirmed by ballot on tuesday next, inasmuch as the bank could not, under the provisions of its act of parliament, declare otherwise than in that form a dividend higher than that which it had distributed during the preceding half-year. the three resolutions proposed by mr. moxon were then read; but they were not put to the meeting, inasmuch as they found no seconders. mr. alderman salomons said that their governor had observed that he thought the payment of interests on deposits was objectionable; and everyone must see that such a practice ought not to be adopted by the bank of england. but he took it for granted that the governor did not mean that his statement should apply to joint stock banks which he had himself told them had conducted their business so creditably and so successfully. the governor of the bank said that what he stated was that such a system would be dangerous for the bank of england, and dangerous if carried into effect in the way contemplated by mr. moxon. mr. p. n. laurie said he understood the governor of the bank to say that it would be dangerous to take deposits on call, and in that opinion he concurred. mr. alderman salomons said that he, too, was of the same opinion. on the motion of mr. alderman salomons, seconded by mr. botly, a vote of thanks was passed to the governor and the directors for their able and successful management of the bank during the past half-year, and the proceedings then terminated. (this file was produced from images generously made available by cornell university digital collections) bank of the manhattan company origin history progress wall street new york [illustration: present office of the manhattan company - wall street building erected jointly in by the manhattan company and the merchants' national bank] bank of the manhattan company chartered a progressive commercial bank [illustration: chief of the manhattans] wall street new york [illustration: common seal] on may th, , the committee of by-laws reported "that they had devised a common seal for the corporation, the description of which is as follows: "oceanus, one of the sea gods, sitting in a reclining posture on a rising ground pouring water from an urn which forms a river and terminates in a lake. on the exergue will be inscribed 'seal of the manhattan company.'" there are nine banks now in existence whose history reaches back into the eighteenth century. of these, two are in massachusetts, two in connecticut, one in pennsylvania, one in delaware, one in maryland and two in new york. corporate banking in new york began with the organization of the bank of new york by alexander hamilton in , which received its charter in . for fifteen years this bank, together with the new york branch of the first bank of the united states, were the only banks doing business in either the city or state of new york. with hamilton and the federals in control of the legislature, new bank charters were unobtainable. this monopoly of banking facilities in the city and state was of great strategic value to the political party in control, and naturally aroused jealousy and resentment among the members of the opposition, whose leader was aaron burr. [illustration: excerpt from charter] in new york city suffered from a severe yellow fever epidemic, which was attributed to an inadequate and inferior water supply. upon the assembling of the legislature in , an association of individuals, among whom aaron burr was the moving spirit, applied for a charter for the purpose of "supplying the city of new york with pure and wholesome water." with a capital of $ , , , the project was an ambitious one for those days, and, as there was considerable uncertainty about the probable cost of the water system, a clause was inserted in the charter, permitting the company to employ all surplus capital in the purchase of public or other stock or in any other monied transactions or operations, not inconsistent with the constitution and laws of new york or of the united states. a great effort was made to defeat the charter on account of this clause granting the company banking privileges. but the necessity for a proper water system, which could be procured only by the organization of a responsible company with large capital, carried it through the legislature and it received the governor's signature. [illustration: form of early stock certificate] the bill was passed april d, , and by april d books were opened for public subscription to the $ , , capital stock of the manhattan company, the par value of which was $ . these original books are still in the possession of the company, and contain the signatures of many of the prominent men of the time. by may th the entire amount had been subscribed by several thousand persons--the city of new york having taken , of the shares. the charter provided that the recorder of the city should be _ex-officio_ a director of the company, a provision which was in effect for years, until the abolition of the office in . [illustration: subscriptions of directors reproduced from original subscription book] [illustration: oath of first president] the water system at the first meeting of the directors, held at the house of edward barden, innkeeper, on april th, , the following directors were present: daniel ludlow, john watts, john b. church, brockholst livingston, william laight, pascal n. smith, samuel osgood, john stevens, john b. coles, john broome, aaron burr, and richard harrison, recorder of the city of new york, ex. officio, the only absentee being william edgar. daniel ludlow was chosen president, and the following minute was made: the principal object of this incorporation being to obtain a supply of pure and wholesome water for the city of new york. resolved that samuel osgood, john b. coles and john stevens be a committee to report with all convenient speed the best means to be pursued to obtain such supply. [illustration: old wooden water mains] on may th, , the water committee was empowered "to contract for as many pine logs as they may think necessary for pipes and also for boring the same." [illustration: contemporary cartoon] a number of wells were sunk, reservoirs and tanks built, and the distributing system extended generally through the city south of city hall. about the system was extended north along broadway as far as bleecker street, and at that time the company had about twenty-five miles of mains and supplied , houses. [illustration: manhattan company reservoir on chambers street] while the water was said to be "wholesome," its quality did not give entire satisfaction, as may be seen from the muddiness of the water in the glass held by "pure manhattan" in the contemporary cartoon reproduced on the opposite page. over one of the earliest wells, at the corner of reade and center streets, a tank of iron plates was erected. this tank is now inclosed in an old-fashioned building which is still owned by the manhattan company. the company continued to operate its water service until about the time the croton system was completed in . [illustration: old water gate dug up in park row in ] founding and early history of the bank on april , , a committee of the directors was appointed "to consider the most proper means of employing the capital of the company." the committee reported on june , , in favor of opening an office of discount and deposit, and a house was bought on the site of the present no. wall street, in which, on september , , the "bank" of the manhattan company began business. the following is one of the earliest advertisements, reproduced from the mercantile advertiser, october , : manhattan company. the office of discount and deposit will open for the transaction of business, for the present, at o'clock in the forenoon, and continue open until o'clock in the afternoon, when the business of the day will be closed. henry remsen, cashier. september . [illustration: wall street in present no. wall street] the first action of the directors after the opening of the bank was: resolved, that this board will hereafter meet twice a week, to wit, on mondays and thursdays of each week, at o'clock. the policy of semi-weekly meetings still prevails in the manhattan company, and its board of twelve directors keeps in close touch with all its affairs. [illustration: manhattan company currency] two months after the bank was opened the directors resolved, that a committee be appointed to visit the vaults and examine the cash and look over the effects of the manhattan company deposited therein. thus, at the outset, the manhattan company required its directors periodically to examine its cash and securities, a safeguard which, years later, the state of new york made compulsory for all state banking institutions. the bank of the manhattan company was profitable from the start and commenced paying dividends in july . the total dividends to and including january, , have aggregated $ , , . [illustration: fractional currency used in utica] although the main office of the bank has always been at the present no. wall street, in the autumn of all the banks moved temporarily to the village of greenwich to escape the usual autumn fever epidemic. the directors then determined to provide a country office for use during the "sickly season." many persons offered sites; among them "mr. astor proposed verbally to cede eight lots of ground near greenwich, being part of his purchase from gov. clinton." finally land was acquired between the "bowery road" and the east river. from to branches of the bank were maintained in utica and poughkeepsie. in negotiations were consummated for a "union of the capitals and interests" of the new york state bank of albany and the manhattan company. a bill authorizing the consolidation was offered in the legislature, but it failed to pass, and the plan was abandoned. in the legislature, in enacting certain amendments to the charter of the manhattan company, reserved for the state the right to take , shares of its capital stock. this right was exercised and the capital stock was increased for the purpose from $ , , to $ , , . both the state and the city of new york are still stockholders, this being the only bank stock which the state holds. in , as shown in the cartoon reproduced on the following page, the manhattan company was one of the banks to receive the government deposits when they were withdrawn from the second united states bank by president jackson. [illustration: published and for sale wholesale and retail by a imbert at his caricature store no broadway] present organization and policy of the bank in the manhattan company became one of the original members of the new york clearing house association, and stands, in order of seniority, no. on its roll. from down to , the manhattan company's deposits averaged between $ , , and $ , , . the deposits doubled during the eighties, again during the nineties, and again in the decade ending . this growth has been made along healthy and normal lines, and not by absorbing or consolidating with other banking institutions. the fact that the manhattan company is an entirely independent institution has doubtless assisted its growth in recent years. the steady increase in both the deposits and the surplus of the manhattan company is evidence of its vitality, its sound banking traditions and its ability to keep its methods so modernized as to give efficient service to its widening circle of clients. to meet both its own needs and those of its commercial and banking patrons, well organized credit and foreign exchange departments are maintained. [illustration: building of the manhattan company wall street in ] the manhattan company, acting as the reserve agent of many state banks and trust companies throughout the country, has a substantial volume of bank deposits. but it was originally established as an "office of discount and deposit," and is today primarily a commercial bank, seeking the active accounts of merchants and manufacturers and extending them accommodation in keeping with their credit and standing, for which the diversified character of its deposits has always provided ample funds. irving press and east thirty-first street new york generously made available by the internet archive/american libraries.) banking by william a. scott, ph.d., ll.d. director of the course in commerce and professor of political economy in the university of wisconsin chicago a. c. mcclurg & co. copyright a. c. mcclurg & co. published april, copyrighted in great britain w. f. hall printing company, chicago editor's preface in europe the average man looks upon the bank as a benefactor. through its agency he secures capital at low rates for his business. in america the bank is too often regarded as a necessary evil, certainly not with affection. yet it plays a most important rôle in the nation's economy. our banking laws are obsolete, unsatisfactory, and actually in some instances detrimental to the best and widest use of the nation's resources. europe has many lessons for us in the problem of how best to use our accumulations. with agriculture demanding and the railroads calling for more capital, the question of scientific banking assumes new proportions. this book, with its chapters on commercial and investment banking, will help to a better knowledge. f. l. m. author's preface the purpose of this book is to supply the general reader with a simple statement of the principles and problems of banking. since it is designed primarily for american readers, special attention has been given to conditions in this country. an effort has been made clearly to draw the line between commercial and investment banking and to indicate the problems peculiar to each. that it may assist the average person in understanding present-day banking problems and thus contribute towards the formation of a sound public opinion regarding them, is the author's hope and desire. wm. a. scott. _university of wisconsin._ contents page chapter i. the nature, functions, and classification of banking institutions, . services performed by banking institutions, . the economic functions of banks, . classification of banking institutions, chapter ii. the nature and operations of commercial banking, . commercial paper, . the operation of discount, . the conduct of checking accounts, . the issue of notes, . collections, . domestic exchange, . foreign exchange, chapter iii. the problems of commercial banking, . the supply of cash, . the selection of loans and discounts, . rates, . protection against unsound practices, (a) capital and surplus requirements and double liability of stockholders, (b) inflation and means of protecting the public against it, (c) other means of safeguarding the interests of the public, . adequacy and economy of service, chapter iv. commercial banking in the united states, . state banks, . national banks, . the independent treasury system, . the interrelations of these institutions, . operation of the system, (a) conflict of functions and laws, (b) loan operations, (c) treasury operations, (d) operation of the reserve system, (e) lack of elasticity in the currency, . plans for reform, chapter v. commercial banking in other countries, . common features, . the english system, . the french system, . the german system, . the canadian system, chapter vi. investment banking, . saving and savings institutions, . trust companies, . bond houses and investment companies, . land banks, . stock exchanges, . some defects in our investment banking machinery, references, index, banking chapter i the nature, functions, and classification of banking institutions the terms, "bank" and "banking," are applied to institutions and to businesses which differ considerably in character, functions, and methods, but which nevertheless have certain common features which justify their being grouped together. we can best prepare the way for a discussion of these differences and common features by a description of the services which these institutions perform in modern society. _ . services performed by banking institutions_ from the point of view of their customers these services may be grouped under the following heads: the safekeeping of money and other valuables; the making of payments; the making of loans; and the making of investments. it is a common practice everywhere, and in some countries, notably the united states, almost a universal practice for people to intrust their money to banks for safekeeping. to a degree, hoarding, in the sense of locking up money in private vaults and other receptacles and keeping it under the eye and in the personal care of the owner, is still practiced, but it is doubtless on the wane in all civilized countries. the practice of intrusting to banks the safekeeping of other valuables, such as important documents, jewelry, plate, etc., is also widespread and growing. the service of the safekeeping of money naturally leads to the second, the making of payments. when we intrust our means of payment to a bank, it is natural that we should also make it our treasurer and disbursing agent, and so we do. if we have payments to make to people at home, in other cities of our own country, or in other countries, we usually order our bank to perform the service for us. loans of almost all kinds are made by banks, and certain kinds, namely, those to business men for the everyday conduct of commerce and industry, are made almost exclusively by them. for the most part these are short-term loans. for long-term loans banks are also one of the chief resorts, but in some countries these are not to so great a degree monopolized by them as the short-term variety. for the investment of the surplus funds of people banks are the chief agencies. this function takes the form mainly of the sale of stocks, bonds, and mortgages, and sometimes of the promotion of new enterprises. none of these services are performed by banks exclusively. for the safekeeping of valuables, and sometimes of money, there are in some places safe deposit companies to which the term "banks" is not applied. in the making of payments the post office departments of governments and express companies participate, and in the making of loans and investments brokers, loan companies, lawyers, etc., participate. the peculiarity of banking institutions consists not in the performance of any one of these services, but in the fact that they specialize in them all, or in a combination of them. merely to keep money and valuables on deposit, or to act as paymaster, or to make loans, or to sell bonds, stocks, and mortgages would not make an institution a bank or an individual a banker; but to make a business of performing most or all of these services for the public involves the use of certain machinery and certain methods of procedure, and the assumption of a rôle in the nation's economy which is distinctive and peculiar, and which has set these institutions apart in every country as objects of legislation and of scientific treatment, as well as in the thought and regard of the people. _ . the economic functions of banks_ viewed from the standpoint of the nation rather than from that of individuals, the functions of banks may be described as those of intermediaries in exchanges and in the investment of capital. in the former capacity they supply the world with the major part of its medium of exchange and serve as distributing agents for that portion of the supply which comes from other sources. they create a medium of exchange through a process of bookkeeping which is world-wide in extent, and through which the mutual indebtedness of individuals, cities, and other subdivisions of countries and nations, brought about by purchases and sales on credit, are offset without the use of money. the practice of depositing surplus funds with banks for safekeeping and consequently of using them as paymasters has resulted in the reliance of everybody upon banks for currency in any form, and has thus thrown upon them the responsibility of directly utilizing all the sources of money supply. thus while the mints of the united states and most other countries coin gold bullion, and supply subsidiary silver and copper and nickel coins to private persons on the same terms as to banks, as a matter of fact few private persons take advantage of this privilege, finding it more convenient and profitable to get the coin they want from banks. the same is true of government notes in countries in which such notes constitute a portion of the currency. the accumulation of a nation's capital and its investment require the cooperation of numerous agencies of which banks are the chief. they collect the savings of the people, combine them into amounts of sufficient size for investment purposes, and invest them temporarily and sometimes permanently. cooperating agencies in this work are insurance companies, societies of various kinds for the promotion of saving, stock exchanges, promoters, etc. some of these take the place of banks in the performance of these services, while others supplement and aid them. _ . classification of banking institutions_ banks differ from one another chiefly in the nature and degree of their specialization, in legal status, and in the place they occupy in the system to which they belong. some banks devote the major portion of their effort to the conduct of exchanges and are called _commercial_ banks, others to investment banking and are called _investment_ banks. the most common subclasses under the latter head are savings banks, land or mortgage banks, and bond houses. savings banks specialize in the collection and investment of small savings; land banks are primarily intermediaries between capitalists and people who wish to invest capital in land, building operations, and agriculture; and bond houses are intermediaries between capitalists and those who wish to invest capital in industrial, commercial, and transportation enterprises, or loan it to states, cities, or other public corporations. commercial banks rarely confine themselves exclusively to the conduct of exchanges. most of them also conduct savings departments and invest the funds intrusted to them through such departments in agricultural, industrial, or commercial enterprises or loan them to public corporations. commercial banking, however, is their main concern, their other departments being side issues of greater or less importance according to circumstances. investment banks also frequently carry on commercial banking as a side issue. these two lines of business are sometimes mixed in such proportions as to render classification difficult. from a legal point of view the banks of nearly all countries may be classified as _private_ or unincorporated, and _incorporated_, sometimes also called joint-stock banks. private banks are started by individuals or firms, like any other private enterprise, without the formality of application for permission to some public officer, and without compliance with a set of legally prescribed regulations. they are subject to the laws of the country governing all kinds of private business enterprises and sometimes to special laws applying specifically to them. in some of the states of the united states such banks are prohibited by law. incorporated banks are usually started by private initiative but owe their actual legal existence and status to a special law, to the requirements of which they must conform before they are permitted to do business. their right to do business is usually evidenced by a document known as a charter, executed and delivered by a public officer legally endowed with the requisite authority, or passed in the form of a law by the legislative organs of the state. charters of the latter kind are known as special charters and are rarely used nowadays, except in the case of institutions of a peculiar character, endowed with special functions. the central banks of europe owe their existence to such charters, as did also the first and second united states banks. in the early history of the united states special charters were uniformly employed by the states, but for many years general incorporation laws have been the rule, on compliance with the requirements of which persons who desire to incorporate banks can secure charters. in federal states, both the federal government and the governments of the constituent states frequently have and exercise the right to incorporate banks. in the united states, banks incorporated by the federal government under the terms of a general law, originally passed in and many times amended since that date, are known as _national_ banks, and those incorporated by the states under the terms of general banking acts or of general incorporation laws are known as _state_ banks. these latter are endowed with privileges which enable them to exercise commercial and some investment banking functions. other banks also are incorporated by our states under the terms of general laws, which are known as savings banks and trust companies. the former, as the name implies, are institutions primarily designed for the encouragement, collection, and investment of savings. the latter are called trust companies because the earliest institutions of this type made the execution of trusts of various kinds their exclusive business. banking functions were later added and in many cases have now assumed chief importance. the nature of the banking business requires some kind of organization of the individual institutions in which certain ones will assume to a degree at least the rôle of bankers' banks. in most european countries this position is occupied by single institutions specially chartered and endowed with special privileges and usually described as central banks. examples are the bank of england in england, the bank of france in france, and the imperial bank of germany in germany. around these are grouped the other institutions in a kind of hierarchy, certain large banks in the larger cities forming centers about which smaller institutions group themselves. in the united states there is no single central institution, but a small group of banks in new york city are the real centers of the system. around these are grouped the banks in the other large cities of the country and these in turn perform important services for banks in the surrounding smaller towns and country districts. chapter ii the nature and operations of commercial banking in the preceding chapter commercial banking has been defined as the conduct of exchanges by means of a world-wide process of bookkeeping. we must now describe this process. its essential features are the discount of commercial paper, the conduct of checking accounts, and the issue of notes. _ . commercial paper_ by commercial paper is meant the credit instruments or documents which the credit system now in general use throughout the commercial world regularly brings into existence and liquidates. the essence of this system is buying and selling _on time_. the farmer buys seed, implements, fertilizer, labor, etc., and pays for them after the crops have been harvested and sold. the manufacturer buys raw materials and pays for them after they have passed through the transformation process which he conducts and the completed goods have been marketed. he frequently sells them to jobbers or wholesalers on time and these in turn sell them on time to retailers and these to consumers. farmers, manufacturers, and merchants both buy on time and sell on time, and are thus both debtors and creditors, and each expects that his sales will ultimately pay for his purchases. the obligations involved in these transactions are represented and recorded in the form of book accounts, promissory notes, or bills of exchange, the latter being written or printed, or partly written and partly printed, orders of creditors on debtors to pay to themselves or to third parties the sums indicated. these documents are being constantly made and constantly paid as the processes of agriculture, industry, and commerce proceed. indeed, their creation and liquidation is a normal phenomenon of our modern economic life. the term commercial paper, as we are using it, applies to such promissory notes and bills of exchange as belong to this credit system. it does not apply to such notes and bills when they owe their existence to credit operations of a different kind, such for example as accommodation loans or investment operations. indeed, the essential characteristic of commercial paper is not revealed in the form of the credit document but in the fact that it is a link in this chain of exchange operations by which modern commerce is carried on. this use of the term should also be distinguished from the one common among bankers and others. in this popular usage these documents are called commercial paper because they are themselves objects of commerce. in our use of the term the adjective "commercial" applies to them only when they play the rôle of intermediary in a process of exchange through credit. in this sense it is a matter of indifference whether they pass through the hands of brokers or not, and the fact of their being objects of purchase and sale does not confer the quality of commercial paper upon documents having an origin and character other than that above described. _ . the operation of discount_ every person in this chain of credit is confronted with the problem of paying his debts as they mature by the use of the amounts due him from other people. since it is rarely possible to arrange maturities on both sides in such a way that the amounts due to be paid him at a given date shall at least equal those he is due to pay on that date, some means of transforming claims against other people due in the future into present means of payment must be found. the one universally employed is the discount of commercial paper. by this is meant the exchange at a bank of his own promissory notes due at times when debts of equal or greater amount due him mature, or of bills of exchange drawn against his debtors, for cash or credits on a checking account. these latter are available as means of payment at any time. as a consideration for this accommodation, the bank charges interest for the period intervening before the maturity of the paper discounted. sometimes this charge is paid at the time the paper is purchased and sometimes at the date of its maturity. the term "discount" technically means taking interest in advance by making available as means of present payment in any of the above mentioned forms a sum less than the amount the bank expects to collect at the date of the maturity of the discounted paper. if the interest is paid when the discounted paper matures, the process is technically called a loan. however, since the time of collecting interest makes no essential difference in the nature of the transaction, the process is commonly described as the discount of commercial paper, regardless of whether the interest is collected in advance or not. _ . the conduct of checking accounts_ a checking account is an ordinary book account on which are credited the cash deposited by a customer and the proceeds of collections, loans, and discounts made on his behalf, and on which are debited payments made to him in cash or on his behalf to other people or to the bank itself. these payments are made on orders signed by the customer and known as checks. the ordinary customer of a commercial bank every day brings to the bank the cash he receives as the result of the day's business, and the checks received, drawn on his own and other banks, and is credited with the amount on the books of the bank as well as on a passbook which he himself retains. if he needs cash during the day, he presents to the bank a check payable to himself for the amount needed, and receives the kinds and denominations wanted; and if he wants to make payments to his creditors in other forms than cash, he sends them checks on his bank payable to their order, or a check drawn by his bank on some bank in another place, usually called a draft, which he has obtained by exchanging for it a check drawn to the order of his bank. to the amount of these payments his account at the bank is debited, and from time to time his passbook is left at the bank for the entry therein of the debits made to date and its subsequent return to him. the customer must take care that his account is not overdrawn, that is, that the debits on his account do not exceed the credits, since overdrafts, except by accident or for very short periods and small amounts, are not allowed in this country, and in other countries, where they are allowed, they must be provided for in advance by a special agreement between the bank and the customer, which usually involves the deposit with the bank of ample security. in order to avoid overdrafts, the customer in this country agrees with his banker on what is known as a "line," that is, a maximum amount of loans or discounts to be allowed. whenever his credit balance falls to a certain minimum, also established by agreement with the bank, the latter discounts for him the paper of his customers, that is, bills of exchange drawn on them or their promissory notes in his favor, or his own promissory notes. the proceeds of these discounts are credited on his account like deposits of cash or of checks for collection. so long as the discounts are confined to commercial paper the bank's part in these transactions consists almost exclusively of bookkeeping between its customers and between itself and other banks. ordinarily, what is debited on one man's account is credited on another's, the cash received nearly balancing that paid out. to the extent that the cash receipts and payments do not balance, the bank either has a surplus or is obliged to provide for the meeting of a deficit. the means available for this latter purpose will be explained in subsequent sections, as well as some of the details of this bookkeeping process. for the present it is important to note precisely how the discount of commercial paper is related to this bookkeeping process. as explained in section , commercial paper is an essential part of the process of exchanging goods through credit. a person buys on time and sells on time and expects to pay for his purchases by the proceeds of his sales. so long, therefore, as the processes of commerce and industry proceed in a normal fashion, the paper discounted by a bank will be paid at maturity and the credit balance created by means of such discounts offset by corresponding debits. ordinarily the credits created through discounts during a given period, say a day or a week, in favor of one set of customers will be balanced during this same period by the payment of notes previously discounted for other customers. within a complete trading area this is certain to happen, since purchases and sales of goods are equal and what is credited to one man is debited to another. the result is very different if a bank discounts investment paper, that is, credit documents which represent the unproductive consumption of individuals or of public and private corporations, or which represent the purchase on time of the instruments of production rather than the production of goods through the use of such instruments and their transfer from the producer to the consumer. the means of payment of such documents can only be created gradually by the application of the profits of the enterprises in which the investments were made, or by taxes spread over a series of years, or by a slow process of saving. if a bank issues its own demand obligations in exchange for such documents, it cannot make its books balance and it will be constantly exposed to the danger of forced liquidation. if it attempts to protect itself by requiring that the discounted paper shall mature in a short period, the necessity of liquidation will be forced upon customers who are responsible for the payment of the discounted paper; that is, such customers will be obliged to sell at such prices as they can command the property in which the investments were made, or some other property. such liquidation always results in forced readjustments of prices and business depression, and sometimes in commercial crises. _ . the issue of notes_ as an alternative for or a supplement to the conduct of checking accounts a commercial bank may issue its promissory notes payable to bearer on demand. by the issue of notes is meant their transfer to customers in exchange for cash, for checks left for collection or drawn against a credit balance in a checking account, or for discounted notes and bills. by the use of these notes commercial banking can be carried on without checking accounts. in that case the notes are issued in exchange for cash and discounted bills, and notes are returned to the bank in exchange for cash or when discounted bills or notes mature and are paid. in the bookkeeping process which has been described bank notes thus issued and returned perform precisely the same function as checking accounts, and are related to the discount of commercial paper and the credit system of the country in precisely the same manner as such accounts. most banks of issue at the present time conduct checking accounts also, using the one instrumentality or the other as their customers desire. in this case notes are issued in exchange for checks drawn against credit balances on checking accounts or deposited for collection as well as in exchange for discounted notes and bills and cash. by the use of both notes and checking accounts, a bank can supply most of the needs of its customers for a circulating medium, the notes serving as hand-to-hand money, and the checking accounts, practically all other purposes. being the direct obligations of banks attested by the signatures of their responsible officers, and being payable to bearer on demand and capable of being issued in all necessary denominations, such notes can be transferred without indorsement, can be used for making change and payments of small and moderate size for which checks are not convenient, and they do not need to be presented at a bank for the test of their validity. if the bank or banks which issue them are properly conducted and supervised and properly safeguarded by law, such notes will circulate freely through the length and breadth of a country. checking accounts meet in the most satisfactory manner all currency needs for which hand-to-hand money is not well adapted, such as large payments and payments at a distance. with a few strokes of a pen payments of the greatest magnitude can be made through their agency. checks can be sent through the mails at slight expense and without danger of loss of the amount involved. by the devices known as travelers' and commercial letters of credit, checking accounts supply the most convenient form of currency for travelers and for merchants engaged in foreign trade. besides bank notes and checking accounts the only forms of currency needed in any community are standard and subsidiary coins, the former for use as ultimate redemption material for all other forms of currency and for the payment of international and other balances, and the latter for small change. even these forms of currency are supplied by commercial banks, but since they do not create them, ways and means of procuring them in the quantities needed constitute one of their peculiar problems. _ . collections_ one of the most important functions of commercial banks is the collection for their customers of checks and drafts drawn on other institutions. when these documents are received, the accounts of customers who deposited them are credited with the amounts, less a small fee for collection, unless by agreement this service of collection is performed free of charge. the checks are then assorted according to the banks upon which they are drawn and the cities in which those banks are located. checks drawn upon home banks are collected either through messengers who present the checks at the counters of the banks upon which they are drawn and secure payment therefor, or through the local clearing house. this is a place where representatives of the banks meet for the exchange of checks. after the representative of each bank has distributed all the checks held by his institution against the others participating in the clearing, and received from them those drawn against his bank, a balance sheet is prepared showing the balance due by or to his bank after the total of the checks distributed has been balanced against the total received. if said balance is adverse, it is paid to the master of the clearing house, and if it is favorable, it is received from him. the checks received through the clearing house or presented by messengers from other banks and paid, are debited to the accounts of the persons who drew them and returned to such persons as vouchers, the net result of the entire transaction being the same as if all the parties involved had been customers of a single bank, with the exception that some means of paying balances had to be found. since balances are sometimes paid by checks on some central institution in which credit balances may be obtained by rediscounts of commercial paper, this necessity can be met without the use of any form of currency other than that furnished by banks themselves. checks drawn upon out-of-town banks are, in this country, collected through so-called correspondents. each bank enters into an arrangement with a few other banks, distributed throughout the country and conveniently located for the purpose, by which the correspondent bank agrees to conduct with it a checking account on which it will credit at par or at a stipulated discount the checks sent it for collection and debit checks drawn against such an account. a comparatively small number of such correspondents suffices, since certain banks in the larger cities, by making a business of such collections, conduct checking accounts with a large number of banks, and can thus make collections by mere transfers of credits on their own books or by the use of the local clearing house. the so-called reserve cities in this country constitute clearing centers for the territories contiguous to them, and new york, chicago, and st. louis, for the entire country. checks received from correspondents and drawn against themselves are debited to the accounts of the customers who drew them and returned as vouchers in the same manner as checks received through the clearing house or paid over their own counters. through this interchange of checks between banks and the conduct of checking accounts with each other, intermunicipal and international exchanges are conducted through the bookkeeping processes of commercial banks with the same ease and economy as are exchanges between people living in the same town. _ . domestic exchange_ the accounts of a bank with its correspondents are a record of the transactions of its customers with the outside world, the checks they receive as a result of sales to outsiders of merchandise, real estate or other property, or as a result of gifts by outsiders to them being credited on such accounts, while the checks they draw or the drafts they purchase in payment for merchandise, real estate or other property purchased of outsiders, or of gifts made to them are debited. when in a given period, say a day or a week, the receipts of the customers of a bank from outsiders, as a result of current or past sales and gifts, exceed the payments made by them as a result of purchases and gifts, its credit balances with its correspondents will increase, and under opposite conditions they will decrease. if the payments should continue in excess for a considerable period, the credit balances of a bank with its correspondents would be exhausted and some means of replenishing them would have to be found, and under the opposite conditions too large a portion of the bank's resources would accumulate with its correspondents and some means of withdrawing funds would have to be found. when a bank needs to replenish its credit balances with its correspondents, it may ship cash or purchase drafts from other home banks, which it can send to its correspondents for collection like checks deposited in the ordinary course of business. the latter resource will of course be available only when these other banks' balances with their correspondents are not exhausted. should the balances of all the banks of a town with their out-of-town correspondents be nearly or quite exhausted, shipments of cash to correspondents could not be avoided. if a bank wishes to withdraw funds from its correspondents for home use, it may order cash shipped or it may, perhaps, be able to sell drafts for cash to other home banks. the expenses involved in shipments of cash, loans, or purchases or sales of drafts for the purpose of replenishing balances with or withdrawing them from out-of-town correspondents, give rise to what is called the _rate of exchange_. if, in order to make out-of-town payments for its customers, a bank is obliged to pay the expense of shipping cash to its correspondents or to pay a premium on drafts purchased from other banks, the natural method of reimbursement will be a premium charge on drafts sold equal to the amount of the expense incurred. if it wishes to withdraw a balance with its correspondent, since to order cash shipped will involve expense, it will be glad to sell drafts for cash at a discount not to exceed such expense. the rate of exchange, or the price of drafts on a given point, may, therefore, fluctuate between a premium equal to the cost of shipping cash to that point and a discount of the same amount. beyond these extremes, these fluctuations cannot ordinarily go, because customers may demand cash of their banks in payment of checks against their own credit balances and ship it to their out-of-town creditors at their own expense, and would do so if the rates charged on drafts should make such procedure profitable. the actual rate of exchange will not ordinarily reach either of these extremes, on account of competition either between the banks which are desirous of selling drafts on their correspondents or between those which are forced to buy as an alternative to cash shipments. if the aggregate balances of the banks of a town with their out-of-town correspondents are large and increasing, the pressure to sell drafts will be greater than that to buy and the rate of exchange will go to a discount, the amount of which, however, will be fixed by competition between the selling banks. in the opposite case, the rate will go to a premium and be fixed by competition between the buying banks. in most towns in the united states there is little or no competition between banks in the business of buying and selling drafts and consequently no open market for exchange and no quotations of exchange rates. in such cases each bank acts more or less independently; shipments of cash to or from correspondents are the ordinary means of regulating balances; and the cost of such shipments are charged to the general expense account of the bank and taken out of customers either by a fixed and more or less invariable charge on drafts sold, or in other ways. since the balances of the banks of a town with their out-of-town correspondents depend primarily upon the commercial and gift relations of their customers with the outside world, it is pertinent to inquire whether as a result of a long continued excess of purchases from outsiders over sales to them and of gifts to over gifts from them, the cash resources of a community might not be completely exhausted, and if not, how such an outcome is prevented. bankers have no direct control over the purchases and sales of their customers, but through the rate of interest they charge on loans and discounts and their ability absolutely to discontinue such accommodations they exert a very potent indirect influence. the rates of interest and discount charged are an important element in the cost of doing business and, if loaning and discounting is discontinued, sales of property to meet maturing obligations are forced, with the result of price readjustments between the town in question and the outside world which speedily change the relations between purchases and sales. when the cash resources of the banks of a town approach the limit of safety and their balances with their correspondents fall to an ominously low point, the normal method of procedure is to raise the rates on loans and discounts, and if conditions grow worse, to raise them higher still and as a last resort to cease temporarily to make them at any price. by increasing the cost of doing business this rise in the rates will check purchases by diminishing or annihilating the profits resulting, and will stimulate sales by rendering it more profitable for some customers to secure funds by sales to outsiders at lower prices than were formerly asked rather than by borrowing from banks. under ordinary circumstances this procedure will be sufficient to change an unfavorable into a favorable balance of indebtedness with the outside world, with the result that more checks on outside institutions will be deposited with the banks and a smaller amount of drafts purchased. bankers' balances with their correspondents will, therefore, increase, and with them their ability to command cash in case of need. the demands made upon them for cash will also decrease, since the volume of loans and of business transacted will fall. if the banks stop discounting, a more or less violent readjustment with the outside world results. business men who have obligations to meet, and most of them will belong to this class, are obliged to sell their goods and property at whatever prices are necessary and to stop purchasing entirely. the outcome, so far as the banks are concerned, is as above indicated. if conditions are such that sales at any price cannot be forced, a crisis ensues; that is, business operations are temporarily suspended and transfers of property in settlement of obligations are made through bankruptcy and other court proceedings. _ . foreign exchange_ the business relations between banks located in different countries do not differ in any essential respect from those between banks located in the same country. interchange of checks, the conduct of checking accounts, shipments of cash, and borrowing and lending proceed in the same manner as between domestic institutions. the chief peculiarities of the foreign exchanges are due to the fact that different units of value and sometimes different standards must here be reckoned with, and that the precious metals, chiefly gold, are used in the settlement of balances. drafts drawn in the united states on english points, for example, call for the payment of pounds sterling, those on french points for francs, and those on german points for marks, while all must be paid for in dollars. the translation of the language of values of one country into that of others thus involved requires the calculation of a so-called _par of exchange_. by this is meant the relation between the weights of pure metal contained in their respective units of value, if the countries in question have the same standard, and the relation between the market values of the metallic content of their units, if their standards are different. thus the par of exchange between this country and england is $ . , since our dollar contains . grains of pure gold and the english pound sterling . times as many grains, or . . our par of exchange with france is . cents, the quotient of . , the number of grains of pure gold in the french franc, divided by . . between china and the united states the par of exchange is the market value in our dollars of the amount of silver contained in the tael, the chinese unit. another technical term employed in connection with the foreign exchanges is _the gold points_. these are the points above and below the par of exchange fixed by the addition in the one case, and the subtraction in the other, of the cost of shipping gold between the two places in question. they are the points between which the rates of exchange fluctuate, or the points at which, when the rate of exchange reaches them, gold moves between gold standard countries. assuming for example, that the cost of shipping gold between new york and london is two cents per pound sterling, the gold points are . and . , it being profitable to ship gold from new york to london when sterling exchange reaches the former figure and to import gold from london when it reaches the latter figure. in the conduct of the foreign exchanges several classes of bills are employed upon which the quotations differ, in part on account of differences in their quality and in part on account of the interest element entering into the value of time bills. for example, new york regularly quotes on london _cables_, _demand_, and _sixty-day_ bills. the rates on a certain date were: cables, . ; demand, . ; and sixty days, . . inasmuch as these are all bankers' bills and consequently of the same quality, the differences in their quotations are due to the interest element and to the fact that in the case of the cables the cost of the cablegram is included. when a new york banker sells a cable on london, his balance with his correspondent is reduced by the amount in a few hours, and the interest he receives on such balances is proportionately diminished at once, and he is also out the cost of the necessary cablegram. when he sells a demand bill, his account with his london correspondent remains undiminished during the time required for sending the bill by mail across the atlantic and for its presentation for payment. he draws interest on his entire balance during this period. when he sells a sixty-day bill, his balance does not suffer diminution on its account for sixty days. in order to place these bills on a footing of equality so far as he is concerned, therefore, he must quote demand and sixty-day bills lower than cables; the former by the cost of the cablegram plus interest on the amount of the bill, say for ten days, at the rate he receives on his london balance, and the latter by the amount of the cablegram plus interest on the amount for sixty days at the same rate. trade, or mercantile, as well as bankers' bills are also frequently and, in some markets, regularly quoted. being of a quality ranked as inferior to bankers' bills, they must be negotiated at a lower rate and are quoted accordingly. chapter iii the problems of commercial banking the conduct of commercial banking presents problems both to the bankers and to the public, the methods of solution of which will be given attention at this point. the problems concerning the bankers primarily may be grouped under the heads, supply of cash, selection of loans and discounts, and rates; and those which primarily concern the public may be grouped under the heads, protection against unsound practices, and adequacy and economy of service. _ . the supply of cash_ the credit balances on checking accounts and the notes of commercial banks are payable on demand in the legal-tender money of the nation to which they belong, and such banks must at all times be prepared to meet these obligations. the term employed to designate the funds provided for this purpose is _reserves_, and in this country they consist of money kept on hand and of credit balances in other banks. in other countries there is also included under this head commercial bills of the kind which can always be discounted. the term _secondary reserve_ is sometimes employed in this country to designate certain securities, such as high-class bonds listed on the stock exchanges, which can be sold readily for cash in case of need. the amount of reserve required can be determined only by experience. in ordinary times it depends chiefly upon the habits of the community in which the bank is located regarding the use of hand-to-hand money as distinguished from checks and upon the character of its customers. these habits differ widely in different nations, and considerably in the different sections and classes of the same nation. in most european and oriental countries, for example, checks are little used by the masses of the people, while in the united states and england they are widely used. in these latter countries, however, they are less widely used by people in the country than in the cities, and by the laboring than the other classes in the cities. within the same city one bank may need to keep larger reserves than another on account of the peculiarities of the lines of business carried on by its customers and the classes of people with whom it deals. in times of crisis and other periods of extraordinary demand, bank reserves must be much larger than in ordinary times. hoarding, unusually large shipments of money to foreign countries and between different sections of the same country, and payments of unusual magnitude, increase the demands for cash made upon banks at such times. the manner in which clearing and other balances between banks are met also has an influence on the amount of reserves required. if such balances are paid daily and always in cash, the amount needed for this purpose is much larger than if they are paid in checks on some one or a few institutions and at longer intervals. the note issue privileges of a bank also affect its reserve requirements. since, if not prohibited by law, notes may be issued in all denominations needed for hand-to-hand circulation within a nation, and since for all purposes except small change such notes are as convenient as any other form of currency, a bank with unrestricted issue privileges can supply all the demands of its customers for currency for domestic use, except those for small change, without resort to outside sources of supply. in this case, however, it needs to keep a reserve in order to meet demands for the redemption of notes. such demands arise on account of the need of coin for small change or for shipment abroad or of means for meeting domestic clearing and other bank balances. the aggregate needed for the supply of such demands, however, is much less than would be required if the privilege of issuing notes did not exist. in the maintenance of reserves the chief reliance of commercial banks is the circulation of standard coin within a nation and the importation of such coin. the coin within the borders of a nation passes regularly into the vaults of banks by the process of deposit, and on account of the credit balances they carry with foreign institutions, the loans they are able to secure from them, the commercial paper they hold which is discountable in foreign markets, and the bonds and stocks sometimes in their possession which are salable there, they are able to import large quantities in case of need. since the standard coin in existence in the world adjusts itself to the need for it in substantially the same manner that the supply of any other instrument or commodity adjusts itself to the demand, banks ordinarily have no difficulty in supplying their needs, and under extraordinary circumstances, though difficulties along this line sometimes arise, means of overcoming them are available which will be discussed in the proper place. if, as is the case in the united states, certain forms of government notes are available as bank reserves, these find their way into the banks' vaults by the process of deposit in the same manner as coin. the possession of such notes by a bank enables it, to the extent of their amount, to throw the responsibility for the supply of standard coin upon the government, and in the circulation of the country such notes take the place of an equivalent amount of standard coin. whether or not a government ought to assume such a responsibility is a question which will be discussed in a subsequent chapter. for the nation as a whole, the balances in other banks and the discountable commercial paper and bonds which a bank may count as a part of its reserves are not reserves except to the extent that they may be employed as a means of importing gold. they are only means through which real reserves of standard coin are distributed. the payment in cash of a balance with another bank or the discount of commercial paper with another domestic bank or the sale of bonds on domestic stock exchanges do not add to the sum total of the cash resources of the banks of a nation. their only effect is to increase the cash resources of one bank at the expense of another. adequate facilities for the distribution of the reserve funds of a country, however, are second in importance only to the existence of adequate supplies of standard coin. if such facilities are lacking, existing reserves can be only partially and uneconomically used, with the result that much larger aggregate reserves are required than would otherwise be necessary and that the entire credit system is much less stable than it otherwise would be. _ . the selection of loans and discounts_ the problem of the reserves is vitally connected with that of the selection of loans and discounts. as was shown in the preceding chapter, the chief business of a commercial bank is to conduct exchanges by a process of bookkeeping between individuals, banks, communities, and nations. this process consists primarily in the converting of commercial bills and notes into credit balances and bank notes, in the transfer of such balances and notes between individuals and banks, and in the final extinguishment of such balances and the return of such notes at the maturity of the commercial bills and notes in which the process originated. in this process there is little need for cash, provided the arrangements between banks for clearing checks and for the interchange of notes are complete and efficiently administered. but when a bank accepts investment in lieu of commercial paper, its need for cash at once increases, because the demand obligations created by the credit balances or the bank notes into which this paper was converted are not extinguished by payments for goods purchased, but must be met by cash. to distinguish between commercial and investment paper is, therefore, one of the chief problems confronting commercial bankers. for its solution an accurate knowledge of the business operations of customers is necessary. an inspection of the paper presented and a general knowledge of their wealth and business capacity are important, but not sufficient. the forms of the paper employed in both commercial and investment operations may be the same, and the possession of wealth does not ensure the payment of the paper at maturity. the chief means available for the acquisition of this knowledge are the requirement from customers of frequent statements of their operations, on properly prepared forms; the use, wherever possible, of the documented commercial bill of exchange; and the maintenance of credit departments equipped with the means of accurately studying commercial, industrial, and agricultural operations, and of diagnosing economic conditions. the study of carefully prepared statements of customers made at frequent intervals reveals to the banker not only the nature of the operations represented by the paper presented for discount, but the trend of the business of his customers and, through them, of the entire country. with such knowledge, he is not only able to protect his institution against improper loans and discounts, but to give valuable advice to his customers, advice which no one else is in a position to give so accurately. by a documented bill of exchange is meant a bill drawn by a seller upon the purchaser of goods, accompanied by documents evidencing the transaction; such, for example, as bills of lading, warehouse receipts, and insurance policies. the names on such bills guide the banker in his efforts to trace the transaction in which it originated and the documents enable him absolutely to identify it, and constitute security for the loan. instead of such bills, promissory notes made payable to banks are commonly used in this country, greatly to the disadvantage of the banking business. such a note reveals nothing to the banker concerning the purpose for which the loan is made, while a commercial bill, even without documents, reveals the names of the principals of the transaction in which the banker is asked to participate. acquaintance with these men and knowledge of the business in which they are engaged at once suggests the probable origin of the bill and furnishes the clue needed for subsequent investigation. a properly equipped credit department will keep on file and at all times available for use the data requisite for the information of the officers upon whom the responsibility of selecting the loans and discounts rests. such data will not only concern the character and business of each customer and the bank's previous dealings with him, but general economic conditions, the operations and experiences of other banks, other business institutions, governments, etc. _ . rates_ besides rates of exchange considered in the preceding chapter, commercial banks are concerned with loan and discount rates. rates on deposits, though sometimes employed, have no place in commercial banking, since commercial deposits are only the credit balances resulting from loans and discounts or from funds intrusted to the bank for temporary safekeeping or disbursement in the interest of the depositor. in every case they represent a service rendered the depositor for which the bank must be paid, and, when interest is allowed, the depositor must repay it in some form with an increment sufficient to remunerate said service. commercial banks may and usually do conduct savings accounts also, for which an interest payment is not only defensible but in every sense desirable, but in so doing they are going beyond the sphere of commercial banking, which alone is under consideration at this point. rates charged on loans and discounts are the chief means through which commercial banks are remunerated for the services they perform. in the long run these rates are determined by competition, and represent the current market value of the services performed by bankers. custom often affects them temporarily and sometimes for long periods prevents their response to influences tending to produce change, but in the long run they yield to economic force and conform to the laws of value. variations in the rate of discount are the most efficient means employed by commercial banks for the regulation of the volume of their loans and discounts and for changing the percentage their reserves bear to deposits and note issues. an increase of these rates tends to check loans and discounts, to decrease deposits and note issues, to increase reserves, and consequently to raise the percentage of reserves to deposits and issues. it checks loans and discounts by increasing the expense of conducting business operations on a credit basis, thus diminishing profits and sometimes causing losses, checking enterprise and decreasing the volume of commercial transactions. a decrease of loans and discounts correspondingly diminishes deposits or note issues, or both, since these are simply the counterpart or representative of such loans and discounts in the form of credit balances in the checking accounts conducted by the banks or the equivalent of such balances in a hand-to-hand money form. an increase in the rate of discount at a given point tends to attract funds from other points where the rates are lower and thus to increase reserves. a decrease of rates produces opposite effects all along the line. _ . protection against unsound practices_ commercial banks are an essential part of the machinery by which the agriculture, industry, and commerce of a country are carried on, and their proper conduct is, therefore, a matter of public concern. on this account they have long been subjects of legislation and of public supervision and control. the methods evolved for safeguarding the public against abuses and unsound practices differ considerably among different nations and to some extent among the different states of the united states, and could only be adequately explained by a history of banking in each nation. only the more important and most widely used of them will be described here. (_a_) _capital and surplus requirements and double liability of stockholders._--a very common, indeed, almost universal, legal requirement is that before beginning business the proprietors of a commercial bank shall contribute a fund to be known as the _capital stock_, and that an additional fund, usually called the _surplus_, shall afterwards be set aside from profits. these funds are required to be maintained intact, so long as the bank continues in business, and to be used for the payment of losses in case of failure or liquidation for any reason. in this country it is also customary to hold the proprietors legally liable in case of failure for an assessment equal to the amount of their capital stock. in foreign countries it is a common practice to have the subscribed considerably in excess of the paid-in capital, the balance being subject to call by the directors at any time, and being available for the payment of losses in case of failure. these funds serve not only as a protection against loss to the customers of a bank in case of failure, but also as a restraining influence on the managers in the everyday conduct of the bank's affairs. they constitute the proprietors' stake in the business, what they are likely to lose if the management is imprudent, dishonest, or inefficient. the absence of such funds would put a premium on rashness and speculation and tempt into the business the unscrupulous and the unfit. in the determination of the size of capital and surplus funds and of the amount of the liability of stockholders for subscriptions in case of failure, no well-founded principles have been developed for the guidance of legislators. they should be great enough to cover prospective losses and to induce conservatism, honesty, and efficiency in management, and not so great as to prevent the free flow of an adequate amount of capital into the business. unfortunately, the statistics of losses in cases of failure are not a sufficient guide. in some cases they bear a large proportion to the volume of business transacted and in others a very small one, and the number of cases available are too small to give much value to averages. the amount necessary to secure the best possible management is also purely problematical. in lieu of well-founded principles, the practice has developed in this country of making the minimum capitalization permitted depend upon the population of the town in which the bank is located. this seems to be a very crude and indirect method of proportioning capital to the volume of business transacted. the fixing of such a proportion, or of a proportion which no bank should be permitted to exceed, is probably the best method of solving this problem, but it should be done directly and not by the roundabout method which has been mentioned above. a proportion of ten to one between capital and aggregate demand obligations would probably be justified by american experience. the present practice of fixing the surplus fund at twenty per cent of the capital would be justifiable if the capital fund were properly regulated in amount. (_b_) _inflation and means of protecting the public against it._--the greatest abuse to which the business of commercial banking is subject, and against which the public most needs protection, is inflation. this is a condition difficult to diagnose, and not well understood by the general public and even by bankers. the most easily recognized symptom of its existence is the forced liquidation of credits; that is, forced sales of property in order to meet maturing obligations to banks. when, for example, the people whose notes or bills have been discounted by banks default in large numbers, and the collateral deposited as security has to be sold, or, in the absence of collateral, the courts must order the sale of their property, the presence of inflation may be suspected. the chief cause of inflation is the issue by commercial banks of demand obligations against investment securities. the means of liquidating such securities are the profits of the enterprises in which the investments were made and in the nature of the case several years are required for the accomplishment of this end. meantime the demand obligations of the banks issued against them in the form of balances on checking accounts or notes must be met and, the funds regularly deposited with them as a result of the operation of such enterprises being inadequate, other means must be found. the only one available is the sacrifice, at forced sales, of the property in which the investment was made or of some other property in the possession of the persons responsible to the bank. the banks usually protect themselves against such forced liquidation by the requirement that the paper they discount shall mature at short intervals, usually not to exceed four to six months, and accept the long-time securities, such as bonds, stocks, and mortgages, only as collateral. by this means they are able to force the liquidation on their customers. otherwise they would be obliged themselves to endure it, with the result that their capital and surplus funds would be impaired and perhaps exhausted; and, if they should prove inadequate, failure would be inevitable. the evil involved in the forced sales of property caused by inflation is the readjustment of prices through which it is accomplished, and the depression and, sometimes, panic which follow. when the prices of many kinds of property must be greatly depressed in order to induce their transfer to other hands, the machinery of commerce and industry is thrown out of adjustment and is sometimes rendered temporarily useless. this result is due to the fact that the relations between costs of production and the returns from the sale of finished products are so changed that profits are reduced or annihilated, and many persons are financially ruined. readjustments of the prices of raw products, labor, and finished goods, and the transfer of plants to new hands, are, therefore, necessary before industry, commerce, and agriculture can again operate in a normal way, and during the period of readjustment some enterprises must entirely stop operations, and all must slow down. at such times many laborers are thrown out of employment, many more work part time only, the wages of nearly all are lowered, and most other classes of income are cut down. depression and, in extreme cases, panic are the result, and these have serious consequences other than financial. the means employed for the protection of the public against inflation are crude and inadequate. they may be grouped under the heads: regulations regarding investments, reserves, and note issues. under the first head belong in the banking legislation of this country limitations on real estate investments and on the amount that may be loaned to a single firm or individual. our national banking act and most of our state banking acts prohibit banks from holding real estate except for their own accommodation, and as a means of reimbursing themselves for defaulted loans, and our national banking act prohibits the taking of real estate security for loans, and many of our state banking acts limit the amount of such security that may be held. our national banking act limits the amount that may be loaned to a single firm or individual to one-tenth of the bank's capital and surplus, and similar regulations are common in state banking legislation. the purpose of these regulations is to confine the investments of banks to what are called liquid securities, but they fail to evince a proper conception on the part of their authors of what really makes a security liquid. apparently legislators and their advisers have felt that if the securities held by the banks mature in short periods, or are listed on a stock exchange, they are liquid; but such is not necessarily the case. commercial paper only is really liquid, since it represents a current commercial process which will soon be completed and the completion of which automatically provides the means for its payment. such paper usually matures in short periods, but the characteristic of liquidity results not from the date at which it is made to mature, but from the commercial process which called it into existence and will ultimately retire it. in this country very often paper of short maturity is so in form only, its makers expecting to renew it, instead of pay it, at maturity. bonds and stocks, even though they may be listed on a stock exchange and daily bought and sold, are not liquid securities in the proper sense of that term. an individual bank may be able to sell them in case of need, but such sale is simply the transfer of the investment to another bank or person, and not its liquidation. the security still exists and must be paid, while its liquidation would take it out of existence. foreign legislators have approximated more closely than ours what is needed in the regulation of bank investments. in the case of their central banks, many of them, notably those of france and germany, have recognized the fundamental distinction between commercial and investment paper, and have required them to hold the former against their demand obligations, especially their notes. the regulation of reserves has become a subject of legislation in this country only. our national banking act classifies national banks into three groups, called country, reserve city, and central reserve city banks, and requires those in the first mentioned group to keep cash in their vaults to the amount of at least six per cent of their deposits, and balances in approved reserve city banks sufficient to bring the total amount up to fifteen per cent of their deposits. banks in reserve cities are required to keep in their vaults cash to the amount of at least twelve and one-half per cent of their deposits, and balances in central reserve cities sufficient to bring the total up to twenty-five per cent of their deposits. banks in central reserve cities are required to keep at least twenty-five per cent of their deposits in cash in their vaults. when the reserves of a bank fall to the prescribed minimum, all discounting must cease. regulations essentially similar are found in the banking laws of most of our states. the purpose of these regulations is to set a limit to the extent to which banks may expand the volume of their loans and discounts, in the belief, apparently, that, if at least the prescribed proportion of cash is all the time kept on hand, the banks will be able to meet their obligations. as in the case of the regulations concerning investments, the authors of these failed to recognize the significance, from the point of view of the cash demands likely to be made upon banks, of the kind of paper admitted to discount. if discounts be confined to commercial paper, the demand obligations they create will be met for the most part by transfers of credits on the banks' books or by the return of the notes issued, and, as foreign experience has demonstrated, the adjustment of cash resources to needs can safely be left to the judgment of the bankers themselves, who, through variations in the discount rate, rediscounts, and other means, can regulate it with ease. if investment paper is admitted to discount, reserves less than one hundred per cent of the demand obligations thereby created are unsafe, since a less amount is likely to force liquidation on the banks' customers, with the results above indicated. the most elaborate regulations for the prevention of inflation have been developed in connection with legislation concerning note issues. the reason for this is the fact that commercial banking was at its origin and for a long time thereafter carried on almost exclusively through note issues, the conduct of checking accounts being a comparatively recent development. the phenomenon of inflation was, therefore, first observed in connection with note issues and associated with them. even now the essential similarity of note issues and checking accounts as banking instrumentalities is not universally recognized. the means of safeguarding note issues which have been incorporated into legislative enactments are the prior lien on assets, the safety fund, the requirement and sometimes the mortgaging of special assets, and the limitation of the total issues. by the prior lien is meant the provision that in case of failure the note holders shall be paid in full before any of the assets are distributed among other creditors. by the safety fund is meant a required contribution from each bank, usually a percentage of the amount of notes issued, placed in the hands of some public official and kept for the redemption, in case of failure, of such of the notes of failed banks as cannot be redeemed out of the assets of the banks themselves. additional contributions from the solvent banks are required for the replenishment of the fund when it has been depleted. the practice of different countries regarding the requirement of special assets to be held against note issues, as well as regarding the mortgaging of such assets, is not the same. germany and france, for example, require their banks to cover their note issues by designated proportions of commercial paper and coin, while the united states requires its banks of issue to cover their notes by government bonds and to contribute a five per cent redemption fund in addition, and england requires the bank of england to cover a designated amount of its issues by government and other securities and the remainder by coin. unlike the others, the united states mortgages to the note holders the securities, that is, the government bonds, required to be held against the notes, by providing that in case of failure these securities shall be sold and the proceeds used for the settlement of their claims. in all of these provisions, the protection of note holders against loss in case of failure has been an influential consideration, and in the cases of the prior lien and the safety fund, the only one. the prevention of inflation may have entered into consideration in the other cases, but among the states mentioned the regulations of france and germany alone are efficient in this direction, since they alone prohibit note issues against investment securities. the above mentioned regulations of england and the united states tend rather to promote, than to prevent, inflation, since they require the holding of investment securities against note issues. the limitation of the aggregate amount of notes that may be issued is a common legislative regulation. in the united states the limit set is the amount of the capital stock, and in france it is an arbitrary figure from time to time changed as the needs of the bank seem to require. as a safeguard against inflation, the value of such limitation depends upon the basis of the issues. if it is investment securities, as in the case of the united states, limitation to a low figure, not in any case to exceed the capital stock, is desirable, since such limitation keeps the inflation within such bounds that the banks themselves may be able to withstand the effects of it by selling upon foreign markets, without great and perhaps without any loss, the securities in which their capital and surplus funds are invested. if the basis of issues be commercial paper, such limitation is unnecessary, since inflation in such a case is improbable, and pernicious, unless it be placed above the point which the volume of issues is likely in ordinary cases to reach. (_c_) _other means of safeguarding the interests of the public._--experience has shown that publicity is a valuable safeguard against bad bank practices, and legislation has, therefore, provided for it by the requirement that statements of banking operations shall be published from time to time. the national banking act of the united states and many of our state banking acts, for example, provide for the publication five times a year of bank balance sheets, drawn up according to prescribed forms. the inspection of banks by public examiners and the requirement of detailed reports to public officials are also provided for in our federal and state legislation. canada requires the reports but not the inspection by public officials, on the ground that the latter cannot be thorough and efficient, and is, therefore, likely to mislead the public and cause it to be less vigilant than it otherwise would be in the use of other means of safeguarding its interests. legislation in this country has also concerned itself with the duties of bank directors and the enforcement of their performance, and with the relations of bank officers to their banks, particularly those involved in borrowing for their own uses or for firms or corporations in which they are interested. a recent legislative experiment along quite a new line has been undertaken in this country in the form of laws providing for the mutual insurance of depositors. oklahoma started this experiment, and her example has been followed by other states. the essence of the experiment consists in the provision of a fund out of which is paid to the depositors of failed banks that portion of their claims which cannot be met from the liquidation of the assets of the defunct banks, such fund to be contributed by the other banks belonging to the system. the protection of depositors against loss is a commendable aim of legislation, but this method of attaining this aim is open to the serious objection that it removes from depositors all concern regarding the proper management of the bank with which they do business, and thus gives the unscrupulous, dishonest, and plunging banker an advantage. attraction of depositors is the chief field in which competition between banks is carried on, and when the power of good management in this direction is removed, high rates on deposits, high lines of credit, low or no rates of exchange, extravagance in equipment, etc., remain the only attractions, and in the offer of these the unscrupulous and plunging banker will always outdo the conservative. it is impossible to overcome this objection by public supervision, and more frequent and rigid examinations. no public officer can equip himself to pass judgment on the relations of a bank with each customer, or to detect secret contracts and unwritten understandings, or to keep unscrupulous people out of the banking business. there can be no doubt that a reputation for conservatism, good judgment, strict integrity, and careful management is, at the present time, the most valuable asset a banker can have, because customers know that they are in danger to the extent that these qualities are lacking. to substitute for the present basis of competition between banks that established by mutual insurance laws is to undermine the foundations of our credit system and to invite disaster and ruin. _ . adequacy and economy of service_ from the point of view of adequacy and economy of service, two types of banking systems require attention; namely, that characterized by a large number of relatively small local independent banks, chartered under general laws, and exemplified in this country; and that characterized by a relatively small number of large banks endowed with the privilege of establishing branches, and exemplified in the other leading nations of the world. under our system each community is encouraged to look after its own banking needs. local initiative in the establishment of new institutions is given free play and local capital and local talent is attracted. outside promoters and outside capital are not excluded, but, if they come, they do so as colonists expecting to cast in their lot with the community and to become identified with it. the managers of our banks for the most part are local men who are the real heads of the institutions they manage and whose careers and prosperity depend on the success of these institutions. the localism which characterizes this system contributes elements both of strength and of weakness. it develops local talent, and promotes mutual understanding and cooperation between the banks and the business enterprises of the community, and conformity of organization and methods to local needs. its weakness consists in the financial isolation and the narrowness of vision and training which are its natural accompaniments. under this system capital does not easily and quickly move from place to place and readily distribute itself according to the relative needs of different communities. in consequence, rates of interest are apt to vary widely, some communities to be under- and others over-capitalized, and the capital of the nation as a whole to be inefficiently employed. under this system the opportunity of bankers for training is meager, since the broader and more fundamental aspects of the business are rarely brought to their attention, and in the smaller towns and country districts they are apt to be recruited from people of mediocre ability and often from those not well fitted by nature and education for this branch of commercial enterprise. the system of branch banking, almost universally employed elsewhere, is strong where our system is weak, but it has weaknesses of its own. it promotes distribution of capital according to relative needs, and consequently efficiency in the application of a nation's capital as a whole, and it offers a wide field of training for the people engaged in the business, and draws its recruits from every quarter. it can readily supply banking facilities to communities too small or too poor to provide for an independent bank, and more readily than our system can adjust itself to rapidly growing communities. its chief weakness consists in the lack of independence of the managers of the branches and the consequent danger that local needs may not be fully satisfied. the manager of a branch is usually granted freedom of action only in routine matters. any business out of the usual order must be referred to higher authorities connected or associated with the main office; and, even with the advice of the manager, who alone is familiar with local conditions, the decision cannot be made with that intimacy of knowledge of and sympathy with the business and aspirations of the individual or firm under consideration that full justice to him and his town may require. in the matter of adequacy and character of service, therefore, the city in which the main office is located has an advantage over those in which the branches are located. in this connection it should also be noted that, while the branch banking system is able to adjust itself to the capital requirements of towns of all sizes more readily than the independent banking system, and thus to secure a better distribution of the banking capital of the community, it does not follow that it will do so. on account of ignorance of conditions, insufficiency of capital or inability readily to increase it, or inertia on the part of the head office, a town may have to wait for the establishment of a branch longer than it would for the establishment of an independent bank. whether or not this will be the case, however, depends to a considerable extent upon the keenness of the competition between the big banks with branches. the big central banks of europe, which have no competition within their field, have been slow to establish branches. the coercive force of the government has been necessary in many cases to secure their proper expansion. in the case of the other big banks, however, both of europe and of canada, competition has resulted in very rapid expansion during the last half century, probably as rapid as could be desired. regarding adequacy of service, the method of granting charters and the attitude of the government towards private banking is important. if banks are allowed to spring up spontaneously, like manufacturing and commercial establishments and farms, they are likely to be plentiful and to be located wherever needed. experience, however, has shown that private banks cannot be adequately regulated in the interest of the public and that incorporation under public auspices should be required. two methods of incorporation are employed, those of the special charter and of the general law. except in the case of special institutions, like central banks, the former is objectionable, since it opens the doors to political favoritism and is likely to result in bad distribution, lack of uniformity in regulation, and lack of steadiness and regularity in development. incorporation under general laws, or the free banking system, as it is sometimes called in this country, is unquestionably the best from every standpoint. all the necessary checks and balances can be incorporated in these laws, and the supervision of public officers, together with the necessary administrative machinery, provided for. this is the only practicable method to employ in an independent system like ours. the special charter method works best in connection with the branch bank system, in which the question of chartering new institutions only occasionally arises, and in which delay is not so serious. chapter iv commercial banking in the united states the commercial banking system of the united states consists of several elements which have been contributed at different periods in our history. the most important of these are state banks, national banks, and the independent treasury system. _ . state banks_ from the very beginning of our national history institutions enjoying, among others, the privilege of commercial banking have been chartered by our states. for several years after the adoption of our constitution it remained an open question whether the incorporation of such institutions was not their exclusive privilege, but in the case of mcculloch v. maryland, in , the supreme court decided that the federal government also had this right. during the years - , and - , the state banks had as competitors the first and second united states banks, and in so-called national banks entered the field, and, more recently still, trust companies. private banks have also existed from the beginning, but their number and relative importance have declined in recent years. at the present time the number of state banks exceeds that of all other classes of banking institutions combined, but in capital and resources they are inferior to both national banks and trust companies. since each state has had a free hand in the matter of legislation concerning the banks chartered under its auspices, uniformity in the regulations imposed upon and in the kind and degree of supervision exercised over this class of institutions, is lacking. in most cases, however, as compared to national banks, the amount of capital required is smaller; they have greater freedom in the making of loans, especially upon real estate security; and they are not so carefully examined and supervised by public officials. the most frequently imposed legislative requirements are: the accumulation of a surplus fund from earnings; double liability of stockholders; a minimum cash reserve to be kept in the vaults, and an additional reserve on deposit in other banks; the organization of a banking department for the administration of the laws pertaining to them; regular reports and examinations; and some limitation on real estate holdings and on the amount of loans to be made on real estate security. on account of the relatively low capital requirements imposed upon them, and the liberality of the laws concerning them in other respects, state banks have been able to prosper where national banks and trust companies could not exist, and on this account in many parts of the south and west they do most of the banking business in small towns and country districts. they generally perform a wide range of banking functions, including those of investment and savings as well as of commercial banks. _ . national banks_ our national banking system owes its existence to financial exigencies of the federal government experienced during the civil war. for a considerable period preceding the outbreak of that struggle the expenses of the government had exceeded its receipts. the deficit was greatly increased as soon as the war began, and congress did not find it possible immediately to devise adequate new sources of revenue, including a market for government bonds. it was, therefore, forced to the issue of legal-tender notes under authority of an act passed february , . after three issues of these notes, amounting to $ , , , had been exhausted, and the value of the notes had depreciated to such an extent that persistence in this method of financiering portended speedy financial disaster, congress adopted a suggestion made early in the war by secretary chase, to the effect that a market for government bonds might be created by compelling banks to purchase them as security for their note issues. an act passed february , , provided for the incorporation of banks with the right to issue notes on condition that they purchase government bonds and deposit them with an official to be known as comptroller of the currency. it was the expectation of the authors of this act that the state banks, then numbering over one thousand, would exchange their state for national charters and purchase bonds sufficient to secure their circulation under the terms of the new act, but, since they showed reluctance so to do, in force was applied in the form of a tax of ten per cent on bank notes otherwise secured. under this pressure most of the state banks reorganized as national institutions, but a few retained their state charters and formed the nucleus of the state system of the present day. on account of the ten per cent tax, however, the issue of notes by this remnant became unprofitable, and the new national banks have to this day remained the sole banks of issue in the country. the act of has been amended several times, notably in , , , , , , and . in its present form it permits the organization of banks with a capitalization as low as $ , in towns of , inhabitants or less, and with a capitalization as low as $ , in towns of , or less. banks organized under this act must put ten per cent of their profits into a surplus fund until said fund amounts to twenty per cent of the capital; must invest at least twenty-five per cent of their capital, if it is less than $ , , and at least $ , , if it is $ , or more, in government bonds; and may deposit said bonds with the comptroller of the currency and receive circulating notes to the amount of their par value, provided their market value is par or above. the rights and privileges of these banks are stated in very broad and general terms, a fair interpretation of which permits them to engage in both commercial and investment banking under certain specified limitations, of which the most important are the following: they must not invest in or hold real estate beyond their owns needs for suitable quarters, or temporarily for the purpose of collecting debts due them; they must not accept real estate as security for loans; they must not loan more than ten per cent of their capital and surplus to any one person or firm; and they must keep reserves to the amount of fifteen per cent of their deposits, if they belong to the group known as country banks, and to the amount of twenty-five per cent of their deposits, if they belong to either the reserve city or the central reserve city group. in the case of country banks, at least two-fifths of the required reserves, and in the case of reserve city banks, at least one-half, must consist of specified forms of money in their own vaults. the remainder may be balances payable on demand in approved banks in reserve or central reserve cities in the case of country banks, and in the central reserve cities in the case of reserve city banks. in the case of banks in central reserve cities, the entire reserve prescribed by law must consist of money in the vaults. these required minimum reserves must not be infringed upon. when a bank's cash and balances with its reserve agents fall to the prescribed minimum, discounting must be stopped under penalty of suspension of privileges and liquidation by the comptroller of the currency. at five dates each year, selected by the comptroller of the currency, national banks must make detailed reports of their condition on prescribed blanks and publish abstracts of such reports in local newspapers. they must also submit to examination by persons appointed for that purpose by the comptroller as often as this official may deem necessary and proper. national banks have been organized in every state of the union, and in maine, massachusetts, and vermont they have completely supplanted the state banks. elsewhere they exist side by side with state banks and compete with them. in some states they are more and in others less numerous than state banks. in the kind of business transacted the only important difference between the two classes of institutions consists in the loans on real estate security, which national banks are prohibited, and state banks allowed, to make. the latter, therefore, share this class of business with the trust companies only, and where it predominates have a distinct advantage in competition over the national institutions. _ . the independent treasury system_ while not a banking institution, the treasury of the united states handles its funds in such a manner and performs such functions with reference to the currency that it has become an important part of the banking system of the country. previous to the funds of the federal government were kept on deposit in banking institutions, during the greater part of the time in the first and second united states banks. friction between president jackson and the second united states bank resulted in their withdrawal from that institution in and their deposit in selected state banks, several of which failed and all of which suspended specie payments during the crisis of . the embarrassment which the treasury experienced in consequence, combined with previous unsatisfactory relations between the government and its depositories, convinced president van buren that the treasurer ought himself to keep and to disburse the funds of the government. he made a recommendation to this effect to congress, which in accordance therewith enacted the first independent treasury act in . the revival of agitation for a third united states bank led to the repeal of this act the following year, but in it was reenacted and with modifications has remained upon our statute books to the present day. in its original form this act provided for the acquisition of vaults in certain cities, in which should be deposited the funds of the government as soon as possible after they came into the hands of the receiving officers, and out of which should be taken, upon drafts issued by the secretary of the treasury, the money needed for the payment of the government's obligations. it further provided that all dues to the government in the future should be paid either in coin or in currency issued exclusively by the government, and that all expenses should be paid in the same forms of money. important modifications in this act were made during and after the civil war. in permission was granted the secretary of the treasury to deposit in national banks funds accumulated in the treasury, and derived from any source except duties on imports, provided the banks selected for this purpose should deposit with him government bonds for their security. subsequently the discretionary power of the secretary in this direction was extended so that at the present time he is authorized at his discretion to deposit in national banks surplus funds derived from any source, trust funds alone excepted, and to accept as security therefor other securities than government bonds. other laws have made national bank notes acceptable for certain public dues, and have given the secretary authority to issue gold and silver certificates against gold coin and silver dollars deposited in corresponding amounts, and to redeem united states notes in gold coin and to keep on hand for that purpose a gold reserve of $ , , . in its operation, this independent treasury system affects the reserves of the banks and through them their discounts and the commerce of the country. whenever the receipts of the government exceed its expenditures, money accumulates in the treasury and the reserves of the banks are diminished; and, under opposite conditions, they are increased. the return of accumulated surplus funds to the banks is possible when the secretary of the treasury decides that such return is desirable or necessary and when the banks are able and willing to supply the bonds demanded as security. in case a deposit is agreed upon the funds go to a relatively small number of national banks selected as depositories by the secretary of the treasury, the amount allowed each depository also being determined by him. through its ability to issue gold and silver certificates, its obligation to redeem united states notes in gold on demand, its administration of the united states mints and assay offices and the laws regulating the supply and distribution of subsidiary coin, the united states treasury cooperates with the banks in the supply and distribution of the circulating medium of the country. the people apply to the banks for the forms of money and currency desired and these institutions meet the demand by means of the funds deposited with them or by their exchange at the various subtreasuries, if the forms of money deposited do not correspond with these demands. _ . the interrelations of these institutions_ under the operation of the national banking act, new york, chicago, and st. louis have been designated as _central reserve_, and forty-seven other cities as _reserve_ cities. the national banks in these reserve cities act as reserve agents for national banks in the cities and towns not so designated and ordinarily receive on deposit the major part of their reserves plus surplus funds not needed for local purposes. banks in the central reserve cities act as reserve agents for the banks in the reserve cities as well as for country banks, and on account of their importance as commercial and investment centers receive and hold in the form of bankers' balances a large part of the reserve funds as well as the surplus investment funds of the national banks of the entire country. state banks and trust companies manage their reserve and surplus investment funds in substantially the same manner as national banks, using national banks in the reserve and central reserve cities as their reserve agents. state laws usually allow approved state banks and trust companies also to act as reserve agents for the banks and trust companies under their jurisdiction, but these approved banks are generally located in the reserve and central reserve cities, and themselves employ the national banks there located as their reserve agents, thus forming simply an additional conduit through which the reserve and surplus investment funds of state banks and trust companies reach the central money reservoirs administered by national banks in the central reserve cities. national banks in the reserve and central reserve cities are also clearing centers for the enormous volume of checks and drafts which the administration of the checking accounts of the banks and trust companies of the country bring into existence. they act as correspondents as well as reserve agents for these other banks and trust companies, and in this capacity collect out-of-town checks and drafts and conduct checking accounts for them. within these cities, as well as in hundreds of others, clearing house associations conduct the local clearings and also act as agencies through which national and state banks and trust companies cooperate in the promotion of common interests. the center of the entire system is in new york city. the clearing house association of that city, consisting of over fifty national and state banks and trust companies, includes the banks the vaults of which constitute the central money reservoir of the country and which constitute the center of the country's clearing system. through the new york subtreasury pass the greater part of the receipts and disbursements of the government, and the chief assay office in the country is located there. the new york stock exchange is our only stock and bond market of national scope, and consequently the investment center of the country. the associated banks of new york city, as the members of the clearing house association are called, hold the greater part of the reserves of the banks and trust companies not required by law to be kept in the local vaults, as well as the greater part of the surplus investment funds of the entire country. it is through the operation of the new york subtreasury on the reserves of the associated banks that the chief influence of the independent treasury system on the banking business of the country is exerted, the greater part of the government's receipts coming directly out of those reserves, and a large part of the expenditures going into them, and the greater part of the money deposited in national banks by the secretary of the treasury going directly or indirectly into new york institutions. most of the exports and imports of coin and bullion pass through new york, and the major portion of the foreign exchanges of the entire country are there effected. the new york assay office receives and distributes the greater part of the new supplies of gold and silver bullion which come from our mines and transforms into bullion the major part of these metals that come to us from abroad and do not find employment as foreign coin. the new york stock exchange is the medium through which a large part of the surplus savings of the country are invested in our industries or loaned for the use of our national, state, municipal, and other local governmental agencies. _ . operation of the system_ the most noteworthy features of the working of this machinery may be discussed under the heads: conflict of functions and laws; loan operations; treasury operations; reserve system; absence of elasticity in the currency. (_a_) _conflict of functions and laws._--the two classes of banking institutions which have been described (state banks and national banks) and trust companies, described in a subsequent chapter, exist side by side in many communities, and in the performance of certain services compete for the patronage of the public. as has already been pointed out, state and national banks differ little in their functions except in their relation to real estate loans, and in some states trust companies perform all the functions of these institutions and many others besides. in the performance of these common services, however, they are rarely regulated by the same laws or subjected to the same kind or degree of public supervision. the competition between them, therefore, is not always on a fair basis and the temptation to violate restraining laws and administrative regulations is strong. the supervising officers recognize the situation as a rule and go to the extreme limit of leniency in administering laws and regulations which operate to the manifest disadvantage of the institutions over which they have jurisdiction, but even then it is often impossible to render the basis of competition fair and equitable. this condition of affairs has resulted in the devising of ways and means of circumventing obnoxious laws and in some cases in practices which are pernicious in themselves. as examples may be mentioned the widespread practice of national banks, which are prohibited by law from making loans on real estate security, of making loans to customers who can offer no other collateral, on the security of their personal notes only, or of making loans secured by real estate by a three cornered operation utilizing a director or officer or some other third party as intermediary. all three classes of institutions compete in soliciting the savings deposits of the community, with the result that the trust companies and savings banks, which often have the advantage here, sometimes force upon their state and national bank competitors a higher rate of interest on such deposits than they ought to pay. the differing regulations in some places in force regarding the amount that may be loaned to a single individual or firm has also resulted in some cases in devious and uncommendable practices. for the remedy of these conditions the first desideratum is the careful differentiation of the various functions performed by all these institutions, and the devising of appropriate legal and administrative regulations for each one. these regulations should then be incorporated into the legislation and the administrative practices of the federal government and of each state, and any institution which performs any of these functions should be obliged to submit to the regulations pertaining thereto. the difficulties in the way of securing such a differentiation of functions and such community of action between the federal government and our states are too obvious to require statement, but they should not prevent the formulation of ideal conditions, and a conscious and persistent effort to attain them. (_b_) _loan operations._--in making loans, a typical method of procedure for a business man is to arrange with a bank for what is technically called a "line," that is, the maximum amount he may expect to be able to borrow under normal conditions. this "line" determined, he borrows from time to time according to his needs, giving as security his personal note, payable in one, two, three, four, or six months. sometimes an indorser is required, and sometimes the deposit of collateral, mortgages on real estate, bonds, stocks, and warehouse receipts being the most commonly used securities employed in such cases. ordinarily, when a note falls due, he expects the bank to renew it, if its payment at the time is not convenient, the agreement on a "line of credit" ordinarily carrying with it that implication, though not legally, probably not morally, binding the bank so to do. indeed, the customer ordinarily counts the amount of his "line" as a part of his working capital and expects to keep it in use a large part, if not all, of the time. in the determination of the amount of these "lines of credit," the judgment of some one or more bank officers, assisted by a discount committee and sometimes, though not as a rule, by a specially organized credit department, rules. in forming these judgments, the bankers of the united states as a class are not guided by any universally recognized and well established principles. the best ones require from their customers carefully prepared statements showing the nature and volume of the business they transact, and a careful classification of their assets and liabilities. others, and these are a large majority, rely upon the knowledge they already possess, gained by general observation, and supplemented by verbal inquiries made from time to time and by the voluntary statements of the customers themselves. the significance of the distinction between commercial and investment operations in the business of banking is not generally understood, and is consequently little regarded. the dominant question in the mind of the average banker, both in determining the amount of a customer's line and in making loans to him after the line is fixed, is how much he is "good for," and on this point the total net worth, rather than the nature of the business operations, of the customer is likely to be decisive. of course, the banker is also influenced by the customer's reputation for both integrity and business ability. this method of procedure has the advantage of rendering access of people to the banks easy and of promoting their extensive use, but it has the grave disadvantage of opening the doors wide to inflation of credit. the majority of our bankers do not know whether more or less than their savings deposits and their capital and surplus, the only funds which can safely be invested in fixed forms, is so invested. the promissory notes of their customers, which constitute the major part of their assets, give no information on this point, and they have not made the investigations necessary to determine with certainty the destination of the funds they have loaned. they are satisfied with the knowledge or the conviction that their loans can be collected, not at maturity--they know very well that many, probably most, of them can not--but ultimately. the result is that unconsciously and gradually the banks create their demand obligations in the form of balances on checking accounts against fixed investments in machinery, buildings, lands, mines, etc., and, when the payment of these obligations is demanded, the reserves fall below the danger point and they are forced to require payment at maturity of paper which the maker had counted upon having renewed indefinitely, and the payment of which is only possible by the forced sale of the property in which the borrowed funds were invested, or of some other property in his possession. if only a single bank or a comparatively few banks find themselves in this condition, relief may be found in the rediscount of paper with other banks, in direct loans, or in the sale of securities on the exchanges; but, if the condition is general, relief by these means is impossible, and widespread forced liquidation becomes necessary. an aggravated situation of this kind causes panic and results in a commercial crisis. (_c_) _treasury operations._--the operation of our independent treasury system produces arbitrary fluctuations in the reserves of the banks and prevents that degree of prevision which is essential to the most economical and the safest practices. the funds needed for current purposes are withdrawn from the banks and kept under lock and key in the treasury vaults, thus diminishing reserves to the extent of their amount. surplus funds likewise accumulate in the vaults with the same result, until the secretary of the treasury sees fit to deposit, and the banks find it possible to receive them. even then the depository banks alone are directly benefited, and no one of these knows long in advance how much it is going to receive or when funds left on deposit will be withdrawn. since the volume of the business of the government is very large, the effects produced by the movement of its funds are of such magnitude as to give them national importance, the ability of banks to loan and to meet obligations already incurred being profoundly affected by them. among these effects must also be noted the inability of the banks to calculate these movements in advance, as they to a degree can those produced by the operations of their commercial customers, and the relation between them and the secretary of the treasury, which results. the relation between the receipts and the disbursements of the government vary greatly from month to month and year to year, so that, on the basis of past experience, it is impossible to predict when the banks will gain from or lose to the treasury. the action of the secretary of the treasury regarding deposits of surplus funds is equally uncertain and unpredictable. no fixed policy regarding this matter has yet been established by precedent or determined by law. each secretary follows his own judgment and is influenced by current events and conditions. the uncertainty which results creates a speculative atmosphere about the money market and renders the banks dependent upon the secretary and the secretary influential on the money market in a manner which is unfortunate for both. since they cannot be indifferent to the operations of the treasury, and cannot predict them, banks are obliged to speculate regarding them, and, if they err, they are likely either to over-extend their credit operations or unduly to contract them. the former will result when they expect an increase in their reserves from treasury sources and do not get it, and the latter when contemplated withdrawals of funds do not occur. the secretary of the treasury is not in a position properly to exercise the power conferred upon him. he is outside the channels of commerce and industry, and must, therefore, secure at second hand the information necessary for intelligent action. such sources of information are frequently unreliable and inaccurate and their use subjects him to the charge of favoritism and to the danger of acting in the interest of special groups or special localities. (_d_) _operation of the reserve system._--each national bank now keeps locked up in its vaults money to the amount of at least six to twenty-five per cent of its deposits and a balance with banks in reserve and central reserve cities sufficient to bring the total to at least fifteen per cent of deposits in the case of country banks, and twenty-five per cent of deposits in the case of reserve city banks. in addition, it is customary for most banks to carry as a secondary reserve high-grade bonds which can be readily sold in case of need. the practice of state banks is practically the same as that of national, and that of trust companies differs only in the amount of reserves carried and in the proportion between the different items. this system has many disadvantages. among them the most obvious, perhaps, is the withdrawal of enormous sums from the current use of the agriculture, industry, and commerce of the country. that portion of these reserve funds which is required to be kept under lock and key in the vaults, amounting in the aggregate to a billion and a half of dollars or more, is not available for use in ordinary times, and is practically useless even in times of stringency, since according to present law, when the reserves fall to the minimum prescribed by law, banks must stop discounting, under penalty of being put in the hands of a receiver. the other portions of these funds, namely, those deposited with banks in reserve cities and those invested in bonds, are likewise withdrawn from the uses of current commerce, since a large part of the former is only available for use on the new york stock exchange, and the latter are invested in railroads, mines, factories, land, etc. the explanation of the devotion of the redeposited portion of the reserves to the operations of the new york stock exchange is to be found in the fact that that exchange furnishes a regular market for call loans on a large scale. since these funds are held subject to the call of the banks which deposited them, and interest at the rate of at least two per cent is paid upon them, the depository banks are bound to seek investment for them, and call loans on collateral listed on the exchange under ordinary circumstances are best suited to their purposes. another disadvantage of this reserve system is the dangerous situation in which it places banks from time to time, and the tendency to panic which it fosters. the demands made upon banks for both cash and credit vary with the seasons. in the fall and spring they are much greater than in the winter and summer. they also vary regularly through periods of years, increasing during the up-grade of a credit cycle and decreasing for a longer or shorter period after a crisis. irregular and unexpected events also cause variations. on account of the rigidity of this reserve system and the lack of elasticity in our currency, the means available to banks for meeting increased demands, especially those of an irregular and unexpected character, are inadequate, and their employment is often dangerous. these means are: keeping in the vaults in slack times a large amount of unused cash, a practice too expensive to be employed; keeping surplus balances with correspondents at two or three per cent interest, not a sufficiently remunerative practice to be employed on a sufficiently extensive scale; rediscount with correspondents of some of their customers' paper, or loans from them on the security of their own signatures or on such security supplemented by collateral; and sale of bonds at such prices as they will bring. none of these expedients is certain at all times and under all conditions, and some of them are precarious at all times. surplus balances with correspondents are most reliable, but they occasionally fail on account of the inability of correspondents to realize upon their call loans. when calls for the payment of balances are large and general, it is impossible for brokers whose loans are called by one bank to transfer them to another. the collateral deposited as security must, therefore, be offered for sale on the stock exchange, and the very stringency which resulted in their being so offered renders their sale, even at slaughter prices, difficult and sometimes impossible. the result at the best is a heavy fall in the prices of stock-market securities, and at the worst a stock-market panic and a suspension of payments by the banks. rediscounts and loans from correspondent banks cannot be depended on. correspondents are under no obligation to make them. they will usually do so as a favor, if their condition warrants, otherwise not. sales of bonds on the stock exchange are difficult and sometimes impossible in times of emergency, and are usually attended with loss. on account of this uncertainty and the danger attending it, when new and unusual conditions likely to result in increased demands upon them arise, banks are likely to act "panicky"; to call in their balances from correspondents; to sell bonds; to call loans; and greatly to curtail or absolutely to cut off new discounts. this action spreads the panicky feeling among their customers, and creates such pressure at the reserve centers as to cause curtailment of accommodations and panic there. at the very best, this reserve system is accompanied by high discount and loan rates and by speculation on the stock market. high rates result inevitably from the hoarding of currency which it involves, the supply of loan funds being abnormally diminished, and speculation follows from the concentration in slack times of funds in new york city, which can only be employed in call loans on stock-exchange collateral. stock brokers regularly take advantage of this situation, speculate themselves and inspire speculation among their customers. the mutual dependence of the stock and money markets thus produced by this reserve system is disadvantageous to both, fluctuations in values, uncertainty, and irregularity on both being the result. (_e_) _lack of elasticity in the currency._--the money of the united states consists of four main elements, gold and silver coin, united states notes, and national bank notes, and none of these fluctuate in volume in accord with the needs of commerce. the gold element depends primarily upon the output of our gold mines and upon the international movement of gold, increasing when that output increases and when our imports of gold exceed our exports, and decreasing under opposite conditions. these fluctuations, however, are quite independent of our commercial needs. silver dollars, which constitute the major part of our silver currency, for several years have been unchanged in quantity, and the volume of united states notes has remained at $ , , since the resumption of specie payments, january , . national bank notes fluctuate in volume as a result of changes in the number of national banks and in the prices of government bonds. whenever a new national bank is organized, a specified portion of its capital must be invested in government bonds, which bonds are usually deposited with the comptroller of the currency in exchange for notes; and, when the price of government bonds rises, banks holding more than the minimum required by law frequently retire a portion of their circulation in order to recover their bonds for sale at the enhanced price. when the price of government bonds falls, many banks purchase additional quantities and increase their circulation. changes in the price of government bonds and in the number of national banks, however, have no connection whatever with changes in our currency needs, and no more do the fluctuations in the volume of the currency as a whole, made up of these various elements combined. as a result of this condition, rates on loans and discounts fluctuate greatly on account of wide variations between the demand and the supply of loan funds, and commerce is hampered at certain seasons and overstimulated at others. as was indicated above, this lack of elasticity in our currency aggravates the defects of our reserve system and also aids in the production of financial panics. _ . plans for reform_ on account of the defects in our system of banking, there has been long-continued agitation for reform, increasing in scope and intensity in recent years. after the crisis of , which revealed these defects to many persons who had not observed them before, congress appointed a commission to make investigations and to prepare a reform measure. in january, , this committee submitted a report which embodied a bill for the incorporation of a national reserve association, to be made up of a federation of local associations of banks and trust companies. the purpose of this association was to supply a market for commercial paper, an elastic element in the currency, a place for the deposit of the bank reserves of the country and of the funds of the government, as well as proper machinery for the administration of this market and these funds. for various reasons, the plan of the monetary commission did not meet with universal favor. it was condemned in particular by the democratic party, which was victorious at the polls in the fall elections, and installed a new administration in washington, march , . a special session of the new congress was called to consider the tariff question, and to it was submitted another plan for the reform of our banking system, which was enacted into law december , . this law provides for the incorporation of so-called "federal reserve banks," the number to be not less than eight or more than twelve. the country is to be divided into as many districts as there are federal reserve banks, and the national banks in each district must subscribe six per cent and pay in three per cent of their capital and surplus to the capital stock of the federal reserve bank located in that district. state banks and trust companies may contribute on compliance with the same conditions as national institutions. if, in the judgment of the organization committee, the amount of stock thus subscribed is inadequate, the public may be asked to subscribe, and as a last resort stock sufficient to raise the total to an adequate figure may be sold to the federal government. cooperation between these federal reserve banks and a degree of unity in their administration are provided for through a federal reserve board of seven members, two ex officio and five to be especially appointed by the president of the united states. for the administration of each federal reserve bank, a board of directors of nine members is provided for, six to be appointed by the member banks and three by the federal reserve board, one of those three to be designated as federal reserve agent and to be the intermediary between the federal reserve board and the bank of whose directorate he is a member. the proposed federal reserve banks are to hold a part of the reserves of member banks and to rediscount commercial paper, administer exchange accounts, and conduct clearings for them. they are also to serve as depositories for the united states government, and to issue treasury notes obtained from the federal reserve board in exchange for rediscounted commercial bills, these notes to be redeemable on demand by them and to be a first lien on all their assets. their retirement, when the need for them has passed, is provided for by the requirement that no federal reserve bank shall pay out any notes except its own, all others being sent in to the issuing bank or to the treasury for redemption. against outstanding note issues a reserve of at least per cent in gold must be maintained, and against deposits one of at least per cent in gold or lawful money. this law provides remedies for the chief defects of our system; namely, a market for commercial paper which will enable a properly conducted bank at any time, through rediscounts, to secure notes, legal-tender money, or checking accounts in the amounts needed; a system of note issues which will fluctuate automatically with the needs of commerce for hand-to-hand money; a more economical administration of the reserve funds of the country, unattended by the dangers of the present system, and an administration of the funds of the federal government which is free from the evils of the independent treasury system. chapter v commercial banking in other countries in contrast with that of the united states, the characteristic features of the commercial banking systems of europe are the central bank performing important functions for all other financial institutions and for the government; a relatively small number of large institutions with many branches mediating between the central bank and the people; and the use of commercial and bank bills instead of promissory notes as the chief instruments of loans and discounts. _ . common features_ the central banks differ considerably in organization and business methods, but perform essentially the same functions; that is, they act as financial agents for their respective governments; discount high-grade commercial and bankers' bills for other banks and usually for private persons; administer the cash reserves of the entire country; and furnish the greater part and, in some cases, the entire supply of bank notes. the other large banks do most of the business with the public, the central bank's relations being chiefly with them and with the government. they conduct checking accounts with merchants, manufacturers, farmers, and others; receive and invest savings deposits, and deal in certain classes of investment securities; conduct the domestic and foreign exchanges; discount various kinds of commercial and banking bills, frequently those not available for discount at the central bank; and make advances on personal and other kinds of security. their main offices are located either in the central money market of the country or in important financial centers, and their branches are extended to all places in which banking facilities are supposed to be needed. as a rule, they are less restricted by legislative provisions than are the national and state banks and trust companies of the united states, and are less carefully supervised and inspected by public officers. commercial and bankers' bills are widely used as credit instruments between buyers and sellers and between bankers and their customers. a common method of procedure, when a sale is made on time, is the drawing of a bill for the amount due, by the seller upon the buyer, payable at the end of the credit period agreed upon, and accepted by the buyer, and the discount of the bill by the seller's bank. in foreign and in some branches of domestic trade, the banker's bill is used on account of its more general acceptability as an object of discount, such bills usually being discountable by the central bank and by banks far distant from the place in which the bill originated. in case a buyer desires to furnish his creditors with bills of this kind, he arranges with his banker for a line of "acceptance" credit, which permits people who sell goods to him to draw bills upon his banker instead of himself, the banker agreeing to accept the bill and guaranteeing its payment at maturity. the seller will usually have no difficulty in discounting such a bill at his own bank, no matter how far removed it may be from the home of the buyer, the character of the accepting bank being known throughout the financial world. "acceptance lines" are usually granted only on condition that the customer agrees to supply the bank with the funds necessary for meeting the accepted bills as they fall due, and to pay a fee for the accommodation. ample security that these obligations will be met is usually demanded. _ . the english system_ in the english system, the central bank is the bank of england, with the possible exception of a few private banks, the oldest financial institution in the country. it is privately owned and privately governed. its board of directors, chosen by the stockholders, consists of twenty-four persons, a portion of whom are practically life members, being regularly reelected when their terms of office expire. the others usually serve alternate years only, vacancies being filled by promising young men selected from the business houses of london. the oldest director is regularly elected to the office of governor of the bank, and the next oldest to that of deputy governor, both serving two years, the deputy governor regularly succeeding to the office of governor, and the ex-governors forming the life members of the board and constituting a kind of advisory council to the governor, and known as the board of treasury. the head office of the bank of england is in london, and there are eleven branches, two in london and nine in the provinces. by a law passed in , the bank was divided into two departments, called respectively the banking and the issue departments, the latter having exclusive charge of the issue of notes, and the former of all other branches of the bank's business. this same law prescribed the conditions under which notes could be issued. it provided that the bank of england might issue £ , , of notes in exchange for securities, and any amount in addition in exchange for an equal amount of coin or bullion. additions to the amount issued in exchange for securities might be made by order of the government to the extent of two-thirds the amount of issues relinquished by the other issuing banks, all such banks in existence at the time the act was passed being permitted to retain, without increasing, their existing issues. most of these other issues having been abandoned since , the bank of england is now permitted to issue in exchange for securities £ , , . the securities against which these issues are made were transferred to the issue department by the banking department, and consist of the debt owed by the government to the bank and of other government or governmentally guaranteed securities. the issue department freely issues additional notes in exchange for an equal amount of gold coin or bullion, and on demand redeems notes in gold coin. since the amount of notes all the time outstanding greatly exceeds £ , , , the business of the issue department is confined to the exchange of notes for gold coin and bullion and the redemption of notes in gold. the banking department receives and disburses the funds of the government, manages the public debt, and serves as the government's agent in most of its other financial operations; receives on deposit from other financial institutions the money which comes into their possession, and supplies them with such money funds as they need from day to day in payment of checks drawn against their balances; discounts bills of exchange with a minimum maturity of four, and in exceptional cases six, months; and to a limited extent makes advances on and invests in high-grade public and other securities. besides the english government and financial institutions, it has other customers, but it is to be presumed that these are of a special character, since the conditions under which it does business with private persons are in most cases more onerous than those prescribed by other banks, and consequently not attractive to the ordinary business man. the so-called english joint-stock banks are classified into three groups, known as metropolitan, metropolitan and provincial, and provincial banks. the metropolitan banks have their head offices in london, and do not, as a rule, extend their branches beyond the suburbs of the metropolis. the metropolitan and provincial banks have their head offices in london and branches scattered throughout the provinces, as well as in various parts of the city and suburbs, and the provincial banks have their head offices in the larger provincial cities, and each one confines its branches usually to the town and country districts tributary to the city in which its head office is situated. often the provincial banks establish branches in london. for banking purposes, these banks are the chief reliance of the agriculture, industry, and commerce of the country, but competing with and supplementing them are the bill brokers and discount houses, the private banks, and the foreign and colonial banks. the bill brokers and discount houses make a business of dealing in foreign and domestic bills of exchange. they buy in the first instance a large percentage of the bills brought to market, keep some of them until maturity, and sell the remainder to the other banks, usually indorsing them first. a large part of the capital employed in their business is obtained by loans made from the other banks, subject to call and secured by the bills they purchase deposited as collateral. the private banks are the remnant left of the oldest group in the country. there were private banks in london centuries before the bank of england was incorporated, and previous to the bank of england was their only competitor. since their number has steadily diminished. those which remain have, as a rule, built up a special constituency, to the special interests of which they cater. among them are strong institutions, but as a class their importance in the system is not great, and is waning. the foreign and colonial banks are branches of important institutions in foreign countries and the english colonies which have a considerable volume of business to transact in london. they serve as intermediaries between their respective countries and the english money market, and on account of the enormous volume of foreign commerce which is financed in london, their number is large, and the rôle they play on that market is important. in the operation of this machinery, the most noteworthy features are the reserve system, and the administration of the discount rate of the bank of england. there is no law on the english statute books prescribing the amount of cash which banking or other financial institutions shall keep in their vaults. the custom of these institutions regarding that matter is to keep on hand relatively small sums and to rely upon the bank of england or some other london banking house for the replenishment of their supply as needed. for this purpose, london and many provincial banks keep balances with the bank of england, and other banks maintain balances with other london institutions. these balances may be obtained by the deposit of coin or bank of england notes or by rediscounts. another widely used resource is the calling of loans made to bill brokers or discount houses. such loans or a considerable volume of bills of the kind discounted by the bank of england, or both, are regularly carried by london banks and counted as a part of their reserves. on account of these practices, surplus cash not needed in the conduct of the current business of the country speedily finds its way into the vaults of the bank of england, and additional supplies, when needed, come from this source. the administration of the cash reserves of the country thus becomes one of the important duties of the bank of england, in the performance of which variation of the rate charged on discounts is the most important device. many years' experience has enabled the bank to determine with a considerable degree of accuracy the volume of the demands for cash likely to be made upon it from day to day, and consequently the amount that it should keep on hand in the vaults. whenever this amount approaches the minimum regarded as consistent with safety, the directors raise the rate of discount, and when the amount on hand becomes excessive, they lower it. the efficiency of this procedure in increasing the reserves in the one case and in decreasing them in the other is due to certain conditions and practices which deserve attention at this point. long-established custom has made the rate of interest paid on deposits in london and other parts of england vary with the discount rate of the bank, and on this account the market rate of discount also varies in the same manner. the bank of england is thus ordinarily able to regulate the market for commercial paper. since paper payable in london is a favorite form of investment for continental bankers, by raising its rate of discount and with it the market rate above the level of the rates of some or all of the continental centers, the bank of england is able to induce these bankers to send money to london for investment and thereby to increase her reserves, and by lowering its rate below the level of the rates in these continental centers, she is able to induce them to sell some of the paper they already hold, and thus to furnish a market for her surplus funds and diminish her reserves. on account of the readiness with which the international gold movement responds to variations in the discount rate of the bank of england, the need for an elastic system of bank note issues is not felt in england to the same extent as in other countries. it is this fact, doubtless, which explains the retention to the present day of the essentially inelastic bank note system created by the act of . _ . the french system_ in france, the bank of france is the central institution. it is the oldest of the important french banks of the present day, having been established in by napoleon the first. its capital, amounting at the present time to , , francs, or approximately $ , , , is supplied by about , private stockholders, about , of whom own only one share each. the two hundred largest stockholders appoint a general council, consisting of fifteen regents and three censors. five regents and all the censors must be chosen from the commercial and industrial classes, and three of the remaining ten regents must be selected from the _tresoriers payeurs généreaux_, an important group of representatives of the public treasury scattered throughout the country. the general council as well as the stockholders' assembly is presided over by a governor, who, together with two sub-governors, is appointed by the president of the republic upon the nomination of the minister of finance. the governor is the chief executive officer of the bank and the final source of authority in most matters of vital importance. he is responsible to the government rather than to the stockholders, and is subject to removal only by the power which appointed him. the bank of france has about two hundred branches and sub-branches located in paris and all the important cities and towns in the republic, also over three hundred so-called agencies located in smaller places and transacting only a limited line of business. each branch has a manager appointed in substantially the same manner as the governor, and the sub-branches and agencies are administered through the branches. through this network of offices, every part of the country is brought into direct and easy access to the bank. the bank of france is the only institution in the country privileged to issue circulating notes. the maximum allowed it is regulated by law and is increased from time to time. at present it amounts to , , , francs, or approximately $ , , , . the bank is obliged to redeem these notes on demand in gold coin or silver five-franc pieces, but it is free to determine how much cash it shall keep on hand for that purpose, and when and under what conditions it shall issue them. its discount operations are limited by law to bills maturing in not more than three months, and bearing the signatures of at least three solvent persons, or two signatures and secured in addition by specified forms of collateral. it is also permitted to make loans or advances, as they are called, on securities of the french government maturing at fixed dates, gold and silver bullion, and the money of foreign countries, and obligations of the french railroads, french cities, and departments, the crédit foncier, and the société algerienne. it is also obliged to loan , , francs ($ , , ) to the government without interest. one of the chief branches of the business of the bank of france is the service of the public treasury and the performance of other financial duties imposed upon it by the government. it serves as the depository and disbursing agent for the government, and performs important functions connected with the public debt, the mints, the savings institutions, and publicly administered trusts of various kinds. it is also the depository for the banking reserves of the country. in france, as in england, it is not the custom of banking and other financial institutions to hoard money in their vaults, but to depend upon the bank of france for supplies as needed. to this end they keep funds on deposit there, and regularly rediscount the paper of their customers when balances need to be replenished. through its network of branches and agencies spread over the entire country, the bank of france is able economically and expeditiously to conduct the intermunicipal exchanges of the country. it participates in local clearings through membership in the clearing houses, at which balances are paid by checks drawn against credits on its books maintained for that purpose by all members, and it conducts so-called transfer accounts with other banks and financial institutions against which drafts can be drawn payable at any place where one of its offices is located. such drafts constitute the chief means through which transfers of funds are made between different places. the business of the bank of france with private persons is limited by the requirement that all paper discounted must have three signatures, or two signatures and collateral security, and that advances can only be made on the security of the forms of collateral indicated above. most business men find it either inconvenient or impossible to comply with these conditions, and consequently transact most of their business with other banking institutions. the third signature on paper discounted by the bank is, therefore, usually supplied by these institutions, which thus act as an intermediary between the bank and the commercial world. next to the bank of france, the most important banking institutions of the country are the crédit foncier, the crédit lyonnais, the comptoir d'escompte de paris, the société générale, and the crédit industrielle et commercial. the crédit foncier is principally engaged in extending credit based on real estate security, but it also discounts large amounts of commercial paper. its organization is modeled after that of the bank of france, and, like that institution, it is controlled by the state. since it is primarily an investment bank, a description of its principal operations will be deferred to the next chapter. the four other banks mentioned are a product of the commercial life of modern france, all having been established since the revolution of . they are all heavily capitalized, the smallest, the crédit industrielle et commercial, having a capital of , , francs ($ , , ), and the largest, the société générale, having a capital of , , francs ($ , , ), and all extend their business by means of branches. the crédit lyonnais and the comptoir d'escompte have branches in france itself, the french colonies, and a number of foreign countries; the société générale, throughout france, in london, and san sebastian, spain; and the crédit industrielle et commercial, in paris and its suburbs. taken together, these four institutions supply the french people in paris and the provinces with banking facilities for both their domestic and their foreign business. while in some of the larger provincial cities local banks with branches in surrounding towns and sometimes in paris are to be found, branches of one or more of these four institutions are the chief reliance in nearly all places. these institutions cater to all the financial needs of their constituents. they supply their needs for cash and for exchange; conduct checking accounts for them, although these are not used in france to the same extent as in the united states; discount their commercial paper and make loans to them on personal and other security; and receive on deposit their savings and provide them with investments. in performing these functions they make extensive use of the bank of france and of the stock exchanges of the country. with the former they conduct checking and transfer accounts and rediscount their customers' bills, by these means procuring the coin, bank notes, and exchange needed; and from the latter they obtain the investment securities required for the satisfaction of both their own and their customers' needs. gold and silver coin and the notes of the bank of france constitute the hand-to-hand money of the country. the latter form the elastic element, and their operation approximates perfection. when demand for money increases for any reason, more commercial bills are presented for discount to the banks, which, after indorsement, exchange them at the bank of france for the notes with which they supply their customers' needs. the note issues of the bank thus expand in direct and immediate response to the needs of the country for more currency. when such needs have passed, the discounted bills, in exchange for which these notes were issued, mature and are paid in greater volume than new bills are created and presented for discount, and notes, or a corresponding amount of coin, accumulate in the vaults of the bank. the notes are cancelled and destroyed and the coin is kept in store until it again passes into circulation through exchange for notes still outstanding, or for discounted bills. on account of the elasticity of its note issues, and the extent to which they are used in the commerce of the country, the bank of france has occasion to change its rate of discount less frequently than any other bank in europe. the result is that the country enjoys the advantage of steady and low rates, since in france, as in england, the discount rate of the central bank controls the market rate, and the ease and inexpensiveness with which the notes are issued make low rates possible. _ . the german system_ the imperial bank, with head offices in berlin, and about one hundred branches and more than four hundred sub-branches scattered throughout the country, plays essentially the same rôle in the german banking system that the bank of england and the bank of france play in the english and french systems, respectively. it was established in by an act which also profoundly affected the entire banking system of the country, and its development has been aided and directed by several acts passed subsequently. its capital, supplied by the general public, amounts at the present time to , , marks ($ , , ), and it is governed by three boards, known respectively as the curatorium, the direktorium, and the central ausschuss. the curatorium is composed of five members, of which body the chancellor of the empire is ex-officio chairman. a second member is appointed by the emperor, and for that position he has always selected the prussian minister of finance, and the three remaining members are appointed by the bundesrath. it meets quarterly and reviews all the operations of the bank. it, or rather, the chancellor, its chairman, has supreme power, which, however, he has never exercised except on one occasion, when he ordered the bank not to accept russian securities as collateral for loans, an order since revoked. the administration of the bank's affairs is chiefly in the hands of the direktorium, consisting of a president, vice president, and seven other persons, all of whom are appointed by the emperor for life, from a list of candidates recommended to him by the bundesrath. this board selects the staff of bank officers and clerks, and superintends the daily conduct of the bank's business. the central ausschuss is a committee of fifteen persons elected by and representing the stockholders. it holds monthly meetings; has the right to demand complete information concerning the bank's operations, to discuss all matters freely, and to tender advice and counsel; but it has no power to control except regarding two matters: it can set a limit to the amount of securities the bank can purchase, and can veto any proposed transactions with the imperial government or with the governments of any of the states. like the other central banks described above, it receives on deposit and disburses the funds of the imperial government; administers the coin reserves of the country; conducts the domestic exchanges, and serves as a bankers' bank. it is free to do business with the general public, but the legal and other limitations under which it must operate give the other banking institutions of the country the advantage in competition for this kind of business. it shares the right of note issue with four other banks, which, out of thirty-two that retained that privilege at the time the imperial banking system was established, alone retain it at the present time. the issues of these four institutions, however, are relatively small in volume, and the imperial government has the right to deprive them of it january , , or any tenth year thereafter, on condition of giving one year's notice of its intention so to do. the issues of the imperial bank are subject to the following regulations: they must be covered by cash and discounted bills maturing in not more than three months, and signed by at least two solvent persons, the proportion of cash being not less than one-third of the total. if the total amount issued exceeds the bank's holdings of gold bullion, specie, and government notes by more than , , marks at the end of march, june, september, and december, and , , marks at other times, a tax of five per cent per annum is levied on the excess. the law confers upon the bank the following powers: a. to buy and sell gold and silver coin and bullion. b. to discount, buy and sell bills of exchange whose maturity shall be three months at the longest, and for which usually three, and in no case less than two, accredited vouchers shall stand good; furthermore, to discount, buy and sell bonds of the empire or of any german state, or domestic municipal corporations, provided such bonds mature within three months at the longest and conform to the new standards of value. c. to grant interest-bearing loans for terms no longer than three months, upon movable security (lombard, or deposit loan business), such as: gold and silver, coined or uncoined; interest-bearing or non-transferable bonds maturing within a maximum term of three months, whether of the empire, a german state, or of domestic municipal corporations; interest-bearing non-transferable bonds on which the interest is guaranteed by the empire or by any one of the german states; capital stock and stock priority shares, fully paid up, of german railway companies in actual operation; mortgage bonds of the provincial, municipal, or other land credit institutions of germany that are subject to state control, including shares of german mortgage banks to an amount never exceeding three-fourths of their market value; interest-bearing non-transferable bonds of foreign states, and foreign railway priority bonds, covered by state security, in amounts not exceeding per cent of their market value; bills of exchange of recognized soundness, after deducting at least per cent of their market value; and pledges of native merchandise, in amounts within two-thirds of their value. d. to negotiate collections for the account of individuals, institutions, and governing boards; and upon security, as before mentioned, to furnish payments, and make orders or conveyances on the branch banks or on correspondents. e. upon prior security, to buy on behalf of outside parties, effects of all kinds, including the precious metals; and after delivery to sell the same. f. to receive money for circulation or on deposit, with or without interest, the sum of interest-bearing deposits not to exceed that of the capital stock and reserve fund. g. to accept the custody or other management of objects of value. besides the imperial bank there are in germany eight very large and powerful banking institutions and a considerable number of smaller and less powerful ones. the eight great ones have each its head office in berlin, and connections, through branches, agencies, and controlled institutions, in other parts of the empire, the german colonies, and foreign countries. together they control about eighty per cent of the entire banking capital of the empire. in reality they are federations of banking institutions, many of which were once independent, and some of which were promoted and established in the interests of the group. while these eight institutions are primarily engaged in commercial banking, they are also promoters on a large scale of german industry and commerce, both at home and abroad. through interlocking directorates, stock ownership, and in other ways, they are closely allied with the leading industrial and transportation interests of the empire, and they have been and are leaders in the promotion of these interests in other parts of the world, notably in the orient, south america, and africa. they are, therefore, leaders on the stock as well as the discount markets of the country, and are widely influential in investment as well as commercial banking affairs. these, as well as the other commercial banks, consisting for the most part of local institutions and those catering to special interests, use the imperial bank for rediscounts, for transfers of funds between different parts of the country, and as a depository for surplus funds. they do not normally keep on hand more cash than is needed for till purposes. being in easy reach of an office of the imperial bank, supplies can be obtained at any time by checks drawn against credit balances or through rediscounts of commercial bills. special accounts are carried for transfer purposes and are used even in the transfer of funds between different offices of the same institution. on account of its right to issue notes against commercial securities, the imperial bank has the power to meet the demands made upon it and to supply the country with an elastic medium of exchange. the levy of a tax upon the excess of the issues above a prescribed maximum prevents perfect elasticity, unless this maximum be kept above the highest point which the circulation would normally reach, since the actual levy of the tax forces the rate of discount to such a point as to seriously restrict commercial operations. however, since the line between commercial and investment banking is not drawn by the great berlin banks with the care that is desirable, and since they have been able at times, especially on account of their foreign connections, to embarrass the imperial bank in its efforts to maintain adequate specie reserves, such a tax is probably a desirable safeguard against over-expansion of credit. _ . the canadian system_ in important respects the canadian banking system differs from those of the european countries which have been described and from that of the united states. it consists of a varying number of relatively large institutions, each with several offices administered from a common center, but without a central bank. for some time the total number has decreased, since from thirty-six to twenty-seven, in spite of the fact that the canadian law, like that of the united states, provides for the formation of new banks at any time, on compliance with certain prescribed conditions, including a subscribed capital of at least $ , and a paid-up capital of at least $ , . the number of branches, however, has increased rapidly, much more rapidly than the population. the most noteworthy legal provisions pertaining to the banking business in canada concern note issues and loans and discounts. regarding the establishment of branches, the amount, and, with one exception, the composition of the reserves, and many other matters carefully regulated by law in the united states, canadian bankers are left free to follow their own judgment. neither is there public examination of banks in canada. reports must be regularly made to the minister of finance, and he may call for special reports whenever he desires so to do; but neither he nor any other public officer has the right to examine a bank's books or to quiz its officers or directors. in contrast with banking legislation in the united states, another peculiar feature of canadian law is the incorporation of the canadian bankers' association, an organization resembling in essentials the american bankers' association, and the assignment to it of important functions connected with the issue of notes and the winding up of the affairs of failed banks. regarding note issues, the chief provisions of the canadian law are as follows: each bank is permitted at any time to issue circulating notes to the amount of its capital stock, and between october and january an additional amount, equal to fifteen per cent of its combined capital and surplus, may be issued on payment of a tax to be assessed by the governor in council, not to exceed five per cent per annum. the notes are a first lien on all the assets of the bank that issued them, and must be redeemed on demand at the head office and at such other places as are designated by a committee of public officials known as the treasury board. as such redemption centers, this board has named toronto, montreal, halifax, winnipeg, victoria, st. john, and charlottetown. each bank must also deposit with the minister of finance a sum of money equal to five per cent of its average circulation. the aggregate of the amounts thus deposited by all the banks is known as the "circulation redemption fund," and may be used in the redemption of the notes of a failed bank. in case the fund is so used, and the liquidated assets of the bank prove to be inadequate for its complete replenishment, a tax sufficient to meet the deficit is levied on the solvent banks in proportion to their circulation. regarding loans and discounts, the law aims rather to protect than to restrict the operations of the banks. they may "deal in, discount, and lend money, and make advances upon the security of, and may take as collateral security for any loans, ... bills of exchange, promissory notes, and other negotiable securities, or the stocks, bonds, debentures, and obligations of municipal and other corporations, whether secured by mortgage or otherwise, or dominion, provincial, british, foreign, and other public securities." the only important restriction placed upon their loaning activities is the prohibition of making advances on the security of landed or other immovable property. in making loans to wholesale dealers and shippers of produce, the law safeguards the banks by allowing them to take a blanket lien on the goods dealt in by the borrower. this lien applies not only to the goods in possession at the date of making the loan, but to any others which may be substituted for them or manufactured out of them. this lien is prior to that of any other unpaid vendor, except one acquired before the bank's lien was established. the chief officers of a canadian bank are the general manager, the chief accountant, the superintendent of branches, the inspector, and the secretary, all connected with the head office, and the managers of the branches. the general manager is the chief executive and the chief in authority. while he is subject to the board of directors, on account of his wide experience and knowledge his judgment is usually followed. the other officers are appointed by him with the approval of the board, but, almost without exception, from persons who have served the bank in subordinate capacities. the general manager himself is nearly always a man who has passed through the hierarchy of positions from the bottom up, and is therefore thoroughly familiar with every detail of the bank's business and history. the inspector has charge of the examination of the branches, and this work is so carefully and thoroughly done that examination by public officials is not considered necessary, or regarded as desirable by most canadian bankers. regarding this matter, however, there are differences of opinion, and changes in the near future are not improbable. the managers of the branches are in strict subordination to the authority of the general manager, though they are necessarily allowed a large amount of discretionary authority in matters pertaining to the branch over which they preside. unless prevented by distance, they are in daily communication with the head office or with one of its representatives. in the operation of the canadian system, noteworthy features are the methods of controlling credits, of managing the issues and the reserves, and of securing unity or at least harmony of action. it is the usual practice in canada for a business man to do all his banking with one institution. this practice is rendered possible because most of the banks are large enough to take proper care of almost any business establishment in the dominion, and because experience has demonstrated its wisdom. the banks compete vigorously for new business but do not attempt to attract one anothers' customers. indeed a customer who desires to change his banking connections is looked upon with suspicion and is subjected to a very careful examination by the bank that is asked to take him on, including a careful discussion of all the aspects of the matter with the bank he desires to leave. the result of this practice is that a man's banker is thoroughly familiar with his affairs, especially his credit relations, and at the same time feels under obligations to render him such support and guidance as he deserves. on account of this practice, also, commercial paper brokerage does not flourish in canada. the notes of the canadian banks constitute practically all of the hand-to-hand money of the country in denominations above two dollars. the one and two dollar denominations are supplied by dominion notes--all but $ , , of which are represented by gold coin or bullion--and the lower denominations by subsidiary silver supplied by the government. each bank pays out its notes freely to supply the cash demands of its customers, and receives from them on deposit, without hesitation or depreciation, the notes of other banks as well as its own. the former, however, are either sent in for redemption as soon as received or used in making payments to the banks which issued them. thus notes are cleared as readily as checks and the volume in circulation expands and contracts in automatic response to business needs. the fact that these notes are neither legal tender nor guaranteed by the government does not interfere with their circulation--daily clearings, the first lien on assets, and the redemption fund amply protecting holders against the possibility of loss--but does prevent their being hoarded as reserves or for any other purpose and thus contributes towards their elasticity. the connection now established by law between the maximum volume of bank note issues and the capitalization of the banks renders necessary the increase of the latter in correspondence with the expansion of commerce in order to prevent a contraction of credit. present law, however, does not provide for such an increase. it is left to the voluntary action of the banks, which seem inclined to increase surplus funds rather than capital. the permission granted in to extend issues beyond the amount of capital during the crop moving season, on payment of a tax, is a makeshift and not a solution of the difficulty, since a tax on issues is a means of forcing contraction of credit and not of adjusting issues to legitimate needs. since canadian banks are able to meet the greater part of the public demand for hand-to-hand money by means of their own notes, they do not need to carry in their vaults large amounts of gold and silver coin and dominion notes. they keep on hand only so much as experience indicates they are likely to be called upon to supply to their customers, plus a reasonable margin for safety and for the payment of clearing house balances. the greater part of their reserves consists of balances in banks outside of canada, especially in the united states and england, call loans in new york city, and easily salable securities. in case of an emergency of any kind these resources may be transformed into gold or their customers supplied with foreign exchange, which is often as much or even more needed. gold can at any time be exchanged for dominion notes if that is the currency wanted. the lack of a central bank and of a rediscount market is to a degree compensated by unity of action among the banks. this is the result not so much of law as of conditions, among which the most important are: the fact that the six largest banks do fifty per cent of the business and that one of these, the bank of montreal, holds most of the deposits of the government and is generally spoken of as the government bank; the fact that the general managers are experts, in first-hand touch through their branches with business conditions in canada and other parts of the world, and in possession of the same data concerning these conditions, and through the same kind of acquired skill and similar experiences likely to draw the same or at least similar conclusions from this data; common interests in the prosperity of the country and in the prevention of speculative excesses and mutual interdependence in the successful conduct of their everyday business as well as in times of emergency and stress: and the bankers' association, which through its journal gives authoritative expression to the best banking opinion and actually acts for the banks in many matters of common interest. to what extent this community of action takes the form of rediscounts for each other in ordinary times it is impossible for an outsider to say, but that it is operative in times of stress is indicated by the manner in which the failures of the bank of ontario in and the sovereign bank in were handled. in both of these cases the public was protected against loss and panic was averted by the cooperative action of the other banks in assuming the obligations of these institutions to the public, and in winding up their affairs in such a manner as to occasion little disturbance. while canadian banks are free to carry on investment as well as commercial banking operations, their published reports indicate that they take care to avoid confusion of the two, or the infringement of one upon the other. their holdings of investment securities are kept well within the limits set by their aggregate capital, surplus, and savings funds, and their method of handling commercial business, based as it is on accurate knowledge of their customer's operations and upon the lien upon produce heretofore described, prevents their acceptance, through ignorance, of investment securities under commercial disguise. chapter vi investment banking in the economy of nations the encouragement and promotion of saving and the accumulation, distribution, and investment of capital are as essential as the conduct of exchanges, but the performance of these functions has not been segregated and institutionalized to the same extent as has commercial banking. vast amounts of capital are invested directly by the people to whom it belongs without the aid of middlemen and large amounts are also invested through brokers of one kind and another who can hardly be classed as bankers. the most important types of institutions which have been developed in connection with these functions are savings banks, trust companies, bond houses and investment companies, land banks, and stock exchanges. _ . saving and savings institutions_ saving is an individual matter for which the essential conditions are the development of the instinct to make provision against uncertainties of future income and to better the material condition of one's self and family, and a surplus of income above necessary daily expenditures. in order to secure the realization of these conditions to as great an extent as possible, many agencies cooperate in all modern nations, among them savings institutions. included among these are various forms of provident associations, sometimes independently organized and sometimes connected with other organizations, insurance associations of many kinds, building and loan societies, and savings banks. the need for savings institutions varies greatly among the different nations and among different classes of people in the same nation. among people of great wealth the surplus of income above expenditures is so great that large savings can hardly be avoided, and among all the well-to-do classes the margin from which savings are possible is sufficiently large and the desire to save sufficiently great to insure large accumulations of capital. among these classes there is little or no need for institutions designed primarily for the development of the saving instinct. what they need are institutions for the safe keeping, accumulation, and investment of the savings which they are constantly making. the principal work of savings institutions, therefore, pertains to the classes of people who are not well-to-do and who need encouragement and help in their efforts to improve their material condition, if they are so inclined, and stimulus to make such efforts, if they are not so inclined. the means available to savings institutions for the accomplishment of these ends are the urging of the importance of saving upon the attention of people who do not adequately appreciate it, the placing at their easy disposal of facilities for making savings when they have the ability and inclination to save, and the application of pressure of various kinds to compel or induce saving. in the application of these means the methods employed by the various groups of institutions mentioned differ widely and they are efficient in different degrees, partly because they have other objects in view besides the promotion of saving and partly because they deal with different classes of people. savings banks constitute the only group to which the term bank can properly be applied and consequently the only one to which attention will here be given. in a book entitled, _savings and savings institutions_, written by professor hamilton of syracuse university, the following definition is given:[pages and .] savings banks are institutions established by public authority, or by private persons, in order to encourage habits of saving by affording special security to owners of deposits, and by the payment of interest to the full extent of the net earnings, less whatever reserve the management may deem expedient for a safety fund; and in furtherance of this purpose bank offices are located at places where they are calculated to encourage savings among those persons who most need such encouragement. professor hamilton classifies these institutions as trustee, cooperative, municipal, and postal savings banks. in the first group he places institutions managed by boards of philanthropically inclined persons who serve without pay; in the second, those managed cooperatively by the people who make use of them; in the third, those established and administered by municipalities; and in the fourth, those connected with the post-office departments of governments. the strength of trustee savings banks lies in the comparatively low costs of their administration and in the fact that in their investments they are likely to enjoy the advantages of the judgment and enthusiasm of people skilled in the investment business; that of cooperative savings banks, in their adaptability to the special needs of their constituents and in the education which cooperative administration involves; and that of municipal, and especially of postal savings banks, in their capacity to place their services within the easy reach of all who need them and in the confidence which their public character inspires. in the investment of the funds intrusted to savings banks, safety and as large returns as are consistent with it, rather than ease of liquidation, are the prime considerations, and hence they usually take the form of high grade investment securities rather than of commercial paper. their deposits are usually subject to withdrawal only after due notice, and, being savings deposits, their withdrawal usually follows only after the lapse of a considerable period of time. the purpose of their withdrawal is frequently investment and this is sometimes made through the agency of the bank which held the deposit and may involve merely a transfer of securities. outside of the new england and middle states, savings banks were rare in this country previous to the inauguration of our postal savings bank system in . the explanation of this condition is doubtless to be found chiefly in the wide extension of private, state, and national banks, and trust companies, practically all of which conduct savings departments and solicit the patronage of savers. these institutions have coveted this field and have not encouraged the establishment of savings banks. there is reason to believe, however, that they have not worked the field as thoroughly as savings banks would have done and that, on account of the dominance of their other interests, they are not as well fitted as savings banks to work the field thoroughly. moreover it is probable that they are not able to pay as high a rate on deposits as well conducted savings banks would be able to pay. there seems, therefore, to be room, and probably need, here for the development of savings banks of some at least, if not all, of the types above described. _ . trust companies_ within a comparatively short period of time the trust company has developed into an institution of prime importance in the united states. in the beginning of its history it was, as its name implies, simply an institution for the administration of trusts of various kinds, such as the execution of wills, the guardianship of minors and other dependent persons, the administration of the estates of persons either unable or unwilling to administer them for themselves, and trusteeship under corporate mortgages, especially those of railroads. in the latter capacity they became mortgagees in trust for bondholders, registering the bonds, collecting the interest as it became due, paying the bonds at maturity, and in case of default taking the legal steps which were necessary for the protection of the bondholders. the execution of these trusts involved in most cases the custody and investment of funds, so that investment banking became a part of their business almost from the beginning, and, in time, in states in which the laws passed for their regulation did not prevent, they added commercial banking to their other functions. in some cases they have also become promoters of enterprises, taking the initiative in the organization of corporations for various industrial and commercial purposes. in new york city, and in individual cases in some other large cities, the commercial end of the business has become the dominant one; in the former case on account of the ability of these companies, unrestricted by certain laws applying to state and national banks, to offer to commercial customers better terms than their competitors. in most states, however, especially in the large cities in which they chiefly flourish, trust companies have become primarily investment banking institutions, their other functions being carried on as side lines and assuming, of course, in some cases greater importance than in others. since they are still in the early stages of their development, the status of trust companies in the banking system of the united states is not yet definitely determined. legislation concerning them varies considerably in different states, as do also their relations with other banking institutions. the competitive character of these relations has resulted in some cases in legislation which has aimed to differentiate and define the various functions which all these institutions perform, and to prescribe the conditions under which each one or each group must be performed, regardless of the way in which they are combined, and in others, in their practical consolidation with national or state banks, or both, through community of stock ownership, interlocking directorates, etc. from the point of view of the convenience of the public there are advantages in the combination of all the banking functions in a single institution, and the success of trust companies to some extent has been due to this cause, but they have also profited from the unequal competition which exemption from certain limitations imposed on state and national banks has enabled them to enjoy. the removal of the conditions which result in this unequal competition, a process already in progress and likely to continue to completion, will reveal the strength of the advantages of combination versus specialization of functions. previous to such a revelation it will be impossible to determine whether or not the trust company form of organization is destined to become the dominant one. _ . bond houses and investment companies_ a large part of the business of investment banking in the united states is conducted by corporations and firms organized for the purpose of buying and selling investment securities, especially bonds and mortgages. rarely, if ever, do these concerns conduct savings accounts. ordinarily they confine their attention exclusively to the investment end of the business and act in the capacity of jobbers, or brokers, or both. within the investment field some of them specialize closely and others deal in a wide range of securities. the specialties most frequently followed are government, state, and municipal bonds, railroad bonds, public service securities, timber bonds, irrigation bonds, and real estate mortgages. specialization involves the development of expert knowledge of the class of securities dealt in and thus of special serviceableness to both investors and the promoters of the enterprises or the public bodies which issue the securities. these specialists sometimes serve as middlemen between the issuers of securities and other investment banks, as well as between them and the real owners of the capital invested, their expert knowledge being of service to the former as well as the latter. until recently there have been few attempts to regulate the operation of these institutions by law, but the fraudulent practices of some of them, and the ignorance and weakness of perhaps the majority of investors, have recently created in some quarters a strong public sentiment in favor of such regulation. in several states legislation has resulted, of which the most noteworthy is the so-called "blue sky laws" of kansas and some other states. in details these laws differ widely from one another, but they are alike in that they impose upon some branch of the state government the obligation of supervising both companies which issue securities and those which offer securities for sale. the kansas law, the first of this kind passed in the united states, has been considered too drastic by most of the companies that have attempted to operate under it, but the wisconsin law, which went into effect october , , is looked upon with more favor. in formulating these and other laws for the proper regulation of these concerns, it has been found difficult to provide adequate protection to the investing public without unduly hampering the issue and negotiation of securities, but this difficulty should, and in time doubtless will, be overcome. a free and open market for bonds, stocks, and other evidences of indebtedness is essential to freedom of enterprise and mobility of capital, which are in turn essential to the economic prosperity of any country. on the other hand, investors undoubtedly need and deserve the protection of the state against misrepresentation and fraud. it is practically impossible for them in many, perhaps in most, cases to obtain the information necessary for self-protection. the matters and conditions to be dealt with in such legislation are so complex and subject to such frequent change that laws are apt to be imperfect, inefficient, or obstructive. it seems probable that those which do not attempt to be specific and detailed, but give wide powers and discretion to administrative boards or commissions, are most likely to be successful. _ . land banks_ in europe an important group of institutions has developed for the supplying of agriculture and the building industries with the capital needed in their operations. the greatest number and variety of these are in germany, in which their development has been continuous since the days of frederick the great. in order to assist in the recuperation of his kingdom from the devastation caused by the seven years' war, frederick caused the land owners of certain provinces to be organized into associations called landschaften, which were authorized to issue mortgage bonds on the joint security of the lands of all the members of the association in exchange for mortgages on the lands of individual members who needed funds for the improvement of their estates. these mortgages were made payable to the association in the form of small annuities, to which were added the interest paid on the bonds and an increment for the payment of the expenses of the association. these associations were governed by the members through a general assembly, representative boards, and elected officers, and were supervised by the state and carefully regulated by law. regulations were carefully worked out pertaining to the ratio that the loan should bear to the value of the estate mortgaged, methods of valuation, ways and means of maintaining an equilibrium between the bonds issued and the mortgages held, the treatment of defaulting members, etc., etc. machinery for the sale of the mortgage bonds delivered to members was also created, and in some cases later on these sales were made directly by the associations themselves, and cash paid to the maker of the mortgages. five of these original landschaften have continued to the present day, and others modeled after them were subsequently established. in in all germany twenty-five were in operation, of which eighteen were in prussia. the newer ones have not in all respects followed their models. unlike the original five, membership in them is not limited to the nobility and is not compulsory; the liability of the members for the payment of the bonds issued has in some cases been limited to a percentage of the total; the loans are usually paid in cash; and the bonds are sold directly by the associations; but the principles of mutual liability and mutual control which were basic in the old organizations have not been violated in any case. both old and new are organized in the interests of borrowers on real estate mortgage security, and aim to secure funds for these on the lowest possible terms and for long periods of time, by making the security offered the lenders greater than any single borrower could supply. the degree of their success is indicated by the fact that in the amount of their outstanding mortgage loans amounted to nearly a billion dollars, and that their mortgage bonds rank on the exchanges with prussian state bonds and have at times outranked them. another type of land bank appeared in the early part of the nineteenth century as a result of the movement for the freeing of the serfs and their transformation into freehold peasants. the lands of these cultivators were burdened with a variety of feudal dues and charges which had to be commuted before they could become freeholds. in order to facilitate this process banks were established which assumed the obligations of a peasant towards his feudal superior in return for a mortgage on his holding, repayable with interest in the form of an annuity, and in amount equal to the sum to be paid to the feudal superior for the total extinguishment of all feudal obligations. some of these banks were established and administered by states, provinces, and communes, and some by private parties. the public ones obtained the funds they needed partly from subsidies and partly from the sale of guaranteed mortgage bonds and the private ones wholly from the sale of mortgage bonds. the completion of the work for which these banks were originally established put an end to their development about , but similar institutions have since been established in prussia to assist colonists in the purchase and equipment of their farms, and in central and western germany to promote general agricultural and urban real estate operations. the colonists sent into poland for the germanization of that province were in this way assisted by the prussian government, and in some parts of germany the same means have been employed for the purpose of aiding in the process of breaking up large estates into small holdings, in the construction of dikes, roads, and reservoirs, and in changing the courses of streams. next to the landschaften the most important intermediaries between capitalists and investors in real estate in germany are the so-called hypothekenaktienbanken, or joint-stock mortgage banks. these are private corporations, capitalized by the sale of stock shares to the general public, and controlled by their stockholders through directorates, like industrial corporations the world over. their business is the making of long-period loans on real estate security, and the funds thus employed are obtained by the sale of mortgage bonds secured by the real estate mortgages in which the proceeds are invested and by their own capital, surplus, and other funds. they differ from the landschaften in that they are not cooperative or mutual institutions, but strictly business enterprises run in the interests of their stockholders. their primary aim is to earn dividends rather than to secure the lowest possible loan rates and other favorable terms for borrowers. as a matter of fact they are forced by competition and by the principles of good business to make loans at reasonable rates and on favorable terms regarding repayment and other matters, and they successfully compete with the landschaften and other cooperative credit institutions of germany. their mortgage loans are usually made repayable on the annuity plan, one-half per cent each year being the common rate of payment, and they loan about the same percentage of the value of the lands mortgaged, as do the landschaften and other land banks, and the rate of interest charged is the market rate, into the determination of which, of course, the competition of all other institutions enter. while these institutions loan in the aggregate enormous sums on farm property, their chief field of operations is urban real estate, and particularly the industry of residence, or as we would call it in this country, apartment-house construction. it is on this account that the period of their most rapid development coincides with that of the recent rapid industrial and commercial development of germany, which dates back only to the establishment of the empire in . most of them began operations in the decade - , but the most rapid growth in the magnitude and scope of their business operations has come in recent years. in there were forty institutions of this kind in operation in the german empire. the number at the present time is probably considerably greater, since for obvious reasons combinations among them are not promoted by the same kind of economic pressure that in recent years has operated so efficiently in germany in the field of commercial banking. two other groups of german institutions merit attention in this connection, namely, the so-called schulze-delitzsch and the raiffeisen credit associations. the schulze-delitzsch societies were the direct outcome of the period of dearth and famine through which germany passed in the years immediately preceding the revolution of . the first one was not a credit association, but a cooperative buying society, organized by a local judge named schulze for the aid of his needy neighbors of the small trading class in the town of delitzsch. in a credit association on the same plan was organized. others followed, in rapid succession in and after the seventies, until at the present time they are numbered by the thousands and their members by millions, and they are scattered throughout the entire empire. the principle of their organization is the association of a comparatively small group of neighbors, or of people who know one another well, or who may easily come to know one another well, by each making a contribution to a common fund to be loaned out to individuals on personal security chiefly, and which, together with the credit of the entire group, may be made the basis of security for larger funds to be borrowed on the open market. they are carefully organized on the cooperative principle, each member having an equal voice in a general assembly which chooses a board of directors and a small administrative board, to which is intrusted the actual management and administration of the affairs of the society. loans are made to members only, usually for short periods of time, on the personal security of the borrower and of others who are willing to vouch for him, and on the unusually favorable terms which the credit of the entire organization and very low costs of administration render possible. the knowledge which each member has of the character and business methods of his fellow members who borrow, and of the use to which borrowed funds are put, and the stake which each one has in the financial stability and success of the organization, bring the percentage of losses to a very low figure, and make it possible for these societies to grant their members maximum accommodations at minimum prices. to the funds accumulated from initiation fees, membership dues and the sale of the associations' credit have been added, in constantly increasing amounts in recent years, the savings of the members themselves. many societies have such an amount of funds intrusted to them in this way that they are not only entirely freed from the necessity of borrowing, but are obliged to seek opportunities for investment outside their own group. this condition of affairs, in addition to many other common interests, led to the federation of the schulze-delitzsch societies into larger groups, and these in turn into state and national associations, through which surplus funds in one could be made to serve the needs of others inadequately supplied, and through which all the societies could be brought into efficient connection with the general money market of the country. for a number of years these federated societies conducted a large central institution, first in frankfurt and afterwards in berlin, known as the deutsche genossenschaftsbank. in , however, this institution was absorbed by the dresdener bank, one of the eight great private banking corporations of germany, which now serves as the central agency for all these societies. the membership of these associations is not restricted to any class of persons, and they actually include a very large number of small farmers. an inquiry made in showed that in of them, with a total membership of , , there were , farmers, and that one-fifth of the total loans of these associations were made to this class of their members. they must, therefore, be numbered among the land banks of the empire, or at least among the institutions which are helping to solve the credit problem for the agricultural classes. the raiffeisen societies resemble the schulze-delitzsch in many particulars and differ from them in others. like them they are strictly cooperative in character, and, when organized for credit purposes, designed to supply members with loans on the most favorable possible terms. their development was also due to the hard economic conditions of the period immediately succeeding the revolution in . they differ from the schulze-delitzsch societies chiefly in the following particulars: they charge no initiation fees and do not rely to the same extent on the proceeds of the sale of shares, the amount of which they place at a very low figure, often the lowest permitted by law; they make long-period as well as short-period loans, indeed the former chiefly; they do not pay dividends on their share capital, but instead put all profits into reserve funds or prevent their accumulation by keeping the loan rates low; they exercise more care than do the schulze-delitzsch associations to keep their societies small, laying great emphasis upon the importance of personal acquaintance between members and thus upon mutual watchfulness; and, in their origin, they were peasant organizations pure and simple, and hence more strictly land banks. their founder, f. w. raiffeisen, burgomeister of a small village in westphalia, prussia, wanted to rescue the poor peasants of his and other districts from the clutches of the usurers, into whose hands they had fallen and by whom they were being exploited in a most shameful manner. since it was loans that these people needed and since their cash resources were always very low and in many cases nil, he felt that to require, as a condition of membership, entrance fees and the purchase of one or more shares of stock, however small, would be fatal to the success of his plans. he also firmly believed that in the integrity, industry, frugality, and agricultural skill of these people was the basis for sound credit and that cooperation was a means by which these elements of sound credit could be made available and attractive on the money market. at the beginning, therefore, no entrance fees or share subscriptions were required. later prussian law made share subscriptions compulsory and they were, of course, introduced, but they were made so low, and the acquisition of the money for their purchase so easy, that they have not been a serious obstacle. from the beginning raiffeisen invited to membership in his societies the well-to-do and substantial people as well as peasants. of course these people did not require the society for the satisfaction of their own credit needs, but raiffeisen saw that they would greatly strengthen the credit of the societies and he was able to appeal to them on philanthropic grounds. this class of people have a leading part in the administration of the societies of which they are members and have contributed greatly to their success. at the outset the raiffeisen societies had to rely chiefly on borrowing for the acquisition of the capital needed, but with time and success savings deposits, surplus funds accumulated out of profits, and lastly the proceeds of the sale of shares have played an increasing rôle. at the present time many societies are not obliged to borrow at all, and not a few have surplus funds which are placed at the disposition of other societies which are still obliged to borrow. like the schulze-delitzsch societies the raiffeisen associations have federated. at present there are thirteen so-called unions, and at the head of all is a central bank with head office at berlin and branches at königsberg, danzig, breslau, cassel, frankfurt, coblenz, brunzwick, strassburg, nuremberg, posen, and ludwigshafen. the central bank is a joint-stock company, organized on the principle of limited liability, the stock of which is owned by the local societies. it formerly had close relations with the imperial bank, but is now associated with the so-called centralgenossenschaftskassa, endowed by the state of prussia, in such a way that advances and discounts are extended to it on favorable terms. the raiffeisen societies rival the schulze-delitzsch in the rapidity of their growth and in the rôle they play in the economic life of modern germany. in they numbered , , of which , were credit associations. the collective balance sheets of these societies in showed , , marks assets, , , marks liabilities, and a membership of , . while germany was the pioneer in the establishment of land credit institutions, and while such institutions have attained a greater variety of form and a higher degree of perfection in that country than in any other, other countries have advanced along similar lines and now have institutions and a fund of experience well worthy of study. the institutions of germany have in most cases served as models in these other countries, the mortgage banks and the schulze-delitzsch and raiffeisen societies having been most frequently copied. these models have been adapted to foreign conditions and modified in interesting and instructive ways as well as copied without essential change. among the mortgage banks developed outside of germany the crédit foncier of france is especially noteworthy. in its organization it was modeled after the bank of france and is second only to that institution in the magnitude of its operations and the scope of its influence. its head office is in paris and it has at least one branch in each department. its capital stock owned by private parties amounts to about $ , , , its surplus to over $ , , , its loans secured by mortgage to over $ , , , and its total resources to about $ , , , . like the german mortgage banks, it secures the greater part of its loan funds through the issue of mortgage bonds and a large percentage of its loans are made on mortgage security for long periods of time and are repayable on the annuity plan. however, it transacts a greater variety of business than does the typical mortgage bank of germany. it loans on city and farm real estate and to communes, and it transacts a large commercial banking business, though this is distinctly a side issue, incorporated with its other business in order to give profitable employment to funds, sometimes large in amount, which are temporarily on hand awaiting investment. at various times it has absorbed competing institutions and at times it has established collateral institutions to transact lines of business for which its own constitution and legal limitations did not fit it. among these the most important are the crédit agricole and the foncier algierienne. it was obliged ultimately to absorb and liquidate the former, but the latter still flourishes in the colony of algiers. mortgage banks have also gained a footing in most of the other countries of continental europe. in italy they passed through a period of storm and stress, owing to their connection with the issue banks of that country and the consequent confusion between commercial and investment banking which resulted, but they have recently been established on an independent basis and are now developing along right lines and with apparent success. the schulze-delitzsch and raiffeisen societies have been imitated in austria, hungary, belgium, switzerland, and, to some extent, in france and india. the so-called "banche populari" and "casse rurali" of italy are respectively modified forms of these two german types, and rank among the most important means employed in that country for the improvement of the condition of the peasants and small tradesmen. state, provincial, and communal aid for these institutions has been more frequently evoked and more extensively employed outside than inside of germany, and other important modifications of the german prototypes have been made in italy and elsewhere. _ . stock exchanges_ an essential part of the machinery of investment banking is the stock exchange. this is a place where the buyers and sellers of securities or their agents regularly meet for the transaction of business. it may be a portion of a street or a market place or a room in a building. a fully equipped modern exchange contains a large room equipped with telegraphic and telephonic communication with the most important parts of the country in which it is located and of the world, with apparatus for registering prices and easily communicating information to its members, and with the offices needed for the accommodation of the clerks and other employees required. either by posts or in some other manner the precise places in it in which each security or group of securities is to be dealt in is also usually indicated. the purpose of the stock exchange is to facilitate and to regulate dealings in securities. it facilitates such dealings by providing as nearly perfect means as is possible for putting buyers and sellers into communication with each other, and for collecting and making available to them the information they need. to this end they provide for daily meetings at fixed hours; they make and publish lists of the securities dealt in; they speedily record and, through the telegraph and the telephone, communicate to all quarters of the globe the prices at which securities change hands; and through the meeting room equipped as before described they make it possible for buyers and sellers, no matter where located, to communicate with each other in a very short period to time. they regulate such dealings by establishing and rigidly enforcing rules and regulations for listing, transferring, clearing, and paying for securities and for other matters pertaining to the conduct of their members. these institutions serve investment banks as well as private investors, constituting the machinery which connects them all. they thus enlarge the area and scope of the markets for securities, and greatly increase the mobility of capital. without them the surplus savings of one locality would only very slowly and with difficulty find their way to other localities where they are needed, with the result that capital would lie idle or be very inefficiently employed in some places while in others natural and human resources would be undeveloped or very inefficiently developed. existing stock exchanges differ considerably in the manner in which they are organized and managed, in methods of doing business, and in the scope of their operations. some of them are incorporated and others unincorporated; some restrict their membership to a prescribed number, others admit as many as are able and willing to comply with the conditions imposed; some are local in their scope, some national, and others international. in this country all the exchanges deal in local securities chiefly, except the one in new york city, which is national in its scope. the london exchange does a larger business in international securities than any other, but the paris and berlin exchanges, as well as those located at the other important european capitals, and the one at new york share in it to a greater or less degree. stock exchanges have suffered in reputation, and their real functions and merits have been obscured by the abuses to which they have been subjected. connected with their legitimate business of facilitating the investment of capital, various forms of speculation have developed which in some cases have degenerated into gambling pure and simple. the better managed ones have striven to rid themselves of these abuses, and in some countries, notably in germany, legislative bodies have taken a hand. the results, however, have proved only partially successful. some forms of speculation are not only legitimate but necessary in modern business life, and these shade into the illegitimate, unnecessary, and positively harmful forms by such short and easy steps as to render it difficult, and perhaps impossible, to draw a line between the two which can serve as a guide for regulations of an administrative or legislative kind. _ . some defects in our investment banking machinery_ a comparison of our investment banking machinery with that of european countries, especially germany, reveals important differences. among these the most notable are the wide use there and the almost complete absence here of the following: (a) the resort to cooperation as a means of revealing and making available the basis for credit of large numbers of people who lack capital but could use it to the advantage of themselves and of the nation; (b) the long-period mortgage loan repayable on the annuity plan and the mortgage bond as a means of accumulating capital for such loans; and (c) the cooperation of the state and other public bodies and of capitalists and philanthropically disposed persons in developing the credit possibilities of the masses and in directing the flow of proper portions of the stream of capital in their direction. in the development of investment banking institutions in this country, individual initiative prompted by self-interest has been the chief, and except in the case of savings banks, the sole motive force. the result is that most of them have been organized in the interests of lenders rather than borrowers and serve best the purposes of big business and of persons already possessed of large credit by virtue of their wealth or their business reputations. under these conditions, while enormous amounts of capital in the aggregate have been invested in agriculture and urban real estate, the former has suffered relatively in comparison with transportation, manufacturing, and speculation. contributory causes in the development of this situation have been the great need for capital for the development of our transportation system, the stimulation of manufactures by high protective duties, and the enormous area of our public domain which was given or sold to settlers on very easy terms. inasmuch as our transportation system and our manufacturing industries have now attained a high degree of development, our public domain has been nearly exhausted, and land values and the cost of living are rapidly rising, the needs of agriculture are pushing themselves into the foreground, and we are beginning to look to european experience for suggestions regarding the best methods of diverting to that industry a larger part of our rapidly accumulating capital resources. there are obvious difficulties in the way of the application of cooperation to the solution of the problem of agricultural credit in this country. in spite of the fact that immigration is constantly bringing to us people from the very foreign countries in which cooperative credit associations flourish, our agricultural population is still dominated by the spirit of individualism which has been and is one of our dominant national traits. our farmers are also more widely scattered than is the case in europe, and consequently less closely knit together in social units. their holdings are also larger, their capital needs greater, and their business instincts more highly developed. there seems to be no good reason, however, why the joint-stock mortgage bank should not flourish here as well as in europe. it is a purely private business enterprise of the kind with which we are perfectly familiar. the mortgage bond ought to appeal to our investors, many of whom have exhibited a strong predilection for mortgage security and real estate investments, and long-period mortgage loans, repayable on the annuity plan, would meet the needs of many land purchasers and of people who need to invest considerable sums in drainage, irrigation works, etc., better than our present methods. in most, if not all, of our states, trust companies could develop these new lines of finance without prejudice to the other branches of their business. the use of state, county, and municipal subsidies or credit in enterprises of this kind is rendered difficult, if not impossible, in this country, by strong prejudice against the use of public funds in private enterprises, and in some states by constitutional prohibitions. this prejudice is based upon unfortunate experiences, and is at least partially justified by the laxness of our administrative methods and the prevalence of graft, which expose us to the danger of the improper use of public funds devoted to enterprises of this kind. there is no reason, however, why our states should not take the initiative in the improvement of our investment banking machinery and why private capitalists and philanthropists should not turn some of their energy into this channel. suggestion and leadership are needed in this field quite as much as legislation tending to restrict and regulate the operations of existing institutions. references the following books are comprehensive in character, treating most of the subjects covered in the foregoing chapters: macleod, h. d., theory and practice of banking. gilbart, j. w., history and principles of banking. bagehot, walter, lombard street. dunbar, charles f., history and theory of banking. scott, wm. a., money and banking. rev. ed. white, horace, money and banking. fisk, a. k., the modern bank. the subject of clearings and the exchanges are discussed in the following books: cannon, j. g., clearing houses. clare, george, the a, b, c of the exchanges. clare, george, a money market primer and key to the foreign exchanges. margraff, a. w., international exchange. escher, f., foreign exchange. the following cover the history and present condition of banking in the leading countries: conant, c. a., modern banks of issue. knox, j. j., a history of banking in the united states. sumner, wm. g., a history of banking in the united states, being vol. i of a history of banking in all the leading nations. kirkbride & sterrett, j. e., the modern trust company, its functions and organization. breckenridge, r. m., the history of banking in canada. laughlin, j. l., editor, banking reform. johnson, j. f., the canadian banking system. withers, hartley, palgrave, r. h., and others, the english banking system. liesse, a., evolution of credit and banks in france. national monetary commission, the reichsbank, - . riesser, j., the german great banks and their concentration. on investment banking see: wolff, h., people's banks. peters, e. e., co-operative credit associations. hamilton, j. h., saving and savings institutions. pratt, s. s., the work of wall street. conant, c. a., wall street and the country. index "acceptance" credit and lines, accommodation loans, , accounts overdrawn, agriculture, capital for, ; individualism in, assets, prior lien on, ; special, balances, , , , banche populari, bank of england, - bank reserves, - bank of france, - banker's banks, ; bills, , ; most valuable assets, ; making loans, banking, act, , ; adequacy and economy of service, , ; branch, , ; business, ; commercial, nature and operation of, - ; commercial in the united states, - ; commercial in other countries, - ; canadian, - ; defects and reforms in banking systems, - ; english, - ; french, - ; functions in single institutions, ; german, - ; incorporation, ; investment, - ; kansas "blue sky laws," ; problems of commercial, ; reserve, ; services rendered by, - ; wisconsin regulations, ; local, , bank notes, see _notes_ banks, bond houses, ; canadian, - ; central of europe, ; central reserve, ; classified, ; classification of national, ; collections, ; commercial, , ; cooperative, ; correspondent, , ; england, bank of, - ; european land banks, - ; european central, ; federal, ; federal reserve, - ; france, bank of, - ; french land, - ; functions of, ; german imperial, - ; german land, - ; incorporated, ; inspection of, ; interest charges, ; investment, , ; italian land, - ; joint stock, ; land, ; loan-making, ; municipal, ; national, , - ; note issue privileges, , ; of issue, , ; postal saving, ; private, ; protection against unsound practices of, - ; real estate, , ; savings, , - ; services rendered by, - ; state, , - ; supply currency, ; trustee, berlin stock exchange, bills of exchange, , ; documented, "blue sky laws" of kansas, bond houses, - bonds, government, , ; mortgage, , , bonds and stocks, not liquid securities, book accounts, branch banking, , , bullion, , ; in canada, ; in england, ; in france, ; in germany, buying and selling on time, , cables in foreign exchange, canadian banking system, - capital and surplus requirements for banks, - ; stock, , cash, supply of, - ; demands on banks, ; resources, casse rurali, central banks of europe, , , , ; england, - ; france, - ; german, - charters, ; special, , checking accounts, , , , , checks, , , - ; abroad, chicago, clearing center, ; central reserve banks, clearing house, - ; center in new york, coin, ; and bank reserves, ; in england, ; in france, ; in germany, , ; standard and subsidiary, ; supply, collections, , commercial banking, collections, ; currency, , ; domestic exchange, ; nature and operations of, - ; other countries, - ; problems of, ; promissory notes, ; protection against unsound practices of, - ; savings accounts, ; in the united states, - commercial paper, - ; discount of, , , ; and investment paper, , ; liquid security, ; market for, competition in banking, comptoir d'escompte de paris, , conflict of functions and laws, cooperative banks, correspondent banks, , credit "acceptance" line, ; balance, , - , , ; cooperation in, - ; department in banks, , ; inflation of, ; "line" of, , , ; subsidies, state, county, and municipal, ; system, - credits, forced liquidation of, crédit agricole, ; foncier, ; industrielle et commercial, , ; lyonnais, , crisis, commercial, , , currency, , ; lack of elasticity, - debt paying, , debits, - demand in foreign exchange, , deposits, - depositors, mutual insurance of, - discount, defined, ; loans and discounts, selection of, - ; loans and rates, ; operation of, ; rate, canadian, , ; bank of england, ; bank of france, ; reserve system, , ; stopped, discounted paper, , , - , documented bill of exchange, domestic exchange, drafts, , , ; foreign payments, england, bank of, , - ; banking system, - ; foreign and colonial, ; joint stock banks, ; metropolitan, ; private, ; provincial, ; reserve system, europe, commercial banking in, - ; central banks of, - ; land banks, - european investment banking machinery, exchange operations, - ; checks, - ; domestic, - ; foreign, - federal reserve banks, - ; federal reserve board, , foncier algierienne, foreign exchange, - ; _par of_, , ; classes of bills used, france, bank of, , - french banking system, - german banking system, - ; hypothekenaktienbanken, , ; investment banking machinery, ; land and mortgage banks, - ; landschaften, - ; schulze-delitzsch, - ; raiffeisen, - germany, bank of, , - gold element of currency, , ; points, , ; and silver coin in england, , ; in france, ; canada, incorporation, ; should be required, independent treasury system, - inflation, - , - ; of credit, inspection of banks, , insurance, mutual of depositors, , investment, banking, - ; commercial paper, , ; confined to liquid securities, ; defects in machinery, ; improvement of machinery, ; paper, , , , ; of surplus funds, italy, land banks, , joint-stock mortgage banks, ; english joint-stock banks, ; german, - kansas "blue sky laws," land banks, - letters of credit, "line" of credit, , , liquidation, forced, , ; of credits, , ; protection against, liquid securities, loan operations, - loans, , , , ; and discounts, selection of, - ; canadian system, , ; fluctuations, ; german land bank, - ; in the interest of big business, ; limits to, , ; long-term, ; pernicious practice of national banks, ; and reserve system, ; short term, local banking, , london stock exchange, mints, monetary commission, , money of the united states, mortgage banks, ; france, - ; germany, - ; italy, ; mortgage bonds, ; mortgage loans, long period, municipal banks, national banks, , , , - , , ; federal reserve, , ; money in vaults, ; notes, ; pernicious loan practices, ; subscribed to federal reserve banks, national reserve association, new york city, assay office, ; central reserve bank, ; clearing center, , , ; stock exchange, , , , notes, bank, - ; central banks of europe and supply of, ; canadian, - ; bank of england, ; of france, , ; of germany, ; issue of, - ; issue privileges, , ; government, ; limitation of issue, ; promissory notes, ; regulations regarding, ; safeguarding issue, ; volume of united states, oklahoma, mutual insurance plan, overdrafts, "panicky" conditions and feeling, , , par of exchange, , paris stock exchange, passbook, , postal savings banks, , promissory notes, , , - , prior lien, on assets, , protection against unsound practices of banks, - ; - publicity, a safeguard, rate of discount, law in france, ; of exchange, , rates, - ; raising on loans and discounts, real estate and banks, reserve banks, federal, - ; central reserve, ; cities, , reserves, administration of funds, ; bank, ; english system, - ; in national banks, ; operations of system, - ; regulations regarding, , ; secondary, - ; in state banks, ; in country banks, safety, in savings banks, ; fund, , savings banks, , ; defined, saving and saving institutions, - secretary of the treasury and surplus funds, - securities, dealings in the stock exchange, , security, liquid, silver dollars, sixty-day bills in foreign exchange, , société algerienne, société generale, , state banks, , - , , ; and federal reserve, st. louis, central reserve bank, ; clearing center, stock exchanges, - stockholders, liability of, - surplus, , trade or mercantile bills, treasury of the united states, - ; operations, - trust companies, , - trustee banks, united states, notes, volume of, ; subtreasury, , ; treasury, - units of value and foreign exchange, vouchers, wisconsin, regulation laws, the national social science series _edited by frank l. mcvey, ph.d., ll.d.,_ _president of the_ _university of north dakota_ now ready money. william a. scott, director of the course in commerce, and professor of political economy, university of wisconsin taxation. c. b. fillebrown, president massachusetts single tax league, author of _a b c of taxation_ the family and society. john m. gillette, professor of sociology, university of north dakota banking. william a. scott in preparation the city. henry c. wright trusts and competition. john f. crowell the cost of living. walter e. clark statistics. w. b. bailey basis of commerce. e. v. robinson public finance. carl c. plehn each, fifty cents net a. c. mcclurg & co., publishers, chicago cinderella story by allen kim lang _what a bank! the first vice-president was a cool cat--the elevator and the money operators all wore earmuffs--was just as phony as a three-dollar bill!_ [transcriber's note: this etext was produced from worlds of if science fiction, may . extensive research did not uncover any evidence that the u.s. copyright on this publication was renewed.] i the first vice-president of the william howard taft national bank and trust company, the gentleman to whom miss orison mccall was applying for a job, was not at all the public picture of a banker. his suit of hound's-tooth checks, the scarlet vest peeping above the vee of his jacket, were enough to assure orison that the taft bank was a curious bank indeed. "i gotta say, chick, these references of yours really swing," said the vice-president, mr. wanji. "your last boss says you come on real cool in the secretary-bit." "he was a very kind employer," orison said. she tried to keep from staring at the most remarkable item of mr. wanji's costume, a pair of furry green earmuffs. it was not cold. mr. wanji returned to orison her letters of reference. "what color bread you got eyes for taking down, baby?" he asked. "beg pardon?" "what kinda salary you bucking for?" he translated, bouncing up and down on the toes of his rough-leather desert boots. "i was making one-twenty a week in my last position," miss mccall said. "you're worth more'n that, just to jazz up the decor," mr. wanji said. "what you say we pass you a cee-and-a-half a week. okay?" he caught orison's look of bewilderment. "one each, a franklin and a grant," he explained further. she still looked blank. "sister, you gonna work in a bank, you gotta know who's picture's on the paper. that's a hunnerd-fifty a week, doll." "that will be most satisfactory, mr. wanji," orison said. it was indeed. "crazy!" mr. wanji grabbed orison's right hand and shook it with athletic vigor. "you just now joined up with our herd. i wanna tell you, chick, it's none too soon we got some decent scenery around this tomb, girlwise." he took her arm and led her toward the bank of elevators. the uniformed operator nodded to mr. wanji, bowed slightly to orison. he, too, she observed, wore earmuffs. his were more formal than mr. wanji's, being midnight blue in color. "lift us to five, mac," mr. wanji said. as the elevator door shut he explained to orison, "you can make the taft bank scene anywhere between the street floor and floor five. basement and everything higher'n fifth floor is iron curtain country far's you're concerned. dig, baby?" "yes, sir," orison said. she was wondering if she'd be issued earmuffs, now that she'd become an employee of this most peculiar bank. the elevator opened on five to a tiny office, just large enough to hold a single desk and two chairs. on the desk were a telephone and a microphone. beside them was a double-decked "in" and "out" basket. "here's where you'll do your nine-to-five, honey," mr. wanji said. "what will i be doing, mr. wanji?" orison asked. the vice-president pointed to the newspaper folded in the "in" basket. "flip on the microphone and read the paper to it," he said. "when you get done reading the paper, someone will run you up something new to read. okay?" "it seems a rather peculiar job," orison said. "after all, i'm a secretary. is reading the newspaper aloud supposed to familiarize me with the bank's operation?" "don't bug me, kid," mr. wanji said. "all you gotta do is read that there paper into this here microphone. can do?" "yes, sir," orison said. "while you're here, mr. wanji, i'd like to ask you about my withholding tax, social security, credit union, coffee-breaks, union membership, lunch hour and the like. shall we take care of these details now? or would you--" "you just take care of that chicken-flickin' kinda stuff any way seems best to you, kid," mr. wanji said. "yes, sir," orison said. this laissez-faire policy of taft bank's might explain why she'd been selected from the treasury department's secretarial pool to apply for work here, she thought. orison mccall, girl government spy. she picked up the newspaper from the "in" basket, unfolded it to discover the day's _wall street journal_, and began at the top of column one to read it aloud. wanji stood before the desk, nodding his head as he listened. "you blowing real good, kid," he said. "the boss is gonna dig you the most." orison nodded. holding her newspaper and her microphone, she read the one into the other. mr. wanji flicked his fingers in a good-by, then took off upstairs in the elevator. * * * * * by lunchtime orison had finished the _wall street journal_ and had begun reading a book an earmuffed page had brought her. the book was a fantastic novel of some sort, named _the hobbit_. reading this peculiar fare into the microphone before her, miss mccall was more certain than ever that the taft bank was, as her boss in washington had told her, the front for some highly irregular goings-on. an odd business for a federal mata hari, orison thought, reading a nonsense story into a microphone for an invisible audience. orison switched off her microphone at noon, marked her place in the book and took the elevator down to the ground floor. the operator was a new man, ears concealed behind scarlet earmuffs. in the car, coming down from the interdicted upper floors, were several gentlemen with briefcases. as though they were members of a ballet-troupe, these gentlemen whipped off their hats with a single motion as orison stepped aboard the elevator. each of the chivalrous men, hat pressed to his heart, wore a pair of earmuffs. orison nodded bemused acknowledgment of their gesture, and got off in the lobby vowing never to put a penny into this curiousest of banks. lunch at the stand-up counter down the street was a normal interlude. girls from the ground-floor offices of taft bank chattered together, eyed orison with the coolness due so attractive a competitor, and favored her with no gambit to enter their conversations. orison sighed, finished her tuna salad on whole-wheat, then went back upstairs to her lonely desk and her microphone. by five, orison had finished the book, reading rapidly and becoming despite herself engrossed in the saga of bilbo baggins, hobbit. she switched off the microphone, put on her light coat, and rode downstairs in an elevator filled with earmuffed, silent, hat-clasping gentlemen. what i need, orison thought, walking rapidly to the busline, is a double scotch, followed by a double scotch. and what the william howard taft national bank and trust company needs is a joint raid by forces of the u.s. treasury department and the american psychiatric association. earmuffs, indeed. fairy-tales read into a microphone. a vice-president with the vocabulary of a racetrack tout. and what goes on in those upper floors? orison stopped in at the restaurant nearest her apartment house--the windsor arms--and ordered a meal and a single martini. her boss in washington had told her that this job of hers, spying on taft bank from within, might prove dangerous. indeed it was, she thought. she was in danger of becoming a solitary drinker. home in her apartment, orison set the notes of her first day's observations in order. presumably washington would call tonight for her initial report. item: some of the men at the bank wore earmuffs, several didn't. item: the vice-president's name was mr. wanji: oriental? item: the top eight floors of the taft bank building seemed to be off-limits to all personnel not wearing earmuffs. item: she was being employed at a very respectable salary to read newsprint and nonsense into a microphone. let washington make sense of that, she thought. * * * * * in a gloomy mood, orison mccall showered and dressed for bed. eleven o'clock. washington should be calling soon, inquiring after the results of her first day's spying. no call. orison slipped between the sheets at eleven-thirty. the clock was set; the lights were out. wasn't washington going to call her? perhaps, she thought, the department had discovered that the earmuffs had her phone tapped. "testing," a baritone voice muttered. orison sat up, clutching the sheet around her throat. "beg pardon?" she said. "testing," the male voice repeated. "one, two, three; three, two, one. do you read me? over." orison reached under the bed for a shoe. gripping it like a scout-ax, she reached for the light cord with her free hand and tugged at it. the room was empty. "testing," the voice repeated. "what you're testing," orison said in a firm voice, "is my patience. who are you?" "department of treasury monitor j- ," the male voice said. "do you have anything to report, miss mccall?" "where are you, monitor?" she demanded. "that's classified information," the voice said. "please speak directly to your pillow, miss mccall." orison lay down cautiously. "all right," she whispered to her pillow. "over here," the voice instructed her, coming from the unruffled pillow beside her. orison transferred her head to the pillow to her left. "a radio?" she asked. "of a sort," monitor j- agreed. "we have to maintain communications security. have you anything to report?" "i got the job," orison said. "are you ... in that pillow ... all the time?" "no, miss mccall," the voice said. "only at report times. shall we establish our rendezvous here at eleven-fifteen, central standard time, every day?" "you make it sound so improper," orison said. "i'm far enough away to do you no harm, miss mccall," the monitor said. "now, tell me what happened at the bank today." orison briefed her pillow on the earmuffs, on her task of reading to a microphone, and on the generally mimsy tone of the william howard taft national bank and trust company. "that's about it, so far," she said. "good report," j- said from the pillow. "sounds like you've dropped into a real snakepit, beautiful." "how do you know ... why do you think i'm beautiful?" orison asked. "native optimism," the voice said. "good night." j- signed off with a peculiar electronic pop that puzzled orison for a moment. then she placed the sound: j- had kissed his microphone. orison flung the shoe and the pillow under her bed, and resolved to write washington for permission to make her future reports by registered mail. ii at ten o'clock the next morning, reading page four of the current _wall street journal_, orison was interrupted by the click of a pair of leather heels. the gentleman whose heels had just slammed together was bowing. and she saw with some gratification that he was not wearing earmuffs. "my name," the stranger said, "is dink gerding. i am president of this bank, and wish at this time to welcome you to our little family." "i'm orison mccall," she said. a handsome man, she mused. twenty-eight? so tall. could he ever be interested in a girl just five-foot-three? maybe higher heels? "we're pleased with your work, miss mccall," dink gerding said. he took the chair to the right of her desk. "it's nothing," orison said, switching off the microphone. "on the contrary, miss mccall. your duties are most important," he said. "reading papers and fairy-tales into this microphone is nothing any reasonably astute sixth-grader couldn't do as well," orison said. "you'll be reading silently before long," mr. gerding said. he smiled, as though this explained everything. "by the way, your official designation is confidential secretary. it's me whose confidences you're to keep secret. if i ever need a letter written, may i stop down here and dictate it?" "please do," orison said. this bank president, for all his grace and presence, was obviously as kookie as his bank. "have you ever worked in a bank before, miss mccall?" mr. gerding asked, as though following her train of thought. "no, sir," she said. "though i've been associated with a rather large financial organization." "you may find some of our methods a little strange, but you'll get used to them," he said. "meanwhile, i'd be most grateful if you'd dispense with calling me 'sir.' my name is dink. it is ridiculous, but i'd enjoy your using it." "dink?" she asked. "and i suppose you're to call me orison?" "that's the drill," he said. "one more question, orison. dinner this evening?" direct, she thought. perhaps that's why he's president of a bank, and still so young. "we've hardly met," she said. "but we're on a first-name basis already," he pointed out. "dance?" "i'd love to," orison said, half expecting an orchestra to march, playing, from the elevator. "then i'll pick you up at seven. windsor arms, if i remember your personnel form correctly." he stood, lean, all bone and muscle, and bowed slightly. west point? hardly. his manners were european. sandhurst, perhaps, or saint cyr. was she supposed to reply with a curtsy? orison wondered. "thank you," she said. he was a soldier, or had been: the way, when he turned, his shoulders stayed square. the crisp clicking of his steps, a military metronome, to the elevator. when the door slicked open orison, staring after dink, saw that each of the half-dozen men aboard snapped off their hats (but not their earmuffs) and bowed, the earmuffed operator bowing with them. small bows, true; just head-and-neck. but not to her. to dink gerding. * * * * * orison finished the _wall street journal_ by early afternoon. a page came up a moment later with fresh reading-matter: a copy of yesterday's _congressional record_. she launched into the _record_, thinking as she read of meeting again this evening that handsome madman, that splendid lunatic, that unlikely bank-president. "you read so _well_, darling," someone said across the desk. orison looked up. "oh, hello," she said. "i didn't hear you come up." "i walk ever so lightly," the woman said, standing hip-shot in front of the desk, "and pounce ever so hard." she smiled. opulent, orison thought. built like a burlesque queen. no, she thought, i don't like her. can't. wouldn't if i could. never cared for cats. "i'm orison mccall," she said, and tried to smile back without showing teeth. "delighted," the visitor said, handing over an undelighted palm. "i'm auga vingt. auga, to my friends." "won't you sit down, miss vingt?" "so kind of you, darling," auga vingt said, "but i shan't have time to visit. i just wanted to stop and welcome you as a taft bank co-worker. one for all, all for one. yea, team. you know." "thanks," orison said. "common courtesy," miss vingt explained. "also, darling, i'd like to draw your attention to one little point. dink gerding--you know, the shoulders and muscles and crewcut? well, he's posted property. should you throw your starveling charms at my dink, you'd only get your little eyes scratched out. word to the wise, _n'est-ce pas_?" "sorry you have to leave so suddenly," orison said, rolling her _wall street journal_ into a club and standing. "darling." "so remember, tiny, dink gerding is mine. you're all alone up here. you could get broken nails, fall down the elevator shaft, all sorts of annoyance. understand me, darling?" "you make it very clear," orison said. "now you'd best hurry back to your stanchion, bossy, before the hay's all gone." "isn't it lovely, the way you and i reached an understanding right off?" auga asked. "well, ta-ta." she turned and walked to the elevator, displaying, orison thought, a disgraceful amount of ungirdled rhumba motion. the elevator stopped to pick up the odious auga. a passenger, male, stepped off. "good morning, mr. gerding," miss vingt said, bowing. "carry on, colonel," the stranger replied. as the elevator door closed, he stepped up to orison's desk. "good morning. miss mccall," he said. "what is this?" orison demanded. "visiting-day at the zoo?" she paused and shook her head. "excuse me, sir," she said. "it's just that ... vingt thing...." "auga is rather intense," the new mr. gerding said. "yeah, intense," orison said. "like a kidney-stone." "i stopped by to welcome you to the william howard taft national bank and trust company family, miss mccall," he said. "i'm kraft gerding, dink's elder brother. i understand you've met dink already." "yes, sir," orison said. the hair of this new mr. gerding was cropped even closer than dink's. his mustache was gray-tipped, like a patch of frosted furze; and his eyes, like dink's, were cobalt blue. the head, orison mused, would look quite at home in one of kaiser bill's spike-topped _pickelhauben_; but the ears were in evidence, and seemed normal. mr. kraft gerding bowed--what continental manners these bankers had!--and orison half expected him to free her hand from the rolled-up paper she still clutched and plant a kiss on it. * * * * * instead, kraft gerding smiled a smile as frosty as his mustache and said, "i understand that my younger brother has been talking with you, miss mccall. quite proper, i know. but i must warn you against mixing business with pleasure." orison jumped up, tossing the paper into her wastebasket. "i quit!" she shouted. "you can take this crazy bank ... into bankruptcy, for all i care. i'm not going to perch up here, target for every uncaged idiot in finance, and listen to another word." "dearest lady, my humblest pardon," kraft gerding said, bowing again, a bit lower. "your work is splendid; your presence is taft bank's most charming asset; my only wish is to serve and protect you. to this end, dear lady, i feel it my duty to warn you against my brother. a word to the wise...." "_n'est-ce pas?_" orison said. "well, buster, here's a word to the foolish. get lost." kraft gerding bowed and flashed his gelid smile. "until we meet again?" "i'll hold my breath," orison promised. "the elevator is just behind you. push a button, will you? and _bon voyage_." kraft gerding called the elevator, marched aboard, favored orison with a cold, quick bow, then disappeared into the mysterious heights above fifth floor. first the unspeakable auga vingt, then the obnoxious kraft gerding. surely, orison thought, recovering the _wall street journal_ from her wastebasket and smoothing it, no one would convert a major midwestern bank into a lunatic asylum. how else, though, could the behavior of the earmuffs be explained? could madmen run a bank? why not, she thought. history is rich in examples of madmen running nations, banks and all. she began again to read the paper into the microphone. if she finished early enough, she might get a chance to prowl those off-limits upper floors. half an hour further into the paper, orison jumped, startled by the sudden buzz of her telephone. she picked it up. "_wanji e-kal, datto. dink ger-dink d'summa._" orison scribbled down this intelligence in bemused gregg before replying, "i'm a local girl. try me in english." "oh. hi, miss mccall," the voice said. "guess i goofed. i'm in kinda clutch. this is wanji. i got a kite for mr. dink gerding. if you see him, tell him the escudo green is pale. got that, doll?" "yes, mr. wanji. i'll tell mr. gerding." orison clicked the phone down. what now, mata hari? she asked herself. what was the curious language mr. wanji had used? she'd have to report the message to washington by tonight's pillow, and let the polyglots of treasury intelligence puzzle it out. meanwhile, she thought, scooting her chair back from her desk, she had a vague excuse to prowl the upper floors. the earmuffs could only fire her. orison folded the paper and put it in the "out" basket. someone would be here in a moment with something new to read. she'd best get going. the elevator? no. the operators had surely been instructed to keep her off the upstairs floors. but the building had a stairway. iii the door on the sixth floor was locked. orison went on up the stairs to seven. the glass of the door there was painted black on the inside, and the landing was cellar-dark. orison closed her eyes for a moment. there was a curious sound. the buzzing of a million bees, barely within the fringes of her hearing. somehow, a very pleasant sound. she opened her eyes and tried the knob. the door opened. orison was blinded by the lights, brilliant as noonday sun. the room extended through the entire seventh floor, its windows boarded shut, its ceiling a mass of fluorescent lamps. set about the floor were galvanized steel tanks, rectangular and a little bigger than bathtubs. orison counted the rows of tanks. twelve rows, nine tiers. one hundred and eight tanks. she walked closer. the tubs were laced together by strands of angel-hair, delicate white lattices scintillating with pink. she walked to the nearest of the tubs and looked in. it was half full of a greenish fluid, seething with tiny pink bubbles. for a moment orison thought she saw benjamin franklin winking up at her from the liquid. then she screamed. the pink bubbles, the tiny flesh-colored flecks glinting light from the spun-sugar bridges between the tanks, were spiders. millions upon millions of spiders, each the size of a mustard-seed; crawling, leaping, swinging, spinning webs, seething in the hundred tanks. orison put her hands over her ears and screamed again, backing toward the stairway door. into a pair of arms. "i had hoped you'd be happy here, miss mccall," kraft gerding said. orison struggled to release herself. she broke free only to have her wrists seized by two earmuffs that had appeared with the elder gerding. "it seems that our pandora doesn't care for spiders," he said. "really, miss mccall, our little pets are quite harmless. were we to toss you into one of these tanks...." orison struggled against her two _sumo_-sized captors, whose combined weights exceeded hers by some quarter-ton, without doing more than lifting her feet from the floor. "... your flesh would be unharmed, though they spun and darted all around you. our microfabridae are petrovorous, miss mccall. of course, once they discovered your teeth, and through them a skeleton of calcium, a delicacy they find most toothsome, you'd be filleted within minutes." "elder compassion wouldn't like your harming the girl, sire," one of the earmuffed _sumo_-wrestlers protested. "elder compassion has no rank," kraft gerding said. "miss mccall, you must tell me what you were doing here, or i'll toss you to the spiders." "dink ... dink!" orison shouted. "my beloved younger brother is otherwise engaged than in the rescue of damsels in distress," kraft said. "someone, after all, has to mind the bank." "i came to bring a message to dink," orison said. "let me go, you acromegalic apes!" "the message?" kraft gerding demanded. "something about escudo green. put me down!" * * * * * suddenly she was dropped. her mountainous keepers were on the floor as though struck by lightning, their arms thrown out before them, their faces abject against the floor. kraft gerding was slowly lowering himself to one knee. dink had entered the spider-room. without questions, he strode between the shiko-ing earmuffs and put his arms around orison. "they can't harm you," he said. she turned to press her face against his chest. "you're all right, child. breathe deep, swallow, and turn your brain back on. all right, now?" "all right," she said, still trembling. "they were going to throw me to the spiders." "kraft told you that?" dink gerding released her and turned to the kneeling man. "stand up, elder brother." "i...." dink brought his right fist up from hip-level, crashing it into kraft's jaw. kraft gerding joined the earmuffs on the floor. "if you'd care to stand again, elder brother, you may attempt to recover your dignity without regard for the difference in our rank." kraft struggled to one knee and remained kneeling, gazing up at dink through half-closed eyes. "no? then get out of here, all of you. _samma!_" kraft gerding arose, stared for a moment at dink and orison, then, with the merest hint of a bow, led his two giant earmuffs to the elevator. "i wish you hadn't come up here, orison," dink said. "why did you do it?" "have you read the story of bluebeard?" orison asked. she stood close to dink, keeping her eyes on the nearest spidertank. "i had to see what it was you kept up here so secretly, what it was that i was forbidden to see. my excuse was to have been that i was looking for you, to deliver a message from mr. wanji. he said i was to tell you that the escudo green is pale." "you're too curious, and wanji is too careless," dink said. "now, what is this thing you have about spiders?" "i've always been terrified of them," orison said. "when i was a little girl, i had to stay upstairs all day one sunday because there was a spider hanging from his thread in the stairway. i waited until dad came home and took it down with a broom. even then, i didn't have appetite for supper." "strange," dink said. he walked over to the nearest tank and plucked one of the tiny pink creatures from a web-bridge. "this is no spider, orison," he said. she backed away from dink gerding and the minuscule creature he cupped in the palm of his hand. "these are microfabridae, more nearly related to shellfish than to spiders," he said. "they're stone-and-metal eaters. they literally couldn't harm a fly. look at it, orison." he extended his palm. orison forced herself to look. the little creature, flesh-colored against his flesh, was nearly invisible, scuttling around the bowl of his hand. "pretty little fellow, isn't he?" dink asked. "here. you hold him." "i'd rather not," she protested. "i'd be happier if you did," dink said. * * * * * orison extended her hand as into a furnace. dink brushed the microfabridus from his palm to hers. it felt crisp and hard, like a legged grain of sand. dink took a magnifier from his pocket and unfolded it, to hold it over orison's palm. "he's like a baby crawdad," orison said. "a sort of crustacean," dink agreed. "we use them in a commercial process we're developing. that's why we keep this floor closed off and secret. we don't have a patent on the use of microfabridae, you see." "what do they do?" orison asked. "that's still a secret," dink said, smiling. "i can't tell even you that, not yet, even though you're my most confidential secretary." "what's he doing now?" orison asked, watching the microfabridus, perched up on the rear four of his six microscopic legs, scratching against her high-school class-ring with his tiny chelae. "they like gold," dink explained, peering across her shoulder, comfortably close. "they're attracted to it by a chemical tropism, as children are attracted to candy. toss him back into his tank, orison. we'd better get you down where you belong." orison brushed the midget crustacean off her finger into the nearest tank, where he joined the busy boil of his fellows. she felt her ring. it was pitted where the microfabridus had been nibbling. "strange, using crawdads in a bank," she said. she stood silent for a moment. "i thought i heard music," she said. "i heard it when i came in. something like the sighing of wind in winter trees." "that's the hymn of the microfabridae," dink said. "they all sing together while they work, a chorus of some twenty million voices." he took her arm. "if you listen very carefully, you'll find the song these little workers sing the most beautiful music in the world." orison closed her eyes, leaning back into dink's arms, listening to the music that seemed on the outermost edge of her hearing. wildness, storm and danger were its theme, counterpointed by promises of peace and harbor. she heard the wash of giant waves in the song, the crash of breakers against granite, cold and insatiable. and behind this, the quiet of sheltered tide-pools, the soft lub of sea-arms landlocked. "it's an ancient song," dink said. "the microfabridae have been singing it for a million years." he released her, and opened a wood-covered wooden box. he scooped up a cupful of the sand inside. "hold out your hands," he told orison. he filled them with the sand. "throw our singers some supper for their song," he said. orison went with her cupped hands to the nearest tank and sprinkled the mineral fishfood around inside it. the microfabridae leaped from the liquid like miniature porpoises, seizing the grains of sand in mid-air. "they're so very strange," orison said. at the bottom of the tank she thought she saw ben franklin again, winking at her through the bubbling life. nonsense, she thought, brushing her hands. * * * * * dink took her to the elevator and pressed the "down" button. "don't come up here again unless i bring you," he said. "the microfabridae aren't dangerous, despite what my brother told you, but some of our processes might involve some risk to bystanders. so don't take any more tours above the fifth floor without me as your guide. all right, orison?" "yes, dink." the elevator stopped. "take the lady to her office," dink told the bowing, earmuffed operator. "and orison," he said, just before the door closed, "i'm really not a bluebeard. see you this evening." dink gerding, wearing an ordinary enough suit, well-cut, expensive, but nothing extraordinary for a banker, called for orison at seven. he'd look well, she thought, slipping into the coat he held for her, in a white uniform brocaded with pounds of spun gold, broad epaulettes, a stiff bank of extravagantly-colored ribbons across his chest; perhaps resting his right hand on the pommel of a dress saber. "dink," she asked him, "were you ever in the army?" "you might say i'm still in an army," he said, turning and smiling down at her from that arrogant posture of his. "i'm a corporal in the army of the gainfully employed; an army where there's little glamor but better pay than in the parades-and-battles sort. what makes you ask, orison?" "because of the way you stand and walk, dink," she said. "like an infantry captain from texas." "i'm flattered," dink gerding said, holding open the lobby door for her. "the car's just around the corner." "i met your brother, kraft, earlier today, just before he and the earmuffs caught me up on eighth floor," orison said. "he's no texan, that one. a junker, maybe. i'm afraid i don't much care for your brother, dink." "to be my elder brother is kraft's special misfortune," dink said. "i understand he was quite loveable as a boy. here's our transportation." the car was a rolls-royce silver wraith, splendidly conspicuous beside the curb of the windsor arms, reducing that nobly-named establishment by contrast to more democratic proportions. the ubiquitous mr. wanji, liveried in a uniform nearly as ornate as the one orison had visualized for dink, only his earmuffs clashing with the magnificence of his costume, sprang from the driver's seat, raced around the limousine and stood at attention holding the door for orison and her escort. the front door of the rolls was marked, she observed, with a gold device of three coronets. at the center of the triangle they formed was the single letter "d." the rolls negotiated the city streets with the dignity of the _queen elizabeth_ entering a minor harbor. "i thought you bankers aspired to the common touch," orison remarked. "i expected you to come for me in a taxi, or perhaps a year-old ford you drove yourself." "wanji is a better driver than i. so i have him drive me," dink explained. "we each do the work we're trained for. i assist wanji in balancing his checkbook, for example. as for this car, it belongs not to me, but to my family. my family owns most of the toys i play with." he paused. "i've been thinking, orison, of acquiring a most valuable property for myself alone." "a nice little seventy-meter yacht?" orison inquired. "or the island of majorca, perhaps?" "something even grander," dink said. "you, miss mccall." "but, dink!" the rolls glided to the curb. wanji jumped out and snapped open the door. "sire!" he said, and saluted as dink disbarked. orison took dink's hand and stepped to the curb, acknowledging wanji's bow to her with a princess smile. she'd come a long way from the secretarial pool. * * * * * the doorman of the restaurant, instructed as to the importance of these clients by their tableau at the curb, ushered dink gerding and orison mccall into the presence of the maitre d'. when the doorman had been rewarded with a crackling handshake, the headwaiter led them through the crowd of groundlings as though they were accompanied by fife and drums. the table to which he bowed them, while not the most conspicuous, was without doubt the finest the management had to offer. the _reserved_ sign was swept aside with a gesture that indicated that there were no reservations where mr. dink gerding was concerned. mr. gerding justified the maitre's confidence in him with another green-palmed handshake. "dink," orison whispered across the table. "that was a fifty-dollar bill you gave him." "yes, it was," dink admitted. "i felt that fifty was enough." "quite enough," orison assured him. the wine-steward, wearing a chain that could have held a tub to mooring, absorbed dink's instructions with the air of a chela attending the dying words of his guru. the two waiters poised themselves reverently at his shoulders, waiting the revelation of his order. "we'll begin ..." dink began. "dink, i'd like a lobster," orison said. "i'd not advise lobster," dink said thoughtfully. "i'm afraid that lobster won't agree with you this evening." "dink, lobster is what i want," orison insisted. "haven't you heard of the nineteenth amendment?" "very well, feminist," dink said. he turned to the waiter at his right. "the lady will have a lobster." he turned to the left. "as for me, a saddle of venison, and such accessory furniture as you may choose to accompany it." the waiters bowed and retreated. "why do you insist on being boss, even after banking-hours?" orison asked. "being boss is not my nature, but is my training," dink said. "it seems to me, orison, that you american women resent the dignity of being served by an adoring man." "i prefer dignities to be more democratic," she said. "why, in any case, should you be exercised by my choosing lobster for dinner? my digestion is my own affair, isn't it?" * * * * * "your question," dink said, resting his elbows on the table, "requires a two-part answer. _imprimus_: everything you do interests me, orison, inasmuch as you are my future bride. please make no comment at this point. allow me to enjoy for the moment the male privilege of unimpeded speech. _secundus_: i once wished to be a doctor, had not my career been chosen by my father. i still pursue the study of medicine as a hobby. i didn't wish you to order lobster because i'm certain that you'll be unable to enjoy lobster." "i've eaten it before," orison said. "except for the engineering difficulties in getting through the shell with all those little picks and nutcrackers and nail-clippers, i had no trouble to speak of. dink, are you a foreigner?" "what makes you think i may be?" he asked. "the crest of your car, the earmuffs on most your staff at the bank and the fact that you seem to think a woman's opinion nothing more than a trifle. there's a beginning," orison said. "what's wrong with earmuffs?" dink demanded. "everybody wears earmuffs." "not everybody," orison said. "not in april. not bank officials. not indoors, in any case." "must report this to the board," dink said, taking a notebook from his pocket and scribbling. "must find alternative. no earmuffs indoors." perfect, orison thought, near tears. he's perfect. he'd sit astride that milk-white charger like a round-table knight, sturdy and lean and honest-eyed. dink is perfect, she thought, except only that he's insane. dink tucked his notebook back into his vest-pocket. "if i were a foreigner," he asked, "would it make any difference to you?" "your nationality should concern me as little as my diet concerns you," orison said. "you said _should_," dink pointed out. "that means that you are concerned with me. therefore, i will formally invite you to marry me." he held up his hand as orison began to speak. "i warn you, orison, there are only two answers possible to my proposal. only _yes_ or _some day_." "what if i said no?" orison asked. "i'd interpret it as some day," he said, and smiled. "you know nothing about me," orison protested. "but i do," dink said. "i know you're good. i know that you've fallen half in love with me, and i entirely in love with you, in this half-day in april that we've known each other." "no," orison said, gripping tightly the edge of the table. "that means, some day," he said. the lobster arrived in post-mortem splendor, borne on a silver tray, brick-red, garnished with sprigs of parsley and geranium, served with the silver instruments designed for his dissection and the bowl of baptismal butter. "oh ..." orison said, turning her eyes away from the supper she'd selected. "it's horrible!" "you've no appetite for lobster?" dink asked. "i'd as soon eat boiled baby," orison said, pressing her napkin against her lips. "take it away," dink instructed the waiter. "the lady will have the same order as i." the crustacean, red but undismembered, was again borne aloft by the waiter to be returned to the scene of his martyrdom. "try a little of the wine, orison," dink suggested, tipping a splash of the riesling into her glass. "it will clear your head." * * * * * she sipped. "it helps," she admitted. "what do you suppose happened to me, dink? it's as though all of a sudden i'd become allergic to lobster." "in a sense you are, darling," dink said. "such a strange thing," she said. "don't let these strange things worry you, orison," dink said. "think this: for everything in the universe, there's an explanation. if you understand it or not, the explanation's still there, curled up in the middle of the mystery like pinocchio in the belly of his whale. just have faith in the essential honesty of the universe, orison, and you'll be all right." "a comforting philosophy," orison said. "i can't imagine an explanation for my sudden distaste for lobster, though." "such things happen," dink assured her. "i have a friend, for instance, who holds life in such reverence that he eats only vegetables. isn't that strange? and he worries, this very good friend of mine, that perhaps vegetables have souls, too; and that perhaps it is no more moral to destroy them for his food than it is to roast and ingest his fellow animals." "so what does this friend of yours eat?" orison asked. "vegetables," dink said. "but he worries about it. he's now proposing to confine his diet to cakes made from algae. his argument is that if vegetables have souls, algae have very small souls indeed; and that they suffer less in being eaten than would, say, a cabbage or an apple. his guilt may be numerically greater, eating algae. but it will be qualitatively less." "has this micro-vegetarian friend of yours thought of psychotherapy?" orison asked. "often," dink said. "but he maintains that he's much too old to pour out his mind to a stranger; too set in his patterns to change. he fears most of all, he says, that he might be made uncomfortable in new ways." "we all do," mused orison. "do i make you uncomfortable in a new way?" dink asked. "you're strange," orison said. "your bank is fantastic. all in all, this is the most peculiar day i've ever lived." "i promise you, orison, that someday you'll understand why the sight of lobster made you ill this evening, why so many of the people at the bank wear earmuffs, why i seem foreign. you'll understand the work of the singing microfabridae and you'll meet elder compassion; you'll know why wanji was excited about the escudo green; and someday soon, this most of all i promise you, you'll love me, and be my wife. hah! here are the comestibles. let's talk of topics less vital than love and earmuffs. let's talk of the weather, and mr. kennedy, and the orchestra." v _abstract of transcript, monitor j- , to u.s. treasury department intelligence:_ "miss orison mccall's report from potawattomi, indiana, was delayed by one hour. contact was established at : hours. details follow herewith: "j- : cq, cq, cq, cq. "miss mccall: if you'd been a minute later, i'd have been sound asleep, dreaming bad dreams. "j- : is the job wearing you down? "miss mccall: it's exciting and mysterious. nothing like washington. the boss of taft bank appears to be a man named dink gerding. he's six feet tall and slim, his hair is clipped short as a dachshund's, and he walks like an olympic skier. the other men at the bank bow when they meet him, and some of them get all the way down onto the floor when he's angry. do you suppose this means something? "j- : everything means something. "miss mccall: he said that. dink did. for everything in the universe, he said, there's an explanation. "j- : not so. i mean that everything that people do in banks is explainable. not all the universe is logical--the tax-structure, for instance, or the ways of women. "miss mccall: i'm not required to put up with male chauvinism from a pillow, mister, no banns having been published between us. "j- : sorry, beautiful. here are instructions from the chief. he wants to know why some members of the taft bank staff wear earmuffs, and he wants details of what goes on upstairs. he wants you to get to know this dink gerding better. over. "miss mccall: roger, wilco, and aye-aye. meanwhile, get philologists working on this. the sentence, _wanji e-kal, datto. dink ger-dink d'summa_, means, more or less, 'this is wanji. i'd like to speak to dink gerding.' this message was received by me at taft bank this morning, evidently by accident. check also possible meaning of the phrase, 'escudo green is pale.' "j- : will do. "miss mccall: good night, then; wherever you are. "j- : good night, beautiful. out." _report of treasury intelligence on six words of presumed foreign-language message_: "_datto_ may be tagalog _chief_. _summa_ is latin _sum_. total message is nonsense in fifty languages. the clear message, _escudo green is pale_ probably a code. escudo is portuguese currency presently equal to u.s. $ . . end of report." _confidential report_ (on scratchboard) _of elder compassion to h.r.h. dink ger-dink, prince porphyrogenite of empire, heir-apparent to the throne, scion of the triple crown, count of the northern marches, admiralissimo of the conquest forces of empire, captain-commander of the xliith subversion-and-conquest task force (sol iii)_: "she whispered to her pillow, local time a.m., 'i love him.'" * * * * * orison hadn't gone to sleep easily. she'd suppressed information from j- , saying nothing to him about the microfabridae, surely the most striking objective discovery of her two days' spying within the taft bank. more central in her thoughts than her disloyalty to the treasury department, though, was dink gerding. he'd told her that she was half in love with him. he was half wrong, she thought. "i love him entirely," she whispered, not knowing that j- --in carelessness, not subterfuge--had left the receiver-switch open to the pillow she'd made her confidante. _the wall street journal_ greeted her the next morning, curled up in her "in" basket. she'd just switched on her microphone and said "good morning" to her invisible listener when mr. wanji stepped from the elevator. his ears, she saw, were bare today. but they were pink--a shocking, porcelain, opaque, toby-mug shade of pink. she looked away from this latest manifestation of peculiarity in banker's ears. "good morning, mr. wanji," she said. "hi, doll," wanji said. "the brain-guy says you don't have to read out loud any more. just read quiet-like. dig?" "yes, sir," she said. "shall i take notes on anything in particular?" "naw," wanji said. "the brain-guy, he remembers everything." "the brain-guy?" orison asked. "is that dink gerding?" "naw. dink's the boss. the brain-guy is the man who makes the wheels go round," wanji said. he pressed the "up" button of the elevator. as wanji embarked, orison observed that the elevator operator had the same shocking-pink ears. had those earmuffs been designed to hide this pinkness, the symptom of some rare and disfiguring disease? orison returned to her newspaper, reading silently as ordered, wondering what obscure pinocchio of sense was curled up in the belly of this whale of illogic. the elevator, she noticed with the housekeeping bit of her mind, was running much more than usual today, up and down like a spastic yo-yo. whatever the mysterious business of the william howard taft national bank and trust company might be, there was a lot of it being done. her telephone buzzed. orison switched off her microphone. "miss mccall here," she said, feeling very efficient and british. "this is mr. kraft gerding," she was told. "i need you at the national guard armory right away, miss mccall. will you come right over?" "yes, sir," orison said. she gathered up her purse and coat and pressed the elevator button. the operator ushered her into his car as though she were his queen, and the elevator the paramount plane of the royal flight. standing behind him as he piloted them downward five floors, orison studied the man's ears. they were that awful, artificial pink, as though enameled. pancake makeup? orison wondered. the ears, now the earmuffs were off, might be the clue to that fish-of-understanding she sought. orison dampened a fingertip and applied it to the edge of the man's ear. he turned and stared. "a fly," orison explained. "i brushed it off." "oh. thank you. here's the street floor, miss mccall." "thank you." orison stepped from the lobby to broadway, refusing to examine her fingertip until she was well beyond the shadow of the taft bank building. now she looked at it. a sort of pink paint was showing there. and where she'd touched the elevator operator's ear to remove the makeup, the flesh beneath had shown a brilliant, eggplant purple. * * * * * orison was greeted at the national guard armory by auga vingt, mistress of malice. "how lovely of you to come right over, darling," she said. "kraft is waiting for you in the office of company c." "thank you, darling," orison purred. she clutched her purse as she walked up the indicated stairway, miss vingt behind her. kraft gerding was in full uniform behind a desk marked "commanding officer," but his was not the uniform of the u.s. army. it was the sort that mr. wanji had worn as dink's chauffeur, its splendor squared. "good morning, miss mccall," kraft gerding said, standing. "i'm so happy you could come. we need you here." "what am i to do, sir?" orison asked. "your presence is the full extent of your services required, my dear," he said. "you see, you're my hostage. my brother's interest in your welfare is so marked that i determined to seize you as collateral for his cooperation. we've begun a revolution, miss mccall. you'll stay with us until victory. colonel the margravine auga vingt, commander of the royal refreshment corps, will act as your hostess. colonel, please take miss mccall to her quarters." "now look here, bud!" orison said. "the proper address to mr. gerding is 'your royal highness,' darling," miss vingt said, accompanying her point of protocol with a jab at the small of orison's back. "come along, darling." "i'm not going anywhere until i've telephoned dink," orison said. "terribly sorry," said colonel auga vingt. "our telephone has just gone out of order." two bravos wearing u.s. army fatigues--surely the largest such uniforms ever sewn together--stepped into the room. they were enormous men, menacing, purple of ear. "will you walk along like a good girl, or shall i have my pets carry you?" the odious auga asked. "i'll walk," orison decided. "what's more, i'll sue." "all in good time, darling," auga vingt said. * * * * * orison's cell was large enough to be a ballroom, comprising as it did the entire basement of the armory. a cot had been unfolded in one corner, next to a parked half-track, and three olive-drab blankets were stacked upon it. "home, darling," colonel vingt said. "i hope you realize that kidnapping is a federal offense," orison said. "so is seizing an armory," her warden explained. "of course, the u.s. army doesn't realize we've got it, yet. they drill here only on mondays." she turned and spoke quickly to the two guards, using what was apparently the same language wanji had employed over the telephone. the guards bowed, then each chose a vehicle for his guard-post. one seated himself behind the wheel of a weapons-carrier, the other posting himself, cross-legged, on the steel hatch of a sherman tank. auga vingt turned to leave. "hey," orison said. "you're not going to abandon me here with these two gorillas." "but, darling, i am!" the obnoxious auga replied. "if you're worried about your virtue, rest easy, lamb. i can assure you that my thugs are safe as kittens, providing only that you make no attempt to escape. they are required, you see, to confine their romantic aspirations to members of the royal refreshment corps of appropriate rank. since they speak no english, nor any other tongue you're likely to have heard of, they won't be much company. but they will be loyal in their attendance." "let me out of here!" a man's voice shouted, the sound echoing among the ranks of tanks, half-tracks, weapons-carriers, and jeeps. "who's that?" orison demanded. "your fellow-prisoner," auga explained. "until quite recently, he was commanding officer of c company. your keepers have strict orders not to let you two speak to one another. but i must get on with my duties, charming as i find your company. good day, darling." "drop dead," orison suggested. * * * * * after the door had slammed behind auga vingt, and the key had chattered in its lock, she sat at the edge of her cot. the two guards watched her as casually as though she were just another item on the motor company's t.o.&e. this is what she got for playing it coy with washington, orison thought. if she'd clued j- in on the microfabridae, she'd at least have been given some technical help. then someone might have been there to blow the whistle when she disappeared from the taft bank building. as things stood now, no one would know of her abduction until her pillow called tonight at eleven-fifteen and got no answer: a long time off, she thought. perhaps she could get some help from the imprisoned commander of c company, she thought. orison stood and called out, "hey, there! can you hear...." a large palm suddenly closed over her mouth. the guard who'd been seated atop the tank had sprung down and appeared beside her as suddenly as a circus trick. experimentally, he removed his hand from her mouth. "... me?" orison completed her query, and was shut off again. "five by five," the male voice answered. "who are...." the other guard was gone now, and presumably stood beside the captain as his fellow stood beside orison. there was silence for five minutes, orison having trouble breathing, struggling until it became apparent that no action of hers would have the slightest effect on the mountainous bulk of her muffler. then he removed his hand. orison, out of breath, her lesson learned, stayed quiet. the guards resumed their seats aboard the rolling-stock. there must be another way to signal her fellow-prisoner, orison thought. tapping? she clicked an s-o-s on the side of a jeep with her pen. her guard appeared beside her as quickly as before, and took the pen to stick it in his pocket. she was, it appeared, effectively in solitary confinement. orison stood up to see if the guard minded. apparently not. she walked about the huge basement. she'd never before seen so much military hardware outside an armed forces day parade. impressive, all this steel. a ramp led up to a door the size of a barn-side, also steel, bolted. if she could get inside a tank, and close the hatch, and somehow get the monster up that ramp to ram that door, she'd make an impressive call for help, orison thought. she put one foot atop a tank-tread when a large arm reached around her and set her aside. her guard, silent-footed, had been following all through her tour. orison returned to her cot. great deal, she thought. from desk to dungeon in an hour and a half. she'd battled with shadows, earmuffed shadows, and had got herself set in an amateur jail guarded by a pair of purple-eared apes. nothing to do but wait. four feet crashed onto concrete, two figures bowed till the palms of their hands brushed the floor. "_t'ink_," the newcomer said. the two guards backed to their vehicles and resumed their seats. "orison, my dear!" it was kraft gerding, all unction and teeth, advancing upon her like the loser at tennis, hand outstretched. "i hope you haven't been unduly discommoded," he said. * * * * * "i haven't been commoded at all," orison said. "no one showed me the way. would you mind explaining this chivaree to me, mr. gerding?" "i'd be delighted to explain, my dear," kraft gerding said, bowing. "may i sit?" he asked, waving a hand toward her cot. "you may fall on your dreadful face, for all i care," orison said. "you must learn to speak like a queen," kraft said, seating himself on the cot beside her. "otherwise, of course, you are perfect." "of course," orison said. "i can't say the same for you." "i grow on one," kraft said. "you wonder, no doubt, how the william howard taft national bank and trust company became a battleground; why many of our employees have ears the color of day-old bruises; why wanji was so exercised by the color of escudoes; and what the work is that the microfabridae sing at. no?" "yes," orison said. "may i smoke?" kraft gerding asked, bringing a cheroot from an inner pocket of his fieldmarshal's uniform. "smoke, glow, burst into flame. it's all the same to me," orison said. kraft gerding lit his cheroot with the air of an acolyte igniting incense. then, puffing, "accident," he said, "has made you privy to a _coup d'etat_. our empire, you see, is based on porphyrogeniture. thus my brother, dink, is the heir apparent. i, his elder brother, conceived before our father became emperor, am merely margrave of the north, prince royal of the house of dink, colonel-general of the forces of the triple crown, grand duke of the zilf archipelago and holder of the keys to the royal city of chilif." "how unassuming can you get?" orison asked. "your un-knowledge is deeper than i bethought me," kraft gerding said, smiling, scooting a little wester on the cot. orison moved one hips-breadth further to the west. "very well," kraft said. "as a primer, thus: my brother dink ger-dink, heir through accident of tradition to the triple crown of empire; i, his elder, better brother; and our officers and exiles--these latter common criminals, marked for men's contempt with purple ears--constitute the xliith subversion-and-conquest task force of the empire of dink. this mighty empire, for your information, lies some distance off in the southern skies of earth." "how far off?" orison asked. "as far," kraft gerding said, "as all your men since adam have run in pursuit of beauty." he scooted further west. orison made still further westering. "you come from some foreign planet?" she asked. "no longer foreign, my dear," kraft said. "our planet, our triple footstool, welcomes young earth to share our ancient wisdom and relax under the shadow of our might." "and i, young earth, tell you, kraft gerding, to go sail a saucer," orison said. * * * * * kraft gerding stood up. "come with me, my dear. i'll show you the greenery that establishes me as emperor apparent of the planet earth." he strode to a steel door, took a key from his pocket, and unlocked it. "behold!" he said, flinging the door open. orison stepped into the basement room, a cube some fifty feet in each dimension. she found herself in a corridor between huge walls of bundled paper. kraft gerding, behind her, pried a packet from the wall and handed it to her. "this, my dear orison, is the lever with which i'll over-turn the earth," he said. the bundle was banded with a strip of paper bearing the legend, "$ , in 's." each bit of paper in the bundle bore the portrait of president u. s. grant. "this room," kraft gerding said, "contains some four hundred million dollars in u.s. currency. i intend with this money, and as much more as i need, to subvert and purchase a nation. the united states will then be the beach-head for the world." "counterfeits," orison said. "but perfect counterfeits," kraft said. "the paper was manufactured by the master-craftsmen of chilif. the inks were compounded by the chemists of that same capital city of empire. the plates were cut by twenty million engravers, the microfabridae of the storm-planet, supervised by elder compassion, an ancient of the slothful race that inhabits the planet nearest our mother sun. this is but one of my treasuries. i have many such. there is the threadneedle room, filled with pounds-sterling, in ones, fives, fifties and hundreds. there are other rooms, boxes, trunks and trucks filled with all the currencies of earth. i am ready now to purchase this planet from its owners. no violence, you see. just subterfuge." "it's violence enough, to ruin a planet," orison said. "it beats war," kraft gerding said, drawing on his cheroot. "and that disgusting miss vingt?" orison asked. "what does she do in your forces of subversion?" "colonel the margrave auga vingt is commander of the royal refreshment corps," kraft said. "you understand that it wouldn't do to allow our men, the purple-eared scum of three planets, to live off the land in the delicate matter of women. colonel vingt's corps both maintains morale and prevents incidents of fraternization that earthmen might deplore with their fists and guns." kraft chuckled. "you'll be amused to hear that auga vingt has an ambition to become my empress, once i have overthrown my brother's tyranny and taken over earth." "i must sit down," orison said. "by all means, my dear," kraft said. he tipped over a stack of bundled twenty-dollar bills as a hassock for her comfort. * * * * * "could i have a cigarette?" orison asked. "do." kraft gerding removed a pack from his pocket and lighted it for her, passing it from his lips to hers. orison, hiding her feelings of distaste for this intimacy, drew on the cigarette. "perhaps i might have a drink as well?" she asked. "all this is making me rather dizzy." "it is dizzy-making," kraft conceded. "in an instant, my pet." he strode from the treasure-room, shouting in his native language to the guards. orison tugged a twenty-dollar bill from one of the bundles on which she'd been sitting and held it to the tip of her cigarette, drawing to make it hot. the paper glowed, but the tiny patch of fire died out almost at once. she fumbled in her purse. there it was--her bottle of nail-polish remover. she splashed the aromatic fluid over the bundled money and again touched her cigarette to it. the paper flared. flames ran in upstream rivers through the stacks above. orison ran to the nearest jeep and turned the key. the gears were unfamiliar to her, but she mastered them sufficiently to get moving forward toward the steel doors. up the ramp she rolled, her feet braced down hard on the accelerator, wedged into her seat. the jeep struck the steel doors and bounced back the ramp to the sound of a giant chinese gong, its engine stalled. groggy, orison dismounted and ran to the door. she pounded on the steel with both fists, shouting for help. an arm encircled orison, and she heard behind her the door of the money-room slam shut. "the blaze will smolder itself out in a moment, my dear," kraft gerding said. he spoke to the guard who held her, and she was released. "i doubt that you've destroyed more than a million dollars' worth of your local paper with your prank," he said. "five minutes' press-run. i've brought you a spot of brandy. i daresay you can use it. arson is thirsty work." he held out his hand. one of the purple-eared guards produced a silver tray with a decanter and two balloon-glasses, poured them a quarter full and presented the glasses to his chief, bowing deeply. kraft took one glass, giving the other to orison. "a toast?" he asked. "to the success of my rebellion. to our inevitable marriage. and to the health of our progeny, who are, my dear, to inherit the earth. a shotgun toast," he said. orison dashed her brandy toward his face. kraft turned, catching the shower against his left ear, where it trickled down to stain the braid of his epaulette. he glared and raised his hand in a most unchivalrous gesture, then stopped himself. one of the guards produced a silken cloth to blot him dry. "the word 'shotgun' was perhaps ill-chosen," kraft said. "the spirit you show, dear orison, is a quality most appropriate to the future empress of earth." "keep away from me," orison said. * * * * * "our ceremony of betrothal is simple," kraft said. he put his sword-arm about her waist. "you need only hear me say the words, 'i, rex-imperator, take thee to wife,' and then bow, in the presence of witnesses of my choosing. you'll be as noble as any princess conceived in the purple chamber of the palace of chilif." "i'd rather die than marry you," orison said. "you've established the parameters of the possible rather neatly, my dear," kraft gerding said. "you will become my wife, and empress-apparent of earth, or you will shortly be the loveliest corpse on this fair planet. my will is heaven's law, you understand. my word carries the sanction of two suns, and my anger breeds massive destruction. i ask of you your one slight person. in return, i offer to share with you my greatness. you will rule with me in the palace i have chosen--i forget its name, but it is presently used as the tomb of the lady who invented the brassiere--the taj mahal, that's it. perhaps we could rename it. answer quickly, now; great deeds are deeds of impulse: marry me!" "you're mad," orison said. "when a man has the power i have, he cannot be called a madman, for his mind shapes the world to his dreams. there is then, you see, no disorientation," kraft said. "you've had a good ten seconds now to decide. shall i call my wedding-guests or my executioner?" "dink will never let you marry me," orison said. "his suit has come so far as that?" kraft said. "no matter. i'll destroy him." "please leave me, your excellency," orison said. "i need time to think." "i am clay in your lovely hands," kraft said, bowing. "i grant your wish." "if i might ask another boon, your excellency," orison said, "i'd like to talk with dink." "and so you shall," kraft promised her. "tomorrow, perhaps. with my brother in chains and you in the regalia of an empress." he bowed again, and left her. the door-lock clicked after him. the two huge guards closed in on either side of orison and led her back to her cot. when she had seated herself, they withdrew to their perches on the army vehicles. vii i might as well have joined the marine corps instead of the treasury department, orison thought, resting her fists on her knees. she had no weapons now, nothing to help her break out from this steel-shuttered cellar. what's more, the only clear evidence she had of the crime these extraterrestrials were plotting was a single counterfeit twenty-dollar bill wadded up in her hand. it looked entirely genuine, she thought. it was perhaps too perfect for her purpose. it was quite possible that this bill could be established as a counterfeit only by the unlikely discovery of a genuine note with the same serial-number. the paper-makers and chemists of chilif, the engraving millions of microfabridae, had done their work too well. suddenly, across orison's field of regard there danced dozens of brilliant, five-pointed stars--over the weapons-carriers and the tanks, the jeeps and the two lolling guards, the concrete floor and the steel doors. orison rubbed the heels of her hands into her eyes, but the stars were still there. "don't worry," someone said. "i painted the stars on the backs of your eyes only to get your attention." the stars disappeared, and orison heard again the music of the microfabridae, a singing almost unhearable. "who's that?" orison demanded, her voice uncertain. "don't speak. you'll frighten the guards," the mysterious voice said. "we have had long association, orison. it was i who, so close in empathy with you, prevented your eating lobster, for example. earth's lobster is a distant relative of mine. i could not see you ingest one without feeling deep qualms. and it is to me you have been reading, filling my mind with knowledge and amusement while i was engaged in the dull work of projecting the images of currency to the microfabridae at work at their printing-plates. i am known as elder compassion, and i am your friend." "and dink's friend?" "his especially," the voice said. "our business right now is to help you escape. we must know exactly where you are, orison." "i'm in the basement of the national guard armory," orison said softly. "where are you?" "i'm on the ninth floor of the bank building," elder compassion said. "yes, that means telepathy, of a weak and uncertain sort. i am not one of the true telepaths, those gold and mighty minds i can hear trumpeting in the night. i can but whisper, and eavesdrop a bit in minds that let me. and is the fact that i speak within your ear and listen to the currents that make words within your mind so much more mysterious than your pillow that whispers?" * * * * * "tell me what to do," orison said. "look at the entrance of your basement," elder compassion said. orison stared at the steel doors at the top of the ramp. "yes, dink. you're in the right place." the inner voice ceased for a moment; and into orison's mind flashed a picture of those doors seen from outside. an automobile was parked a dozen feet from the door. dink's car! wanji was at the wheel and dink, grandly uniformed, was beside him. a pink, animate thread dipped down from the trunk of the rolls and began working its way toward the steel doors. microfabridae, orison guessed. then the picture in her mind flicked off, and she was alone again. she watched the doors at the top of the ramp. for ten minutes or so, there was nothing new to be seen. then--a pinpoint of light, a tiny movement. "look away," elder compassion said within her. "we don't want to make your guards suspicious." from the corner of her eye orison could see the thin pink line approaching the sherman tank upon which one guard was sitting, at ease but alert. the line of microfabridae split into two columns, and one set out toward the second guard, seated in his weapons-carrier, facing the little room where c company's commanding officer was imprisoned. orison knotted her fists to keep from screaming, reminding herself that these creeping things weren't spiders. she heard, faint at first, but growing at the edge of her consciousness, the song of the microfabridae. the twin columns were thicker now. it seemed impossible that the guards hadn't yet seen them. a living thread oozed up the side of the tank and busied itself a moment at the guard's ankles. "what's going on?" the captain, orison's fellow-prisoner, shouted from his hidden cell. "mmmmf," the guard assigned to the captain replied. then he was entirely silent. orison stood. her own guard was strapped to the steel of his tank by a hundred strands of lilliputian thread. a thin net of the stuff, fine as angel-hair, covered his mouth. the second guard, in the weapons-carrier, was bound in the same manner. he stared at orison and moved his jaw, but could say nothing. "they'll not be injured," elder compassion told her. "it is impossible for me to allow a living being to be hurt. now, go look at the man who just called out." orison went to the cell where the captain was, avoiding as she walked the pools of microfabridae scattered about the floor. the man stood in a barred room, evidently designed as the toolroom of the motor-pool, his hands around the bars. "good afternoon," he said. "what's going on here?" "we're getting out," orison told him. * * * * * "ask him if he can drive a tank," elder compassion whispered to orison. "those steel doors are too well built to be quickly opened by our little locksmiths." "can you drive a tank, captain?" orison asked. "miss, i piloted one of those m e sherman's across europe sixteen years ago. i've still got the strength to pull a landrel. but you'll have to get me out there to do it; because there isn't room in this cell." "i'll get you out," orison promised. "you want the microfabridae to chew through the lock?" the voice-in-her-head asked gently. "that's what i had in mind," orison said. "i know," elder compassion said. "please look at the lock, so that i may direct our little friends to it." orison gazed at the lock. a line of microfabridae snaked up the steel door-frame and entered the keyhole. from inside the door came a chittering sound, like a clock gone berserk. then the crustacea reformed and marched down the door to the floor. orison pressed the door-catch. the eviscerated lock gave way. the captain stepped out to stare at the microfabridae. "miss," he said, "you and i could make a fortune with a team of those trained termites. there isn't a bank in the country that could stand up against us." "it's been thought of," orison said. "help me get this man down from the tank, please, and we'll be on our way." between them they lifted the cocooned guard, wrapped like a larva in microfabridaean silk, to the cot, the little workers snipping with their chelae the threads that had bound him to the steel. "can you unlock the steel doors?" orison asked. "i don't have the key," the captain said. "then we'll have to go through them," orison said. "can we do it?" "we've got thirty-five tons to roll up that ramp," the captain said. "if we can't bust out with a punch like that, shame on us. seems kind of rough on the taxpayers to bulldoze through that expensive door." "if we don't make it out of here, those taxpayers may find themselves paying their thirty per cent to someone less friendly than uncle sam," orison said. she clambered up the side of the tank and tugged at the hatch. "let me," said the captain. he opened the hatch and dropped inside. "you sit here to my right. we're going out the hard way, and buttoned up." he closed the hatch, then reached over his left shoulder to tug the master battery switch, squeezed together the twin butterfly switches on the panel and grabbed hold of the steering-landrels. "hold on, miss. we're headed for sunlight." * * * * * the sherman's thirty-five tons were rolling along at ten miles an hour when its bow met steel. concrete splinters flew from the sides of the door, which crumpled as the tank fisted into its middle. the door broke free of its supports and slammed outside, forming a deckway over which the treads of the tank crunched. the captain killed the engine and opened the hatch. he boosted orison out, and followed her. "orison! over here!" dink gerding shouted. orison leaped from the tank and ran toward the rolls-royce. "get down!" dink shouted again. he ran to seize her, and threw her to the ground. "and stay down!" he was up, drawing his sword. there was a crash. a smear of lead appeared on the concrete beside orison. dink, bellowing rage, was running down the ramp into the armory basement, his sword raised. kraft gerding stood at the head of his troops at the foot of the ramp. in hand he had an army . . he shouted to his men, a dozen purple-ears, dressed in fatigues, each as big and ugly as the two who'd been guarding orison and the captain. they strained forward to follow him--but fell like ten-pins, tripped up by strands of web knitted between their ankles by fast-working microfabridae. "don't stop him, elder cousin!" dink shouted, his words evidently meant for the mysterious brain-guy, elder compassion, in the ninth floor of the taft bank building. "this i must do," dink said. kraft gerding dropped the automatic and slicked his sword from its scabbard. the blade, orison saw, rising to her feet, was by no means an ornament. it looked most naked and competent. dink advanced upon his brother, each holding his sword at the ready like scorpions ready to do battle. "it would distress me to wound you, elder sibling," dink said. "_lese majesty_ or no, my liege," kraft shouted, "i intend to chop you to stew-meat!" their blades met and clashed, the swordsmen taking the shock of their contact with skillful springing of their arms and shoulders. behind the clash of steel, orison heard a new sound, the scream of a siren. a second siren called out, and both grew louder. "the police!" wanji shouted. "stop it, sires!" the captain stood beside orison. "i've seen _hamlet_ played," he said, "but the sword-fight was nowhere near so violent as this. who are these two nuts, anyway?" "my fiance, and the man who, if he lives, will be my brother-in-law," orison said. "excuse me," the captain said. * * * * * orison gripped the captain's arm and tried not to cry out at dink's danger. kraft parried his brother's blade, raising it high and to his right. then he went in like a flash, hacking his edge down toward the juncture of shoulder and neck. dink fell aside. kraft's sword bit concrete. dink flipped his sword in a jeweled arc, slamming kraft's blade from his hand to spin end-over-end through the air like a drum-majorette's baton. kraft's sword slammed to the pavement. in an instant a pool of microfabridae had covered it, binding the steel to the concrete with strands of their angel-hair. dink advanced on his brother, backing him against the bulk of the sherman tank. kraft gerding stood with his hands at his sides, his face composed in dignity, waiting for the coup de grace. "bind the traitor, elder cousin," dink said, addressing an ear not present. microfabridae, obedient to the command they alone heard, rolled in little waves across the steel door and knit kraft in a web from ankles to larynx. the police were very near now, their sirens dying as they slowed to halt. dink sheathed his sword. "wanji!" he called. "put him in the car. it is time that we withdraw." wanji ran up to the cocooned figure, saluted, and dumped kraft gerding across his shoulder like a giant spool of silk. the microfabridae flowed to the rolls and pooled themselves somewhere in its trunk. "to the bank, wanji," dink ordered, seating himself beside his driver. orison sat in the back, next to the trussed-up kraft. police appeared, whistling and brandishing their revolvers. one occupied himself with kicking at kraft's grounded sword, tied to the pavement by tendrils tougher than steel wire. another guarded the ankle-bound purple-ears, obviously unable to believe what he was seeing. "you in the car there, stop!" a police officer shouted. wanji, erect and unheeding at the wheel, took the limousine around the corner of the armory and down the street toward the bank. "you'd have done better, brother, to have killed me," kraft gerding said, strait-jacketed in silk. "killing would seem appropriate, although our elder cousin declares it unlawful," dink said over his shoulder. "your crime is treason against the triple crown, attempted assassination of the heir apparent, mutiny and kidnap. what punishment would you mete out to an officer so turpitudinous, were you defender of the crowns?" "i would have him put to death in a manner befitting his station," kraft said. "i would not bind him like a sausage and pelt him with taunts." "perhaps you can gain a special dispensation from elder compassion, allowing me to grant you a properly noble death," dink said. "we'll ask him, if you like." * * * * * the william howard taft national bank and trust company was closed, the ostensible reason given by an easel set up in front of the glass doors of the front entrance: "national holiday: birthday of millard fillmore." one of the loyalist purple-ears materialized behind the glass as the rolls rolled up to the curb, and unlocked the doors. wanji and the guard carried kraft gerding between them into the bank-lobby, dink relocking the doors behind them. a knot of spectators gathered on the sidewalk outside, shading their eyes, examining with much conversation the sign, the purple-eared guard, the uniformed wanji and dink and the figure trussed up like a rolled carpet on the parquet floor. "i think this busts up your counterfeiting ring, dink," orison said. "what now?" "that is, darling, precisely the question i want to ask our brain-trust, elder compassion," dink said. "he is both our leader and in a sense our warden, you see. he came with us to earth to guarantee that we in no way violate the principle of reverence for life in our conquest of your planet." the elevator appeared, piloted by another of the purple-ears. "nine," dink snapped. wanji and the guard towed the packaged kraft aboard. * * * * * the anteroom into which the elevator door opened on ninth floor smelled of ozone and dryness. faint music vibrated the desert air. "bach?" orison asked. "scarlatti," dink said. "his music consoles elder compassion for the violence of men. here--you'll need these." he handed orison a pair of almost opaque goggles, the sort that welders wear. "come on," he said, tugging orison through a door. even with the heavy goggles, the room beyond was brilliant beyond belief, a sahara summer-solstice noon in brightness. the floor was covered by tons of sand, duned up against the windows in waves that would have disheartened a camel. the music now was almost as oppressive as the heat and the light. great booming gouts of sound came from every direction. suddenly, as though responding to orison's mental protest, the music stopped. the lights dimmed somewhat. "we have come, elder cousin," dink announced to the sand. "i speak to the lovely woman," an interior voice said to all of them. "do not fear me, orison, though i will seem to you a most hideous worm. my world nestles next its sun. i, made to fit a homeworld that would seem a hell to you, could hardly be expected to conform to green earth's standards of beauty. reflect, orison, that i wish you well." * * * * * something dragged itself across a dune. "my god!" orison whispered, gripping dink's right arm with both her hands. "orison, this is my mentor and my dearest friend," dink said. "his name is elder compassion. he is older than the language you speak. and he is, though housed in strange flesh, a man of good will." the thing that squatted across the mid-room dune was twelve feet long from the tip of the arched scorpion-telson to the twin pincers that formed a chitinous mustache beneath its mouth. it stared at her with a pair of compound eyes the size of hub-caps. "i'll not weary you further with squeezing words into your minds," the interior voice said. "bring me the writing-boards, son and cousin." "cornet!" dink snapped. "bring scratchboards." "sire!" a young officer ran back to the anteroom and came back with a stack of blackened boards, one of which he set up in the sand before the monster, glancing nervously over his shoulder at the lance-like tip that quivered in the air above him. "it is a fearsome thing, this killing-tool my body is equipped with," the voice said, "and embarrassing. it is rather as though your good gandhi had been forced to carry a sub-machine gun through life." the cornet scrambled out of way through the sand, and the giant sting lowered itself to the scratchboard. the words he inscribed into the blackness were written in a delicate italic, hardly larger than human penmanship: "my son, she is lovely." "it is gracious of you, elder cousin, to recognize beauty in a form so unlike your own species," dink said, bowing. there was a mental chuckle. "her mind, you clod!" the monster sketched in the scratchboard. "her lovely, lovely mind." "i am pleased that you ratify my choice of wife, elder cousin," dink said. "she will assist you in the most difficult task ever a scion of the triple crown had to accomplish, son and cousin," elder compassion wrote. "she will aid you in preparing the golden worlds to accept coca-cola." "your meaning, elder cousin, is hidden from my poor understanding," dink said. "i mean this," elder compassion sketched on his scratchboard. "you came for conquest bearing with you the seeds of violence, and thus defeat. you came to subvert earth by pandering to earth's greed. you were yourself, through the agent of your greedy brother, rendered impotent. violence has been done. we must now retreat, making such amends as we can. in the years that will soon be upon us, earth's men will follow us to the golden worlds, where you, as emperor, and orison, empress, will greet them." "to the ship, then?" dink asked. "what will we do with the rebels? with kraft, my brother?" "they have earned the payment of exile," elder compassion wrote. "we will leave them here." * * * * * dink turned to the young officer. "cornet, assist our elder cousin to the ship," he ordered. he turned to two of the purple-ears. "take kraft to the vault," he said. orison spoke to the monster. "sir," she said, "you spoke of making amends for the damage you have done. you must first of all destroy the paper with which you'd hoped to ruin us." "i'll give those orders, orison," dink said. "what will be done about the counterfeit money you've already spent, financing your subversion?" she asked. elder compassion was writing on his board. "three miles beneath this city lies a vein of gold," he wrote. "the microfabridae are this minute plumbing the earth to reach it. we will leave full payment for our fiscal sins." dink took orison's hand. "you'll come with us?" he asked. "i will, dink." "then i, rex-imperator, son of the triple crown, prince porphyrogenous of empire, take you to wife," he said. "if you're sure this is quite legal," orison said, "i do." "there are voices all about us," elder compassion spoke in their minds. "the traitor, kraft, is in the vault, bound and seated in the midst of wealth. we must go, or there will be more violence." "the moment the microfabridae have left their golden payment for our folly, elder cousin, guide them to the ship," dink said. "i long to show my princess her dominions." "she is the first," the voice spoke again. "the first of the irresistible conquerors from earth." [transcriber's note: no section iv or section vi headings in original] transcriber's note: text enclosed by underscores is in italics (_italics_). text enclosed by tilde characters is in bold face (~bold~). a simple explanation of modern banking customs by humphrey robinson edited from a legal standpoint by w. overton harris, former judge of the jefferson county (kentucky) circuit court, dean of the louisville (kentucky) law school designed for the promotion of closer and more satisfactory relations between the public and the banks; for the information of depositors generally, and of those just entering the banking business. boston small, maynard & company publishers copyright, , by humphrey robinson entered at stationers' hall contents page i. general remarks ii. the choice of a bank iii. opening a bank account iv. how to deposit v. your account on the bank's books vi. stopping payment of a check vii. how the bank collects the checks you deposit viii. the clearing house ix. a certified check x. protesting notes, drafts, etc.,--why necessary and how it is executed xi. the local collection department xii. the loan department xiii. new york exchange xiv. the method of issuing national bank notes xv. the so-called "special privileges" of banks a simple explanation of modern banking customs i general remarks after some years of work in a bank, it has been impressed daily upon the writer that, if the depositors were fully informed about the details of the conduct of banks, closer and more satisfactory relations would result. hence this attempt to explain, in a simple and concise way, avoiding as much as possible the use of technical terms, certain things that every depositor should know. for ten years the writer was "in business." for an equal length of time he has been connected with a large city bank. he remembers his utter lack of comprehension of banks and their ways, and his consequent mistakes, perplexity, and embarrassment in dealing with them. also the unfairness and prejudice with which he often judged them. recalling all this, he believes that, without giving offense, he can state these facts. many men having constant transactions with the banks do not realize the importance of the choice of a bank; few understand the correct way in which a note should be drawn, or how to determine the exact due date of a sixty or ninety-day note, or acceptance; what "protesting" a note or draft really means, and what effect it has on the drawers or endorsers; the functions of the clearing house and the simplicity of its methods; why the banks are compelled to pursue a certain course in the collection of paper sent them, even though this course may be very objectionable to the payers; how checks are collected; the effect of certifying a check; and many other details. also that very few depositors have ever seen a copy of the national bank act, or are familiar with the laws governing their own state banks and trust companies. this lack of knowledge of the laws and customs, from which there can be no safe departure, is undoubtedly the cause of many unreasonable requests; assertions of fancied rights; remonstrances, and irritating misunderstandings. this condition should not exist. one explanation for it may be, that the work in a bank is so strenuous, everything having to be accomplished in so short a time, that the officers and employes do not have the opportunity to explain fully the reason why. many seem to think that the details of banking are very complicated. but there is no mystery about these details. they are very simple and sane. the methods of bookkeeping are really elementary, principally mere addition and subtraction. of course the science of banking and political economy involves deep and profound study, but these are not treated here, and the writer has attempted merely to give an idea of the daily routine of a bank. this can be stated with certainty. the interests of the public and the banks are identical; and an acquaintance with banking customs will enable any man to conduct his business with much greater intelligence, satisfaction and profit. also that banks want to accommodate, as far as possible, not only their own customers, but others, because they are possible customers. it is hoped that this writing, in some small degree, may hasten the time, when the political orators, remembering that the day of the private banker has passed, and that the people now own the banks, will cease inciting the public against them; when the law makers, elected by the stockholders and depositors of banks, will cease oppressing them by unequal and unjust taxation; when the public generally, realizing the necessity and importance of banks to every community, will cease being prejudiced against them and their ways, and, by reason of a better understanding, will feel closer and more cordial toward them. so "here's to a better acquaintance" between the public and the banks. ii the choice of a bank the choice of a bank should be most carefully considered, especially by a business man. the same care should be exercised in selecting a bank as would be used in choosing your lawyer or your doctor. having done this, make it a rule to be as frank and open and straightforward with your banker as with your lawyer or your doctor. you will never lose by it. all banking relations must be founded on mutual confidence. once let your banker get the idea that you have deceived him, and naturally he is forced to view your statements with suspicion. tell him the whole truth about your business and your resources, even though it hurts sometimes. it is primarily to his interest to help all his customers build up their business as much as possible, and to keep them going, and your success contributes to the general success of your bank. he should be, not only your banker, but your intimate financial adviser and your very good friend. in deciding upon your bank, did you inquire into the character and disposition of its president and cashier? are they men whose business sagacity and honorable careers are such that you are glad to seek their advice; and can you repose every confidence in their keeping inviolate your business secrets? will they fulfill to the letter their promises of protection to the best of their ability in times of financial stress? or, have they exaggerated their resources and facilities and made all kinds of suave, but very general promises in order to get your account? have you gone a little further and considered the personnel of the board of directors of your chosen bank? that board is supposed to approve or disapprove all loans and business arrangements. or, did you open your account with some bank merely because of convenience of location, or because some friend suggested that institution? iii opening a bank account in opening your account with a bank, you will be asked to give your signature and your address. write your name naturally, as you are in the habit of signing it. the paying teller has to accustom himself to the peculiarities of the signature of every patron of the bank, and has to be constantly on the lookout for forgeries; for if he pays a forgery, the bank must stand the loss. he soon gets to know your signature as he knows your face. so don't have your signature on the bank's books as, john p. williams, for instance, and then sign numbers of your checks, j. p. williams. the letter "j" might stand for james or joseph, and, if the account is in the name of john p. williams, the bank is taking an unreasonable risk in paying out your money on a check signed, "j. p. williams." it would have to make good any loss that might result thereby. a woman, for instance, will open an account as florence perkins smith, and then send out checks signed "florence p. smith"; or "f. p. smith"; or if married, will sign, mrs. harry b. smith. then the paying teller must see that every endorsement on the check is technically correct. for instance, that a check made payable to john p. williams is not endorsed "j. p. williams," and again that a check payable to "j. p. williams, trustee," is not endorsed by j. p. williams only, and not as "trustee." before going to the paying teller's window you should endorse any check you are collecting; even though it is made payable to "cash" or to "bearer." if the check should turn out "no good," the teller can then see at a glance who cashed it, and communicate with the proper party. compliance with these points saves much delay. every check should be endorsed exactly as it is made payable on its face. many firms, as well as individuals, overlook this point daily. the paying teller must watch for raised or altered checks. the law holds that any legal instrument is void if altered in any material way. so many people, if they make a mistake in writing a check, will erase or alter the amount or the name, instead of taking a little more time and making out a new one. the banks have to be very cautious and particular about paying such checks, for they are paying out actual cash on doubtful orders. according to law, they must suffer the consequences if they pay to the wrong person or pay the wrong amount. but all depositors must use every reasonable precaution to keep their checks from being altered in any way. many people, especially in the rural districts, write checks in lead pencil. how easy it is for such checks to be changed if they fall into the hands of dishonest parties. the rejection of the account of any person, who will be so careless, is plainly only the part of safety. the figures should be placed close to the dollar mark. in writing the amount of the check in words, begin close to the left hand margin, and when the amount is written, draw a line in the blank space left between the amount, and the word "dollars." the law says that where the figures and the written amount differ, the written amount shall govern. iv how to deposit in making your deposit, always head your deposit ticket with your name exactly as you wrote it when leaving your signature with the paying teller, otherwise, it might be credited to some other person. also, fill in the amount of your deposit as plainly, and as legibly as possible. after the receiving teller has checked off your deposit ticket, it is passed on to the individual bookkeeper who has charge of your account. he is only human, and any bad figures on your ticket may lead to mistakes and consequent irritation to you. always make out your own deposit ticket. the receiving teller should not be asked to do this. there are generally other people in line, and they, as well as the teller, have a right to complain if he has to stop and do this for you. list your _money_ separately as _gold_ and _silver_, and, in entering your _checks_, write against each amount the name of the bank drawn on, and the town, as plainly and briefly as possible. then add the various amounts and hand the slip to the teller. when depositing currency arrange the bills so that the ones and twos will be together, the fives together, the tens together and so on. have the bills straight and face upward. with the gold and silver follow the same idea. if your deposit is large put the money in packages and label with amount and your name. by following these directions you will put the receiving teller under everlasting obligations. he has a very short time in which to accomplish a great deal, and his position at best is nerve racking. in endorsing a check, either simply write your name on the back, or write "pay to the order of ---- bank" and then sign your name. when a check is undoubtedly intended for you, and your name is not stated correctly on its face, endorse it _exactly_ as it is made payable, and then endorse as you generally do. for instance, if a check intended for brown bros. & co. is made payable to brown bros., it should be endorsed first brown bros., and then brown bros. & co. checks should be deposited or cashed promptly. you have only until the next succeeding business day in which to collect, or deposit for collection, any check. if you hold a check longer than forty-eight hours, and the bank on which it is drawn should fail in the meantime, you have released the drawer and must take your chances with the other claimants against the bank. for this reason the banks send out all checks deposited with them for collection on the same day, or the next succeeding business day; otherwise they have released both the drawer and the endorsers, if the paying bank should fail or any loss should result by reason of their delay. checks drawn on banks in the same town, and which are deposited after the clearing hour, are held over at the depositor's risk, until the next day. v your account on the bank's books there is no mystery about bank bookkeeping. it is about the simplest known. the total amount of your deposit is added to the balance you already have in the bank; then the total amount of your checks, that reach your bank that day, is deducted; the result is your balance. right here it is well to emphasize that the great majority of the banks _keep no record of the names of the parties from whom you receive checks which you deposit; nor do they keep any record of the names of the people to whom you make your checks payable_. when you deposit a check, the only record generally kept by the banks is the date that you deposited it, the amount, and the town in which it is payable. if it is on a bank in the _same city_, your bank will keep a record of the name of that bank, but not otherwise. in handling thousands of checks daily, it can be seen what a stupendous task it would be for a bank to keep a complete record of the drawers and _all_ the endorsers on every check. its force of clerks would have to be doubled or trebled. the bank should not be expected to keep your private memoranda, and it is the duty of the depositor to keep a complete record of the parties from whom he gets the checks that he deposits or cashes. if a check is lost in the mails, the bank has a perfect right, after giving the depositor the amount, the date on which it was deposited, and the town in which it was payable, to charge the amount to the depositor's account until he furnishes a duplicate of the lost check. so, if you cash a check drawn by john b. smith, for example, and payable to james a. jones, and then endorsed by several other parties; it is your duty, and not the bank's, to keep a record of the person from whom you received that check, and obtain a duplicate if it is lost before reaching its destination. also with all other checks which you deposit or cash. many retail firms cash checks for customers; and after endorsing, will deposit them for collection; keeping absolutely no record of the sources from which they received them. for example,--mrs. brown, of st. louis, receives a check from her son in cincinnati. she gets it cashed at the dry goods store with which she deals. then the merchant deposits it, with numerous other checks, in his bank for collection. if the check is returned unpaid, the bank certainly has a perfect right to call on the merchant to pay it. the merchant then calls on mrs. brown to pay him. now if that check is lost in the mails, say burned in a railroad wreck, the bank has the same right to call on the merchant for a duplicate. and it is no valid excuse for him to say that he has no record of the person from whom he received it. in short, each person endorsing a check should keep a record of the person from whom he received it, or for whom he endorsed it. on the last business day of every month your statement is made up and you should call for it as soon after as convenient. then you should assort your canceled checks according to the dates or numbers of same, and compare them with the stubs in your check book. this is _very important_ in order that you may detect any forged or raised checks and _promptly_ inform your bank. if such checks are not reported to the bank in a reasonable time, you will have to stand the loss. the total amount of the checks _not_ returned by the bank should be the exact amount of the difference between the balance as shown by your check book and your bank book. for example,--you give a check on the last day of the month; it does not reach your bank until the first, second or third day of the next month. it can not be charged to your account until it does reach your bank; therefore, the bank's statement will generally show a larger balance than your check book. the difference is the amount of checks that are out. banks do not like to tell the amount of your balance over the telephone. they can not identify you "over the 'phone," and some person, who has no business to know, may be inquiring into your affairs. for the same reason they do not like to state the amount of your balance to any one in person, unless you authorize it. that is a confidential matter between you and the bank, and they make this rule for your protection as much as their own. vi stopping payment of a check if, for any reason, you desire to stop payment on a check, communicate with the paying teller as quickly as possible. give him a full description of the check, the name of the party to whom it is made payable, the number, the date, and the amount. then _always_ confirm this action in writing. if, after examination of your checks, the bank informs you that this particular one has not been paid, you can safely issue another, if desired. inform your bank, however, that you are issuing a duplicate, and write the word "duplicate" across the face of the check. vii how the bank collects the checks you deposit when your deposit is handed in to the receiving teller, he assorts the checks you give him into "foreign" and "clearing" items. the "foreign" items, that is, checks or drafts on banks in other towns, are then passed on to the route clerk. he, in turn, assorts them so that they may be sent to the banks that will collect them for the least possible cost. for instance, if your bank is situated in the middle west, the checks you deposit on the far west will be sent to a chicago or st. louis bank. checks on eastern cities, except new york possibly, will be sent to philadelphia or baltimore. checks on nearby towns probably will be sent direct to banks in those towns. the reason for not sending checks direct to the towns on which they are drawn, is, that often they can be collected much more cheaply by sending them through other large cities. the less expense your bank incurs in collecting, the less it will have to charge you. the depositor should understand that the bank's charges for these collections are figured at about cost. it is a fact that an examination of this account on the books of any city bank almost invariably will show that it is a source of loss rather than profit. in other words, the city banks really charge their depositors less than it actually costs for collections on other towns. the "clearing" items, that is, checks on banks in your own town, are passed to the clearing house clerks. the collection of these checks through the clearing house, and the operation of that institution, are next explained. viii the clearing house the clearing house is simply a meeting room for the convenience of the different banks in a city; a place in which to swap checks. small towns have none. ordinarily no figuring is done here except addition and subtraction. its operation is simple. suppose you owe brown $ . , and you owe jones $ . . then suppose brown owes you $ . , and owes jones $ . . then suppose jones owes you $ . , and owes brown $ . . now, instead of each of you going around to two other places, you three meet in a certain conveniently located room to square, or clear up, accounts. this saves time and steps. a clerk is in this room to do the sums for you. with a little addition and subtraction he has the following: you owe brown and jones together $ . brown and jones together owe you . ------ therefore, you owe brown and jones together $ . you and jones together owe brown $ . brown owes you and jones together . ------ therefore, you and jones together owe brown $ . you and brown together owe jones $ . jones owes you and brown together . ------ therefore, you and brown together owe jones $ . the clerk then announces that you owe $ . here; mr. brown is entitled to receive $ . , and mr. jones is entitled to $ . . then he gives mr. brown an order on you for $ . , and mr. jones an order for $ . . nothing complex about this if you know how to add and subtract. now just substitute for your name, the first national bank; for brown's, the second national bank; for jones', the third national bank. then put the figures up into the thousands or hundreds of thousands of dollars in place of the small ones given above. then name the room where you met, the clearing house, and call the clerk who did the sums, the clearing house manager. then call the orders he has given, the clearing house manager's checks. no matter how many banks in any one city, or how large the figures, this simple method of settling is in operation daily. say there are twenty banks in your city. your bank receives through the mails, and from its local depositors, numbers of checks on the other nineteen banks in the same town. the clerk, who goes to the clearing house, and his assistants, assort these checks into nineteen different piles. each bank goes by a number at the clearing house. then these checks are stamped on the back about like this--"paid through the ---- clearing house"; then follows the date, and name, and number of the bank which sends them. these nineteen piles of checks are added up into nineteen different totals; the checks on each bank being kept in separate bundles. the nineteen totals are added into one grand total. the clerk then starts for the clearing house with nineteen bundles of checks; and a sheet which shows how much his bank has against each of the other banks; and the grand total it has against all the other banks combined. therefore, at a certain hour, generally noon, on each day, twenty clerks, one from each bank, meet at the clearing house. each one takes his stand at his desk. when the manager taps the bell, every clerk makes the round of all the other desks, and leaves the bundle of checks he has against each bank with a slip showing the total amount of the package. when this is over, each desk has nineteen bundles of checks on it and nineteen slips showing the different totals. each clerk then adds up these nineteen totals, and the grand total resulting shows what all the other banks have against his bank. he then reports two amounts to the manager of the clearing house,--the grand total of the checks he has brought in, and the grand total of the checks which have been brought in against him. say he has brought in $ , . worth of checks against the other nineteen banks, and they have brought in $ , . worth of checks against his bank. then his bank has a credit at the clearing house of $ , . . after the manager figures up from these totals handed him by the different bank clerks, he finds that certain banks brought more than was brought against them, and that certain other banks brought less than was brought against them. in other words certain banks have "lost" at clearing while others have "gained" and at a later (designated) hour of the day, the debtor banks pay in their losses at the clearing house and the creditor banks receive their gains, the total losses and gains, of course, exactly offsetting each other. while the systems employed at the clearing houses of the various cities of the united states may vary in some particulars, they are all founded on the principles stated in the preceding paragraphs. these principles have been so perfected that the clerks from the different banks are at the clearing house for a few minutes only each day. the manager imposes a fine of several dollars on the bank for every mistake in calculation its clearing house clerk makes; also for tardiness. to return to the checks which have been brought back from the clearing house. if, on examination, the paying teller has discovered any forgeries, or irregular or missing endorsements, or anything suspicious about any checks; or if the bookkeepers have found that any check overdraws the account of the depositor, the bank has only until the close of banking hours to return such checks and collect from the banks that sent them through the clearing house. so the examination of these checks must be made carefully and very quickly. the "_clearing house association_" in your city is what might be called a mutual aid society, which the banks have organized for purposes of mutual convenience and protection. this association pays the expenses of the clearing house; the manager's salary; the rent; etc. it adopts rules and by-laws and fixes fines and penalties for breaking them. but it is not an incorporated body and can not sue or be sued. in time of panic, the association is a tower of strength, not only for the banks themselves, but for the whole community. the associated banks, at such times, have it in their power to make or break the business interests of their city. _but their interests are identical with the interests of their patrons._ remember the banks are owned by the people, not by two or three private individuals. the failure of any one bank, or of any one business house, increases the panicky feeling. therefore, the clearing house association naturally and from very self-interest, must do its utmost to keep its members and their customers on their feet. in financial storms, the association may adopt certain rules and regulations which may seem unreasonable to the public; but these methods are put in force for "the greatest good of the greatest number"; not only for the protection of the banks, but of their customers and depositors. it is a time for the public to be as reasonable as possible; to uphold the banks and their officers and directors. it is a time for the public and the banks to come closer together. rest assured the banks have no desire to see any firm or person fail in times of panic, or any other time. they make their largest dividends when business is brisk and everything is prosperous. what every clearing house association does want to wipe out, however, is the dishonest and reckless banker. he is a menace and source of anxiety to every bank in the community. the sooner the other banks can detect and expel him from the business, the better. in some cities, notably chicago and st. louis, the clearing house association regularly employs expert accountants to make periodical and unexpected examinations of the banks in the association. if any bank is found to be doing a reckless business and not living up to the rules and regulations of the clearing house, it is heavily fined or expelled. and expulsion from the clearing house means ruin for that bank as soon as the business community learns of it. all clearing house associations should adopt this strict supervision. many a bank was saved embarrassment and possible failure in the recent panic of by the wise methods put into effect by the clearing house association. selfishness and enmity were ordered to the rear. there are always banks whose officers have less foresight and wisdom than others. some of these had been lending too freely, and their actual cash reserves were not sufficient to meet the storm of checks of their frightened depositors; frightened mainly because of ignorance, for, with a few exceptions, the banks were in good condition. to call in their loans and replenish their supply of cash would cause business failures and add to the panic. so the clearing house associations of the different cities determined that the strong and wise banks should help the weak and foolish ones. loan committees were appointed to sit daily at the clearing house. the various banks brought to this committee notes they had discounted, or stocks and bonds owned by them. if the committee thought them good, the clearing house association would lend the bank bringing them, up to about % of their face value. of course, the clearing house association did not lend these banks actual cash, but they issued them clearing house certificates, bearing interest, which could be used among the banks in settling daily claims against each other; just as if the banks had deposited actual cash at the clearing house. in this way, if bank number one had the clearing house manager's check on bank number two for $ , . , in settlement of some daily balancing at the clearing house, bank number two could pay bank number one with clearing house certificates instead of actual cash. in other words, the banks which had a number of good notes, or stocks and bonds, but a small amount of cash, were saved by the combined, unselfish and patriotic action of all the banks working together for the common weal. if the public generally knew of the many instances of generosity and unselfishness that were shown in the clearing houses in this and other panics, the banks, as a class, would not be denounced and condemned as they sometimes are. and this unselfishness was not exercised by the banks for the salvation of the banks alone, but for the business interests of the whole community as well; for, as has been pointed out, _the interests of the banks and the people are one_. ix a certified check your check is nothing but a piece of paper on which is written an order on your bank to pay some one a certain sum. strangers might not like to accept this piece of paper in payment of debts due them. in many cases your check should be "certified." when a depositor presents a check to his bank to be certified, it should be handed to the paying teller. he, in turn, hands it to the individual bookkeeper having charge of that depositor's account. if the bookkeeper finds the balance sufficient to cover the amount of the check, he stamps across its face the words "good for $---- (the sum named in the check) when properly endorsed." then the teller or some officer of the bank, signs that statement and the amount of the check is immediately charged to that depositor. in other words, the bank guarantees or certifies that your check is good. the bank must be very particular about certifying a check. if any officer or employe of a national bank certifies a check, which calls for more than the maker of the check _actually_ has to his credit, such officer, or employe, has committed a penitentiary offense. this provision of the national banking act is most strictly enforced, and the penalty is severe. when certification is necessary, the maker of the check should be the one to have it certified. if you take brown's check to his bank and have it certified, you release brown entirely and can only hold the bank. for example,--a man sold a piece of land, and, on delivering the deed, took the purchaser's uncertified check. after the purchaser had left with the deed, the seller, thinking the check might not be good, had it certified. the bank failed that afternoon. the purchaser proved that he had more than the amount of the check to his credit on the bank's books. on consultation with his lawyers, the seller found that he had no claim on the drawer of that check and could only file his claim against the bank with its other depositors. and he only received about fifty cents on the dollar when the bank's affairs were finally wound up. all because he did not insist on the purchaser of the land having his own check certified. if he had done this he could have held both the purchaser and the bank. by having your check certified, you practically exchange your check for one guaranteed by the bank. for example, the bank certifies your check for $ . . it immediately _charges_ your account with the $ . , and _credits_ its "certified check account" with $ . . then when your certified check comes back to the bank, through the person to whom you delivered it, the bank _charges_ its "certified check account" with $ . , and the transaction is closed. therefore, if, for any reason, you decide not to use a check after you have had it certified, _do not destroy it as you would an uncertified check_. be sure to bring it back to the bank so that the amount may be _credited_ your account, and be _charged_ to the bank's "certified check account." otherwise your account will remain charged with the amount and your balance will show that much less. x protesting notes, drafts, etc. why necessary and how it is executed protesting notes, drafts, checks, or other commercial paper is simply warning or giving notice to people, _secondarily_ liable on that paper, that it has not been paid when due. the person who ought to pay the paper is _primarily_ liable. all other persons who have endorsed the paper or drawn it on another person, firm or bank are _secondarily_ liable. you have endorsed brown's note. brown does not pay it when due. if you do not receive a prompt notice of this, you might endorse another note for brown under the false impression that he had paid the first one. likewise, if you have endorsed jones' draft on his firm, or his check, and his firm, or his bank refuses to pay such draft or check, both you and jones should receive prompt notice that payment was refused. with such notice you would not endorse for jones a second time unless he made good to you, and explained matters satisfactorily. if jones was honest in drawing his draft or check he is entitled to prompt notice of non-payment so that he can take immediate steps to get his money. possibly his firm is embarrassed financially, or his bank has failed. say smith & co. have drawn a draft on a customer and have taken it to a bank and secured the money on it. if the customer refuses to pay the draft, the bank wants prompt notice so it can collect from smith & co. and smith & co. want prompt notice so they can take legal steps at once to protect themselves, and probably stop further shipments to this customer. various other instances might be given where endorsers or drawers of paper might suffer loss or damage from lack of notice of its non-payment. the law holds that this giving of notice is of such grave importance, that, if the bank receiving paper for collection does not promptly notify all persons, _secondarily liable_, of non-payment, all such persons are released from obligation, and the collecting bank must take its chances on making the amount from the payer. this statement must be qualified to this extent. if a _check_ is not protested, the maker of the check must _prove_ that he has suffered loss by not receiving notice of non-payment. but the drawer of a draft, or the endorsers on any check, draft, or note are released, whether they suffer damage or not. generally speaking, a check is a written request of a depositor to his bank to pay a certain sum to a certain party; whereas a draft is a written request of any one to a firm or individual, to pay a certain sum to a certain party. of course, if the bank receives orders from the parties sending them, _not_ to protest certain notes, checks, or drafts, it must obey these orders. but if no such instructions accompany the paper, the bank _must_ protest or make itself liable. every bank of any size has one of its employes appointed a notary, or it can employ a notary on the outside. he is an officer appointed by the state, and is under bond to the state to perform all his duties according to law. when the bank hands protestable paper to a notary, it is his duty to make a formal demand at the proper place on the person who should pay it. if payment is refused, the notary makes an exact copy of the note, draft or check at the top of a printed form used for this purpose. then, over his signature as a notary, accompanied by his official seal, he states that he has made a demand in person for payment of the paper described by him; and, on payment being refused, he has "protested" the non-payment. also that he has mailed or delivered notices of this non-payment to all the parties secondarily liable on this paper and states their names. the notary's official statement is called the "instrument of protest." the notices he mails are called the "notices of protest." certain fees are allowed the notary by law for protesting. these are called "protest fees," and become a part of the debt. of course, the person who ought to have paid the paper gets no "notice of protest." he certainly knows if he has not paid. the notary must keep a copy of all his "instruments of protest." this is a public record, just as any court record is, and as accessible to the public. it is rarely examined, however. so, from the language prescribed by law, that the notary uses in his "instrument of protest," comes the common use of the terms "protest" and "no protest" paper. to bind the parties _secondarily_ liable a notary can protest paper only on the _exact_ day it is due. otherwise he might put it off several days, or demand payment before it was due, and damage might result in either case. so, if the protesting is not done on the exact date when the paper is due, it is of no avail. the maturity of a draft reading so many days, or months, after _date_ must be calculated from the date of the draft itself. but the maturity of a draft reading so many days, or months, after _sight_ must be calculated from the date it was presented to the sight of the payer and accepted. it is very necessary to date acceptances of time drafts reading "after sight." _demand for payment must be made at the proper place during business hours._ a check of course is payable at the bank on which it is drawn, during banking hours. a draft on a firm is payable at its office; likewise a draft on an individual is payable at his office, or if he has none, then at his residence. notes or accepted drafts are payable at the place stated on their face. but, when no place of payment is stated, demand for payment must be made at the office of the maker of the note, or the acceptor of the draft; or if he has no office, then at his residence. when you draw up a note it is the proper thing to state on its face "payable at ---- bank" (giving the name of your bank); or "payable at my office"; or "payable at my residence." likewise, when accepting a draft, write the date, then "accepted, payable at ----" (stating your bank, or residence) across the face of the draft over your signature. therefore when a note, or an accepted draft is made payable at a certain bank, demand for payment _must_ be made at that bank, and _not_ on the maker of the note, or the acceptor of the draft. most notes and accepted drafts are made payable at the bank of the payer. all of them should be. in this way, if you keep money enough in your bank to meet your notes and acceptances, just as you keep money there to meet your checks, the bank will save you all worry about their payment in case you or your bookkeeper overlook them. under such circumstances your paper would never be protested. in accepting a note from a customer, _do not have it made payable at your bank_. have the drawer make it payable _in his own town and at his own bank_. demand for payment must be made at the exact place stated in the note. as every business man is particular about protecting his credit in his own town, and _especially_ at his own bank, it is obvious that he will be most diligent about providing for the payment of paper made payable at the bank with which he is doing business. notes and accepted drafts should be sent, a week or two in advance of their maturity, to the town in which they are made payable. if paper, made payable at new orleans, for instance, is not in new orleans _when due_, proper demand for payment can not be made and the drawers or endorsers might be released. _there is absolutely no law requiring a bank to send you a notice that it holds your note, or draft accepted by you, for collection and due at some future date._ it is customary for banks to send such notices, but it is only a courtesy. it is _your_ duty to keep account of when your paper is due, and to have funds at the place of payment when it is due. the banks that do so are very careful about sending out these notices, but the public should regard it as a favor shown them and not as their lawful right. many people do not know or appreciate this fact. you should always put your street address just below your signature on a note so that notice can be addressed properly. also, in drawing a draft, always put the name of the person or firm, on which it is drawn, in the lower left hand corner, and _invariably_ state the street address. xi the local collection department a bank has a perfect right to refuse to accept and to return any checks, notes, drafts, etc., sent it for collection. but if it does accept them, it must obey the instructions of the sender, literally and exactly. the bank has absolutely no right to disregard these instructions, no matter how obnoxious or disagreeable they may seem to the payer of the paper. many people regard all collectors as offensive and unwelcome. they wish to take their own time about paying their debts. please mark this difference between the collector of your grocer's or druggist's bill, and the city bank as a collector of your note, or of a draft on you. the monthly collector must turn in cash for the majority of the bills given him or lose his position. but it really makes little difference to the bank whether you refuse or pay the note or draft that some other bank has sent it. when collections are sent to a bank direct by firms, or by banks in another city, that do not keep an account with it; the collecting bank makes small fees, but these fees are very insignificant. so, by prompt payment of notes and drafts, you are conferring more of a favor on yourself than on the bank. it is wise to protect your credit with strange banks as well as your own. every bank receives many confidential inquiries concerning the financial standing of firms and persons in its city. if not personally known to the officer in charge of this correspondence, he invariably inquires of the collection department as to the promptness with which the parties in question meet their notes and drafts. and even though you are not a patron, a bank in your own city would rather give you a good financial reputation than a poor one. the collecting bank must regard most carefully the instructions of the sender, especially about protesting or not protesting. also about telegraphing payment or non-payment, and whether to hold the paper after it is due or not. in no case must it surrender any documents attached to a draft until the draft is paid, or accepted; and, in case of acceptance, documents attached must not be surrendered unless the sender so directs. when drafts have bills of lading attached, and the draft states on its face that it is payable on arrival of the goods, the bank can hold it until the goods arrive; but if the draft calls for payment on presentation, even though it has a bill of lading attached, the bank holding it, until the arrival of the goods, does so at its own risk. as has been stated, and it can't be stated too forcibly, the presenting bank has no option and must obey orders to the letter. if it does not, it must suffer any resulting loss. it is only an agent and can not regard the wishes of the payer. another point you should bear in mind. the bank must not only pay strict attention to the instructions of the sender of the collection, but it must follow the law. in self-protection a bank must keep itself informed about the laws regarding collections and any changes in these laws. if a bank accepts anything but the actual cash in payment of a collection, it does so at its own risk, and not at the risk of the sender. for instance, a bank has a draft on smith, or holds smith's note for collection. smith offers his check in payment. if the check turns out "no good" the bank must recover the paper immediately, and any document which might have been attached; otherwise the sender can hold the bank for the amount. therefore, when you tender your check to a bank in payment for collections, you are asking them to take a risk. if you are not well known in the bank, it is only a reasonable request for the bank to ask you to have your check certified. don't ask the bank to have it certified; for, as has been explained in the remarks on "certified checks," the bank by so doing would release you, and could hold only the paying bank. you might just as well ask a strange bank to _cash_ your check as to offer it your uncertified check for a collection on you. you would hardly cash a check for a stranger. why should the bank take an equal risk for you? yet nothing seems to rouse the ire of the average man more, than for the collection clerk to ask him to have his check certified. it is a well-nigh universal rule in all clearing house associations, that the banks, which are members thereof, shall not collect checks on each other before the daily hour for meeting. also it is a general custom not to collect from each other, checks that are deposited, or taken in payment for paper due, after that hour. hence, when a bank accepts uncertified checks in payment before the clearing hour, it will know before closing time whether such checks are good. but, if a bank accepts an uncertified check in payment after the clearing hour, either, it must have it certified, and thereby release the drawer; or, it must hold it until the next day at its own risk. the banks always respect the man who has his check certified, if tendered after the clearing hour. for these same reasons you can see why a bank can not take a check on a bank in some other town in payment of a collection. it then would be several days before the bank would know whether the check was good or not. also the bank would be out that amount of money for the length of time it takes to collect that check; for every bank must remit to the sender on the very day it puts its "paid" stamp on a collection and delivers it to the payer. therefore, when a bank notifies you that it holds your note, or a draft drawn on you, for collection, bear in mind four points. first: the bank must follow the instructions of the sender or owner of the paper. second: it can not disregard the law. third: you are benefiting yourself more than the bank by paying your paper promptly. fourth: the bank is taking a risk every time it accepts anything other than actual cash for a collection. the collecting bank can not consider the instructions of any one but the bank or persons from whom it receives the item. for instance, you live in st. louis, and have sent your note to brown & co. of bridgeport, conn. brown & co. discount your note with their bank, or give it to their bank for collection. before it is due the bridgeport bank forwards this note to a philadelphia bank, which in turn forwards it to a st. louis bank. you are duly notified by the st. louis bank. for various reasons you may not wish to pay. in that event, positively the only way to have this note recalled is for you to communicate with brown & co. then they must request its recall by the bridgeport bank, which in turn instructs the philadelphia bank. then that bank instructs the st. louis bank to return the note. in other words, all instructions must come through the same channels by which the note was originally sent. bear in mind that you are not the owner of this paper, nor is the bank which receives it for collection. when a draft has the words "with exchange" on its face the drawer is asking the payer, not only to pay the amount of the draft, but also the bank charges for collecting. unless the presenting bank has instructions to collect this exchange or return the draft, it can accept the amount of the draft and deduct its charges when it remits for the collection. so don't feel resentment toward the bank when it asks you to pay for collection charges. many people do. but the bank is only following instructions and cares nothing whether you, or the fellow at the other end, pays the cost. because it is human nature to object to paying out money, the local collection department is the recipient of more complaints and unreasonable requests than any other department of the bank. any number of actual happenings could be set down. now the law says that banks shall keep open _during certain hours_ on every business day, which is not a legal holiday. after the closing hour there is a tremendous amount of work to be done. the tellers must balance their cash; the bookkeepers must take off a balance of every account on their particular set of books; and every check and draft deposited, or received through the mails, and payable in other towns, must be listed and forwarded for collection. nothing can be held over without risk, no matter how heavy the day's work. the rule in every bank is to clean up all the work on the very day it is received. none of this daily balancing of cash, or books, can be commenced until the last check has been cashed, the last depositor has come in, and the last payer of a collection has settled. for instance, the payment of a single draft or note after banking hours, necessitates the holding open of several sets of books or the erasure and changing of various totals by the bookkeepers. it is a very mistaken, but popular, idea that the bank employes practically are through with their duties at the close of banking hours. the fact is, that the usual hours for the employes are from eight till five, and it is no uncommon thing for the clerk and officers to be hard at work many hours after the business houses have closed. yet many persons think the bank very disobliging if it refuses to transact business after hours. one unreasonable individual insisted that he had until sundown to pay his note on the day it was due. when the collecting bank told him it would be protested if not paid before the end of banking hours, he became very abusive and wanted to know who gave that bank the power to say how late he could pay. he was politely referred to the law makers, but this did not lessen his resentment against the bank. the foregoing are statements of actual daily occurrences and are only fair samples of the injustice with which many persons treat the banks. and it is mainly the result of ignorance of the laws and customs, which the banks _must_ obey. xii the loan department as a preface to the remarks on this department, the following simple and concise statement is taken, by permission, from that excellent book, "money and banking," by mr. horace white. (book ii, chapter i, page , edition of .) "function of a bank" "a bank is a manufactory of credit and a machine of exchange. mr. h. d. mcleod's analysis of the mechanism of banking is substantially this: a man has $ , . of his own money. he starts a bank. his neighbors deposit $ , . with him. this money becomes the absolute property of the banker. the depositors have simply a right to withdraw an equal amount whenever they like, which right can be enforced by law. the banker owns the money and the depositor has a claim, or right of action, against him for an equal sum. but the depositors will not draw the money out immediately; if they had intended to do so, they would not have deposited it at all. the banker finds by experience that some of his customers will deposit as much money as others draw out, so that $ , . is on hand all the time. he concludes that if his own $ , . in connection with his good reputation, is considered by the public a guarantee for $ , . , then the whole $ , . will serve as a guarantee for at least $ , . . when he begins, his balance sheet reads in this way: liabilities. assets. deposits $ , . cash $ , . "he now begins to discount the commercial paper of his customers running say ninety days at %. when he discounts a bill of exchange for $ , . , he deducts the interest for ninety days ($ . ) and credits the customer the remainder ($ . ) on his books. this $ . is called a deposit, because the customer has the right to draw it out by his check exactly as he could draw out an equal sum of gold deposited by him in the same bank. in the eye of the banker, and of the customer, and of the law, it is a deposit. in ordinary times it is like any other deposit. that is, the proportion remaining uncalled for at any time will be about the same as the proportion of actual money deposited. yet it is nothing but a bank credit. hence the word deposit, when thus used, is clearly a misnomer, since, by derivation and common understanding, a deposit means a thing laid away, or given in charge of somebody. it must be borne in mind, therefore, that bank deposits consist of two different things, namely, ( ) money, ( ) bank credits, and that the latter may be four or five times as large as the former. "the process continues till the banker has $ , . of discounted bills in his portfolio. then his accounts stand thus-- liabilities. assets. deposits $ , . cash $ , . profit , . loans & discounts , . ----------- ----------- $ , . $ , . "this is mr. mcleod's exposition and it is the correct one. it follows that the banker has manufactured something which serves as a medium of exchange to the extent of nearly $ , . . this something is credit. goods can be bought and sold with it as readily as with money, since the checks drawn against these deposits are universally accepted. the whole $ , . of bills are not discounted in a lump, but gradually, so that some are always maturing and bringing money in to meet the checks of customers, in an endless chain of deposits and discounts. it is found in practice that $ , . of loans and discounts may be easily carried on $ , . of cash. thus, the loans of all the national banks in the united states in october, , were $ , , , . , and their cash (including silver certificates and silver dollars) was a trifle less than $ , , . , or only one-fifth of the amount of the loans. the other four-fifths was credit, and perfectly sound credit too, for it had passed through one of the severest panics in our history." the foregoing quotation is an unanswerable argument for the need of banks as manufacturers of credit in every community. the greater the banking capital in any section, the easier it will be for the people of that section to carry on and enlarge their business. the loan department is not only the most important, but it is the money-making end of the bank. if it makes no loans it will pay no dividends. if, on the other hand, it makes bad loans, it will go out of existence. it can be understood readily that the successful bank officer, whose duty it is to accept or reject loans, must be a person of large experience and wide knowledge of men and affairs. he must be an excellent judge of human nature. not too conservative, nor yet too venturesome. he must be a constant student of financial conditions; and must expand or contract his loans as the sea of finance is placid or stormy. his responsibility is great. he must lend, but he must lend judiciously, millions of other people's money. he can not allow feelings of personal friendship to warp his judgment. he must be thoroughly familiar with the laws concerning the making and the collection of notes. in an address to the national banks in , the hon. hugh mcculloch, the first comptroller of the currency, gave this sound advice: "_do nothing to foster and encourage speculation. give facilities only to prudent and legitimate transactions._ distribute your loans rather than concentrate them in a few hands. pursue a straightforward, upright, legitimate banking business. treat your customers liberally, bearing in mind that a bank prospers as its customers prosper." in lending, the bank should encourage the _business interests_ of its community and should discourage speculation. if every one, before asking a loan, would put this question to himself, "would i take this risk," his banker would be saved much embarrassment. on the other hand, if you know your security is good, there is no reason why you should feel any degree of awe or nervousness in offering your own or your customer's notes. that is what the bank is in business for, and your proposition, if not made for purposes of reckless speculation, is welcomed in ordinary times. bear in mind, however, that your banker may, at times, have to refuse your paper, because he has seen clouds on the financial horizon of which the average person is ignorant, and he is endeavoring to protect, not only his stockholders, but his patrons, from the storms that are imminent. it is advisable for you to consider his views carefully, and probably to curtail business expansion. _your average balance on the bank's books has a great deal to do with the amount of the loans, no matter how well secured, that you can ask reasonably._ every bank has a number of customers who expect to be taken care of in the loan department. but, if all the bank's patrons are borrowers, it soon will have loaned out all of its funds. the bank must have depositors also. while some depositors do not ask for loans, experience has shown that the proportion of a customer's balance to his loans must be sustained in order to keep the bank adjusted. in new york the banks generally require a regular customer to keep an average balance of not less than twenty per cent. of the loans made him. most interior banks consider ten per cent. about the right proportion. for example, in the interior cities, if your account shows an average balance of $ . , you can reasonably request loans, properly secured, of $ , . . an average balance of $ , . should entitle the depositor to loans of $ , . and so on. experience proves that if the banker does not keep this important point in mind, his machinery will be "out of gear." speaking generally, it will pay any concern to _borrow_ money, if necessary, to show a fair balance to its credit. bankers are only human, and all business is selfish. every bank will be disposed to take care of its best paying customers first in times of financial storms. every merchant looks out for his best customers first. why not a banker? when a firm attempts to hold its bank down to the last cent of profit, keeps no balance to speak of, and subjects the bank to endless expense in the collection of its checks and drafts, it can not reasonably expect as liberal treatment in "squally times" as the concern which pursues the broader policy of "live and let live." some firms, if they would figure it out, could see plainly that the bank was handling their account at a loss; yet, they think they are conferring a great favor in placing their business with any bank. a large concern was pursuing this narrow policy. among other things it made a practice of borrowing large sums in other cities at four or five per cent. when the local rate was six. the recent panic came on. money advanced to fifty, to one hundred per cent. in new york. the local banks were having all they could do to take care of their own good customers. the result was that this firm came to the verge of an assignment. and, if it had not happened that the banks of its city did generously come to its rescue, it would have collapsed. it is well to remember, that, while the rates of interest in new york are temptingly low at times, they fluctuate violently and often without warning; also that the bankers in a strange city have no personal interest or local pride in your success or failure. money is only a commodity, and rates of interest are governed by supply and demand. now the _supply_ of money in the new york banks varies tremendously, by millions of dollars in fact. this variation comes from many causes. on the other hand, the _demand_ for money in new york is constantly changing. the reasons for this are manifold. but in the smaller cities, both the supply and demand are much more uniform and steady. hence the rates of interest, outside of new york, are much less liable to change. therefore, unless the demands of your business exceed the banking facilities of your town, it is _very_ advisable for you to confine your loans to the local banks. the loan department is restricted by certain laws, just as the other departments. state and savings banks, and trust companies must obey the laws of their particular state, but any bank having the word "national" as part of its name, or the letters "n. a." (national association), or the letters "n. b. a." (national banking association) following its name, must adhere strictly to the provisions of the national bank act. the congress of the united states has forbidden the use of the word "national" as part of the name of any bank or trust company which does not comply with all of the sections of the national bank act. as the statutes differ in each of the separate states, only the laws governing national banks will be considered here. the whole spirit of the national bank act in relation to loans is to prevent the advancing of money on anything but "quick assets." in other words, loans must not be made on any security, that can not be turned into money quickly. for this reason a national bank can not lend on real estate as a security. also it should not accept notes having longer than ninety days or four months to run. the fundamental principle of the law is the guarding of the depositors' money; to have it ready for them at all times. but the _whole fabric and theory of banking is founded on the fact_, demonstrated by centuries of experience, that at no _one_ time do _all_ the depositors want to draw _all_ their money from _all_ the banks. also that every day some loans are due and can be converted into cash if necessary. payment of demand, or "call," loans can be demanded any day. on time loans, payment can not be asked for until the maturity of the note, the day agreed upon by the bank and the borrower. on demand, or "call," loans the interest must be paid at the end of every three months, or when the loan is paid. on time loans, the interest, or discount, is paid in advance. notes reading one, two, three, or four months after date are due, of course, one, two, three or four months after the date of the notes. but thirty, sixty, or ninety-day paper is not due in one, two, or three months. this is a common error. the exact number of days must be calculated. the following table for determining the maturity, or "due date," of thirty, sixty, or ninety-day paper is herewith given: table for finding maturity of notes and drafts at , , and days +-----------+---------------+---------------+---------------+ | | at days | at days | at days | | dated in | will be due | will be due | will be due | | month of | same date in | same date in | same date in | +-----------+---------------+---------------+---------------+ | january | february less | march plus | april | | | day | day | | +-----------+---------------+---------------+---------------+ | february | march plus | april plus | may plus | | | days | day | day | +-----------+---------------+---------------+---------------+ | march | april less | may less | june less | | | day | day | days | +-----------+---------------+---------------+---------------+ | april | may | june less | july less | | | | day | day | +-----------+---------------+---------------+---------------+ | may | june less | july less | august less | | | day | day | days | +-----------+---------------+---------------+---------------+ | june | july | august less | september | | | | day | less days | +-----------+---------------+---------------+---------------+ | july | august less | september | october less | | | day | less days | days | +-----------+---------------+---------------+---------------+ | august | september | october less | november less | | | less day | day | days | +-----------+---------------+---------------+---------------+ | september | october | november less | december less | | | | day | day | +-----------+---------------+---------------+---------------+ | october | november less | december less | january less | | | day | day | days | +-----------+---------------+---------------+---------------+ | november | december | january less | february less | | | | day | days | +-----------+---------------+---------------+---------------+ | december | january less | february less | march | | | day | days | | +-----------+---------------+---------------+---------------+ | | | ~example.~--paper dated march th at days is | | due june th. | | | | ~to prove.~--exclude day of date, then days in | | march, plus days in april, days in may, days | | in june equals days. | | | | paper apparently due, from this table, on february | | th, is, of course, due march d, or apparently due | | april st, is, of course, due may st. | | | | in leap year allowance must be made for days in | | february. | | | | for paper payable in states allowing grace use table, | | then add days of grace. | +-----------------------------------------------------------+ national banks can lend only a certain proportion of their deposits. in new york, chicago, and st. louis, called central reserve cities, national banks must keep on hand, in lawful money, a reserve of twenty-five per cent. of their deposits. in albany, baltimore, boston, cincinnati, cleveland, detroit, louisville, milwaukee, new orleans, philadelphia, pittsburg, san francisco and washington, called _reserve cities_, the national banks must have the same reserve of twenty-five per cent. of their deposits. but the national banks in these last-named thirteen cities can keep one-half of _their_ reserve in national banks located in any of the three central reserve cities, viz.: new york, chicago and st. louis. in all other cities or towns the national banks must have a reserve of fifteen per cent. of their deposits, but nine per cent. of _their_ reserve can be kept in national banks located in any of the thirteen "reserve cities"; or in national banks in the three central reserve cities. "approved reserve agents" are the banks of the larger cities, selected by the banks of smaller cities or towns, in which to carry part of their reserve. these selections _must_ be approved by the comptroller of the currency, the executive head of the national banking system. a national bank is forbidden to lend more than ten per cent. of its combined capital and surplus to any one firm or individual. "but the discount of bills of exchange drawn in good faith against actually existing values, and the discount of commercial or business paper actually owned by the person negotiating the same, shall not be considered as money borrowed." also no national bank can lend on its own stock as security. the comptroller of the currency can have an examination made, as often as he may deem proper, of the condition of any national bank. the visits of the national bank examiners are never announced in advance. they come suddenly and without warning. their duties are not only to balance the books and count the cash, but also _critically to examine each loan and its security_; and to give especial attention to loans to any director or officer, and to any concerns in which they may be financially interested. if the bank is overloaned, that is, has loaned more than the law allows, the examiner immediately reports it, and the comptroller of the currency orders that bank to cease lending, and to require payment of enough of its loans to make good the reserve required by law. and if the bank does not court disaster and the closing of its doors, it hastens to obey orders and to "get in line." the supervision of the national banks is not perfunctory or careless. it is very strict. the inquisitorial powers of the national bank examiners are practically unlimited. they have a legal right to put any bank officer on oath in questioning the affairs of the bank. they look into every department in the most searching way, and any disobedience of the law is reported promptly to the comptroller. these examiners are appointed by the united states government; and if they want to hold their positions, they must be strictly impartial in their reports to the authorities. the provisions of the national bank act have been so rigidly enforced, _that in forty-four years, or since the act was passed by congress, the average annual loss to depositors in national banks, has been only thirty-seven one thousandths part of one per cent. of their deposits_. practically no loss at all. isn't that a tribute to the wisdom of that law; to the strict supervision of the government; and to the honesty and integrity of the officers of national banks; past and present? it has happened, of course, that some spoilers have occasionally obtained control of a national bank, and have dishonestly used the depositors' money in risky ventures for their own profit. but the officials of the treasury department have soon sized them up, and such men shortly find the banking business not to their liking, especially with "uncle sam" as a supervisor. xiii new york exchange practically every bank in the united states keeps part of its funds in banks in new york city, the money center of the country. all national banks are allowed to keep part of their reserve in the national banks of new york, chicago and st. louis, the three central reserve cities. for these reasons checks drawn on banks in these three cities are generally accepted at par, that is, collected without cost to the depositor. in this connection, the word "exchange" comes from the fact that you _exchange_ your personal check for the bank's check on another bank, located in some other city. in remitting for collections, or for balances due, the banks outside of the three central reserve cities, generally send their checks on one of these cities, according to their location. under certain conditions you will notice your local newspapers quoting new york exchange at so much premium or so much discount. these rates are generally in use only between the different banks in your city. the banks do not charge a depositor any premium for its checks on other cities, unless the amount of the checks called for is large. the proper way to draw your check when you want new york exchange, is to make it read "pay to the order of new york exchange." the bank then makes out its check on a new york bank payable to your order. then you should endorse the bank's check to the order of the party to whom you are remitting. banks do not like to sell their checks on other banks to strangers. some expert at raising checks may buy new york exchange for ten dollars and raise it to ten thousand. also he might buy the bank's check with the idea of obtaining the cashier's signature for the purpose of forgery. xiv the method of issuing national bank notes many people have the idea that a national bank, having a capital of, say one hundred thousand dollars, can call on the united states treasury department for an equal amount of national bank notes, without expense to the bank; and thus have double the amount of its capital to lend at the start. the national bank act does say that each national bank _must_ issue currency equal to a certain per cent. of its capital; and further, that each national bank _can_ issue currency equal to the full amount of its capital. but the profit on taking out this currency, or circulating notes, is so very small that many banks do not issue as much as the law allows. these circulating notes must be issued under certain expensive conditions. first--the bank must purchase and deposit with the treasurer of the united states an amount of registered united states bonds, equal at their par value, to the amount of the circulating notes called for. second--dependent on the kind of bonds deposited, the bank must pay a tax on its circulating notes. third--the bank must stand the expense of plates for printing and the express charges for sending it the original issue of its notes. also, when any of its worn-out or mutilated notes are sent to the treasury department, they are destroyed, and the bank then has to pay the expense of re-issue and the express charges for sending them to the bank that originally issued them. the signature of the president and cashier of the bank must be affixed. therefore national banks, in calculating the possible profit on taking out circulating notes, have the following example to be considered in issuing every one hundred thousand dollars of their notes: bonds purchased: united states registered % bonds to be paid at par in . price of bonds $ , . par value of bonds purchased , . money worth %. income from bonds $ , . income from circulating notes loaned at % , . --------- $ , . _less deductions._ annual tax on circulating notes $ . sinking fund to retire premium on bonds at maturity, amount to be charged off each year . expenses (plates, express charges, etc.) . . --------- net income from circulating notes $ , . net income from loaning $ , . (net cost of bonds purchased) at % , . --------- net profit on taking out $ , . of circulating notes $ , . hence the net percentage of profit on taking out national bank notes on this class of bonds, is about one per cent., based on their _present_ market price. the profit on taking out circulation on other united states bonds is even less. suppose the market price of the % bonds purchased was higher, say , as it was several years ago, the profit would be even less. also, if the bonds decline in market value below par (as in case of war, for instance), the bank must stand that loss; and purchase and deposit an additional amount of bonds, so as to make the market value of the bonds deposited equal to the amount of its outstanding circulating notes. in order to retire its circulating notes and obtain possession of its united states bonds, deposited as security therefor, the bank must send the treasury department an amount of lawful money equal to the amount of the circulating notes it wishes to retire. it can then "withdraw a proportionate amount of the bonds held as security for its circulating notes." but the law says that not more than nine millions of national bank notes can be retired in any one month. therefore, if the market price of united states bonds goes up to a point where all profit on its circulation is wiped out, the bank may have to wait several months until previous requests for retiring circulation are out of the way. in the meantime united states bonds may have gone down in price. as has been stated, a national bank _can_ take out an amount of circulating notes, or national bank currency, equal to the amount of its capital. but the profit on the operation is so small (leaving out the chances of actual loss) that many banks do not issue notes to the full amount allowed. the following figures relative to the total capital of all the national banks, and the total circulation of these banks on the dates stated, conclusively prove this fact. (these figures are taken from the annual report of of the comptroller of the currency.) november , january , march , . . . capital stock $ , , . $ , , . $ , , . circulating notes , , . , , . , , . may , august , . . capital stock $ , , . $ , , . circulating notes , , . , , . it can be seen from these figures that the national banks _could_ have taken out _over three hundred millions_ more of circulating notes than they _actually_ issued during the time stated. and these figures are not exceptional. banks, other than national, "shall pay a tax of ten per centum on the amount of their own notes used for circulation and paid out by them." this tax is prohibitive and no state banks issue circulating notes for this reason. xv the so-called "special privileges" of banks in every political campaign, especially the national ones, the orators talk a great deal about the "special privileges" of banks. but they are never defined exactly. according to them, one privilege (?) the bank enjoys is the power to lend a certain per cent. of its depositors' money. but if it could not do this, what reason would the bank have for existing? that is its principal real source of profit. practically the only other privilege the national banks have, is the right to take out national bank notes, or currency. as has been shown in the remarks on "the method of issuing national bank notes," this privilege allows so little profit that the banks do not use it to the full extent of the law. on the other hand, consider a few of the many risks the bank is constantly taking. every loan it makes is a risk. a few bad loans, made through dishonest or visionary representations of its customers, may blot out the bank's profits for a year or more. every check or draft cashed is a risk. every check, draft, or note it takes for collection is a risk. in fact, every transaction the bank undertakes is more than ordinarily hazardous. moreover the profits of the average city bank are not large. considering their responsibilities and the innumerable ways by which they may involve the bank, the salaries paid the employes, from the president to the messengers, are small. also remember there is no "water" in the stock of banks. the capital of every national bank must be fully paid in, before it is allowed to open for business; and in most of the states, the banks, other than national, must have their entire capital paid up within a year from their beginning. the net profits of successful banks, located in cities with a population of one hundred thousand or over, average about six to ten per cent. the business man, when considering an investment in a mercantile or manufacturing enterprise, generally counts on double that amount of dividends. if, as the politicians state, the banks enjoy so many "special privileges"; it is strange that the people of every section of the country do not rush in to organize and take stock in banks. * * * * * * transcriber's note: minor typographical errors have been corrected without note. irregularities and inconsistencies in the text have been retained as printed. [illustration: _very truly yours charles n. fowler_] seventeen talks on the banking question between uncle sam and mr. farmer, mr. banker, mr. lawyer, mr. laboringman, mr. merchant, mr. manufacturer by hon. charles n. fowler who was a member of the house of representatives for sixteen years, a member of the banking and currency committee for fourteen years and chairman of the committee for eight years published by the financial reform publishing co. elizabeth, new jersey copyright, , by financial reform publishing co. [illustration] the trow press new york foreword this book is written in the form of a conversation between uncle sam and six men of various occupations. it begins with the a, b, c of the subject and by question and answer goes over all the different phases of the subject precisely as you would expect them to arise under such circumstances. after weeks of study and investigation they finally reach an agreement, based upon their talks, and formulate a financial and banking system for the united states. the author. table of contents page first night. the standard of value second night. what is money? third night. what is currency? fourth night. bank credit currency fifth night. what is exchange? sixth night. value, price, wealth, property, credit seventh night. commercial credit, land credit, government credit eighth night. colonial credit money ninth night. united states notes or greenbacks tenth night. reserves eleventh night. the bank twelfth night. land credit bank thirteenth night. the clearing house fourteenth night. banking in fifteenth night. outline of bill sixteenth night. draft of bill seventeenth night. aldrich plan and plot exposed [illustration] first night the standard of value uncle sam: gentlemen, i have invited you to take part in one conversation a week upon the much-vexed and all-important question of a financial and banking system for my country. we shall continue these conversations until we arrive at some conclusion which will be satisfactory to all of us, although this may seem difficult at the outset. to begin with, i want to assure you that our talks shall be absolutely confidential, and nothing that is said at these meetings shall ever go any farther, unless we agree to announce our conclusion. with this understanding we can be brutally frank with each other, and i can expose my hand to you. the present situation is one demanding immediate attention, and only our ignorance, greed or political cowardice can prevent us from arriving at a satisfactory solution of this problem. we must be sincere and patriotic in our purpose, for we represent practically every phase of our citizenship, and i assume you are typical of the average intelligence of the people. here is mr. lawyer to steer us clear of legal obstacles, mr. laboringman to speak for our millions of daily toilers, mr. farmer to point out the disadvantage of agricultural loans, mr. merchant to illustrate the defects of our present commercial credits, mr. manufacturer to caution us against the conversion of our liquid capital into fixed investments and mr. banker to tell us of his woes and enlighten us upon the remedies for all his ills. what we don't know now, we will each attempt to find out before our talks come to an end. certainly there is some solution to this question. in short and in fact it must be solved. i am the laughing stock of the entire civilized world today. for our persistent folly we suffer losses in the aggregate amounting to hundreds of millions of dollars every year. we ought to have, and can have the best and the most efficient banking system in the world. indeed, we ought to give the laugh to all the other countries in banking, as we do practically in everything else. it is up to us. mr. banker: uncle sam, i agree absolutely with what you have just said. i believe it is our duty to sit every week, as you suggest, continuously until we arrive at some conclusion upon which we can all agree. if we do this i believe, since we represent so many callings and are so representative of the various lines of business, we shall find the public approving of our conclusion. i suggest that we begin with the very a, b, c of this question, and settle one point after another as we go along. if we do this, our differences will disappear as we progress, and the x, y, z of this question, or the formation of a financial and banking system, will be comparatively easy in the end. for example, we must first fix clearly in our minds what a standard of value is, and what our standard of value is, what money is, what currency is, what capital is, what a bank is, and so continue step by step to the end, leaving absolutely nothing for guesswork, if that is at all possible. the experience of the world has been so broad and complete that our solution of this question is entirely possible, although we have some problems that are peculiar to ourselves. mr. lawyer: that plan suits me exactly, for only recently i made a thorough study of the question of our standard of value. my investigation took me back more than , years, and i found the subject amusing often as well as intensely interesting, while the result of my research was most satisfactory. i discovered that everything from baked clay to the credit of practically every government that has ever existed had been used at some time or other, as a standard of value, or a measure of value. mr. farmer: mr. lawyer, just what do you mean by a "standard of value"? mr. lawyer: a "standard of value" is anything that may be selected by which all other things in some particular locality or country are measured. the indians of british columbia used haiquai shells; one string being equal to one beaver skin. in australia tough green stone and red ochre were used. in central africa slaves were used. in iceland the law made cattle the standard of value. in the fiji islands whales' teeth. in the south sea islands red feathers were used. in mexico and abyssinia salt was used. agriculture has produced its standard of value; corn, maize, olive oil, cocoanuts, cocoa-nut oil, tea, tobacco, cacao, beans, wheat, rice. the pastoral life produced its standard of value; sheep, cattle, goats, horses and practically every other domestic animal, according to the time and place. the following history of american experience in the development of a standard of value cannot be better restated, and is practically a repetition of the experience of mankind in all the ages, therefore i want to read what horace white says upon the subject: "it may be said that virginia grew her own money for nearly two centuries, and maryland for a century and a half. "the first settlers of new england found wampumpeage, sometimes called wampum and sometimes peage, in use among the aborigines as an article of adornment and a medium of exchange. it consisted of beads made from the inner whorls of certain shells found in sea water. the beads were polished and strung together in belts or sashes. "they were two colors, black and white, the black being double the value of the white. the early settlers of new england, finding that the fur trade with the indians could be carried on with wampum, easily fell into the habit of using it as money. it was practically redeemable in beaver skins, which were in constant demand in europe. the unit of wampum money was the fathom, consisting of white beads worth sixty pence the fathom. in connecticut decreed that wampum should be 'strung suitably and not small and great uncomely and disorderly mixt as formerly it hath been.' four white beads passed as the equivalent of a penny in connecticut, although six were usually required in massachusetts and sometimes eight. in the latter colony wampum was at first made legally receivable for debts to the amount of d. only. in the limit was raised to fifty pounds sterling, but only for two years. it was then reduced to forty shillings. it was not receivable for taxes in massachusetts. the use of wampum money extended southward as far as virginia. "the decline of the beaver trade brought wampum money into disrepute. when it ceased to be exchangeable in large sums for an article of international trade the basis of its value was gone. moreover it was extensively counterfeited, and the white beads were turned into the more valuable black ones by dyeing. nevertheless it lingered in the currency of the colonies as small change till the early years of the eighteenth century. while it was in use it fluctuated greatly in value. "the first general assembly of virginia met at jamestown july , , and the first law passed was one fixing the price of tobacco 'at three shillings the beste, and the second sorte at d. the pounde.' tobacco was already the local currency. in an act was passed forbidding the making of contracts payable in money, thus virtually making tobacco the sole currency. "the act of was repealed in , but nearly all the trading in the province continued to be done with tobacco as the medium of exchange. "in the price of tobacco in silver had been s. d. per pound in virginia. the cultivation increased so rapidly that in the price had fallen to d. in order to raise the price, steps were taken to restrict the amount grown and to improve the quality. the right to cultivate tobacco was restricted to , polls. carpenters and other mechanics were not allowed to plant tobacco 'or do any other work in the ground.' these measures were ineffective. the price continued to fall. in it was only d. it was now enacted that half of the good and all of the bad should be destroyed, and that thereafter all creditors should accept lbs. for ; that the crop of should not be sold for less than d., nor that in for less than s. per lb., under penalty of forfeiture of the whole crop. this law was ineffectual, as the previous ones had been, but it caused much injustice between debtors and creditors by impairing the obligation of existing contracts. in tobacco was worth only - / d. and in only d. per lb. "these events teach us that a commodity which is liable to great and sudden changes of supply is not a desirable one to be used as money. "in the year a treaty was negotiated between the colonies of maryland, virginia, and carolina, to stop planting tobacco for one year in order to raise the price. this temporary suspension of planting made necessary some other mode of paying debts. it was accordingly enacted that both public dues and private debts falling due 'in the vacant year from planting' might be paid in country produce at specified rates. "in an extraordinary series of occurrences grew out of the low price of tobacco. many people signed petitions for a cessation of planting for one year for the purpose of increasing the price. as the request was not granted, they banded themselves together and went through the country destroying tobacco plants wherever found. the evil reached such proportions that in april, , the assembly passed a law declaring that these malefactors had passed beyond the bounds of right, and that their aim was the subversion of the government. it was enacted that if any persons, to the number of eight or more, should go about destroying tobacco plants, they should be adjudged traitors and suffer death. "in tobacco notes were legalized. these were in the nature of certificates of deposit in government warehouses issued by official inspectors. they were declared by law current and payable for all tobacco debts within the warehouse district where they were issued. they supply an early example of the distinction between money on the one hand, and government notes, or bank notes, on the other. the tobacco in the warehouses was a real medium of exchange. the tobacco notes were always payable to bearer for the delivery of this money. they were redeemable in tobacco of a particular grade, but not in any specified lots. counterfeiting the notes was made a felony. in another variety of currency, called 'crop notes,' was introduced. these were issued for particular casks of tobacco, each cask being branded and the marks specified on the notes. "the circulating medium of the new england colonies was quite as fantastic as that of virginia. merchantable beaver was legally receivable for debts at s. per pound. in the general court of massachusetts ordered that corn should pass for payment of all debts at the price it was usually sold for, unless money or beaver skins were expressly stipulated. in other words, a debt payable in pounds, shillings, and pence might be paid at the debtor's option in any one of three ways; in corn at the market price, in beaver at s. per pound, or in the metallic money of england. for more than half a century this order continued in force and operation, other things being added to the list from time to time. "in musket balls were made receivable to the extent of d. in one payment. "in indian corn was made current at s. per bushel, wheat at s., rye and barley at s., and peas at s. dried fish was added to the list. taxes might be paid in these articles and also in cattle, the latter to be appraised. "the need of metallic currency was severely felt. in it was ordered that no coin should be exported, except s. to pay each one's traveling expenses, on penalty of forfeiture of the offender's whole estate. "the cost of carrying the country produce taken for taxes amounted to per cent of the collections. a constable once collected bushels of peas as taxes in springfield. he found that he could transport this portion of the public revenue most cheaply by boat. launching it on the connecticut river, he shipped so much water on board at the falls that the peas were spoiled. thus we learn that money ought to be easy of carriage and not liable to injury by exposure to the elements. "in it was ordered for the first time that contracts made in silver should be paid in silver. "in , during king philip's war, the need of metallic money for public use was so great that a deduction of per cent was offered on all taxes so paid. "the first local currency of new netherlands was wampum, but it was subordinate to the silver coinage of the mother country; that is, it was reckoned in terms of that coinage as fixed by the dutch west india company from time to time. it was fixed at six white beads for a stiver. wampum was not made in the province, but was imported from the east end of long island, the principal seat of production. it is mentioned in a letter from the patroons of new netherlands to the states general in june, , as 'being in a manner the currency of the country with which the produce of the country is paid for,' the produce of the country being furs. "beaver soon became current here, as in new england, and for the same reason, its currency value being fixed by the company at florins per skin. as wampum beads were equal to stiver and stivers to florin, and florins to skin, the ratio of wampum to beaver was to . the market ratio did not coincide with the legal ratio very long. nor was the legal ratio of either wampum or beaver to silver maintained; for, in , director stuyvesant wrote to the company urging that beaver be rated at florins instead of , and wampum at for a stiver instead of , as these rates were nearer the commercial values. "in the assembly of south carolina made rice receivable for taxes, 'to be delivered in good barrels upon the bay in charlestown.' in the following year a tax of , , pounds of rice was levied, and commissioners were appointed to issue rice orders to public creditors, in anticipation of collection, at the rate of s. per lb., in the following form: "'this order entitles the bearer to one hundred weight of well-cleaned merchantable rice to be paid to the commissioners that receive the tax on the second tuesday in march, .' "rice orders were made receivable for all purposes, and counterfeiting was made felony without benefit of clergy. "in eastern tennessee and kentucky, early in the nineteenth century, deer skins and raccoon skins were receivable for taxes and served the purposes of currency. "when california was first invaded by gold seekers there were a few mexican coins in circulation there, not nearly sufficient to answer the needs of the growing community. the immigrants brought more or less metallic money with them. the smaller coins were those of many different countries, chiefly spanish. for want of sufficient coins, the first trading was done largely with gold dust, sometimes by weighing it in scales, sometimes by guesswork. a 'pinch' of gold dust about as large as a pinch of snuff had a current value and was a common measure in places where there was no means of weighing. at a public meeting in san francisco, september , , it was resolved by unanimous vote that $ per ounce was a fair price for placer gold. this rate was at once adopted in all business transactions. by and by private coiners of gold came into the field. the legislature was at first alarmed by the appearance of these unaccustomed pieces, and passed a law to prohibit circulation and to close the shops where they were made. it was soon found, however, that they were a great convenience. then the law was repealed. several establishments immediately went to work assaying and coining gold. one of these was at salt lake city, whose productions were known as mormon coins. only one of these establishments, that of moffat & co., of san francisco, conformed exactly to the government standard of weight and fineness. all the others, however, including the mormon ones, circulated freely, and were received on deposit by the banking houses until the government set up an assay office and began to stamp octagonal pieces of $ , called 'slugs,' and afterwards those of $ each. this was done in ; the san francisco mint was not ready till . the moffat coins continued to circulate after the mint had gone into operation, since everybody had confidence in their goodness. it is estimated that $ , , of private coins were struck. they were received in the atlantic cities at their assay value only." the foregoing illustrations drawn from our own history serve to explain the nature of money and the processes by which mankind learns to distinguish between good money and bad. mr. farmer: in all that has been said there is nothing stranger nor more interesting than what is going on today. uap is one of the most interesting of the south sea islands. it is the western outpost of the carolines, which were purchased by germany from spain for $ , , at the close of the spanish-american war. the form of money used by the people and the perfection of the system of currency is as interesting as anything in the history of the human race. the small change consists of pieces of pearl shell and small round stones. large sums are represented by fei. these are big circular stones in the form of wheels ranging in diameter from one to twelve feet. in the centre of each is a hole through which a pole is thrust to facilitate carriage from one spot to another. these coins are not minted on the island, nor has any addition been made to the supply of them for a number of years. they were originally fashioned in the pelao islands, and brought thence to uap in canoes over a stretch of four hundred miles of ocean. a very large fei could not be changed into smaller coin without seriously disturbing the currency of the island. the owner of one of these twelve-foot masses of wealth is a sort of j.p. morgan. like the man with the million dollar bill in mark twain's story, he does not need to break his money in order to pay for anything he may buy, but readily secures all that he desires on credit. it speaks volumes for the honesty of the islanders that all this stone money is left out of doors standing against the sides of the huts. the annals of uap do not contain a single record of the theft of a fei, but perhaps the difficulty of disposing of such unwieldy cash may be a potent factor in the matter. not only is the ownership of a large fei equivalent to the command of an unlimited amount of currency, but abstract possession seems to entail the same advantage. many years ago a canoe carrying one of these large stones was sunk a few miles off the island. although the fei went to the bottom of the ocean and has lain there ever since, the man to whom it was consigned enjoyed all the advantages that would have accrued from its delivery to him. during his lifetime he was accredited one of the wealthiest men of uap. not only that, but he bequeathed his interest in the submerged fei to his son, and it has been passed on in like manner through four or five generations, securing all the advantages of substantial wealth to each. mr. lawyer: metal of some kind has been used as far back as the records of time go, and strange as it may seem, gold was the first metal to be used as well as the first to be discovered, as a standard of value, or measure of value. iron was used in sparta, spikes in central africa, nails in scotland, lead in burmah, copper, tin and silver in rome. silver and gold were used in china a thousand years ago. in her palmy days gold bracelets and rings were weighed out in egypt, measuring value. for the past two hundred years there has been a distinct evolution of the world's present standard of value going on, sometimes it has been gold, sometimes it has been silver, sometimes nations have tried to have both. during the last hundred years the struggle to use both has gone on persistently until within the last twenty-five or thirty years. william a. shaw states that in france during a period of one hundred years, the ratio between gold and silver had been changed one hundred and fifty times. the controversy of this period has well been called the "battle of the standards." a constantly increasing trade between the nations of the earth has made a common standard of value more and more important, while the ever-increasing refinement in the exchange of commodities among the peoples of the earth has made a single standard absolutely essential. experience has wrought the change, and now the entire commercial world has gold as its standard of value. it is interesting to observe how gold because of its peculiar fitness, as compared with any other commodity, was finally selected and adopted as the world's standard of value. if we were to study for months for the purpose of ascertaining what the characteristics of the world's standard of value should be, we would define the characteristics of gold as particularly distinguished from any other metal or thing. _first_: gold has by far a greater stability of value than any other substance. it is very doubtful whether there is a perceptible change, at least any such change of value, as could be agreed upon. it is so small. _second_: gold has portability, or the facility of transportation from one part of the country to the other, or from one nation to the other, that makes it desirable as compared with any other metal, that is to be thought of for a standard of value. for example, the same value in silver weighs thirty times as much. _third_: the divisibility of gold at the mint into convenient pieces for trade and commerce is all that can be desired. _fourth_: it has, practically speaking, perfect durability. it will not corrode, or waste away, except by wear, and waste by wear is now largely obviated by the use of some representative, such as our gold certificate. _fifth_: gold possesses homogeneity or perfect uniformity of structure and material. _sixth_: gold possesses cognizability, or can be readily known or recognized. it was undoubtedly all these inherent qualities, these prerequisites that led to those legislative enactments which have during the last hundred years singled out this yellow metal as the most fit arbiter of the world's trade. the first legislative act that seemed to lead to this ultimate decision of the world was passed by the house of commons in , but not until was the law passed that definitely settled the question of the standard of value for great britain. the very same law passed in that year, now nearly one hundred years ago, remains in force to this day. in , the united states followed great britain in an attempt to establish the gold standard. we reduced the weight of our silver coins, smaller than one dollar, and made them legal tender for only five dollars in amount. the silver dollar was not considered in this legislation of , and not until february , , did the gold dollar become the unit of value, when the gold standard was unequivocally established. the silver dollar was at that time worth about two cents more than a gold dollar, and therefore it was omitted from the coinage. this was the famous crime of ' , about which the men now wearing gray hair, or no hair, heard so much in the ' 's and early ' 's. yes, we were hearing this as late as , when it was the battle cry of the presidential campaign. it may be stated that practically the whole civilized world, with the single exception of great britain, has come to the single gold standard, since . the only country now remaining upon the silver basis, or that has not taken steps to place itself upon a gold basis, is, according to the report of the director of the mint, the central american states, which are of comparatively no commercial importance whatever. mr. merchant: how much gold is there in the world today? mr. lawyer: it was estimated in that the amount of gold accumulated was approximately $ , , , (four thousand million dollars). the amount of gold produced during the last twenty-two years, or since , by all the countries of the world approximates $ , , , (six thousand five hundred million dollars). of course a deduction, or allowance, must be made for what has been used outside of monetary purposes, or in industrial consumption, approximately $ , , , (one thousand five hundred million dollars). a deduction should also be made for what has been absorbed by india, about $ , , (seven hundred million dollars), and also by egypt, about $ , , (two hundred million dollars), or nearly $ , , , (one thousand million dollars), by these two countries. the director of the mint in his report, page , says: "in statistics of the precious metals india is the most important country of asia, and has long been one of the most important in the world. the government of india has advised this bureau that the uncoined gold imported into that country might be considered to be used for ornaments and in manufactures. this amounted in to $ , , . "the movement to india deserves to be treated in a class by itself. a large part of the gold and silver that goes there sinks out of sight, and whether it is made into ornaments or buried in the ground, is withdrawn at least in large part from the monetary stock of the world. some of it may be brought out in periods of emergency, such as times of famine, and reconverted into money, but in the past a steady stream of the precious metals has moved into india and disappeared as a factor in the commercial world. sir james wilson, k.c.s.i., for many years in the government service in india, in a comprehensive address delivered before the east india association of london, on june , , reported the net imports of gold by india since at about $ , , , , or one-tenth of the world's production in that time. "it may be questioned whether the economists who are expressing fears as to the effects that may result from the production of gold at the present rate are aware of the amount of that metal taken by india since the gold standard was definitely established, and the government began to pay out sovereigns freely. that occurred in . for the ten-year period, - , the net imports plus the country's own production were $ , , ; for the eleven years, - , they aggregated $ , , . for the british fiscal years ended march , , they amounted to $ , , , or about one-quarter of the world's production after the industrial consumption was provided for. "_if this ability on the part of india to take and pay for gold proves to be permanent, it is apparent that there will be no over supply to trouble the rest of the world._" the finance department of the government of india, in its report for the fiscal year ended march , , commenting upon these figures, says: "'the gold figures are striking, but it is equally remarkable that the increase in gold has not been at the expense of silver; the country, in other words, continues to take practically the same amount of silver, but it prefers that the addition to the imports of treasure which it has been able to claim should be in the form of gold.'" sir james wilson, in the address alluded to, sums up his explanation by saying: "'as for india, her prosperity is steadily advancing. great numbers of her people prefer to spend their savings on gold rather than on other commodities. the probability is that altogether apart from questions of currency india will continue to absorb gold in ever increasing quantities.' "the egyptian situation is somewhat like that of india. the country is on a gold basis, and for thirty years has been steadily taking gold in the settlement of its trade balances. the high price of cotton in recent years, and the increasing production of the country explains the trade balances, but there is some mystery about the way the gold disappears from view. it does not enter into bank stocks, and it is difficult to understand how a country of its size and population, and in which the masses of the people are so poor, can absorb so much gold coin. in the first period under review the customs records show net imports by $ , , , and in the second period, $ , , . for the year they were $ , , . "some light is shed upon the situation by the following statement in an address by lord cromer, made in london, in : "'a little while ago i heard of an egyptian gentleman who died leaving a fortune of £ , [$ , ], the whole of which was in gold coin in his cellars. then, again, i heard of a substantial yeoman who bought property for £ , ($ , ). half an hour after the contract was signed he appeared with a train of donkeys bearing on their backs the money, which had been buried in his garden. i hear that on the occasion of a fire in a provincial town no less than £ , ($ , ) was found hidden in earthen pots. i could multiply instances of this sort. there can be no doubt that the practice of hoarding is carried on to an excessive degree.'" in round figures the approximate amount of gold remaining for commercial or banking purposes is approximately $ , , , (four thousand million dollars), in addition to what we had in , making a total of $ , , , (eight thousand million dollars). of this total amount the united states has $ , , , (one thousand eight hundred million dollars), or nearly one-quarter of the monetary gold supply of the world. however, if we had our proper proportion of the world's monetary gold, considered from the standpoint of our bank resources, we should have upwards of $ , , , (three thousand million dollars). mr. banker: how do you make that out? mr. lawyer: the banking resources of the entire world are now about $ , , , , while those of the united states are about $ , , , , or two-fifths of the bank resources of the world, and therefore we are entitled to two-fifths of the eight billion of monetary gold of the world. this would give us $ , , , . while, as i have just said, it is true that there have been no discoveries of new fields since , with the exception of the klondike, a most important event occurred in the discovery of the cyanide process, which was, with the circumstances attending it, well described by the mining world and engineering record of london, which said: "the discovery of the cyanide process must be regarded as one of the greatest achievements of modern time. and there can be no doubt that cyaniding will be held by the coming generation for its importance, not so much to the mineral industries directly, as for its bearing upon world economies in rendering possibly a greatly increased output of gold and silver year after year. in a comparatively brief twenty-year interval since , when messrs. mcarthur and forrest brought the modern perfected cyanide process prominently before the mining world, the output of gold has amounted to , , fine ounces. this is a most astonishing showing, especially when compared with a total output of , , fine ounces for the entire years previous from to , a period lacking just three years of being four centuries. "for the great expansion in the world's output, particularly noticeable in the past fifteen years, the spread of the cyanide process is directly responsible. nor, if we except the klondike, has this record production been boomed by the development of new fields. the cream of the world's gold fields had already been skimmed in previous years in california, australia, south africa, siberia, india, and elsewhere. it is mainly on the cast-off leavings of the old field that the cyanide process has achieved a record production of the yellow metal. and among those leavings, we must not forget the innumerable low-grade properties whose exploitation has been rendered fundamentally possible only by the cyanide process. it is these latter which now furnish the bulk of the world's supply of gold, and upon which the world must depend very largely for its future requirements." mr. banker: those figures are startling. we must be getting more gold than we need for banking purposes. mr. lawyer: on the contrary, our banking resources are increasing faster than our gold supply. in the banking resources of the world were estimated at $ , , , , less than one-third of what they are today. that is, the banking resources have trebled since , and the gold supply for reserve or monetary purposes has only doubled. mr. banker: what about the gold supply for the future? mr. lawyer: the production during the past four years has been about stationary, averaging $ , , each year. you must remember there have been no gold discoveries of any consequence during the past ten years, and it is very probable that the production will remain almost stationary for a few years to come. at present it looks as though the gold supply, and the demand for gold for monetary purposes, would run along about equal. of course the more intimate the business relations of the nations of the earth become, the more efficient will the reserve of gold become, because the reserves of the world will become more and more mobilized, and therefore more efficient in the conduct of the world's business. mr. merchant: from what you have said, and as a result of my own study, i am convinced that the adoption of the gold standard was a natural selection. it was the survival of the fittest. thousands of books have been written upon this subject, and libraries literally filled with them. in , when the presidential campaign was fought out on this question, my investigation led me into an extended historical review of the use of metals as money. i found that it had been in use by the babylonians, the egyptians, the greeks, the romans, the chinese, the europeans during the middle ages, and that the struggle between gold and silver during the last two hundred years had resulted to the advantage of the people, to the commerce of every nation and to the whole world. this last struggle was not whether gold or silver should be the standard of value, but whether both should or could be used as the standard of value. that is, could we have a double standard. the decision has been unequivocal and universally in favor of a single standard of value, and that standard gold. but the double or bi-metallic standard had been a troublesome question long before that. professor ridgeway says that from the first to the last the greek communities were engaged in an endless quest after bi-metallism * * *, but while the gold unit never varies in any part of hellas, until a late epoch, the silver coins exhibit differences not merely between one district and another, but even between one period and another in the same city or state. there is incontrovertible evidence to prove that the same trouble was caused by the fluctuation in the relative value of gold and silver, as arises in modern times. delmar also states that gold greek coins remained constant while the silver ones varied, and had to be adjusted. at present, it may be stated as a general truth, that all other things throughout the commercial world are now measured by gold, or very soon will be, as all the commercial nations of the earth, with a single exception, have taken steps looking to the adoption of the gold standard. the gold standard is the evolution of the ages. second night what is money? uncle sam: at our talk last wednesday evening we all agreed upon two facts, and these were fundamental to the consideration of a financial and banking system for me. the first fact was this: that gold is the standard of value all the world over, as well as our standard. the second fact: that a standard of value was something by which the value of all other things is measured. it must necessarily follow then, and be perfectly clear to all of us that everything we produce, and everything that we buy and sell is measured by gold. in other words _that gold is our money and that our money is gold_. mr. lawyer: uncle sam, you say "gold is our money." now, it seems to me as though there must be something done to gold to make it money, even though all our money is gold. mr. banker: yes, something is done to gold to make it money, and to circulate it as money. just three things are done to gold to make it possible to circulate it as money. _first_, we have established a degree of fineness. the gold coin we circulate as money is nine-tenths pure gold, or nine-tenths fine, and one-tenth of cheaper metal. this is added to give it an increased hardness so that the loss by rubbing the gold against other things will not be so great. this loss is called the abrasion of gold. _second_, we have established a unit of value in gold which is one dollar, composed of twenty-five and eight-tenths grains of gold, nine-tenths pure, or fine. _third_, uncle sam here cuts up the gold into pieces as follows: he makes a two dollar and a half piece, which contains two and a half times as much gold as our unit of value and stamps each piece two and a half dollars. it is known as a quarter eagle, being one-quarter of the ten dollar piece which is called the eagle. he makes a five dollar piece which contains five times as much gold as our unit of value and stamps each piece five dollars. it is also known as a half eagle. he makes a piece which contains ten times as much gold as our unit of value and he stamps it ten dollars. it is also known as the eagle. he makes a piece which contains twenty times as much gold as our unit of value and stamps it twenty dollars. it is also known as the double eagle. this is called making coins, or coining money. these four gold coins constitute all the money there is in the united states, for uncle sam does not make pieces containing twenty-five and eight-tenths grains of gold, nine-tenths pure, or fine any more, and stamp them one dollar because this piece of gold was so small as to be inconvenient, indeed an actual nuisance. uncle sam stopped making these coins in . uncle sam: that is right, and i don't make any more gold pieces now containing fifty times as much gold as my unit of value for the same reason that i don't make any of the dollar pieces. a fifty dollar piece was found to be inconvenient and in a way an actual nuisance. mr. laboringman: well, uncle sam, i would like to have a few of such nuisances, and if any of you fellows have any of these two nuisances, even the one dollar pieces about your persons, i wish you would allow me to relieve you of all you have of either kind. when it comes to getting rid of that kind of a nuisance, you don't seem to be in a hurry about it. however, just remember that i stand ready at all times to remove a nuisance of that kind, if it happens to be bothering any of you. mr. merchant: we will remember that and give you the first chance. mr. laboringman: well, you might as well forget it, for i'll never get the chance. mr. manufacturer: mr. banker, did i understand you to say that the four gold coins you have mentioned, the two and a half, the five dollar, ten dollar and twenty dollar gold pieces constitute all the money that there is in the united states? mr. banker: that is precisely what i said, and i stand ready to prove it. yes, to demonstrate it absolutely, and if i don't convince everyone of you that i am right, i'll eat all the other stuff you call money that you can bring me. mr. lawyer: here is a gold certificate, isn't that money? mr. banker: mr. lawyer, please hand me that certificate. here is what it says on its face: "_this certifies that there have been deposited in the treasury of the united states of america ten dollars in gold coin payable to the bearer on demand_." it is perfectly evident, mr. lawyer, that this is nothing but a warehouse receipt for ten dollars, stored in washington subject to the demand of the holder. there is just the same difference between that and the gold coin as there is between a trunk and a trunk check. you would not hold up a trunk check, and tell me that it was a trunk. this certificate is no more money than a trunk check is a trunk. mr. lawyer: you are right, mr. banker. there is nothing so absolutely essential in our talk, as illustrated by this incident, as the use of correct, exact language. and i am very glad that you have impressed this fact so indelibly upon our minds at the outset. mr. farmer: did you say, mr. banker, that all the money there was in the united states were the gold coins? then you said that if you didn't convince the rest of us that that was the fact, you would eat all the other stuff that we call money that we would bring you. now, it seems to me as though that was just one of your smooth, slick tricks of getting what we have got in our pockets, as usual. how does that strike the rest of you boys? now, i have a few silver slugs here, mr. banker, that will keep you busy chewing until you pass over, if you try that game on us. mr. banker: that is all right, mr. farmer, but you wait until you hear me out. now, let us agree upon one fact, and that is this, that uncle sam over there is not making or coining any other pieces of gold than the four pieces i have just described, and that none of the one dollar or fifty dollar pieces are now in circulation. do you all agree that that is a fair assumption under the circumstances? uncle sam: yes, that is a perfectly fair assumption that all of the gold now in circulation consists of the four pieces i am now making, the two and a half, five, ten and twenty dollar pieces. but, if they constitute all the money i have in circulation, i am mightily fooled, and it is high time i was put right. mr. banker: well, that is what i am going to do. i am going to put you right, for you have not only been fooled yourself, but you've been fooling the people long enough as well. three hundred and fifty years b.c., one of the greatest philosophers, and one of the wisest men that ever lived, described the development and evolution of money, and defined what money was better than any man ever has since, i think. that man was aristotle. aristotle's account of the origin and definition of money was as follows: "it is plain that in the first society (that is in the household) there was no such thing as barter, but that it took place when the community became enlarged: for the former had all things in common, while the latter, being separated, must exchange with each other according to their needs, just as many barbarous tribes now subsist by barter; for these merely exchange one useful thing for another, as, for example, giving and receiving wine for grain and other things in like manner. this kind of trading is not contrary to nature, nor does it resemble a gainful occupation, being merely the complement of one's natural independence. from this, nevertheless, it came about logically that as the machinery for bringing in what was wanted, and of sending out a surplus was inconvenient, the use of money was devised as a matter of necessity. for not all the necessaries of life are easy of carriage; wherefore, to effect their exchanges, men contrived something to give and take among themselves, which being valuable in itself, had the advantage of being easily passed from hand to hand for the needs of life--such as iron, or silver, or something else of that kind, of which they first determined merely the size and weight, but eventually put a stamp on it in order to save the trouble of weighing, for the stamp was placed there as _the sign of its value_." wilbur aldrich says: "gold, and no other thing, sustains all the functions of money. gold is money as soon as it is taken from the earth, without smelting, without refining, without minting and without limitation." horace white says: "nobody would give that which has cost him labor in exchange for something which he could obtain without labor." mr. merchant: mr. banker, you quoted a man there, mr. aldrich, i think it was, who said that gold alone possessed all the functions of money. just what do you mean by the "functions of money"? mr. banker: i am glad that you asked that very question, because those functions have determined the place of gold in the world's business, and made it the standard of value of the world, and consequently the money of the world. those functions are these: _first_: gold is a measure of value; that is, all other things are measured in gold. _second_: gold is divided into units, such as our dollar, the english sovereign, the french franc, the german mark, and so determines prices. _third_: gold is a medium of exchange. _fourth_: gold is a storehouse of value; that is, the people of the world hold it as an absolutely safe form of property, varying less in value than anything else they can possess. _fifth_: it is such a permanent form of value that it is made the basis or standard of future or deferred payments: not only at the end of a year, but at the end of twenty-five or fifty years. mr. merchant: i would like to ask you whether you think there is anything in this claim that gold is cheaper today than twenty years ago? whether it is falling in value, and as a consequence prices of everything else, which must be compared with gold, are rising? mr. banker: no, sir, i do not think that the increased output of gold is the cause of higher prices. the increased prices can be more than accounted for in other ways. think of it. there are: . the trusts, . the middleman, . advertising, . unscientific management, . overcapitalization, . monopoly! monopoly! . extravagance, . militarism, . exhaustion of soil, . high rates of interest on agricultural loans, . unnecessary disease, . concentration of population in cities, . shorter hours by one-quarter, . increased wages by one-quarter at least; in some instances, %, . shorter hours for women, . child labor laws, . minimum wage laws, . workmen's compensation acts, . insurance against unemployment, . old age pensions. mr. laboringman: well, i don't know what you fellows think, but i am for everyone of these forward movements that make for a better humanity, morally, intellectually and physically; and i'm utterly opposed to the unfair advantages that any man, or corporation, has over any other man, or any other corporation. a just government rules its people through just laws, and guarantees equal opportunities under the operation of those laws. mr. banker: so i think we all are, or will be, very soon. every lover of his country, everyone who recognizes that the government exists for man--manhood and womanhood--must be for these purposes, but all these things will require a readjustment, and will take time. i am only saying that these things more than account for all your high prices, but let me finish. . during the past ten years, , , of our people have shifted, or gone, from the country to the cities. food producers have decreased, and food consumers have increased by , , . our population has increased % and our food products only % since . . the hundreds of millions that have gone into automobiles, not one dollar in a thousand of which produces anything but a good time, or a joy ride, is a burden on production, and has been affecting prices, because they are nothing but luxuries. . then there are all the other conveniences of life, such as telephones, electric light, etc. again, gentlemen, let us note where the gold has gone to during the last ten years, the period of increase in price. germany got only $ , , , although her business has expanded enormously. england took only $ , , , while france took $ , , , russia $ , , , and we absorbed $ , , , . during the same time india took $ , , . will anyone say that the prices in these various countries have in any way shown or reflected the amount of gold taken or absorbed? let some one come forward and prove that gold has become cheaper by pointing out that prices in the various countries indicate its effects upon commodities. lastly, let them explain the fact that while the banking resources of the world have increased from $ , , , to over $ , , , , or increased three and one-half times, the gold for monetary purposes has only doubled, or increased from $ , , , to $ , , , . mr. merchant: i am more than satisfied and pleased that i asked you that question, for i knew it would be constantly bobbing up and bothering us, as we went along. when i interrupted you, you were speaking of gold and its functions as money. mr. banker: yes, and i assert that no other substance or thing possesses these functions, qualifications or characteristics, at least in no such degree as gold. does anyone here deny that? mr. lawyer: i think we must all agree to that, and further i would say that anything that did not possess all these functions, qualifications or characteristics in combination cannot very well be called money. to illustrate, if anything was used as a medium of exchange but depended upon its relation to gold for its acceptance it could not be called money. i am fully aware that we speak of "cash" and "money," as anything we get in exchange for property, but this language does not mean anything definite, except as to the transaction. i want to lay this down as an absolute rule, and something that no one of us should forget or overlook during our conversations. "_we should be careful to avoid calling any kind of credit instrument money, no matter how much used as a medium of exchange._" let me read that again. uncle sam: now, let me see just what you mean by that. if i understand you, i think that is an attack upon me, upon my credit. for if my recollection serves me right, the united states notes, or greenbacks, have been called money, and treated as money ever since i issued them during the war, way back in , i think it was. mr. banker: well, uncle sam, do you think calling a thing something which it is not makes it that thing? to say that the moon is made of green cheese does not make it so. now, here's one of your united states notes, or greenbacks. do you recollect what you printed on that at the time you issued it, and have been printing on it ever since? this is what it says: "_the united states will pay the bearer $ . ._" that promise, or agreement, can mean but one thing, and that is that you will pay the bearer five times one dollar, or five times twenty-five and eight-tenths grains of gold, nine-tenths fine. now, it must be perfectly clear to you, indeed, the conclusion is incontrovertible, that that $ . united states note, by which you agree to pay me $ . cash, can't be the $ . itself. mr. farmer: no, by jocks, i know that is true. tom jones gave me a written agreement to deliver me a horse last monday morning. i sent my boy over with his written promise for the horse, and he refused to deliver the horse. certainly, his promise was not the horse; that's perfectly clear to me, for i did not get the horse, and that's the same kind of a deal that this united states note is. mr. laboringman: yes, but uncle sam is no such flunker as that. mr. banker: well, he flunked from until , for about seventeen years, and he came within an ace of flunking again in . he is liable to flunk any time it suits him, if he should get into a tight place. uncle sam: that's so, and the misfortune and the shame of it is, that i am left in a position where i am compelled to flunk. mr. banker: i agree with you, but that only adds additional proof that this $ . bill, which is your promissory note, your i.o.u., or old due bill, given for boots, mules and ammunition during the war, is not money at all, but a mere promise to pay money. as you have just said, it is most unfortunate that you have been left in this position by your boys who have been going to congress for the past fifty years, apparently without the intelligence, or courage, to relieve you of this disgraceful situation. uncle sam: well, if these united states notes are nothing but my promissory notes, or due bills, agreeing to pay money, it is self-evident that they are not money. you have completely satisfied me on that point. mr. banker, how much of that kind of stuff have i got out? mr. banker: $ , , . uncle sam: great scott, i presume if i should get into trouble with some first-class nation, and have to go to war for a few years, and the people began to wonder whether i was going to pull through and pay my debts, that is to doubt my ability to stand the bill, and all that $ , , , then that $ . united states note would not pass for $ . . mr. banker: precisely so; that very note passed for only $ . at one time in , or only cents on the dollar. uncle sam: well, i wish congress would get busy and pay these things off, so that i would be prepared for business, if anything should turn up compelling me to fight. mr. manufacturer: from what you have said, mr. banker, and what uncle sam admits, i guess we all agree that the united states notes, or greenbacks, are not money at all, but just ordinary debts, or demands for money, and therefore cannot themselves be money, of course. but what have you to say about this national bank note here? how does this differ from the united states notes or greenbacks? don't you admit that this is some sort or kind of money? mr. banker: i do not. it is no more money than the united states note. just read what it says: mr. manufacturer: i will. this is what it says: "_the first national bank of new york will pay the bearer $ . ._" mr. banker: don't you see that that bill is a mere i.o.u. of the bank, nothing but a promise to pay five times twenty-five and eight-tenths grains of gold, nine-tenths fine, to the bearer? it does not differ in the slightest degree from the united states note except that one is the promise of the first national bank of new york, and the other the promise of uncle sam to pay $ . . you can no more say that a promise of a bank to pay money is money than you can say that a promise of uncle sam to pay money is money. both are debts, and both are demands for money, and therefore neither can be money. mr. farmer: gentlemen, while i must admit that mr. banker has completely, yes, absolutely, gotten away with the united states notes and national bank notes and convinced us that they are not money at all, just watch me choke him with this silver slug, weighing - / grains, and bearing two invincible superscriptions. _first_: "in god we trust." _second_: "united states of america, one dollar." mr. banker, what have you to say about our silver dollar? do you mean to tell me it is not money? that's what i want to know. think of it, this dollar of our daddies not money. mr. banker: well, mr. farmer, if you'll follow me for half a minute, i will only have to ask you whether you yourself think it is money; and i will abide by your own decision. but, what i would rather do is to put it to a vote of the crowd, and if it is not unanimous i'll give it up. here is a cent piece, bearing one of your invincible superscriptions, "united states of america, one cent." we have more to trust god for in one of these cents than we have in your silver dollar, and therefore it was a grave oversight when uncle sam left off the other invincible superscription, "in god we trust," since this piece of bronze is worth only about one-thousandth part of a one-hundredth part of our gold dollar, or . . here is one of our nickels, bearing the same invincible superscription, "united states of america, v cents," which is worth about two-thousandths of one-hundredth part of a gold dollar, or . . here is a cent piece, worth about cents, or . , and here is a cent piece, worth about cents, or . . here is a cent piece, worth about cents, or . . here is the sacred dollar of our daddies, worth about cents, or . . now, all these pieces of metal belong to the same class of coin from the cent to the dollar included, and are merely token coins. mr. merchant: well, what is a token coin? mr. banker: a token coin is a piece of metal bearing the stamp of the government, and passing at its face value, though the metal it contains is worth less than its face value. this definition covers every piece of metal coin uncle sam makes except our gold coins, which are worth just as much and no more in the form of coin than they are in the form of metal, or gold bars. now, mr. farmer, i want you to understand that the silver dollar is included in these token coins. mr. manufacturer: well, please tell me why do people take these pieces of money at their face value, when they are worth so much less than they pretend to be? mr. banker: for the very simple reason that uncle sam over there redeems all the coins, smaller than one dollar, when presented to him in sums of five dollars or more, and because it is made the duty of his secretary of the treasury to maintain the face value of our silver dollar with our gold dollar by exchanging gold dollars for silver dollars, if anyone asks him to do so. if the government should pass a law refusing to redeem our silver dollars with gold dollars, our silver dollar would then pass for just what the silver it contains would be worth from day to day. it is now worth cents. in it was worth cents. in other words, our silver dollar is not its own redeemer at cents any more than the united states notes or the national bank notes are their own redeemers. a silver dollar is a demand or a check calling for a gold dollar. the silver dollar, the united states note, the national bank note all pass at their face value because they are convertible into gold, and are temporarily redeemed by uncle sam in gold, while gold is its own redeemer, and a ten dollar gold piece, or any other gold coin, is worth just as much, if hammered into a spike, or melted into a slug, as when it bears the stamp of uncle sam, certifying its quality and its quantity. mr. lawyer: mr. banker, what are subsidiary coins? mr. banker: all these token coins are properly called subsidiary coins. let me read to you what horace white says on that point: "the word 'subsidiary' is usually applied to coins which constitute the small change of a country, and which are legal tender only for limited amounts. in the united states the silver dollar must be classed as subsidiary also; for, although it is full legal tender, the government does not coin it for private individuals as it coins gold. it is subsidiary or subordinate to gold coin." mr. laboringman: uncle sam, why do you make these token or subsidiary coins? uncle sam: i make token or subsidiary coins out of silver, nickel, and copper just as a matter of convenience to the people, and as a result of custom also. mr. lawyer: i think what horace white says upon that point is particularly good, and answers your question, mr. laboringman, completely. white says: "if subsidiary silver coins circulate at a value which is largely imaginary, the question may be asked, why not make them of some other metal, or even of paper? there are no reasons except custom and convenience. a coin, not heavier than a half dollar, is more convenient than a piece of paper; it is cleaner, and in the long run is probably cheaper, as it does not require frequent renewal. a cheaper coin might be made out of some other metal, but it is generally best to conform to the habits of the people. having been always accustomed to a silver subsidiary coinage no good reason is apparent why we should depart from it." mr. merchant: of course, you must use something besides gold to make the , , and cent pieces out of, because even a gold dollar would be found to be impracticable on account of its size. it would take a microscope to find a piece of gold worth only cents. mr. laboringman: and it would take a telescope to find a piece of gold worth only cent. mr. banker: mr. white has this to say also about the silver dollar: "the silver dollar is a larger kind of subsidiary coin, and should be treated by the government exactly as the smaller ones are treated. the government has received the value of a gold dollar for every silver one emitted, and is therefore bound in equity to redeem the dollars as it redeems the halves, quarters and dimes.... there are additional reasons, however, for direct redemption of the silver dollar. one is that such coins are unlimited legal tender between individuals. another is that there is a certain amount of public apprehension and lack of confidence touching any coin which passes for more than its metallic value." "mcleod says that in in a posthumous work sir william petty pointed out that one metal only should be adopted as the standard unit, and other metals should be issued as subsidiary to the standard unit. the same doctrine was advocated with great force and at great length by locke in , and also by harris in the middle of the last century, and was finally embodied in the great masterpiece of the subject 'lord liverpool's coins of the realm,' published in ." now, gentlemen, it must be apparent to everyone that a silver dollar is only another form of a debt of uncle sam over there, and that unless he continues to stand ready to exchange gold dollars for silver dollars, and so keep the silver dollars in circulation at cents, they would circulate at their metal or bullion value, or at about cents. mr. farmer, do you think that stamping one dollar upon that silver coin, added one-hundredth part of a cent to it, or affected its value in the slightest degree? are you not convinced that it is not money at all, but a mere debt of uncle sam and that it is a mere demand for one dollar in gold, and nothing more? mr. farmer: i am bound to admit that you have surprised me, indeed paralyzed me, for i thought the silver dollar was money, but it is certainly exactly the same sort of thing that the greenback and the national bank note is, and if they are not money, neither is the silver dollar money. mr. merchant: i am sure we all agree on that point now, but what about this silver certificate? do you pretend, mr. banker, that all our silver certificates are not money either? mr. banker: that is just what i assert, but i claim still more than that with regard to the silver certificate; for, if you will read it, you will find that it is only a warehouse receipt for silver dollars, which have been deposited in the united states treasury; and therefore is not a promise to pay anything, but simply to deliver so many silver dollars, which, as i have just demonstrated, must be redeemed in gold to keep them going for cents on the dollar. mr. lawyer: i am going to ask one question in this connection, and that is this. the united states notes are a legal tender for everything except to pay taxes on goods coming into the country and interest on the debt and silver dollars are a legal tender, unless the contract is made payable in something else. does not the fact that the united states note and the silver dollar are legal tender, make them money? mr. laboringman: what's legal tender? mr. lawyer: anything which can be lawfully used in payment of a debt, or which creditors are compelled to accept, is called legal tender currency. mr. banker: the fact that the united states note and silver dollar are legal tender does not change the real character of either of them. don't you know that the very fact that you are compelled, or think you are compelled, to make anything legal tender, to make it go for something it is not, lowers its value and depreciates that very thing? the price of the united states notes or greenbacks from the day they were issued, until january , , the date uncle sam redeemed his promise to pay gold for them, was simply a quotation of the government credit. this credit ranged from $ . to cents. white says: "the difference between these extreme quotations may be taken to represent changes in the public credit, or various vicissitudes and states of mind, dependent upon the war." again he says: "in congress attempted to check the depreciation of the currency by closing the gold exchange, and prohibiting sales of gold or foreign exchange for future delivery. the premium on gold advanced more rapidly after the passage of this act than before, and congress repealed it two weeks later." mr. laboringman: now, men, let me see if i understand what this is all about. if i have caught on to just what you have been saying about gold, which is all the money we have, and all these promises to pay money, these united states notes, bank notes and silver dollars, the difference between gold coins and these promises is the same as the difference between a meal and a meal ticket. and when you come to the silver certificate that is only an order for a meal ticket. uncle sam: by jove, he's hit the thing plump and square on the head, hasn't he, boys? but what i want to know now is how many of these meal tickets i've got out in one form or another? and, mr. banker, i want to know another thing. i want to know how many cans of pork and beans i have on hand to meet the meal tickets with? mr. banker: well, uncle sam, as i look at it you have , , , meal tickets out, and only , , cans of pork and beans to meet the demand for meals. uncle sam: great scott, what unbounded confidence the people must have in me not to shove those meal tickets in, before i get ready to supply the meals. what is worrying me is this, if anything should happen to cause any suspicion on that score, the jig would be up with me, and i can see the end of my credit; but of course that wouldn't be my finish. now, what i want done is this: i want to shift these meal tickets over to the banks where they belong, or make full provision for them myself, so that i can stop worrying, and shall be ready for business, if called upon to meet a first-class nation in a protracted war. by the way, mr. banker, just how did you make those meal tickets amount to , , , and that i had on hand only , , cans of pork and beans to meet the meal tickets with? you must remember it takes one can of pork and beans to redeem one meal ticket. mr. banker: uncle sam, you will remember that you have $ , , of united states notes to pay. you have also $ , , silver dollars to redeem, and there are $ , , national bank notes, making a total of $ , , , , all resting on your $ , , of gold in the reserve of your treasury. uncle sam: yes, but i don't have to pay those national bank notes, do i? mr. banker: well, uncle sam, it's this way, you know, you have to pay them out of a % fund created by the bankers, but the bankers can turn right around and ask you to redeem the united states notes which you pay them for the national bank notes, in gold. uncle sam: mr. banker, tell me another thing. if these silver certificates are nothing but warehouse receipts calling for silver dollars, and the silver dollars are nothing but token coins, then all these silver certificates are nothing but token or subsidiary coins in another form. mr. banker: that is literally true. uncle sam: and you say i have $ , , of silver dollars out good for nothing but token or subsidiary coin? mr. banker: precisely so. uncle sam: now, what i want to know is this. how much of this silver is needed today to supply the people with the token or subsidiary coin, up to and including the $ . bills; that is, the $ . bill, the $ . bill, , , and cent pieces? mr. banker: there are in circulation today about $ , , of these various forms of subsidiary or token coins, or about $ . for every man, woman and child in this country. uncle sam: what is the total amount of silver in the country then, of all kinds, silver dollars and pieces of silver less than one dollar? tell me that. mr. banker: there are, as i just said a moment ago, $ , , of silver dollars and $ , , of silver pieces less than one dollar, or a total of $ , , . uncle sam: well, well, you frighten me, for at the rate of four dollars each, the amount necessary for the convenience of the people, i am stacked up ahead for at least fifty years, or until we have about , , of people; for you say we have all told $ , , of silver coins in the country now. i want to tell you gentlemen, right now, that i want to get out of this hole, and i want to keep your mind steadily on that point as we go along. the whole situation is a most embarrassing one. tell me how much gold coin we have scattered about everywhere over the country? mr. banker: there is about $ , , , of gold available in the country. uncle sam: then i am confident there is great plenty for the present, if we can devise some plan, or scheme, to avail ourselves of it. mr. lawyer: i am convinced of that also, but the trouble is going to be to bring it together, centralize it and so mobilize it that we can make the most of it. we have learned one great and most important lesson tonight, and that is that the only money we have is gold, and that we cannot substitute an agreement to pay gold, a debt, a mere demand for gold itself, for it. such a proposal when you think of it is an absurdity, a contradiction of terms. to state the result of our conversation, or our conclusion, as i understand it, it is this: money must be coined out of a commodity that is just as valuable in the form of a commodity as it is in the form of coin. a piece of gold weighing just the same as a $ gold coin, if as pure, is worth just as much as a $ gold piece. last wednesday evening we all agreed that, as the result of our conversation, gold was the standard of value of the entire world, and was our standard of value as well. tonight, as i understand the result of our talk, we all agree that the only money we have in this country is gold coin; that our money is gold coin, and that our gold coin is our money. next wednesday night let us investigate our currency and ask ourselves "what is currency?" before we separate, i want to read to you what webster says currency is, because i want you to be thinking over the matter in the mean time. webster says: "currency is the state or quality of being current; a continual course or passing from person to person or hand to hand; general acceptance; circulation." mr. laboringman: you mean something that everyone takes and is glad to get. mr. lawyer: precisely so; it is that which is in circulation, or is given and taken as having value, or is representing value, as the currency of the country. if we all keep this definition in mind, we shall have very little trouble next wednesday evening in agreeing upon what currency is, and what it ought to be. uncle sam: i want you men to remember one thing, and that is this, that we want no currency in this country that isn't as good as gold, and currently redeemed in gold coin to prove it. nothing will satisfy uncle sam but the best, and don't you forget it. on top of that i want to plant another proposition, and that is this: it's not my business to be exchanging gold for that currency either. compel the banks to do that, for that is their business. but first, we will settle what our currency is, and what it ought to be. good night. third night what is currency? uncle sam: well, boys, when we parted last wednesday night, it was agreed that we should take up for consideration and discussion tonight the question, "what is currency?" and just before we left mr. lawyer read webster's definition of currency. mr. merchant: i am very glad that he did so because it gave me a start, and set me to thinking, and as a result i became very much interested in the subject. mr. banker: i have made the question of currency a study now for several years, and regard it of prime importance in any financial and banking system; but especially so considering the peculiar conditions existing in this country with our vast extent of territory, and the many distinct commercial centers there are here, each specializing in some one kind of production or industry. but more particularly is a right form of currency essential in this country because of the great number of our individual, independent banks now exceeding , . mr. manufacturer: well, mr. banker, it strikes me that you are getting a trifle on to a side line. let us get right down to business, and see if we can make any progress in determining just what currency is, what kind we have and what kind we ought to have, if any change is to be made. to my mind, and i have put all the spare time i had upon the question, that definition when fully understood described currency perfectly, and will help us amazingly in arriving at a clear idea of just what currency is as well as what it is not. let me restate a part of it, which i think covers all of it. "currency is that which is in circulation, or is given and taken as having value, or as representing value." that is, currency may have value in itself, as illustrated by our gold coin, or may only represent value, as illustrated by our gold certificate. again, the definition described another quality, when it said that "currency passes from person to person, or from hand to hand; general acceptance; circulation." to be a piece of currency then, a thing may or may not have actual value, as a gold coin, or as a gold certificate, which can be exchanged for the coin. but the thing must have general acceptance, that is, it must be received by the people generally, as a matter of course, and without hesitation, and without taking anything from it, or adding anything to it, such as a stamp, or a signature. that is, a piece of currency having passed through a thousand hands, remains identically the same thing, except the ordinary wear to which it has been subjected. mr. merchant: mr. banker, taking that explanation as correct, what would you say that our currency consists of? mr. banker: our currency consists of the following things: _first_: gold coin, which is generally accepted, and has actual full value. _second_: gold certificates, which are generally accepted, but have no actual value. _third_: all token, or subsidiary coin, including the silver dollar. _fourth_: silver certificates. _fifth_: united states notes. _sixth_: bond-secured national bank notes. mr. merchant: i read an article recently in which checks and drafts were spoken of as currency. can it be possible that they can properly be called "currency"? mr. banker: certainly not. they come under an entirely different head, and i hope we shall spend an evening considering them very soon. checks and drafts never pass from person to person and from hand to hand and are not of general acceptance. herein lies the mark of distinction. checks and drafts do not pass from person to person and from hand to hand and are always of special acceptance, that is, they are considered before they pass. they are taken according to the strength of the makers, acceptors and endorsers and usually pass only by endorsement. we must make no such mistake because it will lead to a confusion of ideas. mr. merchant: mr. banker, you have just told us of what our currency consisted. gold coin, gold certificates, token coins, silver certificates, united states notes and our bond-secured bank notes. taken altogether i presume you would call that our currency system. do you call it a good system? mr. banker: it is our currency system, but it is without doubt the worst currency system in the world, if you include only respectable commercial nations. mr. merchant: well, mr. banker, what is wrong with it? mr. banker: to tell you what is wrong with our currency system, i would first have to tell you what a right kind of currency system is. and i will proceed to do so in a word. a right kind of currency system consists of three forms of currency only. _first_: gold coin, or the gold certificate. _second_: token, or subsidiary coin. _third_: a credit bank note or bank credit currency. all these forms of currency are absolutely essential to a right currency system, as i shall proceed to demonstrate. _first_: gold coin, or its substitute, the gold certificate, is the very foundation of a right currency system, because there must always be present, or immediately available, a sufficient amount of gold to prove, protect and redeem, if necessary, all other forms of currency. _second_: subsidiary coins are absolutely essential as a matter of convenience to carry on the small trade of the country. _third_: a credit bank note which will always spring into being, precisely as a check does, to perform some special transaction, is the most efficient and most economic form of currency in the world, because it always just equals the demand for currency, and costs no more than a deposit account, subject to check. mr. manufacturer: just what do you mean when you say that a credit bank note currency will cost no more than a deposit account subject to check? mr. banker: i mean just this, that if you had a deposit at a bank of $ , , and the bank upon receiving your check for $ , could convert that book account, or book debt, into a note account, or note debt, by giving you its bank notes for $ , , in exchange for your check, the bank note currency would cost only the interest on the reserve carried against the notes, which would be identical in amount with the reserve carried against the deposit. to illustrate, if the bank were in the country it would carry per cent reserve, if a national bank, or $ in cash against that deposit of $ , . the interest on that $ for one year at per cent would be $ . now, if that deposit were convertible into notes, and you kept the same reserve of per cent against them, the thousand dollars in notes would cost only $ per year, and could and would in turn be reconverted into a deposit, subject to check. not only does this form of currency cost only about one-sixth as much as our present currency in the form of united states notes and bond-secured bank notes, but it is the only form of currency that will always be precisely equal to all the demands of trade. it will never be too great in amount. it will never be too small in amount. it will always just exactly equal the ever varying requirements of business and will always be as good as gold, because currently redeemed in gold. the principle of converting bank book credits into bank note credits, in accordance with the requirements of the customers of a bank, is the bank credit currency principle and there is not a single instance in the history of banking where it has ever been tried and failed. let this be laid down as one of the eternal laws of banking. _current coin redemption is the very soul and breath of life to bank credit._ mr. merchant: that is certainly most interesting and i must say a most impressive fact, if we can secure a currency, equal at all times to the requirements of trade, and always as good as gold coin, and at an expense of one-sixth of what our present currency costs us in the form of united states notes and bond-secured bank notes. there are today outstanding $ , , united states notes and $ , , of bond-secured bank notes, or about $ , , , in all. now, since any bank must pay par, or cents on the dollar, to get possession of either of these forms of currency, the cost of carrying either of them will be per cent on the total of $ , , , , or $ , , per annum. of course if the banks are compelled to use such an expensive form of currency, they will have to charge their customers accordingly, and in the end it comes out of me, mr. manufacturer and so on down the line, until, finally, the cost or burden reaches mr. farmer over there, or mr. laboringman over here. now, you assert that a credit currency would only cost the country one-sixth as much, or only eleven million per year, whereas the same amount of currency in united states notes and bond-secured bank notes now cost us $ , , a year, or $ , , more than it should. of course every cent of that must in the end come out of labor. mr. banker: i said one-sixth for the country bank. the average reserve held by all the national banks is per cent, not per cent. so that the unnecessary cost to the people of our present united states notes and bond-secured bank notes is five times as much as it should be, or we are losing every year $ , , , every dollar of which must come out of labor. mr. merchant: now, let me see whether i understand this matter correctly; to illustrate, let us suppose that your bank needed today $ , more currency than it has on hand to accommodate a customer. you would have to go out and buy it, and pay $ , for it, or obligate your bank to do so. with interest at per cent it would average $ per year to carry it, but if you could exchange your bank's notes, amounting to $ , , for your customer's note of $ , , and carry a reserve against your bank notes outstanding of say per cent or $ , and interest is at per cent, it would cost you only per cent on $ , instead of per cent on $ , ; or you would make a saving of $ on the $ , of currency. am i correct in my understanding of the difference of cost upon these two forms of currency? mr. banker: yes, you are absolutely right. no one could state the principle better than you have. mr. merchant: well, then, it is clear, that if there is a saving of $ a thousand on $ , , , , we are wasting annually on that one item alone $ , , . mr. manufacturer: but, gentlemen, let me call your attention to another fact. this country is losing several times as much as that every year on the average, because of our present rigid form of currency. just as soon as there is any fear anywhere in this great country about a bank of any consequence, or about the business generally in the country, every banker from dan to beersheba begins to grab currency in whatever form he can get it, because he knows the amount is fixed and limited. it is not nearly so much a run on the banks by the depositors, as it is a run by the bankers on each other, just to accumulate cash. everything comes to a dead stop, just as it did in , and it always will under present conditions. now, it seems to be perfectly plain that if the banks could convert their book credits into note credits, they could immediately meet the demand for cash, and so avert these commercial catastrophes, which set us back years. you know we are just now beginning to realize that we are getting over the panic of . gentlemen, instead of the panic of costing us $ , , a year, it costs the people of the united states more than ten times as much as that every year. god only knows what these commercial tragedies mean in the life of a nation like ours, and it is up to us to prevent them, if possible, and it must be possible. it looks to me as though mr. banker was on the right track. uncle sam: well, you fellows have got to show me a thing or two, before we make the proposed changes, because i am from missouri, as well as from forty-seven other unsuspecting states, and don't you forget it. in the first place, i want you to show me why my i.o.u.'s or the united states note, so-called greenbacks, are not a good currency. in the second place, i want you to show me why the present national bank notes, which are secured by my bonds, dollar for dollar, are not the best currency in the world. i have been told this for the last fifty years, and if it is not true, it is about time i waked up. mr. banker: well, uncle sam, they've been fooling you, for both the united states notes and these bond-secured bank notes are the worst form of currency in the world, and i can prove it. uncle sam: well, you will have to prove it, that's all. mr. banker: in the outset, i will tackle the united states note, and incidentally, i will state all the other objections to them, as well as the objections to them as currency. _first_: they are demand obligations against you amounting to $ , , , and you must stand ready at all times to redeem them in gold. this fact always has and always will imperil your credit. it was the same greenbacks that sent your credit down to cents on the dollar during the war, and again they came within an ace of wrecking your credit in when the gold in the treasury went down, down and down, until there was only $ , , left, between you and national dishonor. don't you remember that you then sold $ , , of your bonds to protect your credit which was being sapped by these very same united states notes? pretty expensive business that, when you could have had a currency that the banks of the country, and not you, would have been compelled to redeem in gold whenever necessary. you will no doubt remember that in when you began to keep your promise, and redeem these greenbacks in coin, and make your old due bills as good as gold, you issued $ , , of bonds for a corresponding amount of gold to establish your reserve or guarantee fund, in order that you might keep your promise good in the future. if you add this $ , , to the other $ , , you have issued since to protect your credit against these united states notes, you will find that you have issued altogether $ , , of your bonds, or $ , , more than the total amount of the greenbacks, $ , , , and that you have also obligated yourself to pay interest on these bonds from first to last amounting to $ , , more. now, the astounding fact is that these old due bills, these i.o.u.'s, these united states notes, or so-called greenbacks, are still out and you still owe them, just as you did in , when you began keeping your promise to redeem them in gold. one of your expert clerks in the treasury department at washington, the chief of the loan and currency division, published a calculation in the congressional record of april , , page , that showed that, if the greenbacks had been funded on the st day of january, , into per cent year bonds, and canceled and destroyed, the total cost to the government for principal and interest to july , , would have been $ , , , whereas the total cost and liability actually incurred on account of them has been $ , , , ; the difference in favor of converting into bonds being $ , , . now, don't you think, uncle sam, that as a matter of business you'd better get rid of these demand debts, these united states notes? _second_: don't let this most important fact escape your attention either; that if you should be called upon to use your credit extensively, as would be necessary in case of a great war, these demand notes would be a very black cloud upon your credit, and your loans would cost you vastly more, on account of the interest you would have to pay, because they were still outstanding. i hope that you are not hugging that sweet delusion that war is impossible. _third_: these united states notes, as you are aware, are made legal reserves for the national banks, who hold them against their deposits. now, if your credit goes to pieces, the credit of the banks will go with it of course; because precisely to the extent that the banks hold these debts of yours as reserves, they are driving gold out of the country, and therefore instead of being better able to help you, they will attack your credit by demanding gold from you for these old demand debts. you are also, of course, familiar with gresham's law, so-called, under the operation of which, the poorer money always drives out the better. i assert without any fear whatever of successful contradiction, that if you had paid off these united states notes in , you would not only have saved $ , , by so doing, but that today there would be in the united states in our banks, and in circulation among the people, $ , , more gold than we now have. in other words, instead of our gold amounting to $ , , , , it would now amount to $ , , , . uncle sam: well, you have certainly demonstrated that i have made some very expensive mistakes. let's see just what the net result of this blundering has been. i have lost $ , , on account of the greenbacks and i have lost the great advantage of having $ , , more gold to further strengthen the commercial credit of the country; and yet, i still owe every cent of these due bills and what seems to me equally certain is this: that if i should get into a great war, these very greenbacks will make me more trouble by injuring my credit in the future to a much greater extent than they ever have done at any time in the past. there is no doubt whatever about that. by the eternal, something must be done to get me out of this apparently bottomless pit. but you have not told us yet why these i.o.u.'s of mine, or united states notes, are not fit for currency, as you declare. you know that you sort of hurt my feelings, and for half a minute i was fighting mad, but as i said i am from forty-seven states, besides missouri, and therefore i am ready to be shown. mr. banker: i am coming to their use as currency right now. there are three distinct reasons why the united states notes are a bad form of currency. _first_: any government issue of bills, or of i.o.u.'s such as these are, must be very limited, if they are kept as good as gold. _second_: the united states notes do not spring into existence in connection with business transactions, as the right kind of a currency always does. _third_: it costs those who use it, as currency, five times as much as currency should. it is precisely as mr. manufacturer over there asserted a moment ago. any system of currency that is of necessity limited in amount, and fixed as these united states notes must be from the very nature of the case, breeds panics, because everybody realizing that the amount is limited, begins to scramble for cash upon the first intimation that there is any business trouble brewing. for this reason, they are utterly unfit as a system of currency. again, a right currency system is the natural product of business, and the amount of the currency will always rise and fall with the demands of trade. this can never be the case with the united states notes, and they are on that account utterly unfit for currency. and finally, certainly, if they cost the users of currency five times as much as the right kind of currency would, then we should replace them at once with the right kind of currency. now, let me illustrate and demonstrate this. if, over at my bank, we are compelled to furnish an average of $ , in currency a week, our average expense for the year will undoubtedly be $ , invested for that purpose. and if money is worth per cent interest, it will cost us $ to supply that amount of currency. if we can buy united states notes as cheap as any other kind of currency, and we should carry them in stock, they will cost us $ per annum. now, our bank, being a country bank, we carry per cent of all our deposits to meet current demands. is it not a perfectly simple and self-evident fact that if instead of being compelled to buy this $ , of united states notes every week, and so keep $ , invested all the year around at a cost to us of $ , the interest on $ , , we could convert $ , of our deposit debts into $ , note debts of the bank it would only cost us per cent on $ , , the amount we are carrying as reserve against our deposits of $ , , or only $ . in other words, we would save $ on the transaction. of course, if we have to pay out $ more in the one way than in the other, we will have to get it back from mr. merchant here, mr. manufacturer, mr. lawyer, mr. farmer and mr. laboringman; and if we should collect it from mr. merchant and mr. lawyer, they will in turn take it out of mr. farmer and mr. laboringman. mr. farmer: you bet they will. we always get the gaff in the end. mr. laboringman: where do i come in? i don't come in anywhere except to carry the load, as usual. i come out at the little end of the horn, as always heretofore. uncle sam: well, fellows, you see, don't you, that everything gets back, sooner or later, to the producer? he carries the load. mr. merchant: but we carry the worry. mr. banker: i wish you did. you would have an easy time then, but-- mr. laboringman: you needn't say "but" to me. you have it on all of us. there is no doubt about that. however, mr. banker, i'm not going back on you, for you have helped me out of several tight pinches. uncle sam: well, it does really look to me as if i had been living in a fool's paradise. those dear old greenbacks they have been about as much of a fraud as the dollar of our daddies. i do declare this whole thing makes me half sick. but if you are actually finding out what really ails me, i'll get over that pretty soon, and, boys, if we stick to this job, and play fair and honest, we'll have the best banking system in the world yet, and don't you forget it. but you forgot to tell me about the safest and best banking system in the world because every bank note was secured by one of my government bonds. that's what they've been telling me, you know. now, what about that? mr. banker: well, i could not interfere with your confession that you had been living in a fool's paradise, and dreaming dreams about making something out of nothing, while your credit was in peril, and you were losing hundreds of millions and furnishing the country a currency that was costing the people five or six times as much as the right kind of currency would. now, a word about your bond-secured bank note illusion, and i will be through. uncle sam, you remember that during the war, you were looking around in every direction to find some new method for obtaining means to carry on the war. you had busted your credit wide open with your united states note issue, and the question was how to find some new resource. your secretary of the treasury, mr. chase, concocted this scheme of giving the banks the right of issuing notes if they purchased government bonds, and deposited them to secure the payment of the notes. it is very strange, but he did not get much from this source, as there were only $ , , of notes out when the war closed. however, the scheme was started, and has been going ever since, precisely as it was inaugurated, a bond investment scheme. the amount of notes in circulation has never borne any direct relation to the demands of trade, as you can see by the following facts: in the notes outstanding amounted to $ , , , and in , eleven years afterwards, they amounted to only $ , , , or about $ , , less, although the country was growing and business expanding all the while. we ought always to expand our currency during the fall months about $ , , , and we ought to contract it during the succeeding months, or during the springtime just as much. but a careful investigation shows that these bond-secured notes have decreased as often in the fall months as they have increased, and have increased in the spring months as often as they have decreased. this proves conclusively that the amount of notes outstanding has never borne any relation whatever to the requirements of trade. the scheme is today precisely what it was when first concocted, purely a bond investment affair. uncle sam: well, well, now that is mighty strange, but my greatest chief justice, john marshall, pointed out the necessity of having a currency directly related to the business of the country, when upholding the constitutionality of the act incorporating the second united states bank. he said: "the currency which it circulates by means of its trade with individuals is believed to make it a more fit instrument of government than it could otherwise be." one of my presidents, james a. garfield, used this language: "_no currency can meet the wants of this country that is not founded on business._" boys, both of these great men must have referred to credit currency, and declared that it was essential to our business. mr. banker: furthermore, uncle sam, these bond-secured bank notes are indirectly just that much more of a burden resting upon the united states treasury, upon you, if you want to know the truth, as i explained to you last wednesday night. the fact is, these bond-secured bank notes are only another form of government credit put into circulation through the disguise of government bonds. every single criticism and objection that i have made tonight to the united states notes are applicable equally to these bond-secured bank notes. _first_: for all banking purposes, economically speaking, they are practically rigid and inflexible, at least so far as current needs go. _second_: these bond-secured notes do not spring into existence, or into being, as checks and drafts do in connection with some business transaction, but are tied up with a bond speculation. _third_: they cost those who use them as currency from five to six times as much as the right kind of currency would. _fourth_: if we adopt the right kind of a currency system, it will set free $ , , of capital which is now tied up in these government bonds, and this vast sum which would be realized from the sale of the bonds will assist to an amazing degree in supplying much needed capital to the commerce of the country. mr. merchant: how is that? mr. banker: the banks could then sell all the bonds now deposited to secure these bond-secured bank notes. they amount to $ , , . that these bond-secured bank notes are a monument of our stupendous folly, and have been a curse to the business interests of the country, i am sure no one here will attempt to deny. mr. lawyer: the japanese, thinking that we were a smart people, copied this bond-secured bank scheme from us, but immediately discovered that it was worse than worthless and repudiated it. no one else has been foolish enough to adopt it. mr. banker: i challenge anyone here to urge a single reason in favor of either the united states notes, or the bond-secured bank notes, which are only another form of united states notes. no one can meet the objections raised to them. in fact, there are two objections to the bond-secured notes, in addition to those urged against the united states notes. first, as stated, they have tied up $ , , in the bonds. second, they have proved such a successful delusion as to prevent any sane legislation until sad experience has driven us to take the matter up seriously and compelled us to act. uncle sam: well, boys, so far as i am concerned, i am thoroughly convinced that you don't want any of my i.o.u.'s for currency. nor do we want any bond-secured bank notes, which are really only another form of my i.o.u.'s. but i am still from missouri, as i have not yet been convinced what we ought to do by way of a substitute. mr. banker has told us something about credit currency, and he declares that it is the only real thing in the way of currency. now, i suggest that we take that matter up next wednesday night, and decide definitely whether we want to adopt that principle, and substitute that system, or some other. what do you all say to that? mr. merchant: i think that should be the programme. in the meantime, let us all dig into the question and go to the very bottom of it, and if possible stump mr. banker. mr. banker: all right, gentlemen, i am ready for you, and if i don't convince you that the only thing for us to do is to adopt a credit currency system, i will retire in favor of anybody you name. possibly you'll select nelson w. aldrich. uncle sam: no, you won't do anything of the kind. we'll look around a long time before we'll take him on. it is my candid opinion that he don't know a thing on earth about the question. i have known nelse about thirty years. he came to my house after he had been engaged in the grocery jobbing business, and he has been a jobber ever since. a man who could stay in congress for thirty years, declaring that we had the best banking system in the world, would not recognize an economic principle, on a cloudless day, walking down the middle of pennsylvania avenue at noon time. now, as i said, nelse has always been a jobber, and he would detect a crooked political deal crawling down a gutter, lizard-like, in the densest fog at midnight. he was prominent in a way in my home town, but it was only as a broker in senatorial favors. he kept books with the rest of his associates, his fellow senators. he was the clearing house of the united states senate. that's all. he would be the very last man in the united states, the very last to join in clear, intelligent, unselfish, patriotic thinking. he just couldn't do it. why, boys, he had rather go down a ram's horn than a gun barrel. he likes the twisting sensation. we don't want him at any price. mark my word. what we want is honesty, intelligence, patriotism, unselfish devotion to duty and some good hard work. let us hope that we shall find a way out. good night. fourth night bank credit currency uncle sam: when we parted last wednesday night, we had an understanding that everybody would give all the time he could to looking up credit currency. now, i think before we take up that subject, it might be well to recall and review what we've settled among ourselves up to the present time. _first_: we learned that gold is our standard of value. _second_: we all agreed that our money consisted of our gold coin alone. _third_: we agreed that our money, which consists of gold coin, is identical in amount with our gold currency; that they are one and the same thing. _fourth_: we found that we had at present a large amount of other currency, consisting of subsidiary coins (including the silver dollar), the united states notes and our bond-secured bank notes. _fifth_: we came to the conclusion, however, after our last talk, that neither the united states notes nor the bond-secured bank notes were fit for currency; and, in our quest for the best substitute possible, mr. banker proposed a credit currency currently redeemed in gold coin as the form of currency best suited to our condition. indeed he asserted that it was the only form of currency we should think of. i have gone over the road we have traveled so far and called attention to all the mile posts so that we should become perfectly familiar with them; for unless there is a complete harmony between our conclusions reached from time to time, our talks will in the end lead us to no practical results. at our last talk it was decided, you will remember, that both on account of the peril to my credit, and because the united states notes and the bond-secured bank notes were unfit for currency, we should tonight consider credit currency as a substitute. mr. merchant: uncle sam, i am more than gratified that you have called our attention tonight to just those things we have agreed upon, because unless we keep all these points constantly in mind, we will have trouble in the end in reconciling our views. on the other hand, it has began to dawn on me that possibly what we have always considered beyond our comprehension may after all prove a comparatively simple matter, because i have discovered, since our talks began, that truth here as in all other subjects is simple when we arrive at and comprehend it. our great problem in this connection is to disentangle the great or fundamental truths and make each one stand out in bold relief. so far, i think we have succeeded to a remarkable degree. mr. manufacturer: we must have done so, for we have not yet struck a single point upon which we have not unanimously agreed. let us hope that we shall be as successful in the future. at present, i must say i am a little dubious about the results of tonight's discussion, for i have run up against a snag or two, which i half fear will stump mr. banker, when he tries to pull them. however, he has been pretty successful so far in holding his own, and he may surprise us tonight. mr. banker: i have no desire, or hope, of surprising you, but i have perfect confidence in convincing all of you, that there is only one system of currency for us to adopt, or even think of adopting, and that is a pure credit currency. let us assume that two men, a and b, who are of equal and unquestioned standing in some country town, start in the banking business at the same time. a begins by taking the deposits of his neighbors, and continues until he has received $ , , and has loaned the same out to the people of the community. he now owes $ , subject to check, and he has $ , owing to him, as he has loaned out all his deposits. b starts a banking business, but upon an entirely different plan, or basis. he takes no deposits in the ordinary way, but if anyone comes to him desiring to borrow, or sell him promissory notes, he will lend his credit, and take all good notes and checks offered him, and in exchange give his own notes in such denominations and form as are suitable for circulation as currency, until he has exchanged $ , of his notes for $ , of the notes of the same people who have borrowed the $ , from the other banker. now, this is not a strange thing for b to do, because the bankers of scotland did this for one hundred and forty years before they took deposits subject to check. now, let us return to a and b. as a matter of course, some of these notes of b will be deposited in a's bank, and b will have taken in some of the checks on a's bank. at o'clock each morning a and b meet; a presents b's notes for redemption and b presents checks upon a for redemption, and the one pays the other the difference. sometimes the balance is due to a and sometimes it is due to b. at the end of six months or a year, it will be at a stand off. a has paid b as much as b has paid a. now, can anyone of you men here tell me what difference there is in the transactions of a and b, except this, that the notes of b amounting to $ , payable to bearer on demand are outstanding, while the deposits at a's bank amounting to $ , and payable to order are outstanding. those notes of b's amounting to $ , are a bank credit currency. they are issued against, or upon b's credit. they pass from person to person, from hand to hand and are currently redeemed every day. while the deposits at a's bank amounting to $ , are against a's credit, and the checks against them are redeemed every day. it is perfectly evident that if the capital of a and b combined is ample to meet the business requirements of that town, the form of credit offered by them will also adapt itself to the peculiar needs of each citizen. in other words, on a limited scale, you have a perfect banking system in that country town; bank credit being given to each person in precisely the form he wants it. now, let us go a step further. let a and b unite and incorporate the a-b bank with a paid-up capital of $ , , each man paying in $ , and the bank, so organized, taking over the liabilities. the one bank could then furnish the people of that community their deposit, or order credit, and their current credit, or currency at exactly the same cost to the bank; for the amount of the reserve will determine the cost of the note credit as well as the book credit. the bank being a country bank will carry a per cent reserve, or $ , cash, to protect the deposit of $ , subject to check, and also a per cent reserve, or $ , cash, to protect the $ , of demand notes outstanding. the actual cost to the bank in each case is per cent on the reserve of $ , or $ per annum. if this bank should be located in the cotton-growing section of the country, and from august until january, the people needed more currency than at any other time of the year to pay for picking and handling the crop, and the customers of the bank came in and drew their checks for $ , and asked the bank for currency for that amount, and the bank should, as it ought to be able to do, under such circumstances change its deposit debt of $ , to a note debt of $ , , so that instead of owing $ , in deposits, it owed only $ , in deposits, and instead of owing only $ , in notes, it owed $ , , would it make any difference whatever to the bank except the trouble of making a few book entries? in the springtime, probably, the situation would be just the reverse. the notes having served the convenience of the cotton-planters would be returned to the bank by various people, and deposited to the credit of the depositors, so that now the deposits are $ , , and the notes outstanding, or note debts, are only $ , ; the total debt of the bank being precisely the same all the time, $ , . it has made no difference whatever to the bank, but the customers of the bank, and all the people of that community, have been perfectly accommodated at the smallest possible expense to them. now, if that bank had been compelled to go to some financial centre and buy that $ , of currency in the form of united states notes, bond-secured bank notes, or the notes of a central bank, it would have cost the bank at the rate of per cent per annum on $ , , or $ , ; whereas, it has only cost the bank per cent on the reserves carried to protect the $ , , at the rate of $ , for each $ , , or six per cent on $ , . the cost to the bank you will see would be only $ , , as against $ , , if compelled to buy the currency, or would result in an actual saving to the bank of $ , , an item, gentlemen, well worth saving. mr. merchant: mr. banker, as i understand your contention from the illustration you have just completed, it is this, that there is absolutely no difference whatever, either in principle or in practice, between a bank book credit and a bank note credit, except as a mere matter of bookkeeping. that it is wholly immaterial whether there are , men walking about the streets of a town, each having a $ bank note of the local bank in their pockets, or a thousand men walking about with check books from which they can issue , checks for $ each. it is wholly a question of having a banking system that will adjust itself every hour of the day, and every day in the year, to the requirements of trade in that town, at the least possible expense to the people. mr. banker: you comprehend my contention perfectly. mr. lawyer: i will agree that your plan is structurally perfect to accomplish this purpose; but, before i can concede that the plan is all that can be desired, and all that we must insist upon having, i must know that your plan contemplates the current redemption of these bank notes in gold coin. for, as we have already agreed, our currency must be as good as gold coin, and this can only be demonstrated by daily gold coin redemption. mr. banker: these bank notes or this credit currency will always be interchangeable with the deposits of the bank of issue, and, like the checks against the bank, will be daily redeemed over the counter of the bank, and also at some clearing house centre. the life of the notes will probably not exceed on the average thirty days. i hold that it is the duty of the bank to supply its customers with exactly that form of credit, either current credit in the form of notes, or book credits subject to check, which their business demands, and that both forms of credit must be kept as good as gold by giving gold if gold is demanded. mr. lawyer: with this point of current gold redemption covered and settled, i am willing to agree that theoretically you have completely convinced me. now, what have you to offer in support of your theory by the way of any practical illustrations? mr. banker: i am glad that you have demanded illustration and proof by way of banking experience; but, before taking up the historical evidence in support of my condition, i want to define a credit currency, so that you will have a concrete idea, if i may express myself that way, in your mind. i define a credit currency as follows: _a note issued by a bank against its credit, without depositing united states bonds, or any other kind of security, to guarantee its payment, is bank credit currency_. in speaking of the marvelous prosperity of scotland, macleod used this language in about the effect of credit currency in scotland, where it has now been in use years. "all these marvelous results which have raised scotland from the lowest state of barbarism up to her proud position in the space of years are the children of pure credit." the great achievement of the scotch system of credit notes is exceedingly well stated by mr. charles a. conant in these words: . it has provided scotland with an elastic currency adapted to the condition of her industries and adequate in volume to their changing needs. . it has enabled the people to carry on numerous commercial and agricultural transactions for which they could not have found the necessary quantity of coin, and has economized the locking up of capital in the precious metal. . it has made the use of notes of small denomination familiar and popular, and has taught the people the distinction between bank notes as the representatives of credit, and the precious metals as the measures of value. . it has brought into active use the available savings and capital of the country. . it has afforded an opportunity for entering upon business to thousands of poor, but honest men, and enabled them to lay the foundation of a comfortable home, and in many cases of a fortune. . it has convinced the people so conclusively of the value and safety of the banking currency system that no serious panic has ever lasted beyond a few days, or has ever affected any of the banks, except those which were justly the subject of distrust. horace white, describing the scotch system, says: "notes are issued in denominations of five dollars, or one pound, and upwards. they are exchanged daily at the edinburgh clearing house, and settlements are made between banks by drafts on london. the notes remain in circulation on the average eighteen days after issue, the whole circulation being redeemed twenty times each year. noteholders have a prior lien on the assets." that is, if a bank should fail, the noteholders are paid first, and before anyone else gets anything. mr. merchant: what is that? did you say that the noteholder had a first lien on the assets of the scotch bank: that is, that the noteholders are paid in full before anyone else gets anything? mr. banker: yes, sir, and for the very best reasons in the world. mr. lawyer: certainly, the noteholders should have a first lien upon the assets of the bank issuing them, because bank notes are a public convenience. bank deposits, on the other hand, primarily are a private convenience. it is a matter of public importance that bank notes should flow through the channels of trade, pass from person to person and hand to hand unquestioned by any member of the public, and have ready as well as general acceptance. the man who selects his bank for the purpose of making deposits has time to investigate and decide deliberately which one he will choose. while a man in a transaction must accept the currency of the country offhand. at all events, it is a matter of the greatest public importance that he should do so without hesitation, and yet be protected, be absolutely safe in doing so. mr. merchant: come to think it over, i believe you are absolutely right. our present bank notes are made a first lien upon the assets of the bank issuing them. we were talking about that the other day over at the bank, and while i had never thought of it before, the cashier of the bank explained the matter fully to me, and gave the same reason for making bank notes a first lien that mr. lawyer has. when i told him that i did not quite understand the thing as he did, he satisfied me completely by using his own bank as an illustration. he said, you will remember that we were a state bank until about a year ago, when we became a national bank. our capital of $ , is all invested in this bank building which we occupy. our deposits were $ , . we took $ , of our deposits and purchased $ , of government bonds, which we deposited with the united states government, and received in return $ , bank notes which we have put out, or, as we say, put into circulation. now, since we actually took $ , of our deposits to buy the bonds with, and then placed the bonds up as collateral, to guarantee the payment of $ , of notes, it is perfectly clear that the noteholders will get their money, in case of our failure whether anybody else gets anything or not. i then asked him this question: suppose, for the sake of the argument, that the $ , of the united states government bonds should not sell for $ , ? say they sold for only $ , , would the noteholders lose the other $ , , and he replied as follows: "no, if the bonds should sell for only $ , , the remaining $ , due the noteholders would be taken out of our assets, before any depositor got a cent." you see, therefore, gentlemen, that our national bank notes are a first lien upon the assets of the banks that issue them, and that they will always be paid in full, before the depositors get anything. mr. manufacturer: i am very glad this point came up, and has been explained so completely and satisfactorily, because during the week when i was studying up this question of a credit currency, that matter came up, but i found no explanation or reasons given for making the notes a first lien. it seems to me to be a fundamental principle that they should be, and the reasons are the soundest for making them a first lien. the bank note is a tool or instrument of trade for the benefit of the public, and is of general importance, while the bank deposit is a tool or instrument for the benefit of the individuals composing that general public, and primarily of individual importance. the distinction between the two must be very clear to all of you as it is to me. mr. laboringman: that is just as it should be. the working people should always have a currency as good as gold, something that will not turn to ashes during the night; that cannot deteriorate to the extent of a single cent; for we are all practically compelled to take whatever is in circulation, or comes along, in the way of currency. it should certainly be as good as gold. i don't care how you fix it, but i do insist upon that. i say that it is one of the very first duties of the government to the people; for, of all the ways of doing the laboring masses out of their earnings, and cheating them, a depreciated currency is positively the worst. make your currency redeemable in gold, and so safe that no toiler can lose by holding it any length of time. mr. manufacturer: i am quite sure that we all agree that not only should the bank notes be currently redeemed in gold coin, but to make them doubly safe, safe beyond any peradventure, they ought also to be a first lien upon the assets of the bank issuing them. during the week i read somewhere that the scotch banks had been in operation years, and that they did not start the deposit and checking system until they had been in operation for years. during all that time they simply exchanged their notes for the notes of the farmers, the shopkeepers, the manufacturers and anybody who was entitled to credit. mr. banker: now, if you will allow me, i will produce some further historical evidence. the greatest financial genius that the united states has produced, and one of the greatest the world has produced, drew the charter of the first united states bank upon which the second was modeled. both of these banks were pure credit currency banks, and were founded upon the very soundest banking principles; but both of them were the victims of political strife and party feud. no man who has ever lived more clearly comprehended the principle of credit than did alexander hamilton. the highest note issue of the first united states bank was $ , , , and deposits were $ , , . the highest note issue of the second united states bank was $ , , , and the deposits were $ , , . in , under the inspiration of napoleon bonaparte, undoubtedly as great an economist as soldier, the bank of france was organized, and is the most striking single example in all history of the bank credit currency principle. it has to all intents and purposes always had the right of unlimited note issue, as the limit is always fixed far beyond the requirements of trade. the amount of the notes outstanding are usually ten times as large as the deposits. the notes now exceed $ , , , , while the deposits are only about $ , , . in a single week there has been a conversion of $ , , of deposits into notes, and a reconversion of a corresponding amount of notes into deposits. as a result of the destruction of the second united states bank by a veto of president jackson, there were established in various states of the union banking institutions, largely modeled upon the work of hamilton. these institutions showed remarkable strength and rendered most significant service to those sections of the country where located. probably the most noted of them all was the state bank of indiana, organized in , which continued its almost matchless career until . it was a pure credit currency bank, marvelously suited to serve the people of indiana, under the conditions in which they lived. its capital was $ , , ; its maximum of note issue was $ , , , always currently redeemed in coin. in , during the crisis when every bank in the state of indiana, and all the banks in new york, except the chemical, closed their doors, the state bank of indiana kept on redeeming its notes in coin. this indiana state bank had thirteen branches. the central office was at indianapolis. hugh mccullough, afterwards one of the wisest secretaries of the treasury we have ever had, was president of the fort wayne branch. he wrote this interesting paragraph: "fort wayne was three good days' ride from indianapolis, mostly through the woods. for fifteen years i made this journey on horseback, and alone, with thousands of dollars in my saddle bag, without the slightest fear of being robbed. i was well known upon the road, and it was well known that i had money with me, and a good deal of it; and yet, i rode unharmed through the woods, and stopped for the night at the taverns and cabins on the way in perfect safety." another most signal success of the same credit currency principle was the bank act of louisiana, which was passed in . it was a model, not only for those times, but for these as well. all the banks had to settle their balances every saturday night in coin. in louisiana, as a result of this law, held more specie than any other state in the union except one. the very day that gen. butler took possession of new orleans, the banks were redeeming their notes in coin. i might, if it were profitable, describe in detail the bank of the state of ohio; the banks of the state of kentucky; the banks of virginia; the bank of the state of missouri; the bank of the state of iowa. everyone of them were signal successes, and everyone of them models worthy of imitation, and all of them were established and operated successfully as credit currency banks. but i want particularly to rivet your attention upon the suffolk bank system of new england, which was purely the product of experience, and i may say a perfect development of the law of evolution in banking. mr. merchant: my recollection is that the suffolk system covered all the six new england states, and that there were then over banks in the system, with capital varying all the way from $ , to $ , each. two other facts must be kept constantly in mind in this connection; they are these: st, the combined authorized note issue of these banks was $ , , , absolutely unlimited to all intents and purposes; d, there was then no means of communication or transportation except the stage lines and horseback mail carriers. there were no telephones in those days, nor telegraph lines, nor even railroads. mr. banker: i am more than pleased, mr. merchant, that you have brought out these points, before i proceeded to explain what actually happened in the course of the development of what i regard as the most marvelous exhibition the world has yet furnished us with, what in principle was practically a perfect banking system, and what was in practice as nearly perfect as any human institution could be under the circumstances. mr. manufacturer: well, mr. banker, that is unqualified, literally unmeasured praise. if we ever had so good a banking system actually in operation in this country, i don't see why we did not have sense enough to keep it. i hope you will be good enough to tell us why we lost it. mr. banker: that is a very important and most pertinent question, and certainly most natural that you should ask it. i should have covered that point before, but it will do just as well now. uncle sam, you will remember that when you passed the national bank act in order to get the advantage of all the bank note circulation and so increase the sale of united states bonds, you put a tax of per cent on all bank notes for the purpose of preventing any bank from issuing them, except national banks. the result was that you killed the state bank of indiana and all the other banks to which i have referred, which were then issuing notes in the united states, including the banks in the suffolk system. mr. manufacturer: i ought to say right here, before you go on, that the per cent tax on bank note issues, while doing a world of harm, precisely as you say, did some good, too, because it prevented a lot of banks that were not properly organized, and were not compelled to redeem their notes in coin, from issuing a good deal of worthless paper, or comparatively worthless paper. it is usually known as "red dog," or "blue pup," or some other kind of dog paper. there are two things that resulted from the national bank act that i think should not be overlooked, though the act may have proved an economic failure. it gave us a uniform currency throughout the country, and it was of equal value everywhere, passing without charge, and at no time worth less than the credit of the government, or the current value of the united states note. therefore, if we are wise enough to take advantage of these two important results, our experience will not be wholly in vain. that is, we want a uniform currency throughout the country, in all the different states, passing in at every bank window, at face value, without charge, and unquestioned by anybody, because currently redeemed in gold coin everywhere. mr. banker: these interruptions have been splendid and i thank you for them. you fellows have undoubtedly been studying up on this question, as we used to say at school, "you've been cramming up." now, returning to the suffolk system, i want to assert there is not a question that can be asked by anyone, nor a point that can be made by anyone in favor of a banking system, that the suffolk system does not answer and illustrate and exemplify. let me outline the situation: . it covered six different states. . it covered a large territory. . the facilities for communication were bad. some parts of new england were as far from boston then as san francisco is now. . there were individual, independent banks. . there was no branch banking. . the permissive note issue to all intents and purposes was unlimited. the possible amount of issue was $ , , , but the maximum amount of notes out at any time did not reach per cent of this total, while the average amount did not exceed per cent of it. . the bank notes of the suffolk system were universally accepted at par throughout new england. . they were redeemed every day at boston, in coin by the suffolk bank. . they were accepted in all commercial centers of the west, buffalo, cincinnati, chicago, milwaukee and st. louis at a premium of from to per cent, because redeemed at boston _in coin._ the suffolk bank was the clearing house for all the bank notes of new england, and they were accepted at par, and redeemed in coin if demanded. horace white says: "it was the underlying principle of the suffolk bank system that any bank issuing circulation should keep itself at all times in a condition to be able to redeem it; that it should measure the amount by its ability so to do; and that the exercise at any time of the right to demand specie of a bank for its bills was something of which the issuing bank had no right to complain.... "under the suffolk system of bank note redemption specie was seldom asked for, but it was always paid when demanded; _the metallic reserve was the touchstone of the whole business_." the following is mr. white's description of the operation of the bank: "in two clerks could do all the work. in seventy were required, and the redemptions reached $ , , per year. as the circulation of the new england banks at that time was about $ , , , the whole amount was redeemed ten times each year, or about once in five weeks. "any person engaged in a legitimate trade in any part of new england could exchange his promissory note, running or days, for the notes of a bank with which he could pay the wages of his employees, or buy the materials for his industry in any part of the united states or canada. the notes would remain in circulation about five weeks, and then find their way to the suffolk bank, where they were offset by the notes of other banks which took their rise in the same way. the man whose promissory note the bank had discounted, and by means of which it had put its own notes in circulation, had meanwhile sold his products. if he had sold them in boston, his draft on the boston merchant would pay his note at the local bank, and this would enable the latter to keep its balance good at the suffolk. if he had sold them in new york or chicago, he would get his pay in a draft on boston, which would answer the same end. if he had sold them at home, and had received new england bank notes in exchange for them, the local bank could use these to keep its balance good at the suffolk. new england trade was carried on by an endless chain of offsets and book balances at the suffolk bank. the security for the notes consisted of the bank's assets, and the banker's moral character and business sagacity. both notes and deposits rested upon the same security that deposits rest upon now, and the volume of both was determined by the wants of trade." the interplay of bank book credit and bank note credit under the suffolk system in the panic of is nowhere equaled in the history of banking; and that demonstration of the perfect adaptability of bank credit to the most sensitive, and at the same time the most extreme situation that can possibly arise, leaves no question unanswered as to its fitness under all circumstances to meet the requirements of the people. a year before the panic, the note issue stood at $ , , , and the deposits were $ , , . as a result of the panic, there was an exigent demand for currency, and the note issue rose from $ , , to $ , , , and the deposits fell at the same time from $ , , to $ , , , showing a conversion of about $ , , of book credits into note credits, or of deposits into currency. a year afterwards, when this exigent demand for currency had subsided, and the reaction had set in, the notes fell from $ , , to $ , , , and the deposits increased from $ , , to $ , , . in other words, $ , , of notes were deposited and took the form of deposits, subject to check. i do not need to state the fact, except for the purpose of calling your attention to it, that this currency did not cost the people of new england any more than deposits; for the two were constantly changing places with each other, strictly in accordance with the needs of trade. mr. merchant: mr. banker, i think we are all under the very greatest obligation to you for this elaborate explanation. this splendid illustration, yes, absolute demonstration of the perfect adaptation of bank credit to our currency needs. i want to compliment you upon another thing, and that is, your position that it is the bank's business to make provision for coin redemption. what do we have our banks for except to furnish us credit in just the form we need it to carry on our business, and to keep that credit, in whatever form it takes, just as good as gold. that is the natural business of a bank. i never caught on to that fact before, and therefore could not appreciate it. mr. manufacturer: mr. banker, i have been greatly interested. now, if that plan worked so perfectly in new england, i cannot see for the life of me, why every other section of the country cannot work out the same system. if the new englander could coin currency out of bank credit, based on codfish and cloth, why cannot the western man coin currency out of bank credit, based on cattle, cotton and corn? the crux of the whole matter, the very heart of the thing, the vital part is, that the bank be ready to redeem its notes in gold. why shouldn't it, that's the question? mr. banker: well, it should, that is the answer to your question, and the bankers around every natural financial center in the united states should get together, and form just what those bankers had in new england before the war, a perfect banking system of their own. mr. merchant: mr. manufacturer, that's sound and looks mighty good to me. do you see any objection to it, any flaw in it? mr. manufacturer: no, i do not, except to persuade the people, as mr. banker has persuaded and converted us. of course we will be up against some legal difficulties, won't we, mr. lawyer? mr. lawyer: i imagine that we shall have no serious difficulties about the legal questions involved, if we can persuade congress. you see we are up against congress and for about every thought the average congressman has concerning a question of this kind, he has several about how he is going to get back into congress at the next election; that's the real difficulty. uncle sam: well, we'll see about that when we get this worked out, and we'll put it up to them before election, and find out where they stand. they must study this question just as we have, and if they can't show us a better way, they will have to come over, or they won't get over, that is all there is about that. mr. banker: well, gentlemen, when it comes to putting up an argument to the congressman, we will shove the canadian currency system under his nose, and keep it there until he gives in. mr. merchant: are the canadians using this credit currency system? mr. banker: that's what they are. they started by copying the massachusetts bank act, as it existed before the war, and have gone on making some changes from time to time since. the banks are authorized to issue regularly an amount of currency equal to their capital. the amount of capital has not been increased in proportion to their business, because there are only a few banks there now, in all, with about , branches. here is a chart i had prepared to show you, because it illustrates so perfectly how the currency expands and contracts every fall. you see that in the month of october every year they have an increase of about $ . per capita over the minimum amount, and that just as soon as the crops are disposed of, the currency again takes the form of a deposit. [illustration: this diagram demonstrates that the canadian bank notes adapt themselves every year, every month, every day, with unvarying precision, to the ever changing demands of trade.] _total circulation of the chartered banks of canada for each month of to nov. th._ january $ , , february , , march , , april , , may , , june , , july , , august , , september , , october , , november , , maximum issue , , minimum issue , , ----------- amount of expansion $ , , population of canada , , per capita expansion $ . same expansion in the united states would amount to $ , , under present conditions we do not have any note expansion whatever. not one single dollar. every "fall" we have a tragedy, because we are compelled to use our reserve money to meet the increased demands for currency. the above figures correspond in their _expansion and contraction_ with the figures for many years previous, with one significant change in the date of maximum circulation, which has changed with the later farm demands due to the tremendous development in the great north-western territory. no stronger proof could be added to the marvelous way in which this bank credit currency automatically adjusts itself to any and every condition as it arises. this currency goes to the clearing house every day, precisely as the checks and drafts do, for redemption. and in those cities where there are no clearing houses, the banks present the notes they take in, to each other, and the notes are redeemed every day by the respective banks issuing them. mr. merchant: gentlemen, isn't it marvelous how that currency adapts itself to the demands of the canadian crop moving period? why, if we had such a system working here, you would have an increase of currency every fall exactly equal to our demands, probably $ , , . i have heard the amount variously estimated from $ , , to $ , , . at all events, this principle would give us exactly the amount needed to meet the demands of trade. mr. banker: that is precisely what would happen, and there would be no shipping currency to and fro, backward and forward from new york to chicago and st. louis, and then from these cities to a thousand other points; and then when the crops had been moved the currency must be shipped from the thousand points to st. louis and chicago and then on again to new york. the banks in every locality would create their own currency according to their respective needs, and at a cost of about one-fifth of what it costs them today. as the matter now stands, gentlemen, if i want $ , currency i bundle up $ , or $ , of my commercial paper, and take it to my correspondent, and get the currency by giving my bank's note, and leaving the $ , or $ , of paper as collateral. now, if you should ask my correspondent upon what he had loaned me $ , he would say, "my bank's credit and the commercial paper i left with him." but, gentlemen, why could i not issue $ , of my bank notes against my bank credit, and keep the $ , or $ , of commercial paper? certainly if my bank's credit and the commercial paper were good enough for my correspondent bank to let me have $ , upon, they ought to be good enough to issue my own notes upon. the present situation is simply absurd and most troublesome, as well as most expensive. mr. manufacturer: i agree with you, it certainly is. i was talking the other day with a congressman about the canadian currency system, and he said, "yes, it works fine up there, but they have a branch banking system up there, and only banks." well, i said, it works just as well in france with one bank. it has been working in scotland just as well with banks for years. it worked in indiana with one bank and branches. it was just as efficient and successful in louisiana under a general bank act, where several banks were incorporated. and it worked in new england under the suffolk system with individual independent banks--why won't it work here? all he could say was, "well, i don't know." uncle sam: pinhead. didn't know the difference between a principle and a fact, and he didn't even know the fact. now, boys, i am completely satisfied and if any one here is not, let him speak up, or forever hold his peace. i believe you must all be satisfied. you must all be on time next wednesday night so that we will not have to wait as we did tonight. good night. fifth night what is exchange? uncle sam: now, boys, let us see just what we have settled during the four nights we have been talking this matter over. the first night we learned that gold was the standard of value, the whole world around. the second night we agreed that gold coin was the only money we had. the third night we agreed that the only currency that we had and ought to have was gold coin, the foundation and redeemer of all other currency and our token or subsidiary coins. we came to the conclusion and unanimously agreed that neither the united states notes nor bond-secured bank notes were fit for currency, because not related to business transactions in their origin, that they were unresponsive to the demands of trade, and were five times as expensive as the right kind of currency. the fourth night we agreed that the only true or correct currency was a credit bank note, currently redeemed in gold coin. _in other words, we agreed that gold was our standard of value, gold coin our money, and that our currency should consist of gold coin, the subsidiary coins and bank credit currency._ tonight we want to find out, if we can, what exchange is. this is a mighty important question for probably per cent or nine-tenths of all our business is transacted in some form of exchange. mr. lawyer, i want to put it up to you first. what is exchange? mr. lawyer: well, uncle sam, the best definition i can give, is to take one thing for or in the place of another. it is illustrated in a way by the old saw, "a fair exchange is no robbery." that describes the act of exchange, but i imagine that what you have in mind is the system or practice of exchange, as carried on today. that practice or system is only a multiplication of transactions where one man takes one thing in place of another. in this connection it means to take one credit in place of another credit; to take one debt in place of another debt. as now developed and applied to the commerce of the world, i would say that _the science of exchange is to substitute one credit for another credit, or to make one debt pay another debt_. a debt is what is due from one person to another person. i have a deposit with mr. banker there, and i owe mr. farmer $ for a load of potatoes; if i draw a check upon mr. banker for $ in favor of mr. farmer, and hand it to him, i have paid my debt to mr. farmer with mr. banker's debt to me. mr. merchant: now, mr. lawyer, just hold on a minute until i find out a thing or two before we go any further. in fact, i am sure everyone here would like in the outset to find out the same things, except possibly uncle sam, who ought to know everything, and is probably omniscient, mr. banker, who deals in these things, and you, mr. lawyer, who are presumed to know about them, and must know them, as a matter of necessity in your practice. what i want to know is: . what is a promissory note? . what is a check? . what is a draft? . what is an acceptance? . what is a bill of exchange? until we know precisely what these various terms signify, or mean in banking, when put into use, we shall soon be so far out at sea that we will not know what we are saying, because we do not know the meaning of the words we are using. this will be true of some of us at least. we must familiarize ourselves with these words, or terms. mr. banker: if you will allow me, i will try and explain and tell you what these various terms mean, and what use we make of these several instruments in writing. _first_: a promissory note is a written promise to pay some one a sum of money. it may be either to pay it immediately, or on demand, or at some future day; to pay it either with or without interest; or to pay it at some particular place. mr. merchant: it is just a written acknowledgment of a debt, isn't it? mr. banker: it is a written acknowledgment of a debt, coupled with a promise to pay it. if a owes b $ , , and gives his note for that amount, and b sells the note to c, the note has become exchange. it is not the usual form of what is called exchange, but is nevertheless just as truly exchange; for suppose that c owes a $ , , he can then cancel the debt by delivering him the note for $ , . c has paid his debt to a with a's debt to b. _second_: a check is a written order on a bank to pay money on demand. it may be drawn to cash, or it may be drawn to bearer, or it may be drawn to the order of some one. if a owes b $ , and a has a deposit at a bank for that amount, a can cancel his debt to b by giving him a check on the bank for $ , . the check is exchange, though not in the usual form of what is known as exchange, for a has canceled his debt to b by giving b the bank's debt to him. _third_: a draft is a written order from one person to another to pay a third person a sum of money. an acceptance is to write across the face of a draft, payable at a future time, the word "accepted," and the signature of the person accepting it. if a is owing b $ , and c is owing a $ , , the debt to b can be paid by a's draft upon c. the draft is identical in every respect with the check, the difference is in form only, and the use of them. a check is only used when the order to pay money is upon a bank. a draft may be, and often is used when the order to pay money is upon a bank. a check, properly or correctly speaking, is never used in an order to pay money upon an individual or corporation, but a draft is invariably used in such cases. the transactions are identical in effect, though the conditions, or circumstances, are different. both the check and the draft are exchange. _fourth_: when a draft has been accepted, it becomes the promissory note of the one accepting it, as he promises to pay it on the day named in the draft. an accepted draft is only another form of a promissory note, for if a owes b $ , , and b draws upon a for that amount, and a accepts the draft, a is in precisely the same position as he would have been if he had sent b his promissory note for $ , . in the banking world a draft, after it has been accepted, is often called and known as an "acceptance." _fifth_: a bill of exchange in its ordinary or usual sense, is an order of one person upon another to pay a third person a sum of money. mr. manufacturer: that is precisely what you said a draft was. mr. banker: just wait a moment, please, until i finish, and you will note the difference. the bill of exchange is the medium of settling accounts or debts between parties residing at a distance from each other, without the intervention of money by exchanging checks or drafts. mr. manufacturer: then they are identically the same thing except a bill of exchange acquires its name from the fact that it settles debts at a distance. mr. banker: that is the exact distinction, if one is to be made at all, and i think it will be well for us to make this distinction to save confusion in our conversation, although in the ordinary and usual language of the street, or the business world, the terms, or words, "draft," "acceptance" and "bill of exchange" are used indiscriminately the one for the other. if the definition of mr. lawyer stands, and i think it is a very good one, when he said "the science of exchange is to make one debt pay another debt," the science of bills of exchange is to make one debt pay another debt at a distant point. this is not a distinction fully without a difference, because it helps us to classify the transactions and distinguish them in a way as we go along. a simple illustration is this: a, who lives in boston, owes b, who lives in san francisco, $ , , and c, who lives in san francisco, owes d, who lives in boston, $ , . b and d could exchange drafts with each other; then b and d could collect each other's drafts. but b could sell his draft on a to c for $ , and c could pay his debt of $ , to d by forwarding him the draft on a. d would then collect the draft on a. it will be seen at once that this transaction has saved the expense of sending $ , in money from boston to san francisco, and also of sending $ , in money from san francisco to boston at great expense by express. this transaction between boston and san francisco is known and called a transaction in domestic exchange. if a, who lives in new york, owes b, who lives in london, $ , , and if c, who lives in london, owes d, who lives in new york, $ , , b, the resident of london, can draw on a in new york, and sell the draft to c, who resides in london, and c could pay his debt to d, who resides in new york, by forwarding b's draft to d, who resides in new york. d could then collect the draft from a. it is perfectly clear that by means of this transaction, the expense of sending $ , in gold from new york to london, and also the expense of sending $ , in gold from london to new york, has been saved. this draft would be foreign exchange, because the cities are in two different countries. mr. merchant: according to your illustration, mr. banker, if our sales of cotton, grain and meat to great britain should amount to $ , , , a year, and the sales of great britain to us of woolens, silks, cotton and cloth and other manufacturies should amount to $ , , , , we would not have to transmit a single dollar of gold either way, because the debts would just cancel each other. if the debtors in the united states could find out who the debtors in great britain were, then they could exchange debts with each other. the debts of the two countries would just offset each other. mr. banker: that is absolutely true, and it is entirely possible that the $ , , , worth of goods in the two countries could be bought and sold without moving a single dollar's worth of gold either way across the atlantic. mr. manufacturer: well, that is just what we want to do and save the expense and trouble of transmitting the money, and it is up to you, mr. banker, to explain just how we are to accomplish this trick or feat, because it will save a tremendous expense, if this can be done. mr. banker: yes, and will bring other advantages to the business interests of the country of almost incalculable importance, as we shall soon see. now, the question is how to gain these ends. two things must be accomplished in this connection, if we are to profit by every advantage that can possibly be taken in our trade with each other, as well as in our trade with other countries. _first_: the bills of exchange must be of such a high character as to invite those, who need them to pay debts with, to take them unhesitatingly. _second_: the bills of exchange must become known to those who may want to use them to pay debts with, instead of shipping the actual money. mr. merchant: of course, you gentlemen are aware that our debts abroad are being settled in just this way today to a very large extent, and i do not think that you need worry very much about the bills of exchange not becoming known to those who need them to pay debts with, if they are made of such a high character as to command a market, for the market will at once develop and make itself felt. that is, i mean a general market for bills of exchange of unquestioned character. the only thing for us to do is to give our bills of exchange such a standing as to command ready and general acceptance in the commercial world. how can we do that? mr. banker: that can be accomplished in a very simple, easy and natural way, if we will only adopt it. let me illustrate what i mean. today, a, living in this country, sells a bill of goods, say for $ , , to some one in great britain; the purchaser in great britain arranges with his bank to accept a or day bill drawn on it by the american shipper. such drafts are drawn on well-known bankers, and when accepted become virtually a time-deposit at the bank, and therefore can always be disposed of at the lowest current rate of interest. this arrangement is a very great advantage to the english business man, as it enables him to use the high credit of the bank in carrying on his business. at the present time our national banks are not authorized to accept drafts made in this way, but if they were authorized to do so, the credit of our banks would be given to the drafts made by one business man upon another whether the drafts were domestic or foreign. such an obligation is the most desirable one for a bank or an investor to hold, as a temporary investment for the following reasons: _first_: the draft arises out of a transaction where goods passing from buyer to seller are equal in value to the face of the draft. the goods are actually in transit, and the draft is economically a title to the goods. _second_: the seller is invariably good, or at least thought to be. _third_: the buyer is invariably good, or thought to be. _fourth_: the bank accepting the draft is invariably good, or believed to be. but above and beyond that no bank will engage in such a transaction, without making itself absolutely safe in some way. mr. merchant: mr. banker, if we should adopt that principle in this country, we would at once make every dollar's worth of goods in transit, or ready for shipment, a liquid asset, practically a cash asset, as we shall see, for the american merchant and manufacturer; because a large amount of capital would at once be attracted to this field for steady employment, or temporary investment. mr. manufacturer: there is nothing so essential to relieve the constant strain upon individual credit and mobilize the really liquid wealth of the country, as the creation of the kind of paper you have just described. think of it for a moment; there are the goods in transit, the shipper, the buyer and the banker back of the paper that will be coming due within the next sixty or ninety days. you can hardly imagine anything safer, and more quickly convertible into cash. money available for the purchase of such paper would come from many sources, among them the following: _first_: corporations would immediately be organized to deal in such paper. _second_: all strong business houses, merchants and manufacturers would prefer to hold such paper instead of stocks or bonds, for their surplus funds during their slack seasons. _third_: bankers of all classes, both in the country and city, would find such paper preferable to any other form of investment for a secondary reserve, and for their surplus funds during slack periods in their respective sections. _fourth_: if acceptances are limited as they should be to goods in transit, or on the road to consumption, the adoption of this principle will mark, indeed will accentuate, the strong, the fundamental difference between liquid assets and the more fixed forms of investment, such as bonds and stocks. banking capital employed in this way can far more readily adjust itself to the exigent demands of liquidation in the case of a panic, or a commercial crisis. _fifth_: undoubtedly, to a very large degree, foreign capital would be attracted to our market for this kind of paper, because its strength and liquidity has already been proved to the bankers and capitalists on the other side of the atlantic. and whenever capital was required, the rate of interest would be such as to be inviting. in other words, the rates of interest would rise, correspondingly with our needs, and the entire commercial world would be our possible market for the commercial paper representing the economic title to the five or six billions of finished goods that are always passing from the producer to the consumers in this country, and to the consumers abroad. mr. banker: undoubtedly, we should soon have right here a general market to take care of all this kind of paper; and it ought to become soon the strongest and broadest market in the world for this kind of an investment, considering our vast commercial resources. all of our bills of exchange would be drawn in dollars, not francs, marks or pounds sterling, and we would put upon them the stamp of the eagle, and not the lion and the unicorn. uncle sam: i like that. it stirs my blood, warms the cockles of my american heart. that's business. mr. manufacturer: i understand that for such bills of exchange, those accepted by banks, there has grown up in london, paris, berlin, amsterdam and many other european centers, a large market, known as a discount market. indeed, that this form of paper constitutes a very essential feature of the commercial transactions of all european financial centers. mr. banker: that is true, and unless we follow them and adopt the same principle, and facilitate in the same way the protection, transportation and distribution of our commodities, needed for current consumption, we will continue to work under a very great handicap, as compared with our foreign competitors. moreover, we will again find it difficult, if not impossible, to adjust ourselves to those periods of contraction which must come from time to time, without almost immeasurable losses, and the consequent stagnation in business that is sure to follow. mr. merchant: i appreciate what mr. banker has just said. i am confident from my observation during the panics of and that our greatest injury came from the shock to business due to the fact that there seemed to be no real relief from the strain until there was an actual breakdown all along the line. now it is evident that if a large amount of capital were employed in the economic titles, as it were, to our consumable commodities in the form of bills of exchange and the market for them extended to the financial centers of europe, as seems probable, indeed certain, whenever the rate of interest was high enough, we should pass through any future strain, without the usual tragic results. of course this added facility to the investment of our bills of exchange will not be a cure-all, but it will certainly correct an obvious and a very great defect in our present method of doing business. mr. banker: certainly it will not be a cure-all, because it is only an added facility in our credit system, and therefore must be provided for precisely as a corresponding amount of loans should be. you see, don't you, that an acceptance by a bank is practically the same thing as a loan to the buyer and seller of the goods jointly, or to one of them with the other as an endorser. the only difference is this: that if a loan is made the money would be placed at once to the credit of one of them, subject to his check, while the acceptance is an agreement to pay the amount on a future day. the bank must take precisely the same precaution in securing or protecting itself, and should carry identically the same reserve against acceptances that it does against its deposits subject to check. mr. lawyer: that is true, for if the buyer and seller fail to make good, and meet the draft, the bank must pay it precisely as a bank must pay the checks of its depositors, even though the borrowers of those deposits do not pay their promissory notes when due. in reality and in fact the results are identically the same, therefore i agree with you, mr. banker, that a bank should carry the same reserve against its acceptance liability as against its deposit liability. mr. manufacturer: mr. banker, have bills of exchange and bank acceptances been used very long, or are they something quite new and modern? mr. banker: the lord only knows how ancient they are. however, it is undoubtedly true that the use of them, especially acceptances, has grown enormously in recent years. for it is now a universal practice at all financial centers throughout europe. the bank liabilities of the whole world were only $ , , , in , while today they are upwards of $ , , , , possibly as much as $ , , , . this almost appalling increase is due not only to the growth of international trade and the expansion of the credit system in foreign trade, but to domestic production as well. of course an acceptance is the natural counterpart of a bill of exchange. bills of exchange, or something accomplishing the same purpose, were in use among the greeks. the history of the subject is buried in much obscurity. it is stated upon high authority that among the bankers of the roman world there existed a certain method or means of effecting payments abroad. mr. lawyer: here is what one author, wilbur aldrich, says: "from the beginning of the christian era the jews became dispersed and, shut out from other trades and occupations, became usurers, or money-lenders at interest, a business which by the canon law was forbidden to christians. the jews were united by such strong ties that their business assumed almost a corporate aspect. they bought, sold and transferred for collection part of the many debts constantly owed to them, and became practically an international exchange community. their practice gradually evolved the bill of exchange. "rivals of the jews, and more given to money changing, lombard and other italians naturally also became exchangers. many large italian houses included whole families, and had branches in many cities widely separated. the financiers from each city in italy and from associated leagues of such cities, frequently united for exchange purposes. italian finance thus grew into a great system of international exchange. among the great fairs of the middle ages, under the influence of the italians, some became connected chiefly with the business of exchange; piazenca, the most noted of the fairs of exchange, was practically a clearing house for foreign exchanges. "the bill of exchange was already in frequent use in the middle of the thirteenth century, but at this time its form was that of a document certified before a notary. at the end of the fourteenth century, it had approached the form now in use. it should be added that the bill of exchange was drawn only by the money changers and the bankers that had branches or agents. "the business of bill broking grew up in england towards the end of the fourteenth century. the issuance of bills of exchange, based upon genuine business sales of goods, was recognized as a legitimate source of gain by the canonists; or the ecclesiastic lawyers." mr. banker: you _see_, mr. manufacturer, from what mr. lawyer has just read, bills of exchange, in practically the same form that we now have them, have been in use about years. however, we are not now so much interested in a post mortem of the bill of exchange as we are in its place in our commerce. what we are most interested in is, just what part the bill of exchange is playing in the trade and commerce of today. what we want to get clearly fixed in our minds is what it is, and what it does, as distinguished from other instruments of trade. _first_: for the purpose of a definite idea of just what exchange is, let us remember that exchange includes every written promise or order to pay money that is used to substitute one credit for another credit, or to make one debt pay another debt. _second_: that bills of exchange (sometimes called drafts, or acceptances, indiscriminately) are promises or orders to pay money which are used to substitute one credit for another credit, or to make one debt pay another debt, at some distant city. if the cities are in the same country, the bills of exchange are called domestic exchange. if the cities are in different countries, the bills of exchange are called foreign exchange. _third_: let us agree, gentlemen, that so far as we are concerned we should not, and shall not, consider the acceptance of any draft by a bank as legitimate, unless the draft has grown out of an actual sale and shipment of goods. in other words, what i want to impress upon you is that if the draft is the economic title to goods, which are moving from the producer to the consumer, the liability of a bank upon an acceptance is reduced to a minimum. acceptances of drafts growing out of sales and shipments of goods will never be a source of dangerous expansion, because they will liquidate, or pay themselves out, as the goods will be wanted to eat, to wear, to use, or to go into other manufactures, almost immediately. _fourth_: i want to nail one fact down right here so that no one of you will ever overlook it, or forget it; and that fact is this: an acceptance is just as much a bank liability as a deposit subject to check, for if the seller and buyer, or the drawer and the drawee, don't pay the debt on the day named, the bank will have to pay it, just as much as it will have to pay the checks against its deposits, although the people who borrowed the deposits have not paid their notes. it is clear, therefore, that the same reserve should be carried to protect acceptances as deposits. mr. lawyer: i am convinced of that, and i think we cannot insist upon this conclusion too strongly for two reasons. first, the credit facilities for trading, or carrying on business, are increasing at a tremendous rate, and this particular form of credit is probably increasing at a greater pace just now than any other. second, there is no form of credit more indirect, subtle and liable to mislead than this; therefore, it will require double diligence to keep it as good as gold. we must remember that since gold is our standard of value, gold alone is the touchstone of all credit, acceptances as well as deposits and bank notes. mr. banker: there is no question whatever about that. if we want an absolutely sound and impregnable financial and banking system, we must meet checks and acceptances with gold just as well as bank notes, for they are all identical and the same thing--only in different forms--bank credit. gentlemen, if you place our banks in a position where they can pay gold no one will ever ask for gold, except for some special purpose like that of export. mr. merchant: is it not a fact that credit transactions in business are increasing every year? mr. manufacturer: mr. merchant, i presume you mean, relatively. that is, that the proportion of business transactions in credit as distinguished from cash is greater now than formerly. mr. merchant: that is precisely what i mean, of course. i am aware that there is on the average a great increase of business every year. mr. banker: in some localities credit transactions are increasing, but in others they are practically at a standstill. for example, i suppose if you should take some country town in a cotton-growing district, the amount of cash used from august to january might be per cent of all the transactions; for the planter pays the pickers and all the laborers cash, and they in turn pay the storekeeper; during other periods of the year, when accounts are running, the cash used is much smaller. the average amount of cash used gradually falls as the people come to use banks more and more, the bank checks taking the place of currency. generally speaking, however, the average country community does about per cent of its business with currency, while the medium sized cities, or towns, do possibly as much as per cent of the business with checks. in the largest cities as much as per cent of the business is done with checks, while the clearing houses settle their differences or balances with about per cent of actual money, where money is used. sometimes the differences or balances at the clearing houses are settled by checks or drafts on a financial center. while we have no definite figures that justify a positive statement, it is generally estimated that about per cent of all the business of the country is done with some form of credit instrument, checks, drafts, or bills of exchange. mr. merchant: then all forms of exchange, promissory notes, checks, drafts and bills of exchange are really mediums of exchange in precisely the same sense that gold coin and currency are mediums of exchange. mr. banker: certainly they are all just as efficient as mediums of exchange, as gold coin and other forms of currency, although not as facile for small trade. but, in large transactions they are far more expeditious, more convenient, cost much less, and involve less risk. these are the reasons they are used instead of cash to so large an extent. uncle sam: boys, from the attention that you have given this subject it is evident that you are mightily interested, for you have had to work a good deal harder to understand what you were talking about than usual. but we have arrived, we have really gotten somewhere, difficult as exchange is generally thought to be. now, in order to fix in your minds just what progress we have made during these five talks, i want to review what we have accomplished, or agreed to. the first night we found out that our standard of value was gold. the second night we decided that our money was gold coin and that nothing else would do. the third night we found out that our currency was gold coin, token money, united states notes and bond-secured notes; we also found out that the united states notes and bond-secured bank notes were not fit for currency. the fourth night we determined that the only currency in addition to our gold coins and token coins worth considering for our purpose was a credit bank note, or bank credit currency. tonight we have found out what exchange is and that nine-tenths of our business is done in some form of it; but that we must keep it as good as gold by holding adequate reserves to protect this form of credit as well as any other. now, i call that going some. mr. manufacturer: uncle sam, last wednesday evening, during our discussion, mr. banker frequently used the word "reserve" in connection with our currency, and insisted that the reserves should be such as to protect the currency, and tonight he has again used the word "reserve" in the same way in connection with exchange. while i know in a general way what he means, i am not at all sure that i comprehend fully what a reserve is in its true and broader sense. mr. farmer: nor do i, and to confess the truth i am a little dazed on that very point, and i want to suggest that we spend the next night finding out what a bank reserve is. if all that mr. banker has been saying is true the reserve is certainly the hub of this wheel, and i want to tell you now that unless the hubs of your wheels are all right, you won't have much of a wagon when you get through. mr. banker: that's right. your reserves are the very heart of the whole question, the hub of the wheel. uncle sam: well, then, we'll have reserves up next wednesday, and let us hope that our reserves will never get down, at least to a dangerous point. good night. sixth night value, price, wealth, property, credit uncle sam: well, boys, what about reserves? mr. lawyer: uncle sam, soon after we departed the other night, i began to think over the subject of reserves; but soon found myself considering several other points, which, it seemed to me, we should take up before reserves. therefore, without consulting you, i telephoned mr. merchant, mr. banker, mr. manufacturer, and i saw mr. laboringman and talked the matter over with him. we all agreed that there were several other points that we should discuss tonight instead of reserves. i knew that mr. farmer lived on a rural free delivery route, and that i could reach him by noon the next day or thursday morning; so here we are ready to talk about something else. and we came to this conclusion without even consulting you, for which possibly we ought all of us now to beg your pardon. uncle sam: well, there you go again. really, i feel as though i were in about the same position that one of my wisest presidents, abraham lincoln, said he was in, with regard to his influence over his cabinet. you will remember he once said, "i don't believe i have any influence with the present administration, anyway." of course, we all know that was one of honest abe's sly drives, because he knew deep down in his soul that in the end he was always the master of ceremonies. however, what is it that you want to talk about? of course, you understand, that under the circumstances, having made the arrangement to talk about reserve, "i am completely upsot." mr. farmer: well, i'm the fellow that suggested that we talk about reserves tonight; but i am sure that the change made was most advisable. to use an ugly illustration, possibly ugly to this august assembly, we now have our horses representing the standard of value hitched up to our wagon which represents our currency and exchange, the things that carry the value, wealth, property, and all commodities that go by price, the trades having been made on credit, but calling for capital. i think with mr. lawyer that we had better find out just what these various words or terms mean before going any further. otherwise we will certainly be using words whose meaning we do not know, or, at least, do not properly appreciate. mr. merchant: now just what did you say; value, wealth, property, capital and credit? that all sounds very well, but i suggest that you include one more word that has always been a source of annoyance to me when i want to buy anything, and most unsatisfactory when i want to sell anything, and that is "price." mr. farmer: oh, i had that in all right, but i will admit, in a sort of backhanded way. mr. banker: all right, then, let us include price in the list; then the programme for tonight is, value, price, wealth, property, capital and credit. mr. laboringman: just what do you mean by the value of anything? that is, what is value anyway? mr. manufacturer: i have been studying over that very thing, and i believe i can give you a definition that will wash. the value of anything is measured by the use to which it is put, and is expressed in anything for which it is exchanged. mr. farmer: i have been mulling over this question of value a little myself, and i think that mr. manufacturer has that about right. i worked it out this way: i have an old horse down on the farm that i traded for, giving hiram johnson, my neighbor, a mule. that mule was a mighty handy animal. i could do anything with him on the farm, but he was a little too handy with his hind legs occasionally, so i traded him off to let him practice on my neighbor johnson. now the value of that mule was that horse that i got in exchange for it; and the value of that horse was the mule. so, too, if i traded a hog for a sheep the value of the hog is the sheep, and the value of the sheep is the hog. mr. merchant: hold on just a minute before you go any further, as i want to know whether anyone here can tell me what intrinsic value is. we heard so much about that during the campaign of ; and i want to know whether there is anything in it or not. i ran up against the same expression in one of the books that i thumbed away back in . and today you sometimes hear men say that gold has intrinsic value. now, according to your definition, if no one could use gold, or rather did not use it and you could not exchange it for anything else, it would not have value. mr. banker: precisely so. nothing is more absolutely true than that. gold, like everything else, gets its value from the demand for it, which comes from its use and its consequent exchangeability. mr. lawyer: that is undoubtedly true, all the value that gold has arises from its use and exchangeability, and its exchangeability arises from its universal use. it may be said, possibly, that the value of anything is measured by the use to which it can be put; but i believe that it is all covered by the latter part of the definition given by mr. manufacturer: _the value of anything is any other thing for which it can be exchanged._ anything has value when it is exchangeable; when it is not exchangeable it has no value. what is really more in keeping with our common everyday language, is the definition of the roman law, "the value of anything is what it can be sold for." mr. banker: yes, that is true in one sense, but i think we had better make a distinction between receiving money and something else. if you exchange anything for money, the amount of money received is more properly called its price. mr. lawyer: you are right; i think we should make just that distinction: "the value of anything is the thing you receive in exchange for it." _the price of anything is the money you receive in exchange for it._ of course in everyday conversation, we are constantly using value and price indiscriminately. we ask, what is the value of something, when we want to know the price of it. uncle sam: well, you have made short work of two topics or points raised already. mr. farmer: yes, and if we keep our noses to the grindstone, our eyes on the sickle we are grinding, and our feet on the ground, we'll make headway right along. mr. laboringman: i think anybody can understand this subject, at least so far anyway. we may get over our heads before we get through, but i know i'm all right yet. uncle sam: the great thing to do in a discussion of this kind is just what you do in any other matter. talk common sense. just talk horse sense. do you know i flatter myself that the common sense of the american people is the wealth of the country? mr. lawyer: wealth, did you say, uncle sam? why that is just what we are going to talk about. it may be that common sense is the source of most of the wealth of the american people, but really, uncle sam, with all due deference to you, i do not think you can call it wealth. aristotle said: "we call wealth everything whose value is measured by money." mr. banker: that definition of aristotle has never been improved upon, and today all students, scholars and economists have accepted it as correct. and, while others have talked without limit and written books without number about wealth, no one has improved upon what aristotle said wealth was. just keep this simple inquiry in your minds: "can it be sold for money," and, remember that "whatever can be exchanged for money is wealth." let me illustrate just what i mean. if i have land, houses, cattle, horses, cotton, corn, or any other material thing that i can convert into money, they all constitute wealth. again, if i were a lawyer, a doctor, farmer, bricklayer, engineer, musician, or painter, my services would be wealth because i can sell them or exchange them for money. again, there is still another kind of wealth that may be described by the single word "rights," such as mortgages, bonds, stocks, bank notes, checks, drafts, bills of exchange, copyrights, patents, good will of a business, etc., all these various things are also wealth because they can be exchanged for money. they can all be bought and sold. let us remember this then, that all wealth is one of these three things: _first_: wealth is material, land, etc. _second_: wealth is labor, work, etc. _third_: wealth consists of rights, checks, notes, bonds, etc. mr. lawyer: then, if i understand you correctly, you say a man is wealthy because he has a good deal that he can turn into money. of course i am aware that a man may be considered wealthy in one community, and in another community the same man with the same amount of wealth may be considered a comparatively poor man--in other words, everything is relative. a man worth $ , in some small country town may be considered, and properly so, a very rich man; but on fifth avenue, new york, he would be considered a comparatively poor man, because it might take $ , to pay a year's rent for a house. mr. laboringman: you bet i can see that point all right. mr. farmer: it seems to me as though you have made that perfectly clear, but i want to tell you boys that when i tried to study up on this question during the week, i got all balled up on the words property and wealth, for i cannot see the slightest difference between these two words. mr. lawyer: well, i think there is a very great difference; and i think i can demonstrate to you by an illustration right in your own neighborhood just what the distinction is between these two words. you will remember, mr. farmer, when that mill located over on carroll river, and that big dam was put in, mr. adams, a man whom you and i both know very well, owned all the land in that neighborhood. you will remember that he proceeded to borrow money and build houses for the employees who wanted to come and work in the mill. i think he built as many as houses for that purpose. you will remember the dam washed out and that they did not rebuild it; and as a consequence the mill closed down. the result was the employees all left, and mr. adams was involved to a very large extent, i think something over $ , all told. now he still has the property, but the insurance company has the mortgages--in fact, mr. adams has a great deal more property now than he had before the mill located there, because he has the land and the houses, but he has a good deal less wealth. for when the mill located there, mr. adams' wealth exceeded $ , , but after the mill closed he could not rent or sell the houses to anyone. now the evident result was that he had increased the amount of his property, for he had houses, but he actually had no wealth left. his property was what we lawyers call corporeal property, that is, material property, land, and buildings. the insurance companies which held the mortgages had a very different kind of property, called by the lawyers incorporeal property, that is, not material property but an interest in the real or material property. i think you will all agree that while mr. adams still has all his property, all the wealth there is left belongs to the insurance company which holds the mortgages. mr. merchant: mr. lawyer, is it not true that you could and would say that a man had a lot of property if he owns say , acres of land worth only cents an acre, even if it was not salable at all? mr. lawyer: yes, i think that is true, and illustrates in another way that there is or may be a real difference between property and wealth; however, it may be said that in conversation we often use the words wealth and property without much, if any, distinction. it seems to me that we should note this particular difference. _wealth consists of property convertible into money, and therefore implies exchangeability, while property may not mean wealth at all, because the property has no exchangeable value._ mr. banker: mr. lawyer, i think that that last statement of yours will assist mr. farmer very greatly in understanding the real difference between wealth and property. the difference is certainly very evident. mr. farmer: yes, i have caught on. there may be a very great difference between wealth and property, although we are in the habit of using these two words without any reference to the special meaning that really attaches to them. in our conversation we use them indiscriminately, and i don't know as that makes any difference; but for our purposes, that is, for the purposes of these discussions, i think it is very important that we should know the difference; because something may arise that will compel a recognition of the real difference between these two words. mr. banker: i was just going to remark that the very difference between these two words suggests one of the other words we have agreed to consider tonight, and that is the word "capital"; for capital is a form of wealth, although all wealth is not capital. wealth, as we have seen, consists: ( ) of material things, such as houses, land, etc.; ( ) of productive power, called labor, etc.; ( ) of rights, such as checks, notes, bonds, etc. the owner of these things may use some of them for his convenience. he may so use some of them as to produce a profit. now, when anything is traded with, or so used as to produce a profit, or as we often say used productively, it is called capital. stephens defines capital thus: "capital, the source whence any profit or revenue flows." so senior says: "economists are agreed that _whatever_ gives a profit is properly called _capital_." again m.d. fontenay says: "wherever there is a _revenue_, you perceive _capital_." macleod says: "capital is an economic quantity used for the purpose of profit." i would suggest that we say _capital is anything used for the purpose of profit_. macleod uses this language also: "if a person has a sum of money, he may expend it on his household requirements; or in gratifying his personal taste by buying books, or statues, or pictures, etc. money spent in this way is not _capital_. "but if he buys goods of any sort for the purpose of selling them again with a _profit_: then the money so employed is '_capital_,' and the goods so purchased are also _capital_, because they are intended to be sold with a '_profit_.' "so money let out at interest is _capital_. "in a similar way any material thing may be used as capital. if a landlord lets out his land for the purpose of profit, it is capital. "all modern economists class personal skill, ability, energy and character, as wealth, because persons can make a profit by their use. hence they may be used as capital, as well as material objects. "if a man digs in his garden for his own amusement such labor is not capital; or if he sings or acts or gives gratuitous lectures on any subject to his friends, such labor is not capital. "but if he sells his labor in any capacity for money: then such labor is capital for him. thus huskisson says: 'that he had always maintained that labor is the poor man's capital.' so mr. cardwell addressing his constituents said 'labor is the poor man's capital.' and a writer in a daily paper, speaking of agricultural laborers, said: 'the only capital they possess is their labor, which they bring into the market to supply their daily wants.' "so if a man expends money in learning a profession such as that of an advocate, physician, engineer, or a profession of any sort which he practices for profit, the money laid out in acquiring such knowledge is capital: and his skill, ability and knowledge are also capital. he makes an income which is measurable and taxable, just in the same way as if he had made profits by selling goods. "now, there are two fundamentally distinct ways in which capital may increase: " . by direct and actual increase of quantity; thus flocks, and herds, and all the fruits of the earth increase by adding to their number and quantity. " . by exchange. "that is by exchanging something which has a low value in a place, for something which has a higher value. "now, it is clear that money produces a profit, and becomes capital, by the second of these methods. money is used as capital by exchanging it for some goods or labor, the produce of which may be sold or exchanged again, for a greater sum than they cost." mr. lawyer: mr. banker, that is very simple and very clear, but it strikes me that a distinction which is of greater importance to us is the form that capital takes, and i would say, as preliminary to a distinction in the different forms of capital, that we should have a broad definition of what capital is, concretely expressed. _capital is that part of the accumulated wealth of the country that is used for the purpose of profit. it is either active, passive, or fixed._ the active capital is that portion of the wealth of the country which is employed in the production, transportation and distribution of consumable commodities, and is more accurately described as the commercial fund of the country. the passive capital is that portion of the wealth of the country which is derived from the commercial fund in the form of earnings, profits, savings and income from investments, and is more accurately described as the investment fund of the country. it is represented by bonds, mortgages, and other investment securities. the fixed capital is that portion of the wealth of the country which is represented by real estate, buildings and all permanent improvements, such as railroads, mill property, irrigation enterprises, etc. _if we transfer the active capital, or commercial fund of the country, to the passive capital, or investment fund, or what is still more serious, convert it into fixed capital, we can no more keep the people working and producing new wealth than you can keep a steam engine producing power without coal and water._ what invariably happens in the so-called good times but almost invariably what, by experience, proves "boom" times, is that business men and in fact everybody, not only take all of their spare money, and go into speculations, but they exhaust their credit as well; and what they have to pay so far exceeds what they have to pay with, that when the chain of credit breaks at any one point, the whole fabric falls. it then takes years, usually, to catch up and reconstruct and reach a normal condition in which, after "paying for the dead horses," so to speak, the profits on business, savings from labor and the income from rents and investments again begin to supply investment funds. for example, it took at least four years to get the american people to thinking naturally and normally, after the panic of --and the fact is some "dead horses" have not been paid for yet; but generally speaking, we are now ready to turn a considerable sum from various sources into the investment fund of the country, or into bonds, construction of new work, and into fixed investments, lands, buildings, railroads and other permanent improvements. mr. banker: i think that you will all perceive from what mr. lawyer has just said with regard to the various directions into which capital may be turned and the fatal mistake that is ever and ever recurring--the transfer of active or productive capital, or the commercial fund, into the investment fund, or fixed forms, is what invariably, as he said a moment ago, breaks the chain of credit at some point. you can readily see, indeed it takes no argument to show, that nothing in the business world should be guarded so jealously as the commercial fund of the country, in order that credit may be maintained and labor steadily employed. mr. lawyer: our discussion has brought us most naturally to the last word suggested for our consideration, and that is the word "credit." i remember what daniel webster once said in a speech when speaking on the continuance of the charter of the united states bank in . it was this: "credit is the vital air of the system of modern commerce. it has done more, a thousand times, to enrich the nations than all the mines of all the world." and again in another place he says: "we owe more to credit and to commercial confidence than any nation which ever existed; and ten times more than any nation, except england. credit and confidence have been the life of our system, and powerfully productive causes of all our prosperity. they have covered the seas with our commerce, replenished the treasury, paid off the national debt, excited and stimulated the manufacturing industry, encouraged labor to put forth the whole strength of its sinews, felled the forests and multiplied our numbers, and augmented the nation, so far beyond all example, as to leave us a phenomenon for other nations to look at with wonder." mr. banker: that might have been true in , but today other commercial nations could truthfully reverse that comment, for they have in some respects and in some places passed us in credit facilities--they have beaten us as it were at our own game, that is, in having worked out a more highly developed use of credit. mr. manufacturer: when you recall the fact that between and per cent of our business is carried on in some form of credit, you realize that we have become so accustomed to this marvelous device that we have lost appreciation of its power for human achievement and advancement. mr. banker: you are right. do you know that i regard credit as one of the three greatest instrumentalities of modern civilization? mr. lawyer: well, no, i never thought of credit in that connection. that suggestion is so unusual that i am quite interested to know what you regard as the three and in what order of importance you would place them. mr. banker: i regard the invention of printing as the greatest influence in the world's advancement, because it opened up the paths of knowledge to the poorest as well as the richest, and completely destroyed the supremacy of wealth in the acquisition of knowledge. we have observed what gigantic strides have been made during the past twenty years, and with what increasing and amazing facility information is now being disseminated, the progress of the last ten years outstripping the imagination itself. everybody can now know everything, if they have the time and ability to acquire it. mr. farmer: how absolutely true that is. there are no less than ten magazines on my table at home. they cover every conceivable subject from electrical science, in which my son is deeply interested, to the fashion plates of the latest style of women's dresses, current events, current literature, fruit growing, intense farming, stock breeding, eugenics and euthenics. mr. lawyer: hold on there, mr. farmer, or you'll prove conclusively that you fellows out in the country know more than we do in town. mr. farmer: well, between you and me, i think that's so. mr. banker: the second most powerful agent in the advancement of the human race is that instrumentality by which all the resources of the human mind have been developed and brought into requisition in meeting the ever-increasing demands of mankind throughout the world. it has destroyed the supremacy of money, and provided the means by which the most humble of the race can place his foot upon the ladder of opulence. that instrumentality is credit. mr. lawyer: i doubt whether such a proposition was ever thought of, certainly it has never been advanced to my knowledge before; but when you stop to think of it, i do not believe that anyone can successfully controvert that statement. look about you, and imagine, if you can, what the condition of the people would have been without the advantage of credit. who of all your acquaintances has not made his way to success by means of credit. credit is certainly the gateway to opportunity, and opportunity is the everlasting hope of the world. mr. banker: mr. lawyer, unless you stop your flow of eloquence upon this newly discovered means of human happiness, i will not get a chance to state the third greatest contributing cause to the uniform and universal development and advancement of mankind. it is steam and its modern companion electricity. through the application of steam to ocean craft and railroads, transportation has brought the people of the whole world practically into one market zone, and we are now all eating the same food and wearing the same clothes, and to the last degree, every people, and broadly speaking, every man, is doing that which he can do most efficiently and profitably. mr. manufacturer: mr. banker, you have certainly opened up an entirely new strain of thought to me; and yet when you grasp the full force of the idea, and comprehend fully these three elements or forces: printing, the general transmission or diffusion of thought or knowledge; credit, the fullest use of all our talents by opening up a world of opportunity; and transportation, the fullest exchange of all the products of the mind and hand of man, you have actually covered the realm of human life up to date. and yet, who ever thought of placing this relative importance upon credit. we have been discussing the comparative importance of gun powder that brought the knight and soldier to a common level, the cotton gin, electricity, the telegraph, the telephone, chemistry, surgery, wireless, printing and steam, but whoever heard of credit in this connection? mr. merchant: what you say is distinctly true, but all these other things i can readily see are only additional facilities in making the three great fundamental instrumentalities for the advancement of the human race more efficient; and the more one thinks it over, the more impressive mr. banker's statement becomes. _first_: printing, the means of spreading knowledge; _second_: credit, the fullest opportunity of developing and using the powers of mind and body; _third_: steam and electricity, the means of distributing on land and sea the products of all mankind. these three, printing, credit and power are certainly the three greatest forces of modern civilization. mr. banker: now, gentlemen, having convinced you as i assume i must have done, of the tremendous part that credit is playing in the world of today, let us try to find out and comprehend just what credit really is, and how it happens to be so essential to our present life. the word "credit" means, "i believe," "i trust." that is, i believe in a man, in a man's character, and in his ability, and therefore i trust him to do something tomorrow, three months from now, six months from now, nine months from now, one year, or possibly a longer time, which he cannot do today. that is credit. what a limitless field of opportunity and then of speculation this confidence of man in man opens up. credit is to money what steam is to water, and credit like steam must always be kept within control, and within safe bounds, as in the case of steam, or there will be an explosion of credit, a most direful thing. now, there never will be an explosion or crisis in the world of credit, so long as credit is subjected constantly to the test of coin redemption, that is, the conversion of credit into money, gold. so long as credit can be extinguished by payment in gold, it is under control. but, gentlemen, when gold redemption becomes impossible, look out! let me read what macleod says about that: "it is unextinguished credit which produces those terrible monetary cataclysms which scatter ruin and desolation among nations. it is by the excessive creation of credit that overproduction is brought about, which causes those terrible catastrophes, called 'commercial crises,' and the inability of credit-shops to extinguish the credit they have created, commonly called the failures of banks, is the cause of the most terrible social calamities of modern times." mr. lawyer: now, we have the other side of the picture. on the one hand, we have daniel webster painting the possibilities of human achievements through credit--its tremendous power for good, when under control, and, on the other hand, the words of macleod pointing out the awful danger, the tragical consequences of credit beyond control. the years of , and are illustrations of what happens when credit has passed the boundaries of control. mr. banker: precisely so, and what we want to do is to prevent the recurrence of those commercial tragedies which interrupt the currents of prosperity, spreading desolation and death throughout the length and breadth of the land. mr. laboringman: it is to be hoped that we can do it, for no class suffers so much as the working masses during these periods of disaster, depression and distress. don't you see that if any one of us has succeeded in laying aside by painful saving a little nest egg, in some savings bank, that it is wiped out, and he has to begin all over again? and if one of us fellows has accumulated enough to start some little business of his own, ninety-nine times out of one hundred he is cleaned out, and through no fault whatever of his own. mr. farmer: in this very connection i want to call your attention to another thing, and that's this. these men who have the intelligence, ambition, perseverance and moral courage to pinch and save, even if they have to starve to get a start for themselves, constitute the true and the greatest ultimate source of wealth of this nation. they are the chaps that make two blades of grass grow where only one grew before. you don't want to forget that. they are not only the hope of every community in which they live, but they are a constant inspiration to the young. mr. manufacturer: now, gentlemen, you are talking sense. if we can devise some scheme to keep business from running away with us, and running off the track, and down the embankment every few years, and plumb over the precipice, we'll be doing something worth while. in a word, what we want, it seems to me, is to keep business on a more even keel, if possible; and if we could only get control of credit, and keep it within reasonable limits, always subject to a current gold test, we will be in a fair way to accomplish it. mr. banker: that is just what we are after; to find some way to keep credit within reasonable limits. you have struck the keynote of this whole question. in the first place, i want to call your attention to the fact that there are several kinds of credit, and that we must familiarize ourselves with all of them, in order that we may know how to deal with them. a doctor, you know, is a mighty poor stick, if he cannot diagnose your case, and tell you just what ails you, and yet proceeds to give you some kind of medicine, any kind of medicine for the right or the wrong disease. indeed, he's about the most dangerous individual to have in a community. now, unless we can become convinced that we are proceeding along right lines, because we have actually discovered the evils from which we are suffering, we had better let things alone. but our case is not hopeless, for the disease from which we are suffering has a well-known specific antidote, and it is up to us to first find out what ails us, and then to administer it. the treatment of the credit phase of the situation, or what may be in a way termed the mental aspect of the case, is probably as important as any other, and i will now try to analyze and describe credit, so that we can understand it, at least from my point of view. there are five well defined forms of credit. _first_: credit granted to aid production. _second_: credit to distribute production. _third_: credit granted upon accommodation paper. _fourth_: credit granted upon real estate. _fifth_: credit granted to the government, or forced by the government. uncle sam: say, mr. banker, do you know what time it is? don't you see it's half past ten o'clock? it will take you till morning to tell all about credit, and i don't know but what it would take you until "kingdom come." mr. laboringman: well, i've got to be up at six o'clock in the morning, and be at my job by seven, and i want to go home. i move, we adjourn. mr. farmer: so do i, for i've four miles to go yet tonight. mr. lawyer: what difference does that make? the trolley goes right by your door, and you'll be there in twenty minutes. mr. farmer: that's all right, mr. lawyer, i don't get my breakfast at nine o'clock as you do, but i've got to be up in the morning at five o'clock to feed my stock. i'm a-going, so good night. uncle sam: this is a rather informal break-up, but i guess it will be of no use to call in the police, so good night. seventh night commercial credit, land credit, government credit uncle sam: mr. farmer isn't here yet. he left in such a huff the other night, possibly he is sore--no, he is not, here he comes. mr. lawyer: when our meeting broke up last wednesday night, mr. banker had just outlined the different forms of credit, and i was very glad that he did, because it gave me an opportunity to read up on the subject and be prepared to listen intelligently, at least, to what any of you may say tonight. mr. merchant: i did some investigating, too, and found the subject far more interesting than i supposed it could possibly be. indeed, that is true of any subject. your interest is always measured by your knowledge, and many matters that seem to us difficult to understand, become exceedingly simple as you get into them, and comprehend them. how often the apparently impossible task completely dissolves under persistent attacks. mr. banker: i am more than pleased that you gentlemen have given your spare time to this subject. simple in function it is, but it is immeasurably great in its possibilities, extent and responsibilities from the standpoint of the banker. just as we parted last wednesday i had described or defined the different forms of credit, so far as they enter into banking directly or indirectly. as i then stated, the first and simplest use of credit is that granted for the production of something to eat, wear or use--what we call consumable commodities, that is, credit granted to aid in production. if mr. farmer over there should come into my bank now as he used to before he got rich, and ask for a thousand dollars to pay his expenses while he was planting, cultivating and harvesting his crop, and then in the fall should come again and ask me for three thousand dollars more to buy some steers and hogs with, because he thought he could make more money feeding than by selling his corn outright, and i had let him have the total amount of $ , from time to time as he wanted it, because i believed in his honesty and intelligence, and also because i regarded the venture as a good one, that would be granting credit for the production of beef and pork, food products--the very necessities of life. just as soon as his steers and hogs had become fit for market, and had ceased to gain anything to speak of, by holding them and further feeding, he must sell or lose the cost of holding on the chance of a rise in the market. but even this delay must be temporary. virtually he is compelled to sell from the very nature of the case. when he sells his steers and hogs, suppose he should receive $ , . first, he pays me the $ , and interest, and has about $ , profit on the transaction. you will all perceive and understand, that as i gave mr. farmer this credit of $ , from time to time, he gave me his promissory note for an equal amount, so that as fast as i granted credit he created a debt. i acquired the right to demand payment of $ , and he incurred the duty or obligation to pay $ , . so for every credit granted a corresponding debt is created; and if every debt is paid every credit will be canceled. though the credit granted to mr. farmer was for the production of the necessities of life, it was not the safest kind of a loan to make as we shall soon see--his personal responsibility aside of course; because after i had given the $ , he might have to replant his corn. the summer might be dry and the frost might come early and cut off his crop; but passing over these possible dangers to his crops, if we assume that his crop is the biggest he ever raised, and that that very fact makes it desirable to borrow the additional $ , , pleuro-pneumonia might strike his cattle, and cholera might seize his hogs and the transaction might result in a loss of $ , instead of a profit of $ , ; or even a greater loss than $ , . it is these risks that the banker takes in making loans to farmers that justifies higher interest rates than are charged under some other circumstances. again it is these risks that lead a banker out of caution to take real estate loans in addition, to cover the accidents of crop raising, although the national bank act forbids making loans upon real estate. mr. farmer: under such circumstances, i think it ought to be possible for a bank to take real estate loans. i believe it would help the farmer to get his money at a trifle lower rate of interest. mr. banker: i agree with you, and provision should be made for just such cases; but the rule of the national bank should still prevail with regard to loans upon real estate so far as a regular business is concerned, unless the bank is doing a savings bank business or a trust company business, in which event it would be entirely proper to use such funds for that purpose. mr. merchant: mr. banker, a moment ago you said that the loan to mr. farmer, apart from his personal standing, was not the safest kind of a loan to make. just what did you mean by that? mr. banker: i am glad that you asked that question, for it should be explained right here. suppose that you, mr. merchant, should purchase $ , worth of pork and beef in the barrel, at some distant point, and should come to me for the money to pay for it. in all probability i should ask you for the bill of lading covering the shipment, and also insist upon your getting an insurance policy on the goods before giving you the money. in this case, i am loaning money upon the necessities of life, consumable commodities, and unless the insurance company fails, and the goods are destroyed, i cannot possibly lose a cent. i have, humanly speaking, eliminated all chances of loss. you will observe that if i should hold the bill of lading and the insurance policy, i have the title or ownership of the pork and beef, in any event. in such cases, comparatively speaking, the rate of interest ought to be the lowest possible, as far as the risk goes. mr. manufacturer: but this kind of a transaction constitutes a comparatively small part of the commerce of the country. mr. banker: yes, that is true, and if credit was limited to such transactions, credit crises would be very few, indeed, probably never would arise as a result of over trading under such circumstances; trade would be greatly hampered, and business curtailed to a destructive degree. mr. manufacturer: that is certainly true. you men all know that i am a manufacturer of high class clothing. i want to give you an illustration of how business is being carried on today in the way of multiplying credit. a manufacturer of woolen goods at lancashire, england, sold to a wholesale merchant on the other side, $ , worth of goods on three months' time. the wholesale merchant sold the goods for $ , to an english exporter on three months' time. the english exporter sold the goods to an american importer for $ , , duty paid; the importer sold them to an american jobber for $ , ; the jobber sold them to me for $ , . all these sales occurred within thirty days, and not a single man paid a cent of money on account of his purchases. by way of payment, this is what happened. i gave my note due in ninety days to the jobber, and he discounted it at his bank. the jobber gave his note due in ninety days to the importer, and the importer discounted it at his bank; the english exporter sent over a draft upon the american importer at ninety days sight, and he accepted it and it was returned to england, where the exporter discounted it at his bank. in the meantime, the wholesaler drew a draft on the exporter at ninety days sight, and he accepted the draft, whereupon the wholesaler discounted the draft at his bank. at the same time the manufacturer drew on the wholesaler at ninety days sight, and the draft was accepted by the wholesaler, and was discounted by the manufacturer at his bank. thus we see that goods which sold originally for only $ , went through five different hands and became the basis upon which credits were granted for $ , , and debts were created for $ , . every single debt was sold just as though it was so much woolen goods. every man had his money and not one of them had paid his debt, and yet every transaction was legitimate and in the ordinary course of business. within sixty days i shall have turned these goods into clothes and sold and delivered them, giving my customers in turn credit upon my books, or will have accepted their promissory notes, which i may discount at my bank if i should need the money in my own business. now mark and note this. if i should deliver to the american jobber my check today, and he should send his check to the american importer and the american importer should send a draft to the english exporter, and the english exporter should deliver his check to the wholesaler, and the wholesaler should send his check to the manufacturer, debts amounting to $ , would have been paid and credit amounting to $ , would have been canceled; and yet not a single cent of cash in the form of coin or currency has been used. every one of the checks, notes or drafts taken in the transaction is property, just as much as the note taken for a single sale of the goods would have been property. indeed, every one of the five notes or drafts was just as much property as the goods themselves were, and could be bought and sold just as well as the goods themselves could be bought and sold. now it must be evident to all of you that in the production, transportation and distribution of commodities, credit performs exactly the same function as money. so far, therefore, credit is in all respects equivalent to money. so long, therefore, as the operations through credit are successful, everything goes well. mr. banker: precisely so, mr. manufacturer, so long as the operations are successful, everything goes well; but it is the sudden breaking of the chain of credit that brings or precipitates a disturbance. macleod uses this language in referring to the destruction of confidence: "it is the sudden failure of confidence and extension of credit which produces what is called in commercial language, 'a pressure on the money market' and which causes money to be 'tight.' when money is said to be scarce, it does not mean that there is a smaller quantity of money actually in existence than before; there may be more, or there may be less in the country; no one can tell what the amount of money in existence is, but a great amount of credit which serves as a substitute, and was an equivalent of money, is either destroyed altogether, or is suddenly struck with paralysis, as it were, and deprived of its negotiable power, and therefore, practically useless. a vast amount of property is expelled from circulation, and money is suddenly called upon to fill the void." it must be observed and noted right here, therefore, that streams of gold, of gold, i say, must be constantly and swiftly running through the channels of trade, and so intimately connected with a practically unlimited supply or an inexhaustible reserve of gold, in the form of a central reserve for the whole country, to immediately extinguish any conflagration of credit as soon as it breaks out, precisely as a flood of water extinguishes a fire when it first makes its appearance. for the past ten or fifteen years, the banks of england have realized the necessity of pursuing this principle, by carrying their own individual reserves, and accordingly have been gradually accumulating cash reserves of their own, instead of depending upon the bank of england, except as a last resort. germany, too, within the past year, has suffered severely because adequate reserves have not been present in her channels of trade; and having discovered this weakness in her banking practices, appointed a commission to pass upon that and other questions. the commission reported that the individual banks should carry their own reserves; and herr havenstein, president of the imperial bank, a short time ago demanded that the banks of germany should carry their own cash reserves up to per cent of their liabilities. how much more important, then, gentlemen, must it be that we, when you consider the extent of our country, our vast and varied banking interests which are being carried on by , or , individual or independent banks, should require everyone of these banks to be in a position to test its credits with the touchstone of gold, and at the same time take the precaution of protecting itself by a central reserve of gold far beyond any possible demand that may be made upon it. mr. merchant: mr. banker, from what you have been telling us it is perfectly clear that every promissory note, check, draft, or bill of exchange, which are acknowledgments of debt, are just as much property as land, houses, cattle, corn, iron, or anything else material that can be bought and sold. credit itself is merchandise and the subject of a gigantic commerce of its own. "a well-managed credit amounts to tenfold the funds of a merchant; and he gains as much by his credit as if he had ten times as much money." this maxim is generally received among all merchants. credit is, therefore, the greatest wealth to every man who carries on commerce. demosthenes says: "there being two kinds of property, money and general credit, our greatest property is credit." again he says: "if you were ignorant of this, that credit is the greatest capital of all toward the acquisition of wealth, you would be utterly ignorant." so melon says: "to the calculation of values in money, there must be added, the current credit of the merchant, and his possible credit." so also dutot says: "since there has been regular commerce among men, those who have need of money have made bills, or promises to pay in money. the first use of credit, therefore, is to represent money by paper. this usage is very old; the first want of it gave rise to it. it multiplies specie considerably. it supplies it when it is wanted, and which would never be sufficient without this credit; because there is not sufficient gold and silver to circulate all the products of nature and art. so there is in commerce a much larger amount in bills than there is specie in the possession of the merchants." mr. banker: while it is true, as a general principle, that by the sale and transfer of the same property, as we have seen in the case of the woolen goods, many credits are granted and a corresponding amount of debts are created, it is also true that a single debt in the form of a promissory note, check, draft or bill of exchange, may be the medium of exchanging or transferring many different pieces of property. this is just the reverse of the transaction that mr. manufacturer has explained to us. mr. farmer: that is right. i want to tell you fellows something. one day about six months ago i was thinking of taking an automobile trip, but hesitated on account of the weather signs. i hung around town here for an hour or two and happened to drop into the office of a certain lawyer (i never go there any more now). we talked politics. while there, i asked him what he thought of the weather, and the political situation, and then went out. at the end of the month i got a bill from that lawyer for $ . i called upon the gentleman (i suppose i have got to call him a gentleman on account of his neighbor here) to find out what his bill meant, and he claimed that while we talked about politics, the presidential election prospects and the weather, that i had pumped him about some very important legal matters upon which he had given me valuable advice. upon my soul i never knew it, but what could i do. my only possible escape was to pay some other lawyer, possibly mr. lawyer over there, $ to defend the case. as is the practice nowadays, i took the short cut and paid it by sending him my check. that lawyer indorsed and gave that check to a neighbor of mine for a jersey cow. my neighbor indorsed and gave the check to a country grocery store out there and paid his bill with it. the country storekeeper indorsed and gave the check to mr. merchant over there for $ worth of boots and shoes. mr. merchant indorsed and gave the check to mr. manufacturer for $ worth of clothing. mr. manufacturer indorsed and deposited that check with mr. banker, right here, who charged it up to my account. now, by jove, you wouldn't think that was possible, but here is the check with those five indorsements. mr. manufacturer has just given us an instance where the same identical property worth only $ , in lancashire, england, was sold five times, and that credits amounting to $ , were being granted, and a corresponding amount of debts were created. now here is a case where my debt to that blasted lawyer acknowledged by my check, paid him $ ; paid my neighbor for a jersey cow $ ; paid the country grocery store for groceries $ ; paid mr. merchant for boots and shoes $ ; paid mr. manufacturer for clothing $ ; paid the bank on account of mr. manufacturer's debt $ ; or six separate debts in all, amounting to $ . and the joke is, i never ought to have given the check at all. this is the reverse side of the use of credit. the instance given by mr. manufacturer was one illustrating the tremendous expansion of credit. the instance i have given is one of the contraction of credit. mr. banker: right on that point mr. macleod says that sixty years ago almost the entire circulating medium of lancashire, england, consisted of bills of exchange in no way different from mr. farmer's debt, and that they sometimes had as many as indorsements upon them before they came to maturity. so that the useful effect of a bill of exchange is indicated by the number of indorsements upon it, supposing that every transfer is accompanied by an indorsement, which is not always the case. we see here the fundamental difference between bills of lading and bills of exchange, because the indorsements on the former denote the number of transfers of the same identical property; the indorsements on the latter denote the number of transfers of distinctly different property. mr. merchant: mr. banker, in every form of credit granted so far and debts created, we have certainly been dealing only in a legitimate way with consumable commodities, the necessities of life, and ordinarily, if not always, this kind of credit will take care of itself. and yet the marvelous facility and power of credit has been illustrated so vividly, that i am sure all of us appreciate it and can readily see how it might be abused and lead to disaster if not confined to the actual production of articles of food, clothing and daily use, or, in a word, to the production of the necessities of life. mr. farmer: i object to your including that lawyer's bill as one of the necessities of life. mr. lawyer: i beg your pardon, but we lawyers are a necessity. possibly necessary evils, but nevertheless, i insist that we are necessary. mr. banker: passing over this little quarrel between mr. farmer and mr. lawyer, mr. merchant has hit upon the vital distinction that should always be maintained in commercial banking as distinguished from investment banking as we shall soon see. mr. lawyer: there is not one man in a thousand that comprehends the distinction that you have just called our attention to, and i include the bankers when i say that, too. i did not appreciate it myself a week ago, but it is fundamental and must not be overlooked. i want to call your attention to one form of credit that does not grow out of actual transactions in the production and distribution of consumable commodity, and that is accommodation paper. mr. laboringman: accommodation paper? it strikes me as though that was just the kind of paper i wanted. i certainly will take any accommodation that mr. banker over there will give me. mr. lawyer: speaking of accommodation paper, mr. macleod says: "we now come to a species of credit which will demand great attention, because it is the curse and plague spot of commerce, and it has been the great cause of those frightful commercial crises which seem to occur periodically; and yet, though there can be no doubt that it is in many cases essentially fraudulent, yet it is of so subtle a nature as to defy all powers of legislation to cope with it." the obvious distinction between accommodation paper and promissory notes or bills of exchange here referred to, and all legitimate commercial paper, is this: the accommodation paper represents a future transaction, something to be done, while the true commercial paper represents a past transaction, or something that has been done; for example, goods that had been manufactured and are ready for sale or have been sold and shipped. mr. banker: mr. lawyer, will you allow me to illustrate that distinction? mr. lawyer: certainly. mr. banker: if mr. manufacturer there should make ten different sales of clothing of $ , each, and then send out ten drafts to his ten customers, who accepted them and returned them, these ten drafts would be called real bills of exchange, or let us call them true commercial bills, because the ten men have purchased and agreed to pay for the goods received by them. should the ten men have sent their promissory notes to mr. manufacturer, they would be identically the same thing as the drafts which they had accepted, and answer identically the same purpose. the real beneficiaries in these ten transactions are the ten purchasers of the goods which they have received; and if mr. manufacturer should sell me these ten bills of exchange or promissory notes as the case might be, with his indorsement, the ten men would all individually regard themselves as primarily liable; and they will, therefore, each of them, prepare to pay his note when it comes due, although mr. manufacturer is the guarantor. but if mr. manufacturer should go to these same ten men and ask each of them as a favor or _accommodation_ to him to accept the draft or indorse his note for the same amount of $ , , each due in days, no goods having been purchased by any one of them, all these drafts would be accommodation paper, and no one of these men would look upon his note as his debt, and therefore would expect that mr. manufacturer would take care of the paper when it came due. in the latter case, mr. manufacturer, having gotten the money and the ten men having no interest in the transaction, except as an accommodation to mr. manufacturer in the form of a favor, mr. manufacturer becomes the real maker of the ten notes, and the ten men who are indorsers are, as i have said, without any interest in the transaction, except that of accommodation acceptors. mr. macleod has described this whole transaction so fully and forcibly i want to read it to you: "there is in fact only one real principal debtor and ten sureties. now these ten accommodation acceptors are probably ignorant of each other's proceeding. they only give their names on the express understanding that they are not to be called upon to meet the bill: and accordingly they make no provision to do so. if anyone of them is called upon to meet his bill, he immediately has a legal remedy against the drawer (or the note maker). in the case of real bills, then, the bank would have ten persons who would each take care to be in a position to meet his own engagement; in the case of accommodation paper there is only one person to meet the ten engagements. furthermore, if one of the ten real acceptors fails in his engagement, the bank can safely press the drawer: but if the drawer of the accommodation bill fails to meet one of the ten acceptances, and the bank suddenly discovers that it is an accommodation bill, and they are under large advances to the drawer, they dare not for their own safety press the acceptor, because he will, of course, have immediate recourse against his debtor, and the whole fabric will probably tumble down like a house of cards. hence the chances of disaster are much greater when there is only one person to meet so many engagements, than when there are so many each bound to meet his own. "we see, then, that the real danger to a bank in being led into discounting accommodation paper is that the position of principal and surety is reversed. they are deceived as to who the real debtor is, and who the real surety is, being precisely the reverse to what they appear to be, which makes a great difference in the security to the holder of the bills...." in carrying on a legitimate extension of credit, the bank never permits the advance to exceed a certain definite limit; but it never can tell to what length it may be inveigled to discounting accommodation paper until some commercial reverse happens, when it may discover its customer has been carrying on some great speculative operation with capital borrowed from it alone.... "this is the rationale of accommodation paper; and here we see how entirely it differs from real commercial paper. because with real commercial paper, and bona fide customers, though losses may come, still directly the loss occurs, there is an end of it. but with accommodation paper the prospect of a loss is the very cause of a greater one being made, and so perpetually in an ever-widening circle till at last the canker may eat into a banker's assets to any amount almost." "the insurmountable objection, therefore, to this species of paper, is the dangerous and boundless facility it affords for raising money for speculative purposes." mr. merchant: that is absolutely true. accommodation paper and speculation go hand in hand. they are twin sisters. siamese twin sisters. pardon me, if i take a moment to demonstrate its terrors by relating the experience of a friend of mine who was led into an irrigation scheme: "my friend was in the grocery business in a western town and had a stock of groceries worth $ , , and he had $ , cash in the bank. the dam and water ditch was to cost $ , . my friend sold off a part of his goods, realizing $ , of additional cash. he moved the balance of his goods out to the point where the dam was to be located, forty miles away, and began operations. he succeeded in finishing the dam after paying out for work all that he had, and in securing indorsers up to $ , upon accommodation paper in the city where he had carried on the grocery business. two hundred thousand dollars had been paid for groceries and clothing. the laborers had gone to his store and obtained food and clothing during the two years he was engaged in constructing the work, and they had consumed all their wages in living, and more, too. he put an issue of bonds on the dam but could not sell them; therefore he could not pay the banks. his indorsers could not pay the banks, and most of them were ruined because of their indorsements for accommodation purposes. he was wiped out. he turned over everything to the bank, bonds and all. the banks had to carry those bonds ten years before they could sell them." mr. banker: mr. merchant, you have given a splendid illustration of the result of accommodation paper, but you have proved far more than you set out to demonstrate. you have not only shown the ruin wrought by the $ , of accommodation paper, but also the extreme danger accompanying accommodation paper, when the proceeds go into a real estate investment or improvement; especially an irrigation enterprise that usually requires a long time to reach results. the same is true with regard to railroad investments, town lots, or any kind of real estate investments. your friend put into that grocery store from first to last $ , worth of groceries and clothing, and the laborers who did the work ate up the groceries and wore out the clothing. mr. merchant: that is just what they did, for he simply gave them credit at the store for their wages, and they were charged for what they bought, and at the end of two years, the $ , worth of groceries and clothing were consumed and converted into that dam and ditch. he used to say he was ruined by the dam ditch. mr. banker: now you have proved another thing by your illustration and that is this. when the $ , worth of food and clothing represented by two years' work of men were converted into a real estate improvement, instead of into consumable commodities, the necessities of life, you have, so to speak, destroyed that much commercial capital, by converting or changing it into fixed capital. this is true because your friend could not begin and build another dam, for he had no money with which to do it. mr. merchant: but, mr. banker, he could sell his bonds. mr. banker: if he could, yes, but you just said he could not, and that he turned everything over to the bankers and that they carried the bonds for ten years. now suppose that a flood should have come and taken out his dam and destroyed his irrigation ditch, it would then be perfectly clear to all of us, would it not, that $ , worth of food and clothing had gone down the stream and had been forever lost; completely wiped out, just as completely as if the goods had been consumed by fire. mr. merchant: that is perfectly plain, but suppose that he could have sold the bonds, he would have gotten his money back, would he not? mr. banker: yes, we would say in that case, that he had gotten his money back, but he could not get the $ , of food and clothing back, for they are in the dam and ditch. the $ , he gets for his bonds, if he sold them for that price, is an entirely different $ , , as you must admit after a moment's thought. your friend had groceries and clothing which he could sell for $ , in money. now, suppose that you had had at the same time, $ , in your business. your $ , with the $ , your friend had put into the dam, when finished would amount to $ , . now, if he had come to you to dispose of his bonds, and you had thought well enough of them to sell out your business and buy them, your $ , bonds would represent the food and clothing in the dam and ditch, and are no longer cash capital any more than a farm is cash capital, and it might take you longer to sell your irrigation bonds than to sell a farm. you said it took the bank ten years to get rid of them. mr. merchant: oh, i see that now. we have simply converted $ , of cash capital into $ , of passive or fixed capital. before he built the ditch he had $ , and before i sold out my grocery business i had $ , , making $ , of cash capital. now he has $ , of cash capital and i have $ , of fixed capital, possibly an eternal investment in the bonds. that is what you would call a permanent investment, i suppose, for it might take me twenty years to demonstrate the value of the enterprise as it did the bankers. mr. banker: now, mr. merchant, i want you to mark and remember this; in fact, i want all of you gentlemen to set this down in your memories so that it can never be dislodged. these irrigation bonds would continue as passive or fixed capital until the earnings or sale of the property, covered by the ditch, should not only pay the interest upon them, but should pay off the principal as well, even if it took a thousand years to accomplish this result. mr. laboringman: that is nothing but a straight real estate loan as far as i can see, and not a very good one at that. mr. banker: that is just what it is, and for the very same reason a banker should no more buy such bonds or loan on such securities, his commercial deposits than he should loan money on real estate. the principle is the same. if we bankers loan on cotton, cattle, hogs, wheat, corn, or manufactured goods of any kind, we know there is a constant and ready market at some price for these things, for they are all in current demand at some price, somewhere, while a real estate loan, however good it may be, is not what we call a quick asset, or liquid asset; that is, something that you can turn into money at once. a commercial bank should never take a real estate loan, except as additional security for money advanced for some legitimate commercial purpose as distinguished from an investment. the commercial funds should be used for the production of crops, or goods of some kind, and if a real estate mortgage is taken in addition, it should be only within reasonable limits, for it is the easiest thing in the world to tie up all a bank's capital and deposits in real estate loans; that is, to turn the capital and deposits into passive or fixed capital, mortgages or real estate, which might be selling readily in boom times, but which are utterly unsalable when the break comes. mr. laboringman: what do you mean by tying up the capital and deposits of a bank in mortgages and real estate? mr. banker: i will explain that to you in such a way that i am sure you cannot fail to understand and appreciate it. suppose that i had $ , in cash in my bank to meet the demands of my depositors; but should give it to farmers in exchange for mortgages upon their farms. i could not pay my depositors the mortgages; they want money. i might not be able, and probably would not be able, to sell the mortgages in time to pay the depositors their money; and if money happened to be scarce, possibly not for a long time would i be able to pay them their money. i would have that $ , tied up in mortgages. this is granting credit on land. now, these mortgages will continue in existence until the farmers can make enough out of their crops to pay the interest upon them from year to year, and finally to pay them off; it may take ten or twenty years. if i had loaned $ , on cotton or cattle, the products of the farm, they could have been converted immediately into money at some price to meet the demands of my depositors. mr. laboringman: i see now that you bankers must keep the money you receive from us depositors, either in cash or in something you can instantly convert into money, and when you don't do that, you have tied it up, as you say; and if we happen to find it out we are apt to want our money; and if we all want it at the same time, you call it a run on your bank. now when you say a banker is ready for a run, you mean, as i now understand it, that he has all his deposits on hand in cash, or has all his deposits invested in something that he can turn into cash: good notes that have been taken in the course of business, that is, in the production and transportation of consumable commodities, the necessaries of life. of course, anybody must understand that if a bank bought a lot of farms or a lot of farm mortgages (and it might be worse off if it bought city mortgages with our deposits), he could not convert them or turn them into money on demand. i am on to this thing now; neither mortgages nor land can be considered what you described a minute ago as quick assets, or as liquid assets, because you cannot convert them into money practically on demand. mr. farmer: i grasp that idea now myself. do you know i have always thought, until within an hour, that we farmers ought to be able to get something to pay out in the shape of currency that represented our land, or in exchange for a mortgage, just because i knew a mortgage was good or worth its face; but i see now that a bank must not only have something that is good and worth its face, but it must be exchangeable for, and convertible into, real money or gold, at any time, or the bank must shut up. and you can't turn all our farms into some form of currency, and expect the banks to redeem it any more than you can sell a farm every hour. i have been trying to sell one farm for ten years. now i see that would not make very good currency. since i cannot sell it, the only way for me to convert that farm into cash capital is to take the net earnings, and lay them aside until they equal its value or what it cost me; that might not be within twenty years, as i might not be able to save for that purpose more than per cent or per cent a year which, at compound interest, would about make it. it is perfectly clear to me, now, that real estate is not a proper basis for a currency, which must be currently redeemed in gold. it cannot be done; that is a sure thing. mr. lawyer: mr. farmer, you have reasoned out for yourself a thing that has fooled many a man, and the world has had many bitter experiences trying to do the very thing you now so clearly see cannot be done; that is, make currency out of real estate, or, rather, as you would say, make money out of real estate, when, as we have already seen, gold is the only money we have or can have, so long as gold is our standard of value. jevons, a great english writer, has well said: "land is doubtless one of the best kind of security for the ultimate repayment of a debt; and it is therefore very suitable when money is lent for a long time. but representative bank notes purport to be equivalent to gold, payable on demand, and nothing is less readily convertible into gold in an emergency than land." mr. farmer: and we cannot have any more currency than we can redeem daily in gold. therefore we can't make currency out of all of our real estate, even our agricultural land, which is according to our last census worth sixteen billions or $ for every man, woman and child in the united states. the average value per acre is $ . . now, at first thought, anyone would say that it would be safe to issue money for this value, or sixteen billion dollars; but who would redeem it? that is the question. one hundred and sixty dollars for every man, woman and child. that would certainly be absurd; and yet i have always thought that we could do that very thing until tonight. i see how it is, currency must be currently redeemed in our standard of value, or it will become first worth less than cents on the dollar, and if the thing goes far enough, it would actually become practically worthless, although it might be based upon valuable real estate. how perfectly simple and plain this all is now. mr. lawyer: indeed, it is simple and plain, but do you know that that scheme of making currency or money out of real estate, or converting real estate into currency or money, was tried twice in france upon a most gigantic scale? first, john law, in , worked out a scheme whereby he tied the government of france to a land enterprise in the united states, the "mississippi scheme," covering a large french grant, and through his plan issued money, government money, that represented about one-quarter cash and the balance real estate. but everybody has heard of john law and the "mississippi bubble," so i won't say any more about that. nearly a century afterward the same scheme was tried again, and strange as it may seem, in france, too. from to , during the french revolution, the credit of the french government was added to vast real estate holdings, so that the security was doubled, such as it was. i have just looked this matter up with a good deal of care, and the best description i found was substantially as follows: assignats were a form of paper money issued in france from to . assignats were so termed because land was assigned to the holders of them. the financial strait of the french government in was extreme; coin was scarce, loans were not taken up, taxes had ceased to be paid, production and the country were threatened with bankruptcy. in this emergency assignats were issued to provide a substitute for metallic currency. these assignats were originally of the nature of mortgage bonds on the national lands. these lands consisted of the church property confiscated on the motion of mirabeau by the constitutional assembly on nov. , , and the crown lands which had been taken over by the nation on oct. th. subsequently the lands of the emigres, the princes and royal followers, , of the nobility who were exiled from the soil of france, were added to the list of lands against which the assignats were issued. these assignats were first to be paid to creditors of the state; with them the creditors could purchase national land, the assignats having for this purpose a preference over other forms of money. if the creditor did not care to purchase land, it was supposed that he could obtain the face value for them from those who desired land. those assignats which were returned to the state as purchase money were to be canceled, and the whole issue, it was argued, would consequently disappear, as the national lands were distributed. a first issue was , , francs or ($ , , ) worth of assignats, each note being francs or $ value and bearing interest daily, at per cent. they were to be redeemed by the product of the sales, and from certain other sources, at the rate of , , francs ($ , , ) in ; , , francs ($ , , ) in ; , , francs ($ , , ) in and , and the balance in . the success of this first issue was undoubted, as all such first issues are. mirabeau was a strenuous advocate of the assignats. "they represent," he said, "real property, the most secure of all possessions, the soil on which we tread. there cannot be a greater error than the fear so generally prevalent as to the overissue of assignats, reabsorbed progressively in the purchase of the national domain; this paper money can never become redundant." in the interest was reduced to per cent, and as the treasury had again become exhausted, a further issue was decided upon; it was also decreed that the assignats were to be accepted as legal tender, all public departments being instructed to receive them as the equivalent of metal money. the second issue amounted to , , francs ($ , , ) and carried no interest. it was solemnly declared in the decree authorizing the issue that the maximum issue was never to exceed one billion two hundred million francs ( , , , ) ($ , , ). this pledge, however, was soon broken, and further issues brought the total up to three billion seven hundred and fifty million francs ( , , , ) ($ , , ). the consequence of these further issues was instant depreciation, and the note of francs ($ ) sank to less than francs ($ ) in coin. recourse was then had to protective legislation. the first step was to decree the penalty of six years' imprisonment against any person who should sell specie for a more considerable quantity of assignats, or should stipulate a different price for commodities, according as payment was to be made in specie or assignats. for the second offense, the penalty was to be twenty years' imprisonment (august , ). for this the death penalty was ultimately substituted (may , ). this severe provision was, however, repealed after the fall of robespierre. notwithstanding these precautions, the value of the assignats still declined, till the proportion of specie had become that of sixty to one. then came the passing, by the convention, on may , , of the absurd maximum. the decree required all farmers and corn dealers to declare the quantity of corn in their possession and to sell it only in recognized markets. no person was to be allowed to lay in more than one month's supply, a maximum price was fixed above which no one was to buy or sell under severe penalties. these measures were soon stultified by further issues and by june, , the total number of issued assignats aggregated nearly eight billion francs ($ , , , ), of which only two billion four hundred and sixty-four million francs had returned to the treasury to be destroyed. the extension of the maximum price to all commodities only increased the confusion. trade was completely paralyzed and all manufacturing establishments were closed down. attempts by the convention (legislature) to increase the value of the assignats were of no avail. too many causes operated in favor of the depreciation; the enormous issue, the uncertainty as to their value, if the revolution should fail; the relation they bore both to specie and commodities which retained their value and refused to be exchanged for money of constantly diminishing power. even between the assignats themselves there were differences. the royal assignats themselves, which had been issued under louis xvi had depreciated less than the republican ones. they were worth from per cent to per cent more, a fact due to the hope that in case of a counter-revolution they would be less likely to be discredited. the directory was guilty of even greater abuses in dealing with the assignats. by the issue had reached the enormous figure of forty-five billion francs ($ , , , ), and even this gigantic total was swollen still more by the numerous counterfeits introduced into france by the neighboring countries. the assignats had now become totally valueless, the abolition of the maximum the previous year, , had produced no effect; and, though by various payments into the treasury, the total number had been reduced to about twenty-four billion francs ($ , , , ), their face value was about thirty to one of coin. at this value they were converted into eight hundred million francs ($ , , ) of land warrants or mandats territoriaux, which were to constitute a mortgage on all the lands of the republic. these mandats were no more successful than the assignats; and even on the very day of their issues were at a discount of per cent. they had an existence of six months, and were finally received back by the state at about the th part of their face value in coin. that is, the state gave one dollar in coin for seventy dollars in the paper. this experience of france has been the experience of practically the entire world, italy, russia, germany, great britain. the south american countries are now going through it. even the very best of them, brazil and argentina, although their notes are not backed up by the land as those of france were, have suffered the same consequences of their folly. they are the notes issued by the government against their own credit. they were issued as fiat money, but are gradually being retired just as the assignats were as depreciated currency. mr. banker: well, we haven't anything on the south american countries to speak of ourselves from colonial times down to the present day. uncle sam: now, mr. banker, just hold up; you can't get into that tale of woe tonight, for i always have a bad dream when i think of it; a veritable nightmare. we must quit for tonight. mr. farmer over there has gone to sleep on my hands already. mr. farmer: no, he hasn't; not on your life, and i hope it's a very long life, uncle sam. mr. laboringman: mr. farmer, you are the first man i ever saw who snores when he is awake. you snored loud enough to wake the dead. your snoring actually kept me from going to sleep. uncle sam: well, boys, let me see whether i can recollect just what points we have made tonight. _first_: there is credit, which is the result of confidence and trust. it is the right to demand payment. _second_: for every credit granted, a debt is created. _third_: if every debt is paid every credit will be canceled. _fourth_: credit is never excessive no matter what its absolute quantity is, so long as it always returns into itself; that is, cancels itself. _fifth_: credit from a commercial point of view, when granted to create consumable commodities, the necessaries of life, is filling its proper function. _sixth_: credit granted to facilitate the sale, transfer and distribution of consumable commodities, the necessaries of life, is filling its proper function from a commercial point of view. _seventh_: credit extended in the form of acceptances of checks, drafts or bills of exchange, growing out of the actual production and distribution of the necessaries of life, is filling its proper function from a commercial point of view. _eighth_: credit obtained through accommodation acceptances or indorsements is a bane to and peril of commerce, especially if such credit is used in real estate investments, and more particularly in speculation. _ninth_: credit granted upon real estate securities should depend entirely upon the investment fund of the country for its cancelation. so far as such credit is canceled by appropriating the commercial fund of the country, labor will be thrown out of employment, production and consumption will cease to a corresponding degree, and this will measure the amount of human suffering that is sure to follow. _tenth_: real estate is not a proper basis for currency, because it is not a consumable commodity with a ready market where it can be converted into gold and because the value of real estate from the standpoint of our currency needs is unlimited and therefore necessarily not convertible into gold coin which is always essential to a sound currency. the history of credit granted to our government or forced by our government from the people will furnish plenty of food for our appetites, humble our pride, and recall most sickening experiences one week from tonight. don't you think so, mr. banker? mr. banker: i certainly do. mr. lawyer: so do i. and even then we cannot do the subject half justice; but i suppose that we must get through some time. uncle sam: i see that mr. farmer is now wide awake, but that mr. laboringman over there is starting for the land of nod, because mr. farmer is not keeping him awake by his snoring, so i think i'd better say good night. eighth night colonial credit money uncle sam: when we parted last wednesday night, we all agreed to make our experiences in government issues of money the subject of inquiry tonight, and i presume you have all been spending your days and nights in studying american history, that is, in studying me. mr. merchant: i have put more work into the question of our government issues of money than into any subject in my life in the same length of time, principally because i knew mr. farmer used to be what we called a green-backer some years ago and i wanted to be ready if he happened to still entertain those ideas and was still subject to those fits of madness that came over him before he paid off the mortgage on his farm. but that's ancient history now, and he's holding the mortgage on the other fellow's farm. now, mr. farmer, don't get hot, for i don't mean any disrespect to you, but only to recall that craze for fiat money when you and i were much younger than we are now. then again, you seem to have had a real revelation during our last talk, and to have been converted to the principle that there could be too much paper money. mr. farmer: that's all right, mr. merchant, but i well remember that i was not alone when i used to advocate greenbacks without limit. mr. banker over there was in the same boat with me. mr. banker: right you are, mr. farmer, and there was not a man in this immediate neighborhood then except old judge jones who did not agree with us, but we've traveled some since then. mr. lawyer: well, gentlemen, i am a little surprised to find you all so completely convinced that government issues of money are to be condemned before a fair trial. i half imagine that mr. manufacturer over there will sympathize with me in my contention for the constitutional power, and the wisdom of issuing united states notes. mr. manufacturer: you are very sadly mistaken about me; i am ready to prove that you are mistaken, both as to the wisdom and constitutional right of the government to issue money even if you are a lawyer, and ought to know all about the constitution. i don't claim to know very much about the money question, generally speaking, but like mr. merchant i have made a special study of this particular feature of it. i am convinced there is only one side to this question, however many sides there may be to some other phases of it, and we do not have to leave the history of our own country for overwhelming proof of the folly of it. i for one do not believe that the government has any constitutional right to issue money. mr. lawyer: well, well! mr. merchant: we'll make you say "well, well" before we get through with you, if it takes till morning. mr. manufacturer: it won't take until morning and when we get through with him, he will be finished for fair, i think. mr. laboringman: we are evidently going to have some fun tonight. you seem to think that you have mr. lawyer in chancery. now, blaze away. i want you to nail mr. lawyer on the greenback question, if you can; for he has been getting the best of you on several occasions; personally, i hope i will never get any less of the greenbacks as they are good enough for me. mr. merchant: but they are not good enough for you, mr. laboringman, nor for anyone else, if they are not worth one hundred cents on the dollar; or if they are ever liable to be worth less than one hundred cents on the dollar; or if they are teaching an economic falsehood, so long as they remain in existence; or if they are positively doing the business interests of the country actual harm by excluding a corresponding amount of gold, and finally, if they have no legal right for existence today, even though one may admit for the sake of the argument that it was necessary to issue them to save the nation, an admission which i will not make. mr. manufacturer: good for you, mr. merchant, that statement has the right ring to it. the greenback is guilty of every one of the charges that you make from my point of view, and so it must always be with every government issue of money. you may go back to the very first government issue of paper money in this country, and follow the practice down to this very hour, and it has left a trail of dishonesty, disaster, ruin and misery unmatched by any other single cause. in my contention for this statement i am going to rely for my historical facts upon george bancroft, the greatest american historian of our earlier period. in the fall of , upon the return of an unsuccessful expedition which massachusetts had sent out to capture quebec, the general court, the then legislative power, ordered an issue of "£ , ($ , ) of printed bills of equal value with money." and the balance of the cost which was £ , or $ , was issued the following day. in july, , within nineteen months of the earliest emission, the first legislature under the new charter which transformed the self-governing colony of massachusetts bay into a direct dependency of great britain, made "all these bills of public credit current within this province in all payments equivalent to money, excepting specialties and contracts made before the publication" of this new law. their credit was supported by receiving them in all public payments at a premium of per cent. _immediately all the coins then in massachusetts were exported to england and the new stock followed as fast as it came in from abroad._ the vain sorrow of the province expressed itself in by the prohibition of "the export of coin, silver money or bullion." in june, a joint committee of the council and representatives, to be aided by the advice of merchants and others, was appointed to consider how to revive trade, and find out some suitable medium to supply the scarcity of "money"; and it is to be noted that the word "money" in all colonial legislation was used exclusively for gold and silver coin. the first issue of bills of credit of massachusetts, after it became a royal province, was in november, , for £ , in value "equal to money," but to be accepted in all public payments at the advance of per cent. the passion for borrowing spread like flame on the dry prairie. in november, , massachusetts ordered £ , to be let out by trustees to the inhabitants of the province for five years on real security, at per cent per annum, to be paid back in five annual installments. the act was a sacrifice of the public interests to borrowers, who were to return their loan only after a lapse of time, sufficient to insure the very great depreciation of the paper in which it was to be paid. moreover, the borrowers needed an enforcement by law of the circulation of the paper which they borrowed: swiftly, therefore, in december, , under a pretext "to prevent the oppression of debtors" a stringent statute made the bills legal tender for all debts that had been, or should be contracted, between the th of october, , and the th of october, . the loan of bills of credit by massachusetts in was managed at the seat of government. but why should boston be favored? "that the husbandry, fishery and other trades of the province might be encouraged and promoted," bills of credit on the province to the amount of £ , were in ordered to be distributed to a loan office in each county. but why should borrowers in the smaller townships be forced to travel to their shire towns? let a public money lender be near every man's door. by the statute of march, , £ , were distributed among borrowers in each of the several towns according to its proportion in the last province tax. again in , £ , in bills of credit were proportionately loaned among the several towns, even on personal security, at the rate of per cent for six years, after which repayment was to be made in five yearly installments. of course, "money" disappeared; not even a single penny was to be had; the small change became of paper. the next development of the colonial system of paper money was a partial repudiation, so far as massachusetts was concerned. in february, , less than forty-seven years after the first emission of bills of credit by massachusetts, that colony issued £ , of a new tenor of which one dollar was to be equal to three of the old, and which, after five years, was to be redeemed at par in silver and gold. when the time of redemption came around they were not paid off, but by a further repudiation four pounds for one was made the rate in exchanging the old tenor for the new. on the th of january, , the general court in massachusetts made this confession: "the emissions of great quantities of bills of public credit, without certain provision for their redemption by lawful money in convenient time, have already stripped us of all our money and brought them into contempt to the great scandal of the government; for the remedy thereof this province hath fixed the value of their bills in lawful money, and the time of their redemption in new style." but that year went by and relief had not been found. in , james allen, the preacher of the annual election sermon, from the pulpit, addressed the governor in this wise: "be the means of delivering us from the perplexing difficulties we are involved in by an unhappy medium, uncertain as the wind and fluctuating like the waves of the sea, through the unrighteousness thereof the land mourneth, and the cries of many are going up into the ears of the lord of sabaoth." in , people of massachusetts took the largest part in the brilliant enterprise which ended in the louisburg campaign, and were to receive from the british parliament some payment for their extraordinary expenses in the expedition. in february, , massachusetts, while awaiting its share of this remuneration, invited the governments of connecticut, new hampshire and rhode island to join in abolishing the use of bills of credit; but as no one of the three gave effectual heed to the summons, the people of massachusetts proceeded alone. it was estimated that about £ , , of their bills of credit would be outstanding in the year , that is, $ , , . in january of that year an act was passed redeeming the bills of the old issue or tenor at the rate of shillings, those of the new issue or tenor at the rate of s. and d. for one spanish dollar; a rate which somewhat exceeded their market value at the time. the bills of credit of new hampshire, rhode island and connecticut were excluded by most stringent laws, and massachusetts, with its quickened industry and established credit, "sat as a queen among the provinces." mr. merchant: mr. manufacturer, you must have gotten your information from the same source that i obtained mine; all that you've said sounds very much like george bancroft, whose history of this question i've just read. since my ancestors came from connecticut, i am going to tell her tale of woe. in june, , connecticut put forth £ , of bills, or $ , ; then soon followed that by £ , more, which were "to be in value equal to money, and to be accordingly accepted in all public payments." in october, , connecticut, to prevent oppression by the rigorous exaction of money, declared its bills of credit legal tender for debt contracted between the th day of july, , and the th day of july, . the time for the operation of the law was afterwards extended to . in the year connecticut loaned interest-bearing bills for nearly £ , . in may, , it issued £ , of a new issue of which £ , were to be loaned to freeholders of the colony on mortgage, or personal security, to be repaid one half in four years, the other half in eight years in current bills, or hemp, or duck, or canvas at their current market price. these bills were made legal tender in all payments. but this provision was censured by the lords of trade in england, and in the following november it was repealed. roger sherman, the greatest statesman of connecticut, gave his mind to the questions about money and mediums, commerce and exchanges, and having mastered them in , under the name of philoeuonomos, "the lover of just laws," he addressed to the men of connecticut "a caveat" against injustice or an inquiry into the evil consequences of a fluctuating medium of exchange. these are some of his words: "the legislature of connecticut have at length taken effectual care to prevent a further depreciation of the bills of this colony; the other governments (meaning new hampshire and rhode island) not having taken the like prudent care, their bills of credit are still sinking in their value...." "_money ought to be something of certain value it being that whereby other things are to be valued_ ..." and this i would lay down as a principle that can't be denied that a debtor ought not to pay any debts with less value that what was contracted for, without the consent of, or against the will of the creditor.... "if what is used as a medium of exchange is fluctuating in its value, it is no better than unjust weights and measures, both of which are condemned by the law of god and man; and, therefore, the longest and most universal custom could never make the use of such a medium either lawful or reasonable. "we in this colony are seated on a very fruitful soil, the product whereof with our labor and industry and the divine blessing thereon, would sufficiently furnish us with and procure us all the necessaries of life and as good a medium of exchange as any people in the world have or can desire. but so long as we part with our most valuable commodities for such bills of credit, as are no profit, we shall spend a great part of our labor and substance for that which will not profit us; whereas, if these things were reformed we might be as independent, flourishing and happy a colony as any in the british dominion." in may of the same year, the famous traveler, john ledyard, and twenty-five other merchants of connecticut caught up the theme, and in a petition to their legislature said: "the medium of trade whereby our dealings are valued and weighed, ought to be esteemed as sacred as any weights and measures whatever, and, to maintain justice, must be kept as stable, for as a false weight and a false dollar is an abomination to the lord, a false and unstable medium is equally so, as it occasions as much iniquity, and is at least as injurious." the connecticut assembly supported these memorialists, excluded the bills of paper money of rhode island, and overcoming every embarrassment, at last, like massachusetts, redeemed every nine shillings of its paper money with one shilling in specie. after the first day of november, , all accounts in connecticut were kept in lawful money. mr. manufacturer: the experience of the other new england states is practically the same as that you have just recited in connecticut. in the council of new hampshire was zealous to follow the fashion of issuing paper money by loan and issued £ , . rhode island, also, in july, , on its first emission of bills of credit, declared them equal in value to "money," and made them receivable in all public payments. in november, , rhode island discharged a claim by a loan of its bills of credit to the amount of £ for four years free of interest. new jersey, too, tried its hand at the same scheme, following the lead of pennsylvania. in december, , it issued £ , , and in , it struggled hard to issue a larger amount, but william patterson, who was afterwards a member of the supreme court, resisted the proposal with inflexible courage, and here are some of the words which he employed: "an increase of paper money, especially if it be a tender, will destroy what little credit is left, will bewilder conscience in the mazes of dishonest speculations, will allure some and constrain others into the perpetration of knavish acts, will turn vice into a legal virtue, and sanctify iniquity by law. men have, in the ordinary transactions of life, temptations enough to lead them from the path of rectitude; why then pass laws for the purpose, or give legislative sanction to positive acts of iniquity? lead us not into temptation is a part of our lord's prayer worthy of attention at all times, and especially at the present." in march, , when there was universal peace, borrowers undermined the scruples of pennsylvania, and that colony issued bills of credit for loans to individuals, and not only compelled creditors to receive the bills at par, or "lose their debts," but ordered sellers to receive them at their nominal value in the sale of goods, or lands, or tenements or "forfeit a sum from shillings to £ ." again, on march , , pennsylvania, which hardly knew what it was doing and had not yet gathered up the strength of its will, was the first to renew in peace the evil usage of the times of war, and issued $ , in what was called treasury notes, the lowest of one-quarter of a dollar, the highest at twenty dollars. two years later, but after great resistance, its legislature issued £ , , the lowest note of pence. but in the decisive hour pennsylvania, too, proved the implacable foe of paper money. in , £ , in its bills of credit were brought into circulation by loans of per cent by the legislature of maryland. virginia was involved from may, , in measures of war, and immediate and increasing issues of paper bills were made which from the beginning were a lawful tender for private debts. for the new "notes" of april, , it was further ordered that any seller who should demand more for his goods in notes than in gold or silver coin, should "forfeit per cent of their value." ... in , in the month of march, virginia directed the emission of £ , , and authorized £ , , more; and the continental paper currency and its own were made a legal tender in discharge of all debts and contracts, except contracts which expressly promised the contrary. in north carolina directed the emission of more than £ , , , and such further sums as the exigencies of the state might require; in the next year gave authority at one dash to issue $ , , of paper dollars bearing per cent interest. again in , north carolina emitted £ , , declaring each pound of the emission equal to two and one-half spanish milled dollars, and a tender in all payments whatever. in , the state emitted £ , more. south carolina, too, as late as , permitted itself to be persuaded to lend among the constituents of its legislature £ , in paper bills of the state, which were to pass in payments to the treasury of the state but were not otherwise made legal tender. the state soon perceived that the paper banished more gold and silver than the amount of the bills which were to take their place.... this was done, although its legislature on the pretext of creating a fund to sink former bills of credit, and to encourage trade and commerce in july, , had ordered £ , in new bills of credit to be stamped and put out at interest in loans. in december, , they passed this statute: "it is found by experience that the multiplicity of the bills of credit hath been the cause of the ruin of our trade and commerce, and hath been the great evil of this province, and that it ought with all expedition to be remedied." finally, the great empire state, with all the rest, entered eagerly into the defense of its northern frontier, and in november, , for the first time involved itself in the use of bills of credit. in , the legislature of new york passed an act for emitting £ , in bills of credit to be put out on loan. again in april, , the opening year of the final great movement for a closer union of the state, it placed an emission of £ , in bills of credit with loan officers, to be loaned on mortgage security; and they were made a legal tender in any suit for debt or damages, and the costs of suit. the bills were further to be received for duties to be collected at the port of new york by the state. gen. macdougal, the brave soldier and patriot, though sick unto death, insisted upon being carried to the senate, that, as the last act of his public life, he might give his voice against the proposal to emit paper money. in , the united states began repudiation by issuing a new paper dollar equal to forty of their previous issues. after their new constitution was established, all that remained of the bills of the continental congress were called in at the rate of one dollar in silver for one hundred dollars impressed on paper. mr. farmer: while you gentlemen were studying bancroft, i have been reading horace white upon this question of government issues of money, and thought i would not give myself away until after you exposed your hands. you've piled up facts, but you've given us a very slight impression of the effect that these money issues had, and therefore i am going to give you the benefit of my explanation which i think throws another and very important light upon the subject. mr. white refers to a pamphlet circulated in , which speaks of the bills of credit in new england issued on loan "to themselves, members of the legislature and to other borrowers, their friends, at easy and fallaceous lays, to be repaid at very long periods; and by their provincial laws made a tender in all contracts, trade and business, whereby currencies, various and illegal, have been introduced which from their continued and depreciated nature in the course of many years, have much oppressed widows and orphans and all other creditors." the same writer gives special attention to the colony of rhode island, which had "defrauded more in a few years than any of the most wicked administrations in the several nations of europe have done in several centuries. a contract made thirty years ago for £ , sterling in value is at present reduced to a nominal shillings." white says that in addition to legal tender acts there was a great variety of laws to compel people to sell their property at the same price for bills of credit as for silver. the debtor class was not satisfied with forcing depreciated paper upon creditors for past obligations, but insisted that they ought to be able to buy as much property with the paper as with specie. those who had been forced to take the paper for past debts naturally joined in this demand, and the legislatures agreed with them. hence we find in nearly all the colonies severe penalties on those who charged more for their goods, lands or services in bills of credit than in money. in some cases the penalty was a fine, in others imprisonment, in others confiscation of property offered. the usual course of events where bills of credit were issued was as follows: ( ) emission; ( ) disappearance of specie; ( ) counterfeiting; ( ) wearing out of bills; ( ) calling in and replacing worn and counterfeited issues with new ones; ( ) extending the time for old ones to run, especially those which had been placed on loan; ( ) depreciation; ( ) repudiation of early issues in part and the emissions of others called "new tenor." dr. douglas says that massachusetts had at one time "old tenor, middle tenor, new tenor first, new tenor second." rhode island had an indefinite number of tenors. all sorts of opprobrious epithets were heaped upon them. they were called invidious statutes, old, worn, torn, tattered, shattered, ragged, mutilated, defaced, obliterated, illegible and "unfit to pass." the depreciation of the colonial bills varied in the different colonies. in massachusetts the maximum depreciation was for (the standard being "proclamation money"). in connecticut it was for . in , the value of the new hampshire shilling was a little less than a half penny; in , it vanished altogether. rhode island owed tenor bills in that were worth to . those of north carolina were for ; of south carolina for . here is mr. white's graphic description of the times: "the pamphlets and records of the colonial period are filled with accounts of the distress and demoralization caused by depreciated paper made legal tender. as all loans were so payable, the accumulations of age, and the inheritance of orphans dwindled. so, too, did the earnings of the wageworker. in order to avoid the losses from a depreciating standard of value, resort was had by working men to 'store pay,' and here they were generally cheated. trustees and executors, who had money in their hands which belonged to other people, and who saw how things were going, often postponed the payment on frivolous pretext, since each delay enabled them to settle their accounts with less value, thus devouring widows' houses. not only was bad blood stirred up by the resistance of the royal governors, but a spirit of lawlessness was engendered against the local assemblies, if they showed a disposition to resist the demands of the _green-backers_ of that day. even after the revolution the legislature of new hampshire was mobbed because it refused to legal tender bills. one of the demands of shays' rebellion in massachusetts was for more paper money. in rhode island, after the revolution, a general system of repudiation of debts, public and private, was undertaken, and carried through by means of legal tender paper in spite of the decisions of her courts." however bad these colonial bills of credit proved to be, if it were possible those of the revolutionary period were still worse. even before the continental congress assembled the separate colonies began to issue bills of credit. when the continental congress met in june, , franklin urged that the bills should bear interest, in order to prevent depreciation. he even urged that the interests should be payable in "hard dollars," but this was voted impracticable. all seemed to be in confusion, and in this unsettled state it was voted in july, , to issue due bills for , , spanish milled dollars, to be sunk by taxes in four successive years, beginning november , , the taxes to be levied and collected by the states in proportion to their population. these bills were not legal tender at the time of their issue. the congress had no power to make them so, but in january, , it was recommended that the states should do so, and this they did, one after another, in one way or another. before the two millions were issued, another million was wanted, and was authorized with three million more, before the end of the year; and still they came nine millions more, or until fifteen in all were out, before independence was declared. this was called continental currency to distinguish it from the issues of the separate states. mr. white says from this time the demon of "fiat money" had possession of the country, and worked its will on the inhabitants. the issues ran on in an increasing volume till they amounted to $ , , in the year . in the whole mass became worthless. on this subject the essays of pelatiah webster have become classic. mr. webster, it is thought by some, was the author of the constitution. he was a merchant of philadelphia and an ardent patriot. he wrote "we have suffered more from this than from every cause of calamity; it has killed more men, pervaded and corrupted the choicest interests of our country more and done more injustice than even the arms and artifices of our enemies." professor sumner says that when the depreciation was going on rapidly a man might lose his whole wages while earning them. naturally, the next thing in order was the establishment of prices, for which purpose conventions were called. the first one held at providence was composed of delegates from the four new england states. it fixed the prices at which imported goods might be sold, but an exception was made of arms and ammunition in order to encourage their importation. of course the proceedings in connecticut were substantially the same. this state, however, had a law to prohibit persons from buying any more goods than the select men, or county commissioners, should judge to be necessary for the use of their respective families. anything like prudence in laying in supplies was thus forbidden. a price convention of the six middle states was held at york, pa., in march, , but was unable to agree upon a single point. when the price conventions failed of their object, new ones were held fixing new limits, for example fourfold the prices of , then eightfold, then tenfold, then twentyfold--terrorism being applied in each case to enforce the decrees. country folks accused town folks of extortion, and threatened to come in and take what they wanted by force. town folks accused country folks of withholding their produce, and so laws were enacted against withholders. anonymous hand bills and broad-sides were circulated threatening vengeance on merchants. as a result of such irrational business disturbances, boston was, in october, , on the verge of starvation; money transactions had nearly ceased and business was done by barter. a soldier's pay had dropped by depreciation from $ . per month to cents, although it had been twice raised by congress. washington could not move his soldiers to yorktown till robert morris had borrowed hard money from rochambeau for their back pay. in march, , congress tried the colonial experiment of "new tenor" in a very awkward and roundabout way, and declared that "old tenor" to be worth to ; the actual depreciation being for . as it was supposed that $ , , of continental money was out, this was a repudiation of all but $ , , of it. the depreciation then went on more rapidly than before. the "new tenor" bills started at a depreciation of for , which became for , even before they reached the army, and dropped to to in a few months. old tenor went at a galloping pace at for in philadelphia, when it ceased to circulate. in the remoter districts of the south, it continued in circulation nearly a year longer, and until the depreciation had reached , to . the southern people, when they learned that they had been using the stuff long after it had become worthless in the north, thought that they had been cheated by the yankees, thus intensifying the sectional distrust which was already so dangerous. continental money was now an object of execration and afterwards of derision. "not worth a continental" became a synonym for absolute worthlessness, and remains an axiom to this day. in the act of congress approved august , , authority was granted for funding the bills in per cent bonds "at the rate of $ in the said bill for $ . in specie." only $ , , turned up to take advantage of this provision. mr. banker: i want to be perfectly frank with the rest of you men. last thursday i was over at mr. lawyer's office and we got into a discussion about this matter. i was literally astounded to find him in favor of government issues of money, and that he actually thought such issues were constitutional. i knew how mr. merchant and mr. manufacturer stood, for we had talked the matter over some time ago. so we got together and divided up the work we should each of us do in order to convince mr. lawyer that he was wrong on both points. from what has been shown with respect to the facts i am sure that mr. lawyer must be convinced that the principle at least of government issues of legal tender paper money is unsound; for all the evidence, as we have seen for years, from to , is all on one side. indeed not a single exception can be found anywhere. you will remember that everyone of the thirteen original states tried fiat legal tender paper money, and then when they all united under the continental congress, they tried it altogether; but the result was precisely the same. _first_: you will remember, came the issuance of the bills of credit, as they called them, or greenbacks, as we call them, paper money. _second_: and immediately all the gold and silver disappeared because driven from the channels of trade, with something cheaper with which the debtor could cancel his obligations. _third_: dishonesty, dishonor, fraud, disaster, ruin and repudiation followed each other in quick succession. _fourth_: then came the return to sound conditions when paper issues were discarded and the effort to make something out of nothing was abandoned. mr. lawyer, i want to ask you now whether you do not think we have made a case against you so far as the unwisdom and utter folly of government issues of paper money is concerned. mr. lawyer: i must admit that the facts are overwhelming. i had never taken the time nor trouble to investigate the subject, but had assumed that one of the functions of our government was the issuance of money, even paper money, if you like. it seems from what has been shown here and last wednesday night as well that this scheme of issuing paper money has been tried, not only by everyone of our thirteen colonies and the continental congress, but by practically every country of the world at some time or other. it was tried in austria, england, france, germany, italy, russia and is now going on in nearly every one of the south american countries with the same experience, i am informed, that other countries have suffered. now, so far as the facts have been disclosed, there is not a single instance in which the scheme has been tried that has not resulted in precisely the same way--complete failure and ultimate dishonor and repudiation if persisted in as a principle. under the circumstances i must say, as every fair-minded man must, that the practice has been an absolute failure, and therefore it must be admitted that the principle must be unsound, for it seems to have worked nowhere, although tried under every conceivable condition. of course i am compelled to give in on the unsoundness of the scheme. now, you understand, that my admission as to the unsoundness and unwisdom of the practice does not carry with it my admission that the united states government has no constitutional right or authority to issue paper money if it chooses to do so. mr. banker: i understand perfectly well that your admission of the one point has nothing whatever to do with the constitutional question, but i wanted to know your conclusion after a consideration of the facts as presented first. i think everyone here will agree that the disastrous experiences of the colonies and of the continental congress in issuing paper money must have forced this question upon the minds of the framers of the constitution, as one of the very greatest importance to be settled by them. certainly what they thought about it would indicate what they intended to do. i will first show this by what they said, and then i will demonstrate what they intended to do by what they actually did do in the constitutional convention. alexander hamilton, in june, , set forth explicitly in a resolution for a new constitution of the united states of america his deliberate opinion in these words: "to emit an unfunded paper as the sign of value ought not to continue a formal part in the constitution, nor ever hereafter to be employed; being in its nature pregnant with abuses and liable to be made the engine of imposition and fraud; holding out temptations equally pernicious to the integrity of government and to the morals of the people." in , thomas paine, the author of "common sense," in an opinion on paper money used this language: "the laws of the country ought to be the standard of equity and calculated to impress on the minds of the people the moral as well as the legal obligation of political justice. but tender laws of any kind operate to destroy morality and to dissolve by the pretence of law what ought to be the principle of _law_ to _support_, reciprocal justice between man and man; and the punishment of a member who should move for such a law ought to be _death_." in the summer of richard henry lee, then president of congress, warned washington of a plan formed for issuing a large sum of paper money in the next assembly of their state, adding as his opinion: "the greatest foes in the world could not devise a more effectual plan for ruining virginia. i should suppose every friend to his country, every honest and sober man, would join heartily to reprobate so nefarious a plan of speculation." washington replied to lee in these words: "i never have heard, and i hope i never shall hear, any serious mention of a paper emission in this state. yet ignorance is the tool of design and is often set to work suddenly and unexpectedly." in , on the th day of january, washington wrote to jabes bowen as follows: "paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice." to mr. stone, a member of the senate of maryland, who appealed to washington to allow his opinion on this subject to be made publicly known, washington wrote just three months before the opening of the constitutional convention, as follows: "as my sentiments thereon have been fully and decidedly expressed long before the assembly either of maryland or of this state was convened, i do not scruple to declare, that if i had had a voice in your legislature, it would have been given decidedly against a paper emission upon the general principles of its utility, as a representative and the necessity of it as a medium. "to assign reasons for this opinion would be as unnecessary as tedious. the ground has been so often trod that a place hardly remains untouched. in a word the necessity arising from the want of specie is represented as greater than it really is. i contend that it is by the substance, not with the shadow of a thing, we are to be benefited. the wisdom of man, in my humble opinion, cannot at this time devise a plan, by which the credit of paper money would be long supported; consequently, depreciation keeps pace with the quantity of the emission, and articles for which it is exchanged rise in a greater ratio than the sinking value of the money. wherein then is the farmer, the planter, the artisan benefited? an evil equally great is the door it immediately opens for speculation, by which the least designing, and perhaps most valuable part of the community are preyed upon by the more knowing and crafty speculators." in , george mason wrote "they may pass a law to issue paper money, but twenty laws will not make the people receive it. paper money is founded upon fraud and knavery." on the first day of august, , washington wrote to jefferson: "other states are falling into the very foolish and wicked plans of emitting paper money." in may, , charles pinckney, in a speech in the convention of south carolina, said: "i apprehend these general reasons will be found true with respect to paper money; that experience has shown that in every state where it has been practiced since the revolution, it always carries the gold and silver out of the country, and impoverishes it." john marshall, the greatest of all our chief justices, the man who breathed into the dry bones of a constitutional contract, the soul of nationality, expressed himself at various times in these words: "he had 'an unabated zeal for the exact observance of public and private engagements.' he rightly insisted that the only ways of relief for pecuniary 'distresses' were 'industry and frugality'; he condemned 'all the wild projects of the moment; he rejected as a delusion every attempt at relief from pecuniary distresses' by the emission of 'paper money' or by 'a depreciated medium of commerce.'" george bancroft said: "these were his opinions through life. he gave them to the public in , and twenty-four years later in a revised edition of his 'life of washington,' he confirmed his early convictions by the authority of his maturest life." james madison, who was probably more responsible for the constitution than any other single individual, used these words in addressing the delegates of virginia in the year : "paper money is unjust; to creditors, if a legal tender; to debtors, if not legal tender, by increasing the difficulty of getting specie. it is unconstitutional, for it affects the rights of property, as much as taking away equal value in land. it is pernicious, destroying confidence between individuals; discouraging commerce; enriching sharpers; vitiating morals; reversing the end of government, and conspiring with the examples of other states to disgrace republican government in the eyes of mankind." as the result of his words and the well-known opinions of washington, lee and mason, the house of delegates of virginia on the first day of november resolved by a vote of against that an emission of paper money would be "unjust, impolitic and destructive of public and private confidence, and of that virtue which is the basis of republican government." disquieting symptoms having appeared in virginia, madison, in april, enjoined monroe, a member of its assembly, to battle paper money. madison enumerated among the evils for which the new constitution should provide a remedy, the "familiar violation of contracts in the form of depreciated paper, made a legal tender." in his notes for his own guidance in the federal convention, he laid down the principle that "paper money may be deemed an aggression on the rights of other states," and just five weeks before the time for the meeting of the convention, he wrote from congress, then sitting in new york, to edmund randolph, as follows: "there has never been a moment since the peace, at which the federal assent would have been given to paper money." in conclusion, mr. lawyer, i want you, because you are a particularly good reader, and ought to be more interested in this subject than anybody else, if you are wrong, to read the story of the constitutional convention as related by george bancroft. mr. lawyer: i will very gladly do so. "the convention of the states for the reform of the confederacy organized itself by electing as its president george washington, who of all the public men in his day was the most decided in his convictions and the most outspoken in his words on the inherent dishonesty of irredeemable paper bills. "virginia took the lead, and randolph, its governor, in his opening speech drew attention to paper money by reminding its hearers that the patriotic authors of the confederation did their work 'in the infancy of the science of constitutions and of confederacies, when the havoc of paper money had not been foreseen.' "among the delegates from connecticut were oliver ellsworth, who in the federal congress had repeatedly served on committees for the reform of the federal constitution, and roger sherman, who, in , had published his conviction that good laws and poor money are irreconcilable. they agreed to insist in the convention 'that the legislatures of the individual states ought not to possess a right to emit bills of credit for a currency, or in any manner to obstruct the recovery of debts, whereby the interests of foreigners or the citizens of any other state may be affected.' "the refusal of the convention to confer on the legislature of the united states the power to emit bills of credit or irredeemable paper money in any form is so complete that, according to all rules by which public documents are interpreted, it should not be treated as questionable; but as the truth in this case is of infinite importance, and has been questioned by those in authority, the wrong done to the constitution may justify a simple narrative of the facts, which ample and indisputable records establish, and which no power can alter. "the journal of the convention for framing the constitution was kept under the supervision of its members, and its authority is vouched for by washington, not only as the presiding officer of the convention, but as president of the united states in a special message to congress. "by a clause in the ninth article of confederation of the united states of america, and only by that clause, the confederated states had authority 'to emit bills on the credit of the united states.' "of the legislature of the united states, under our present constitution, the court insists that 'congress is clearly authorized to emit bills of credit.' but is it so? "the eighth clause of the seventh article, in the first draft of the constitution, was as follows: 'the legislature of the united states shall have the power to borrow money and emit bills on the credit of the united states.' the journal of the convention for august th makes this record: 'it was moved and seconded to strike out the words "and emit bills," and the motion to strike out these words "passed in the affirmative. yeas: new hampshire, massachusetts, connecticut, pennsylvania, delaware, virginia, north carolina, south carolina, georgia-- . nays: new jersey, maryland-- ." so the convention by a vote of more than four to one, refused to grant to the legislature of the united states the power "to emit bills on the credit of the united states."' "for the interpretation of this record, madison, the best possible witness, has left this note: 'striking out the words cut off the pretext for a paper currency, and particularly for making the bills a tender either for public or private debts.' "madison was the chief author of the new constitution. its opponent, luther martin, the attorney-general of maryland, a delegate to the federal convention and present at the debate, read to the maryland house of delegates a paper, in which he gave his account of the purpose of the convention; his evidence agrees exactly with that of madison, and for nearly a hundred years his fidelity as a witness was as little questioned as that of madison. here are two witnesses: madison, who approved the prohibition, and martin, who condemned it; the court pushes the testimony of madison aside as if he had 'not explained himself,' though on the point in question his words are as clear as sunlight. the address of martin the court rejects as a 'philippic,' though it contains not a word of invective against any individual, and does contain the clearly expressed wish of its author 'not to wound the feelings of any person.' "we have a record of what was spoken and of what was done in the federal convention kept by madison, who took upon himself the most solemn engagement to preserve the truth for the instruction of coming generations, and whose opportunity, capacity, and integrity no one questions. his report of what was said and done on the th of august in the federal convention preserves the testimony of many witnesses, taken down as it were by the most capable notary. "the question before the convention was: shall power be granted to the legislature of the united states 'to emit bills of credit'? the first witness is gouverneur morris, a man free from illusions; a delegate from the state which contained philadelphia, then the most opulent city in the thirteen states; and as by its interests he was nearly connected with the city and state of new york, he thoroughly represented the interests of commerce. he moved to strike out the grant of power to 'emit bills on the credit of the united states,' saying: 'if the united states have credit, such bills will be unnecessary; if they have not, will be unjust and useless.' the seconder of gouverneur morris was pierce butler, a delegate from south carolina, then the richest commercial state in the south. he remarked in the course of debate that 'paper is a legal tender in no country in europe,' and he was urgent to withhold from the government of the united states the power to make it so. "madison interposed: 'will it not be sufficient to prohibit the making' the bills 'a tender'? gorham, in reply to madison, held that no accompanying prohibition was sufficient to make it safe to grant to the legislature of the united states the power to emit bills of credit. he spoke absolutely 'for striking the words out,' saying: 'if the words stand, they may suggest and lead to the measure.' "the words of oliver ellsworth, our third chief justice, were: 'this is a favorable moment to shut and bar the door against paper money. the mischiefs of the various experiments which have been made are now fresh in the public mind, and have excited the disgust of all the respectable part of america.' "randolph expresses 'his antipathy to paper money'; but, 'could not agree to strike out the words, as he could not foresee all the occasions that might arise.' "james wilson, in concurrence with ellsworth, said: 'it will have a most salutary influence on the credit of the united states to remove the possibility of paper money. this expedition can never succeed whilst its mischiefs are remembered; and, as long as it can be resorted to, it will be a bar to other resources.' "george reed spoke for delaware: 'the words, if not struck out, would be as alarming as the mark of the beast in revelation.' "john langdon, of new hampshire, conforming to the wise instructions of the towns of his state, said: 'i had rather reject the whole plan than retain the three words "and emit bills."' "madison, agreeing with the journal of the convention, records that the grant of power to emit bills of credit was refused by a majority of more than four to one. eleven men took part in the discussion; and every one of the eleven whether he spoke for or against the grant of the power, gouverneur morris, pierce butler, james madison, nathaniel gorham, george mason, john f. mercer, oliver ellsworth, edmund randolph, james wilson, george reed and john langdon, each and all, understood the vote to be a denial to the legislature of the united states of the power to emit paper money. take the men, one by one, and see how weighty is the witness of each individual; take them together and add the consideration that they, every one of them, unanimously support each other and are contradicted by no one, and who shall dare question their testimony? the evidence is perfect; no power to emit paper money was granted to the legislature of the united states. "by refusing to the united states the power of issuing bills of credit, the victory over paper money was but half complete. the same james wilson, who twelve days before, with oliver ellsworth, had taken a chief part in refusing to the united states the power to emit paper money, and the same roger sherman, who in had put forth all his energy to break up paper money in connecticut, jointly took the lead. the first draft of the constitution had forbidden the states to emit bills of credit without the consent of the legislature of the united states; on the th of august they jointly offered this motion: 'no state shall coin money, nor emit bills of credit, nor make anything but gold and silver coin a tender in payment of debts,' making the prohibition absolute. roger sherman, animated by zeal for the welfare of the coming republic of countless millions, exclaims in the debate: 'this is the favorable crisis for crushing paper money.' his word was the will of the convention, and the states, by a majority of eight and a half against one and a half--that is, by more than five to one--forbade the states, under any circumstances, to emit bills of credit. this is the way in which our constitution 'shut and barred the door against paper money' and 'crushed' it. "nothing is wanted to the perfect strength of the truth, that the constitution put an end to paper money in all the united states and in all the several states.... 'no suggestion of the existence of a power to make paper a legal tender can be found in the legislative history of the country. had such a power lurked in the constitution, as constructed by those who ordained and administered it, we should find it so recorded. the occasion for referring to it has repeatedly arisen; and had such a power existed, it would have been recognized and acted on. it is hardly too much to say, therefore, that the uniform and universal judgment of statesmen, jurists, and lawyers has denied the constitutional right of congress to make paper a legal tender for debts to any extent whatever.'" thomas jefferson's opinion: "the federal government--i deny their power to make paper a legal tender." mr. banker: now, mr. lawyer, you undoubtedly with all your profession will recognize daniel webster as the greatest expounder of the constitution. i want you to read what he says and then my case will be closed on the constitutional right and authority of the government to issue paper money. mr. lawyer: i will gladly do so. "most unquestionably there is no legal tender, and there can be no legal tender, in this country, under the authority of this government or any other, but gold and silver, either the coinage of our own mints, or foreign coins, at rates regulated by congress. this is a constitutional principle, perfectly plain, and of the very highest importance. the states are expressly prohibited from making anything but gold and silver a tender in payment of debts; and although no such express prohibition is applied to congress, yet as congress has no power granted to it, in this respect, but to coin money and to regulate the value of foreign coins, it clearly has no power to substitute paper, or anything else, for coin, as a tender in payment of debts and in discharge of contracts. congress has exercised this power, fully, in both its branches. it has coined money, and still coins it; it has regulated the value of foreign coins, and still regulates their value. the legal tender, therefore, the constitutional standard of value is established and cannot be overthrown. to overthrow it would shake the whole system. the constitutional tender is the thing to be preserved, and it ought to be preserved sacredly, under all circumstances." mr. merchant: well, mr. lawyer, what do you really think about the constitutional question now? mr. lawyer: in the light of the facts preceding the constitutional convention, the personal opinions of those who framed it, and what they actually did in the convention, i will admit i have not a leg to stand on. the story of our experience so well told by you gentlemen demonstrating the utter unwisdom of government issues of money, and the overwhelming evidence on the constitutional question has completely converted me to your contention. but i was relying in a sort of a blind way upon the fact that our supreme court has held that the united states notes were lawfully issued. how about that? have you investigated it? mr. banker: i have, but the story of the greenback will take the best part of another night. therefore, i move we adjourn. it is enough glory for one night to have a layman knock out a lawyer upon a constitutional question. mr. lawyer: there is no humiliation in being shown that you are wrong upon so great a question; i regard it as a piece of disgraceful cowardice for a man to persist in holding to a position when he is clearly wrong. uncle sam: that is the way i like to hear my boys talk. this is really the longest siege we have had, and you all look as though you had been undermined, and so we had better say good night. ninth night united states notes uncle sam: here we are again and all present. not a single man has been sick or even reported as indisposed or indifferent since we began these discussions. you must all be thinking that we are engaged in a religious duty, a patriotic service, or you are mightily interested in the subject. before we begin, let me recall what was so fully presented last wednesday night so that we can keep the mile posts constantly before us. we then learned that during a hundred years, from to , every one of the thirteen colonies experimented with "bills of credit," "legal tender" "paper money," or "greenbacks," as we call them, and that they issued fiat or "legal tender money" in almost every conceivable shape, form and way. they issued money against their own credit; they issued it against real estate mortgages, that is, in the form of loans secured by mortgages; they issued it against the personal credit of men in the form of ordinary loans; they issued it under the authority of the continental congress when the colonies were all united. but in no case did any one of them, or all of them combined, escape the certain and universal fate of all such efforts. the order of events was always the same: ( ) emission of paper money; ( ) depreciation of the issue; ( ) disappearance of coin; ( ) emission of more paper money to make up for the depreciation of that already issued; ( ) defrauding of creditors; ( ) repudiation; ( ) cancelation; ( ) reappearance of gold and silver; ( ) resumption of species or coin payment; ( ) a return of that degree of prosperity that the times and the conditions of the country justified. then came that review of the opinions of the framers of the constitution and the vote in the constitutional convention to strike out the power to issue "bills of credit" by the general government by the decisive vote of to , backed up subsequently by the opinions of thomas jefferson and daniel webster. as a result of the night's discussion, mr. lawyer was forced to admit the unwisdom of any such issue of legal tender money, and that in the light of the evidence, such an issue was without authority of law and unconstitutional. mr. banker: uncle sam, i think it should be stated right here that every president of the united states and every successive congress of the united states down to recognized the fact that it was the intention of the members of the constitutional convention "to shut and bar the door against any such issue." here is what horace white says: "during the war of , the government of the united states issued treasury notes to the amount of $ , , . all except $ , , were payable to order and payable at a definite time and bore interest at the rate of five and two-fifths per cent. about two-thirds of them were of denominations of $ or more. they did not become a part of the circulating medium and were not intended to. they were paid to such creditors of the government as were willing to receive them, and they were generally at par until specie payments were suspended in september, . on november , , mr. hall, a member of congress from georgia, introduced a bill into the house for an issue of treasury notes to be legal tender. the house, by vote of to , and without debate, refused to consider this bill. no other attempt was made to pass a legal tender bill until . "in the panic and crisis of - , during a portion of which time specie payments were suspended, the government issued treasury notes to the amount of $ , , to meet deficiencies of revenue. all of these notes bore interest, and were payable at a fixed time. they did not become a part of the circulating medium. a few were issued by the secretary of the treasury in , bearing only a nominal rate of interest (one mill per $ per annum). such notes had not been contemplated by congress. the committee of ways and means of the house, to whom the subject was referred, reported that the secretary had exceeded his authority, but congress took no action on the report. it was the opinion of the committee that these notes were 'bills of credit' within the meaning of the constitution, and that congress had no power to issue 'bills of credit.' in , during the war with mexico, treasury notes to the amount of $ , , were issued. they bore interest at the rate of five and two-fifths and six per cent. they did not enter into the circulation, and were not intended to. the foregoing issues of interest bearing treasury notes were merely government loans, of which the securities were in small denominations and had only short periods to run. "when specie payments were suspended in , and again in , silver and small change disappeared because it was worth more per dollar than the bank notes in circulation. on both occasions private notes and tickets or less denomination that $ . , and copper coins were issued and put in circulation by bridge, ferry, and turnpike companies and by tradesmen and manufacturers. one hundred and sixty-four varieties of private copper coin of the period of have been preserved in numismatic collections. most of them bore the names of the issuers who promised to redeem them. "prior to the civil war, the fiscal operations of the government were transacted exclusively with coin, by its own officers, without the intervention of banks." mr. merchant: now it seems to me an interesting question why after maintaining this policy for more than seventy years from to , a fundamentally different view was taken in . mr. lawyer: i think i can answer that question, if you will allow me. you see, i have been looking this matter up since our last discussion, when you fellows knocked me out, and i am now loaded for bear myself. salmon p. chase, secretary of the treasury, probably knew as little about finance as any man of his great ability could. he did not seem to be able to think in the terms of economics at all. when the war broke out he happened to do the natural thing by first going to the bankers of new york, philadelphia and boston, and making loans amounting to one hundred and fifty million dollars. though prior to that time the secretary of the treasury had had no authority to deposit the government money in the banks, congress then authorized him to do so, and he was enabled to leave it in the banks until he wanted it; but he did not know enough to do that even. he required the banks to pay the gold into the treasury at new york at the rate of $ , , per week. fortunately, the public creditors knew more about this question than he did, or had more confidence in the country than he seemed to have; and so when they received the gold they immediately returned it to the banks. chase's utter incapacity to deal with the question in his report as secretary of the treasury in the fall of , and a threatened war with great britain, growing out of the trent affair, so shocked public confidence that by january , , our national finances were in a state of complete and utter collapse, and the consequence was that specie payments were suspended. i do not see how anyone can fail to conclude, after a careful study of the situation, that had chase allowed the bankers to finance the war, we should have fared very much better than we did. we should probably have saved thirty-three per cent of the cost of the war, or approximately one billion dollars ($ , , , ), the total cost of the war being three billion two hundred million ($ , , , ). mr. banker: i agree with you absolutely, mr. lawyer, chase seemed to be as unfit to run the treasury department, as a fish is to run a foot race. if he had allowed james gallatin, moses taylor and george s. coe, three great new york bankers, who arranged the first loan to formulate a financial policy for him, the war could undoubtedly have been carried on without issuing greenbacks, or any "legal tender money." but after specie payments had been suspended, the situation was certainly critical, and became more difficult to manage. however, there were those who thought, and i agree with them, that it was never necessary at any time, even then to resort to "legal tender money," or greenbacks. mr. farmer: how do you think it could have been avoided? how do you think james gallatin, moses taylor and george s. coe would have provided the money for carrying on the war? mr. banker: by selling the bonds of the government upon the best terms possible, as to rates and interest and time, and by such a system of taxation, as would help produce the necessary means for prosecuting the war. these bankers had already furnished one hundred and fifty million dollars ($ , , ), and stood ready to go on and finance the war as they certainly could have done, if they had been permitted to do so. when they, in august, , arranged to furnish the first $ , , , the banks of new york, philadelphia and boston held gold amounting to $ , , , and on december th, they held practically the same amount, or $ , , , although they had already furnished $ , , of the $ , , they had loaned. however, chase was both ignorant and obstinate and the result was a crisis in our national affairs. mr. lawyer: that is the fact, and as you said a moment ago even then there were those, and they were among the greatest of our public men, who were convinced that it was unwise, dangerous, unconstitutional and unnecessary to issue "legal tender money," or greenbacks, as they are called. just hear what some of them said. justin s. morrell used this language in the house of representatives: "if this paper money is a war measure, it is not waged against the enemy, but one that may well make him grin with delight. i would as soon provide chinese wooden guns for the army, as paper money alone for the treasury. "what is it that we most need? clearly we lack money, and wish to inspire our own people with that confidence that will induce them to lend the requisite amount. but the very first step we propose is one to destroy whatever of confidence yet remains among those who have a dollar to lend. we proclaim by an engraved advertisement--to be forced into the pockets of every man by the fiat of the government--that we will hereafter liquidate all of our debts with paper only.... "i object to this bill on the ground of its utter impolicy. i admit that from the contracts entered into--many of which are now due--i regret have not been paid as promptly as they deserve to be, and from the heavy monthly disbursements to our armies, that the government can flood the country with even $ , , of paper dollars. but from that amount, you would vastly increase the cost of carrying on the war; prices would go up and the addition we should pile upon our national debt would prove that it might have been even wiser to have burned our paper dollars before they were issued; the inflation of the currency would be inevitable.... "it will be conceded that the power is no where contained in the letter of the constitution, and that, in all our history since the adoption of the constitution, it has never been exercised.... by making paper a legal tender, no more specie will be seen, except through offers of rewards to draw it from its hiding places, until we emerge from our present difficulties, and not for an indefinite period perhaps, thereafter. the $ , , of specie said to be in the country, though i think there is not quite so much, will be hoarded and remain useless and idle for the rest of the war. i am for keeping this, the vital fluid of commerce, in healthy, active circulation." charles sumner used this language in the united states senate: "is there not bad faith toward creditors who are compelled to receive what is due to them in a depreciated currency? is there not bad faith toward all abroad who, putting trust in our integrity, national and personal, have sent their money to this country, in gold or its equivalent? and, surely, just in proportion as this is so, you cannot doubt that we shall suffer alike in character and resources; for what resource is greater to a nation, or to an individual, than a character for integrity?... is it necessary to incur all the unquestionable evils of inconvertible paper, forced into circulation by an act of congress--to suffer the stain upon our national faith--to bear the stigma of a seeming repudiation--to lose for the present that credit which in itself is a treasury--and to teach debtors everywhere that contracts may be varied at the will of the stronger? surely there is much in these inquiries which may make us pause. if our country were poor or feeble, without population, and without resources, if it were already drained by a long war, if the enemy had succeeded in depriving us of the means of livelihood, then we should not even pause. but our country is rich and powerful, with a numerous population, busy, honest and determined, and with unparalleled resources of all kinds, agricultural, mineral, industrial and commercial; it is yet undrained by the war in which we are engaged; nor has the enemy succeeded in depriving us of any of the means of livelihood. it is hard--very hard--to think that such a country, so powerful, so rich and so beloved, should be compelled to adopt the policy of even questionable propriety." james a. bayard, of delaware, used this language: "the thing is to my mind so palpable a violation of the federal constitution, that i doubt whether in any court of justice in this country, having a decent regard for its respectability, you can possibly except that this bill, which you now pass, will not, whenever the question is presented judicially, receive its condemnation as unconstitutional, and void in this clause." roscoe conklin used this language in the house: "i propose to assign my reasons briefly for voting against the attempt by legislation to make paper a legal tender. the proposition is a new one, no precedent can be found in its favor; no suggestion of the existence of such a power can be found in the legislative history of the country; and i submit to my colleague as a lawyer, the proposition that this amounts to affirmative authority of the highest kind against it. had such a power lurked in the constitution as construed by those who ordained and administered it, we should find it so recorded. the occasion for resorting to it, or at least referring to it, has, we know, repeatedly arisen, and had such a power existed, it would have been recognized and acted on. it is hardly too much to say, therefore, that the uniform and universal judgment of statesmen, jurists and lawyers has denied the constitutional right of congress to make paper a legal tender for debts to any extent whatever.... "it will, of course, proclaim throughout the country a saturnalia of fraud, a carnival for rogues. every agent, attorney, treasurer, trustee, guardian, executor, administrator, consignee, commission merchant, and every debtor of a fiduciary character, who has received for others money, hard money, worth cents on the dollar, will forever release himself from liability by buying up for that knavish purpose, at its depreciated value, the spurious which we shall have put afloat. everybody will do it, except those who are more honest than the american congress advises them to be. think of savings banks, entrusted with enormous aggregates of the pittances of the poor, the hungry and the homeless, the stranger, the needle woman, the widow and the orphan; and we are arranging for a robbery of per cent, if not of per cent, of the entire amount, and that by a contrivance so new, as never to have been discovered under the administrations of monroe, adams or james buchanan.... "such a step, if it should ever be taken by a government, should be taken when everything else has failed, and the last extremity has been reached. it is the last expedient to which kings and nations can resort." william pitt fessenden, of maine, used this language: "with regard to the particular bill now before the senate, we all know that it was resorted to as a temporary measure, not in the beginning, but in consequence of the necessities of the treasury, arising from a greater expenditure than the secretary could have imagined, and arising from the necessary delay with reference to other measures. can it be said that a measure like the one now pending before the senate and the country is a measure of a day or an hour? why, what does it propose? it proposes something utterly unknown in this government from its foundation; a resort to a measure of doubtful constitutionality, to say the least of it, which has always been denounced as ruinous to the credit of any government, which has recourse to it; a measure, too, about which opinions in the community, as perhaps they never have been divided upon any other subject; a measure which, when it has been tried by other countries, as it often has been, has always proved a disastrous failure.... "everybody who has spoken on this question, i believe without an exception--there may have been one or two--but all the opinions i have heard expressed, agree in this: that only with extreme reluctance, only with fear and trembling as to the consequences, can we have recourse to a measure like this of making our paper a legal tender in the payment of debt.... "a measure of this kind certainly cannot increase confidence in the ability, or the integrity of the country. it can make us no better than we are today, so far as the foundation of all public credit is concerned. "next, in my judgment it is a confession of bankruptcy. we begin and go out to the country with the declaration that we are unable to pay or borrow, at the present time, and such a confession is not calculated to increase our credit. "again, say what you will, nobody can deny that it is bad faith. if it be necessary for the salvation of the government, all considerations of this kind must yield; but to make the best of it it is bad faith, and encourages bad morality both in public and in private. going to the extent that it does to say that notes thus issued shall be receivable in payment of all private obligations, however contracted, is in its very essence a wrong, for it compels one man to take from his neighbor in payment of a debt that which he would not otherwise receive, or be obliged to receive, and what is probably not full payment.... "again, in my judgment it must inflict a stain upon national honor. we owe debts abroad. money has been loaned to this country, and to the people of this country, in good faith.... "again, it necessarily changes the values of all property. it is very well known that all over the world gold and silver are recognized as money, as currency; they are the measure of value. we change it here, what is the result? inflation, subsequent depression, all the evils which follow from an inflated currency.... "again, a stronger objection than all that i have said to this proposition--i am stating the objections which everybody must entertain, because i suppose these facts are palpable--is that the loss is to fall most heavily upon the poor. i believe it never was disputed, it cannot be in the light of experience, that those who are injured most by an inflated currency are the laboringmen, the poor.... the poor laborer suffers in the first place more than all; then small capitalists, if i may so call them; and the rich capitalist, last of all. such is the necessary result and consequence always of this system." thaddeus stevens used this language in the house: "this bill is a measure of necessity, not of choice. no one would willingly issue paper currency, not redeemable on demand and make it a legal tender. it is never desirable to part from that circulating medium which by the common consent of civilized nations forms the standard of value. but it is not a fearful measure, and when rendered necessary by exigencies, it ought to produce no alarm." john sherman used this language: "i agree that this measure can only be justified on the ground of necessity. i do believe there is a pressing necessity that these demand notes should be made a legal tender, if we want to avoid the evils of a depreciated, dishonored paper currency." e.g. spalding, the reputed father of the legal tender act, used these words: "these are extraordinary times, and extraordinary measures must be resorted to, in order to save our government, and preserve our nationality.... "this being accomplished i will be among the first to agitate a speedy return to specie payment, and all measures that are calculated to preserve the honor and dignity of the government in time of peace." mr. merchant: from what transpired there was undoubtedly an overwhelming opinion that there was a necessity, and therefore the issue of united states notes was justified. no one will deny this power, if placed upon that ground, that the issuance of the notes was essential to the preservation of the life of the nation. but certainly that reason no longer exists, and therefore we should now act as we would then have acted, if we had not believed that it was a national necessity. the measure for the first issue of $ , , of united states notes was passed and signed by the president february , . the second issue of $ , , came very soon, on july , . the third issue of $ , , followed on march , , making a total issue in about a year of $ , , . if the result of the war had been doubtful and long continued, god only knows what the results would have been, as these united states notes came very near reaching the zero point, as it was. the astounding fact, as the result of having practiced the law of making something out of nothing, followed in when one of the great political parties in the hot pursuit of political success declared in its platform that it was in favor of paying off the national debt with the i.o.u.'s of the government or united states notes. of course, this action would have been the natural and necessary prelude to national repudiation. mr. farmer: what i want to know is how much those greenbacks actually depreciated. mr. banker: i have a sheet here furnished by the government showing precisely what they were worth from february, , to january , , when we resumed specie payment, and began their current redemption in gold coin. it shows that they were worth cents on the dollar in february, , when the president signed the bill; in one year, or february , , they were worth cents on the dollar; and in a little more than a year afterwards, in july, , they were worth only cents on the dollar. that is, if you had bought a horse for $ in january, , and given a note due in july, , you could have paid for the horse with $ . you will perceive that every creditor was defrauded going down hill until you struck the bottom on that july day in , when it took $ . of united states notes to buy $ . of gold coin, and you defrauded every debtor climbing up that long hill from that july day in , when the united states notes were worth cents, until january , , when they became worth cents. it took us just two years to go down the hill, and fifteen years to reach the top of the same hill, only to find the crater of a sleeping financial volcano beneath our feet; for if war clouds should now encompass us, or we should take one single step in the wrong direction, our national credit would again be shattered, and must fall into utter ruin. mr. farmer: well, it then came out just as those men said it would, didn't it? mr. banker: certainly, and i want to call your attention to another thing, and that is that the additional cost of the war, because of issuing united states notes, was greatly increased precisely as they predicted it would be. mr. farmer: oh, yes, we must find out about that. you remember we investigated the cost of the greenbacks since the war, and that mr. banker then demonstrated to our entire satisfaction that the united states government would have been better off by $ , , , if at the close of the war we had issued bonds, bearing per cent, and taken up these united states notes and paid them off. now, it would be mighty interesting to know just how much the war cost because we issued these united states notes, and went off the gold standard. mr. lawyer: i have something here right on that point. let me read it: in his work on public debts, prof. h.c. adams computes the extra cost of the war to the tax payers in consequence of the depreciated currency at $ , , . and mr. wesley hill, in the "journal of political economy," march, , computes the net cost of the war, due to this cause at $ , , . now to be fair and take the average of these two estimates or $ , , , and add the cost of meeting greenback redemption since the war, or $ , , , we have $ , , , , or about one-third of the cost of the war which, as i told you a while ago, was three billion two hundred million dollars, proving everything that was said by those who were opposed to issuing the greenbacks. mr. manufacturer: i beg your pardon, sir, except one thing, mr. lawyer. according to the decisions of the supreme court, up-to-date, and that is, that they are constitutional. you remember, of course, that the question of the constitutionality of the legal tender quality of the united states notes has been before the united states supreme court three different times. this question came up in the case of hepburn vs. griswold, december, , and was held by five judges against three, the court then consisting of eight judges, the opinion of the court being delivered by salmon p. chase, himself, who was then chief justice, "that the making of the notes, or bills of credit, a legal tender in payment of pre-existing debts, is not a means appropriate, plainly adapted, or really calculated to carry into effect any power vested in congress; is inconsistent with the spirit of the constitution, and is prohibited by the constitution." mr. farmer: well, this man chase, who was then chief justice, was secretary of the treasury, and favored the issuance of these same united states notes, didn't he? mr. lawyer: yes, he is the same person. but you must remember that he was a politician in the one case, and a chief justice in the other. possibly, i should have said a statesman in the first place, but thomas b. reed said that a statesman was a dead politician, and probably, you might say, according to his theory, that chase is a statesman now. chase also held that the clause in the acts of and , which makes united states notes legal tender in payment of all debts, public and private, so far as it applies to debts contracted before the passage of these acts, is unwarranted by the constitution: "the legal tender quality," chase said, "was valuable only for the purpose of dishonesty, every honest purpose was answered as well without it." just one year afterward, in december, , the question of the legal tender of the united states notes was again before the united states supreme court, which now consisted of nine members. in a decision of five against four, the above decision was reversed; one judge had died, and a new judge had been created, and these two joined the three formerly in favor of the act. mr. manufacturer: that looks a little as though general grant wanted that kind of a decision, and had picked out the right kind of men to get it. possibly it was more this decision than pressure of business that called for the creation of an additional member of the court--was it not? mr. lawyer: a great many have thought so, and that makes it look as though the supreme court does some legislating occasionally on its own account. however, the same question came up again in the case of juillard vs. greenman, and was decided the same way in march, . it was then held that congress has the constitutional power to make treasury notes of the united states a legal tender in payment of private debts in time of peace, as well as in time of war. justice gray uses this language: "the power is incident to the power of borrowing money, and issuing bills or notes of the government for money borrowed, of impressing upon those bills or notes, the quality of being a legal tender for the payment of private debts was a power universally understood to belong to sovereignty in europe and america at the time of the framing and adoption of the constitution of the united states." it appears that he based his decision upon this fact, but george bancroft, the historian, reviewed this opinion in both its legal and historical aspects. and referring to the statement quoted above, this great historian declared it to be a stupendous error, and further affirmed that no such power was understood to belong to sovereignty in europe at the time of the adoption of the constitution, that is, in . mr. manufacturer: well, i assume that we have another guess coming yet, haven't we? you know this same court has guessed four times already on the sherman anti-trust law. in the knight case, they declared that manufacturing was not and could not be considered as united states commerce. then came the trans-missouri case, then the northern security co. case, and last the tobacco and standard oil cases, wherein this august body ran amuck the word "reasonable," although that very word was not in the act at all, and although it had been impossible to get congress to put it into the act. but after all, is it not the very soul of the whole question? and is it not a fact that the supreme court of the united states ought to be constantly interpreting the constitution of the united states in the light of changed conditions, and ever advancing public opinion? mr. lawyer: it looks as though it might be well to give the supreme court one more chance to guess; they might possibly guess right next time. it is certainly "reasonable" to hope so, both in accordance with the constitution, and in accordance with economic law, and in accordance with the experience of the whole world. mr. merchant: well, what would happen if, when the supreme court guesses again, it should guess right? would the fact that the court declared that congress had no power to make paper money a legal tender render the greenbacks unfit for reserves, or illegal, as reserves? mr. banker: congress cannot, by law, make anything fit for reserves, which by economic law is unfit for reserves; but congress may make anything, however unfit for reserves from an economic point of view, a legal reserve; they might make potatoes, wheat, corn, a bale of cotton, or a bundle of hay reserves. therefore, although the supreme court should declare the legal tender act unconstitutional, as it ought to, the united states notes might still be held as reserves. the silver certificates and the gold certificates are both legal reserves, but neither of them are made legal tender by law, nor should they be, as nothing but gold, which is our standard of value, should be made legal tender. however, all of these barbarous forms of currency, united states notes, silver certificates, bond-secured national bank notes should, and must be maintained upon a parity with gold, if possible, as they now are; because the faith and honor of the government is at stake. it is this very fact that is the source of our weakness from a national point of view, for the united states has no assets with which to meet these enormous liabilities. the united states has no resources, such as a bank has. it has nothing to sell in the way of grain, meat, cotton, or manufactured goods, or personal property of any kind. it has no capital, and no deposits, as our banks have, whose resources today exceed twenty-five billion dollars ($ , , , ). the individual deposits of the united states today exceed seventeen billion dollars ($ , , , ). every month about three billion dollars' worth of notes come due. compare this situation with the condition of the united states treasury, and its ability to meet obligations. the treasury does not control a single dollar's worth of assets, except the incoming taxes, which are more than pledged every year to meet the current demands arising from the expenses of the government. mr. lawyer: that is correct, as we learned upon a former evening. the united states is bound for more than one billion seven hundred million of demand liabilities, directly and indirectly, and has only one hundred and fifty million of gold with which to meet them. all the government has is the power to tax the property of the people. of course it can anticipate this taxing power by selling bonds to meet an emergency; but let us imagine for a moment what may happen. this very night we may be looking out upon a perfectly clear and peaceful sky, and even so soon as tomorrow morning war clouds may curtain the rising sun, and before nightfall blacken the zenith of the heavens, and hang low and lowering the whole horizon round, presaging the most titanic and wicked struggle in blood that has ever stained the history of the human race. what do you think the effect would be upon our credit, with all these demand obligations outstanding? would not that fact, coupled with a great war on our hands, impair our credit to a very great degree, compelling us to sell our bonds at much lower prices, and at rates of interest far higher than could be possibly necessary, if there was no question whatever about our remaining steadfastly upon the gold standard instead of resorting to fiat paper money, as we did the very last time we had to meet a similar difficulty, or crisis? mr. banker: there is no doubt whatever about the imperative necessity of our relieving the united states treasury from the load it is now carrying, and placing the united states government in the same position precisely that every state and municipality is in, so far as its credit is concerned; for the treasury of the government, when filling its normal and proper functions, is no more fit to carry on the banking business than a man who may be wealthy in land, but has no cash assets; or a township, city, county or state is. and until the united states government divests itself of these unnatural burdens, which it is unfitted to carry, we shall continue to suffer immeasurably whenever called upon to use our national credit to any great extent. let me explain this principle a little more fully so that we will all get it so thoroughly fixed in our minds that we shall not forget, or overlook it, as we go on. a farmer, however wealthy in lands and prosperous he may be, even though he may be worth half a million, or a million dollars, should not have demand obligations outstanding for any considerable amount because his resources are in lands or fixed investments. if he borrows to enable him to produce his crops, he should make his notes come due when he can meet them with the money he receives from the sale of his crops, and the balance, or his profits, will go to pay the interest on the mortgage, and possibly reduce it. so a township, a city, county, or state has no personal property worth considering to meet demand obligations. it has no liquid property of any kind, in fact, nor any resources whatever, except its power to tax the property within its jurisdiction; and therefore, if it needs money, it may borrow to meet expenses; but it will make its notes come due when the taxes come in, precisely as the farmer times his notes' maturity with the sale of his crops. if a municipality has no demand obligations, and its bonded debt is low, it can borrow on its bonds at a low rate of interest. but if its demand obligations are enormous in proportion to its ready cash, high rates of interest, and possibly even bankruptcy, will always be staring it in the face. granting or assuming that the united states government has no power to issue legal tender, or fiat money, which is the greatest peril and most unmitigated curse that ever hung over any country, the united states treasury is in precisely the same position, or situation, that the farmer is, whose property is in land; that the township, the city, the county and the state is in, and should always keep itself in a position where, in case of war, or any other great emergency, it could use its credit to the best possible advantage to itself; that is, to us, the people who must pay the taxes to liquidate whatever debt it may incur. mr. farmer: i for one want to thank you for this explanation, for i have always had a sneaking idea that the united states government owned everything, and was, as we say, the richest government on earth, when it could not possibly mean anything except that the people who constitute the nation are the richest people on earth. of course the government doesn't own anything worth speaking of, and cannot take any property, without due process of law, that is, either through the process of taxation or through condemnation proceedings, for public uses. it is perfectly plain to me now that the united states government is no more fitted to carry on the banking business than lorrain township, where i live, nor this city, this county, nor this state, except that it operates on a bigger scale, that's all. do you know that's as clear as a pike staff to me now. mr. manufacturer: now, gentlemen, i want you to correct me if i don't state this credit question right, from beginning to end; for i'm not sure that i have followed all that has been said with sufficient care to understand it perfectly. i appreciate the fact that we must grasp this question of credit, and comprehend it very clearly, if we are going to prepare a banking bill in which credit must play a most important part. _first_: we have credit, which is the result of confidence and trust and gives us the right to demand payment. _second_: if credit is granted for the purpose of producing and distributing consumable commodities, it should be for a short period, proportioned to the time involved to complete the transaction. _third_: if credit is granted upon real estate, it should be for a long period, because the security is not readily convertible into cash. _fourth_: credit granted to a government, by purchasing its bonds, should be for a long period, unless for some temporary purpose. _fifth_: neither real estate nor government credit are a fit basis for currency, because neither is a fit security for a demand debt, nor cash credit, such as consumable commodities are. _sixth_: government credit should never be used in the form of legal tender money, because it must itself be redeemed in coin. it never has been, and never can be its own redeemer, and is always subject to unlimited abuse which must necessarily result sooner or later in repudiation. mr. banker: mr. manufacturer, you have summarized the discussion upon credit remarkably well, i think. mr. merchant: so do i, and i am sure that we all understand what constitutes the difference between the right and wrong basis of demand obligation--convertibility or non-convertibility--quick assets or slow assets--the commercial fund and the investment fund. if we keep this thought steadily in view it will help us amazingly when we come to draw a banking bill demanding the recognition of this fundamental distinction. mr. lawyer: gentlemen, don't you see that the very nature of things forces the recognition of this fundamental distinction, because you can keep your currency, if of the right kind, and all your credit used in the production and distribution of consumable commodities convertible into gold coin. but you cannot keep all the railroad bonds, all the municipal bonds and all the real estate of the country convertible into coin, practically on demand. that is impossible, and has been proved times without number, as we have already seen. mr. laboringman: mr. lawyer, i have been sitting here with a very hazy kind of an idea about this credit matter, until this moment, but that last point you made seems to me to clinch things, for i saw in the "evening journal" last night that there was about one hundred and twenty-five billion dollars' worth of property in the united states. of course you can't cash that all in tomorrow, nor next week, nor next month, nor next year even, and the fortunate thing about it is that the owners don't want to. when you come to think of it, there is a mighty small part of it that the people want to turn into cash each day. mr. banker: mr. laboringman, that is the point exactly, and our problem is to make it absolutely sure that those who have a right, and want to demand cash, can always get it. this can only be accomplished by two things, adequate gold reserves to protect all current demands, and such assets or commercial credits as can be converted into gold, at once to meet any extraordinary demands--yes, even satisfy the panic-stricken mob, and carry the country through such crises as and without unnecessary loss, indeed, prevent the recurrence of any such experiences again. mr. laboringman: do you really think that that can be done? what a blessing that would be to labor. mr. banker: i certainly do believe it can be done; indeed, i know it. but every banker must be compelled to do his part; that is, be ready at all times to carry his proper share of reserves against his deposits. one half of the bankers of this country cannot ride the other half, that is certain. mr. merchant: mr. banker, what amount, or percentage of reserves do you think a banker should carry? mr. farmer: now, hold on, just a minute. you can't get into that subject, because i want to hear it, and i've got to go home right now. mr. banker: very well, gentlemen, we will put it off, if you say so, until next wednesday night. uncle sam: this is the second time you men have said that you would take up reserves. indeed, it has been so long since you talked about taking it up before, that i was afraid that it would be overlooked entirely, and yet nothing but the standard of value itself is more important. now, mark this, we want the right kind of reserves, and plenty of them. good night. tenth night reserves uncle sam: here we all are, every man in his accustomed place for the tenth night. not a man has been late on a single occasion, although mr. farmer just got in under the wire one night by the skin of his teeth. it is most agreeable and satisfying to note that there has been no lagging in interest since we began. indeed, there seems to me to have been a most pronounced gain in your enthusiasm, at times amounting almost to religious fervor. mr. laboringman: that's the way it always is; the more you know about anything, the more interesting it becomes. mr. merchant: certainly the man who has a fad or who is even a crank upon any subject, enjoys life a good deal more than a dead level commonplace fellow, who never takes any particular interest in anything--just passes the time. every man for his own pleasure, if for no other reason, ought to have something in which he is interested outside of his regular employment. it may be a good horse, a good cow, a good dog, or some fine chickens--a good garden, a fine front yard, or just some flowers, or some subject affecting the welfare of his fellows. every man ought to have something; it doesn't matter so much what it is, so long as he is devoted to it intensely. of course, if he can profit by it, or help his fellows at the same time, so much the better. however, we have our hands full just now with a subject which has become mighty interesting, i think, to all of us, and i hope that our work will prove not only interesting to us, but profitable to our fellows. at all events, it can do no one any harm, and will better fit everyone of us for our duties as citizens. there is too little work of this kind done all over the country; men can accomplish so much more, if they only get together in small groups like this, instead of plugging along alone. it's a good deal like the football game, where team work counts for so much. it may be that what we are now doing will inspire thousands of other little groups to get together and discuss this, the greatest, the most important business question that can possibly come before the american people, and then when this is finished, they will, as a matter of habit, take up others, in precisely the same way. uncle sam: hold on there, mr. merchant, you've lectured us long enough this evening, now let us get down to business. you know if there is anything that your uncle samuel is noted for all the world over, it is business, and business is business, you know. but, before we tackle the tenth topic, tonight, i am going to retrace the road we have traveled, and see if you can all recall and recognize the mileposts we've passed. _first_: there was the standard of value, gold. _second_: money, our only money is gold. _third_: currency, the wrong kind. _fourth_: currency, the right kind. _fifth_: exchange by which one debt is made to pay another. _sixth_: value, the value of anything is measured by the thing for which it is exchanged. price, the amount of money received for anything. wealth, what can be exchanged for money. property, the right of ownership. capital, anything that may be so used as to result in a profit. credit, result of confidence and trust; creates a debt, and is the right to demand payment. _seventh_: land or government credit is unfit as a basis for money or currency. _eighth_: our colonial experience proved that land and government credit were unfit as a basis for money or currency. _ninth_: our united states notes again demonstrated the fact that government credit should never be used as a basis of legal tender money. tonight we are to discuss reserves, which are the protection or guarantee of credits granted or debts created. is that a correct definition of reserves? mr. banker: uncle sam, i don't think anyone could give a better one. uncle sam: by way of encouragement to you men, before you begin to discuss the subject of reserves, i want to gamble the prophecy that if you will work out some method or plan that will make it possible for the banker to pay all his deposits on demand, and at the same time will enable him to continue to use practically all of them in profitable employment, i will guarantee you now the support of every banker for your plan, when you've completed it. mr. merchant: i don't think you assume any risk in that guarantee, uncle sam. mr. laboringman: uncle sam, you say that you will guarantee that every banker will support it. that insurance policy won't be any risk at all. won't cost you a cent. i tell you now that if you can work out a plan that will amount to an absolute guarantee of deposits, as a matter of administration, i will guarantee the support of every depositor in the country, and if i could prove it to their satisfaction, every depositor would gladly pay me from one-quarter to one-half per cent on his deposit. do you know what i would get at that rate, say at one-quarter per cent, only $ , , every year; for our deposits you say are now seventeen billion ($ , , , ). have you men ever looked up bank failures in the united states? here is something i stumbled upon yesterday. our country is so extensive and our banks are so numerous that nothing whatever is thought in one part of a bank failure in another part. especially is this so since they occur so frequently. like the operation of the guillotine during the french revolution and the automobile manslaughter of today, bank failures in the united states have become mere passing occurrences. is this putting it too strongly? let us see. since the establishment of the national system in , national banks have failed, with liabilities reaching $ , , . the direct losses of the failed banks amount to $ , , . two thousand and fourteen state and private banks have failed since , with liabilities amounting to $ , , , and probable losses of $ , , . the total liability of all banks, national, state and private, failing since is $ , , , . their aggregate is , banks. in other words, fifty-six banks have failed every year on an average, or nearly five banks every month, and more than one bank every week. three hundred and fifty-one national banks have failed since , with liabilities aggregating $ , , . one thousand four hundred and six state and private banks have failed since , with liabilities aggregating $ , , . the total liabilities of all banks failing since aggregate $ , , . the total number of all banks failing since is , . in other words, eighty-eight banks have failed every year on an average, or more than seven banks every month, and one bank about every four days, during the last twenty years. but who can estimate the indirect losses or depict the consequences of these bank failures? if this tragic condition can be obviated, it is a crime against the people of the united states, it is a crime against civilization itself, to permit its continuance. mr. banker: no, indeed, neither uncle sam nor mr. laboringman assume any risk in their guarantees. they certainly do not, and i will go still further, and under those circumstances will guarantee the support of every merchant, manufacturer, farmer, laboringman, and every man, woman and child, whether depositors or not, as we would be the greatest benefactors of the human race, if we could devise a plan that would remove all risk from every deposit. and yet, humanly speaking, i am not sure that this very result, the absolute guarantee of all deposits may not be accomplished, and the chief factor in the accomplishment of so great a blessing to the people is locked up in the principle of reserves, assuming, of course, that the administration of the banking business is such as to keep it sound. if all the deposits made with the bank were in gold, or were convertible into gold, and held to meet the deposits when called for, the problem would be simple indeed, and would be solved already. but such a plan would be impracticable and archaic. indeed, it would preclude all profit, unless a charge were made for such service, and would reduce a bank to a safe deposit company. it would exclude the use of all credit, and therefore destroy the possibility of doing approximately more than nine-tenths of the business carried on today, unless we should go back to actual barter. our problem is to make the business of banking absolutely safe and yet preserve the great credit structure by which the business of the country and the world is carried on. mr. merchant: for the purpose of this discussion we must assume that the business is honestly managed, and is, therefore, ordinarily sound, and confine ourselves to just the single subject of reserves, which my study leaves me to think, may be considered; st, from the standpoint of the single bank; d, from a standpoint of the community or a single city; d, from a standpoint of the whole country; th, from the standpoint of the whole world or our relation to the rest of the commercial world. now, generally speaking, we mean by reserves in banking that part of the capital which is retained in order to meet the average demands upon deposits. but this, of course, varies with every bank to some extent; and, while per cent cash would be ample reserve for a high-class mutual savings bank, a commercial bank, in equally good standing, may require from per cent reserve up to per cent, according to the character of the business carried on. a country bank dealing with the farmers might require the smaller amount, while a bank dealing entirely with bankers would require the largest possible reserve, to meet any emergency at any time. each individual bank must be judged by itself and its reserves adjusted accordingly. in the second instance, as suggested, the locality or environment must be taken into account; in many instances the character of the neighboring banks and their peculiar business are all factors of great importance, and no one of them can be overlooked. so also when the bank credit is considered as a unit of the structure of the nation, the general situation from one end of the country to the other has a bearing upon it, and from some cause terror may sweep over the entire land in a single day, and every nerve of trade be paralysed. then, finally, if our nation is an integral part of the commercial world, we must devise some method that will conserve our reserves when possibly for a hundred of various reasons, they may be steadily leaving us or be drawn away by foreign influences. mr. banker: your statement of the condition and forces that are always playing upon every center of credit from the single bank in the country town to the largest and strongest in our financial centers makes it necessary for the welfare of the whole people, that we should develop in the united states an atmosphere of absolute confidence that nothing can shake. unless we can do this we shall continue to have commercial earthquakes of ever increasing violence and destructiveness. how to develop, establish and retain a defense of impregnable confidence should be then our purpose, and if we succeed, this must be our great achievement. speaking of the matter in a more definite way, we must assume that from the primary form of reserve, which is what we started out with, such a part of our capital in gold as will always prove equal to the average demands upon deposits must be kept constantly available. we must have what are aptly called secondary reserves, which will meet all ordinary, yes extraordinary, or unusual calls; but, finally we must have such access to an almost incomprehensible store of gold, as to impress and overwhelm the imagination, and place its possible exhaustion beyond human conception. mark this, your cash on hand of the reserve order, that is in gold coin, ought under all circumstances, to be ample to care for current requirements, while your credits, subject to call, with other banks, or arrangements for credit, ought to be ample to meet all ordinary, or seasonal, or periodic demands--and your general assets, which most of necessity be your ultimate reserve, must be of such a liquid character that if a panic comes, and the necessity arises, they can be converted into cash, of the reserve order; that is gold coin. you perceive, of course, that such a condition assumes two things; first, that gold should always be running through the channels of trade in sufficient quantities to touch and characterize the quality of all credits; book credits, as well as note credits; both must always be equal to gold, and commerce must be kept conscious of that fact by the persistent presence of gold. there must be kept before the business eye, the people's eye, the national eye, such a vast horde of gold concentrated for the purpose as to compel even the most timorous to feel safe, beyond a peradventure. there must be a conviction everywhere that the system cannot break down or fail. mr. manufacturer: mr. banker, your position, or statement, is in perfect accord with bagehot, the great banking economist of england. here's what he said: "i have tediously insisted that the natural system of banking is that of many banks keeping their own cash reserves, with the penalty of failure before them if they neglect it." in another place he says: "of course, in such a matter the cardinal rule to be observed is that errors of excess are innocuous, but errors of defect are destructive. too much reserves only means a small loss of profit, but too small a reserve may mean ruin. credit may be at once shaken, and if some terrifying accident happens to supervene, there may be a run on the banking department, that may be too much for it, as in and , and may make it unable to pay its way without assistance, as it was in those years." and again he writes: "why should a bank keep any reserve? because it may be called upon to pay certain liabilities at once and in a moment." upon the same point i want to support your position by another great english economist, stanley jevons. he says: "there is a tendency to frequent severe scarcities of loanable capital, causing sudden variations of the rate of interest, almost unknown thirty years ago. i will therefore in the next chapter offer a few remarks intended to show that this is an evil naturally resulting from the excessive economy of the precious metal which the increasing perfection of our banking system allows to be practiced, but which may be carried too far, and lead to extreme disaster." again he says: "the vast trade of the country cannot be placed upon a sound basis, until the force of public opinion among bankers imposes upon each member the necessity of holding a cash reserve, bearing a fair proportion to the liabilities incurred. it matters little who holds the reserve, provided it actually does exist in the form of metal, and is not evaporated away, _by being placed at par_, or deposited with other banks which make free use of it. in the absence of some common action among bankers, it is certain that the sensitiveness of the money market will increase, and it is probable that commercial crises will from time to time recur, even exceeding in their violence and disastrous consequences those whose history we know too well." the want of the conservation of proper gold reserves is what has led to the weakness of the german situation today and compels them to take steps to strengthen the reserves of the individual banks in accordance with the finding of the commission appointed to revise the banking laws of germany. the individual banks of england have also been increasing their cash reserves for several years past, recognizing the force of what jevons wrote several years ago. mr. farmer: that's all right, mr. banker, as a statement of principles, and i think it is perfectly clear to me just what you mean; but there is one point that i would like to have settled, and that's this: what is a reserve in the united states? that is, what can you call a reserve? you know i am a director of our little bank down in the village below. the other day i asked them what they held for reserves and the cashier brought out this list; $ , silver certificates; $ , of united states notes, or greenbacks; $ , national bank notes; $ , gold certificates; $ , gold coin; and some silver change. as quick as i saw that bunch of stuff, i said to myself, just what you pounded into me some nights ago, that those bank notes ought never to be held as reserves, because they were nothing but another bank's debts, nothing but another bank's i.o.u.'s. do you know that idea never penetrated my cranium until that very minute. now, that is an absolute absurdity, that one bank's debts should be used as another bank's reserves. just imagine what a high old time we would have, if the banks went around the country exchanging their debts with each other for the purpose of creating reserves. the sky would be the limit. just think of it; where would it stop? mr. banker: well, mr. farmer, that is precisely what the bankers of this country are doing. i know of one national banker who took $ , , of his own bank notes, and put them into the reserves of a trust co., and all the stock of the trust co. was owned by his bank, and was locked up in the safe of the bank. i know another national bank that got a large trust co. to bury $ , , of its notes down at the bottom of its reserves, so that they could not get out; and this is a fair sample of just what is going on all over this country today. this is done just to keep their notes out, so that they can make the extra per cent or - / on the notes in circulation, as we call it. some one of you may say, well! these notes are secured by government bonds. yes, suppose they are, what of it? congress has just passed a law providing for $ , , more just like these present national bank notes, which are to be secured by state bonds, municipal bonds, railroad bonds and promissory notes and what not, and the boast of that wonderful economist aldrich was that you could not tell them apart. any fraud, apparently, would suit him, so long as no one found it out. now, i assert, and challenge any man to deny it, that if any good debt is fit to be used for reserve money, then every good debt is equally fit. if a government debt is good reserve money, then new york state debts, pennsylvania, illinois, and all state debts; and if all state debts, then new york city, philadelphia, chicago and all city debts; and if new york, chicago and philadelphia debts are good reserve money, then the united states steel, standard oil and all corporation debts; and if all corporation debts are good reserves, then the debts of j.p. morgan, john d. rockefeller, andrew carnegie and all private debts are good reserves. when you stop to think of it, what a preposterous proposition it is to make any debt a reserve for another debt. the state of california has just waked up, and will not permit her state banks to hold a national bank note as reserve; but the great state of new york specifically provides that her banks may hold national bank notes as reserves. mr. merchant: i must confess that i never knew that before; such a scheme as that is perfectly rotten, and it seems to me as though something ought to be done to correct so obvious an evil. why, gentlemen, these men who are using bank notes as reserves, must have known that they were driving just that much gold out of the country, and weakening the basis of credit to just that extent. mr. banker: i don't know whether they know enough to know that or not, and i don't know whether it would have made any difference with them if they did. when a man's cupidity and greed make a slave of him, they drive all patriotism out of his soul, just as debts, promises to pay, or wind money drives the gold out of the country. mr. manufacturer: this scheme of banks exchanging their promissory notes or their debts for the purpose of making reserves is a new one to me, too. but, if any one thing can be much worse than another, it must be this scheme. gentlemen, a true reserve must be the measure and touchstone of credit, therefore a reserve cannot be a credit itself nor a debt created by granting credit. now, what is the thing by which we are measuring the value of all credit? indeed, the thing by which we are measuring the value of everything? it is gold, is it not? then certainly gold is the only thing that ought to be considered as a reserve. mr. banker: right you are, mr. manufacturer, no greater economic truth was ever uttered, or better said, than you have just put this one. in support of that, i want to read something just written by joseph t. talbert, vice-president of one of our greatest banks. it is this: "what is a bank note? it is the available gold behind a bank note that gives it value. substitution of any form of credit paper, the greenback, for instance, is a substitution of a deferred promise of a thing, for the thing itself. a statute which forces such notes upon the people as a legal tender, works a fraud and vitiates all reason in regard to money and banking. it perverts the moral sense of right and justice." mr. farmer: there is no doubt whatever that all the true reserves that that little country bank really had, was only the gold and gold certificates amounting to $ , out of the total of $ , , the rest being only a substitution of some form of credit which must itself be redeemed by gold which is certainly the only redeemer. we settled that a long time ago, but it never came home to me until right now. this thing is growing on me so rapidly that i shall soon be a real, unregenerate gold bug. i guess i am that now. but, how plain and self-evident that truth is when we get close to it. we are living and teaching a gigantic economic fraud, an economic lie. mr. banker: some reference may have already been made to this fact; however, it will do no harm to repeat it right here because of its force and great importance. under the english bank act of , permission was given to count silver as one-quarter or per cent of the reserves of the bank of england; but it has never done so, since it is regarded as an economic falsehood. the reason is obvious. if the bank today held $ , , of silver and $ , , of gold, the gold would not only have to carry the $ , , of silver, which is nothing but another form of credit money, because actually worth only cents on the dollar in bullion, but the gold would also have to carry $ , , additional; that is, all the credit based upon this $ , , of silver, a condition that is wholly misleading; for the silver instead of being a reserve at all, as it seems, or pretends to be, would actually be, so to speak, a bundle of dynamite under the whole structure of english credit. so, in the united states our $ , , of united states notes, or greenbacks, instead of being an actual reserve to that extent, are not only a burden resting upon our gold, to the amount of their face value; but the burden our gold is carrying is multiplied to the extent of all the credit that is resting, or is based upon these united states notes, which may be anywhere from one billion to three billion according to the per cent of the reserves the banks using them carry. they may be used as a per cent reserve, and carry twenty times the amount of the reserves, or more than six billion; it is possible that they may be carried as a per cent reserve, the average of all the national banks, or only per cent, the average reserves of all the other state banks, excluding the mutual savings bank. mr. merchant: what's that? do you mean to say that the state banks do not carry more than an average of per cent reserve, and that the national banks carry an average of two and a half times as much or per cent cash? mr. banker: i have the statement of the comptroller right here, which shows that the average cash reserves of all the state banks is per cent, including the mutual savings banks, but excluding them, only an average of per cent, and that the average reserves of all the national banks is per cent. the report of the comptroller also shows this fact, that while all other banks than the national banks, excluding the mutual savings bank, hold only per cent cash reserves of their individual deposits, or demand liabilities, they have per cent of their assets invested in bonds and other securities, which must of necessity be slower than current commercial paper, while the national banks, which hold per cent in cash of their individual deposits, have invested only per cent of their assets in bonds, or other securities. the inconvertibility of a great per cent of the assets of the state institutions is another burden then, thrown upon the total cash bank reserves of which the national banks carry $ , , , with $ , , , individual deposits, while the other banks, excluding the mutual savings banks, have only $ , , cash reserves, with individual deposits amounting to $ , , , . the average cash reserves of the united states therefore are only a trifle over per cent, when they should not be less than per cent under any circumstances at the low level, reaching nearer per cent at the high level. that is, reserves should be held for use, not ornament. there should be such an elasticity in the use of reserves, as to enable any community or section of the country to adjust itself to the ever-changing conditions of trade. let me make this point perfectly clear by giving you an illustration. under the law of today, our bank carries per cent cash, which amounts to about $ , . there are times of the year when i could carry $ , or even $ , a good deal easier than i could carry $ , , or even $ , at another time. common sense would say that i ought to be able to adjust my business and my reserves somewhat to the varying conditions, but no, i am tied down by a cast-iron rule, so that i cannot bend without breaking the law. there is no doubt that my reserves ought to average for the year fully per cent cash. in addition to this, i ought to carry at least per cent more that i know absolutely is available at any time. yes, and this should be so carried with the combined reserves of my fellow bankers all over the united states, as to make any amount available that could possibly be necessary at any time under any circumstances. _this is the principle of the elasticity of reserves._ the wide variation between the state reserves and the reserves of the national banks is not difficult to explain. there are eighteen states today which have no reserve requirements at all. in the remaining states, the reserve requirements range all the way from per cent to per cent. the reserve laws in some of the states are excellent, just as good as that of the national bank act, while in an adjacent state, there may be no provision whatever requiring reserves. the result is that half of the banks of the country which are compelled to carry adequate reserves are carrying the other half, a condition that is unfair, unjust and manifestly unsound. mr. merchant: it is not only manifestly unfair as between the bankers themselves, but such a condition imperils the banking situation as a whole, and more than any other single cause, brings on a general commercial disaster, as things now stand. the banking of the united states and all the productive and transportation interests are, comprehensively speaking, but one single business, so intimately associated and interwoven are their affairs. the banks put up their capital as an insurance fund, to protect their customers, and should handle their resources, and should keep such an amount of reserves on hand or at their command as to guarantee the payment of all depositors upon demand, or in accordance with their contracts. since the banks, commerce and the people are all bound up together, the contracts of the banks with the people should take one common form, and each bank, from one end of the country to the other, should be compelled to assume its proper share of the burden, both as to paid-up capital and as to reserves. it is interesting to note that the capital of the , national banks amounting to $ , , , is just about equal to the capital of the other , banks, outside the national system reporting, and the estimated capital of $ , , of the non-reporting banks, $ , , , . the surplus of the national banks is per cent of their capital, and strange and fortunate to say, excluding the mutual savings bank, the surplus of all other state banks is exactly per cent of their capital. that is, the national banks have $ , , , capital and surplus to insure $ , , , individual deposits and $ , , , due to the other banks, or a capital and surplus to all deposits of nearly per cent, while all the other banks have $ , , , capital and surplus to insure individual deposits $ , , , and $ , , due to banks, or a little over per cent. insurance expressed in capital and surplus, therefore, is about equal, but a great and serious divergence comes, as we have seen, in the average cash reserves of the two classes of banks. mr. manufacturer: this is the weakness of the present situation from the standpoint of reserves, and some of the states are beginning to realize the importance of protecting the well-conducted banks from the consequences of those recklessly or dishonestly managed; and they are passing laws compelling all persons or firms doing a banking business to submit to state supervision and control. they are compelling them to incorporate their business within a reasonable time. these states do not propose to have the innocent depositors swindled through a misuse of funds; nor do they propose to permit bankers to so conduct their banking business within their borders, that they can, if they so desire, commit gigantic frauds, or by the misuse of the people's deposits, bring on bank panics and a complete paralysis of business. i think that ohio has just passed such a law and that illinois is about to put the same kind of a statute into operation. the people of all the states are beginning to understand that banking is a quasi-public business, and that the banker, though not strictly speaking a trustee, is in fact a quasi-trustee, and must conduct his business upon that basis. mr. banker: mr. manufacturer, you are quite right in what you have said, but you have not gone far enough; nor as far, i am sure, as you will be inclined to go when i have outlined the necessity of a police regulation of the banking business, from a national rather than from a state point of view. just stop and think the matter over. to use your own observation with regard to the action of the state, no one will deny that a state has the right to supervise every person, firm or corporation that takes deposits under the name of bank, or banker, with a view of protecting the people against foolish or dishonest bankers. by the same course of reasoning, the united states, or national government, has the right, and it is clearly its duty, to protect one state against the unwise and dangerous course of some other state and one section of the country against misconduct in the banking business in some other section of the country. bad banking is not only a local mishap, but a national misfortune. nine-tenths of the country might be under such supervision and control of its banking business as to insure practical immunity from such conditions and practices as breed panics and the remaining tenth be so conducted as to preclude the possibility of a day's freedom from the danger of a commercial cataclysm. will anyone say that such a condition should continue for a day, or a year, or for ten years, or for a hundred years, or for a thousand perchance, because the general government has no right or power to act in the matter for want of constitutional authority? let me ask you, mr. lawyer, whether there is anything that will so certainly conserve the peace, the prosperity and the "general welfare" of the united states as a sound and uniform financial banking system extending over the whole country. mr. lawyer: i certainly cannot conceive of anything of so much importance as a sound and uniform banking system for the whole country. if there is one single factor in our life that is distinctly national in its character and scope, it is this. during the past week, i devoted much time to that phase of this question, because, as we have gone along during the last two or three months, and this problem has been under discussion, i have become more and more impressed with its vast importance, and above all with its distinctly national character. i have not butted in tonight, as you will observe, as i was anxious to see how you gentlemen would treat this subject of reserves, whether from a standpoint of individual banks, or from the standpoint of the community, the commercial center, or our country as a whole, or upon the broad proposition that gold today constitutes the world's banking reserves and that we are a very great part of that commercial world. for my own part, i had come to the conclusion that there could not be a system of reserves established that would be efficient and of the highest use, and really protective unless it were national in its extent, and universal in its application. therefore, realizing the absolute necessity of some common power to control all reserves, in order to compel each bank to perform its part by carrying its share of the burden that commerce imposes, i have been unable to find any solution, except in a uniform national system; and why not? certainly the national government could compel every bank to carry certain specified reserves, and failing to do so to pay a tax of or per cent per annum upon all deposits not so protected; that is, upon all deposits in excess of the required reserve. this could be done under the taxing power of the government, precisely as a tax of per cent was put upon all bank notes. would any patriotic banker refuse to coöperate with his fellow bankers in such a reform, unless he wanted some unfair advantage by compelling the other bankers to carry his load for him? you gentlemen will remember that the national government was given jurisdiction of the postal savings banks under these words which it was understood at the time were written by the president: "sixty-five per cent of the deposits could remain with the banks as a working balance, and also a fund which may be withdrawn for investment in bonds or other securities of the united states, but only by direction of the president, and only when in his judgment 'the general welfare' and the interests of the united states so require." similar words could be used with regard to a per cent of the surplus of the banks, and if the one was tenable, certainly the other would be especially so, since the latter involves seventeen billion of individual deposits, of which six billion four hundred and eighty million ($ , , , ) are savings deposits. again article i, section of the constitution, empowers congress "to regulate commerce with foreign nations and among the several states and with indian tribes." upon this clause of the constitution rests the anti-trust law. what have we not done under this clause of the constitution and the general welfare clause? we have passed the food and drugs act, giving the government power to stop the use of poisonous substances in food products and drugs: the insecticide act, giving the government power to determine what kind of poison shall be used to annihilate bugs: the plant quarantine act, giving the government power to regulate the importation of nursery stock and other plants and products and to enable the secretary of agriculture to establish and maintain quarantine districts for plant diseases and insect pests: the livestock quarantine act, to enable the secretary of agriculture to effectually suppress and extirpate contagious pleuro-pneumonia, foot and mouth diseases and other dangerous infectious and communicable diseases in cattle and other live stock: the meat inspection act that, for the purpose of preventing the use in interstate, or foreign commerce, of meat and meat food products, which are unsound, unhealthy, unwholesome, or otherwise unfit for human food, the secretary of agriculture at his discretion may cause to be made, by inspectors appointed for that purpose, an examination and inspection of all cattle, sheep, swine, and goats before they shall be allowed to enter into any slaughtering, packing, meat-canning, rendering or similar establishments in which they are to be slaughtered, and the meat and meat food products thereof are to be used in interstate or foreign commerce. the twenty-eight hour law by which the government compels the humane treatment of cattle: employers' liability act: the safety appliance act: the hours of service act: the transportation of explosives act: the newspaper publication act: the white slave act. can anybody doubt that we shall have a "national health act" by which the government can stop the invasion of this country by yellow fever, cholera, bubonic plague, or any other scourge that may possibly visit our shores, and sweep over the land? can anybody doubt that we shall soon have a national child employment act by which the childhood and youth of the land may be protected against those labor practices that imperil our chief national resource, the human resource? can anyone doubt that we shall soon have a national woman's employment act that future generations may not be pauperized in health, strength and character? can anyone doubt that we shall soon have a national workmen's employment act to the end that american citizens in all parts of the united states engaged in our productive industries shall have equal opportunities in matters of hours of labor? the general welfare of this nation demands strength, power and greatness; but the strength, power and greatness of this nation reside and consist in the character, health, strength and power of the people, and therefore conservation of our greatest national resource is the conservation of our human resource. the citizen is a national asset. can anyone doubt that justice between the employers of labor in our various states, and the general welfare of this republic, demand uniform health and labor laws to the end that the citizenship of this republic may be the best product of the human race? gentlemen, if all these things are done, can be done and ought to be done by the national government, can anyone doubt the soundness of this proposition: that it is interstate commerce to ship by mail, or freight, any kind of property? what is property? "property is a thing or things subject to ownership; anything that may be exclusively possessed and enjoyed; chattels, lands, possessions." gold, gold certificates, silver, silver certificates, united states notes, checks, drafts, promissory notes are all certainly within this definition. h.d. macleod, the highest authority i know of on banking economics, says: "property, therefore, in its true sense, means solely a right, interest or ownership, and consequently to call goods or material things property is as great an absurdity as to call them right, interest or ownership. "to call goods themselves property is, comparatively speaking, a modern corruption, and we cannot say when it began." therefore, property is primarily and essentially the very things with which banking is solely concerned. will anyone deny that gold is property? remember that when gold is shipped in large quantities, it is by weight and not by count. will anyone deny that gold certificates are property? will anyone deny that silver is property? will anyone deny that silver certificates are property? will anyone deny that united states notes are property? will anyone deny that promissory notes are property? can anybody have the hardihood to say that if a note broker in new york ships a million dollars' worth of commercial paper to purchasers in the west upon a commission of a quarter or a half per cent, and receives his payment, for the sake of the argument, let us say, by a shipment of gold coin, that such broker is not engaged in interstate commerce? does this transaction become a different transaction, forsooth, because it is carried out by a banker? will anybody deny that checks and drafts and bills of exchange are property? will anybody deny that a bank has property, although it may be the owner of one million dollars' worth of promissory notes? will anybody declare that a bank has no property when it has a million dollars' worth of gold coin in its vaults? if a bank in chicago should by any chance own one million dollars' worth of wheat, and should sell and ship the same to a new york bank, and the new york bank should ship the chicago bank one million dollars' worth of gold, will anybody deny that they are engaged in interstate commerce? now, suppose that the chicago bank should sell the wheat in chicago to mr. armour, instead of shipping it, for his promissory note for one million dollars, due in thirty days, and that the chicago bank should then sell, and mail the note to the same new york bank, and the new york bank should ship the chicago bank one million dollars in gold, in payment for the note, will anyone have the hardihood to assert that this transaction is not interstate commerce? will anyone deny that the sale and shipment by note brokers of billions upon billions of promissory notes from one state to another every year is not interstate commerce, but that to ship eggs, apples, potatoes, chickens, grain, cotton and live stock is interstate commerce? i assert that it is just as proper and important that the national government inspect this paper, and the banks that create it, or ship it, or buy it, as it is to inspect the sheep, hogs, cattle, slaughterhouses and the meat they turn out in order that it can protect the people of the united states. if the paper so shipped is infected by the hand of a rotten maker, commercially speaking, and the bank sending it out and responsible for it is not carrying an adequate reserve to meet the paper, should the maker fail to pay it, the harm done is vastly greater than that resulting from slightly infected meat. how much infected meat would it take to do the harm, the damage to the american people that resulted from the panic of ? and yet, if we had had a wise, national financial and banking system, we need never have passed through that harrowing, wasting panic that resulted in destroying property values into the billions; in the death of thousands of the people directly and indirectly; in the ruined health of tens of thousands more; in the non-employment of hundreds of thousands; and in the unknown and immeasurable suffering that ensued. such a national system must be supported by every banking unit; by every individual bank carrying its part of the commercial burden, and providing its proper share of the insurance of commercial safety by contributing its proper proportion of the necessary reserves, both local and national. mr. merchant: mr. banker, i heartily approve of every word that you have said, and there can be no possible doubt about the result of a discussion of this phase of this question by the american people. there is one question, however, that i desire to ask you before we pass on, as we may overlook it. is it not true that our national banks are now carrying per cent reserves of which per cent are cash? are not these reserves large enough to meet all emergencies? mr. banker: i presume you gentlemen all know just how the national banks carry their reserves; but fearing that you do not, i will explain the system to you. all so-called country banks are required to carry per cent reserves; that is $ , cash against every $ , of deposits; that they may send per cent or $ , for every $ , of deposits away to what we call reserve cities. now, there are banks in of these reserve cities. these reserve cities are required by law to carry a reserve of per cent, or $ , , for every $ , deposits; but they may send away - / per cent, or $ , , for every $ , of deposits to a central reserve city, of which there are three: new york, chicago and st. louis. these central reserve cities must carry per cent cash reserves or $ , in cash for each $ , of deposits. experience shows that these banks in the reserve cities and these banks in the three central reserve cities keep all of their money loaned out all of the time; that is, right up to the reserve limit. since they have no margin, when called upon for anything more than the usual daily current requirements, something extraordinary must be done to meet the demand. loans must be called in and paid off. but since these same banks that are calling loans are supposed to be carrying the real, the final, the ultimate reserves, a deadlock follows, and the borrower is up against it; rates go almost anywhere that the banks want to put them; from per cent to per cent, to per cent, to per cent, or even , per cent; i believe that's the record rate. in other words, we have no true, final reserves in this country at all, for you cannot break the government limit fixed by statute, and therefore we have a complete lockup all along the line, until through straining, something breaks somewhere. there is absolutely no use of sending a part of your reserves away, if you cannot get them when you want them; for then it is no reserve at all, and that is the actual position or situation in the united states today. our so-called central reserves are not reserves; it may be written down as a purely fictitious scheme, for there cannot be found a single year in which any substantial arrangement has ever been made by running the reserves up in the central reserve cities until they amounted to an average of or per cent, which would be the only practical way of providing for the crop-moving period. if there is one thing more barbarous in our banking practices than a bond-secured currency, it is our system of superimposed bank reserves, especially in connection with the fixed limit, established by the government. what would you think of a railroad company which ran out through the wheat country, having one-quarter of all its freight cars idle all the time as a reserve, and yet when thrashing time came, refused to use them, although the wheat was rotting on the ground, because the management of the road demanded that the railroads should always have at least one-quarter of the cars idle, as a reserve to meet the demands during the crop-moving period. wouldn't you think that that was idiotic? mr. laboringman: well, i should say so. mr. lawyer: mr. banker, there is another point in that connection, and that's this. you started off to get a central reserve, a true reserve, as i supposed, as distinguished from the reserves of the national banks that are all loaned out all the time. then, your reserves were all broken up in the end, first into three hundred and twenty banks, and at the end into fifty-five banks, located in new york, chicago and st. louis. what we must have, it seems to me, is a real central reserve in the form of unloaned gold, and then permit the banks to use their cash reserves, if by any chance they needed them in part at least. i notice that you carry about $ , in accordance with the legal requirement. now, just as you said a while ago, there are times of the year when you could easily carry $ , ; but again there are times when you want to use a part of the $ , , possibly as much as $ , of it. why should you not do it, and then accumulate the necessary excess in the slack time to make up your average for the year. mr. banker: that is precisely what we ought to be permitted to do. mr. lawyer: then, mr. banker, instead of sending as you now do, per cent of your deposits, or $ , , to a reserve city, and that city in turn sending a part of it to some central reserve city, your balance with your reserve city should be sufficient to carry your exchange account, and the balance go to a great central gold reserve, upon which you and your fellow bankers throughout the country could rely absolutely when the emergency came. mr. manufacturer: i have been listening to you gentlemen with intense interest, and must say that you have worked this plan out completely and practically. i see what an enormous advantage it would be to a bank to use its reserve as a reserve should be used, and what an absolute guarantee of protection it would be to have all the reserves of all the banks centralized, and ready to help anyone of them in need of gold, because the gold was actually on hand, and had not been loaned out as the banks now do; but i have been wondering where the state banks and trust companies were going to get per cent more reserves of their demand deposits to put up in this central gold reserve. you must remember that they have five billion of deposits. mr. banker: i can tell you how to do that; that is very easy. when the state banks come into the national system as they certainly will, if you have the right kind of a system, they will exchange their notes for the gold or gold certificates that are now in circulation, as they come in over their counters. you see that all the gold and gold certificates that are now held by the banks only amount to $ , , , although there is in the country $ , , , of gold, practically one billion of gold, or $ of gold for every man, woman and child out in the corn, cotton and wheat fields; in the mining camps, when as a matter of fact, this gold should be in the reserves of our banks, protecting our bank credits; and bank notes should be in the corn, cotton and wheat fields, in the mining camps filling the true function of currency, and where gold, or gold certificates are not at all needed. mr. lawyer: now, wait a moment, mr. banker, and let me see if i grasp that. it is very important that we should all understand this. i am exceedingly anxious to, and it strikes me that we are at a mighty interesting juncture of this subject. if a state bank with a reserve of $ , came into your national system and had to increase its present reserve, which is only per cent, by as much as per cent, it could do so by simply retaining the gold and gold certificates as they were deposited from day to day, and pay out its bank notes to the extent of one hundred thousand dollars. the result would be that the bank would increase its liabilities by $ , , but it would also increase its reserves by $ , . that is certainly a perfectly sound proposition. before the bank came into the system, its reserves were only per cent, or $ , , since its deposits were $ , , . after it goes into the national system, it has changed $ , of its notes for $ , of gold, or gold certificates, as they came in over the counter; it now owes $ , , , of which $ , is of notes, but it now has $ , of reserves of all of its demand liabilities, or per cent, instead of $ , , or per cent, as before. mr. merchant: isn't that a simple and very easy thing to do? and what tremendous strength it would give to the whole banking situation immediately. mr. manufacturer: then when you think of it, what a stupendous piece of folly it is, to have all this gold floating around the country, doing no possible good, when a piece of credit paper, or bank note, would do the work just as well. mr. laboringman: anybody can see that. a man that can't ought to be arrested for want of brains. he'd have to plead guilty. putting that gold that you need in your bank reserves at the rate of one dollar of gold for five or six dollars of credit into the streets, cotton fields, corn fields and in the mines, is no greater piece of folly than it would be to send a six-horse team to haul mr. farmer home, when one horse would do just as well. uncle sam: mr. laboringman has got this thing dead right. in fact, in my judgment, he has the horse sense of this crowd. give him a show, i'll bet on him every time, he always takes a short cut, and hits the nail square on the head. mr. merchant: suppose, mr. banker, that all the banks of the country should come into the national system, and put up, say per cent, as you suggested a while ago, of their demand or individual deposits, and per cent of their savings deposits, what would your central gold reserve amount to? mr. banker: on june , , the comptroller of the currency reported that the individual deposits amounted to ten billion five hundred million ($ , , , ), and that the savings deposits, outside of the mutual savings bank, amounted to two billion eight hundred and seventy-two million ($ , , , ). if the state banks and trust companies should become national banks, and bring their reserves up to the national standard, by exchanging their notes for gold; that is, exchanging $ , , of their notes for that much gold, the result would be as follows: individual deposits $ , , , @ % $ , , , savings deposits , , , @ % , , bank notes , , , @ % , , -------------- making a total central gold reserve of $ , , , this is just double what the gold reserve of france is, the largest gold reserve in the world today, but when you consider the fact that our banking resources are per cent of the total banking resources of the world, it should be even more than that. it is interesting to note that in making this readjustment for a central gold reserve it would be just $ , , larger than our bank note circulation. with this central reserve of gold created, the united states could then control the inflow and outflow of gold to and from the united states, precisely as england controls the movements of gold today by fixing the rate of discount or a price for the use of gold. uncle sam: well, boys, if there is one phase of this question that you have treated with a greater thoroughness and more satisfactory results than any other, to my mind, it is your plan for protecting our bank credits with ample gold reserves. they are so disposed of as to keep at all times all bank credits in touch with gold, and therefore as good as gold; at the same time have developed a great central gold reserve in harmony with the practice of the great commercial nations of the world, and commensurate with my importance as a banking power in the world. you have made this subject so clear and conclusive that i need not restate the points you have made. i hope our next night will be as satisfactory as this has been. good night. eleventh night the bank uncle sam: at our last meeting you considered the very important element in banking, of reserves, and seemingly the final factor that enters into the structure of a bank. you have run the whole schedule off, i think. standard of value, money, currency, exchange, capital, credit, government credit as money and as currency, land credit as money and as currency and reserves. what else can there be? mr. banker: i do not think there is any particular topic for us to tackle now, but the bank itself, and i want to be permitted in the outset to describe just what a bank is, and what it does. i do not think there is any single thing in business life that is so misunderstood. people think of a bank as a kind of mystery. the banker is a merchant in money and credit, and precisely as you can say that a man is a hardware merchant, cotton goods merchant, grain and flour merchant, so you can say that the banker is a money and credit merchant. he deals in these two things. let me illustrate this in a simple way. if mr. farmer should come to me to borrow a thousand dollars for three months, and i should make him the loan, as we say, i, as a banker, would buy his note, due in three months. that is just what happens every time a bank makes a loan; it simply buys the note. now, in all probability i would not give mr. farmer any actual money, but would simply give him credit for one thousand dollars on the books of the bank, so that he could draw his check against it. in other words, i would owe him one thousand dollars. i have created a debt to him of one thousand dollars; in short, i have traded debts with him. he has given me his note, which is a debt for one thousand dollars due in three months, and i have given him credit on the books of the bank, a debt due to him on demand. the transaction does not differ in the slightest degree from the trade of horses for cattle. let me demonstrate this. suppose that mr. farmer came to me and offered me two of his jersey cows for my horse and buggy, because he does not want the cows, but does want the horse and buggy to do a lot of running around. i want the cows to milk, and so make the exchange with him. he gets something that meets his pressing needs in the horse and buggy, and i get something from which i receive an income, the cows from which i get milk. this corresponds to the interest on his note, and by the way, the cream would be my profit. mr. laboringman: that's it; you bankers are always milking the public, and the interest you get is all cream; all profit. mr. banker: oh, no! it is not as bad as that. don't make such a mistake. the average cost to the bankers of the country, outside of any losses, is about per cent upon their deposits for interest paid on deposits, rent for building, clerk hire and other general expenses. so you see that it is not all profit by any means. but let me get right back to what i was saying. the banker is nothing but a trader who keeps an open shop for the purpose of trading his debts for the debts of his depositors; or to put it in another way, for the purpose of exchanging his credit for actual money which is deposited with him, or for checks and drafts that are deposited with him, or for promissory notes which he buys when he loans money to his customers, and gives them credit on his books for the amount of the loans. all these different things, money, checks, drafts and promissory notes are bought by the banker with his credit, and the greater the amount he buys with his credit the greater will be his debt. but, you will probably say these are his deposits. very true, but his deposits are his debts. don't forget that. mr. lawyer: mr. banker, you have accurately described the situation, just as it exists today, and that, of course, is what we are interested in; but it seems to me as though it would be a great help to us to follow the development of banking, as we have it now. macleod, the highest authority upon banking credit, and the theory of banking, used this language: "the first business of a banker is not to lend money to others, but to collect money from others." bagehot used this language, in describing the business of the bank: "thus, a banker's business--his proper business--does not begin while he is using his own money; it commences when he begins to use the capital of others." many writers have maintained that a bank should only be allowed to create exactly as much credit as the specie paid in, and that its sole function should be to exchange its credit for coin, and coin for credit; and that the quantity of the bank's credit should always be exactly the same as the coin it displaces. this principle is called the currency principle. many banks in the world's history have been constructed on this principle, especially those famous banks at venice, hamburg, amsterdam and several others. these cities, small in themselves, were the centers of great foreign commerce; and as a natural consequence, an immense quantity of coin and denominations of all sorts of different countries was brought by the foreigner who resorted to them. these coins were, moreover, greatly clipped, worn and diminished. the degraded state of the current coin produced intolerable inconvenience, disorder and confusion among merchants, who, when they had to make or receive payment of their bills, had to offer or receive a bag full of all sorts of different coins. the settlement of these bills, therefore, involved perpetual dispute--which coins were to be received, and which were not, and how much each was to count for. in order to remedy this, it finally became absolutely necessary that some fixed uniform standard of payment should be devised, to insure regularity and a just discharge of debts. in order to do this, the magistrates of those cities instituted a bank of deposit, in which every merchant placed all his coins of different kinds and nations. these were all weighed, and the bank gave him credit, either in the form of notes, or a credit on their books, exactly corresponding to the real amount of the bullion deposited. the owner of this credit was entitled to have it paid in full weighted coin on demand. these capital credits, therefore, always insured a uniform standard of payment; and it was enacted that all bills upon these respective cities, above a certain amount, should be paid in these bank credits, which were called _bank money_. the consequence was evident, as this bank credit, or bank money, was always exchangeable for money of full weight on demand; it was always at a premium. these banks professed to keep all the coin and bullion deposited with them in their vaults. they made no use of it in the way of business, as by discounting bills. thus the credit created was exactly equal to the specie deposited and their sole function was to exchange specie for credit and credit for specie. these banks were examples of the currency principle; they were of no further use to commerce than this, that they served as a safe place to keep money in--and they insured a uniform standard of payment for debts. they made no profit by their business, but those who kept their accounts with them paid certain fees to defray the expenses of the establishment. later and during the civil war in great britain the goldsmiths of london began to receive the cash of the merchants on deposit. they not only agreed to repay it on demand, but to pay per cent per annum for the use of it. consequently, in order to enable them to do that, the deposits necessarily became their property to trade with as they thought best. when, therefore, these goldsmiths received this money on deposit, they gave in exchange for it, or issued to their customers a credit, or right to demand back an equal amount of money at will. and it must be noted that it is this banker's credit which in banking language is termed a deposit. the money itself is called an asset, or resource. macleod says that in practice it will be found that in ordinary times a banker's balance in cash will seldom differ by more than one thirty-sixth part from day to day. so that if he retains one-tenth part of his cash to meet any demands for payment that may be made, that is ample and sufficient in ordinary times. the banker, therefore, can see that if an amount of cash was sufficient to support ten times the amount of his liabilities, he might safely buy debts to several times the amount of cash in his hands. from this you see clearly by evolution a banker is a trader, just as mr. banker said a few moments ago, whose business consists in buying money and debts by creating other debts. if he has taken actual money on deposit, he has bought it, and if he has received checks and drafts on deposit, he has bought them likewise with his credit. thus, it is seen that the essential and distinctive feature of a bank and a banker is to issue credit payable on demand, and that this credit may be put into circulation and serve as money. _first_: they might demand payment in cash; if they did so, the banker canceled his debt. _second_: the banker, if his customer wished it, gave him his promissory note to pay him or the bearer on demand such sum as he might wish; this neither created nor extinguished a deposit, it merely recorded it on paper for the convenience of transferring it to someone else. this promise to pay was at first called a "goldsmith's note," and is now called "a bank note." _third_: if the customer wished to make a payment he might write a note to his banker desiring him to pay the money to some particular person, or to his order, or to bearer. these notes were then called "cash notes," but are now called "checks." now, it is perfectly clear that neither a bank note, nor a check creates any new right; it merely records on paper a right to have money which already exists, and it is used for the purpose of transferring that right to have money to someone else. it will be noted now, and i want you to keep this observation clearly in mind, that all banks are banks of issue, that is issues of credit. macleod says that the very meaning of the words "to bank" is to issue a right of action or a credit, in exchange for money or other debts; and when once the banker has issued this right of action, or right to have money, to his customer by writing it down to his credit, it makes not the slightest difference as to his liability whether he delivers his own promissory note, that is a bank note, to his customer, or whether he merely creates the credit, and gives him the right to transfer it to someone else by means of a check. when a person deposits money at the bank, it is not his intention to deprive himself of the use of it; on the contrary, he means to have as free use of it as if it were in his own purse. the depositor, therefore, lends his money to his banker, but yet at the same time has the free use of it, as the bank employs that same money in promoting trade; upon the strength of the money being deposited with the bank, it buys debts with its promises to pay, either in the form of "bank notes," or of credit on its books, several times exceeding the amount of the cash placed with it; and the depositors who sell the bank their debts, have the free use of the very same coin which the depositor has the right to demand; thus the lender that is, the depositor, and the borrower that is, the banker, have the same right at the same time to the free use of the same money. all banking depends on the calculation that only a certain small portion of each set of depositors will demand the actual cash, but that the majority will be satisfied with the mere promise, the "bank notes" or the credit on the books of the bank. banking is a species of insurance; it is theoretically possible that a banker may be called upon to pay all his deposits at once, just as it is theoretically possible that all the lives insured in an office may end at the same instant; or it is theoretically possible that all the houses insured may be burned at the same hour. the depositors and noteholders of the bank of england could demand payment the same day. all the depositors and noteholders of the bank of france could demand payment the same day. all the depositors of any bank could demand payment the same day. but all banking, as well as all insurance, is based upon the expectation that these contingencies will not happen, and the average experience of life proves that they do not happen. a banker multiplies his debts to be paid on demand and keeps buying a sufficient amount of cash to insure the immediate payment of all claims which are _likely_ to be demanded at one time. if a pressure comes upon him he must sell some of the securities he has bought, or borrow money on them. when the customer discounts a note at his bank he parts with the property in it, just as when he sells any other article. the note becomes the absolute property of the banker and he may sell it again, or pledge it, or deal with it in any way that suits his own interests best. the notes in the safe of a banker are exactly similar to the goods in the shop of a retail dealer. the retail dealer buys the goods from the wholesale dealer and sells them at a higher price to his customers; and, as he makes a profit by doing so, the goods are _capital_ to him. notes likewise are goods, or merchandise, which the bank buys from its own depositors at a discount, or bearing interest for a time, and as the bank makes a profit by so doing, the notes are _capital_ to the bank precisely in the same way that the goods in the shop of the retail dealer are _capital_. now, lest we shall be misled, i want to call your attention to an error which is very common. many persons not being aware that the word "_deposit_" in banking language means the credit created in exchange for money, checks, drafts or notes bought, when they hear or read that a bank has such an amount of deposits conceive or suppose that the bank has that amount of cash on hand to trade with. when it is said that a bank has $ , , , $ , , or $ , , or $ , , of deposits, they are not deposits in cash at all; they are almost entirely pure credit, and are exactly equivalent to just as many "bank notes." they are nothing but an enormous superstructure of _credit_ built up on a comparatively small basis of reserves exactly like the note circulation. these figures do not show the quantity of cash at the command of the bank that can be traded with; but they show the quantity of business the bank has done, and the debts or liabilities it has created. these deposits, then, which so many think are cash, are in fact nothing but the credits the banks have created in exchange for the cash and notes which figure on the other side of the balance sheet as assets or resources. this play of bank credit has been graphically described by joseph t. talbot, the vice-president of one of our largest national banks; he says: "a customer holding a bank note may present it for deposit and credit, instead of demanding redemption in cash. in this case, there is a conversion from the circulating form of credit, payable to bearer, back to a 'book credit,' payable to order, as was ordinarily the case. thus it will be seen that all these forms of 'bank credits' are interchangeable, one for another, at the pleasure of the holder of the credit. the difference between these several forms of credit involves no changes whatever in the bank's liabilities. they amount to about the same difference which exists, let us say, between a coupon bond and a registered bond. the one is payable to bearer, the other is not. at one time a bank note may best serve a customer's needs; at another time he might prefer a deposit in the bank; or again he might prefer 'exchange.' all these interchangeable uses of credit actually and continuously take place. it will now be clear that a circulating 'bank note' in the hands of the public does not differ essentially from a 'deposit credit' on the bank's books. "if one of your local bankers were asked how much he allowed his bank to issue in cashier's checks, he would tell you that he issued whatever sums his customers wanted; either against their balances, or against new loans. he would tell you the same in respect of the amount of exchange he issued; his sole rule and guide being the amount of such credit which his customers require, and which he is in position to lend afresh, and to maintain against, or to redeem in cash, if demanded. if asked how long these obligations were allowed to remain outstanding, he would tell you that he had no control whatever over the period of their circulation; that these obligations stood out just as long as the holders wanted to use them in that form, and no longer; that his only concern was in being prepared to redeem the obligations on demand in cash. "thus it is that the volume of bank credits, whether in the form of deposits, checks or notes, responds in a rise or fall according as there is legitimate trade demand; and over this the bank has no control, except by ceasing to make loans. this is why deposits increase as loans increase, and these increase as the volume of business increases." now, if we understand the real nature of these so-called deposits, the reason for their diminution is plain. deposits fall because loaning stops. when you stop loaning, you stop creating credit. you can readily see that it is not a diminution of deposits in cash, but it is a contraction of credit, a refusal to make loans. this erroneous notion of the real meaning and nature of deposits in banking language may lead to very great mistakes in estimating the stability of a bank. that a bank's stability depends on a due proportion being kept between the deposits or the liabilities and the cash; and it may very well happen that while the deposits are apparently mounting high, and might lead many persons to believe that the actual quantity of cash was increased, it might be nothing, perhaps, but a dangerous extension of credit. and if this were carried too far, the bank might be in the most dangerous position just when it was apparently most flourishing. now, let us consider how a banker who has purchased either money or notes from his customers by creating deposits or debts, may be used by his depositors. that is how the depositors may use these credits. of course, every banker does business exactly in the same way, or practically so, and when their customers begin to use checks these different results may follow: _first_: the actual money may be drawn out. _second_: the credit may be transferred to the account of another depositor of the same bank. _third_: the check may be an order to pay another bank. but in this case, if the first bank is ordered to pay the second bank so much, the chances are that the second bank will be ordered to pay the first bank practically the same amount. if the claims of the two banks on each other were exactly equal, the respective checks or orders are interchanged, and the credits readjusted to the different customers' accounts accordingly, without any payment in money. if it should happen that the claims of all the banks against each other exactly balanced, any amount of business might be carried on, without requiring a single dollar of gold coin. if the mutual claims of the different banks against each other do not exactly balance, it is only necessary to pay the differences in coin. now, exactly to the degree that banks are brought into a closer relationship with each other by such means, the smaller is the quantity of coin required to carry on the business of the country; or the more gigantic is the superstructure of credit which can be reared upon a given reserve. from what i have already said, you must all see that a merchant deals with credit; but a banker is a dealer in credit. a merchant brings his notes or debts, that are payable some time in the future, to the banker for sale, and the banker buys them for credits in the form of deposits, or debts payable instantly, which have precisely the same effect in commerce as so much gold. he reaps exactly the same profit by creating a credit in favor of his depositor as if he gave him the actual cash. the checks drawn against these credits so created by the banker circulate commodities in trade precisely in the same way that bank notes do which circulate commodities precisely in the same way that gold coin does. consequently, these bank credits so created by the banker, whether upon his books subject to check, or in the form of bank notes, are exactly equal in their practical effects, so far as exchanging commodities is concerned, to the creation of so much gold coin. this being true, you must realize how absolutely essential it is that every bank credit must be kept as good as gold by current redemption in gold everywhere, whenever demanded. mr. banker: mr. lawyer, in all that you have said you have only affirmed what i said in the outset; the banker is a shopkeeper, a trader exchanging his credit for money and debts. the development of the banking business in the united states is most interesting, and its growth has been simply marvelous. on feb. , , almost fifty years ago, when the national banking system was inaugurated, there were in the eastern states, including new york, new jersey and pennsylvania, what are known as mutual savings banks. these institutions are run solely for the benefit of the depositors. this is upon the theory that those using savings banks are the wards of the state. these mutual savings banks have no capital and the trustees, or directors, serve without pay. there are today in the united states of these mutual savings banks, with deposits amounting to $ , , , . practically all of these mutual savings banks are located in the east, there being only thirty-one west of buffalo. these few got a start before the present conditions of banking grew up. today it is quite impossible to start a mutual savings bank anywhere, because the state banks and trust companies are able to pay such high rates of interest, owing to the fact that they can conduct the savings bank business as a part of their regular commercial business, or as a part of their trust company business. that is, the savings bank business is incidental to their regular business, and requires no separate and special organization. if there are any extra charges they would be nominal at most. the savings business being conducted over the same counter, this particular branch of banking may be regarded as done at no cost to them. under the circumstances it is very easy to see how the state banks, and those banking institutions more recently organized, known as trust companies, have absorbed all the savings business where the mutual banks had not already been permanently established. another reason that has enabled them to do this is the fact that in most states there are no prescribed rules for the investment of savings bank deposits, and the banks are using the savings deposits for commercial purposes, and also in speculative ventures, particularly in the way of underwritings where the profits are much larger than could be realized from such funds if they were limited to investments of the highest order where, as you know, the rates of interest are comparatively much lower. mr. merchant: how many such institutions are there? mr. banker: there are today thirteen thousand three hundred and eighty-one state banks, with four hundred and fifty-nine million of capital and two billion nine hundred million of deposits. side by side with these state banks are , state savings banks, with seventy-seven millions of capital and eight hundred and forty-three millions of deposits. these state savings banks differ only in name from the regular state banks. the only point to be noted in this connection is that the local statutes, or the laws of the state where the bank is located, always determine whether the name will be a state savings bank, or a state bank. it may be assumed that whatever the name, the business carried on is practically the same all over the united states, with here and there some slight difference, but no substantial variance. mr. manufacturer: these institutions you have named do not include the trust companies, do they? there seems to be a perfect craze to start trust companies now. why is that? mr. banker: within the past twenty-five years there has grown up, almost as if by magic, the class of banks you have just mentioned, differing from state banks and state savings banks only in one single respect, but that is an all-comprehending one. enterprising men in almost every state have secured the passage of laws for what they call a trust company business. generally speaking, what you cannot do under a trust company charter is some kind of a business that has not yet been thought of. there are , of such trust companies, so called, with capital amounting to $ , , owing individual deposits amounting to $ , , , with $ , , additional liabilities, or something over four billion dollars, all told. this vast business has grown up outside of the national banking system, simply because the national bank could not, but these other institutions could develop along natural lines of business progress. notwithstanding these obstacles, however, there is no kind of a banking business that the national banks of the country are not doing in some way or other. of course, they are not all of them doing all kinds of business, but they have worked out methods by which they can, if they desire to do so. of the , national banks, nearly half of them, , , are now doing a regular savings bank business, without any express authority of law, and , , depositors have deposited with our national banks $ , , . who is there who does not know that either downstairs in the same building, or upstairs in the same building, or around the corner in some other building, with the back ends of the two buildings adjoining, many, if not all, the national banks have attachments, where they are carrying on the savings bank business and the trust company business under state charters. national banks are under national supervision, while the state banks and trust companies, owned and manipulated by them, are under state supervision, or possibly under no supervision at all. there are many national banks holding the stock of other banks, either savings banks, state banks, or trust companies in their treasury, and some of them are holding the stock of two or more banks. only recently it was discovered that a national bank had invested ten million dollars, directly or indirectly, in other banks throughout the country; possibly an examination would show that this ten million was partly the stock of other national banks, and partly the stock of state bank institutions such as savings banks, state banks and trust companies. now, if there is one holding company more to be criticised, and more to be abjured than any other, it is a bank holding company, controlling the stock of a great many other banks, particularly so under different supervision. when we behold the malformation of banking as now carried on in this country, due to the struggle of the various institutions to adjust themselves to these new conditions and to take advantage of all the opportunities in modern business, it reminds one of the crooked, twisted, knotted, and sadly misshapen tree-trunk that has grown up amidst and between huge rocks, that stand in the way of an upright and symmetrical development. these huge bowlders and rocks are the obsolete laws on our statute books, our ignorance, our selfishness, our prejudice, our political cowardice and our demagoguery. like our mutual savings banks, the original idea was that a trust company could only do a trust business in the strict sense of that word. they could hold a railroad mortgage, and pay interest to the bondholders, perform similar functions for other corporations, and could act as a trustee in case of estates. today you may assume that no kind of business will escape the scope of the charter of the so-called trust company, from the care of estates and the execution of corporate trusts to banking in all of its forms, and agencies of every conceivable kind. in other words, the all-round charter of the american trust company, popularly so called, permits it to do anything that the varied affairs of the american citizen may by any chance require. just as there are in the east mutual savings banks, which are relics of former days, so the trust companies, with their limited powers, are only a landmark in the evolution of american banking, and must disappear as a separate institution in time. the growth and development in fifty years has produced in the united states a banking unit, doing in a conglomerate way what it ought to be doing as a departmental business, with four distinct functions: viz., a commercial business, the manufacturing of credit; a savings bank business, accumulating the savings of the laboring masses, which is a sacred trust fund that should be placed in high grade investments; a trust company business, executing trusts, and carrying on agencies of every kind; a note-issuing business, which is only another form of the commercial business, as the bank note is in fact only another form, as we have learned, of a deposit--a circulating credit in place of a check credit for the convenience of the people. from feb. , , the birth of the national bank act, down to the present time there has not been one single change in the national bank law worth mentioning. it is true we have dotted an "i" here, and crossed a "t" there; but as for a substantial change there has not been a single one made. now, this is truly a most marvelous fact, when you consider how great have been the changes, especially since , or during the past twenty-two years. our banking resources have increased fourfold. in they were about six billion, today they are more than twenty-five billion. mr. lawyer: this growth in our banking power is not so strange because it only reflects the growth of our business. the clearings of the united states in were only thirty-seven billion, while the clearings this year must pass the hundred and seventy billion dollar mark. the productions of the united states in were only seventeen billion. the productions of the united states in will exceed thirty-five billion dollars. the wealth of the united states in was only sixty-five billion dollars. the wealth of the united states in is estimated at about one hundred and twenty-five billion dollars. the imports in were seven hundred and eighty-nine million; the imports the present year will be one billion eight hundred million; the exports in were eight hundred and forty-five million; this year our exports will exceed two billion three hundred million dollars. mr. farmer: and do you mean to say with this vast, almost incalculable increase of production and wealth and consequent increase of banking resources, there has not been a single step taken by the national government to facilitate it? mr. banker: mr. farmer, there has not been a single change made to facilitate the handling of this vast business. on the other hand, there seems to have been such a profound ignorance on the part of congress, or such an abject fear, lest they might aid business, that every progressive movement of a legislative character has been left to the states, which have given us laws as varied as jacob's coat of many colors; indeed, rivaling the fifty-seven varieties of the famous pickle man. not only have they left the banking business to just "grow up" like topsy in uncle tom's cabin; but the government itself has been one of the greatest obstructionists to the national growth of our banking business in its interference with the natural movement of the money of the country which by every economic law, and business right, belongs in the channels of trade, and not in the strong boxes of the government. mr. manufacturer: that is absolutely true. i was greatly impressed only yesterday by a statement made by the secretary of the treasury right on that point of government interference with current business by withdrawing money from circulation and piling it up in the vaults of the treasury. in the light of what we have learned during our talks, it is simply appalling; indeed, it does not seem possible in a civilized country. secretary macveagh says in the outset, "no reform of your banking and currency system can be adequate which does not take the united states treasury out of the banking business," and then adds: "when the independent treasury system was established the idea was that all the funds of the government should be stored in the treasury vaults in the form of money, just as the mediæval war lords kept their treasures in strong boxes. the independent treasury system was established in troublesome financial days, when the state banks were not the safest places for the deposit of money. the people decided that the public funds must be kept in government vaults for safety. "in this country, with our rigid laws fixing the minimum reserves the banks must hold, any loss of cash by the banks means an instant contraction of their loaning power. if the banks of new york and chicago lose $ , , cash, they must at once reduce their liabilities by $ , , . this means that they must reduce by that amount their loans to the business community. "with the volume of bank credit moving in the reserve cities four times as fast as the volume of cash, and throughout the country ten times as fast as the volume of cash, it is plain that the machinery of credit is extremely sensitive to variations in the amount of cash held by the banks. for this reason, an institution like the united states treasury, alternately accumulating and disbursing many millions of cash, is likely to create widespread disturbance in the money market. "the funds held by the great european governments vary from $ , , to $ , , . the coin, bullion, and paper money held as assets in the united states treasury during the present administration has varied from $ , , to $ , , . in other words, nearly one-tenth of all the money in the country is held idle in the treasury vaults. if this money were all deposited in the banks it would increase their reserves per cent. "the receipts and disbursements of the treasury are most irregular. the treasury receipts in exceeded the disbursements by $ , , . two years later the disbursements exceeded the receipts by $ , , . for the past two years receipts have again exceeded disbursements. the general fund in the treasury was $ , , in ; three years later it had fallen to $ , , . under our present system of keeping a large surplus government fund idle in the treasury these wide variations in the yearly balance not only seriously disturb the money market and the business of the country, but force the secretary of the treasury to enter actively into the money market as a paternal overseer of the machinery of credit. "it not infrequently happens that surplus revenues accumulate in the treasury just at a time when the banks are straining their resources to grant all the credits needed to finance a business boom. the treasury then takes money out of the banks and hoards it just at the time when the country most needs it. if the business boom goes so far as to strain credit to the breaking point, then the treasury must come 'to the relief of the situation,' by depositing some of its hoarded cash in the banks. in recent years the treasury has been carrying a large surplus, and it has been in a position to relieve financial tension by depositing funds in the banks. in december, , following the money panic, the special deposits in the banks by the treasury had reached $ , , . three years later they were reduced to $ , , . in the fiscal year - , the treasury withdrew $ , , from the banks. "this state of affairs places in the hands of the secretary of the treasury a power greater than any american should have. the power of the secretary to influence the money market by deposits or withdrawals of public funds is always dangerous. no government officer should have this power. it has been a great burden, i believe, on the shoulders of every recent secretary of the treasury department. "if the people realized how dangerous is the power in the hands of the secretary of the treasury, they would insist that the treasury be at once taken out of the banking business. accustomed as we are to government interference with the money market, few of us realize how the treasury in the past few years has exercised the central-bank function of regulating the discount rate. the treasury, by alternate deposits and withdrawals of the public money in the banks, as well as by other devices, has attempted to regulate the discount rate. "the treasury department should be divorced from the money market and from the banking business, and the way to effect the reform is plain. we should have in this country a quasi-public institution not only to hold the ultimate cash reserves of the banks and to regulate the rate of discount, but to act as the fiscal agent of the government. such an institution would hold the government balances as deposits, and the government could check against them just as any large business concern checks against its balances in bank. with the government balances deposited in such an institution the business of the country would never be disturbed by the treasury hoarding up cash, and the secretary of the treasury would no longer be forced to meddle in the money market. "as long as we have the present banking and currency system, we shall have panics--and no longer. does not this alone create a state of emergency? what doubt should there be of the urgency of this legislation? why should it take another wasteful and degrading panic to impress congress? why cannot suffice? there are many other things of prime importance to be secured through monetary reform, but if nothing were to be secured but emancipation from panics there would be abundant imperative reasons for immediate action by congress." mr. merchant: this statement of secretary macveagh proves absolutely just what you said a moment ago, that the situation was appalling, and when you realize that this practice has been kept up ever since , when the sub-treasuries were established, it is unbelievable. the act of aug. , , declared it a felony to deposit public money in banks. the united states government has been committing an economic felony ever since. it has been committing an economic crime against commerce and the laboring interests of the country ever since that act was passed, and is doing it this very hour. the act of feb. , , establishing national banks, authorized their use as depositaries of the public money except "receipts from customs." forty-four years later the act of march , , struck out the words "except receipts from customs." by the act of march , , bank checks were made receivable for customs dues, but no step has been taken by the treasury of the united states to make them so at new york, baltimore, boston, chicago, cincinnati, new orleans, philadelphia, st. louis, san francisco and washington, where the united states government still has its morgues for our money. every day the checks are presented which are sent in in accordance with the law, and the actual money is withdrawn from the channels of trade; that is, the united states government withdraws reserve money to the full extent of every dollar that is due it. mr. lawyer: while mr. manufacturer was reading what secretary macveagh said, i have been wondering what the people would do if the united states steel corporation, the standard oil co., j.p. morgan or john d. rockefeller, or any of the railroad companies, or any other great interest, should collect and hold in safe-deposit boxes hundreds of millions of money, just as the united states treasury does. mr. farmer: i'll tell you what we would do. we would blow them up mighty quick, and hang them to boot, that's what we'd do. mr. merchant: gentlemen, just think what it means to withdraw these hundreds of millions of reserve money from the channels of trade, say in the fall, keeping in mind that every dollar that the government grabs and withdraws, will support from five to ten times that amount of credit. the withdrawal, as mr. macveagh said, of one hundred million dollars, means the contraction of from five hundred million to a billion dollars; this is not only a fool's practice, but it is an actual crime against the commerce of the country; a crime against the producers, a crime against the laboring men of the country. mr. lawyer: how long, o lord, how long, shall we remain the laughing stock of the rest of the world? but, let us see, can any man here give me a single reason why the united states government should not deposit its money with the banks, precisely as all the other governments of the world do? it seems to me perfectly clear that the united states government should treat its income precisely as this town does, this county does, this state does. is there any conceivable reason why it should not act in this matter precisely as new york city, chicago, new york state and illinois, and every city and every state does? mr. banker: not one in the world. mr. manufacturer: this discussion upon the development of banking in the united states and the present treasury situation brings out the necessary reforms most vividly to my mind from these two points of view, the banks, and the treasury. _first_: assuming that we are all agreed as to the result of our talk last wednesday night upon reserves, that they must be national to be equal and adequate, our conclusions now are inevitable, ( ) we must give to the national banks the power to do a savings bank business, as well as a commercial business; ( ) we must give our national banks the power to do a trust company business; ( ) we must give our national banks the power to issue a pure credit bank note precisely like that issued by the scotch banks and the canadian banks, and was issued by the five hundred banks in new england before the war. these notes will go to the clearing houses every day with the checks and drafts to be cleared at precisely the same time, and precisely in the same way. _second_: we must take the united states government out of the banking business, so that its transactions will cease to be a disturbing factor in the everyday affairs of the commercial world. mr. banker: you have outlined these necessary reforms splendidly, but there are just two more points in this connection that must not escape our attention. they are these: _first_: all these various forms of banking are distinct in character and economically the funds of each perform a peculiar function that must be recognized and observed or we shall make a great fundamental error in constructing what we hope will prove a sound financial and banking system. we must provide that the commercial function, the savings function, the trust function shall be kept apart by separating the funds arising from each, and keeping them completely segregated, in order that the country may always know just what its commercial fund is, as distinguished from its investment fund. _second_: there is such a great demand for farm mortgage loans by those who are pursuing agriculture that i am convinced that some provision should be made whereby the farmers of this country could obtain money upon their lands, as cheaply as our great railroads and other corporations are able to do. i have given this matter much study, and as you gentlemen are aware, i am a member of the committee appointed by the american bankers' association to investigate and report the best method possible to accomplish this purpose. therefore i think that we had better consider it here. mr. lawyer: i am in perfect accord with what you are aiming at, but it is almost eleven o'clock. mr. laboringman: i have been waiting patiently to see whether you gentlemen were going to provide in some way for coöperative credit, but up to date, you've not peeped a word. mr. manufacturer: both of these subjects are really outside of a financial and banking system, the particular thing we set about creating. however, i am perfectly willing to take a night to discuss them, and if we should find that either or both of them should constitute a part of our plan i am ready to adopt them. mr. banker: all right, i am agreed, and i think we all are agreed that it is not only fair, but advisable, that we take up the whole subject next wednesday night. uncle sam: do you know, boys, i am really proud of the work you are doing; you've gotten on swimmingly. you have shown such fine moral courage in caving in when you found out that you were wrong instead of playing the part of the jackass that has not intelligence enough to discern when he is in error, and too obstinate to change, if he happens to find out by accident that he is wrong. mr. manufacturer: uncle sam, i am a democrat, and i look upon that as a personal stab. uncle sam: just wait a minute, or playing the part of the elephant, that is so turgid, or possibly designedly stupid, or so calm and by self-satisfaction lulled into a conservatism that amounts to reaction, and therefore refuses to move. mr. merchant: well, i'm a republican, and that looks like a slap at me. however, i guess uncle sam is just in for a housecleaning tonight. uncle sam: you're both all right, personally, but your organizations have been in wrong until just now there seems to be a patriotic soul-awakening, and it's up to you to redeem them, or there will be a housecleaning, and don't you forget it. i want men; men who have intelligence and conscience; men who are capable and have convictions; men who have moral courage; men who will fight if necessary to have peace; i mean that peace that rules only when right prevails and justice reigns. good night. twelfth night land credit bank uncle sam: boys, by unanimous vote we agreed at our last meeting to devote tonight to the subjects that seem to lie close to the hearts of mr. farmer and mr. laboringman. you will remember that mr. farmer insisted that our work would not be complete unless we included in our plan a land credit bank, while mr. laboringman declared that he had waited patiently to hear what we had to say about coöperative credit, but in vain. since mr. farmer is a member of the committee appointed by the agricultural society of his state to investigate the subject of land credit banks, i presume he is loaded to the guards and can tell us all about it, and convince us, too, that he is right in his contention. i suggest that we let him lead off tonight. mr. farmer: well, gentlemen, i can assure you of my confidence of my ability to convince you of the importance of recognizing my contention; but i shall have to ask you all to be patient and agree to assist me in working out the plan that is best adapted to our needs and conditions. in studying this aspect of the banking problem, i think it will be well to follow the steps of development up to date, just as we have in considering other phases of this question, because experience is our surest guide to tell us what not to do as well as what we ought to do. in the outset, however, i want to call your attention to the fact, that there is no subject of broader interest and more world-wide discussion than the productivity of the soil. you are all aware, no doubt, that there has been established at rome the international institute of agriculture, and that last summer fifty different governments were represented there. hon. david lubin, of california, represented this government. the president of the united states became intensely interested and with the help of our foreign representatives, particularly hon. myron t. herrick, ambassador to france, a vast amount of most valuable information has been gathered, studied, digested and classified. i think that we are now ready to take the matter up and legislate upon it. our interest ought to be greater and more intense than that of any other nation on account of the number of our people engaged in agriculture and the staggering interest rates they are paying. think of it. the , , farmers of the united states are adding over $ , , , to the national wealth each year. they are doing this on a borrowed capital of $ , , , , on which $ , , of interest is annually paid. counting commissions and renewal charges, the rate averages at - / per cent for this country as against - / or - / per cent for germany. if the american farmers had a thoroughly organized system of coöperative associations they would not only save this difference of $ , , or $ , , to themselves individually, but in the course of time the entire debt would be transferred to the societies, the interest paid to them, an economic waste stopped, and this stupendous sum restored to agriculture. the assertion is neither fanciful nor extravagant. it is below the actual ratio obtained by a comparison with the german figures. there is practically no limit to the amount of capital that could be advantageously employed for rehabilitating worn-out and abandoned farms, opening up new areas, and introducing modern methods of cultivation; and it is of vital importance that this capital be obtainable at once in sufficient volume and on easy terms. the world-wide problem caused by the pressure of population upon the means of subsistence now confronts the united states in the very face of its matchless natural resources and vast acreage of arable lands still remaining untouched by the plow. the $ , , of foodstuffs exported last year barely equaled per cent of the annual interest charges on the debts the farmers owe. the cause of the trouble is the lack of capital, and the remedy lies in financing the farmer and the landowner. this is the indisputable conclusion logically reached from examination into the actual conditions and from comparisons furnished by recent european history. the solution of the problem concerns the general welfare as much as does the currency and monetary reform, and it is gratifying to note that it seems destined to go side by side along with this undertaking. for as soon as the alarm was sounded the best talent of the nation became enlisted, and now bankers, merchants, professional men, legislators, and private individuals in town and country, many impelled purely by patriotic and disinterested motives, have combined their efforts to better the situation before it pass to the acute and critical stage. the only instrument by which land-mortgage banks can finance themselves, draw money from the public for investment in loans, are the debenture bonds, but these bonds will not circulate freely nor far from the place of issue unless they are known to have the same underlying values and give the same rights to the holder, regardless of whether they be secured by mortgages in texas, massachusetts, or in any other state. but possessed of these characteristics as guaranties of law, there is no reason why debentures of large mortgage banks should not be listed in stock markets and sold, negotiated, and exchanged as readily as railway and municipal securities, and thus equalize and reduce interest rates for farmers throughout the country. for our guidance that we may escape all cost of experience that has been paid for by others, i am going to give you the benefit of my study of the government report upon this important subject and quote it extensively as the best authority we have. you must all realize that this almost complete organization of land and rural credit in advanced european nations was not a haphazard and spontaneous growth. it was brought about by the insistence of public and private individuals, philanthropists, scholars, bankers, legislators, agricultural societies, government commissions, and national assemblies, all studying and working in a common cause. the history of their efforts in the middle of the past century reads much like an account of the agitation which has been started in the united states by the american bankers' association, the southern commercial congress, the federal authorities at washington, and other bodies and individuals, for financing the farmer, improving agricultural conditions, and encouraging the movement back to the soil. in europe the agricultural banks and credit facilities were created before agricultural or even general education was attempted. the united states began at the opposite end. the american colleges and systems for teaching agriculture are among the oldest and best in the world, and millions of dollars have been appropriated by the federal and state legislatures since the passage of the morrill act in lincoln's administration to aid this science in one way or another. incalculable good has come therefrom, but the results would have been far greater if financial education had gone hand in hand with this work. it would have led to the study and introduction of the rural banking methods of europe generations ago, and so familiarized the american farmers with the uses of credit that the lack of capital and excessive interest rates would not now be interfering with the agricultural development of the country. the development and history of land credit banks in germany is most interesting and is as follows: the land-mortgage banks are either joint-stock corporations or societies of borrowers. these latter are typified by the well-known german landschaften, and are the originals of all land banks. before them the private money lender reigned supreme. the organization of land credit, in fact, began with them. they undoubtedly also suggested the coöperative idea to herr schulze, because five, with nearly $ , , of mortgage loans, were in existence in , when he was trying to start his personal-credit society at delitzsche. these peculiar institutions are associations of landowners, and have no shares and pay no dividends, the profits, if any, going to reduce the loans; and since they and their borrowers are identical, and managerial services gratuitous, they have been able to lend money at lower rates than any other kind of companies. the establishment of the old landschaften was the outcome of the indebtedness and distress of the nobility, and their membership in germany is still composed mainly of that class and large landed proprietors. after the seven years' war the nobles, who owned nearly all the land, lacked the working capital necessary to repair and cultivate their damaged estates, and so were unable to pay their creditors. frederick the great ordered the suspension of interest on all estate debts for three years. the period was subsequently extended. the result was the withdrawal of the money lenders from agriculture, the rise of interest to ruinous rates, and a financial stringency that involved the public welfare. in order to relieve the situation this autocratic king decided to adopt plans that had been submitted by herr bühring, a berlin business man. accordingly, in , by a royal fiat, he forced the nobles of silesia to join an association whether they wished to borrow or not, and their lands were made jointly liable without limit for all loans granted by the association. loans were granted only upon the consent of the directorate elected by the members themselves. great care was naturally exercised, so no losses occurred, while immense credit came to the association. this was the first landschaft. others were formed in the same fashion. nine more were formed by the provinces and one voluntarily. then two companies were organized on the coöperative principle, so that there are now twenty-five landschaften. the mortgages held by them, all on farm lands, exceed $ , , , and the interest rate runs as low as per cent and . per cent per annum. the bonds by which the money for these loans were obtained are secured by the mass of underlying mortgages and general assets of the issuing association, and ultimately by the unlimited liability of all its members. the collective guaranty and the fact that loans are made only to members constitute the characterizing features of a true landschaft; but there is a growing tendency to limit this liability and substitute reserves in place of it. originally a landschaft did not give cash to a member in exchange for his mortgage. it gave him a bond which simply contained a promise to pay in the event the interest and principal could not be collected from the debtor. the bond was of the exact size of the mortgage, primarily secured by it, and made payable to bearer on a few months' notice. in case of default the holder had to resort to foreclosure proceedings, so the bonds had only a limited circulation, and were often sold below par. this was but a slight advance on private money lending. later the associations undertook to collect the interest and principal. finally they assumed direct responsibility, and began to give cash to members for their mortgages, raising funds for this purpose by issuing and selling bonds of even denominations for large and small amounts. the practice of requiring mortgages to be paid in lump was abolished, and in place thereof the loans were made repayable by annual installments running through a long period of years, and the installments were set aside for redeeming the bonds. these steps brought about a complete revolution in land credit and marked the beginning of the land-mortgage business as it is known today. the whole theory of the organization of land credit is based upon this debenture bond and system of amortization and sinking funds devised and introduced by the landschaften. one without the other two is useless. the three must be combined, and also coupled with strong management under wise laws in order to attract a steady flow of cheap money to agriculture. it is remarkable that this truth has never been realized nor applied in the united states to farm-mortgage loans. in spite of the example of practically every nation in europe for generations, the lending of money on mortgage in america still remains largely a mere brokerage business unrestricted by proper governing laws, either by individuals or corporations, while mortgages continue to be drawn up for three or five years, when experience shows that the average life of a loan is far in excess of that period and needs to be renewed time and again, with added expense to the debtor and trouble for the creditor. had the european amortization system been employed the companies dealing in western farm mortgages between and probably would have escaped the misfortunes that brought them down to ruin. amortization is simply a method of paying off a loan by returning a little of the capital each year. these payments are called annuities and are composed of the interest and contributions to the sinking fund and the cost of conducting business. they are calculated for periods of ten to seventy-five years, and at the end of the period the mortgaged debt becomes extinguished and the property returns to the owner free and clear of all encumbrances. the prevailing interest rate on amortizable mortgages in france at present is . per cent. but by adding a little over . per cent to this, and paying . per cent a year, a french farmer can extinguish his debt within twenty years and obtain a satisfaction piece in full from his creditor. thus, suppose he borrowed $ , . he pays $ annually twenty times for the interest, sinking fund and expenses. this makes a total of $ , , interest included, and his debt is paid off. a farmer in the southwestern states would pay this much for interest alone, and his debt would still be unsatisfied. amortization has a two-fold value. it lessens the debtor's burden year by year and increases in an equal ratio the security of the lender, provided, of course, the sinking fund created by the accumulated annuities be properly and honestly kept for the redemption of the debentures. the landschaften were very particular in this respect. hence, their debentures obtained the confidence of the public, and through their means they were able to draw capital from all parts of the country for distribution among their members at the lowest rates on record. if a holder of a bond wished his money back he had merely to sell his bond in the open market. in this way fluidity was given to real estate securities for the first time in history and the dream of "mobilizing the soil" accomplished at last. for these reasons the landschaften hold the most prominent place in the literature on land credit, and everybody who studies that subject must begin with them. the old landschaften, however, have many characteristics peculiar to their own localities and dates of their foundation. they are in fact governmental institutions, and their head officers are public functionaries clothed with summary executive and judiciary powers over the property, and, to some extent, over the actions of their associate members. these powers were simply an enlargement of the feudal and manorial rights possessed by princes in early times, and so, in many respects, are contrary to modern ideas. but the new landschaften, which have adopted the best principles, present points worthy of careful study. a description of these latter institutions is taken from the excellent report of sir f.a. nicholson to the madras presidency in india. these new institutions are of different patterns. several are annexes to the older societies, but most are independent and resemble ordinary mortgage banks, except in the essential point that they have no share capital, earning dividends. they are, as the old societies, simply syndicates of borrowers formed to supply proprietors with capital on the lowest possible terms and repayable in the easiest manner. they are gratuitous intermediaries between the outside capitalists and the borrowers, and while performing services of the highest importance in testing the security offered by the borrowers and in guaranteeing to the public the safety of the capital lent by them, they charge absolutely nothing for their services beyond a small commission, perhaps one-fourth of per cent, or even one-tenth of per cent, to cover actual expenses. it is usual for each association to be restricted to a particular area of operations within which every proprietor, whether noble or peasant, may obtain a loan if he can offer sufficient security. there is always a minimum limit either to loans or to the value of property on which loans will be given. this is usually low. in the new brandenburg landschaft, affiliated to the old kur-und-neumark landschaft, loans may be granted on property having a net income of only $ . the minimum limit is seldom even approached. members are those who borrow from the bank. they are generally responsible in all their property, not merely for their own borrowings, but for the debts of the society to the outside public. but in some cases only the property pledged to the society is responsible; in others they are bound, in case of need, to pay a sum proportionate to the amount of their own borrowing. there are no shares to be paid up except in two societies. these two resemble coöperative societies, for the shares are personal and nontransferable, are of unlimited number, varying with the number of members, and their value is claimable by a withdrawing member. the share seems to be demanded simply to provide a first working capital and the nucleus of a reserve. the amount of the share is frequently a certain percentage of the amount of the loan required. some societies demand an entrance fee of a few cents, which goes to the reserve. this reserve will be dealt with below. the societies in general, having no share capital, do not lend their own funds. the candidate for a loan asks that debentures may be issued against a mortgage of his property. this is then examined. if the security is approved the candidate executes a mortgage deed to the society, which thereupon issues debentures which are placed on the market and, being sold, provide the funds for the loan. in the old banks the debentures are simply handed to the borrower, who sells them for himself. in the new land banks either this is done or the bank sells them and pays the borrower the value if below par, or if they sell above par then the face value, the surplus going to the reserve; or they simply issue debentures on the market and pay the borrower the amount of the loan as settled. it will be seen, then, that the banks have no capital and no need for it. the debentures are for the usual class, secured not by the particular mortgage on which they are issued, but by the whole mass of mortgages held by the bank and by all its proper forms of security, viz., the property of the members, the reserve or guaranty fund, and even the sinking funds. in some banks a debenture holder has the right (never needed, however) of requiring a court to assign a particular mortgage against his debenture as a specific security in case the bank should fail to pay him his interest or capital due. a debenture holder cannot demand payment of his debenture, except when it is drawn for payment. but the bank can call in any at six months' notice, besides withdrawing them by lot in the usual way. these debentures enjoy an excellent position, the per cents selling usually at or above par. since cheapness of loans is the sole object of the bank, it is customary to call in debentures selling at a premium and issue a fresh series at a lower rate. loans are usually applied for to the district committee which each bank has, with a statement of the property, the amount required, and all documents necessary to prove title and freedom from encumbrance. properties may be valued by a special valuation, or a multiple of the net income as assessed to the land tax may be taken. in both cases, however, an inspection of the property is necessary unless under a special rule. half to two-thirds of the estimated value is allowable as a loan. the interest paid by the borrower on the loans is that paid by the bank on the debentures, the bank being merely an intermediary between the borrower and the actual lending public. but where the bank pays the loan in cash it charges such interest as it thinks proper, in order to make up any loss should the debentures sell below par. loans are repayable almost entirely by amortization, usually in about fifty-three years. some short-term loans are granted, with corresponding debentures. the bank cannot demand repayment of a loan except in case of waste, deterioration, or the like. on the other hand, the borrower is at liberty to repay in whole or in part whenever he pleases, but must pay the entire interest for the half year in which he repays. the loan is repaid by an annuity consisting of the interest, sinking fund (usually beginning at one-half of per cent), with a contribution to the reserve or guaranty fund, and another for the expenses of administration. the annuities have totaled per cent, but they now average around per cent or lower; e.g., interest being per cent, sinking fund one-half of per cent, guaranty fund one-fourth of per cent, and expenses one-fourth of per cent. some of the banks also require a lump payment on the grant of the loan of or per cent, to be credited either to the working or to the guaranty fund. the working fund is formed by the contribution made for the expenses of management and any special sources. hungary is the only nation outside of germany that has a true landschaft of the original type. but modified forms exist in russia, austria, switzerland, denmark and roumania, where they have been useful in supplying agriculture with cheap capital. there is no older principle in land credit than the landschaften idea. it has been tested and proved by over one hundred and thirty years of success, and could undoubtedly be employed to advantage by water users' associations in the irrigated regions of the west and in other parts of the united states where landowners might unite to raise funds for drainage or other improvements for their common good. some of the banks of switzerland and the credit associations of denmark, with the laws governing them, perhaps furnish the best models, as appears from the reports of the american ministers to those countries that have been forwarded to the secretary of state. the most noticeable fact revealed by the investigation of the european land-credit institution is the all-pervading presence of the state in every nation. most of the older joint-stock corporations have a public character equal to that of the german landschaften. every one that dates back to or was directly organized by the state or brought into existence by a government fiat or favoring legislation, subsidized in some way or other and granted special privileges. the supervision now exercised over them all is most stringent, going into the minutest details and varying from direct control to surveillance by state officials, usually by special laws that impose heavy penalties for malfeasance or even neglect of regulations. continental europe is accustomed to state intervention. commercial credit was organized by means of central banks connected with the government, and so this régime was naturally followed in organizing the land credit. for this reason the results obtained, at least in some instances, cannot be used by way of comparison to illustrate the possibilities of organization along the lines of private and independent endeavor. but whatever may be the opinion entertained for the state intervention in the land-credit system of the continent, there can be no doubt that the working principles and business methods of the european land-mortgage banks are the best ever devised, and that they will have to be introduced into the united states if it be hoped to make the farm mortgage a fluid and popular form of investment and direct a flow of capital in sufficient volume to agriculture to enable it to keep pace with the progress of the nation. the main features of this system are the limitation of the interest rate that can be charged, the amortization of the debt, and wise and equitable regulations and restrictions relative to loans and the issuance of debentures which protect the farmer from extortion and thriftless borrowing, and at the same time bring safety and a feeling of confidence to the investing public. these features, with modifications and additions, appear in all european land banks, whether they be semipublic, as they are in france, spain and russia, or of a private character, as with some cases in germany, or of the mixed type of switzerland and italy, but are best exemplified in the great crédit foncier of france--the largest and most successful land bank in the world. but germany has progressed very decidedly beyond the so-called landschaften as exemplified by her great mortgage banks which, though of comparatively recent operation, largely exceed in business that of the landschaften type, and it is here that we find many vital suggestions for our guidance. germany has general laws under which these mortgage banks operate, but the rules of operation and supervision are of the strictest kind. the mortgage banks of europe may be classified generally as public or semipublic, and as strictly private institutions. the first have just been described. the latter are all those which, whether they consist of lenders or only of borrowers, operate under general laws and have absolutely no privileges. the state, however, does not leave these companies entirely to their own devices. they are limited in the conduct of their business by strict rules and regulations, and are subject to the most scrutinous supervision. the best law of this kind is that enacted in germany in . it is the last word in legislation for private joint-stock mortgage banks, and with slight modifications could be easily adapted to the united states, as it was framed to overcome the troubles occasioned by the conflict of authority between the sovereign provinces of which the empire is composed. remarkable as it may seem, these companies in germany have outstripped the old established and specially privileged public banks. they now have $ , , , loaned out on mortgage, or over five times more than the landschaften. the capital is $ , , , the smallest being $ , and the largest $ , , . the bonds in circulation amount to $ , , , , with interest at - / or per cent per annum, while the average returns on mortgage loans are . to . per cent per annum. as per cent and even per cent dividends are yearly declared, the figures again furnish a favorable comparison with the landschaften and crédit foncier. the provincial head, however, selects the president of one of these newer german banks, while the imperial government watches over them all. the supervision is carried out by royal commissioners and extends to the minutest detail. these inspecting officials have the right to verify the securities and cash on hand, and demand information regarding every separate transaction. they may also send a representative to general meetings of stockholders and to sittings of boards of directors and take all measures that may seem fit to enforce the proper conduct of business. they also approve the appointment of the auditor and assistant auditor, who are charged in each bank with the duty of seeing that debentures are issued only upon the conditions and within the limits legally prescribed. it will be observed that the mortgage business in germany, as carried on today, is an evolution. the same fact is evident in the changes that have taken place in the crédit foncier, the greatest mortgage bank in the world. the history of this great institution is as follows: it was formed in under the law enacted that year for organizing land credit and improving agricultural credit facilities. it was immediately placed under government control, given a subsidy, and granted a monopoly for twenty-five years. the monopoly was not renewed, but all its original special privileges remain, which perhaps accounts for its being the only land bank in france. its relation with the state is very close, and many of its most important features were taken bodily from the landschaften. inasmuch as the institution has been the model for all europe and is now being widely discussed in the american press, i will describe it at length. the governor and two subgovernors of the crédit foncier are appointed for life by the president of the republic. it is subject to the surveillance of the treasury department of the government, and three of its directors must be high officers of the department. it may use the government treasuries for the receipt of its dues and the deposit of its surplus funds and enjoys a reduction in stamp and registration duties. its debentures are registered or payable to bearer, and the claim of a third party to them cannot be made in court except in case of theft or loss. trust and public funds may be invested in them. its mortgages are exempt from the decennial registration and consequent charges required of other mortgages. it has a cheap and speedy method of "purging" the title of real estate in case of disputes. in the event of default the courts cannot grant the debtor any delay and payments due it upon loans cannot be garnished or attached. it is allowed summary proceedings for attaching mortgage property in case of violation of contracts. if dues are not paid or if the property deteriorates it may attach and sell the property simply upon notice and publication. during attachment proceedings it has a right to all returns from the estate. the sale may be by auction in a civil court or at a notary public's office, if the court permits, and no adverse claim to the proceeds of the sale can be allowed until its claims are fully satisfied. the regulations under which the crédit foncier transacts its business are very strict. the mortgage loans must be first liens. the property must have a clear and unencumbered title and yield a certain and durable income. loans and theaters, mines, and quarries are not accepted. the amount loaned on any property must not exceed half its value, or one-third the value for vine-yards, woods, orchards, and plantations. factory buildings are estimated without regard to their value for particular purposes. a borrower cannot bind himself to pay a greater annuity than the total annual income of the property mortgaged, while on the other hand the society is not allowed to charge borrowers . per cent over the rate at which it obtains money on its debentures issued at the time of the loans. an excess of only . per cent is allowed on loans to municipalities. the outstanding loans and debentures issued must exactly correspond in amounts. after paying a per cent dividend the crédit foncier must set aside between and per cent of the balance of the profits each year for the obligatory reserve, and continue to do so as long as the same does not equal one-half of the capital stock. the investment of this reserve is left to the board of directors. the capital stock of the society must be always maintained at the ratio of one-twentieth or more of the debentures in circulation and is the primary guaranty of its obligations, especially the debentures. the capital at present is $ , , , divided into , shares of $ each; but authority has been obtained to increase the same to $ , , , represented by , shares, which will be done before the debentures in circulation pass the legal limit. one-fourth of the capital must be invested in french rentes or other treasury bonds; one-fourth in office buildings of the society, or by loans to french colonies, or in securities deposited with the bank of france as a guaranty for advances. shares cannot be issued at a price below par. they are nonassessable. the surplus may be loaned on mortgages or to municipalities or may be used in other mortgage business allowed by the statutes; and for buying its own debentures, making advances to borrowers in arrears, or purchasing mortgaged property in foreclosure; and for acquiring commercial paper acceptable by the bank of france or securities to be deposited with that bank. the governor of the crédit foncier most be the owner of at least two hundred shares of stock of the society. he receives a salary of $ , . the subgovernors must hold one hundred shares each. their salaries are $ , . they perform such functions as are delegated to them by the governor, and in order of their nomination fulfill his duties during his absence on account of illness or other causes. the governor appoints and dismisses all agents of the society and superintends the organization of the service in paris and elsewhere. he countersigns the debentures and signs the share certificates and all other papers and documents and must strive to promote the interests of the society in every way. the governor is the head of the board of directors, which is composed of himself, the two subgovernors, the auditors, and twenty to twenty-three directors. this body possesses the administrative powers of the society and is beholden only to the laws and the general assembly of the stockholders for the proper exercise of the same. the three auditors are the guardians of the society. their duties are to watch, investigate, and make reports. the only power they have is to call extraordinary general meetings of the shareholders. the general assembly of the stockholders meets regularly once a year. it consists only of the two hundred largest stockholders, of whom forty make a quorum if they hold one-tenth of the stock of the society. each member has one vote for every forty shares of stock held, but cannot cast more than five votes in his own name, nor more than ten in his own name or by proxy. he has, however, a right to one vote even though his shares be less than forty in number. the general assembly receives the report of the governor, and also of the auditors, if any. it elects the directors and auditors and decides on all resolutions or proposals for the increase of capital, the amendment of the by-laws and constitution, and generally on all matters not otherwise specifically provided for. the only places outside of france where the crédit foncier can do business are algiers and tunis. under a clause in its charter which allows it, with the sanction of the government, to enter into projects for improving the soil, developing agriculture, and to extinguish existing debts on real estate, etc., the society has been authorized to finance drainage projects and to advance money on the paper of the sous-comptoir des entrepreneurs, an incorporated association of builders. it may also receive deposits up to $ , , , one-fourth of which must be kept in the government treasury and the balance invested in government paper, treasury bonds, or high-class bankable commercial notes and securities. in connection with its banking house it has large deposit vaults. the crédit foncier is permitted to take short-term mortgages and does a big business in that line. but the true purpose of its existence and the greatest part of its operations are the granting of long time loans. these are made on mortgages to individuals and without mortgage to municipalities and public establishments. the periods run from ten to seventy-five years. the annuities required to be paid for amortizing the loan for the average period used are so small as to appear insignificant. the success achieved by the crédit foncier in popularizing the amortization principle for real estate loans is the chief cause of its great renown. at present its interest rate for mortgage loans is . per cent per annum, for public establishments . per cent, and . per cent for municipalities. the total annuity, including both interest and amortization sum, for a twenty-five year mortgage loan is a little over . per cent. with this small annual payment the debt is gradually wiped out, and nothing is left to be paid at the end of the term. the longer the term the smaller the annuity, and vice versa. the loans now exceed $ , , . here is an amortization table of the crédit foncier: _annuity of a capital of $ , interest at . per cent, payable semiannually._ duration. annuities. years $ . years . years . years . years . years . years . years . years . years . years . years . years . years . years . the crédit foncier is obliged to keep the interest and amortization payments in separate accounts, the latter going to create a sinking fund for the retirement of outstanding debentures. as stated above, the amounts of the loans and debentures must balance each other; consequently, as loans are paid up debentures must be paid off. borrowers have the right to pay in advance, which they frequently exercise, so the proper adjustment of the balance is beyond the control of the society. it is for this reason that the debentures, although calculated to be redeemed synchronously with the loans they represent, have no fixed time for maturity and are recallable at option. in each issue a certain number are repayable by lots, with prizes for the lucky holders. a bond last year drew a prize of $ , . the right to give prizes at the lottery drawings is one of the special privileges of the society. the debentures are of two kinds--those representing the mortgages are called "foncières" and those representing the loans to municipalities and public establishments are called "communales." they are issued in series. the smallest denomination is $ . they may be bought by installments and are the most popular form of investment in france, being held largely by farmers and poor people in the cities. the issue of for $ , , at per cent, payable within seventy years, was oversubscribed eighteen times. the total land mortgages and municipal indebtedness in france is figured at $ , , , . nearly one-third of this is represented by the loans of the society. such is the crédit foncier of france. the control exercised over it by the state through the appointment of its head officers, the simplified foreclosure proceedings, and the other judicial, administrative, and fiscal privileges accorded to it are common practices in continental europe. as mentioned above, all the older banks are specially privileged, and consequently have a practical monopoly of the mortgage-bond business in some of the nations. now, gentlemen, i have gone into these details not to be slavishly copied, because i think we would make a very great mistake to load down our legislation with so much detail. it will be far better to allow the managers to work out a system of operation that will he suited to our conditions. in this way we will not be handicapped by red tape that is ill adapted to our situation. the same penal laws that are in force with respect to our national banks with any additions that the peculiarities of this business call for ought, it seems to me, to suffice. my suggestion would be a comparatively simple organization with broad powers to the board of directors. in this way we will soon have an american system of land credit banks superior to any in the world, even though we do start after all others have begun. indeed, if we are wise, this is the very reason why we should surpass all others. now, if you will recall with me the points of change and progress made, you will find that the tendency is away from unlimited liability, as originally provided, and now toward a dependence upon capital and reserves solely for protection to the debenture holders. in my judgment we should adopt the following as the basis of our land credit bank: _first_: we should confine the business to loans upon improved agricultural lands. _second_: we should make the institution strictly coöperative, but with a limited liability to the amount of the paid-up capital. _third_: every local association, or primary unit, should be an association of men within a restricted locality and the business should also be confined to the immediate vicinity of the association. _fourth_: i do not believe that the membership of a primary unit should be less than twenty-five, nor more than fifty. _fifth_: i think that the capital of a primary unit should not exceed $ , , and that the shares should be $ each. no person should own more than two hundred and fifty shares, or per cent of the capital. _sixth_: all loans made should be recommended by the local association. in case of a loss by the sale of property taken over, one-quarter of such loss should be borne by the primary unit, of local association, making or recommending the loan upon which the loss was made. _seventh_: all expenses connected with the examination and recommendation of a loan shall be paid by the primary unit, or local association. _eighth_: the application for a loan should then go to a state organization, which should be created by a union of all the local associations. i suggest a central organization in each state for the purpose of lessening the expenses over the entire state, as the laws affecting real estate in the several states have some peculiarities to those states. _ninth_: each state organization should have charge of all the business done in that particular state; the examination and final approval of the security; the examination and approval of the title; the collection of all interest; the payment of all taxes and insurance, and the final repayment of the loan. _tenth_: the state organization should be a union of all the local associations in any particular state, and should hold one-quarter of the capital of all the local associations as its own for the purpose of carrying on the business of that state. _eleventh_: all property upon which loans are made should be conveyed absolutely to the state institution where located with a waiver of all rights of foreclosure; but, providing for the advertisement and sale of the property, as if a judgment had been rendered. this is essential to save the cost of foreclosure. _twelfth_: in case of a loss, as the result of the sale of any real estate taken over, one-quarter of it shall be borne by the state organization. i make this provision because no local association could carry all its losses, and yet it should be responsible for a sufficient amount of loss to impose a serious obligation upon the local association recommending the loan, and also a serious obligation upon the state institution for having finally approved and completed the loan. _thirteenth_: all the expenses of the state institution incurred by way of caring for the business of all the local associations should be paid by a percentage charge on all the business done in the state. this is desirable so that the mortgages shall go to the national organization, free and clear from any charges and obligations whatever. _fourteenth_: i would have a national organization which should fix the rate of interest to be paid by the borrowers, and the rate of interest of all the bonds and debentures sold. all bonds and debentures should be sold by the national organization, which should be under national supervision for the purpose of giving to the debentures the highest possible credit wherever they may be offered for sale. _fifteenth_: i think that one-half of all the capital of all the local associations in the united states should be transferred to the national organization, and be held and treated by it as if it were its own capital. and such capital shall be holden to the debenture holders as a guarantee, and for the purpose of securing the best possible credit for the national organization. _sixteenth_: the national organization, and all state associations, and all local associations, shall be under the supervision, and be examined by an auditor appointed by the president of the united states. _seventeenth_: to secure unqualified success for a land credit bank in the united states, no business should be attempted until the capital paid in shall amount to at least $ , , ; that is, until the national organization shall have a cash capital of its own of $ , , in order that its debentures may bear the lowest possible rate of interest that a large capital with a national organization under national supervision will insure. _eighteenth_: the debentures of a national organization should be free of all taxes, local or national. in general these are my recommendations, which i hope will be incorporated in the measure we are to prepare. mr. merchant: mr. farmer, i notice that you propose to confine the loans to agricultural land. don't you think that a good and equally helpful business could be carried on by loaning money on city and urban property? mr. farmer: possibly that is so, but i do not think so, and in any event, i never would combine these two classes of loans. if we are to have national land credit banks doing a country and city or urban business, let them be kept entirely separate. the general business permitted and carried on by the crédit foncier is a just ground for severe criticism. it is permitted to take deposits. an american land credit bank should have no such power. it should be confined, in my judgment, with extreme strictness to loaning money upon improved agricultural land. mind you, i do not say that there should be no other land credit bank to do some other kind of business. that is a matter for future and separate consideration. mr. laboringman: mr. farmer, in all that you have said you have not once even mentioned credit unions or mutual credit societies. i had been betting on you to help me out in my fight for a recognition of the principle of coöperation, but it looks as if you had deserted me. mr. farmer: no, mr. laboringman, on the contrary, i will do anything in my power to help you or anyone work out the great saving principle of coöperation; but since i have been attending these talks two or three things have stuck in my crop and i could not get them out even if i tried, and one thing in particular applies especially to the agricultural societies, called credit unions. _mutual credit societies or credit unions are organized to furnish capital for production; that is, it is commercial capital, or credit for commercial purposes, not for investment purposes at all. not a single dollar of a credit union should ever be loaned upon real estate. not a single dollar! not a single cent!!_ such a practice would literally destroy the principle upon which they are founded; mutual aid to assist in production, not investment. don't you remember how mr. banker pounded that into us; and convinced us all, too? but more convincing than anything else as to this great economic truth, that not one single dollar of credit union money should ever be loaned upon land, is the history of them. we must not forget that they were organized to secure personal credit and to depart from that practice is a perversion of their purpose and just to that extent must result in failure. the coöperative idea for personal credit was originated in germany by francis frederick schulze, a little before the middle of the nineteenth century. it passed over into austria and hungary in , into italy in , into belgium in , into france in , into scotland in , and into ireland in . these dates are given to show the order of advance and the recentness of the movement in some parts of europe. the first german association was formed in by frederick william raiffeisen. herr schulze did not get his started until the following year. herr raiffeisen was poorly educated but deeply imbued with religious feelings. he lived among peasants in a sparsely settled and impoverished locality, and his object was to help the lowest classes. the associations which grew up under his guiding hand were mutual societies confined to small farming districts. the thought of profit was discarded and they were managed by the gratuitous services of their members. herr schulze was a talented writer and speaker, and when he took up his life work was holding a judicial post in his native town of delitzsche. his philanthropy, although intense, leaned to the practical side. he believed in paid services and fair returns for money. the associations formed under his leadership were located mainly in towns. they were managed by salaried officers, and membership was dependent upon the purchase of shares on which dividends were allowed. but both kinds were founded upon the fundamental principle of combining persons together and using the credit created by their united guaranty for providing funds for members who might wish to borrow. in the early days the mutual credit associations were formed simply by articles of agreement in the nature of a partnership contract, and members were jointly and severally liable without limit for all the loans that were made. in course of time, when the government began to take official recognition of the associations, some of the followers of schulze favored a limit to this liability. hence the mark of distinction became clearly defined between "raiffeisenism" and the "schulze-delitzsche" propaganda. the german law, as it now stands, requires mutual banks to have share capital, but allows them to be organized upon the limited or unlimited liability plan. all true raiffeisen banks, in order to preserve their character, have shares of only a nominal value and devote dividends to educational or charitable purposes. in germany these local banks are grouped under central banks, which in turn are linked together by two general central banks, and their funds are made to move freely for agriculture throughout the empire. the centralization of the system has also been inaugurated in france. personal credit in agricultural europe is obtained usually by means of the coöperative credit associations. they are also used by artisans and small tradespeople in the towns and cities. these associations are in fact the only banks which the farmers will patronize for short-time loans in the nations where they abound in the greatest numbers. with their aid poverty and usury have been banished, sterile fields have been made fertile, production has been increased, and agriculture and agricultural science raised to the highest point. their educational influence is no less marked. they have taught the farmers the uses of credit as well as of cash, given them a commercial instinct and business knowledge, and stimulated them to associated action. they have encouraged thrift and saving, created a feeling of independence and self-reliance, and even elevated their moral tone. the picture can hardly be overdrawn. every traveler who visits the places where these little associations exist speaks in glowing phrases of the prosperity and contentment that prevail. they are organized on such simple lines that their management requires only ordinary intelligence. failures have rarely occurred. in france and other countries they hold a record of having never lost a cent. the working capital and number of members of individual associations are so small as to be insignificant, yet they do one-third of the banking business of italy; while the combined amount of their operations in germany equal that of the commercial banks. but the mutual banks, both in town and country, are looked upon with favor in the financial world because they keep millions of dollars of petty sums in circulation which, except for them, would be idle and hoarded. they are, in fact, feeders for the commercial banking system. in in belgium banks, with a membership of , , had outstanding (roughly calculated) $ , , of loans; in france ninety-six regional banks did upward of $ , , of business on a capital of $ , , , while the , local banks, with a membership of , farmers, had $ , , of capital and a record of over $ , , of operations. there were nearly , banks in austria. the membership was over , , and the loans ran over $ , , . in italy banks that furnished reports had a working capital of over $ , , . in germany there is one bank for every , of the population, and the total business done was over $ , , , . in one province there is a bank for every , acres of land; and so on for all other nations that have coöperative credit institutions. the rate of interest charged was one or two points lower than in commercial circles, yet these banks, with a few exceptions, made a fair profit on the turnover of their capital. in some instances it ran as high as per cent and per cent. with this striking array of figures to show its stability and usefulness, it is remarkable that the farmers of the united states have been so slow to adopt this system of banking for temporary loans on personal security. it has existed in canada for twenty-two years. in the province of quebec there are a number of mutual banks that have loaned hundreds of thousands of dollars. but massachusetts is the only state in our country that has made an attempt to encourage its introduction. it already has a law allowing the incorporation of credit unions. it was passed in after a careful study of european legislation, and furnishes an excellent example for the other states. the first concern to start under this law was the myrick credit union at springfield. in twelve months it had one hundred and five members, a capital of $ , and $ , of outstanding loans. interest rates have been low, yet it paid over per cent dividends on its capital. thirteen new unions were formed in and have $ , of capital. a pamphlet issued by the state bank commissioner gives a comprehensive description of the fundamental principles that a mutual association for personal credit must adhere to. i cannot do better than to quote from it. they are as follows: _first_: the association shall be organized on coöperative lines. as the members may be either borrowers or lenders, according to circumstances, its affairs must be conducted in such a way as to give fair and equitable treatment to both classes. _second_: the association shall be one of persons and not of shares. to this end each shareholder has one vote, irrespective of the number of shares he holds. furthermore, a limit is set to the number of shares or the amount of deposit which a member may have in the association, in order that no one person may have a too dominating influence or be able to damage the association by suddenly withdrawing large sums. _third_: loans shall be made only for the purposes which promise to result in a saving or a profit to the borrower. each applicant for a loan must state the object for which he desires to borrow, in order that the credit committee, which passes on all loans, may rigidly exclude thriftless and improvident borrowing. _fourth_: as loans are made only to members and as any member may become a borrower, care must be taken to admit to membership only men and women of honesty and industry. _fifth_: as personal knowledge of the character of the members is essential, the membership in an association must be restricted to citizens of a small community, or of a small subdivision of a large city, or to a small group or organization of individuals. _sixth_: every provision must be made to bring the association within the reach of the humblest citizen. the par value of the shares should be small (it averages about $ ), and they should be payable in very small installments. loans of very small amounts should be made and should be repayable by installments if desired. _seventh_: in making loans it should be recognized that character and industry are the basis of credit, and a loan may be made to a member who has not adequate security to pledge for it, provided he can obtain the guaranty of one or more other members, but no member is obliged to guarantee the loan of another member unless he desires to do so. _eighth_: borrowers must carry out to the letter the conditions of repayment and agreed upon at the time their loans are made. prompt payment of obligations is a fundamental requirement of these associations. it should not be inferred from the great success and good accomplished that the coöperative credit associations could be taken as models in their entirety or that the establishment of such societies would act as an immediate panacea for all the troubles that beset agriculture in america. they seem to be adapted only for localities where the population is fixed and settled and welded together in close relation by community of interests. let me call your attention to what the government report says in support of this position. the germans have had their sad experiences and it would be the height of folly for us to travel over the same road again, only to learn by our own experience what we can now know without paying for it. too much emphasis cannot be laid on the fact that these small credit societies are not organized for making loans on real estate. the deposits and funds received by them are withdrawable on short notice. this privilege must be allowed in order to attract the capital needed. but as loans to members yield interest considerably under the ordinary market rate, the only way they have of paying for the use of this capital is by making quick and numerous turnovers with it. in germany they have taken long-time mortgages, but the practice is strongly denounced by all students who have investigated into the cause of the remarkable success of the raiffeisen and schulze-delitzsche systems as contrary to the theory on which they are founded. credit is indispensable to every business. it is the means whereby $ is made to do the work of $ , as the saying goes, but its classifications and limitations cannot be ignored without danger. a loan to acquire something merely for consumption is not tolerated, no matter what may be the security offered. the loan must be strictly for a creative purpose. this is the first cardinal principle, and so rigorously is it adhered to in europe that the credit societies invite to their circle only those who are producers of wealth. _another principle is that personal and real credit are inherently and irreconcilably separate and distinct, and each must have specially adapted institutions for carrying on its operations. this is only a reaffirmation of what we have already decided over and over again._ the recognition and observance of these principles have done much to prevent thriftless debt among farmers, and are undoubtedly the reasons why the land credit is so thoroughly organized on the european continent. a loan on chattel or character security should naturally be for a short time and for temporary purposes, for such security is perishable and subject to loss or change. the long-time loan requires an unchanging and permanent security, and the only thing possessing this quality is mother earth herself. but when capital is once sunk in land it becomes fixed and can never be recovered except from the income created thereby or the amortization sums paid in representation of that income. a debtor should not be called upon to pay back the loan in a lump or in advance of his receipts from the land. to do so leads only to further borrowing, usually on more burdensome terms, when the mortgage expires. on the other hand, a private individual cannot be expected to take his money back in driblets or wait long years for its complete return. so private lending on real estate is a theoretical and also a practical wrong. the proof of this lies in vast numbers of foreclosures and the excessive interest rates of farm mortgages in western united states, where they are largely held by persons. the smallness of the annual payments and the length of an ordinary loan in europe are shown in the tables of the crédit foncier, which have been given already. a glance at them makes it apparent that amortization, the basic principle of a land loan, can be brought into full play only by the aid of large corporations or associations with charters perpetual or lasting a long time. mr. banker: it does not seem to me, under the circumstances, as though we could treat the mutual credit associations or credit unions wisely. indeed, i am of the opinion that legislation by us would interfere with and retard the progress of such associations. uncle sam: mr. laboringman has waited patiently to have his say about coöperation. mr. laboringman: yes, i have been biding my time, for i have something to say that ought to interest all of you, as a possibility at least, and if it is reasonable to do so, i hope that you will include some sympathetic laws by way of encouragement. england was the birthplace of modern industrialism, as you all know. there, too, was started the great movement of modern coöperation. small and insignificant was the beginning. in the rochdale pioneers put all their little savings into the pot, and they amounted to only $ . with this they started a store. by they had seventy-four members and $ of capital, and did $ , worth of business, by keeping their little business open only two evenings a week. they were an object of derision and all sorts of jibes. s.p. orth describes the situation as follows: last year the british government made a careful and complete report on coöperation in england, and found more than three million persons in the membership of the various societies, and over three times that number under the immediate sphere of coöperative influence. that means that one person in every five in the united kingdom is now interested or influenced by this vast association of producers and consumers. during the past ten years, the increase of membership has been per cent and the trade per cent. the productive and distributive business alone amounts to $ , , . the retail societies have $ , , of capital. "last year the sales of these retail societies totaled more than $ , , , or about $ . per member." it is most significant that the societies, in their own mills and factories, produced nearly per cent of these goods themselves; that is, production and distribution are going hand in hand. they began by making boots and butter; now they make cloth, iron and all sorts of things. the average profits for the last ten years have been nearly per cent and there is now a serious discussion whether the cost of articles to the customer should not be lowered. in some of the districts, notably some of the mining districts, the coöperative stores have a virtual monopoly, and their system of banking or keeping the surplus credits for the customer is a great boon. but in other very poor districts, keeping up the prices has worked some hardship. it is now proposed by some of the stronger societies to open special stores in the poorer districts and cut the prices. all business, until a few years ago, was done on a strictly cash basis, but recently the insidious credit system has crept in, and it may lead to serious consequences. last year, out of its surplus, the union of coöperative societies, a federation of all english coöperativists, voted $ , to charity, $ , to education, i.e., libraries, lectures, and concerts, and $ , to propaganda. the early retail societies found it hard to get good terms from wholesale houses, owing to the enmity of the private merchants. the law did not allow them to amalgamate and start a wholesale business of their own. but in the law was changed, and at once two coöperative wholesale societies were organized, the english and the scotch. they are the models for the world. the two societies are virtually one, although maintaining different officers, rules, and stockholders. in fact, the wholesale societies are the federation of the retail and productive societies of england and scotland. the english society requires the constituent societies to hold one $ share for every five of its membership; the scotch society one $ share for every one of its members: i. e., an english coöperative shoe factory of two hundred members wishing to join the english wholesale society would take forty $ shares, or two hundred $ shares in the scotch society. these wholesale societies are the grand clearing house of nearly all the coöperative shops and factories of the kingdom, and the suppliers of all the coöperative retail stores. and they are monumental institutions. in they had a membership of more than , , , a capital of more than $ , , , a surplus of $ , , . their annual sales amount to more than $ , , , and their profits more than $ , , . the english society is the larger. it is a corporation that not only engages in wholesale trade but is a manufacturer, banker, importer; it packs meat, cures bacon, refines lard, binds books, grows tea, blends coffee, founders iron; it manufactures flour, butter, biscuit, sugar, pickles, cocoa, tobacco, candles, glycerine, starch, saddlery, furniture, clothing, corsets, underwear, brushes, crockery, tinplate, woolens, carpets and almost everything else that an average british home may need. it deals in coal, apricots, and wheat; has offices in new york, toronto, rouen, france; denia, spain; copenhagen and guthenberg, sweden; has twenty-seven creameries in ireland, tallow and oil works in sydney, australia; a "bacon factory" in denmark, a tea plantation in ceylon, and fruit farms in shropshire and hereford. besides, it owns four steamers for the trade between rouen and manchester. its main offices on balloon street, manchester, are enormous and palatial. together with warehouses and stores, they cover a number of city blocks. their offices in london compare favorably with any private establishment, and for efficiency they are second to none. nearly , men are employed by this society. some of its factories are large, e, g., the leicester shoe works employ , men; the irlam soap works, men; long sight printing works, men; the middleton pickle works, , etc. the chief offices of the scotch society are on morrison street, glasgow. they manufacture umbrellas, tweeds, paislies, oatmeal, aberdeen finnan-haddie, and other characteristic scotch merchandise. its capital is about $ , , . germany and belgium, too, are furnishing successful coöperative associations. mr. orth describes them so well that i want to read what he says. there are about two thousand of the coöperative supply societies among the farmers, with nearly one hundred and fifty thousand members. there are also about three thousand coöperative dairies, with two hundred and thirty thousand members, and one hundred and sixty coöperative wine cellars and two hundred and fifty-five coöperative warehouses and grain elevators. it was natural that retail stores should be established next, on a coöperative basis. for some reason they did not thrive until about ten years ago. at that time a split occurred in the coöperative ranks, due to politics, and two federations or unions of coöperative societies were organized; the general union or liberal union, and the central union or socialist union. the former is remaining stationary, the latter growing by leaps and bounds. in every large city the coöperative retail society has a central plant. it usually includes a warehouse and bakery. the one located at berlin is a good type. it is situated at lichtenberg, a suburb. here you see splendid buildings, in good architectural style, fitted up in the most modern manner; telephones to all departments, electricity, central heating plant, a uniform clock system for keeping time, etc. the whole plant cost $ , , . the great warehouse is full of groceries. although only a year in the buildings, they are already overtaxed and additions are planned. this central supply house looks after the sixty coöperative grocery stores in berlin. it has a string of fine delivery autos. any one can become a member by paying fifty pfennigs ( - / c.) admission, and forty marks ($ ) a year. this, however, is taken out of his dividends. the society also owns a fine row of apartment houses, which are leased to members at a low rental. the goods used are bought in the open market, or are supplied by the german coöperative wholesale society of hamburg. there is very little productive coöperation in germany. there are , retail societies, more than two million members, and more than $ , , in their reserve fund. the wholesale society had a hard time of it until the spurt in favor of coöperation began a decade ago. now it thrives, doing about $ , , business a year. there are a great many local coöperative building societies, with two hundred thousand members, and many other evidences that the spirit of coöperation is abroad in the land. in there were , , persons actively interested in one form or another of german coöperation. in the number had increased to nearly five million. in the little land of belgium coöperation is at its best; not at its greatest showiness, nor maximum figures. but here, in this land of congested population, of illiteracy, of low wages and depressing conditions, the abject workingmen have taken hold of their own problems, asking neither sympathy nor favor, and have worked out a scheme of industrial coöperation that is a genuine achievement. in bread was very dear in ghent. times were very hard. so high was the price of flour that many workingmen went hungry. a few of these workers united to do what they could to supply loaves at cheaper rates. they had $ capital. they found an old cellar with an old oven in it, hired an old baker, and peddled the bread in baskets. today there is a fine workingmen's clubhouse in ghent, called "vooruit." across the façade stands the motto, "the brotherhood of workingmen means peace on earth." this is the outgrowth of the cellar bakeshop. "vooruit" stands for everything that is superb in coöperation. here is not only a large lecture hall and café and offices of the unions; here is the studio of van biesbroeck, the workman-sculptor; here is a library, and in the neighborhood are stores, ware-rooms and shops. a few years ago it was found that many women were ruining their health by the long hours of service at the looms. "vooruit" started a coöperative weaving shed, where the women work eight and three-quarter hours a day. the bakery now does almost $ , , worth of business a year; it makes , loaves a week. the eight thousand members of "vooruit" have six drug stores, coal yards, many grocery stores and meat shops, a dry goods store, and other industries. all done by workmen in thirty years, workmen who were never highly paid and who trained themselves to do these things. they meet every year, the eight thousand members, and vote on the price of bread. sometimes it is one cent higher than the commercial rate, but their dividends more than cover this. in brussels is the famous "maison du peuple," the house of the people. it, too, began with a small bakery, employing two men and turning out five hundred and fifty-two loaves the first week. today the "maison" has twenty-five thousand members, two great bakeries, six warehouses, four butcher shops, twenty-five grocery stores, and numerous shops where various articles are made. this "house," standing on rue joseph stephen, cost $ , and was paid for by the brussels workingmen out of their coöperative funds. the café, seating eight hundred people, is an animated place; every one seems content. the office of the savings bank is doing a rushing business, women and children bringing in the savings of the family for the week; the committee rooms are full of workmen planning some new enterprise. in the evening the lecture hall or theatre is crowded, the two thousand five hundred seats all taken, to see a play produced by an amateur company, all members of the "maison." all this, and more, in the form of coöperation. in - the "maison" made a profit of $ , ; of this about three-quarters was distributed as personal dividends to shareholders. the rest was spent on social benefits and a reserve fund. in belgium, then, you find all the coöperative activities united in each city under one general management. it includes groceries and clothing, medical aid, insurance, savings bank, clubhouse privileges, lectures, libraries, entertainments. there are one hundred, and sixty-one distributive societies with , members; sixteen productive societies with , members. the productive societies include weaving, printing, cabinetmaking, tobacco and cigars, hardware and bakery. the total coöperative business is $ , , a year, a large amount when you consider the diminutive size of the country and the poverty of the people. the fact that in all of these countries coöperation is growing at a rate of increase of per cent to per cent proves that a need for it exists. now, uncle sam, we are starting these coöperative stores here, and the question with us and the one we are constantly asking, is what protection are we going to have from the trusts and monopolies which can, if permitted to do so, destroy us with low prices at any point, while they rob the people at some other point, to make up the losses, while ruining us. what we must have is legislation, to protect us, and if we can get it into this bill, i want it. uncle sam: i do not see how any phase of what you have said can be governed by a financial and banking bill. it is true, that incidentally you may do a banking business in your coöperative societies. so far as you do, you ought to conform your practices with whatever we may decide upon in the way of banking laws. so far as you buy and sell, or manufacture, you are engaged in production and commerce, and not in the banking business. under the circumstances, you are entitled to an answer, although a little aside from the subject in hand. let me tell you, however, right here, and you may set it down as settled. that, if you start any coöperative associations for the production or distribution of goods of any kind, you shall have a square deal. i have been waiting patiently, but getting ready all the while, to put some of the managers of these monopolies in jail. you can take my word for it. you are going to have equal opportunities under the operation of just laws, if there is any way of giving them to you. and if your uncle samuel understands the situation, i think there is. unfair chances, special privileges and monopolies cannot naturally and properly have any place in a country where all men are born free and equal under the law. the fact is, the law is sufficient now, but there is not a public sentiment strong enough to compel the courts to put men in jail for robbing their fellows through the forms of law; even if it is known that the laws by which they rob their fellows or are permitted or enabled to rob their fellows were passed expressly for that purpose. that is the fault of the times through which we have just passed. the time is now at hand when all this is to be reversed. the people have come to realize and appreciate the fact that it is ethically, morally, and justly speaking, as wrong to rob a man through the forms of law, as for the bully to fell a man in the streets and pick his pockets. the people are forming new ideals, and the judges are getting new ideas. these new ideals, and these new ideas, will soon handcuff and incarcerate the business culprits, the business bullies, just as the ancient ideals of the people, and the old ideas of the judges have, in the past, put the physical bully and the material thief in the dark, dank dungeon. i have altogether too many men, who are always inquiring how near they can go to the jail door and not get in. you mark my word, i am going to push some of them in very soon now. what i want is a nation of men who are imbued with a sense of justice and fair play in business; and who will regard business relations as moral obligations, and paramount to the technical letter of the law. when that day comes, one banker will not want his fellow-bankers to carry his reserves for him. the principle is the same, whatever the relation of men may be; therefore, you can take my word for it, that all those who want to coöperate to secure a greater degree of the profits of their labor, a greater degree of justice among their fellows, will find uncle samuel coöperating with them, in the preparation and execution of those laws which will make for a juster government. since this government springs from the people, and belongs to the people, no part of the people, certainly no small part of the people, should be able to take unfair advantages and undue profits, by any legalized special privileges, or by the power of monopoly. i say to you now, that these should be, and will be destroyed, and that all men shall be equal before and under the law. this is the predestined purpose of this government, and it will never come into its fulfillment until you learn, my boys, that you are your brother's keepers. mr. merchant: uncle sam, that's pretty good preaching; but how are you going to apply it to this banking question? uncle sam: did not mr. laboringman just appeal to me to find out whether coöperative societies were going to have a fair show? i have just told him "yes," and i intend they shall have it, and i know of no better place to begin than here and now. i am going to construct two or three pieces of machinery--a guillotine for the monopolies, and an electric chair for special privileges, and concoct a barrel of anesthetics for stealthy, statutory stealing. mr. lawyer: but all this kind of legislation must come under the sphere of the sherman anti-trust law. i think no one will contend that any aspect of coöperation, as represented by mr. laboringman, should be incorporated in our banking bill. mr. banker: i agree with both mr. farmer and mr. lawyer, that we cannot make any provision for it at this stage of its development in this country; but who shall prophesy about a movement that has spread over the world, as this has, and is now growing at such a rapid rate? it is estimated that at least ten million in great britain are interested in it; more than five million in germany, and that the outstanding coöperative investments in continental europe must exceed $ , , , by this time. of course, these figures mean some banking sooner or later, in this country, when the movement once gets under way. mr. farmer: yes, i agree to that, but any attempt on our part at this time to legislate in advance, would do more harm than good. mr. laboringman: that is probably true, as it might interfere, as you say, with the movement. all i ask then, is that we have a fair field, so that we can develop along natural lines, and be protected in the exercise of our mutual coöperative rights. i thank you, gentlemen, for giving me, and my particular cause, so much of your time. uncle sam: mr. laboringman, your cause is their cause. your cause is my cause. your cause is our cause. your cause is the cause of humanity. the principles upon which your cause rests, pushed to their logical conclusion, will secure social and industrial justice. there are many who have taken millions, yes, hundreds of millions, through the forms of law, but without any ethical right whatever. from them these millions will be taken away in time, through the forms of law; through the power of taxation by progressive income and inheritance taxes, and the injustice of today will be righted by the justice of tomorrow. mr. banker: uncle sam, you have suggested a programme outside of banking legislation; but i must confess incidental to the cause presented by mr. laboringman. mr. farmer: gentlemen, we have stayed longer tonight than on any previous night, and i must go now. so, good night. uncle sam: mr. farmer has forced an adjournment. thirteenth night the clearing house uncle sam: we are on the very last lap tonight, as i understand the situation. we have had the standard of value, money, currency, exchange, value, price, property, wealth, credit, reserves, the bank; and now comes the settlement of the claims against the bank in the shape of checks, drafts and bills of exchange. when we finish this conversation we can, i hope, begin to put things together, that is, make use of our material. mr. banker: uncle sam is right, we shall be ready to do some constructing when we have disposed of the clearing house, which is destined to play a gigantic part in the future of american banking. this is true because the clearing house is bound to become the machinery by which all american banks are to coöperate and protect themselves through their combined strength; and it will be a splendid exhibition of what true coöperation can accomplish. the character and origin then of the clearing house, its present and prospective function, must be carefully studied by us, if this assumption is correct. mr. merchant: the character of the clearing house, or the principle upon which it works, is simple enough; although its operations are vast, and its achievements in times of financial stress have been most striking, even though not always satisfactory. the principle of clearing is, as i have just said, simple indeed. if i have a claim against mr. manufacturer, and he has an equal claim against me, we clear them by exchanging our claims with each other. if one of you gentlemen should sue another for one hundred dollars, and the other should make a defense by pleading an offset of one hundred dollars, and the court should allow both claims, you would clear them through the court, the one offsetting the other; that is all there is of the principal involved. mr. banker: mr. merchant, you have put this matter more simply than any book has ever done. indeed, i had not reduced the transaction to such simple terms. to put it in the form of a definition, as you stated, it would read this way: "to offset one claim against another, and pay the balance, if any, is clearing them." i had thought that it would be my particular task to explain this transaction of clearing, and after a good deal of meditation i had worked out a thought which i am sure is next best, after your definition; and it will take us one step nearer to the clearing house, without getting into any of its complexities. my illustration is this: if there were but one bank in a town, and all the people did their business through this single bank, by depositing their money and checks, and then paid all their bills, with checks on the bank, apart from any outside business, every debt in the town would be paid by check, and there would be no need of any money at all as the claims and debts would be exactly equal, and would always cancel each other to a cent. mr. lawyer: what you have said about one bank in a town is equally true of two, three or four, or any number of banks, if you assume that every person in town does his entire business through the banks, providing, of course, that the banks get together, and offset all the checks and drafts they receive during the day. there might be something to pay from day to day for the time being, but all would be adjusted in the end, without any variation or difference. mr. banker: precisely so, but when you get those bankers together, for the purpose of trading checks, you have created a clearing house. stephen colwell says: "clearing is beyond all question, the simplest, the most economical, and when applicable, the most efficient of all modes of paying debts; it is precisely analogous to balancing accounts." james g. cannon, author of the leading work upon the history of american clearing houses, describes a clearing house "as an office, established by the banks of a city, where their representatives meet daily to exchange drafts and checks, and adjust balances." again, "as a device to simplify and facilitate the daily exchanges of items, checks, drafts and bills of exchange, and the settlement of balances among the banks, and a medium for muted action upon all questions affecting their mutual welfare." you would think that the clearing house was such a simple matter, and such a great advantage that a clearing house would have been thought of, and put into operation as soon as banks got under way, but not so. their development and establishment, as we know them today, has been slow indeed, and the early history of their origin most interesting. jevons says: "about the year , a few of the london bankers hired a room where their clerks could meet to exchange notes and bills, and settle their mutual debts. the society was of the nature of a strictly private club; the public knowing nothing about it, and the transactions being conducted in perfect secrecy. mr. gilbart tells us that even in this form it was regarded as a questionable innovation, and some of the principal bankers refused to have anything to do with it. by degrees, however, the convenience of the arrangement made itself apparent, more bankers were admitted to the society, and a distinct committee and set of rules were formed for its management. although it remains to the present day a private and voluntary association, unchartered, and in fact unknown to the law, the clearing house has steadily grown in importance, and in the publicity of its proceedings. "several important extensions of the clearing work have been made in the last twenty-five years. after the rise of the london joint stock banks, subsequent to , they were for a long time refused admittance to the clearing house; but in june, , they were at last allowed to join the association. the bank of england long remained entirely outside of the confederation, but more recently, it has become a member." (written in .) the establishment of clearing houses in english cities, outside of london, did not take place until a century, almost, after that in london went into operation, or as late as , which was just five years short of a century later. as early as albert gallatin presented a plan for a clearing house in new york, and so perfectly outlined the scheme, finally adopted, that i want to read it to you. and i want to impress upon you the fact that gallatin was one of the very ablest economists that we have ever produced. "there is a measure which though belonging to the administration of banks, rather than to legal enactment, is suggested on account of its great importance. few regulations would be more useful in preventing dangerous expansion of discounts and issues on the part of the city banks, than a regular exchange of notes and checks, and an actual daily or semi-weekly payment of the balances. it must be recollected that it is by this process alone that a bank of the united states has ever acted or been supposed to act as a regulator of the currency. its action would not in that respect be wanted in any city, the banks of which would, by adopting the process, regulate themselves. it is one of the principal ingredients of the system of the banks of scotland. the bankers of london, by the daily exchange of drafts at the clearing house, reduce the ultimate balance to a very small sum; and that balance is immediately paid in notes of the bank of england. the want of a similar arrangement among the banks of this city produces relaxation, favors improper expansion, and is attended with serious inconvenience. the principal difficulty in the way of an arrangement for that purpose is the want of a common medium other than specie for effecting the payment of balances. those are daily fluctuating; and a perpetual drawing and redrawing of specie from and into the banks is unpopular and inconvenient. "in order to remedy this it has been suggested that a general cash office might be established, in which each bank should place a sum in specie, proportionate to its capital, which would be carried to its credit in the books of the office. each bank would be daily debited, or credited, in those books for the balance of its account with all the other banks. each bank might, at any time, draw for specie on the office for the excess of its credit, beyond its quota; and each bank should be obliged to replenish its quota whenever it was diminished one half, or in any other proportion agreed on. it may be that some similar arrangement might be made in every other county, or larger convenient district of the state. it would not be necessary to establish then a general cash office. each of the banks of scotland has an agent at edinburgh, and the balances are there settled twice a week, and paid generally by drafts on london. in the same manner the balances due by the banks in each district might be paid by draft on new york, or any other place agreed on." james c. hallock, the highest authority in this country upon clearing house operations, has so succinctly stated how the checks were disposed of, before the clearing house was established, that i am going to read that to you, and show you two diagrams, which we will keep on file for future reference. "in , the banks of new york city organized a clearing house, the first in america; until then they had done business without one. the method had been laborious. "each of the fifty-two banks had daily received over its counter, or by mail, checks on every other bank in town. to collect them the banks had opened deposit accounts with one another. each had become a depositor in fifty-one city banks. each also had had the others as depositors and kept fifty-one accounts with them. the pass books used had been of the ordinary form as 'merchants' bank, in account with chatham bank.' "according to the common usage of depositors, each bank would have sent messengers to fifty-one banks daily, and each would have had fifty-one messengers come to its own counter from the other banks. they had done a little better than that. the chatham bank, for instance, would have checks on the merchants' bank. it would list them on a deposit slip, charge the merchants' bank with the amount in its pass book, and place the checks in the book which the messenger would now carry to the merchants' bank, and deliver to its receiving teller. the latter would remove the checks, and having some on the chatham bank with list attached, he would credit his bank with the amount in the pass book, place the package in it and hand it back, thus refilled to the messenger. "this exchange of checks by two banks at the counter of one was a rudimentary clearing which, like all bank clearings, saved labor, time and trouble. to deposit these checks in the customary manner would have required two messengers and two pass books. by this clearing arrangement one messenger and one pass book sufficed. perceiving the sensibleness of this saving, the new york banks had for many years tacitly agreed that each should send messengers to one-half of the banks for six months, and the other half for the next six months. they had thus reduced the number of banks to be visited daily by each from fifty-one to twenty-six banks, and accordingly reduced the number of pass books in use by each. "the accompanying diagram representing the banks arranged in a circle, with two of them sending messages to twenty-six each, indicates how toilsome the exchange of checks still was, up to the formation of the new york clearing house, which commenced operations on oct. , ; though only two banks are represented as sending, in fact, all were really sending, or being sent to; for every bank sent to all others that did not send to it. [illustration: without a clearing house in new york. _diagram showing a bank messenger's trips to exchange checks with other banks._] "when two banks exchanged checks the amounts were almost always unequal, leaving a balance for one to pay and the other to receive. every day every bank, if they had settled daily, would have had fifty-one balances to pay, or receive. they were payable in coin. instead of attempting the daily adjustment of accounts, which would have consumed hours, and caused much annoyance, it had become a tacit agreement that a weekly settlement of balances should be made after the exchange of friday morning. on settlement day, the cashier of each bank would draw checks for every debt due to him by other banks, and send out the messengers to collect them. over fifty porters were out all at once, wrote a bank officer of the time, with an aggregate of several hundred bank drafts in their pockets, balking each other, drawing specie at some places, and depositing it in others, and the whole process was one of confusion, disputes and unavoidable blunders of which no description could give an exact impression. "the second diagram, representing the fifty-two banks in a circle around the clearing house, indicates how completely all this misdirection and waste of energy stopped upon the installation of that marvelous method which affects such amazing economy. every bank now sends straight to a common point. every bank sends there all the checks it has on all the city banks, and charges the whole amount against an imaginary debtor--the clearing house. every bank receives there all the checks all the other city banks have on it, and admits its indebtedness for the whole amount to an imaginary creditor--the clearing house. the balance can now be struck. if the bank loses, it pays the clearing house the difference. if the bank gains, the clearing house pays the bank; and there is the end of it, reached by the shortest path with the greatest ease and quickness. "the principal results may be summarized: "the clearing house saved every bank in new york city on the average twenty-six trips daily to exchange checks with other banks. it abolished sending to other banks for this purpose. it substituted one trip to the clearing house--an economy of - / per cent. "the clearing house saved every bank in new york the payment or receipt, mostly in coin, of fifty balances on settlement day (friday). it abolished settling at the counter of banks, except for checks, sent through the clearing and returned 'not good.' it substituted one payment, or receipt, of a net balance to or from the clearing house, an economy of per cent. [illustration: with a clearing house in new york. _diagram showing single trips to exchange checks with all other banks in the city._] "the clearing house saved the banks of new york all the drudgery, irritation and anxiety which had made daily settlements impracticable. it abolished the weekly settlement; it substituted daily settlements to the clearing house--an economy of considerable importance. "the clearing house saved all the banks of new york the trouble of keeping accounts with one another. it abolished accounts of city banks with city banks--closed , accounts. it substituted one account for each bank with the clearing house--an economy of per cent. "these savings, not to mention others, proved beyond dispute, that clearing checks economizes." it was twenty-two years before gallatin's suggestion was adopted, and a clearing house was established, which, as stated, was in . the first clearing was effected on oct. , , and amounted to $ , , . . the balances amounted to $ , , . . boston followed in the footsteps of new york, and established a clearing house in , and philadelphia in . the next step in the line of progress, in the matter of bank clearings, came, as hallock says, as a result of cheap postage and the railroads in england, and included country checks. he says: "somewhat less than half a century ago london recognized the fact that the out-of-town check was an indispensable instrument of civilized man, at least in great britain. he would use it, contrary to custom, and despite the remonstrances of city bankers, who thought only london drafts should be sent to london. "a product of modern times and method, country checks came to london with the railroads. few at first, when the average postage on a letter consisting of a single sheet, was nine pence, and another sheet, or any enclosure, however small, doubled the rate, making the postage on a letter enclosing a check thirty-six cents, on the average. with penny postage established in , regulating the rate on a letter by its weight (one penny per half ounce), without regard to the number of sheets, or enclosures, country checks began to stream into london. "in the city bankers, perceiving their inability to suppress, or exclude them, decided to adopt the suggestion of some country bankers, and collect english and welsh checks through the clearing house. "the idea originated in the spring of with a young country banker, william gillett, the son and grandson of country bankers. he visited the provincial banks, and interested them in the project. when prepared to carry it out the country bankers met in london on sept. th of that year, and communicated the plan to the london clearing banks to obtain their support. the londoners opposed it; they suggested doubt as to the utility and feasibility of any change in existing systems. however, their coöperation being solicited, the london bankers held a meeting at the clearing house on oct. th, to take the matter into consideration, and appointed a special committee to confer with the country bankers. "then, on reflection, it appeared to another young man, the son and grandson of clearing bankers, that the organization of a large and entirely new establishment, which the country bankers proposed, was unnecessary, as the london bankers could give them all the facilities they required, without any great additional labor, or expense. this junior officer in the private bank of which his father was the head, has since gained world-wide celebrity in science and literature as sir john lubbock (now lord avebury). even with the aid of such talent and opportunities as his, it required unflinching resolution to establish country clearing in london. after devising a method that conformed as closely as practicable to actual usage in clearing city banks, young lubbock had to call at every london bank, at most of them several times, and explain fully the exact manner in which he proposed to carry out the system. it was very difficult for him to convince his brother bankers. finally the special committee requested him to meet the principal clerks of the different banks. these clerks unanimously recommended the adoption of his plan. "the london bankers then adopted it, and on nov. th submitted it to their country correspondents. the plan for an independent country clearing house was abandoned by the country bankers' committee on nov. th, and the clearing of country checks commenced in london on nov. , . in less than eight weeks, after the idea was broached in london, it was put in practice there." this system covers , square miles. mr. hallock says, "sedalia bankers unconsciously imitated the london plan, but modified it, as had been done abroad elsewhere; for out-of-town checks are cleared, not only in london, but also in other english cities, as manchester, liverpool, birmingham, newcastle-on-tyne, leeds, sheffield and bradford, in some eight scotch towns and dublin." the next advance, which is undoubtedly destined to revolutionize clearing in the united states, was started in boston in by making new england a free check zone. hallock says: "the clearing of out-of-town checks, though opposed for years by a small minority of boston banks, was successfully established at boston in . the system includes checks on all points in new england, and maintains a free zone of nearly equal extent. "proposed in and , the boston movement at first resulted in a deadlock, based on the supposed importance of having certain city banks, who declined to come in, participate. after twenty-two years through another movement started among the connecticut banks, the deadlock was broken by substituting the manager of the boston clearing house for any abstaining members, and giving him checks on their correspondents to collect. the association finally decided that all checks passed through the out-of-town clearing should be collected by him. "the only opposition exhibited by country banks has been in the refusal of a few to pay the clearing house in full for their checks, deducting so-called exchange. boston checks passed through the clearing house are paid in full, or not at all. new england checks should be. this can be effected, either as in london, by boston banks returning checks, drawn on such banks, as not collectible through the boston clearing house, or by the manager, charging to collect checks, bearing indorsement of the non-par banks, which would cut them off from the use of the new england free list, now enjoyed by them, without reciprocity; that is, without being themselves on the free list." mr. charles a. ruggles, manager of the boston clearing house, says: "in the thirteen years that we have made collections in this way, we have collected over eight thousand million dollars ($ , , , ). "our cost now is, and has been for ten years, seven cents for a thousand dollars. that includes the clerk hire of fifteen men, postage and stationery, and we collect seven or eight hundred million dollars a year; furthermore, per cent of the banks in new england remit at par. we collect per cent of it in twenty-eight hours." it is an interesting and important historical fact that the country banks of england and wales forced the clearing of country checks at london; so, too, the banks of connecticut, thirty of them in number, by combining under the advice and leadership of mr. james c. hallock, succeeded in having the plan adopted by the boston clearing house. as a result new england became a free check zone. i think we should note in this connection that the father of mr. james c. hallock was the organizer, if not, indeed, the originator of the new york clearing house in . mr. laboringman: mr. lawyer, you talk and talk and talk, when you could say what you really have to say, in one-tenth of the time, and in about as many words. we have spent a whole hour in the history of the origin of the clearing house, and have just learned what i could repeat in about two minutes. _first_: london, in a kind of a sneaking way, began to clear checks in , and kept a clearing house in a blind alley. nothing more was done in england by way of advance until , when the country banks of england and wales, covering a territory of , square miles, by threatening to start their own clearing house in london, compelled the london banks to clear their checks. not till , nearly one hundred years later, did any other city adopt it. but today many cities in great britain are clearing country checks. _second_: gallatin proposed a clearing house for new york in . hallock established it in . boston and philadelphia followed in three and five years, respectively. in , new england became a free check zone, all checks being received at par at boston. since then several other cities have followed suit. atlanta, macon, nashville, sedalia and kansas city. now, i have said everything you said. next! uncle sam: mr. laboringman always gets a "b" line on things. mr. lawyer: that is true in substance, but the very fact that mr. laboringman has stated the case so well is the greatest compliment he could pay us. it is only by iteration and reiteration, word upon word, and precept upon precept, that has made this whole subject so plain to all of us. we have made haste by going slowly, and we don't want to get into a hurry now. mr. banker: i agree with you, mr. lawyer, patience has been our best and truest friend in all these talks, and we should not desert her now. mr. laboringman: that's all right, but let us get down, right down to business. just where are we at now? and where are we going to in the clearing house matter? mr. banker: we are now going to discuss the clearing house from five points of view. _first_: the clearing house, from its original standpoint--new york was the pioneer, and is probably our highest type. its clearings are certainly by far the largest in the world. _second_: the clearing of country checks, of which boston was the pioneer in a large way, although preceded in point of time by sedalia, mo., a country city of only , people in . _third_: the examination of all banks clearing through the clearing house, of which chicago was the pioneer, starting june , --and probably the best type, although there are today about twenty cities following in her footsteps, including the following: minneapolis, feb. , ; st. paul, may , ; st. louis, oct. , ; los angeles and san francisco following upon the heels of st. louis; kansas city, march , ; st. joseph, the early part of ; philadelphia, april , ; new york, , with others, not mentioned, making twenty in all. _fourth_: the centralization of the reserves of the banks at the clearing houses, as a matter of convenience in settling balances, and carrying on their common business generally, but subsequently for the purpose of facilitating the issuance of clearing house certificates. mr. lawyer: let me repeat to you, gentlemen, what may have been stated before, that there is no law providing for the existence of the london clearing house, nor is there a single law in a single state in any way authorizing or affecting a single clearing house in the united states. therefore, all that they have done has been without any authority of law. they are a law unto themselves; and it is not at all certain that that has not been wise. indeed, i am of the opinion that it has been most fortunate for the business interests of the country. what do you think, mr. banker? mr. banker: i am of the same opinion; in confirmation let us return to the consideration of the points suggested. _first_: the new york clearing house, as stated, had its first clearing oct. , . mr. cannon says that not until august, , did the new york clearing house have a constitution. this instrument, with the subsequent changes, is in force today, and constitutes as perfect an illustration of the evolution of law by practice, as can be found anywhere. this institution had various homes until it took up its present quarters in one of the most beautiful buildings in the whole country--worthy in every way of its use and purpose. it has cost $ , , and is owned by the clearing house banks of new york, under the name of the clearing house building company. mr. cannon says: "the administration of the clearing house is vested in a president, secretary, manager, assistant manager, and five standing committees.... the manager under the control of the clearing house committee, has full charge of all business at the clearing house, but before entering upon his duties, he is required to give bond, in the sum of $ , .... although the constitution provides for the appointment of a manager, annually, it is the custom to retain the same one in office, year after year. as a matter of fact, there have been only three managers in the whole history of the association.... the clearing house committee is clothed with almost absolute power, being second in authority only to the association itself. the ablest and most experienced bank officers, therefore, are usually chosen to serve on it. the committee is elected annually. the association at present, , consists of sixty-three members and twenty-two non-members, and the united states sub-treasury, located at new york. the latter makes its exchanges only at the clearing house, its balances being settled at its own counter. it has no voice in the government of the association, and pays a nominal sum for actual expenses. the privilege which the sub-treasury enjoys of making its exchanges through the clearing house is a matter of great accommodation, both to the sub-treasury and to the banks. the new york post office clears through one of the members, but renders no compensation to the association for the privilege. "the membership of the association, since its organization, has been constantly changing, owing to the admission and expulsion of members and voluntary withdrawals, as provided by the constitution.... a bank, the capital of which does not exceed $ , , , must pay $ , ; a bank, the capital of which exceeds $ , , , must pay $ , . any member increasing its capital is required to pay in accordance with those rates." in , the large number of trust companies that had come into existence attracted the attention of the clearing house and the clearing house committee adopted a rule that no trust company could clear that had not been in existence for at least one year, and that every trust company clearing through a member shall furnish a weekly statement of its condition to the manager of the association. the new york state law did not then provide that any trust company should carry cash reserves, although state banks were required to have per cent cash in their vaults. it was tacitly understood that all banks clearing, should have per cent reserve. of course the trust companies could ride the banks, and they took advantage of their opportunity. this caused great dissatisfaction, and rightly so. on feb. , , the association passed a resolution requiring that every institution (not a bank required to maintain specified reserves) "shall after june , , keep in its vaults a cash reserve, equal to per cent; after feb. , , - / per cent; after june , , not less than per cent, nor more than per cent, as the association might determine." the trust companies kicked and protested, and almost, without exception, withdrew from the clearing house; but, after the panic of , the new york legislature passed a law requiring them to carry per cent cash reserves. on june , , the association passed a resolution compelling all trust companies, who were members, to carry a cash reserve of per cent, and on jan. , , the association for the first time in its history made a rule compelling all its members to keep a cash reserve of per cent. every member of the new york clearing house is required to furnish to the manager, weekly, for publication, a statement showing its condition, showing the average amount of loans, and discounts, specie, legal tender, notes in circulation and deposits. the capital and net profits are also given, this being the only association which gives the latter item. along the same line of legislation controlling the action or conduct of its members, the clearing house committee, having plenary power to do so, passed a rule--determining just what every member and bank, clearing through members, should charge for collections. the rule made some cities free, that is, there were no charges for collection made compulsory. some cities were under a fixed charge of one-tenth of one per cent, and others under a fixed charge of one-quarter of one per cent. upon april , , this rule became obligatory, and if any member violated it, the penalty was $ , for the first offense; for the second offense it might be expelled from the association.[ ] mr. laboringman: that is precisely the same rule we have in our union, only our limit is not so high. we fine a member $ . for his first offense, and for the second offense we take away his card. by jove, that is a hot proposition. and these are the very fellows who are always cussing us because of our union rules. mr. lawyer: i want to tell you something else, gentlemen, that combination among the banks is clearly in restraint of trade and in violation of the sherman anti-trust law. anybody who wants to can bring those banks to time. mr. banker: now, gentlemen, don't you perceive that this institution, step by step, has evolved its own laws, or rules of action, slowly developing its present system, and regulating and controlling the conduct of those outside institutions which enjoy its privileges? the story of this clearing house is the record of all of them in principle. they are, each and every one of them, self-centered, self-contained, and a law unto themselves. the operation of the new york clearing house is practically that of all the others. its room is sixty feet square. four rows of desks occupy the floor. each member has its own numbered desk separated from its neighbors' by a wire net work. at one minute to ten o'clock the manager sounds the gong and all are instantly ready for the exchange which begins promptly at ten o'clock. at the expiration of forty-five minutes usually, but sometimes in thirty-seven minutes, and even in thirty-five minutes, every member of the association has in its possession all the paper drawn upon itself, which the other members have credited on their books, and has delivered all the paper drawn upon all the other members of the association in exchange which it has credited upon its books. mr. cannon states that the amount delivered by any member has never been exactly equal to the amount received but has come within one cent upon a single occasion. to complete the clearing transaction, it is necessary, of course, for those who owe anything to pay it to the clearing house, and for the clearing house in turn to distribute what is paid to it among those who are entitled to receive it. as a matter of convenience for the purpose of settling the balances, the members of the clearing house deposit with the clearing house gold coin, gold certificates, silver certificates and legal tender notes, and receive clearing house certificates, therefor, in denominations of $ , , $ , , $ , , $ , , $ , , $ , , $ , , $ , and $ , each. all notes of a smaller denomination than $ . should, according to practice, be put up in packages of not more than $ , . all packages are sealed and marked with the name of the institution depositing them with the amount, date and kind of money they contain. the banks, also, deposit at the sub-treasury in new york gold coin, for which certificates are issued by the assistant united states treasurer. these certificates are in two denominations, $ , and $ , each; the holders of these certificates are the absolute owners of them. _it is stated upon high authority that the amount of such money now deposited at the various clearing houses throughout the united states exceeds the sum of $ , , . in other words, that we have today in the united states centralized our reserves to that extent for certain purposes._ mr. merchant: mr. banker, your history of the development of the clearing house and your description of its operations have certainly been very clear, and most interesting. the second point you mention, the clearing of country checks, will appeal to all the business men of the country as it has to me for a long time; especially since i have a great deal of business up in new england, where this practice has been in force since . i was up there the other day, and my partner took me to see mr. charles a. ruggles, the manager of the boston clearing house. after he had described the system of clearing country checks, he handed me a little pamphlet giving the history of its development in boston and setting forth its reasons and advantages so graphically, that i am going to quote from it in telling you gentlemen about it. let me say to you that i am confident that when this principle is fully understood, and carried out, as it soon will be, to its logical conclusion, checks, precisely like our bank notes, will be par everywhere in the united states. i am fully aware that you are greatly surprised at this statement; but take my word for it and remember that what i have prophesied is going to happen. _free zones are going to increase until every check will be free within its own zone, and almost immediately as a consequence, the zone centers will settle with each other daily; that is all checks will not only be free in their own zones, but will be free between all zones, that is all checks will be par everywhere._ however, let me tell you how it developed in new england. ruggles describes it in these words: "that the use of checks has increased rapidly in the past ten years is an undisputed fact, and the question of how to handle them to advantage, or without loss, is a problem that has caused much discussion. all large cities have had the same experience, and have dealt with the question in various ways. rather than ask his bank to draw exchange, the country merchant sent his check to boston in payment of his account, and in this way, he was encouraged by the city merchants who deposited the check in his bank, where it was received at par. this continued until the volume handled reached such proportions as to make the item of exchange quite prominent in the expense account, which the city bankers sought to reduce by various methods. in many cases checks were not sent directly to the banks upon which they were drawn, some other route being selected to avoid exchange charges; as, for example, a check on stonington, conn., deposited in westerly, r.i., only six miles distant, after many days, during which it traveled one thousand miles, perhaps, passed through providence, boston, newport, then new haven and new london and reached its destination bearing the endorsement of nine banks. mr. cannon in his work on clearing houses cites a remarkable case of zigzagging to avoid collection charges; a check on sag harbor, n.y., paid to a hoboken firm was eleven days reaching its destination. had it been collected through the new york clearing house ten days' time, fifteen hundred miles of travel and a vast amount of clerical work might have been saved." here are two diagrams showing the route and the indorsements of the check to which mr. cannon referred, taken from mr. cannon's work on clearing houses. mr. ruggles further says: "the subject of the collection of the country check in a more expeditious and economical method than that then in force in boston, was first agitated in , when a committee of five was appointed to consider the question. a majority reported that the annual cost to the banks of boston was two hundred and twenty-nine thousand dollars for collecting new england checks and recommended that the business be consolidated, which would very materially reduce labor and expense. this report was received and placed on file. a minority report was also submitted in opposition to any change, on the ground that it would sever the social and business relations which then existed, and the clerical force required to handle the entire business would incur so heavy an expense that the cost of collecting would be as much, if not more, than was the case by the method then existing. no further action was taken until , when another committee was appointed to consider the same question. they reported that returns from all the banks showed that double the business reported by the former committee was then being transacted and that the probable cost was four hundred thousand dollars; they suggested that an agency similar to the clearing house be established for the purpose of making the collections. the banks failed to endorse this proposition and the matter was dropped until , when a committee was appointed by the bank presidents' association to again consider this important question; in their report it was recommended that the clearing house association act on the matter and undertake to make the collections. a committee was appointed by that body, who endorsed the previous report. their report was accepted and the clearing house association authorized the clearing house committee to put in operation the present system, and the banks of massachusetts were first addressed on the subject on april , , the result being a conference between the massachusetts bank cashiers' association and the clearing house committee. this conference revealed a decided difference of opinion at first, but both sides were brought to a clear understanding of the situation eventually. the position taken by the clearing house was that it did not propose to dictate to the country banker how he should transact his business or coerce him into acting in conjunction with the clearing house; nevertheless, the boston banks claimed the right to use their own methods in making collections, and should the country banker decide to charge exchange, checks on his bank would not be accepted at par in boston, and might be collected by express or such other means as was thought advisable. comparatively few of the banks in massachusetts appeared in opposition when the subject had been fully discussed. at a second conference the cashiers' association asked the privilege of making payments in new york exchange if more convenient for them, and this request was readily complied with. they also asked that they might ship currency when necessary, at the expense of the boston banks; this request was also granted, and in a few months all were remitting at par and checks from all the boston banks were being collected through the clearing house. on sept. st, maine was added to the list, followed by rhode island and connecticut on nov. th, and new hampshire and vermont in january, . [illustration: fac-simile of the back of the check, showing the numerous indorsements it bore on finally reaching the bank on which it was drawn. _from james g. cannon's work on clearing houses._] "the first year the amount collected was $ , , at a cost of ten cents per thousand dollars; the second year $ , , at a cost of eight cents; the third year $ , , with cost reduced to seven cents. since the opening of the foreign department, as we term it, the average yearly business has been six hundred million dollars, and the average cost seven cents. the expenses are met by an assessment levied on the banks based on their daily average business. there are at present in new england six hundred and thirty-seven banks and trust companies to whom checks are sent daily, and the number of packages handled will average five thousand." [illustration: map showing the check's itinerary. _from james g. cannon's work on clearing houses._] mr. banker: mr. merchant, i am very much surprised that you have made such a thorough study of this feature of the banking problem, but i am also equally gratified. you have certainly explained the question so clearly and fully that no one can fail to be impressed with the future possibilities of this plan of clearing country checks, and i am convinced that you are absolutely right that the time is not far distant when every check in the united states will be par everywhere precisely as our bank notes are today; and why should they not be so, since both are identically the same thing in principle. mr. lawyer: i can see what a tremendous advantage that would be to our commerce, indeed, incalculable, and i can see that there is no substantial difference between a check on a bank and a bank note, which is a check of the bank on itself; both are mere credits, and as you say, when fully comprehended and rightly understood, will be treated in precisely the same way in the exchanges of the country. but it does seem to me as though we shall have to have a better knowledge of our banks, and the business houses of the country, too, if this great reform is to be brought about. mr. banker: that is true, but the bankers of the country have realized for a long time that their greatest peril came from the unsound practices and reckless methods of some of their own number and have already taken steps to protect themselves against such practices. you, gentlemen, will all of you, no doubt, remember the walsh failure at chicago in . you will also remember that walsh had control of three different banks with approximately $ , , resources; one was a national bank, under national supervision; one a trust company and one a savings bank; both of the latter being under state supervision. this enabled walsh to flim-flam the examiners, one examiner being national and the other state, by juggling the assets and then finally diverting practically all of the deposits into his own enterprises; certainly the best part of them was used in promoting his business schemes. it took this kind of an earthquake to wake up chicago and bring into the banking fraternity, or business world, one of the greatest reforms of the commercial life of the country. i say commercial world advisedly because about the same time chicago had an experience with a fish house that was really the biggest fish story that was ever told. the sad thing about this fish story was that it was true and cost the fishermen, the chicago banks, and the fishermen and bankers elsewhere, about $ , , . these two experiences capped the climax and illustrated perfectly the need of just what followed in the clearing house at chicago. this brings me naturally to the third point that i mentioned as important and vital in the evolution of the american clearing house. on june , , the clearing house association of chicago, illinois, acting upon a resolution introduced by mr. fenton, vice-president of one of its banks, established an independent system of clearing house bank examinations. only recently the chairman of the clearing house used this language: "the result of our experience in chicago is most satisfactory and gratifying. the banks have almost unanimously adopted every suggestion made by the clearing house committee for their betterment and strength. in several instances the committee, from its wider knowledge of the financial situation, has been able to save some of the smaller institutions from loss by enabling them to take hold of conditions in time. i cannot properly go into such details as would illustrate the effectiveness of clearing house examinations as we have experienced it, and can only say in a general way that it has been even more satisfactory than i anticipated it would be before it was undertaken." mr. lawyer: right on this point i want to read to you a letter i have just received from the clearing house examiner of los angeles, california. dear sir: replying to your inquiry of december th, will say that clearing house examinations were begun in los angeles on may , . since the inauguration of the system there have been no bank failures, because the executive committee of the clearing house association will not permit banks to reach the danger point. we have had one instance where, after watching a bank for three years, giving it a chance to correct its bad methods and put itself in good condition, the clearing house finally compelled it to assign all of its assets to a trustee, and the public was notified that all claims would be paid on demand.... national and state examinations have improved greatly during the last ten years, but they will always lack the strongest element--the calm, clear judgment of the local executive committee, whose demands are founded on knowledge of the situation, and whose mind is not warped by political strings. yours very truly, (signed) john w. wilson, _examiner, los angeles clearing house assn._ mr. cannon in his admirable work on clearing houses, says: in substantially his own words the chicago examiners operate under the following conditions: the examinations extend to all the associated banks in chicago, and to all non-member institutions. the work is conducted with the aid of five regular assistants, each fitted by experience to thoroughly do that part of the work assigned to him. the examinations include, besides the verification of the assets and liabilities of each bank, so far as is possible, an investigation of the workings of every department, and are made as thorough as is practicable. after each examination the examiner prepares a detailed report in duplicate, describing the bank's loans, bonds, investments and other assets, mentioning specially all those, either direct, or indirect, to officers, directors, or employees, or to corporations in which they may be interested. the report also contains a description of conditions found in every department. one of these reports is filed in the vaults of the clearing house in the custody of the examiner, and the other is handed to the examined banks' president for the use of its directors. the individual directors are then notified that the examination has been made, and that a copy of the examiners' report has been handed to the presidents for their use. in this way every director is given an opportunity to see the report, and the examiner, in every instance, insists upon receiving acknowledgment of the receipt of these notices. the detailed report, retained by the examiner, is not submitted to the clearing house committee, under whose direct supervision he operates, unless the discovery of unusual conditions make it necessary. a special report in brief form is prepared in every case, and read to the clearing house committee at meetings called for that purpose. the report is made in letter form, and describes in general terms the character of the examined banks' assets, points out all loans, direct or indirect, to officers, directors, or employees, or to corporations in which they may have an interest. it further describes all excessive and important loans, calls attention to any unwarranted conditions, gross irregularities, or dangerous tendencies, should any such exist, and expresses in a general way the examiner's opinion of each bank as he finds it. the circumstances under which the first clearing house bank examiner was appointed and the result are well set forth by james b. forgan, president first national bank of chicago. "chicago was the pioneer in clearing house bank examinations. "they were inaugurated there in after the failure of a national bank and two state banks. these institutions were under the direct management of one man who was president of the three. the condition of their affairs when disclosed surprised and appalled the other chicago bankers. the liabilities of the private ventures of the president had gradually accumulated in the three banks until they had absorbed the entire capital and surplus of all three, amounting to $ , , , and per cent of their aggregate deposits of $ , , , one-third of which was public funds. "the condition in the national bank had developed through a period of years during which the comptroller of the currency, through the semi-annual reports of his examiners, had been kept fully advised of what was going on. among the assets were found nineteen fictitious loans for $ , each represented by so-called memorandum notes. each memorandum note purported to be secured by $ , of second mortgage bonds of the wisconsin & michigan railway co. this road was controlled by the bank president, and the bonds proved worthless. the first mortgage bonds of the same road, $ , of which (being almost the entire issue) were also among the assets of the banks, were finally disposed of at about cents on the dollar. these memorandum notes did not, on the face of them, even pretend to be the obligations of bona fide borrowers. the ostensible signatures on them, although in different names, were all in the handwriting of the clerk who filled them out and who wrote plainly in red ink across the face of each the words 'memorandum note.' they could not deceive anyone who saw them and they did not deceive the national bank examiners who reported to the comptroller the facts in connection with them. "although cognizant of these irregularities and of the accumulating obligations in the bank of the president's private enterprises, the comptroller apparently could not or at all events did not take measures to stop them by other means than those of expostulation and reproof until matters became so bad that they simply could not be permitted to go further. "when at last drastic measures were decided upon the comptroller and the state auditor, acting together on a saturday afternoon after the vaults of the three banks had been closed with time locks set for monday morning, notified our clearing house committee that unless provision were made for payment in full of the deposits none of the banks would be permitted to open for business on monday morning and they would be put in the hands of receivers. "business conditions were strained and the time was therefore particularly unfavorable for permitting the failure of three prominent banks. the effects of such a calamity it was feared would have extended far beyond the confines of chicago. "the situation was thus protected from a general disturbance of public confidence, but it was done at the cost of a very heavy loss, foreseen at the time and since realized by the participating banks. "the statements of the national bank made five times a year to the comptroller's department, copies of which were rendered to the clearing house committee and on which it had implicitly relied, failed to disclose these conditions. "i have given you these details of this unfortunate affair because they show so clearly the limitations of governmental supervision of banks under our national banking law as it has been interpreted by the courts and by the legal advisers of the comptroller's department. "let me draw your attention to a few of the legal restrictions which limit the comptroller's power to act in such cases. " . under the national bank act no obligation due a bank is considered bad until interest is past due six months and not then if it is secured or in process of collection. " . the comptroller may appoint a receiver when he concludes that a bank is insolvent. but here again he has been hampered by the legal definition of insolvency, which is 'inability to pay current debts as they mature.' " . the making of a national bank report to the comptroller so long as it is in accordance with the bank's books, however erroneous it may be as to actual values, which alone disclose a bank's true condition, cannot be construed as a misdemeanor. "these legal restrictions are presumably the reason why some banks have been permitted to persistently publish to the public the figures of their statements as rendered to the comptroller of the currency after they are known to have met with heavy losses and have failed to provide for them by charging them to profit and loss. that this has been permitted in some cases is notorious. the case of the chicago national bank and a recent one in a large central city [$ , , of $ , , surplus was charged off] are conspicuous examples because of their size. undoubtedly as a rule the published statements of the banks are reliable, but there are a few exceptions, with which, in view of the legal restrictions which govern his action, the comptroller finds himself unable to cope. these exceptions, however, frequently result in failures and catastrophes. the comptroller cannot legally take drastic measures with such banks until they perform some act of insolvency or when he believes their capitals to be impaired, which, being a matter of judgment in regard to the realizable value of their assets, is frequently difficult to prove. "these disclosures in connection with the failures of these three banks showed the associated banks of chicago that statements so rendered, which up to that time had been all the clearing house committee had to rely upon and which, as published, form the basis of the standing and credit of banks with the public, could not be implicitly relied upon. it was therefore unanimously resolved to adopt a system of supervision, under which there would be some assurance that such conditions could never again develop in any bank connected with the chicago clearing house association. there was therefore organized a bureau of examination in connection with the clearing house. * * * * * "as to the practical working of clearing house examinations in chicago during the six years of their existence i can only say that it has proved in every way most satisfactory and successful. there has been neither friction nor unpleasantness. bank directors realize the great benefits derived and are unstinted in their praise of them. they are greatly assisted by these reports in keeping themselves informed on the condition of their banks and they readily coöperate with the clearing house committee in the correction or elimination of anything open to criticism. our experience has been that the banks have almost unanimously adopted every suggestion made by the committee. i cannot, of course, discuss such details as would show its efficacy. i can only say that the results have been most satisfactory to all concerned and that much good has been accomplished for the chicago banks individually and collectively. "the organization, being entirely voluntary, partakes somewhat of the nature of a gentlemen's agreement, under which each bank binds itself to conduct its business under proper methods. the effectiveness of the method lies in the fact that they are all measured by the same standard, viz.: that their statements as rendered to the clearing house association must be satisfactory to the committee, in view of the examiner's reports upon them, otherwise they cannot continue to enjoy clearing house privileges." mr. banker: from mr. wilson's statement about los angeles and mr. forgan's statement about chicago, it must be perfectly clear to all of you, as it now is to me, that if we had in this country, say thirty or forty commercial zones, or free check zones, like new england now has, that is thirty or forty financial centres, covering all the territory naturally tributary to them, and so compassing, or covering the entire country, and these zones, all organized precisely as the chicago clearing house association is organized for the examination of all the banks of the united states, bank failures would become a thing of the past. mr. lawyer: well, let me see now, how you would insure that result, that is that bank failures would cease. the banks fail very often, possibly generally, because the officers of the banks have used the bank's assets in their own schemes, or those in which they are interested. but bank failures are very often due to fish paper, such as you described a few moments ago. how would you detect, check and stop that sort of thing? that is, how would you prevent too much paper from some one merchant, or manufacturer, getting into the banks? mr. banker: don't you see, mr. lawyer, that if your examination covered all the banks in a commercial zone, your examiners would always know, or could very easily find out, just how much paper any business house had in the banks of that particular zone, couldn't they? don't you see that if they observed that a large amount of paper of some business house had been placed in the banks of that zone, that is, loans made, or paper sold, they would at once be placed upon their guard and inquiry, and would proceed to find out just how much paper that particular business house ought to have, or was entitled to have out, considering its capital, and the general character of its business? don't you see that these bank examiners could insist on knowing all about the financial condition of any business house in their particular zone, just as well as the banks themselves could and do insist upon knowing? if a business house should refuse the bank examiner the fullest possible information about its affairs, its days would be numbered as a borrower at the banks of that zone, would they not? mr. lawyer: that is just the point. a business that is over expanding its credit by borrowing, or by selling its paper, will probably be working some other zone, or several of them at the same time. mr. banker: you might naturally think so until you reflected upon the situation for a moment. don't you see that if you had, as i have just said, thirty or forty such commercial zones, all organized, and all united into one system, as perfectly as if they were one single institution, that they could within twenty-four hours know to almost a dollar how much any business house in the whole united states had outstanding so far at least as the banks were concerned in all of them--simply by telephoning or telegraphing to each other? _you must see that every one of these commercial zones would soon become the most comprehensive and the most perfect credit bureau in the entire world, and that taking them altogether, they could and would, by the most exhaustive methods, not even now fully appreciated, be able to check the whole commercial situation in the united states in an incomprehensibly short space of time. nothing is so essential today as to know the facts about the situation because of the enormous increase of trade, and consequent expansion of credit._ mr. lawyer: it does seem to me, after all, now that you have finished the details of your plan, that you have in it a perfect check upon the whole business of the banking world. humanly speaking, i see no loophole nor escape whatever. mr. laboringman: that looks to me like an all-round scheme. it will certainly work like the colored man's fish trap, it will catch 'em, both "agoin' and acomin'," and would give this country the only practical scheme i've ever heard of for insuring bank deposits; for it does not seem possible to me for a bank to get into a position where it ought to fail. now, gentlemen, if there is one reform in this whole business that ought to be accomplished it is such an administration of these banks, as will practically prevent failures. don't you think so yourselves? this question is always coming home to the working people, because a bank failure is a tragedy in their lives. mr. manufacturer: yes, mr. laboringman, i certainly do agree with you, and i believe that this plan of having all the banks of the entire country examined by bankers just as they are now being examined by the clearing houses instead of politicians, and finding out, as such clearing house examiners will, not only the condition of the banks, but the financial condition of every business house as well, will accomplish what you want. the laboring people are entitled to better protection than what has yet been given them. this goes to the very root of things. mr. merchant: gentlemen, i have been listening with the greatest possible interest to the story of the growth of the american clearing house and the most marvelous thing about this matter to me is that this vast system which has not yet been correlated is the product of experience, and that there is not a single practice of this huge machine from the atlantic to the pacific as it is carried on, or operated, that is based upon a single statute. think of the clearing house associations in those twenty cities, actually examining, not only their own members, but every other bank that clears its checks through one of their members. why, gentlemen, today these bank examiners could cut off my credit at my bank without my knowing it by simply saying to the banks that my credit was too much extended, and that i ought to cut it down, and get into a safer position. mr. farmer: well, do you know, i am of the opinion that there is nothing so important in these days as to have someone going around and compelling these fellows to pull in their horns. they will never interfere with anyone as long as he keeps in sight of the shore. it's a good thing and will do more than anything i know of to keep our business ship on an even keel. mr. manufacturer: when mr. farmer talked about pulling in their horns, i thought he was perfectly at home, and talked about something that he was familiar with; but when he gets to talking about a ship and keeping close to shore, it strikes me that he's getting out to sea. however, this proposed supervision and checking scheme strikes me just as it does him, as the most desirable, wholesome and healthy process by which we can go on in the future far more steadily, and in the end far more rapidly than we do now, with our ups and downs, and i am heartily in favor of it. but, mr. banker, it occurs to me that if these thirty or forty zones you speak of are going to work so closely together, as you think, and have outlined, there will be sooner or later a tremendous business going on between them. mr. banker: of course there will; and that suggestion brings me naturally to the fourth point i raised in connection with the development of our american clearing houses which was a combination of a part of their reserves for their own convenience. you will remember that i called your attention to the fact that it was estimated by high authority that the banks belonging to the clearing house associations were now carrying upwards of two hundred million dollars of their reserves at the various clearing houses. it does not seem to me as though it was taxing the imagination very much to see how very easy it would be to apply the same principle to the thirty or forty financial centers that is now being applied to all the banks included in the clearing houses. of course i realize that the reserves will have to be upon a correspondingly increased scale, ranging from one billion to one billion and a half, as things now stand, and that they will all have to be actually combined, and perfectly mobilized, precisely as the reserves are, when a clearing house association fortifies itself, to protect all of its banks, and the commercial interests of any community in times of danger and panic. mr. laboringman: what do you mean by clearing house certificates? i have seen these things mentioned time and time again in the papers, and i must say i could not get on to them. i supposed it was just some huggery-muggery of mr. banker, over there, for the purpose of getting the best of the dear people. mr. banker: on the contrary, just the reverse is true. clearing house certificates, commonly so called, are issued only to protect the people's interest. they are issued for the common good, and are thoroughly appreciated by all those who understand their use, and the circumstances under which they are issued. mr. laboringman, you have just asked what a clearing house certificate is. we all know what a gold certificate is. it certifies that there are deposited in the treasury of the united states as many gold dollars as its face calls for, and the holder can go and get the gold dollars by presenting the certificate. in the early part of this evening, we learned that a clearing house certificate was issued by a clearing house whenever some bank deposited with it gold coin, gold certificates, silver certificates, or united states notes; that is, such a clearing house certificate is for such a deposit as is made, and entitles the holder to what it calls for, as was then stated. now, the popular name, clearing house certificate, is applied to something quite different from the exact, or technical, definition above given. when we say that a clearing house has issued clearing house certificates, in ordinary, or popular, language we mean "clearing house loan certificates," because the public never have any occasion for discussing the usual clearing house certificates. the clearing house loan certificates are issued by a clearing house upon commercial paper, bonds, stocks or any satisfactory security. in , collateral security amounting to $ , , passed through the hands of the new york clearing house committee, of which $ , , , or . per cent, was commercial paper and $ , , , or . per cent, was bonds, stocks and short-time railroad paper. mr. lawyer: mr. banker, if you will allow me, i think that mr. cannon has stated this phase of the question so well that i should like to read it right here. he says: "clearing house certificates are of two kinds, those issued upon the deposit of gold coin (and in new york city and boston on gold and silver certificates and legal tender notes) and those issued upon the deposit of collateral securities. the former are employed in ordinary times solely as a method of economizing time and labor and reducing risk in handling large sums of money. the latter are employed in times of financial disturbance or panic, and although both are intended for use solely in the settlement of balances at the clearing house, the circumstances that call them forth, the results effected by their use, and the part they play in banking economy have little or nothing in common. the certificates issued upon the deposit of gold, etc., are termed 'clearing house certificates,' and those issued upon the deposit of collateral security are very properly termed 'clearing house loan certificates,' with which latter only are we here concerned. "clearing house loan certificates may be defined as temporary loans made by the banks associated together as a clearing house association, to the members thereof, for the purpose of settling clearing house balances. such certificates are negotiable, as a rule, only among the members of the association, and are not in any sense to be regarded as currency. they are not even seen by the business community, and do not pass from bank to bank except in payment of clearing house balances. "to obtain an intelligent understanding of the real character and purpose of such certificates it will be well to treat somewhat of the circumstances under which they are issued. in the course of the present century the united states has undergone periodical derangements of business affairs, when confidence was displaced by mistrust, when the payment of debts became difficult, when property values declined, and business houses failed; when industry and trade were paralyzed, and general stagnation ensued in all lines of enterprise. in such times depositors in banks, stricken with fear and sometimes pressed by need, draw out their deposits, in many cases to such an extent as to render it difficult or even impossible for the banks to contract their loans sufficiently to meet the demands thus made upon them. under our present currency system no adequate method is provided for expanding the money volume as occasion demands, whereby the banks can continue their usual loans and discounts, and thus prevent a panic with all its evil consequences. hence it is left in a large measure to the financiers of each community to work out their own remedy, supplemented by such mutual assistance as a courteous regard for each other may dictate or as business relations may demand. "quick to see the defects in our currency system, and the desirability of in some way supplying it, the bankers of new york, nearly fifty years ago, devised the scheme of issuing clearing house loan certificates as a method of relief from temporary stringencies. subsequently, nearly all the clearing houses in the great centers adopted the same device, and by their heroic resort to the measure they have at different times relieved the business community of untold disaster, for which invaluable service they have justly received the grateful recognition of the entire country. "the great value of clearing house loan certificates lies in the fact that they take the place of money in settlements at the clearing house, and hence save the use of so much actual cash, leaving the amount to be used by the banks in making loans and discounts, and in meeting other obligations. the volume of currency, to all intents and purposes, is expanded by this means to the full amount of the certificates issued." in the history of the past the denominations have varied from cents to $ , in the different associations and in proportions varying from $ to $ of certificates to $ of collateral deposited. the total amount of its balances is not always paid in clearing house loan certificates by a bank to which such certificates have been issued. thus, for example, the debit balance of a given bank may be $ , , which in ordinary times would be paid in money or gold certificates. in a time of panic a part of this sum--say $ , --is paid in clearing house loan certificates and the remaining $ , in currency. another, with the same balance, might pay the whole in clearing house certificates, while still another would pay the full amount without the use of any certificates whatsoever. the first issue of clearing house certificates occurred in . in the autumn of that year there was a rapid shrinkage in bank deposits and a corresponding contraction in loans and discounts. the situation grew more and more serious as the end of the year approached. the presidential election was a disturbing factor of more than ordinary significance. immediately succeeding the election of abraham lincoln to the presidency the situation began to assume a critical aspect. distrust and uncertainty were universally felt. in accordance with the authority thus given, the first issue of certificates was made nov. , , and the beneficial effect was immediately felt. the banks rapidly extended their loans, deposits increased, and commercial paper, which formerly could not be sold for per cent, was now freely marketed at per cent and per cent. as a result of the pressure the association passed a resolution in the following september, authorizing another issue of loan certificates, and on sept. , , the first issue was made. in the association issued certificates for the third time. the first bore the date of november th, and the largest amount outstanding at any one time was $ , , . owing to the prolongation of the war, with the consequent unrest in business circles, the issue of certificates for the fourth time began march , , and reached its maximum, $ , , , on april th of the same year. no more loan certificates were issued until the year , when for the first time the clearing house associations of other cities, seeing their great practical utility, began to avail themselves of their use. in the year mentioned the association at new york followed the precedent established in , and the same course was taken by the clearing house associations at boston, philadelphia, baltimore, cincinnati, st. louis and new orleans. the panic which called forth such united action was one of unusual severity. it reached its climax in september, and so severe were its ravages that the new york stock exchange closed its doors on the th of the same month, for an indefinite period, but reopened them ten days thereafter. the usual resolutions were passed by the clearing house association, authorizing the issue of certificates, and on september d the first issue was made. the amount was fixed at the outset at $ , , , which, with the announcement that the government would purchase the same amount of bonds, caused an immediate subsidence of the panic, and in less than three days its most acute stages were over. during the two months referred to, certificates to the amount of $ , , were issued. new orleans alone issued certificates in , the amount being $ , . new york alone issued certificates in , the amount being $ , , . the next certificates were issued nov. , , and the issue ceased december d, amounting in the aggregate to $ , , ; the largest amount outstanding at any one time was $ , , , on december th; and the last certificates were retired february , , less than three months from the date of the first issue. boston and philadelphia followed. then came one of the memorable panics, . the issue was commenced june , , and ceased september th of the same year, the total issue having been $ , , . the largest amount outstanding at one time ($ , , ) was attained august th, which amount remained unaltered until september th. then followed philadelphia, baltimore, new orleans, cincinnati, buffalo, atlanta and birmingham. birmingham to protect its cash issued denominations all the way from twenty-five and fifty cents up to $ , $ , $ , $ , and all the larger amounts. besides the loan certificates issued in , there was a considerable amount of emergency circulation taken out by the banks in the southeast, under the title of "clearing house certificates," in cities where no clearing houses existed. in adopting the name of clearing house certificates, it was not the purpose of the banks to practice deception on the people, but to indicate what was really true and what the term would seem to imply, namely, that such certificates were temporary loans made by the banks associated together, and that the banks were pledged for their redemption. the denominations in the cities referred to were: albany, ga., $ , $ , and $ ; chester, s.c., $ , $ , and $ ; columbia, s.c., $ , $ , $ , $ , $ and $ ; danville, va., $ , $ , $ , $ , $ , $ , and $ ; newman, ga., $ , $ and $ ; and rock hill, s.c., $ , $ and $ . there is no doubt that the relief afforded in this manner was of great public assistance in the several communities where it was given, effecting results similar to those accomplished by the actual clearing house loan certificates in the great centres. business houses and corporations came to the relief of the situation and among them was the new bedford mfg. co., social mfg. co., hartford, conn., eagle and phoenix mfg. co., columbus, ga., swift mfg. co., columbus, ga., arnold print works, north adams, mass., richmond locomotive works, richmond, va., minneapolis and northern elevator co., city of tacoma, city of richmond, city of johnstown, pa., loomis and hart mfg. co., chattanooga, tenn. so much for panics up to our last. then came the panic of . of this a prominent banker and economist has said: "the truth is that responsibilities for the panic of lie at the door of our currency system. no other adequate cause can be found. we do business by the modern system of bank credits, but we have failed to supplement this machinery with the means for readily converting bank credits into cash." on oct. , , new york issued clearing house loan certificates. on oct. , , chicago also issued clearing house loan certificates. on nov. th, chicago issued clearing house checks for $ , $ , $ , $ , amounting to $ , , . these checks were secured by clearing house loan certificates. on november th, philadelphia issued clearing house certificates and the business houses issued pay checks for wages which were cleared through the clearing house. during the fall many cities issued clearing house checks in small denominations which were used for currency. canton issued pay checks for $ , $ , $ and $ , amounting to $ , , which had no security back of them. in november pay checks in denominations of $ , $ , $ , $ were issued to the fourteen banks of the clearing house of cincinnati. cleveland followed chicago in denominations of $ , $ , $ , $ . fargo, dakota, issued $ , $ , $ , $ and $ . los angeles issued october th "clearing house certificates or scrip," designed as a circulating medium for the general use of the public. mr. cannon records the action taken by the associated banks of group no. of the ohio bankers' association, which includes twelve counties, and is worthy of comment since it offers the first concrete example of the possibilities of the banks of any particular section of any state, uniting in an effort to overcome the disastrous consequences resulting at times from false rumors in panic periods. mr. merchant: _now, gentlemen, why all this frightful agony, this terrific straining, this ever-recurring tragedy and universal ruin, simply because we persist in being utterly ignorant of the simplest economic truths which our own actions on every such occasion have demonstrated--that there is absolutely no difference between a bank book credit and a bank note credit, except that the people want something that passes current in greatly increased quantities, when loaning stops or credit is checked. you have only to go to scotland, and note the fact that there has been in operation there two hundred and seventeen years the vital principle involved, the conversion of bank book credits into bank note credits, and the current redemption of all bank credits in gold coin, whenever called for._ why, gentlemen, if the man who wants to find the cure would only shake the moss from off his back, and take time to read what i am going to submit to you now, or pull the cobwebs out of his eyes and go up to montreal, or toronto, or any canadian city, and see the bank notes come into the clearing houses, with the checks and drafts, he would wonder why he had been such a complete idiot all his life, when our nearest neighbor was enjoying perfect immunity from our troubles. l. carroll root, an american economist and historical student of the first rank, after a most thorough and exhaustive investigation of banks and banking in new england before the war, concludes his comment as follows: "when the national banking system appeared upon the scene it found the channels of circulation in new england filled by a state bank currency of well recognized soundness. "in general, it was a currency based upon the 'banking principle.' it was issued against general assets--not against the deposit of bonds. it was secured in addition, in most of the states, by the further liability of officers and stockholders, or by a first lien upon all the assets of the bank, or both. it was limited--rather loosely, we would now say--to one hundred and twenty-five or one hundred per cent of the capital. but though issued under the legislation of six different states, it was in reality a single currency system--made so through the agency of a commercial enterprise, established and carried on without the aid of law. the bills of banks in any one part of new england passed at par in every other part; and for years the notes of new england banks had been enjoying an extended circulation in the west, where its reputation found for it ready acceptance. at home, too, its valuable points were appreciated and its forced transference to the national system a matter of regret. "the history of new england bank currency, thus closed, is significant for two developments which characterize it: "first, the steady growth, under the teachings of experience, of the system as to the issue and regulation of bank currency, which has since then become generally approved among the english-speaking peoples of the new world. in one direction after another special opportunities for fraud or exploitation of a confiding public by rash banking developed their legitimate disasters and prompted the invention of remedies 'to fit the crime.' conditions were so nearly alike throughout the new england states that each was prompt to suffer from any financial disease affecting any other, and equally prompt to adopt, with such improvements as its own enterprise might suggest, the remedies which had been found effectual elsewhere. as a result, the complete system, at the time of its practical suppression by the national bank act, was utilizing nearly every expedient to secure safe and conservative banking that were then or have since been incorporated in our own national banking system, or in that of canada--the two great plans which have since been matured. "a second feature was the development of redemption facilities and methods. starting with absolute chaos, assisted by no law, progressing tentatively as each necessity prompted the invention of new means to meet it, the result was a carefully buttressed and easily working system, under which, to an extent never approached in its efficiency by any plan elsewhere created by law, the bank note currency of new england was made elastic, safe and ideally convenient and inexpensive in use. "for a full generation before the war, the amount of ultimate loss to noteholders was too small to be reckoned as an appreciable percentage on the amount of currency outstanding, while the delays and minor inconvenience in the prompt cashing of the bills of broken banks were the result rather of the imperfect communication and exchange facilities of those days than of material defects in the banking system itself; indeed, so satisfactory had been the workings of what is known as the 'suffolk bank redemption plan'--that the need even of the most modest guarantee fund for instant redemption of broken bank bills was not felt until after the panic of ; and even then the total loss was petty when compared with the total circulation, and such as the most moderate plan of subsidiary guarantee would have forever obviated." mr. manufacturer: that is most astonishing, actually astounding; they went through identically the same experiences during the first fifty years of this country that we have been going through during the last fifty, and they perfected a banking system which we killed by the per cent tax on bank notes. now we are gradually, whenever necessary, even in defiance of law coming back to the same principle of credit currency, for certainly, whatever may be said of the clearing house loan certificates, generally speaking, all those $ , $ , $ , $ , $ , $ and $ clearing house checks were nothing but a pure credit currency, and we do not seem to have sense enough to see it, and adopt that principle. new england redeemed all her currency at the suffolk bank at boston, the financial centre of that commercial zone. new england did before the war, precisely in the redemption of her bank currency what she has been doing since , in redeeming new england checks at boston. we must take our hats off to new england. all we want to do is to adopt the currency system which she worked out, and her free zone system for check redemptions. canada obtained her original banking law by copying the statutes of massachusetts before the war. she has improved upon them in detail, but the great underlying principle is the same. mr. merchant: the total amount of certificates in one form or other, cash checks, etc., issued in , was stated by the comptroller of the currency to be $ , , . it is a most interesting fact to note that just prior to the panic hon. charles n. fowler, then chairman of the committee on banking and currency, of the house of representatives, introduced a bill for the purpose of allowing the banks to issue $ , , of bank notes of the pure credit currency character, and urged its adoption, as a measure of relief for the impending crisis. you will note the amount was only one million and three quarters in excess of the amount actually issued, or an estimate within three-fifths of one per cent of the amount actually used. never before in the history of the country was such license taken by the banks of the country as in in using bank credits in the form of cash checks indiscriminately; but they demonstrated this great economic truth that the nearer they approached to a pure credit currency, the nearer right they were. and they demonstrated this fact also to the satisfaction of every intelligent man on this question; that, if this country had been blessed with a credit currency redeemed through the clearing houses every day, precisely as these clearing house certificates and pay checks were, the panic of would never have marred the commercial history of this country. with all of our own experience before us, from the establishment of the banks of virginia in , is our stupidity to continue. and are we now to do something possibly more than stupid when we are naturally, even in defiance of law, as we have seen, finding our way out? if left alone, we shall soon adopt these same principles, now in practice in scotland, ireland and canada? principles which, without statutory laws, gave new england, before the war, the most perfect banking system that has ever existed anywhere in this world, all things considered. mr. farmer: then why in thunder don't we adopt it now? i suppose we are through with the clearing house now, aren't we? i hope so, for i am due at the farm. they are waiting for me. uncle sam: just hold on a minute. if i understand the facts, you are all wrong about one thing, and this includes both mr. cannon and mr. hallock. the first clearing house on this continent was not at new york at all, but it was established at boston, where i held my first tea party, and it was started in , thirty-five years before new york got to going. it only took two clerks to do the business for the first six years. by , just two years after new york started, it took seventy clerks to do the business, and the redemptions amounted to four hundred million dollars per year. transactions in new england in those days were comparatively very small, and the business was carried on as it is in france today, very largely with bank notes instead of checks. you remember, we learned one night that the bank of france owed $ , , , (one billion) in notes, and only one-tenth as much, or only $ , , subject to check; and that if a bank could issue notes, as freely as take deposits, the habits of the people would always determine whether the amount of bank notes was greater than the deposits. from to the note issue of the banks in new england ranged from $ , , to $ , , , and averaged $ , , , while the deposits ranged from $ , , to $ , , , and averaged only $ , , , or the note issue was nearly per cent greater than the deposits. the note issue then was the main feature of the banking business, precisely as it is at the bank of france, and they started a clearing house to clear the bank notes and it was called "the suffolk bank," where all the new england bank notes were cleared, precisely as new england checks and drafts are cleared today. new england was a free bank note zone before the war precisely as it is a free check zone today. all notes were par at boston, as all checks are par today, and the suffolk bank, where the bank notes were cleared, was just as much a clearing house as the one they have in boston today, for clearing the checks and drafts. there is not the slightest difference between the two, and the fact that no one of you men recognized it as a clearing house, convinces me that you do not yet fully comprehend and appreciate the fact that there is not the slightest difference between deposits subject to check, and a true credit currency, or a bank note issue. this is the great fundamental, economic truth, and unless you understand and recognize it, you might as well quit now. mr. banker: i thoroughly appreciate what you say, uncle sam, and i think we all do, but you have driven this matter home, so that i don't think we will ever forget it, or fail to apply it under such circumstances again, will we, boys? mr. laboringman: no, never. that discovery of uncle sam's was a centre shot, a real bull's eye. uncle sam: the result of this evening's talk is then, as i recall it: _first_: there is no statutory authority for any clearing house, either in england or the united states. _second_: the first clearing house started in london in . the second clearing house started in boston in under the suffolk bank. the third started in new york in . _third_: clearing country checks was established in london in . new england became a free zone for country checks in . _fourth_: clearing houses without any authority of law have adopted the following functions: (_a_) they have fixed charges for services; (_b_) they have provided reserves for their convenience; (_c_) they have forced all those banks, which are members, and all those clearing through them to submit to examinations; (_d_) they have not only issued clearing house certificates for use in settling balances, but for circulation as currency in denominations of $ , $ , $ , $ , $ , $ , $ , to meet the demands of trade. if you'll give them fifty years more, and will not interfere with them, they will in actual defiance of law reëstablish the currency system of new england before the war and now in operation in canada. it's too late to detain you a minute longer. you may go now, but remember that it took your uncle samuel to discover the important historical fact that the first clearing house established in this country was the suffolk bank at boston. good night. footnotes: [footnote : since the above was written new york city has become a free check zone for a large territory tributary to it.] fourteenth night banking in uncle sam: this is the fourteenth night, boys, since we began to meet, and discuss what in a way concerns me far more than any other question except the morals of the people. the tariff you can change, any time, any day, and, as i think should be changed schedule by schedule, so that there would not be any disturbance of business. nor could corrupt trades between the various interests be made, if that policy were pursued. when we take up our money plan we must be sure we are right, before we adopt it. i mean absolutely right; for there is no hope apparently of changing our monetary laws when once they get upon the statute books. mr. lawyer: that is certainly true, uncle sam, for we've not made a single substantial change in our national bank act since it was passed feb. , , almost fifty years ago. of course, we dotted an "i" here and crossed a "t" there, but that is all. mr. banker: i never thought of that before, but it is literally true. the only change ever made, worth mentioning, in the national bank act was that made in connection with the funding of the national debt in the act of march , . then congress adopted word for word a provision contained in congressman fowler's first general financial and banking bill of march, . this provision provided: that the new bonds should be payable in gold coin and bear interest at the rate of per cent per annum and that the banks could issue circulation up to par of the bonds, and that the tax of per cent should be reduced to one-half of per cent. not another change has been made, and this was incidental, rather than the direct purpose of the act. mr. lawyer: this indifference, or non-interference with monetary laws, is not peculiar to ourselves, however. you find the same is true in england. there has been no change in the english bank act since it was adopted in , although practically all the english banking economists during the past fifty years have agreed that it is most faulty in some respects, particularly in its currency provisions. the same is true of the bank of france which was established in by napoleon, who proved to be as great an economist as he was a general. the same was true during the first fifty years of our banking legislation. the same will always be true in every country, for nothing is ever done, affecting a financial system, until the situation becomes intolerable as it is in this country today, and as it is fast becoming in germany. of course, the reason is not far to seek; it arises out of the fact that there is a general fear that any change in the banking practices, or system of any country, will disturb the existing business conditions, or arrangements. hence nothing is ever done, as long as the people will put up with it. it takes the terrors and wastes of business misfortune to bring any change however obviously needed; therefore, we must be very patient, and most thorough in our work of preparing a measure for the reformation of our present banking practices which have been correctly described as "archaic," "barbaric" and "the worst in the world." mr. merchant: that is right, we must be both patient and thorough; and to be thorough i think we ought to know what the situation was in this country in , at the breaking out of the war; because if there is one fact that has impressed me more than any other, it is this, that all the real progress we have made during the past fifty years or since the war, has been either without any law, or in actual defiance of law. under these circumstances i think it is of the utmost importance that we find out if we can what progress, if any, this country had made up to , which was certainly a breaking up point in banking, as well as in all other lines. mr. banker: i agree with mr. merchant, and ever since we began these discussions i have taken every opportunity to go back and investigate the banking situation, before , hoping and expecting that our experience then would help us now. i have been literally amazed at what i have discovered in the way of sound banking in many of the states, and i have been profoundly impressed with the fact that then, too, as well as now, all that they had secured that was good was the outgrowth of experience. mr. manufacturer: i was so greatly impressed with the complete and, as it seemed to me, practically perfect system that had grown up under the suffolk clearing house, which started at boston in , that i have been wondering whether there were not other instances like that which would help us; for, gentlemen, whatever we may think, or want, personally, one thing is certain, and that is this, that we must take things largely as we find them, and legislate as far as possible in harmony with them, bringing the inefficient, the laggard and the "sucker" up to the approved standards of our banking experience and compelling every individual bank to do its part in providing its own insurance by carrying equal and adequate reserves and by carrying on its business in accordance with the highest standards of banking practices today. then we must bring all of the banks of the country under the reign of economic law, and into one harmonious whole for the benefit of all the people. we must protect our gold reserves against the demands of the rest of the commercial world. now, if any one of you has any information about banking conditions before the war that can possibly be helpful, i hope he will give it to us for our consideration. mr. banker: i have no hesitation whatever in saying that there were better banking institutions in the united states in than there are today, so far as the principles are concerned upon which they were operated. but, of course, we must note two things in this connection: first, banking generally was not nearly as good upon the average as it is today; nor could you expect it to be. second, banks generally were small, and only in a very few states was banking any more under governmental direction and control than the grocery business, stock buying or horse trading. the result was that sharpers all over the country were using the word "bank" or "banker" to swindle the unwary people and defraud the public generally. third, in some states the legislators were so ignorant of economic law that the laws passed by them only facilitated the schemes of the swindlers in their diabolical work. it was the reaction against the disastrous and disgusting experiences in one state after another because of the rotten conditions prevailing that some of the states finally passed laws for the establishment of banking systems, which for soundness and efficiency had never been surpassed, nor even equalled for the territory covered and services rendered. let me cite you a few instances; i will take first louisiana. the state of louisiana passed a bank act which, though erring in one or two particulars, was nevertheless almost ideal; and under it, the state in stood fourth in banking capital, and held more specie than any other state except one. no limit was placed upon the amount of credit notes the banks could issue, nor the deposits they could receive and no security was pledged for their redemption. the virtue and real substance of the act was in requiring a coin reserve of - / per cent of all liabilities, deposits as well as notes, and confining the loans outside of capital to paper running for ninety days, or less. not a single bank organized under this law suspended specie payments during the panic of , and all were conforming to the requirements of redemption when general butler marched down the streets of new orleans. the capital of the banks in amounted to $ , , , the $ , , , the circulation $ , , and the deposits $ , , . on feb. , , the legislature of ohio passed a bank act under which the ohio state bank was organized, with the right to establish branches and to issue credit bank notes. each bank was required to deposit per cent of the amount of its circulation to create a safety fund to redeem the notes of any branch that might fail. in there were seventeen branches; in twenty-five branches; in thirty-eight branches and in thirty-nine branches. the note issues were of a purely credit character, and were proportioned to the capital as follows: for the first $ , of capital, there might be $ , of notes; for the second $ , of capital, $ , of notes; for the third $ , of capital, $ , of notes; for the fourth $ , of capital, $ , of notes, and for each additional $ , of capital, $ , of notes. the evident purpose of the act was to give the people a uniform and sound currency, and the plan succeeded admirably. the state bank of ohio was regarded as one of the soundest in the country. the essence of the act was in the requirement that the notes issued by the respective branches should be redeemed in gold or silver coin, the lawful currency of the united states, and in the insurance given of this result by a reserve equal to per cent, of which at least one-half should be gold or silver and the balance equivalent to gold or silver coin. john jay knox says: "the banks authorized under the laws of and were uniformly successful and furnished a currency for the people, not one dollar of which was ever lost by the holder thereof." the capital in was $ , , , specie $ , , , circulation $ , , and deposits $ , , . mr. merchant: i have often heard my father speak of the state bank of indiana. can you give us the history of that system? mr. banker: indiana presents the anomaly of having organized the most admirable system of banking of any state in the union, and also of having had a banking system or banking practices at one time so vicious that under it the banks bankrupted nearly the whole people. the state bank of indiana and its successor, the bank of the state of indiana, stood all the tests of financial panic from until the banks were all absorbed by the national banking system, without closing their doors for a minute, or losing a dollar to bill holders, depositors or stockholders. it is a proud distinction for indiana that its state bank was long the model bank of the country. so well were its affairs managed that in a period of twenty-two years of actual business, the profit to the state on its $ , of stock amounted to three and a half millions of dollars. the bank of indiana, which became a model, was chartered in , with a capital of $ , , , and the state was divided into ten districts, afterwards increased to seventeen, there being a branch of the bank in each. under its charter the bank could receive deposits, buy and sell gold, silver, bullion and foreign coins, discount commercial paper, and issue bills payable to bearer--a true credit note. a forfeiture of - / per cent was imposed upon all notes not redeemed in coin. the institution was hardly under way when the panic of broke upon the country. the new york banks suspending, compelled the indiana bank to follow in order that it could protect itself. john j. knox says: "no bank in the country stood higher than did the state bank of indiana during the panic. in all the western and southern states its notes commanded a premium, and in the east were taken at a small discount.... its loans were made in small amounts and scattered all over the entire state, thus affording the greatest possible measure of relief." great as was the success of this splendid institution, the jacksonian democrats, coming into power, at once began an assault upon it, precisely as their leader had laid the axe to the roots of the united states bank. the indiana democrats failed to destroy the bank of indiana, but succeeded in passing a general banking law permitting banks to be established upon filing with the auditor of the state the bonds, or other evidences of debt, of the federal government, or of any of the states, as security for the notes to be issued. the state of indiana itself went into the business of issuing notes, and even plank-road companies issued them. the indiana state notes could be had for sixty cents on the dollar and were called "red dog." the plank-road notes and others of similar value were called "blue pup." the bank of the state of indiana organized in with twenty branches to take the place of the indiana state bank, maintained the same high standard as its predecessor, going through the panic of without suspension, although every private bank in the state, except two at indianapolis and one at fort wayne, went down. like its predecessor, the bank of the state of indiana fell on evil times soon after its organization. the panic of came two years after the organization of the state bank; and in , before the bank of the state had been in operation quite two years, a great financial panic swept over the country, precipitated by the failure of the ohio life insurance & trust co. every bank in the east, except the chemical bank of new york, suspended specie payment, and all in the west, except the bank of the state of indiana and the bank of kentucky. the indiana bank weathered the storm, and redeemed all its obligations in gold, as fast as they were presented. many of the branches of the bank of kentucky were at remote points from the railroads, and could not be easily reached by the brokers and other bill holders, but those of the bank of the state of indiana were within easy reach and holders rushed for the specie. in the capital was $ , , , specie $ , , , circulation $ , , , deposits $ , , . mr. manufacturer: i can tell you all about the kentucky banks myself--and i want to tell you there were no better then and there are no better anywhere today. the legislature of kentucky in the session of - granted a charter to the bank of kentucky with $ , , of capital and the privilege of six branches. charters were also granted to the northern bank of kentucky, with a capital of $ , , , and the bank of louisville, with a capital of $ , , , each institution having the power or right to issue credit notes to double the amount of their capital. while the northern bank of kentucky liquidated in and the bank of louisville was merged into the southern bank in , the bank of kentucky had in the latter year a capital of $ , , and a surplus of $ , , , giving indubitable proof that no one had ever suffered because of its power of note issue. and there the bank of kentucky stands today, occupying the building it purchased from the united states bank, a monument to the sound principles upon which it was founded. it may be most fittingly observed before passing, that when in may, , the blighting wave of suspension swept from new york across the country, these three banks of kentucky held $ , , in specie against $ , , of notes in circulation--an object lesson for those who may possibly fear that the banks cannot obtain sufficient gold today to protect the notes they are permitted to issue. the panic of , which was severe in many parts of the country, and which caused great alarm in kentucky, produced no ill effects on the banks, all of them continuing to pay in specie, even after the new york banks had suspended. in the capital of these banks was $ , , and the circulation was $ , , . mr. banker: the record made by the kentucky banks was excellent, but for organization the state bank of iowa, like that of the state of indiana, has had no superior anywhere in the world, and humanly speaking, the administration and working of both was practically perfect. iowa in the morning of her statehood was opposed to banking as a business; her first constitution provided that "the general assembly shall provide for the organization of all other corporations except with banking privileges, the creation of which is prohibited." the constitution also provided, that "the general assembly shall prohibit any person or persons, association, company, or corporation from exercising the privilege of banking or creating paper to circulate as money," the penalty for each offense being one year in the county jail and a fine. during the intervening years down to , when the new constitution was framed, iowa had suffered so severely from the _bond-secured circulation_ of illinois in particular, known as "wild cat," "red dog" and "yellow dog" money that a provision was incorporated permitting the legislature to create corporations with banking power, subject, however, to a vote of the people, and also to establish a state bank with branches founded on actual specie basis. i want to call the attention of you fellows to the fact that they had a referendum, a state referendum, in iowa in those days. it was provided that the branches should be mutually responsible for each other's notes; that the stockholders should be liable for an additional amount equal to their stock; that the bank could issue _pure credit notes for double the amount of the paid-up capital_; that in case of insolvency the bill holders should have a prior lien over other creditors and that specie redemption must be maintained. to secure this solvency beyond peradventure, each branch was required to deposit with the state bank either coin, united states stocks or interest-bearing state stocks at their market value in new york, but in no case above par. this deposit was equal to - / per cent of the note issue, and was known as "the safety fund" to redeem the notes of the branches in case any of them failed to do so. in addition each branch must have on hand an amount of coin, equal to per cent of its notes outstanding and deposits held. here is a replica of the banking system of the bank of the state of indiana, and it contains all of the prerequisites of a well-nigh perfect banking system; and the result proved the soundness of the plan. this bank was prohibited from paying interest upon deposits. the parent bank was not a bank of issue or of deposit. it transacted no business, except with and for the branches. certainly there is no bank in the united states today with so good a charter as that of the state bank of iowa. by an act approved in february, , county treasurers and the state treasurer were authorized to accept the notes of these branches in payment of taxes, and by an act approved march , , payment of taxes and the interest and principal on the school fund might be paid in united states treasury notes, national bank notes, or _notes of the state bank of iowa_, thus showing the unquestionable value of the state bank circulating notes. when the national banking system was established in , and the per cent tax on circulation was imposed, the life was choked out of one of the most perfect banking systems that had ever existed; and every note of the $ , , outstanding on jan. , , was redeemed without the loss of a single cent to the holders. the capital was $ , , ; specie, $ , ; circulation, $ , , ; deposits, $ , , . mr. lawyer: in i heard an attorney from richmond speak upon the state banks of virginia so boastfully, that out of pure suspicion i investigated them, not believing anything he said at the time. about there sprung into life in virginia a system of state banks based on the old scotch system under which a half dozen banks of issue were authorized, with numerous branch banks in every part of the state. the charter provisions of these banks were the basis of the few laws that have been enacted in relation to banking since that day. the first of the banks to be established under state control was the bank of virginia, incorporated by the general assembly, jan. , , with a capital stock of $ , , in shares of $ apportioned; three thousand seven hundred and fifty shares to richmond, three thousand to norfolk, two thousand two hundred and fifty to petersburg, one thousand to fredericksburg, five hundred and twenty-five to winchester, four hundred and fifty to staunton and five hundred and twenty-five to lynchburg. the charter provided that the banks should hold real estate and other effects to the value of $ , , , including the capital stock. the cashier was required to give bond for $ , ; the total amount of notes to be put into circulation by the banks, together with the debts, were restricted to $ , , , over and above the money actually deposited in the bank; that is, the issue could be three for one on its cash capital, and this was the established rate for this class of banks. the bank was well managed and was highly successful. its notes, all payable in gold, had a wide circulation and were at only one-fourth of per cent discount in new york. five other banks were established with the power of establishing branches. these mother banks, six in number, were great institutions, and held the complete confidence of the people. the law did not require that they should keep any reserves and they kept none, except the specie held in their vaults to redeem their notes. the law provided that the total amount of paper circulation of these banks should _never exceed five times the amount of the coin in possession and actually the property of the bank_. if the coin of the bank was reduced below one-fifth of its circulation, it was required to stop all discounts until the ratio was restored. as a matter of fact some of the banks issued as high as to . the banks at such times kept their coin reserve up by keeping the discounts down. the banks of virginia from to had a prosperous period, keeping on an average $ , , of notes in circulation without loss. it is reported that occasionally drafts drawn on new york were placed in the safe to make up a balance, and called "coin." be that as it may, there is no case on record where a bank of circulation and deposit failed, and it is claimed by those acquainted with the banking of that day that no one ever lost a dollar by a virginia bank note previous to the war of , and they were at a discount of only one-quarter of one per cent in new york. on jan. , , the capital was $ , , , specie was $ , , , circulation was $ , , , deposits $ , , . the bank of the state of missouri was started in , with authority to issue notes at the ratio of three to one for the specie in its vaults, and with a branch at each of five considerable towns in different sections of the state; lexington, fayette, palmyra, cape girardeau and springfield. its capital was $ , , . in , when the population of missouri was eight hundred and forty thousand and that of st. louis one hundred and twenty-five thousand, and the indications of substantial prosperity were to be seen in every department of business, the bank circulation was only $ , , , although its stock of $ , , specie warranted notes to the amount of $ , , , and a considerable part of its circulation was doing duty in california, oregon and new mexico, whither it had been carried by emigrants and traders. it is no wonder that under these circumstances missouri offered an inviting field for the "wild cat" money issued so profusely by banks in other western states and that its people became victims of an inconvertible and unreliably currency, which the bank note reporter quoted at a discount all the way from to per cent. so valuable were the notes of the banks of the state of missouri in california in the ' 's that a gang of counterfeiters took advantage of their popularity, and struck off imitations of them in large quantities. it was a remedy for this evil, which had become unendurable, and in response to the persistent demands of the important commercial interests of the chief city of the state that the legislature, in , chartered seven banks of issue, with branches conveniently located for the accommodation of business. these banks were promptly organized in the spring of , immediately after the act authorizing them was passed; for the state was prosperous, and offered a fair field for legitimate investment. the monetary crisis which was impending but not discerned fell upon the country shortly after they had opened for business; but they stood the strain well; two of them, the mechanics and the exchange of st. louis, refused to suspend specie payment, and continued to redeem in coin through the panic; and when the civil war broke upon the country four years later, these two banks again refused to join in the general suspension, and maintained coin payment under all conditions that followed. the system of banks organized under the act of rendered the important service of partially displacing the uncertain and variable currency issued by the banks of other states and territories which had found so easy a field in missouri. the legislature had also authorized the old banks in the state to establish additional branches and to issue notes for $ . , and in a short time every considerable town in the state had a bank, and the notes of missouri banks, issued at the rate of $ . to every dollar of specie on hand, afforded a local currency better than that brought in from the outside, which had for years almost monopolized the field. the "wild cat" money nevertheless made a stubborn contest, and the last of it did not disappear until the national bank act went into operation. in the wild, reckless period, when almost anything in the shape and appearance of an engraved bill, with the name of a bank on it, was good enough to buy public land with, and good enough, therefore, for all other purposes--and in the latter period when other western states _authorized banks to issue notes based on various kinds of bonds_ with the place of redemption out of the way and difficult of access--sometimes in a forest or in a swamp--the legislature of missouri refused to charter institutions to multiply such currency within the limits of the state. the notes of the bank of the state of missouri were preferred to specie in new mexico, utah and on the pacific coast, and the same high character marked the issues of the system of banks authorized by the general law of . the capital in was $ , , ; specie, $ , , ; circulation, $ , , ; deposits, $ , , . everything i have just said i have taken from john jay knox's "history of banking." during all this varied experience in the west and south, there was a most conspicuous illustration of a complete banking system demonstrating and proving every economic principle that is involved in constructing a financial and banking system for the united states. it was the suffolk system of new england. here were six states, the laws varying in each. portions of these states were far more remote from boston in those days than any part of the united states is from any other part today, so far as business relations and convenience are concerned. there were no railroads, nor telegraph lines, nor long distance telephones. indeed, almost every essential to anything like a sound banking system as conceived and observed from the standpoint of today was wanting. there was no law requiring a uniform reserve. there was no law requiring coin redemption. there was no law requiring bona fide capital. there was no check upon the amount of notes that might be issued if a bank was dishonestly inclined. there were, in , three hundred and six banks, deriving their authority from six states, and one hundred and fifty-nine of them did not possess an average capital of $ , ; nor was the average capital outside of boston more than $ , , and including that city, it was not more than $ , . by there were five hundred and four banks. there are only seven hundred and forty banks today in the same states. can any fair-minded, impartial man deny that the conditions today are vastly in favor of better results than they were then? one law for all; a bona fide capital; a required reserve; a system of redemption established by law; notes furnished by the united states government; a common national supervision. these all unite to compel the admission that any system that could prove its adequacy under such adverse conditions as existed from to would certainly approximate perfection today. nowhere in the whole range of banking experience have so many things, which the student of this subject wants to know, been demonstrated beyond cavil. to all intents and purposes the possible issues were without limit. the actual circulation in was only per cent of that permitted. the circulation of was only per cent of that permitted; and the circulation in was only per cent of that permitted. during every year from to , except one, the note issues were greater (and usually nearly double) than the deposits, illustrating with what certainty and perfect nicety such a system adapted itself to the ever varying needs of the people who were fortunate enough to have it, and how it invariably, with peculiar fitness, met the needs of the rural districts where currency and not checks was especially required. the states of new hampshire and vermont had bank capital amounting to $ , , in , and notes outstanding amounting to $ , , , while boston with $ , , of capital had only $ , , of notes outstanding. _a marvelous exhibition of this interplay and interchange of bank book credits and bank note credits occurred in the six new england states as a result of the panic of . the authorized note issue of the five hundred and ten banks constituting the suffolk system with capital ranging all the way from $ , to $ , each was $ , , . in , the year before the panic, the note issue amounted to $ , , , and the deposits amounted to $ , , . in , as the result of the panic, the note issue rose to $ , , and the deposits dropped to $ , , ; in , one year after the panic, the note issue had fallen to $ , , , and the deposits had risen to $ , , , or there had been a conversion of $ , , of bank note debts into deposit debts. the exigency for cash had disappeared and the depression had come._ do not fail to observe three important facts in this connection: _first_: that although the banks were authorized to issue $ , , , they never exceeded $ , , , which was the highest point of circulation, and that was reached as the result of the panic of , and that they averaged $ , , from to . _second_: that there was a perfect adaptation of the deposits and note issues to the peculiar and ever changing demands of the people during the panic, and during the depression in trade that followed the panic. _third_: that the number of banks in new england in , the year before the panic, was four hundred and ninety-five, and in the year , the year after the panic, there were four hundred and ninety-nine banks, or four more banks the year after the panic than there were the year preceding the panic, an unquestionable tribute to the principle of current coin redemption. now, mark this, that the very heart and the very soul of the suffolk system was in the fact that the notes were redeemed in boston in coin. so good were these notes considered to be throughout the entire west, that at buffalo, chicago, milwaukee and all commercial points in the then far west, they were always taken at a premium of from to per cent. it was not the size of the bank of issue that made them good and desirable, but the fact that they were redeemed in coin in boston. when the soundness of this system is tested by a comparison with that of the national banks, the result more than justifies the assertion that the suffolk bank system of new england was incomparably better than the national bank system; for, when the conditions during the twenty years from to are compared with those of the past thirty years, all must admit that argument is futile and the conclusion is inevitable. mark this, that while a tax of one-eighth of per cent of all the notes in circulation would have paid all the notes of the banks that failed under the suffolk system from to , it would have taken a tax of one-fifth of per cent on all the notes outstanding issued by the national banks to pay the notes of the failed national banks. in confirmation of what i have said in praise of the suffolk system let the bank commissioners of connecticut, vermont, maine, massachusetts and the _new york courier and enquirer_ testify. "the currency of this state is of the first order and can not be improved, being equal to gold and silver. this is strong language, we admit, yet perfectly true, for every bill holder can on demand convert his bills into coin." (connecticut bank commissioners' report, .) "the bills of any country bank, redeemed at par in any commercial city, will always be current throughout the extent of region whose business channels flow to that city. hence, new england money is worth more in the cities of new york and philadelphia than the bills of their own country banks. vermont bills have uniformly borne a premium in the eastern cities without loss, while bills of their own states are at a heavy discount." (vermont bank commission's report, .) "the 'suffolk system,' though not recognized in our banking law, has proved to be the great safeguard to the public. whatever objections may exist to this 'system' in theory, its practical operation is to keep the circulation of our banks within the bounds of safety. no sound bank can have any well-founded reason for refusing to redeem its bills in boston, and a bank that is not sound can not long do business under that system and ceases to be in good credit when it is 'thrown out at the suffolk.'" (maine commissioners' report, dec. , .) "if there was no check upon circulation there might be some danger, but the frequent redemptions at the suffolk bank and the rapid communications between different parts of the country will prevent any greater circulation than the natural business wants of the country will sustain.... indeed, this system of par redemption seems to be a most perfect regulator upon all the new england banks. it would seem somewhat surprising that something has not been adopted in other parts of the country that should produce the same beneficial results." (connecticut bank commissioners' report, .) "the charters of the banks have been renewed. if the laws by which they are constituted the agents of the people to provide a currency, and by which their faithfulness in the discharge of such agency is secured, remain unchanged, there is every reason to believe that the currency of massachusetts will be for the next twenty years what it has been for the twenty years past--as perfect as any in existence, as perfect as in the nature of things it can be. no reasonable man, no practical man, no man who is not bound hand and foot in the fetters of mere theory, can desire for the people a currency better adapted to meet all the circumstances of a business community than that which has been furnished by the banks of massachusetts for the last quarter of a century." (james b. congdon, cashier merchants' bank, new bedford, in memorial to governor of massachusetts, .) "we said that the massachusetts currency was apparently unsecured. in reality their bank paper is well secured. the experience of the last fifteen years has demonstrated that the losses from bank issues in the state of new york are four or five times greater than in massachusetts. the system of the latter is better than our own." (_new york courier and enquirer_, .) "it is by no means wonderful that a system which has stood the test of time and struck its roots so deep as to have become incorporated with and formed a part of our banking system should be abandoned with hesitation for one which is new and untried." (maine bank commissioners' report, .) "the state parts with these objects of her care and solicitude with many regrets, but with a just pride in their career, inspired by the belief that their capital has been highly instrumental in promoting the prosperity of the state, and that they have furnished as good a paper currency, based on individual credit, as any part of the country has ever enjoyed." (massachusetts banking report, .) mr. lawyer: _if, as we have gradually come to understand and firmly believe, the true service of a bank is to furnish credit to its customers, as they want it, and in such form as they need it, then these institutions which you have been describing were certainly far better suited to the purposes of their day than any banks we now have in existence._ two things seem to have been present in all of these various institutions: ample coin reserves, which ranged from to per cent, to meet any demand for credit redemption and perfect freedom in changing bank credits from the form of book credit to the form of note credit, and the form of note credit to the form of book credit, according to the desires and needs of the customers of those banks. as a result of interchangeability of book and note credits, a bank could always protect its coin reserve, for if the customer was just as well satisfied to take the bank's notes, instead of coin, or its reserves, it must be apparent to all of you that the cost to the bank would only be from one-sixth to one-fourth as great, and that the bank would have several times as much credit to loan, and at the same time be in a much stronger position. let me illustrate what i mean by calling your attention to what happens over in new york every fall. let us suppose that the new york banks owe the country banks, say $ , , and that the country banks call for it from july to january for the purpose of moving the crops. the banks of new york with the right kind of a currency system would not need to disturb the situation in new york at all because they could send their correspondents their credit notes, or cashier's checks, for $ , , . you see the new york banks would simply convert a deposit credit subject to check or draft into a note credit. the amount of the debt would remain the same, the amount of the reserves would remain exactly the same; but, instead of the country banks continuing to keep the deposits subject to check at the banks, they would take the notes which would serve their purpose, because they could in turn send the notes into the corn and cotton fields, to help harvest and gather the crop; and, just as soon as the notes had served their purpose, they would be returned to the country banks and by them in turn sent on to the new york banks, and would have been reconverted into book credits. not a single dollar of actual money would have been used in the whole transaction, and yet the country would have been served just as well, as though every bank note sent out had been a gold certificate. on the other hand, if the new york banks should continue to be as they are today compelled to ship the $ , , , they would have to call loans and shift conditions until they could scrape up $ , , with as little injury as possible to their customers and send it west; nearly every dollar so sent out is reserve money of some form, gold certificates, silver certificates and united states notes. now mark this, the credit notes cost the bank only the interest on the reserves behind the notes; but when the banks ship out their reserves, the cost must necessarily be four or five times as much, to say nothing of the injury they have done to the business conditions in new york. and so this same principle runs on throughout all of our banking business today from one end of the country to the other. mr. merchant: well, mr. lawyer, your entire argument goes to demonstrate with mathematical certainty that the country banks would never have any occasion whatever to send to new york for currency, as they would create their own currency by converting bank book credits into bank note credits to meet all ordinary demands, a fact that not only accentuates, but proves more conclusively what you are saying, and reinforces your argument. should we be fortunate enough to secure a right kind of banking system in this respect, we could almost double our bank reserves, that is, make them twice as large, and yet make two or three times as much profit on that part of the banking business, growing out of the substitution of credit notes for reserves, and at the same time be vastly better able to protect the balance of our business from disturbance due to the fact that we are compelled to use reserve money for currency purposes. this now seems to me a very simple matter when you once have grasped it. mr. banker: in this connection i want to call your attention to this fact, and i want to note that it is a very important fact which was so obvious in connection with every single statement of capital, specie, circulation and deposit, that has been given, when referring to the banking systems before the war, and that's this: that the note issues did not begin to average one-half the authorized amounts, proving conclusively that the currency of these banks invariably adapted itself to the exact needs of the people. notes outstanding possible issue was per specie held deposits cent of possible issue louisiana $ , , no limit except $ , , $ , , % coin reserve ohio $ , , $ , , about $ , , $ , , par indiana $ , , no limit but a $ , , $ , , - / % penalty for failure to redeem in coin iowa $ , , $ , , % $ , $ , , virginia $ , , $ , , % $ , , $ , , missouri $ , , $ , , % $ , , $ , , suffolk system $ , , $ , , % $ , , $ , , _can anyone doubt, after noting these figures, that the note issues of the various banking systems kept as perfect pace with the requirements of trade, as checks and drafts do? certainly it is perfectly evident that the bank notes came and went precisely as all bank credit should._ mr. lawyer: while all these splendid banking systems were snuffed out by the per cent tax upon circulation, the sound principles upon which they were all founded are still most successfully exemplified by the canadian banking system which you will remember took its charter from the statutes of massachusetts. there are today banks in canada, with , branches. the general principle of the canadian banking system is identical with that of the virginia, kentucky, louisiana, indiana, ohio, iowa and missouri banks. it is true there are some differences in matters of detail. the amount of notes that can be issued regularly is that of the capital of the bank. the notes are a first lien upon the assets of the bank, including a double liability of the stockholders; the bank notes are also secured by a guarantee fund of per cent, which is contributed by the banks issuing the notes; there is a provision that the notes shall bear interest at the rate of per cent until notification of redemption. no holder of a canadian bank note has ever lost a cent since these provisions have been in force. you remember that we have a chart which shows very graphically with what marvelous accuracy, year in and year out, month in and month out, day in and day out, the canadian bank note currency meets the actual requirements of trade; no more, no less, but always just adequate. the precision with which the currency rises and falls with the demands of trade is the result of the daily redemption of all bank notes, concurrently with the checks and drafts, through the clearing houses, or over the counters of the banks, or at the points fixed by law for note redemption for the purpose of keeping the notes at par, all over canada. we want to keep this diagram here on file, because it speaks louder than words possibly can. mr. banker: one striking characteristic of the bank of the state of indiana and the state bank of iowa was that the parent, or home institution, did no business at all, except for the branches, and examined and supervised them. hugh mcculloch, the president of the bank of the state of indiana, said, "that the soundness of the bank was due to the frequent examinations." another feature to be found in both these systems, and so far as i know peculiar to them, was this: that all the branches were responsible for the failure of any one of them; but the branches did not share in each other's profits. the result of this law was to make every branch the watch dog of every other branch; there was only one instance in which the home, or parent institution, took charge of a branch in either state, and that was in . the executive committee of the state bank of iowa having heard that one of the branches had made some unsafe investments, "promptly took charge of its affairs, and authorized a reorganization, calling upon other branches for such aid as was required, which was given so that the branch, with no delay, and without loss of a cent to its customers, or note holders, or suspension even of its legal business, was again put on a firm and solvent basis." undoubtedly this plan of supervision by the parent, or home institution, which did no business, was a wise precaution. mark this, it is precisely the same principle put into operation that is now being followed by twenty of our clearing houses, and was then, and as i believe it will prove now, a practical guarantee of all the liabilities of all the banks that are subject to such examinations and supervision. the most significant fact, and the one to be noted particularly, is that the parent, or home institution, like the clearing house, only acted for the branches, precisely as the clearing house acts for its members, and examined and supervised them. economically this principle is absolutely sound. historically, it is of essential importance because here history is repeating itself, after a lapse of fifty years, and in both instances this protective principle and practice has grown out of precisely the same conditions--the unsound and dangerous methods of certain members of the banking fraternity itself. mr. merchant: gentlemen, the astounding thing to me is that when this country had once learned and practiced so sound, complete and perfect a banking system, it should have lost it. mr. manufacturer: i don't think that that is at all strange when you remember that it only existed in a few states and consider just how we lost it. you will remember that the virginia banks which were founded upon the old scotch system started in , and worked perfectly until the war broke out. the other banks, or systems of banks, were established from time to time, some of them as late as , and as mr. banker remarked several nights ago, modeled very largely after the two united states banks, the charter of the last of which expired only in . from a close study one can discover both of these two systems combined in some instances. in this way we were gradually working out a national system precisely as we are today under new and vastly more varied conditions, but the war coming on, destroyed all that had been done. you will remember that secretary chase, desiring to sell government bonds for the purpose of carrying on the war, secured legislation which put a tax of per cent upon all bank note issues and compelled banks desiring to issue currency to buy government bonds as a basis of their circulation. as a result, he produced a currency of uniform appearance that was of equal value everywhere and a great blessing to the country. this condition was a very great and most agreeable change in the currency experience of the country, because there had been practically no legislation except in a few states that in any way controlled banking practices, or currency issues. the result was that we had "blue pup money," "red dog money," "wild cat money," "yellow dog money" and every other kind of "dog gone money," that could be gotten up with paint and paper to fool and defraud the people. on top of this situation there arose a terrific political prejudice engendered through political controversy toward a central bank. the conditions brought about by the legislation, secured by chase, have kept up the present régime until it has become so utterly intolerable, because utterly unsound economically, and so disturbing to the general welfare as to compel immediate consideration and reconstruction. it is really the first time since the civil war that the finances and banking of the country have become a serious question outside of the acute phases presented in the government issues, or the greenback craze of and the silver hallucination of . today, the question is not a specific one, or a mere detail, but one of fundamental principles and of a most comprehensive character. it involves the whole subject of governmental finance and banking and it is well that it should; for our business is so vast now, almost per cent of the banking power of the world being within our borders. our annual productions are approximately thirty-five billions. our annual clearings will pass the fabulous mark of $ , , , (one hundred and seventy billions). so that every recurring financial disaster will be worse, if possible, than the one going before it. mr. banker: right you are, mr. manufacturer, and this is true because the principles involved are as fundamental and immutable as the law of gravitation; and if we persist in our folly, when dealing with these enormous volumes of credit, the destruction that is sure to follow will be on a scale with that of worlds in collision. mr. merchant: that seems to describe the situation somewhat graphically and impressively, but i must say truthfully. we are undoubtedly "up against it" as the boys say. only the other day i was talking with a president of one of the largest national banks in the country, and he told me that unless something was done very soon, he would get out of the business, because he could not stand the strain; but the bankers' troubles are no worse than those of every business man, and it seems to me as though we were on a perpetual strain, and living in a sort of terror of what may happen at almost any time. the business atmosphere is unnatural. certainly this cannot be necessary. mr. laboringman: well, i don't see anything very strange or unnatural about this thing, if it is as you have already stated that there have been no changes in your banking laws worth speaking of, since . look at your railroad development. fifty years ago the locomotive that weighed thirty-five tons was a whopper, but now they turn them out weighing one hundred and thirty-five tons. we used to have thirty-five and fifty-pound rails, and our ties forty inches apart. now we have a hundred-pound rail, yes, one-hundred-and-fifteen-pound rail, with the ties twenty-five inches apart. the other day, i counted one hundred cars with one hundred thousand pounds capacity each, every one loaded full in a single train. now, what would you think of running a hundred-ton engine, and that kind of a train of cars over a railroad built fifty years ago? ties only eight inches thick and forty inches apart, on a corresponding road-bed. why, men, i can tell you we don't want a single-track railroad of that character now, with a switch out every ten miles to let trains pass; but we want a four-track road, with twelve to fifteen-inch ties, only twenty-five inches apart, and equipped with signal and block systems of the latest type, and most perfect automatic operation. uncle sam: gentlemen, when it comes to getting down to brass tacks, and hitting the thing plump square between the eyes, mr. laboringman gets away with all of you. now, can you beat that as an illustration of our financial and banking needs? if you will construct a banking system up-to-date, and just add to these domestic requirements the necessary provisions growing out of the fact that i am now a world power, i should have said, i am the world power, and prepare an international financial and banking system, we shall meet the demands of this new century; but otherwise i shall find myself wholly incapable of protecting the very foundation of commercial credit, my gold reserves, when the test comes. mr. banker: mr. laboringman and uncle sam have laid down the right kind of a program in telling terms, if not explicit. it is clearly up to us to work out a plan as comprehensive and perfectly adapted to our needs today, as were the banking systems of louisiana, ohio, indiana, kentucky, virginia, iowa, missouri and the suffolk banking system of new england was to the needs of those various sections of the united states at that time; for they were practically perfect from the standpoint of economic principles and the needs of those times. the principles upon which they were founded are eternal and are just as applicable today as they were then. the principles have not changed, although the conditions have, and that most amazingly. fifteenth night outline of bill uncle sam: for nearly four months, for this is our fifteenth night, we have been studying the principles of economics and the practices of banking, and we have gone over with the greatest care the experiences of american banking institutions from the beginning. no body of men could have been more faithful in attendance, nor more sincere in their desire to know the facts, and understand the fundamental principles as they are; nor more determined to get to the bottom of things; nor more ready to yield, and renounce even hoary-headed fallacies when it was demonstrated that you were wrong, than you have been. all of you seem to have possessed that high moral courage essential to the progress of the world, ready acknowledgment of error, even though the confession bore heavily upon the stability of your opinions. you seem to have utterly forgotten, if you ever possessed it, that false sense of courage that ever impels us to deny that we are wrong, however apparent our error may be. you have pursued the only course that leads on to progress. your inquiries have always been: what are the facts? what are the principles involved? what does experience show? what is it wise to do under the circumstances? what principles, practices and methods will give us the very best financial and banking system in the world? mr. merchant: uncle sam, if our work under your tutelage has inspired you with the belief that our aims and purposes have been unselfish and patriotic, as you have just intimated, the measure of our achievement will be limited only by our capacity for the great task in hand. certainly without unselfish devotion, and a sincere desire to do patriotic service, however great our abilities, our work should, and would in the long run, be a failure; even though it might upon the surface seem to be suited to the ends sought, because ulterior motives and selfish purposes, like murder would soon out. mr. banker: it's a source of satisfaction to me to have had a part in this work so far and i shall be content if the public will only accord us their confidence in our good faith, and afterwards show their interest in the public welfare by the same persistent study of this question that we have given it. two things are perfectly clear to my mind. first, this question will never be settled upon right principles until the public takes it up in earnest, and discusses it to a finish, as they did the gold standard in . congress will never legislate upon this question broadly as they should, until they are convinced that the people are practically agreed and are behind some well established principles and at least approve the outline of some well considered plan for a financial and banking system for this country. mr. manufacturer: i believe that is literally true, with the exception that if all of us business men and farmers sit idly down until we have another panic, then the men who have been behind nelson w. aldrich will take advantage of the opportunity afforded by the conflagration of credit and like the looters, human ghouls, jackals and hyenas that robbed the dead and dying, after the san francisco fire, will rush in, and, before the public are aware of it, will put something over, probably the same old scheme, concocted in behalf of the special interests of this country, fooling the people by changing its name, and having it introduced by some innocent member of congress from an out of the way place, and under unsuspected auspices. such a possibility makes it our duty to present in concrete form the result of our study. mr. banker: that is a true prophecy; if the people of this country remain indifferent, and allow another panic to come, without having made a study of this question, these conspirators will undoubtedly carry out their plot yet. therefore, i agree with mr. manufacturer that it is our duty to start such a discussion, if possible, as will save the people from such a dire calamity. mr. farmer: i suppose that i shall be largely responsible for the measure of interest the farmers take in this subject. i want to tell you now that this band of political pirates, and the secret forces of the special interests, are not going to board this ship, without ample warning, so far as i am personally concerned. mr. banker: before we get down to business and actually attempt to draw a bill, i think we should review the facts and situation from beginning to end, so that we may have a sort of sky line to guide us in that work. the banking situation before , the growth of the business of the country since and the development by the slow processes of evolution of that great mass of practices without the aid of law, and to some extent in absolute defiance of law, constitute the condition to which we must apply those great fundamental principles of economic law, if we would be wise, and hope to succeed in so great an undertaking by convincing the people, not only of our sincerity, but of our wisdom as well. it is estimated that there was in the united states in approximately $ , , of gold, and that our banking resources were approximately three billion dollars ($ , , , ); in other words, that the gold represented about per cent of our banking resources. today we have banking resources in excess of twenty-five billion dollars ($ , , , ) and our gold is only one billion eight hundred and fifty million dollars ($ , , , ), or our gold represents only about per cent of our banking resources. in other words, our gold reserves today are not as strong as they were in by at least per cent. another matter of importance about which i am sure we all agree is this: that there were in several of the states in , banking systems which were vastly superior to anything we have today. this was particularly true of the banks of virginia, indiana, iowa, ohio, kentucky, missouri and the suffolk system of new england. as a proof of this contention, which no man who knows anything about the subject will attempt to controvert, i have only to state that identically the same banking principles are in operation in canada today that were in operation in those states. canada, you will remember, took her system from the statutes of massachusetts. will any man in the united states deny that canada has a vastly superior banking system to anything we have in the united states? will any man assert that any country in the world has a better banking system than canada has today? if so, let him name it. all the canadian people, and all the canadian bankers, so far as i have been able to learn, are completely satisfied, indeed, proud of their system. is there one single business man, or one single banker, in the united states, who would have the audacity to expose his ignorance by stating upon a public platform that we have any banking system at all in the united states? and if he did, would he not be compelled to admit that it was one of the worst in the world, and as a panic breeder that it easily stands in first place? mr. merchant: i do not see how it could be otherwise, when you recall some of the facts brought to our attention during these talks. the national bank act was passed feb. , , just fifty years ago, and we have literally refused to pass a single paragraph that would enable the bankers of the country to adjust themselves to the vastly changed conditions. think of it, then we had only three billion of banking resources! today we have more than twenty-five billion. then our savings were comparatively a mere pittance, while they are today six billion five hundred million dollars ($ , , , ). the trust feature of the banking business, as followed today, had not even been heard of. then by a tax of per cent, we destroyed the natural note-issuing function of the banks simply because secretary chase wanted money to carry on the war. there were no laws to regulate banking in this country, except in a few of the states, where they had developed banking systems as perfect as any that have ever existed anywhere. the united states government would have been just as much within its rights and power, and just as wise, economically speaking, if it had at the same time, and for the same purposes, imposed a tax upon the deposits that were not made in the national banks. for, as we have seen, there is absolutely no difference between bank book credits and bank note credits. a bank is just as fit to issue a bank note as it is to take a deposit. if a bank is not fit to issue a note, which is nothing but a cashier's check, it is unfit to take a deposit. again, however important it may have been to pass suitable banking laws in the past, there has never been a time when action was so necessary as now, because of the almost incomprehensible increase in our banking resources. the comptroller of the currency, you will remember, has just made a report showing that the increase in our banking resources for the four years preceding june , , reached the surprising and startling figures of five billion four hundred and three million dollars ($ , , , ). the significant meaning of these figures cannot be appreciated without recalling the fact that the comptroller's office shows that the total banking resources of the united states in were estimated at only five billion four hundred and fifty million dollars ($ , , , ) or only $ , , more. in other words, the increase in our banking resources in four years ending with june , , were almost equal to the entire accumulation of our banking resources from the first settlement at jamestown in , two hundred and eighty-three years ago. mulhall, the english statistician, stated that the banking resources of the entire world in , including the united states, were a little less than seventeen billion dollars ($ , , , ), and estimated that our banking resources at that time were a little less than seven billion dollars ($ , , , ), or about two-fifths of the total banking power of the world. today our banking power exceeds twenty-five billion dollars ($ , , , ), while that of the entire world is estimated at about fifty-five billion dollars ($ , , , ). in other words, we now have more than per cent of the total banking power of the world. commercially speaking, the last fifty years has been the most marvelous period in the history of the human race, and the most surprising and most surpassing period of this most marvelous period are the years from to . we now have more than twenty-five million toilers. our productions in will exceed thirty-five billion dollars ($ , , , ). our foreign trade will reach four billion dollars ($ , , , ). our bank clearings will probably pass the one hundred and seventy billion dollar ($ , , , ) mark. our total transactions (of all kinds) will approximate five hundred billion dollars ($ , , , ). any business expressed in these stupendous figures, and involving every dollar of our capital, both the commercial and our vast investment funds, and every day's labor from ocean to ocean, and from canada to the gulf, ought to be commanding most serious attention on the part of every intelligent and patriotic man. this is more especially so when we look into the present situation, and discover upon what dangerous ground we stand, and how imminent a commercial explosion is, and that our very prosperity at the present time is our greatest peril. indeed, that as our prosperity comes on apace, with equal certainty are we moving onward toward a commercial cataclysm. since we have just passed a more or less critical stage, it may be well to call attention to the fact that any single, untoward incident of any great importance might have produced a business tragedy, even so soon after the commercial earthquake of , which hardly left a single brick undisturbed in the edifice of the most prosperous time in the history of this or any other country. the national banks have been confined from the outset to a single kind or phase of banking, properly known as commercial banking. this was practically all there was in the way of banking in the united states in , except the mutual savings banks, of which there are today six hundred and thirty in the whole country. it's a most remarkable fact that only thirty-one of these are west of buffalo. there are today one thousand two hundred and ninety-two stock savings banks, with $ , , of capital, owing individual deposits of $ , , . there are thirteen thousand three hundred and eighty-one state banks, with $ , , of capital, owing individual deposits of $ , , , , with $ , , additional liabilities. there are one thousand four hundred and ten loan and trust companies, with $ , , capital, owing individual deposits of $ , , , , with $ , , additional liabilities. here are sixteen thousand eighty-three stock savings banks, state banks and trust companies, with $ , , capital, owing individual deposits of $ , , , . these do not include one thousand ninety-one private banks reporting to the comptroller of the currency, nor the mutual savings banks, which bring the total number up to seventeen thousand, eight hundred and four and the individual deposits up to $ , , , . the capital of the national banks is $ , , , ; their individual deposits are $ , , , and the amount due to banks is $ , , , . these vast banking resources are without any general organization whatever and yet consists of four distinct economic functions, and our great danger lies in the fact that there is no harmonious development and unification that we can call a system under one influence and control. this is absolutely necessary for the safety of banking and commerce at home, and the protection of our reserves, especially against adverse influences in unfavorable times from abroad. mr. merchant: to simplify the matter, so that we can follow it through to the end, i suggest that we begin with the unit of a banking system: the bank as we know it today, the individual, independent bank, and note just what changes we should make in the organization of a bank, to make it the perfect and complete machine that the people demand, that they may be served as well today as they were in certain sections of the united states before the war. mr. banker: that's a good idea; indeed, the only way to be thorough, and get results. as was pointed out last wednesday evening, banking today consists of four distinct functions. a commercial business a savings business a trust business a note issue business _first_: the commercial business: the use of capital in the production and distribution of consumable commodities--food and clothing and all the incidental tools and machinery. _second_: the savings bank business: the accumulation of the money saved by the working people of the country. this is distinctly a trust fund, and belongs to the investment fund of the country, and should be treated or handled as such. _third_: the trust company business: the execution of wills, and the care of estates; the execution of mortgage trusts, such as railroads or corporations create; the representation of others in the capacity of agent or attorney in the complicated business affairs of today; all such funds are of a distinctly trust character, and the investment of the money accumulating and growing out of such transactions in many of the states are specifically provided for by statutes. such business cannot be included in the commercial affairs of the country, economically speaking, because they are essentially trust transactions, and the funds, generally, belong to the investment class. _fourth_: the note issue business: the provision of all the currency of the country, except the gold coin and gold certificates, which, while they constitute all of the money of our country, are also used for currency; and except the subsidiary coin and token coins of the country. _true bank credit currency is economically identical with checks upon deposits held by a bank. the bank note is the check of the cashier against the credit of the bank, while the deposit check is the check of the depositor against the credit of the bank. the bank note, for the convenience of the people, is always in even amounts, and passes without indorsement, while the check of the depositor is for any amount, odd or even, that may be involved in a transaction, and almost universally passes only by indorsement._ the people have just as much right to demand that the banks provide them with a true bank currency, as to meet their checks in any other way, by cash payment or by draft on some distant city. some people have the very erroneous idea that a bank is creating money when it issues bank notes. it is doing nothing of the kind; on the other hand, it is only doing something for the convenience and accommodation of its customers, and serving the public in the matter of protecting its reserves and so strengthening its credit by increasing its reserves against its deposits. _a bank makes less profit in issuing bank notes than it does in taking deposits and loaning them out._ now, follow me, gentlemen, and i will demonstrate this to you beyond a doubt. you gentlemen all know that the capital of our bank is one hundred thousand dollars; suppose that i had the right to issue an amount of credit notes equal to my capital and that i had to pay the government a tax of per cent upon the one hundred thousand dollars of notes that i issue. now, suppose that i exchange these bank notes for the notes of the farmers and merchants, who are customers of my bank, which bear per cent interest; it is clear that outside of other expenses, my profits will be per cent on one hundred thousand dollars, or four thousand dollars. but, you must remember this, that i will have to pay the government for engraving a bank note plate, $ . , and will then have to pay the government in addition for the transmission of the notes about twenty cents per $ , . now if i should receive deposits amounting to one hundred thousand dollars and should pay interest on them at the rate of per cent per annum, and should loan them out at the rate of per cent to some of my customers, my profits would be per cent, or four thousand dollars; identically the same profit that i made upon the one hundred thousand dollars of bank notes; but i do not have the extra expense of the engraved plate and the cost of the transmission of the notes. of course, you understand that the reserves that i carry in both cases are identically the same-- per cent; that is, i am carrying fifteen thousand dollars ($ , ) against the deposits and also fifteen thousand dollars ($ , ) against the one hundred thousand dollars of notes. you will see, therefore, that i will make less on the one hundred thousand dollars of bank credits in the form of bank notes than upon the one hundred thousand dollars bank credits in the form of deposits. mr. merchant: mr. banker, i want to thank you for this very clear explanation of what a bank note really is and why a bank should have the power to issue it, and more especially for your explanation of the fact that a bank makes less upon that form of bank credits than upon a corresponding amount of deposits. _i do not believe there is one person in a million who understands this question at all. i know we've all had the insane idea that the right of note issue was some kind of a special privilege to the bank out of which it would make some enormous profit; when, as a matter of fact, it is nothing of the kind; but on the contrary, only a great convenience and accommodation to the people themselves._ furthermore, in as much as it will enable the bank to protect its reserves, by paying out its notes, instead of paying out its reserves, it will reduce the expense of the bank to that extent and so reduce the interest rates upon its loans. it will probably at some time or other of great stress save the bank from closing its doors, because it can create or obtain cash to meet the local demand, while otherwise it would have to suspend, although the bank might be absolutely sound. you see, don't you, that the bank in issuing credit currency is doing precisely the same thing that the banks did when they issued cashiers' checks, or clearing house certificates, in and . mr. manufacturer: mr. banker, your explanation has certainly been an eye-opener to me, too. how simple all truth is when you get to it. it is our ignorance and prejudices that are our curse. just think what the application of this simple principle would mean to the united states as a whole. every community could be supplied by the local banks with the necessary currency just as well as deposit facilities and at a cost not to exceed one-fifth of what it costs today, and not to exceed one-fifth of what it would cost if the banks had to buy their currency from some central institution. mr. banker: well, gentlemen, i was just going to state, when mr. merchant interrupted me, and i am glad that he did, that while a true bank note and a deposit are economically identical, yet it is a distinct feature or function of banking, nevertheless, and in working out our plan should be treated as such. mr. merchant: if i have followed you, mr. banker, and grasped the situation at our last wednesday night meeting, banking in the united states should be carried on in the future like any other business of four distinct departments; that is, a departmental business. the accounts should all be kept separate and apart, so that a bank statement would show the amount of deposits in the commercial department; the amount of deposits in the savings department; the amount of deposits in the trust department; and the amount of notes outstanding at any time. mr. banker: that is it precisely, and the only way that this can be accomplished is by granting the specific power to the national banks of the country: _first_: to continue to do a commercial business. _second_: to do a savings business. _third_: to do a trust company business. _fourth_: to do a note issue business. this step taken, no bank in the united states, with the rarest exception, can afford to remain out of the system, and the result will be to bring the banking business of the united states into one harmonious whole. the present conglomerate condition will be wiped out. holding companies, which are probably the most prolific source of business iniquity and a curse to the country, generally will cease to mark american banking as a game of jugglery and sharp practice wherever the managers of double-headed or triple-headed banks are inclined that way. furthermore, unless this is done, you will in the future as in the past, know little or nothing of the true condition of the banks of this country as a whole. for what can you know about the true inwardness of a bank, which is composed of three distinct institutions: a national bank on one block, with the stock of a trust company located on another block, and the stock of a savings bank located on still another block, and the stock of the two institutions lodged in the strong box of the national bank. the managers of the national bank may be of the very highest character, and of unquestionable and absolute integrity, and they might manage their business just as well as if there were no laws at all. but laws are made for the lawless, not for men of this class. laws are made to compel the greedy, the over ambitious, the foolish and the unscrupulous to toe the line, and maintain certain standards, which have been established by the highest class of men of the banking world. you can readily see that a national bank, under national supervision, with two other institutions under its control, which might be under state supervision, or under no supervision at all, could engage in practices that no upright man would stand for; and practices, too, that usually result in terrific losses, and consequently breed panics. these powers having been granted to the national banks, the law should then compel the separation and complete segregation of all these various accounts, as they are all distinct in their nature or character, economically speaking. part of them are active capital, and belong to the commercial fund of the country, while the others are passive capital, and belong to the investment fund of the country. it may be objected by some self-satisfied, selfish, ignorant and unpatriotic banker, who is doing all of these things now in some way with ample or even more than satisfactory profits, that the combination of these different forms of the banking business is theoretically wrong. but let it be distinctly understood and observed, and remembered, that we are not dealing with a theory now. nor are we organizing something new. we are dealing with an actual, serious and most dangerous fact, and that is, that the banks of the country are now doing all these things in a conglomerate way, largely unsupervised and uncontrolled. our unit of banking, the individual, independent bank, should have its parts coördinated, unified and brought into a system, and under one common supervision and control. that supervision should not be political, but should be a supervision of the banks by the banks in the interest of the people and the banks themselves. _now we are also dealing with another most dangerous fact. it is this: first, the national banks are carrying cash reserves amounting to per cent. the reserves of all the other banks amount to only per cent; and, excluding the mutual savings banks, the reserves of all the remaining banks amount to only per cent. the cash reserves of the banks of the united states should under no circumstances fall below per cent, and under some circumstances they should amount to at least per cent. second, the reserves, such as they are, are all broken up into small fragments, and scattered broadcast over the land._ the result is that our reserves lack the element of true reserves, and are robbed of their efficiency, which is essential to commercial safety. the highest degree of efficiency and utility of reserves can only be secured by a centralization of or per cent of our cash reserves, or say per cent of our individual deposits, and per cent of our time deposits or savings accounts. in this way, we shall centralize and mobilize about $ , , , of our gold, which now exceeds $ , , , . it will be observed that the reform here proposed is in perfect accord with the evolution of all our anglo-saxon law. it is merely putting into statutory form the present universal practices of the country which have grown up as a result of those new conditions which are peculiar to ourselves, and compelling conformity with those great economic laws that cannot be violated or disregarded without suffering the consequent penalty. again, it is the only way that each bank can be compelled to carry its share of the burden of our commerce, and furnish its share of insurance to the business interests of the country, so far as sufficient and uniform reserves will do it. the second great reform, then, that is essential is also in perfect harmony and accord with the most approved practices of the banking world. it will be noticed that here, too, a method or system from approved practices has grown up, not only without the sanction of law, but in part actually in defiance of law. i refer to the fact: _first_: that there is no law in any state authorizing the organization of the clearing house, and yet there are over two hundred and fifty of them in the united states. _second_: that there is no law authorizing any clearing house committee to examine the banks composing it. but in twenty cities at least the clearing houses are not only examining their own members, but go even further than that and insist that no bank shall clear through any clearing house bank which does not submit to an examination by the examiner appointed by the clearing house. this has been found essential to the safety of the banking situation in these cities, but is no more essential in these twenty cities than in five hundred or one thousand other cities; in fact, essential throughout, and all over every state of the union. this has come to be an established practice, and is being taken up rapidly, all over the united states, and yet there is no law whatever that authorizes it, suggests it, or by implication justifies it. _third_: with the consent and approval of public officials, both state and national, but without authority of law, the banks of many of our clearing houses are carrying at all times a large part of their reserves at their clearing houses for their convenience and as an aid to commerce. undoubtedly they are doing just what they should do. it is stated upon high authority that the amount of reserves that are now centralized and mobilized at the clearing houses today will exceed $ , , . this practice is the result of experience, not only in the times of panic, such as and , but also for the daily needs of their gigantic transactions. _fourth_: in like manner, not only without law, but actually in defiance of law, these self-contained, self-centred, self-governing clearing houses, whenever necessity calls for it, very wisely and properly issue a true credit currency, in principle, at least in the form of clearing house certificates which serve all the purposes of legal currency itself. they are issued in $ certificates, $ certificates, $ certificates, $ certificates, $ certificates, $ certificates and in denominations of $ , $ , , $ , , and on up to as many or more millions. all this is done not only without the authority of law, but in the latter case in actual defiance of law. here then again we have purely as a result of evolution in modern american banking the second naturally developed unit, the clearing house, by combining, coördinating and unifying all the banks, or simple units, coming within its jurisdiction. they exist without law and operate without law, and in one respect, as i have just said, in defiance of law. this clearing house unit consists of the following elements: financial centre (with one hundred banks), clearing house committee (without law), clearing house bank examiner (without law), clearing house reserves (without law), clearing house certificates (in defiance of law). if this system has been the means of purging the banks coming within its influence and jurisdiction and strengthening the situation, wherever adopted, and if no city where it has been in practice, of which there are now more than twenty, would not give it up, let any man say why this safe principle should not now be extended until every bank in the united states is brought within its beneficial influence. however, this result can only be attained by having a uniform and truly national banking system. as was pointed out only a moment ago, that if the national banking powers mentioned are granted to the national banks, no bank can afford to remain outside of the system, because the advantages gained by going into it are so great. however, if there are bankers, who by running double-headed or triple-headed institutions believe that they cannot then do some things that they are now doing, and which they, therefore, probably should not do, should undertake to argue that banking cannot be brought under national supervision and control, let them consider the following facts: _first_: that the united states government put a tax of per cent upon all state bank notes and that they died a natural death. of course, it is true they were suffocated. but would any one go back to the days when they had to pay exchange upon a bank note every time they crossed a state line? would anybody take a step that would substitute a local currency for a national currency of uniform character and quality? let every antagonist mark this, and remember it well that the same power that put a tax of per cent upon bank note issues can also put a tax of per cent upon deposits for any one of a number of good reasons; for example, it could and should impose such a tax, if necessary, to compel all the banks of the country to carry their part of the commercial burden in the shape of equal and adequate reserve. _second_: can any one give a single reason, valid reason, why the postal savings bank was made a national institution that would not apply with equal, if not greater, force to the $ , , , individual deposits of which $ , , , are savings? _third_: can any one deny that it is interstate commerce for note brokers to ship millions, yes billions upon billions, of promissory notes, or so-called commercial paper, from one state to another by express, mail or freight? will any one deny that promissory notes are property? will any one assert that shipping promissory notes differs in the slightest degree from shipping eggs, apples, potatoes, cotton, grain or live stock on the ground that promissory notes are not property, but that eggs, apples, potatoes, cotton, grain and live stock are property? will any one deny that the same power that passed the "food and drugs act," giving the government power to stop the use of poisons in medicines and food; the "insecticide act," giving the government power to prescribe the character of poison to be used to kill bad bugs; the "plant quarantine act," giving the government the right to stop lice from traveling across a state line; the "meat inspection act," giving the government power to insist upon decent meat; the "live stock quarantine act," giving the government the right to prevent a man from driving his cattle under certain conditions over a state line; the "twenty-eight hour law," requiring shippers to treat cattle humanely; the "employers' liability act," the "safety appliance act," the "white slave act," the "hours of service act," the act regulating the transportation of explosives; will any one deny, i say, that the same power that passed all these acts cannot be exercised to protect forty-seven states in the union against such bank practices in the forty-eighth state, as will at any moment throw the entire country into a panic and destroy all public confidence in our banks and bring in its wake the destruction of credit and consequently the destruction of vast property values? certainly no one will deny that any state has the power, and that it is its duty to compel every person, firm or corporation using the word "banker" or "bank" to submit themselves to jurisdiction, supervision and control of that state. every state has the power to protect any of its citizens against the wrongdoings of other citizens, and one bank or banker against the evil practices of other banks or bankers. in eighteen states no bank reserves are now required by law, and in many states there is no supervision whatever of state banking institutions by the state. is it possible that the national government has no power to act in the light of these facts when the banking business of the country is essentially not only one kind of a business, but, indeed, one single business, each one being a wheel in the great credit machine? _it is so interlaced, and so interwoven that one rotten spot map prove as dangerous to the whole fabric of credit as a box of dynamite under one's chair. is it possible, i say, in the light of all these facts, that there is no redress, no protection to our vast commerce, and to labor through the national government? is it possible that we could be compelled to continue for a thousand years in the midst of our present terrors from bad supervision and want of adequate reserves?_ the manufacturers, the merchants, the farmers, the laboring men, and business interests of every kind have a right to demand and undoubtedly will demand protection, and demand it now. unless i misunderstand the present temper of the american people, they will now demand that their interests be safeguarded, and that they be protected against the always impending dangers growing out of the present conglomerate condition of the banking business. i assert that this end can only be achieved by extending the same organization which many of the larger cities have already adopted to all the natural, financial centres of the country and include with them all the territory naturally tributary to such centres; in other words, that we should now extend the same organization to every commercial zone of the country of which these natural financial centres are the dominating commercial cities. this diagram will indicate more forcibly just what i mean than words can convey. [illustration: diagram illustrating district system of bank organization to give stability in commercial zones.] the straight lines are drawn from some centre in a city arbitrarily, and purposely so, in order to eliminate all political machinations and gerrymandering in forming the districts for any reason that may arise from time to time. they are so drawn as to divide the whole number of banks in the entire commercial zone into seven equal districts. that is, if there should be seven hundred banks in the commercial zone there would be one hundred banks in each district. the one hundred banks in each district organize in precisely the same way, and as follows: _first_: upon coming together the one hundred banks of district no. proceed to organize formally by electing a president and secretary. then they select and elect their portion of the "bankers' council" of the whole zone, which corresponds exactly to the clearing house committee of the financial centre. the one hundred bankers of each district elect one banker and one business man from the respective districts, or seven bankers and seven business men, or fourteen in all, and the fourteen so selected then proceed to select and elect their president, who shall not be one of the fourteen so selected by the bankers of the several districts. these fifteen men so selected constitute the "bankers' council," and bear identically the same relation to the whole commercial zone as the clearing house committee bears to the banks which constitute the clearing house. _second_: the one hundred bankers of each district then proceed to select and elect a banker as a member of the board of control, or seven in all, whose duty will be, among other things, to examine the banks of the entire zone precisely as the clearing house bank examiner examines the banks of the clearing house of the financial centre; provided, however, that the district from which the bankers' council have selected their president shall accept such president as their member of the board of control. will any one say that with such supervision as this board of control will give to the banks of the commercial zone, each bank having been compelled to qualify in the outset--will any one say, i repeat, that such supervision will not absolutely prevent bank failures? this is not only important to the depositors of the country but also to the general business of the country as well. thereupon all banks of the zone will transfer to the board of control a part of their required reserves; that is, per cent of their deposits and per cent of their note issues will be deposited with the board of control. later this should be increased to per cent. let us assume that this per cent of their deposits and per cent of the notes issued amount to $ , , , which will be the central or economic reserve of the commercial zone and be under the control and management of the board of control. you will recall that the bankers' council, which bears the same relation to the commercial zone that the clearing house committee bears to the financial centre of the zone, was composed of seven business men and seven bankers, who selected their own president. these fifteen men will select a representative from their respective zones. so that we shall have a board of directors representing the thirty or forty commercial zones directly and not indirectly. each zone will be represented alternately by a business man and a banker, so that the board at washington would always consist of fifteen or more business men and fifteen or more bankers; the business interests and banking interests equally, the inside and outside of the bank counter; the depositors and the banks or the trustees of the depositors. the next logical and necessary step is a national central gold reserve if we hope to prevent our gold leaving us at the will of foreigners, and also if we hope to serve the whole nation, just as the clearing house is serving its members today, and as the commercial zone will be able to serve all of its members, when it has been once organized. therefore, as a sequel to the organization of the commercial zones, say thirty or forty of them in the united states, they in turn will all unite their gold in one great central gold reserve, which will amount to approximately $ , , , (one billion two hundred and fifty million dollars). we should then have the "american reserve bank." the amount of gold held by this institution would be twice that held by any other in the world, and would be under the control of a board of directors which i have just hastily described; i have used and suggest the name "american reserve bank," because we are known the world over as "the americans," and, therefore, i think it peculiarly fit to use the name "american reserve bank." this institution, with the specific powers granted to the individual banks as outlined, will be able not only to protect each individual bank, but to protect the reserves of all the banks; that is, the reserves of the united states against the drafts of the world, precisely as the bank of england protects her gold, or adds to it by a rate of discount; that is, by fixing a price for the use of gold. mr. manufacturer: by the way, before i forget it, i want to make one suggestion right here, because it seems to me as though this was the right place to bring it in, and that is this: i am firmly convinced that a bank like yours, and all commercial banks, should be allowed to write their acceptance across the face of notes or drafts, and so develop what is called a discount market in the united states, such as they have in other countries. mr. banker: mr. manufacturer, i am glad that you have spoken of that matter, and here is just the place to discuss it. a great many people are deluding themselves about the matter of acceptances. it must be remembered that the banks are not going to increase their own capital by increasing their liabilities through acceptances. indeed, this practice would only add fuel to a conflagration of their credits, unless the banks should confine themselves to accepting only such paper as had grown out of actual transactions in which the goods had been sold and delivered, or were actually in transit. moreover, by way of assurance, every piece of such paper so accepted by a bank should state upon its face that the goods for which it was given had been sold and delivered, or were in transit. _such acceptances are absolute agreements to pay a specific sum of money upon a specific day, and therefore are just as much a liability as a deposit subject to check, with this disadvantage, that the property is not within the control of the bank, as the deposits are, against which a check is drawn, and therefore every bank should carry precisely the same reserve against its acceptances that it carries against its deposits._ acceptances of the approved sort will not necessarily, if at all, greatly increase production; but they will create a new form of investment, that is, a guaranteed commercial paper of which billions of the single name sort are being sold today. of course, two-name paper with the acceptance of a bank of high standing will soon bring into being here, just as it has in london and other financial centres of europe, new capital. that is, capital will be attracted to the business of buying and selling such high-class paper. it will be a profitable investment for the idle funds of merchants and manufacturers at those seasons of the year when all of their capital is not occupied in their business, and also for the banks of the country at those times of the year when the local demands are not equal to their supply of funds. it is undoubtedly true that such paper would also soon find a market abroad, as well as at home, and to that extent would facilitate american manufacture and commerce. but we must not deceive ourselves about the fact that the banks will just to that extent increase their liabilities while they have not increased their actual capital to the extent of a single cent. mr. manufacturer: i must confess that i have misapprehended the effect of an acceptance, but you are certainly right with regard to it, and unless we should keep the business of the country in a sound condition, the acceptance business might prove a two-edged sword, and this emphasizes the fact that we must keep a close watch upon what our commercial fund is all the time, and prevent it from being transferred and absorbed in fixed investments, which is always a bane to the commerce of a country. we must not forget these three important factors which are always present here in the united states: first, the vast, undeveloped resources of our country, and the ever-inviting opportunities; second, the intelligence, the ambition, the impulsiveness and the optimism of our people; third, the peculiar, local relations of our twenty-five thousand, individual, independent banks, which are always in close sympathy with and affected by the growth and development of their locality and the varied interests, and the enthusiasm of the people. the vision of our local banker is largely confined to his immediate vicinity. mr. farmer: how absolutely true that is, and therefore how great must be our caution in opening up the flood gates of credit, before we know that we have guarded the situation at every point. i notice that those banks before the war were all so sound and successful because they had to get the coin to make redemption with. here is something i read in a book yesterday, and it strikes me that it is right in point now: "redemption is the breath of life to all credit." you bet i have found it's death to a fellow who's got to, and can't pay. mr. banker: yes, and when you realize that credit is the very soul of trade and commerce, as it is carried on today, how absolutely essential it becomes that credit be kept within the limits of certain coin redemption, if we are to have sound business conditions. mr. merchant: well, mr. banker, how do you propose to keep credit within safe boundaries, and so insure sound business conditions all the time? mr. banker: in just two ways: _first_: by having the reserves of gold on hand in the various banks, sufficient at all times to prove all commercial credits, say from to per cent, according to the peculiar business and varying responsibility of the banks to their banking obligations; and in addition, such a central gold reserve as will to all intents and purposes be unlimited, so far as any possible demands may be made upon it--say per cent ultimately of all individual deposits and per cent of savings deposits. this would give us at the present time about one billion dollars ($ , , , ) of cash reserve, and about one billion two hundred and fifty million dollars ($ , , , ) of gold in a central reserve to meet the emergencies of commerce. _second_: such a supervision of the banks by the banks themselves as will keep their assets in liquid form, at least to the extent that their assets are commercial assets and are liable for individual deposits on demand. in this connection i want to call your attention to the fact that not a single bank has yet failed which has been under the supervision of a clearing house. you will remember that this principle was adopted in chicago in , and that today the banks in at least twenty of our leading cities are under clearing house supervision. gentlemen, i have been a banker, as you know, for about forty years. i have never been favorably impressed with any of the methods yet proposed for the guarantee of bank deposits, however desirable the end sought is, because they have none of them involved the matter of such supervision as would insure sound banking, and compel every bank to carry its part of the commercial burden in the way of equal and adequate reserves. but i am absolutely convinced that there never need be a bank failure again in this country, if we will only organize ourselves throughout the length and breadth of the land, precisely as the clearing houses have to protect themselves against the unsound practices that are always creeping into the banking business particularly. mr. laboringman: well, mr. banker, if that is true, if a bank cannot fail under the supervision of your proposed organization it will not cost anything to insure your depositors. why not relieve the millions of depositors from the anxiety they always feel about their money in the banks? for my part, i cannot see the slightest difference between a workman's compensation act, an employer's liability act and a bank insurance act. to me they are on all fours with each other. the business in each case should bear the burden. this is the settled social policy of the country, and is in perfect harmony with that social and economic philosophy that has been gaining ground so rapidly throughout the world in recent years. i cannot see how you can escape it. i appeal to you men; am i not right about this matter? mr. manufacturer: that point has never occurred to me in this connection, but i must say i cannot see any difference whatever between my carrying an insurance policy to protect my workmen and mr. banker carrying insurance to protect his depositors. can you, mr. banker? before you answer me, i want you to do two things: i want you to forget for the moment that you are a banker and i want you to think twice before you speak. i have been so deeply impressed with the points that mr. laboringman has just made, that to me his arguments are unanswerable. mr. banker: i am ready to answer right now and ready to admit that his arguments are unanswerable. mr. farmer: i am glad that you all practically agree upon this very important, all important, point. i want to tell you something that happened during the past week. i tackled mr. lawyer about a week ago upon this point and he declared that the guarantee of bank deposits was an absurdity and unthinkable because it would cost too much. i went home and wrote to the treasury department to give me the average annual deposits in the national banks since down to date and also the average annual loss due to bank failures. i have a letter from the comptroller of the currency, gentlemen, which shows this astounding fact, that an annual tax of / of one per cent upon the average deposits would have paid all the losses due to the failure of national banks. think of it! only a little over / of one per cent. mr. laboringman: / of one per cent. jehoshophat! think of the misfortune and suffering that might have been saved by the payment of that mere pittance. _it is an infinitesimal nothing. think of it: it is only - / cents on every $ ; only one-third of one cent on $ , and one-third of one mill on $ . you would not believe it. but, as i told you, i am good at figures and you can bet your life that i am right._ mr. farmer: i want to read the letter of the comptroller to you men. treasury department, washington, january , . mr. joshua farmer, loraine, new york. dear sir: your letter of january d is received and in compliance with your request i take pleasure in furnishing you the following information with respect to aggregate deposits of active national banks and the liability of insolvent national banks: the annual deposits for forty-nine years in active national banks average $ , , , . the losses sustained by creditors of failed national banks (actual for closed receivership and estimated for those not closed) will approximate $ , , , or an annual average loss of $ , . the average annual loss is, therefore, . per cent of the annual average deposits in active banks. of the national banks placed in the charge of receivers, the affairs of have been finally closed and the losses to creditors definitely determined. the liabilities of insolvent national banks the affairs of which have been finally closed amounted to $ , , creditors received in dividends, offsets, etc. , , ------------ loss to creditors $ , , creditors, therefore, received an average of . per cent, the loss averaging . per cent. there are now (september , ) insolvent banks in process of liquidation by receivers, with liabilities of $ , , creditors have received (september , ) , , ----------- balance due creditors $ , , creditors of these insolvent banks have, therefore, received an average of . per cent. for these receiverships it can safely be estimated that the loss to creditors will be no greater than in those banks already closed, namely, . per cent. during the past ten years national banks have been placed in the charge of receivers. the affairs of of these banks have been finally closed and are yet in the charge of receivers. the liabilities of these banks, as shown by the enclosed statement, aggregate $ , , . creditors have received $ , , , or . per cent. if creditors were, therefore, paid no further dividends, the loss during the ten years mentioned would average only about . per cent. it cannot at this time be determined what the ultimate loss will be to creditors of the insolvent banks which failed since . yours very truly, w.j. fowler, _deputy comptroller_. mr. lawyer: well, here goes another complete knock-out for me, i am plumb out, over the ropes this time. i don't know that i can ever recover from that blow. mr. banker: just a moment, gentlemen, while i admit that you have won your fight for the depositors, you must remember that although you have an insurance that will cover net losses after you have cleaned up the failures and closed out the assets, you will still have quite a problem to solve to meet the demands of the depositors when the failure takes place. mr. laboringman: if the depositors in the national banks had been insured in some way during the past forty-nine years, i do not believe that we would have had one failure in ten that we have had, and if you will now protect the banks, as mr. banker proposes, through his supervision by a board of control, i do not believe that we will ever have another; then why not give our , , depositors the benefit of it, as it will cost nothing and will absolutely prevent runs on your banks. mr. merchant: yes, and also stop the hoarding of money, which is a curse to any country where it takes place. i am not sure, gentlemen, but what the adoption of this principle of deposit insurance will do more to guarantee steady conditions than any other one thing. mr. banker: well, while the problem has its difficulties, i really think it is up to us to work it out in some way. the folly, greedy purpose and unscrupulous methods of some of our fraternity have not only brought misfortune and overwhelming distress to their particular neighborhoods but a cataclysm to the whole commercial world because of the shock to banking credit generally. mr. merchant: well, mr. banker, how are you going to protect yourself against those bankers who think that they can do better by remaining outside of the national banking system, because they can do a scalping and scavenger business if left free. of course, it will be advantageous for the upright banker to come into the national system. mr. banker: you will remember that in congress passed a law imposing a tax of per cent upon all bank notes, except those based upon government bonds. you also know from what has been said that the notes of all other banks immediately disappeared from circulation. congress has ample power, as was pointed out fully the other night, and should put a tax of per cent, or even per cent if necessary, upon all deposits a bank may have against which it does not hold the reserves prescribed by the national laws. congress has other methods it can adopt growing out of its constitutional powers by which every institution in the united states doing a banking business may be compelled to conduct its affairs upon sound principles. mr. merchant: from some statement we were looking at the other night we learned that the banks of the country were now carrying as a part of their reserves something more than $ , , of national bank notes. the fact is that the amount is probably twice that, as the banks of the country, outside of the national banks, make no distinction in what they hold as reserves, between gold certificates, silver certificates, united states notes and national bank notes. of course this is nothing but a scheme of inflation, for there may be other credits based upon these bank notes which are themselves nothing but debts, aggregating all the way from $ , , to $ , , , , or more, according to the percentage of reserves the banks holding them may be carrying. mr. banker: i would impose a tax of per cent per day on every bank note that any bank in the united states holds as a part of its required reserves. it would not take long to force the substitution of gold coin, gold certificates, or other lawful reserves in place of these i.o. u.'s of the national banks. mr. manufacturer: during our discussions it has been demonstrated to me, at least, and i am sure to all, that there is in fact no more justification, economically speaking, for holding united states notes, or greenbacks, as a part of the reserve of a bank than national bank notes. do you think it is wise to continue these united states notes indefinitely, as a part of our bank reserves? mr. banker: i certainly do not. they are not only unfit for bank reserves, but are teaching economic lies every day that they remain out. you are aware, i have no doubt, that the banks of this country, generally, are paying interest upon their deposits; probably as much as per cent upon the average. i would impose a tax of per cent upon our bank note issues, because banking is carried on upon about that basis. if a bank pays per cent upon deposits, and per cent upon its notes outstanding, the burden is precisely the same upon both forms of bank credits. i would use a part of this per cent tax upon the bank notes, which would amount to approximately $ , , , for these purposes: _first_: to pay the expenses of the several commercial zones and the american reserve bank. _second: i would pay into the interest department of the united states treasury an amount equal to per cent per annum upon the $ , , per cent united states bonds; so that the government could convert these per cent bonds into per cent bonds, and return them to the banks to whom they belong._ _third_: whatever cash i had left i would use to convert the united states notes into gold certificates. in the course of fifteen, at the outside twenty years, i figure, we would be able to convert all of the united states notes into gold certificates, and leave our banks with reserves of gold alone, with the exception of the subsidiary coin, which would, of course, be only nominal in amount. no one will deny that this would be a most desirable thing to accomplish. mr. farmer: no, i don't think that anyone would make such a fool of himself as to argue or contend that that would be a bad thing any way, and you seem to have a very simple method of bringing it about. mr. lawyer: i noticed that you said that the tax of per cent upon the bank notes would produce about $ , , a year. how do you make that out, when we have only $ , , of bank notes out? that would give us only $ , , . mr. banker: i am glad you asked that question. you see that if the banks now outside the national system came into it as they certainly would, because of the very great advantages it would give them, they would have to increase their reserves at least per cent upon their individual or commercial accounts, and per cent upon their savings accounts. this they would do by simply exchanging their bank notes for gold coin and gold certificates, as they came in over the bank counter. the result would be an increase of our bank reserves to about $ , , , and of course a corresponding increase of our bank liabilities. no one would deny that this would be a sound banking proposition. for, our individual deposit liabilities, which are now $ , , , , would be increased to only seventeen billion five hundred million dollars ($ , , , ), an increase of only per cent, while our reserves, which now amount to about $ , , , , would be increased by $ , , , or nearly per cent. mr. lawyer: i see, then, that you propose to increase the note issue about $ , , . this would give us a note issue of $ , , , , and per cent of this would be $ , , . we had a chart here the other night and some figures, which showed that the increase and decrease of the bank note currency in canada amounted to $ . / per capita every fall, and that every year, for a number of years, so far as we have the record at least, exactly on the th day of october, it was always at its maximum. since we are now taking back from canada what canada originally took from massachusetts, the principle of a true bank credit currency, we might expect just what they had in new england, before the war, and what canada now has every year, and every month of the year, and every day of the month. that is, we would have an amount of bank note currency just equal to the demands of trade; no more, no less, but always just what the business of the country requires, dollar for dollar, day in and day out. am i correct? mr. banker: you are absolutely correct. our variation in the demands of currency would not differ very much from that of canada. we might expect a difference between the maximum and minimum issue of about $ , , a year, that is, it ought to range from about one billion dollars to about one billion three hundred and fifty million dollars during each year, as matters now stand. mr. lawyer: well, if that is true, we should never know one season of the year from another, so far as the demands of currency are concerned. mr. banker: no, you never would; and the facilities gained by the banks for adjusting themselves to the changing conditions would enable them to be far more helpful to their customers than they now are, and yet be absolutely safe in doing so. you see, i would not limit a bank to an amount of currency equal to its capital; but subject to the approval of the board of control, where the bank was located, it could issue as much more, or a total of per cent of its capital. that is twice as much as its capital; for, there are banks today situated a good deal as the new england banks were before the war, where the people would use more bank notes than deposits, if they were permitted to study their own convenience. this we would find to be true in the newer parts of the cotton growing country in cotton picking times. can anyone tell why a bank, under such circumstances, should not meet the peculiar demands of its customers, and furnish bank notes at a cost of one-sixth of what it must be, if the bank is compelled, as it is today, to rediscount its promissory notes, and buy gold certificates or united states notes to be used as currency, when its own bank notes would answer every purpose of currency just as well? mr. lawyer: then i understand also from what you said upon another occasion that you would allow a bank to use a part of its reserves during those seasons of the year when the demand for money was particularly strong, and make up its average reserves when the demand was slight. mr. banker: precisely so. why should not a bank act just like any other merchant or trader, and adjust its stock of goods to the ever-changing conditions of its business? of course i am fully aware that there is one element entering into a bank's business that is not common to other mercantile houses, and that is the question of its credit. it must keep itself in such a position at all times as to preclude the chance of suspicion arising about its ability to meet its demand obligations. this point brings me squarely up to the matter of a central reserve. a bank that is known to be under the supervision of a board of control, which can and ought to know its actual condition, and which has the power to compel it to so conduct its business, as to be entitled to consideration and accommodation, whenever it asks for it, and actually needs it, will certainly have the confidence of the public to an unbounded degree. of course, i am assuming that the public are aware of the fact that the board of control in turn has access to the great central reserve of one billion two hundred and fifty million dollars ($ , , , ). you can imagine that the public under such circumstances would have absolute confidence in a bank. indeed, i am of the opinion that as soon as this organization is effected, bank failures would be a thing of the past, because the public would soon come to appreciate this, and look upon every bank in the system as safe beyond the peradventure of a doubt. mr. farmer: there would be every reason for confidence in such an institution because of its great strength; and yet, if i understand your plan, as outlined, every one of these individual zones would be as independent of every other zone as if it were a foreign country. it would be like a great bank standing alone, of which every bank within the zone was an integral part, for the purpose of the defense of the credit of each. then again, every individual bank would remain just as independent as it is today, while at the same time it enjoyed the full confidence which the larger institution would be naturally entitled to. mr. banker: that is precisely the result this coöperative reserve fund of one billion two hundred and fifty million dollars ($ , , , ) would produce. mr. lawyer: _then, as i understand it, beyond the individual independent bank, and beyond and behind the individual independent zone, would be "the american reserve bank," standing guard over the commercial interests of the whole united states, ready at any time to meet any possible contingency that might arise in any section of the country, with practically unlimited power to release, hold, or recall gold from the four quarters of the globe, because it can place a price upon the use of gold in the form of interest, and so conserve the general welfare of american commerce and american labor._ mr. banker: now, gentlemen, let me call your attention to five important results we have achieved in the development of this outline of our proposed structure. _first_: you will observe that every bank in the united states will be completely freed from every dominating influence, because in the last analysis it will have access to a practically inexhaustible hoard or reserve of gold, which belongs to itself as much as to any other bank. _second_: you will note that every commercial zone is a perfect and complete self-governing body. not a single outside person has anything whatever to do with its affairs. every person who is in any way connected with it, is selected by its members, even including the deputy united states comptroller, who will be, as you remember, the chairman of the board of control, and president of the bankers' council. in principle and in function this organization is identical with that of the bank of the state of indiana, and of the state bank of iowa, in which you will remember the parent, or home institution, did no business whatever, except for the branches, which it examined and supervised. _third_: you will note that in the matter of issuing currency, it follows the principle of bank credit currency in operation today in canada, with the added power, subject to the approval of the board of control, of doubling the issue to meet unusual demands of trade or in case of an emergency. _fourth_: you will observe that we have planned to reach ultimately a system of reserves consisting of gold, exclusively, and also to keep all bank credits, both deposits and note issues, in constant touch with gold by paying gold whenever called for. _fifth_: that in the matter of a strong central gold reserve, you will observe that the plan follows the principle in force at the bank of england where all transactions are in gold, making england the only truly free market for gold in the world. gentlemen, i am convinced that it is the natural right and present opportunity of the united states to become the financial centre of the world; but no country can ever become the financial centre of the world, unless it is a free market for gold. no country can be a free market for gold, unless its entire credit system is based upon gold, and gold alone, thereby guaranteeing unquestioned bills of exchange. such bills would draw a rate as low as the lowest because protected by a gold fund of such magnitude, when considered from the standpoint of its obligations to the commerce of the country, where held, all conditions being considered, as to insure beyond question its ability to take and give gold, as necessity requires in international trade, without endangering its stability, or affecting its credit. this result can only be achieved by enforcing the discount rate throughout the country involved; and the discount rate can only be enforced throughout the country involved by buying and selling bills of exchange in straight gold transactions. we should not trade one bank credit for another bank credit, and put this bank credit into our bank reserves, as the aldrich scheme proposed, thereby driving gold out of the banks, and out of the country, and also utterly destroying our power to control and protect the cash gold reserves of our banks, which outside of what may be called subsidiary money (from $ pieces down), should ultimately and always be _gold and gold alone_. in conclusion, i submit that the whole plan as we've worked it out does not introduce a single foreign element but creates out of our own practices, which have developed out of our own peculiar conditions, a financial and banking system, founded upon sound economic principles. it gradually eliminates those errors that have crept into our financial and banking practices, possibly through supposed necessity, but certainly through ignorance; and yet, the present incoherent conglomerate condition is brought to a simplicity and strength that may safely challenge any country in the world to institute a comparison for economy, efficiency, strength and safety. mr. merchant: gentlemen, if you will achieve the results that you have outlined in the course of this evening's talk, you will accomplish all and precisely what mr. macveagh, secretary of the treasury, recently described as the ends that must be attained if we are to bring about a complete financial and banking reform. these are his words: "a relief measure reforming the banking and currency system must include, among its necessary features, provisions for never-failing reserves and never-failing currency, and for the perfect elasticity and flexibility of both; for the permanent organization and organized coöperation of the banks, which are now suffering and causing the nation to suffer by reason of their unorganized state; for a central agency, to represent and act for the organized and coöperative banks--this agency to be securely free from political or trust control, but with the government having adequate and intimate supervision of it; for independent banking units--so independent that no one bank can be owned, controlled, or shared in in any degree, directly or indirectly, by any other bank; for the equality of all banks, national or state, both as to standards and as to functions--so that every requirement made of a national bank must be complied with equally by a state bank, and every function or privilege enjoyed by a state bank shall be enjoyed by a national bank; for the utilization and the fluidity of bank assets; for the scientific development of exchanges--domestic and foreign; for foreign banking as an adjunct of our foreign commerce, and for taking the treasury department out of the banking business." mr. farmer: well, you have forgotten the thing that interests me more, generally speaking, than all else, and that is the land credit bank, which we went into last wednesday night. of course you intend to include this when you prepare your bill. uncle sam: you bet they will, for i think it's about time that the corn raiser, cotton planter and grain producer and all the rest of the toilers of the turf, should be getting their money at as low rates as anybody else on first-class security for a long period of time, and i am determined to give the farmers of the country the benefit of my good name to aid them in this matter. mr. banker: of course we had all agreed to that, and shall include it in the draft of the bill. mr. manufacturer: uncle sam, i move that mr. banker, mr. lawyer, and mr. farmer be a committee of three to prepare a bill to be submitted to us next wednesday evening. mr. merchant: i second the motion. uncle sam: it's a go. good night. sixteenth night draft of bill uncle sam: well, boys, here we are ready for the report of the committee on legislation, i suppose you would call it. are you ready to report now? mr. farmer: yes, mr. lawyer will make our report and speak for the committee. mr. lawyer: uncle sam, your committee has been deeply impressed with the duty you have imposed upon it. that the solution and settlement of our financial and banking problem is the most important economic question that has ever confronted the civilized world must be admitted by all who will take the trouble to investigate it and institute a comparison between our conditions and those of any other country at the time when it adopted its financial and banking system. in , when the bank of france was established, the financial resources of france were without official record, but comparatively nominal. in , when the bank act under which the bank of england is conducted was enacted, the banking resources of that country were probably in the neighborhood of $ , , . the total note issue of england, scotland, and ireland was less than $ , , ; the public and private deposits in the bank of england were less than $ , , ; and the gold in the bank of england was less than $ , , . in , when the imperial bank of germany took its present form, industrial germany was still slumbering; and the bank resources probably did not exceed $ , , , . the capital of the incorporated banks was about $ , , , the notes were about $ , , , and the reserves held about $ , , . the banking resources of the united states are today more than ($ , , , ) twenty-five thousand million dollars and our foreign trade more than ($ , , , ) four thousand million dollars. the question we are dealing with, therefore, is not only the most stupendous of its kind, but it must be considered both from a domestic and foreign point of view. it is from both these points of view that we have approached the preparation of this measure. as i proceed to read the bill i shall make some comment by way of explanation in order that our purpose may be understood. a bill to establish a complete financial and banking system for the united states of america. section . _be it enacted by the senate and house of representatives of the united states of america in congress assembled_, that a complete financial and banking system for the united states of america shall be, and is hereby, created, organized, and established as follows: _first_: the commercial zone. _second_: the bankers' council. _third_: the board of control. _fourth_: the american reserve bank. section . that upon the passage of this act the president of the united states shall appoint three persons, who, with the secretary of the treasury and the comptroller of the currency, shall proceed immediately to designate such cities in the united states, not less than twenty-eight in number and not to exceed forty-two in number, for the location of the financial centres of the commercial zones, numbering them consecutively as shall best accommodate and serve the business and banking interests of the united states. section . that within ninety days after the designation of the cities for the location of the financial centres of the commercial zones every national bank, with the approval of the five persons designated in section two of this act, shall select one of the centres so designated as the place for its clearing house, and thereupon the comptroller of the currency shall notify all the national banks to meet at their respective financial centres on a given day and at a designated place for the purpose of organizing the several commercial zones, of which there shall not be less than twenty-eight nor more than forty-two in number. comment:--referring to sections two and three i would urge upon your attention these points: _geographical considerations_ great britain has only , square miles of territory. france has , and germany , square miles. all europe, outside of russia, is only about half the size of the united states. it has , , square miles, while we have , , square miles. including russia, all europe has only , , square miles. extended as our territory is, our products are far more varied and more universally important to the human race than those of any other nation. they exceed in value $ , , , a year. _local interests_ new england is essentially a manufacturing center of dry goods, wearing apparel, and metal wares. pennsylvania is known the world over for its coal, iron, and oil industries. new orleans is the market for cotton, sugar, and rice. kansas city is the emporium for live stock and grain. chicago, the greatest food market on earth, is fast coming to be one of the greatest manufacturing points in almost every line of industry. st. paul and minneapolis supply us with wheat and flour. the cities of the rocky mountains are growing in importance year by year, each one entitled to distinction for some particular industry. the development of the pacific coast, from san diego to seattle, is challenging universal attention. it is the opinion of your committee that it is highly important, indeed, absolutely essential, for the best interests of the people, industrially, commercially, socially, and politically, that each geographical zone of common business interests should have independent self-government in matters of banking, precisely as the several states have control of their local affairs. at the same time, these commercial zones should be so harmonized and federated as to give to each the financial strength and power of all combined, precisely as every state is as strong and powerful politically as the federal government itself. all the governments of europe are traditionally monarchical and imperialistic. their banking institutions not only all bear the insignia of their political origin, but also characteristically mark the times and conditions that gave them birth. in england alone self-government found true expression in the selection of the board of directors of the bank of england. the british government has no relation to the management, either directly or indirectly. it neither appoints a single representative on the board, nor has any voice whatever in his selection. again, it is to be noted that the englishman, ever tenaciously jealous of his rights, excluded from the board of directors all bankers. no banker has ever sat upon the board of directors of the bank of england. the french empire of and the german empire of are each reflected in the organization of the bank of france and the imperial bank of germany. this government was organized as a protest against royal rule and imperial power. it has been fighting the evils of centralization for more than a hundred years; and of nothing has it shown such persistent jealousy as the possible centralization of financial interests and the control of commercial credits. will it be said by some one who thinks only in the terms of the special interests that, notwithstanding this watchfulness and constant anxiety, great aggregations of capital in the business world have come practically to control the business situation; that our commerce is practically centralized now, and that our banking should be so, to make it the counterpart of the existing state of things? let us not assume that the problems of coördinated power and wealth have all been solved. let us believe that the study of this modern mystery has just begun. let us hope that if it is possible for us so to solve the financial and banking problem as to recognize the best traditions of the republic and the highest aspirations of the american people, keeping steadily in view every economic law involved, we shall then save our beloved country from the tragic consequence of political controversies directly affecting our commercial credit and indirectly affecting every day's labor and every dollar of capital until the question is settled right. we must not forget that every conceivable phase of the so-called "money question" has been the football of american politics from the organization of the first and the second united states banks, down through the greenback madness, the silver craze and the gold standard fight. not a single subject has aroused such intense bitterness as this one, excepting slavery alone. whoever, then, tries to solve this problem must recognize at every turn the origin of our political institutions, the genius of our people, and the peculiar characteristics of the american citizen or he will fail utterly in his undertaking. section . that each bank shall be entitled to one vote, which shall be cast by an officer of the bank who has been duly authorized by a vote of the board of directors thereof, such authorization to be evidenced in writing and under the seal of the bank. each bank shall be identified in its zone by a number. comment:--it is our judgment that every bank should have equal power in organizing and consequently in controlling the respective zones; because we believe the business interests of the country will be better conserved thereby. section . that the association of all national banks clearing or redeeming their notes at each of the cities so designated shall be known as "the ---- commercial zone." section . that all the national banks of each of the commercial zones so constituted and established shall organize themselves into "the ---- commercial zone" by electing a chairman, a secretary, and a treasurer, who shall all hold office until the first monday of the following may, and by proceeding in the following manner: section . that they shall take some point in the financial centre of their respective commercial zones, from which they shall draw seven radial lines, so cutting the territory as to divide the whole number of banks, as nearly as possible, into seven district groups, each district containing approximately the same number of banks, and may from time to time thereafter shift said radial line for the purpose of maintaining such equal subdivision of the banks. comment:--it is a matter of great importance that these districts shall be automatically and arbitrarily constituted, if possible; and this plan will accomplish it. by this method every part of every commercial zone will be represented by business men as well as bankers. neither particular sections nor particular banks can have any direct advantage. section . that each subdivision of the commercial zone so created shall be known as a district, and they shall bear numbers respectively from one to seven, inclusive. section . that the board of the bankers' council shall be constituted as follows: _first_: the bankers of each district of the respective zones, voting as prescribed in section four of this act, shall elect a banker and a business man as members of said board. _second_: the term of office shall be seven years; but the terms of the members of the first board shall be for one, two, three, four, five, six and seven years, respectively; that is, the board shall arrange itself into seven groups, each being composed of one banker and one business man, and thereupon the seven groups shall determine by lot how long each group shall serve. _third_: the fourteen members of the board of the bankers' council of the respective zones shall then elect their president, who shall not be one of the fourteen so selected, but shall be a resident of one of the districts in their own zone. the term of service of the president of said board shall be left to the respective boards of the bankers' council in the several zones. section . that the services to be rendered by the bankers' council shall be advisory to the board of control whenever the board of control may call them in consultation, or an appeal is made to them from the action of the board of control by some citizen or citizens of their particular zone. section . that the members of the bankers' council shall receive no salary, but all expenses incurred by them severally incidental to such consultation and services shall be paid. comment:--the relation of the bankers' council is the same to the zone as the clearing house committee is to the clearing house. it will be the supreme court of the zone. it has the last word upon all business questions growing out of banking in the zone, in case of appeal. section . that the president of the bankers' council shall be chairman of the board of control. section . that the president of the bankers' council shall be a deputy united states comptroller. section . that each of the deputy comptrollers of the currency shall from time to time furnish such information and make such reports to the comptroller of the currency as the board of directors of the american reserve bank shall prescribe: _provided, however_, that the comptroller of the currency may ask for reports as now provided by law. section . that the board of control shall be constituted as follows: _first_: the bankers of each district, excepting the district in which the chairman resides, voting as prescribed in section four of this act, shall elect a banker who resides in their district as a member of the board of control. _second_: the term of office shall be seven years, but the terms of the members of the first board shall be for two, three, four, five, six and seven years, respectively, and the six members so elected shall determine by lot how long each shall serve. section . that before any member of a board of control enters upon the performance of his duties he shall sever all connection as officer or stockholder with every bank in his commercial zone, and he shall be ineligible to any position in any bank in his zone during the time for which he shall have been elected to serve. comment:--the board of control will be composed of a body of men who are younger than the bankers' council; but of the same high order. they will be men who have the undoubted confidence of the banking fraternity; men who are to win the prizes in the banking world. this position will be a sure stepping stone to the best positions; but it must not be used for that purpose, at least until each man has served out his time. section . that compensation of the members of the board of control shall be five thousand dollars per annum, payable monthly, including the chairman, except that the chairman may receive any salary in addition thereto that the bankers of his zone may determine to pay him: _provided_, that such additional salary shall be assessed upon the capital and surplus of all the national banks in that zone. comment:--the president of the bankers' council, chairman of the board of control, and deputy united states comptroller should all be represented by the same individual for these reasons: _first_--the relation between the two bodies of men should be easy and constant for the best interests of the people. there should be no slow machinery to put into operation in case of necessity. quickness and harmony will always be essential. _second_--the power of the united states government should always be present to enforce orders. _third_--a man of the greatest ability obtainable should be secured to occupy this place; therefore his salary and length of service should be left open for arrangement with the bankers' council. this man ought to be the leading man in banking in his zone in point of character and wisdom. section . that the services to be rendered by the board of control shall be as follows: _first_: each board of control shall have supervision of all the national banks located in its zone. comment:--the expense and annoyance of bank examinations as they are carried on today would be reduced one-half and they would be worth ten times as much as they are today with the exception of those made by clearing house examiners. _second_: the boards of control shall have power to employ all the examiners and such other assistants as may be necessary to properly and efficiently supervise the banks under them, and such examiners, as far as possible, shall be paid stated salaries. _third_: each board of control shall have power to purchase commercial paper or bills of exchange from the banks in its zone whenever they desire to build up their reserves by obtaining additional gold or for the purpose of crop moving or any special or extraordinary demand of trade: _provided, however_, that all the paper so purchased by them shall bear the unqualified indorsement of some bank in their respective zone. comment:--mr. merchant: now it seems to me as though that organization is as simple, direct and complete as it can possibly be. it makes every zone an absolutely independent banking democracy. no outside influence is permitted to interfere with the zone. it is certainly local self-government from top to bottom. the fact that anyone in the zone may appeal to the bankers' council for redress and that every district has two representatives upon that board, will insure fair consideration at the hands of the board of control. section . that in case of a bank failure in any commercial zone one of the members of the board of control in that zone shall be appointed the receiver thereof and shall not receive any additional compensation for the services rendered as such receiver. section . that the board of directors of the american reserve bank shall be constituted as follows: _first_: the bankers' council of each commercial zone shall elect a member to the board of the american reserve bank. the commercial zones bearing the odd numbers shall elect bankers and the commercial zones bearing the even numbers shall elect business men, and every seven years thereafter the bankers' council of the respective zones shall alternately elect a banker or a business man, so that the elective members of the board of directors of the american reserve bank shall always be composed of an equal number of bankers and business men. _second_: the term of service shall be seven years; but the terms of service of the first elected board shall be for one, two, three, four, five, six, and seven years, respectively; that is, the board shall arrange itself into seven groups, each composed of two or more bankers and two or more business men, and thereupon the seven groups shall determine by lot how long each group shall serve. section . that it shall be the duty of the board of the american reserve bank, and it shall have the power, to fix the rate of interest or discount at which all the commercial paper or bills of exchange shall be purchased or discounted by all the boards of control. section . that it shall be the duty of the board of directors of the american reserve bank to issue a bulletin the latter part of each week, giving a statement showing a balance sheet of the american reserve bank and making such suggestions and comment and giving such advice as their wisdom may determine; and it shall make such arrangements as to insure the presence of this bulletin at practically every national bank in the united states every monday morning. section . that the place of business of the american reserve bank shall be washington, district of columbia. section . that the members of the board of the american reserve bank shall reside in washington, district of columbia, and shall give their time and personal attention to the business of the bank. section . that the members of the board of the american reserve bank shall receive as compensation ten thousand dollars per annum each, payable in monthly installments. comment:--each independent zone will send its own man to represent it in the board of the american reserve bank--so that every financial centre will have a spokesman to present its claims on the one hand and to give full and reliable information on the other; also to guide the whole board in its policy. the board shall give weekly advice to all the banks in the united states upon the condition of business at home and abroad. the american reserve bank, as we shall see, will hold all central reserves of the united states for the benefit and protection of each and all of the zones precisely as the zones must protect all the individual banks within their borders. since our gold reserves are now a part of the common reserves of the whole commercial world, the price for the use of gold must be under the control of the board of directors of the american reserve bank. in this capacity they are acting for every individual bank in the united states whose agent they are. section . that the board of directors of the american reserve bank shall elect as the president of the american reserve bank some one who is not a member of the board so constituted. they shall also elect a vice-president of said american reserve bank and such other officers as they may decide from time to time to be necessary to the best conduct of the business of said bank. comment:--since the board of directors are the direct representatives of the respective zones, and since the american reserve bank is only the servant of the combined zones working in coöperation, it is clear, that the board should elect its own president and vice-president. if there is one thing, more than any other, that should be kept out of this coöperative organization, it is politics. if the appointment should be the perquisite of the president of the united states it might be used as a bribe or a reward; such a thing should not be thought of. the policy of such an institution should be beyond the reach or influence of party politics. section . that the term of service of the president and vice-president of the american reserve bank shall be three years, and the salary of the president shall be twenty-five thousand dollars per annum, payable in monthly installments, and the salary of the vice-president shall be eighteen thousand dollars per annum, payable in monthly installments. the salaries of all the other officers or employees of said bank shall be fixed by the board of directors of said bank. comment:--the term of service should not be too long, for it would follow that a good officer would be retained, while a mistake could be corrected within a reasonable time. the salary should be sufficient to secure the ablest men that the country affords. section . that the comptroller of the currency shall ex officio be a member of the board of directors of the american reserve bank. section . that the secretary of the treasury of the united states shall ex officio be a member of the board of directors of the american reserve bank. comment:--since the united states government would carry its balances with the american reserve bank, the government should be recognized by making the secretary of the treasury and the comptroller of the currency ex-officio members of the board. section . that the president of the united states, with the approval of the united states senate, shall appoint three directors of the american reserve bank, who, for their first term, shall serve five, six, and seven years, respectively, and thereafter seven years, and each such director shall receive a salary of ten thousand dollars, payable in monthly installments. comment:--while it is true that the matter of management should be kept out of politics, it may be granted that it might be wise to have a small number of directors, appointed by the president of the united states, who would have only their respective votes in the deliberations of the board--but no official place. they might serve some good purpose at times; while they certainly could do no harm. the policy of the institution should not and would not be involved in these appointments. section . that vacancies in any one of the three boards as organized in this act may occur by death, resignation, or expulsion, and shall occur whenever a member of any of the boards shall be a director or officer of a suspended, insolvent, or failed bank. all such vacancies shall be filled by the respective boards in which they occur until the first monday in the month of may following, except those appointed by the president of the united states. section . that the term of office of each member of the three boards herein described shall begin at the time elected, but shall continue from the first monday in the following may as if that day were the beginning of the time for which they were severally elected. section . that on the first monday in may each year after one full year of service has expired the bankers of each commercial zone shall meet at the city in which the financial centre is located to fill any vacancies that may have occurred in any one of the boards described in this act, and also to elect any members to said boards where terms of members have expired. section . that each commercial zone shall have all the attributes and powers of a body corporate and may sue and be sued in the united states courts having jurisdiction of the action brought; it may receive deposits from banks and act in every capacity of a bank for other banks, but shall not allow or pay any interest on such deposits; it shall have power to receive, collect, and forward bank notes; it shall have power to buy and sell commercial paper and bills of exchange from and to the banks which are members of such zone; it shall have power to act as the agent or attorney in fact of the banks which are members of any of the commercial zones, so far as it may be necessary to do so to carry into effect the purposes of this organization; it shall have the power to do and perform any and all acts that may be necessary for the proper performance of its duties in the supervision of all banks under it, and in the conduct and operation of the commercial zone. section . that each commercial zone shall maintain and keep in operation at its financial centre a clearing house where all the bank notes, checks, drafts, bills of exchange, and other instruments of credit, drawn upon any bank located in the zone, may be cleared, and for any other purpose that may come within the purview of this act; and all such instruments of credit shall be accepted and settled for at par at such clearing house, under and in accordance with such rules and regulations as may be established from time to time by the board of directors of the american reserve bank. comment:--mr. manufacturer: you have now completed the functions of the zone, it seems to me; and everything that you have proposed is based upon the approved practices of the american clearing house. the free check zone, provided for in this last section, is identical with that at boston, where, ever since , every new england bank check has been at par at the centre. atlanta, nashville, kansas city and several other cities are working out the same plan. this plan is also identical with the plan that new england worked out before the war, with respect to the redemption of bank notes, when bank notes were the chief form of bank credit then used. from to , you will remember, the suffolk bank acted as a clearing house for all new england bank notes which were par at boston, precisely as checks are today. here we are getting back to the simple fundamental principle of current redemption of bank credit without charge to commerce in whatever form the people may choose to use it. it is bank notes and checks in france, scotland, ireland and all over canada. why should it not be bank notes and checks all over the united states just as well, in order that the people may have bank credit in the most convenient and cheapest form possible? then, you have extended to every commercial zone the same organization for supervision and administration that the most advanced clearing houses have; the board of control to examine them and the bankers' council as a court of appeal to settle all difficulties that may arise. mr. merchant: is it practical to have the zones conform to state lines? mr. banker: such a thing should not be thought of. economic laws do not follow state lines. there is not a single state in the union that is a natural economic zone. some states should have several financial centres; some none. to attempt to make a commercial zone conform to state lines would be absurd. bank credit flows to centres as water rushes to the ocean, and we should not violate a great economic law to the irreparable injury of commerce. sense and not sentiment should control our action. st. louis and kansas city are natural financial centres, but jefferson city is not. st. louis draws its bank credits from eastern missouri, southeastern iowa, northeastern arkansas and southern illinois. kansas city draws its bank credits from western missouri, southwestern iowa, southeastern nebraska, all of kansas and some of oklahoma. these cities illustrate the principle that must not be violated or we may do more harm than good. vermont has no economic centre, and it would do violence to trade and commerce to make one arbitrarily. tennessee has three such centres. indiana and several other states have but one. section . that the american reserve bank shall have all the attributes and powers of a body corporate and may sue and be sued in any united states court having jurisdiction of the action brought. it shall have power to buy and sell gold bullion and gold coin; to buy and sell united states government securities; to loan money to the united states government, and to act as banker, fiscal agent, representative and attorney in fact for the united states government; to buy and sell bills of exchange, domestic and foreign; to act as fiscal agent, attorney in fact, for all members of the respective commercial zones, and shall have full power to carry into effect the object for which this organization is created; it may receive deposits from banks and act in every capacity of a bank for other banks, but shall not allow nor pay interest upon any deposits that may be made with it. section . that the board of directors of the american reserve bank shall define from time to time the nature and character of the promissory notes, checks, drafts, and bills of exchange that may be purchased by the respective zones and the length of time they may have to run: _provided, however_, that every piece of paper purchased by any commercial zone shall bear the unqualified indorsement of some national bank in its zone. comment:--it would be unwise to fix now arbitrarily by statute just what kind of paper the banks of every zone should buy. this ought to be left to the board of the american reserve bank. they will meet it wisely as it arises. section . that the united states government is hereby authorized and empowered to prepare, upon the passage of this act, bank notes for the respective banks applying for them without the following superscription upon them: "this note is secured by bonds of the united states or other securities," but in all other respects like the bond-secured bank notes now in use: _provided, however_, that the notes delivered to any bank for issue and circulation shall have in bold type, first, and to the left of the centre, the number of its zone, and, second, to the right of the centre, the number of the bank by which it is identified in its zone. comment:--this section provides a true bank note by erasing that barbaric superscription that makes our present bank notes a bond speculation; and by bold numbers identifies every bank note with a zone and with the bank issuing it, thereby greatly facilitating the quick redemption of the notes. mr. merchant: how much more economical would this currency be than a currency furnished by the government or purchased from some central bank or other central institution? mr. banker: it would cost just one-fifth as much, or the difference between _par_ that would have to be paid for the currency purchased and the average reserve carried; or about per cent. the average per cent of gain to the banks would be about per cent upon the amount of notes outstanding (approximately $ , , , ) or $ , , . of course, this gain would come to the people, sooner or later; in the end, the expense of the bank is borne by commerce. the present enormous cost of shipping currency to and fro across the country would be saved also, and this amounts to several million dollars a year, to say nothing of the added trouble of shipping commercial paper with which to pay for it. section . that upon the completion of the organization of the several commercial zones as hereinbefore provided any national bank may retire all or any part of its present bond-secured note circulation by depositing with the united states treasurer an amount of the present bond-secured notes or lawful money, or both, which shall be equal to the amount of its circulation so retired, and may thereupon, with the approval of the comptroller of the currency, take out for issue and circulation an amount of bank notes, which shall be known as "national bank notes," that does not exceed in amount its paid-up and unimpaired capital without depositing united states bonds or any other securities to secure the payment thereof as now provided by law: _provided, however_, that before any national bank shall have the right to retire its present bond-secured circulation and take out national bank notes for circulation as in this section prescribed, it shall first, unless located in its financial centre, make arrangements with a national bank which is located in its financial centre for the redemption of its bank notes in gold coin or other lawful money: _and provided further_, that it shall first deposit in gold coin or gold coin certificates with the american reserve bank an amount of money equal to per centum of its average deposits during the preceding calendar six months, and in addition thereto an amount equal to per centum of the national bank notes it proposes to take out for issue and circulation. comment:--the amount of notes is limited to the amount of capital as a matter of convenience only. some banks will not be able to keep out per cent of their circulation, because their customers use checks; other banks will need at certain times of the year in some sections of the united states an amount of circulation largely in excess of the amount of their capital. the habits of the people will always determine what the amount of currency in use is, if permitted to choose between checks and notes; but crop-moving times will greatly increase the normal demand, as we have seen in the case of canada. section . that thereafter every national bank shall have upon deposit upon the tenth days of january and july of each year with the american reserve bank an amount of gold coin equal to per centum of its average deposits during the preceding calendar six months and per centum of its national bank notes taken out for issue and circulation: _provided, however_, that this reserve shall be increased at the rate of per centum each year for a period of three years thereafter; and that thereupon and thereafter every national bank shall have upon deposit upon the tenth days of january and july of each year with the american reserve bank an amount of gold coin equal to per centum of its average deposits during the preceding calendar six months and per centum of its national bank notes taken out for issue and circulation. section . that every national bank shall carry a cash reserve of per centum of all of its individual deposits subject to check up to six million dollars and one-half of per centum additional for each five hundred thousand dollars up to ten million dollars, and upon this and all additional individual deposits a reserve of per centum in cash. section . that every national bank shall carry a cash reserve of per centum of its deposits from banks, or upon its bank balances. comment:--there is no doubt whatever that banks should carry larger cash reserves against bank balances than against those of individuals. the banks of europe which carry such balances carry all the way from per cent up to per cent. section . that any national bank may at any time fall per centum below its required cash reserve: _provided, however_, that its average cash reserve from january st to december st shall be equal to its required cash reserve. section . that the amount that any national bank located outside of a financial centre shall be required to carry with a national bank located in a financial centre for the purpose of redeeming its notes may be counted as a part of its required cash reserve. section . that any national bank desiring to build up its reserve may rediscount or sell any of the commercial paper or bills of exchange owned by it by applying to the board of control of the commercial zone in which it is located. section . that if any national bank shall not maintain its required average cash reserve, as prescribed by this act, it shall pay at the end of the year as a penalty therefor, per centum upon all loans in excess of such required cash reserve; and such penalty so paid shall be paid without any reference to any rediscounts made with the board of control for gold: _provided, however_, that the board of directors of the american reserve bank may at any time suspend the whole or any part of said per centum penalty that may result from a demand for gold during a panic, crop-moving period, or any unusual or extraordinary condition. section . that any national bank desiring to take out for issue and circulation an amount of national bank notes in excess of its paid-up and unimpaired capital, without depositing united states bonds or any other securities to secure the payment thereof, may do so to an amount not to exceed per centum of its paid-up and unimpaired capital stock, provided the board of control of the commercial zone to which such bank belongs first gives its approval thereto. section . that the united states government shall print and place in the hands of the respective boards of control an amount of national bank notes for each national bank in its zone equal to the paid-up capital thereof in addition to the bank notes taken out in accordance with section . comment:--you will observe, gentlemen, that by section a bank is allowed to fall per cent below its average cash reserve; that by section it can buy gold from the board of control with its commercial paper and build up the reserve; also that by section it can take out an additional amount of currency to meet any emergency that may arise. now, when you appreciate the fact that the board of control is going to make every bank qualify in the outset, as sound and then is virtually responsible for its condition, with the power to aid it in case of necessity, it is difficult to even imagine a case where a bank would fail. mr. merchant: that is so; every bank ought to be kept in liquid shape by the board of control; then its means of defense, as you have just pointed out, are unlimited. of course it would then have all its present resources by way of rediscounting paper with its city correspondent; and on top of that the provisions of your bill. you could not possibly bust a bank. section . that national bank notes shall be a first lien upon all the assets of the bank issuing them, including the double liability of the stockholders, and any person or bank holding any of the national bank notes of a failed bank shall be entitled to recoup the amount thereof out of the first moneys received on account of the failed bank. comment:--these credit notes should be a first lien precisely as our present bank notes are; as the scotch notes are and as the canadian notes are. bank notes should be made a first lien, because they are a public convenience and because the holder is morally and practically compelled to take them in the ordinary course of business. mr. manufacturer: he could refuse if he chose and demand legal tender, could he not? mr. lawyer: certainly, but public policy should put the goodness of bank notes beyond question under all circumstances. section . that the expense of transmitting national bank notes by a bank to its financial centre, except its own bank notes, shall be paid by the board of control of the commercial zone in which such financial centre is located. section . that the expense of transmitting national bank notes from a financial centre outside of the zone to which they belong to the financial centre to which they belong shall be paid by the bank issuing the national bank notes so returned. comment:--it will not cost bankers anything to forward notes for redemption, as the expense of transportation will be paid by the commercial zones. this fact will insure the immediate return of all notes for redemption. section . that the national bank notes issued in accordance with the provisions of this act shall be received at par in all parts of the united states in payment of taxes, excises, public lands, and all other dues to the united states, including duties on imports, and also for all salaries and other debts and demands owing by the united states to individuals, corporations, and associations within the united states, except interest on the public debt and in redemption of the national currency. said notes shall be received upon deposit and for all purposes of debt and liability by every national banking association at par and without charge of whatsoever kind. section . that from and after the passage of this act no bank shall receive or have on hand deposits exceeding in amount ten times the amount of its paid-up and unimpaired capital. comment:--capital is a sort of insurance fund precisely as reserves are, and there should always be a reasonable relation sustained between capital and deposits. section . that any national bank may, with the approval of the board of control, establish a branch bank in any town, village, or locality within its own zone and within a radius of twenty miles, where there is no national bank; but such branch bank shall be discontinued as soon as an incorporated bank is established at that point with a capital of at least ten thousand dollars. section . that whenever any body of men desire to establish a national bank, or to nationalize a private bank, state bank, or trust company, they must first secure the approval of the board of control of the commercial zone in which the proposed bank is to be located; and if such application shall not be approved by the board of control for any reason, the applicant or applicants may then appeal to the board of the bankers' council for approval. section . that the decision of the board of the bankers' council upon all appeals by applicants for the privilege of starting a national bank shall be final, and their decision shall also be final in all other matters in which appeals may be made from the board of control. section . that all the rules and regulations under which branches are carried on shall be fixed and established by the board of directors of the american reserve bank. section . that any national bank which has taken out national bank notes for issue and circulation in accordance with this act shall pay the american reserve bank on the tenth days of january and july of each year per centum upon the average amount of notes in actual circulation during the preceding six months. comment:--the tax is placed at per cent per annum because that is the usual rate of interest now allowed on good balances all over the united states, and the notes are only another form of deposits made by the public who carry or use the notes. section . that the tax so paid by the banks upon the national bank notes, as provided in section of this act, shall be appropriated for the following uses and purposes: _first_: to pay all the expenses of whatsoever kind growing out of the administration of the four organizations established by this act. _second_: to pay per centum per annum upon all the united states per centum bonds or consuls until their maturity in nineteen hundred and thirty. _third_: to establish and maintain in the american reserve bank a bank note redemption fund equal to per centum of the average amount of the notes outstanding each six months preceding the first days of january and july of each year for the purpose of redeeming the notes of failed banks. _fourth_: the balance remaining, if any, shall, on the tenth day of january in each year, be paid into the division of the reserve fund of the united states treasury in gold coin for the purpose of converting the united states notes into gold certificates. section . that to any national bank which has complied with section thirty-nine of this act the united states government shall return the per centum fund deposited with it for the purpose of redeeming its bond-secured bank notes. section . that any national bank desiring to wind up its affairs and go out of business shall be entitled to receive back all its advances made upon its deposits and note issue to the american reserve bank: _provided, however_, that all the liabilities of such bank have been paid in full and satisfied, or any amount of lawful money equal thereto has been paid into the american reserve bank for that purpose, and the comptroller of the currency approves the repayment of said sum. section . that from and after the first day of january, nineteen hundred and fourteen, no national bank shall pay out over its counter any bond-secured bank note, but shall send the same to its financial centre, and the financial centre shall forward it to the united states treasurer for redemption, cancelation and destruction. section . that any national bank that shall count any national bank note or notes as a part of its reserve shall pay into the american reserve bank a penalty of per centum per diem on the amount so counted, and any national bank that shall, after january first, nineteen hundred and fourteen, count any bond-secured bank note as a part of its reserve shall pay into the american reserve bank a penalty of per centum per diem upon the amount so counted. comment:--if there is one evil that should be crushed out in this country more than any other it is the practice of carrying debts as reserves. no bank should be allowed to carry any other bank's notes, any more than any other check or draft which it thinks is good. it has been this abuse of bank credit that has led to more trouble than almost any other single thing. it was the requirement of coin reserves and current coin redemption that made the banks of virginia, louisiana, kentucky, ohio, indiana, iowa, missouri and the suffolk system such perfect successes. here is the crux. the very soul of sound banking is current coin redemption. so let us not fool ourselves by putting wind and water into our reserves. section . that any national bank may and is hereby authorized to accept any note, check, draft, or bill of exchange, with not more than four months to run, for any one of its regular customers: _provided, however_, that the instrument of credit so accepted shall be for goods or merchandise sold and actually delivered or in transit to the buyer: _and provided also_, that the instrument of credit states this fact upon its face: _and provided further_, that the bank so accepting any such instrument of credit shall keep and maintain against such acceptance identically the same reserve as it is required to keep and maintain against a deposit subject to check, and it shall be subject to the same penalty as provided in section forty-six of this act. comment:--let us not fool ourselves by supposing that by creating liabilities we are actually creating new capital. by acceptances a class of paper will undoubtedly be created that will in turn create a market for itself. the object therefore of acceptances should be to facilitate the handling of commodities in transit. section . that any national bank having a paid-up capital and surplus of at least two million dollars may establish a branch in any foreign country with the consent and approval of the board of directors of the american reserve bank. comment:--if we hope for our share of profit upon our foreign trade and if we hope to secure for the american merchant an equal opportunity in securing that foreign trade, we must prepare here two aids: one is banking facilities and the other is shipping facilities. is it not perfectly clear that a foreign banker would do anything in his power to divert all the traffic he could over the shipping lines of his country? we shall find in the end then that our foreign trade will be aided not by our foreign bank alone but by american shipping as well. section . that any national bank that has a paid-up capital of at least fifty thousand dollars, and the surplus required by law, may act as a guardian, administrator, executor, or trustee and in such capacity in any state, by whatever name known, in accordance with the laws of the state or territory where situated or located, and the reserves required against trust funds shall be as follows: _first_: seven per centum thereof shall be deposited with the american reserve bank. _second_: six per centum cash shall be carried against all trust funds up to six million dollars and one-half of per centum for each additional five hundred thousand dollars up to ten million dollars, and upon this amount and all additional amounts, per centum in cash shall be carried, but any national bank accepting trust accounts shall keep the same separate and apart from all other accounts in said bank, and shall establish a trust account department; and all such deposits shall be invested in such securities as are prescribed by the laws of the state where such bank is located. section . that if the laws of the state where any national bank accepting trust accounts is located do not prescribe how trust funds shall be invested, then the board of the american reserve bank shall fix rules and regulations for the investment of such funds. section . that any national bank may accept savings accounts, as distinguished from commercial accounts, but any national bank accepting savings accounts shall keep the same separate and apart from all other accounts in said bank, and shall establish a savings account department; and all such savings deposits shall be invested in such securities as are prescribed by the laws of the state where such bank is located. section . that if the laws of the state where any national bank accepting savings accounts is located do not prescribe how savings funds shall be invested, then the board of the american reserve bank shall fix laws and regulations for the investment of such funds. section . that all investments made for the benefit of the savings depositors of any national bank shall be held primarily and exclusively for the benefit of the depositors in the savings department; and in case of a bank failure, if the investments made for the benefit of the depositors in the savings department do not satisfy their claims in full, then the depositors of the savings bank shall be entitled to such a part of the capital, surplus, and capital liability as the savings deposits bear to all other deposits up to and until the savings accounts are paid in full. section . that any national bank accepting savings accounts shall, on the tenth days of january and july of each year, have with the american reserve bank an amount in gold coin equal to per centum of the average deposit in such department during the preceding six months, and such national bank shall be required to carry cash reserves amounting to per centum against such savings account. section . that the said per centum so paid by the national banks to the american reserve bank as reserves against their savings deposits shall be invested in united states government bonds or securities for the exclusive benefit of the savings depositors in the national banks as a savings bank fund, and the full interest earned upon said bonds shall be credited to the savings bank fund in the american reserve bank, and no part thereof shall be deducted for any other purpose whatsoever than the protection of savings bank depositors. comment:--this trust fund would absorb about $ , , of the present bonds held by the national banks for circulation, as the total savings now approximate seven billion dollars ($ , , , ). section . that any national bank accepting a savings bank account may at any time demand the right to have thirty days' notice of an intention to withdraw the same, and may also reserve the right to pay all savings accounts in two installments-- per centum thereof in three months, per centum in six months. section . that from and after the first day of january, nineteen hundred and fourteen, every person, firm, partnership, or corporation using the word banker or bank, and every state bank and trust company in the united states receiving deposits subject to check, or saving accounts in the usual way, or trust funds shall keep and maintain identically the same reserves against these respective funds as is provided for by the provisions of this act; and any person, firm, partnership, or corporation using the word banker or bank, and every state bank and trust company, except mutual savings banks, that fails to comply with the provisions of this act shall pay a tax of per centum to the united states government on the tenth day of january in each year upon all the deposits or trust funds against which the foregoing prescribed reserves have not been kept and maintained. section . that any person, firm, or corporation using the word banker or bank, and every state bank or trust company that shall, after january first, nineteen hundred and fourteen, hold as a part of its required reserves, as prescribed in section sixty-three, any national bank note, check, draft, or other instrument of credit, shall pay a tax thereon to the united states of per centum per diem on the amount so held; and every person, firm, or corporation using the word banker or bank, and every state bank or trust company accepting deposits or trust funds as described in section sixty-three shall, upon the first day of january in each year, make a sworn statement to the united states government showing exactly the amount and the character of reserves held during the preceding year against all of its deposits, and upon failure to do so shall pay a fine of one thousand dollars per day until such report is made. comment:--these sections, and , provide that every person or corporation in the united states shall not only carry its proper share of reserves, as we have all agreed they should, but the right kind of reserves as well. quantity and quality must both be made obligatory if we are to have a banking system that amounts to anything. section . that as soon as the amount of money deposited by the national banks with the american reserve bank, as aforesaid, shall reach the sum of five hundred million dollars all the bonds now deposited by national banks to secure government deposits shall be returned to the respective banks to which they belong; and from and after that date any national bank holding a government deposit shall pay interest thereon to the treasurer of the united states at the rate of per centum per annum, and the said interest so received shall be paid into the division of reserve fund in the treasury, and united states notes of an equal amount shall be retired, canceled, and destroyed and gold certificates issued therefor. the said interest shall be payable as follows: per centum on the tenth days of january and july of each year on the average balance during the preceding six months. section . that all the profits growing out of the operations of the several commercial zones and the american reserve bank combined may be distributed between the united states government and all the national banks pro rata, according to the amount they have respectively deposited with the american reserve bank, whenever in the judgment of the board of the american reserve bank it is advisable to do so, having made such provision for a reserve as is deemed necessary: _provided, however_, that the distribution of profits shall not exceed per centum per annum until practically all of the united states notes have been converted into gold certificates; and for that purpose all the profits in excess of per centum shall be paid into the reserve fund of the united states treasury in gold coin. section . that subject to the disposition made and provided for in this act of all the various sums of money to be paid to the american reserve bank all such sums of money shall be combined and held in one common fund and be known as the american reserve bank fund, and this fund shall guarantee the repayment of all government deposits made with the american reserve bank and the redemption of the national bank notes of any failed bank. comment:--in paragraph three, under section , provision was made for a per cent guarantee fund to redeem the bank notes of any bank which has failed. this fund is held by the american reserve bank, which under section will be used to redeem the notes of all failed banks immediately and the amount of the notes so redeemed shall be recouped from the assets of the bank that issued the notes; if, by chance, one should fail after it has become a part of the proposed system, which i, for one, do not believe is possible. section . that the american reserve bank shall, on the first days of january and july of each year during the life of the per centum united states consols up to nineteen hundred and thirty, pay into the treasury of the united states an amount of cash in equal payments which shall be equal to per centum per annum of all the united states per centum bonds or consols now aggregating about seven hundred and thirty million dollars. section . that when the american reserve bank shall have paid into the united states treasury the first half of per centum in accordance with the preceding section, the united states government shall thereupon refund all of the per centum bonds or consols into per centum bonds or agree to pay per centum thereon; and thereafter the government shall pay per centum interest upon all of said per centum consols. comment:--by this section all the per cent bonds will be converted into per cent bonds and they will then be returned to the banks to which they belong. they can then be sold by them, bringing into the commercial fund of the country $ , , . this change ought to enable the banks to loan money more cheaply to the people; we must remember that the more expensive we make banking in this country the higher the rates of interest will be; for, in the end, the people bear every added burden. section . that when the united states government shall have made provision for refunding the per centum bonds or consols into per centum bonds and the american reserve bank fund shall amount to the sum of five hundred million dollars, the united states treasury shall transfer to and keep with the american reserve bank a sufficient balance--upward of fifty million dollars--to meet all of its checks and drafts; and thereupon the american reserve bank shall become the fiscal agent of the united states government for all purposes, except for the collection and current daily deposits of its revenues, which shall not be deposited thereafter in the united states treasury or sub-treasuries. section . that from and after the date that said american reserve bank fund shall amount to the sum of one thousand million dollars the secretary of the treasury of the united states shall deposit from day to day all government receipts from whatsoever source received in the american reserve bank. comment:--according to these two sections, and , the united states treasury will cease to be a disturbing factor in the commerce of the country; and it will do its business, precisely, as any municipality, by check and draft upon the american reserve bank, where its money will be deposited, from day to day, currently, as received. section . that beginning on the first day of january after the "american reserve bank fund" shall amount to one thousand million dollars, every national bank shall pay to the american reserve bank a tax of one-fifth of per cent upon all of its deposits held upon said first day of january, and upon the first day of january thereafter for two successive years a tax of one-fifth of per cent upon the amount of deposits held. section . every national bank shall thereafter contribute a sufficient amount on the first day of january in each year to make the total amount that it has contributed equal to three-fifths of per cent of its deposits. section . the fund so created by the payment of the said three-fifths of per cent to the american reserve bank shall constitute and be known as "the depositors' insurance fund." section . any bank that shall come into the national banking system at any time after the passage of this act shall immediately proceed to make its contribution to "the depositors' insurance fund" as prescribed in sections eighty-three and eighty-four of this act. section . if any national bank shall fail after three years from the time that the first tax upon deposits was paid, all depositors shall be paid in full, as hereinafter provided, as soon as the amount due them respectively has been ascertained. section . the board of control of the commercial zone where the failed bank is located shall issue in the name of its commercial zone perpetual securities subject to call equal in amount to the amount of the deposits held by the failed bank. the securities so issued shall be in the denomination of five hundred dollars and multiples thereof, and be known as bank bonds of ---- commercial zone, and shall bear interest at the rate of per cent per annum, payable annually. section . the board of control issuing bank bonds as in the foregoing section prescribed, may deposit an amount thereof with the american reserve bank equal to all deposits less than five hundred dollars and all fractions of deposits less than five hundred dollars, and receive in exchange therefor, an equal amount of money. section . the board of control may at its option sell the bank bonds so issued, and pay the depositors in cash in full or may pay the depositors in cash in part and in bank bonds in part. section . from time to time as cash is realized from the assets of the failed bank the board of control shall retire a corresponding amount of bank bonds, the bonds so retired to be determined by lot. section . as soon as the loss resulting from the failure of the bank is determined, the board of control shall proceed to assess a tax at the rate of one-fifth of per cent per annum upon all the deposits of all the national banks in the commercial zone where the failed bank was located until one-half of such loss has been collected from such banks. the remaining one-half shall be borne by "the depositors' insurance fund." comment:--since the commercial zone where the failed bank is located is directly responsible for the failure because its board of control could have prevented it, that particular zone should bear at least half the loss. this is essential to impress upon all the bankers of the zone the importance of selecting the very best men upon the board of control. section . the board of directors of the american reserve bank may invest such part of "the depositors' insurance fund" in united states government securities as they may deem wise. section . if at any time in the future the board of directors of the american reserve bank shall find it necessary to reimpose upon all the deposits of the national banks the tax of one-fifth of per cent to carry this act into effect, they are hereby authorized and empowered to do so. section . if the board of directors of the american reserve bank shall at any time deem "the depositors' insurance fund" unnecessarily large, it may distribute a portion of the same among the banks as their interests may appear. comment:--mr. lawyer: gentlemen, by sections to we have provided for the insurance of depositors, as you will perceive. we have accomplished this by financing, as it were, the assets of the failed banks so that all depositors can have their money immediately. we believe that the result of this plan will be not only to absolutely protect all depositors and give them their money immediately; but, to save the depositors from a world of worry; to protect the banks from panics and runs; to stop hoarding; to protect storekeepers, merchants, manufacturers and all business interests from the consequences of the inability of the people to meet their obligations because their money or cash resources are tied up in bank failures as heretofore. our problem was to meet the condition confronting a community when a bank closed its doors, and i think we have solved it. mr. banker: there can be no possible question but what this plan, which will put into the american reserve bank at least $ , , before it becomes operative, will accomplish the purpose sought, since the total loss to all depositors in the national banks in forty-nine years have been only $ , , , and the estimated loss where the failed banks have not been closed out is only $ , , , or a total loss for the whole time of only $ , , . mr. merchant: you have undoubtedly solved every difficulty connected with this great and most benevolent purpose. mr. laboringman: gentlemen, i want to thank you from the bottom of my heart for what you have just done. i want to thank you in the name of the millions of toilers. if i have had any influence in bringing this great reform about, i feel that i have been repaid a thousandfold for the time i have spent with you. mr. lawyer: to you, mr. laboringman, more than to all the rest of us, is due the insurance of depositors in our national banks; for you may rest assured now that it will come about sooner or later. of course, that letter to mr. farmer from the comptroller of the currency paralyzed all opposition, and to you two men belongs the glory of this victory; to you two men will be due the gratitude of all depositors. section . that whenever the accumulations from the tax upon the national bank notes shall reach an amount equal to per centum of the national bank notes outstanding during the preceding six months after paying all the expenses growing out of the administration of the four organizations established by this act--the commercial zone, the bankers' council, the boards of control, the american reserve bank--and the per centum per annum upon all the per centum bonds or consols is being currently paid, the excess from whatever source remaining over, allowing for such a reserve as is deemed necessary, shall, on each succeeding tenth days of january and july in each year, be paid into the division of the reserve fund of the united states treasury in gold coin; and as soon as the secretary of the treasury shall receive and cancel an amount of united states notes equal to the gold so paid in, he shall issue gold certificates therefor. section . that when the secretary of the treasury of the united states shall have received from the interest paid by the banks upon the government deposits, and from all other sources, the sum of one hundred and ninety-six million six hundred and eighty-one thousand and sixteen dollars in gold coin for the purpose of redeeming and converting a like amount of the united states notes into gold certificates, and he shall have received, canceled and destroyed substantially all of the remaining united states notes outstanding, making due allowance for the united states notes estimated to be lost or destroyed, he shall then transfer all the gold coin and gold bullion in the reserve fund, amounting to one hundred and fifty million dollars, with all the accumulations, to the division of redemption of the trust fund; and thereafter no national bank shall hold a united states note as a part of its reserve, nor shall there be paid out of the united states treasury any united states notes; but the same when received shall be canceled and destroyed, and gold certificates shall be issued therefor. comment:--you will have noted in sections and , also in section , that provision has been made for paying gold into the reserve fund, which is the fund behind the greenbacks or united states notes, and that a corresponding amount of greenbacks are to be canceled and the same amount of gold certificates are to be issued in their place. the amount of greenbacks is $ , , . the present amount of the reserve fund is $ , , . now after we have paid into this fund $ , , , the greenbacks will be converted into gold certificates. we estimate that this will take twelve to fifteen years. then all our bank reserves will, practically, be in gold coin or gold certificates, because the silver certificates will be cut up into one and two dollar pieces and will be token money, in the pockets of the people, the tills of the stores and will constitute small cash for the banks. uncle sam: glory halleluiah! that will be the day i long have sought and mourned because i found it not! boys, your work will be a great relief to me. section . that when substantially all the united states notes shall have been converted into gold certificates, as in this act provided; when practically all of the bank notes secured by government bonds have been returned to the united states treasury and canceled; and when practically all the silver certificates of the larger denominations have been cut up into one and two dollar certificates or coined into subsidiary coins; and when the american reserve bank shall be acting as the fiscal agent of the united states government, it shall thereupon assume the maintenance of the parity of the silver certificates and silver coins with gold coin. comment:--uncle sam may well rejoice because this section, you will observe, provides that the american reserve bank shall then maintain the parity of all his silver with his gold. mr. merchant: gentlemen, have you estimated how much gold your plan would bring into the american reserve bank? mr. banker: yes, sir; we should have approximately one thousand two hundred and fifty million dollars ($ , , , ). mr. merchant: where would this gold come from? mr. banker: partly from what the banks now hold, and partly from the channels of trade. there is about $ , , now in the banks and $ , , in the channels of trade, or $ , , , in the united states. the present _dead reserves, i mean dead reserves held by the banks under a legal prohibition against their use_, and the gold floating around in the cotton fields, corn and wheat fields, in the mining camps, in the stores, and in the pockets of the people generally, would at once be brought to their proper use, vitalized, and mobilized into a common defense of the bank credit of the country; all of it, ready all the time, to meet the demands of commerce, and to protect every bank in a liberal and wise use of its credit. mr. manufacturer: i presume that you have been deeply impressed, as i have, with the importance of protecting our gold reserves from the standpoint of a nation among the great commercial nations of the world. we have learned that there are many forces now acting upon gold, because it is the universal reserve of the world. mr. banker: precisely so, and this fact necessitates this centralization of gold, and that a power be lodged somewhere to protect it from those influences, which, if set in motion, and unobstructed, will rob us of it almost in the twinkling of an eye. only a year ago we saw these influences at work in germany. it was stated that at least $ , , was withdrawn in about sixty days. tomorrow, these same influences may be drawing away our foundations of credit in a similar manner, and we would suffer an irreparable injury, because we are without any means of defense. there are those who seem to think that if we have a balance of trade in our favor, we are safe; but this is only one factor; nor are we certain of this, for any length of time. we are today, literally, living in a fool's paradise, that may disappear while we contemplate it in serenity. history has already taught the world many lessons upon this point, and if we are wise, we will heed them. mr. merchant: mr. banker, just what are the influences that affect the movement of gold to or from the country? mr. banker: in our case, the causes that may influence the movement of gold to or from us, may be summed up as follows: _first_: the balance of trade. _second_: the state of foreign exchange throughout the world. _third_: the state of our currency, that is, the use of substitutes for real reserves; such as united states notes, silver, and bank notes, in place of gold. the present plight of germany is due to her use of bank notes as reserves. it is a vivid illustration. history has furnished hundreds of illustrations; but the most forcible in our recent history was the issue of the united states notes in the sixties, and the effect of the silver purchase act of . gresham's law put into operation will overcome all opposing forces. _fourth_: foreign financing. _fifth_: political disturbances. _sixth_: the state of the money market in foreign financial centres. _seventh_: demands for capital in periods of speculative development in foreign countries. _eighth_: changes in our tariff laws. it is easy to imagine how complicated and powerful these forces might become, and how essential it is that we should be ready to combat them, when the tide turns against us. we must be in a position to buy and sell gold bullion, and to buy and sell domestic and foreign exchange, and to loan a large sum of money, gold, i mean, quickly, through a board of control to stop a panic in some financial centre, and last--and above all, we must hold the chief key to the situation. that key lies, mainly, in the power to fix and enforce a price for the use of gold, in what is popularly called a discount rate for gold, and make it universal throughout the united states. all these objects will be attained by the centralization of about one-half of our reserves in the american reserve bank, and by having them under the direction of a board of men, who come directly from each of the commercial zones, and who are, therefore, responsible to the people of their respective zones. mr. merchant: now, gentlemen, you seem to have completed your report so far as the commercial bank is concerned, and i must say your plan looks good to me; but, i want to ask you something before we leave this question, and that is, why did the english bank act of provide that only the bank of england should issue bank notes, and why did germany follow in her footsteps in , by giving to the imperial bank the sole right of note issue? mr. banker: i am very glad that you have asked that question, because it is often a stumbling block to those beginning the study of this subject. one naturally says to himself, if this plan of a central bank of issue is good enough for england and germany, why should we not adopt it here? in the first place, the two banks act upon entirely different principles, and in both cases their theories, so far as their note issues are concerned, have broken down. in the bank of england suspended specie payments, and during the napoleonic wars issued an unwarranted amount of paper or notes, which led to wild speculation. at the same time, the country banks joined in the frenzy, and issued large quantities of notes also. all the paper became greatly depreciated, causing such a derangement of commerce as to call for a public investigation. the bullion report of , the most profound economic and important statement ever made in the history of banking, followed. this declared that the mere numerical amount of notes in circulation at any time was no criterion whatever of their being excessive. the bullion report declared _that the only sure criterion was to be found in the price of gold bullion and the state of the exchanges_. ricardo says: "the issuers of paper money should regulate their issues solely by the price of bullion and never by the quantity of their paper in circulation. the quantity can never be too great or too little, while it preserves the same value as the standard." if ricardo had used the words _bank credit_, instead of _paper money_, it would have been technically more correct. this statement of ricardo, and that contained in the bullion report, constitute the very soul of this subject, so far as bank credit in any form (bank notes or bank deposits, which are identical) and gold are concerned. reserves in gold, in sufficient quantity to redeem all bank credit, deposits as well as notes, are essential. do not forget that. of course, gold will be seldom called for, but it must be forthcoming if demanded. no better illustration of the ricardo principle can be found anywhere in the history of banking than in the banks of virginia, louisiana, kentucky, ohio, indiana, iowa, and missouri before the war. this principle, announced in the bullion report was rejected by the house of commons, and was not recognized by the bank of england, or english bankers generally. from to bank notes were thought good enough for reserves, that is, the basis of other credit. there were constantly recurring business disturbances and banking troubles up to , when the bank of england resumed specie payments. in gold began to leave england again, and continued to go throughout , when the crisis came. in the bank seemed to be convinced that the principles of the bullion report were correct, and it tried to apply them in part. in and there was more financial trouble, and again at the end of another serious period arrived. by the end of the specie had dropped from $ , , to $ , , . all these adverse experiences convinced the public that something was radically wrong. there then appeared upon the scene lord overstone, mr. norman, col. torrens and other influential writers, who maintained that the amount of bank notes should not exceed the amount of bullion, and that it was the excess of bank notes over the amount of bullion or gold that sent the gold out of the country. they carried the day, and even converted peel to their way of thinking. the bank charter expired in . they thought that they had now found a panacea for all their ills; it was the so-called _currency principle_; that is, that bank notes should not exceed the amount of specie. in adjusting the matter, they did issue bank notes against $ , , of government securities, which was in direct violation of their own contention. they did not have to wait long to see how completely they were mistaken. their contention was, that if the bank only issued notes against specie, the people would have to bring the notes to get specie. the bank kept right on taking deposits and making loans, apparently with no knowledge of the fact that it made no difference what kind of debt the bank incurred, whether in the form of a deposit or in the form of a note, it would have to be paid in specie if the check holder wanted the specie, just as much as the note holder wanted the specie. many business disasters occurred in . the new scheme was to be put to the test within two years after the english bank act was passed. on aug. , , the amount of bullion in the bank was $ , , . the bank notes outstanding were $ , , . by jan. , , the bullion was down to $ , , . the bank notes outstanding were $ , , . by april , , the bullion was down to $ , , . the bank notes outstanding were $ , , . _it was demonstrated beyond question, you see, that you could get gold with a check just as easily as with a bank note; for, while $ , , of bullion had disappeared, the amount of the bank notes outstanding remained the same. in other words, the bank notes were not retired as the gold was withdrawn, which was the whole theory upon which the bank act of was based._ the bank act had failed completely and utterly to accomplish what it was designed to do. there could have been no more abject failure. it was upon this occasion that the bank employed, for the first time, either by accident or with intention, the principle that was subsequently, in , expounded by macleod. he states the principle thus, "that when the rate of discount between two places differs by more than sufficient to pay the cost of transmitting bullion from one place to another, bullion will flow from where discount is lower to where it is higher." while the bank of england seemed to have employed this principle in , it acted too slowly and very feebly. it lost a large part of its gold before it raised its rate of discount, and then it raised it only to - / per cent, then to per cent, and finally to per cent. the world has since learned the power of this weapon; but it is not all-powerful against any odds, as we have seen in watching the withdrawal of gold from germany during the time when there was a possibility of war with france. when i started to answer your question, i said that both the english and german banks had failed to accomplish the particular things which they had set out to do. i think you will admit that i have demonstrated my contention with regard to the bank of england. now, the plight of germany is this: she had supposed that she could create true bank reserves out of bank credits, but that scheme has completely broken down. her own commission appointed to revise the bank act during the past year has just recommended that the individual banks carry their own coin reserve. now, gentlemen, there is no point in common between england, germany, and france, so far as note issues go. the bank act of took away from the bank of england the power of note issue, and reduced the bank to identically the same position that the united states treasury is in, with regard to the gold certificates; that is, the bank act reduced the bank to a mere warehouse, with the power to issue gold certificates in the form of bank notes. the bank of england has no more authority to issue bank currency than the new york clearing house has; not a bit. the imperial bank of germany issues notes against per cent of coin and other collateral. the bank of france issues notes without reference to any particular amount of coin, but carries an enormous gold reserve, averaging about per cent of its note issue. the bank of england usually carries about $ , , in gold, and has outstanding about $ , , bank notes; the difference between the gold and this amount being covered by government securities. her deposits are $ , , . the imperial bank of germany carries about $ , , of gold, and has outstanding about $ , , bank notes. her deposits are about $ , , . the bank of france holds about $ , , of gold, and has outstanding about one billion dollars of notes ($ , , , ). her deposits are usually about $ , , . mr. merchant: it is true that there does not seem to be any great similarity in the condition of these three institutions. the points of contrast are as great as the points of likeness. england is a great check using country; hence, there are few notes. france is a great note using country; hence, comparatively few deposits are kept, while germany seems to occupy a middle ground between the two. the bank of france has been operated upon the principle laid down in the ricardo axiom, and also in accordance with the principles enunciated in the bullion report. but france is handicapped by the load of silver she is carrying, which amounts to about $ , , ; and germany is greatly handicapped by the fact that her use of bank notes as reserves has prevented her, as she now discovers, from accumulating a proper amount of gold to adequately protect her bank credits. the result is, that neither germany nor france are open markets for gold; both throwing trammels and obstacles in the way, if you desire to get gold in either country. the entire commercial world is conscious of the difficulties you are under when trying to take gold away from paris or berlin. bills of exchange drawn in pounds, shillings, and pence are preferable the world over to any other; because the bank of england is an open market for gold at the current price. mr. lawyer: mr. banker, since you cannot institute a comparison between these three banks in the matter of note issues, in what respect do they have a common purpose? mr. banker: in only one single respect is there a common factor in all of them, and that is, that each of them carries the final reserves of its country. this is the one common fact, the all important fact, because without this massing of their reserves two essential results could not be achieved. first, a panic of any proportion could not be quickly and successfully met. second, no one of them would have any means whatever of protecting its gold against the drafts that the rest of the commercial world is likely to make upon it at any time, nor any power of adding to its gold in case of some great necessity growing out of a crisis. mr. merchant: recently we have heard repeatedly that, while we were having our ever-recurring spasms or panics in business, the countries with central banks were not suffering in the same way. is it not a fact that canada has been just as free from these spasms and panics as any country in the world, and yet canada has no central bank? mr. banker: yes, that is true. it never occurred to me before, but i should say that canada was, if anything, much freer from these convulsions and panics, as you call them, than any other country. mr. lawyer: i agree with you. there has not been the suggestion of such a thing, as far back as i can remember--thirty or forty years. now, since canada has not a central bank but twenty-seven banks, the protection against these disturbances or panics must lie deeper and more fundamental. what is it? it cannot be the central bank idea, because germany has been having a vast amount of trouble for more than a year, and at the present time seems to have plenty in store for her. mr. banker: yes, it does lie deeper than your mere form of organization; i think i can explain it so that every man here can understand and appreciate it. the reasons are fundamental and economic: _first_, there must be ample _gold reserves and elasticity in those reserves_. without any law with regard to the amount of reserves to be carried the banks of canada carry about per cent, and since no specified reserves are required there is perfect elasticity in their reserves. _second_: there must be convertibility, if necessity requires it and precisely to the extent required, of bank book credits into bank note credits. bank credit currency in canada amounts at its maximum to $ per capita and the variation averages now about $ per capita. the same ratio would give us an expansion and contraction every fall of about $ , , without changing our reserves to the extent of a single cent. mr. farmer: i catch on to that. two principles are involved and it doesn't make any difference how you apply them, only so that they are in operation. _the first is the principle of ample coin reserves and their elastic adjustment to current commercial needs. the second principle is the interchangeability of bank book credits and bank note credits and their current convertibility into coin._ mr. banker: that is the whole thing in a nut-shell, outside of the principle of a central gold reserve, and it doesn't make any difference whether you apply those principles to one bank or to twenty-seven banks, as in canada at present, or to five hundred banks, as in the suffolk system before the war, or to our twenty-five thousand banks today. mr. manufacturer: as i understand the bill you have prepared, our american reserve bank will have no liabilities whatever, and yet it will have more gold than all of these three countries combined. mr. banker: that is correct. you see, there are just three reasons for the existence of the american reserve bank: _first_: by it, all the banking power of the united states stands ready to help every individual bank move the crops; and, in case a panic breaks out, to protect every individual bank. _second_: by it, we shall always be in a position to control and direct the movement of gold to and from the united states. _third_: by it, we have completely decentralized bank credit; because each zone can rely absolutely upon the centralization of the gold reserves to assist it whenever necessary; so also can every individual bank. national land credit bank section . that the national land credit bank is hereby created and established upon the organization of the following institutions as prescribed: _first_: the local land credit association. _second_: the state land credit association. _third_: the national land credit bank. section . that no more than fifty persons and no less than twenty-five persons may associate themselves together in any state of the united states under the name of ---- land credit association, and be known as a local association. section . that the capital stock of each local association shall be twenty-five thousand dollars, no more, no less; and it shall be paid up in full in cash. the par value of the stock of such association shall be one hundred dollars. section . that any person may become a member of a local association by owning one or more shares of the stock, but no member of an association shall own more than twenty-five shares thereof. section . that every local association, each member voting the number of shares owned by him, shall elect an executive committee composed of five members and a secretary and treasurer of said local association. the committee shall choose its own chairman. section . that the term of service of the members of the committee shall be one year. section . that no member of a local association shall transfer his stock to any other person without the unanimous approval of the executive committee, evidenced by the signatures of such committee upon the records of the association and by the signature of the chairman of said committee upon the certificate of stock, which shall be transferable only by such signature: _provided, however_, that any person desiring to sell his stock may appeal from the decision of the executive committee to the members of such local association. section . that the total amount of loans that any local association can make is twenty times the amount of its capital stock, or five hundred thousand dollars. section . that the executive committee may take applications for loans and recommend the same for favorable consideration to the board of managers of the state association, but no loans shall be made except upon improved productive agricultural lands, and then only for per centum of a fair valuation thereof. section . that all compensation, if any, to the executive committee and the secretary and the treasurer and all expense of the local association of every kind whatsoever shall be derived from charges made for services rendered in connection with the various applications made to them and for services rendered in connection with loans already made. each association shall fix its own scale of charges, if any are made. section . that no loan shall be considered or consummated in any state until there are organized in such state at least twenty local associations in accordance with sections two, three, four and five of this act and until at least five hundred thousand dollars have been paid up in cash. section . that when at least twenty such local associations have been organized in any one state the governor of such state, upon being informed of this fact, shall name a time and place for meeting, and the members of the several associations shall meet in person, or by legal proxy duly representing their respective shares, for the purpose of organizing a state land credit association. section . that the state land credit association shall be organized under the name of (here insert name of state where located) land credit association and be known as a state association. section . that every state association shall have a board of managers, which shall consist of seven members, who shall be elected by the shareholders of the several local associations in the state present or duly represented by legal proxies. section . that the members of the board of managers shall hold office for the period of seven years: _provided, however_, that the seven first elected shall hold office for one, two, three, four, five, six, and seven years, respectively, and they shall determine by lot how long each member shall serve. section . that the officers of each state association shall consist of a president, vice-president, secretary, treasurer, and attorney. the said officers shall be members of the board of managers, except the secretary and treasurer, who may or may not be members. section . that the officers named in the preceding section shall be appointed by the shareholders of the several local associations present or duly represented by legal proxies. section . that the salaries to be paid the officers of each state association shall be fixed by the shareholders of the several local associations of such state present or duly represented by legal proxy. all such salaries and all the expenses of whatsoever kind incurred in carrying on the business of the state associations shall be paid out of fees or charges made upon the business done in that state. section . that the place of business of the state association shall be fixed by the shareholders of the local associations of the respective states present or duly represented by legal proxy. section . that all applications for loans made to any local association and duly recommended by the executive committee thereof after a personal examination of the property and a full report in accordance with such rules, regulations, and forms as the board of managers of the state association may prescribe shall be examined and considered by said board of managers. section . that no loan shall be made by any state association unless the same has been approved in writing by at least five members of the board of managers in a record of loans kept especially for that purpose by the state association; nor until such approval shall also be signed by the attorney of the state association stating that he has examined the title to the property and that it is free and clear and that the loan is a first lien upon the property described in the conveyance. section . that no loans shall be made upon any property unless an absolute conveyance of the same shall be made by the owner thereof to the state association of the state where the land is located, in such form and manner as the attorney of such association shall prescribe; and the owner shall lawfully waive any claim or right of defense that he might otherwise have in case of foreclosure proceedings under the laws of the state in which the real estate is located. and, further, the owner of said real estate shall, in such manner and form as the attorney of the association shall prescribe, appoint the local association through which the loan was negotiated as a trustee for the benefit of the state association to take possession of the property in case of default in payment of interest, taxes, or insurance, or in case of waste of any kind, and shall give such local association full authority and power to manage the property, or sell the same whenever, in the judgment of the executive committee of such local association, it is advisable to do so: _provided, however_, that such sales shall be made only after the property has been duly advertised in accordance with the law made and provided for sale of real estate in the state where located after foreclosure proceedings have been had and judgment entered. section . that all money loaned shall be furnished through the several state associations, and shall be paid by check or draft, and full records shall be kept by the several state associations of all loans made in their respective states of every transaction connected with such loans. the state association shall have full and entire charge of all loans made and outstanding in their respective states, the collection of interest, the payment of taxes, the care of insurance, and the repayment of the loan by the borrower, which shall always be to the state association of the state where the real estate is situated. section . that no loans shall be made by any state association until-- _first_: there have been organized in the united states at least one thousand local associations, in accordance with sections ninety-nine, one hundred, one hundred and one, and one hundred and two of this act. _second_: until at least twenty state associations have been organized in accordance with sections one hundred and ten, one hundred and eleven, and one hundred and twelve of this act. _third_: until there has been paid up in cash the sum of twenty-five million dollars. _fourth_: until there has been organized, as hereinafter provided, the national land credit bank. section . that as soon as there have been organized at least one thousand local associations and at least twenty state associations, as herein provided, the president of the united states shall be notified of these facts, and he shall thereupon name a time and place in the city of washington, district of columbia, for the organization of the national land credit bank, and he shall advise all the local associations whose names and addresses have been furnished him of such time and place of meeting and the purpose therefor. section . that, pursuant to the notice of the president of the united states provided in the preceding section, each local association of the several states where state associations shall have been organized shall send one representative to washington for the purpose of organizing the national land credit bank. each representative of a local association shall have one vote, but any association may be represented by a proxy in such legal form as is prescribed by the laws of the state where such local association is situated. section . that the board of directors of the national land credit bank shall consist of seventeen members, as follows: _first_: fifteen members of such board of directors shall be elected by the representatives of the local association present in person or by proxy. _second_: the secretary of agriculture of the united states shall ex officio be a member of said board. _third_: the president shall appoint a united states auditor, with the consent and approval of at least two-thirds of the members of the board elected by the representatives of the association. the term of service of the auditor shall be five years, and he shall be a member of the board of directors of said national land credit bank. section . that the members of the board of directors of the national land credit bank who have been elected by the representatives of the local associations shall serve for a period of five years: _provided, however_, that those first elected shall serve for one, two, three, four, and five years, respectively, and they shall divide themselves into five groups, and thereupon determine by lot how long each group shall serve. section . that the officers of the national land credit bank shall consist of a president, vice-president, secretary, treasurer, and auditor. section . that the officers of the national land credit bank, except the auditor, shall be appointed by the board of directors of said national land credit bank, and they shall receive such salaries as the board of directors may determine: _provided, however_, that the president shall receive eighteen thousand dollars per annum and that the auditor shall receive six thousand dollars per annum. section . that the city or place where the national land credit bank shall conduct its business shall be selected and determined by the representatives of the local associations present in person or by proxy. section . that the annual meetings of the local associations shall be held on the first monday of april in each year. the annual meeting of the state association shall be held on the first monday of may in each year. the annual meeting of the national land credit bank shall be held in the first monday of june in each year. section . that upon the completion of the organization of the national land credit bank, as herein provided, each local association shall transfer and pay over to the national land credit bank per centum or one-half of their cash paid-up capital amounting in the aggregate to at least twelve million five hundred thousand dollars, and they shall also transfer and pay over to their respective state associations per centum or one-quarter of their cash paid-up capital amounting in the aggregate to at least six million two hundred and fifty thousand dollars. section . that the cash capital so paid over to the national land credit bank and the cash capital so paid over to the several state associations, as provided in the preceding section, shall become the absolute property of the national land credit bank, and of such state associations, as completely and absolutely as if the same amount had been paid directly to them for stock issued. for the amount of money so received by the national land credit bank and the amount so received by the state association from the local associations the said national land credit bank and the several state associations shall issue their several receipts in such legal form as to entitle them to a pro rata share of the assets of the said national land credit bank and the several state associations upon the distribution thereof, subject, however, to the claims of all holders of the obligations of whatsoever kind issued and outstanding of the national land credit bank. section . that every local association, every state association, and the national land credit bank shall each of them be, and they are hereby, made legally constituted bodies corporate that may sue and be sued in any united states court which may have jurisdiction of the subject matter of the action brought. section . that the said national land credit bank, the several state associations, and the several local associations may severally invest their capital and surplus in mortgages token as herein prescribed, or in the obligations of the national land credit bank, or in united states government securities. they may severally borrow money in the regular course of their business either upon their credit or by pledging any of the securities they may own. section . that neither any local association nor any state association nor the national land credit bank shall take deposits in any form, either subject to check or upon time, except for investment in the obligation of the national land credit bank; and any one of these institutions that shall take a deposit of any kind, except as herein provided, shall pay to the united states government a tax thereon of per centum per annum, nor shall any one of these institutions loan money in any other manner or form than as herein provided. upon any loan made by any one of them upon personal security, or in any other manner or form than as herein provided, shall pay a tax thereon to the united states government of per centum per annum. section . that the national land credit bank shall have power, and is hereby authorized, to issue and sell or dispose of its own obligations in the form of bonds, debentures, or under any other name, and bearing such rates of interest, and in such manner and form, and upon such terms and conditions as to time to run, and manner and method of payment as the board of directors may determine from time to time. section . that the mortgages held by any local association, or by any state association, or by the national land credit bank, such mortgages having been taken in accordance with the provisions of this act, and all the obligations, bonds, or debentures issued by the national land credit bank under the authority granted by this act, shall be exempt from all taxes or duties of the united states government, as well as from taxation in any form by or under any state, municipality or local authority. section . that all advances of money upon loans made by the several local associations shall be under the control and under the direction of the board of directors of the national land credit bank, and the rate of interest to be charged on all such loans made shall be fixed from time to time by said board of directors. section . that at the end of each year the united states auditor shall make a full report of all the institutions organized under this act, and such reports shall show what the profits are of the national land credit bank, and of the several state associations, and of each of the local associations, respectively. thereupon the board of directors of the national land credit bank shall set apart one-half of the net profits so certified to by the united states auditor as a part of its surplus account, and may carry the balance as undivided profits, or may declare such a dividend out of its undivided profits as in their judgment seems wise. section . that the amount paid out in dividends by the national land credit bank shall always be divided equally between the state associations and the local associations in proportion to the capital held by them and the local associations. section . that the board of managers of the several state associations shall thereupon set apart one-half of the net profits so certified to by the united states auditor as a part of its surplus account and may carry the balance as undivided profits and may declare and pay such a dividend out of the undivided profits as in their judgment seems wise. the executive committee of the several local associations shall set apart one-half of the net profits so certified to by the united states auditor as a part of its surplus account and may carry the balance as undivided profits, or may declare and pay such a dividend out of the undivided profits as in their judgment seems wise. section . that when the surplus account of the national land credit bank shall be equal to per centum of the capital money so paid over to it by the several associations, the board of directors may declare such additional dividend as in their judgment may seem wise: _provided, however_, that no such increase, or extra dividend, shall ever reduce the surplus below said per centum of the capital so held by it. the same rule herein laid down for the payment of dividends by the national land credit bank shall apply to the several state associations and each and all of the local associations. section . that if it shall become necessary at any time for a local association to take possession of real estate upon which a loan has been made and sell the same, the profit or loss thereon shall be shared by the several institutions in the same proportion as the capital is held by them; that is, the national land credit bank shall share one-half of the profit or loss, the state institution making the loan shall share one-quarter of the profit or loss, and the local association recommending the loan shall share one-quarter of the profit or loss. comment:--_first_: sufficient responsibility should be imposed upon each local association to compel it to look after all delinquents diligently. _second_: sufficient responsibility should be imposed upon each state association to compel it to look after every loan in the state with promptness and persistency. section . that if any local association shall be formed at any time after the organization of the national land credit bank, before it goes into actual operation such local association desiring to become a member of a state association shall first be compelled to obtain the unanimous consent of the board of managers of the state association in which the proposed local association is situated and shall pay for its shares such a price as may be fixed from time to time by the board of directors of the national land credit bank for the admission of new associations. section . that all the expenses of whatsoever kind growing out of the management of the national land credit bank shall be paid out of the earnings thereof. section . that the entire surplus of the national land credit bank and the surplus of the state associations and the surplus of the local associations shall be held as a working balance, and also as a fund which may be withdrawn for investment in bonds or other securities of the united states. the president of the united states may direct that the whole of said surplus be invested in the bonds or other securities of the united states if, in his judgment, the general welfare and the interests of the united states require. section . that for the purpose of creating and establishing the organization provided for in this act and putting the same into operation there is hereby appropriated the sum of three hundred thousand dollars, or so much thereof as may be necessary, as a loan to the national land credit bank, at the rate of per centum per annum until paid: _provided, however_, that this loan shall not extend beyond the period of ten years. section . that to accomplish the purpose of this act the governor of each state is hereby authorized and empowered to appoint some citizen of his state to organize at least twenty local associations in his state in accordance with the provisions of this act, and such appointee is hereby authorized to expend not to exceed six thousand dollars in such undertaking. upon the completion of the organization of at least twenty local associations under and in accordance with the provisions of this act the amount of money so expended not to exceed six thousand dollars will be repaid to such appointee of any governor upon the presentation of vouchers for the money so actually expended duly signed by the governor of the state to the treasurer of the united states. section . that the governor of the state in which at least twenty of such local associations have been organized as in this act provided shall thereupon report in detail to the president of the united states, giving him the names and addresses of the local associations so organized, the names of the chairmen of the respective executive committees and their post-office addresses, and the names of the banks and their respective post-office addresses in which the several local associations have deposited the paid-up capital of twenty-five thousand dollars each, together with duplicate letters of receipt of the money from said bank. section . that if any governor of any state shall fail to make a report within nine months after the passage of this act that at least twenty local associations have been organized as in this act provided, then and in that event the allotment of the six thousand dollars to pay the expenses for the organization of at least twenty local associations in his state may be used proportionately to pay the expenses, if any, of organizing local associations in any other state or states in excess of the required number necessary to establish a state association--that is, the amount remaining unearned by any of the states shall be apportioned to the several states reporting more than twenty local associations directly in proportion to the number in excess thereof, preference, however, always being given to the states whose average expenses are lowest for the organization of their several associations. mr. lawyer: gentlemen, this concludes the results of our labor and i want to express the solicitude of your committee in proposing this bill and the hope that it may in a large measure meet your expectations. uncle sam: well, boys, speaking for the crowd, i want to say that i did not believe that the committee would be able to make its report for a month. upon my soul, i did not expect that they would ever make so satisfactory a report. they seem to have thoroughly comprehended all the subjects we have discussed and to have produced a financial and banking bill that will meet every question that can possibly arise; one that will protect every individual bank in its independence; one that will protect every commercial zone in its independence; and one that will protect my reserves against the demands of all the rest of the world. mr. lawyer: those are precisely the things we have striven to accomplish, uncle sam. mr. merchant: during the past week i ran into a friend of mine who is in the banking business and considering that we were practically through with our work, i told him what i had been doing the past four months without giving him your names. "well," he said, "i want to give you a pointer. if you are following along the trail of the aldrich scheme you had better drop it; you had better save your time, because the people are on to that deal and they won't stand for it. you will have to make it clear that you are working from an entirely different point of view." this remark of his opened my eyes and i am going to suggest that we spend one night demonstrating the striking, the fundamental points of difference between our bill and that aldrich scheme. mr. merchant: i am convinced that we should do that very thing and i propose and move that we meet next wednesday night for that purpose. mr. banker: to make a clean job of our work, i believe that is essential; because hundreds and hundreds of thousands of dollars have been expended in promoting that scheme, therefore, i second that motion. uncle sam: the motion is carried and now good night, all. * * * * * to you, uncle sam, we, the representatives of the farmers, bankers, lawyers, laboring-men, merchants and manufacturers, dedicate the result of our endeavor, our future services, indeed, our lives; and we pledge our callings, every one of them, to continue the work here begun with that degree of vigilance and patriotism of which this great cause is worthy, confident that the result of our efforts will be to safeguard your honor and establish you upon the solid foundations of a sound financial and banking system. [illustration: wont you walk into my parlor said the spider to the fly the aldrich plan and plot exposed] seventeenth night aldrich plan and plot exposed uncle sam: from what you boys intimated the other night, i got the impression that the so-called aldrich scheme demonstrated almost everything that we should not do in working out a financial and banking system. it must have been more or less of a warning to you, then, when you started out. mr. lawyer: to tell the truth, i had become so convinced of its ulterior purposes from the standpoint of management, that i never studied it seriously from an economic point of view, until this last week. mr. banker: my position was just the reverse of that of mr. lawyer, for while i had studied it from an economic point of view and that of a practical banker, and had become so convinced of its utter unsoundness on the one hand, and unfitness for use to ninety-nine out of every hundred of american banks, i never dug into the soul of its management, until the past week. so we compared notes, and found the situation particularly interesting. mr. merchant: before you go any further, i want to read something from a speech, delivered in congress march , , two years before the aldrich plan was born. you are all doubtless aware that the aldrich scheme was nothing more nor less than an attempt to transfer to this country the german scheme of note issue and banking generally. mr. laboringman: i heard the other day, that the aldrich bill was deader than a door-nail. why do we want to spend any time on that? or, are you fellows like the irishman, who said that he was kicking a dead dog to teach him that there was such a thing as punishment after death? mr. merchant: you must remember, mr. laboringman, that error is always repeating itself, and that sin and iniquity never die; so, the economic blunders of the aldrich bill and its administrative purposes should be exposed and held up as a lesson and an illustration to guide us in the future. what i wanted to read, was a part of congressman fowler's speech, delivered in the house of representatives. referring to the german banking situation, he said: "the position of both england and france, under present conditions, would seem sound and impregnable from a governmental as well as a banking point of view. each has planted itself upon the gold standard, with certain precautions peculiar to its circumstances. germany, on the other hand, has not pursued the course of england, with its limited gold reserve, forcing the public into the deposit and check system to meet the current demands of trade. this would have been impossible without a long-continued ruinous revolution, considering that there is a quarterly settlement in germany that calls for an expansion in currency amounting to $ , , . nor has germany pursued the course of france, which has a gold reserve large enough to meet any test or burden that either the government or the commerce of germany might have imposed upon it, but has adopted a middle course which has not the strength of the position of either england or france, nor the credit facility of france. "its gold reserve is of the halfway sort, and its bank note issue is also of the halfway sort. the result is that the financial and banking situation of germany must necessarily prove weak upon the first great test when the bank notes of the imperial bank of germany must be made a legal tender. "indeed, upon the declaration of war by germany or against germany, the first step taken in a financial way would be for her to declare her bank notes a legal tender. it is hardly problematical what would soon happen, with the wide divergence between her gold fund and the amount of her note issue." gentlemen, within eighteen months after he made that statement, when war seemed probable with france, germany made her bank notes a legal tender. further along in the same speech, commenting upon the unsoundness of the german plan, he said: "imagine for a moment a central bank in the united states, like the imperial bank of germany, issuing all our bank note currency and these notes going into the reserves of our myriad of banks as the basis of loans which, under our system, in turn become our deposits. "the natural, first, and immediate effect would be an expansion of credit, an inflation to just the extent to which the notes were used for reserves. "as soon as the situation became obviously dangerous, a halt would be called and a contraction in loans would follow. but a contraction of loans calls for liquidation, and liquidation produces an exigent demand for currency. we all learned that lesson only so short a time ago as . "but in the very face of the increased demand for more currency the currency would be contracting, because the loans would be reduced by calling in bank notes which were being used for reserves; or, in other words, the loans called would be paid in bank notes. "for every $ , of notes so called in the loans might be reduced to an average of $ , , and yet this very process of liquidation would be concurrently destroying the only instruments of credit that would adequately meet the demand created by forced contraction. it would clearly lead to self-destruction, to commercial suicide. "the best thought of england recognizes this subtle but obviously destructive contradiction in the use of credit, and therefore opposes the use of credit notes by the bank of england." _gentlemen, the fact that we can force our banks to carry a specified amount of reserves and of a specified quality, by the power of taxation, will preclude the use of bank notes as reserves in the united states._ mr. fowler then concludes as follows: "there are then, in addition to all of the objections to the bank of france, three other unanswerable objections to the establishment in this country of any central organization approaching in character the imperial bank of germany: "_first_: it would give us a financial and banking structure so weak that it could not stand any great strain such as necessarily comes with a great war, if, indeed, it were not so weak as to lead to a suspension of gold payments even in time of peace. "_second_: no thought whatever should be given to any suggestion that makes it possible for one bank credit to be used in the reserves of another bank and so substitute any form of credit for gold in our bank reserves. "unless gold alone is ultimately recognized as fit for bank reserves, we shall continue to pay dearly for our mistake until it is corrected. "_third_: no proposal whatever should be entertained by us that involves the possibility of the suspension of gold payments, for no country can become the clearing house of the world that is not a free market for gold. the united states and not england ought to be the clearing house of the world." these words, as i have said, were spoken about two years before mr. aldrich attempted to import the german bank into this country. mr. banker: that is very interesting and prophetic, but not more so than his speech at the republican club of new york, january , . let me read that to you, gentlemen, by way of an exposition of the economic faults of the so-called aldrich scheme. he said: "i wish to speak purely from an economic point of view and to cover only one single phase of the proposal; its dangerous expansion, unbounded inflation and certain expulsion of gold from the country. "'_first_: nothing should ever go into the reserves of the banks of a country except what is coined out of its standard of value. "'_second_: the poorer money always drives out the better.' "every single note of the so-called reserve association used in the reserves of our banks will displace just that much gold and drive it out of the country. "judged, therefore, from a purely economic point of view, i assert that the reserve association plan is the most unsound, the most dangerous; indeed, it is absolutely the worst proposal that has been brought forward for serious consideration by any respectable body of men since the adoption of the constitution, with the two following exceptions: first, the issue of legal tender money by the government such as greenbacks; second, the free and unlimited coinage of silver at the ratio of to . "an officer of one of the largest banks of the united states recently used this language: 'mr. fowler, it is incredible that we should be called upon to consider such a proposition.' "if this is really true, how does it happen, that so many business men and so many bankers approve it, is a most natural inquiry. the cause is not difficult to perceive. "there is not a business man nor hardly a banker who is not even now still living in a state of fright from the terror of . one thought alone seems to have taken possession of the country to the exclusion of everything else, and that thought is this: that we must hereafter be able to convert our commercial credits into bank or current credits. there seems to be something approaching madness; indeed, there seems to be an insane haste lest they be caught again, possibly tomorrow, certainly next fall. but they need not worry, for danger is not imminent; will not come again right away. "during the past two years up to the present time the entire thought of the country has been directed to a mere mechanism to achieve this result, without any reference to or consideration whatever of those fundamental, eternal principles of banking economics that demand recognition and obedience if we are to escape the frightful penalties which their violation always inflicts. "in the outset i want to lay down two fundamental laws that i wish were burned into the minds of every banker and every business man within the borders of this republic. they are these: "one--nothing should ever be counted as a reserve which is not coined out of the standard of value. our standard of value is gold, therefore nothing should go into the reserves of our banks except gold. "two--the poorer money always drives out the better. "i hope that whoever hears these words will commit these two laws to memory, for they are as fundamental and eternal in their operation as the law of gravitation. "i assert that the plan of the so-called reserve association is in direct violation of the first of these laws, and will put the second law into operation to a dangerous and destructive degree. "every intelligent student knows that the plan proposes to transport to this country the german system of banking, which i assert has completely broken down at home during the past six months. now, if this system has broken down in germany, where there are a few great banks with hundreds of millions of assets and not more than banks all told, what can you expect it to do here with more than , individual, independent banks, directly responsible to their depositors? "the following letter was given to me by an officer of one of our largest banks, accompanied with these words: "'i realize that in giving you this letter i am, in a way, betraying a business confidence, but i regard it as my patriotic duty to give it to you, to use in any way you may see fit. for what would happen to this bank if we should send out such a letter to our depositors? our doors would be closed inside of twenty-four hours.'" the letter referred to was written by the deutsche bank of berlin, which has assets approximating $ , , , and is as follows: "'in consequence of the restrictions recently made by the imperial bank, with regard to the supply of money at the end of every quarter of the year, we are, to our regret, compelled to ask you, when drawing against your account with us upon our head office and our branches by mail, kindly to advise us by cable of such drafts on them as are likely to come forward for payment during the last three working days of the quarter and the following two working days, so as to enable us to provide from here especially the necessary funds at the office drawn upon. "'as to cable transfers which, during the five days in question, you may have to order on our head office or branches, to the debit of your account with us, we shall feel obliged by your ordering them only if you can advise us by cable one day before, the amounts to be placed by us to your debit on receipt of such advice, or ordering upon us for mail transfer from here. "'the foregoing, of course, does not apply to small amounts.' "as a further proof that the system has broken down at home, let us see what has been going on in germany during the past six months to further demonstrate the weakness of their system. "the great banks of germany have been scouring the markets of the world, going into every nook and corner, hunting for gold. at what price? was it at per cent, per cent, per cent, per cent, per cent, per cent? no. the new york _evening post_, in its annual review, says it was from per cent to per cent. i have been credibly informed that the great banks of germany, with hundreds of millions of assets, were borrowing money in our own markets at - / per cent and - / per cent for three months, or upwards of per cent. "i was told of one loan to one of the largest banks in berlin, running for a whole year at per cent. "think of it! what would the condition in our country have to be before the national city, the bank of commerce and the first national of new york, and the first national and continental commercial of chicago, were scouring all quarters of the globe for gold and paying from to per cent for the loans? "the imperial bank of germany could not save the few great banks of germany. what would the same kind of an institution in the united states do for , independent banks under the same circumstances, all pulling at the skirts of this proposed financial balloon? the imperial bank could not make real money out of paper credit when the crisis came. "let me ask the , individual independent banks of america, what they would do when the day of contraction and refusal came? where would you go for gold with your comparatively small capital and limited credit? "the financial situation in germany is by far the weakest of all the great nations of europe and the cause is not far to find nor difficult to detect. "their notes, which are based upon only per cent of gold and per cent of commercial credits, are used as reserves and made the basis of additional credits. economically speaking, whenever a bank puts anything into its reserves it makes that thing a legal tender and exactly to that extent displaces that much gold, if gold is the standard of value. "during the ten years from to the gold accumulated by russia amounted to upward of $ , , ; that accumulated by france, upward of $ , , ; that accumulated by england, where nothing but gold is treated as reserves and where there has been comparatively little growth in business, $ , , . the united states accumulated $ , , , , while germany, with all her development of trade during the last ten years, accumulated only $ , , of gold when it ought to have been ten times as much, all things considered, or $ , , . if she had done this she would not have been compelled to send her great financial institutions all over the globe in search of gold and been compelled to pay per cent and per cent for it." gentlemen, within sixty days after those words were uttered, this conversation was reported to have taken place. the german emperor asked herr havenstein, the president of the imperial bank of germany, whether germany was prepared, financially, to carry on a war with a first-class power. herr havenstein said: "no." to this the german emperor replied, "i do not want that answer to that question when i ask it again." herr havenstein immediately called the managers of the thirty great banks together, and told them that they must collect at least a per cent reserve. to this they protested, saying that it meant the accumulation of at least $ , , in gold; but havenstein persisted and insisted upon his demand. now, gentlemen, if you add the $ , , they had accumulated, to what havenstein insisted that they should accumulate, or $ , , , you have $ , , as a minimum. it is altogether probable that $ , , was nearer what they should have accumulated. it should be noted in this very connection, that germany recently appointed a commission to investigate her banking system, and that this commission reported that the individual banks of germany should carry their own reserves, precisely as congressman fowler has always contended, declaring that it is especially important in the case of our individual, independent banking system. from what has been said, it has been demonstrated that every criticism that he has made of the german system, has been confirmed by their own subsequent action. the rest of his speech was as follows: "mark this: if we did not have the $ , , united states notes or greenbacks, the $ , , of legal tender silver and a part of the $ , , national bank notes in the reserves of our banks, we would now have in the united states $ , , , of gold instead of only $ , , , . does all this prove nothing to us? "every intelligent student of economics knows that after alexander hamilton, with the acquiescence and approval of jefferson, had fixed the ratio of the gold and silver dollar in , a differential of only one-half to one per cent drove all the gold out of the country by , and that from to the changed ratio drove every dollar of silver out of circulation. who does not know that from to the issue of fiat government paper drove every dollar of gold out of the country; that for seventeen years we were off the gold standard, resuming specie payments in ? "has any banker over fifty years of age forgotten the silver struggle from to , when, because of the silver purchase act by which we only added $ , , a year to our reserve money, we came to the very precipice of repudiation and national dishonor? "these four great and significant lessons have been taught us--since the establishment of this government--the poorer money invariably drives out the better, and yet we are confronted by such stuff as the following falling from the lips of the reputed author of the so-called reserve association: "'the banks will be able to replenish their reserves indefinitely.' the counterpart of this proposition is that the banks will be able to make loans indefinitely. think of such a proposition! and again, he says it was deemed necessary 'to provide such effective regulation of discounts and note issues as would enable the organization to respond promptly at all times to normal or unusual demands for credit or currency without danger of undue expansion or inflation.' if this proposition survives at all it will be as the curiosity of the century. i submit that neither of these propositions could have emanated from a mind capable of thinking in the terms of economics. "i assert that if we adopt a sound financial system in the near future we shall have in the course of ten years upward of $ , , , , possibly $ , , , , of gold in the united states. i assert further that if we adopt the proposed so-called reserve association scheme we shall have at the end of five years thereafter in the neighborhood of only $ , , , , allowing for a differential of $ , , either way as a possibility. in other words, we would have as a result not more than per cent and possibly not more than per cent of the gold that we shall have if we pursue a wise economic policy. "the scheme provides that any deposits with the association may count as reserves; also that any of its notes may be held as reserves. "since the average reserve of all national banks is and has been for many years about per cent, let us assume, first, that a national bank called 'x' has $ , , of deposits and holds a per cent reserve, or $ , , of gold; second, that x national bank deposits this million of gold with the reserve association; third, that a national bank called the 'y national bank' exchanges $ , , of commercial paper for $ , , of the notes of the reserve association, which it puts into its reserves. "in the course of time it will have a million of deposits, largely in the shape of loans based upon this million of notes; so that the original $ , , which stood guard over $ , , of debts now is called upon to protect $ , , of debts, or only about an per cent reserve as against . "the x national bank owes $ , , of deposits against $ , , deposited with the association. the association owes the x national bank the $ , , deposited with it and $ , , of notes outstanding which it issued to the y national bank. the y national bank has liabilities outstanding of $ , , with the notes as reserves, or a net expansion and inflation of $ , , . "it has been assumed or claimed by some advocates of the scheme that probably $ , , , of gold would be deposited with the association, in which event there would be an expansion and inflation of $ , , , , or a total liability of $ , , , where now there are only $ , , , . "while this expansion and this inflation have been going on the notes have been going into the banks as reserves, and a corresponding amount of gold has been driven out of the banks and out of the country. "now, mark you, i have not pursued this expansion, this inflation, beyond the per cent gold reserve for all the liabilities of the reserve association. when you turn your imagination to all the possibilities remaining in rediscounts, borrowing direct, acceptances and falling in your reserves, and the credits which grow out of credits directly and indirectly, the prospect becomes bewildering. the expansion and inflation becomes a matter of planetary distances and astronomical figures. the proposal leads into the nebulous somewhere, into the bottomless nowhere. "every student recognizes that the weakest point in our national bank system is the superimposed credit resulting from the deposits with our reserve cities and then with our central reserve cities. but in the very face of that fact here is a proposal that accentuates that fault one hundred fold. "the strangest thing about this whole proposal is that it is based upon the fact that we have not sufficient capacity for expansion and inflation of credit. will any one say that what we wanted during the years of - - - - was more inflation? does not every intelligent student of banking economics know that what we should have had was some way of checking the delirium instead of increasing the mad speculation? "to determine now what we want we must first ascertain with some degree of accuracy just what happened. "until we come to realize that there are two distinct kinds of capital involved in our banking business, and learn to treat them according to their peculiarities, we shall continue to have the same kind of trouble, to a greater or less degree, that we have had in the past. "there is the trust fund or the savings of the people and money belonging to estates or the investment fund. then there is the commercial fund or that capital engaged in production and trade. the law should compel the segregation or separation of these two funds, so that we know with some degree of certainty whether the investment fund has all been exhausted and our commercial funds or capital are being encroached upon and absorbed in fixed investments. this is precisely what happened by . "to illustrate this thought, let us assume that a railroad needs one hundred flatcars to carry its peculiar freight and needs one hundred passenger cars for the accommodation of the people. it is self-evident that if the road uses all the flatcars and half the passenger cars to carry its freight, the balance of the passengers will have to make some other provision for transportation or walk. this is just what occurred in , and a great many people are still walking as a result of that misadventure. liquidation is still going on, with a probability that we shall be well into before normal or really good business conditions will prevail all round. "now, it is apparent that if this diagnosis is correct, the bankers did not cause the panic, as is so frequently charged. indirectly, the bankers had a good deal to do with bringing it about, but not in the manner usually supposed. the way they helped it on was this: "the great syndicates or underwriting bankers adopted the practice of simply notifying rich men and bankers all over the country that to them so much of some issue of bonds had been allotted. those to whom they had been allotted, influenced, on the one hand by flattery and on the other by fear, lest if they refused to absorb what had been set apart for them they would be ignored in the future, took the allotment at all hazard. "this forcing process went on until commerce broke down, because it had been robbed of its necessary capital and has not been able to replace it since, out of earnings." mr. merchant: mr. banker, do you believe that to be a correct statement? mr. banker: believe it! i know it. there is no doubt whatever that the banks generally are under a kind of duress. they know that if trouble comes, they must go to the powers that be. when these underwritings are put out, and we bankers are notified that we are expected to take a certain amount, we feel compelled, half compelled at least, to respond, precisely as mr. fowler stated, and, as a natural consequence, the commercial fund of the country is sapped and absorbed, and transferred to passive investments, which, when the break occurs, become to all intents and purposes fixed investments because you cannot dispose of them at all. what we must do, and what i am sure we have accomplished in the bill we have prepared, is to set every individual bank free, absolutely free, from any domination or influence of any kind, direct or indirect. take my bank as an illustration of what i mean. today i am living in a kind of terror of the possibility of coming again, because i have no way of protecting myself, except through my correspondents, and, under present conditions, that is no guarantee, as the banks may all break down again as they did then. this, you will remember, is due to the fact that we have no real economic reserve in the united states today. all the reserves are loaned out all the time. let me call your attention to what my position will be, under the bill we have prepared. _first_: i shall be able to furnish all the currency i need, by simply converting book debts or deposits into note debts or currency, up to twice the amount of my capital, if necessary. that is, i can regularly issue $ , , the amount of my capital, and by going to my board of control, $ , additional. but, if i did this, i would not increase my liabilities a single dollar, but simply change the form of them from deposits to notes. mr. merchant: have you any doubt about the people taking your bank notes, as you suggest? mr. banker: none, whatever. you see, in the first place, they do not come to the bank because they fear the bank cannot pay them; but, because when one of these shocks to credit comes, there is a tremendous demand for cash of some kind. you will remember, that in and , when currency was sold in new york, it did not make any difference what it was: gold or gold certificates, silver or silver certificates, united states notes or bank notes--anything that was cash brought the same premium. but, suppose the question should arise and a man should ask, are these notes good? he would not hesitate long after i gave him these facts: _first_: that they were a first lien upon all my assets. _second_: that there was a gold guarantee fund amounting to $ , , in the treasury of the american reserve bank, to redeem them if my bank failed. _third_: that the american reserve bank with $ , , , would redeem the notes in case my bank failed. mr. laboringman: well, mr. banker, do you know what i would do, if i had a deposit in your bank, under those circumstances, and got scared of you? i would give you a check for my deposit, take your notes, and hold them until the storm blew over. that's what i would do. uncle sam: there, can you beat that as a precaution against accidents? mr. laboringman never will get left, if you will give him half a chance. mr. manufacturer: under those circumstances, of course, the question of goodness of the notes would never arise. the people would soon think only of the great central gold reserve, which would always be before their eyes. mr. banker: in addition to my note issue, i would have the same recourse to my bank correspondent in new york that i have today, and he would then be in a far better position to assist me than he is now, because of his additional resources. besides, i could fall in my required cash reserves, which would be about $ , down to $ , , without any danger to my bank; because of my greatest, final, and practically inexhaustible resource, the board of control, which has examined my bank, knows my assets, and will give me any amount of gold to protect me in case of necessity. mr. merchant: i see, your exact condition is known to the board of control; and the board of control has access to the gold in the american reserve bank, and could get fifty or one hundred million dollars to protect itself, if necessary. mr. banker: that is so. my last protection is the american reserve bank, which actually holds reserves, real reserves, not united states bonds, united states notes, silver certificates, chips, and whetstones, nor any old thing; but gold, in unlimited quantities, to all intents and purposes. now don't you see, gentlemen, that if you will place me in that position, i will be absolutely free and independent of any bank in the united states, and of all banking influences of whatever kind--simply because my final appeal is to a great coöperative fund, in which i have a common interest with all my fellow-bankers, and i know that my protection is absolute? mr. manufacturer: yes, and i see another very important, all-important fact growing out of that situation; the complete liberation of every bank in that zone, as well as your bank; indeed, every bank in every zone would be absolutely liberated. mr. merchant: yes, and i see more than the liberation of all the individual banks. i see the complete liberation of every commercial zone or section of the country from every other commercial zone or section of the country; as each zone will look for its protection to the american reserve bank, the holder of the great coöperative gold fund, that is more than ample for any emergency that can possibly arise. mr. lawyer: mr. banker, how would you fare under the aldrich scheme, if you wanted $ , of currency to use to move the crops in the fall? mr. banker: i am glad that you have asked for a comparison of our plan with the aldrich scheme, under the same conditions. i could not have any accommodation whatever, unless i first subscribed for an amount of stock in his scheme, equal to per cent of my capital, and i had paid up per cent, or one-half of it, or $ , . then, i must have a deposit or balance with his institution, possibly as much as $ , , if i wanted to borrow as much as $ , . even then, i could not get any accommodation unless i had notes or paper that had less than twenty-eight days to run. but country bankers such as i am have no short time paper worth speaking of, and any of the paper or notes that might happen to be coming due within twenty-eight days would be the paper of people who do not want it sold and collected at some remote city. they usually want to pay a part and renew a part, so that, practically, i could not get any accommodation along that line. indeed, i do not believe that there is one bank in a hundred in the united states that could use the scheme at all directly. now, if i should go into that scheme i would have to become a member of what they call a local association. if i had no twenty-eight day paper, i would then have to go to my local association with my hat in one hand, and my grip full of notes in the other, and ask them to guarantee my paper for me, by paying a commission for such guarantee. of course, some of the officers of the local association would be from my particular neighborhood, and competing with me for business. i would not want to confess to my local fellow-bankers by asking their help in ordinary times, and i would not want to put into their hands the paper of my customers, and so expose their business to their neighbors. the result would probably be that i would resort to my correspondent banker, just as i am doing today. of course, the large banks might have plenty of twenty-eight day paper, and could turn it over to the branch of aldrich's central bank, and get some of the notes about which we have already heard something and supply me. now, let me suppose that i could use an average of $ , of currency throughout the year, and that i keep that amount of paper up all the time, for the purpose of supplying myself with currency of the aldrich make; you can see that it would cost me per cent upon $ , , or $ , per annum. mark this, put it in your pipes and smoke it, that under our plan, allowing for the cost of my reserve of per cent on $ , of notes, or per cent on $ , , or $ , and allowing my tax of per cent on $ , of notes, or $ , , it would make a total cost of only $ , . my bank would, as you can see, be the loser of $ , by using the aldrich scheme as against our plan. do not fail to remember that the largest part of the per cent tax on the notes under our plan will go to pay off the greenbacks. again, i want you to keep in mind the expense and trouble of shipping out the commercial paper, and looking after it throughout the year, and the interminable nuisance of buying just the right amount of currency every day, as compared with issuing your own notes, precisely as your customers want currency. you see, i will be getting back some of my notes every day through the clearing house, as they will then be sent to the clearing house with the checks and drafts, just as they are in canada. mr. merchant: of course, if you can save $ , on your currency every year, and a large amount of additional expense, as well as an endless amount of trouble, you can afford to share your gain with us fellows. mr. banker: most certainly, and you may depend upon it, that all the extra expense that we incur will come out of our borrowers. mr. manufacturer: as you say, there cannot be one bank in a hundred that would ever have what you call twenty-eight day paper. i know i would not want you, and i am sure that mr. merchant there would not want you, to take our paper to some local association and ask to have it guaranteed unless there was a panic and everybody was in the same boat. the whole scheme looks absurd and impractical. mr. banker: your opinion is confirmed by one of our most prominent country bankers, who said, "this proposition is impractical, unparalleled, and useless." mr. merchant: mr. banker, if you should ask your city banker correspondent from whom you purchased the central bank notes, upon what he relied, when he gave you the notes, what would he say? mr. banker: he would undoubtedly say that he relied upon the credit of my bank, and upon the paper i turned over to him in exchange for the central bank notes. mr. merchant: well, if your credit and the paper with your endorsement are good enough for that banker, why are they not good enough security for your own bank notes? mr. banker: they certainly would be; especially since i would be under the supervision of the board of control, and my notes would be secured by being a first lien upon my whole assets; by a guarantee fund, and by the total amount of gold held by the american reserve bank. mr. merchant: mr. banker, you spoke of belonging to a local association if you should go into the aldrich scheme. how many of those associations would there be in the united states? mr. banker: no one could tell until they got through organizing them. the banks now have about two billion dollars of capital, and two billion dollars of surplus, or a total of four billion dollars. the scheme provides that any number of banks representing $ , , of capital and surplus could form an association. if they succeeded in driving all the banks of the country into it, as was evidently their intention, you see there could be about of these local associations engaged in guaranteeing their associates, if they wanted to, after prying into their private business. mr. merchant: that is the worst feature i have heard yet, because it would let all the cliques and cabals get together and run things by manipulation. don't you think so? mr. banker: i certainly do think so. bankers above all things do not want to expose their business to their immediate neighbors in the banking business. you will remember that in the plan that we have just submitted, we confined all knowledge to the boards of control, of which there is to be no more than forty-two, possibly only twenty-eight, and that we required all members of the board of control to disassociate themselves from all banking connections in their respective zones. mr. laboringman: yes, but you have seven districts in every one of your zones, don't you? that would make two hundred and ninety-four districts, if you should have as many as forty-two zones, would it not? or one hundred and ninety-six if you have only twenty-eight zones. i am sure my arithmetic is right, for i am fairly good at figures. mr. banker: yes, your figures are right, but you must remember this--that the only purpose for the creation of the districts in our plan, as we have constituted them, is to prevent combinations and cabals, and guarantee a fair and evenly distributed representation of all parts of every zone. these districts exist only for the single purpose of the organization of the commercial zones--the election of members to the board of the bankers' council and to the board of control. when this is accomplished, their work is done. mr. laboringman: oh, i see, you would only have at most forty-two organizations in the united states that would have any actual business to do. mr. banker: that is correct. every zone would be so organized as to absolutely protect the confidences of the business world and the banking fraternity. i think in the organization of the commercial zone, that we have taken such steps to emphasize and secure publicity of action, and so much pains to guarantee representation from every section of every zone, that the people as well as the bankers will be kept advised all the while of all that is being done. i think that the matter of the subsequent selection of members, both to the board of control and to the board of the bankers' council, will always be a subject of general discussion and newspaper comment. this is true more particularly, because every bank has one vote, and because only one member will be elected to the board of control each year, and only two members will be elected to the board of the bankers' council each year. publicity and direct representation are the two distinct ends sought, as we believe that in this way alone can a true and proper sense of responsibility be imposed upon the members of the two boards. mr. merchant: i agree with you absolutely. it is precisely as president-elect wilson said: "publicity, pitiless publicity, is the only sure protection to the people." mr. manufacturer: just another word upon that point. samuel j. tilden i think it was who said: "publicity is the only safeguard of republican institutions." how well we have guaranteed publicity in the organization of our commercial zone the public will have to judge. however, if our method for securing publicity can be improved upon, we will all welcome it. mr. farmer: since we have been discussing this feature of publicity and independence, i have become so deeply impressed with the fact that every bank will be set free, will be able to act so independently, and that every commercial zone will be such a complete, such a perfect democratic republic in itself, that i have been wondering whether each zone could not create and carry its own reserve. listen! this is my idea. some one has mentioned st. louis as a financial centre. now, why could not st. louis carry the central reserve for that commercial zone, and so each of the forty-two financial centers of the zones carry their own central reserves, precisely as we have learned the clearing houses are carrying the reserves of their banks today. you have extended the approved clearing house practices to the entire zone--you have complete, absolute, local self-government; you have your supervision and control of all the banks in the zone; you have your central reserve--you have a free check zone. now, what more do you want? why should not every zone stand upon its own bottom, just as the banks of virginia, louisiana, kentucky, missouri, and ohio did; and as the bank of the state of indiana and the state bank of iowa did? that's what i want to know. mr. banker: i must say that is a very pertinent, a very interesting, and very important question. there is one point upon which everybody now agrees, however much they may differ upon other points. that one point of common agreement is this--that the real source of weakness, from the standpoint of organization today, is the fact that whenever there is fear or apprehension in the country, every bank begins to fight for reserves, fight for some kind of cash; because there is no actual or real protection as matters now stand, unless a bank has practically as much cash as its deposits amount to. in other words, it is really a run of the banks upon the banks. it is "everyone for himself, and the devil take the hind-most." now, it must be apparent to you that each of your forty-two zones would be fighting each other for reserves, just as all the individual banks fight each other today when the danger comes, and the whole situation proves no stronger than the weakest link; hence, our exchanges break down. st. louis, for instance, might have a central reserve of $ , , ; but would st. louis be satisfied that that was enough to protect her against any accident? she is confident that she has some strength, but is not sure of unlimited strength and absolute protection. therefore, the struggle for reserves would begin between the zones, with the first appearance of danger, just as it does today between the banks. on the other hand, if the banks in the st. louis zone should send their $ , , to washington, and send along with it their representative of that zone, and in like manner every zone should send its central reserve and representative to washington, it would make a total reserve of $ , , , of gold in one mass, and a board of forty-two members to manage it. the result would be precisely the same as that now attained by having a federal army, a federal navy, a national government, for a "common defense." if each zone should be left to stand upon its own bottom, as you say, we would be repeating, economically, identically the same mistake that we made politically when we formed the confederation of states in . the confederation was too weak to be an efficient government, and so we formed a "stronger union," the present federal government in . it is no more important that the banks in a clearing house should get together than that all the banks in any given commercial zone should get together; and it is no more important that the banks in any given commercial zone should get together, than that all the zones should get together for a _common defense_ of all the business interests of the country, and for the common defense of all the reserves of the country against all the demands of the rest of the commercial world. unless this final union of reserves is made, no discount rate for gold can be fixed and enforced, and we would find ourselves in the same helpless, hopeless situation or position that we are in today. but if all the central reserves of all the zones are united in the american reserve bank, and every commercial zone has its representative upon the board of directors, you will have in the banking world of the united states identically the same form of government we now have in our national government. then when we have converted our united states notes into gold certificates, and when all our silver certificates have been reduced to the form of token money, by cutting them up into pieces of two dollars and less, the american reserve bank will be in identically the same position that the bank of england is in today, the most positive and powerful force in the world in controlling and directing the movement of gold. and yet, like the bank of england, the american reserve bank would not be a bank of issue. it is not a question of note issue at all; but it is a question of centralizing our gold reserves to meet any emergency in the business world, coupled with the power of fixing and enforcing a price for the use of gold, a discount rate for gold throughout the united states. the financial and banking system that we have proposed combines the bank of england and the canadian bank note system--the two highest and best exemplifications of a central gold reserve and bank credit currency. mr. farmer: well, mr. banker, you are undoubtedly right. i see now that we would be very little, if any, better off with the individual zone system than we are today, when you recall the fact that the whole world now uses one common reserve, gold, and have ways of obtaining it. i think your argument illustrated by the army and navy and the national government is absolutely unanswerable. what do you think, mr. merchant? mr. merchant: i have never had any doubt about that question at all. mr. laboringman: abe lincoln said, you know, "a house divided against itself cannot stand." i think this thing is just as plain as the nose on your face. it is uncle sam against the world just as much in banking as in anything else; and a good deal more so in these days of lightning intelligence and cheap transportation. with a representative of every commercial zone, say forty-two in all, sitting at washington and holding in trust for the protection of all the people of the united states such a central gold reserve as you propose to make the banks create, you have a perfect duplicate of our present national government, in political matters. these representatives of the zones are the servants of the zones, just as the senators are the servants of the states. another thing, twenty-one of them will be business men, and twenty-one will be bankers; both sides of the bank counter, the inside and the outside, will be represented; and, since you have arranged to have one-seventh of them, or three business men and three bankers go out every year, your board of forty-two will always be old, and yet always will be becoming new. the more i think of it, the more i am for it, because i am for uncle sam against the world. uncle sam: if you ever want a "b" line on anything, go to mr. laboringman every time. mr. banker: well, we have considered the economic side of the aldrich scheme pretty thoroughly. i think it is about time that we heard something from mr. lawyer about the administrative features of the scheme. mr. lawyer: from a professional point of view, i have been a student of motives all my life, and as you know, i have been a part of a powerful, political machine in this state for more than twenty years. the aldrich scheme furnished me a rich mine of motives, and a detail of organization that staggered even an old political stager as i am. you will remember that when aldrich made his first announcement about his plan, he said that we must have a _central bank_ and that immediately president taft declared at boston, "senator aldrich desires to round out his career with a financial system for the united states, and says that we should have a _central bank_." i never will forget what an eminent citizen of this state said when he read that statement. it was this: "well, god help the american people if nelson w. aldrich ever rounds out _his career_ with a financial system for the united states." you will all of you remember, i am sure, what a cold reception the idea of a "central bank" at the hands of aldrich received. does anyone of common intelligence believe that aldrich ever changed his scheme below its throat? it is true he put a mask on its head; but that is all. he hunted around for an all-concealing name to hide the thing under--"the national reserve association." _i assert that his proposal would mean the greatest and most centralized central bank in the world._ note these figures and draw your own conclusion: nat. reserve bank of bank of bank of assn. france england germany capital $ , , $ , , $ , , $ , , deposit , , , , , , , , , note issue , , , , , , (see note.) , , possible note issue , , , possible issue large with tax. note.--_the bank of england is not in any sense a bank of issue, because the amount of notes it issues is limited to the amount of gold coin in the issue department. the notes are gold certificates. there is an exception to the law, to the extent of the arbitrary amount of notes issued against the government debt and securities, held in the issue department, amounting to $ , , ._ now, gentlemen, here you have a proposal to organize in this country an institution with a capital greater than the combined capital of the central banks of england, france and germany, because the capital of all of our banks now exceeds $ , , , , and the subscription to the national reserve association must be per cent of this amount, to entitle them to participate. certainly the idea must have been that they all would participate in so beneficent an institution. "it was to be a bank of banks for all the banks." it was the declared purpose of the author of the scheme that the banks should surrender all their real money, now carried as reserves, to this central institution in exchange for its notes; or that the banks would deposit more than $ , , , with the national reserve association. this would be a deposit nearly three times as great as all the deposits of the central banks of england, france and germany combined. the bill provides, section , that the national reserve association can issue $ , , of its notes, _and as many more_ as are covered "by an equal amount of lawful money" (united states notes, silver, or silver certificates, and gold in some form), without paying any tax. but if the banks turned over their present reserves, amounting to $ , , , , as contemplated by the author of the national reserve association, it could issue $ , , , before beginning to pay any tax on circulation. by paying a tax of - / per cent per annum, it could put out $ , , more notes, not covered by lawful money, or $ , , , ; then, by paying a tax of per cent, it could go any limit until its lawful money reserve was reduced to per cent. this makes a possible issue of $ , , , , or a possible note issue today two or three times as great as all the note issues at any time outstanding of the central banks of england, france and germany combined. _every dollar of this vast amount is only the credit of the so-called national reserve association, and yet is a lawful reserve for over twenty-five thousand banks to hold._ mr. merchant: by the way, mr. banker, i would like to ask you what you think of a tax upon bank notes to be paid by the central bank of issue as it is practiced in germany where they got this idea. mr. banker: economically speaking, a tax paid under such circumstances is of no more use than your appendix. mr. merchant: my appendix! i have had my appendix removed. mr. banker: well, that makes no difference. i still insist that a tax paid upon bank notes under such circumstances is of no more use, economically speaking, than your appendix, whether it has been removed or not. mr. lawyer: section provides, "the national reserve association shall be the principal fiscal agent of the united states. the government of the united states shall, upon the organization of the national reserve association, deposit its general funds with said association and its _branches_, and thereafter all receipts of the government, exclusive of trust funds, shall be deposited with said association and its _branches_, and all disbursements by the government shall be made through said association and its _branches_." the central bank of any country may be defined to be the bank at which the other banks carry their reserves, and at which the government carries its balance. but will some advocate say "it is only the bank of all the other banks"? this is the very quintessence of a central bank. upon this evidence will any candid man say that the so-called national reserve association is not a central bank? it was to have fifteen branches. the bank of england has none. the bank of germany has nineteen main branches. the bank of france has one hundred and twenty-seven main branches. "section .--the national reserve association shall have power both at home and _abroad_ to deal in certain things." section .--"the national reserve association shall have power to open and maintain banking accounts in foreign countries, and to _establish agencies in foreign countries_ for certain purposes." have the central banks of england, france or germany any power to maintain accounts and establish agencies in foreign countries? with "a baby stare," and under cover of "sunday-school pretences," we are told that this all-comprehending scheme is just a simple coöperative enterprise for the exclusive benefit of the individual american banks. indeed, that it is the only truly altruistic banking institution that was ever conceived. now, as the chief argument for the adoption of this scheme, its main promoters and sponsors have persistently declared that the country was now being dominated and controlled by certain great banking interests, and, therefore, that the people should liberate themselves from these sinister and dangerous banking powers by running into the warm and enticing embrace of the national reserve association. upon investigation, we find this anomaly, this surprising, this astounding fact: that the promoters and advocates of this gigantic machine are these self-same sinister banking influences who have the country by the throat today. hon. leslie m. shaw has pertinently inquired, "is it not strange that nelson w. aldrich and his affiliations are tired of their great power and vast opportunities, and are now trying to divest themselves of them," through the innocent-looking national reserve association? it will be well remembered by all of you, that at the time that the aldrich scheme made its first bow to the dear people, the public discovered that the national city bank owned bank stock to the amount of $ , , in other national banks located throughout the united states. possibly the same interests owned several times that amount. i was informed about that time that they controlled at least one hundred banks in the leading cities of the united states. now, let us assume that to be true, and let us meditate upon what such an organization could accomplish if they wanted to elect every officer in every local association, and every officer in charge of every branch, and the board of directors of the national reserve association, and so name the "_governor_" and the rest of the executive committee of nine which is to control this great central bank. to appreciate the power of such an organization, you must keep in mind the fact that practically every bank in the united states would be carrying a balance with some one of these banks immediately under their control. there is your machine. it is a perfect duplicate of the political machine in this state. the state "boss," whom you know stands in precisely the same position as the national city bank would stand. as you are fully aware, i am the "boss" of this county; and i am in identically the same position that one of these hundred banks would be that are controlled by the national city bank. when i get my orders, i immediately communicate with every so-called local leader in every township. this political machine works three hundred and sixty-five days and three hundred and sixty-five nights in the year. in the sense of an organization, we are working all the time, and it is the organization work that does the business. all the rest of the people are unorganized. so it would be with the banks. the men who belong to the organization or machine "_like it and fear it_"; because as things have stood, no one could get anywhere without being a part of the machine. this fact forces acquiescence. it has been, as you know, a perfect feudalism from top to bottom. we have had a machine government in this state as perfect as the manchu government in china. can you imagine anything easier than for the national city bank with this complete banking organization all over the united states to name every man practically that went into this organization from top to bottom? this would not be done by holding a majority of the stock in all the twenty-five thousand banks; they don't care about that; because it is a matter of no consequence to them, and if they attempted to do anything so crude, it would spoil their whole game. they attain their ends in more subtle but no less certain and powerful ways. they get influences to work. they put forces into operation. their interests are not limited to the banking business. they have affiliations with great transportation companies and manufacturing interests, and therefore control large bank deposits everywhere that the banks want and are always working to get. then there are favors to be granted; commissions to be paid; "melons to be cut." opportunities are suggested. in one respect at least they are like the lord, they "work in a mysterious way their wonders to perform." they had established their ramifications throughout the united states by making the national city bank a holding company of bank stocks, and the culmination of their power was to be realized through the devious methods of organizing the national reserve association. the same money and the same power that filled the columns of the newspapers of the country with the unqualified praise of the aldrich scheme for two years--the same power that rushed resolutions of one uniform stereotyped kind through twenty or thirty state bank associations, and steam rollered the same unconsidered declarations through two annual conventions of the american bankers' association, would have made this so-called _altruistic, benevolent, coöperative association_ the most powerful machine ever organized; because, it would have absolutely dominated all the bank credit in the united states, or per cent of the banking power of the world. you must remember that these interests are by far the greatest speculators in the united states. yes, the greatest in the world. mr. banker: but don't you remember that the bill provided in section that the paper rediscounted by it must "be issued or drawn for agricultural, industrial, or commercial purposes," and not "for the purpose of carrying stocks, bonds, or other investment securities"? mr. lawyer: yes, but that is all folderol. it is the purest kind of poppycock. if a bank wanted to take on a speculative deal, it could sell its commercial paper, could it not, and use the money for speculation just the same? that is on precisely the same level with its declaration that the institution was not a central bank. it is such subterfuges that disgust every candid man. listen to mr. aldrich in his report upon the bill upon the selection of the "governor" of the national reserve association by the president of the united states. he says, "further restraint upon the administration of the association upon narrow or selfish lines, is imposed by the provision that four of the highest officials of the government are made ex officio members of the controlling board, _and by the requirement that the governor shall be selected by the president of the united states_. the fear has been expressed that the _selection of the governor by the president_, and the provisions making the secretary of the treasury, the secretary of agriculture, the secretary of commerce and labor, and the comptroller of the currency, ex officio members of the board of directors of the reserve association, _might lead to an attempt to control the organization for political purposes_." please note the sham, fraud and false pretense covered by this comment. the bill provides that the "governor" of the association, as they call him, shall be selected by the president of the united states _from a list of at least three names, furnished by the directors_. will any honest man say that the president of the united states would have had any more to do with the selection of the "governor" of the so-called national reserve association than the king of siam? again note this cheap, false pretense, "fear has been expressed that the selection of the governor by the president," and the four ex officio members of the board of directors, "might lead to an attempt to control the organization for political purposes." these four ex officio members have just four votes upon a board of forty-six which proceeds immediately to eliminate all of the ex officio members forever, by selecting an executive committee consisting of nine members to manage its affairs, from which all of them are excluded except the comptroller of the currency. can any intelligent man doubt the purpose of all these sham declarations and false pretenses? if so, let him spend a day or two trying to find out how the members of the boards of the local associations are to be chosen; try to unravel the process by which the members of the boards of the branches are to be evolved; and, having grown tired and dizzy with his task, let him undertake to prove how the board of directors of the national reserve association are to be manufactured through the machinations born of ulterior purposes. i have studied puzzles before, but for complications, wheels within wheels, evident designs upon evident designs, occult purposes under occult purposes, and a combination of powerful forces, born of sinister influences, this project will forever stand alone as an illustration of what the human mind can do to conceal its real object. there is not one man in a hundred, indeed i do not believe that there is one man in a thousand, taking the business men, farmers, working men, and bankers all together, who can solve the riddle, and tell how it is done. such a mystery could not have just happened. it must necessarily have been the product of a purpose. _simplicity, publicity and direct methods are the guaranties of common honesty. intricacy, secrecy and indirect methods are invariably used to hide uncommon dishonesty. i do not mean petty larceny, taking a few pennies, or a loaf of bread; but the absorption of hundreds of millions, without returning anything to the world in exchange for them._ should the united states have been so unfortunate as to have been bound hand and foot for fifty years, the life of the proposed charter, by the trammels and intricacies of the national reserve association under control of an executive committee, consisting of only nine men who had been the evolutionary product of a preconceived purpose and well-defined plan, can anyone doubt what the result would have been? can anyone doubt that all of their banks and all of their business interests would have gotten all the money they wanted all the time? the advanced information from week to week and, at times, possibly, a month ahead, of what the discount rate would be--a very natural way for some member of that executive committee to show his or their proper appreciation of his or their promotion to their positions--would have been worth more every year, during the fifty-year grant, than all the wealth that the american people could produce during any twelve months; for this advanced information about the discount rate would have made profits a mathematical certainty upon the billions and billions of stocks and bonds that are quoted upon the stock exchange, the fertile field of the man who knows that he has a sure thing. mr. manufacturer: mr. lawyer, that smells pretty bad. mr. lawyer: yes, i admit it; but does it smell any worse than oil has been smelling for more than twenty years? than certain united states senators have been made to smell? than robbing rebates smell? is it not the natural sequel to this train of abuses to which the country has been treated? this whole situation was so graphically depicted, precisely as it has developed, two years before mr. aldrich gave birth to this conception, that i want to read it to you: "a central bank could easily be so organized as to sap the commercial blood of this country at every turn and direct the silent and unseen currents of advantage into the channels of favored institutions, and all these favored institutions might turn out, upon investigation, to be, in the end, one institution. "and if, unfortunately, the subterranean connection could not be detected, and even if detected, could not be broken, what a power for evil and injustice such an organization would prove in the life of this nation. "this is not only regarded as possible, but as probable; indeed, it is charged that it is the preconceived, cunning design of the advocates of a central bank to accomplish this purpose. "under these circumstances, with what suspicion and jealousy will every act of the central bank be watched! localities will become envious of localities. cities will bitterly attack their neighboring cities. nine-tenths, if, indeed, not ninety-nine out of every hundred, of the banks will imagine spears in needlecases, and, right or wrong, fling their accusations upon the wings of the wind; and we will be living in a commercial world of unrest and constant controversy surpassing in suspicion, envy, jealousy and bitterness anything this republic has ever witnessed. the consequences no man can prophesy; no imagination can paint." these words were spoken by hon. charles n. fowler, march , , just two years before mr. aldrich made his report to congress upon his national reserve association. mr. laboringman: you know i said that i had heard that the aldrich bill was dead; for one, i hope so. if the people ever get a lick at it they will finish it for certain. mr. farmer: you are right, and you bet that if they ever get a chance to discuss this banking bill question, they will come mighty near settling upon the right proposition in the end. mr. banker: i agree with you, and furthermore i am thoroughly convinced that we shall never reach a satisfactory conclusion until we have had just the same kind of a hand-to-hand fight over this question that we had over the gold standard. mr. manufacturer: it looks so to me. that gold-standard fight taught me that you could trust the american people to make a wise decision, if you would only have a country store, schoolhouse, cornfield debate, in which every man in the country got into the game--preacher, lawyer, teacher, farmer, merchant, manufacturer, laboringman, townfolks and country folks, all alike. mr. merchant: nothing more true has been said since we have been talking about this question than that remark about the importance of a public discussion of this whole matter. i know any number of men who when this aldrich scheme came out were ready to swallow it, but who now realize what a fatal blunder it would have been. the reason was, that they knew absolutely nothing about the question and they were living in such a state of terror on account of the panic, that they were ready to take anything that would shield them from experiences such as they had just passed through. the aldrich scheme was the only thing in sight, because hundreds of thousands of dollars had been spent in promoting it. they are just beginning to study and think about the subject. our hope of wise action by congress rests upon a red-hot debate among the people, exactly as you said. mr. banker: well, it will be easy enough to show them what the real reforms demanded are. _the reforms we demand are these_: _first: holding companies in the banking business must be completely wiped out._ _second: every national bank should be authorized to do_ _( ) a commercial banking business._ _( ) a savings bank business._ _( ) a trust company business._ _( ) a note issue business, precisely as the canadian banks do._ _third: all the various accounts--commercial, savings, trust and note issues--should be segregated._ _fourth: every bank in the united states should be compelled to carry the same amount of bank reserves._ _fifth: all bank reserves should consist of gold or gold certificates, as soon as the united states notes can be converted into gold certificates._ _sixth: every bank in the united states should be brought under national control, because banking is essentially interstate commerce._ _seventh: every natural financial centre in the united states should become the clearing centre for all the checks, drafts and bank notes that are payable in the territory that is economically and naturally tributary to that financial centre; such territory should constitute a commercial zone._ _eighth: there should be organized at each of these financial centres a clearing house at which all the checks, drafts and bank notes payable within the commercial zone shall be at par._ _ninth: the banks of each commercial zone should elect a board of control to examine, supervise and control all the banks within such commercial zone, precisely as the clearing home bank examiners are examining and supervising all banks clearing through them today._ _tenth: the banks of each commercial zone should also elect a court of appeals, or a banker's council, composed of an equal number of business men and bankers, to settle all banking and business questions that would properly come before them._ _eleventh: the board of control in each commercial zone should be presided over by a deputy united states comptroller, for the purpose of securing immediate and efficient action._ _twelfth: the banks of the united states should all contribute a percentage of their deposits to a central reserve, which should be composed of gold, and gold alone. the percentage of deposit should be per cent at the outset, and be gradually increased to per cent, which would amount, at the present time, to a central gold reserve of upwards of $ , , , . this reserve would correspond to the reserve held today by the clearing houses for their banks._ _thirteenth: this central gold reserve should be held in trust by a body of men composed of one man from each commercial zone, for the benefit of all the commercial zones._ _fourteenth: each board of control should have access to this central gold reserve, and should have power to sell gold to any bank within its zone and under its supervision, in case it desired it for the purpose of moving crops or for any other legitimate reason. the practical result would be, that the gold would be held, to a large extent, at the financial centres, and under the command of the board of control, precisely as the clearing house committees today hold the reserves of the banks constituting their respective clearing houses._ _fifteenth: the use, distribution and control of the central gold reserve should be under the management of the representatives of all the commercial zones, who should be composed equally of business men and bankers._ _sixteenth: for the purpose of establishing responsibility and securing efficiency, the representatives of the zones should act through corporate powers granted by the national government._ _seventeenth: the purpose of a national centralization of gold to so large an extent is two-fold:_ _( ) it brings all the banking power of the united states to the defense of the commercial interests in every part of the united states instantaneously._ _( ) it will give to the representatives of the zones the power to control and direct the movement of gold to and from the united states, by fixing and enforcing a price for the use of gold, or a discount rate for gold transactions throughout the united states._ _these reforms are based upon three distinct propositions:_ _first: they incorporate the principles of a central gold reserve, as illustrated by the bank of england, where all the transactions are in gold, and gold alone, without the use or intervention of bank credit in the form of bank credit notes, which could be used for reserves by the banks throughout great britain._ _second: they incorporate the principle of bank credit currency, as illustrated by the bank note system of canada, which involves daily redemption in gold coin through the clearing houses._ _third: they extend to every economic or natural commercial zone the established and approved practices of the american clearing houses, that is:_ _( ) bank supervision and control over all members._ _( ) a reserve created by all the members of the clearing house and held by the clearing house committee for the benefit of all the members._ _( ) such a free check system over every commercial zone, precisely as new england has had since , and as has just been established over a large territory around new york by the new york clearing house._ _the result of these reforms would be:_ _( ) to make each individual bank absolutely independent, because it has an unlimited resource in the coöperative gold reserve._ _( ) to make every commercial zone as free and independent of every other commercial zone, as england is of france, or france is of germany._ _( ) to completely decentralize all bank credit in the united states, while it centralizes the gold to a degree that would enable us by raising the discount rate to close the door of our markets against the demands for gold from abroad._ _( ) to insure all depositors in national banks against loss._ _( ) to liquefy and therefore develop a general market for commercial paper._ _( ) to save the business interests of this country more than $ , , every year, to say nothing of the incalculable losses growing out of our ever-recurring panics._ #/ mr. lawyer: mr. banker, you have stated with great clearness and precision just what our investigation has demonstrated should be done to give us a sound and economical financial and banking system. after a careful consideration of the question, i am prepared to say that the aldrich scheme would not accomplish or effect a single one of these reforms. on the other hand, i am convinced that, while it would give us temporary relief, immediately there would follow undue expansion. in quick succession there would come wild inflation, a vast amount of gold would be expelled from the country and we would find ourselves in the end in far greater and more serious difficulties than those from which we are now suffering. mr. banker: your conclusion is in perfect keeping with my own. it seems to me very remarkable how many people were temporarily misled by its claims, but have since turned from it and are now opposed to it. mr. lawyer: i do not think that is either remarkable or strange, when you recall the mental condition of the whole country, due to the panic; the vast amount of money poured into its propaganda; the claims made for it and the fact that it incorporated some things that the public realized ought to be done. for example, it proposed to divide the country into districts, an idea that congressman fowler had advocated ever since or for more than fifteen years, and had incorporated in his bill of . the aldrich scheme provided for a central reserve, but composed almost entirely of united states bonds, united states notes and silver in some form, a fact that did not attract the attention of the public at the outset. it proposed to make an unlimited market for the rediscount of paper, a most pleasing thought to contemplate until it was discovered that this was to be done by "replenishing" the reserves of our , banks "indefinitely," as aldrich said, with bank debts in the form of bank notes issued by the so-called "reserve association." it incorporated the plan proposed by congressman fowler in his bill of for converting the "_two per cent united states bonds_" into "_three per cent united states bonds_," a fact that impressed the national banks favorably. the so-called association was given an attractive name--"national reserve association," also borrowed from the first draft of congressman fowler's bill of , with only a slight change. he called his central reserve, "united states reserve association." finally, owing to the clever presentation of the scheme, the country took to it at the start, because they wanted something done and they hoped that the scheme was what mr. aldrich declared it to be, when he said, "the plan we propose is, essentially, an american system, scientific in its methods and democratic in its control." every intelligent man now knows that the system he proposed was the german system from top to bottom, which broke down completely under the first real test, which came in . every man who calls himself an economist must admit, instead of its being scientific in character, it was constructed in absolute defiance of all economic law, and now the public is convinced that instead of being democratic in control, it was intended to be a gigantic "_central bank_" with fifteen branches over which a "_governor_," a name wholly foreign to american banking institutions, and his seven associates were to rule, the "_governor_" appointing his assistant managers over the fifteen branches as if it were a manchu dynasty and not a democracy at all. thus one by one the economic blunders have been pointed out; one by one the sinister motives have been exposed; one by one the false pretenses have been unmasked, until there is left only a recollection of the impression made by the expenditure of hundreds of thousands of dollars in this futile attempt to enslave all american bank credit and the lesson of extreme caution and a most urgent need on the part of every citizen in every walk of life, of study, diligent study, if he desires to perform a truly patriotic duty and be of some real service to his country in this hour of peril, inspired only by unselfish motives and a sincere devotion to the welfare of the whole people. mr. merchant: mr. lawyer has certainly succeeded in pointing out very clearly the things that _must be excluded_ from our bill. mr. manufacturer: and mr. banker has certainly succeeded in pointing out very clearly the things that _must be included_ in our bill. mr. laboringman: well, then, if we are all sure that we are right, let us go ahead. mr. farmer: we will; and as our forefathers fought for the birth of this nation we will fight for its life. uncle sam: boys, i shall live only through your intelligence, your courage, your justice, your honor, your patriotism, your service, your sacrifice; and i shall be immortal only if all those who come after you shall possess these same virtues. farewell. appendix a united states circulation statement--january , . =======================+================+=================+============= |general stock |held in treasury,| money in |of money in the |as assets of the |circulation. |united states. | government. | +----------------+-----------------+--------------- |january , .|january , . |january , . -----------------------+----------------+-----------------+--------------- gold coin (including | | | bullion in treasury) | $ , , , | $ , , | $ , , gold certificates[ ] | | , , | , , standard silver dollars| , , | , | , , silver certificates[ ] | | , , | , , subsidiary silver | , , | , , | , , treasury notes of | , , | , | , , united states notes | , , | , , | , , national bank notes | , , | , , | , , +----------------+-----------------+-------------- total | $ , , , | $ , , |$ , , , -----------------------+----------------+-----------------+-------------- population of continental united states january , , estimated at , , ; circulation per capita, $ . . footnotes: [footnote : for redemption of outstanding certificates an exact equivalent in amount of the appropriate kinds of money is held in the treasury, and is not included in the account of money held as assets of the government.] appendix b classification of cash in banks--june , . ===========================+=================+============+============= classification. |national banks. |all other |all reporting | | banks. | banks. ---------------------------+-----------------+------------+-------------- gold coin | $ , , | , , | , , gold certificates | , , | , , | , , silver dollars | , , | , , | , , silver certificates | , , | , , | , , subsidiary and minor coins| , , | , , | , , legal-tender notes | , , | , , | , , national bank notes | { , , }| , , | , , cash not classified | {of other banks}| , , | , , ---------------------------+-----------------+------------+-------------- total | $ , , |$ , , |$ , , , ---------------------------+-----------------+------------+-------------- amount of money held by united states treasury, $ , , . amount of money held by all banks, $ , , , . amount of money held by the people, $ , , , . total amount of money in the united states, $ , , , . appendix c assuming that the plan should be adopted within the year , and taking round but approximate figures, the amount of reserves required to put the plan into operation would be as follows: individual deposits, commercial $ , , , due to banks , , , band credit currency, notes , , , --------------- _total demand liabilities_ $ , , , central reserves against this amount at % $ , , , cash reserves on this amount at an average of % , , , cash reserves against savings held amounting to $ , , , at % , , -------------- _total reserves required under our plan_ $ , , , _amount of circulation in the united states that may be used as reserves_: gold coin in the united states $ , , , standard silver dollars , , subsidiary coin , , treasury notes, , , united states notes , , -------------- $ , , , less gold held in the u.s. treasury as a reserve fund , , -------------- _total possible reserves_ $ , , , amount of reserves required by our plan $ , , , -------------- leaving a net amount of lawful reserves for circulation among the people of $ , , amount of subsidiary coin $ , , amount of silver dollars out , , amount of $ and $ bills out , , ------------ $ , , this amount is probably about equally divided between the banks and the people. amount of circulation now outside of the u.s. treasury and the banks and, therefore, in the hands of the people $ , , , if we deduct the amount of lawful reserves left for circulation among the people $ , , -------------- _we have the total amount of bank note circulation_ $ , , , amount of circulation provided for , , , -------------- additional amount of bank credit currency to be provided $ , , _but this increased amount of bank notes, amounting to $ , , , will not take any additional reserves because the deposits which will be converted into these notes are now covered by reserves. it is plain that, thereafter, book credits and note credits will be currently interchangeable._ _thus every demand for currency will be met automatically and perfectly, every day, everywhere, throughout the united states, day in and day out; month in and month out; year in and year out._ index appendix a, united states circulation, appendix b, amount of money held by banks, appendix c, reserves required under proposed plan, acceptance, what is an, desirability of, liability of, same as deposit, , reserves against, should be same as against deposits, acceptance should be allowed only on goods in transit, would develop a general market for commercial paper, acceptances, agriculture produced its money, aldrich, nelson w, , aldrich, wilbur, american reserve bank, formation of, duties of board of, fund of, how reserve is created, government balance carried with, , shall maintain parity of silver and gold, aldrich plan and plot, exposed, , cost of currency of, branches and foreign agencies, economic objections to, expansion and inflation of, inconvenience and uselessness of, loss of gold by, associations possible, was central bank, possible capital and issue, why public favored at first, , would not effect reforms demanded, reasons for its rejection, aristotle, bagehot, , bank, what is a, credits of equivalent to gold, failures of, deposit, system of, holding companies in, at hamburg, number of, in united states, , number and resources of, independence of individual, penalty for not carrying reserves, repression in development of, bank, description of, by macleod, by bagehot, united states, at venice, banks, no change in national, increase in business of, various kinds and business of, banker, is what, banking is interstate commerce, is kind of insurance, bank deposits and bank notes identical in, necessary reforms in, resources of, in , amount of, in , amount of, in , amount of, in world in , bancroft, george, , bank credit currency, definition of, first lien on assets, additional amount permitted, cost of transmission, how paid, facility of supplying currency, identical with check, increase of, how described and issued, less profitable than deposits, not understood, tax on, how used, strength of, bankers' council, formation of, bank notes, bond-secured, are a first lien, are government credit, in circulation, bear no relation to business, cost of, as currency, not money, origin of, objections to, as currency, penalty for carrying, as reserves, promise of, to pay money, bayard, james a., bill, draft of, board of control, compensation of, boston, country clearing at, , bullion report, california, first use of gold, canada, bank system of, chart showing movement of currency in, canada, circulation in , free from panics, cannon, james g., capital, what is, , active, passive and fixed, , active, essential to commerce, conversion of commercial, into fixed, , real estate mortgages tie up, central bank, tax on notes of, chase, salmon p., , check, what is a, city bank, national, bank stock holdings of, boss system established by, chicago clearing house examinations, , clearing house, approved practices of, , clearings prior to establishment of, , country clearing, established in england, centralizing reserves of, definition of, , established in london, first clearing in new york, free zones, functions adopted, for each commercial zone, clearing house certificates, issues of, , coins, amount of subsidiary, description of subsidiary, parity of value of, total amount of silver, token, value of, colonial credit money, depreciation of issues of, effect of issues of, issues by continental congress, issue of, in connecticut, in massachusetts, in new hampshire, in new jersey, in north carolina, in new york, in pennsylvania, in rhode island, in south carolina, in virginia, price of issues fixed, succession of events following issue of, colwell, stephen, congress, will legislate only after discussion, connecticut, bank commissioners report , conklin, roscoe, coöperative societies, conditions in germany, conditions in belgium, extent of business, in united states, not a subject of banking legislation, profits of, main offices described, started in rochdale, success assured in united states, wholesale houses of, conant, charles a. (scotch currency), credit, definition of, , , ample reserves essential to sound, comparative value of, contraction of, by an instrument of, dangers of, expansion as a result of, germany's abuse of, importance of, our banks should be ready to prove their, per cent, of business done by, production by use of, proper functions of different forms of, , use of, in lancashire, various forms of, webster on, crédit foncier, amortization of mortgages, capital of, can take deposits, formed when, how governed, currency, definition of, , cost of bank credit, definition of bank credit, deposits identical with bank credit, , economy of bank credit, , consists of, proper system of, right kind of, what it is not, redemption of, deposits, guarantee of, no difference between currency and, interchangeability of currency into, , depositors, insurance of, , , cost of insurance of, depositors, insurance fund, how created, losses of, how paid, deutsche bank, diagrams, zone, subdivisions, canadian currency chart, clearing house, , course of check, - egypt, absorption of gold by, electricity, importance of, ellsworth, oliver, england, bank of, dissimilarity of, with banks of france and germany, failure of bank act, resources, when established, not bank of issue, exchange, what is, bill of, broad definition of, difference between draft and bill of, is equal to gold in all transactions, origin, ancient, farmers, number of, fessenden, william pitt, forgan, james b., , fowler, charles n., , , fowler, w.j., deputy comptroller, france, bank of, founded by napoleon, land used as basis of money in, government credit of france used as basis of money, resources of bank, when established, note issue of, gallatin, albert, garfield, james a., germany, resources of bank, when established, financial situation of bank, weak, failure of bank act, gold, adopted as standard by united states, by england, amount of, amount in united states in and , certificate, changing value of, monetary use of, outlook for supply of, production of, united states share of, universal standard of value, gold, total amount used as reserves, what influences the movement of, gold reserves, how created, government, demand liability of, government issues preceding greenbacks, hamilton, alexander, , herrick, myron t., hallock, james c., , india, absorption of gold by, indiana, bank of the state of, state bank of, , statement of bank of, interest, rate in united states, france, germany, iowa, state bank of, , statement of bank of, japan, tried bond-secured currency, jefferson, thomas, jevons, stanley, , kentucky, bank of, , land credit bank, directors of, dividends of, losses, how borne, put into operation, how, outline of provisions, , , landschaften, business of modern, modern, origin of, old, spread of, law, john, lee, richard henry, legal tender, what is, liverpool, lord, coins of the realm, loan certificates, clearing house, amount of, issued, are bank credit currency, denominations of, - lessons of, london, clearing started in, , los angeles, clearing house, louisiana, bank act of, statement of banks of, lubbock, sir john, macveagh, franklin, , madison, james, , maine, report of bank commissioner , and , marshall, john, , mason, george, massachusetts, report of bank commissioner, missouri, bank of the state of, , statement of bank of, money, amount held by banks in united states, appendix b amount of, in united states, appendix a coin and commodity must be of equal value, credit must not be called money, description of, functions of, gold is our, how made, what are the pieces of, "wild cat," "red dog," etc., morrill, justin s., mortgages, amount of, rate of interest on, mutual credit societies, number of, in massachusetts, resources for short loans, ohio, bank of the state of, bank act of, statement of bank of, paper, accommodation, , commercial, difference between commercial and accommodation, paine, thomas, panic of , pinckney, charles, population, shifting of, price, what is, prices, causes of higher, printing, importance of, promissory note, what is a, note and draft identical, property, what is, difference between property and wealth, postal savings banks, raiffeisen, friedrich wilhelm, real estate, unfit as basis for currency, redemption, in coin essential, reforms demanded, , , , reserves, amount of, amount held by national and other banks, appendix b, amount of central, , additional, where obtained, bagehot, bank notes as, circumstances should control amount of, character of, average, in united states, elasticity of, , from what points considered, how increased, , jevons on, legal tender quality unnecessary to, national banks, promises to pay as, present, inefficient, penalty for not maintaining, , , present method of, useless, are measure of value, therefore must be coin, state or city debts as, silver, not used in bank of england, should be national, superimposed, state bank, taxation to compel equal, unfair to permit unequal, united states notes not actual, what constitutes proper, ricardo, root, l. carroll, ruggles, charles a., , scotland, description of, currency by conant, currency by white, effect of bank credit in, schulze, francis frederick, shaw, leslie m., shaw, william a., sherman, john, sherman, roger, , silver certificate, a warehouse receipt, silver dollars, amount of, appendix a, , a government debt, a subsidiary coin, a demand for gold, not money, , weight of, spaulding, e.g., stevens, thaddeus, steam, importance of, standard of value, changes in ratio of gold and silver as, gold, the natural selection of, as the, qualities of gold as, sub-treasury, deposits in, suffolk bank system, , , , , achievements of, , bank was first clearing house in united states, , commissioner's reports on, , description of, destroyed by per cent tax, sumner, charles, talbot, joseph t., , uap, money of, united states, bank clearings of, financial center of world, foreign trade of, important interests of, production of , size of, compared with europe, total business transactions of, united states government, nature of, taxing power, only resource, , time obligations only should be incurred, , unfit to meet demand debts, united states notes or greenbacks, additional cost of war due to, agreement to pay gold, amount of, appendix a and bonds issued for, constitutionality of, - cost of, as currency, , cost of, since , depreciation of, drive gold out, how converted into gold certificates, , issues of, lowest value of, not money, price of, a quotation of government credit, resumption of payment of, suspended payment of, unfit for currency, walsh, john r., failure of, war, civil, first loan for, washington, george, , wealth, what is, difference between property and, webster, daniel, , white, horace, , wilson, john w., clearing house examiner, los angeles, zone, credit bureau of, organization of, , organization, repetition of national government, places of, discount limited to, publicity of organization, should not stand alone, state lines do not conform to economic, a new banking system: the needful capital for rebuilding the burnt district. by lysander spooner. boston: sold by a. williams & co. washington street. . entered according to act of congress, in the year . by lysander spooner, in the office of the librarian of congress, at washington. printed by warren richardson, washington st contents. page chapter i.--a new banking system, chapter ii.--specie payments, chapter iii.--no inflation of prices, chapter iv.--security of the system, chapter v.--the system as a credit system, chapter vi.--amount of currency needed, chapter vii.--importance of the system to massachusetts, chapter viii.--the true character of the "national" system, chapter ix.--amasa walker's opinion of the author's system, the reader will understand that the ideas presented in the following pages admit of a much more thorough demonstration than can be given in so small a space. such demonstration, if it should be necessary, the author hopes to give at a future time. _boston, march, ._ chapter i. a new banking system. under the banking system--an outline of which is hereafter given--the real estate of boston alone--taken at only three-fourths its value, as estimated by the state valuation[a]--is capable of furnishing three hundred millions of dollars of loanable capital. [a] by the state valuation of may, , the real estate of boston is estimated at $ , , . under the same system, the real estate of massachusetts--taken at only three-fourths its estimated value[b]--is capable of furnishing seven hundred and fifty millions of loanable capital. [b] by the state valuation of may, , the real estate of the commonwealth is estimated at $ , , . the real estate of the commonwealth, therefore, is capable of furnishing an amount of loanable capital more than twelve times as great as that of all the "_national_" banks in the state[c]; more than twice as great as that of all the "national" banks of the whole united states ($ , , ); and equal to the entire amount ($ , , , or thereabouts) both of greenback and "national" bank currency of the united states. [c] the amount of circulation now authorized by the present "national" banks of massachusetts, is $ , , , as appears by the recent report of the comptroller of the currency. it is capable of furnishing loanable capital equal to one thousand dollars for every male and female person, of sixteen years of age and upwards, within the commonwealth; or two thousand five hundred dollars for every male adult. it would scarcely be extravagant to say that it is capable of furnishing ample capital for every deserving enterprise, and every deserving man and woman, within the state; and also for all such other enterprises in other parts of the united states, and in foreign commerce, as massachusetts men might desire to engage in. unless the same system, or some equivalent one, should be adopted in other states, the capital thus furnished in this state, could be loaned at high interest at the west and the south. if adopted here earlier than in other states, it would enable the citizens of this state to act as pioneers in the most lucrative enterprises that are to be found in other parts of the country. all this capital is now lying dead, so far as being loaned is concerned. all this capital can be loaned in the form of currency, if so much can be used. all the profits of banking, under this system, would be clear profits, inasmuch as the use of the real estate as banking capital, would not interfere at all with its use for other purposes. the use of this real estate as banking capital would break up all monopolies in banking, and in all other business depending upon bank loans. it would diffuse credit much more widely than it has ever been diffused. it would reduce interest to the lowest rates to which free competition could reduce it. it would give immense activity and power to industrial and commercial enterprise. it would multiply machinery, and do far more to increase production than any other system of credit and currency that has ever been invented. and being furnished at low rates of interest, would secure to producers a much larger share of the proceeds of their labor, than they now receive. all this capital can be brought into use as fast as the titles to real estate can be ascertained, and the necessary papers be printed. legally, the system (as the author claims, and is prepared to establish) stands upon the same principle as a patented machine; and is, therefore, already legalized by congress; and cannot, unless by a breach of the public faith, any more be prohibited, _or taxed_, either by congress or this state, than can the use of a patented machine. every dollar of the currency furnished by this system would have the same value in the market as a dollar of gold; or so nearly the same value that the difference would be a matter of no appreciable importance. the system would, therefore, restore specie payments at once, by furnishing a great amount of currency, that would be equal in value to specie. the system would not inflate prices above their true and natural value, relatively to specie; for no possible amount of paper currency, every dollar of which is equal in value to specie, _can_ inflate prices above their true and natural value, relatively to specie. whenever, if ever, the paper should not buy as much in the market as specie, it would be returned to the banks for redemption, and thus taken out of circulation. so that no more could be kept in circulation than should be necessary for the purchase and sale of property at specie prices. the system would not tend to drive specie out of the country; although very little of it would be needed by the banks. it would rather tend to bring specie into the country, because it would immensely increase our production. we should, therefore, have much more to sell, and much less to buy. this would always give a balance in our favor, which would have to be paid in specie. it is, however, a matter of no practical importance whether the system would bring specie into the country, or drive it out; for the volume and value of the currency would be substantially unaffected either by the influx or efflux of specie. consequently industry, trade, and prices would be undisturbed either by the presence or absence of specie. the currency would represent property that could not be exported; that would always be here; that would always have a value as fixed and well known as that of specie; that would always be many times more abundant than specie can ever be; and that could always be delivered (in the absence of specie) in redemption of the currency. these attributes of the currency would render all financial contractions, revulsions, and disorders forever impossible. the following is an outline of the system. the principle of the system is that the currency shall represent an _invested_ dollar, instead of a specie dollar. the currency will, therefore, be redeemable by an _invested_ dollar, except when redeemed by specie, or by being received in payment of debts due the banks. the best capital will probably be mortgages and railroads; and these will very likely be the only capital which it will ever be expedient to use. inasmuch as railroads could not be used as capital, without a modification of their present charters, mortgages are probably the best capital that is immediately available. supposing mortgages to be the capital, they will be put into joint stock, held by trustees, and divided into shares of one hundred dollars each. this stock may be called the productive stock, and will be entitled to the dividends. the dividends will consist of the interest on the mortgages, and the profits of banking. the interest on the mortgages should be so high--say six or seven per cent--as to make the productive stock worth ordinarily par of specie in the market, _independently of the profits of banking_. another kind of stock, which may be called _circulating stock_, will be created, _precisely equal in amount to the_ productive stock, and divided into shares of _one dollar each_. this _circulating stock_ will be represented by certificates, scrip, or bills, of various denominations, like our present bank bills--that is, _representing one, two, three, five, ten, or more shares, of one dollar each_. these certificates, scrip, or bills of the _circulating stock_, will be issued for circulation as currency, as our bank bills are now. in law, this _circulating stock_ will be in the nature of a lien on the productive stock. it will be entitled to no dividends. its value will consist, _first_, in its title to be received in payment of all dues to the bank; _second_, in its title to be redeemed, either in specie on demand, or in specie, with interest from the time of demand, before any dividends can be made to the bankers; and, _third_, in its title, when not redeemed with specie, to be redeemed (in sums of one hundred dollars each) by a transfer of a corresponding amount of the capital itself; that is, of the productive stock. the holders of the _circulating stock_ are, therefore, sure, _first_, to be able to use it (if they have occasion to do so) in payment of their dues to the bank; _second_, to get, in exchange for it, either specie on demand, or specie, with interest from the time of demand; or, _third_, a share of the capital itself, the productive stock; a stock worth par of specie in the market, and as merchantable as a share of railroad stock, or government stock, or any other stock whatever is now. whenever productive stock shall have been transferred in redemption of _circulating stock_, it (the productive stock) may be itself redeemed, or bought back, at pleasure, by the bankers, on their paying its face in specie, with interest (or dividends) from the time of the transfer; and _must_ be so bought back, before any dividends can be paid to the original bankers. the fulfilment of all these obligations, on the part of the bank, is secured by the fact that the capital and all the resources of the bank are in the hands of trustees, who are legally bound--before making any dividends to the bankers--to redeem all paper in the manner mentioned; and also to buy back all productive stock that shall have been transferred in redemption of the circulation. such are the general principles of the system. the details are too numerous to be given here. they will be found in the "_articles of association of a mortgage stock banking company_," which the author has drawn up and copyrighted. chapter ii. specie payments. although the banks, under this system, make no absolute promise to pay specie _on demand_, the system nevertheless affords a much better _practical_ guaranty for specie payments, than the old specie paying system (so called); and for these reasons, viz: . the banks would be so universally solvent, and so universally known to be solvent, that no runs would ever be made upon them for specie, through fear of their insolvency. they could, therefore, maintain specie payments with much less amounts of specie, than the old specie paying banks (so called) could do. . as there would be no fears of the insolvency of the banks, and as the paper would be more convenient than specie for purposes of trade, bills would rarely be presented for redemption--otherwise than in payment of debts due the banks--except in those cases where the holders desired to invest their money; and would therefore _prefer_ a transfer of productive stock, to a payment in specie. if they wanted specie for exportation, they would buy it in the market (with the bills), as they would any other commodities for export.[d] it would, therefore, usually be only when they wanted an investment, and could find none so good as the productive stock, that they would return their bills for redemption. and then they would return them, not really for the purpose of having them redeemed with specie, but in the hope of getting a transfer of productive stock, and holding it awhile, and drawing interest on it. [d] there would always be a plenty of specie for sale, in the seaports, as merchandise. . the banks would probably find it for their interest, as promoting the circulation of their bills, to pay, at all times, such _small_ amounts of specie, as the public convenience might require. . if there should be any suspensions of specie payments, they would be only temporary ones, by here and there a bank separately, and not by all the banks simultaneously, as under the so called specie paying system. no general public inconvenience would therefore ever be felt from that cause. . if the banks should rarely, or never, pay specie _on demand_, that fact would bring no discredit upon their bills, and be no obstacle to their circulation at par with specie. it would be known that--unless bad notes had been discounted--all the bills issued by the banks, would be wanted to pay the debts due the banks. this would ordinarily be sufficient, of itself, to keep the bills at par with specie. it would also be known that, if specie were not paid _on demand_, it would either be paid afterwards, with interest from the time of demand; or productive stock, equal in value to specie in the market, would be transferred in redemption of the bills. the bills, therefore, would never depreciate in consequence of specie not being paid _on demand_; nor would any contraction of the currency ever be occasioned on that account. for the reasons now given, the system is practically the best specie paying system that was ever invented. that is to say, it would require less specie to work it; and also less to keep its bills always at par with specie. in proportion to the amount of currency it would furnish, it would not require so much as one dollar in specie, where the so called specie paying system would require a hundred. it would also, by immensely increasing our production and exports, do far more than any other system, towards bringing specie into the country, and preventing its exportation. if it should be charged that the system supplies no specie for _exportation_; the answer is, that it is really no part of the legitimate business of a bank to furnish specie for exportation. its legitimate business is simply to furnish credit and currency for home industry and trade. and it can never furnish these constantly, and in adequate amounts, unless it can be freed from the obligation to supply specie on demand for exportation. specie should, therefore, always be merely an article of merchandise in the market, like any other; and should have no special--or, at least, no important--connection with the business of banking, except as furnishing the measure of value. if a paper currency is made payable in specie, _on demand_, very little of it can ever be issued, or kept in circulation; and that little will be so irregular and inconstant in amount as to cause continual and irremediable derangements. but if a paper currency, instead of promising to pay specie _on demand_, promises only an alternative redemption, viz: specie on demand, or specie with interest from the time of demand, or other merchantable property of equal market value with specie--it can then be issued to an amount equal to such property; and yet keep its promises to the letter. it can, therefore, furnish all the credit and currency that can be needed; or at least many times more than the so called specie paying system ever did, or ever can, furnish. and then the interest, industry and trade of a nation will never be disturbed by the exportation of specie. and yet the standard of value will always be maintained. the difference between the system here proposed, and the so called specie paying system--in respect to their respective capacities for furnishing credit and currency, and at the same time fulfilling their contracts to the letter--is as fifty to one, at the least, in favor of the former; probably much more than that. thus under the system now proposed, the real estate and railroads of the united states, at their present values, are capable of furnishing twenty thousand millions ($ , , , ) of paper currency; and furnishing it constantly, and without fluctuation, and every dollar of it will have an equal market value with gold. the contracts or certificates comprising it, can always be fulfilled to the letter; that is, the capital itself, (the productive stock,) represented by these certificates, can always be delivered, _on demand_, in redemption of the certificates, if the banks should be unable to redeem in specie. on the other hand, it would be impossible to have so much as four hundred millions, ($ , , )--one fiftieth of the amount before mentioned--of so called specie paying paper currency; that is, a paper promising to pay specie _on demand_; _and constantly able to fulfil its obligations_. it is of no appreciable importance that a paper currency should be payable _on demand_ with specie. it is sufficient, if it be payable _according to its terms, if only those terms are convenient and acceptable_. for then the value of the currency will be known, _and its contracts will be fulfilled to the letter_. and when these contracts are fulfilled to the letter, then, _to all practical purposes, specie payments are maintained_. when, for example, a man promises to pay wheat, either on demand, or at a time specified, and he fulfils that contract to the letter, _that, to all practical purposes, is specie payments_; as much so as if the promise and payment had been made in coin. it is, therefore, the specific and literal fulfilment of contracts, that constitutes specie payments; and not the particular kind of property that is promised and paid. the great secret, then, of having an abundant paper currency, and yet maintaining all the while specie payments, consists in having the paper represent property--like real estate, for example--that exists in large amounts, and can always be delivered, on demand, in redemption of the paper; and also in having this paper issued by the persons who actually own the property represented by it, and who can be compelled by law to deliver it in redemption of the paper. and the great secret--if it be a secret--of having only a scanty currency, and of _not_ having specie payments, consists in having the paper issued by a government that cannot fulfil its contracts, and has no intention of fulfilling them; and by banks that are not even required to fulfil them. it is somewhat remarkable that after ten years experiment, we have not yet learned these apparently self-evident truths. the palpable fact is that the advocates of the present "national" currency system,--that is, the stockholders in the present "national" banks,--_do not wish for specie payments_. they wish only to maintain, in their own hands, a monopoly of banking, and, as far as possible also, a monopoly of all business depending upon bank loans. they wish, therefore, to keep the volume of the currency down to its present amount. as an excuse for this, they profess a great desire for specie payments; and at the same time practice the imposture of declaring that specie payments will be impossible, if the amount of the currency be increased. but all this is sheer falsehood and fraud. it is, of course, impossible to have specie payments, so long as the only currency issued is issued by a government that has nothing to redeem with, and has no intention of redeeming; and by banks that are not even required to redeem. but there is no obstacle to our having twenty times as much currency as we now have, and yet having specie payments--or the literal fulfilment of contracts--if we will but suffer the business of banking to go into the hands of those who have property with which to redeem, and can be compelled by law to redeem. it is with government paper, and bank paper, as it is with the paper of private persons; that is, it is worth just what can be delivered in redemption of it, and no more. we all understand that the notes of the astors, and stewarts, and vanderbilts, though issued by millions, and tens of millions, are really worth their nominal values. and why? solely because the makers of them have the property with which to redeem them in full, and can be made to redeem them in full. we also all understand that the notes of sam jones, and jim smith, and bill nokes, though issued for only five dollars, are not worth two cents on the dollar. and why? solely because they have nothing to pay with; and cannot be made to pay. suppose, now, that these notes of sam jones, and jim smith, and bill nokes, for five dollars, were the only currency allowed by law; and that they were worth in the market but two cents on the dollar. and suppose that the few holders of these notes, wishing to make the most of them, at the expense of the rights of everybody else, should keep up a constant howl for specie payments; and should protest against any issue of the notes of the astors, the stewarts, and the vanderbilts, upon the ground that such issue would inflate the currency, and postpone specie payments! what would we think of men capable of uttering such absurdities? would we in charity to their weakness, call them idiots? or would we in justice to their villainy, denounce them as impostors and cheats of the most transcendent and amazing impudence? and what would we think of the wits of forty millions of people, who could be duped by such preposterous falsehoods? and yet this is scarcely an exaggerated picture of the fraud that has been practiced upon the people for the last ten years. a few men have secured to themselves the monopoly of a few irredeemable notes; and not wishing to have any competition, either in the business of banking, or in any business depending upon bank loans, they cry out for specie payments; and declare that no _solvent_ or _redeemable_ notes must be put into circulation, in competition with their _insolvent_ and _irredeemable_ ones, lest the currency be inflated, and specie payments be postponed! and this imposture is likely to be palmed off upon the people in the future, as it has been in the past, if they are such dunces as to permit it to be done. it is perfectly evident, then, that specie payments--or the literal fulfilment of contracts--does not depend at all upon the amount of paper in circulation as currency; but solely upon the fact whether, on the one hand, it be issued by those who have property with which to redeem it, and can be made to redeem it; or whether, on the other hand, it be issued by those who cannot redeem it, and cannot be made to redeem it. when the people shall understand these simple, manifest truths, they will soon put an end to the monopoly, extortion, fraud, and tyranny of the existing "national" system. the "national" system, so called, is, in reality, no national system at all; except in the mere facts that it is called the national system, and was established by the national government. it is, in truth, only a private system; a mere privilege conferred upon a few, to enable them to control prices, property, and labor; and thus to swindle, plunder, and oppress all the rest of the people. chapter iii. no inflation of prices. section . in reality there is no such thing as an inflation of prices, relatively to gold. there is such a thing as a depreciated paper currency. that is to say, there is such a thing as a paper currency, that is called by the same names as gold--to wit, money, dollars, &c.--but that cannot be redeemed in full; and therefore has not the same value as gold. such a currency does not circulate at its nominal, but only at its real, value. and when such a currency is in circulation, and prices are measured by it, instead of gold, they are said to be inflated, relatively to gold. but, in reality, the prices of property are not thereby inflated at all relatively to gold. it is only the measuring of prices by a currency, that is called by the same names as gold, but that is really inferior in value to gold, that causes the _apparent_, not _real_, inflation of prices, relatively to gold. to measure prices by a currency that is called by the same names as gold, but that is really inferior in value to gold, and then--because those prices are nominally higher than gold prices--to say that they are inflated, relatively to gold, is a perfect absurdity. if we were to call a foot measure a yard, and were then to say that all cloth measured by it became thereby stretched to three times its length, relatively to a true yard-stick, we should simply make ourselves ridiculous. we should not thereby prove that the foot measure had really stretched the cloth, but only that it had taxed our brains beyond their capacity. it is only irredeemable paper--irredeemable in whole or in part,--that ever _appears_ to inflate prices, relatively to gold. but that it really causes no inflation of prices, relatively to gold, is proved by the fact that it no more inflates the prices of other property, than it does the price of gold itself. thus we say that irredeemable paper, that is worth but fifty cents on the dollar, inflates the prices of commodities in general to twice their real value. by this we mean, that they are inflated to twice their value relatively to gold. and why do we say this? solely because it takes twice as many of these irredeemable paper dollars to buy any commodity,--a barrel of flour for example,--as it would if the paper were equal in value to gold. but it also takes twice as many of these irredeemable paper dollars to buy gold itself, as it would if the paper were equal in value to gold. there is, therefore, just as much reason for saying that the paper inflates the price of gold, as there is for saying that it inflates the price of flour. it inflates neither. it is, itself, worth but fifty cents on the dollar; and it, therefore, takes twice as much of it to buy either flour or gold, as it would if the paper were of equal value with gold. the value of the coins--in any nation that is open to free commerce with the rest of the world--is fixed by their value in the markets of the world; and can neither be reduced below that value, in that nation, by any possible amount of paper currency, nor raised above that value, by the entire disuse of a paper currency. any increase of the currency, therefore, by means of paper representing other property than the coins--but having an equal value with the coins--is an absolute _bona fide_ increase of the currency to that extent; and not a mere depreciation of it, as so many are in the habit of asserting. practically and commercially speaking, a dollar is not necessarily a specific thing, made of silver, or gold, or any other single metal, or substance. _it is only such a quantum of market value as exists in a given piece of silver or gold._ and it is the same quantum of value, whether it exist in gold, silver, houses, lands, cattle, horses, wool, cotton, wheat, iron, coal, or any other commodity that men desire for use, and buy and sell in the market. every dollar's worth of vendible property in the world is equal in value to a dollar in gold. and if it were possible that every dollar's worth of such property, in the world, could be represented, in the market, by a contract on paper, promising to deliver it on demand; and if every dollar's worth could be delivered on demand, in redemption of the paper that represented it, the world could then have an amount of currency equal to the entire property of the world. and yet clearly every dollar of paper would be equal in value to a dollar of gold; specie payments--or the literal fulfilment of contracts--could forever be maintained; and yet there could be no inflation of prices, relatively to gold. such a currency would no more inflate the price of one thing, than of another. it would as much inflate the price of gold, as of any thing else. gold would stand at its true and natural value as a metal; and all other things would also stand at their true and natural values, for their respective uses. on this principle, if every dollar's worth of vendible property in the united states could be represented by a paper currency; and if the property could all be delivered on demand, in redemption of the paper, such a currency would not inflate the prices of property at all, relatively to gold. gold would still stand at its true and natural value as a metal, or at its value in the markets of the world. and all the property represented by the paper, would simply be measured by the gold, and would stand at its true and natural value, relatively to the gold. we could then have some thirty thousand millions ($ , , ,) of paper currency,--taking our property at its present valuation. and yet every dollar of it would be equal to a dollar of gold; and there could evidently be no inflation of prices, relatively to gold. no more of the currency could be kept in circulation, than should be necessary or convenient for the purchase and sale of property at specie prices. it is probably not practicable to represent the entire property of the country by such contracts on paper as would be convenient and acceptable as a currency. this is especially true of the _personal_ property; although large portions even of this are being constantly represented by such contracts as bank notes, private promissory notes, checks, drafts, and bills of exchange; all of which are in the nature of currency; that is, they serve for the time as a substitute for specie; although some of them do not acquire any extensive, or even general, circulation. but that it is perfectly practicable to represent nearly all the _real estate_ of the country--including the railroads--by such contracts on paper as will be perfectly convenient and acceptable as a currency; and that every dollar of it can be kept always at par with specie throughout the entire country--that all this is perfectly practicable, the author offers the system already presented in proof. section . to sustain their theory, that an abundant paper currency--though equal in value to gold--inflates prices, relatively to gold, its advocates assert that, _for the time being_, the paper depreciates the gold itself below its true value; or at least below that value which it had before the paper was introduced. but this is an impossibility; for in a country open to free commerce with the rest of the world, gold must always have the same value that it has in the markets of the world; neither more, nor less. no possible amount of paper can reduce it below that value; as has been abundantly demonstrated in this country for the last ten years. neither can any possible amount of paper currency reduce gold below its only true and natural value, viz.: its value as a metal, for uses in the arts. the paper cannot reduce the gold below this value, because the paper does not come at all in competition with it for those uses. we cannot make a watch, a spoon, or a necklace, out of the paper; and therefore the paper cannot compete with the gold for these uses. that gold and silver now have, and can be made to have, no higher value, as a currency, than they have as metals for uses in the arts, is proved by the fact that doubtless not more than one tenth, and very likely not more than a twentieth, of all the gold and silver in the world (out of the mines), is in circulation as currency. in asia, where these metals have been accumulating from time immemorial, and whither all the gold and silver of europe and america--except what is caught up, and converted into plate, jewelry, &c.--is now going, and has been going for the last two thousand years, very little is in circulation as money. for the common traffic of the people, coins made of coarser metals, shells, and other things of little value, are the only currency. it is only for the larger commercial transactions, that gold and silver are used at all as a currency. the great bulk of these metals are used for plate, jewelry, for embellishing temples and palaces. large amounts are also hoarded. but that gold and silver coins now stand, and that they can be made to stand, as currency, only at their true and natural values as metals, for uses in the arts; and that neither the use, nor disuse, of any possible amount of paper currency, in any one country--the united states, for example--can sensibly affect their values in that country, or raise them above, or reduce them below, their values in the markets of the world, the author hopes to demonstrate more fully at a future time, if it should be necessary to do so. section . another argument--or rather assertion--of those who say that any increase of the currency, by means of paper--though the paper be equal in value to gold--depreciates the value of the gold, or inflates prices relatively to gold, is this: they assert that, where no other circumstances intervene to affect the prices of particular commodities, such increase of the currency raises the prices of _all_ kinds of property--relatively to gold--in a degree precisely corresponding with the increase of the currency. this is the universal assertion of those who oppose a _solvent_ paper currency; or a paper currency that is equal in value to gold. but the assertion itself is wholly _untrue_. it is wholly _untrue_ that an abundant paper currency--that is equal in value to gold--raises the prices of _all_ commodities--relatively to gold--in a proportion corresponding to the increase of the currency. _instead of doing so, it causes a rise only in agricultural commodities, and real estate; while it causes a great fall in the prices of manufactures generally._ thus the increased currency produces _a directly opposite effect_ upon the prices of agricultural commodities and real estate, on the one hand, and upon manufactures, on the other. the reasons are these: agriculture requires but very few exchanges, and can, therefore, be carried on with very little money. manufactures, on the other hand, require a great many exchanges, and can, therefore, be carried on (except in a very feeble way), only by the aid of a great deal of money. the consequence is, that the people of all those nations, that have but little money, are engaged mostly in agriculture. very few of them are manufacturers. being mostly engaged in agriculture, each one producing the same commodities with nearly all the others; and each one producing all he wants for his own consumption, there is no market, or very little market, for agricultural commodities; and such commodities, consequently, bear only a very small price. manufactured commodities, on the other hand, are very scarce and dear, for the sole reason that so few persons are engaged in producing them. but let there be an increase of currency, and laborers at once leave agriculture, and become manufacturers. as manufactured commodities usually bring much higher prices than agricultural, in proportion to the labor it costs to produce them, men usually leave agriculture, and go into manufacturing, to the full extent the increased currency will allow. the consequence is that, under an abundant currency, manufactures become various, abundant, and cheap; where before they were scarce and dear. but while, on the one hand, manufactures are thus becoming various, abundant, and cheap, agricultural commodities, on the other hand, are rising: and why? not because the currency is depreciated, but simply because so many persons, who before--under a scanty currency--were engaged in agriculture, and produced all the agricultural commodities they needed, and perhaps more than they needed, for their own consumption, having now left agriculture, and become manufacturers, have become purchasers and consumers, instead of producers, of agricultural commodities. here the same cause--abundant currency--that has occasioned a _rise_ in the prices of agricultural commodities, has produced a _directly opposite effect_ upon manufactures. it has made the latter various, abundant, and cheap; where before they were scarce and dear. on the other hand, when the currency contracts, manufacturing industry is in a great degree stopped; and the persons engaged in it are driven to agriculture as their only means of sustaining life. the consequence is, that manufactured commodities become scarce and dear, from non-production. at the same time, agricultural commodities become superabundant and cheap, from over-production and want of a market. thus an abundant currency, and a scanty currency, produce directly opposite effects upon the prices of agricultural commodities, on the one hand, and manufactures, on the other. the _abundant_ currency makes manufactures various, abundant, and cheap, from increased production; while it raises the prices of agricultural commodities, by withdrawing laborers from the production of them, and also by creating a body of purchasers and consumers, to wit, the manufacturers. on the other hand, a _scanty_ currency drives men from manufactures into agriculture, and thus causes manufactures to become scarce and dear, from non-production; and, at the same time, causes agricultural commodities to fall in price, from over-production, and want of a market. but whether, on the one hand, agricultural commodities are rising, and manufactured commodities are falling, under an abundant currency; or whether, on the other hand, manufactured commodities are rising, and agricultural commodities are falling, under a scanty currency, the value of the currency itself, dollar for dollar, remains the same in both cases. the value of the currency, in either of these cases; is fixed, not at all by the amount in circulation, but by its value relatively to gold. and the value of gold, in any particular country, is fixed by its value as a metal, and its value in the markets of the world; and not at all by any greater or less quantity of paper that may be in circulation in that country. section . but it is not alone agricultural _products_ that rise in price under an abundant currency. real estate also, of all kinds--agricultural, manufacturing, and commercial--rises under an abundant currency, and falls under a scanty currency. the reasons are these: _agricultural_ real estate rises under an abundant currency, because agricultural products rise under such a currency, as already explained. _manufacturing_ real estate rises under an abundant currency, simply because--money being the great instrumentality of manufacturing industry--that industry is active and profitable under an abundant currency. _commercial_ real estate rises under an abundant currency, because, under such a currency, commerce, the exchange and distribution of agricultural and manufactured commodities, is active and profitable. _railroads_, also, rise under an abundant currency, because, under such a currency, the transportation of freight and passengers is increased. on the other hand, all kinds of real estate fall in price under a scanty currency, for these reasons, to wit: agricultural real estate falls, because, manufactures having been in a great measure stopped, and the manufacturers driven into agriculture, there is little market for agricultural products, and those products bring only a small price. manufacturing real estate falls, because, manufacturing industry having become impossible for lack of money, manufacturing real estate is lying dead, or unproductive. commercial real estate falls, because commerce, the exchange and distribution of agricultural and manufactured commodities, has ceased. railroads fall in price, because, owing to the suspension of manufactures and commerce, there is little transportation of either freight or passengers. thus it will be seen that an abundant currency creates a great rise in agricultural products, and in all kinds of real estate--agricultural, manufacturing, and commercial, (including railroads); and, at the same time, causes manufactured commodities to become various, abundant, and cheap. while, on the other hand, a scanty currency causes agricultural commodities, and all kinds of real estate, to fall in price; and, at the same time, makes manufactured commodities scarce and dear. it is a particularly noticeable fact, that those who claim that an abundant paper currency inflates the prices of _all_ commodities, relatively to gold, never find it convenient to speak of the variety, abundance, and cheapness of manufactures, that exist under an abundant currency; but only of the high prices of agricultural commodities, and real estate. the whole subject of prices--a subject that is very little understood, and that has been forever misrepresented, in order to justify restraints upon the currency, and keep it in a few hands--deserves a more extensive discussion; but the special purposes of this pamphlet do not admit of it here. but enough has probably now been said, to show that the great changes that take place in prices, under an abundant currency, on the one hand, and a scanty currency, on the other, are not occasioned at all by any change in the value of the currency itself--dollar for dollar--provided the currency be equal in value to coin. enough, also, it is hoped, has been said, to show to all holders of either agricultural, manufacturing, or commercial real estate (including railroads), that the greater or less value of their property depends almost wholly upon the abundance or scarcity of currency; and that, inasmuch as, under the system proposed, they have the power, in their own hands, of creating probably all the currency that can possibly be used in manufactures and commerce, they have no one but themselves to blame, if they suffer the value of their property to be destroyed by any such narrow and tyrannical systems of currency and credit as those that now prevail, or those that have always heretofore prevailed. by using their real estate as banking capital, they can not only get an income from it, in the shape of interest on money, but by supplying capital to mechanics and merchants, they create a large class who will pay high prices for agricultural products, and high prices and rents for manufacturing and commercial real estate; and who will also supply them, in return, with manufactured commodities of the greatest variety, abundance, and cheapness. it is, therefore, mere suicide for the holders of real estate, who have the power of supplying an indefinite amount of capital for mechanics and merchants--and who can make themselves and everybody else rich by supplying it--to suffer that power to be usurped by any such small body of men as those who now monopolize it, through mere favoritism, corruption, and tyranny, on the part of the government, and not because they have any claim to it. chapter iv. security of the system. supposing the property mortgaged to be ample, the system, as a system, is absolutely secure. the currency would be absolutely incapable of insolvency; for there could never be a dollar of the currency in circulation, without a dollar of capital (productive stock) in bank, which _must_ be transferred in redemption of it, unless redemption be made in specie. the capital _alone_, be it observed--independently of the notes discounted--must always be sufficient to redeem the entire circulation; for the circulation can never exceed the capital (productive stock). but the notes discounted are also holden by the trustees, and the proceeds of them must be applied to the redemption of the circulation. supposing, therefore, the capital to be sufficient, and the notes discounted to be solvent, the redemption of the circulation is doubly secured. what guarantee, then, have the public, for the sufficiency of the mortgages? they have these, viz.: . the mortgages, composing the capital of a bank, will be matters of public record, and everybody, _in the neighborhood_, will have the means of judging for himself of the sufficiency of the property holden. if the property should be insufficient, the bank would be discredited at once; for the abundance of solvent currency would be so great, that no one would have any inducement to take that which was insolvent or doubtful. . by the articles of association, all the mortgages that make up the capital of a bank, are made mutually responsible for each other; because, if any one mortgage proves insufficient, no dividend can afterwards be paid to any of the bankers (mortgagors), until that deficiency shall have been made good by the company. the effect of this provision will be, to make all the founders of a bank look carefully to the sufficiency of each other's mortgages; because no man will be willing to put in a good mortgage of his own, on equal terms with a bad mortgage of another man's, when he knows that his own mortgage will have to contribute to making good any deficiency of the other. the result will be, that the mortgages, that go to make up the capital of any one bank, _will be either all good, or all bad_. if they are _all good_, the solvency of the bank will be apparent to all _in the vicinity_; and the credit of the bank will at once be established _at home_. if the mortgages are _all bad_, that fact, also, will be apparent to everybody _in the vicinity_, and the bank is at once discredited _at home_. from the foregoing considerations, it is evident that nothing is easier than for a _good_ bank to establish its credit, _at home_; and that nothing is more certain than that a _bad_ bank would be discredited, _at home_, from the outset, and could get no circulation at all. it is also evident that a bank, that has no credit at home, could get none abroad. there is, therefore, no danger of the public being swindled by bad banks. a bank that is well founded, and that has established its credit at home, has so many ways of establishing its credit abroad, that there is no need that they be all specified here. the mode that seems most likely to be adopted, is the following, viz.: when the capital shall consist of mortgages, it will be very easy for all the banks, in any one state, to make their solvency known _to each other_. there would be so many banks, that some _system_ would naturally be adopted for this purpose. perhaps this system would be, that a standing committee, appointed by the banks, would be established in each state, to whom each bank in the state would be required to produce satisfactory evidence of its solvency, before its bills should be received by the other banks of the state. when the banks, or any considerable number of the banks, of any particular state--massachusetts, for instance,--shall have made themselves so far acquainted with each other's solvency, as to be ready to receive each other's bills, they will be ready to make a still further arrangement for their mutual benefit, viz: to unite in establishing one general agency in boston, another in new york, and others in philadelphia, baltimore, cincinnati, chicago, st. louis, new orleans, san francisco, &c., &c., where the bills of all these massachusetts banks would be redeemed, either from a common fund contributed for the purpose, or in such other way as might be found best. and thus the bills of all the massachusetts banks would be placed at par at all the great commercial points. each bank, belonging to the association, might print on the back of its bills, "_redeemable at the massachusetts agencies in boston, new york, philadelphia, &c._" in this way, all the banks of each state might unite to establish a joint agency in every large city, throughout the country, for the redemption of all their bills. in doing so, they would not only certify, but make themselves responsible for, the solvency of each other's bills. the banks might safely make _permanent_ arrangements of this kind with each other; because the _permanent_ solvency of all the banks might be relied on. the permanent solvency of all the banks might be relied on, because, under this system, a bank (whose capital consists of mortgages), once solvent, is necessarily forever solvent, unless in contingencies so utterly improbable as not to need to be taken into account. in fact, in the ordinary course of things, every bank would be growing more and more solvent; because, in the ordinary course of things, the mortgaged property would be constantly rising in value, as the wealth and population of the country should increase. the exceptions to this rule would be so rare as to be unworthy of notice. there is, therefore, no difficulty in putting the currency, furnished by each state, at par throughout the united states. at the general agencies, in the great cities, the redemption would, doubtless, _so far as necessary_, be made in specie, _on demand_; because, at such points, especially in cities on the sea-board, there would always be an abundance of specie in the market as merchandise; and it would, therefore, be both for the convenience and interest of the banks to redeem in specie, on demand, rather than transfer a portion of their capital, and then pay interest on that capital until it should be redeemed, or bought back, with specie. often, however, and very likely even in the great majority of cases, a man from one state--as california, for example,--presenting massachusetts bills for redemption at a massachusetts agency--either in boston, new york, or elsewhere--would prefer to have them redeemed with bills from his own state, california, rather than with specie. if the system were adopted throughout the united states, the banks of each state would be likely to have agencies of this kind in all the great cities. each of these agencies would exchange the bills of every other state for the bills of its own state; and thus the bills of each state would find their way home, without any demand for their redemption in specie having ever been made. where railroads were used as capital, all the banks in the united states could form one association, of the kind just mentioned, to establish agencies at all the great commercial points, for the redemption of their bills. of course each railroad would receive the bills of all other roads, for fare and freight. thus all railroad currency, under this system, would be put at par throughout the united states. chapter v. the system as a credit system. section . perhaps the merits of the system, as a credit system, cannot be better illustrated than by comparing the amount of loanable capital it is capable of supplying, with the amount which the present "national" banks (so called) are capable of supplying. if we thus compare the two systems, we shall find that the former is capable of supplying more than fifty times as much credit as the latter. thus the entire circulation authorized by all the "national" banks,[e] is but three hundred and fifty-four millions of dollars ($ , , ). [e] exclusive of the so-called "gold" banks, which are too few to be worthy of notice. but the real estate and railroads of the country are probably worth twenty thousand millions of dollars ($ , , , ). this latter sum is fifty-six times greater than the former; and is all capable of being loaned in the form of currency. calling the population of the country forty millions ( , , ), the "national" system is capable of supplying not quite _nine_ dollars ($ ) of loanable capital to each individual of the whole population. the system proposed is capable of supplying five hundred dollars ($ ) of loanable capital to each individual of the whole population. supposing one half the population (male and female) to be sixteen years of age and upwards, and to be capable of producing wealth, and to need capital for their industry, the "national" system would furnish not quite eighteen dollars ($ ) for each one of them, on an average. the other system is capable of furnishing one thousand dollars ($ , ) for each one of them, on an average. supposing the adults (both male and female) of the country to be sixteen millions ( , , ), the "national" system is capable of furnishing only twenty-two dollars and twelve and a half cents ($ . - / ) to each one of these persons, on an average. the system proposed is capable of furnishing twelve hundred and fifty dollars ($ , ) to each one, on an average. supposing the number of _male_ adults in the whole country to be eight millions ( , , ), the "national" system is capable of furnishing only forty-four dollars and twenty-five cents ($ . ) to each one. the other system is capable of furnishing twenty-five hundred dollars ($ , ) to each one. the present number of "national" banks is little less than two thousand ( , ). calling the number two thousand ( , ), and supposing the $ , , of circulation to be equally divided between them, each bank would be authorized to issue $ , . under the proposed system, the real estate and railroads of the country are capable of furnishing one hundred thousand ( , ) banks, having each a capital of two hundred thousand dollars ($ , ); or it is capable of furnishing one hundred and twelve thousand nine hundred and ninety-four ( , ) banks, having each a capital ($ , ), equal, on an average, to the capital of the present "national" banks. that is, this system is capable of furnishing fifty-six times as many banks as the "national" system, having each the same capital, on an average, as the "national" banks. calling the number of the present "national" banks two thousand ( , ), and the population of the country forty millions ( , , ), there is only one bank to , people, on an average; each bank being authorized to issue, on an average, a circulation of $ , . under the proposed system, we could have one bank for every five hundred ( ) persons; each bank being authorized to issue $ , ; or $ , each more than the "national" banks. these figures give some idea of the comparative capacity of the two systems to furnish credit. under which of these two systems, now, would everybody, who needs credit, and deserves it, be most likely to get it? and to get all he needs to make his industry most productive? and to get it at the lowest rates of interest? the proposed system is as much superior to the old specie paying system (so called)--in respect to the amount of loanable capital it is capable of supplying--as it is to the present "national" system. section . but the proposed system has one other feature, which is likely to be of great practical importance, and which gives it a still further superiority--as a credit system--over the so-called specie paying system. it is this: the old specie paying system (so called) could add to the loanable capital of the country, _only by so much currency as it could keep in circulation, over and above the amount of specie that it was necessary to keep on hand for its redemption_. but the amount of loanable capital which the proposed system can supply, hardly depends at all upon the amount of its currency that can be kept in circulation. it can supply about the same amount of loanable capital, even though its currency should be returned for redemption immediately after it is issued. it can do this, because the banks, _by paying interest on the currency returned for redemption_--or, what is the same thing, by paying dividends on the productive stock transferred in redemption of the currency--can postpone the payment of specie to such time as it shall be convenient for them to pay it. all that would be necessary to make loans practicable on this basis, would be, that the banks should receive a higher rate of interest on their loans than they would have to pay on the currency returned for redemption; that is, on the productive stock transferred in redemption of the currency. the rate of interest _received_ by the banks, on the loans made by them, would need to be so much higher than that _paid_ by them, on currency returned for redemption, as to make it an object for them to loan more of their currency than could be kept in circulation. subject to this condition, the banks could loan their entire capitals, whether much or little of it could be kept in circulation. for example, suppose the banks should pay _six_ per cent. interest on currency returned for redemption--(or as dividends on the productive stock transferred in redemption of such currency)--they could then loan their currency at _nine_ per cent. and still make _three_ per cent. profits, even though the currency loaned should come back for redemption immediately after it was issued. but this is not all. even though the banks should _pay_, on currency returned for redemption, precisely the same rate of interest they _received_ on loans--say _six_ per cent.--they could still do business, if their currency should, on an average, continue in circulation _one half the time for which it was loaned_; for then the banks would get three per cent. net on their loans, and this would make their business a paying one. but the banks would probably do much better than this; for bank credits would supersede all private credits; and the diversity and amount of production would be so great that an immense amount of currency would be constantly required to make the necessary exchanges. and whatever amount should be necessary for making these exchanges, would, of course, remain in circulation. however much currency, therefore, should be issued, it is probable that, on an average, it would remain in circulation more than half the time for which it was loaned. or if the banks should pay _six_ per cent. interest on currency returned for redemption; and should then loan money, for _six_ months, at _eight_ per cent. interest; and this currency should remain in circulation but one month; the banks would then get eight per cent. for the one month, and two per cent. net for the other five months; which would be equal to three per cent. for the whole six months. or if the currency should remain in circulation two months, the banks would then get eight per cent. for the two months, and two per cent. net for the other four months; which would be equal to four per cent. for the whole six months. or if the currency should remain in circulation three months, the banks would then get eight per cent. for three months, and two per cent. net for the other three months; which would be equal to five per cent. for the whole six months. or if the currency should remain in circulation four months, the banks would then get eight per cent. for the four months, and two per cent. net for the other two months; which would be equal to six per cent. for the whole six months. or if the currency should remain in circulation five months, the banks would then get eight per cent. for the five months, and two per cent. net for the other month; which would be equal to seven per cent. for the whole six months. the banks would soon ascertain, by experiment, how long their currency was likely to remain in circulation; and what rate of interest it was therefore necessary for them to charge to make their business a paying one. and that rate, whatever it might be, the borrowers would have to pay. subject to this condition, the banks could always loan their entire capitals. chapter vi. amount of currency needed. it is of no use to say that we do not need so much currency as the proposed system would supply; because, first, if we should not need it, we shall not use it. every dollar of paper will represent specific property that can be delivered on demand in redemption of it, and that will have the same market value as gold. the paper dollar, therefore, will have the same market value as the gold dollar, or as a dollar's worth of any other property; and no one will part with it, unless he gets in exchange for it something that will serve his particular wants better; and no one will accept it, unless it will serve his particular wants better than the thing he parts with. no more paper, therefore, can circulate, than is wanted for the purchase and sale of commodities at their true and natural values, as measured by gold. secondly, we do not know at all how much currency we do need. that is something that can be determined only by experiment. we know that, heretofore, whenever currency has been increased, industry and traffic have increased to a corresponding extent. and they would unquestionably increase to an extent far beyond any thing the world has ever seen, if only they were aided and permitted by an adequate currency. we, as yet, know very little what wealth mankind are capable of creating. it is only within a hundred years, or a little more, that any considerable portion of them have really begun to invent machinery, and learned that it is only by machinery that they can create any considerable wealth. but they have not yet learned--at least, they profess not to have learned--that money is indispensable to the practical employment of machinery; that it is as impossible to operate machinery without money, as it is to operate it without wind, water, or steam. when they shall have learned, and practically accepted, this great fact, and shall have provided themselves with money, wealth will speedily become universal. and it is only those who would deplore such a result, or those who are too stupid to see the palpable and necessary connection between money and manufacturing industry, who resist the indefinite increase of money. it is scarcely a more patent fact that land is the indispensable capital for agricultural industry, than it is that money is the indispensable capital for manufacturing industry. practically, everybody recognizes this fact, and virtually acknowledges it; although, in words, so many deny it. men as deliberately and accurately calculate the amount of machinery that a hundred dollars in money will operate, as they do the amount of machinery that a ton of coal, or a given amount of water, will operate. they calculate much more accurately the amount of manufactured goods a hundred dollars will produce, than they do the amount of grain, grass, or vegetables an acre of land will produce. they no more expect to see mechanics carrying on business for themselves without money, than they do to see agricultural laborers carrying on farming without land, or than they do to see sailors going to sea without ships. they know that all mechanical, as well as agricultural, laborers, who have not the appropriate capital for their special business, must necessarily stand idle, or become mere wage-laborers for others, at such particular employments as the latter may dictate, and at such prices as the latter may see fit to pay. all these things attest the perfect knowledge that men have, that a money capital is indispensable to manufacturing industry; whatever assertions they may make to the contrary. they know, therefore, that prohibitions upon money are prohibitions upon industry itself; that there can be no such thing as freedom of industry, where there is not freedom to lend and hire capital for such industry. every one knows, too--who knows any thing at all on such a subject--that it is, intrinsically, as flagrant a tyranny, as flagrant a violation of men's natural rights, for a government to forbid the lending and hiring of money for manufacturing industry, as it is to forbid the lending and hiring of land, or agricultural implements, for agricultural industry, or the lending and hiring of ships for maritime industry. they know that it is as flagrant a tyranny, as flagrant a violation of men's natural rights, to forbid one man to lend another money for mechanical industry, as it would be to forbid the former to lend the latter a house to live in, a shop to work in, or tools to work with. it is, therefore, a flagrant, manifest tyranny, a flagrant, manifest violation of men's natural rights, to lay any conditions or restrictions whatever upon the business of banking--that is, upon the lending and hiring of money--except such as are laid upon all other transactions between man and man, viz.: the fulfilment of contracts, and restraints upon force and fraud. a man who is without capital, and who, by prohibitions upon banking, is practically forbidden to hire any, is in a condition elevated but one degree above that of a chattel slave. he may live; but he can live only as the servant of others; compelled to perform such labor, and to perform it at such prices, as they may see fit to dictate. and a government, which, at this day, subjects the great body of the people--or even any portion of them--to this condition, is as fit an object of popular retribution as any tyranny that ever existed. to deprive mankind of their natural right and power of creating wealth for themselves, is as great a tyranny as it is to rob them of it after they have created it. and this is done by all laws against honest banking. all these things are so self-evident, so universally known, that no man, of ordinary mental capacity, can claim to be ignorant of them. and any legislator, who disregards them, should be taught, by a discipline short, sharp, and decisive, that his power is wholly subordinate to the natural rights of mankind. it is, then, one of man's indisputable, natural rights to lend and hire capital in any and every form and manner that is intrinsically honest. and as money, or currency, is the great, the indispensable instrumentality in the production and distribution of wealth; as it is the capital, the motive power, that sets all other instrumentalities in motion; as it is the one thing, without which all the other great agencies of production--such as science, skill, and machinery--are practically paralyzed; to say that we need no more of it, and shall have no more of it, than we now have, is to say that we need no more wealth, and shall have no more wealth, and no more equal or equitable distribution of wealth, than we now have. it is to say that the mass of mankind--the laborers, the producers of wealth--need not to produce, and shall not be permitted to produce, wealth for themselves, but only for others. for a government to limit the currency of a people, and to designate the individuals (or corporations) who shall have the control of that currency, is, manifestly, equivalent to saying there shall be but so much industry and wealth in the nation, and that these shall be under the special control, and for the special enjoyment, of the individuals designated; and, of course, that all other persons shall be simply their dependants and servants; receiving only such prices for their property, and such compensation for their labor, as these few holders of the currency shall see fit to give for them. the effect of these prohibitions upon money, and consequently upon industry, are everywhere apparent in the poverty of the great body of the people. at the present time, the people of this country certainly do not produce one third, very likely not one fifth, of the wealth they might produce. and the little they do produce is all in the hands of a few. all this is attributable to the want of currency and credit, and to the consequent want of science, skill, machinery, and working capital. of the twenty million persons, male and female, of sixteen years of age and upwards--capable of producing wealth--certainly not one in five has the science, skill, implements, machinery, and capital necessary to make his or her industry most effective; or to secure to himself or herself the greatest share in the products of his or her own industry. a very large proportion of these persons--nearly all the females, and a great majority of the males--persons capable of running machinery, and of producing each three, five, or ten dollars of wealth per day, are now without science, skill, machinery, or capital, and are either producing nothing, or working only with such inferior means, and at such inferior employments, as to make their industry of scarcely any value at all, either to themselves or others, beyond the provision of the coarsest necessaries of a hard and coarse existence. and this is all owing to the lack of money; or rather to the lack of money and credit. there are, doubtless, in the country, ten million ( , , ) persons, male and female--sixteen years of age and upwards--who are naturally capable of creating from three to five dollars of wealth per day, if they had the science, skill, machinery, and capital which they ought to have, and might have; but who, from the want of these, are now creating not more than one dollar each per day, on an average; thus occasioning a loss, to themselves and the country of from twenty to forty millions of dollars per day, for three hundred days in a year; a sum equal to from six to twelve thousand millions per annum; or three to six times the amount of our entire national debt. and there are another ten million of persons--better supplied, indeed, with capital, machinery, &c., than the ten million before mentioned--but who, nevertheless, from the same causes, are producing far less than they might. the aggregate loss to the country, from these causes, is, doubtless, equal to from ten to fifteen thousand millions per year; or five, six, or seven times the amount of the entire national debt. in this estimate no account is taken of the loss suffered from our inability--owing simply to a want of money--to bring to this country, and give employment to, the millions of laborers, in europe and asia, who desire to come here, and add the products of their labor to our national wealth. it is, probably, no more than a reasonable estimate to suppose that the nation, as a nation, is losing twenty thousand millions of dollars ($ , , , ) per annum--about ten times the amount of our national debt--solely for the want of money to give such employment as they need, to the population we now have, and to those who desire to come here from other countries. among the losses we suffer, from the causes mentioned, the non-production of new inventions is by no means the least. as a general rule, new inventions are made only where money and machinery prevail. and they are generally produced in a ratio corresponding with the amount of money and machinery. in no part of the country are the new inventions equal in number to what they ought to be, and might be. in three fourths of the country very few are produced. in some, almost none at all. the losses from this cause cannot be estimated in money. the government, in its ignorance, arrogance, and tyranny, either does not see all this, or, seeing it, does not regard it. while these thousands of millions are being lost annually, from the suppression of money, and consequently of industry, and while three fourths of the laborers of the country are either standing idle, or, for the want of capital, are producing only a mere fraction of what they might produce, a two-pence-ha'-penny secretary of the treasury can find no better employment for his faculties, than in trying, first, to reduce the rate of interest on the public debt one per cent.--thereby saving twenty millions a year, _or fifty cents for each person, on an average_! and, secondly, in paying one hundred millions per annum of the principal; that is, _two and a half dollars for each person, on an average_! and he insists that the only way to achieve these astounding results, is to deprive the people at large of money! to destroy, as far as possible, their industry! to deprive them, as far as possible, of all power to manufacture for themselves! and to compel them to pay, to the few manufacturers it has under its protection, fifty or one hundred per cent. more for their manufactures than they are worth! he has been tugging at this tremendous task four years, or thereabouts. and he confidently believes that if he can be permitted to enforce this plan for a sufficient period of years, in the future, he will ultimately be able to save the people, annually, _fifty cents each, on an average, in interest_! and also continue to pay, annually, _two dollars and a half for each person, on an average_, of the principal, of the national debt! he apparently does not know, or, if he knows, it is, in his eyes, a matter of comparatively small moment, that this saving of $ , , per annum in interest, and this payment of $ , , per annum of principal, which he proposes to make on behalf of the people, are not equal to what _two days_--or perhaps even _one day_--of their industry would amount to, if they were permitted to enjoy their natural rights of lending and hiring capital, and producing such wealth as they please for themselves. he apparently does not know, or, if he knows, it is with him a small matter, that if the people were permitted to enjoy their natural freedom in currency and credit, and consequently their natural freedom in industry, they could pay the entire national debt three, four, or a half dozen times over _every year_, more easily than they can save the $ , , , and pay the $ , , , annually, by the process that he adopts for saving and paying them. and yet this man, and his policy, represent the government and its policy. the president keeps him in office, and congress sustain him in his measures. in short, the government not only does not offer, but is apparently determined not to suffer, any such thing as freedom in currency and credit, or, consequently, in industry. it is, apparently, so bent upon compelling the people to give more for its few irredeemable notes than they are worth; and so bent upon keeping all wealth, and all means of wealth, in the hands of the few--upon whose money and frauds it relies for support--that it is determined, if possible, to perpetuate this state of things indefinitely. and it will probably succeed in perpetuating it indefinitely--under cover of such false pretences as those of specie payments, inflation of prices, reducing the interest, and paying the principal, of the national debt, &c.--unless the people at large shall open their eyes to the deceit and robbery that are practised upon them; and, by establishing freedom in currency and credit--and thereby freedom in industry and commerce--end at once and forever the tyranny that impoverishes and enslaves them. chapter vii. importance of the system to massachusetts. section . the tariffs, by means of which a few monied men of massachusetts have so long plundered the rest of the country, and on which they have so largely relied for their prosperity, will not much longer be endured. the nation at large has no need of tariffs. money is the great instrumentality for manufacturing. and the nation needs nothing but an ample supply of money--in addition to its natural advantages--to enable our people to manufacture for themselves much more cheaply than any other people can manufacture for us. to say nothing of the many millions who, if we had the money necessary to give them employment, might be brought here from europe and asia, and employed in manufactures, more than half the productive power of our present population--in the south and west much more than half--is utterly lost for the want of money, and the consequent want of science, skill, and machinery. and yet those few, who monopolize the present stock of money, insist that they must have tariffs to enable them to manufacture at all. and the nation is duped by these false pretences. to give bounties to encourage manufactures, and at the same time forbid all but a favored few to have money to manufacture with, is just as absurd as it would be to give bounties to encourage manufactures, and at the same time forbid all but a favored few to have machinery of any kind to manufacture with. it is just as absurd as it would be to give bounties to encourage agriculture, and at the same time forbid all but a favored few to own land, or have cattle, horses, seed corn, seed wheat, or agricultural implements. it is just as absurd as it would be to give bounties to encourage navigation, and at the same time forbid all but a favored few to have ships. the whole object of such absurdities and tyrannies is to commit the double wrong of depriving the mass of the people of all power to manufacture for themselves, and at the same time compel them to pay extortionate prices to the favored few who are permitted to manufacture. when tariffs shall be abolished, massachusetts will have no means of increasing her prosperity, nor even of perpetuating such poor prosperity as she now has,[f] except by a great increase of money; such an increase of money as will enable her skilled laborers and enterprising young men to get capital for such industries and enterprises as they may prefer to engage in here, rather than go elsewhere. [f] i say "poor prosperity," because the present prosperity of massachusetts is not only a dishonest prosperity, but is also only the prosperity of the few, and not of the many. even if massachusetts were willing to manufacture for the south and west, _without a tariff_, she could hope to do so only until the south and west should supply themselves with money. so soon as they shall supply themselves with money, they will be able to manufacture for themselves more cheaply than massachusetts can manufacture for them. their natural advantages for manufacturing are greatly superior to those of massachusetts. they have the cheap food, coal, iron, lead, copper, wool, cotton, hides, &c., &c. they lack only money to avail themselves of these advantages. and, under the system proposed, their lands and railroads are capable of supplying all the money they need. and they will soon adopt that, or some other system. and they will then not only be independent of massachusetts, but will be able to draw away from her her skilled laborers, and enterprising young men, unless she shall first supply them with the money capital necessary for such industries and enterprises as may induce them to remain. they will, of course, go where they can get capital, instead of staying where they can get none. so great are the natural advantages of the south and west over those of massachusetts, that it is doubtful how many of these men can be persuaded to remain, by all the inducements that capital can offer. but without such inducements it is certain they will all go. and massachusetts has no means of supplying this needed money, except by using her real estate as banking capital. it is, therefore, plainly a matter of life or death to the holders of real estate in massachusetts to use it for that purpose; for their real estate will be worth nothing when the skilled labor and the enterprising young men of massachusetts shall have deserted her. all this is so manifest as to need no further demonstration. and massachusetts will do well to look the facts in the face before it is too late. section . what prospect has massachusetts under the present "national" system? the comptroller of the currency, in his last annual report, says, that of the $ , , of circulation authorized by law, massachusetts has now $ , , . he says, further, that this is more than four times as much as she would be entitled to, if the currency were apportioned equally among the states, according to population; more than twice as much as she would be entitled to, if the circulation were apportioned among the states, according to their wealth; and three times as much as she is entitled to upon an apportionment made--as apportionments are now professedly made--half upon population, and half upon wealth. the comptroller further says, that a law of congress, passed july , , requiring him to withdraw circulation from those states having more than their just proportion, and to distribute it among those now having less than their just proportion, will require him to withdraw "from thirty-six banks in the city of boston, $ , , ; [and] from fifty-three country banks of massachusetts, $ , , ." thus the law requires $ , , to be withdrawn from the present banks of massachusetts. when this shall have been done, she will have but $ , , left. and as this will be more than three times her just proportion on a basis of population, and nearly twice her just share on a basis of wealth, there is no knowing how soon the remaining excess over her just share may be withdrawn.[g] [g] if the excess mentioned in the text should not be withdrawn, it will be only because the system is so villainous in itself, that other parts of the country will not accept the shares to which they are entitled. by the census of , massachusetts had a population of , , . she has now, doubtless, a population of , , . calling her population , , , the $ , , of circulation which she now has, is equal to $ for each person, on an average. when $ , , of this amount shall have been withdrawn, as the law now requires it to be, the circulation will be reduced to less than $ for each person, on an average. if the circulation should be reduced to the proportion to which massachusetts is entitled, on the basis of wealth--that is, to $ , , --she will then have less than $ for each person, on an average. if the circulation should be reduced to the proportion to which massachusetts is entitled on a basis of population--that is to $ , , --she will then have a trifle less than $ for each person, on an average. for years the industry of massachusetts has been greatly crippled for the want of bank credits, although her banks have been authorized to issue their notes to the amount of $ , , ; or $ to each person, on an average. what will her industry be when her banks shall be authorized to issue only $ , , , or $ for each person, on an average? what will it be, if her bank issues shall be reduced to her proportion on a basis of wealth, to wit, $ , , ; or less than $ for each person, on an average? or what will it be, if her bank circulation shall be reduced to her proportion on a basis of population, to wit, to $ , , ; or less than $ for each person, on an average? in contrast with such contemptible sums as these, massachusetts, under the system proposed, could have nine hundred millions ($ , , ) of bank loans;[h] that is, $ for every man, woman, and child, on an average; or $ , to each adult, male and female, on an average; or $ , to each _male_ adult, on an average. [h] since the notes on page fifth were printed, the _boston journal_, of jan. , , says that, by the valuation of , the real estate of massachusetts is $ , , , . which, now, of these two systems is most likely to secure and increase the prosperity of massachusetts? which is most likely to give to every deserving man and woman in the state, the capital necessary to make their industry most productive to themselves individually, and to the state? which system is most likely to induce the skilled laborers and enterprising young men of massachusetts to remain here? and which is most likely to drive them away? section . but the whole is not yet told. the present "national" system is so burdened with taxes and other onerous conditions, that no banking at all can be done under it, except at rates of interest that are two or three times as high as they ought to be; or as they would be under the system proposed. the burdens imposed on the present banks are probably equal to from six to eight per cent. _upon the amount of their own notes that they are permitted to issue_. in the first place, they are required, for every $ of circulation, to invest $ in five or six per cent. government bonds.[i] this alone is a great burden to all that class of persons who want their capital for active business. it amounts to actual prohibition upon all whose property is in real estate, and therefore not convertible into bonds. and this is a purely tyrannical provision, inasmuch as real estate is a much safer and better capital than the bonds. let us call this a burden of _two per cent. on their circulation_. [i] at first they were required to invest only in _six_ per cent. bonds. but more recently they have been coerced or "persuaded" to invest sixty-five millions ($ , , ) in _five_ per cent. bonds. and very lately it has been announced that "the comptroller of the currency will not hereafter change united states bonds, deposited as security for circulating notes of national banks, except upon condition of substituting the new five per cents. of the loan of july , , and january , ."--_boston daily advertiser of february , ._ from this it is evident that all the banks are to be "persuaded" into investing their capitals in _five_ per cent. bonds. next, is the risk as to the permanent value of the bonds. any war, civil or foreign, would cause them to drop in value, as the frost causes the mercury to drop in the thermometer. even any danger of war would at once reduce them in value. let us call this risk another burden of _one per cent. on the circulation_. next, every bank in seventeen or eighteen of the largest cities--boston among the number--are required to keep on hand, at all times, a reserve--_in dead capital_ (legal tenders)--"equal to at least twenty-five per centum," and all other banks a similar reserve "equal to at least fifteen per centum," "of the aggregate amount of their _notes in circulation, and of their deposits_." doubtless, two thirds--very likely three fourths--of all the bank circulation and deposits are in the seventeen cities named. and as these city banks are required to keep a reserve of dead capital equal to twenty-five per cent., and all others a similar reserve equal to fifteen per cent., _both on their circulation and deposits_, this average burden on all the banks is, doubtless, equal to _two per cent. on their circulation_. next, the banks are required to pay to the united states an annual tax of one per cent. on their average circulation, and half of one per cent. on the amount of their deposits. here is another burden equal to at least _one and a half per cent. on their circulation_. then the capitals of the banks--the united states bonds--are made liable to state taxes to any extent, "not at a greater rate than is assessed upon the monied capital in the hands of individual citizens of such state." this tax is probably equal to _one per cent. on their circulation_. here, then, are taxes and burdens equal to _seven and a half per cent. on their circulation_. next, the banks are required to make at least _five_ reports annually, to the comptroller of the currency, of their "resources and liabilities." also reports of "the amount of each dividend declared by the association." then, too, the banks are restricted as to the rates of interest they are permitted to take. then "congress may at any time alter, amend, or repeal this act;" and thus impose upon the banks still further taxes, conditions, restrictions, returns, and reports. or it may at pleasure abolish the banks altogether. all these taxes, burdens, and liabilities, cannot be reckoned at less than _eight or nine per cent. on the circulation of the banks_; a sum two or three times as great as the rate of interest ought to be; and two or three times as great as it would be under the system proposed. and yet the banks must submit to all these burdens as a condition of being permitted to loan money at all. and they must make up--in their rates of interest--for all these burdens. under this system, therefore, the rate of interest must always be two or three times as high as it ought to be. the objections to the system, then, are, first, that it furnishes very little loanable capital; and, second, that it necessarily raises the interest on that little to two or three times what it ought to be. such a system, obviously, could not be endured at all, but for these reasons, viz.: first, that, being a monopoly, those holding it are enabled to make enormous extortions upon borrowers; and, secondly, that these borrowers--most of whom are the bankers themselves--employ the money in the manufacture and sale of goods that are protected, by tariffs, from foreign competition, and for which they are thus enabled to get, say, fifty per cent. more than they are worth. in this way, these bank extortions and tariff extortions are thrown ultimately upon the people who consume the goods which the bank capital is employed in producing and selling. thus the joint effect of the bank system and the tariff is, first, to deprive the mass of the people of the money capital that would enable them to manufacture for themselves; and, secondly, to compel them to pay extortionate prices for the few manufactures that are produced. under the system proposed, all these things would be done away. the west and the south, that are now relied on to pay all these extortions, would manufacture for themselves. their lands and railroads would enable them to supply all the manufacturing capital that could be used. and they could supply it at one half, or one third, the rates now required by the "national" banks. of course, massachusetts could not--under the "national" system--manufacture a dollar's worth for the south and west. she could not keep her manufacturing laborers. they would all go where they could get cheap capital, cheap supplies, and good markets. and then the manufacturing industry of massachusetts, and with it the value of her real estate, will have perished from the natural and legitimate effect of her meanness, extortion, and tyranny. looking to the future, then, there is no state in the union--certainly none outside of new england--that has a greater interest in supplying her mechanics with the greatest possible amount of capital; or in supplying it at the lowest possible rates of interest. and this can be done only by using her real estate as banking capital. chapter viii. the true character of the "national" system. section . under the "national" system there are less than , banks. but let us call them , . calling the population of the country forty millions, there is but one bank to , people. and this one bank is, _in law_, a person; and only a single person. in lending money, it acts, and can act, only as a unit. its several stockholders cannot act separately, as so many individuals, in lending money. so far, therefore, as this system is concerned, _there is but one money lender for twenty thousand people_! of these , people, ten thousand (male and female) are sixteen years of age and upwards, capable of creating wealth, and requiring capital to make their labor most productive. yet, so far as this system is concerned, there is but one person authorized to lend money to, or for, these ten thousand, who wish to borrow. and this one money lender is one who, proverbially "has no soul." it is not a natural human being. it is a legal, an artificial, and not a natural, person. it is neither masculine nor feminine. it has not the ordinary human sympathies, and is not influenced by the ordinary human motives of action. it is no father, who might wish to lend money to his children, to start them in life. it is no neighbor, who might wish to assist his neighbor. it is no citizen, who might wish to promote the public welfare. it is simply a nondescript, created by law, that wants money, and nothing else. moreover, it has only $ , to lend to these , borrowers; _that is, a fraction less than $ , on an average, for each one_! what chance of borrowing capital have these ten thousand persons, who are forbidden to borrow, except from this one soulless person, who has so little to lend? if money lenders must be soulless--as, perhaps, to some extent, they must be--it is certainly of the utmost importance that there be so many of them, and that they may have so much money to lend, as that they may be necessitated, by their own selfishness, to compete with each other, and thus save the borrowers from their extortions. but the "national" system says, not only that the money lender shall be a soulless person, and one having only a little money to lend, but that he shall also have the whole field--a field of , borrowers--entirely to himself! it says that this soulless person shall have this whole field to himself, notwithstanding he has so little money to lend, and notwithstanding there are many other persons standing by, having, in the aggregate, fifty times as much money to lend as he; and desiring to lend it at one half, or one third, the rates he is demanding, and extorting! it says, too, that he shall have this whole field to himself, notwithstanding that ninety-nine one-hundredths of those who desire to borrow, are sent away empty! and are thereby condemned--so far as such a system can condemn them--to inevitable poverty! section . but further. each one of these , legal, or artificial, persons, who alone are permitted to _lend_ money, is made up of, say, fifty actual, or natural, persons, to whom alone, it is well known, that this legal person will lend it! these , legal persons, then, who alone are permitted to lend money, are made up of , actual persons, who alone are to borrow it. these , actual persons, who compose the legal persons, do not, then, become bankers because they have money to lend to others, but only because they themselves want to borrow! thus when the system says that they alone shall lend, it virtually says that they alone shall borrow; because it is well known that, in practice, they _will_ lend only to themselves. in short, it says that only these , men--or one in four hundred of the population--shall have liberty either to lend, or borrow, capital! such capital as is indispensable to every producer of wealth, if he would control his own industry, or make his labor most productive. consequently, it says, practically--so far as it is in its power to say--that only one person in four hundred of the population shall be permitted to have capital; or, consequently, to labor directly for himself; and that all the rest of the four hundred shall be compelled to labor for this one, at such occupations, and for such wages, as he shall see fit to dictate. in short, the system says--as far as it can say--that only , persons--only one person in four hundred of the population--_shall be suffered to have any money_! and, consequently, that all the property and labor of the thirty-nine million nine hundred thousand ( , , ) persons shall be under the practical, and nearly absolute, control of these , persons! it says that thirty-nine million nine hundred thousand ( , , ) persons shall be in a state of industrial and commercial servitude (to the , ), elevated but one degree above that of chattel slavery. and this scheme is substantially carried out in practice. these , men call themselves "_the business men_" of the country. by this it is meant, not that they are the producers of wealth, but only that they alone handle the money! other persons are permitted to sell only to them! to buy only of them! to labor only for them! and to sell to, buy of, and labor for, them, only at such prices as these , shall dictate. these , so called "_business men_," not only own the government, but they _are_ the government. congress is made up of them, and their tools. and they hold all the other departments of the government in their hands. their sole purpose is power and plunder; and they suffer no constitutional or natural law to stand in the way of their rapacity. how many times, during the last presidential canvass, were we told that "_the business men_" of the country wished things to remain as they were? having gathered all power into their own hands, having subjected all the property and all the labor of the country to their service and control, who can wonder that they were content with things as they were? that they did not desire any change? and their money and their frauds being omnipotent in carrying elections, there was no change. these , "business men," having secured to themselves the control of all bank credits, and thereby the control of all business depending on bank loans; having also obtained control of the government, enact that foreigners shall not be permitted to compete with them, by selling goods in our markets, except under a disadvantage of fifty to one hundred per cent. and this is the industrial and financial system which the "national" bank system establishes--so far as it can establish it. and this is the scheme by means of which these , men cripple, and more than half paralyze, the industry of forty millions of people, and secure to themselves so large a portion of the proceeds of such industry as they see fit to permit. chapter ix. amasa walker's opinion of the author's system. as mr. amasa walker is considered the highest authority in the country, in opposition to all paper currency that does not represent gold or silver actually on hand, it will not be impertinent to give his opinion of the system now proposed. he reviewed it in a somewhat elaborate article, entitled "_modern alchemy_," published in the _bankers magazine (n. y.)_ for december, . that he had no disposition to do any thing but condemn the system to the best of his ability, may be inferred from the following facts. after describing the efforts of the old alchemists to transmute the baser metals into gold, he represents all attempts to make a useful paper currency as attempts "_to transmute paper into gold_." he says that the idea that paper can be made to serve the purposes of money is "_a perfectly cognate idea_" with that of the old alchemists, that the baser metals can be transmuted into gold. (p. .) he also informs us that-- "it is perfectly impracticable _to transmute paper into gold_ to any extent or degree whatever, and that all attempts to do so (beneficially to the trade and commerce of the world) are as absurd and futile as the efforts of the old alchemists to change the baser metals into the most precious." (p. ). these extracts are given to show the spirit and principle of his article, and the kind of arguments he employs against all paper that represents other property than coin; even though that property have equal value with coin in the market. yet he says:-- "one thing we cheerfully accord to mr. spooner's system--_it is an honest one_. here is no fraud, no deception. _it makes no promise that it cannot fulfil._ it does not profess to be convertible into specie [on demand]. it is the best transmutation project we have seen." (p. ). when he says that "it is the best _transmutation_ project he has seen," the context shows that he means to say that it _comes nearer to transmuting paper into gold_, than any other system he has seen. this admission, coming from so violent an opponent of paper currency, may reasonably be set down as the highest commendation that _he_ could be expected to pay to any _paper_ system. he also says:-- "many schemes of the same kind have, at different times, been presented to the world; but none of them have been more complete in detail, or more systematically arranged, than that of mr. spooner. (p. ). but by way of condemning the system as far as possible, he says:-- "mr. spooner, however, can, we think, make no claim to originality, so far as the general principle is concerned. the famous bank of john law, in france, was essentially of the same character." (p. .) no, it was _not_ essentially of the same character. one difference--to say nothing of twenty others--between the two systems was this: that law's bank issued notes that it had no means to redeem; whereas mr. walker himself admits that "mr. spooner's _system makes no promises that it cannot fulfil_." that is to say, it purports to represent nothing except what it actually represents, viz.: property that is actually on hand, and can always be delivered, _on demand_, in redemption of the paper. is not this difference an "essential" one? if mr. walker thinks it is not, he differs "essentially" from the rest of mankind. what fault was ever found with john law's bank, except that it could not redeem its paper? will mr. walker inform us? transcriber's notes: . page scan source: http://books.google.com/books?id=sjmmaaaamaaj the money gods the money gods by ellery h. clark author of "loaded dice," "the carlton case," "ebenezer's millions," "pharos," "dick randall," "the camp at sea duck cove," &c. boston new york the cornhill publishing company copyright, , by the cornhill publishing company all rights reserved, including motion picture rights, dramatic rights, serial rights, and including that of translation into foreign languages, including the scandinavian printed in the united states of america the jordan & more press boston to dr. and mrs. l. d. shepard contents chapter i hide and seek. ii tangled threads. iii the golfers. iv a flurry in the market. v fools rush in. vi misery meets company. vii the adventure of blagden. viii the adventure of tubby mills. ix a message from the past. x the adventure of atherton. xi a fresh start. xii the flight of bellingham. xiii the great secret. xiv a triple discovery. xv thrust and parry. xvi the final effort. xvii the power and the glory. xviii fate is fickle. xix the sowers of the wind. xx the end. the money gods the money gods chapter i hide and seek outside the open window, clustering ramblers flecked the wall with crimson, and the ceaseless murmur of the questing bees filled the midsummer air with melody. no other sound disturbed the silence of the study, where marshall hamilton, president of the standard bank, and his secretary, hugh bellingham, sat facing one another at the table in the centre of the room. one by one, the capitalist was disposing of the documents before him, working rapidly, but with the absolute precision acquired by years of experience in the world of high finance. a note here, a numeral there, a word of explanation to the secretary; at length he had completed his task. "that will be all, bellingham," he said curtly. "when you've attended to these, you may have the rest of the day to yourself. i'm expecting some friends to play golf." bellingham rose, picked up the papers from the table, and with a murmured word of thanks made his way slowly up the broad staircase to his pleasant, airy room at the top of the house. yet it was evident that he viewed the prospect of a holiday with indifference, for as he seated himself at his desk and gazed forth over marshall hamilton's broad acres, the look upon his face was one of discouragement bordering on despair, while his thoughts, gloomily disconsolate, were divided between pity for himself and envy of his employer. how would it feel, he wondered, to change places with the banker, if only for a day, and to become the owner of these well-kept lawns, these groves of birch and pine, the hills and valleys of the links and the sea-blue river winding its leisurely way through the green and fertile meadows on its journey toward the sea. that would indeed be happiness, and more glorious still would be the knowledge that he was one of the "big men" of wall street, not only a multi-millionaire, but a director in a score of huge companies and the organizer of mighty enterprises. for an instant, as he sat staring into the sunshine and letting his fancy roam at will, he almost succeeded in realizing his dream, but the next moment, with a sudden start, he came to himself again--hugh bellingham, private secretary at a salary of two thousand a year, and with debts so urgent and so impossible of payment that the very thought of them was a perpetual torment, causing him anxious days and sleepless nights, and robbing his life of all pretence of happiness. "money," he reflected, "i've got to find it. a lot of it, too. ten thousand dollars, at the least. but heaven knows where it's coming from, and if i don't have it soon--" a shrug of his shoulders completed the sentence, and rousing himself with a sigh from his vain imaginings, he turned to the papers before him and was about to begin work in earnest when he heard the patter of footsteps coming swiftly down the hallway toward his room, and at the sound shook his head in humorous despair. "young marshall," he said to himself. "no chance for writing now." and scarcely had the words passed his lips when the door flew violently open and marshall hamilton, junior, a handsome boy of seven, burst explosively into the room, and without wasting time on preliminary greetings, hastened to announce the purpose of his visit. "i say, hugh," he cried, "i've finished my lunch, and miss wilton's still at the table, stuffing like a pig. so let's play hide and seek." abruptly, bellingham swept his papers together, thrust them into the drawer of his desk, and rose acquiescently from his chair. "very well, sir," he rejoined, "if you say hide and seek, then hide and seek it is. and i suppose you want me to be 'it' so that you can have all the fun and make me do all the work." but the boy shook his curly head. "no, no, hugh," he cried, "you're wrong about that. _i_ want to be the hunter; that's the mostest fun. and don't you hide--" he added, raising an admonishing finger, "in any easy baby place like curtains, the way you did last time. i want to have a real 'citing hunt, so you must choose the hardest place you can. now then, i'll give you a fair start; i'll count three hundred by ones. ready, hugh--" and seating himself in the chair which the secretary had just left, he buried his face in his hands and began to count rapidly to himself in a buzzing undertone, while bellingham, crossing the room on tiptoe, made his way quickly out into the corridor, wondering where he might find a hiding place sufficiently inaccessible to satisfy the aspirations of the hunter. near the turn in the hallway, he paused opposite the picture gallery; and, seized by a sudden impulse, entered, closed the door behind him, and for a moment stood motionless, temporarily blinded by the transition from the glare outside to the semi-darkness within. presently, however, his sight returned to him, and at once, in the vague half-light, he became aware of an uncomfortable feeling that the ancestral hamiltons upon the walls were peering down at him through the gloom with a hostile and disapproving gaze, as though resenting his presence in the room. but time pressed, and the secretary, still governed by the impulse which had bade him enter, did not stop to analyze this impression, but instead turned hastily from the unfriendly portraits to the four suits of massive armor which flanked the door, bulking grimly upon their pedestals, survivals of those far-off days when the fighting hamiltons of old had girt their swords about them, and had gone blithely forth to do battle with their foes. toward the nearest of these bellingham made his way, and a few moments later stood safely entrenched within his shell of steel, securely hidden from view and smiling to himself as he reflected that he had unquestionably found a place difficult enough to test the ingenuity of his pursuer. the seconds passed. evidently the boy was making a thorough search of bellingham's chamber, for no sound disturbed the quiet of the gallery until all at once, with a swiftness which made bellingham start, he heard the door suddenly opened and closed again, and immediately afterward became aware that someone was hastily crossing the room. for the moment, with his field of vision restricted by the bars of his helmet, he could not tell who the visitor might be, yet he felt certain that the footsteps could not be those of a child, and the next instant proved that he was right as there appeared before his startled eyes the figure, not of the boy from whom he was hiding, but of marshall hamilton himself. a singular time, thought the bewildered secretary, for his employer to be visiting the gallery, and the banker's subsequent actions were more remarkable still, for walking directly up to one of the portraits, a dignified hamilton of the seventeenth century with ruff at neck and sword at side, the financier stopped short, listened for a moment, and then, casting a quick glance over his shoulder, raised his hand and apparently touched some portion of the picture, whereupon, to bellingham's amazement, the portrait, frame and all, swung smoothly back; the banker, without hesitation, stepped quickly through the orifice thus made, and an instant later the picture had slipped noiselessly into place again, and all was once more silent in the room. for the moment, bellingham experienced nothing but the most intense astonishment, yet almost at once this feeling gave place to one of apprehension and dismay, for it was only too evident that the exit which he had just witnessed was something which he had never been meant to see, and that if his eavesdropping should be discovered, he would be placed in a position of obvious embarrassment, and perhaps of actual danger. and moreover, since young marshall was a great chum of his father, it seemed equally clear that if the boy should find the secretary's hiding place, news of it would inevitably come to the banker's ears; and accordingly bellingham, without losing an instant, made haste to emerge from his place of concealment, and stepping quickly to the door of the gallery, opened it just in time to hear the boy's voice crying impatiently, "make a noise, hugh; i can't find you. make a noise, quick." like a flash, bellingham darted across the hall, entered a spare bedroom, and with a sigh of relief dropped behind a table, at the same time calling aloud to guide the hunter. instantly the boy came storming down the hall, captured his quarry in triumph and began clamoring eagerly for another game. but fortunately for bellingham, miss wilton, having completed the process of "stuffing like a pig," now appeared upon the scene and took command of her charge. "you're to come driving with me, marshall," she announced, and turning to the secretary, she added, "and miss helen wishes to know, sir, if you would care to play a round of golf with her at five o'clock?" bellingham, his mind still in confusion, stood staring at her as if he found it difficult to comprehend her words, but at length he managed to answer, with an effort, "yes indeed, i'll play with pleasure," and as the boy and his governess disappeared down the staircase, he stood for some moments gazing after them; then with a muttered, "well, i'll be damned," he turned on his heel, and walked rapidly away down the corridor. chapter ii tangled threads bellingham's first act, upon regaining his room, was to close the door tightly behind him, as if to prevent the possibility of pursuit. after which, he resumed his seat at his desk, and lighting his pipe, leaned back thoughtfully in his chair, and began to consider at his leisure the strange scene which he had just witnessed in the gallery. a more imaginative man might perhaps have wondered if his eyes had not deceived him, but bellingham, being of a prosaic and matter-of-fact disposition, did not dream of questioning the evidence of his senses. yet to solve the riddle of his employer's conduct was a problem which was wholly beyond him, and although various vague conjectures suggested themselves to his mind, he immediately dismissed them as being too improbable to be worthy of consideration. drink could not be the answer, nor could drugs, for marshall hamilton, although a man of more than middle age, was aggressively healthy, with a body of iron and nerves of steel. intrigue seemed to the secretary to be a more plausible explanation, and yet scarcely a likely one, for the banker's devotion to his invalid wife, and his affection for his daughter and for his little boy were unmistakably genuine and sincere. more probable appeared the supposition that the sliding panel might be the entrance to a vault, where the capitalist could keep important documents and securities. but whatever the secret might be, the secretary felt certain that it was on no slight and trivial errand that the banker had visited the gallery, for in the three years during which he had served his employer he had long ago discovered that hamilton's huge responsibilities made his outlook upon life essentially a serious one. and while it was quite possible that if someone else, of lesser interests and of greater leisure, had thus vanished through a wall, the incident might have seemed frivolous and amusing; yet where marshall hamilton was the man in question, bellingham felt that the occurrence was of genuine significance. all his efforts to solve the mystery, however, were in vain, and presently realizing that he was accomplishing nothing, and that his correspondence was still unfinished, he came to the sensible conclusion that he was wasting his time, and accordingly set to work upon his task and a couple of hours later had completed it, just as martin, the butler, knocked at the door and entered to leave the afternoon papers upon the secretary's desk. bellingham thanked him, and at the same time advanced a chair and pushed a box of cigars across the desk, for martin's personality, and his position in the hamilton household, were both distinctly out of the ordinary. tall and smooth-shaven, with a keen and penetrating eye, there was something in his appearance suggestive of the ministry; yet this impression was a false and misleading one, for while it was true that the butler had interests and aspirations far beyond his station, yet these interests were the very reverse of ecclesiastical. the stock market, the wheat pit, the cotton exchange--these were the absorbing passions of his life; his ears, sharp as those of a fox, were trained to lose no word that fell, at table, from the lips of his master and his master's friends; and whether it was owing to this, or to natural shrewdness on his part, his ventures had prospered so amazingly that he occupied a position in the eyes of his fellow-servants almost as dignified and exalted as that of his master in wall street. now, with a respectful inclination of his head, he seated himself, helped himself to a cigar, and in answer to the secretary's question, "well, what's new, martin?" he answered, "stocks were very strong to-day, sir. steel crossed one hundred and twenty-nine." "the devil!" exclaimed bellingham. "you don't mean it!" and forthwith turned eagerly to the papers, for while in his present impoverished condition he had no personal interest in the market's ups and downs, yet in the atmosphere of finance in which he lived it was part of his duty to have at his fingers' ends the daily fluctuations in cotton, stocks and grain. for some moments he studied the pages of the _journal_ in silence; then handed the paper to martin, observing, "well, you're right. and there's the explanation, too." the butler took the paper from bellingham's hand, and read, in staring headlines, at the top of the page, "bull market continues. marshall hamilton and cyrus mckay both said to favor the advance. steel booked for two hundred." martin's eyes glistened. "mr. bellingham," he asked earnestly, "do you imagine, sir, that this is true?" the secretary, with the unbiassed mind of the man who has no stake in the game, meditated for a moment, then answered truthfully, "my dear martin, i haven't the remotest idea whether it's true or not." the butler looked visibly disappointed. "if you happen to hear anything, sir," he said in a tone so low that it was almost a whisper, "you know what i mean, sir--any letters or telegrams--i should be most grateful if you'd remember me, sir." bellingham nodded. "i'll be glad to," he answered, with just the suggestion of a smile, for the combination of martin the decorous servant and martin the eager speculator was one which never failed to amuse him. then, impelled by mere curiosity, he added, "which is it this time, martin? are you long or short?" the butler's face was impassive, but his voice was eager with the irrepressible passion of the gambler. "i'm short, sir," he answered. "quite heavily short. i have every reason to believe, mr. bellingham, that we are going to see a severe decline in the market. unusually severe, sir. but of course i may be wrong." bellingham glanced at the papers with renewed interest, running his eye up and down the narrow columns of figures which summarized, in this brief space, the prosperity or the adversity of the entire world. "they're awfully strong," he commented, "and the gains run through the list, too. locomotive is up four, crucible three and a half, steel five. and the rails are strong, too. by jove, martin, i believe you _are_ wrong. be careful you don't come a cropper. have you any real reason for thinking the market isn't going up?" "why, sir," the butler answered, "you may remember that about three months ago it was generally supposed that we were on the brink of a panic. but i am confident that at that time mr. hamilton and mr. mckay and the other gentlemen were buying very heavily indeed. and if that is so, sir, why it hardly seems probable that they would be adding to their purchases now, when stocks are thirty or forty points higher than they were then. in fact, sir, if it's not an impertinence upon my part, i think that if you were to sell steel short on a scale up--" but bellingham interrupted him. "my dear martin," he observed with a smile, "when a man has dallied with the market all his life, as i have, and suddenly ceases either to buy or to sell, there is usually just one answer," and raising his hand, he formed, with thumb and forefinger the figure zero. the butler flushed. "i beg your pardon, sir," he said hastily. "i didn't intend--i meant it in a friendly way, sir--" "of course you did," bellingham good-naturedly interposed, "and i appreciate your tip, martin. i'm only sorry i can't take advantage of it, but i hope you make a million. oh, and by the way," he added, as the butler rose to go, "would you mind telephoning saunders to saddle the bay mare? i'll be over right away." ten minutes later, on his way to the stables, he met helen. hamilton returning from the garden, her arms heaped high with flowers. "you're not forgetting our golf?" she asked. "miss wilton said that you would play." "yes, indeed," he answered, "i'm only going for a turn. i'll be back in plenty of time." and as he continued on his way, he found himself thinking, as he had done a hundred times before, that his employer's daughter approached more nearly to his ideal than any other girl whom he had ever seen. he admired her beauty, her charm, her thoughtfulness of others, and most of all he liked the friendliness of her smile and the frank and fearless glance of her dark brown eyes. "no nonsense about her." that was his invariable summing-up of her character, and her friendship had been the pleasantest feature of his employment at marshall hamilton's. once astride the mare, however, he had no further chance for meditation, for his mount had stood idle for two days, and now seemed to be doing her level best to pull his arms from their sockets, and to break his neck into the bargain. but after he had made the circuit of the lake, and had turned her head toward home, she behaved more sedately, and subconsciously he had already begun to think again of the adventure in the gallery when all at once, as he neared the entrance to the links, the whole affair was suddenly revived by the appearance of cyrus mckay's motor, drawn up by the side of the road, the chauffeur, a thick-set, bullet-headed young irishman, sprawled comfortably on the seat, cigarette in mouth. "i'm expecting some friends to play golf." he remembered his employer's phrase, and at once drew rein beside the car. "hullo, jim," he hailed, "how are you? mr. mckay on the links?" "sure," the chauffeur answered, with a yawn. "i brought him out here two hours ago, and i've just come back for him now. so i guess he's had some game." "yes, indeed," agreed bellingham, "it's a perfect day for it, too. you'll find you'll be waiting another half hour yet." the chauffeur stretched himself luxuriously, happy in the mere enjoyment of the pine-scented air and the languorous warmth of the sun. "well," he grinned, "it won't worry me any; i'll put my time against his. but on the level, mr. bellingham, don't it beat hell? when the boss is working, he's the busiest guy in wall street; a minute is worth a thousand dollars; i'm on the jump the whole blamed time. and then he'll come out here to mr. hamilton's and waste a whole afternoon chasing a little white ball around a field, making half a dozen rotten shots to every good one. honestly now, can you beat it?" bellingham smiled. "it's relaxation, jim," he answered, "and that's what the big men have got to have. that's all that keeps them going. whoa, girl, whoa," for the mare, impatient at the delay, reared straight upward and began to paw the air frantically with her forefeet. there was a momentary struggle while bellingham coaxed her back to earth again, calling over his shoulder to the chauffeur, "good-by, jim, see you again." then, yielding to a fleeting impulse, he added, "where are you keeping the car now? i may drop in and see you some day." "wheeler's garage," nolan answered. "find me there about noon, most any time," and bellingham, giving the mare her head, arrived at the stables in greater perplexity of mind than ever. "so he's been playing golf," he reflected, "just as he said he would, and according to jim nolan, mr. mckay came to the links at half past two. but that was just the time when i was in the gallery. so mr. hamilton couldn't have stayed there long; that's certain. probably he went straight over to the golf course. but i was working at the window, all that time, and i should surely have seen him. and it's a safe bet that a man can't be in two places at once. so what the devil does it all mean, anyway?" the village clock was striking five as he and his partner reached the hill which overlooked the first tee. jock mckenna, the professional, practising faithfully for the open championship, was just making ready to drive, while on the green, two hundred and twenty yards away, a half dozen small white objects bore testimony to the stocky scotchman's deadly aim. helen laid her hand restrainingly on bellingham's arm. "let's watch him," she whispered, and mckenna, unconscious of his audience, drew back with the free, effortless swing of the born golfer, while the ball, like a shot from a gun, skimmed away toward the fluttering flag, struck, bounded, rolled, first with vigor, then more and more slowly, until it came to a final stop hole high and only a hair's breadth to the left of the green. helen, with the enthusiasm of a true lover of the game, clapped her hands involuntarily. "oh splendid, jock," she cried, "that was a beauty," and the professional, looking quickly up at them, smiled and touched his cap, not ill pleased that his shot had been appreciated. an instant later, they had joined him upon the tee. "well, jock," asked bellingham, "how did mr. hamilton come out with mr. mckay? i suppose he won, didn't he?" the professional stared. "'deed, and there's been no match to-day," he declared. "and more's the pity, for the course was never as good as now. young mr. marshall was down this morning, skelping up my turf for me till i fair had to drive him away, but nobody else has played a stroke." helen hamilton, paying no heed to their talk, had teed her ball, and now, with a deliberate and well-timed swing, sent her ball straight down the fairway for a hundred and fifty yards. "very good, miss helen," was mckenna's comment, "you're improving all the time. what handicap does mr. bellingham give you now?" "a stroke a hole," she answered, "but i only take it to humor him. in another month i shall beat him even." she spoke chaffingly, and bellingham answered in similar vein, "nonsense, i could give you two strokes instead of one," but his thoughts, as he swung, were far distant from the game, and a topped and sliced tee shot came to rest in a sand-trap near the seventeenth green. helen hamilton laughed aloud, and the professional half smiled in sympathy with her triumph, half frowned in disapproval of this most inartistic shot. "you've played golf enough, mr. bellingham," he said reprovingly, "to make it a shame for me to have to say 'you didna follow through,' like i would to some beginner. but that was the trouble, man; you checked your swing as though you were no thinking of the shot at all." "my club turned in my hand," said bellingham absently. "the grip's worn smooth." but as they started for the green, he was saying to himself, "so they played no golf. and if they weren't on the links, where were they? that's one mystery. and the second is, no matter where they were, what on earth were they doing?" and greatly wondering, he walked onward toward the trap where his misplayed ball lay buried in the sand. chapter iii the golfers the hamilton estate was bounded upon the north by the main highway, and between the road and the hills and valleys of the links extended a strip of woodland, about a quarter of a mile in width, and covered with a dense growth of hemlocks, birches and tall pines towering upward toward the sky, while at the base of these forest giants briars and brambles, shrubs and bushes, had been permitted to grow unchecked, until they had formed a network of underbrush so thick as to be well-nigh impassable. upon the same day, and almost at the identical hour when bellingham stood gazing open-eyed after his employer's vanishing form, a man came slowly through this strip of woodland, proceeding cautiously, with the practised step of the forester, along a path so narrow and so overgrown that it was practically invisible. yet the man was apparently familiar with his surroundings, and apparently, too, he was not merely a forester, but a huntsman as well, for he carried a gun slung over his shoulder and his clothes and cap of faded green harmonized so perfectly with the underbrush that his furtive progress along the path was almost imperceptible. slowly and noiselessly he advanced until he had drawn near to a clump of huge firs, set in a natural circle and distant about a hundred yards from the trail which led to the links. here he paused and dropping on his hands and knees crept through the bushes and entered a hutlike shelter, artfully woven of growing shrubs, where he lay effectually concealed, commanding, through a narrow orifice, a perfect view of the approach to the clump of firs. next, with leisurely precision, and with no trace of excitement upon his bronzed and weather-beaten face, he proceeded to unsling his weapon from his back and to make it ready for use; and as he did so, one further circumstance became apparent--namely, that he was a huntsman who did not care for noise--a poacher, perhaps--for what had resembled a gun now proved to be an old-fashioned crossbow, of rare and curious workmanship, and this bow the huntsman bent, and then, adjusting the murderous looking bolt, settled down to wait in comfort until his quarry should appear. silence descended upon the forest; a silence so profound that it seemed as if animals, birds and insects, all were slumbering amid the quiet of the summer afternoon. surely, the huntsman had poor prospects of success, yet if this were so, he did not appear to care, but lay motionless, resting quietly, with ears upon the alert and eyes fixed steadily upon the clump of firs. the moments passed. then, presently, far up the road, sounded the throbbing rhythm of a motor, and a half a minute later cyrus mckay's big car drew up at the gateway leading to the links, and mckay, founder and president of the national wire trust, stepped leisurely forth, a huge, burly, bull-necked man, with power written in every line of his ruddy, jovial face, in every movement of his big body, and in every glance of his shrewd blue eyes. with something of an effort, he reached for his golf bag, and with a nod to the chauffeur, said, "all right, jim. come back at half past four." the chauffeur touched his cap; the big car turned and sped smoothly down the road, and mckay, left alone, started slowly along the pathway toward the links. apparently, he anticipated a pleasant afternoon, for as he strolled along he whistled boyishly, burst occasionally into snatches of song, and presently, some distance up the path, he stopped for a moment, drew a white feather from his pocket and adjusted it carefully in his cap; after which he seemed suddenly to alter his mind regarding his destination, for striking boldly off from the trail, he began making his way through the waist-high underbrush, directly toward the clump of firs. as the sound of the motor had died away in the distance, the huntsman in the thicket had redoubled his vigilance, and now, as the crackling of the bushes grew more and more distinct, his keen eyes swept searchingly about the glade and his fingers tightened upon the stock of his weapon, as if it were for human game that he was thus lying in wait. yet if this were the fact, it was clearly not mckay whom he was expecting, for as the latter's bulky form loomed into view the hunter relaxed his grip upon his crossbow, and once more resumed his attitude of patient watchfulness. in the meantime mckay had reached the edge of the circle of firs, and with a shrug of distaste for the ordeal that lay before him, he settled his cap more firmly on his head, and guarding his face with his upraised arm, he at length succeeded in forcing a passage through the close-knit barrier of the trees. then, extracting a key from his pocket and achieving, not without difficulty, a kneeling posture, he cleared away the soil until a square of steel came into view, and fitting a key to the lock, he threw back the door and disclosed a flight of stone steps, down which, with the utmost nonchalance and as if he were conducting himself in a perfectly normal manner, he promptly disappeared, carefully closing the trap behind him. at the foot of the short flight of steps he paused for a moment, and drawing a flashlight from his pocket proceeded briskly along the narrow passageway, stoutly shored and timbered, until he presently emerged, through a second door of steel, into the underground chamber where marshall hamilton stood awaiting him. the room itself was simply--almost barely--furnished, and in appearance was as conventional as the method of approaching it was unique. the only furniture was a heavy mission table and four chairs to match; a massive safe was set into the wall; at one end of the room stood an old wooden desk, elaborately carved and inlaid, and at the other a sideboard bearing glasses, decanters and cigars. the two men shook hands with the ease of long acquaintance. "on time, as usual," hamilton observed. mckay drew a chair up to the table and sat down. "the others will be here?" he asked. "any minute," hamilton responded with equal brevity. "they come from the south, this time," and the words had scarcely passed his lips when the door opened to admit james norton, the "cereal king," and vincent brooks, senior partner in the famous banking house of brooks & harrington. brooks was a tall, fair man, often described by his friends as "a fellow who had been dealt every card in the pack." in other words, he had been welcomed, from the day of his birth, into the most aristocratic society in new york, was immensely wealthy, and possessed, into the bargain, great natural ability and a wonderful aptitude for "big business," where the figures ran into billions, and the risks and the rewards were alike staggering to the imagination. norton, on the other hand, was almost his exact opposite, a dark, eager man of forty, fairly dynamic with energy, who had been favored with no cards by fortune, and who had thereupon fared blithely forth and had collected an entire pack for himself. in the wall street district he had first been hated and despised as an upstart, but later had been made welcome as a man too shrewd and forceful to be ignored. immediately the four men seated themselves around the table, and hamilton, drawing a sheaf of papers from his pocket, proceeded to call the meeting to order and for perhaps fifteen minutes read steadily, interrupted now and again by a comment or a query from one or the other of his associates. at the conclusion of his task, there followed approval and acceptance of his report, the carrying of various formal motions, and then began a low-toned, informal talk between the four, apparently entirely harmonious until mckay and norton became involved in a discussion which gradually increased in intensity until at length they had the conversation to themselves, brooks and hamilton listening with an intentness which made it evident that the subject was one of vital importance. finally mckay, with the utmost earnestness, spoke at length, summarizing and emphasizing his arguments with all the skill at his command, but when he had concluded it became evident that his efforts had only served to increase norton's opposition, for the cereal king struck the table before him with his clenched fist, crying, "no, no, mckay, you're absolutely wrong. you're altogether too conservative. life is short, and so i say: let's get all we can." at this outburst mckay only smiled, and instead of answering he turned to hamilton. "would you be kind enough, marshall," he asked, "to read to us once more the statement showing our profits for the year?" hamilton found the document referred to. "gross," he answered, "seventy millions. net, after deducting all payments and expenses, forty-two millions." "thanks," said mckay briefly, and to norton he added, "well, my boy, that makes precisely ten millions and a half apiece for the four of us, to say nothing of what we've disbursed to our subordinates, or of the sums that have been realized by our friends across the water. in the face of such a showing, do you maintain with seriousness that we may be termed ultra-conservative?" "that," responded norton with spirit, "is exactly my contention. it's not the actual financial results, in dollars and cents, that i'm criticizing, for as you say, ten millions and a half of sure money is a satisfactory income for anyone. no, my objections are based purely on artistic grounds. when you consider--" but mckay, with a huge burst of laughter, broke in upon him. "artistic grounds!" he exclaimed. "good heavens, man, you might accuse us of plenty of other things, but not of being inartistic. why, that is our strong point--our trump card. if we're not artistic, we're nothing." norton shook his head. "only in a sense," he retorted. "in the same way that we hark back to the beginnings of any art. for their age, they sufficed, but in the light of later knowledge and achievement they are bound to appear pitifully crude and inadequate. and so it is with us. forty years ago the founders of our society were the ablest financiers of their day, and the system which they inaugurated was wonderfully efficient for that period. but think of all that has happened in forty years. think of the increase in population, the increase in wealth, the increase in the number of enterprises, of corporations and combinations, of securities upon the stock exchange. and yet, in spite of this, we are still satisfied to conduct our business along the old primitive lines of forty years ago. why, i could take pencil and paper now, and in two minutes i could suggest improvements that would increase our earnings a hundred, two hundred, three hundred per cent. i'm absolutely certain of it." "i quite agree with you," mckay responded quietly, "there's not a doubt of it. but the answer is: what's the use? here's a parallel case for you. suppose, somewhere in some mountain wilderness, you were to come by chance upon an undiscovered stream, simply filled with trout so hungry and so unwary that they would rush ravenously for your bare hook. under such conditions, would you use bait?" "not at first," rejoined norton. "i'll admit that. but you don't complete your parallel. after a while, as your supply of fish begins to diminish, you will find that those which are left will grow wiser and more suspicious. and that is the time when you will need all your skill, and must use your choicest bait." "no, no," mckay protested warmly, "that's not a fair argument at all. we are not discussing some possible time when fish grow wise. we are confining ourselves to facts; my premise is that you can catch all you need with your bare hook. and when four men--" he added, with a wave of his hand toward the papers on the table, "can make forty million dollars in twelve months, without half trying, it certainly doesn't appear as if our human fish were possessed of any great supply either of caution or of brains." brooks, man of few words, nodded approval. "right," he interjected. "you're quite right, cyrus." and to norton he added significantly, "you don't want to fish out your brook, jim. if you do, you'll go hungry." norton's eyes gleamed. "perfect rot," he persisted. "that's the same old 'safe and sane' chatter i'm so tired of hearing. in the first place, you can't fish the brook out; there's one born every minute. but wouldn't i like to try it, though. i'd like to start right now; there never was a better chance; and for the next twelve months do nothing else except slaughter the innocents. big fish, fingerlings, i'd keep 'em all. never a one would i throw back into the brook to grow. why, just imagine what we could make, if we once started after it. we'd murder 'em; crucify 'em; skin 'em alive." and he licked his lips covetously at the thought. mckay's brows contracted. it was not the first time that his own views and those of his younger associate had come into violent contact. "oh, if you aspire to be a game hog, a professional butcher--" he began, but at this point marshall hamilton, who had maintained an unbroken silence, allowing the debate to range unchecked, suddenly leaned forward in his chair. "one moment, cyrus," he said courteously, "may i interrupt you?" and as mckay assented, the banker continued, "this figure of the trout brook is a very appropriate one, but neither of you has quite completed the picture. to make the parallel exact, you must include a very important person, and that is the owner of the stream." norton stared. then, with the respect which was invariably accorded to the financier, he objected, "i don't think i follow you, mr. hamilton. who is this owner? i should say that we come pretty close to being the owners ourselves." "no," hamilton answered, "we are not the owners. there are times when it might appear so, but we must not allow ourselves to be deceived. we are nothing more than poachers--bold, formidable and successful poachers, i admit--but none the less poachers for all that. and though the owner of the stream is stupid and careless, slow to anger and to realize that he is being robbed, still we must never forget that he exists and that when once aroused his power is irresistible." brooks looked frankly puzzled. "i cannot suppose, marshall," he said quizzically, "that after the highly uncomplimentary adjectives you have been using, you are venturing to refer to the individual mentioned in the prayer books as the 'high and mighty ruler of the universe.'" "no," hamilton answered briefly, "this is the twentieth century. i'm not bringing god into the discussion in any way." "i don't understand you either, marshall," broke in mckay. "i disagree with norton in many respects, but i do agree with him in this--that so far as this enterprise of ours goes, we are supreme. whom do you designate as this owner of the stream? surely not the law?" there was a general smile. "no," hamilton drily responded, "scarcely that. as far as the courts are concerned, i suppose we may fairly claim that we _are_ the law." "and the profits--" interjected brooks under his breath, but hamilton was too much in earnest to heed him, and continued, "no, the owner of the stream is the public, and the weapon we have to fear is the intangible but terribly effective one of public opinion." "oh, the public," commented norton flippantly, "well, as vanderbilt said--" but hamilton went on gravely. "i assure you that i am quite serious. our one possible danger is that some day the public may learn the truth. you all know that periodically, after some spectacular rise or equally spectacular decline in prices, there is sure to be a terrific bleating from the victims, and a plaintive demand that someone must investigate the new york stock exchange. of course these demonstrations don't amount to anything--it's child's play to check them--but if we should adopt norton's suggestion and should play the game to the limit, then the danger would be correspondingly increased, and if some day the truth should become known--" norton interrupted him. "but that is impossible," he declared. "impossible," retorted hamilton, "is a dangerous word. i acknowledge that it is highly improbable--thanks to the founders of this order for taking the precautions that they did--but it's not impossible. there is always 'the plaguy millionth chance.' and grant," he added with increased emphasis, "that the truth should become known; admit, for the sake of the argument, that the public should find out what has been happening to their money for the last forty years, and where would we be? i'll tell you where. we'd be marked men, fleeing for our lives, and never safe from vengeance, even in the uttermost corners of the earth." no one gainsaid him, and the gravity of his hearers' faces was sufficient confirmation of the importance of what he said. "you're right," brooks assented. "quite right," mckay agreed. and norton, convinced in spite of himself, added thoughtfully, "well, perhaps you are." "i'm sure of it," hamilton answered, "and now, gentlemen, it is time to go. when shall we meet again?" "i suggest day after to-morrow, at the same hour," said mckay. "to-morrow will be a big day in the market, and we shall have a number of things to discuss." "yes, the time is ripe," hamilton responded, "it is a wonderful opportunity." "how far will cotton decline?" asked norton. "i should say, off-hand," answered hamilton, "a couple of hundred points, at least. but that will be decided, of course, in the usual way. we can tell better after the first break." "and wheat," queried brooks, "will go up?" "exactly," said hamilton. "the conditions there are exactly reversed. the advance will be sharp." he walked over to the sideboard, filled his friends' glasses, and then raised his own high in the air, glancing, as he did so, at the old desk across the room. "here's to our predecessors," he said gravely. "the men who came here forty years ago. the men who have made us what we are to-day." chapter iv a flurry in the market it still lacked five minutes of ten o'clock, the hour for the daily opening of the stock exchange, but the board room at holt and henderson's was already filled to suffocation, and presently, as more and more clients came hurrying through the doors, so little space remained that as the crowd surged to and fro frequent forcible collisions became unavoidable. yet while at any other time these gamblers would promptly have resented this jostling and scrimmaging, now they were so preoccupied and so intent upon their own affairs that they never thought of wasting time, either in apologizing themselves or in demanding an apology from those with whom they had come in contact. the gathering would have repaid the studies of a psychologist. it numbered at least two hundred men, and apparently every rank and condition of society had furnished a representative. well-dressed gentlemen rubbed elbows with ragged tipsters and hangers-on of wall street; a famous musician examined the "chart" of a no less famous artist; a coachman confident of a rise in july oats swapped theories with a farmer who foresaw a fall in december corn. but though in appearance so strikingly dissimilar, yet in one respect all these men were startlingly alike; not one of them seemed wholly normal. their aberration displayed itself in various ways. some were unable to keep still, but moved continually hither and thither, from the news ticker to the newspaper files, from the newspaper files to the bulletin board. others, though content to remain in one spot, were unable to control their tongues and talked incessantly, the intensity of their speech and their nervous laughter showing the strain under which they were laboring; while others still, of a less friendly temperament, maintained an unbroken silence and a sullen aloofness from their companions. occasionally, here and there, small groups collected to discuss one subject, and one only--the future of the three great markets. "well, what do you know?" was the common salutation, while now and then a customer, seemingly disregarding the grim significance of the phrase, would propound the jocular query, "well, what are they going to do to us to-day?" questions, answers, comments, filled the air. "london's up." "how's liverpool?" "it's a big bull move; they've only started 'em." "i think they're toppy; you can sell 'em on the rallies." so ran the talk of the speculators, vapid and valueless, without end or beginning, and begotten of the fever which consumed their veins. at one end of the office was a narrow alcove in the wall, just wide enough to contain a single chair, and this seat was now pre-empted, as it had been for the past month, by a man who at least in appearance presented a marked contrast to his fellow gamblers. he was young and exceptionally good-looking, with the build and bearing of an athlete, while his clear-cut features betokened not only birth and breeding, but also no lack of determination and tenacity of purpose. his whole attitude, indeed, suggested confidence in himself, and the occasional glances which he bestowed upon his companions were somewhat disdainful, as though he despised them for their excitement and their lack of self-control. yet he himself, although quite unaware of it, was not exempt from the universal nervousness of the office, for every few moments he cast a quick glance upward at the clock, and repeatedly drew from his pocket a small memorandum book, studying it as the patron of the race track examines his wagers before the beginning of a race. the hands of the clock pointed to ten o'clock; a bell tinkled sharply; and the tickers, like sprinters shooting from their marks at the starter's signal, commenced clicking and whirring at breakneck speed, while demming, the red-headed, pot-bellied customers' man, began bellowing forth the quotations with an air of omnipotence which suggested that he alone was responsible for all that was taking place. "crucible, ninety-four," he cried, "union, one hundred and fifty-three; steel, one hundred and twenty-seven and a half," and then, to divert his audience, and to show that he was a genuine humorist, he dropped into the time-honored slang of the street, and with a smirk of self-appreciation, went on chanting, "annie connolly, one hundred and five; old dog, sixty-two; soup, par and a quarter." the young man in the corner listened eagerly, noting the prices, as the board boys posted them, with an approving eye. "still strong," he said half-aloud, "they're going up, all right," and he had settled himself to watch in comfort the rise that was to make him rich when one of the employees of the office came hastily up to him. "if you please, mr. atherton," he said respectfully, "mr. holt would like to see you for a moment, sir, in his office." atherton looked at him in surprise. "are you sure you have the right name?" he queried. "i don't like to leave the board just now." "yes, sir, i'm sure," the man responded. "in fact, mr. holt said that he particularly wished to see you at once." atherton rose. "very well, then," he answered shortly, "if it's as important as that, i'll go." in the private office he found both partners seated at the long table in the centre of the room. holt was tall, dark and solemn; henderson short, rosy and never without a smile; so that almost inevitably they had become known to employees and customers alike as "joy" and "gloom." they greeted him pleasantly enough, and after he had taken a seat, holt picked up a card from the table and with a preliminary clearing of his throat, observed, "our margin clerk has called our attention, mr. atherton, to the state of your account, and i thought that i had better speak to you about it." atherton, with the touchiness of a very young man, at once took offence. "i wasn't aware," he said stiffly, "that my account was not in good shape. but if you object to it, i suppose i can take it elsewhere." at this retort, mr. holt's solemnity visibly increased, but the smiling henderson, at his best in such an emergency, came promptly to the rescue. "now, now, mr. atherton," he remonstrated, "don't be so hasty. there's nothing wrong with your account as it stands, and it's an account that we're very glad to have in the office, and that we don't wish to lose. but mr. holt is merely suggesting to you, for your own good, that you are rather crowding things. you've been carrying twenty-five hundred shares of steel; yesterday, at the close, you bought twenty-five hundred more. and as your deposit with us is just about fifty thousand dollars, it is obvious that you are getting pretty close to the danger line." "quite so," atherton acknowledged, "but that is my lookout. as long as i keep my ten point margin good, why should you worry?" "that," resumed mr. holt, "is exactly the question. are we to understand that in the event of a decline in the market, you stand ready to deposit additional sums as we may require them?" "no," atherton answered frankly, "you're not to understand anything of the sort. all the money i have in the world is in here now. but the market is going up and you're not obliged to worry about more margin; if there should be a drop, then we can talk things over again." mr. holt heaved a sigh of impatience. "you young men, mr. atherton," he complained, "are all alike. you are too cocksure about everything. now you can't tell anything about this market; it may go up; it may go off; but to try to carry five thousand shares of steel on a ten point margin is absolute madness--i've been in the brokerage business long enough to know that. sell out half your holdings, mr. atherton, and then, if a drop comes, you won't be giving us all nervous prostration." atherton frowned. he had calculated his profits so many times that the thought of seeing them cut in halves did not appeal to him in the least. "i don't want to sell," he demurred. "i tell you this market _can't_ go down. the steel corporation is earning more money than at any time in its history. everyone says it's going to cross two hundred. so don't be too particular about my margin; they don't always insist on ten points in other offices." "more fools they," retorted holt briskly, but henderson, foreseeing in atherton's attitude the possible loss of a good customer, hastened to make a suggestion. "personally, mr. atherton," he observed, "i think mr. holt is quite right. we've been in this business a long time, and we've seen many a good man embarrassed for lack of sufficient margin. but if you feel confident that we are in a big bull market, and are willing to take your chances, we will carry you, provided you will sign an order authorizing us to sell you out if steel reacts to one hundred and twenty. in other words, you give us a stop loss order for our protection, and take your chances of being caught. it's rank gambling on your part, mr. atherton, and we won't always agree to carry you overnight, but if it is an accommodation to you, we will carry you along from day to day, and give you the opportunity of making a big killing if the market goes up." atherton reflected, and obsessed as he was with the idea that the market was going much higher, mr. henderson's scheme impressed him favorably. with his stock selling at over one hundred and twenty-seven, a recession to one hundred and twenty seemed impossible, and by signing the stop loss order he would be enabled to hold the whole of his five thousand shares. accordingly, since it was no time for delay, he made up his mind at once and promptly answered, "very well, i'll do it." at once mr. holt selected a "sell order" from the printed slips upon the table, filled in the figures agreed upon, and atherton, hastily signing his name, hurried back to the board room to find, to his delight, that steel had advanced to one hundred and twenty-eight. this, however, appeared to be a critical point in the struggle, and while the transactions increased to enormous proportions, the fluctuations narrowed correspondingly. up an eighth, down a quarter, up an eighth again, while every few moments demming's voice could be heard roaring vociferously, "a thousand steel--three thousand steel--five thousand steel--" eleven o'clock came, and twelve, and atherton, in view of the market's steadiness, decided to go out to lunch. but the grip of the game had laid its spell upon him, and without the board before his eyes he became so nervous and ill at ease that he ate his meal at breakneck speed, raced hurriedly back to holt and henderson's, and drawing a breath of relief as he regained the familiar entrance, he thrust open the door and went in. yet scarcely had he crossed the threshold when he realized that during his brief absence from the office something sensational must have occurred. the room was in a turmoil; a bedlam of sound filled the air; a mob of dishevelled customers fought their way madly toward the windows of the order clerks, elbowing and shoving each other this way and that in their frenzied eagerness to buy or sell. waters, regulator of margins, ordinarily the coolest man in the world, now stood in the rear of the office, crimson-faced, perspiring, sorting and shuffling a sheaf of customers' cards in his hands, and sending his subordinates rushing hither and thither in pursuit of those unfortunates whose slenderly margined accounts were either already submerged or in imminent danger of becoming so at any moment. all this atherton saw in one lightning flash of vision; the next moment his eyes leaped to the board and he gasped to see in the steel column the figures, one twenty-four, while in the same breath he heard the voice of demming, hoarse and exhausted, but still powerful, roaring out "union, one forty-nine; reading, one hundred and three; steel, one twenty-three and seven-eighths, three-quarters, five-eighths, a half--" in a second the calm and confidence of the past few weeks, born of a rising market and the conviction that he was making his fortune, vanished utterly, leaving him weak, trembling and panic-stricken. no longer despising his fellow gamblers, he grasped the first who passed him by the arm. "what's up?" he cried. "what the devil's happened?" "war!" the man shouted in reply. "war with japan! battleships and submarines off the pacific coast! a whole fleet of 'em. hell to pay. i'm going to sell 'em short, right here." he rushed away in the direction of the order clerks, leaving atherton perplexed and dismayed. a short distance away from him he noticed a man, apparently calm amid the confusion, whom demming had once pointed out to him as the best judge of the market among all the customers of holt and henderson. without the loss of a moment, atherton walked up to him. "what do you think of 'em?" he asked anxiously, "are they going lower?" the man did not take his eyes from the board, but answered courteously enough, "i can't tell. it's a big bear raid. i've thought for the last few weeks the big men were getting out." "but i thought all the big men were in" protested atherton. "that's what all the papers have been saying." the trader grinned sardonically. "there's a lot in the papers that oughtn't to be there," he rejoined, "and there's a long sight more that isn't there, but ought to be. there's only one explanation of this. the public are ninety-five per cent long of stocks, and the insiders are getting them! that's all; it's the same old game." atherton reflected. "but the warships--" he queried. "all in your eye," was the trader's response. "it will be denied to-morrow. but they're doing just as much damage," he added, with a gesture toward the board, "as if they were real. when the crowd takes fright, it's all over. down go stocks, and then the big men load up again at the bottom, and sell again at the top. it's what you might call a crime, if you dared to." at this new view of the stock market, atherton felt more perplexed than ever. "then you think they'll rally?" he ventured. "sure," his informant agreed, "but you can't tell how much lower they'll go first. it all depends on how heavily the public is in the market. i know what the bears are aiming at, and that's one hundred and twenty on steel; that was the old low, six weeks ago. if it goes through there, good-night." atherton shuddered, for by coincidence this was precisely the point at which his stop order would be reached. yet he hesitated to put much confidence in this stray acquaintance and his theories. big men slaughtering the public so wantonly, false reports in circulation, prices being swayed, not by basic conditions, but by manipulation and by such strange fetishes as "new lows"--if all these things were true, his faith in human nature and in the goodness of the world had been sadly misplaced. "but look here," he objected, "steel _can't_ go down like this. why, the earnings for the last quarter--" the trader's grin widened, and for the first time he turned away from the board and gazed squarely at atherton, as if at some new and interesting specimen of mankind. "earnings," he repeated vaguely, and still again, more forcibly, "_earnings!_" and at last, as though realizing the inadequacy of speech, he muttered tolerantly and not unkindly, "oh, hell--" and turning on his heel, walked over toward the board. atherton, bewildered and abashed, stole back to his alcove, and sat down to watch the progress of the fight. in his mind, he pictured to himself the rival armies--the bears red-faced, scowling, domineering men, objectionable to a degree, pirates of the exchange, attempting to wreck a stock like steel; the bulls sane, conservative men of affairs, shrewd judges of fundamental conditions, men, in fact, much like himself. and he could not doubt that the bulls would win. up went steel an eighth, and he thrilled with pride for those who were defending it; down it went a quarter, and he shook with fear of these reckless raiders and highwaymen. and so the battle raged. two o'clock came and went, and suddenly atherton realized the sensations of a wearied fighter in the ring, striving to hold his own until the clanging of the gong to mark the end of the round. "if only it holds another hour," he thought. then he would at least have a respite until the following morning, a chance to decide matters at his leisure without this frightful accompaniment of sound and fury, this whirling maelstrom of men seeking desperately to make new dollars or trying more desperately still to cling to the dollars they already owned. if the market would only hold-- but even as these thoughts were shaping in his mind, there came a furious onslaught from the bears. one hundred and twenty-three for steel, twenty-two and a half, twenty-two, twenty-one and three quarters. he could feel the blood surging to his brain, and his hands clenched as though he were fighting physically for victory. then a rally and a long fight around twenty-three. but he could feel, with a gambler's instinct, that there was no life to the advance, and sure enough, as he had feared, presently the tide began once more to ebb. twenty-two again, twenty-one and a half, then suddenly, with a bull-like bellow from demming, one hundred and twenty-one, twenty and seven-eighths. for the fiftieth time he glanced up at the clock; two, thirty-five; only twenty-five minutes more, but less than a point lay between him and virtual ruin. his lip trembled, his knees shook under him, and without realizing that there was anything incongruous in such a proceeding, he began to pray fervently, imploringly-- in the midst of the group which thronged, five deep, around the ticker, suddenly arose wild commotion. atherton could discern faces frenzied with joy; other faces torn with anguish; heard, above the tumult, some one cry shrilly, "they've done it!" and the next instant, demming, in tones of incredulous wonder, was reporting the cataclysm, "union, forty-eight, seven, six; reading, ninety-nine, eight, seven and a half; steel, one hundred and twenty, nineteen, eighteen, seventeen, _sixteen_--" atherton stood dazed, benumbed; the blow had fallen so quickly that for a moment he could not grasp the truth. then all at once he knew--knew that he had lost not only the fortune he had sought but most of the capital which he had risked to gain it. steel at one hundred and twenty; he would have fifteen thousand dollars left; but instantly he recalled the lightning speed of the sheer drop to one hundred and sixteen, and wondered whether he had been fortunate enough to escape at the stop loss figure. there was but one way to find out, and mingling with the crowd, he fought his way to the order clerk's window, and presently caught the eye of curtis, his particular friend among the office force. the clerk shook his head dubiously. "no word yet, mr. atherton," he called, "everything is away behind." and thus, for ten minutes which seemed unending, atherton maintained his place until at last curtis bent quickly forward, scribbled some figures upon a piece of paper, folded it, and handed it through the window. atherton seized it, made his way back to the alcove, and tense with excitement, unfolded it to see staring up at him the figures - / . his fears were realized--deducting commissions, his account was practically wiped out of existence. and suddenly a frenzied desire seized him to leave the place and never to see the inside of a broker's office again. there was a moment's delay at the cashier's window, and then, residue of the fifty thousand he had staked, there came back to him a check for thirteen hundred and forty dollars and seventy cents. he thrust it into his pocket, and started for the door. around the board the storm was still raging, but now a different note was in the air. "steel, one twenty-one," he heard, "twenty-two, three and a half, twenty-four." the trader whom he had questioned stood in his path, and recognizing atherton, he said, "they've turned. just as i thought. warship story's denied. all a mistake; japan expresses warm friendship. they'll come back strong now. you can buy 'em right where they are." without answer, atherton passed on. in his heart smouldered a fierce resentment--a bitter hatred of everybody and everything connected with the gambler's trade. forgetting, for the moment, that he had only himself to blame, he felt that he had somehow been tricked, deceived, robbed. and as he opened the door, and banged it to behind him, the last sound which rang in his ears was demming's frenzied shriek, "steel, twenty-six and three-quarters, _twenty-seven!_" outside, in the street, the world was bathed in sunshine. overhead the sky was blue. about him, on every side, men and women were going about their appointed tasks, alert, smiling, unbelievably happy. of a sudden atherton's vision cleared, and in a flash of readjustment, he realized, for the first time, the incredible folly of what he had done. chapter v fools rush in bellingham was alone in his room. before him, on his desk, lay letters from his creditors, and beside them a timetable of the local trains. the telephone leading to the stables stood within easy reach of his hand, yet he made no effort to lift the receiver from its resting-place, but remained irresolute and motionless, a picture of indecision. over and over again, during the last two days, he had tried to make up his mind as to the course he should pursue, but his endeavors had been unavailing, and he was still as far from a conclusion as ever. upon one hand, decency and caution combined to warn him. urged decency, "you are living under marshall hamilton's roof; accepting his money; eating his bread. by the merest chance, you have seen something which you were never intended to see. in loyalty to your employer, you should dismiss it from your mind, and never think of it again." and caution added, "all that decency says is true, and you must remember that there is a further consideration, which is more important still. that is your own safety. there is a mystery here, and it is the experience of mankind that mystery, as a rule, goes hand in hand with danger. you may not be satisfied with things as they are, but do not forget that nothing is ever so bad that you cannot make it still worse. therefore you will be wise to drop the whole affair, once and for all." thus argued decency and caution, but opposed to them, in bellingham's troubled mind, were another pair of powerful allies, desperation and curiosity. clamored desperation, "if you cannot find the money to pay your debts, your creditors will very shortly complain to mr. hamilton. there is no doubt of that; the proof of it lies in black and white on the table in front of you. and when mr. hamilton learns of your financial condition, he will discharge you at once; that is one point about which he is most particular. you will lose this position, and you will have difficulty in finding another; and thus you will drag through life a failure, with the millstone of debt bound fast around your neck." so, with pitiless candor, spoke desperation, and curiosity, knowing the glamor of adventure and the charm of the unknown, added alluringly, "this is no ordinary mystery; marshall hamilton and cyrus mckay are two of the biggest men in new york. opportunity, they say, knocks but once, and this may be your life's turning-point. you cannot disregard it." thus the secretary gave ear to all these arguments in turn, but in the end it was the promptings of caution that he heeded most, for the primary instinct of self-preservation told him that life, even to a man hampered by his debts, was still much to be preferred to death and oblivion. yet it was hard for him to think of wholly abandoning the undertaking, and presently it occurred to him that there was more than one method of solving the mystery, and that a compromise was not in the least impossible. it was true that marshall hamilton had vanished through a picture in the wall, but it was also true that cyrus mckay had disappeared into the woods adjoining the links; and while caution counselled him to avoid the gallery, curiosity, on the other hand, persistently insisted upon a vicarious pursuit of mckay. nolan, of course, was clearly the man for the job. he drove his employer to the golf course; therefore he had the opportunity. he was physically strong and courageous; therefore he would not shrink from danger. and he was pleasure-loving and always in debt; therefore a reward would be certain to appeal to him. beyond question, nolan was the man. "but is it right," asked decency, "to send someone else where you would not venture yourself?" to which query desperation promptly answered, "oh, in this world you can't be too particular; it's a case of each man for himself. there probably isn't any danger, anyway, and if you should get hold of anything really valuable, you can make it right with nolan later." thus the discussion ended. "i'll try it," decided bellingham, and taking the receiver from the hook he telephoned to the stables and ordered the motor in time to catch the next train for town. an hour later, he emerged from the subway, and made his way rapidly down the street in the direction of the garage where nolan kept his car. a sense of guilt oppressed him, and though he realized that his fears were wholly groundless, he could not prevent himself from casting occasional furtive glances to left and right, as though apprehensive of pursuit. at length he came to the garage, and hailing the first workman whom he met, inquired if nolan were around. the man jerked a thumb over his shoulder. "back of the shop," he answered briefly. "sixth floor. freight elevator. run it yourself." and went on with his task. bellingham made his way in the direction indicated, entered the elevator and pulled the rope, and began his leisurely ascent past floor after floor littered with cars--cars new and old, cars good and bad, cars whole and cars dismembered--until he came to the sixth story, where he stopped the elevator and to his joy discovered nolan, cigarette in mouth, seated placidly upon a bench at the end of the room, superintending repairs, real or imaginary, upon mr. mckay's machine. thrilling with renewed excitement, the secretary walked over to him, and nolan, when he recognized his visitor, greeted him cordially. "hello, mr. bellingham," he cried. "didn't expect to see you quite so soon." "oh, just a little business matter," the secretary replied, trying hard to make his voice sound nonchalant and under control. "walk over as far as the window, and i'll tell you what i want." nolan rose at once, and as soon as they were safely out of earshot, bellingham continued, "look here, jim, do you want to make some easy money?" the chauffeur grinned, and for answer inserted thumb and forefinger in the pocket of his coat, exposing the empty lining. "ah, say," he rejoined, "don't ask me none of those easy ones. try me with something hard." bellingham felt his spirits rise. "that's the way to talk," he said, "and here's what i want you to do. you remember taking mr. mckay out to mr. hamilton's day before yesterday to play golf. well, he didn't play; i know that for a fact. and what is more, i believe that he and mr. hamilton have some kind of secret meeting-place near the golf links. so the next time you go out there, i want you to drive away as usual, and then, after you round the first curve in the road, you can stop your car, double back along the wall, and trail after him to see where he goes. and for your trouble, jim, i'm going to be just fool enough to give you fifty dollars." nolan deliberated. fifty dollars was worth making, but his job was a good one, and he had no wish to lose it. "well," he answered at last, "here's one trouble, right away. the boss is a pretty wise old guy, and this trailing business is a new game for me. the betting is that i trip over a tree, go on my nut, and when his nibs turns around and asks me what the devil i'm doing there, why where's my alibi?" "alibi?" echoed the secretary. "why, that's easy; there's nothing to that at all. mr. mckay keeps his clubs in the machine, doesn't he?" "yes, always," rejoined nolan. "they're in there now." "then that settles it," said bellingham. "all you need to do is to take out his putter and hide it under the seat. then when you start after him, take the putter with you, and if by any chance he sees you coming after him, just wave it around your head and tell him it dropped in the car and you knew he needed it. how about that?" "that," agreed nolan, "is certainly good. pretty smooth, i call that." "then you'll do it?" asked bellingham eagerly. the chauffeur did not hasten his reply. "well," he said at length, "i suppose i'm taking chances, after all, and i figure that if the job's worth fifty dollars, it's worth a hundred." the secretary did not stop to argue. "very well," he assented, "a hundred it is." "and it's also worth," the chauffeur continued, "just about twenty dollars down, to bind the bargain." bellingham drew out his pocket-book; then hesitated in his turn. "but how do i know," he objected, "when you will be going out there again?" "that's easy," nolan answered, "because we're going this very afternoon. so you're bound to get some action for your money, all right." bellingham felt his nerves tingle with excitement, and without further protest he handed the money to the chauffeur. "good for you, jim," he said. "i'll be here to-morrow, at this same time, and i'll give you the balance then." "i'll be here," nolan agreed, "and now i must get back and see that those strikers don't put my car to the bad. if she don't run perfect, i'll get it from the old man. so good-by, mr. bellingham." "good-by," echoed the secretary, and descending as he had come, he walked quickly away up the street, greatly wondering what news nolan would have for him on the morrow. promptly at half past two, that afternoon, cyrus mckay's motor stopped at the gateway leading to the links, and as before mckay alighted, took his clubs from the machine, and said to the chauffeur, "four thirty, jim." there was no sign of anything unusual in nolan's manner. "yes, sir, four thirty," he answered, and touching his cap, he turned his car and sped briskly away for the city. yet no sooner had he turned the curve of which bellingham had spoken, than he began swiftly to execute his plan. drawing in to the side of the road, he shut off his power, extracted his employer's putter from under the seat, and tossing his cap, with its conspicuous black visor, into the car, he vaulted the wall and began to work back toward the path. fortune favored him, for the underbrush had gained no hold upon the smooth masonry, and he was able to make rapid progress, so that only a short time elapsed before he regained the entrance to the links. his next task was to find some trace of his employer, but a quick glance down the path revealed nothing and nolan, puzzled, walked straight ahead toward the links, casting quick glances to right and left of him as he advanced. presently, halfway down the trail, a twig snapped to his left, and quickly turning his head, he saw mckay slowly forcing his way through the bushes in the direction of a circle of huge firs. at the sight, nolan's usual calm deserted him, and his pulse beat faster. "there _is_ something queer, then," he thought, and bending low he crept stealthily after his employer, like a hunter stalking his game. little by little, favored by his slighter build, he gained upon mckay until the distance between them had been decreased one-half, whereupon he tried to gain no more but was content simply to keep pace with the man whom he was trailing. straight onward toward the firs mckay made his way, and when he reached them, instead of turning aside, he stooped and began to seek an entrance through their branches' barricade. nolan felt his wonderment increase. "the devil," he murmured, and fearful lest he might lose sight of his employer, he sacrificed safety to speed, and stole rapidly onward until he too had reached the border of the trees. ahead of him, he could faintly discern his master's form, and the continual snapping of twigs made it evident that he was still advancing. for a moment nolan stood motionless, uncertain what to do. his heart was beating violently. if he continued to follow, the pretext of the forgotten putter could hardly serve him as an excuse; if he went on from this point, it was at his own risk. and suddenly, for no apparent reason, fear seized him. in the shelter and silence of the forest, he seemed to himself to shrink and grow small; the solitude oppressed him; and he stood like a man in a dream, scarcely breathing and noting, subconsciously, the beauty of the rifts of sunlight which filtered through the trees. "i guess," he muttered, "i'll be getting back." but even as he spoke the words, there sounded behind him a faint twang, as of a cord released-- he was running, running and leaping magnificently, running as he had never run before. whither he was going, he could not tell, for the power of sight had left him, but he felt that he was travelling through space with incredible speed. a singular buoyancy had permeated his whole being, so that it seemed to him that he was no longer upon the earth, but was whirling over sea and land and sky. onward he swept, still onward-- but now, little by little, he could feel that his speed diminished, and that he was struggling upward, like some submerged and drowning swimmer, from darkness toward the light. slower and slower he ran, more slowly still-- his eyes opened. he was lying among the bushes, flat upon his face, and he realized that he was in frightful pain, and that he gasped painfully for breath; something was choking him; throat and lungs were filled with it. and as his brain cleared, suddenly he knew, although too far spent to conjecture what had befallen him, that he was very near to death. he tried to move-- there was a trampling in the bushes, and a man in faded green stood over him. then he felt himself roughly seized by the chin, his head was bent back, further, further--something gleamed and glittered in the sunlight-- calmly, and without emotion, the huntsman stood looking down upon the murdered man. "only three," he murmured, "in all these years. one in my father's time; two in mine." and after a pause, he added, "how could this man have known? and is he the only one, or will others come to tempt their destiny?" chapter vi misery meets company daylight was fading; the shadows of the trees lengthened upon the grass; yet atherton made no move to leave the park, but still sat motionless, oblivious to everything except the turmoil of his thoughts. from the office of holt and henderson he had walked blindly along, heedless of his destination, until as he had neared the lake a sudden weariness had seized him and he had sunk down upon a bench to rest. for a time, he could scarcely convince himself of the reality of what had occurred; seen in retrospect, it all appeared fantastic and of the texture of a dream. but at length, as the afternoon wore on, and the shrill clamor of the newsboys filled the park, he purchased a paper and when he read, in black and white, the story of the day's decline, his last hope vanished and he knew that this was no nightmare, but reality, and that financially he was a ruined man. at first, the burden of his calamity seemed too hard to bear. fifty thousand dollars! while he had possessed it, never dreaming of its loss, he had not appreciated its magnitude, but now that it was gone, he realized what a sum of money it was. so marvellously easy to lose; so tremendously difficult to regain. but presently, since he was young, and by no means a coward, he managed to recover his courage. he had made a bad mistake, but so had other men; he had a difficult task before him, but others had faced problems still more difficult, and had triumphantly solved them. therefore he resolved that beginning with to-morrow he would put the past behind him, and would think only of the future; but this afternoon he would not try to plan--his brain was weary and the tragedy of the day was still too recent and too deeply in his thoughts. and suddenly, as he lived over again the past few weeks, it dawned upon him that he had been quite mad, and not he alone, but all these other men who had sat and talked and laughed their futile laughter while the narrow ribbon of the tape spelled ruin for them before their very eyes. how had he dared, he wondered--how did any of them dare--to speculate in stocks? what did they know of real conditions throughout the world? in the papers they read bits of news, already stale and cold, and this news they swallowed and assimilated until at last they mistook its effect upon their minds for the process of original thought. so it had been with him. over and over again, for days, he had read, first in one form, then in another, the news that steel was going up; until he had ended by believing it with a fervor that nothing could shake; imagining, moreover, that he had shrewdly reasoned this out for himself, that he was a good judge of commerce, finance, trade--that because of his ability he could make a fortune in stocks--he laughed ironically; disillusionment had been absolute, complete, a hammer stroke--"the boy gambler," he murmured to himself, "a story of punctured pride." twilight deepened; the night breeze, grateful and refreshing, swept across the water, and all at once atherton remembered that he had not eaten since his ill-omened luncheon and that he was ravenously hungry. "it's lucky," he reflected, "that i've enough left for a meal," and forthwith made his way toward the sign of the peacock, a café where he knew that evening dress was not required, and where food, wines and music vied each with the other in excellence. the head waiter greeted him with his customary smiling welcome. "all alone to-night, mr. atherton?" he inquired; and atherton, answering mechanically, "yes, for one, please," was shown to a table near the window, but no sooner had he seated himself than henri, the second in command, came bustling up to him. "ze zhentlemen," he explained, "across ze room--zey ask ze honnaire--" and he waved his hand with a gesture deprecatory but inviting. atherton glanced in the direction indicated, and immediately recognized the two men as friends and classmates of his college days. blagden, tall, dark, good-looking, had been one of those attractive but unreliable students who are more brilliant than successful, more admired than liked, so that on the whole his university course had been more spectacular than satisfying. but though open to plenty of criticism on other grounds, no one had ever denied him the qualities of courage, coolness and "nerve," and these had won for him outdoors the title of tennis champion, indoors the still more valuable reputation of being the best poker player in college. the other man, thickset, solid, rosy, with the neck of a bull, was "tubby" mills, guard upon the eleven for three seasons; never quite of "all-america" timber, but steady, dependable, and always managing to let the man opposed to him in the line realize, before the game was ended, that he had been through an afternoon of exercise perhaps more strenuous than beneficial. stolid but likable, "tubby" made up in genial good nature what he perhaps lacked in brains. atherton rose at once, crossed the room and took the vacant chair at their table. "well, well," blagden greeted him, "how goes it, old scout?" and so strong is the force of habit that atherton, despite the day's reverses, rejoined, "oh, first-rate, thanks. how is it with you?" "fine," blagden responded, "couldn't be better. everything lovely." "and you, tubby," said atherton, turning to mills. "oh, pretty good," the chubby one answered, and pushing the bill of fare toward atherton, he added, "here, what will you have? this is on me. better try a porterhouse with onions; we've ordered some fizz." atherton followed his advice, and the talk, running back to college days and college classmates, dealt for a time wholly with the past until at last, after a pause, blagden asked the question that atherton had been expecting, "and what are you doing with yourself now?" atherton hesitated; then, inspired perhaps by the comforting influence of the steak and the "fizz," he answered impulsively, "oh, i might as well tell you the truth. i've been playing the market, and like a fool i got in so deep that this drop to-day wiped me out. so i'm practically busted, and wondering what i'm going to do next." having finished his disclosure, he awaited the conventional expressions of sympathy from his friends, but to his surprise neither of them spoke, and blagden stared at mills, and mills at blagden until presently, somewhat to atherton's resentment, both of them began to grin broadly. "shall we tell him, tubby?" asked blagden at length. "sure thing," responded mills briefly. "he told _us_." blagden turned to atherton. "well, then," he observed, "to borrow a phrase from the unregenerate and indefensible game of poker, this appears to be a case of three of a kind. last week, i was long of twelve thousand bales of january cotton, and they dropped the market on me one hundred and fifty points in two days, and beggared me to the tune of about ninety thousand dollars. to-day tubby, who has been a terrible bear on wheat, and was short up to his eyebrows, got forced out on the rise, and was stung for--how much was it, tubby?" "oh, about thirty-five thousand," answered mills regretfully, "between thirty-five and forty. i bit off more than i could chew." in spite of himself, atherton smiled in his turn. "well, i'll be damned," was his first rejoinder, and then, as the real significance of the coincidence dawned upon him, he cried, "what's the trouble with this speculative game, anyway? why on earth can't anyone beat it? we're not all fools. suppose a hundred men start speculating on the same day? you'd naturally suppose, on some kind of law of averages, that half of them would win and half would lose. but what's the answer? the answer is that the whole darned hundred lose. i never knew it to fail. and i'd like to know why. it can't be true that everybody who invests money in cotton and grain and stocks is stark, staring crazy. there must be some men who understand conditions, who possess ability enough to calculate and plan; there must be some winners. but if they are, i never heard of 'em. it's a mighty funny game." "you're right," blagden assented. "i've been doing some thinking myself since last week; i've been asking the very questions you're asking now. i can't find the answer, but i've got this far; i know why poor idiots like you and me and tubby get it in the neck. it's because we play the game single-handed. and look at what we're up against. this is an age of consolidation and co-operation. it's so in business and it's so in the markets. pools--that's all you hear nowadays--pools in leather, copper, oil, cotton, corn. and we're fools enough, with a few thousand dollars, to go into a game where you need millions. and as for talking about understanding conditions, and calculating what the market ought to do, why good lord, atherton, you ought to know better than that. speculation is only another way of spelling manipulation. prices don't _go_ up--they're forced up; they don't _go_ down--they're jammed down, and sometimes most curiously far, too. but as for planning, calculating, reading, studying conditions--good night!" and he refilled his glass. there was a thoughtful silence. atherton, pondering on what blagden had said, and remembering, also, what the trader at holt and henderson's had told him, felt that his ideas of speculation had undergone a violent change. so that at length he answered reluctantly, "well, it looks as though you were right. but i wish we'd thought of this before. now it's a case of 'they've got the money and we've got the experience.'" mills leaned forward, planting his elbows comfortably upon the table. "that's so," he agreed, "i never could see much sense in this _post mortem_ business. the point is: what are we going to do next? and i for one wish it distinctly understood that i refuse to be licked. i started out to make a million dollars, and i'm not going to quit until i'm put away in a box underground. you two fellows were considered rather clever when you were in college, so instead of all this sob stuff why don't you furnish some practical wisdom? what are we going to do? how are we going to get our money back?" atherton gazed at his stocky friend, not without admiration for his grit. "blagden," he answered, "has made one mighty good suggestion. whatever we do, let's not continue this 'lone hand' business; let's take his tip that this is an age of consolidation, and let's pool our resources, such as they are, and see if we can't manage to do a little better." mills grunted approval. "good scheme," he assented. "we'll be a regular trust. but when you say, 'resources, _such as they are_,' you've put your finger on our weakest spot. if we have resources, they're not in cash. what shall we call ourselves? 'the united brotherhood of down and outs'? or is that too severe?" but blagden, the imaginative, suddenly caught fire at the idea. "no, no," he objected, "nothing as crude as that. give a dog a bad name and hang him. i'll tell you what we'll call ourselves. 'gentlemen adventurers.' that has the proper ring. every morning we'll start forth on a tour of discovery; then we'll meet and compare notes and see if we can't combine our experiences to our mutual advantage." "that sounds fine," mills agreed, "but what kind of adventures are we going to have?" "oh, tubby, tubby," cried blagden. "if there's a more prosaic man in the world than you are, i'd like to see him. why, you miss the point of the whole thing. if we knew just what was going to happen to us, every day of our lives, where would the fun be? where would be the romance, the thrill? if you could see an adventure coming half a mile down the road, then it wouldn't _be_ an adventure; it has to bump into you from right around the corner. do you get the idea?" "oh, sure," retorted mills. "at least, i get what you think is the idea. but that is the trouble with you poetical chaps; you can't understand that this is a practical world, especially the dollars and cents part of it. and if you're proposing that we leave here to-night and start looking for adventure, why we'd better raise an emergency fund at once. because instead of finding money, we'll be losing it. i've started looking for adventure lots of times in my life, and i always bring up in one of two places--the police station or the hospital." "oh, i don't mean that kind of adventure," blagden hastened to explain. "i mean the 'new arabian nights' sort of thing. we'll meet princesses and potentates and you may take my word for it that it won't be long before we're on the trail of some real money. we'll get back all we've lost and more too." he spoke persuasively, but mills remained unconvinced. "oh, it's easy enough," he objected, "to talk like that in here, with the lights and the music and a couple of glasses of champagne under your belt. but nothing will really happen. we'll go out of this place and walk peacefully home again, and in the morning we'll wake up and laugh at ourselves. i only wish your dreams would come true, blagden, but they won't; they're all moonshine. the only real thing is that we're broke." but blagden, always at his best under fire, rallied vigorously to the support of his theory. "nonsense," he cried, "you ought to be ashamed of yourself. one minute you claim to be a fighter and the next you're ready to quit cold. why, the trouble with you--the trouble with all three of us--and the reason we think there's no romance left in the world is simply that we've gone stale--stale from sitting over the ticker day after day, without a thought of anything else on earth except the ups and downs of the market. i would gamble my last cent that there's waiting for us, right here in this city, adventure enough to fill a thousand books; adventures of riches and of poverty, of romance and reality, of battle and murder and sudden death. here's the test. what day is this? tuesday. friday night, at nine o'clock, we'll meet in my rooms and compare notes. we'll all three try our best in the meantime and if by friday no one of us has had an adventure worthy of the name, no one of us has chanced on the slightest idea, the faintest clue, that spells money, then i'll admit that i'm wrong and that tubby's right. now then, you fat guzzler, isn't that fair?" "oh, sure, that's fair enough," mills was forced to agree, "but i don't believe--" he stopped abruptly, gazing straight before him, and then, under his breath, he murmured, "great heavens, what a peach!" the girl who had entered the café and taken a seat at a table not far from their own surely merited his praise. she was tall and slender, faultlessly gowned in black, and her face, under the broad picture hat, was of exceptional beauty, yet with an expression of mingled indifference and assurance that bespoke a plentiful knowledge of the world. she gave her order, began leisurely to remove her gloves, and presently, as she glanced about the room, atherton perceived, to his surprise, that her eyes remained fixed upon their table with a singular intentness. nor was he the only one to notice this, for immediately mills observed, "by jove, one of us seems to have made a hit. do you know her, atherton?" atherton shook his head. "no, i haven't the pleasure," he answered. and as the girl's eyes were suddenly averted, he added, "there was something, though, about our table, that seemed to attract her. and reasoning by the process of elimination, i conclude that it must be blagden." "you flatter me," blagden calmly rejoined. "just my luck, though, to be seated with my back to the lady. is she really so charming?" "charming?" mills echoed fervently, in a tone which answered blagden's question in ardent affirmative. and atherton supplemented, "yes, if anybody happens to fancy that particular type, i should almost say that she is as pretty a woman as i ever saw in my life." "why, this is wonderful!" cried blagden. "this calls for personal investigation. i don't suppose i can deliberately turn around and stare, but we might as well be going, anyway, and i must see her, if only as we depart." they rose, and as they started to leave the table, atherton noticed that the girl's eyes were again turned in their direction, and almost simultaneously was aware of a smothered ejaculation from blagden. "so you know her?" he whispered. blagden did not answer directly. "just a moment," he muttered, "i'll be right back." and walking swiftly over to the table, he exchanged a few brief words with its occupant, and then rejoined his companions, his face eager and expectant. "i'll see you fellows later," he hurriedly explained; adding hastily, "what do you think of my theories now. didn't i tell you this was the city of adventures. and mine is going to begin right here." mills grinned. "you always were a lucky devil," he cried enviously. "well, all i can say is that if this is the form our adventures are going to take, they can't come too fast for me." and he and atherton walked slowly in the direction of the door, while blagden turned and made his way toward the girl who awaited him. chapter vii the adventure of blagden "it was two years ago," began blagden, "on the beach at trouville. i shall never forget it. the sea and the sky were blue; the sands were silver; and you were a marvelous mermaid, in gold and crimson, basking on the shore. when i saw you, i felt such emotion that i began at once repeating whole stanzas of swinburne, appropriate to the occasion, and rivalling the day in warmth. i hoped--" but she interrupted him. "it is pathetic," she said, "that a memory so tenderly poetical should be so much at fault. i am grieved for myself; i thought i had made a more lasting impression." "but my memory," he protested, "is not at fault. i remember perfectly. it was a wonderful costume, almost worthy of its wearer. it was gold, pale gold--" "oh, stupid man!" she cried, "we are not talking of costumes; what do they matter? we are talking of our first meeting, and that was not at trouville at all. trouville, although delightful, came later. our first meeting was at the races--" "by jove," he ejaculated, "you're right. so it was--deauville races. and you were in the grandstand, in the very first row--" "that's better," she exclaimed. "your memory is improving. i was watching the horses parade before the opening race, and was suddenly smitten with the charms of a beautiful bay named _voyageur_. immediately i knew that i must bet five hundred francs on _voyageur_. the time was short--" "and so," he smiled, "you made appealing eyes at me--" "no, no," she contradicted, "i did not. or if i did, i was quite justified. you had been staring at me very rudely for some time." "that is true," he admitted. "i couldn't help myself. but in any event, we became acquainted, and i placed the money on your favorite. i recall that distinctly. and i remember thinking, 'poor girl; poor lovely girl; she will surely lose.' and then _voyageur_--" she in her turn took up the tale. "oh, wasn't it splendid?" she cried. "a furlong from home, and we thought that he was beaten, and then, like a flash, up he came, out of the ruck, past the leaders, won under wraps, with his jockey sitting still, and both of us shrieking, '_voyageur_! _voyageur!_' like mad." "it was glorious," he agreed. "and after that do you remember the race for two-year-olds, and my theory that in an untried field the odds were all against the favorites winning? i suggested that we buy a ticket on every horse in the race; you assented, and the theory proved a magnificent success. we won a thousand francs--" "and that night," she reminded him, "flushed with victory, we played roulette. it was i who invented the system then, and unlike yours, it cost us every cent we had made, and much more besides. do you remember that?" "of course i do," he answered. "it was the old story; we were winners, but didn't know when to stop. but it was worth it; those were royal days." "and then," she continued, "came our ventures in the market. the rise in rails that made us rich; and the cotton corner that beggared us. you haven't forgotten those?" "forgotten them?" he echoed. "could i forget? ah! what times those were!" there was a pause. at length she said musingly, "two years ago. two long years. and how has fortune treated you? bountifully, i hope." blagden smiled. "i was just complaining to my friends," he said, "that she had deserted me. and now--she resumes her favors." she bowed, half in earnest, half jestingly. "you are too kind," she answered, "but seriously, i am sorry if you have not prospered." "to be candid," blagden admitted, "i have not. but i am not discouraged. being a goddess, it is her privilege to be fickle; that, i suppose, is her real fascination. but tell me how the years have gone with you. have you lived as you planned to live?" she regarded him steadily, and without emotion. "exactly," she answered, "as i planned." he was silent, returning her gaze. "well," he rejoined at length, "if it is a matter for congratulation, then i congratulate you. is he rich?" "oh, very," she responded. "you need hardly have asked me that?" "quite true," he answered. "forgive my stupidity. and are you happy?" "why--yes," she replied more doubtfully, "i suppose so. i have a great deal. i desire more." "that," he said, "is the chief trouble with all of us. that, in fact, was the reason for my recent undoing. i risked a moderate capital to gain a fortune, and was wiped out. i lost everything--hook, line and sinker." "i am so sorry," she answered. "was it in stocks?" "next door to it," he responded. "it was january cotton. by every test in the world, by reasoning, by statistical information, by the opinion of the trade, by the advice of brokers, by every known method of determining values, january cotton was the greatest purchase in the universe. it had to go up, that was all there was to it. it was mathematically impossible for it to stay down. so i bought it, bought it up to my eyebrows; and so, i imagine, did every tom, dick and harry in the street. result, a hundred and fifty point drop, swift and sudden as a hurricane, and when it was over, scattered heaps of financial corpses, of which i had the honor to be one. i had money, desired more; and got--what i deserved." she sighed sympathetically. "i only wish," she murmured, more to herself than to him, "that i had known." he regarded her with frank amazement. "what could you have done?" he queried. "prevented me from losing?" "yes," she answered gravely, "i think that i could. i, of course, know nothing, but it happens that my friend is a great authority upon the markets. he is never wrong." blagden smiled indulgently. "oh, i've heard of those fellows," he responded. "don't think i'm rude, but there's no such thing in the world as a man who's never wrong on speculation. he simply doesn't exist." "but you don't understand," she insisted. "he _really_ knows." "pure coincidence," he retorted lightly. "i've known of such cases. he might hit it three times, four times, a dozen times, but nobody can be consistently right. it's humanly impossible." "it was over six months ago," she rejoined with conviction, "that he told me to make my first trade. at my cottage he has had installed tickers for all three of the markets. if he is there between ten and three, he keeps close watch of them. and every so often he will say, 'would you like some pin money?' and always i win, and never lose." "well," said blagden lightly, "we won't quarrel over it. if you say it's so, it's so. but why do you say that you 'desire more?' i should consider you a very fortunate lady. if i could win every time i gambled, i don't think i'd require anything else." "oh, yes, you would," she promptly answered. "if you were only allowed to play every week or two, and in a very limited way, and under the direction of another person, would that satisfy you? of course not. the point is here. i am only allowed to meddle with stocks as an amusement--a plaything. but i want to know how he does it. then i should be satisfied, for i could make all the money i wished." "but why so eager about money?" he queried. "you never used to be." "in two years," she answered, "i have changed a great deal. i am older; i hope wiser. i know that youth fades, that life itself is brief. and before i die, i wish to realize a dream--a vision. i wish to have the finest pleasure yacht in the world and to voyage north, south, east, west, until i have seen all that there is to see upon this earth. hence my desire for money." "now i understand," he replied. then added, more lightly, "you say you 'want to know how he does it.' does it appear to be a kind of magic? does he make his profits in the same way that a conjuror extracts rabbits from a hat?" his levity nettled her. "you are provincial," she retorted sharply. "you reason that because you have lost money in stocks, everyone must do so. often it is foolish to believe too much; but sometimes one may believe too little." he hastened to make amends. "i apologize," he said. "you are perfectly right. and i am really immensely interested in your story. you think, then, that he speculates with some sort of system?" "i am sure of it," she answered with conviction, "and when i saw you here to-night, i suddenly remembered many things that you had told me about the market, and i wondered if you could not aid me now." "if i may help," he assured her, "i am wholly at your service. though i fear i am somewhat at a loss as to how or where to begin." "and yet," she rejoined, "there is a starting-point. i am confident of it. are you at liberty this evening?" "never more so," he answered. "then come with me," she said. "i have a taxi waiting." and blagden, assisting her to put on her wraps, escorted her to the motor, which whirled them away from the city, mile after mile, until it finally stopped at a pretty cottage, far out in the country, isolated and half hidden in a miniature forest of trees, shrubs and flowers. a trim maid answered her mistress's ring, then discreetly vanished. "now," she said, "i will show you what i mean," and leading the way to the study on the floor above, she turned the switch and flooded the room with mellow light. blagden looked about him with interest. as she had told him, over against the wall stood the three tickers, side by side, and beyond them a desk and a telephone switchboard. in spite of himself, blagden was impressed. there was an orderliness, an indefinable businesslike touch to the room and its contents which seemed to make it evident that its owner was a man of affairs. "well," she queried, "do you believe me now?" "oh, it's not a question of belief--" he began, but she suddenly exclaimed, "wait a moment; i forgot," and hurriedly leaving the room, she returned almost instantly with a small memorandum book in her hand. "now," she said, "look at this." blagden took the book and scanned the entries with care. here was fifty reading bought at ninety-three and sold at ninety-eight; and here one hundred bales of may cotton sold at eighteen, fifty-six, and bought in at seventeen, fifty-two. a little further on were ten thousand bushels of december wheat bought at a dollar, fifty-four and closed out at a dollar, fifty-seven. sometimes the gains were large, sometimes small, but invariably, as she had claimed, each transaction showed a profit. blagden gazed, fascinated. "now," she said, "isn't it wonderful?" "wonderful," he echoed. "it's more than that. it's a miracle. if i had met you six months ago, where would i be to-day? i'd be rolling in it; i'd be worth a million." her face was as covetous as his. "you've been in the market for years," she said. "haven't you any way of finding out?" "i don't know," he answered slowly. "did you tell me in the café you had a clew?" she hesitated. "it sounds rather ridiculous," she answered, "but do you think it's possible that the time of day can have anything to do with the strength or weakness of stocks?" he looked disappointed. "oh, i've heard that talk down town," he responded. "there are as many theories of speculation as there are speculators. everyone agrees that there's manipulation--flagrant manipulation--though of course this is indignantly denied by everybody connected with the exchange. but how this manipulation is managed, no two men agree. i've heard what you hint at, that the future course of stocks is determined by their artificial strength or weakness at certain hours of the day; two o'clock, some people think is the significant time. personally i never believed in it at all. why do you ask?" "because," she answered, "when he stands here by the tickers, he is continually looking at his watch. i am not supposed to know this; in fact, between ten and three i am excluded from this room; but i have devised means of watching, and that is the peculiarity i have noticed; that, and the jotting down in his notebook of memoranda which he apparently copies from the tape." blagden looked puzzled. "i should be very slow," he said, "to believe anything of the kind. and i should think you could manage this affair without my aid. considering your relations with this man, considering your very obvious attractions, i should think the stage was all set for a modern version of merlin and vivien." she smiled a trifle bitterly. "i will confess to you," she answered, "that the same thing occurred to me. in fact, i attempted it; and failed utterly. compared with this--" she indicated the tickers--"i am the proverbial dust beneath his feet." there was silence. at length blagden spoke. "this fascinates me," he said. "at first, i wholly disbelieved your story; now i do believe it. and upon one condition, i will devote my time, my energy, my best endeavor to the solving of this mystery. but the condition is important." she regarded him curiously. "name it," she said. he rose from his seat, and stood looking at her appraisingly, a cold flame gleaming in his eyes. "it is this," he answered. "you liked me, i think, in the old days, but i was a poor man. i am a poor man to-day. but if we fathom this secret and gain the keys to paradise, then let us make the building of your yacht a joint enterprise, and let us make the cruise--together." she too had risen and now stood looking at him with a faint smile upon her lips. "ours," she responded, "is a quite exceptional friendship. you are a man and i am a woman, and yet we have the great advantage of thoroughly understanding one another. if you can grant me my desire, i will reciprocate. i accept your offer, and i wish you success." chapter viii the adventure of tubby mills at the street entrance to the café, mills and atherton came momentarily to a halt. "well," observed the stout one, "we've got to hand it to blagden. he's what you might describe as the original tabasco. yet it's no credit to him that he finds adventures; they just naturally come his way. he couldn't dodge 'em if he tried. see what's happened to him now; do you suppose either of us is going to run into anything like that?" atherton, still under the spell of blagden's eloquence, was gazing forth upon the crowded thoroughfare, with its hurrying throngs of pedestrians, and its multitude of motors, passing and repassing incessantly under the glare and brilliance of the bright white lights. "i think," he slowly answered, "that anything is possible. blagden is right. ninety-nine men out of a hundred live and die in a rut. it has to be so; that is life. but if the hundredth man is so situated that he may range the world at will, with eyes open and every sense alert, i believe, with blagden, that he will find adventure awaiting him at every turn in the road. it's tremendously exhilarating. here we take leave of each other; you go one way, i go the other, and what we may discover we haven't the shadow of an idea. i think we ought to thank blagden for waking us up. i haven't felt so keen about living since i can remember." "blagden," said mills, "is a queerer combination than most of us. he's an artistic sort of chap, with all the merits and defects of the artistic temperament. he always makes me think of an airship with its steering gear shot away; he goes like the very deuce, but you can't tell what his destination is, or at what moment a gust of wind may veer him from his course. prince or pauper; he may become either; but he'll never be one of your commonplace mediocrities." "you're right," atherton agreed, "and to-night, at least, i envy him, though i imagine that in the end your plodder is perhaps the happier man of the two. he may get less out of life, but he risks less. thrills and ills are apt to go together." his companion laughed. "well, we've got to risk it," he answered. "we're committed now to a life of adventure, whether we like it or not. i'm going to vary your phrase. 'thrills for mills' is going to be my motto. and we must make a start, atherton; our time is short. good-night and good luck; we'll see each other friday." he raised his hand in farewell, and started leisurely down the street. people by tens and hundreds and thousands surrounded him, enveloped him on every hand, yet of all the multitude he seemed to be the only wayfarer who was not hurried, preoccupied, intent upon his own individual affairs. "this," he concluded, "is too much like the middle of the stream; what i want is some quiet backwater, where there's a chance to pause and breathe." leaving the main street, he walked east for several blocks, and turning again parallel to his original course, found himself in one of the poorer residential districts of the city. as he had divined, here there was incident to be encountered, but of too sordid a nature to bear the remotest resemblance to genuine adventure. old men, ragged, unkempt, muttered requests for a night's lodging, for food, or more openly for the price of a drink. younger men, of sinister exterior, eyed him as he passed and noting his bulk, allowed him to go on his way unmolested. women of the street, in gaudy finery, their white faces daubed with scarlet in ghastly mockery of health and beauty, ogled him leeringly, and mills, sophisticated city dweller though he was, felt his heart sicken at the thought of their venal trade. "if there was some attraction," he thought, "some seduction, that would be one thing. but these wrecks--these walking corpses--it's horrible." by this time, he had traversed several blocks, and the chances of adventure seemed each moment to be growing slimmer. "i'll go home," he reflected, "and go to bed. and in the morning i'll make a round of the brokers' offices; perhaps i'll be able to pick up news of something really good." and having thus allowed his mind to return to the subject of the market, he began to dream, like all defeated gamblers, of some wonderful way of "getting square with the game." "cotton," he mused. "a man could make money in cotton. i got in too deep; that was all. if a fellow would only stick to small lots, and regular rules--" a touch upon his arm aroused him, and he wheeled to confront a girl of a very different type from those whose demeanor had so disgusted him. she was evidently of the working class, but she had the instinctive good taste to dress according to her station, leaving to others the garish footgear, the semi-nudities of costume, and the overpowering stench of cheap perfume. and thus, in comparison with her companions upon the street, she looked so refreshingly youthful and ingenuous, and her big eyes were so appealingly pathetic that mills, for the first time, began to feel that an adventure, even in this locality, might be both possible and enjoyable. "i ask your pardon," she said, "for speaking to you, but i am in great trouble, and i thought that perhaps you would be willing to help me." mills, still only half aroused from his meditations, stared at her uncomprehendingly, and as he did so was struck afresh by the girl's air of innocence. her eyes still gazed trustfully into his, her hold upon his arm was not relaxed, and as a result mills presently found himself replying guardedly, "why, i might. what's wrong?" she gave a sigh of relief. "oh, you are so good," she cried. "i was sure of it when i saw you. and i need someone to help me so badly. only--" she added shyly, "let's not stand here. it's so conspicuous, and this is a horrid neighborhood; people are always talking. just come with me; it's only a step--" mills hesitated. perhaps, if he had taken a little less wine, he might have been more suspicious; possibly, if she had not slipped her arm confidingly through his, he might have been less avid of adventure; but as it was, he yielded, and as they walked along she lost no time in acquainting him with the story. it was not she herself, it appeared, who was in trouble, but a friend of hers named rose, who was only eighteen years old and as beautiful as a picture. rose, it appeared, had been sought by a policeman on the beat, but being as virtuous as she was pretty, she had indignantly rejected the overtures of this immoral man. whereupon he had threatened to "get" her, and promptly made good his threat by employing a skillful shoplifter to "plant" some articles of jewelry upon the person of the persecuted rose. she had been arrested; her case was coming up for trial to-morrow; and alone in the world, she did not know, in her predicament, where to turn for aid. thus her friend had been prompted to go forth and look for help, and had been attracted by the prepossessing exterior of mills. "i knew you looked good, the moment i saw you," she repeated, and as she uttered the words, her voice was tremulous either with grief or with some other emotion. mills was frankly puzzled. the tale struck him as extremely wild and improbable, but on the other hand he was enjoying the society of his guide, and the opportunity of seeing the lovely rose strongly appealed to him. just how this meeting was to benefit the order of gentlemen adventurers was perhaps not quite clear, but mills' mind was not, by this time, working along the lines of strict logic; emotion, rather than pure reason, was in the ascendant. and in any event, he would have had little time to ponder the matter, for the walk, as his guide had promised, was a short one, and he presently found himself following her into a tenement of rather dubious exterior, and up countless flights of stairs whose atmosphere wholly failed to appeal to mills' somewhat fastidious nostrils. more than once, during the climb, strong suspicion assailed him, and his better judgment counselled flight, but the fear of being a "quitter" restrained him, and he continued his ascent until presently he surmounted the final flight, and found himself in a room somewhat barely furnished, but with an air of comfort and refinement which renewed his confidence in his guide. she laid aside her hat and coat, and as she turned toward him, he observed with pleasure that she was really exceedingly pretty. "rose will be here right away," she observed; then, listening for a moment, she added, "there she is now," and mills, listening in his turn, could hear a light footfall ascending the stair. but in another instant his companion's face turned white. "my god!" she cried, "it's my husband. i thought he was out of town. what on earth shall i do? he mustn't find you here." mills gave her one searching glance, muttered grimly to himself, "well, i'll be damned," and making no effort to escape, sat motionless in his chair, his eyes fixed upon the door, which opened the next moment to admit a small, sinister looking man, who gazed at the couple before him in a manner forbidding and malevolent. nor were his first words reassuring. "what the hell is this?" he cried, and advancing toward mills, he demanded truculently, "what the devil are you doing here?" the girl sprang forward. "don't hurt him!" she cried. "it's my fault. i oughtn't to have listened to him. but he wanted to come. he said he'd pay me well--" her words acted as an infuriant upon this slender but dangerous looking man. "i'll teach you swells--" he hissed, and like a flash he whipped a pistol from his pocket and levelled it at the head of the unfortunate mills. for an instant the victim gazed stolidly at the menacing circle of steel; then, with an air of complete detachment from his surroundings, he made an equivocal and wholly unlooked-for rejoinder. "got a cigarette?" he asked. the outraged husband glared. from past experience on many such occasions he was quite prepared for men who grovelled and begged for mercy, and once in a great while he had learned to look for a man who showed fight, but a retort like this was distinctly a novelty. and since the question scarcely admitted of a direct reply, he responded with a snarl, "now don't get gay, young feller, don't get gay." mills turned to the girl. "i call that tough," he observed conversationally. "here i want to register courage, and the only real way to do it is to light a cigarette. i love to see 'em do it on the stage, and now when i have a chance myself, all i can do is just say i'm not scared. but it's not the same thing; it ruins the effect." the girl eyed him keenly, her face noncommittal, expressionless. the man continued to glare. mills did not look like a lunatic, and the girl, as a rule, managed to "pick them" to perfection. yet this time it appeared as though she had made a mistake, and while he hesitated, uncertain as to his next move, mills obligingly relieved his embarrassment by continuing, "what you want, of course, is to get money out of me or else to damage my reputation. but unfortunately for you, i have neither reputation nor money. as far as reputation goes, i'm a small town guy, unknown in new york, and as for money, i've been playing the wheat market, and if you're looking for my coin, why, as the funny man says, 'i'll help you look.' i'm sorry to be such a disappointment--" he turned once more to the girl--"but this is the time you got the wrong pig by the ear." the pseudo husband stared fixedly at mills as if trying to make up his mind as to the truth of his story; then evidenced his belief by abruptly returning his pistol to his pocket, and to relieve his feelings began to vent his indignation upon the girl. "by gad, you're clever," he exclaimed, and since he did not possess a large vocabulary and depended principally upon repetition for his effects, he added, after a momentary pause, "you're clever, by gad." the girl's brow darkened. evidently she did not take kindly to criticism, and casting about for some means of defence, she jerked her head in tubby's direction. "well," she countered, "look at him." her four words worked wonders, for mills, quick to perceive their point, first grinned, then laughed, and finally, partly as a relief for overstrained nerves, partly because the true humor of the whole affair now suddenly dawned upon him, fairly shook with merriment, while the girl, watching him, forgot her resentment and relaxed, until finally she too joined in his mirth, and even her saturnine companion permitted himself the luxury of a grin. "but see here," cried mills at last, "i'm not stuck on my looks, or my shape, but the old badger game--why that's positively an insult. why didn't you sell me a gold brick and be done with it? you must have thought i was a cinch." "i did," she retorted, "but don't you care, fatty, you're all right. the joke's on me; i'm sorry i tackled you." "well, it's on me, too," he admitted. "you did a good job. let's call it square, all around." the man with the pistol had come forward as they talked, and now stood directly in front of mills, regarding him with a fixed and searching gaze. "just one minute, now," he cautioned. "a square answer to a square question. there's no double cross to this? you're not going to leak to the bulls?" "not much," mills answered. "live and let live. i've no kick coming." apparently the man was content. "then see here," he continued, "if you're busted, i can find you a job. my name is stoat. this old badger stuff isn't my regular line; in my day i was called the best second-story man in new york, and i could turn a good trick now if i needed to. but there's safer games than that; i've had a fake promoting scheme under my hat for a long time, and with your front we could make a killing. with a few little changes you'd be the honest miner to the life you and i and the kid here could work the thing to a frazzle. what do you say?" mills hesitated. the change from full pockets to empty ones had wrought a distinct alteration in his moral code. yet partnership with stoat was not an attractive prospect. "i don't believe," he temporized, "i'm the man you want. i never mixed up in anything like that." stoat yawned audibly. "well, it's late," he said, "and i'm most cursedly sleepy. i was sitting into a game all last night, and i've got to get to bed. think this thing over, and if you want to give it a go, drop around to-morrow sometime. you'll be making no mistake; it's safe as can be, and there's big money in it, too." mills got up and started for the door. "all right," he agreed, "i'll think it over. much obliged for the offer." and to the girl he added, "good night. when you see rose, remember me to her." she laughed. "say," she answered, "you fell for that easy, like all the rest of 'em. it's a shame to do it. but you're a pretty good guy. you come around to-morrow and we'll talk business." once more upon the street, mills gazed around him with fresh appreciation. how near he had been to death he could not guess; his knees felt as they used to at the finish of a three-mile run. to the lights, the noises, the people on the street, he warmed with a new affection. "i'm mighty glad," he muttered, "that i'm still in the picture." and more pensively than was his wont, he turned his steps toward home. chapter ix a message from the past bellingham for the twentieth time consulted his watch, and finding that it still lacked ten minutes of midnight, he rose, walked over to the window, and stood looking out into the night. in the distance he could see the bulk of the stables looming through the darkness, and near at hand the huge lone pine tree towered in silhouette against the sky; yet his mind was not fixed upon what was before him, but was reviewing once again the events of the day, events which had occurred scarcely twelve hours ago, but which seemed, in retrospect, to have taken place ages since, in the shadow of some dim and distant past. he could see himself, a distinct and separate entity, leaving the car and hurrying toward the garage, alert, expectant, eager to find nolan and hear what he had to say. from the same man whom he had seen before he had sought to discover if nolan was in, and the man had nodded with a curt "yep," but when bellingham was half way to the elevator his informant had called him back to explain, "say, hold on a minute; i forgot; nolan's quit his job." the secretary could feel again the sinking of the heart, the shock of disappointment the words had caused. "quit?" he had repeated, and the man had replied, "yep. he's quit. new man on the car; a swede. he's up there if you want to see him." but bellingham had muttered something about its being a personal matter, and still in a daze, had made his way out of the garage, perplexed and disheartened, and vainly wondering what could possibly have happened to the chauffeur. it was not an easy problem to solve. certainly the money he had advanced could have been no temptation to nolan; twenty dollars was nothing compared with the keeping of a good position. and if the chauffeur's abandonment of his job had not been voluntary, of necessity it must have been involuntary; it appeared as though he must have been detected in his pursuit of his employer, and met with a summary dismissal. yet if this were so, why could he not still have kept his appointment with the secretary. there seemed to be no satisfactory solution, yet as a practical matter none was necessary; of what importance were theories when he knew that the actual result was a complete failure of his plans to gain information through the instrumentality of nolan. and as a result he would now be forced to act himself; no choice was left to him; whether he liked it or not, he must assume the risk. thus, throughout the remainder of the day, he had laid his plans, and now was decided as to his course. but the hour for action had not yet arrived; two o'clock in the morning was the time he had chosen; and thus he lighted his spirit lamp, made and drank two cups of coffee, and then, setting and muffling his alarm clock, he lay down, fully clothed, upon the bed, to gain a little rest before setting out upon his tour of exploration. but before many moments passed, he realized that the setting of the clock was a needless precaution; the strain he was under added to the stimulant he had taken made sleep an impossibility. and curiously enough his brain, which should have been intent upon the adventure before him, now cast back through the years, and as he lay there he could see, projected against the curtain of the dark, pictures long since forgotten, detached and yet connected, leading with merciless precision to the miserable predicament of his latter days. behind the house lay a broad expanse of meadow, gay with flowers and traversed by a brook which had its source in the hills adjoining the farm. hither, in his boyhood, he made an almost daily pilgrimage, but not to gather the violets and the buttercups which lined its banks, or to hunt for blackbirds' nests in the swamp below. the attraction for him had been altogether different. with his jack-knife he would fashion boats from shingles, imagine them in his mind to be racing yachts, under clouds of sail, and starting them, with scrupulous fairness, amid the ripples of the stream, he would run headlong down the field, just able to keep pace with the current, and watching with breathless interest the outcome of the contest, as the tiny craft swept around promontories, skirted the shallows, and finally crossed the finish line, to be rescued with a forked stick, and carried back up the meadow to race and race again. how had he come to play this game? no one, as far as he could remember, had taught it to him; he had been only six or seven at the time, but the memory persisted, the thrill of the struggle, the eager brook and the no less eager boy-- the scene shifted. some one had given him a game of "steeplechase," and a new world was born. as clearly as if it had lain on the bed beside him, he could see the oval of the board, the horses, bay, black, white and gray, and he himself, cheeks flushed, heart throbbing, sitting entranced hour after hour, casting the dice, and watching and recording the result of every race. later had come his college days, with the thrill of real racing; the futurity, the suburban, the scramble of dainty thoroughbreds with the bright silks of their jockeys gleaming in the sun. but before this he could dimly recall his first knowledge of the stock market, when his father, forbidden for a time to use his eyes, had asked his son to read to him the quotations in the evening paper. bellingham could remember that he had made sorry work of it, so that his father, usually the kindest of men, had lost his temper and had soundly berated him for his stupidity. other days, too, he could remember, of alternate exaltation and depression until the afternoon when he had come home to find his mother in tears, and his father had taken him by the shoulder and said gravely, "hugh, you must promise me one thing. never, so long as you live, must you have anything to do with the stock market. it has been the curse and ruin of my life. it must not ruin yours, too." boylike, he had promised, but a dozen years later, when the lure of the street had bewitched him, he had not regarded his promise, and with the few thousands at his command, had started to make his fortune. how he had despised the men who traded in ten-share lots; "pikers," he had called them; for it had seemed to him that to deal in hundred and two hundred share lots, on a slender margin, was evidence of true gameness and grit. but this period had not lasted long; soon the ten-share lots became a necessity, and finally an impossibility, until the fatal day when he had borrowed money on a story that was two-thirds a lie, and a week later had seen a quiet, lagging market suddenly declined with incredible rapidity, leaving him hopelessly in debt, and now at the mercy of his long-suffering creditors. so passed the pictures before his eyes, from the boy running beside the brook to the desperate, harried man. inheritance or not, here had been the keynote of his life--the love of a contest, a race, a struggle, the thrill of the unknown gamble, the possible chance. and in other ways he had been sane and normal; as men go, a decent sort of man. a sense of injustice surged within him. was it fair? if a good god ruled the world, why did he implant these fierce desires in the breasts of his children? why did he change a world of joy and beauty into a hell of discontent? why did he-- with a start, he came to himself. how long, he wondered, had he been dreaming? the flashlight showed ten minutes of two, and silencing the alarm, he rose, and in his stocking feet crept cautiously to the door of his room and out into the hall. for good or ill, his hour had come. the 'house was absolutely still. and suddenly, oppressed with the strain of the day, unnerved by the strangeness of his errand, he seemed to himself to be moving in some fantastic nightmare, and he was seized with a panic of fear, so that he could scarcely control his impulse to return as he had come and to abandon his reckless quest. but after an instant, he managed to conquer his quivering nerves, and concentrating all his energies upon his task, he stole down the hallway like a shadow, entered the gallery, and found himself standing before the portrait through which the banker had made his unexpected exit three days before. copying, as well as he could recall it, the posture of his employer, he pressed with his forefinger here and there upon the canvas, but without result until he reached the hilt of the pictured sword, when almost before he realized what was taking place, the portrait, as before, swung back, and the gateway of adventure lay open before him. a hundred times, during the day, the secretary had made his plans, and thus, without losing an instant, he entered the orifice, drew his knife from his pocket, and wedging the narrow space between the portrait and the wall so that his retreat would not be closed to him, turned to examine the staircase that lay at his feet. it was a slender spiral of steel, apparently extending downward for an indefinite distance, and so narrow that there was scarcely an inch of superfluous space on either hand. without hesitation, bellingham started to descend, listening from time to time and hearing nothing, until at length he reached the bottom and found himself in a low passageway, with a door at the end. the secretary's heart sank. "locked," he thought to himself, but equally to his surprise and his delight, the knob turned in his hand, and he entered a small chamber, with a second door at the further end. this additional exit, however, was securely barred, and finding his progress cut off in that direction, bellingham turned his attention to the room itself. a first glance afforded him small encouragement. to open the massive safe was clearly impossible; the sideboard was empty; and the desk in the corner, though it appeared, at first sight, to be a promising hiding place, proved, on closer examination, to contain nothing. the secretary's heart sank. evidently his hopes were vain; his dream of romance gave place to prosaic reality; and with a pang of keenest disappointment he stood ready to admit defeat. yet since he had risked so much, he decided that before leaving he would make one final search, an investigation of the room so careful and minute that he would be certain that he had overlooked nothing. accordingly, he first approached the sideboard, hunting around, behind and under it, removing and replacing each drawer in turn. yet his efforts were in vain, and when he next transferred his attentions to the desk and began a similar exploration there, he met with no better success until he had removed the last drawer of all, and then, for the first time since he had entered the chamber, he experienced a momentary thrill as the flashlight revealed a crumpled paper which had fallen between the back of the drawer and the rear wall of the desk. inserting his arm, he brought it forth to find that it was torn, faded and yellow with age, with some words quite illegible and others missing altogether. yet piecing it together as best he could, he made an attempt to decipher its contents, and the next moment, so intense was the shock, so overpowering the revulsion from despair to exaltation, that he found himself staggering backward as if from a blow, grasping at the table behind him to save himself from actual physical collapse. but the next moment, as his heart once more sent the blood coursing through his veins, he rallied, and without losing a second he returned the drawer to its place, glanced hastily around to make sure that he had left no traces of his visit, and then made his way as quickly as possible up the staircase, through the opening in the wall, and once more regaining his room, he locked the door, lit his reading lamp, and began a systematic study of his prize. it took only a few moments to make him realize that the task of deciphering the document was to be one of almost insuperable difficulty, but at the same time it became increasingly evident that he had made a discovery the importance of which could scarcely be exaggerated. the paper was a plain sheet of foolscap, apparently a rough draft of a final copy,--torn into eight pieces, of which to bellingham's chagrin it now appeared that two--the lower rectangle on the right and the third from the top on the left--were missing. in the upper right-hand corner of the paper was the date, january , , and beneath, in the middle of the sheet was a heading of which the first word was almost wholly obliterated, but the remaining four, "of the money gods," were comparatively clear and distinct. under this heading were five sub-divisions, the numerals , , , and showing plainly at the left, while the missing would evidently have been written on the first of the two pieces which were lacking. and now, patiently and with infinite effort, straining his eyes over the dull, discolored paper and the faded ink, bellingham succeeded in bringing out a word here and there until under the first numeral he had an actual sentence, though still with gaps where the wished-for word stubbornly resisted his search. "most men ---- fools ----blers by nature ---- easiest way ---- to ---- in stocks." the second sentence, for some reason or other, was much more distinctly written, and in a short time the secretary had produced, "fundamental plan; bull market, sell ---- top; depress; bear ----ket; buy at bottom; give shorts ----." but it was the third sentence which proved to be the most startling of all. it was very brief, containing only eight words, of which part of the first and the last four were all that the secretary could read. but they were quite sufficient to make him gasp. "communi---- ---- signals on the tape." the letters, pregnant with meaning, stared him in the face, and made his breath come quick and fast as he threw an apprehensive glance into the darkness behind him, as though dreading the wrath and vengeance of some ghost from another world. almost beside himself with excitement, he toiled on. but the fourth sentence, with its missing fragment, told him little, for while the words were clear enough to the eye, they conveyed no message to his brain. on the upper line were the words, "on the watch," and directly beneath them, "for these signals," but the loss of the left hand paper, and the absolute impossibility of conjecturing what other words completed the sentence, made this portion of the message apparently valueless. equally tantalizing was the message under the figure five. the sentence began clearly enough, "the basis will be / / / if ----" and then came the blank occasioned by the second missing fragment of paper; while the sentence, resumed on the left-hand portion of the document, continued, " / / / if down. buying and selling ----" then once more the inevitable hiatus, and finally the three words, "on a scale." and this was the end. the secretary sat gazing straight before him, his brain in a tumult. coincidence well nigh incredible had led to this discovery, and now left no doubt in his mind that rumors which had been current in the street for years, but always laughed to scorn by the whole fraternity of brokers, were true, after all. and suddenly, with irresistible conviction, facts, remarks, events, never before understood, now crowded to his mind, clear as crystal in the light of his present knowledge. signals on the tape. more than once he had heard the story, told with bated breath under pledge of strictest secrecy. but here was proof. and for him, individually, this ancient document revealed all the glories of a new world. and thus, bending once more over the paper, bellingham toiled until the first light of the dawn crept in at the windows, and rising unsteadily from his desk, he saw staring at him from the mirror a worn and haggard face which he could scarcely recognize as his own. chapter x the adventure of atherton atherton stood on the steps of the café watching mills' departure until his friend's broad back and sturdy shoulders were swallowed up in the crowd; then, descending to the street, he strolled leisurely away in the opposite direction. but although, as he had just said to mills, blagden's enthusiasm had inspired him, he now concluded that it was not at this particular moment that he desired adventure, for there is a limit to human endurance, and the experiences of the day had left him exhausted both in body and mind. so that in spite of blagden's counsel as to keeping constantly on the alert, he threaded his way through the throng absent-mindedly, his thoughts, through force of long habit, reverting instinctively to the ticker, whose sudden plunge downward had proved so ruinous to all his hopes and plans. at length, however, as he turned aside from the main thoroughfare, he was roused from his abstraction by the sight of an automobile standing motionless at the curb, while the chauffeur cranked away manfully, but without result, and a tall, well-built man of middle age, evidently the owner of the car, stood looking on with a frown upon his brow. the whole affair was commonplace enough, and presumably atherton would not have given it a second thought, if it had not been for the girl who stood at the man's side; but at the sight of her, her beauty and the charm of her radiant youth suddenly made him forget everything else in the world, and under the pretense of looking into a neighboring window, he lingered for the pure delight of stealing an occasional glance at her, already determined that as soon as the car took its departure he would contrive to note its number, so that he might learn its owner's name. but a still better opportunity was to present itself, for presently there came an explosion, not from the car but from its owner. "that will do," he said crisply. "you can't run an automobile, and never could. you're discharged. go to the garage and tell them to send for the car, and come out to-morrow for your pay and your clothes." without protest, and almost as if glad to escape thus easily, the chauffeur vanished around the corner, and immediately atherton, lover and master of motors, saw the goddess of adventure beckoning to him alluringly. at once he stepped forward, and asked, "beg pardon, but may i help you?" the owner glanced at him sharply. "that depends," he retorted, "on how much you know about a car. i doubt if you could know any less than the idiot i was fool enough to hire. if you want to try, go ahead." without the loss of an instant atherton began his investigations. "spark's all right," he muttered; then, sniffing the air suspiciously, he added, "but i can smell gas; she must have sprung a leak." and inserting his hand under the carbureter, he brought it forth again, his palm dripping with gasolene. "feed pipe," he decided, but shrewdly surmising that the owner would care more for results than for explanations, he kept his knowledge to himself, and drawing his knife from his pocket, he dropped on his knees beside the car and after a few moments' deft manipulation, rose, walked forward, and gave the crank a vigorous turn. there followed two or three spasmodic reports, after which the engine, once more receiving its normal supply of gas, settled down to work and began to whirr away in perfect and melodious rhythm. whereupon atherton, who by this time was beginning to find enjoyment in the situation, approached the owner of the car and touching his cap, reported, "all right, sir; she'll run now." the owner eyed him keenly. "good," was his brief comment; then added in a tone that was half a statement, half a query, "you're not a professional chauffeur?" there was a moment's silence before atherton, seized by inspiration, answered, "well, not exactly, sir; not at present. the fact is, i'm looking for a situation." again the keen appraising glance, followed by question and reply. "you're a good driver?" "yes, sir, i can drive a car." "my name is hamilton. i live near rosecroft, about twenty miles out of town. do you want to drive me there?" this time atherton did not hesitate. at once he recognized his patron's name, and became aware that here was a genuine adventure, an opportunity not to be disregarded. and accordingly, striving to adopt a tone appropriate to his new employment, he responded respectfully, "yes, sir, i'd be glad to." hamilton turned to the girl. "jump in, helen," he said, and to atherton, in the manner of a man thoroughly accustomed to giving orders, "now find the nearest telephone; ring the central garage and tell them that i shan't need them, after all. do it as quick as you can, and then come back here." he stepped into the motor, and atherton, smiling to himself, hastened to carry out the banker's orders, and then returned to the car, eager to discover what the outcome of this adventure would be, and determined to show his passengers that he had not overstated his ability as a chauffeur. nor did he disappoint them, although as a matter of fact he had every opportunity for producing a favorable impression. the roads were perfect, the car behaved splendidly, and aided by occasional brief instructions from mr. hamilton, in a little over an hour from their departure he entered the winding driveway, experienced a momentary glimpse of wide lawns, shrubbery and stately trees, and brought the car to a halt beneath the portico. immediately the door opened, and a dark, dapper-looking little man in livery came down the steps to meet them, alertly enough, yet as it seemed to atherton with the air of one a trifle unaccustomed to his surroundings. and that this impression was correct became evident when mr. hamilton, alighting, looked at the servant in some surprise and then as if suddenly recollecting said, "oh yes, you're the new second man. where is martin?" "martin, sir," the man answered, "has retired. shall i tell him that you are here?" "no, never mind," answered mr. hamilton. "ask the housekeeper to get us something to eat." and turning to atherton, he added brusquely, "you said you were looking for a situation. do you want this one?" the question, under the circumstances, was not wholly unexpected, and atherton, during the drive, had had ample opportunity to make up his mind as to his answer. so that now he replied promptly, "yes, sir. very much indeed, sir." "satisfactory references?" asked the banker, and atherton, knowing a number of men upon whom he could rely, responded, "yes, sir." whereupon the financier, without further questioning, observed, "very well then, you're engaged on trial." and to his daughter, "i'm going to ask bellingham to show him to his room. by the way, what's your name?" "atherton, sir," answered the new chauffeur. "very well," said hamilton again. "wait here." he disappeared within the house, but helen hamilton, instead of following him, remained standing on the porch, and presently, with frank approval, she remarked, "you drive a car very well indeed. much better than the other man." at her words, atherton felt as if the genial warmth of his romance had suffered a sudden chill. the other _man_. he did not care for the term, for it made him realize that although he had obtained a foothold in the hamilton family, he had gained it by means of the rear entrance instead of the front. he was a servant, mr. hamilton's _man_. but though at first resentful, he soon had the grace to perceive that after all his position was of his own choosing, and accordingly he answered deferentially, "i thank you, miss, very much indeed." there followed silence, and atherton, fearing that she would depart, was racking his brains to discover some method of prolonging the conversation, when she solved the problem for him by continuing, "i am really very glad that we met you to-night." immediately, atherton felt a glow of joy, only the next instant to have his hopes again dispelled as she added, "it is an excellent chance for you. mr. bellingham will give you all the details, but i know that for one thing if you suit my father he always allows his chauffeurs two sets of livery free." atherton gazed at her, wondering if any object underlay her words. her glance was sincerity itself; her tone seemed blandly philanthropic; yet atherton could not make himself believe that the daughter of marshall hamilton would stand upon the porch of her house at midnight, discussing the terms of his employment with an unknown chauffeur. no. even if he flattered himself unduly by the assumption, he imagined that she must have detected at least a trace of the gentleman in his demeanor, and was trying to draw him out. yet despite his blind and adoring infatuation, he promptly decided that if this were her purpose, he would give her no satisfaction, and therefore with assumed eagerness he answered greedily, "that's very generous of him, miss. and i hope, miss, he don't object to something with a bit of life to it. a purple, miss, with a red stripe, is tasty; very rich and tasty indeed." if she was puzzled by his reply, she did not show it, but whether at the vision of the "tasty" suit, or for some other reason, she broke forth into silvery laughter, so bewitching that the enraptured atherton, in another moment, might have capitulated and revealed to her the secret of his identity, if the door had not opened to announce the return of mr. hamilton, followed by a good-looking young fellow, apparently some four or five years atherton's senior. "bellingham," said the banker, "this is atherton, who is to take rawlings' place, temporarily at least, perhaps permanently. i wish you would show him his room, and explain to him the customary routine. have the car ready at half past eight." bellingham acknowledged the introduction with a nod, jumped into the car, and they started at once for the stables. atherton's first impression of his new acquaintance was not particularly favorable, for the secretary was evidently preoccupied and hardly spoke until he had conducted the new chauffeur to his pleasant and comfortable room in the upper portion of the stables. but here, as he lit the light and for the first time had a fair chance to see what the new arrival looked like, a sudden change came over him, and after a somewhat prolonged scrutiny he suddenly exclaimed, "well, i may not be in a class with the well-known mr. holmes, but if descriptions and family resemblances count for anything, i should say the odds were about a hundred to one that you were a cousin of billy atherton, princeton, ' ." it was atherton's turn to stare. "right you are," he answered. "do you know billy?" "more or less," responded bellingham. "we roomed together for four years." and suddenly atherton remembered. "what a fool i am!" he cried. "hugh bellingham, of course. i never thought of it. why, i've heard about you from billy time and again." they stood gazing at each other, and at precisely the same moment both of them began to grin. "i suppose," said atherton, a trifle sheepishly, "that you're wondering about this fool chauffeur business--" but bellingham cut him short. "my dear fellow," he rejoined, "i'm not wondering at anything. it's none of my business what you are. and as far as that goes, you have an equal right to wonder at my job; i fear it's not a very exalted one for a college graduate to hold. but we're neither of us on the witness stand. all i can say is that i'm glad you're here, and if there's anything i can do to make you comfortable, or anything i can tell you about the household, why just fire away and ask me what you please. i'm quite at your service." there was a sincerity in his tone that atherton appreciated. "you're mighty good," he answered, "and there are some things i'd like to know, but first, if you don't mind, i'd like to explain my being here." and forthwith, while bellingham seated himself on the side of the bed and listened attentively, atherton briefly recounted his misadventures in the market, his meeting with mills and blagden, and his subsequent search for adventure, with its most unlooked-for ending. when he had finished, bellingham sat for some moments in thoughtful silence before he replied, "atherton, we're getting pretty confidential on short acquaintance, but of course it's not as though we were absolute strangers. and i want to take a liberty, and give you a piece of advice. the man who does that is usually a fool, but you will understand me better if i follow your example, and tell you just why i am in my present position. when i was a year or so older than you are now, i made the same mistake that you have just made. i went broke in the stock market, tried for over six months to land a job, and finally found employment with mr. hamilton, and have been here ever since. so at all events there is a bond of sympathy between us." "by jove, i should say so," atherton answered, "and i imagine, if we knew the truth, we could find a long list of fellow sufferers." "not a doubt of it," replied the secretary, "and that leads up to what i wish to say. if you're like me, if you're like ninety-nine men out of a hundred, you'll find that after a while you'll forget your lesson, and you'll rake and scrape to get money together to go back into the game again. and what i want to urge upon you, most earnestly, is just this: don't do it. i'm not at liberty to tell you all i know, but i can tell you this: you can't beat the game, and to go on trying is nothing more nor less than dashing your head against a wall. it's suicide in either case." neither his earnestness nor his good-will could be misunderstood, and atherton was quick to respond, "i don't doubt that you're right, and i'll surely remember what you say. but i don't think i'm going to be tempted again; i believe i know when i've had enough." the secretary was silent. presently he rose from his seat and nervously paced up and down the room before he finally came to a halt in front of the new chauffeur. "atherton," he said, "doubtless you'll think i'm crazy, but i assure you that i'm not. and you can't appreciate what a godsend it is to me to have you here. i want to ask two favors of you, and i repeat that i was never more serious in my life. do you mind letting me tell you what they are?" the events of the day--and night--had been so many, so varied, and so nearly akin to those of a "movie show," that atherton had reached a point where he felt really incapable of experiencing surprise at anything. and therefore he simply responded, inelegantly but heartily, "why, sure, fire ahead." "then first," said the secretary, "if at any time during your stay here you think you discover anyone in the household, from mr. hamilton down, trying to spy upon me, either by daylight or dark, i want you to promise that you will let me know as soon as you possibly can. are you willing to do that?" "of course i am," responded atherton. "i'm afraid i'm not worth much in the detective line, but i'll keep my eyes open, and let you know if i see anything out of the ordinary. that settles number one; what's number two?" "this," bellingham answered. "if i had to leave very suddenly, could you give me an address in the city where i could go and stay for a little while, in case i wanted a temporary hiding-place? i mean a house where i could be sure that i could trust the occupants; the quieter the locality, the better for me." atherton pulled out his memorandum book, tore out a page, and scrawled blagden's address across it. "here's the very place," he answered. "and if i find that you've left, i'll get in touch with blagden at once and tell him to be on the lookout for you. the neighborhood is just what you're after; old-fashioned and peaceful." bellingham took the paper and thrust it into his pocket. "that's fine," he said with evident relief, "and thank you for being willing to take me seriously. perhaps some day i can explain everything to you; i might even be able to reciprocate your kindness." atherton smiled. "you can reciprocate right now, if you'd like to," he responded. "i'd like to ask you just one question. is miss hamilton engaged to be married, or anything like that?" bellingham stared; then smiled in his turn. "so that's it," he rejoined. "well, now the chauffeur business becomes clear. and i'm glad that i may relieve your mind. no, there have been plenty of applicants, but i don't think the right one has yet appeared. i believe she is still heart whole and fancy free." atherton heaved a sigh of relief. "i'm glad to hear that," he answered, and unable to remain quiet, he leaped to his feet, and in his turn began to pace the room. "bellingham!" he cried, "she is--she is--" but the words would not come, and his very silence bore witness to the fervor of his love. bellingham, in spite of his worries and anxieties, threw back his head and laughed aloud. "my dear fellow!" he cried, "you're certainly hard hit. but let me tell you this. i've known miss hamilton for three years, and i can testify that no finer girl ever lived. i wish you luck, atherton, although i must say that just at present i should think you were laboring under quite a handicap." at the thought of his poverty, atherton's face fell, but the next moment he regained his confidence. "a handicap," he retorted, "makes a fellow do his best. if i hadn't lost my money, i should never have met miss hamilton; and by jove, bellingham, it's worth the price. i don't regret it." at this reasoning, the secretary smiled, but he answered kindly, "well, i think you deserve to succeed. but i'll leave you now, for it's late, and you must be tired." they parted at the door, and atherton, left alone, began slowly to disrobe, reflecting earnestly upon the events of the last twelve hours. "some day," was his conclusion. "some hectic day." and at the thought of his friends and the meeting in the restaurant, he added, half aloud, "i'll have to admit that blagden is a wonder. 'adventure' is certainly right." chapter xi a fresh start "but i shouldn't think," said helen, "that you would be satisfied to remain a chauffeur. there's no future in it; it's only rather an easy way of earning a living." atherton was silent. he had risen early and thoroughly overhauled his engine, and on his appearance at the house had discovered, to his delight, that helen had decided to accompany her father on his trip to town. they had left mr. hamilton at his office, and after making some purchases in the shopping district, helen had taken her place beside him on the front seat of the car, and they had started for home. quite evidently, thought atherton, feminine curiosity was still unsatisfied. she had begun, with the elaborate and obvious artifice of the sex, to talk on general subjects, gradually, however, narrowing the scope of the conversation until it had centered upon atherton himself. but while, on the one hand, she had the advantage, by thus taking the offensive, of being able to direct the talk as she pleased, atherton, on the other, through his inferior social position and through the necessity of managing the car, was able to present a strong defence, and contrived, by answering her queries either in monosyllables or with evasion, to leave her as much in the dark as ever. to this course he had steadily adhered, for while he had no real objection to telling her the true state of affairs, yet he feared that if he did so she might repeat the story to her father, and that marshall hamilton might regard his past with disfavor and forthwith give him his discharge. and this was the last thing atherton desired, for with the coming of morning he had grown each moment more eager to retain his "job." in the first place, after his long sojourn in the city, his surroundings themselves delighted him. the song of birds which had awakened him, the fresh, pure air, the radiant sunlight, the soft green of the fields, all the sights and sounds of the country seemed to refresh and reinvigorate him. then, too, there was his acquaintance with bellingham, and a natural curiosity regarding the mystery which surrounded the secretary's actions and the strange requests which he had made. and finally there was the novelty of the whole situation; the charm of feeling himself disguised, of playing a part, put him on his mettle to do it well, and the ordeal of breakfast below stairs, with the august martin presiding at the head of the table had kept him on the alert in his anxiety neither to overdo nor underdo the role of chauffeur. there was distinctly a spice of excitement about the whole affair; he was still young enough to enjoy it as a "lark." a pretty housemaid had made admiring eyes at him; less pleasantly, he had imagined that once or twice he had detected jenkins, the new second man, eyeing him with concealed but deliberate scrutiny. on the whole, it seemed to him that he had acquitted himself well, and thus he still had courage, even with so charming a cross-examiner, to continue to enact the part of atherton the self-satisfied chauffeur, and not of atherton the gentleman in adversity. and accordingly, after thoughtful consideration of her remark, he answered perversely, "well, miss, there's many advantages to a chauffeur's job. it's apt to be steady, and it's considered very genteel, miss; very genteel, indeed." the girl's expression, he thought, showed disappointment at his reply, but before she could answer they swept around a turn in the winding road, and the beauty of the scene before them was sufficient to make them, for the moment, oblivious of all else. a broad blue stream of troubled water, fed by many a clear and sparkling mountain brook, rushed headlong down the valley, its whirling eddies gleaming with the silver of dashing spray and the gold of dancing sunbeams. above the bridge which lay in their path the river was wide and comparatively shallow, but below the bridge the banks narrowed sharply; the water deepened; and a couple of hundred yards further down went roaring and booming over the falls which furnished power for the mill whose machinery hummed and whirred beside the eddies of the foam-flecked pool. and to complete the picture's charm, in the middle of the bridge a boy leaned against the railing, casting his line into the stream below, while by his side two little girls romped and played with a half-grown puppy of some nondescript breed which wriggled and leaped and whirled hither and thither, in pure delight at being alive to enjoy the wonders of such a delightful and interesting world. to avoid all chances of injury, atherton brought the car down to a snail's pace, and thus they crossed the bridge in safety, but as the wheels of the motor struck the road upon the further side he heard behind him a sharp and terrified yelp from the dog, followed almost simultaneously by a shrill cry of anguish from his playmates. instantly atherton's hand was on the brake; the car jerked jarringly to a standstill; and in another second he had leaped out and had regained the middle of the bridge. what had happened was only too evident. the puppy, in the course of his mad gyrations, had approached too nearly the edge of the bridge, had lost his balance, fallen, and was now being swept rapidly away down stream. for the little girls, it was plain that the end of their world had come; after their first instinctive cry, they stood motionless, with parted lips, their faces white and rigid with grief and terror. there was no time for reasoning or for counting the cost; no time for anything but instant action; and with the speed of lightning atherton stripped off his coat, poised for an infinitesimal moment, and then plunged, head foremost, into the flood. the impetus of his dive carried him under, but as he came to the surface and shook the water from his eyes he saw that his aim had been true, for the puppy was only a few feet away from him, its head just visible above the rush of the waves, as it battled valiantly, but vainly, for its life. a couple of quick strokes and atherton had grasped it with his left hand, and thanking fortune that he could use the english side stroke, he struck out as best he could with his unencumbered arm. nor did he save his strength, since a quick glance above and below showed him that his task would be no easy one, for the speed of the current was tremendous, and already the bridge seemed far away, and the brink of the falls loomed ominously near. yet on the other hand the stream was narrow, and once freed from the burden of the dog, he could have reached the shore in a dozen powerful strokes. but as it was, with his left arm useless, it was hard to keep his head and shoulders clear of the water, and half blinded, he struggled on, never dreaming of releasing his hold upon the puppy, but fully conscious that at best it was going to be a case of touch and go. the seconds passed, the roar below him grew louder, and at length, taking time for one quick glance, he saw that the falls were less than fifty feet away, and that just at their brink, before the downward rush of the river began, a jagged rock jutted out from the shore into the stream. here, then, was his chance, though but a slim one, for swimming is one of the most taxing exercises in the world, and his long hours beside the ticker had softened him and relaxed his muscles so that now, just when he needed it most, his lack of condition told upon him and began steadily to wear him down. and thus, summoning every remaining ounce of energy, he lashed through the water until as though through a mist he saw the rock come into view just below him. one stroke more and it was abreast--the boom of the falls deafened him--he choked, gasped--now his moment had come--he reached desperately for the rock, grasped it only to have his clutch torn loose--he had missed it, his chance was gone--he had lost his fight-- down the bank flashed headlong a gleam of white; the girl's lithe form was thrown prostrate upon the rock; her arm leaped out, her hand caught his, and she braced herself, every muscle stiffening under the strain; then slowly, inch by inch conquering the force of the current, she drew man and dog to safety, and a moment later bent over them as they lay prone upon the bank. atherton's eyes were closed; his breath came in quick, uneven gasps. "are you all right?" she cried, and although he made no direct reply, he contrived a vague gesture toward the draggled ball of yellow fur at his side. "look after--pup," he managed to articulate, and was satisfied to lie still, while the sunshine whirled dazzlingly about him, and the baffled river roared past at his feet. but the dog needed little help. nervous shock--if puppies are subject to nervous shocks--seemed to be all that ailed him, and presently he sat up, very moist and somewhat dazed, to greet the children who now came tearing down the bank, their grief changed suddenly to wild delight. for the little girls, the dog was all that mattered; and gathering him, all dripping as he was, into their arms, they loaded him with caresses and endearments, and without a thought of atherton, bore him away toward home. but the boy, old enough to be a hero worshipper, lingered to gaze admiringly as atherton at length sat up and began to wring the water from his clothes. "say, mister," he volunteered, "you done that slick," and abashed by the sound of his own voice, hastily departed to see that the incident was adequately described at the farmhouse. and thus helen and atherton were left alone. little by little, atherton's composure returned. the world ceased revolving; his heart beats steadied; and immediately he was admiringly conscious of the girl's courage and skill. so that presently, forgetting for the moment his efforts at disguise, he exclaimed with all sincerity, "i don't see how you did it! there's no doubt you saved my life!" but the girl was evidently not thinking of her own share in the rescue. "if i did," she answered, "i am glad. but you were very brave. it was a great risk to take for a dog." "well, i always liked dogs," he pleaded in extenuation, "and he was a cunning little rascal, too. he looked so tiny and helpless down there in the water; it didn't really seem quite fair." there was silence. for atherton, the world had suddenly taken on new and brighter colors, for the girl's expression plainly showed her admiration for his act. and at length, summoning all his courage, he asked, "if i should ask you a truthful question, would you give me a truthful answer?" far down in the depths of her eyes there gleamed a sparkle of merriment, but otherwise her face was quite grave as she responded, "of course." and with the slightest possible accent upon the pronoun, she added, "_i_ am always truthful." but he did not choose to notice the implication. "then," he asked, "when you saw me last night, did you think i appeared to be an ordinary, everyday chauffeur, or did you notice any signs of--what shall i call it--of a gentleman in reduced circumstances?" "as for reduced circumstances," she answered promptly, "i never gave that a thought, but as for thinking you were a gentleman, yes, that certainly occurred to me. and really, mr. atherton--" again, though ever so slightly, she stressed the "mr."--"i fear that the theatre isn't your vocation. your conception--that is the word, isn't it--your conception of the chauffeur's part is very crude indeed. it is a quite frightful combination of a stage englishman and a vaudeville butler." his face fell. "now isn't that too bad!" he exclaimed ruefully, "and i thought i was doing it so well. i am terribly discouraged." "oh, but you needn't be," she responded. "to be an actor is a fine thing, but there are other things even better. for instance, to be a life-saver is infinitely nobler." she spoke between jest and earnest, and atherton, for the first time since his ducking, laughed. "considering the size of the pup," he answered, "the title is far too grand. but i'll accept it, just the same, to save my pride. and if you don't mind, i should like to explain this business of the chauffeur," and very briefly, and without the mentioning of names, he ran over the adventures and misadventures of the preceding day. "and so," he concluded, "you can see that i've made rather a mess of things. but i wish--i'd like to--" he began to flounder helplessly, then got himself once more in hand, and went on steadily, "you'll think i'm an awful bounder for saying this, but i'll probably never have another chance, and coming so near to the edge of things as i did just now seems to make life a lot more real. i want to say just this; that i admire you tremendously, and i wish i'd had the good luck to meet you before i made ducks and drakes of all my prospects in life." and now, having had his say, he was suddenly amazed at his own temerity, and did not dare look at her until at length, as she remained silent, he ventured to steal a glance at her face, and was relieved to discover that she did not appear to be displeased. she was gazing straight before her into the whirling eddies of the river, and presently she turned her head and answered him, and as she did so he was struck afresh by the simple charm and directness of her manner. "if you admire me," she said, "i am very glad, and i assure you it is quite mutual. i like a man to be brave, and even more, i think, i like him to be kind. and as for your misfortunes, i don't think you should regret them. you see, i know something about stocks, and the market--my father and i have always been great pals--and i'm sure the game isn't worth the candle. i'm sure that every man who possibly can should be doing some hard, honest work--work that will somehow count--and stock gambling most emphatically doesn't count. so i believe your losses are a blessing in disguise." he knew that she spoke the truth, and hastened to acknowledge it. "you are quite right," he admitted, "but it's sometimes hard to live down a reckless past. i should like nothing so much as a fresh start, but can i get it? i don't think it will be easy." she meditated. "the question is," she said slowly, "what can you do best?" and with a gleam of mischief, she added, "we'll omit the stage, but all the rest of the world remains." he smiled a trifle grimly. "i'm badly equipped, i know," he responded. "the usual college education, and that is about all. but i am a fair mechanic. motors especially. i've always loved them, and sometimes i can make them do things that other people can't. i believe, if i could get a chance in the automobile business, i could make good." she thought again. "i see a way," she said at length. "my father, as you perhaps know, is a man of wide interests. among other things, he and his friends have just taken over two or three big motor companies, and are going to consolidate them. i'll arrange an interview for to-night; you can tell father your story, and perhaps he'll help you. at any rate, i'll tell him what you did this morning; that ought to show him that you have courage, and that you know how to make up your mind." atherton stared. there was a business-like directness about her which made him realize that she was a true daughter of marshall hamilton. "you're very good," he answered gratefully. "i'd like nothing better than a chance like that." "i'm happy to help," she said, and as she rose to her feet, she added, "and now, if you've recovered, we must be going. i've a luncheon engagement that i mustn't miss." he jumped up at once, his knees still a bit unsteady, but his heart as light as a feather, and feeling, as they made their way back toward the motor, that the falling of the dog into the water had sufficed to change the whole course of his fortunes. that night, at eight o'clock, he was received in marshall hamilton's study, and for twenty minutes was subjected to a rapid fire of questions, searching but not unfriendly, and aimed with a skill that made atherton understand and appreciate why his employer was a successful man. to the matter of his stock losses mr. hamilton came back more than once, but apparently he was willing to forgive this indiscretion, for at the end of their talk it was arranged that atherton should continue as chauffeur until monday night, and should then be given a chance in one of the factories of the new company to see whether he could reascend the ladder from which he had been so rudely displaced. so his opportunity had come to him, and as he left the house and made his way back to the stables, bright visions of the future filled his brain, and he dreamed over and over again, as young men have dreamed since the beginning of time, dreams of youth, dreams of fame, and above all else, dreams of love. chapter xii the flight of bellingham on the narrow balcony outside his room atherton sat alone in the darkness, looking forth upon the splendor of the night. above him stretched the velvet blackness of the heavens, jewelled with bright and luminous stars; from the distant woodland sounded, in ceaseless iteration, the music of the whippoorwills; while from the meadows the south wind, bearing the fragrance of the fields, stirred the ivy on the stable walls and murmured nocturnal melody among the branches of the slumbering pines. beauty everywhere, on earth and in sky; beauty, it seemed to atherton, in perfect unison with the thoughts which filled his brain. "ye shall be born again." the old biblical phrase, long forgotten, echoed and re-echoed in his mind. and in his case he knew that it was true; that the events of the last three days had altered the whole current of his being. already the old life--the feverish hours around the ticker, the crowd of gamblers, the close, stale air of the customers' room, the glare and dazzle of the lights--all of these things seemed part and parcel of another world. now they were gone, and gone, too, was that horrible concentration on points and fractions; quarters and eighths; to atherton, gazing upon the calm and silent glory of the night, it seemed incredible that he could ever have lived through times like these. midway in his mind, between that past hell and this present heaven, lay the memory of his meeting with blagden and with mills. and once again, as he recalled that evening, it seemed to him impossible that he could have been a party to the compact they had made. like a drunkard only half sobered after a debauch, he knew now that although he had not realized it he had still been under the spell of the market, a beaten gambler, yet in the grip of the lure and lust of the game. yet his agreement caused him no real uneasiness, for though at the time blagden's magnetism and his ready eloquence had made all that he had said seem plausible and sane, now, viewed from this distance, the idea of three young men, without money and without influence, solemnly banding together to defy the world, appeared quite childish and absurd. and yet, so far as he was concerned, he was compelled to admit that in one particular blagden's judgment had certainly been correct; a true adventure had awaited him. how, he wondered, had mills and blagden fared. it was difficult to imagine tubby in any very melodramatic role, but blagden, after his meeting with his fair acquaintance, seemed destined inevitably to encounter some sort of romance or intrigue. and as atherton thought of the woman at the café, with her splendid beauty so flauntingly for sale, a sudden sequence of comparisons and contrasts flashed through his mind. there was the life of the ticker, feverish, fascinating, fruitless, ringing empty and hollow when set over against the sane and wholesome life of the man who works for his livelihood. and in like manner there was this traffic and barter of illicit love, morbid, exotic, supersensual, paling to quivering shame when compared with true love, something so earthly and yet so celestial, so passionate and yet so ethereal, so bewildering and so enthralling that it would not let him sleep, but kept him here in the darkness, while the clocks struck twelve, and half-past, and one-- among the shadows surrounding the house occurred a subtle transformation--a change half sound, half motion, and so faint and evanescent that atherton, still partly in dreamland and only semi-conscious of the real world about him, regarded it incuriously, oblivious of its real significance. but an instant later he became thoroughly awakened as he saw one of the shadows detach itself from the rest and begin to move, cautiously and without noise, in the direction of the stable. atherton looked on with interest. "now who the dickens," he wondered, "can that be? and what in the world is he after? this is a cheerful hour for a man to be taking a walk for his health." the general attitude of the figure, indeed, suggested secrecy, if not something still more sinister. slowly and warily it advanced, but the stable was evidently not its destination, for as it passed the huge pine in front of the house it approached it, little by little, until at last the shadow of this nocturnal prowler became lost and merged in the lower branches of the tree. at once atherton's curiosity increased. "i'd better have a look at this," he decided, and stepping into his room, he slipped his revolver into his pocket, passed quietly down the stairs and began making his way toward the tree. at the edge of its lower branches, which swept the ground, he paused to listen, and heard above him faint sounds which seemed to indicate that this midnight marauder was ascending the tree. completely mystified, he dropped on hands and knees, and as he crawled inward, an occasional descending branch or bit of bark made it evident that his supposition was correct. atherton's wonderment increased. "must be a lunatic," was his first thought, but this seemed scarcely possible. then why, he reflected, should a person wish to climb a tree at this time of night? to signal? for what purpose, and to whom? to keep some kind of a watch, or lookout? this seemed more likely. could the man be a burglar, with a confederate working in the house? "if i go up after him," he thought, "he'll surely hear or see me. and if i hail him when he comes down, i'll probably get into trouble right away. if he _is_ a burglar, he's doubtless a good shot and a quick one, too. i think i'll play this safe." and climbing up some eight or ten feet from the ground, he found a place where two huge limbs grew close together, and working out as far as possible from the trunk of the tree, he stretched himself out at full length and waited. occasional faint sounds reached him from above and presently the figure again descended, passing so near him that even in the darkness atherton gained the impression that the man was of slender stature, somehow suggesting vaguely the identity of martin's new assistant. waiting until it seemed safe, atherton slipped down to the ground in his turn and reached the circumference of the branches just in time to see the shadow once more disappear upon the veranda. presumptively, then, the man was not a burglar, but an inmate of the house. but for what purpose had he climbed the tree? "i believe," concluded atherton, "that i'll go up myself. must be a bully view, if nothing else." accordingly, he began his ascent, memories of similar climbs in boyhood coming vividly to mind as he mounted higher and higher. the first part of his journey was made in darkness so profound that there was no possible chance for observation, but when he reached a height about two-thirds of the way to the top the branches began to shorten rapidly so that presently he found that he could command a view of the stable upon one hand and of the house on the other. the stable was in total darkness, but when he turned his attention to the house he at once discovered that one window was brightly lighted and his heart quickened at the sight, for there was now at least a possible explanation of the mystery. who's room was it, he asked himself, and although totally unfamiliar with the interior arrangement of the house, he felt that considering the secretary's story everything pointed to bellingham as its occupant. again he started upward, but it now became a question whether or not he could obtain a glimpse of the room, for he had reached an altitude where the trunk of the pine had decreased dangerously in size, so that every puff of wind swayed him giddily to and fro. undoubtedly, his predecessor's lighter weight had been an advantage, but atherton's curiosity was thoroughly aroused and setting his teeth he advanced foot by foot until at length, with one arm clasped tightly around the trunk of the pine, he had gained a height whence he could view, through the open window, the interior of the room. as he had expected, it was bellingham's apartment. the secretary, a green shade over his eyes, sat at his desk, working with concentrated absorption upon the papers before him. to his right and left were scattered about the room what at first appeared to be streamers of white ribbon, but which atherton presently recognized as the paper "tape" which supplies the tickers and upon which are recorded the daily transactions of the exchange. "a chart fiend," thought atherton to himself, "working in secret, as they always do. i wonder, though, why anyone should be spying on him; he can't be harming anybody but himself. i wonder if it's possible--" but at this point a gust of wind, unusually severe, interrupted his reflections, swinging him back and forth so dizzily that when it had subsided he was glad enough to begin his descent from his airy altitude. once safely back upon the ground, he paused to think. his first impulse was to return to his room and wait until morning before informing bellingham of what had occurred. but on second thought various circumstances seemed to combine to render haste imperative. for one thing, there was the manner in which the secretary had acted; for another, there was the unmistakeable earnestness of his appeal; and to lend color to his fears there was this singular nocturnal observation of his labors. surely, no ordinary servant would have had the wish, the courage or the skill to make this dangerous ascent, and in addition to this there was the added fact that this arboreal spy was in the employ of marshall hamilton, one of the financial leaders of new york. all in all, the matter assumed serious proportions. but how, at this hour of the morning, was he to make his way to bellingham's room? doors and windows were locked; no water pipe or sturdy vine adorned the walls. "a bow and arrow," he thought to himself, "might do the trick." and although such a weapon was not available, the idea suggested another, and making his way back to the stable, he unearthed, in the loft adjoining his room, an old discarded tennis set, and abstracting three of the balls, returned to his room, slit them with a knife, and hastily penned three notes, "man has been watching you from top of pine tree. if you leave, meet me at address given to-morrow night, eight o'clock." then, inserting one of these, with a corner projecting, in each of his missiles, he once more retraced his steps toward the house. if possible, he would have preferred to make his attempt from the ground, but the height of bellingham's room made the angle so difficult that he wisely decided there would be no use in attempting this method of communication. "i might shoot away all night," he reflected, "and never hit the window at all. i'll have to take another climb." and accordingly, travelling with the added speed acquired by familiarity with his surroundings, he soon regained the top of the pine. to his relief, the window was still open, and the secretary was still pursuing his labors with undiminished ardor. "this," thought atherton, "is the time to 'groove' one," and taking one of the balls from his pocket, he waited for a lull in the wind, and calculating, as well as he could, the required elevation, he let fly with so good an aim that the ball struck fairly on the window ledge, bounced over and disappeared within the room. immediately atherton saw the secretary start, look around him with an expression of amazement, and then rise hastily from his seat. a few moments later he reappeared at the window, gazing forth in the direction of the pine tree with every evidence of terror and consternation; then abruptly closed the window and lowered the shade. for an instant atherton could see him moving hurriedly about the room; then the light was suddenly extinguished, bellingham's apartment was engulfed in the black bulk of the house; and atherton, feeling that he had done everything in his power, again descended and made his way to his room, wondering greatly what would be the outcome of the night's events. chapter xiii the great secret an unexpected trip in the motor had delayed atherton's departure for town, and it was after nine o'clock when he ran quickly up the stairs which led to blagden's room, confidently expecting to find bellingham there before him. the morning had dawned, revealing no trace of the secretary, and atherton had taken advantage of an errand in the village to telephone blagden to be on the lookout for the fugitive in the neighborhood of eight o'clock. but now, to his disappointment, he entered the room to find blagden and mills alone, blagden lying on the couch, eyes half closed, pipe in mouth, mills sprawling in the easy chair, extracting minor chords of unspeakable melancholy from blagden's guitar. both were clearly bored, and glad of a chance to vent their indignation upon atherton. "you're an idiot of a fellow," observed blagden. "where's this friend of yours? we've been here since seven o'clock." "yes," added mills. "hurried our dinner, too. worst thing in the world for a man. we thought from your telephoning that it must be important." atherton, weary from loss of sleep, dropped into a chair. "well, i imagine it is important," he rejoined. "he'll be here, i'm sure. unless--" he added thoughtfully, "something may have happened to him. i shouldn't be greatly surprised if that was the trouble. but you fellows needn't make such a row about it. it hasn't done you any harm. we were supposed to meet to-night anyway." mills laid aside the guitar. "that's right," he assented, "this was to be the experience meeting. and as you are the originator of the whole thing, blagden, you'd better begin. how did you get along with the lovely lady? was it a real adventure?" blagden puffed thoughtfully at his pipe. "yes," he at length replied, "it surely was. the lovely lady is interested in stocks and she has a--what is the technical word in such cases--friend, isn't it? gentleman friend? yes, that's it. she has a gentleman friend who gives her tips on the market and--" he paused dramatically--"whose tips are always right. she never loses, and _always_ wins." both of his hearers laughed. "you mentioned the 'arabian nights' that evening in the café," scoffed mills. and atherton added, "that's just like a woman. why did she pick out the one impossible story in the world? anything else i'd have believed, out of compliment to her good looks. but a friend who beats the stock market. never. that's incredible." "yes," blagden admitted, "on general principles, i'd agree with you. and yet i must say that her story was most convincing. i saw the house where she lives; saw the tickers, large as life, installed by her friend; saw her very dainty little account book, with its record of six months' trading in cotton, grain and stocks, and with every transaction showing its profit--a clean slate." there followed silence. then atherton asked, still unbelievingly, "but why does she confide in you? if she's got such a good thing--the tips, i mean, not the gentleman friend--why isn't she satisfied? why does she tell _you_ her troubles?" mills laughed. "it's his personal charm," he volunteered. "he always scores with the ladies. they'll tell him anything." "oh, shut up, tubby," blagden retorted, "this is a serious matter." and then to atherton, "the answer is as old as the time of bluebeard, as old as eve and the serpent. curiosity, that is the trouble with my charming friend. it seems that she's not satisfied merely to make money; it's the secret of making it she's after. and her benefactor won't tell it to her. he lets her play with the market as a child would play with a toy, and that's all." "but how does she know," queried mills, "that there is any secret? it may be nothing but luck." "yes, that's possible," admitted blagden, "but according to our experience, it's very unlikely. no man's luck would hold in all three markets for six months without a break. besides, she's intelligent enough, and she's convinced that he plays on a regular system. her theory is that there's some kind of inside manipulation by which stocks are put up at certain hours of the day and put down at others; frequently, she says, he consults his watch before making a trade. rather an ingenious idea." "humph," ejaculated mills, "i should say it was. sounds pretty reasonable to me. first time i ever heard of it." "well," demurred blagden, "it's barely possible, but i doubt it. in fact, i don't take the whole story very seriously. and yet--it's curious. but in any event, i fear i didn't help her much. if there is a secret, it's not an easy one to solve." he was silent. "anything else?" asked atherton, after a pause. "no," blagden answered, "that's the whole story. and now you fellows can tell your troubles. how about you, tubby? any adventure?" mills chuckled at the remembrance. "oh, rather," he replied. "i too met a lady, only she wasn't quite in a class with yours. she was a pretty little minx, though, at that, and after she had decoyed me to her home with a most pathetic story, she and her running mate, a most villainous looking individual named stoat, tried to hold me up with the old badger game." "good lord!" cried blagden, "that wasn't any joke, tubby. it may be an old game, but it's as dangerous as it ever was. weren't you scared?" "sure was," admitted mills. "couldn't have been scareder, but nature having blessed me with a placid exterior, i managed to get by without their knowing it. and finally we wound up by becoming great pals; i never made such a hit in my life. in fact, good old stoat, who appears to be quite a noted criminal, offered me a partnership on the spot. as near as i could make it out, he was drawn to me by my appearance of respectability. it sounds conceited of me to repeat it, but he assured me that with the proper training, i had all the qualifications for a most successful criminal." atherton laughed. "some compliment," he commented dryly, but blagden heard the news with perfect seriousness. "i believe he was right, tubby," he cried. "if he seemed to be a pretty smooth proposition, why don't you go in with him? we might get hold of something big, and without any risk to it, either." "oh, thanks," retorted mills with unwonted asperity, "why don't you try it yourself? i'll introduce you with pleasure. but none of the jesse james stuff for me, please. jails and electric chairs never appealed to me in the least." blagden grinned. "oh, i haven't your peculiar beauty of face and form," he rejoined. "i'm sure i wouldn't suit your friend. you're missing a great chance, tubby; you'd better reconsider." "not on your life," answered mills with conviction, "but if you ever require the services of a first-class robber, second-story man and i dare say murderer, why he kindly gave me his name and address, and i shall be delighted to bring two such congenial spirits together." "all right; i'll remember it," said blagden. then, turning to atherton, he asked, "how about you? anything doing?" atherton smiled. "why," he responded apologetically, "after all this spotlight melodrama of yours and tubby's, i'm afraid my experience will sound pretty tame. in fact, when you learn the truth, you may expel me from the united order of gentlemen adventurers. it's a shameful confession, but i'm working for my living. i am--" he paused a moment properly to emphasize the announcement--"a chauffeur." both his hearers shouted with laughter. "oh, fine!" cried blagden, "that's the best yet. go on. give us the details. i'll bet it's a lady you're working for. some rich old spinster, i hope. she might adopt you." "no," atherton answered, "no lady in this at all. but i'm working for a man you may have heard of. his name is marshall hamilton." his hearers suddenly sobered. "the deuce!" cried mills, and blagden added, "well, there's a chance to get some real tips on the market. perhaps you have some already." "no, no such luck," responded atherton, "but i have come across something curious connected with the stock market. mr. hamilton has a secretary named bellingham, a very decent chap indeed--he's the one i telephoned you about this morning. now bellingham, it appears, is a chart fiend, or something of that sort; he has the tape sent to him and works at it nights, puzzling out some sort of a system of his own. but the singular thing is that he's been mortally afraid of being detected; we got chummy the first night i met him, and he told me all his fears, and asked me for some safe address where he might go if he had to leave on the jump. and last night the very thing happened that he'd been dreading; some one was spying on him; i got wind of it and let him know, and advised him to come here to-night. so with the dawning of the morning, friend bellingham had disappeared, and that is why i expect him here." there was a moment's silence. then blagden cried, triumphantly, "didn't i tell you fellows the truth? didn't i say that we were stagnating over the tickers when there was plenty of adventure left in the world if we only had enterprise enough to go out and look for it? and just see what we've discovered in the first few days." "yes, that's true," agreed atherton. "we'll give you credit for that. but don't forget that there's something else you haven't proved to us. you claimed that somehow or other we were going to be able to combine our experiences to our mutual advantage, and i can't quite see how we're going to do it. you have made the acquaintance of a lady who knows how to beat the stock market; mills knows an expert criminal; and i am driving a car. but how is all this going to make us rich? explain that to us, blagden." "oh, well," blagden retorted, "what do you expect? that fortunes are made over night? of course not. give us a chance. we'll accumulate more knowledge as we go along, and presently we'll strike a winning combination. just consider what's happened to us already. why, if we can keep up this gait, we'll need a card catalogue to keep track of our adventures. you're unreasonable, atherton; we've made a start, and that's the principal thing." as he finished speaking, the bell, as if to punctuate his words, rang sharply. atherton leaped to his feet. "bellingham," he cried, and strode hastily to the tube. "who is it?" he asked, and as he had expected, the answer came back in low but hurried tones. "it's i; bellingham. let me in, atherton, quick!" atherton pressed the button, threw open the door, and an instant later there came the sound of rapid footsteps on the stairs, and bellingham came into the room, pausing on the threshold to close and lock the door behind him, as though fearing pursuit. the secretary's appearance had changed greatly for the worse. his face was pale; dark circles ringed his eyes, and acknowledging atherton's introductions to the others with a nod, he sank heavily into a chair with the air of a man thoroughly exhausted and spent. blagden eyed him keenly for a moment, then rose, walked over to the sideboard, poured some brandy into a glass, and handed it to him. bellingham drained the glass, and almost immediately the red began to creep back into his cheeks. "thanks," he said, "that's better," and turning to atherton he added, "i've had an awful day. i've been shadowed; i'm sure of it. but i managed to give them the slip about an hour ago. i wanted to see you before i leave." atherton did not know how to interpret his words. "before you leave?" he echoed. "have you made up your mind to that?" "yes," bellingham answered, "it's the only thing i can do. i've taken a risk. i've played for big stakes--and lost. if i stay here, i won't live another twenty-four hours. i've booked passage for south america; the steamer sails at seven o'clock to-morrow morning; and i shan't feel easy until i've gone aboard to-night and locked my stateroom door behind me. then i believe i have a chance. but if i do get away safely, i owe my life to you, and i wanted to see you and tell you so." "but you shouldn't have risked it," cried atherton. "it wasn't worth while. i don't deserve any thanks, anyway; i acted on the impulse of the moment; that was all." bellingham gazed at him abstractedly, as if scarcely heeding his words. "time is short," he said, "and i've a good deal to say. we've got to think quick." then, with a glance at mills and blagden, he added, "i understand that you three fellows have pooled your fortunes. what i say to one, i can say to all." "that's correct," atherton assented, and the secretary continued, "then here's the story. by the merest accident, i've stumbled on a big secret, the biggest secret in the world. financially speaking, you can't overestimate its importance. if a man can solve it, he can make all the money he wants--nothing can stop him. but if it becomes known that he has solved it, or if he is detected in the attempt, he might as well have written his own death warrant. i want to do the right thing by you fellows; if you care to have me do it, i'll tell you what i know. or if, on the other hand, you don't feel like tempting fate, well and good; i dare say i'll only be doing you a bad turn by telling you. take your choice; i leave it to you to decide." blagden, whose eyes had never left the secretary's face, was the first to speak. "we'll take a chance," he answered coolly. "isn't that right, boys?" "sure thing," assented mills, but atherton did not immediately respond. three days ago, he would not have hesitated, but his meeting with helen hamilton had made all matters connected with money assume a secondary place, and life itself, with so much to live for, now seemed a possession too precious to be risked. yet it was difficult to take bellingham's words seriously; he must be exaggerating. and finally curiosity turned the scale, and he answered briefly, "all right; go ahead." bellingham leaned forward in his chair, his eyes bright, the liquor loosening his tongue. "then here is the story," he cried. "for years, every one has claimed that the stock market is an unbeatable game. man after man tries it; goes into it sanguine, confident; and emerges broken in purse and spirit. isn't that so?" there was a murmur of assent. "and why it is so," went on bellingham, "is a mystery. you can't say that all men are fools. they're not. men play the stock market who have succeeded brilliantly in other lines--men who have never made a failure in their lives--but the stock market beats them as it beats any novice. i think you'll bear me out in that." again his hearers signified assent, and bellingham, lowering his voice, continued, "then what is the answer? all my life i've lived in the atmosphere of the exchange; all my life i've heard the legends and the rumors that surround it; but never, until three days ago, have i even suspected the truth. there's no need for me to tell you how i came by this knowledge; it's enough for me to say that a paper, accidentally discovered, has so filled the gaps in what i knew before that now i can make something more than a guess at the real mystery of the stock exchange. and this is what i know. forty years ago, four men--the wealthiest, ablest and shrewdest men of their day--met together and founded the most wonderful secret order in the world. this was their plan--to form and perfect an organization so powerful that by means of it they could govern the course of the stock market--could actually raise or lower prices as they chose." blagden, who had been listening with constantly increasing attention, now broke in, more to himself than to the others, "just what i said. combination; cooperation; it's the only way." bellingham turned to him. "exactly!" he cried. "and what was the first requisite for their plan? money, of course; money unlimited; not money as we understand it, in hundreds and thousands, but money in millions, in tens of millions, in billions. and that is what these four men, with their resources and connections, were able to achieve. they labored until they had ready at their command what was practically an inexhaustible reservoir of gold. that was the first step. the next was to perfect the army of men who were to carry on this financial war. at its head were seven commanders-in-chief, the four i have mentioned, and besides them one in england and two on the continent. these were the true insiders, the sole possessors of the secret, sworn by the most solemn of oaths to guard it from all the world excepting themselves and their successors in office. they were the leaders, but under them were colonels and captains and privates in the ranks, each man of proved ability, and each with his special duty to perform. and thus, fully equipped with men and munitions, they were ready to take the field." mills had been gazing at him, wide-eyed, absorbed in the secretary's story. now he could contain himself no longer. "i don't care much," he cried, "for your comparison. you keep talking about a war. i should call it a slaughter. with most of the money in the world behind you, how can you help but lick the other fellow. war! do you talk about a war between a boa-constrictor and a rabbit?" "you're right," assented the secretary. "quite right. and i'll drop figures of speech altogether. when these men had everything in readiness, then began the cold-blooded, systematic despoiling of the people. for one thing, they had--and have--the finest publicity department in the world. the heads of it know all the weaknesses of human nature, know every detail of the psychology of the so-called average man. they know how to arouse his interest in the market, how to whet his appetite for speculation, how to get him to invest his money, and most important of all, once he has taken sides as a bear or a bull, they know how to publish the forecasts and the information that will make him stick to his position until they have extracted the last cent of the last dollar that he can afford to lose. that is what the publicity department can do, and aiding and abetting them at all times are the sleek and smiling brokers--financial courtezans--genial, jovial men, bidding you welcome to the warmth and light and luxury of their offices; joking with you, advising you, humoring your wild ideas and your crazy theories of speculation, gathering their commissions as their pay and knowing, in the bottom of what they call their hearts, that once you are in their clutches, you won't escape while you have a penny to your name. that is your average broker--a licensed thief, a man of ill-fame, a speculative prostitute." there followed momentary silence. then atherton remarked, "i don't doubt the truth of what you say. but admitting that it's so, still you haven't shown us why a man can't sometimes win." "but i have!" cried bellingham, "or if i haven't, it's because i haven't made myself clear. don't you understand? it's nothing more nor less than highway robbery. the insiders play against the public; the insiders with their eyes open, the public blindfolded. or, to vary the figure, the insiders hold their cards in their hands, while the public lay theirs face up on the table. there's only one result. it's open and shut--cut and dried. why, at any moment of the day these men have access to the books of any bank or any broker's office in america; they can tell, at a second's notice, just what proportion of the public is long of stocks and just what proportion is short. they know the name and trade and record of every speculator in the market; they know his resources, his commitments; and if they wish to 'get' a man, it is just like some millionaire strolling down with a net to his private fishpond, and picking out some particularly plump fish for his dinner. as a matter of fact, mighty few individuals are successful enough so that it is worth while to go after them, but if the insiders decide to do it, why--snap--and it's all over; not even a ripple comes to the surface. and if it's a pool they decide to swallow--some combination of foolish millionaires who have grown suddenly rich--then it becomes a very pretty game, like shooting or fishing or bull-fighting or any other so-called sport where the odds are all one way. it takes a little longer--the death struggle is more drawn out--sometimes a bubble or two does come to the surface--but the result is always the same. you must see it now; i'm sure you do. it is the absolute quintessence of simplicity." atherton sat silent for a moment; then, as the true significance of the secretary's story dawned upon him, he murmured to himself, slowly and with infinite meaning, "well, by _heck!_" bellingham glanced at his watch; then drew from his pocket a packet of papers and a sealed envelope, and handed them to atherton. "i can't stay much longer," he said, "but here is the proof of my story; the papers are the results of my experiments; the envelope contains the holy of holies, the key to the whole mystery. i can give you the gist of the matter now. the greatest achievement in their whole wonderful system is their method of communicating their plans. you can see how necessary it must be; they are dealing with a hysterical public, who in time of panic follow each other like sheep. therefore, when some unexpected event occurs--the northern pacific corner, war, disaster of any kind--if these men cannot consult together almost instantly, they may face ruin, even for individuals as powerful as themselves. how then will they communicate? by cable? telegraph? telephone? too cumbersome. too many people to handle the messages. simpler far a code, a cipher, so that what appears to be an ordinary transaction recorded on the tape becomes in reality a piece of information that shapes the destiny of the market, and of the thousands who vainly seek to fathom the secret of its ups and downs. to issue these is the special duty of one man. i know that all this is true, and i fear that they suspect that i possess this knowledge. in any event, the game is too big for me; i would rather be a live dog than a dead lion." he paused for a moment, but though the three faces bent on his were tense and rigid with excitement, no one spoke, and presently he continued, "but besides being their greatest strength, you can see how this wonderful system might be their greatest weakness as well. and when i say this, i refer to the possibility of the system's being discovered. now the originators of this plan were men of intelligence and ability; they must have seen this danger, and the necessity of safeguarding their secret in every possible way. and they did so. but fate is stronger than man, and through a trick of fate they have been found out." as he finished speaking, he rose from his seat. "i dare not stay longer," he said, "and for the sake of all three of you, i prefer not to go from this house directly into the street. isn't there some way, blagden, by which i could go along the roofs and down by some other exit?" "yes," blagden agreed, "we can do that." and with a handshake the secretary took his leave of mills and atherton, and followed blagden up the ladder, along the chimney tops, until an open skylight at the end of the block furnished them their opportunity, and at the foot of the stairs bellingham, after carefully reconnoitering, made ready to depart. "if it's necessary to see you again," whispered blagden, "what is your boat, and when does she sail?" "the _pernambuco_," bellingham answered. "she leaves at seven o'clock to-morrow morning. good-by and good luck." and the next instant he had slipped out into the street, and had disappeared from sight. chapter xiv a triple discovery blagden returned as he had come, quickly remounting the stairs of the lodging house, ascending the ladder and crossing the roofs, and at length, with a feeling of relief, clambered down into his own dwelling, and re-entered his apartment, to find mills and atherton seated at the table, busily examining the documents which bellingham had left behind him. "now then," said blagden brusquely, "leave those papers alone a minute; there's time enough for them later. but here's the question to settle first. we've been listening to the damndest yarn i ever heard in my life. and what i want to know is this. do you fellows believe it, or don't you?" "i don't," mills answered readily. "not for a minute. bellingham appeared to be a very decent chap, but i don't consider him sane. i think he's gone crazy over this thing. it's too tough a story to swallow." blagden smiled. "tubby," he rejoined, "you were born a doubter. you may suffer from other faults, but your imagination will never be your ruin; i'm sure of that. what do you say, atherton? do you believe it?" "yes, i do," atherton promptly rejoined. "you see, tubby," he added, turning to mills, "i've had the advantage of knowing bellingham before he knew he was being watched, and he was as sane a man then as you would wish to see. of course he's a nervous wreck now, but who wouldn't be? he must feel like a hare with the hounds after him. i hope he gets away all right." "oh, nonsense!" cried mills unbelievingly, "he'll get away. i don't believe he's being followed at all." "well, i do," atherton retorted. "you can bet that fellow who was after him was no ordinary detective, and if he had the enterprise to be climbing pine trees at two o'clock in the morning, to get the goods on bellingham, i don't believe he's going to let him escape if he can help it. what's your opinion?" he asked of blagden, who stood by the mantel piece, smoking furiously, his brow contracted as he pondered over the amazing story to which they had just been listening. blagden laid aside his pipe and began pacing up and down the room. "frankly, atherton," he confessed, "i'm puzzled. i'm half inclined to believe the whole thing is true; it would explain practically everything about the market which has perplexed us for so long. and yet it's such a romantic, impossible sort of a tale that i can't convince myself it's so; at least, not without further proof. but i'm sure of one thing; we ought to investigate with all the care in the world; it may be the opportunity of a lifetime. can you make anything out of his figures?" and he motioned toward the papers on the table. "not a great deal," atherton answered. "i should say he was still in the experimental stage; he's guessing at different theories, and then seeing how they fit the facts. but of course, unless you've got the whole code at your fingers' ends, you couldn't expect to follow the ups and downs of the tape intelligently. he has made a beginning; it remains for us to try to complete it." "and what was the other paper he spoke of?" asked blagden. "what did he call it? 'the holy of holies'?" atherton started to draw it from his pocket; then, with an apologetic half laugh, thrust it back again, walked to the door, and cautiously reconnoitered. but no one was in sight, and accordingly he rejoined his friends, again pulling the envelope from its resting place, while mills and blagden peered eagerly over his shoulder. the first envelope contained a second one; the second a third. "april fool," muttered mills. "i told you he was crazy," but was suddenly silent as atherton drew from the third envelope the paper, faded and yellow with age, which bellingham had found in the vault, and with it a typewritten copy, explaining its contents as far as the secretary had been able to decipher them. no faintest sound disturbed the stillness of the room as they read, and as they finished, they remained motionless, staring at each other, with all trace of levity or disbelief gone suddenly from their faces. then mills, like a man awakening from a trance, slowly passed his hand across his forehead. "he couldn't have faked that paper," he murmured. "that's the real thing." but the others scarcely heard him. "then it _is_ true," said atherton at length. "everything we've heard and guessed at, but never honestly believed. there is a 'money trust,' there _is_ a 'system.' good lord, it's like a dream!" "a nightmare," responded blagden grimly. "no wonder we couldn't win. and now let's take our time, and go over it again. i should say that 'holy of holies' was right; i believe this scrap of paper is just about the most important document in the world." side by side, they seated themselves at the table, and word by word began their study of the cryptic talisman. half way through atherton called a halt. "so far, so good," he observed. "as bellingham told us, it's the very height of simplicity. they feed the public with good news, bait them with bull tips, and then when a sufficient number have loaded up at the top, they break the market and incidentally break the fools who have been caught. then begins the campaign of bad news--famine, pestilence and sudden death--then arrive the bear tips, and when all the longs have been driven out and a new crop of suckers have gone short at the bottom, then comes the accumulation by the money gods and up goes the market for them to sell on to the next crop of idiots who will never buy except at the very top, after stocks have advanced from ten to twenty points. but all that doesn't help us much, unless we can tell what is the bottom and what is the top. what we want to know is about these signals. signals on the tape. what a wonderful scheme! when bellingham found this paper, he must have felt as if he had happened upon a ton of dynamite." "dynamite," said blagden, "is a very happy word. if we could prove the authenticity of this paper, we could just about blow this old country sky-high. we could close every stock exchange in america, and drive the money gods into exile for their health. oh, 'dynamite' is too mild a word; this would be a higher explosive than that." as he finished speaking, atherton was conscious of a sudden chill of dismay. rightly or wrongly, he had no desire to see harm befall helen hamilton's father, and was correspondingly relieved to hear mills exclaim, "yes, but we don't want to do anything like that. the only time to be reformers is when we've made all the money we can use. we want ours, blagden, so for heaven's sake don't think of blowing this thing until we've had a chance at it." blagden smiled at the stout man's earnestness. "oh, don't worry," he reassured him. "i was only emphasizing the importance of the paper. you are quite right, tubby; let the money gods live and wax fat. all we want is a few of the crumbs that fall from the master's table." "sure thing," atherton assented with relief, "we're all agreed about that. and now let's examine the rest of the paper. the signals themselves; that's what interests us." once more they bent to their task. "on the watch," read mills, "for these signals. now what is the sense in that? of course they would be on the watch for them. they would be fools not to." but suddenly blagden gave a cry of amazement, and his companions, gazing at him, saw his face go white, and then flush with crimson. he sprang to his feet. "i've got it," he exclaimed, half incoherent with excitement. "don't you see? _on the watch!_ it doesn't mean _be_ on the watch; it means the watch itself. it's the missing words that spoil the sense. it isn't a verb; it's a noun. _a_ watch. the watch a man carries in his pocket. that's where the key to the cipher is, and there couldn't be a better place. no one would suspect it, and it's always at hand. that's what the girl told me; don't you remember? always looking at his watch, when she spied upon him by the tickers. she is right. her friend is one of these men. just think of it. no wonder she always won. and see what it means for us. monte cristo wasn't in it. we've got a fortune in our grasp." he paused, his eyes gleaming, his whole face tense with excitement. then, going over to the sideboard, he poured for himself an even stiffer drink than he had prepared for bellingham, and hastily gulped it down. "i needed that," he said. "some excitement to-night. this is probably the wildest day of our bright young lives." atherton had remained seated, still intent upon the paper before him. "steady, blagden," he objected. "you're jumping at conclusions. this may be all coincidence. but your theory is ingenious. and if you _should_ be right--" he did not finish his sentence, letting his imagination dwell upon the possibilities of the future. "if i _should_ be right," echoed blagden reproachfully. "why good lord, man, of course i'm right. if tubby had doubted me, i could have forgiven him, but you ought to have the vision to piece the thing together. oh, god--" he flared forth again, "what a bully old world it is. checkered, but never dull. here we were, two days ago, busted like a flat tire, and now the lamp of aladdin awaits our touch. and all--" he added suddenly, "because we coöperated. i'd forgotten that in the excitement. i guess i'm the original little coöperator, all right. just think what's coming to us, boys. steam yachts, motors, women--" he smacked his lips, but mills, the practical, now questioned, "yes, but what about getting the watch of this eminent but erring financier? are you going up to him to ask the time of day, and then will you grab it and run? what's he going to be doing? naturally he's no spring chicken." "oh," blagden answered with confidence, "that's merely matter of detail. once we know who the man is, we'll get the watch. just look at our advantage. we know what he's got, and he doesn't know that we know. that gives us the whip hand, right away. as a matter of fact, i dare say the lady could help us." mills brightened. "that's a good idea," he agreed. "something like the panel game. i believe that would work." "but there's one thing," suggested atherton, "that we ought not to neglect. if bellingham intends to leave the country, never to return, we ought to be sure that we have everything he knows. let's go over these papers of his now, and make a list of anything we don't understand. we could see him in the morning and have a last word with him before he sails." "you're right," blagden cried, "but wait a minute first. there's something else i want to see about." he disappeared into his bedroom, from whence they presently heard the tinkle of his telephone. shortly he returned. "now then," he said briskly, "luck is still with us. i rang up the girl, pretending that i wanted to see her to-morrow evening, and she told me that she was engaged and that i must be sure and not come to her house. that, of course, means only one thing. you, atherton, meet me at hillcrest station to-morrow night at eight, and we'll do a little detective work. and you, tubby, get up at five thirty to-morrow morning and go over to the _pernambuco_ with a list of questions that we'll make out now. while everything is going our way, we'll lose no time." for an hour or more they worked, and finally disbanded, mills going to his room to set his alarm clock and then, his brain on fire with excitement, to toss restlessly about for the balance of the night, with a hundred wild dreams and visions disturbing his rest. with the first whirr of the alarm he was out of bed, and disposing of a cup of coffee and a roll, he sallied forth to obtain the final information from bellingham. the good weather of the day before had vanished; the morning was thick and foggy, and as he neared the wharves mills found himself inclined to shiver, half with the chill of the wind, half from the over-excitement of the preceding night. he found the vessel without trouble, a big, old-fashioned, somewhat dingy craft, and with an inquiry or two made his way readily enough to bellingham's cabin. his knock, however, brought no answer, and after a moment's hesitation he tried the door, found it unfastened, and walked in. the secretary's bag lay open on the table, its contents tossed about in confusion, and the secretary himself lay in his bunk, sound asleep. "tired out," thought mills, and crossing the cabin, he extended his hand to awaken bellingham, and in doing so inadvertently brushed with his fingers the cheek of the slumbering man. the flesh, to his touch, was cold as marble, and on the instant sudden dread gripped him by the throat as he nerved himself for the ordeal and slowly withdrew the bedclothes from bellingham's face. there followed a ghastly moment, and he found himself staggering back across the cabin, faint and sick with horror, and with blotches of crimson flashing and wheeling before his eyes. then, by a mighty effort recovering his control, he made his way, like a man in a dream, on deck, back to the gang-plank, and thus to the shore, thanking heaven for the pall of fog which still enshrouded land and sea. like a criminal, he crept back to his lodgings, and like some hunted fugitive, he kept all day to his rooms, a great dread in his heart as he pondered on the craft and power of these unseen foes against whom he and his friends had dared to wage unequal war. and thus the long day passed, dark and lowering, with occasional spurts of rain. but toward sunset the wind veered to the west, scattering the clouds across the sky, with gleams of sunshine filtering through the rifts, and by the time atherton and blagden met at the station, clear stars were shining overhead and a crescent moon gave promise of fair weather to come. "did you have any trouble getting away?" asked blagden, as they tramped up the narrow and deserted road. "no," atherton answered, "things have been quiet all day, and to-night mr. hamilton was called to the city on business, and fortunately for me he decided to go by train, so there was nothing to detain me. but i don't mind telling you, blagden," he added, "that i'm not a bit keen about this whole business. eavesdropping isn't a pleasant task, at best, and if by any chance we should be caught, it would be a humiliating experience." "no fear," blagden answered. "there's a hedge around the house thick enough to hide a regiment. we'll creep into it, one each side of the path which leads to the house, and there's an electric light across the street that ought to make it easy enough to get a look at our man. tracing him afterward may be a more difficult matter, but i don't think so. naturally, he won't be suspicious, and that is a point in our favor. here we are, now, right ahead. just before we reach the drive, you duck into the hedge, and i'll walk by and then do the same on the other side. between us, we'll get a glance at him, and follow him if we can." five minutes later, atherton was comfortably ensconced in his hiding place, and had settled down to what proved to be a tiresome vigil. ten o'clock came and went, half past ten, and then, at last, the sound of an opening door, a glimpse of a man and woman in the dimly lighted hall, a farewell embrace, the door closed and a man's figure came leisurely down the path. atherton, with beating heart, strained his eyes upon the spot where the man must pass. now the footsteps came nearer, and nearer still; now the man's figure was plainly visible in the radiance of the light; and all at once atherton was hardly able to repress a gasp of amazement and consternation. for the face of the man was one that he knew well. it was the face of marshall hamilton. chapter xv thrust and parry the atmosphere of blagden's room was tense with uncertainty. a storm seemed imminent; danger signals filled the air. blagden himself, the embodiment of nervous energy, paced continually to and fro; atherton sat at the table, mechanically tracing aimless figures on the pad before him; while mills, the taciturn and phlegmatic, instead of reclining, as usual, in the easy chair, sat bolt upright, balanced on its edge, his expression eloquent of anxiety. the temporary silence was broken explosively. "damnation, atherton," cried blagden, "can't you see that such a thing would never happen again in a million years. as a rule, i'm not religious, but i tell you this has made me believe that we're chosen as the instruments of providence. i believe there's a 'system' in heaven as well as on earth, and i believe that god almighty has picked us out to break the power of the money gods for the rest of time." atherton smiled, a little wearily. "when fate is on your side," he answered, "and you can see millions ahead of you, then it's an easy matter to believe in god." "but who wouldn't," blagden insisted. "less than a week ago three penniless adventurers meet in a café, and go blindly forth to seek adventure. each of them follows a separate strand of incident, which is apparently quite independent of the other two, until suddenly, like magic, the three strands meet and unite in one. why, we have the whole story now. even with what bellingham told us, we knew almost enough, and what we saw last night gives us the key to the whole affair. here's our man, our big market operator, carrying upon his person the ultimate cipher of the code. all we have to do is by hook or crook to gain possession of his watch, and we'll have the chance that will never come to three men again as long as the world lasts. so don't stand in the way, atherton; be a sport." "it's a simple matter," atherton replied, "to say, 'get possession of his watch,' but haven't you read stories of treasure chests guarded by some secret contrivance which meant death to those who tried to open them? that's the kind of thing we're up against. bellingham tried to solve the mystery, and bellingham is dead. and do you suppose for one instant that if his story is true--if these men have the power he says they have--that we are going to meddle with their secrets and escape unscathed? if you do think so, you were never more mistaken in your life. why, rather than go ahead as you want us to do, i would take my chance on walking into a powder factory, with a lighted pipe in my mouth and the wind blowing a gale." mills nodded solemnly. life to him was something precious; many delights lay before him through the placid years. "you're right, atherton," he agreed. "it's tremendously tempting, but this putting your head into the lion's jaws is a dangerous game; if he happens to close them, why--good-by." blagden, the dynamic, exploded again. "oh, you quitters!" he vociferated, "why do you stand in such awe of this gang. i tell you they're only human. the bigger they are, the harder they fall. under ordinary circumstances, i'll admit that we'd have no show. but see what fate has done for us. here is atherton, in the employ of marshall hamilton. here's mills, pals with the celebrated stoat, who claims to be the best little housebreaker in new york. what could be easier than for atherton to leave a window open, so that stoat could slip into the house, make his way into hamilton's bedroom, and get possession of the watch? easy? why, it would be child's play." "but that," objected mills, "would be only the beginning. even assuming that we got the watch, as soon as it was missed there would be the devil to pay. every speculator in the country would be a marked man. we might have the knowledge but would we dare to use it?" "tubby," retorted blagden savagely, "you make me tired. i've considered all the possibilities, and i've decided that there's just one way for us to succeed. stoat must get the watch, copy the cypher, and then return it again before it's missed. in that way we'll be doing no harm to anyone, and we'll be absolutely safe. nobody can have the slightest ground for suspicion." "oh, that's different," mills assented. "if we could do that, we'd be all right." but atherton promptly demurred. "blagden," he said firmly, "you've got to realize that my position in this whole affair has changed. i'm working for mr. hamilton; he has treated me well; and i can't help you out on any such plan as this. it wouldn't be the decent thing." "oh, decent be damned," rejoined blagden with heat. "you went in with us on this adventure scheme; we agreed to stick together; and now that our chance has really come, you refuse to take advantage of it. i don't consider, atherton, that you're playing square with us." atherton's eyes gleamed. "oh, come," he remonstrated, "i'd go slow with that kind of talk. we went into this together, as you say, but that doesn't mean that we're bound to stick through thick and thin, regardless of whatever circumstances may arise. what do you say, tubby? isn't that stretching things beyond all reason?" "oh, of course," mills agreed, "there's a limit somewhere. but i can't see why you should worry about marshall hamilton. apparently, he's nothing but a plain, ordinary robber; the only difference between him and other criminals is that he operates on a larger scale. i don't see where he comes in at all. and as blagden says, it isn't as though we were harming him. suppose we get what we're after. all we want is to be let alone until we've made our fortunes; then we can decide whether we dare expose the crowd or not. but for the present, no harm is coming to hamilton." "how do you know it isn't?" atherton insisted. "you're assuming that everything is to result as you plan it. but you can't tell. even for stoat, admitting that he's as skillful as we think he is, this is going to be a delicate job. suppose he makes his way successfully as far as hamilton's bedroom, and then suppose that hamilton awakens, that there's a fight, and that hamilton is killed. what are we then? murderers, aren't we? not legally, perhaps, but morally." "oh, rot!" cried blagden contemptuously, "that's not a fair way to argue. supposing--supposing--why, if you once begin, you can suppose anything you please. we've got to figure on probabilities, not possibilities. and tell me this, atherton. i don't admit for an instant that you are right, but assuming that you are--assuming the very worst that can happen--why are you so solicitous about marshall hamilton? what's his life to you? he is protected by respectability, and that's all. apart from that, he's a robber, a common plunderer; he's got your money and tubby's money and mine. he takes the risks of his profession; he can't complain. so i ask you again, why the devil are you so afraid of his being harmed?" atherton hesitated. naturally honest and straightforward, he knew perfectly well in his own mind what his real reasons were--that it was not so much consideration for his employer that influenced him as the fear that something might happen to distress helen herself. yet he was loth to admit this, until all at once the keen-witted blagden, noticing his confusion, suddenly leaped to the correct conclusion. "i have it!" he cried. "it's not marshall hamilton at all; he has nothing to do with it. it's his daughter." and as atherton's expression confirmed his conjecture, he added savagely, "look here, man, what a hypocrite you are. here you pose as a moralist, and all the time you're laying your plans to marry hamilton's daughter, become independent for life, and then leave tubby and me in the lurch. that's a pretty trick." he was thoroughly angered, and like most angry men, had gone too far. atherton leaped to his feet. "stop it," he cried, with ominous calm. "stop it right away. what you're saying is nonsense, every word of it." "every word of it," repeated blagden. "do you deny that you would like to marry miss hamilton?" atherton did not hesitate now. "there is no question of marrying anybody," he answered. "i'm not in a position, financially, to think of marriage. if you ask me whether i'm in love with miss hamilton, i'll tell you that i most certainly am. but when you talk about marrying and becoming independent, and when you talk about my going back on you and tubby, then you're simply ranting about what isn't true." there was a pause, the two eyeing each other like wrestlers about to come to a grapple, while mills, the lover of harmony, gazed miserably from one to the other, in distress at this sudden disagreement. "well," said blagden at length, "i don't see that your reasons make any difference, anyway; i made a mistake when i brought them into the discussion. but the practical result is that you decline to help us with this scheme. isn't that the long and short of it?" "yes," atherton admitted, "it is. it's too risky, and it's criminal, and altogether it's a poor game to mix up in. i'm sure we'll do better to let it alone." "and in the next place," went on blagden, "to make use of biblical language, which you, as a moralist, will undoubtedly approve, if you are not with us, are you against us? will you remain neutral, and let tubby and myself go ahead with this plan ourselves?" atherton shook his head. "no," he replied, "if this were simply a case of robbery, i suppose, under all the circumstances, i shouldn't object to it, but the trouble is that you can't tell where you are going to stop. therefore, i'm opposed to any such attempt as you propose." "very well," said blagden, "now we know where we stand. only please don't think you have a monopoly of all the brains in this crowd, because you haven't. and now i'm going to ask you another question. has it occurred to your pure and youthful mind that the events of last night may have some bearing oh the situation?" atherton started. such a possibility had not occurred to him. "what do you mean by that?" he demanded in his turn. "just this," retorted blagden. "that if worse comes to worse, i mean to take a parting shot at our friend hamilton by letting his wife know of this little affair of his. his wife--and his daughter." atherton's heart sank. "but listen, blagden," he cried, "you wouldn't do that. why, that would be rotten, sneaking blackmail. no gentleman could stoop to that." blagden grinned. "then i'm not a gentleman," he scoffed. "how interesting these distinctions are. your prospective father-in-law is a robber and is unfaithful to his wife, and yet he is a gentleman. it's quite an elastic term. but i'm not proud. i'll forfeit my title to being one. but gentleman or not, if you say that you are going to interfere with my plans, i'll make things hum in the hamilton family." "but mrs. hamilton," objected atherton, "is an invalid. news like that might easily kill her. you have no right to make her suffer." "oh, that's not my lookout," disclaimed blagden airily. "blame her husband, or fate, or anyone else, but not me. so on the whole, atherton, don't you think you'd better withdraw your opposition, and let us go ahead?" atherton, realizing the difficulty of his position, made no answer. to allow wife and daughter to know of marshall hamilton's double life was unthinkable; better far, it seemed, to risk the danger of the attempt to rob the banker of his watch. but while he pondered, suddenly, to his amazement, blagden's whole manner underwent a complete change, and he burst into laughter. "heavens, man, but you take things seriously!" he cried. "i didn't mean what i said. i was only seeing how far i could push the argument. you're quite right; we couldn't take the risk. we'll give up the whole affair, and wait for a better chance." atherton stared at him, relieved and yet incredulous. nor did mills appear to know whether to believe this sudden change of front was simulated or sincere. "good lord!" he exclaimed, "do you mean you're going to stop now? after all we've been through? that doesn't sound like you, blagden; you never were a quitter." blagden threw him a glance of veiled meaning. "oh, i don't mind quitting when i have to," he answered. "atherton's right, and that settles it." he strolled across the room as he spoke, and in his most winning manner laid his hand on atherton's shoulder. "but you must own up, old man," he said, "that you owe a good deal to me. you seem to be on the crest of the wave now, but don't forget who launched you from the shore. when you're happily married and settled down, i shall come around to the back door and expect a cold meal if i need one." at once atherton melted. "i realize everything," he responded, "and if it hadn't been for your energy, i don't know what i should be doing now. i don't want to seem ungrateful, but you can see that i'm in a hard position. i want to do the decent thing by everyone, if i can." "that's right," blagden agreed heartily, "and something else is bound to turn up soon. where can i get hold of you if i want you? how much longer do you stay as chauffeur?" "only till monday," atherton answered. "after that, write me at the standard motor works till further notice. and now i must be getting home; there's no train for two hours if i miss the next one. no hard feeling, blagden?" "not a bit," blagden answered. "you're quite right. i didn't agree with you at first, but i do now. good-by and good luck." his tone was cordiality itself, but when he had regained the street, atherton began to wonder whether or not his friend was speaking the truth. as mills had artlessly phrased it, it "didn't sound like" blagden; blagden the bold, the tenacious and the daring. "i'll take no chances," he reflected, "i owe him a great deal, as he said, but i can still keep my eyes open." and if he could have looked back into the room he had just left, and could have heard the flood of vituperation which streamed from blagden's lips, he would have realized the wisdom of his resolve. chapter xvi the final effort the clock in the village struck two, and atherton, crouching in the darkness amid the shrubbery on the lawn, hailed with relief the distant coming of daybreak. unable, upon reflection, to credit blagden's sincerity, he had left the employ of mr. hamilton on monday, as agreed, but before beginning work at the factory had asked for, and obtained, a three days' leave of absence. and now, for the third successive evening, he had come to stand guard, trusting that if blagden tried to carry out his plan, he could at least prevent danger of injury to the inmates of the house. between midnight and three o'clock in the morning; this, he had decided, would be the time for any such attempt, for before midnight, the house had scarcely settled down to slumber, and after three the first faint light of the midsummer dawn began to brighten in the sky. the first two nights had passed without incident, and of this, the third and last, only an hour remained; yet atherton experienced no sense of relaxation from the tension of his vigil, for if the trial was to be made at all, now seemed to him the fitting time. the night was overcast; a fresh damp wind blew from the south; and a veiled moon and scuds of flying cloud portended rain. "if i were a housebreaker," thought atherton, "i should call this my chance. you couldn't see a man to-night until he was right on top of you--my god, what's that?" not twenty feet away from him, a shadowy figure glided, ghost like, through the shrubbery, bent low and travelling so rapidly that before atherton had time fairly to collect his senses, the man's form was again invisible in the darkness. atherton's heart-beats quickened. that this was stoat he had no doubt whatever, and now, for the first time, he realized the difficulties of his task--an unskilled amateur attempting to shadow one of the best professional burglars in new york. yet whether he liked it or not, the moment for action had come, and acutely conscious of the awkwardness of his movements, he crept as best he could after his predecessor. an open window on the veranda showed him where the thief had entered, and with hammering pulses atherton followed suit, and automatic in hand crept cautiously up the staircase to the second floor, and at the head of the stairs crouched, listening, in the shadow of the hall. marshall hamilton's room lay to the left. helen's was directly opposite the stairway, and from the right, where mrs. hamilton slept, he could hear stifled breathing and an occasional low moan which told him that her malady was at its worst. far away, at the end of the hall, a single light burned dimly, and presently, without the slightest sound, he saw the housebreaker's sinister and shadowy form coming stealthily, with the same rapid gliding motion, down the hallway toward the stairs. clearly, thought atherton, stoat had accomplished the first part of his mission in safety, and he had just begun to experience a sensation of relief when all at once, to his consternation, came the very sound he had been dreading, the faint tinkle of the bell which connected mrs. hamilton's room with her daughter's, and by means of which the elder woman was accustomed to call the younger to her aid. stoat, too, must have heard it, for he stopped instantly, and for a few breathless moments all was silence. then the shadowy form once more advanced, and had almost reached the head of the stairs when the door of helen's room was suddenly thrown open, and the girl, clad in her wrapper, stepped quickly forth into the hall. what followed occurred with the rapidity of lightning. simultaneously the girl detected the presence of the housebreaker, and stoat sprang forward with upraised arm; and in the next fraction of a second--a space too short to permit the use of his revolver--atherton too had leaped, and the blow of the blackjack, meant for helen, struck him a glancing blow on the head, and sent him reeling to the floor, while stoat, at headlong speed, made off down the stairs. yet he was not to escape scotfree, for through the haze that blinded him, and despite the agony of pain, atherton contrived to raise himself on one elbow, and steadying himself with a mighty effort, sent a shot down the staircase after the fugitive. then the lights that flashed before his eyes seemed to recede and to grow faint; darkness descended upon the world; and he fell back unconscious, a creeping trickle of red bearing witness to the power of the burglar's blow. meanwhile, in the trees near the turn of the road, blagden and mills waited anxiously, gazing at the outline of the house, filmed dimly against the sky. here at last was the climax of their adventure; if stoat lived up to his reputation, success was almost within their grasp. and thus, although the night was mild, blagden was aware that he was trembling with excitement, and even the phlegmatic mills was moved beyond his usual calm, and fidgeted uneasily as the moments passed. still came no sign of their accomplice, and at length blagden turned the flashlight on the dial of his watch. "he's been gone twenty minutes," he muttered. "pretty nearly time for him now." "yes," mills assented, "he said he meant to do a quick job. but i suppose it all depends on the watch; whether he can get it and how much is on it. _great god!_" across the silence of the night, sharp, unmistakable, ominous, sounded the report of a pistol. blagden uttered an oath. "damnation," he cried, "they've got him." "perhaps he fired himself," suggested mills. "i don't believe it," returned blagden. "i told him not to shoot, except as a last resource. listen. what's that?" they paused, every nerve on the alert, but blagden had been mistaken, and for some moments they heard nothing. then, at last, far away up the road, there sounded through the stillness the sound of rapid footsteps. "he's got away," cried mills. "thank heaven for that." "i don't care a hang for _him_," returned blagden brutally, "if only he's got what we want. we'd better be ready. they'll be after him." more and more distinctly sounded the footfalls, and presently a dark figure became visible. mills started from the bushes, but blagden laid a restraining hand upon his arm. "careful," he cautioned. "let's be sure it's stoat." but in another moment it was evident that it was their accomplice. and evidently, too, he was either hurt, or spent with running, for they could distinguish his hurried, gasping breaths, and could see that he appeared to be advancing aimlessly, zigzagging from one side of the road to the other. blagden stepped forward, "here," he called sharply, "this way." and at the sound of his voice stoat turned and staggered toward them. he was in sore straits. his head swung back and forth like that of an athlete exhausted in a race, and keeping to his work only by a sheer effort of the will. at once, blagden put his arm around him, and half drew, half carried him into the bushes, but at the contact the housebreaker could not keep back a groan. "they--got me," he whispered haltingly. "i'm all in. guess--i'm going to croak." as he uttered the words, blagden suddenly felt his burden relax in his grasp, and picking the man up bodily, he retreated still further into the woods, and laid him down upon the ground. then, examining him with the flashlight, he ripped open his coat and vest and saw that his shirt was stained with blood. "here's a mess," he murmured, and made his way back to mills. "keep a good lookout," he directed, and returned to stoat, who lay without sound or motion on his bed of leaves and moss. "done for," reflected blagden. but it was not stoat's condition that disturbed him; his mind was set wholly on the success or failure of his mission. and accordingly he stooped, ran his fingers quickly over the housebreaker's person, felt something in one of the pockets of his vest, and with fingers which trembled drew forth an old-fashioned watch which he felt instinctively could be no other than the one he sought. without the loss of a second, he threw open the case, and hardly daring to look for fear of a crushing disappointment, beheld, to his delight, row after row of tiny figures, interspersed with arrows pointing up or down. patient delving among bellingham's papers had made him familiar with the theory of the symbols, and instantly he realized that here, as plain as print, lay the precious key to the whole vast mystery. and then, in a flash, it came over him how wonderfully fate had played into their hands, and though every moment was of value, yet he felt certain, with the gambler's instinct, that he must take an added risk, and once again hastened back to mills' side. "if you hear anyone coming," he whispered, "let me know instantly. otherwise keep quiet until i return." and once more regaining the housebreaker's side, he drew a notebook from his pocket, and with scrupulous care transferred the table of figures from the case. this accomplished, he replaced the watch in the pocket of the injured man, and bending over him with the hope that stoat was either dead or dying, he asked, "how do you feel?" but to his dismay the housebreaker showed a wonderful vitality and tenacity of life. "better," he gasped. "i believe i could walk, if you'll give me a lift." blagden, calculating the future with a heart of steel, nerved himself for the task before him. "all right," he answered soothingly, "i'll help you. lie still a minute." then, with a movement quicker than thought, which caught stoat wholly off his guard, he threw himself across the burglar's body, with one hand over his mouth and with the other gripping his nostrils in an iron clasp. galvanized into life, the housebreaker, with the instinctive effort of self-preservation, for a moment struggled desperately, while horrible choking gasps were muffled in his throat, but his injury, his weakness, and blagden's terrible grip made the encounter all too unequal, and presently there came a quick collapse, and his writhings ceased. blagden rose to his knees, and lifted one of stoat's arms. it fell back limply. then, with a shudder of disgust, he picked up the body in his arms and bore it rapidly toward the road. he found mills standing where he had left him, listening intently. "i think they're coming," he whispered. "so much the better," answered blagden grimly. and advancing from the bushes, he placed the body of the dead man face downward in the road, and as his ears caught the sound of an approaching motor, he leaped back to shelter and grasped his companion by the arm. "come on!" he cried. "we must get away from here as quickly as we can." a moment or two after they had vanished into the depths of the woods, the headlights of a motor, driven at slow speed, brightened the road, and presently a man's voice cried sharply, "there he is. right ahead." immediately marshall hamilton leaped from the car, ran forward, and precisely as blagden had done, began hastily to examine stoat's clothing. instantly his fingers closed on the object he sought, and with a gasp of relief, he drew it forth and returned it to his own pocket. then, without a glance at the housebreaker, "saved," he murmured. "thank god." chapter xvii the power and the glory mills drained his second cup of coffee, lit a cigarette, and rising, walked over to the window and gazed forth across the square. "a funny little town," he observed, half to blagden and half to himself. "the buildings are low and the brows of the citizens are high--or supposed to be." then, turning, he continued, "blagden, there's undoubtedly a touch of humor to all this. here we are, breakfasting in a private room in boston's most exclusive hotel, like a couple of millionaires, and after we've begged and borrowed, raked and scraped, the sum total of our wealth amounts to just six thousand dollars. i call it a case of make or break." "make or break," blagden assented, "is right. but i'm not worrying. we're going down into state street with the best chance that two fellows ever had in this world. and i believe we're going to get away with it." "i hope so," said mills somewhat dubiously, "but oughtn't we to wait a while longer? it's only three days since we got what we went after. i should think it might be safer to lie low until everything has blown over--long enough so that no possible suspicion could attach to us." "no," blagden answered, "emphatically not. in the first place, everything broke just right for us. they must have found stoat with the watch in his pocket, and that is proof positive that he tried to escape with it and failed. how can they connect us with him?" "through atherton, of course," responded mills. "it's true," blagden agreed, "that atherton might impart his suspicions to hamilton, but the betting is all the other way. in the first place, if atherton accuses us, he is obliged to confess to knowing a lot more than he is supposed to know, and considering what happened to bellingham, i imagine that might be equivalent to a sudden and unpleasant death. now if he's in love with hamilton's daughter, that is the last thing he's going to do. and besides, what does he gain? nothing. and even if he could keep himself clear of danger, he must realize that it's too risky to try to hurt us while we're holding our blackmail threat in reserve. no, we've nothing to fear from atherton, and as for the rest of it, there's no reason under the sun why we should be thought of for a moment." "i believe you're right," mills admitted. "but i'll feel better if we find our system really works." "i haven't a doubt of it," blagden asserted, "but we'll soon know. in any event, we have the code by heart. i could say it backwards and forwards; up and down." "so could i," answered mills. "where did you say you were going to trade?" "i've found the very place," responded blagden. "floyd & meredith, in the exchange building. they are thoroughly reliable, and the office is precisely the right size. it's big enough so we won't attract attention--they have perhaps fifteen or twenty customers in the office, on an average. and it's small enough so that we can always have a place at the ticker, and see our stuff as it comes." mills stared out into the sunshine. "and what sized lots," he asked, "are you going to trade in?" "i shall take no chances," blagden answered. "i am going to be over cautious, for if anything happens this time, it will surely be our finish. i'm going to play in three lots of a hundred shares each, which will give us twenty points margin on each lot. that's conservative, isn't it?" "sure," mills grinned. "after some of the shoestring margins i've played on, twenty points sounds like the bank of england, with certain portions of broadway thrown in. and whether you buy or sell, i suppose it will be on a scale, up or down." "exactly," blagden assented. "that is the way the big men do it; we know that now for a certainty. and what is good enough for them is good enough for us." there was silence for a moment; then blagden continued earnestly, "tubby, if we are right, can you imagine what this is going to mean? think of it. actually to win, instead of losing. no more horror of sudden bulges or drops. no more nightmares of dwindling margins. no more agony of stop orders caught and accounts wiped out. to think of piling up gold, steadily, unceasingly, till we have all we want. honestly, it seems too good to be true." mills sighed. "that's what i'm afraid of," he rejoined. "i've been a lamb--or a goat, whichever you choose to call it--so long, that i can't make myself believe we can ever take money out of the market. but there's one comfort; we've always lost before, so if we lose again this time, it won't be a new experience, and we really can't complain." blagden rose from his seat. "we mustn't turn faint hearted now!" he cried. "we've been through a good deal in the last ten days, or our nerves would be in better shape. come on, let's get down to state street and have it over with. as you say, we can't do more than lose." a half hour later, they had entered the exchange building, ascended to the office of floyd & meredith, and were cordially greeted by farwell, the amiable, bald-headed and inoffensive customers' man. it was still a few minutes to ten; a dozen speculators talked, read, or studied the "dope" in letters, telegrams and financial papers of all descriptions. bearishness was in the air. "they're a sale." that was the slogan on every lip; that was the message, express or implied, upon each printed page. from the firm's correspondents in new york came the word, "sell them on the bulges; don't buy them at any price." blagden strolled over to where farwell was standing. "not a very bullish crowd in here," he observed. "you're right, they're not," the customers' man replied. "they're all bears now. and i believe they're right. i think this market is going to break wide open." "what's a good stock to sell?" asked blagden. "i think," farwell answered, "that the rails will be the most vulnerable. take union pacific, now. last months' earnings were very poor, and there is talk of labor troubles; i understand they're facing a serious situation. the industrials ought to go down, too. in fact, i think the whole market is a sale, but i believe the rails will drop the most." blagden walked over to where mills was seated, reading the "boston news bulletin." "well," he queried, "what seems to be the big idea?" mills looked up from his reading. "the idea," he answered, "is that the country is in a bad way. there's an article here on union pacific; it says that in all probability the dividend is going to be cut. if these were the old days, blagden, and i was relying on my own judgment, i know mighty well what i'd do. i'd sell my head off. the short side looks like a cinch." "yes," acknowledged blagden, "it does. and yet, reasoning from what we know, isn't this the very time to be suspicious?" he turned as he spoke and indicated the little knot of gamblers around the ticker. "now," he continued, lowering his voice, "according to what farwell just told me, practically every man there is short of the market. and i suppose this office is only a sample of a great many others; i suppose that it is fair to guess that the majority of traders are short at this moment. then comes the question: are they going to win? and if looks are any indication, i judge they're not." mills gazed at the group. "blagden," he confided, "i think i begin to see a great light. i never studied a group of speculators before; i was always so busy with my own troubles that i never thought of anyone else. but it's just as you say; those men are a pretty futile looking crowd. there isn't one of them who looks as if he possessed any real ability. there isn't one of them whose judgment you would be apt to trust. i believe we're having a unique experience. we're seeing the game played from the inside." ten o'clock came. the ticker whirred; the crowd pressed closer around the tape; and presently mills and blagden strolled over and took their places with the rest. farwell looked up as they approached and with extended forefinger pointed downward to indicate the trend. "they're weak," he told them. "awfully weak. you can sell 'em right here. and there's pressure on union, all right. it's off a point and a half." "guess i'll have to sell some, then," said blagden, and taking his stand where he could read the tape he watched, outwardly calm, but inwardly experiencing the thrill of excitement which comes to the man who is watching the biggest game in the world. the market was active. quotation after quotation came whirring forth from the busy machine, and then, all at once, appeared a heavy block of union pacific, the figures tallying precisely with the symbols they had learned. blagden yawned, turned away from the ticker, and walked over to the window. presently mills followed. "you saw it?" whispered blagden. "sure," mills answered. "they're buying it, and after you left they flashed again to buy reading and then to buy southern railway." "well," said blagden, "there's no use waiting. here's where we sink or swim." and writing out an order to buy a hundred union pacific at the market, he walked across the office to the order clerk, gave him the slip of paper, and resumed his place at the tape. yet the market continued to decline, and the crowd of traders became jubilant. eyes glistened, tongues were loosened, and as the paper profits grew larger before their eyes, more than one speculator, taking advantage of a fleeting rally, wrote out and handed in further orders to sell. it was an exceedingly active day, and one of pronounced weakness as well. in the course of another hour, union pacific had run off two points more, and then, as a second flash appeared, blagden bought a second lot, and about two o'clock, as the whole market broke sharply into a state of semi-panic, he purchased the third and last lot of one hundred shares. "and now," he said as he rejoined mills, "we've done our best. as far as we can tell, we have done exactly what the big men are doing, so if we don't win now, then we never will." "there's just one thing," rejoined mills thoughtfully, "that makes me think we will win. and that is this. i've been watching these fellows all day, and i've noticed that while every one of them is ahead on paper, there isn't one solitary man who has actually cashed in. everyone says the market is going lower; everyone believes it; some of them claim it's going ten, twenty, thirty points below where it is now. it's been a big day--nearly two million shares--and what i'm asking myself is: if these men, and others like them, are doing the selling, then who in the name of goodness is doing the buying?" blagden nodded. "tubby," he answered, "i've been thinking that same thing. but all i'm wondering is, how much lower will they go? with our margin, we ought to be safe for a long time yet, but i should think the market ought to steady pretty soon." and indeed, about twenty minutes before the close, the decline ceased, and after a brief period of uncertainty, prices actually began to improve. "only a rally," was the cry around the ticker. "a rally in a bear market." but to mills and blagden, watching the tape with the eye of omniscience, every sign and symbol spelt, "buy! buy! buy!" and by closing time the tone of the market had altered so perceptibly that the enthusiasm of the bears was changed to uneasiness, yet still, so firmly does the human mind cling to its cherished hopes and dreams, that not a man covered, but waited, undecided and irresolute, to see what the morning would bring forth. so the day ended. and for mills and blagden there followed an evening of eager expectancy, and a sleepless night. the tone of all the papers was still bearish and pessimistic; all the emphasis was laid upon the decline, and none upon the rally. but when ten o'clock came around again and the market opened, the tape itself told a far different story, and mills and blagden, reading spellbound between the lines, could see the mighty touch of a magician's hand. the attack at the start was bold, direct, incisive. stocks were up two to three points all around. then came a reaction; the market was made to "look weak"; and bears regained their courage; and put out fresh lines of shorts; then followed a space of comparative inaction, with prices holding firm, and finally, in the noon hour, when most of the traders had gone to lunch, there came a sudden upward spurt which carried quotations to new high levels for the day. then, with the bears securely hemmed in, began a steady, ceaseless advance, irresistible as the sweep of the incoming sea. up a quarter, back an eighth; up another quarter, back another eighth; so continued the advance. and just at the close, with new bulls rushing in to buy, and terrified bears scrambling for safety, with the market fairly boiling with excitement, suddenly, before blagden's watching eyes, appeared the flash to sell, and in a twinkling, too eager for his profits to think of waiting to sell upon a scale, he shot the three hundred shares of union upon the market, and sold them at the top price for the day. that night, over the most expensive dinner they could invent, the pair, incoherent with happiness, reviewed the day's experiences, and laid their plans for the morrow. "seventeen hundred dollars, tubby," blagden repeated, over and over again. "can you grasp it? seventeen hundred dollars in two days. and that's only a taste; only first blood. now we'll go short, and down she'll go; then we'll load up again. a flood of gold, tubby. what does the bible say? 'the earth is ours and the fullness thereof.'" and tubby, his red face much redder even than usual, grew maudlin over the champagne and the thoughts of the delights which awaited him until at last grief assailed him, and he nearly wept as he uttered the plaint of all the ages, "sho much fun livin', it's shame to think we're goin' die." chapter xviii fate is fickle in the dim light of the early summer dawn marshall hamilton paced restlessly to and fro across his study floor. he had returned from the pursuit of stoat to find that helen had summoned doctor rowland, the local physician, and had herself superintended the removal of atherton's body to the room left vacant by bellingham. shortly afterward, the doctor had arrived, and although at a first cursory examination he had shaken his head ominously, he was now engaged in a more careful study of the patient's injuries, to see if human skill could restore to life the flame which alternately seemed to flicker, and then to subside, in the breast of the erstwhile chauffeur. yet it was not of the injured man that marshall hamilton was thinking, for though he realized that it was to atherton's bravery that he owed his daughter's life, yet long years in the atmosphere of high finance had so accustomed him to viewing the world in its immensity that outside the scope of his own immediate family he had gradually become a man of no emotions whatsoever. mankind, to him, meant no longer the isolated individual, but a vast, teeming mass of habits, customs, tendencies; interesting, if studied in the bulk; wearisome and insignificant, if reduced to a single microcosm. and atherton, therefore, was no more to him than any other pawn in the game; this pawn had saved his queen, and that was all. but with regard to the banker's own affairs, so strangely disturbed by this mysterious sequence of events which had threatened the system of which he was the chief, here the situation was disconcerting in the extreme. only once before, in the twenty years of his leadership, had there been room even for a suspicion that their secret was in danger, and then, without waiting to discover whether or not these suspicions were well founded, the man who had been the occasion of them had suddenly disappeared, and everything had continued as before. but this recent chain of incidents had been infinitely more alarming, for there had been a cohesion between them which seemed to indicate not the haphazard gropings of a single individual, but the concerted effort of a group of bold and intelligent men. to be sure, the attempt of mckay's chauffeur to follow his employer had not caused them any great anxiety. precautions, of course, had been taken; among others, the placing of detectives at the houses of both mckay and hamilton; but no further trouble had been anticipated, and the discovery by one of the detectives that bellingham was secretly working over the tape had come as an unwelcome shock, for the incident of the chauffeur and the labors of the secretary had been so closely connected in point of time that it seemed improbable that they could have been merely a coincidence. and although, in the case of bellingham, further investigation might perhaps have shown that the secretary was merely one of the many innocuous "chart fiends," and that there was nothing sinister in his study of the tape, this possibility was strongly negatived by bellingham's sudden flight, an event which had necessitated his murder upon the very eve of his departure from the country. and here, with this double tragedy, the banker had confidently expected the disturbance to cease, instead of which had ensued, with almost incredible boldness, the events of the night, and the endeavor, within an ace of being successful, at capturing the cypher which held the key to the seemingly purposeless fluctuations of the stock market. thus the banker was most profoundly disturbed. by what possible chance the secret could have been fathomed--how the impregnable defence of forty years had all at once been beaten down--was wholly incomprehensible. and yet, grave as the situation was, there was still much for which to be thankful. for if atherton's bullet had not gone to its mark, and the marauder had escaped with the watch, there might easily have resulted a scandal which would have shaken the country from one end to the other. but as it was, it appeared that although by the narrowest of margins they had managed to escape, and the next task was to be on the alert to see whether more attempts would be made, or whether this, as he most devoutly hoped, would be the last. a knock at the door aroused him, and the imperturbable martin stood aside to admit doctor howland, gray-haired, a trifle bent, but still a hale and vigorous man. "well," asked mr. hamilton, "how do you find him?" "he's badly off," the doctor answered. "there's no doubt about that. he is still unconscious, and his heart action is distinctly unfavorable. in fact, mr. hamilton, to put it bluntly, i should say that he is at the point of death. your daughter is still with him; she has been most helpful; but i have sent for a nurse, who will come at once. we will do all we can, and of course, if you say the word, there are other men whom you cay call in consultation. charles carrington, for instance, has done wonders in these cases, and kennedy is good, also, though of the two, i believe carrington is the more skillful." the banker nodded. "i see," he responded briefly. "yes, i think we should do what we can. by all means, i had better send for carrington." the doctor jotted a number on a scrap of paper, handed it to the financier, and was about to leave the room when helen hamilton, her face as pale as death, met him upon the threshold. "quick, doctor," she cried, "he's delirious, and trying to get up. i've left martin with him." and with a deep-drawn breath she added imploringly, "oh, isn't there anything that you can do?" the doctor, without replying, strode quickly up the stairs, the banker following at his heels, while helen, sinking into a chair, and striving to keep back the tears, prayed imploringly to heaven for the life of the man she loved. they found atherton tossing restlessly from side to side, his eyes wide-open and glassy, the flush of fever in his cheeks. martin was at his side, but as they entered, the bell rang sharply and the butler left the room, leaving marshall hamilton and the doctor alone with the injured man. atherton was no longer violent, but plainly enough the events of the last few weeks were passing, in chaos, through his disordered brain, for he muttered to himself unceasingly, and presently, as his voice gathered strength, they could distinguish clearly what he said, although the words seemed ironically trivial. "i like dogs," he whispered confidentially. "he's a good little pup. i'm glad he's all right." again martin entered the room. "a telephone message for doctor rowland," he announced. "they would like him to come to mrs. horton's at once." the doctor turned to the financier. "a childbirth case," he explained. "i must go, and as a matter of fact, there is very little that i can do here. the nurse will arrive at any moment; i have explained to her everything that is to be done. you had better get carrington." and he hastily left the room. "shall i remain here, sir?" inquired the butler, but hamilton shook his head. "no, look after affairs down stairs," he answered, and martin withdrew, leaving the banker alone with the unconscious atherton. the mutterings ceased; then broke forth again; and presently, quite clearly and with a note of surprise in his tone, the sick man exclaimed, "marshall hamilton!" the banker started. his first thought was that atherton had suddenly regained consciousness, and involuntarily he stepped forward toward the bed, but atherton still gazed straight before him, with no sign of recognition in his staring eyes, and whatever it was that had caused the utterance of the banker's name, it was evident that in a few brief seconds he had traversed countless miles of space and numberless hours of time, for now he was talking earnestly with some one else, his voice high-pitched and querulous with anxiety. "you can't do that, blagden!" he cried. "that's blackmail. and remember his wife is an invalid. it might kill her if she knew." then silence, and then again, "i tell you you can't, blagden; i'll leave it to mills. how about it, tubby; you wouldn't do that?" again silence. in breathless amazement, marshall hamilton stood gazing at the prostrate figure on the bed. he could not mistake the meaning of the words; this message was for him; his sin, long cherished in secret, had found him out. but before he could think or act, another portion of the wild phantasmagoria flashed on the clouded brain, and atherton, trying hard to raise himself from the pillow, exclaimed eagerly, "on the watch; on the watch for these signals. you're right, blagden, that's the whole question: verb or noun!" for the first time in many years, the banker wholly lost his composure; his heart seemed suddenly to contract, and instinctively he clutched at the chair beside him for support. horror was being piled on horror. was his whole life an open book? did the whole world know his secret? in what possible way, after the strict precaution of years, had he and his associates thus betrayed themselves, or been betrayed? atherton, exhausted, now lay without motion, breathing rapidly and weakly, and presently, as the banker's glance fell upon the paper in his hand, containing the number of the specialist, with a sudden movement, as if seeking to take vengeance on an inanimate object, he crumpled it and thrust it into his pocket. this man had saved his daughter's life, and it was his bullet that had brought down the escaping thief, but he knew far too much and therefore it was better that he should die. again footsteps sounded in the hallway; martin ushered in the nurse; and the banker, thus relieved, went slowly down the stairs to his study, his mind in a turmoil of apprehension and of actual fear. helen stood awaiting him upon the threshold. "is he better?" she cried. "is there any hope?" even for hamilton, with his thoughts intent upon other things, there could be no mistaking the intensity of her tone. and since he was genuinely fond of his daughter, he answered. "he's about the same." and then without wasting words, he added, "why? do you care for him?" she stood regarding him gravely, and without a trace of false shame, she answered simply, "more than for anyone in the world. i can't live without him. oh, father, he _must_ get well." marshall hamilton hesitated. through and through, a man of large affairs, he knew well the oath that he had sworn, long years ago; knew it to be his duty to see that by fair means or foul atherton's mouth was closed forever. yet knowing all this, here stood his only daughter, agonized, beseeching. there was a moment's tense silence; then the banker turned and pressed the electric bell. "we'll do what we can, dear," he said, and as martin, immaculate, unruffled and debonair, answered his call, he handed him a crumpled bit of paper. "get doctor carrington at once," he ordered. "tell him expense doesn't matter; i must have him here at once. tell him it's a case of life and death." chapter xix the sowers of the wind all through the night and the early morning a summer northeaster had lashed the city streets; the pavements glistened with moisture; the hurrying rainclouds obscured the sun. but now, as the day advanced, the wind veered to the north, and presently appeared patches of blue sky, and a ray of sunshine, piercing its way through the curtains of the room, fell upon the face of the slumbering mills, as he lay breathing heavily, mouth parted, and the mottled red and white of his cheeks bearing witness to the excesses of the past two weeks. presently, as the sunbeam reached the level of his eyes, he twitched and stirred uneasily, and finally awakening, sat bolt upright with a sound midway between a yawn and a groan, and extending his legs over the side of the bed, remained inert, supporting his aching head in his hands. then, perceiving that blagden still slept, he seized a pillow and flung it with such certain aim that his companion, thus rudely aroused, started up spasmodically from his couch and perceiving the cause for his awakening, scowled savagely, growled, "oh, don't act like a damned kid," and tried to compose himself for further slumber. but the shock had been effectual, and at length, realizing the futility of the attempt, he assumed the same position occupied by mills, and heavy-eyed and blinking, the pair sat gazing at each other across the room. "blagden," said mills solemnly, "do you care to know my genuine, sincere opinion of life in general?" blagden grinned faintly. "if you feel the way i do," he answered, "i can guess it right now. but if it will cheer you up to get it off your mind, why go ahead." mills needed no further encouragement. "life," he observed, "is a fake; an ugly, rotten fake. there's no fun in it; there's no good in it; there's no pleasure; there's no satisfaction. it's dust and ashes, and i'm tired and sick of it." blagden's smile broadened. "well, of all the ingratitude," he rejoined. "when we made our first clean-up, a fortnight ago, you told me life was the most splendid, gorgeous, wonderful thing imaginable. if things had gone against us since then, you might complain, but they haven't; everything that could come our way has come our way. the system is perfect; where we had six thousand dollars we have fifteen thousand now; and in a year we'll have to hire a special safety deposit vault. and in the meantime think of the pace we've set. have we been temperance advocates, preachers of the gospel, haters of women? the answer is; no, decidedly and emphatically, no. it has been some fortnight; some happy little fortnight, tubby, my boy." mills groaned. "that's just the trouble," he complained. "all my life, i've looked forward to the time when i could travel as fast as i wanted to, without caring a hang for the expense. and now that i've done it, what a mess it's been. i don't want to eat or drink again as long as i live, and as for women--" he shuddered--"good lord, blagden, i can't bear the thought of them. lumps of flesh, with wide-open mouths, crying 'give, give, give!' beasts, that's all they are; ugly, crawling beasts; to the deuce with the whole of them." he passed a shaking hand across his eyes, trying to brush away the film of cobweb which hung there. but his hand passed through it, and the film remained. blagden looked at him curiously. "better pull up a bit, tubby," he admonished. "you don't want a session with the d. ts. i know just how you feel, but wait till you've had a bath and a bracer, and you'll be all right again. in fact, you've got to be all right again; this is the night we're going out to danforth's for a time with those girls from the south. had you forgotten?" "by jove, i had," mills acknowledged. but at the thought of danforth and the pictures he had shown them, the embers of gorged and glutted lust began to glow again. "well," he said more cheerfully, "this will be a bit different from the usual thing. besides that, we'll be in the country. what a damnable place the city is. you know, blagden," he went on confidentially, gazing straight before him, "sometimes lately i catch myself doing something i've never done before; i keep thinking back to when i was a kid. i suppose that's a sign i'm growing old. why, darn it all, i can remember the room i used to have, and the little white bed, and the long summer nights with the crickets singing away outside in the moonlight, and there i'd lie awake, kind of wondering what it was all about, anyway, and thinking how fine it would be to grow up to be a man. and now--" his voice died away. "you've got the same idea," observed blagden, "as the man who said that the country boy comes to the city and works hard all his days to earn enough so that at the end of his life he can go back and live in the country again." "and he was right!" cried mills. "that's the absolute truth. this money game is all rot. i want the country again. the grass and the brooks and the trees, the singing of the birds, the sweep of the sky over the hills, sunrise and sunset--oh god--oh god--" once more he passed his hand over his burning eyes. blagden, rising, walked over and laid a hand on his shoulder. "there, there," he said not unkindly, "i never knew _you_ had nerves. we'd better send you away for a week; i can look after things here." with an effort, mills regained control of himself. "confound it all," he cried, "i must be in poor shape to act like this. excuse me, blagden, i'm all right now." then, as another thought struck him, he added, "but think of this fellow danforth that we've been so thick with. how on earth does he stand it? he's no athlete; he's not half my size. but he's stayed with us for two weeks; drink for drink; girl for girl. and i swear he's as fresh as when we started. how do you account for that?" "this man danforth," blagden answered, "is a product of little old new york. and that is half the battle. but even at that, he's a wonder. all of him that isn't steel is whipcord and whalebone, and he carries a copper riveted boiler where his stomach ought to be. in short, he's a bear and a bird, and an all-around phenomenon, and as a physical specimen i take off my hat to him. but as a speculator, tubby, he's the worst i ever saw. he's been losing money like water." "i know he has," mills answered. "and it's a shame, too, because he's an awfully decent little chap. i couldn't help tipping him off the other day. he was long of stocks in a market that was just going to break wide open, and i told him to get out. he did, too, and only just in time. i saved him from a slaughter." blagden looked troubled. "be careful, tubby," he admonished. "we don't want to get the reputation of being money makers; that's our one danger now. i'd rather act as if we were losing it; in fact, i think we'd better lose occasionally just to cover up our tracks. however, i guess there's no harm done. danforth is harmless, and we owe him something for the time he's going to give us to-night." an hour later they discovered danforth, flower in buttonhole, spruce and smiling after three hours' sleep, displaying to the customers at floyd & meredith's a new buck-and-wing step in the centre of the office floor. but he desisted to greet his friends. "it's all right," he told them confidentially, "the girls got in this morning, and to-night will be one great and glorious time. they are ladies, you understand; as fine girls as you'd want to meet anywhere; but chock full of the devil, and once in a while, on the quiet--well, you understand. take the five-thirty for fairview; i'll meet you at the station. there's the bell; i'm short of steel and she's going up on me. see you later." and he leaped for the ticker. that afternoon mills and blagden spent at the ball game, but managed to reach the train in time, and danforth, meeting them at their destination, whirled them away in his motor along the winding country roads through groves of pines, past fertile meadows, and by stretches of marsh where the sunset stained the pools of water as red as blood. "lonely," said danforth, "but i like it. and especially for a time like this. here we are, safe and sound." the motor drew up in front of the plain old country house, and as they followed their guide into the hall, they could see through an open doorway the table bright with silver and linen, set for six. "the girls," danforth explained, "have been spending the day at eastfield. they're coming over by motor; ought to be here any minute now. just let me show you your room." they followed him upstairs, and down the upper hall to the rear of the house, where he flung open the door of the guest room, and stood back for them to enter. "there," he said heartily, "make yourselves at home. i'm just going to the kitchen for a minute to see that everything's all right, and i'll be back again in no time." he departed, closing the door behind him, and mills throwing himself into an easy chair, gazed around him with approval. the room was old-fashioned and low studded, but comfortably furnished, and the drawn shades and the mellow light from the lamp on the table combined to give it an appearance both homelike and inviting. blagden, after a similar appreciative glance, followed mills' example, and both of them, wearied after many days of tense excitement around the ticker, followed by nights of wild carousal, sat in pleasurable silence, their thoughts busied with visions of enjoyment to come. presently they heard outside the throbbing of a motor. "there come the ladies," hazarded mills, but after his surfeit of dissipation, he did not pay their fair companions the compliment of rising from his chair. nor did blagden stir. yet he listened keenly to the sound of the motor, and suddenly observed, "that car wasn't coming, tubby; it was going. what do you suppose that means?" "don't know and don't care," yawned mills, stretching his huge arms luxuriously above his head, "but i've one fault, though, to find with danforth's taste. he seems to have a prejudice against ventilation. it's fearfully close in here." blagden rose, with just the faintest shadow of anxiety upon his face. "you're right," he agreed. "let's have some air." as he spoke, he walked over to the window, snapped up the curtain, and then gave a cry so sharp and so fraught with alarm that mills involuntarily leaped from his seat, and stood gazing with blanched cheeks at the space where a window should have been, but which, instead, was barricaded by a plate of solid steel. in spite of himself, mills felt as if the blood had ceased flowing in his veins, and his voice sounded thick and strained as he cried, "what's this? some fool joke?" without a word, blagden had rushed to the other window, only to encounter a similar barrier. and then suddenly, even in the midst of his excitement, he was aware of a disagreeably penetrating odor in the room. "tubby," he cried, "it's gas; poison gas! he's trying to murder us. where does it come from?" but there was no time to search. already they began to experience a strange lightheadedness, a singing in the ears, and a numbing heaviness in their limbs. mills tried the door, found it locked, and terrified and trembling, turned instinctively to his leader. "blagden," he gasped, "what can we do?" but there came no answer, and he saw that his comrade had fallen and lay motionless upon the floor. thus thrown upon his own resources, desperation seized him, and a blind fury at the treachery of the man whom they had trusted as their friend. hastily crossing the room, and mindful of the old savage drill upon the football field, he ran full speed and hurled himself bodily against the door. before that terrific impact, the wood split and splintered, and mills, tearing wildly, with torn fingers, at the gap thus made, managed to force an opening--only to see, shimmering in the lamplight, again the glint of polished steel. and now despair, grim and relentless, gripped his heart. to him, who had loved life so ardently, and had lived it so emptily, appeared the shadow of death. staggering, helpless, with blood trickling from nose and mouth, he retreated once again; again, with a last flicker of energy, charged the gate of steel; struck it, full force; fell reeling to his knees; tried to rise, tottered, and then, slowly, like some giant tree beneath the woodsman's axe, he crashed headlong, and lay still. chapter xx the end the glory of the morning turned the world to gold, and presently atherton awakened, strengthened and refreshed, and for the first time since his accident, feeling that he was really himself once more. consciousness, or rather semi-consciousness, had returned a week ago, and since that time he had dwelt in a state of delightful convalescence, sleeping, eating, sleeping again, his body slowly regaining the energy destroyed by the ravages of the fever. he had been forbidden to talk, and at first, indeed, his brain had been too incurious for him to wonder greatly concerning the events of the night on which he had been struck down. helen herself was safe, for she had come often to relieve the nurse and to sit by his side, while he had purposely feigned sleep for the delight of watching her from half-closed eyes. and mr. hamilton was unharmed, for he too had found time to make occasional visits to the sick room. and therefore the success or failure of stoat's mission had seemed to him, at first, a matter of relative unimportance. but now, as his strength returned, so did his interest in the whole affair, and he found himself hoping that stoat had achieved what he was after, for that, he felt, would be the surest way of freeing the hamilton household from danger. and if successful, how, he wondered, were mills and blagden progressing with their hair-brained scheme of acquiring riches untold. his curiosity was soon to be gratified, for that afternoon, after the doctor had made his visit, marshall hamilton came into the room, and drew up a chair beside the bed. "doctor carrington informs me," he began, "that you are out of all danger, and on the high-road to recovery." atherton felt instinctively that there was something behind the words, and that they were not the mere commonplaces they seemed. "yes, indeed," he answered. "i'm feeling very fit. almost as well as ever." "that is good," the banker answered, "and i am doubly glad, because it now becomes necessary for us to have a talk of some importance." it was coming, then. atherton mentally braced himself for the ordeal. "i am ready," he said. there was silence. then, "you had two friends," said marshall hamilton, "named blagden and mills." atherton gave him a quick glance, but the face of the financier was inscrutable. yet atherton was sure that the "had" was no mere slip of the tongue, and the significance of the word was not lost upon him. "yes," he answered, "that is so." "they are dead," said marshall hamilton. atherton drew a quick breath, and though he heard with emotions strangely mingled, yet sorrow was uppermost in his heart. with blagden he had differed, and blagden had played him false, yet he had admired the man's courage, his energy, his enthusiasm, while as for mills, poor old tubby had always been a genial, kindly boy. and there was moisture in his eyes and a tightening in his throat as the financier went on, "they played with fire, and the flame consumed them. yet through no fault of their own. they played boldly for a high stake and they played well. they must have been brave, ingenious, shrewd--" he paused; then slowly and thoughtfully continued, "i have lived for over fifty years. i have enjoyed this world. i have tried to observe and study both myself and my fellow men. but to me the most fascinating thing in life has been to watch destiny play its game with us all. do you believe in god?" atherton hesitated. "no," he answered, "i do not think that i do." "my own belief," said the banker, "is in a god, but not the god of the bible. moore, the novelist, has described him in a phrase which i have always admired. 'the greater aristophanes.' isn't that perfect? he is not the blameless, faultless god of scripture, but infinitely more human. he is a humorist; sometimes a grim one. doubtless i appear to you to be wandering, but i am not. here is the point. this greater aristophanes has played with us all--with you and your friends, with me and my friends, with my family and with bellingham, my secretary--weaving us all into a strange, fantastic web, and always on the side of your friends until the final moment. and then--a sudden humor seizes him--he changes sides, and allows a blow to fall on your head. you become ill--delirious--and in your ravings you lay bare the whole mystery which has puzzled me for so long, and incidentally, through no fault of your own, you sign the death warrant of your friends." atherton, overwhelmed, lay silent. "then you know," he said at length, "what the burglary was for?" for answer, the banker drew forth his watch, held it up before atherton's eyes, and replaced it in his pocket. "i know everything," he said. "this was no time for half measures. rightly or wrongly, your belongings have been searched, and i have found the paper which explains the whole affair." the pause lengthened. apparently, it seemed to atherton, the banker was giving him time to assimilate this news, and surely he needed it. and more and more, as he reflected, grew his wonder as to what his position might be. death had been meted out to mills and blagden for their knowledge. why should he escape? instinctively he glanced at the financier as if to read his thoughts, and as if he understood the look--indeed, as if he had been expecting it--hamilton spoke. "you are, perhaps, wondering," he said, "as to my attitude toward you." "that," responded atherton, "is precisely what i should like to know." "i have been," the banker answered, "greatly puzzled, but it has seemed to me that we should have a moment's talk of a most confidential nature. and i am not," he added grimly, "going to extort any pledge of secrecy. knowing the fate of bellingham, of mills and of blagden, you will understand why i deem that unnecessary." in spite of himself, atherton shuddered. he felt weak, powerless, as if he were lying bound in the path of some huge engine of destruction. "this system, of which you are cognizant," continued the financier, "really exists. it is our policy to deny it, but with you that would hardly serve. it exists. it has existed for forty years. it is international in its scope, and although vague rumors are occasionally heard regarding it, and it is periodically assailed upon suspicion, so far our secrets have been so well guarded, and the punishment meted out to those who have spied upon us, or even talked about us, have been so crushingly severe, that we have maintained an impregnable defence. the system is open to criticism; i do not deny that. to many men and women it has brought disaster, ruin, and even death. yet people so constituted that they must gamble in the stock market would probably be unsuccessful in any event in whatever else they undertook; they are the world's weaklings, and their loss means little to the world. moreover, somebody must rule this country; that is our real defence. democracy is a farce, a failure, an idle dream. in any land, there must be an aristocracy of brains. therefore we rule, and on the whole, i think, wisely. we permeate everywhere; we dominate everything; politics, commerce, the whole domain of trade, they are all ours; we are the country's uncrowned kings. thus the market is only one source of our revenue, though our most important source. without us, there would exist a state of chaos. for forty years, we have averted panics; steered the nation through crisis after crisis; our function is really that of a mighty balance wheel. in a word, we do evil that ultimate good may come. do i make myself clear?" atherton had listened, spell-bound. at last doubt had changed to certainty; the picture was complete. "yes," he answered, "i understand." "and now," continued hamilton, "as to your position. by all the rules of the game, you should have ceased to trouble us, two weeks ago. one thing has saved you. unfortunately for me, it appears that my daughter cares for you. though why," he added whimsically, "she could not have fallen in love with someone else, is more than i can see." atherton flushed. "i know," he began, "i'm not in the least worthy of her--" but the banker cut him short. "there, there," he said, "i wasn't really serious. i believe you are a clean and honorable young man--you have shown that in many ways--and i think i may offer you a choice. you may take a subordinate place in our organization. it will have many attractions. you will prosper; you will make money; you may rise, if you possess the ability, even to the greatest heights of all. but you will give your undivided allegiance. you will rid yourself of all emotions of pity. you will see the lambs led to the shearing; you will help to lead them there. but you will gain the pride of place, and glory in the eyes of men." before atherton's eyes swept a vision of the seething brokerage offices, the eager crowds, the whirring, clicking tickers, the dreamers of dreams that were destined never to come true. and unhesitatingly he answered, "mr. hamilton, never again, as long as i live, do i wish to see the inside of a broker's office; never again do i wish to hear the opening bell, to see the tape begin to tell its lying story. let me be a poor man all my life; but let me do some honest work, if it's no more than turning out bolts or nails on a machine. anything in the world but what you offer me." the banker regarded him, apparently not displeased. "i will not say," he answered, "that you are unwise. we play a great game, but a dangerous one. our fortunes swell to the bursting point; labor watches and threatens; the people are not blind; it is a condition which may bring about its own cure. there may come revolution, death and destruction--no man can tell. therefore, you are perhaps wise to choose the factory and the chance to rise through your own endeavors. and that, i take it, is your choice." "there is nothing," atherton answered, "that i should like better." "very well," the banker responded, "but remember this." and as he spoke, his voice became low and stern. "you have done me more than one favor; i do you one now. but i consider that by doing so we are quits, and more than quits. forget what you have seen, what you have heard, what you know. think of it as a dream, dissolving into air. for if ever in the future you breathe one word, one whisper, of what you have learned, you are that moment a dead man, and mine will be the first hand raised to strike you down." atherton, without flinching, returned his gaze, realizing as never before the power of this vast order which ruled with such an iron hand, and realizing, too, his own insignificance, his utter helplessness, his inability to do aught else than to comply. "i give you my word," he answered. "what i know is forgotten." the banker rose. "then the whole incident," he said, "is closed. i wish you a speedy recovery, and now i think there is another visitor waiting to see you, no doubt impatiently." he left the room, and atherton, wearied, for a moment closed his eyes. a splendor of sunshine flooded the world without; an oriole in the swaying elm filled the air with song. all things spoke of youth and life and joy. so softly did she enter that he did not hear her cross the room, and it was only when he opened his eyes again that he knew that dream and reality were one, and that before them lay the long, bright years, for him and the girl he loved to traverse, side by side. http://www.archive.org/details/readingsnimoney philuoft transcriber's note: text enclosed by tilde characters is in bold face (~bold~). text enclosed by underscores is in italics (_italics_). an underscore followed by a letter enclosed in curly braces indicates that the enclosed letter is a subscript. (example: c_{b} indicates that the "b" is a subscript). readings in money and banking * * * * * the macmillan company new york · boston · chicago · dallas atlanta · san francisco macmillan & co. limited london · bombay · calcutta melbourne the macmillan co. of canada. ltd. toronto * * * * * readings in money and banking selected and adapted by chester arthur phillips assistant professor of economics in dartmouth college and assistant professor of banking in the amos tuck school of administration and finance new york the macmillan company all rights reserved printed in the united states of america copyright by the macmillan company set up and electrotyped. published september, . ferris printing company new york city preface designed mainly for class room use in connection with one of the introductory manuals on the subject of money and banking or of money and currency, this volume, _in itself_, lays no claim to completeness. where its use is contemplated the problems of emphasis and proportion are, accordingly, to be solved by the selection of one or another of the available texts, or by the choice of supplementary lecture topics and materials. the contents of the introductory manuals are so divergent in character as to render possible combinations of text and readings that will include, it is hoped, matter of such range and variety as may be desired. fullness of treatment has been attempted, however, in the chapters dealing with the important recent developments in the "mechanism of exchange," and my aim has been throughout to select and, in many instances, to adapt with a view to meeting the wants of those who are interested chiefly in the modern phases of the subject. for valuable suggestions in the preparation of the volume i am greatly indebted to professors f. h. dixon and g. r. wicker and mr. j. m. shortliffe of dartmouth, professor hastings lyon of columbia, professor e. e. day of harvard, and to my former teacher, professor f. r. fairchild of yale. i desire also to mention my great obligation to authors and publishers who alike have generously permitted the reproduction of copyrighted material. chester arthur phillips. dartmouth college, hanover, n. h., july, . table of contents chapter page i the origin and functions of money ii the early history of money iii qualities of the material of money iv legal tender v the greenback issues vi international bimetallism vii the silver question in the united states viii index numbers ix banking operations and accounts x the use of credit instruments in payments in the united states xi a symposium on the relation between money and general prices xii the gold exchange standard xiii a plan for a compensated dollar xiv monetary systems of foreign countries xv the nature and functions of trust companies xvi savings banks xvii domestic exchange xviii foreign exchange xix clearing houses xx state banks and trust companies since the passage of the national bank act xxi the canadian banking system xxii the english banking system xxiii the scotch banks xxiv the french banking system xxv the german banking system xxvi banking in south america xxvii agricultural credit in the united states xxviii the concentration of control of money and credit xxix crises xxx the weaknesses of our banking system prior to the establishment of the federal reserve system xxxi the federal reserve system xxxii the european war in relation to money, banking and finance appendices readings in money and banking chapter i the origin and functions of money [ ]in order to understand the manifold functions of a circulating medium, there is no better way than to consider what are the principal inconveniences which we should experience if we had not such a medium. the first and most obvious would be the want of a common measure for values of different sorts. if a tailor had only coats, and wanted to buy bread or a horse, it would be very troublesome to ascertain how much bread he ought to obtain for a coat, or how many coats he should give for a horse. the calculation must be recommenced on different data, every time he bartered his coats for a different kind of article; and there could be no current price, or regular quotations of value. whereas now each thing has a current price in money, and he gets over all difficulties by reckoning his coat at £ or £ , and a four-pound loaf at _d._ or _d_. as it is much easier to compare different lengths by expressing them in a common language of feet and inches, so it is much easier to compare values by means of a common language of pounds, shillings, and pence. in no other way can values be arranged one above another in a scale: in no other can a person conveniently calculate the sum of his possessions; and it is easier to ascertain and remember the relations of many things to one thing, than their innumerable cross relations with one another. this advantage of having a common language in which values may be expressed, is, even by itself, so important, that some such mode of expressing and computing them would probably be used even if a pound or a shilling did not express any real thing, but a mere unit of calculation. it is said that there are african tribes in which this somewhat artificial contrivance actually prevails. they calculate the value of things in a sort of money of account, called macutes. they say, one thing is worth ten macutes, another fifteen, another twenty. there is no real thing called a macute: it is a conventional unit, for the more convenient comparison of things with one another. this advantage, however, forms but an inconsiderable part of the economical benefits derived from the use of money. the inconveniences of barter are so great, that without some more commodious means of effecting exchanges, the division of employments could hardly have been carried to any considerable extent. a tailor, who had nothing but coats, might starve before he could find any person having bread to sell who wanted a coat: besides, he would not want as much bread at a time as would be worth a coat, and the coat could not be divided. every person, therefore, would at all times hasten to dispose of his commodity in exchange for anything which, though it might not be fitted to his own immediate wants, was in great and general demand, and easily divisible, so that he might be sure of being able to purchase with it, whatever was offered for sale. the primary necessaries of life possess these properties in a high degree. bread is extremely divisible, and an object of universal desire. still, this is not the sort of thing required: for, of food, unless in expectation of a scarcity, no one wishes to possess more at once than is wanted for immediate consumption; so that a person is never sure of finding an immediate purchaser for articles of food; and unless soon disposed of, most of them perish. the thing which people would select to keep by them for making purchases, must be one which, besides being divisible, and generally desired, does not deteriorate by keeping. this reduces the choice to a small number of articles. by a tacit concurrence, almost all nations, at a very early period, fixed upon certain metals, and especially gold and silver, to serve this purpose. no other substances unite the necessary qualities in so great a degree, with so many subordinate advantages. next to food and clothing, and in some climates even before clothing, the strongest inclination in a rude state of society is for personal ornament, and for the kind of distinction which is obtained by rarity or costliness in such ornaments. after the immediate necessities of life were satisfied, every one was eager to accumulate as great a store as possible of things at once costly and ornamental; which were chiefly gold, silver, and jewels. these were the things which it most pleased every one to possess, and which there was most certainty of finding others willing to receive in exchange for any kind of produce. they were among the most imperishable of all substances. they were also portable, and containing great value in small bulk, were easily hid; a consideration of much importance in an age of insecurity. jewels are inferior to gold and silver in the quality of divisibility; and are of very various qualities, not to be accurately discriminated without great trouble. gold and silver are eminently divisible, and when pure, always of the same quality; and their purity may be ascertained and certified by a public authority. accordingly, though furs have been employed as money in some countries, cattle in others, in chinese tartary cubes of tea closely pressed together, the shells called cowries on the coast of western africa, and in abyssinia at this day blocks of rock salt; though even of metals, the less costly have sometimes been chosen, as iron in lacedæmon from ascetic policy, copper in the early roman republic from the poverty of the people; gold and silver have been generally preferred by nations which were able to obtain them, either by industry, commerce, or conquest. to the qualities which originally recommended them, another came to be added, the importance of which only unfolded itself by degrees. of all commodities, they are among the least influenced by any of the causes which produce fluctuations of value. they fluctuate less than almost any other things in their cost of production. and from their durability, the total quantity in existence is at all times so great in proportion to the annual supply, that the effect on value even of a change in the cost of production is not sudden: a very long time being required to diminish materially the quantity in existence, and even to increase it very greatly not being a rapid process. gold and silver, therefore, are more fit than any other commodity to be the subject of engagements for receiving or paying a given quantity at some distant period. if the engagement were made in corn, a failure of crops might increase the burthen of the payment in one year to fourfold what was intended, or an exuberant harvest sink it in another to one-fourth. if stipulated in cloth, some manufacturing invention might permanently reduce the payment to a tenth of its original value. such things have occurred even in the case of payments stipulated in gold and silver; but the great fall of their value after the discovery of america, is, as yet, the only authenticated instance; and in this case the change was extremely gradual, being spread over a period of many years. when gold and silver had become virtually a medium of exchange, by becoming the things for which people generally sold, and with which they generally bought, whatever they had to sell or to buy; the contrivance of coining obviously suggested itself. by this process the metal was divided into convenient portions, of any degree of smallness, and bearing a recognized proportion to one another; and the trouble was saved of weighing and assaying at every change of possessors, an inconvenience which on the occasion of small purchases would soon have become insupportable. governments found it their interest to take the operation into their own hands, and to interdict all coining by private persons; indeed, their guarantee was often the only one which would have been relied on, a reliance however which very often it ill deserved; profligate governments having until a very modern period seldom scrupled, for the sake of robbing their creditors, to confer on all other debtors a licence to rob theirs, by the shallow and impudent artifice of lowering the standard; that least covert of all modes of knavery, which consists in calling a shilling a pound, that a debt of a hundred pounds may be cancelled by the payment of a hundred shillings. it would have been as simple a plan, and would have answered the purpose as well, to have enacted that "a hundred" should always be interpreted to mean five, which would have effected the same reduction in all pecuniary contracts, and would not have been at all more shameless. such strokes of policy have not wholly ceased to be recommended, but they have ceased to be practised; except occasionally through the medium of paper money, in which case the character of the transaction, from the greater obscurity of the subject, is a little less barefaced. money, when its use has grown habitual, is the medium through which the incomes of the different members of the community are distributed to them, and the measure by which they estimate their possessions. as it is always by means of money that people provide for their different necessities, there grows up in their minds a powerful association leading them to regard money as wealth in a more peculiar sense than any other article; and even those who pass their lives in the production of the most useful objects, acquire the habit of regarding those objects as chiefly important by their capacity of being exchanged for money. a person who parts with money to obtain commodities, unless he intends to sell them, appears to the imagination to be making a worse bargain than a person who parts with commodities to get money; the one seems to be spending his means, the other adding to them. illusions which, though now in some measure dispelled, were long powerful enough to overmaster the mind of every politician, both speculative and practical, in europe. it must be evident, however, that the mere introduction of a particular mode of exchanging things for one another, by first exchanging a thing for money, and then exchanging the money for something else, makes no difference in the essential character of transactions. it is not with money that things are really purchased. nobody's income (except that of the gold or silver miner) is derived from the precious metals. the pounds or shillings which a person receives weekly or yearly, are not what constitutes his income; they are a sort of tickets or orders which he can present for payment at any shop he pleases, and which entitle him to receive a certain value of any commodity that he makes choice of. the farmer pays his laborers and his landlord in these tickets, as the most convenient plan for himself and them; but their real income is their share of his corn, cattle, and hay, and it makes no essential difference whether he distributes it to them directly or sells it for them and gives them the price; but as they would have to sell it for money if he did not, and he is a seller at any rate, it best suits the purposes of all, that he should sell their share along with his own, and leave the laborers more leisure for work and the landlord for being idle. the capitalists, except those who are producers of the precious metals, derive no part of their income from those metals, since they only get them by buying them with their own produce: while all other persons have their incomes paid to them by the capitalists, or by those who have received payment from the capitalists, and as the capitalists have nothing, from the first, except their produce, it is that and nothing else which supplies all incomes furnished by them. there cannot, in short, be intrinsically a more insignificant thing, in the economy of society, than money; except in the character of a contrivance for sparing time and labor. it is a machine for doing quickly and commodiously, what would be done, though less quickly and commodiously, without it: and like many other kinds of machinery, it only exerts a distinct and independent influence of its own when it gets out of order. the introduction of money does not interfere with the operation of any of the laws of value.... the reasons which make the temporary or market value of things depend on the demand and supply, and their average and permanent values upon their cost of production, are as applicable to a money system as to a system of barter. things which by barter would exchange for one another, will, if sold for money, sell for an equal amount of it, and so will exchange for one another still, though the process of exchanging them will consist of two operations instead of only one. the relations of commodities to one another remain unaltered by money: the only new relation introduced, is their relation to money itself; how much or how little money they will exchange for; in other words, how the exchange value of money itself is determined. and this is not a question of any difficulty, when the illusion is dispelled, which caused money to be looked upon as a peculiar thing, not governed by the same laws as other things. money is a commodity, and its value is determined like that of other commodities, temporarily by demand and supply, permanently and on the average by cost of production. in the foregoing,[ ] attention has been directed mainly to the two functions of money known ( ) as the standard or common denominator of value, and ( ) as the medium of exchange. concerning transactions begun and ended on the spot nothing more need be said; but the fact of contracts over a period of time introduces an important element--the time element. whenever a contract is made covering a period of time, within which serious changes in the economic world may take place, then difficulties may arise as to what is a just standard of payments. various articles might serve equally well as a standard for exchanges performed on the spot, but it is not so when any one article is chosen as a standard for deferred payments. without much regard to theory, the world has in fact used the same standard for transactions whether settled on the spot, or whether extending over a period of time. in order to work with perfection as a standard for deferred payments, the article chosen as that standard should place both debtors and creditors in exactly the same absolute, and the same relative, position to each other at the end of a contract that they occupied at its beginning; this implies that the chosen article should maintain the same exchange value in relation to goods, rents, and the wages of labour at the end as at the beginning of the contract, and it implies that the borrower and lender should preserve the same relative position as regards their fellow producers and consumers at the later as at the earlier point of time, and that they have not changed this relation, one at the loss of the other. this makes demands which any article that can be suggested as a standard cannot satisfy. and yet it is a practical necessity of society that some one article should in fact be selected as the standard. the business world has thus been forced to find some commodity which--while admittedly never capable of perfection--provides more nearly than anything else all the essentials of a desirable standard. the causes which may bring about changes in the relations between goods and labor, on the one side, and the standard, on the other, are various. we may, for instance, compare wheat with the existing gold standard. the quantity of gold for which the wheat will exchange is its price. as wheat falls in value relatively to gold, it exchanges for less gold, that is, its price falls; or, _vice versa_, gold exchanges for more wheat, and relatively to wheat gold has risen. as one goes up, the other term in the ratio necessarily goes down; just as certainly as a rise in one end of a plank balanced on a log necessitates a fall in the other end of the plank. therefore, changes in prices can be caused by forces affecting either the gold side or the wheat side of the ratio; by forces affecting either the money standard or the goods compared with that standard. consequences of importance follow from this explanation. first suppose that commodities and labor remain unchanged in their production and reward, respectively; then, anything affecting the supply of and demand for gold will affect in general the value of gold in comparison with goods and labor. or, second, if we suppose an equilibrium between the demand for and supply of gold, then, prices and wages can be affected also by anything affecting the cost of obtaining goods or labor. it is one-sided to look for changes in prices solely from causes touching gold, or one term of the price ratio. if, however, it should be desired that prices should remain stationary, then this can be brought about only by finding for the standard an article that would automatically move in extent, and in the proper compensating direction, so as to meet any changes in value arising not only from causes affecting itself, but also from causes affecting labor and the vast number of goods that may be quoted in price. no commodity ever existed which could thus move in value. during long periods of time--within which gains in mechanical skill and invention, revolutions in political and social habits, changes in taste or fashion, settlement of new countries, opening of new markets, may take place--great alterations in the value of the standard may occur wholly from natural causes affecting the commodity side of the price ratio. and yet, in default of a perfect standard, persons who borrow and lend create debts and obligations expressed in terms of that article which has been adopted as the standard by the concurring habits of the commercial community of which they form a part. it should be understood, whenever men enter into obligations reaching over a period of time, that a necessary part of the risks involved in this undertaking is the possibility of an alteration in the exchange values of goods, on the one hand, and in the standard metal on the other, due to industrial changes and natural causes. this is one of the risks which belong to individual enterprise, differing in no way from other possibilities of gain and loss. for instance, prices rose, as indicated by an index number of in to an index number of in . therefore, in the united states, in this period of rising prices the creditor lost and the debtor gained. on the other hand, from to , prices fell from to , and in this period of falling prices the creditor gained and the debtor lost. it is to be observed, however, that these figures refer to actual quotations of prices during the fluctuations of our paper money. but it is evident in such movements as these, that parties to a time-contract must take their own chances of changes; and indeed it is much more wholesome that they should do so. it should be kept well in mind that it is not a proper function of government to step in and save men from the ordinary risks of trade and industry. it goes without saying that if changes in the value of the standard due to natural causes take place during the continuance of a contract, it is not the business of government to indemnify either party to the contract. this is a matter on which every individual who enters into time obligations must bear his own responsibility. footnotes: [ ] john stuart mill, _principles of political economy_, vol. ii, pp. - . [ ] adapted from _the report of the commission of the indianapolis convention_, pp. , , , . the university of chicago press, . chapter ii the early history of money [ ]living in civilized communities, and accustomed to the use of coined metallic money, we learn to identify money with gold and silver; hence spring hurtful and insidious fallacies. it is always useful, therefore, to be reminded of the truth, so well stated by turgot, that every kind of merchandise has the two properties of measuring value and transferring value. it is entirely a question of degree what commodities will in any given state of society form the most convenient currency, and this truth will be best impressed upon us by a brief consideration of the very numerous things which have at one time or other been employed as money. though there are many numismatists and many political economists, the natural history of money is almost a virgin subject, upon which i should like to dilate; but the narrow limits of my space forbid me from attempting more than a brief sketch of the many interesting facts which may be collected. currency in the hunting state perhaps the most rudimentary state of industry is that in which subsistence is gained by hunting wild animals. the proceeds of the chase would, in such a state, be the property of most generally recognized value. the meat of the animals captured would, indeed, be too perishable in nature to be hoarded or often exchanged; but it is otherwise with the skins, which, being preserved and valued for clothing, became one of the earliest materials of currency. accordingly, there is abundant evidence that furs or skins were employed as money in many ancient nations. they serve this purpose to the present day in some parts of the world. in the book of job (ii, ) we read, "skin for skin, yea, all that a man hath will he give for his life"; a statement clearly implying that skins were taken as the representative of value among the ancient oriental nations. etymological research shows that the same may be said of the northern nations from the earliest times. in the esthonian language the word _râha_ generally signifies money, but its equivalent in the kindred lappish tongue has not yet altogether lost the original meaning of skin or fur. leather money is said to have circulated in russia as late as the reign of peter the great, and it is worthy of notice, that classical writers have recorded traditions to the effect that the earliest currency used at rome, lacedæmon, and carthage, was formed of leather. we need not go back, however, to such early times to study the use of rude currencies. in the traffic of the hudson's bay company with the north american indians, furs, in spite of their differences of quality and size, long formed the medium of exchange. it is very instructive, and corroborative of the previous evidence to find that even after the use of coin had become common among the indians the skin was still commonly used as the money of account. thus whymper says, "a gun, nominally worth about forty shillings, bought twenty 'skins.' this term is the old one employed by the company. one skin (beaver) is supposed to be worth two shillings, and it represents two marten, and so on. you heard a great deal about 'skins' at fort yukon, as the workmen were also charged for clothing, etc., in this way." currency in the pastoral state in the next higher stage of civilization, the pastoral state, sheep and cattle naturally form the most valuable and negotiable kind of property. they are easily transferable, convey themselves about, and can be kept for many years, so that they readily perform some of the functions of money. we have abundance of evidence, traditional, written, and etymological, to show this. in the homeric poems oxen are distinctly and repeatedly mentioned as the commodity in terms of which other objects are valued. the arms of diomed are stated to be worth nine oxen, and are compared with those of glaucos, worth one hundred. the tripod, the first prize for wrestlers in the rd iliad, was valued at twelve oxen, and a woman captive, skilled in industry, at four. it is peculiarly interesting to find oxen thus used as the common measure of value, because from other passages it is probable, as already mentioned, that the precious metals, though as yet uncoined, were used as a store of value, and occasionally as a medium of exchange. the several functions of money were thus clearly performed by different commodities at this early period. in several languages the name for money is identical with that of some kind of cattle or domesticated animal. it is generally allowed that _pecunia_, the latin word for money, is derived from _pecus_, cattle. from the agamemnon of Æschylus we learn that the figure of an ox was the sign first impressed upon coins, and the same is said to have been the case with the earliest issues of the roman _as_. numismatic researches fail to bear out these traditions, which were probably invented to explain the connection between the name of the coin and the animal. a corresponding connection between these notions may be detected in much more modern languages. our common expression for the payment of a sum of money is _fee_, which is nothing but the anglo-saxon _feoh_, meaning alike money and cattle, a word cognate with the german _vieh_, which still bears only the original meaning of cattle. in the ancient german codes of law, fines and penalties are actually defined in terms of live-stock. in the zend avesta, as professor theodores ... informs me, the scale of rewards to be paid to physicians is carefully stated, and in every case the fee consists in some sort of cattle. the fifth and sixth lectures in sir h. s. maine's most interesting work on _the early history of institutions_, which has just been published, are full of curious information showing the importance of live-stock in a primitive state of society. being counted by the head, the kine was called capitale, whence the economical term capital, the law term chattel, and our common name cattle. in countries where slaves form one of the most common and valuable possessions, it is quite natural that they should serve as the medium of exchange like cattle. pausanias mentions their use in this way, and in central africa and some other places where slavery still flourishes, they are the medium of exchange along with cattle and ivory tusks. according to earl's account of new guinea, there is in that island a large traffic in slaves, and a slave forms the unit of value. even in england slaves are believed to have been exchanged at one time in the manner of money. articles of ornament as currency a passion for personal adornment is one of the most primitive and powerful instincts of the human race, and as articles used for such purposes would be durable, universally esteemed, and easily transferable, it is natural that they should be circulated as money. the _wampumpeag_ of the north american indians is a case in point, as it certainly served as jewellery. it consisted of beads made of the ends of black and white shells, rubbed down and polished, and then strung into belts or necklaces, which were valued according to their length, and also according to their color and luster, a foot of black _peag_ being worth two feet of white _peag_. it was so well established as currency among the natives that the court of massachusetts ordered in , that it should be received in the payment of debts among settlers to the amount of forty shillings. it is curious to learn, too, that just as european misers hoard up gold and silver coins, the richer indian chiefs secrete piles of wampum beads, having no better means of investing their superfluous wealth. exactly analogous to this north american currency, is that of the cowry shells, which, under one name or another--_chamgos_, _zimbis_, _bouges_, _porcelanes_, etc.--have long been used in the east indies as small money. in british india, siam, the west coast of africa, and elsewhere on the tropical coasts, they are still used as small change, being collected on the shores of the maldive and laccadive islands, and exported for the purpose. their value varies somewhat, according to the abundance of the yield, but in india the current rate used to be about five thousand shells for one rupee, at which rate each shell is worth about the two-hundredth part of a penny. among our interesting fellow-subjects, the fijians, whale's teeth served in the place of cowries, and white teeth were exchanged for red teeth somewhat in the ratio of shillings to sovereigns. among other articles of ornament or of special value used as currency, may be mentioned yellow amber, engraved stones, such as the egyptian scarabæi, and tusks of ivory. currency in the agricultural state many vegetable productions are at least as well suited for circulation as some of the articles which have been mentioned. it is not surprising to find, then, that among a people supporting themselves by agriculture, the more durable products were thus used. corn has been the medium of exchange in remote parts of europe from the time of the ancient greeks to the present day. in norway corn is even deposited in banks, and lent and borrowed. what wheat, barley, and oats are to europe, such is maize in parts of central america, especially mexico, where it formerly circulated. in many of the countries surrounding the mediterranean, olive oil is one of the commonest articles of produce and consumption; being, moreover, pretty uniform in quality, durable, and easily divisible, it has long served as currency in the ionian islands, mytilene, some towns of asia minor, and elsewhere in the levant. just as cowries circulate in the east indies, so cacao nuts, in central america and yucatan, form a perfectly recognized and probably an ancient fractional money. travellers have published many distinct statements as to their value, but it is impossible to reconcile these statements without supposing great changes of value either in the nuts or in the coins with which they are compared. in , at caracas, about thirty cacao nuts were worth one penny english, whereas recently ten beans would go to a penny, according to squier's statements. in the european countries, where almonds are commonly grown, they have circulated to some extent like the cacao nuts, but are variable in value, according to the success of the harvest. it is not only, however, as a minor currency that vegetable products have been used in modern times. in the american settlements and the west india islands, in former days, specie used to become inconveniently scarce, and the legislators fell back upon the device of obliging creditors to receive payment in produce at stated rates. in , the governor of the plantations of virginia ordered that tobacco should be received at the rate of three shillings for the pound weight, under the penalty of three years' hard labor. we are told that, when the virginia company imported young women as wives for the settlers, the price per head was one hundred pounds of tobacco, subsequently raised to one hundred and fifty. as late as , the legislature of maryland made tobacco and indian corn legal tenders; and in there were similar laws concerning corn in massachusetts. the governments of some of the west india islands seem to have made attempts to imitate these peculiar currency laws, and it was provided that the successful plaintiff in a lawsuit should be obliged to accept various kinds of raw produce, such as sugar, rum, molasses, ginger, indigo, or tobacco.... the perishable nature of most kinds of animal food prevents them from being much used as money; but eggs are said to have circulated in the alpine villages of switzerland, and dried codfish have certainly acted as currency in the colony of newfoundland. manufactured and miscellaneous articles as currency the enumeration of articles which have served as money may already seem long enough for the purposes in view. i will, therefore, only add briefly that a great number of manufactured commodities have been used as a medium of exchange in various times and places. such are the pieces of cotton cloth, called _guinea pieces_, used for traffic upon the banks of the senegal, or the somewhat similar pieces circulated in abyssinia, the soulou archipelago, sumatra, mexico, peru, siberia, and among the veddahs. it is less easy to understand the origin of the curious straw money which circulated until in the portuguese possessions in angola, and which consisted of small mats, called _libongos_, woven out of rice straw, and worth about - / _d._ each. these mats must have had, at least originally, some purpose apart from their use as currency, and were perhaps analogous to the fine woven mats so much valued by the samoans, and also treated by them as a medium of exchange. salt has been circulated not only in abyssinia, but in sumatra, mexico, and elsewhere. cubes of benzoin gum or beeswax in sumatra, red feathers in the islands of the pacific ocean, cubes of tea in tartary, iron shovels or hoes among the malagasy, are other peculiar forms of currency. the remarks of adam smith concerning the use of hand-made nails as money in some scotch villages will be remembered by many readers, and need not be repeated. m. chevalier has adduced an exactly corresponding case from one of the french coalfields. were space available it would be interesting to discuss the not improbable suggestion of boucher de perthes, that, perhaps, after all, the finely worked stone implements now so frequently discovered were among the earliest mediums of exchange. some of them are certainly made of jade, nephrite, or other hard stones, only found in distant countries, so that an active traffic in such implements must have existed in times of which we have no records whatever. there are some obscure allusions in classical authors to a wooden money circulating among the byzantines, and to a wooden talent used at antioch and alexandria, but in the absence of fuller information as to their nature, it is impossible to do more than mention them.... the invention of coining the date of the invention of coining can be assigned with some degree of probability. coined money was clearly unknown in the homeric times, and it was known in the time of lycurgus. we might therefore assume, with various authorities, that it was invented in the mean time, or about b. c. there is tradition, moreover, that pheidon, king of argos, first struck silver money in the island of Ægina about b. c., and the tradition is supported by the existence of small stamped ingots of silver, which have been found in Ægina. later inquiries, however, lead to the conclusion that pheidon lived in the middle of the eighth century b. c., and grote has shown good reasons for believing that what he did accomplish was done in argos, and not in Ægina. the mode in which the invention happened is sufficiently evident. seals were familiarly employed in very early times, as we learn from the egyptian paintings or the stamped bricks of nineveh. being employed to signify possession, or to ratify contracts, they came to indicate authority. when a ruler first undertook to certify the weights of pieces of metal, he naturally employed his seal to make the fact known, just as, at goldsmiths' hall, a small punch is used to certify the fineness of plate. in the earliest forms of coinage there were no attempts at so fashioning the metal that its weight could not be altered without destroying the stamp or design. the earliest coins struck, both in lydia and in the peloponnesus, were stamped on one side only.... footnotes: [ ] w. stanley jevons, _money and the mechanism of exchange_, d. appleton and company, new york, , pp. - , , . chapter iii qualities of the material of money [ ]many recent writers, such as huskisson, macculloch, james mill, garnier, chevalier, and walras, have satisfactorily described the qualities which should be possessed by the material of money. earlier writers seem, however, to have understood the subject almost as well.... of all writers, m. chevalier ... probably gives the most accurate and full account of the properties which money should possess, and i shall in many points follow his views. the prevailing defect in the treatment of the subject is the failure to observe that money requires different properties as regards different functions. to decide upon the best material for money is thus a problem of great complexity, because we must take into account at once the relative importance of the several functions of money, the degree in which money is employed for each function, and the importance of each of the physical qualities of the substance with respect to each function. in a simple state of industry money is chiefly required to pass about between buyers and sellers. it should, then, be conveniently portable, divisible into pieces of various size, so that any sum may readily be made up, and easily distinguishable by its appearance, or by the design impressed upon it. when money, however, comes to serve, as it will at some future time, almost exclusively as a measure and standard of value, the system of exchange, being one of perfected barter, such properties become a matter of comparative indifference, and stability of value, joined perhaps to portability, is the most important quality. before venturing, however, to discuss such complex questions, we must proceed to a preliminary discussion of the properties in question, which may thus perhaps be enumerated in the order of their importance: . utility and value. . portability. . indestructibility. . homogeneity. . divisibility. . stability of value. . cognisability. . utility and value since money has to be exchanged for valuable goods, it should itself possess value and it must therefore have utility as the basis of value. money, when once in full currency, is only received in order to be passed on, so that if all people could be induced to take worthless bits of material at a fixed rate of valuation, it might seem that money does not really require to have substantial value. something like this does frequently happen in the history of currencies, and apparently valueless shells, bits of leather, or scraps of paper are actually received in exchange for costly commodities. this strange phenomenon is, however, in most cases capable of easy explanation, and if we were acquainted with the history of every kind of money the like explanation would no doubt be possible in other cases. the essential point is that people should be induced to receive money, and pass it on freely at steady ratios of exchange for other objects; but there must always be some sufficient reason first inducing people to accept the money. the force of habit, convention, or legal enactment may do much to maintain money in circulation when once it is afloat, but it is doubtful whether the most powerful government could oblige its subjects to accept and circulate as money a worthless substance which they had no other motive for receiving. certainly, in the early stages of society, the use of money was not based on legal regulations, so that the utility of the substance for other purposes must have been the prior condition of its employment as money. thus the singular _peag_ currency, or _wampumpeag_, which was found in circulation among the north american indians by the early explorers, was esteemed for the purpose of adornment, as already mentioned.... the cowry shells, so widely used as a small currency in the east, are valued for ornamental purposes on the west coast of africa, and were in all probability employed as ornaments before they were employed as money. all the other articles [previously] mentioned ... such as oxen, corn, skins, tobacco, salt, cacao nuts, tea, olive oil, etc., which have performed the functions of money in one place or another, possessed independent utility and value. if there are any apparent exceptions at all to this rule, they would doubtless admit of explanation by fuller knowledge. we may, therefore, agree with storch when he says: "it is impossible that a substance which has no direct value should be introduced as money, however suitable it may be in other respects for this use." when once a substance is widely employed as money, it is conceivable that its utility will come to depend mainly upon the services which it thus confers upon the community. gold, for instance, is far more important as the material of money than in the production of plate, jewellery, watches, gold-leaf, etc. a substance originally used for many purposes may eventually serve only as money, and yet, by the demand for currency and the force of habit, may maintain its value. the cowry circulation of the indian coasts is probably a case in point. the importance of habit, personal or hereditary, is at least as great in monetary science as it is, according to mr. herbert spencer, in morals and sociological phenomena generally. there is, however, no reason to suppose that the value of gold and silver is at present due solely to their conventional use as money. these metals are endowed with such singularly useful properties that, if we could only get them in sufficient abundance, they would supplant all the other metals in the manufacture of household utensils, ornaments, fittings of all kinds, and an infinite multitude of small articles, which are now made of brass, copper, bronze, pewter, german silver, or other inferior metals and alloys. in order that money may perform some of its functions efficiently, especially those of a medium of exchange and a store of value, to be carried about, it is important that it should be made of a substance valued highly in all parts of the world, and, if possible, almost equally esteemed by all peoples. there is reason to think that gold and silver have been admired and valued by all tribes which have been lucky enough to procure them. the beautiful lustre of these metals must have drawn attention and excited admiration as much in the earliest as in the present times. . portability the material of money must not only be valuable, but the value must be so related to the weight and bulk of the material, that the money shall not be inconveniently heavy on the one hand, nor inconveniently minute on the other. there was a tradition in greece that lycurgus obliged the lacedæmonians to use iron money, in order that its weight might deter them from overmuch trading. however this may be, it is certain that iron money could not be used in cash payments at the present day, since a penny would weigh about a pound, and instead of a five-pound note, we should have to deliver a ton of iron. during the last century copper was actually used as the chief medium of exchange in sweden; and merchants had to take a wheelbarrow with them when they went to receive payments in copper _dalers_. many of the substances used as currency in former times must have been sadly wanting in portability. oxen and sheep, indeed, would transport themselves on their own legs; but corn, skins, oil, nuts, almonds, etc., though in several respects forming fair currency, would be intolerably bulky and troublesome to transfer. the portability of money is an important quality not merely because it enables the owner to carry small sums in the pocket without trouble, but because large sums can be transferred from place to place, or from continent to continent, at little cost. the result is to secure an approximate uniformity in the value of money in all parts of the world. a substance which is very heavy and bulky in proportion to value, like corn or coal, may be very scarce in one place and over-abundant in another; yet the supply and demand cannot be equalised without great expense in carriage. the cost of conveying gold or silver from london to paris, including insurance, is only about four-tenths of one per cent.; and between the most distant parts of the world it does not exceed from to per cent. substances may be too valuable as well as too cheap, so that for ordinary transactions it would be necessary to call in the aid of the microscope and the chemical balance. diamonds, apart from other objections, would be far too valuable for small transactions. the value of such stones is said to vary as the square of the weight, so that we cannot institute any exact comparison with metals of which the value is simply proportional to the weight. but taking a one-carat diamond (four grains) as worth £ , we find it is, weight for weight, times as valuable as gold. there are several rare metals, such as iridium and osmium, which would likewise be far too valuable to circulate. even gold and silver are too costly for small currency. a silver penny now weighs - / grains, and a gold penny would weigh only half a grain. the pretty octagonal quarter-dollar tokens circulated in california are the smallest gold coins i have seen, weighing less than four grains each, and are so thin that they can almost be blown away. . indestructibility if it is to be passed about in trade, and kept in reserve, money must not be subject to easy deterioration or loss. it must not evaporate like alcohol, nor putrefy like animal substances, nor decay like wood, nor rust like iron. destructible articles, such as eggs, dried codfish, cattle, or oil, have certainly been used as currency; but what is treated as money one day must soon afterwards be eaten up. thus a large stock of such perishable commodities cannot be kept on hand, and their value must be very variable. the several kinds of corn are less subject to this objection, since, when well dried at first, they suffer no appreciable deterioration for several years. . homogeneity all portions of specimens of the substance used as money should be homogeneous, that is, of the same quality, so that equal weights will have exactly the same value. in order that we may correctly count in terms of any unit, the units must be equal and similar, so that twice two will always make four. if we were to count in precious stones, it would seldom happen that four stones would be just twice as valuable as two stones. even the precious metals, as found in the native state, are not perfectly homogeneous, being mixed together in almost all proportions; but this produces little inconvenience, because the assayer readily determines the quantity of each pure metal present in any ingot. in the processes of refining and coining, the metals are afterwards reduced to almost exactly uniform degrees of fineness, so that equal weights are then of exactly equal value. . divisibility closely connected with the last property is that of divisibility. every material is, indeed, mechanically divisible, almost without limit. the hardest gems can be broken, and steel can be cut by harder steel. but the material of money should be not merely capable of division, but the aggregate value of the mass after division should be almost exactly the same as before division. if we cut up a skin or fur the pieces will, as a general rule, be far less valuable than the whole skin or fur, except for a special intended purpose; and the same is the case with timber, stone, and most other materials in which reunion is impossible. but portions of metal can be melted together again whenever it is desirable, and the cost of doing this, including the metal lost, is in the case of precious metals very inconsiderable, varying from / _d._ to / _d._ per ounce. thus, approximately speaking, the value of any piece of gold or silver is simply proportional to the weight of fine metal which it contains. . stability of value it is evidently desirable that the currency should not be subject to fluctuations of value. the ratios in which money exchanges for other commodities should be maintained as nearly as possible invariable on the average. this would be a matter of comparatively minor importance were money used only as a measure of values at any one moment, and as a medium of exchange. if all prices were altered in like proportion as soon as money varied in value, no one would lose or gain, except as regards the coin which he happened to have in his pocket, safe, or bank balance. but, practically speaking, as we have seen, people do employ money as a standard of value for long contracts, and they often maintain payments at the same variable rate, by custom or law, even when the real value of the payment is much altered. hence every change in the value of money does some injury to society. it might be plausibly said, indeed, that the debtor gains as much as the creditor loses, or vice versa, so that on the whole the community is as rich as before; but this is not really true. a mathematical analysis of the subject shows that to take any sum of money from one and give it to another will, on the average of cases, injure the loser more than it benefits the receiver. a person with an income of one hundred pounds a year would suffer more by losing ten pounds than he would gain by an addition of ten pounds, because the degree of utility of money to him is considerably higher at ninety pounds than it is at one hundred and ten. on the same principle, all gaming, betting, pure speculation, or other accidental modes of transferring property involve, on the average, a dead loss of utility. the whole incitement to industry and commerce and the accumulation of capital depends upon the expectation of enjoyment thence arising, and every variation of the currency tends in some degree to frustrate such expectation and to lessen the motives for exertion. . cognisability by this name we may denote the capability of a substance for being easily recognised and distinguished from all other substances. as a medium of exchange, money has to be continually handed about, and it will occasion great trouble if every person receiving currency has to scrutinize, weigh, and test it. if it requires any skill to discriminate good money from bad, poor ignorant people are sure to be imposed upon. hence the medium of exchange should have certain distinct marks which nobody can mistake. precious stones, even if in other respects good as money, could not be so used, because only a skilled lapidary can surely distinguish between true and imitation gems. under cognisability we may properly include what has been aptly called _impressibility_, namely, the capability of a substance to receive such an impression, seal, or design, as shall establish its character as current money of certain value. we might more simply say, that the material of money should be coinable, so that a portion, being once issued according to proper regulations with the impress of the state, may be known to all as good and legal currency, equal in weight, size, and value to all similarly marked currency.... footnotes: [ ] w. stanley jevons, _money and the mechanism of exchange_, pp. - . d. appleton & company, new york, . chapter iv legal tender[ ] the essential idea of "legal tender" is that quality given to money by law which obliges the creditor to receive it in full satisfaction of a past debt when expressed in general terms of the money of a country. a debt is a sum of money due by contract, express or implied. when our laws, for instance, declare that united states notes are legal tender--and this is the only complete designation of a legal-tender money--for "all debts public and private," it must be understood that this provision does not cover any operations not arising from contract. current buying and selling do not make a situation calling for legal tender; a purchaser cannot compel the delivery of goods over a counter by offering legal-tender money for them, because, as yet, no debt has been created.[ ] contracts made in general terms of the money units of the country must necessarily often be interpreted by the courts. the existence of contracts calling for a given sum of dollars and the necessity of adjudicating and enforcing such contracts, require that there should be an accurate legal interpretation of what a dollar is. as every one knows, the name, or unit of account, is affixed to a given number of grains of a specified fineness of a certain metal. this being the standard, and this having been chosen by the concurring habits of the business world, it is fit that the law should designate that, when only dollars are mentioned in a contract, it should be satisfied only by the payment of that which is the standard money of the community. since prices and contracts are expressed in terms of the standard article, it is clear that the legal-tender quality should not be equally affixed to different articles having different values, but called by the same name. this method would be sure to bring confusion, uncertainty, and injustice into trade and industry. no one who had made a contract would know in what he was to be paid. the legal-tender quality, then, should be confined to that which is the sole standard. and it is also obvious that when a standard is satisfactorily determined upon, and when various effective media of exchange, like bank notes, checks, or bills of exchange, have sprung up, the legal-tender quality should not be given to these instruments of convenience. they are themselves expressed in, and are resolvable into, the standard metal; so the power to satisfy debts should be given not to the shadow, but to the substance, not to the devices drawn in terms of the standard, but only to the standard itself, even though, as a matter of fact, nine-tenths of the debts and contracts are actually settled by means of these devices. so long as these instruments are convertible into, and thus made fully equal to, the standard in terms of which they are drawn, they will be used by the business community for the settlement of debts without being made a legal tender. and whenever they are worth less than the standard they certainly should not be made a legal tender, because of the injustice which in such a case they would work. having shown that the legal-tender quality is only a necessary legal complement of the choice of a standard, it will not be difficult to see that the state properly chooses an article fit to have the legal-tender attribute for exactly the reasons that governed the selection of the same article as a standard. the whole history of money shows that the standard article was the one which had utility to the community using it. as the evolution of the money commodity went on from cattle to silver and gold, so the legal-tender provisions naturally followed this course. a state may select a valueless commodity as a standard, but that will not make it of value to those who would already give nothing for it; and so, it may give the legal-tender quality to a thing which has become valueless, but that will not of itself insure the maintenance of its former value. this proposition may, at first, appear to be opposed to a widely-spread belief; but its soundness can be fully supported. it should be learned that a commodity, or a standard, holds its value for reasons quite independent of the fact that it is given legal recognition. it has happened that legal recognition has been given to it because it possessed qualities that gave it value to the commercial world, and not that it came to have these qualities and this value because it was made a legal tender. a good illustration of this truth is to be found in international trade. money which is not dependent on artificial influences for its value, and which is not redeemable in something else, is good the world over at its actual commercial value, not at its value as fixed by any legal-tender laws. it is not the legal-tender stamp that gives a coin its value in international payments. a sovereign, an eagle, a napoleon, is constantly given and received in international trade not because of the stamp it bears, but because of the number of grains of a given fineness of gold which it contains--the value of which is determined in the markets of the world. and an enormous trade among the great commercial countries goes on easily and effectively without regard to the legal-tender laws of the particular country whose coins are used. by imposing the attribute of legal tender, however, upon a given metal or money, it may be believed that thereby a new demand is created for that metal, and that its value is thus controlled. and in theory there is some basis for this belief. it is, of course, true that, in so far as giving to money a legal-tender power creates a new demand for it (which without that power would not have existed) an effect upon its value can be produced. but this effect is undoubtedly much less than is usually supposed. it must be remembered that the value of gold, for instance, is affected by world influences; that its value is determined by the demand of the whole world as compared with the whole existing supply in the world. in order to affect the value of gold in any one country, a demand created by a legal-tender enactment must be sufficient to affect the world-value of gold. evidently the effect will be only in the proportion that the new demand bears to the whole stock in the world. it is like the addition of a barrel of water to a pond; theoretically the surface level is raised, but not to any appreciable extent. it may now be permissible to examine into the extent to which a demand is created by legal-tender laws. if the article endowed with a legal-tender power is already used as the standard and as a medium of exchange, it is given no value which it did not have before. the customs and business habits of a country alone determine how much of the standard coin will be carried about and used in hand-to-hand purchases, and how much of the business will be performed by other media of exchange, such as checks or drafts. the decision of a country to adopt gold--when it had only paper before, as was the case in italy--would create a demand for gold to an extent determined by the monetary habits of that country; and this demand has an effect, as was said, only in the proportion of this amount to the total supply in the world. this operation arises from choosing gold as the standard of prices and as the medium of exchange. to give this standard a legal-tender power in addition does not increase the demand for it, because the stamp on the coin does not in any way alter the existing habits of the community as to the quantity of money it will use. but in case an equal power to pay debts is given to fixed quantities of two metals, while each quantity so fixed has a different metallic value but the same denomination in the coinage, gresham's law is set in operation with the result that the cheaper metal becomes the standard. after this change has been accomplished, the legal tender has no value-giving force. when the cheaper metal has become the standard, its legal-tender quality does not raise the value of the coin beyond the value of its content. this cheaper standard, in international trade, would be worth no more in the purchase of goods because it bore the stamp of any one country. prices must necessarily be adjusted between the relative values of goods and the standard with which they are compared. if the standard is cheaper, prices will be higher, irrespective of legal-tender acts. where two metals are concerned, then, the only effect of a legal-tender clause is an injurious one, in that the metal which is overvalued drives out that which is under-valued. the example of an inconvertible paper, such as our united states notes (greenbacks) in - , is still more conclusive. although a full legal tender for all debts public and private, their value steadily sank until they were at one time worth only cents in gold. in california, moreover, these notes, although legal-tender, were even kept out of circulation by public opinion. in short, the value of inconvertible paper can be but little affected by legal-tender powers. its value is more directly governed, as in the case of token coins, by the probabilities of redemption.[ ] as bearing on the point that the value of the paper was more influenced by the chances of redemption than by legal-tender laws, we may cite the sudden fluctuations in the value of our united states notes during the civil war. with no change in the legal-tender quality and no change in the indebtedness which might be paid with such notes, their value frequently rose or fell many per cent. in a single day owing to reports of federal successes or defeats in battle, which had a tendency to affect one way or the other the public estimate of the probabilities of an early resumption of specie payments. the fact that they were legal tender evidently had no effect whatever in maintaining their value. in view of the evident fact that legal-tender acts do not preserve the value of money, it is clear that the demand created by such legislation must be insignificant. and this must be so in principle as well as in fact. there is but one thing which the legal-tender quality enables money to do which it could not equally well do without being a legal tender; that is, to pay past debts. an examination, however, shows that this use of money is very small compared with its other uses. the amount of past debts coming due and which might be paid in any year, month or day is insignificant when compared with the total transactions of that year, month or day--so very small as to lose all measurable value-giving power. in other words, the one thing which legal-tender money can surely do in spite of the habits, wishes or prejudices of the business community in which it exists, namely, cancel past debt, is infinitesimally small when compared with those other things which man wishes money to do for him. it is for this reason that it ceases to give value, and this is why history has shown so many instances where money endowed with legal-tender power has become utterly valueless. the legal-tender money is no longer money if it will not secure for man the things which are most important for his welfare, if it will not buy food, clothes and shelter; for it performs none of the functions of money except the subsidiary one of cancelling past debts. moreover, the obligatory uses of legal-tender money are in fact very inconsiderable. a law requiring a past debt to be satisfied with money of a certain kind has for its essence only the payment of something of a definite value, or its equivalent; in practice, it does not even bring about the actual use of a legal money, since the monetary habits of the community will not necessarily require the debt to be paid in such money. take the extreme case of a judgment by a court against a defendant for fulfilment of a contract; in such an example, of all others, it would be supposed that legal money would be exacted. but even here, the judgment would most probably be satisfied by the attorney's check, or at most by a certified check. if such media of exchange are of common usage in the community they will be resorted to in practice even for legal-tender payments. the necessity of paying that which would be mutually satisfactory to payer and payee also makes clear why the existence of a legal-tender money does not necessarily cause its actual use in payments. the business habits of the community are stronger than legislative powers. business men will not as a rule take advantage of a legal-tender act to pay debts in a cheaper money, if they look forward to remaining in business. for, if, by taking advantage of legal devices they defraud the creditor, they cannot expect credit again from the same source; and since loans are a necessity of legitimate modern trade, such action would ruin their credit and cut them off from business activity in the future. gold was not driven out of circulation by paper money during the years - in california, because the sentiment of the business public was against the use of our depreciated greenback currency; and a discrimination was made against merchants who resorted to the use of paper. explanation has been given of the principles according to which legal-tender laws should be applied, if at all. it is not wholly clear that there is any reason for their existence. it may now be well to indicate briefly the origin of legal-tender provisions. it can scarcely be doubted that their use arose from the desire of defaulting monarchs to ease their indebtedness by forcing upon creditors a debased coinage. having possession of the mints, the right of coinage vesting in the lord, the rulers of previous centuries have covered the pages of history with the records of successive debasements of the money of account. the legal-tender enactment was the instrument by which the full payment of debts was evaded. there would have been no reason for debasing coins, if they could not be forced upon unwilling creditors. it is, therefore, strange indeed that, in imitation of monarchical morals of a past day, republican countries should have thought it a wise policy to clothe depreciated money with a nominal value for paying debts. although the people are now sovereign, they should not embrace the vices of mediæval sovereignty for their own dishonest gain in scaling debts. footnotes: [ ] _report of the monetary commission of the indianapolis convention_, pp. - . the hollenbeck press, indianapolis, . [ ] "a contract payable in money generally is, undoubtedly, payable in any kind of money made by law legal tender, at the option of the debtor at the time of payment. he contracts simply to pay so much money, and creates a debt pure and simple; and by paying what the law says is money his contract is performed. but, if he agrees to pay in gold coin, it is not an agreement to pay money simply, but to pay or deliver a specific kind of money and nothing else; and the payment in any other is not a fulfilment of the contract according to its terms or the intention of the parties." california , carpenter _vs._ atherton. [ ] for a contrary view, see joseph french johnson, _money and currency_, chapter .--editor. chapter v the greenbacks the greenback issues [ ]the greenbacks were an outgrowth of the civil war. soon after the opening of the struggle the secretary of the treasury negotiated a loan of $ , , with eastern banks. partly because of confederate successes and partly because of the failure of secretary chase to adopt a firm policy of loans supported by taxation, public credit greatly declined, and government bonds became almost unsaleable. the outlook became alarming and depositors withdrew gold from the new york banks in such large amounts that specie payments were suspended, december , . in february, , congress provided for the issue of $ , , in united states notes or greenbacks. bond sales proceeded slowly and a second issue of $ , , of notes was authorised in july of the same year. as a result of "military necessity" a third issue of $ , , was authorised january , , and temporarily increased march to $ , , . provision was made for the reissue of the greenbacks and $ , , were outstanding at the close of the war. the fluctuating premium on gold depreciation of the greenbacks occurred at once and the value of gold as expressed in greenbacks was subject to almost constant change. during the year the premium varied from to ; in from to ; and in from to . among the most important political and economic factors which caused these fluctuations may be mentioned: ( ) the increase in the amount of the greenbacks. each new issue was reflected in a rise in the premium. ( ) the condition of the treasury. the annual reports of the secretary of the treasury were anxiously awaited and their appearance caused a rise or fall of the premium according as the condition of the finances seemed gloomy or hopeful. ( ) ability of the government to borrow. the fate of a loan indicated public confidence or distrust. ( ) changes in the officials of the treasury department. secretary chase's resignation, july , , depressed the currency decidedly. ( ) war news. every victory raised the price of currency and every defeat depressed it. from to the premium on gold and the median of relative prices correspond so well that one cannot resist the conclusion that these changes were mainly due to a common cause, which can hardly be other than the varying esteem in which the notes of the government that constituted the standard money of the country were held. if this conclusion be accepted, it follows that the suspension of specie payments and the legal-tender acts must be held almost entirely responsible for all the far-reaching economic disturbances following from the price upheaval which it is our task now to trace in detail. the effects of greenbacks upon wages statistical evidence supports unequivocally the common theory that persons whose incomes are derived from wages suffer seriously from a depreciation of the currency. the confirmation seems particularly striking when the conditions other than monetary affecting the labour market are taken into consideration. american workingmen are intelligent and keenly alive to their interests. there are probably few districts where custom plays a smaller and competition a larger rôle in determining wages than in the northern states. while labor organisations had not yet attained their present power, manual laborers did not fail to avail themselves of the help of concerted action in the attempt to secure more pay. strikes were frequent. all these facts favored a speedy readjustment of money wages to correspond with changed prices. but more than all else, a very considerable part of the labor supply was withdrawn from the market into the army and navy. in and about one million of men seem to have been enrolled. about one-seventh of the labor supply withdrew from the market. but despite all these favoring circumstances, the men who stayed at home did not succeed in obtaining an advance in pay at all commensurate with the increase in living expenses. women on the whole succeeded less well than men in the struggle to readjust money wages to the increased cost of living. it is sometimes argued that the withdrawal of laborers from industrial life was the chief cause of the price disturbances of the war period. this withdrawal, it is said, caused the advance of wages, and greater cost of labor led to the rise of prices. the baselessness of this view is shown by two well established facts--first, that the advance of wages was later than the advance of prices, and second, that wages continued to rise in after the volunteer armies had been disbanded and the men gone back to work. wage-earners, however, seem to have been more fully employed during the war than in common times of prosperity. of course, the enlistment of so many thousands of the most efficient workers made places for many who might otherwise have found it difficult to secure work. moreover, the paper currency itself tended to obtain full employment for the laborer, for the very reason that it diminished his real income. in the distribution of what marshall has termed the "national dividend" a diminution of the proportion received by the laborer must have been accompanied by an increase in the share of some one else. nor is it difficult to determine who this person was. the beneficiary was the active employer, who found that the money wages, interest, and rent he had to pay increased less rapidly than the money prices of his products. the difference between the increase of receipts and the increase of expenses swelled his profits. of course, the possibility of making high profits provided an incentive for employing as many hands as possible. after an examination of the change in the condition of the great mass of wage-earners, it may seem surprising that few complaints were heard from them of unusual privations. this silence may be due in part to the fact that a considerable increase of money income produces in the minds of many a fatuous feeling of prosperity, even though it be more than offset by an increase of prices. but doubtless the chief reason is to be found in the absorption of public interest in the events of the war. the people both of the south and north were so vitally concerned with the struggle that they bore without murmuring the hardships it entailed of whatever kind. government taxation that under other circumstances might have been felt to be intolerable was submitted to with cheerfulness. the paper currency imposed upon wage-earners a heavier tax--amounting to confiscation of perhaps a fifth or a sixth of real incomes. but the workingmen of the north were receiving considerably more than a bare subsistence minimum before the war, and reduction of consumption was possible without producing serious want. accordingly the currency tax, like the tariff and the internal revenue duties, was accepted as a necessary sacrifice to the common cause and paid without protest by severe retrenchment. rent urban rents in studying the influence of depreciation upon rent, it is necessary to use that term in its popular rather than in its scientific sense. this fact is less to be lamented, because the theorist himself admits that the distinction becomes sadly blurred when he attempts to deal with short intervals of time. capital once invested in improvements can seldom be withdrawn rapidly. in "the short run," therefore, it is practically a part of the land, and the return to it follows the analogy of rent rather than of interest. the renting landlord found that the degree in which he was affected by the fluctuations in the value of the paper money depended largely upon the terms of the contract into which he had entered. it is clear from a careful examination that the landlord who before suspension had leased his property for a considerable period without opportunity for revaluation must have suffered severely if paid in greenbacks. the number of "dollars" received as rental might be the same in as in , but their purchasing power was less than one-half as great. somewhat less hard was the situation of the landlord who had let his property for but one or two years. at the expiration of the leases he had opportunities to make new contracts with the tenants. in his capacity as special commissioner of the revenue, mr. david a. wells devoted some attention to the rise of rent. his report for december, , says: the average advance in the rents of houses occupied by mechanics and laborers in the great manufacturing centres of the country is estimated to have been about per cent.; in some sections, however, a much greater advance has been experienced, as for example, at pittsburgh, where per cent. and upward is reported. in many of the rural districts, on the other hand, the advance has been much less. mr. wells later modified this estimate somewhat. the advance in rents was greater in cities than in minor towns. in some cities--_e. g._, cincinnati and louisville--owners of workingmen's tenements appear to have been able to increase their money incomes rather more rapidly than prices advanced, but in boston, philadelphia, st. louis, and in smaller towns, their money incomes appear to have increased more slowly than living expenses. these conclusions rest, however, on a narrow statistical basis. farm rents the rural landowner suffered serious injury from the paper currency when he let his land for a money rent. but renting farms for a fixed sum of money has always been less common in the united states than renting for a definite share of the products. it is probable that at the time of the civil war more than three-quarters of the rented farms were let "on shares." inasmuch as no money payments entered into such arrangements, the pecuniary relations of landlord and tenant were not directly affected by the change in the monetary standard. farm owners who had let their places on these conditions escaped the direct losses that weighed so heavily on the recipients of money rents. but even they did not avoid all loss. for the price of agricultural products for the greater part of the war period lagged considerably behind the price of other goods. this difference, of course, meant loss to men whose incomes were paid in bushels of grain. interest and loan capital the problem of lenders and borrowers of capital the task of ascertaining the effect of the greenback issues upon the situation of lenders and borrowers of capital is in one respect more simple and in another respect more complex than the task of dealing with wage-earners. it is simpler in that there are not different grades of capital to be considered like the different grades of labor. but it is more complex in that the capitalist must be considered not only as the recipient of a money income, as is the laborer, but also as the possessor of certain property that may be affected by changes in the standard money. the problem is further complicated by the fact that the relative importance of these two items--rate of interest and value of principal--is not the same in all cases. whether a lender is affected more by the one item or the other depends upon what he intends to do with his property at the expiration of existing contracts. a widow left in with an estate of say $ , , who expected to keep this sum constantly at interest and to find new borrowers as soon as the old loans were paid, could neglect everything but the net rate of interest received. on the other hand, if this estate had been left to a youth of twenty who intended to invest his property in some business after a few years, the rate of interest would be of relatively less importance to him than the purchasing power of the principal when the time came to set up for himself. of course, the same difference exists in the case of different borrowers. those borrowers who expected to renew old loans on maturity would have to consider little beyond the interest demanded by lenders, while borrowers who expected to pay off the loans out of the proceeds of their ventures would be interested primarily in the amount of goods that would sell for sufficient money to make up the principal. although these two classes of cases are by no means independent of each other, the following discussion will be rendered clearer by observing the broad difference between them. accordingly, attention will first be directed to the effect of the price fluctuations upon the purchasing power of the principal of loans, and afterward to changes in the rate of interest. purchasing power of the principal of loans most persons who made loans in the earlier part of the civil war and were repaid in greenbacks must have suffered heavy losses from the smaller purchasing power of the principal when it was returned to them. but while this general fact is clear, it is difficult to make a quantitative statement of the degree of the loss that will be even tolerably satisfactory. in the case of almost all loans made before the middle of and repaid prior to , the creditor found that the sum returned to him had a purchasing power much less than the purchasing power that had been transferred to the borrower when the loan was made. this decline varied from to more than per cent. on loans made in the middle of or later, on the contrary, the creditor gained as a rule. in the case of loans made in january, , and repaid six months later, the increase in purchasing power was over per cent. the rate of interest in turning to study the fortunes of men who have no thought of employing their capital for themselves, but expect to seek new borrowers as rapidly as old loans are repaid, one finds it necessary to distinguish between cases where loans have been made for short and for long terms; between the cases, that is, where there is and where there is not an opportunity to make a new contract regarding the rate of interest. the latter cases may be dismissed with a word. the capitalist who lent $ , for five years in april, , at per cent. interest, would be in relatively the same position as the workingman who received no advance in money wages; while his money income remained the same, the rise of prices would decrease his real income in and by about one-half. of course, this loss to the creditor is a gain to the debtor; for to the business man using borrowed capital the advance of prices means that he can raise his interest money by selling a smaller proportion of his output. more interesting is the case of loans maturing and made afresh during the period under examination. the important question is: how far did the lender secure compensation for the diminished purchasing power of the money in which he was paid by contracting for a higher rate of interest? the advance in the rate of interest was comparatively small--much too small to compensate for the increased cost of living. while prices rose approximately per cent. and money wages somewhat less than per cent. during the years - , rates of interest on call and time loans increased less than per cent. during the same period. the conclusion is not only that persons who derived their income from capital lent at interest for short terms were injured by the issues of the greenbacks, but also that their injuries were more serious than those suffered by wage-earners. to explain this state of affairs is not easy. the first reason that suggests itself to the mind considering the problem is that both lenders and borrowers failed to foresee the changes that would take place in the purchasing power of money between the dates when loans were made and repaid. no doubt there is much force in this explanation. if, for instance, men arranging for loans in april, , to be repaid a year later, had known that in the meantime the purchasing power of money would decline per cent., they would have agreed upon a very high rate of interest. men able to discern the future course of prices would not have lent money at the ordinary rates, and if the rates prevailing in the new york market throughout all and were less than per cent., it must have been because the extraordinary rise of prices was not foreseen by borrowers and lenders. nor is it surprising that business men failed to see what was coming; for the course of prices depended chiefly upon the valuation set upon the greenbacks, and this valuation, in turn, depended chiefly upon the state of the finances and the fortunes of war--matters that no one could foresee with certainty. indeed, there was much of the time a very general disposition to take an unwarrantedly optimistic view of the military situation and the chances of an early peace. many members of the business community seem to have felt that the premium on gold was artificial and must soon drop, that prices were inflated and must collapse. to the extent that such views prevailed borrowers would be cautious about making engagements to repay money in a future that might well present a lower range of prices, and lenders would expect a gain instead of a loss from the changes in the purchasing power of money. but the full explanation of the slight advance in interest cannot be found in this inability to foresee the future--at least not without further analysis of what consequences such inability entailed. workingmen are commonly credited with less foresight than capitalists, and nevertheless they seem, according to the figures, to have succeeded better in making bargains with employers of labour than did lenders with employers of capital. the explanation of this less success seems to be found in the difference between the way in which depreciation affected what the capitalist and the laborer had to offer in return for interest and wages. there is no reason for assuming that an artisan who changed employers during the war would render less efficient service in his new than in his old position, or that a landlord who changed tenants had less advantages to put at the disposal of the incoming lessee. in both these cases the good offered to the active business man remained substantially the same, and it may safely be assumed that, other things being equal, this business man could afford to give quite as much for the labor and the land after as before suspension. from the business man's point of view, therefore, there seems to have been room for a doubling of money wages and rent when the purchasing power of money had fallen one-half. but in the case of the borrower of capital the like was not true. the thousand dollars which mr. a offered him in was not, like the labour of john smith or the farm of mr. b, as efficient for his purposes as it would have been five years before. for, with the thousand dollars he could not purchase anything like the same amount of machinery, material, or labor. and since the same nominal amount of capital was of less efficiency in the hands of the borrower, he could not without loss to himself increase the interest which he paid for new loans in proportion to the decline in the purchasing power of money, as he could increase the wages of laborers or the rent for land. it should also be pointed out that on one important class of loans capitalists suffered comparatively little even during the war. interest on many forms of government bonds was paid in gold. capitalists who invested their means in these securities consequently received an income of almost unvarying specie value. if the person who made these investments were an american, he would be able to sell his gold-interest money at a high premium, but he would also have to pay correspondingly high prices for commodities, so that upon the whole his position would not be greatly different from that of the foreign investor. that such opportunities for investment as these securities offered should exist when men were most of the time loaning money for short terms at per cent. or less, is perhaps the most emphatic proof that could be offered of the inability of the public to foresee what the future had in store. profits laborers, landlords, and lending capitalists are all alike in that the amount of remuneration received by them for the aid which they render to production is commonly fixed in advance by agreement, and is not immediately affected by the profitableness or unprofitableness of the undertaking. it remains to examine the economic fortunes of those men whose money incomes are made up by the sums left over in any business after all the stipulated expenses have been met. a very important part of the solution of the problem of profits has already been contributed by the preceding studies of wages, rent, and interest. the evidence has been found to support the conclusion that in almost all cases the sums of money wages, rent, and interest received by laborers, landlords, and capitalists increased much less rapidly than did the general price level. if the wording of this conclusion be reversed--the prices of products rose more rapidly than wages, rent, or interest--we come at once to the proposition that as a rule profits must have increased more rapidly than prices. for, if the sums paid to all the other co-operating parties were increased in just the same ratio as the prices of the articles sold, it would follow that, other things remaining the same, money profits also would increase in the same ratio. but if, while prices doubled, the payments to labourers, landlords, and capitalists increased in any ratio less than per cent., the sums of money left for the residual claimants must have more than doubled. in other words, the effect of the depreciation of the paper currency upon the distribution of wealth may be summed up in the proposition: the shares of wage-earners, landowners, and lenders in the national dividend were diminished and the share of residual claimants was increased. two other general propositions respecting profits are suggested. first, other things being equal, profits varied inversely as the average wage per day paid to employees. this conclusion follows directly from the fact that the money wages of men earning $ -$ . per day before the perturbation of prices increased in higher ratio than those of men earning $ . -$ . ; that the wages of the latter class increased more than the wages of men in the next higher wage class, etc. second, other things being equal, profits varied directly as the complexity of the business organization. by this proposition is meant, for example, that a farmer who paid money rent, used borrowed capital, and employed hired labourers, made a higher percentage of profits than a farmer of whom any one of these suppositions did not hold true. if, as has been argued, the increase of profits was made at the expense of laborers, landlords, and capitalists, it follows that that _entrepreneur_ fared best whose contracts enabled him to exploit the largest number of these other persons. profits in agriculture the farmers of the loyal states were among the unfortunate producers whose products rose in price less than the majority of other articles, and from this standpoint they were losers rather than gainers by the paper currency. of course, it is possible that the farmer's loss from this inequality of price fluctuations might be more than offset by his gains at the expense of labourers, landlord, and lending capitalist. but there is good reason for believing that the increase of the _entrepreneur's_ profits in the latter fashion was less in farming than in any other important industry. this conclusion seems to follow from the proposition that, other things being equal, profits varied directly as the complexity of business organization. the american farmers of the civil war were in a large proportion of cases their own landlords, capitalists, and laborers. so far as this was true, they had few important pecuniary contracts with other persons of which they could take advantage by paying in depreciated dollars. of those farmers who hired labor very many paid wages partly in board and lodging--an arrangement which threw a considerable part of the increased cost of living upon them instead of upon their employees. finally, the renting farmer probably gained less on the average from the contract with his landlord than tenants of any other class, because in a majority of cases the rent was not a sum of money, but a share of the produce. while, then, the general effect of the paper standard was in the direction of increasing profits, it seems very doubtful whether farmers as a whole did not lose more than they gained because of the price disturbances. statistical evidence regarding profits it would be highly desirable to test our general conclusions by means of direct information regarding profits made in various branches of trade, but the data available for such a purpose are very meager. what scraps of information are available, however, support the view that profits were uncommonly large. mr. david a. wells, for example, in his reports as special commissioner of the revenue, has stories of "most anomalous and extraordinary" profits that were realized in the paper, woolen, pig-iron, and salt industries. a more general indication of the profitableness of business is afforded by the remark in the annual circular of dun's mercantile agency for , that "it is generally conceded that the average profits on trade range from to per cent." but the most important piece of evidence is found in the statistics of failures compiled by the same agency. the following table shows dun's report of the number of bankruptcies and the amount of liabilities in the loyal states from the panic year to the end of the war: _year_ _number_ _liabilities_ , $ , , , , , , , , , , , , $ , , , , , , , , , , , the very great decrease both in the number and the liabilities of firms that failed is the best proof that almost all business enterprises were "making money." from one point of view the small number of failures is surprising. an unstable currency is generally held to make business unsafe, and seldom has the standard money of a mercantile community proven so unstable, undergone such violent fluctuations in so short a time, as in the united states during the civil war. yet, instead of being extremely hazardous, business seems from the statistics of failures to have been more than usually safe. the explanation of the anomaly seems to be that the very extremity of the danger proved a safeguard. business men realized that the inflation of prices was due to the depreciation of the currency, and that when the war was over gold would fall and prices follow. they realized very clearly the necessity of taking precautions against being caught in a position where a sudden decline of prices would ruin them. they did this by curtailing credits. so long as prices continued to rise such precautions were really not needed by the man in active business except, in so far as he was a creditor of other men; but when prices commenced to fall prudence had its reward. such a sudden and violent drop of prices as occurred between january and july, , would have brought a financial revulsion of a most serious character upon a business community under ordinary circumstances. but so well had the change been prepared for, that the number of failures was actually less than it had been in the preceding year of rapidly rising prices. the whole situation can hardly be explained better than it was by a new york business man writing in _harper's monthly magazine_: "when the war ended," he said, "we all knew we should have a panic. some of us, like mr. hoar, expected that greenbacks and volunteers would be disbanded together. others expected gold to fall to or in a few days. others saw a collapse of manufacturing industry, owing to the cessation of government purchases. but we all knew a 'crisis' was coming, and having set our houses in order accordingly, the 'crisis' of course never came." the production and consumption of wealth production what influence did the greenback currency have as one of the many factors that affected the production of wealth? in the first place, the paper standard was responsible in large measure for the feeling of "prosperity" that seems from all the evidence to have characterized the public's frame of mind. almost every owner of property found that the price of his possessions had increased, and almost every wage-earner found that his pay was advanced. strive as people may to emancipate themselves from the feeling that a dollar represents a fixed quantity of desirable things, it is very difficult for them to resist a pleasurable sensation when the money value of their property rises or their incomes increase. they are almost certain to feel cheerful over the larger sums that they can spend, even though the amount of commodities the larger sums will buy is decreased. habit is too strong for arithmetic. but, more than this, "business" in the common meaning of the word was unusually profitable during the war. the "residual claimant" is in most enterprises the active business man, and, as has been shown, his money income did as a rule rise more rapidly than the cost of living. in other words, "business" was, in reality as well as in appearance, rendered more profitable by the greenbacks. there is therefore no error in saying that the business of the country enjoyed unwonted prosperity during the war. and it may be added that the active business man is probably a more potent factor in determining the community's feeling about "good times" and "bad times" than is the workingman, the landlord, or the lending capitalist. the effect of high profits, however, is not limited to producing a cheerful frame of mind among business men. under ordinary circumstances one would say that when the great majority of men already in business are "making money" with more than usual rapidity they will be inclined to enlarge their operations, that others will be inclined to enter the field, and that thus the production of wealth will be stimulated. but the circumstances of the war period were not ordinary and this conclusion cannot be accepted without serious modifications. . it has been shown that business men realised the precariousness of all operations that depended for their success upon the future course of prices--and nearly all operations that involved any considerable time for their consummation were thus dependent. so far did this disposition prevail that it produced a marked curtailment in the use of credit. the prudent man might be willing to push his business as far as possible with the means at his own disposal, but he showed a disinclination to borrow for the purpose. thus the uncertainty which all men felt about the future in a large measure counteracted the influence of high profits in increasing production. . the foregoing consideration of course weighed most heavily in the minds of cautious men. but not all business men are cautious. among many the chance of winning large profits in case of success is sufficient to induce them to undertake heavy risks of loss. on the whole, americans seem to display a decided propensity toward speculative ventures and are not easily deterred by having to take chances. to men of this type it seems that the business opportunities offered by the fluctuating currency would make a strong appeal. but, while the force of this observation may be admitted, it does not necessitate a reconsideration of the conclusion that the instability of prices tended to diminish the production of wealth. for in a time of great price fluctuations the possibilities of making fortunes rapidly are much greater in trade than in agriculture, mining, or manufactures. every rise and fall in quotations holds out an alluring promise of quick gain to the man who believes in his shrewdness and good fortune, and who does not hesitate to take chances. the probable profits of productive industry in the narrower sense might be larger than common, but this would not attract investors in large numbers if the probable profits of trading were larger yet; and such seems clearly to have been the case during the war when the paper currency offered such brilliant possibilities to fortunate speculators in gold, in stocks, or in commodities. instead, then, of the greenbacks being credited with stimulating the production of wealth, they must be charged with offering inducements to abandon agriculture and manufactures for the more speculative forms of trade. this tendency of the times did not escape observation. on the contrary, it was often remarked and lamented in terms that seem exaggerated. hugh mcculloch, for instance, in his report as secretary of the treasury for , said: there are no indications of real and permanent prosperity ... in the splendid fortunes reported to be made by skilful manipulations at the gold room or the stock board; no evidences of increasing wealth in the facts that railroads and steamboats are crowded with passengers, and hotels with guests; that cities are full to overflowing, and rents and the necessities of life, as well as luxuries, are daily advancing. all these things prove rather ... that the number of non-producers is increasing, and that productive industry is being diminished. in one of his reports as special commissioner of the revenue, mr. wells said: during the last few years large numbers of our population, under the influence and example of high profits realized in trading during the period of monetary expansion, have abandoned employments directly productive of national wealth, and sought employments connected with commerce, trading, or speculation. as a consequence we everywhere find large additions to the population of our commercial cities, an increase in the number and cost of the buildings devoted to banking, brokerage, insurance, commission business, and agencies of all kinds, the spirit of trading and speculating pervading the whole community, as distinguished from the spirit of production. within the period under review, then, it seems very doubtful whether the high profits had their usual effect of leading to a larger production of raw materials or to an increase in manufactures. the prudent man hesitated to expand his undertakings because of the instability of the inflated level of prices; the man with a turn for speculative ventures found more alluring opportunities in trade. consumption no one can read contemporary comments on american social life of the later years of the war without being impressed by the charges of extravagance made against the people of the north. newspapers and pulpits were at one in denouncing the sinful waste that, they declared, was increasing at a most alarming rate. the "shoddy aristocracy" with its ostentatious display of wealth became a stock subject for cartoonists at home, and earned a well-merited reputation for vulgarity abroad. in trying to account for this unpleasant phase of social development, men usually laid the blame upon the paper standard. high prices were said to make every one feel suddenly richer and so to tempt every one to adopt a more lavish style of living than his former wont. thus the view gained general credence that the greenbacks were ultimately responsible for a great increase in the consumption of wealth. however, such a view regarding the consumption of wealth can be but partially true. the enormous profits of _entrepreneurs_ made possible the rapid accumulation of an unusual number of fortunes, and the families thus lifted into sudden affluence enjoyed spending their money in the ostentatious fashion characteristic of the newly rich. it is therefore true that the monetary situation was largely responsible for the appearance of a considerable class of persons--of whom the fortunate speculator and the army contractor are typical--who plunged into the recklessly extravagant habits that called down upon their heads the condemnation of the popular moralist. but if the greenbacks were in the last resort a chief cause of the increased consumption of articles of luxury by families whom they had aided in enriching, they were not less truly a cause of restricted consumption by a much larger class of humbler folk. the laboring man whose money wages increased but one-half, while the cost of living doubled, could not continue to provide for his family's wants so fully as before. he was forced to practise economies--to wear his old clothing longer, to use less coffee and less sugar, to substitute cheaper for better qualities in every line of expenditure where possible. similar retrenchment of living expenses must have been practised by the families of many owners of land and lenders of capital. in other words, the war time fortunes resulted in a very large measure from the mere transfer of wealth from a wide circle of persons to the relatively small number of residual claimants to the proceeds of business enterprises. the enlarged consumption of wealth which the paper currency made possible for the fortunate few was therefore contrasted with a diminished consumption on the part of the unfortunate many on whose slender means the greenbacks levied contributions for the benefit of their employers. that the diminished consumption of wealth by large numbers of poor people escaped general notice, while the extravagance of the newly rich attracted so much attention, need not shake one's confidence in the validity of these conclusions. the purchase of a fast trotting-horse by a government contractor, and the elaborateness of his wife's gowns and jewelry, are much more conspicuous facts than the petty economies practised by his employees. the same trait that leads fortunate people to flaunt their material prosperity in the eyes of the world leads the unfortunate to conceal their small privations. even an attentive observer may fail to notice that the wives of workingmen are still wearing their last year's dresses and that the children are running barefoot longer than usual. but though the newspapers were not full of comments on the enforced economies of the mass of the population, wholesale dealers in staple articles of food and clothing noticed a decrease in sales. in reviewing the trade situation in september, . when real wages were near their lowest ebb, hunt's _merchants' magazine_ remarked that "the rise in the prices of commodities has ... outrun the power of consumption and the fall trade has been almost at a stand. those articles such as coffee, sugar, low grade goods, which form the staple products of the great mass of the people in moderate circumstances, have reached such high rates that the decline in consumption is very marked, amounting almost to a stagnation of the fall trade." the consumption of many articles of luxury increased very greatly, while the consumption of many staple articles declined. the greenbacks and the cost of the civil war the reader who goes back to the debates upon the legal-tender bills will find that most of the unfortunate consequences that followed their enactment were foretold in congress--the decline of real wages, the injury done creditors, the uncertainty of prices that hampered legitimate business and fostered speculation. but a majority of this congress were ready to subject the community to such ills because they believed that the relief of the treasury from its embarrassments was of more importance than the maintenance of a relatively stable monetary standard. greenbacks and expenditures what effect had the greenbacks upon the amount of expenditures incurred? few questions raised by the legal-tender acts have attracted more attention than this. even while the first legal-tender bill was being considered its critics declared that if made a law it would increase the cost of waging the war by causing an advance in the prices of articles that the government had to buy. as the war went on the soundness of this view became apparent. when the war was over and the divers reasons that had deterred many men from criticizing the financial policy of the government were removed, competent writers began to express similar views with freedom. for example, mr. c. p. williams put the increase of debt at one-third to two-fifths; s. t. spear, at a billion dollars; l. h. courtney, an english critic, at nearly $ , , . of later discussions that of h. c. adams has attracted the most attention. he estimated that of the gross receipts from debts created between january , , and september , , amounting to $ , , , the gold value was but $ , , , --a difference of $ , , between value received and obligations incurred. a detailed consideration of the elements that enter the problem would seem to warrant a reduction of the estimates given to $ , , . it is hardly necessary to insist strenuously that this is but a very rough estimate. the greenbacks and receipts the total increase of receipts was approximately $ , , , as shown in the following table: (in millions of dollars) _ _ _fiscal year_ _ _ _(six months) (two months)_ current receipts: from customs . . . . . from sales of public lands . . . . . from direct tax . . . . . from miscellaneous sources . . . . . from internal revenue ... . . . . ---- ----- ----- ----- ----- . . . . . estimated actual increase the caution is hardly necessary that the above results are to be accepted subject also to a wide margin of error. there were other financial consequences of the shift from the specie to the paper standard, however, that were not unimportant, though they were indirect and difficult to gauge. two of the most prominent must be indicated. . it is probable that not a little of the lavishness with which public funds were appropriated by congress during the war can be traced to the paper-money policy. . if the paper currency tempted the government to reckless expenditures, it also predisposed the people to submit more willingly to heavy taxation. it has been remarked several times that the advance of money wages and of money prices made most people feel wealthier, and, feeling wealthier, they were less inclined to grumble over the taxes. while these indirect effects of the paper currency on expenditures and receipts could not by any system of bookkeeping be brought to definite quantitative statement, it is probable that their net result was unfavorable to the treasury. contraction and inflation of the legal tenders[ ] the policy of a permanent currency of government legal-tender paper at the close of the civil war was unknown. upwards of four hundred million notes of the united states were, it is true, in circulation at the return of peace. there were doubtless many individuals who approved the continuance of exactly this form of currency. but no such proposition had been advanced by any public man of influence or by any political organization. that the resort to legal-tender powers was an evil justified only by extreme emergency, and that the circulation of government notes in any form was a purely temporary measure, were the unanimous convictions of the statesmen who contrived the system. the logical inference that these government notes would be paid off and cancelled, as soon as the war deficiency had ended, was publicly accepted. such was the theory and purpose of the public men through whom the legal-tender act was constructed and applied. nor is the general position of our statesmen, at the close of the civil war, any more obscure than their original position. the first financial resolution adopted by congress, in december, , was an explicit promise to retire the legal tenders. the first legislation of that congress gave discretionary powers to the secretary of the treasury for continuous contraction. very few legislative victories are won without at least a temporary popular endorsement, and the votes of december, , and of march, , were no exceptions. but the popular approval of contraction in that year, exception as it was to all our subsequent legislation, is readily enough explained. public opinion, when the war ended, was governed by impatience with inflated prices; inflation far beyond the european level, and properly ascribed to the condition of the currency. the cost of living reached during the highest point recorded in this country's history. from to , inclusive, the average of european prices rose only to per cent.; average prices in the united states advanced, in the same period, no less than per cent. with flour at $ a barrel, butter at cents a pound, coal at $ a ton, and wages and salaries advanced since hardly one-third as far as prices, the demand for currency reform obtained ready endorsement from the people. this popular sentiment was further strengthened by the administration's attitude at the opening of lincoln's second term. mr. mcculloch's first official treasury report, dated december , , took positive ground for the reduction of the legal-tender debt. he asked authority to issue bonds in his discretion, at per cent. or less, "for the purpose of retiring not only the compound interest notes, but the united states notes." two weeks after the publication of this report, on december , , the house of representatives resolved, by a vote of to , that this house cordially concurs in the view of the secretary of the treasury in relation to the necessity of a contraction of the currency, with a view to as early a resumption of specie payments as the business interests of this country will permit; and we hereby pledge co-operative action to this end as speedily as practicable. this resolution of , however, marked the climax of the movement. never thereafter did the policy of retiring the legal-tender notes even approach success. the truth is, that the inflated prices had begun already, during the three months after the resolution of december, to recede. this was inevitable, from the very nature of the previous expansion; and it was a welcome movement to consumers. but it necessarily caused some derangement in the plans of trade, and politicians began to ask, when they had to face the fulfilment of their pledge through a formal act of congress, how the contraction policy would be greeted by producers. the bill, as originally introduced, granted full powers to the secretary of the treasury to issue new bonds for the retirement both of interest-bearing and of noninterest-bearing debt. in the spring of this measure was defeated in the house of representatives by a vote of to . reconsidered and amended so as to restrict contraction of the legal tenders to $ , , in the first six months and to $ , , per month thereafter, the compromise measure did indeed pass the house by to , and the senate by to . but a victory thus won was ominous. mr. mcculloch himself declared the amended act to be awkward and ineffective. still more significant was the character of opposition developed in the course of the debate. it had a dozen varying grounds of argument, most of them pretty certain to appeal to popular prejudice later on. some congressmen objected to the discretionary powers as revolutionary, and, while conceding mr. mcculloch's ability and conservatism, pointed out that a very different treasury secretary might succeed him. others pronounced the notion of immediate resumption of specie payments to be "utopian in the extreme." much was heard of the comfortable theory that if congress would "allow things to go on without active interference," the "natural development of events" would automatically bring about resumption. more than one legislator could not understand, "when we have $ , , [debt] bearing no interest, and which need bear no interest, why it is to be taken up and put into bonds." the excellence of a circulating medium "that rests on the property of the whole country, and has for its security the faith and patriotism of the greatest and freest country on the face of the globe," played its usual part in the discussion; so did the argument that "the amount of legal tenders now outstanding is not too much for the present condition of the country." in short, all the arguments which have been made familiar by the twenty subsequent years of controversy, cut a figure in this opening discussion. as a matter of fact, even the restricted powers of note retirement granted under the law of march, , were revoked within two years. little or no progress had meantime been made towards resumption of specie payments. the secretary himself had officially pointed out that two commercial influences must be removed before resumption would be possible; the excessively high prices in the united states and the heavy balance of foreign trade against us. but prices continued above the european level, and, as a consequence, export of merchandise was checked and imports greatly stimulated. the entire gold product of each year in the united states was sent abroad. contraction of the inflated currency, even if pursued under the limitations of the act of , would in time have brought about conditions under which resumption might have been planned. but events outside of the united states now moved in such a way as to turn the entire financial community against the secretary's policy. hardly two months after the vote of march came a wholly unexpected crisis in the foreign money markets. the london collapse, precipitated by the overend-gurney failure of may, , was in some respects as complete as any in the history of england. it affected every nation with which great britain had commercial dealings; not least of all the united states, of whose securities it was estimated that european investors even then held $ , , . during three months the bank of england kept its minimum discount rate at the panic figure of per cent.; the consequent sudden recall of foreign capital put a heavy strain on the american markets. with the familiar disposition of the trade community to lay the blame for disordered markets on some move of public policy, the treasury's operations to reduce outstanding notes were made the scapegoat. politicians with an eye to popularity were quick to catch this drift of public sentiment. some of them honestly believed that mcculloch's action in the currency was the cause of the trade distress; others, better informed but equally politic, avoided personal declaration of opinion, but characteristically announced that whether the theory was correct or not, the public believed it, and that in deference to the public, currency contraction ought to cease. the usual result ensued. under the previous question, and without debate, a measure revoking absolutely the secretary's power of contraction passed the house of representatives in december, , by a vote of to . in the senate there was an able show of opposition, but it was plainly put on the defensive, and on january , , the resolution passed both chambers in its original and final shape. this was the end of the mcculloch plan. it was the end of all serious debate upon resumption, for at least six years. it was also, and very logically, the beginning of the fiat-money party. the republicans were forced into open defence of sound financial principles by the very recklessness of their opponents. helped by the great personal prestige of its candidate, general grant, the republican party won a sweeping victory. president johnson, who was then at open odds with his party, had produced in his annual message of december , , the extraordinary suggestion that "the per cent. interest now paid by the government" on its debt "should be applied to the reduction of the principal in semi-annual instalments"; in other words, that the plan of repudiating interest obligations--since adopted, with no agreeable results, by turkey and greece--should be formally approved by the united states. this remarkable utterance was first condemned by an overwhelming vote in both house and senate; next, by an almost equally decisive vote, on march , , congress adopted the public credit act, promising coin redemption of both notes and bonds, solemnly pledging its faith "to make provision, at the earliest practicable period, for the redemption of the united states notes in coin." the promise was as easily made as the similar pledge of december, ; was still more easily broken. no such arrangement was made, nor any serious attempt in that direction, until the matter was forced on the party by the exigency of politics. not only was no effort made to reduce outstanding legal tenders, but the supply in circulation was heavily increased; rising from $ , , in the middle of to $ , , in , and two years later, as a result of the treasury's weak experiments in the panic, to $ , , . this period was congenial to such juggling with public credit and legislative pledges. socially, financially, and politically, it stands out quite apart from any other decade of the century. moral sense for a time seemed to have deteriorated in the whole community; it was a sorry audience, at washington or elsewhere, to which to address appeals for economy, retrenchment, and rigid preservation of the public faith. the government's financial recklessness was readily imitated by the community at large; debt was the order of the day in the affairs of both. as the period approached its culmination, foreign trade reflected the nature of the situation. merchandise imports in the fiscal year rose $ , , over ; in they increased $ , , over . this movement was the familiar warning of an approaching crash; but the warning fell on deaf ears, as it usually does. in the house of cards collapsed. the panic of left the country's financial and commercial structure almost a ruin. it had, however, several ulterior results so valuable that it is not wholly unreasonable to describe the wreck of credit as a blessing in disguise. american prices, long out of joint with the markets of the world, and thoroughly artificial in themselves, were certain to be eventually brought down. this very liquidating process served a useful double purpose; it disclosed the nation's true resources, and it placed the united states on equal footing with the commercial world at large. with the bursting of the bubble of inflated debt and inflated prices, the excessive importations ceased. simultaneously the export trade, which had halted during , in spite of the continued agricultural expansion, rose to proportions never before approached in our commercial history. in , the balance of foreign trade turned permanently in our favor. by , even the continuous outflow of gold was checked. in short, the two conditions fixed by hugh mcculloch, ten years before, as indispensable to resumption of specie payments, had now been realized. congress was not by any means disposed, however, to seize the opportunity. the first result of the money market crisis in , as in all similar years, was urgent public clamor for more currency. the supreme court had decided finally, in , for the constitutionality of the legal tenders; the secretary of the treasury, in , had so far yielded to the prevalent excitement as to reissue legal-tender notes already formally retired. the first response of congress, therefore, was an inflation measure. by a vote of to in the house of representatives, and of to in the senate, a law was passed for the permanent increase of the legal-tender currency, by $ , , . the republican party controlled congress by unusually large majorities; but per cent. of the party's vote in each chamber was cast in favor of the bill. only the interposition of grant's presidential veto prevented this first positive backward step in the direction of fiat money. it is reasonable to suppose that this curious vote of the administration party, which occurred in april, , measured the party's political desperation. they were about to receive, in the congressional elections, the usual chastisement experienced by a dominant party when the people vote in a period of hard times; the inflation act was an anchor thrown desperately to windward. the experiment was in all respects a failure. even the party's own state conventions failed to say a good word for the inflation bill, and it gained no mitigation of sentence in the november vote. passage of the resumption act[ ] the forty-third congress had three months of existence left to it after the vote of november, . already defeated overwhelmingly at the polls, it had nothing to risk by a move in sound-money legislation, and possibly much to gain. it used this three-months' period to enact a law of the first importance, not only to the nation, but to the republican party's future history--a law which must fairly be described, however, under the circumstances of the time, as an expression of death-bed repentance. this was the specie-resumption act, drawn up by a party committee, and submitted to congress, in december, , by senator john sherman. it fixed the date for resumption of specie payments at january , , provided for the reduction of legal-tender notes from $ , , to $ , , , but made no provision for any further retirement of the notes. it went through congress on january , . it was contended by some that under the resumption act of there could be no reissue of the greenbacks once received into the treasury. inflationist successes of - settled this uncertainty, as congress, may , , ordered that there be no further destruction of greenbacks. the amount then outstanding was $ , , --the volume of legal tenders still current. the struggle for resumption[ ] the resumption act is one of the most curious laws in financial history. it was plain in its requirement that on and after january , , the treasury should "redeem in coin the united states legal-tender notes then outstanding, on their presentation for redemption"; but it left the treasury to make whatever arrangements it might choose. the law, it is true, conferred ample powers. in order "to prepare and provide for the redemption in this act authorized or required," it empowered the secretary of the treasury "to use any surplus revenues, from time to time, in the treasury not otherwise appropriated, and to issue, sell, and dispose of bonds of the united states at not less than par in coin." this power was perpetual. the law of involved the double problem of providing for resumption at the stipulated date, and of maintaining it afterward. it is the first of these undertakings, which we shall now sketch. there were, as we have already seen, two influences at work in , which made possible the achievement as it would not have been in . these influences--the shifting of the foreign trade balance in favor of the united states and the subsequent check to gold exports--were factors on which no finance minister could have reckoned. both in fact developed after the passage of the resumption law. but even after allowing for these accidental commercial advantages, the credit for the return to specie payments on january , , belongs individually and without dispute to john sherman. as one of the authors of the resumption act, mr. sherman was responsible both for its virtues and its vices. his appointment to the treasury, therefore, in the administration under which resumption must by law be carried out, was entirely logical. yet the practical efficiency of mr. sherman, in an administrative office, could not then have been foretold. the secretary's previous career, though useful and industrious, had been marred by weaknesses which did not promise well. as a legislator, he belonged to the school of compromisers who have indirectly been responsible, in a score of critical emergencies, for the gravest mischief in our history. but mr. sherman was not the first of public men to show that the faults or weakness of a legislator, whose purpose is to obtain enactment of a policy, will sometimes disappear in the administrator, who presses settled policies into execution. as secretary he was unwavering in pursuit of the resumption goal; practical, resolute, and adroit in the means employed. it was in the face of the repudiation clamor that he declared officially for payment of the government bonds in gold. equally distinct was the secretary's public declaration that the act of conferred the power to issue bonds after, as well as before, resumption; another precedent which did invaluable service sixteen years afterward. to say that secretary sherman's management of the treasury achieved during his time precisely the results proposed, and achieved them promptly, is to concede his administration's practical success. nor were these results attained through extravagance or waste. in his refunding and resumption operations, mr. sherman placed the bonds of the united states on better terms than any of his predecessors. arrangements for resumption[ ] the secretary of the treasury now put the final touches on his arrangements for resumption. partly by accident and partly through stress of circumstances, the treasury gold reserve was defined, in later years, at a fixed and arbitrary minimum. the theory adopted by mr. sherman, however, in his early operations, was different and undoubtedly better. following probably the practice of the bank of england, he fixed his reserve at per cent. of outstanding notes--"the smallest reserve," he wrote to congress, "upon which resumption could be prudently commenced and successfully maintained." on this basis he held in the treasury, on december , , $ , , gold in excess of outstanding gold certificates, which was a trifle over per cent. of the government notes then circulating outside the treasury. of this gold reserve, $ , , had been obtained through sale of bonds, part of the coin being procured in europe. there remained now to be settled only the formal machinery of exchange between the treasury and outside institutions. if the treasury had left the banks to pursue unchanged their policy of keeping special gold deposits, the government reserve would have been at once imperilled. if the banks had continued to present their individual drafts for redemption across the counter of the sub-treasury, any timid or blundering banker might have started a general drain of gold. against these possibilities mr. sherman now took measures. he secured the admission of the new york sub-treasury as a member of the clearing-house. at new york and boston the clearing-houses modified their rules, agreed to abolish "gold deposits" after january st, and to accept the legal tenders freely in discharge of balances against one another and against the government. at the same time, the requirement of coin payment of customs duties was revoked, and public officers were directed to receive coin or legal tenders at the payer's option--a move of obvious propriety, since refusal to take notes in payment would merely send the importer to the treasury's redemption office to convert them into coin. all these preliminaries had been formally and positively settled before the close of . on december th, the premium on gold disappeared, for the first time since ; on january st, specie payments were quietly resumed. should the greenbacks be retired? [ ]let us now consider for a moment an issue which twenty years ago was urgently pertinent, was in fact the very crux of so-called "currency reform," and which still persists as a live issue in the minds of some of the veteran "reformers" of those days, although the conditions which then gave it point have long since disappeared. in the middle nineties, when it was estimated that the total gold stock of the entire country was only about million dollars and less than millions of this was in the vaults of the treasury, the government's fiduciary currency, consisting of millions of greenbacks and millions or more of overvalued silver, presented beyond question a serious menace to the country's monetary standard. it meant that the treasury had outstanding currency obligations payable in gold to the extent of three or four times its own gold holdings, and amounting to far more than all of the gold in the country, including the holdings of the treasury, the banks, and the general public. at that time fluctuations in the trade balance of a single year sometimes almost equalled the treasury's gold holdings in amount, and it was quite conceivable, in fact not improbable, that a sudden unfavorable change in that balance might drain the treasury of all of its gold, and leave the country with a currency standard of depreciated silver or paper. this was the situation which continually menaced mr. cleveland's second administration, causing great financial anxiety and forcing the treasury during those years of peace and normal expenditures to borrow million dollars in gold in order to replenish its continually dwindling reserve. such a situation inevitably led the advocates of monetary legislation in the nineties to place first and foremost among their proposals the necessity of getting rid of the precarious greenback, and most of the plans proposed by bankers' associations, chambers of commerce, and financial experts generally at that time emphasized the urgency of this measure. why retirement is not important it sometimes happens that, with the lapse of time and with changed conditions, infirmities, long left untreated, cure themselves, and so it has been with the one-time bothersome greenback. twenty years ago, when the outstanding greenbacks amounted to twice the gold holdings of the treasury and to much more than half of the country's entire gold stock, there was abundant reason for anxiety on account of their continued circulation. the situation is utterly different to-day. gold has accumulated in the treasury beyond the wildest "dreams of avarice" of the nineties. from less than millions in the middle nineties the treasury's gold holdings have grown to approximately , millions to-day, and the estimated gold stock of the country has increased from to more than , millions, despite the fact that the director of the mint in reduced the estimate for gold in circulation by millions as compared with the basis of previous years. the greenback has thus become each year a relatively less important element in our currency system, an element of ever less and less potency for harm. doubtless the absolute amount of outstanding greenbacks has diminished considerably through loss and destruction during fifty years, and is to-day far less than the $ , , issued during the civil war, which are still carried as an obligation on the government books.... the greenbacks are less menacing to-day for the further reason that they are being rapidly transformed into small denominations which are absorbed in the general circulation, and which could only with great difficulty be collected in sufficiently large amounts to cause a serious drain upon the treasury through presentation for redemption.... so great and continuous is the demand for notes of small denominations that one may safely predict that in another decade practically all of the greenbacks still in existence will be in small denominations in the pockets of the people. the "endless chain" with its ineffectual bond issues, the imminence of specie suspension, and the fear of treasury bankruptcy will never again result from the outstanding greenbacks. their dangers, lurid and nerve-racking though they were twenty years ago, are now only memories. the confederate currency[ ] the financial system adopted by the confederate government was singularly simple and free from technicalities. it consisted chiefly in the issue of treasury notes enough to meet all the expenses of the government, and in the present advanced state of the art of printing there was but one difficulty incident to this process; namely, the impossibility of having the notes signed in the treasury department, as fast as they were needed. there happened, however, to be several thousand young ladies in richmond willing to accept light and remunerative employment at their homes, and as it was really a matter of small moment whose name the notes bore, they were given out in sheets to these young ladies, who signed and returned them for a consideration. i shall not undertake to guess how many confederate treasury notes were issued. indeed, i am credibly informed by a gentleman who was high in office in the treasury department, that even the secretary himself did not certainly know. it was clearly out of the power of the government ever to redeem the notes, and whatever may have been the state of affairs within the treasury, nobody outside its precincts ever cared to muddle his head in an attempt to get at exact figures. we knew only that money was astonishingly abundant. provisions fell short sometimes, and the supply of clothing was not always as large as we should have liked, but nobody found it difficult to get money enough. it was to be had almost for the asking. and to some extent the abundance of the currency really seemed to atone for its extreme badness. money was so easily got, and its value was so utterly uncertain, that we were never able to determine what was a fair price for anything. we fell into the habit of paying whatever was asked, knowing that to-morrow we should have to pay more. speculation became the easiest and surest thing imaginable. the speculator saw no risks of loss. every article of merchandise rose in value every day, and to buy anything this week and sell it next was to make an enormous profit quite as a matter of course. so uncertain were prices, or rather so constantly did they tend upward, that when a cargo of cadet gray cloths was brought into charleston once, an officer in my battery, attending the sale, was able to secure enough of the cloth to make two suits of clothes, without any expense whatever, merely by speculating upon an immediate advance. naturally enough, speculation soon fell into very bad repute, and the epithet "speculator" came to be considered the most opprobrious in the whole vocabulary of invective. the feeling was universal that the speculators were fattening upon the necessities of the country and the sufferings of the people. nearly all mercantile business was regarded at least with suspicion, and much of it fell into the hands of people with no reputations to lose, a fact which certainly did not tend to relieve the community in the matter of high prices. the prices which obtained were almost fabulous, and singularly enough there seemed to be no sort of ratio existing between the values of different articles. i bought coffee at forty dollars and tea at thirty dollars a pound on the same day. my dinner at a hotel cost me twenty dollars, while five dollars gained me a seat in the dress circle of the theatre. i paid one dollar the next morning for a copy of the _examiner_, but i might have got the _whig_, _dispatch_, _enquirer_, or _sentinel_, for half that sum. for some wretched tallow candles i paid ten dollars a pound. the utter absence of proportion between these several prices is apparent, and i know of no way of explaining it except upon the theory that the unstable character of the money had superinduced a reckless disregard of all value on the part of both buyers and sellers. a facetious friend used to say prices were so high that nobody could see them, and that they "got mixed for want of supervision." he held, however, that the difference between the old and the new order of things was a trifling one. "before the war," he said, "i went to market with the money in my pocket, and brought back my purchases in a basket; now i take the money in the basket, and bring the things home in my pocket." as i was returning to my home after the surrender at appomattox court house, a party of us stopped at the residence of a planter for supper, and as the country was full of marauders and horse thieves, deserters from both armies, bent upon indiscriminate plunder, our host set a little black boy to watch our horses while we ate, with instructions to give the alarm if anybody should approach. after supper we dealt liberally with little sam. silver and gold we had none, of course, but confederate money was ours in great abundance, and we bestowed the crisp notes upon the guardian of our horses, to the extent of several hundreds of dollars. a richer person than that little negro i have never seen. money, even at par, never carried more of happiness with it than did those promises of a dead government to pay. we frankly told sam that he could buy nothing with the notes, but the information brought no sadness to his simple heart. "i don' want to buy nothin', master," he replied. "i's gwine to keep dis always." i fancy his regard for the worthless paper, merely because it was called money, was closely akin to the feeling which had made it circulate among better-informed people than he. everybody knew, long before the surrender, that these notes never could be redeemed. there was little reason to hope, during the last two years of the war, that the "ratification of a treaty of peace between the confederate states and the united states," on which the payment was conditioned, would ever come. we knew the paper was worthless, and yet it continued to circulate. it professed to be money, and on the strength of that profession people continued to take it in payment for goods. the amount of it for which the owner of any article would part with his possession was always uncertain. prices were regulated largely by accident, and were therefore wholly incongruous. in the winter of - congress became aware of the fact that prices were higher than they should be under a sound currency. if congress suspected this at any earlier date, there is nothing in the proceedings of that body to indicate it. now, however, the newspapers were calling attention to an uncommonly ugly phase of the matter, and reminding congress that what the government bought with a currency depreciated to less than one per cent. of its face, the government must some day pay for in gold at par. the lawgivers took the alarm and sat themselves down to devise a remedy for the evil condition of affairs. with that infantile simplicity which characterized nearly all the doings and quite all the financial legislation of the richmond congress, it was decided that the very best way to enhance the value of the currency was to depreciate it still further by a declaratory statute, and then to issue a good deal more of it. the act set a day, after which the currency already in circulation should be worth only two-thirds of its face, at which rate it was made convertible into notes of the new issue, which some, at least, of the members of congress were innocent enough to believe would be worth very nearly their par value. this measure was intended, of course, to compel the funding of the currency, and it had that effect to some extent, without doubt. much of the old currency remained in circulation, however, even after the new notes were issued. for a time people calculated the discount, in passing and receiving the old paper, but as the new notes showed an undiminished tendency to still further depreciation, there were people, not a few, who spared themselves the trouble of making the distinction. i am sometimes asked at what time prices attained their highest point in the confederacy, and i find that memory fails to answer the question satisfactorily. they were about as high as they could be in the fall of , and i should be disposed to fix upon that as the time when the climax was reached, but for my consciousness that the law of constant depreciation was a fixed one throughout the war. the financial condition got steadily worse to the end. the government's course in levying a tax in kind, as the only possible way of making the taxation amount to anything, led speedily to the adoption of a similar plan, as far as possible, by the people. a physician would order from his planter friend ten or twenty visits' worth of corn, and the transaction was a perfectly intelligible one to both. the visits would be counted at ante-war rates, and the corn estimated by the same standard. in the early spring of i wanted a horse, and a friend having one to spare, i sent for the animal, offering to pay whatever the owner should ask for it. he could not fix a price, having literally no standard of value to which he could appeal, but he sent me the horse, writing, in reply to my note: "take the horse, and when the war shall be over, if we are both alive and you are able, give me as good a one in return. don't send any note or due-bill. it might complicate matters if either should die." a few months later i paid my debt by returning the very horse i had bought. i give this incident merely to show how utterly without financial compass or rudder we were. how did people manage to live during such a time? i am often asked; and as i look back at the history of those years, i can hardly persuade myself that the problem was solved at all. a large part of the people, however, was in the army, and drew rations from the government. the country people raised upon their plantations all the necessaries of life, and were generally allowed to keep enough of them to live on, the remainder being taken by the subsistence officers for army use. in the cities, living was not by any means so easy as in the country. business was paralyzed, and abundant as money was, it seems almost incredible that city people got enough of it to live on. very many of them were employed, however, in various capacities, in the arsenals, departments, bureaus, etc., and these were allowed to buy rations at fixed rates, after the post-office clerks in richmond had brought matters to a crisis by resigning their clerkships to go into the army, because they could not support life on their salaries of nine thousand dollars a year. for the rest, if people had anything to sell, they got enormous prices for it, and could live a while on the proceeds. above all, a kindly, helpful spirit was developed by the common suffering, and this, without doubt, kept many thousands of people from starvation. nobody formed any plans or laid by any money for to-morrow or next week or next year, and indeed to most of us there really seemed to be no future. we were not used to think of ourselves as possible survivors of a struggle which was every day perceptibly thinning our ranks. the coming of ultimate failure we saw clearly enough, but the future beyond was a blank. the reader may find it difficult to believe that with gold at a hundred and twenty-five for one, or , per cent. premium; when every day made the hopelessness of the struggle more apparent; when our last man was in the field; when the resources of the country were visibly at an end, there were financial theorists who honestly believed that by a mere trick of legislation the currency could be brought back to par. i heard some of these people explain their plan during a two days' stay in richmond. gold, they said, is an inconvenient currency always, and nobody wants it, except as a basis. the government has some gold--several millions in fact--and if congress will only be bold enough to declare the treasury notes redeemable at par in coin, we shall have no further difficulty with our finances. so long as notes are redeemable in gold at the option of the holder, nobody wants them redeemed.... the gold which the government holds will suffice to satisfy a few timid ones, and there will be an end of high prices and depreciated currency. i am not jesting. this is, as nearly as i can repeat it, the utterance of a member of the confederate congress. the matter of prices was frequently made a subject for jesting in private, but for the most part it was carefully avoided in the newspapers. as with the accounts of battles in which our arms were not successful, necessary references to the condition of the finances were crowded into a corner, as far out of sight as possible. the _examiner_, however, on one occasion denounced with some fierceness the charges prevailing in the schools; and i quote a passage from prof. sidney h. owens's reply, which is interesting as a summary of the condition of things in the south at that time: "the charges made for tuition are about five or six times as high as in . now, sir, your shoemaker, carpenter, butcher, market man, etc., demand from twenty, to thirty, to forty times as much as in . will you show me a civilian who is charging only six times the prices charged in , except the teacher only? as to the amassing of fortunes by teachers, spoken of in your article, make your calculations, sir, and you will find that to be almost an absurdity, since they pay from twenty to forty prices for everything used, and are denounced exorbitant and unreasonable in demanding five or six prices for their own labor and skill!" there were compensations, however. when gold was at , per cent. premium with us, we had the consolation of knowing that it was in the neighborhood of one hundred above par in new york, and a richmond paper of september , , now before me, fairly chuckles over the high prices prevailing at the north, in a two-line paragraph which says, "tar is selling in new york at two dollars a pound. it used to cost eighty cents a barrel." that paragraph doubtless made many a five-dollar beefsteak palatable. footnotes: [ ] adapted from wesley clair mitchell, _a history of the greenbacks_, part ii, the university of chicago press, . [ ] adapted from a. d. noyes, _forty years of american finance_, pp. - . g. p. putnam's sons, new york and london, . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] a. piatt andrew, the essential and the unessential in currency legislation, in _questions of public policy_, addresses delivered in the page lecture series, , before the senior class of the sheffield scientific school, yale university, pp. - . yale university press, new haven, connecticut. . [ ] adapted from george gary eggleston, _a rebel's recollections_, pp. - . hurd and houghton. boston, . chapter vi international bimetallism [ ]... there are natural and commercial causes which may operate to produce either an incessant fluctuation in the relative value of silver and gold, or a wide and increasing divergence, from year to year, through a long period, from the ratio of exchange existing between the two metals at the commencement of the period. so far are the sources and conditions of supply of the one different from those of the other that, notwithstanding the influence of the durableness of the metals in giving steadiness of value to either by turns, and hence to the two in their relation to each other, it would be in the highest degree unreasonable to assume that the ratio of exchange between gold and silver would remain unaltered through any considerable term of years. the annual or monthly variations may take the form of oscillations, now on one side and now on the other of any historical ratio, or they may be cumulative on one side of that ratio, producing a divergence increasing from month to month, and year to year; but variations in some degree, in some direction, are to be expected under the unrestrained operation of causes influencing the demand for, or the supply of, each metal. the conditions, natural and commercial, which determine the ratio of exchange of the two metals being such, we have seen that government may enter, and, by making the two indifferently legal tender for debts at a ratio fixed by law, may, for the time, counteract the operation of any and all forces tending to produce divergence. so long as any country establishing such a principle holds a considerable amount of that metal which, under the natural and commercial conditions of supply and demand prevailing at the time, tends to become the dearer of the two, it is impossible that the cheapened metal should there, or in any market, fall far below that ratio. by the force of the bimetallic law, the substitution of the cheapened for the dearer metal will at once begin; and so long as that continues, the divergence of the market ratio from the mint ratio can never be wide. why should any one in london or new york pay much more than fifteen and a half ounces of silver for an ounce of gold, when gold can, at any time and in any amount, be obtained for silver at the rate of fifteen and a half in paris? this operation of the bimetallic system can not be denied; but there is ground for dispute as to the degree of the advantages to result, and as to the cost at which those advantages are to be obtained. the monometallist, or advocate of the so-called single standard, is disposed to disparage the benefits to be expected, and to magnify the expense of this system. he points to the fact that the two metals do not actually circulate in the same country, at the same time, in any considerable degree; that it is always the one metal or the other which is used as money, according as the market ratio diverges to the one side or the other of the mint ratio, while the coin made from the dearer metal acquires a premium, and is exported or hoarded. hence it is said bimetallism really means the use of but one metal in a country at a time. it is not a double standard, but an alternate standard. to this the bimetallist replies that the concurrent use of the two money metals, side by side, in the same markets, is a matter wholly of indifference. the merit of the bimetallic scheme does not depend on this at all. the object of bimetallism is, by joining the two metals together in the coinage, at a fixed ratio, to diminish the extent of the fluctuations to which the value of each would be separately liable, by generating a compensatory action between the two, by which the cheapening metal shall receive a larger use, while the appreciating metal drops partially out of its former demand, thus making the two fall together, if there must be a fall, or rise together, in the opposite case: or, conceivably, making the tendency of one to fall precisely counteract the tendency of the other to rise. thus we may suppose four successive cases to illustrate the working of this principle. the first is, where the demand for the use of either metal in trade remaining the same, a large increase in the supply of one metal, a, takes place, the supply of the other, b, remaining unchanged. in this case, without the bimetallic system, the value of a would tend to fall rapidly through a considerable space, while the value of b would stand fast. with the bimetallic system, the joint supply of the two metals would be applicable to meet the joint demand for the two. now, as the joint supply has been increased without any change in the joint demand, there must be a fall in value; but the fall will be in the two indistinguishably, except for a slight degree of delay and friction in exchange. both will fall, but the depth of the fall will be diminished as the surface over which it is to take place has been enlarged. the second is where, the demands of trade for both metals remaining the same, a diminution occurs in the supply of a, while the supply of b remains unchanged. here, by the operation of the same principle, a rise in the value of money will take place, since the joint supply has been reduced without any corresponding change in the joint demand. the rise will be a rise of the two metals indistinguishably, the height of the rise being diminished as the surface over which it is to take place has been enlarged. the third case is where, demand remaining the same, the supply of both metals undergoes a change in the same direction, either of increase or of diminution, at the same time. in this event, the fall or rise will again be of the two indistinguishably, the point reached being a mean between the points which would have been reached by the two severally. the fourth case is where, demand remaining the same, the supply of the two metals undergoes a change at the same time, but in opposite directions, a through diminution, b through increase. in this case, the opposite tendencies will counteract each other. if of equal force, the value of money will be stable; if of unequal force, there will be movement in the direction of the stronger to the extent of the difference between the two. instead of one falling and the other rising in value, the change will be wrought in the two indistinguishably. it will appear from the foregoing statements that, under the bimetallic system, the value of money will be liable to vary more frequently than under the monometallic system. that is, a change in respect to either constituent of the money mass will produce a change of value; and it is apparent that the chances of change are greater with two constituents than with one. on the other hand, the variations under the bimetallic system are likely to be less extensive. indeed, it is a matter of practical certainty that they will be far less extensive than they would be under the monometallic system, whichever metal were adopted as the standard of deferred payments. but, again, the monometallist interposes the objection that the bimetallic system is only to be supported at great expense to the states maintaining it; that they lose by the exchange of the dearer for the cheapened metal, even though they acquire a certain premium in doing so, and that sooner or later the stock of the dearer metal in the bimetallic countries will become exhausted, and the system will collapse, the price of the two metals no longer being held closely or nearly at the former ratio by the possibility of exchanging them at that ratio, freely, in any amount. how far a bimetallic country loses by the alternation of the metals in circulation, as now one and now the other becomes the cheaper at the coinage ratio, is a nice question. that the service rendered to the commerce of the world by establishing a normal price for each metal in terms of the other, and thus creating and maintaining a par-of-exchange between gold countries and silver countries, is worth far more than its cost, seems to me beyond a rational doubt. it would, in my view, be as reasonable to doubt whether london bridge repays the expense of its erection and repair. were the cost of this bimetallic service, whatever it is, properly assessed upon and collected from each commercial nation of the world by turns, according to the proportion in which it derives advantage therefrom, i think it might safely be said that no one of these nations would sustain a single other charge which so fully justified itself in the return it made, whether that other charge were for works of construction, for the administration of justice, or for any other strictly necessary purpose. but there is no assurance that the cost of the bimetallic system will be thus equitably assessed. if the whole charge of erecting and repairing london bridge were thrown upon the merchants of the two or three streets nearest thereto, while yet the whole population were allowed to use the bridge, free of toll, there would not unnaturally arise a strong sense of injustice on the part of those who bore this burden for the public benefit; it might even become a question whether the undoubted advantages derived by them from the use of the bridge repaid the disproportionate expense which it caused them. if the maintenance of the bimetallic system involves a certain burden on the nations which sustain it, as i am disposed to think is the case, it fairly becomes a question whether those individual nations are compensated for bearing the whole expense of the service by their share of the advantages resulting therefrom to the trade and industry of the world. that england could well have afforded, throughout the present century, to maintain this system for her own benefit, whatever it cost, even though other nations profited by it in greater or less degree, is clear as the light. that france, a country of far less extended international trade, has been compensated for bearing so large a part as she has done of the burden of maintaining a par-of-exchange for the commerce of the world, by her share of the resulting advantages, i make no question; but it must be admitted to be fairly a matter of dispute. on such a point it is evidence of no small value that the french people themselves and the french statesmen, though singularly acute and sagacious in matters of finance, have apparently not doubted that the bimetallic system was for the interest of their country. certain of the french political economists--mm. chevalier, levasseur, bonnet, mannequin, leroy beaulieu--from their theory of the subject have held that france lost by her policy in this respect; but the financiers of that remarkable nation held firmly to the "double standard" from to . and though france at the latter date restricted her silver coinage, and two years later stopped it altogether, it was not done as the result of any change of views. partly it was from deference to her monetary allies, belgium and switzerland, but chiefly because the demonetization of silver by germany and the sale of the discarded metal of that empire brought a sudden strain upon the bimetallic system which threatened to break it violently down. hence france closed her mints to silver, but not with any confession that her policy had been erroneous under the conditions previously existing; not from any desire to abandon that policy should the future offer conditions which would admit the resumption of bimetallism. it was the declaration of m. léon say, the french minister of finance, the president of the international monetary conference of , that france, in suspending the coinage of silver, had taken no step towards the single gold standard, but had placed herself in a position to await events, a position which she would not leave till good reasons for action should appear, and then most probably to re-enter on the system of the double standard.... the objection that the stock of the dearer metal in the bimetallic states must, if the drain be indefinitely continued, become after a while exhausted, and that the system will then lose all its efficiency in holding the two metals together, is unquestionably valid; but an altogether unreasonable weight has been assigned to it in the discussion of bimetallism as a scheme of practical statesmanship. if we look at almost any treatise written from the monometallic point of view, we shall find that it is taken as conclusive against that scheme, that conditions of supply and demand can be assumed for the two metals separately which would result in the complete exhaustion of the dearer metal, and the consequent loss of all virtue in the bimetallic scheme. the bimetallist is confronted with a series of adverse conditions, taken each at its maximum and piled one above the other without the least regard to the modesty of nature, or the experience of the past; and is then challenged to say whether the system he proposes could be maintained under such circumstances. if he is candid enough to admit that bimetallism would fail there, it is taken for granted that the whole question is disposed of. now, human institutions are not to be judged of, and approved or disapproved, by such methods. the folly of reasoning like this would be seen at once were it applied to ordinary political matters. no government on earth could stand against one-fourth or one-tenth of the elements of hostility which might conceivably be arrayed against it. mankind do not, therefore, refuse to form governments. bimetallism is a political institution for practical ends, and is entitled to be judged with reference to reasonable probabilities. it may claim the benefit of the chance that adverse conditions will be offset by conditions favourable, and that the adverse conditions will not prove so severe at the start as they may be conceived, and that their force will be more quickly spent than might be feared. it would be perfectly legitimate ground on which to establish european bimetallism, that the french system, with so little of support from other states, passed within a quarter of a century through the three successive shocks of the gold discoveries of siberia, the gold discoveries of california, and the gold discoveries of australia, and yet was not brought to the ground. with germany, france, and england joined in a monetary union, no changes reasonably to be anticipated in the conditions of supply of the one metal or the other would succeed in moving the market ratio far apart from the mint ratio thus supported by maintaining over so wide a surface a legal equivalence between the two metals in payment of debts. and, moreover, while bimetallism is entitled to be judged like any other political institution, with reference to the reasonable probabilities of the future, the allowance which requires to be made for error and extraneous force is less than in most political institutions, inasmuch as the failure of bimetallism involves no disaster to industry or society. when an engineer designs a bridge which is intended to sustain a weight of eighty tons, he introduces a "factor of safety," say three or five, and makes the bridge strong enough to bear two hundred and forty or four hundred tons. the greater the calamity which would result from the breaking down of the bridge--the deeper the chasm which it spans, the swifter the torrent below--the larger the factor of safety. with many political institutions, likewise, the consequences of failure would be so disastrous that the statesman seeks to introduce a high factor of safety; but in the case of bimetallism no catastrophe whatever is to be anticipated, even in the event of failure. at the worst, after the drain of the dearer metal, in consequence of changes in the conditions of supply, is completed, the bimetallic country is simply in the same position with the countries of the single standard using the cheapened metal. while the process of substitution is going on, it sells the dearer metal at a premium; when the process is over, it is no worse off than it would have been had it originally selected as its sole money of full legal-tender power the metal which it has bought at a discount, and which other countries, perhaps its immediate neighbours, are still using. it is not the case of a country seeking to reject the cheapening metal, and to supply its place with the metal which is continually becoming scarcer and dearer.... there is all the difference, in the two cases, between going down hill and going up hill. not only is no catastrophe involved in the failure of bimetallism through the exhaustion of the dearer metal, but it is always in the power of the government to arrest the drain at any point without shock. thus, in , france and her monetary allies, seeing the prospect of a considerable drain of gold through the importation of the discarded and cheapened silver of germany, and having decided, whether wisely or unwisely, not to prevent that drain, restricted the coinage of silver without repealing or suspending the law which made gold and silver legal tender indifferently at a fixed ratio. two years later, finding that the forces operating to lower the value of silver were powerful and persistent, the coinage of silver was peremptorily stopped. can one point to any sign that france has suffered any special injury to her trade and production from this act?... we now have to note ... that every additional state which joins the bimetallic group, having the same mint ratio between gold and silver, does not only share the cost or the burden with those already in the system, but diminishes the aggregate cost or burden to be borne, and this, not in a slight, but in an important degree, so that should the monetary league become general, the total cost or burden to be divided among the many allies would be inappreciable; while, should the system come to embrace all commercial states, there would, in theory, be no burden at all to be borne by any one. thus let us suppose the commercial world to be divided into sixteen states, a to p, inclusive, the first six having the single gold standard, four, g to j, the so-called double standard of gold and silver, say at - / : ; the remaining six states having the single standard of silver, thus: a, b, c, d, e, f (g, h, i, j), k, l, m, n, o, p. it is evident that in the case of a change in the conditions of supply tending to cheapen silver relatively to gold, the new silver would pass into the countries of the double standard, g to j, be there exchanged for gold at the rate of - / : , with some small premium as the profit of the transaction, and the gold would go to the gold countries, a to f, in settlement of trade balances. the rapidity with which this substitution of silver for gold will go forward will depend, first, on the force of the natural causes operating to cheapen silver, and, secondly, on the force of the commercial causes operating to maintain or advance the value of gold. the length of time during which the drain of the dearer metal can be sustained without exhaustion will (given the rate of movement) depend solely on the stock of that metal existing in the bimetallic states jointly when the drain begins. but chief among the commercial causes operating to maintain or advance the value of gold is the exclusive power with which gold is invested by law to pay debts within states a to f; while the stock of the dearer metal available to sustain the drain described is made up, not of all the gold in the sixteen states a to p, or in the ten states a to j, but only of the gold in the four bimetallic states, g to j. hence we see that for every gold state which adopts the "double standard" the amount of gold available, in the case of a cheapening of silver, to meet the drain of the dearer metal (on which the virtue of the bimetallic system depends) is increased; while the demand for gold in preference to silver at - / : (the only cause which threatens the stability of the bimetallic system) is, in just so far, diminished. on the other hand, every silver state that adopts the "double standard" strengthens the bimetallic system in the case of a cheapening of gold. let us suppose the sixteen commercial states to be divided as four gold states, eight gold and silver states, and four silver states, as follows: a, b, c, d (e, f, g, h, i, j, k, l), m, n, o, f. we see that the bimetallic system is now not twice as strong merely as in the case first assumed, but many times as strong, since not only is the amount of the dearer metal (whichever that may at the time be) subject to drain greatly increased, but the demand for that metal, in preference to silver at - / : , now comes from four countries only, instead of six, as formerly. the transfer of still another state from each of the two single-standard groups would vastly increase the stability of the bimetallic system, a, b, c (d, e, f, g, h, i, j, k, l, m), n, o, p. not only would the base of the system be broadened by bringing the dearer metal of ten states, d to m, under tribute in the event of changes operating on the supply of either to affect its value; but the force of the causes threatening the equilibrium of the system would be reduced, since the demand for the dearer metal would now come from only three states: a, b, c, in the case of a cheapening of silver relatively to gold; n, o, p, in the case of a cheapening of gold relatively to silver. bring still another state from each group into the monetary union, and the danger of a breaking down of the system, under any change in the conditions of supply which it would be reasonable to anticipate, almost disappears. a, b (c, d, e, f, g, h, i, j, k, l, m, n), o, p. twelve states now supply the dearer metal; only two states will take it in preference to the other at the ratio of the mint. those two states--whether a, b, or o, p--can not take the dearer metal indefinitely. they will soon be surfeited. a further increase of money in them would only be followed by a fall in its value, which would soon proceed so far as to bring the metals together again. what the one metal would tend to lose in value through increase of supply, the other would tend to lose through diminution of demand. this is the modern bimetallic scheme advocated by wolowski and cernuschi in france, malou and de laveleye in belgium, mees and vrolik in holland, schneider in germany, haupt in austria, seyd and the liverpool writers in england, horton, nourse, and george walker in the united states. it differs widely from the plan of the so-called "double standard," which was pronounced impracticable by locke, adam smith, and ricardo. not the smallest presumption against the reasonableness of this scheme is created by the fact that eminent economists of the past century, and of the first half of the present, declared in favour of the single standard, whether of gold or of silver. those writers contemplated a condition of international relations in which anything like general and permanent concert of action, in establishing and maintaining a ratio between the metals in the coinage, would have been wholly beyond reasonable expectation.... a general or universal system of bimetallism would involve no machinery, no international accounts, no detail whatever. the simple agreement of governments to coin at a certain ratio would be sufficient for all the objects that have been discussed. if unification of coinage, identity of moneypieces, and mutual acceptance of coins by the several nations forming such a monetary league, were to be added, some machinery for the redemption of worn pieces might require to be brought into existence; but this is not a necessary feature of successful bimetallism, which would be entirely compatible with the retention by each state of its own devices and denominations, and with the exchange of moneys as at present effected.... footnotes: [ ] francis a. walker. _money in its relations to trade and industry_, pp. - ; - . henry holt & company. new york. . chapter vii the silver question in the united states [ ]such was the singular combination of events after the peace of that almost at the moment when a million citizens were turned from organised destruction to pursuit of peaceful industry, the avenues of american employment and production were widened in a degree unprecedented in the history of trade. within eight years after lee's surrender, the railway mileage of the united states was literally doubled. only a fraction of this increase belonged to the transcontinental lines which linked the two oceans in . quite aside from the , miles of the pacific railways, upwards of , miles of track were laid in the united states between and . four noteworthy economic developments accompanied this extension of the transportation system. a fertile interior domain, hitherto untouched, was opened up to industry. with the rush of population to these western districts, not only did the disbanded army resume production without industrial overcrowding such as followed the napoleonic wars, but provision was made for three or four hundred thousand immigrants annually. european capital in enormous volume was drawn upon to provide the means for this development. finally, the united states rose from the position of a second- or third-class commercial state to the first rank among agricultural producers and exporters. each of these several phenomena had its special influence on the period. not less immediately connected with this opening up and settlement of our agricultural west was still another phenomenon, of peculiar interest to the study of the ensuing period. the average price of grain had advanced with great rapidity during the civil war. in , the price of wheat, even on the chicago market, reached the remarkable level of $ . per bushel; nor was this price very greatly above the annual maximum of the period. in a large degree, this advance resulted from inflation of the american currency. but the upward movement was world-wide; in and the average price, even in england, was close to the equivalent of two dollars a bushel. that any such abnormal market could be maintained in the face of the new american supplies was at least improbable. the increase in cereal production was twice as rapid as the country's increase in population; the united states became therefore the leading figure in the world's export markets; and this was certain to have important influence on prices. as in america, so in europe, production received immediate stimulus. while american capital was opening up the mississippi valley, european capital was similarly busy along the fertile river basins of the dnieper and the danube. the russian railway system grew during this period from something like , miles to upwards of , . in austria-hungary the percentage of increase was almost equally large. all of these new transportation lines, like our own new granger railways, were at once engaged in carrying to the seaboard supplies of grain which never before had reached an export market. the problem of an earlier generation had been how to feed the constantly increasing population; a wholly new problem was presently to arise, based on the question how to find a ready and profitable market for the year's output of breadstuffs. prices, in short, which rose almost continuously throughout the world during the period of slack production from to , receded almost as continuously in the ensuing generation. nowhere was this phenomenon destined to have more immediate importance, economically, socially, and politically, than in the united states. the opinion is more or less widely held that the decline in prices, notably of grain, has resulted from legislation on the currency. without for the present arguing that proposition, it may be affirmed with entire safety that a good share of the period's currency legislation has resulted from the decline in the price of grain. the fall in wheat has been the typical argument for arbitrary increase of the silver or paper currency in almost every congressional debate since . what is perhaps even more significant, the division in almost every congressional vote upon these subjects has been, not political but geographical--the commercial east against the agricultural west. agitation for silver and the passage of the bland bill [ ]in the summer session of , several bills had been introduced, providing for increased silver coinage and for remonetization of the silver dollar. none of these propositions came to anything; they were chiefly remarkable from the fact that they first gave vogue to the theory of the "crime of "--a theory which assumed that the dropping of the silver dollar from the list of coins in the statutes of that year was the outcome of a conspiracy which carried its legislation through in secret. the entire baselessness of this assertion has been demonstrated often enough and in convincing detail; this very provision regarding the silver dollar was a subject of public discussion in the house, and met with no serious opposition. the assertion in itself is so patently absurd that i shall not pause to discuss it. the truth is that silver in , and during a generation before that date, was worth more to its owner in the form of bullion than in the form of coin. in the silver requisite to coin a dollar at the established ratio was worth $ . . for years, therefore, nobody thought of bringing his silver to the mint for coinage; he sold it in the commercial markets. the total silver-dollar coinage of the united states, between and , was barely eight million dollars, and when, in , the law provided that except for the so-called trade dollar coined for export, "no deposit of silver for other coinage shall be received," no one had interest enough in the matter to offer criticism. but in and came one of those curious coincidences which render possible for all time conflicting theories of an economic event. germany, having adopted the gold standard of currency in july, , began to sell its old silver coin as bullion. at exactly the same time, mackay and fair, in the heart of the nevada mountains, were opening up the great bonanza. the pacific coast was in fact going wild over the rise in mining shares while the east was financially and industrially paralysed. the statute dropping the silver dollar from this country's coinage list was enacted february , ; the german law for retirement of silver coinage was adopted july , ; and a year later the news of the rich nevada "ore-finds" became public property. between the german sales and the sales at nevada city, the price of silver yielded. in , for the first time in a generation, - / grains of standard silver would have been worth more when coined into a legal-tender dollar than when sold in the bullion market. the motive of the mining interest in the free-silver coinage agitation of and was not mysterious. the motive of the anti-administration party in congress was somewhat different. there is not the slightest question that the silver-coinage movement, in the agricultural west particularly, had the same origin and the same following as the paper inflation movement of a few years before. mr. bland himself, the author of the silver bill, declared that the question was presented as between what he called "honest resumption" with silver coinage, "or on the other hand a forced unlimited inflation of paper money." in the heat of debate on the silver bill, the same statesman declared in congress that if his coinage plan could not be passed, he was "in favour of issuing paper money enough to stuff down the bondholders until they are sick." the point of these remarks lies in their frank assumption that the free-silver sentiment and the fiat-money sentiment were interchangeable. so much, then, for the origin and nature of the silver movement. the bland bill passed the house on november , , under the previous question and without debate, by a vote of to , and the resumption operations of the government came to an instant halt. the market price of silver then was such that the legal-tender dollar of the act would have been worth intrinsically less than ninety cents. foreign subscribers to our resumption bonds suspected instantly that payment of the government debt in a depreciated coin was planned by congress; their suspicions were confirmed by a resolution introduced december th by stanley matthews, mr. sherman's own successor in the senate, and passed by both houses. the resolution explicitly declared that in the opinion of congress, all the bonds of the united states, "issued or authorized to be issued," were payable in the silver dollars of the bland law. the extraordinary character of this resolution may be judged from the fact that it was proposed and passed in both houses while the coinage act was still pending, and while, therefore, there was not in existence the coin which was duly declared a legal tender for settlement with public creditors. to the conservative portion of the public, the resolution seemed a piece of financial lunacy; to the treasury, it was not only embarrassing but humiliating. hardly a month before, in his annual report to congress, the secretary had repeated his official statement, previously made to bond subscribers, that payment of the bonds in gold might safely be anticipated. the publication of this statement in new york and london had been followed by greatly increased subscriptions to the bonds, in payment of which gold was required by the government. the matthews resolution amounted, so far as congress was concerned, to repudiation of a formal bargain of which the government had already obtained the fruits. the debate was such as might have been expected on a measure of the sort. it centred repeatedly on denunciation of government bond investors. foreign subscribers were treated with especial scorn; indeed, our foreign customers in general were not spared. it was this debate which drew forth senator matthews's somewhat celebrated query: "what have we got to do with abroad?"--a remark which was perhaps as typical of the session's deliberations as any utterance made from the floor of congress. the situation, during the early months of , was extremely critical. for the time the three direct assaults on the public credit were warded off. the matthews resolution was "concurrent," and hence a mere expression of opinion without binding force. the bill repealing the resumption act of was killed by disagreement in the senate. meantime the silver-coinage act was modified by the senate into a compromise requiring purchase and coinage by the government of two to four millions' worth of silver monthly. even thus modified, it encountered the veto of the president, but was passed over his veto, without a day's delay, by the requisite two-thirds majority. executive conservatism seemed to be fruitless; nevertheless, there is no doubt whatever that the steadfast policy of mr. hayes did much to stem the current of reaction. congress adjourned on june th. even before congressional adjournment, the canvass for the november state elections had begun. the state convention platforms in the summer of , were not in all respects such as the session's work in congress would have suggested. the opposition had gone too far in congress, and popular opinion to that effect was expressed with sufficient emphasis in november, . the administration party gained what amounted to a decided victory. there were but four states, east or west, where opposition majorities were increased in or administration majorities diminished, and these were agricultural states, where the season's sharp decline in wheat had stirred up discontent. there was not much danger from the closing session of a congress whose earlier ventures had received this response from the people. provisions of the act of [ ]although the silver dollar of which the coinage was resumed in , dates back as a coin to the earlier days of the republic, its reissue in that year marks a policy so radically new that the experience of previous years throws practically no light on its working. the act of provided for the purchase by the government, each month, of not less than two million dollars' worth, and not more than four million dollars' worth of silver bullion, for coinage into silver dollars at the rate of - / grains of standard silver (or - / grains of fine silver) for each dollar. the amount of the purchases, within the specified limits, was left to the discretion of the secretary of the treasury. as every secretary of the treasury, throughout the period in which the act was in force, kept to the minimum amount, the practical result was a monthly purchase of two million dollars' worth of silver bullion. the act is sometimes described as having called for a monthly issue of two million silver dollars; but this was not the exact situation. the amount of silver obtainable with two million dollars obviously varies according to the price of the metal in terms of the dollars with which the purchases are made. in february, , when the first purchases were made, those dollars were the inconvertible united states notes, or greenbacks, worth something less than their face in gold. the amount of silver bullion obtainable with two million such dollars depended, on the one hand, on the price of silver bullion in terms of gold, and on the other hand on the value of the dollars themselves in terms of gold. when specie payments were resumed, on the first of january, , and the greenbacks became redeemable in gold, the measure of value in the united states became gold, and the extent of the coinage of silver dollars under the act of became simply a question of how much silver bullion could be bought with two million dollars of gold. the price of silver in was, in terms of gold, not far from a dollar for an ounce of standard silver. since it has gone down almost steadily, and ... in was barely above cents an ounce.[ ] the silver dollar of - / grains contains less than an ounce ( grains) of standard silver. the monthly purchase of two million dollars' worth of silver has therefore always yielded more than two million silver dollars, the amount being obviously greater as the price of silver went lower. on the average, the monthly yield [was] not far from two million and a half of silver dollars.... thirty millions of silver dollars a year was roughly the addition to the currency of the community from the act of . silver certificates [ ]an important provision of the act of was that authorising the issue of silver certificates against the deposit of silver dollars. this authority was limited at the time to certificates in denominations only of ten dollars and upward: a restriction which ... proved to be of great importance. at the time it does not seem to have been expected that the silver certificates would enter directly into the circulating medium; we may infer from the restriction to large denominations that no such expectation was entertained. but in fact, it has been chiefly in the form of certificates that the silver has entered into circulation. these certificates, it is true, are not, like the dollars themselves, a legal tender; but they are receivable for all public dues, customs included, and they pass from hand to hand at least as readily as the bulky pieces which they represent. causes of the act [ ]the passage of that act was due to causes easily described. it was part of the opposition to the contraction of the currency and the resumption of specie payments which forms the most important episode in our financial history between and . the resumption of specie payments had been provided for by the act of , and was to take place on january , . in the meanwhile, the long-continued depression which followed the crisis of intensified the demand for more money and higher prices. that demand led to the inflation bill passed by both houses of congress in , and killed by the veto of president grant. the same feeling led to the silver act. the great fall in the price of silver, beginning in , and showing itself markedly in , made silver, at the old ratio, a cheaper currency than gold, and so caused the opponents of the return to specie payments to prefer silver to gold, as they preferred paper to either. no doubt some additional force was given to the movement in favor of the use of silver from the desire of the silver-mining states and their representatives, that the price of the metal should be kept up through a larger use of it for coinage.... wherein peculiar [ ]although the specific measure passed in thus rested on a long train of historical causes, it contained details that were essentially new, not only in our own experience, but in that of the world at large.... it ... provided for a regular mechanical addition of large amount to the general circulating medium. no precise experiment of this kind had ever been tried. it is true that germany and the countries of the latin union possess, in their circulating medium, large quantities of overvalued thalers and five-franc pieces which are exactly like our silver dollars. they also are legal tender without limit; their total quantity is limited; and it is only by this limitation of the quantity that their value is kept above that of the bullion contained in them. but the thalers and francs in these countries are not new additions to the currency. they are remnants from an earlier period, when germany had a silver standard, and the latin union a complete bimetallic standard. no addition whatever to the thalers is made in germany; and if some coinage of five-franc pieces takes place in france and in other countries of the latin union, the additions are meant merely to fill the place of abraded coins, to provide for the ordinary losses from daily use, and to make any additions to the supply which may be needed for convenience in making small change. no other country has ever entered on an addition of overvalued coin to its circulating medium having the object and extent of that made by our silver act of . this characteristic of the measure, it need hardly be said, was the result not of any deliberate intention to try a new experiment, but of the spirit of compromise which explains so many anomalies in the legislation of democratic communities. the silver act, as passed by the house of representatives, provided for complete bimetallism--for the free and unlimited coinage of the silver dollar at the old ratio of to . in the senate, it was amended by the substitution of the provisions for a limited coinage, which were finally enacted. the compromise was meant to satisfy both those who objected to the cheaper standard and those who wanted more money; and it afforded a welcome escape to the legislators who were trying to satisfy all parties. at the time, no one probably expected that the measure would remain in force for any great length of time. the conservative element hoped that it would be repealed after a short trial; the inflationists (for by that name they might, then at least, fairly be called) believed that it would soon be superseded by the free and unlimited coinage of silver. as it happened, the act remained in force, unamended, and indeed without very serious attempt at amendment, for over twelve years; and the measure which succeeded it in , though different in many details, followed the same method of forcing a large regular injection into the circulating medium of money based on silver purchases by the government. limited circulation of the silver dollars [ ]the government has made every effort to get the dollar coins out of its hands.... but the great bulk of the coins thus got out of the treasury return to it almost at once. the degree of favor which they meet with of course ... varies in different parts of the country, apparently reflecting in a curious way the popular feeling as to the desirability of having silver currency at all. they circulate very little east of the alleghanies, but are used more freely and permanently in the mississippi valley. among the negroes of the south the big pieces are said to be favorites, and to find a permanent lodgment. their greatest circulation ... was reached in ; after that time the change in the denominations of silver certificates caused a decline in the amount used. provisions of the act of [ ]the act of july , , is[ ] more remarkable than that of . it is unique in monetary history. it provides that the secretary of the treasury shall purchase each month at the market price four and a half million ounces of silver bullion. in payment he shall issue treasury notes of the united states, in denominations of between one dollar and one thousand dollars. these treasury notes, unlike the old silver certificates, are a direct legal tender for all debts, public or private, unless a different medium is expressly stipulated in the contract. they differ from the silver certificates in another respect; they are redeemable either in gold or silver coin, at the discretion of the secretary of the treasury. the indirect process of redemption which,... was applied to the silver certificates, is replaced for the new notes by direct redemption. the avowed object is to keep the silver money equal to gold, for it is declared to be "the established policy of the united states to maintain the two metals at a parity with each other on the present legal ratio, or such ratio as may be provided by law." the act of is repealed; but the coinage of two million ounces of silver into dollars is to be continued for a year (until july , ). thereafter it is directed that only so many silver dollars shall be coined as may be needed for redeeming any treasury notes presented for redemption. practically this means that the coinage shall cease; redemption in silver dollars will not be called for under present conditions. the coinage of silver dollars accordingly was suspended by the treasury on july , ; a change which was the occasion of some vociferous abuse and equally vociferous praise, but which in reality was of no consequence whatever. amount of monthly issues [ ]the monthly issues of the new treasury notes vary, like those of the old silver certificates, with the price of silver. but the new issues vary directly with the price of silver, while as we have seen, the old issues varied inversely with the price. the volume of treasury notes issued is equal to the market price of four and one-half million ounces of silver. for a month or two after the passage of the act, the price of silver advanced rapidly, and at its highest, on august , , touched $ . . after september a steady decline set in.... the policy of the banks [ ]shortly after the passage of the act [of ], some sort of understanding seems to have been reached between the treasury department and the banks of new york. the banks came to an agreement that the new notes were to be treated as "current funds," receivable in all payments, clearing-house settlements included.... the fact that the new notes were received by the banks from the sub-treasury in settlement of clearings, was of sensible advantage to the government. the success of the government in maintaining its nominal willingness to pay gold to all comers was due to the forbearance of the banks. gold was called for by them only when needed for export. the argument for silver the bimetallist arguments [ ]... is it desirable that we should have more money? does the maintenance of the gold standard involve injustice or hardship to debtors, or to any class in the community? does it have any ill effects in hampering industry or checking the advance of production? is the free coinage of silver, or any measure leading ultimately to a silver basis, fairly open to the objections commonly urged against it on the grounds of dishonesty and injustice?... in considering these questions, we must look to the ultimate and permanent results of the silver standard. the details ... as to the mode in which the silver issues circulate and the degree of promptness with which they will affect prices, are here of no great importance. under a silver standard the rise in prices will take place in the end; and we are concerned with the social consequences of such an eventual result.... i propose here to take up chiefly one set of serious arguments--those which rest on the changes in general prices which have taken place throughout the civilised world in the last twenty years. the conclusions in favor of a wider use of silver, drawn from such changes, have been maintained by distinguished economists. it is true that the particular plans for the use of silver which are now in vogue in the united states have generally been opposed by these economists. they have urged international agreements for the wider use of silver, and have deprecated independent action by any one nation. but the more thoroughgoing advocates of free silver in the united states say, certainly with much force, that an international agreement has proved to be simply impracticable, and that if the wider use of silver is to be deferred until there is concerted action by the great nations, it will never come. if anything in this direction is to be done, some one country must be courageous enough to take the lead, trusting that others will follow in due time. and certainly it is true that the scheme for international bimetallism has practically no prospect of adoption; while, on the other hand, the serious arguments urged by its advocates tell, in some degree, in favor of any scheme for enlarging the use of silver as money. these arguments, moreover, are of weight, and deserve a more painstaking consideration than is often admitted by those who oppose the silver legislation of the united states. the serious and important arguments, then, among those who, both in this country and in europe, advocate a greater use of silver as money, are derived from the general fall in prices which has been so conspicuous among the economic phenomena of the last twenty years. to that fall they ascribe two evils: first, an unjust increase in the burdens of debtors; and, second, a check to enterprise and to the efficient working of the productive machinery of the community. the increase in the burdens of debtors is one which all economists have pointed to as the result of a general fall in prices, or rise in the value of the circulating medium. the debtor who borrows a hundred dollars now, and repays them five years hence, when all prices have fallen, gives back more than he received. on debts running for short periods of time, changes in general prices are not likely to be great enough to cause serious hardship; but on debts running over long periods the loss to debtors and the gain to creditors will be great and continuing. but such a steady and continuous fall, it is urged, has taken place since ; and the fall is likely to continue further, and to renew its hardships on each new act of borrowing, because its cause is a permanent one. that cause is found in the growing scarcity of gold, which has been selected as the sole standard of value among civilised countries. the production of gold, after having increased with great rapidity in the twenty years following the californian and australian discoveries in , has gone on but slowly since . meanwhile, the population of the civilized countries, their wealth, their production of commodities to be exchanged, have increased with extraordinary rapidity; while the adoption of the gold standard by germany in , and the resumption of specie payments by the united states in and by italy in , have added to the demands for which the scanty annual supply of gold must suffice. hence the general fall in prices; in other words, the appreciation of gold. the second effect of the appreciation of gold, in checking industrial progress and promoting industrial depression, has been less insisted on in the united states than in european countries. the classic economists had generally reasoned that a general rise or fall in prices was indifferent, except in regard to the relations of debtor and creditor. if money became scarce, if its value rose and all prices fell, every producer, to be sure, would receive a smaller money income than before, and would have a smaller money capital. but he would be able to buy as many commodities and as much labor as before, and would be in reality just as rich and prosperous. in the middle of the eighteenth century, when economic thought was just beginning to assume its modern form, david hume had argued that though a fall in prices is at bottom indifferent to everybody (except as debtor or creditor), it would yet, in its effects on men's spirits and expectations, which are all connected with money and with terms of money, exert a depressing influence on industry, and would so be harmful; while rising prices, though also really indifferent to all, would stimulate hope and confidence, and so arouse to more active exertion and more plentiful production. the younger mill, in his _political economy_, thought it worth while to enter on a careful refutation of hume's reasoning. but the bimetallists of our time are disposed to agree with the shrewd scotchman. they say that the active manager of industry, the business man or _entrepreneur_, in the first place is always more or less in debt; in the second place, is always buying labor, or materials, or goods, with the intention of selling a product at a later date at an advance in price. he habitually measures his gains in terms of money, and not in terms of the commodities he can buy with the money. in times when prices are falling, he finds it harder to meet his debts, and to dispose of his goods in hand at a money advance over what they cost him. but the business man, or entrepreneur, in our day is the director and initiator of industry. he employs labor, borrows capital, sets the wheels of industry in motion; it is his expectations and fears and hopes which determine primarily whether the investment of capital shall take place in large or small amount, and whether the machinery of production shall move smoothly and effectively, or slowly, hesitatingly, inefficiently. the argument certainly does not lack plausibility; nor can it be said to have often been squarely met. no doubt it takes the form, in the united states, more frequently of confused encomiums on the inspiriting effects of plentiful money, than of direct reasoning as to the ill effects of too little money, such as i have endeavored to state with fairness in the preceding sentences. yet it does not lack weighty backing. so eminent an economist as president francis a. walker has ... insisted on the evils of a deficient supply of money as strangling the arteries of industrial life. on the whole, however, the other argument, bearing on the increase in the burdens of debtors under falling prices, has been more often heard in the united states, and certainly has been of more effect. prosperity, activity, general industrial advance, have been in this country so great and so obvious that the argument as to any check to industry could take serious hold only in occasional periods of depression or slackened advance. the burden on american debtors from falling prices has therefore been much more steadily complained of, chiefly in regard to the debts of the farmers and other borrowers on a comparatively small scale. no doubt there are other debtors whose burdens are affected at least as much, notably the railways, among whom the practice of borrowing heavily on long time has sometimes had its serious effects. but it is the farmer whose case has received most attention, and in some ways doubtless has deserved it most. the discussion of the relations of debtors and creditors under the gold standard has led to some further conclusions as to the "honesty" of the gold and silver standards. those who oppose a silver basis speak of the silver dollar as a "dishonest" coin. but those who attack the gold standard retort that the really dishonest dollar is that of gold. it is pointed out by them that the fall in the price of silver which has taken place since has not been greater than that in the prices of commodities generally. as compared with commodities, therefore, silver has been more steady in value than gold. the fall in the gold price of silver, which is adduced by the mono-metallists to show that silver is not a good standard of value, is said to be the very thing which proves it to be a good standard of value; for a given amount of silver will buy the same amount of commodities, roughly, as it would twenty years ago, while a given amount of gold will buy more. if debts had been expressed in terms of silver, the debtor would have had to repay the creditor the same amount of commodities that he received--not more commodities, as he has had to do, with debts measured and repaid in terms of gold. so far as the attainment of the closest possible approach to ideal justice is concerned, a silver standard would have served the purpose better than a gold one. the effect of improvements in production the bimetallist agitation for a return to the wider use of silver concurrently with gold first became prominent in the years of depression which followed the crisis of . for some time those who opposed it took the ground that the alleged evils did not exist--that in fact there had been no permanent fall in general prices. the decline in the years after was supposed to be simply the usual reaction from the rise in prices which marks a period of speculative activity. it was expected that the upward movement of the next period of activity would bring the average range of prices as high as it had been before. the general revival which set in after in all civilized countries did indeed check the downward tendency, and in some countries brought about an appreciable rise. but this counter-movement by no means offset the marked fall which had preceded it; and in any case it soon came to an end, and was followed by a new fall, which has continued with no considerable interruption to the present time ( ). it is true that some part of the fall is no more than a recoil from the abnormally high prices of the years - . it is true, also, that some commodities have shown a tendency to rise, and that in one very important respect--in money incomes and the money rate of wages--there has been a striking exception to the general movement. further, it must be borne in mind that even the lowered level which has now been reached cannot be described as abnormally low, being still as high as that which obtained at the middle of the present century. but on the whole, the fact of a general fall in the prices of commodities during the last fifteen or twenty years cannot be denied. the fall has not been uninterrupted; it has not been so rapid or general as to bear on the face of it proof of harmful results; but it has been steady, and, in the opinion of the present writer at least, is likely to continue slowly and steadily for some time to come. recently, therefore, those who combat the bimetallist reasoning have taken a different position. they have reasoned that while prices may in fact have gone down, the fall is not due, as the bimetallists allege, to an appreciation of gold. it is to be accounted for, they say, by other causes, notably by the extraordinary improvements in the production of commodities. new inventions and the perfecting of old ones have cheapened almost all manufactured articles. raw materials and food products have been cheapened partly by the discovery of new sources of supply, and partly by that improvement which has been transforming the industrial situation more radically than any other--the wonderful cheapening of transportation by railways and steamships, which has made the resources of the plains of our west and of the sheep-runs of australia available for the supply of the markets of london and new york. so far as this train of reasoning undertakes to explain the mode in which the fall in prices has been brought about, it seems to me impregnable. but in so far as it endeavors to disprove the appreciation of gold, or to show that the general fall is not due to this appreciation, i have never been able to see its force. in truth, both the bimetallists and their opponents seem to confuse the question when they speak of the appreciation of gold as causing lower prices. the appreciation of gold _is_ the general fall in prices. the two are not related as cause and effect; they are simply two names for one and the same thing--namely, a different rate of exchange between gold on the one hand and commodities in general on the other, by which the same amount of gold buys more commodities than before. when the general fall in prices is admitted, the case of the bimetallists as to the appreciation of gold is established once for all. improvements in the production of commodities may explain how it happens that they are more abundant, and exchange on less favorable terms with gold, of which the quantity has not been increased by new rich mines or great improvements in production; but the fact of the depreciation of commodities, or of the appreciation of gold, is not thereby explained away. nevertheless, the improvements in production do seem to me to have an important bearing on the question in hand: a bearing not on the simple fact of the appreciation of gold, but on the social consequences which are said to flow from it, and therefore on the questions of policy which are here under consideration. a moment's thought will show, for example, that a general increase in the efficiency of labor affects very materially the mode in which a fall in prices acts on the relations of debtor and creditor. if a borrows from b a hundred dollars, repayable in five years, and if at the end of the five years prices in general have fallen to one-half of the previous rates, b, in paying back to a the one hundred dollars, clearly returns twice as many commodities as he got. but if, at the same time, the efficiency of labor has been doubled by improvements in production, b can produce with the same labor twice as many commodities as before; and he returns to a the product of the same quantity of labor as he received. the classic economists and the socialists (at least some schools of socialists) have maintained alike that the ideally perfect standard of justice in the exchange of commodities and services is equality of sacrifice or labor; that if things so exchanged for each other that equal sacrifice got the same reward, complete justice would be attained. applying this test to the relations of debtor and creditor in the case supposed, we find it not one of hardship to the debtor, but apparently one of justice to both parties. it is true the creditor gets more commodities than he gave; but he gets the product of the same amount of labor as he devoted to the commodities originally lent; and why should he not share with the rest of the community the benefits of a general increase in the productiveness of labor? this line of reasoning will become simpler and more concrete if we approach it from another point of view. reference has already been made to the most striking and important exception to the general tendency of prices to fall, namely, that money wages and incomes in all civilized countries have shown a tendency not to fall, but to rise. whether the incomes of the rich have increased faster than those of the poor, or whether the movement has shown itself with rough uniformity for all classes, is immaterial for the present discussion. the admitted fact of a general upward movement alike among rich, middle class, and poor is the significant thing. in other words, there has been an inverse movement of money wages and of the prices of commodities, the one going up while the other went down. now, such an inverse movement is what must take place in case of any real improvement in material welfare. the only concrete way in which civilized people can become better off, is by being able to buy more--by their money incomes going further in the purchase of commodities. the improvement may take the form either of higher money incomes, with stationary prices; or that of stationary incomes, with lower prices; or the intermediate form which in fact seems to have occurred, of money incomes rising somewhat and prices at the same time falling somewhat. if we assume a monetary supply that is limited, or does not increase as fast as improved means of production cause the quantities of commodities to increase, one or the other of the two forms last mentioned must be found. in such a state of things there can hardly be said to be any real hardship for the debtor. it is true that prices have fallen, and that the money he repays the creditor will buy more goods than it did when the loan was contracted; but his own money income has risen, or at least has not fallen, and the repayment of the loan can cause him no special hardship--none greater than he must have expected. the case clearly differs fundamentally from that of a simple rise in the value of money, or general fall in both prices and wages.... the fall in prices in the united states since , and that in european countries in the period since , are the result, on the whole and in the long run, of ... the general improvements in production; they have not been accompanied by a fall in money incomes, and they cannot be said to have caused an increase in the burden of debtors. the reasoning of the preceding paragraphs bears also on the second part of the bimetallist indictment--that, namely, as to the depressing effects of falling prices on industrial enterprise. whether a simple rise in the value of money, unaccompanied by any other circumstance, would have the depressing effects which the bimetallists predict and the classic economists deny, is a question radically different from that which in fact presents itself. it may be that in this simple case the bimetallists might prove to be, in some degree at least, in the right, and that the classic reasoning, here as on many other subjects, while sound in the long run, would need some qualifications and correction. in the long run, no doubt, it is immaterial whether prices are high or low, whether money returns fall or rise; and yet it might turn out that the habitual association of gain or loss with "making money" would cause a period of simple falling prices to be one of hesitating investment of capital and unenterprising conduct of business. but what the world in fact has seen has been the complex case of a fall in prices accompanied by great improvements in production. the business man and capitalist has had, to be sure, to deal with falling prices; but the same amount of capital and labor has turned out more commodities than before; and his total money returns, so far from declining, have generally increased. the money incomes of the managers of industry have shown the same upward movement as the money incomes of the other classes in society. so long as this is the case, it is idle to talk of a depressing effect on enterprise from the fall in prices, or of a strangling of the industrial organism from insufficiency of the circulating medium. in fact, the immediate cause of the fall in prices has been the pushing on the market for sale of larger and larger quantities of commodities, produced with profit at lower and lower cost: a state of things fortunate for the community, and surely not depressing for the business man.... this effect on the entrepreneur of improvements and of falling prices combined, doubtless accounts for the failure of the bimetallist agitation to secure any appreciable hold in the business world. the bimetallists, both in england and on the continent, have labored zealously to engage support among the business men, but never with a degree of success at all proportionate to the energy displayed. the simple reason is that the business world has not been in any state of chronic depression. in the ups and downs of industrial activity there have been periods which seemed to confirm the pessimistic accounts of the bimetallist and of other persons malcontent with the present order of things; but in due time the tide has always turned.... on the whole, then, the fall in prices, when considered in connection with the other great changes which have accompanied it, does not afford so much countenance to the bimetallist proposal as at first sight it seems to. the rise in money incomes and the improvements in production disprove any intolerable burden on debtors, and make it highly improbable that the change has had any general depressing effect on industry. the case of the farmer nevertheless, there is something more to be said, in explanation and justification of the discontent with falling prices, and of the silver agitation which rests on that discontent. while the effects of the fall in prices on debtors as a class and on producers as a whole have not given real grounds for complaint, certain particular debtors and producers have undoubtedly been injured. the case of these latter have given plausibility to the general arguments of the bimetallists, and, what is more important at the present juncture, has given strength to the movement in the united states for more money and more silver. the situation will be best understood if we contrast for a moment the different modes in which the improvements in production have been brought about in manufacturing industries on the one hand, in agriculture on the other hand. in manufactures the improvements have been better machinery, new processes, labor-saving inventions, the conduct of business on a larger scale, and so the greater and more effective division of labor. in agriculture the main cause of cheaper production has been different: it has been the opening up of new lands and new sources of supply. no doubt there are important exceptions to these general statements. in agriculture there have been advances in the arts--new plants, better fertilizers, improved implements, more effective ways of cultivating the soil. in manufactures, on the other hand, there have been important changes due to the discovery of new and rich mines of materials, such as coal, iron, copper. but on the whole, the difference holds good. in agriculture undoubtedly the opening of new lands through the improvements in transportation has been the most important single cause at work. the cheapening of agricultural products has been due not so much to the more effective use of the soil already under cultivation, as to the development of soil not formerly available for the supply of the market. the changes in production and prices have consequently affected the producers in these two branches of production in very different ways. in manufactures all alike have felt them, and have been able to accommodate themselves to the effects. no doubt the shrewder producers adopt improvements and new inventions first, and, so long as they keep in the lead, have the advantage of their competitors. they gain by doing a large business at lower prices, while for the time being their slower competitors lose. but new processes and new inventions spread over the whole field in no long time. the opening of a new source of supply, on the other hand, cheapens production through a process which the holders of the old source of supply cannot avail themselves of. if wheat is raised in large quantities in dakota, the price goes down as effectively as if the wheat fields of england and new york had suddenly become more fertile; but as those wheat fields produce no more than before, the farmer or land owner on the old soil has nothing to offset the lower price. this is the explanation of the agricultural distress of which so much has been heard in europe in recent years, and which has been the main occasion of the revival of protectionist feeling in france, germany, and other countries of the continent. the farmer on the old lands does not find in improvements in production any compensation for lower prices. if he owns the land, he must pocket the loss, and perhaps in the end abandon his land and turn to something else; such has been a common case in new england. if he is a tenant on the land, he will probably, after a period of struggle and hardship, get lower rents, leaving the landlord as the permanent sufferer; such has been the outcome in old england. if he was in debt before the change took place, he will find his debts growing more burdensome as his money income goes down; such has been the result with many a western farmer. it is in causes of this sort that we find the explanation, in part at least, of the restlessness among the western farmers of which the silver agitation is one sign. the fall in the prices of wheat, corn, and other staples has been due to enormously increased production in regions which were formerly out of reach of the market: in india, australia, russia, as well as in california, dakota, washington, oregon, and the far west generally.... it is probable that some of the complaints in regard to the burden of debt on the farmers are simply a legacy from the old days of inflated paper money. not a few of the debts of the present [ ] go back to the years before , when we had prices high in terms of over-issued paper money. these debts have been renewed and continued, in whole or in part; and the fall in prices has made them heavier and heavier to bear. the evil here again is real, and a remedy is now hard to find. the only conclusion which can be laid down with perfect conviction is that we should make sure of preventing the recurrence of a new era of excessive paper money. ... another important circumstance is the general transition in agricultural methods inevitable in those western states which have been settled for a generation or more. when new land is first taken into cultivation the most effective use of it is found in the continuous production of some staple crop like wheat and corn, which can be grown, so long as the cream of the soil is not exhausted, year after year with large returns. after a while, however, the land begins to show signs of exhaustion. the staple crops do not yield as largely as before, and less crude methods of using the soil must be resorted to. manures have to be applied, and the rotation and selection of crops practised. meat and dairy products, vegetables, fruits, and the miscellaneous agricultural articles, must take their place in rural economy. this change has been carried through very largely in states like new york, pennsylvania, and ohio. in the heart of the mississippi valley it is now under way; but the transition is trying, and to some of the farmers it is impossible. a good share of the american agricultural population has been so steadily bred to the easy and careless use of virgin soil that it cannot accommodate itself to more intensive methods. it is constantly moving westward; settling for a generation in one spot, and then, as the land shows signs of exhaustion, moving farther west. the more intelligent and versatile stay behind, adapt themselves to new conditions, and in time prosper under them. the least active also stay behind, and flounder hopelessly in the old ways. but a large number are always moving west. in every state between the alleghanies and the missouri river there are large tracts formerly cultivated by native settlers, who have sold their lands, as they showed signs of giving out, to german or swedish immigrants. these latter have not infrequently paid good prices for the lands: but they have been bred to intensive farming, to careful and varied use of the soil, and they have prospered where their native predecessors have been unwilling or unable to adapt themselves to the new conditions. the period of transition is a hard one for all of the native farmers, whether they stay behind or move on, and the lesson of using the soil with more skill and care is learned only under the pressure of necessity. in such periods all sorts of remedies for hard times make their appearance and have their run. the repeal of the sherman silver purchase act and the financial and economic consequences of silver legislation [ ]for fourteen years, - , only an insignificant amount of gold was paid out of the treasury in the redemption of legal-tender notes; the total amount of gold in the treasury increased almost steadily and continuously from $ , , on january , , to $ , , in . in the new issue of treasury notes, together with a change in commercial conditions, placed heavy burdens upon the reserve, the rapid diminution of which is shown in the following figures: _date_ _net gold reserve_ june , $ , , june , , , june , , , june , , , june , , , the reasons for the fall in the gold reserve are too various and complicated to be treated here: the failure of the great english banking-house of baring brothers in brought about a considerable withdrawal of english capital invested in the united states; and an unhealthy and inflated industrial development in this country was stimulated by the new tariff. to outward appearances the country was very prosperous; expenditures were large, imports increased, and a failure of the crops in europe in enlarged our grain exports. for a brief season only, were the natural effects of the sherman law delayed: europe soon recovered, american exports fell, and in the six months ending june , , the balance of trade against the united states was $ , , . the tariff of was followed by diminished customs receipts. the revenue from customs was as follows: $ , , , , , , , , , , ... fortunately the internal revenue receipts maintained their customary level with something to spare; but increased appropriations, due largely to the passage of a dependent pension bill in , cut deep into the funds of the treasury. in the surplus was $ , , ; in , $ , , ; in , $ , , ; in , $ , , ; but in appeared a deficit amounting to $ , , . the treasury had been weakened by the reluctance of secretary windom to deposit government funds in national bank depositories, and by his preference to rely entirely upon the purchase of bonds for getting money back into circulation. in the earlier years of harrison's administration, bonds were purchased freely--too generously in view of the impending strain upon the resources of the treasury. another element of concern was due to the change in the kind of money received by the government in the payment of revenue. before the passage of the sherman act nine-tenths or more of the customs receipts at the new york custom-house were paid in gold and gold certificates; in the summer of the proportion of gold and gold certificates fell as low as per cent., and in september, , to less than per cent. the use of united states notes and treasury notes of correspondingly increased.... the reason for this substitution of notes for gold was partly due to a reversal in treasury practice. for many years it had been the custom of the sub-treasury in new york to settle its clearing-house balances almost exclusively in gold or gold certificates. for example, in the fiscal year - the sub-treasury paid gold balances to the banks of nearly $ , , , and in the next year $ , , . the banks were thus daily supplied with gold which they in turn could furnish to their customers either for customs purposes or export deliveries. in august, , the treasury began the policy of using ... the new treasury notes in the settlement of new york balances, and in the year ending june, , secretary foster, apparently convinced of the need of a larger gold reserve to support the credit of the treasury notes, increased the use of the older united states notes and held on to the gold reserve. the unexpected result was that the banks, deprived of their usual supply of gold for trade purposes, sought for it at the treasury by the presentation of government notes.... in march, , cleveland for a second time entered upon the presidency. he demanded as the first condition of relief the suspension of silver purchases. the silver advocates, however, were still powerful in both parties, and president cleveland was at a disadvantage in not having the undivided support of his own party. even the position of secretary carlisle was ... doubted: it was publicly declared that he stood ready, if expediency demanded it, to redeem the treasury notes of in silver instead of gold, and, while standing upon the letter of the law which demanded their redemption in _coin_, practically to cut asunder the parity of gold and silver which had thus far been maintained. although the president attempted by a specific declaration to make clear the harmonious purpose of the administration that redemption would continue in gold, public apprehension would not be allayed. whatever might be the wishes of the administration, it was feared that it would not have power to carry them out; particularly when it was announced in april, , that the gold reserve had been drawn down to $ , , by redeeming the treasury notes of . at this juncture of financial and commercial difficulties, in june, , the british government closed the mints in india to the free coinage of silver. the price of silver bullion fell promptly and rapidly, and, while such a decline might on another occasion have produced no immediately serious consequences to the treasury, it came at a moment when public opinion, at least in the eastern states, was aroused to a belief that the entire financial problem was associated with the coinage of silver; and it thus furnished one of the contributory forces which drove the commercial community into a state of panic. it was not until june , , when the panic was well under way, that a special session of congress was called for august ; only by the most strenuous efforts could an adequate support, composed of elements in both political parties, be rallied to uphold the president's insistence that purchases of silver by the government should cease. the house quickly acquiesced, and on august , by a vote of to , passed a bill for the repeal of the purchasing clause; but the senate was stubborn, and not until october could a favorable vote, to , be secured. so far as the treasury was concerned, the mischief had been done; although the government was relieved from further purchase of silver which increased the volume of the obligations to be supported by gold, the old burdens still were sufficiently heavy, in connection with the low state of commerce and industry, to exhaust its immediate revenues. thus on december , , the actual net balance in the treasury above the gold reserve, pledged funds, and agency accounts was only $ , , . trade and industry had been disorganized; the panic of extended into every department of industrial life. in december, , the comptroller of the currency announced the failure during the year of national banks, state banks, private banks, savings banks, loan and trust companies, and mortgage companies. some of these institutions afterwards resumed business, but the permanent damage was great. the fright of depositors was general and the shrinkage in deposits enormous; bank clearings were the lowest since ; clearing-house loan certificates were once more resorted to, this time on a much larger scale than ever before, and extended to cities throughout the country. the production of coal, both anthracite and bituminous, fell off; the output of pig-iron, which had been about , , tons in , fell to , , tons in ; new railway construction almost ceased; in there were railways, operating a mileage of nearly , miles, in the hands of receivers; among these were three great railway systems,--the erie, northern pacific, and union pacific. the total capitalization in the hands of receivers was about $ , , , , or one-fourth of the railway capital of the country. the earnings of railroads and the dividends paid to stockholders were seriously affected; securities fell to one-half and even one-quarter their former value; commercial failures increased from , in , with liabilities of $ , , , to , in , with liabilities of $ , , . the problem of the unemployed became general; special committees were organized in nearly all of the large cities to provide food, and in many places relief work by public bodies was instituted. in the spring of general want and distress led to labor strikes and riots, as in chicago, and even to more abnormal outbreaks, as seen by the march of coxey's army of unemployed from ohio to washington. the distress was increased by the failure of the corn crop in ; the demand for wheat in europe fell off and wheat was sold on the western farm for less than fifty cents a bushel. sale of bonds for gold under these adverse conditions it was inevitable that the revenues of the government should continue to decline. in the six months, january to june, , the excess of expenditures over receipts was $ , , , and during the fiscal year ending june , , this excess increased to $ , , . it was even necessary to encroach upon the gold reserve for current expenses, and for months this fund was far less than caution and prudence demanded. when the integrity of the gold reserve was first assailed, both secretary foster, in the closing months of harrison's administration, and secretary carlisle, at the beginning of cleveland's term, endeavored, with some success, to tide over emergencies by appealing to the banks to exchange gold for legal tenders. the banks recognized that the instability of government credit seriously affected the value of all securities in which they were interested; and in february, , they handed over to the treasury about $ , , in gold, and in march and april about $ , , more. the expedient was not enough to stop the continued drain upon the treasury. at the very moment that the government was relieved of notes through the exchange of gold by the banks, other notes were presented to the treasury for redemption, largely to draw gold for exportation in the settlement of trade balances.... the only way to protect the fund of gold reserve under the circumstances was borrowing--that is, the sale of bonds for gold--yet some people who were opposed to the overthrow of the gold standard consistently urged that borrowing be postponed until the last moment, so as to add as little as possible to the resources available for purchases of silver. some of the gold party would even have permitted the drain to go on to the end, notwithstanding the inevitable evils, in the belief that the country could be convinced of its errors in no other way. eventually, to prevent a suspension of specie payments in gold, the treasury department made successive issues of bonds for the purchase of gold. these issues are very interesting to the student of finance. no administration wishes to add to public indebtedness in times of peace; and secretary carlisle had scruples against selling bonds, except with the authority of the congress then sitting; hence the issue of bonds was put off to the last possible moment. the only existing authority for selling bonds was the resumption act of ; this provided only for ten-year per cent., fifteen-year - / , and thirty-year per cent. bonds, all of which would command a premium so high as to diminish their attractiveness as an investment, and, taken in connection with the length of time which they ran, to hamper the treasury in purchasing or refunding the debt when the crisis was over. the administration asked for the issue of low-rate bonds, but congress, inspired in part by free silver arguments, and in part by political intrigues to discredit the administration, paid no attention to the recommendation of the secretary. finally, in january, , without special legislation, but under the ancient authority of the resumption act, $ , , of per cent. ten-year bonds were sold, yielding $ , , ; and again in november an equal amount of bonds with like conditions were marketed, yielding $ , , . the sale of the first issue was on the whole creditable, considering that at about the same time the president was obliged to veto a bill providing for coining the silver seigniorage, and that an effort had been made in the courts to enjoin the secretary of the treasury from selling bonds under the law of . in each case the sale of bonds called for subscriptions in gold, but the new supplies were quickly exhausted by fresh redemption of notes. the fluctuations in the volume of gold in the treasury as a consequence of the bond sales is seen in the following figures: _date_ _gold in treasury_ january , $ , , february , " , , _bond issue._ november , " , , november , " , , _bond issue._ february , , , the endless chain appeared to be in full and unceasing operation; not only was gold being withdrawn for export but also for individual hoarding, in fear of an impending suspension of gold payments. the treasury finally recognized the futility of selling bonds for gold, most of which was drawn out of the treasury itself, by the presentation of legal-tender notes for redemption. a new device was tried: in february, , the secretary of the treasury entered into a contract with certain bankers for the purchase of , , ounces of standard gold at the price of $ . per ounce, to be paid for by the delivery of united states bonds having thirty years to run and bearing per cent. interest; not less than one-half of this gold was to be procured abroad, and the parties with whom the contract was made stipulated that they would "as far as lies in their power exert all financial influence and make all legitimate efforts to protect the treasury of the united states against the withdrawals of gold, pending the complete performance of this contract." an ounce of standard gold was worth $ . , and the difference between that sum and the contract price represented the premium received by the government on the bonds, making the price at which the bonds were accepted $ . . a condition was affixed to the contract, by which, in case congressional authority could be secured, a per cent. _gold_ bond might be substituted, and for this the syndicate agreed to pay a higher price. in view of the unfavorable terms of the bargain imposed by this contract, the administration hoped that congress would promptly act and authorize the issue of the lower and more remunerative bond. faithful in its adherence to silver, congress could not be swerved; it defeated the bill authorizing the sale of a low-rate gold bond, and then engaged in an angry debate denouncing the executive for his subserviency to the gold standard banking interests in entering into a contract not only disgraceful but illegal. in reply it could be shown that the new york sub-treasury was within forty-eight hours of gold exhaustion.... at first the syndicate was successful, because of some slight improvement in trade, but later it practically failed to control the price of exchange. it once more became cheaper for merchants to ship gold than to purchase bills, and gold continued to be withdrawn from the treasury. on december , , the gold reserve stood at $ , , , and after the commercial apprehension caused by president cleveland's venezuelan message a fortnight later, the reserve was still further reduced. once more the administration resorted to a bond sale, and again the action was preceded by a special message from the president to congress asking for a grant of authority to issue gold bonds instead of coin bonds, and also for the retirement of the legal-tender notes which continued in an endless chain their journey to the treasury, and drove off gold to the commercial market. as congress still refused to act, the treasury resorted to a fourth issue of $ , , per cent. bonds. the treasury now carefully avoided any appearance of dealing through a syndicate and publicly advertised for offers, with the encouraging result of , bids, amounting to $ , , . seven hundred and eighty-one bids were accepted and the premium yielded about $ , , . the relief obtained by the treasury, however, was meagre, for it is estimated that $ , , of the bonds were purchased with gold withdrawn from the treasury by the redemption of notes. this was the government's penalty for its endeavor to separate itself from all dealings with a banking syndicate. in spite of this sale of bonds the reserve remained near the traditional danger line. in july, , it fell to $ , , because of hoarding due to popular apprehension as to the success of the silver movement in the november presidential election. fearful that a new bond issue might strengthen the claims of the silver advocates, bankers and dealers in foreign exchange voluntarily combined to support the treasury by exchanging gold for notes. the effort succeeded, and the reserve was placed in safety. after the elections in november gold came out from its hiding-places, and was turned into the treasury in large amounts. business and revenue improved and the difficulties of the treasury department were tided over. many republicans held the earnest conviction that the issue of bonds would not have been necessary if the revenue had been sufficient. not only had industry and commerce been unsettled by the tariff act of , but the operations of the endless chain must certainly continue, it was held, until there was a generous income in excess of expenditures, whereby a considerable part of the credit currency might be covered into the treasury and thus lessen the possible claims for redemption. the administration emphatically replied that at no time when bonds were issued was there intention of paying the expenses of the government with their proceeds, and that the treasury department had no authority whatever to issue bonds for such purposes. president cleveland was insistent that on each occasion of a bond issue there were sufficient funds in the treasury to meet the ordinary expenditures of the government. the proceeds of the bonds sold for the maintenance of the national credit were, however, turned into the general fund of the treasury, and consequently, though not originally designed for that purpose, employed to meet indiscriminately all demands made upon the government, whether for redemption of notes or the payment of debts.... there was a series of deficits beginning with , but the deficit by no means equalled the amounts of bonds sold. footnotes: [ ] adapted from a. d. noyes, _forty years of american finance_, pp. - g. p. putnam's sons, new york and london. . [ ] _ibid._, pp. - . [ ] f. w. taussig, _the silver situation in the united states_, pp. , . g. p. putnam's sons. new york. . [ ] i have stated the price here, for simplicity, in terms of so much per ounce of standard silver, _i. e._, silver containing per cent. of alloy. the usual quotation in the united states is per ounce of fine silver. [thus, the new york price, march , , was - / cents per ounce of fine silver.] [ ] _ibid._, pp. , . [ ] _ibid._, pp. , . [ ] _ibid._, pp. - . [ ] _ibid._, pp. , . [ ] _ibid._, pp. , . [ ] [present tense because written while the act was still in force.] [ ] _ibid._, pp. , . [ ] _ibid._, pp. , . [ ] _ibid._, pp. - . [ ] davis r. dewey, _financial history of the united states_, pp. - . longmans, green and company, new york, . chapter viii index numbers [ ]index numbers are used to indicate changes in the value of money. the objects for which this measurement is undertaken are thus well stated by sir r. giffen (second report of the committee appointed for the purpose of investigating the best method of ascertaining and measuring variations in the value of the monetary standard. report of the british association, ): ( ) the fixation of rents or other deferred payments extending over long periods of time, for which it has been desired to obtain a currency of a more stable sort than money is supposed to be. ( ) to enable comparisons to be made between the value of money incomes in different places, which is often an object of great practical interest; not only individuals contemplating residential changes, but also governments and other large spending bodies, spending money in widely distant places, having to consider this question. ( ) to enable historians and other students making comparisons between past and present to give an approximate meaning to the money expressions which they deal with, and say roughly what a given fine, or payment, or amount of national revenue or expenditure in a past age would mean in modern language. to which some would add: ( ) to afford a measure of the extent to which trade and industry have been injuriously affected by a variation in prices; and of the correction which it would be desirable to apply to the currency. an index number is constructed by combining several items, each of which is a ratio between the price of a certain article at a particular date under consideration (_e. g._, last year or month) and the price of the same article at a period taken as base or standard (_e. g._, - , in the index number constructed by mr. sauerbeck, _journal of the statistical society_, and ). these ratios are generally expressed as percentages. _e. g._, the percentage for _flour_ in , as given by mr. sauerbeck, is ; meaning that the price of flour in is to the average price of the same article in - as : . the term index number is sometimes applied (_e. g._, by mr. sauerbeck, _op. cit._) to each of these items, as well as to their combination. the percentages are usually compounded by taking an average of them. but a result of equal generality may be obtained by taking their sum. one of the best-known index numbers, that of the _economist_, is thus constructed. twenty-two articles having been selected, the price of each article at the current date compared with its price at the standard period ( - ) is expressed as a percentage; and the sum of these percentages is put as the index number. thus the _economist_ index number for the year is ; such a sum is easily reduced to the form of an average by simple division (_e. g._, ÷ = ). accordingly in what follows it will be sufficient to consider the latter form only. the construction of an index number presents the following problems: (_a_) what are the commodities of which the prices are to be taken? (_b_) how are the prices to be ascertained? (_c_) how are the ratios between the prices of each article at the current and the standard dates to be combined? the answers to these questions vary according to the purpose in hand.... as appropriate to the first purpose, a standard of deferred payments, two methods present themselves, viz., to arrange that the debtor should pay, the creditor receive, either ( ) the same quantity of goods and services, the same amount of utility, so to speak; or ( ) the product of the same quantity of labour--or more exactly effort and sacrifice. of these methods the former has been more generally accepted. it is adopted for instance by the british association committee already referred to, as _par excellence_ the measure of the change in the value of the monetary standard. the former method is indeed more intelligible. however, in favour of the latter there are some weighty considerations and authorities. it seems to be the nearest possible approach to ricardo's conception of a commodity invariable in value, "which at all times requires the same sacrifice of toil and labour to produce it." (_principles_, iii. ch. xx., "on value and riches," cp. mill, bk. iii. ch. xv., "on a measure of value.") "a standard," says mr. leonard courtney, "should be something which as far as possible involves the same labour and the same sacrifice in obtaining it" (_nineteenth century_, march, ). prof. marshall, in his evidence before the royal commission on gold and silver, says, speaking of appreciation of gold: "when it is used as denoting a rise in the real value of gold, i then regard it as measured by the diminution in the power which gold has of purchasing labour of all kinds--that is, not only manual labour, but the labour of business men and all others engaged in industry of any kind" (question ). if the first method is adopted, the answers to the questions above set are as follows: (_a_) the commodities of which the prices are to be taken should be articles of consumption rather than materials and implements. payments for personal services should be included, but not wages in general. (_b_) retail prices should be used. (_c_) the proper combination of the ratios is an average of the kind technically called _weighted_.... the general principle according to which the weights are to be assigned is that they should represent the importance of each commodity to the consumer. but this idea may be embodied in different plans. . one plan is to assign as the weight of each percentage, or ratio between prices, the value of the corresponding commodity at the initial or standard period. according to this plan the index number is the ratio between these two values: the quantities initially consumed at the prices of the current date, and the same quantities at the standard prices. this method is exemplified by sir r. giffen's estimate of the change in the value of money between (and ) and _earlier_ years, in his report on prices of exports and imports, , table v. . another plan is to assign, as the relative importance of each percentage, its value at the particular epoch, the current year. this plan is adopted by mr. palgrave in his memorandum on _currency and standard of value_ ... in the third report of the royal commission on depression of trade and industry, table xxvii. . according to another plan, the index number is the ratio between the following two values: the quantities consumed at the current date at the current prices, and the same quantities at standard prices. this plan is adopted by mr. sauerbeck (_journ. stat. soc._, , p. ). . or, instead of taking either the initial quantities or those of the current date, a mean between the two may be taken. this is the plan adopted by the british association committee. they estimate "the average national expenditure on each class of article at present and for the last few years"; and put for the relative importance of each commodity a round number corresponding to that estimate. thus the estimated expenditure per annum on _wheat_ is £ , , , and on _meat_ £ , , : that is respectively . per cent., and per cent. of the sum of the corresponding estimates for all the commodities utilized by the committee. as convenient approximations, the weights five and ten are recommended by the committee. if the index number based on labour ... rather than on consumption, is adopted as the standard for deferred payments, it would be proper by analogy to take as the measure of appreciation or depreciation the change in the pecuniary remuneration of a certain set of services, namely all, or the principal, which are rendered in the course of production throughout the community during a year, either at the initial or the current epoch; or some expression intermediate between the two specified. but it may be doubted whether the statistics requisite for this method are available. with regard to the second and third of the purposes above enumerated, the determination of the comparative value of money at distant places and remote times--one or other of the two methods indicated would seem to be theoretically proper. for the fourth purpose, the regulation of currency, the proper construction of the index number would seem to be as follows: (_a_) the "articles" of which the prices are taken into account should be both commodities and services; (_b_) both wholesale and retail prices should be used; (_c_) the relative importance of each article should be proportioned to the demand upon the currency which it makes. but here as in other parts of the subject theory halts a little, and statistics lag far behind theory. considering the theoretical doubts and statistical difficulties which attend the determination of _weights_ proper to each purpose, there is much to be said in favour of assigning equal relative importance to all the items; especially if care is taken to include many articles such as _corn_, _cotton_, etc., which for any of the purposes which may be contemplated must be of first-rate importance. such is the character of some of the principal index numbers which have been constructed--those of the _economist_, of jevons, of soetbeer, and of mr. sauerbeck. in the construction of such an index number the use of the arithmetic mean is not imperative. jevons employs the geometric mean. his reasons for preferring it are not very clear (the "variation of prices," _currency and finance_, p. ).... the geometric mean has also the advantage of being less liable than the ordinary average to be unduly affected by extremely high prices (_report of the british association_, , p. ). the great objection to the geometric mean is its cumbrousness. there is another kind of mean which has some of the advantages of the geometric, and is free from its essential disadvantage; namely, the median ... which is formed by arranging the items in the order of magnitude, and taking as the mean that figure which has as many of the items above as below it. for instance the median of the forty-five percentages on which mr. sauerbeck's index number is based was, for , ; while the arithmetic mean was . it is difficult to see why the latter result is preferable to the former; if what is required is an _index_ of the change in general prices, not specially referred to any particular purpose, such as of securing a constant benefit to a legatee. the perplexity of a choice between such a variety of methods is much reduced by the two following considerations. _first_, beggars cannot be choosers. the paucity of statistical data (see the report drawn up by sir r. giffen in the _report of the british association_ for , p. ) restricts the operation. thus for the purpose of index numbers based on consumption ... retail prices are theoretically appropriate; but "practically it is found that only the prices of leading commodities, capable of being dealt with in large wholesale markets, can be made use of" (giffen, _loc. cit._). _second_, the difference between the results of different methods is likely to be less than at first sight appears. for instance, the probable difference between the index number constructed by the british association committee, and six others which have been proposed by high authorities--supposing the different methods to be applied to the same data, viz., the prices of twenty-one articles specified by the committee may thus be expressed. the discrepancy which is as likely as not to occur between the committee's and other results is from to . per cent. the discrepancy which is very unlikely to occur is from to per cent. (_report of the british association_ for , p. ). in fact, the index number for the year , as determined from the same data by seven different methods, proved to be , . , , , , , . (_ibid._, p. ). the practical outcome of these two considerations is thus well expressed by giffen (_loc. cit._ p. ), "the articles as to which records of prices are obtainable being themselves only a portion of the whole, nearly as good a final result may apparently be arrived at by a selection without bias, according to no better principle than accessibility of record, as by a careful attention to weighting.... practically the committee would recommend the use of a weighted index number of some kind, as, on the whole, commanding more confidence.... a weighted index number, in one aspect, is almost an unnecessary precaution to secure accuracy, though, on the whole, the committee recommend it." footnotes: [ ] _dictionary of political economy_, edited by r. h. t. palgrave. vol. ii, pp. - . macmillan and company, limited. london. . chapter ix banking operations and accounts [ ]the intermediate employed in actual transactions is, in increasing degree, that form of currency called credit, the lowest order of currency, rather than money itself. checks and drafts make up a progressively larger share of the circulating medium. the net deposit credits in the national banks in the united states--to say nothing of the other banks--are double the volume of the actual money in the country. and a large share of this actual money is really employed as reserves to support the credit circulation. more than per cent. of the larger sorts of transactions are mediated through the use of deposit credit, and probably more than one-half of the remaining transactions are similarly effected. thus the study of banking is essential to any understanding of monetary problems.... [ ]for a bank, as well as for any other considerable establishment, it is requisite that a capital should be provided at the outset. there can be no constant proportion between the amount of this capital and the extent of the business which may be built up by its means. we can only say that, other things being equal, the larger the business that can be carried on with safety with a given capital, the larger will be the field from which profits can be earned, and the higher the proportion which the profits will bear to the original investment; but the point at which the extension of the business passes the line of safety, must be determined by the circumstances of the particular bank, by the kind of business carried on by those dealing with it, and by the condition of the community in which it is established. the attempt has sometimes been made to limit by law for incorporated banks the proportion of transactions for a given amount of capital, but no such provision has any foundation except a conjectured average, too rough to be of service in any individual case. in this respect, as in so many others, the judgment of the persons most interested, acting under the law of self-preservation, is far more trustworthy than any legislative decision. the capital thus to be provided at the outset is, of course, in the case of a private bank, the contribution of the partners, as in any other undertaking. in the case of an incorporated bank the capital is divided by law into equal shares or units of fixed amount; as _e. g._, under the law of the united states, a capital of $ , is divided into , shares of $ each; and these shares are contributed by the individual shareholders, in such proportion as they please. the law may as a matter of public policy limit the proportion of capital stock to be owned by any one individual or firm, and it may also limit the liability of shareholders for debts due by the bank, in case of its failure; but in general, in the absence of special provisions to the contrary, the powers, rights, and liabilities of every shareholder are now usually determined by the number of shares of the stock contributed or owned by him. in the election of directors and of other officers for the immediate management of the business, every share entitles its owner to cast one vote; the dividend of profit is divided in the ratio of shares owned, and contributions to meet losses, if required by law, are called for in the same ratio. the capital subscribed by the intending shareholders must necessarily be paid in in money or in the legal tender of the country. it is not necessary that the whole should be paid in at the outset, but the payment of the whole usually precedes the full establishment of the business; and, in the case of incorporated banks, the law often requires that some definite proportion, as _e. g._, one-half, shall be paid in before the opening of business, in order to insure good faith and a solid basis for the business undertaken. if, now, we undertake to represent by a brief statement of account the condition of a bank having a capital of $ , paid in, in specie, on the morning when it opens its doors for business, we shall have the following: _liabilities_ _resources_ capital $ , specie $ , it may at first sight appear to be a contradiction in terms, that the capital should be set down as a liability and not as a resource. but we must here distinguish between the financial liability for what has been received from the shareholders and the right of property in the thing received. the bank has become accountable to its shareholders for the amounts paid in by them respectively, but the money actually paid in has become the property of the bank; or, in the language of accountants, the bank has become liable for its capital, and the money in hand is for the present its resource for meeting this liability, or for explaining the disposition made of what has been received. as the bank requires banking-rooms and a certain supply of furniture and fixtures for the convenient transaction of its business, we may suppose it to expend $ , of its cash in providing this "plant." the property thus procured, with the remaining $ , in cash, will then be the aggregate resources by means of which the capital is to be accounted for, and the account will stand as follows: _liabilities_ _resources_ capital $ , real estate, furniture, fixtures, etc. $ , specie , -------- -------- $ , $ , the bank, however, cannot answer the purposes of its existence, or earn a profit for its shareholders, until its idle cash is converted into some kind of interest-bearing security. nor is it enough that a permanent investment of the ordinary kind should be made, as by the simple exchange of the cash for government bonds or railway securities. it is the chief business of the bank to afford to purchasers and dealers the means of using, by anticipation, funds which are receivable by them in the future, and this implies both the purchase of private securities or "business paper" to a considerable extent, and also frequent change and renewal of purchases. moreover, while the private capitalist finds it advantageous to make simple investments of a permanent sort, this would plainly be insufficient for the shareholders of a bank, who have to pay from its profits some serious expenses of management, and need, therefore, a larger field for earnings than the ordinary returns on their capital alone. the bank being obliged then to extend its operations beyond the amount of its capital, is compelled for this purpose to make use of its credit. in fact, it is only by such a use of its credit that the establishment becomes in reality a bank. most of the conditions of the case are best answered by the "discount" of commercial paper as above described. the time for which such obligations have to run varies with the custom of the trade which gives rise to them, but is in most cases short enough to imply early repayment to the bank. and even where custom gives the paper longer time, if the paper itself is used only as a collateral security, the note which is the actual object of negotiation with the bank is by preference usually made not to exceed four months. it is easy then to arrange the purchases of paper with reference to the times of maturity, so as to provide for a steady succession of payments to the bank, and thus facilitate the reduction of the business, if necessary, or its direction into new channels, as prudence or good policy may require. the certainty of prompt payment at maturity, needed for this end, is presented in a high degree by the paper created in the ordinary course of business. independently of the collateral security which the bank may hold, the written promise of a merchant or manufacturer to pay on a fixed day is an engagement which involves the credit of the promisor so far that failure is an act both of legal insolvency and of commercial dishonor. selected with judgment, then, such paper is not only the investment which most completely answers the purposes of the bank's existence, but is probably as safe as any investment which could be found. it may easily happen, however, that the bank may find it desirable to invest a part of its resources in some other form, either because good commercial paper cannot be procured in sufficient amount, or as a matter of policy. in this case it will purchase such other securities as offer not only complete safety of investment, but the possibility of easy conversion into cash in case of need. in this country united states bonds, and many descriptions of state, municipal, and corporation bonds might answer this purpose. stocks would more rarely answer it, being more liable to the fluctuations in price caused by misfortune or the ordinary vicissitudes of business. mortgages on real estate, however, would not be admissible, except when held as a security, collateral to some other which is more easily convertible, for even when the mortgaged property is so ample and stable as to insure the goodness of the mortgage, the conversion of the mortgage into cash by sale is not always easy, and is especially difficult at those times when the bank most needs to have all its resources at command. indeed, the danger to be apprehended from the locking up of resources, in securities which may be solid but are not easily realized, is so great, that it has been said to be the first duty of the banker to learn to distinguish between a note and a mortgage, his business lying with the former. real estate, of course, cannot be regarded as a banking security, however desirable it may be as an investment for individuals, for it is not only subject to great fluctuations in value, but is at times unsaleable.... the results of the process of investment in commercial paper and in other securities are best understood when we trace the effect in the account of the bank. taking then the account as it stood after the purchase of fixtures, let us suppose that the bank buys paper or securities from those dealing with it, or, in the common phrase, makes "loans to its customers," to the amount of $ , , the paper being in many pieces and having various lengths of time to run, but averaging about three months. supposing the interest to be computed at per cent., we should have the account changed by the operation as follows: _liabilities_ _resources_ capital $ , loans $ , undivided profits , real estate, furniture, fixtures, etc. , deposit , specie , -------- -------- $ , $ , here we have the securities which certify the right of the bank to demand and receive $ , at a future date placed among the resources; the net proceeds of the securities, or the aggregate of the sums which the bank holds itself liable to pay for them on demand, stand among the liabilities as deposits; and the interest deducted in advance, or the profit on the operation, which the bank must at the proper time account for to the stockholders, also stands as a liability. this, however, is the condition of the account at the moment of making the investment, when the bank has made its purchase of securities by merely creating a liability. as this liability is real and must be met, so far as the depositors at any time see fit to press it, let us suppose that depositors call for cash to the amount of $ , , and we shall have a further change in the account as follows: _liabilities_ capital $ , undivided profits , deposits , ------ $ , _resources_ loans $ , real estate, etc , specie , ------ $ , it is clear that, unless the enforcement of the liability for deposits and consequent withdrawal of specie goes much farther than this, the bank can safely increase its loans or its purchase of securities, although its method of doing so is by the increase of its liabilities. we will suppose it, therefore, to have expanded its affairs until it has reached something like the average condition of those banks in the united states, which, being incorporated under the laws of the several states, are not authorized to issue notes. it will then stand thus: _liabilities_ capital $ , surplus , undivided profits , deposits , -------- $ , _resources_ loans $ , bonds and stocks , real estate , other assets , expenses , legal-tender notes } cash items } , specie } -------- $ , postponing for the present the consideration of some terms which here occur for the first time, it appears from the above account that purchases of securities have been made to more than three times the amount of the capital, and that this has been effected chiefly by the creation of liabilities in the form of deposits. what determines the limit to which this process can be carried? if depositors seldom demanded the payment to which they are entitled, but were contented with the mere transfer of their rights among themselves as a conventional currency, the bank might dispense with holding any large amount of specie or cash in any form and keep most of its resources employed in its productive securities. the expansion of the deposits would then resemble in its effects the expansion of any other currency and might go on until a check should be interposed by the consequent rise of prices and demand for specie for exportation. and it is true, as we shall see, that in communities where banking is largely practised, the use of deposits as currency by transfer from hand to hand is so extensive, that a bank in good credit can rely upon their being withdrawn so slowly, or rather to so small an extent, as to make it unnecessary to have cash in readiness for the payment of more than a small proportion at any given moment. but in a period of financial disorder or alarm, withdrawals may be made earlier or more frequently, and a larger provision of cash may be needed for safety, than at other times; the kind of business carried on by depositors may expose one bank, or the banks in one place, to heavier occasional demands, or may on the other hand make demands steadier, than is the case elsewhere; and a city bank may be more subject to heavy calls from depositors than a country bank. in general, then, for every bank, in its place and under the circumstances of the time, there is some line below which its provision of cash cannot safely fall. this provision of cash, which in the account last given includes the cash items, specie, and legal-tender notes, is called the reserve, and the necessity of maintaining a certain minimum reserve fixes a limit to the ability of the bank to increase its securities. for obviously any increase of securities, that is, of loans or bonds, must ordinarily be effected, either by an increase of deposits, or by an actual expenditure of cash. if, then, the reserve were already as low as prudence would allow, or were threatened by approaching heavy demands from depositors, no increase of securities could be made without serious risk. what proportion the reserve should bear to the liabilities which it is to protect is a question which the law has sometimes attempted to settle, by requiring a certain minimum, leaving it to every individual bank to determine for itself how much may be required in addition to this minimum. and this is no doubt as far as any general rule can go. as has already been suggested, the requirements for safety of different banks and in different places must vary, and so must the requirements of the same bank at different times. in fact, the question as to the proper amount of reserve never depends simply on the absolute ratio of the reserve to the liabilities, but always involves further questions as to the probable receipts of cash by the bank and probable demands upon it, in the near future. it can only be said that the reserve should be large enough, not only to insure the immediate payment of any probable demand from depositors, but also to secure the bank from being brought down to the "danger line" by any such demand. if per cent. is the minimum consistent with safety, the reserve should be far enough above this to be secure from reduction to a point where any further demand or accident may make the situation hazardous. in the management of its reserve the bank itself necessarily feels a strong conflict of interests. on the one hand, it is impelled to increase its securities as far as possible, for it is from them that it derives its profits, and the retention of a large amount of idle cash is felt as a loss. on the other hand, the maintenance of a reserve sufficient, not only to enable the bank to continue its payments but to inspire the public with confidence in its ability to continue them, is a necessity of its existence, even though a part of its resources do thus appear to be kept permanently idle. as a natural consequence, the actual settlement of the question in favor of a large or of a small reserve in any particular case will depend in good measure on the temperament of the managers. in every banking community may be found "conservative" banks, the caution of whose managers forbids them to take risks by extending their business at the expense of an ample reserve; and by their side may be seen the more "active" banks, whose managers habitually spread all possible sail, and provide for the storm only when it comes. it is to be observed that the necessity of providing a cash reserve is not met by the excellence of the securities held by the bank. although their certainty of payment at maturity be absolute, still the demands upon the banks are demands for cash, and cannot be answered by the offer of even the best securities. if the depositor or creditor does not receive cash in full for his demand when it is made, the bank has failed, and any satisfaction of his claim by the delivery of a security is, as it were, only the beginning of a division of the property of the bank among its creditors. specie, therefore, or the paper which is a substitute for it as a legal tender for debt, forms the real banking reserve. the reserve of the bank may, however, be greatly strengthened by the judicious selection of securities. for example, if, in the account above given, the "bonds and stocks" are, as they should be, of descriptions which are readily saleable, they afford the means of replenishing the reserve in case of need, without foregoing the enjoyment of an income from this amount of resources for the present. in extreme cases of general financial panic, it is true, even the strongest government securities may find but few purchasers; still such a provision is the best support which can be had in the absence of, or as an auxiliary to, a sufficient reserve of actual cash. the natural method of securing the proper apportionment of resources between securities and reserve, under ordinary circumstances, is by increasing or diminishing the loans, or, in other words, the purchases of securities made from day to day in the regular course of business. that part of the securities which consists of the promises of individuals or firms to pay to the bank at fixed dates, is made up of many such pieces of commercial paper, maturing, if properly marshalled, in tolerably steady succession. the payment of one of these engagements when it becomes due may be made either in money, or by the surrender to the bank of an equal amount of its own liabilities ... [in the form of deposits]. in the former case, the payment of the maturing paper to the bank is in fact the conversion of a security into cash, and increases the reserve without change in the liabilities; in the latter, the reduction of securities is balanced by a reduction of liabilities which raises the proportion of reserve. if, then, the bank stops its "discounts" or the investments in new securities, or if it even slackens its usual activity in making such investments, the regular succession of maturing paper will gradually strengthen its reserve; if it increases its activity in investment, it will weaken or lower its reserve; and if it adjusts the amount of its new investments to the regular stream of payments made by its debtors, it may keep the strength of its reserve unaltered, until some change in the condition of affairs brings cash to it or takes cash away by some other process. this natural dependence of the reserve upon the more or less rapid re-investment of its resources by the bank is distinctly recognized by the law of the united states, which provides that when the reserve of any national bank falls below the legal minimum, such bank "shall not increase its liabilities by making any new loans or discounts," until its reserve has been restored to its required proportion. by a less harsh application of the same principle, the bank of england operates upon its reserve by lowering or raising its rate of discount, and thus encouraging or discouraging applications for loans. and it was with a view of facilitating the replenishment of the reserve by the curtailment of loans, that the law of louisiana formerly provided that the banks of new orleans should hold what were called "short bills," or paper maturing within ninety days, to the amount of two-thirds of their cash liabilities, so that the constant stream of payments of such paper might always insure to every bank the early command of a large part of its resources. to return, in conclusion, to the account last given; we have there among the liabilities certain sums classified as "surplus" and as "undivided profits." taken together these sums represent the profits which have been made, but not divided among the stockholders, and which are therefore to be accounted for by the bank. the surplus is that portion of these profits which as a matter of policy it has been determined not to divide and pay over to the stockholders, but to retain in the business, as in fact, although not in name, an addition to the capital. the remaining portion, the undivided profits, is the fund from which, after payment of current expenses and of any losses which may occur, the next dividend to the stockholders will be made. the current expenses are for the present entered on the other side of the account, as they represent a certain amount of cash which has disappeared; but at the periodical settlement of accounts they must be deducted from the undivided profits, and will thus drop out from the statement. "other assets," here set down as an investment, may be supposed to cover any form of property held by the bank and not otherwise classified, but especially the doubtful securities, or such property, not properly dealt in by a bank, as it may have been necessary to take and to hold temporarily, for the purpose of securing some debt not otherwise recoverable. for example, although the bank could not properly invest in a mortgage, it might be wise for it to accept a mortgage in settlement with an embarrassed debtor, and in this case the mortgage would stand among the "other assets." and, finally, "cash items" include such demands on individuals or other banks as are collectible in cash and can therefore fairly be deemed the equivalent of cash in hand. in the absence of any legal provision limiting the classification of such demands as reserve, they may be regarded as virtually a part of the reserve, which in the case before us may therefore be treated as made up of cash items, specie, and legal-tender notes. to illustrate what has been said in this chapter we will now suppose the bank to make the following operations: a. to add to its securities $ , , by discount of three-months paper at per cent., three-fourths being purchased by the creation of liabilities, and one-fourth by the expenditure of cash. the account would then stand as follows: _liabilities_ capital $ , surplus , undivided profits , deposits , -------- $ , _resources_ loans $ , bonds and stocks , real estate , other assets , expenses , reserve , -------- $ , b. to retrace its steps by diminishing its "discounts" or holding of securities to the extent of $ , , of which four-fifths are paid to it by the surrender of demands for deposits to a like amount and one-fifth in cash; to pay $ , for current expenses; and further to increase its reserve by the sale of bonds and stocks to the amount of $ , . the following would then be the state of the account: _liabilities_ capital $ , surplus , undivided profits , deposits , -------- $ , _resources_ loans $ , bonds and stocks , real estate , other assets , expenses , reserve , -------- $ , c. to sell $ , of its other assets for cash with a loss of $ ; to make a semi-annual dividend of per cent., of which one-half is credited to stockholders who happen to be depositors also, and one-half is paid in cash; to sell $ , of bonds at a profit of per cent., and to carry $ , of its undivided profits to surplus. the account would then stand at the beginning of the new half year, as follows: _liabilities_ capital $ , surplus , undivided profits , deposits , -------- $ , _resources_ loans $ , bonds and stocks , real estate , other assets , reserve , -------- $ , statement of a representative national bank _resources_ loans and discounts $ , . overdrafts, secured . u. s. bonds deposited to secure circulation , . u. s. bonds pledged to secure u. s. deposits , . bonds other than u. s. bonds pledged to secure postal savings deposits , . other securities , . stock of federal reserve bank , . banking house , . furniture and fixtures , . due from federal reserve bank , . due from approved reserve agents , . due from other banks , . checks on banks in same city , . outside checks and other cash items , . fractional currency, nickels, and cents . notes of other national banks , . coin and certificates , . legal-tender notes , . redemption fund , . ------------- $ , , . _liabilities_ capital stock paid in $ , . surplus fund , . undivided profits , . less current expenses, interest, and taxes paid , . , . circulating notes out-standing , . individual deposits subject to check , . certificates of deposit due in less than days , . certified checks . united states deposits , . postal savings deposits , . ------------- $ , , . [ ]~the method and extent of credit issue.--~assume that a bank with a cash capital of $ , is opening for business in an isolated town and is the only bank in that town. how much can it lend? ordinarily a bank lends by discounting a customer's note and by giving the customer a deposit credit upon its books for the proceeds of the note.... if, now, our bank in question lends $ , , giving deposit credit for this sum, it has $ , of cash on hand against $ , of cash liability. its statement will stand as follows: _resources_ cash $ , notes , -------- $ , _liabilities_ capital stock $ , deposits , -------- $ , now let it lend another $ , . with its loans and deposits each standing at $ , its reserves are per cent. of its demand liability. only with $ , of loans will its reserves have reached ... [a] per cent. limit: _resources_ cash $ , notes (loans and discounts) , -------- $ , _liabilities_ capital stock $ , deposits , -------- $ , further: suppose that $ , of cash is deposited with the bank from the channels of business; how much more can it lend? fifteen thousand dollars must be retained as reserve against the new liability; $ , is available as reserves against further lending. based upon these further reserves loans may be granted to the extent of nearly $ , more. in fact, only with an expansion of $ , , in loans and in derived deposits--a total deposit of $ , , --has its reserve fallen to the ratio of per cent. of its liability. _resources_ cash (original) $ , loans and discounts , cash (new) ( , ( , l & d (new) , ---------- $ , , _liabilities_ capital stock $ , deposits , deposits (new) ( , ( , ---------- $ , , the situation summarizes as follows: on its asset side the bank has $ , of cash and $ , , of securities (bills and notes). its deposit liabilities amount to $ , , . its cash is / . + of its liability-- per cent. ~the function of reserves.~--if this is what actual banking means, is banking safe? what would happen if all these deposits were immediately called for in cash? true, not all are likely to be called for, but some cash will be demanded. in fact, the borrowers, instead of accepting all of the proceeds of these notes in deposit credit, will in some measure require and receive cash. precisely so; and so the bank must keep on hand a cash reserve to meet this possibility. for the most part, however, the customers of the bank make payments through checks upon the bank, and these credits are deposited in turn to the credit of other customers. no cash, but only bookkeeping, is required. and if some customers draw out cash, other customers will probably receive it and return it to the bank. a reserve of per cent. is enough for the case. there, would, indeed, be small gain in banking if against every deposit an equal sum in cash must be held in store by the bank. ~economy of redemption money.~--it is thus evident that the employment of $ , cash as a banking reserve has made possible the existence of a more than sixfold volume of circulating medium--currency. against each $ , of deposit liability there need be only $ of actual cash. the bank customer, however, thinks of his deposit claim as money, and it really serves him all the purposes of money. the right to have the money when desired is as good as the actual money, is more convenient, and is as readily and as serviceably transferred. the economy of money through the use of credit substitutes for money extends really further than the foregoing analysis indicates. under the [now superseded] law, three-fifths of the reserves of a rural bank may be on deposit with banks in reserve cities. thus against $ , of deposit liability the rural bank needs hold only $ , of reserve money. against the deposit of the remaining $ , , the reserve city bank is required in turn to hold a reserve of only per cent.--$ , . and of this required $ , , one-half may be represented by deposits in central reserve cities, _e. g._, new york, chicago, and st. louis. against the $ , deposited with it the central reserve bank is required to hold only per cent. of reserves--$ . . thus at the outside limit of credit extension, $ , of deposit currency may be supported by only $ , . of reserves in money, ( + / × ( / ) + ( / )). one dollar of reserves upholding $ of currency.[ ] it is, of course, not true that the banks ordinarily allow their reserves to run as low as the legal limit, or make the utmost possible use of the privilege of counting claims against one another as legal reserves. nor is it accurately true that all forms of money are of equal efficiency in the support of credit. not all forms of money, but only those of the higher levels in the money scale, are allowed to be counted as legal reserves.... some forms of money make demands upon other forms for redemption, or are limited in exchange power to the exchange power of the form in which redemption is to be made. the total exchange efficiency of the money of a country is, then, not accurately to be computed on the assumption that all moneys are equally efficient for all purposes--that some are not in varying degree burdens upon the money functions of the others. ~banking viewed in detail and in the aggregate.~--and one further modification is called for. the analysis so far made, while valid for any isolated bank, or for the banking system regarded as an aggregate, is not precisely accurate for the affairs of any one competing bank among other banks. when the check drawn by the borrowing depositor may be deposited in other banks and collected by them against the lending bank, its granting of credits rapidly draws down its reserves to swell the reserves of its competitors. one hundred thousand dollars of new reserves may not mean to it an increase of lending power of more than, say, $ , . for banks in the aggregate, however, this increase of reserves brings its full several-fold increase of lending power, provided that all the reserve efficiency is utilized in whatever bank it rests. as the lending by each bank is depleting its reserves, the lending which other banks are doing is reinforcing these reserves. the aggregate possible extension of credit is not changed. ~what banks actually do and lend.~--it follows from the foregoing analysis that, in the main, banks do not lend their deposits, but rather, by their own extensions of credit, create the deposits; that these deposits are funds which the deposit-creditors of the bank can lend if they will, and that many men into whose hands these deposits fall through transfer are certain to use them as funds to be lent. in fact, also, even when the deposits in the bank are not derived from the lending activity of the bank, but are really funds deposited from outside sources, these funds are commonly used by the bank as a reserve basis on which loans are extended rather than as funds which are themselves loaned out by the bank. banks are, in truth, mostly intermediaries between debtors and creditors--but not in the sense of borrowing funds from one class of customers in order to lend them to another class, but rather in the sense of creating for their borrowing customers funds which may be used by these borrowers as present purchasing power. the borrower becomes indebted to the bank in order that for his own purposes he may use the promise of the bank as the equivalent of cash to himself. in the form of a deposit liability the bank becomes a debtor to whomever the borrower shall nominate. the fact that the borrower pays interest while the bank undertakes a noninterest-bearing obligation, or pays relatively low interest, explains in the main the gains attending the business of commercial banking. ~deposits and solvency.~--it is, therefore, a sheer blunder to infer that a bank is rich or strong because of its great total of deposits, or to regard deposits in banking institutions as making part of the aggregate wealth of the community. instead, the deposits indicate for a bank the extent of its operations, and indicate for a community the extent to which the banks, under the guise of noninterest-bearing obligations, have assumed the debts of business men, on terms of these business men becoming debtors--and interest-paying debtors--to the banks. the solvency of the bank is in its portfolio of securities. its deposits are not its assets, but its liabilities. these liabilities it has mostly created for the use of its borrowers. the further it may safely go in assuming liabilities, the larger its holdings of borrowers' notes may be, and the more interest or discount charges it may collect. essentially, therefore, the business of a bank is a form of suretyship--the guaranteeing of its borrowers' solvency--an underwriting of the credit of its customers. the bank transfers its customers' prospective future paying power into present funds. it is for this reason that the contract takes the form of a money loan and the premium the guise of an interest payment. ~bank loans related to currency and loan funds.~--and note now that it is precisely because the business of a bank is to furnish to its borrower a present purchasing power for his own use that the business of banking becomes the source of the larger part of the circulating medium of society. in their service to their customers the banks create currency; and in creating currency they create loan funds which, in the hands of the holders of them, are available like other currency for any purpose, either lending or other. ~the sources of currency supply.~--it is, then, clear that the larger part of the circulating medium of society is not money; that not all of the money that there is is bullion money; and that not even all of the bullion money need be ultimate money--redemption money of the highest rank. the sources of currency in society are various--some of it bullion, with a cost of production limit upon its supply, some of it government paper, substantially free of cost, some of it banking credit with certain peculiar and appropriate costs attending its issue. ~currency and its cost of production.~--it is obvious that the actual limitations upon the supply of exchange media must be made clear if we are to understand the influences which are fundamental to the exchange values of the currency unit. only, indeed, by this investigation of the sources of the supply, and of the terms on which each different factor of the supply is available, are we in position to understand the influences which impose upon bidders for money a certain level of sacrifice in obtaining it. what, then, are the limitations upon the supply of credit currency supplied by the banks? in other words, what are the banking costs in the granting of demand deposit rights to customers? evidently limitations there must be, and limitations in the nature of costs, else the competitive activity of the banks would indefinitely increase the supply of currency, and any would-be purchaser of goods or payor of debts or projector of an enterprise could have the time use of purchasing power gratis; no limit would exist to the rise in prices which must attend this increase in the circulating medium. what are these limitations? ( ) each bank must conform the volume of its lending, and therewith its issue of circulating credit, to the fundamental requirement that it be always able to make good its agreement to discharge its deposit liabilities on demand. to maintain reserves involves expense. especially may it be expensive if they have been allowed to get low; securities may have to be marketed at a sacrifice, or good customers pressed for payment at inconvenient times. in periods of general pressure or panic, other banks are not likely to be in a position to lend their own reserve funds or to consent to create deposit credit in aid of still other suffering banks. not rarely the bank of england, in the attempt to attract reserve funds, advances bank notes or deposit credit to importers of gold, without imposing the customary interest charge for the covering of the delays of the mint. in at least one case, in , it borrowed reserves from the bank of france. in the united states treasury made especially large money deposits with the national banks of new york to help eke out the needed reserves. meantime the interior banks were compelled to pay to exporting merchants generous premiums for exchange bills upon europe, through which, despite the high interest rates ruling in european markets, these banks were able to import millions of gold for their own reserve requirements. in fact, the banking business involves the hazard not merely that some of the debtors of the bank may become insolvent, but also the general and overhead hazard attaching to its underwriting service that it may itself in time of stress become unable to meet its obligations. its liabilities must not be allowed to get seriously out of ratio to its cash resources. ~the protection of reserves.~--in point of fact also the efforts of the various different banks to maintain each its own reserve place a limit on the extent to which any one bank can extend its activity in the expansion of loans and of the derivative liabilities. just as a relatively liberal granting of credit by one bank must tend to transfer its reserves to other banks, so a relatively great extension of credit in one center or in one country must tend to transfer the reserves, _e. g._, gold, to other centers or countries. even were it true that a local credit expansion has no effect upon local prices and thereby upon the currents of trade, some transfers of reserves would still take place, and would impose a policy of restriction in credit accommodations.... the influence is actually exerted by both methods. ~( ) another cost in bank-made currency.~--the loan rates of the bank must also provide a fund to cover its costs of administration--salaries, clerk hire, rents, and the like. where transactions run in large units the ratio of expense to the volume of business may be low. this is in part the explanation for the low rates of discount in the great financial centers compared with the rates outside. credit currency has its cost of production rate as truly as any other service upon the market.... the relation between loans and deposits [ ]the money of modern english commerce and finance is the cheque, and the credit dealt in in the london money market is the right to draw a cheque.... now that we have come to the point at which the manufacture of the right to draw cheques has to be made as clear as may be, it will be well to come into close touch with the facts of the case and look at a bank balance-sheet of to-day. in order to get a fair average specimen i have taken the latest available balance-sheets of half a dozen of the biggest london banks, and put their figures together.... let us examine the aggregated specimen that i have drawn up. _millions of £_ capital paid up reserve fund current and deposit accounts acceptance on behalf of customers - / profit and loss account - / ------- _millions of £_ cash in hand and at the bank of england loans at call and short notice - / bills discounted and advances investments liability of customers on acceptances - / premises ------- the above statement does not include the figures of the bank of england, but is an agglomeration of the balance-sheets of six of the biggest of the ordinary joint-stock banks. the first feature that strikes the casual observer is the smallness of the paid-up capital of the banks when compared with the vastness of the figures that they handle. we see that only millions out of the that they have to account for have been actually paid up by shareholders, though millions have been retained out of past profits and accumulated in reserve funds ["surplus," in united states], and - / millions are due to shareholders, for distribution as dividend or addition to reserve, in the shape of the profit and loss account balance for the period covered by the balance-sheet. a profit of - / millions on is handsome enough, especially when it is considered that most of these balance-sheets covered a half-year's work, but - / millions out of is a trifle, and it thus appears that a narrow margin of profit on their total turnover enables the banks to pay good dividends, and that the business of credit manufacture earns its reward, as might be expected, out of the credit that it makes. proceeding in our examination, we see that the item of acceptances on behalf of customers on one side is balanced by the liability of customers on the other. this means that the banks have accepted bills for their customers (so making them first-class paper and easily negotiable), and are so technically liable to meet them on maturity; but since the customers are expected to meet them, and have presumably given due security, this liability of the customer to the bank is an offsetting asset against the acceptance. and since the acceptance business is a comparatively small item, and a bank's liability under its acceptances is not a liability in quite the same sense as its deposits, and does not immediately affect the present question of the manufacture of currency, it may be omitted for the present. we can thus simplify the balance-sheet by taking out this contra entry on both sides. further analysis of the liabilities shows that the capital, reserves, or surplus, and profit and loss balance may be regarded as due from the banks to their shareholders, and that the remaining big item, current and deposit accounts, is due to their customers. this is the item which is usually spoken of as the deposits, according to the tiresome habit of monetary nomenclature which seems to delight in applying the same name to a genus and one of the species into which it is divided. just as the bill of exchange is divided into cheques and bills of exchange, so the english banks' deposit accounts are divided into current and deposit accounts. but most people who have a banking account know the meaning of this distinction. your current account is the amount at your credit which you can draw out, or against which you can draw cheques, at any moment; your deposit account is the amount that you have placed on deposit with the bank and can only withdraw on a week's or longer notice, and it earns a rate of interest, usually - / per cent. below the bank of england's official rate. the essential point to be grasped is the fact that the banks' deposits, as usually spoken of, include both the current and deposit accounts, and are due by the banks to their customers. now let us see how this huge debt from the banks to the public has been created. an examination of the assets side of the balance-sheet proves that most of it has been created by money lent to their customers by the banks, and that the cheque currency of to-day is, like the note currency of a former day, based on mutual indebtedness between the banks and their customers. for the assets side shows that the banks hold millions in cash and at the bank of england, millions in investments, and millions invested in their premises--the buildings in which they conduct their business--and that - / millions have been lent by them to their customers, either by the discounting of bills or by advances to borrowers, or by loans at call or short notice. we can now reconstruct our balance-sheet, leaving out the acceptances on both sides, as follows: _millions of £._ _millions of £._ due to shareholders - / cash in hand and at bank due to customers of england -------- investments - / premises due from customers - / -------- - / and it thus appears that nearly three-quarters of the amount due from the banks to their customers are due from their customers to the banks, having been borrowed from them in one form or another. and this proportion would perhaps be exceeded if we could take the figures of english banking as a whole. but that cannot be done at present, because some of the smaller banks do not separate their cash from their loans at call in their published statements. the greater part of the banks' deposits is thus seen to consist, not of cash paid in, but of credits borrowed. for every loan makes a deposit, and since our balance-sheet shows - / millions of loans, - / out of the millions of deposits have been created by loans. to show how a loan makes a deposit, let us suppose that you want to buy a thousand-guinea motor-car and raise the wherewithal from your banker, pledging with him marketable securities, and receiving from him an advance, which is added to your current account. being a prudent person you make this arrangement several days before you have to pay for the car, and so for this period the bank's deposits are swollen by your £ , , and on the other side of its balance-sheet the entry "advances to customers" is also increased by this amount, and the loan has clearly created a deposit. but you raised your loan for a definite purpose, and not to leave with your bank, and it might be thought that when you use it to pay for your car the deposit would be cancelled. but not so. if the seller of your car banks at your bank, which we will suppose to be parr's, he will pay your cheque into his own account, and parr's bank's position with regard to its deposits will be unchanged, still showing the increase due to your loan. but if, as is obviously more probable, he banks elsewhere--perhaps at lloyd's--he will pay your cheque into his account at lloyd's bank, and it will be the creditor of parr's for the amount of £ , . in actual fact, of course, so small a transaction would be swallowed up in the vast mass of the cross-entries which each of the banks every day makes against all the others, and would be a mere needle in a bottle of hay. but for the sake of clearness we will suppose that this little cheque is the only transaction between parr's and lloyd's on the day on which it is presented; the result would be that parr's would transfer to lloyd's £ , of its balance at the bank of england, where all the banks keep an account for clearing purposes. and the final outcome of the operation would be that parr's would have £ , more "advances to customers" and £ , less cash at the bank of england among its assets, while lloyd's would have £ , more deposits and £ , more cash at the bank of england. and the £ , increase in lloyd's deposits would have been created by your loan, and though it will be drawn against by the man who sold you the car, it will only be transferred perhaps in smaller fragments to the deposits of other banks; and as long as your loan is outstanding there will be a deposit against it in the books of one bank or another, unless, as is most unlikely, it is used for the withdrawal of coin or notes; and even then the coin and notes are probably paid into some other bank, and become a deposit again; and so we come back to our original conclusion that your borrowing of £ , has increased the sum of banking deposits, as a whole, by that amount. the same reasoning applies whenever a bank makes a loan, whatever be the collateral, or pledge deposited by the borrower, whether stock exchange securities, as in the case cited, or bales of cotton or tons of copper; or, again, whenever it discounts a bill. in each case it gives the borrower or the seller of the bill a credit in its books--in other words, a deposit; and though this deposit is probably--almost certainly--transferred to another bank, the sum of banking deposits is thereby increased, and remains so, as long as the loans are in existence. and so it appears that the loans of one bank make the deposits of others, and its deposits consist largely of other banks' loans.... relation between reserves and demand liabilities again [ ]... a bank must so regulate its loans and note issues as to keep on hand a sufficient cash reserve, and thus prevent insufficiency of cash from ... threatening. it can regulate the reserve by alternately selling securities for cash and loaning cash on securities. the more the loans in proportion to the cash on hand, the greater the profits, but the greater the danger also. in the long run a bank maintains its necessary reserve by means of adjusting the interest rate charged for loans. if it has few loans and a reserve large enough to support loans of much greater volume, it will endeavor to extend its loans by lowering the rate of interest. if its loans are large and it fears too great demands on the reserve, it will restrict the loans by a high interest charge. thus, by alternately raising and lowering interest, a bank keeps its loans within the sum which the reserve can support, but endeavors to keep them (for the sake of profit) as high as the reserve will support. if the sums owed to individual depositors are large, relatively to the total liabilities, the reserve should be proportionately large, since the action of a small number of depositors can deplete it rapidly. similarly, the reserves should be larger against fluctuating deposits (as of stock brokers) or those known to be temporary. the reserve in a large city of great bank activity needs to be greater in proportion to its demand liabilities than in a small town with infrequent banking transactions. experience dictates differently the average size of deposit accounts for different banks according to the general character and amount of their business. for every bank there is a normal ratio and hence for a whole community there is also a normal ratio--an average of the ratios for the different banks. no absolute numerical rule can be given. arbitrary rules are often imposed by law. national banks in the united states, for instance, are required to keep a reserve for their deposits, varying according as they are or are not situated in certain cities designated by law as "reserve" cities, _i. e._, cities where national banks hold deposits of banks elsewhere. these reserves are all in defense of deposits. in defense of notes, on the other hand, no cash reserve is required--that is, of national banks. true, the same economic principles apply to both bank notes and deposits, but the law treats them differently. the government itself chooses to undertake to redeem the national bank notes on demand. the state banks are subject to varying restrictions. thus the requirement as to the ratio of reserve to deposits varies from - / per cent. to - / per cent., being usually between per cent. and per cent. of the reserve, the part which must be cash varies from per cent. (of the reserve) to per cent., usually per cent. such legal regulation of banking reserves, however, is not a necessary development of banking.... the rÔle of a specie reserve illustrated by the inconvertible notes of the bank of england issued during the operation of the restriction act[ ] [ ]... your committee proceeded, in the first instance, to ascertain what the price of gold bullion [in terms of bank of england notes] had been, as well as the rates of the foreign exchanges, for some time past; particularly during the last year. your committee have found that the price of gold bullion, which, by the regulations of his majesty's mint, is £ _s._ - / _d._ per ounce of standard fineness, was, during the years , , and , as high as £ in the market. towards the end of it began to advance very rapidly, and continued very high during the whole year ; the market price of standard gold in bars fluctuating from £ _s._ to £ _s._ per ounce. the market price at £ _s._ is about - / per cent. above the mint price.... it is due,... in justice to the present directors of the bank of england, to remind the house that the suspension of their cash payments, though it appears in some degree to have originated in a mistaken view taken by the bank of the peculiar difficulties of that time, was not a measure sought for by the bank, but imposed upon it by the legislature for what were held to be urgent reasons of state policy and public expediency. and it ought not to be urged as matter of charge against the directors, if in this novel situation in which their commercial company was placed by the law, and entrusted with the regulation and control of the whole circulating medium of the country, they were not fully aware of the principles by which so delicate a trust should be executed, but continued to conduct their business of discounts and advances according to their former routine. it is important at the same time to observe that under the former system, when the bank was bound to answer its notes in specie upon demand, the state of the foreign exchanges and the price of gold did most materially influence its conduct in the issue of those notes, though it was not the practice of the directors systematically to watch either the one or the other. so long as gold was demandable for their paper, they were speedily apprised of a depression of the exchange, and a rise in the price of gold, by a run upon them for that article. if at any time they incautiously exceeded the proper limit of their advances and issues, the paper was quickly brought back to them, by those who were tempted to profit by the market price of gold or by the rate of exchange. in this manner the evil soon cured itself. the directors of the bank having their apprehensions excited by the reduction of their stock of gold, and being able to replace their loss only by reiterated purchases of bullion at a very losing price, naturally contracted their issues of paper, and thus gave to the remaining paper, as well as to the coin for which it was interchangeable, an increased value, while the clandestine exportation either of the coin, or the gold produced from it, combined in improving the state of the exchange and in producing a corresponding diminution of the difference between the market price and mint price of gold, or of paper convertible into gold. your committee do not mean to represent that the manner in which this effect resulted from the conduct which they have described, was distinctly perceived by the bank directors. the fact of limiting their paper as often as they experienced any great drain of gold, is, however, unquestionable.... it was a necessary consequence of the suspension of cash payments, to exempt the bank from that drain of gold, which, in former times, was sure to result from an unfavourable exchange and a high price of bullion. and the directors, released from all fears of such a drain, and no longer feeling any inconvenience from such a state of things, have not been prompted to restore the exchanges and the price of gold to their proper level by a reduction of their advances and issues. the directors, in former times, did not perhaps perceive and acknowledge the principle more distinctly than those of the present day, but they felt the inconvenience, and obeyed its impulse; which practically established a check and limitation to the issue of paper. in the present times the inconvenience is not felt; and the check, accordingly, is no longer in force.... by far the most important ... consequence ... [of the restriction act] is, that while the convertibility into specie no longer exists as a check to an over-issue of paper, the bank directors have not perceived that the removal of that check rendered it possible that such an excess might be issued by the discount of perfectly good bills. so far from perceiving this ... they maintain the contrary doctrine with the utmost confidence.... that this doctrine is a very fallacious one, your committee cannot entertain a doubt. the fallacy, upon which it is founded, lies in not distinguishing between an advance of capital to merchants, and an addition of supply of currency to the general mass of circulating medium. if the advance of capital only is considered, as made to those who are ready to employ it in judicious and productive undertakings, it is evident there need be no other limit to the total amount of advances than what the means of the lender, and his prudence in the selection of borrowers, may impose. but in the present situation of the bank, intrusted as it is with the function of supplying the public with that paper currency which forms the basis of our circulation, and at the same time not subjected to the liability of converting the paper into specie, every advance which it makes of capital to the merchants in the shape of discount, becomes an addition also to the mass of circulating medium. in the first instance, when the advance is made by notes paid in discount of a bill, it is undoubtedly so much capital, so much power of making purchases, placed in the hands of the merchant who receives the notes; and if those hands are safe, the operation is so far, and in this its first step, useful and productive to the public. but as soon as the portion of circulating medium in which the advance was thus made performs in the hands of him to whom it was advanced this its first operation as capital, as soon as the notes are exchanged by him for some other article which is capital, they fall into the channel of circulation as so much circulating medium, and form an addition to the mass of currency. the necessary effect of every such addition to the mass is to diminish the relative value of any given portion of that mass in exchange for commodities. if the addition were made by notes convertible into specie, this diminution of the relative value of any given portion of the whole mass would speedily bring back upon the bank which issued the notes as much as was excessive. but if by law they are not so convertible, of course this excess will not be brought back, but will remain in the channel of circulation, until paid in again to the bank itself in discharge of the bills which were originally discounted. during the whole time they remain out, they perform all the functions of circulating medium; and before they come to be paid in discharge of those bills, they have already been followed by a new issue of notes in a similar operation of discounting. each successive advance repeats the same process. if the whole sum of discounts continues outstanding at a given amount, there will remain permanently out in circulation a corresponding amount of paper; and if the amount of discounts is progressively increasing, the amount of paper, which remains out in circulation over and above what is otherwise wanted for the occasions of the public, will progressively increase also, and the money prices of commodities will progressively rise. this progress may be as indefinite as the range of speculation and adventure in a great commercial country.... footnotes: [ ] herbert joseph davenport, _the economics of enterprise_, pp. , . the macmillan company, new york. . [ ] charles f. dunbar, _chapters on the theory and history of banking_, pp. - , g. p. putnam's sons, new york and london. . [ ] herbert joseph davenport, _the economics of enterprise_, pp. - . the macmillan company. new york. . [ ] it should not be overlooked, furthermore, that the velocity of the circulation of deposits is approximately two and one-half times that of money.--editor. [ ] hartley withers, _the meaning of money_, pp. - . e. p. dutton and company. new york. . [ ] irving fisher, _the purchasing power of money_, pp. - . the macmillan company. new york. . [ ] this act, passed in in order to prevent a drain of gold to the continent during the napoleonic war, forbade the bank of england to redeem its notes. it remained in force until , when specie payment was resumed.--editor. [ ] report from the select committee on the high price of gold bullion. ordered by the house of commons, to be printed, june, . chapter x the use of credit instruments in payments in the united states [ ]discussions concerning the issue of notes by banking institutions, which largely occupied the attention of students of finance and business men in the eighteenth and the first three quarters of the nineteenth centuries, have been succeeded by equally intense discussions of the amount and influence of credit deposits on the books of the banks, when drawn on by their customers with checks. the fact that the use of checks against deposits renders unnecessary a large amount of money, or currency, attracted attention early in the history of deposit banking, and efforts have been made from time to time to determine the proportion of money, or currency, replaced with checks and credit documents of similar character.[ ] we may summarize the results of our inquiry and inferences therefrom briefly as follows: . in the first place, it is very clear that a large proportion of the business of the country, even the retail trade, is done by means of credit instruments. while it is probably true that wage-earners, as a class, do not commonly use checks, it is also true that a great many of them do. moreover, the use of checks is common among people who derive their income from other sources, even though it be not larger than the well-paid day laborer. we are justified ... in concluding that or per cent. of the retail trade of the country is settled in this way. .... over per cent. of the wholesale trade of the country is done with checks and other credit documents. . the very general use of checks is shown in the deposits of "all other" depositors. the average is close up to that of the wholesale trade, and while many corporations, public and private, are doubtless represented here, and many speculative transactions are included, there is no reason for excluding any one of those in determining the proportion of business done, whatever we may think of its legitimacy from the point of view of public morals or public utility. . the use of checks is promoted in a measure by the payment of wages by check. it appears from our investigation that of weekly pay rolls reported by the banks, aggregating $ , , for the week ending march last, per cent. was in checks.... . the great use of checks is shown also by the large number of accounts under $ .... . we may therefore safely accept an average of to per cent. as the probable percentage of business of this country done by check. . the fact that so large a proportion of business is done with credit paper may or may not be a good thing. whether it is or not depends on circumstances. if any part of the country is compelled to use checks because of the lack of currency, when it would prefer the latter, the situation is an evil. . the transaction of so large a volume of our business by checks is an element of danger in times of stringency and crisis. in such times the uncalled balance of credit transactions creates a larger demand for money, but the habit of settling by check has meantime kept the available amount of money at a minimum. . consequently there ought to be some means of supplying additional currency when credit as a means of payment diminishes. this currency ought to be as safe and as uniform as the ordinary currency, and it should be capable of being quickly emitted and recalled. that is, it should possess elasticity. . the large money circulation of the country is explained by the facts that our prices and wages range high, that our people probably carry a larger average amount of money on their persons than do foreigners, that some portion of our currency has been destroyed or lost or hoarded.... as our business grows, the amount of money needed as reserve to perform this vast volume of business transactions increases, too.... . the volume of credit transactions very likely tends to increase as population and business grow. it does not increase uniformly, however, but by periodic movements. that is to say, the rate of increase of credit transactions, as compared with the whole volume of business, grows, as it were, by jerks and at a decreasing rate. several important questions are closely related to the inquiry which has been [made and summarized]. among them are these: . what is the amount of money rendered unnecessary by the use of credit paper? . what is the influence of the vast volume of credit transactions on the value of money or the level of prices?[ ] . why is it that our per capita circulation is so large and where is the money in active circulation?... . we will take these questions up in order.... no one can say ... with definiteness what is the amount of money released if or per cent. of our business transactions are settled by means of credit paper. this is a matter in which the long experience of practical bankers is the only safe guide, because the amount in question is changing from day to day as the conditions change. no simple rule about it can be laid down.... one point needs to be carefully borne in mind. however great the volume of credit exchanges, however extensive the use of credit may become in a community, they can never fully displace sales for direct money payment. the extensive use of credit is not of itself a sign that a community is well off. credit is used in poor as well as in rich communities. its extensive use in a poor and undeveloped country is likely to indicate a lack of capital rather than an abundance of wealth. every community tends to use the cheapest medium of exchange accessible to it. if its capital is of very high value for producing goods for direct consumption, a community will be averse to investing much of it in a medium of exchange. this is the reason why undeveloped countries, as our own was a century ago, try to effect their exchanges by means of credit paper to a larger extent than wealthier communities. under such conditions paper money is commonly thought to be the cheapest medium of exchange. if, now, part of the money exchanges are replaced with credit exchanges, the amount of money released, or the amount without which the community could now get on, would be the whole amount formerly used in money payments ... minus the reserve necessary to do this credit business. the important point, however, is that less money is necessary. how much less we can not be sure. we can get some light on the subject, however, by noting the volume of business done by credit paper and the balances which from time to time are carried as a basis of settlement. it is important to note also that an increase in the volume of credit transactions does not necessarily mean that we must get a proportionate increase in our reserve of money. every refinement of the credit mechanism makes it possible to do a larger volume of business on the same reserve.... the volume of business that can be done by credit paper depends on several circumstances. obviously, in the first place, it depends upon the banking facilities of the country. if the banks are widely distributed, if they are willing to deal in transactions small enough to be within the reach of large numbers of people, many more transactions will be settled through them than would otherwise be the case. this fact undoubtedly explains in large measure the development of what may be called the "banking habit" among the people of the united states. undoubtedly our people pay by check much more commonly and much more largely than people of any other country. we settle smaller transactions by check; our banks are willing to carry smaller accounts. indeed, the rapid industrial development of our country is probably due in no small degree to our system of independent banks and the facility with which we have permitted banks to be established. the small independent bank in the country community has felt that its interests and success were bound up with the interests and success of the community, and, therefore, has undoubtedly been willing to do more for the general interests than a branch of a large bank in some remote commercial center would have felt like doing, even if it had been justified in doing so. the small capital with which we have permitted banks to be established also has undoubtedly been a contributing factor to our rapid economic development, as well as to the promotion of the banking habit among our people. in the next place, the density of population is, of course, an important factor for the growth of credit exchanges. a larger volume of business is settled by bank paper in a commercial center than in an agricultural community, even though the proportion of total business thus settled may not be larger. however, it is necessary that there should be a certain number of people within reach of a common center in order to have a bank established there. of course the smaller the bank the fewer the people thus required. thus again our inclination in the past to favor the establishment of the small independent banks has facilitated the spread of banking and promoted the volume of business settled in the country districts by credit payment and stimulated the banking habit among our people. finally, the general education and intelligence of the mass of the people is an important factor. men do not use banks unless they have confidence in them, and they have come to be regarded as a settled part of the ordinary commercial mechanism of the community. our people are people of a wide general education and high order of intelligence. they understand the place and work of the bank in a community much better than the same number of people, for example, in a european country. this fact is strikingly brought out by a study of the proportion of retail business settled by means of checks, in what are called the "foreign" districts of our large cities, on the one hand, and in an agricultural community on the other. the european immigrant is not a man who has had banking connections in his home country, and he does not use them here, even though the facilities are more numerous. such evidence as there is seems to indicate that payment by check has shown an increase during the past few years: (a) in the first place, the returns of our reports show a larger percentage in retail trade.... (b) the prosperity of the farmers in the central west has enabled many to have bank accounts who fifteen years ago could not carry balances. the writer's information from central illinois is strongly in this direction. (c) the third evidence is found in the growth of the number of small banks, especially in the country districts.... (d) the appearance of a considerable proportion of checks in the deposits of mutual savings banks is also, to some degree, significant.... on the other hand, the increase of that part of the population which consists of the wage-earning class, by whom the use of checks is small, is undoubtedly greater than that of our other classes of population. however, the wealthy classes, though fewer in number, have more to spend and their use of checks raises the proportion of credit paper in payments. we can not expect any social movement to continue steadily in one direction for an indefinite time. such evidence as inquiries of this character furnish seems to show that there is a certain ebb and flow in the proportion of checks used in business payments. with a given amount of money a certain proportion of it can be used for bank reserves on which to build credit transactions. for a time the volume of business will increase more rapidly than the money supplies, so that the proportion of credit business to the whole will increase, the improvement of the credit machinery in the meantime facilitating the movement. but the perfection of the facilities for utilizing to the utmost a given reserve, or a slowly increasing one, will come to a stop after a time, and it will be necessary to increase the money supply for any further expansion of credit. in the language of business, another unit of capital must be added to plant. the unit added to the social capital devoted to exchange--that is, the additional amount of money--will be larger than is necessary for most profitable immediate use, consequently the proportion of money exchanges will for a time show an increase. we may conclude, therefore, that the volume of business done on credit gradually increases as the population and total amount of business are enlarged, but at a decreasing rate and with occasional or periodic retardations. . _relation of credit exchanges to the volume of money and prices._--it is pertinent to inquire, now, what effect, if any, this great settlement of indebtedness by means of credit paper has upon the value of money. evidently, it can influence this value, or the general price level, only as it changes the amount of demand for money. we have seen reason, now, to think that per cent. of our business transactions are settled by means of credit paper. credit paper cancellation enables a larger amount of business to be done with the same amount of money and has an effect in determining the value of money by increasing the demand for reserves.... ... the use of credit paper in effecting credit exchanges makes possible a far larger volume of business than could otherwise be done, and that this increased volume of business must in some way influence prices seem[s] undeniable.... ... we are told by many that there is a vast amount of credit transactions embodied in banking and clearing-house statistics which may be termed "fictitious." that is to say, they are not a part of the necessary work of exchange in a community. for example, the cotton and wheat crops are sold several times over on the exchanges of the country, but not all these purchases and sales are a necessary part of the process of getting the cotton from the planter to the manufacturer. these sales, we are told, are purely speculative and born out of the credit organization, which, it is urged, merely makes the transactions possible.... however,... these exchanges actually exist. all the purchases involved constitute a part of the demand for means of settlement. therefore they are to be regarded as a proper part of the exchange business of the country, and in some degree they must influence the need for money.... ... the demand for money to effect exchanges includes, first, demand for money for direct exchanges; second, demand for reserves for credit exchanges. some goods exchange by direct barter and still more probably by indirect barter. if these last exchanges just cancelled one another, the credit paper that grows out of them would also cancel, and no balances would remain to be settled with money. usually, however, they do not cancel, and the balance must be settled with cash; hence a reserve is necessary.... this demand for reserve is certainly one of the influences that go to determine the value of money. in short, the demand for money includes a demand for direct payment and a demand for reserve.... . _our monetary circulation._--our per capita circulation, as estimated by the comptroller of the currency, has increased from $ . in to $ . in .[ ] this is larger than the per capita circulation of other great industrial and commercial countries with the exception of france. why is it necessary and where is it? it is necessary, perhaps, for the following reasons: (a) a larger amount of money is needed in this country because, in the first place, our prices range higher. if the prices of articles commonly consumed range per cent. higher than they do abroad, the people who buy them and pay for them with money need a larger amount to make their purchases. the same cause makes a larger reserve necessary to exchange a given volume of goods by credit. the demand for money, therefore, both for reserve and direct money transactions, is greater on account of the higher scale of prices. (b) the same kind of reasoning applies to our wage scale. whether the wage scale be the cause of the higher cost of living or the higher cost of living be the cause of the higher wage scale, more money will be needed in proportion to the trade. if wages are paid with checks, more money will be needed by the amount that the reserve must be increased to furnish a basis for the checks. (c) our country is more sparsely settled than england, france, or germany. in spite of the large increase in the banking facilities of the country, it still remains true that very many places are remote from banks, so that business, so far as it is not barter, will probably be carried on with money. it is necessary, therefore, to have a larger amount of money than if population were denser.... (d) it may be that our spirit of individualism plays some part. so large a proportion of our wage-earning population have come from conditions where they had opportunity to handle very little money, that they like to carry money on their persons. it makes them feel, as one man said to the writer, "more independent." to quote the same informant, they would "rather pay higher prices and have more money to pay with." (e) doubtless there is a good deal of hoarding by people who distrust banks or are not near enough to use them. it might be urged that no larger proportion of people here hoard than is the case in europe. without disputing this, it is true, however, that if only the same proportion hoard and in the same relative amounts as is done by corresponding classes of the population, the absolute amount thus withdrawn would be larger because of our higher scale of wages and prices.... footnotes: [ ] david kinley, _the use of credit instruments in payments in the united states_, pp. , ; - . senate document no. . st congress, _ d session_. [ ] in this discussion the phrase "credit documents" or "credit instruments" does not include bank notes. [ ] [the effect of credit exchanges on the value of money, treated at length in the next chapter, is only briefly discussed in the extracts here reproduced.] [ ] [approximately $ in .] chapter xi a symposium on the relation between money and general prices the form of this chapter was suggested by the proceedings of a session of the meeting of the american economic association, devoted to a consideration of the causes of the rise in prices between and . selections from papers there presented, and from the relative discussion, make up a considerable part of the chapter, and it is suggested that all of the selections, except the last, may well be considered for purposes of study as having come from the papers and discussion of the session referred to, although numerous additions and substitutions have been made in order to render the treatment one of principles involved in the determination of general prices without special reference to any particular period of years. irving fisher[ ]: overlooking the influence of deposit currency, or checks, the price level may be said to depend on only three sets of causes: ( ) the quantity of money in circulation; ( ) its "efficiency" or velocity of circulation (or the average number of times a year money is exchanged for goods); and ( ) the volume of trade (or amount of goods bought by money). the so-called "quantity theory,"[ ] _i.e._, that prices vary proportionately to money, has often been incorrectly formulated, but (overlooking checks) the theory is correct in the sense that the level of prices varies directly with the quantity of money in circulation, provided the velocity of circulation of that money and the volume of trade which it is obliged to perform are not changed. the quantity theory has been one of the most bitterly contested theories in economics, largely because the recognition of its truth or falsity affected powerful interests in commerce and politics. it has been maintained--and the assertion is scarcely an exaggeration--that the theorems of euclid would be bitterly controverted if financial or political interests were involved. the quantity theory has, unfortunately, been made the basis of arguments for unsound currency schemes. it has been invoked in behalf of irredeemable paper money and of national free coinage of silver at the ratio of to . as a consequence, not a few "sound money men," believing that a theory used to support such vagaries must be wrong, and fearing the political effects of its propagation, have drifted into the position of opposing, not only the unsound propaganda, but also the sound principles by which its advocates sought to bolster it up.[ ] these attacks upon the quantity theory have been rendered easy by the imperfect comprehension of it on the part of those who have thus invoked it in a bad cause. personally, i believe that few mental attitudes are more pernicious, and in the end more disastrous, than those which would uphold sound practice by denying sound principles because some thinkers make unsound application of those principles. at any rate, in scientific study there is no choice but to find and state the unvarnished truth. the quantity theory will be made more clear by the equation of exchange, which is now to be explained. the equation of exchange is a statement, in mathematical form, of the total transactions effected in a certain period in a given community. it is obtained simply by adding together the equations of exchange for all individual transactions. suppose, for instance, that a person buys pounds of sugar at cents per pound. this is an exchange transaction, in which pounds of sugar have been regarded as equal to cents, and this fact may be expressed thus: cents = pounds of sugar multiplied by cents a pound. every other sale and purchase may be expressed similarly, and by adding them all together we get the equation of exchange _for a certain period in a given community_. during this same period, however, the same money may serve, and usually does serve, for several transactions. for that reason the money side of the equation is of course greater than the total amount of money in circulation. the equation of exchange relates to all the purchases made by money in a certain community during a certain time. we shall continue to ignore checks or any circulating medium not money. we shall also ignore foreign trade and thus restrict ourselves to trade within a hypothetical community. later we shall reinclude these factors, proceeding by a series of approximations through successive hypothetical conditions to the actual conditions which prevail to-day. we must, of course, not forget that the conclusions expressed in each successive approximation are true solely on the particular hypothesis assumed. the equation of exchange is simply the sum of the equations involved in all individual exchanges in a year. in each sale and purchase, the money and goods exchanged are _ipso facto_ equivalent; for instance, the money paid for sugar is equivalent to the sugar bought. and in the grand total of all exchanges for a year, the total money paid is equal in value to the total value of the goods bought. the equation thus has a money side and a goods side. the money side is the total money paid, and may be considered as the product of the quantity of money multiplied by its rapidity of circulation. the goods side is made up of the products of quantities of goods exchanged multiplied by their respective prices. the important magnitude, called the velocity of circulation, or rapidity of turnover, is simply the quotient obtained by dividing the total money payments for goods in the course of a year by the average amount of money in circulation by which those payments are effected. this velocity of circulation for an entire community is a sort of average of the rates of turnover of money for different persons. each person has his own rate of turnover which he can readily calculate by dividing the amount of money he expends per year by the average amount he carries. let us begin with the money side. if the number of dollars in a country is , , , and their velocity of circulation is twenty times per year, then the total amount of money changing hands (for goods) per year is , , times twenty, or $ , , . this is the _money_ side of the equation of exchange. since the money side of the equation is $ , , , the goods side must be the same. for if $ , , has been spent for goods in the course of the year, then $ , , worth of goods must have been sold in that year. in order to avoid the necessity of writing out the quantities and prices of the innumerable varieties of goods which are actually exchanged, let us assume for the present that there are only three kinds of goods,--bread, coal, and cloth; and that the sales are: , , loaves of bread at $ . a loaf, , , tons of coal at . a ton, and , , yards of cloth at . a yard. the value of these transactions is evidently $ , , , _i. e._, $ , , worth of bread plus $ , , worth of coal plus $ , , worth of cloth. the equation of exchange therefore (remember that the money side consisted of $ , , exchanged times) is as follows: $ , , × times a year = , , loaves × $ . a loaf + , , tons × . a ton + , , yards × . a yard this equation contains on the money side two magnitudes, viz. ( ) the quantity of money and ( ) its velocity of circulation; and on the goods side two _groups_ of magnitudes in two columns, viz. ( ) the quantities of goods exchanged (loaves, tons, yards), and ( ) the prices of these goods. the equation shows that these four sets of magnitudes are mutually related. because this equation must be fulfilled, the prices must bear a relation to the three other sets of magnitudes--quantity of money, rapidity of circulation, and quantities of goods exchanged. consequently, these prices must, as a whole, vary proportionally with the quantity of money and with its velocity of circulation, and inversely with the quantities of goods exchanged. suppose, for instance, that the quantity of money were doubled, while its velocity of circulation and the quantities of goods exchanged remained the same. then it would be quite impossible for prices to remain unchanged. the money side would now be $ , , × times a year or $ , , ; whereas, if prices should not change, the goods would remain $ , , , and the equation would be violated. since exchanges, individually and collectively, always involve an equivalent _quid pro quo_, the two sides _must_ be equal. not only must purchases and sales be equal in amount--since every article bought by one person is necessarily sold by another--but the total value of goods sold must equal the total amount of money exchanged. therefore, under the given conditions, prices must change in such a way as to raise the goods side from $ , , to $ , , . this doubling may be accomplished by an even or uneven rise in prices but some sort of _a rise of prices there must be_. if the prices rise evenly, they will evidently all be exactly doubled.... if the prices rise unevenly, the doubling must evidently be brought about by compensation; if some prices rise by less than double, others must rise by enough more than double to exactly compensate. but whether all prices increase uniformly, each being exactly doubled, or some prices increase more and some less (so as still to double the total money value of the goods purchased), the prices _are_ doubled _on the average_.... from the mere fact, therefore, that the money spent for goods must equal the quantities of those goods multiplied by their prices, it follows that the level of prices must rise or fall according to changes in the quantity of money, _unless_ there are changes in its velocity of circulation or in the quantities of goods exchanged. if changes in the quantity of money affect prices, so will changes in the other factors--quantities of goods and velocity of circulation--affect prices, and in a very similar manner. thus a doubling in the velocity of circulation of money will double the level of prices, provided the quantity of money in circulation and the quantities of goods exchanged for money remain as before.... again, a doubling in the quantities of goods exchanged will not double, but halve, the height of the price level, _provided_ the quantity of money and its velocity of circulation remain the same.... finally, if there is a simultaneous change in two or all of the three influences, _i. e._, quantity of money, velocity of circulation, and quantities of goods exchanged, the price level will be a compound or resultant of these various influences. if, for example, the quantity of money is doubled, and its velocity of circulation is halved, while the quantity of goods exchanged remains constant, the price level will be undisturbed. likewise, it will be undisturbed if the quantity of money is doubled and the quantity of goods is doubled, while the velocity of circulation remains the same. to double the quantity of money, therefore, is not always to double prices. we must distinctly recognize that the quantity of money is only one of three factors, all equally important in determining the price level.... we now come to the strict algebraic statement of the equation of exchange.... let us denote the total circulation of money, _i. e._, the amount of money expended for goods in a given community during a given year, by _e_ (expenditure); and the average amount of money in circulation in the community during the year by _m_ (money). _m_ will be the simple arithmetical average of the amounts of money existing at successive instants separated from each other by equal intervals of time indefinitely small. if we divide the year's expenditures, _e_, by the average amount of money, _m_, we shall obtain what is called the average rate of turnover of money in its exchange for goods, _e_/_m_ that is, the velocity of circulation of money. this velocity may be denoted by _v_, so that _e_/_m_ = _v_; then _e_ may be expressed as _mv_. in words: the total circulation of money in the sense of money expended is equal to the total money in circulation multiplied by its velocity of circulation or turnover. _e_ or _mv_, therefore, expresses the money side of the equation of exchange. turning to the goods side of the equation, we have to deal with the prices of goods exchanged and quantities of goods exchanged. the average price of sale of any particular good, such as bread, purchased in the given community during the given year, may be represented by _p_ (price); and the total quantity of it purchased, by _q_ (quantity); likewise the average price of another good (say coal) may be represented by _p´_ and the total quantity of it exchanged, by _q´_; the average price and the total quantity of a third good (say cloth) may be represented by _p´´_ and _q´´_ respectively; and so on, for all other goods exchanged, however numerous. the equation of exchange may evidently be expressed as follows: _mv_ = _pq_ + _p´q´_ + _p´´q´´_ + etc. the right-hand side of this equation is the sum of terms of the form _pq_--a price multiplied by a quantity bought. it is customary in mathematics to abbreviate such a sum of terms (all of which are of the same form) by using "sigma" as a symbol of summation. this symbol does not signify a _magnitude_ as do the symbols _m, v, p, q_, etc. it signifies merely the _operation_ of addition and should be read "the sum of terms of the following type." the equation of exchange may therefore be written: _mv_ = sigma_pq_. that is, the magnitudes _e_, _m_, _v_, the _p_'s and the _q_'s relate to the _entire_ community and an _entire_ year; but they are based on and related to corresponding magnitudes for the individual persons of which the community is composed and for the individual moments of time of which the year is composed. the algebraic derivation of this equation is, of course, essentially the same as the arithmetical derivation previously given. it consists simply _in adding together the equations for all individual purchases within the community during the year_.... [we are now] ... prepared for the inclusion of bank deposits or circulating credit in the equation of exchange. we shall still use _m_ to express the quantity of actual money, and _v_ to express the velocity of its circulation.[ ] similarly, we shall now use _m´_ to express the total deposits subject to transfer by check; and _v´_ to express the average velocity of circulation. the total value of purchases in a year is therefore no longer to be measured by _mv_, but by _mv_ + _m´v´´_. the equation of exchange, therefore, becomes: _mv_ + _m´v´_ = sigma_pq_ = _pt_[ ].... with the extension of the equation of monetary circulation to include deposit circulation, the influence exerted by the quantity of money on general prices becomes less direct; and the process of tracing this influence becomes more difficult and complicated. it has even been argued that this interposition of circulating credit breaks whatever connection there may be between prices and the quantity of money.[ ] this would be true if circulating credit were independent of money. but the fact is that the quantity of circulating credit, _m´_, tends to hold a definite relation to _m_, the quantity of money in circulation; that is, deposits are normally a more or less definite multiple of money. two facts normally give deposits a more or less definite ratio to money. the first ... [is] that bank reserves are kept in a more or less definite ratio to bank deposits. the second is that individuals, firms, and corporations preserve more or less definite ratios between their cash transactions and their check transactions, and also between their money and deposit balances.[ ] these ratios are determined by motives of individual convenience and habit. in general, business firms use money for wage payments, and for small miscellaneous transactions included under the term "petty cash"; while for settlements with each other they usually prefer checks. these preferences are so strong that we could not imagine them overridden except temporarily and to a small degree. a business firm would hardly pay car fares with checks and liquidate its large liabilities with cash. each person strikes an equilibrium between his use of the two methods of payment, and does not greatly disturb it except for short periods of time. he keeps his stock of money or his bank balance in constant adjustment to the payments he makes in money or by check. whenever his stock of money becomes relatively small and his bank balance relatively large, he cashes a check. in the opposite event, he deposits cash. in this way he is constantly converting one of the two media of exchange into the other. a private individual usually feeds his purse from his bank account; a retail commercial firm usually feeds its bank account from its till. the bank acts as intermediary for both. in a given community the quantitative relation of deposit currency to money is determined by several considerations of convenience. in the first place, the more highly developed the business of a community, the more prevalent the use of checks. where business is conducted on a large scale, merchants habitually transact their larger operations with each other by means of checks, and their smaller ones by means of cash. again, the more concentrated the population, the more prevalent the use of checks. in cities it is more convenient both for the payer and the payee to make large payments by check; whereas, in the country, trips to a bank are too expensive in time and effort to be convenient, and therefore more money is used in proportion to the amount of business done. again, the wealthier the members of the community, the more largely will they use checks. laborers seldom use them; but capitalists, professional and salaried men use them habitually, for personal as well as business transactions. there is, then, a relation of convenience and custom between check and cash circulation, and a more or less stable ratio between the deposit balance of the average man or corporation and the stock of money kept in pocket or till. this fact, as applied to the country as a whole, means that by convenience a rough ratio is fixed between _m_ and _m´_. if that ratio is disturbed temporarily, there will come into play a tendency to restore it. individuals will deposit surplus cash, or they will cash surplus deposits. hence, both money in circulation ... and money in reserve ... tend to keep in a fixed ratio to deposits. it follows that the two must be in a fixed ratio to each other. it further follows that any change in _m_, the quantity of money in circulation, requiring as it normally does a proportional change in _m´_, the volume of bank deposits subject to check, will result in an exactly proportional change in the general level of prices except, of course, so far as this effect be interfered with by concomitant changes in the _v_'s or the _q_'s. the truth of this proposition is evident from the equation _mv_ + _m´v´_ = sigma_pq_; for if, say, _m_ and _m´_ are doubled, while _v_ and _v´_ remain the same, the left side of the equation is doubled and therefore the right side must be doubled also. but if the _q_'s remain unchanged, then evidently all the _p_'s must be doubled, or else if some are less than doubled, others must be enough more than doubled to compensate.... the factors in the equation of exchange are ... continually seeking normal adjustment. a ship in a calm sea will "pitch" only a few times before coming to rest, but in a high sea, the pitching never ceases. while continually seeking equilibrium, the ship continually encounters causes which accentuate the oscillation. the factors seeking mutual adjustment are money in circulation, deposits, their velocities, the _q_'s and the _p_'s. these magnitudes must always be linked together by the equation _mv_ + _m´v´_ = sigma_pq_. this represents the mechanism of exchange. but in order to conform to such a relation the displacement of any one part of the mechanism spreads its effects during the transition periods [_i.e._, periods of rising or falling prices] over all parts. since periods of transition are the rule and those of equilibrium the exception, the mechanism of exchange is almost always in a dynamic rather than a static condition....[ ] [illustration] [ ]it is interesting to make a quantitative comparison of the various magnitudes with the increase in the quantity of money as the most important factor in raising the price level. while it is true, as shown by the diagram, that the volume of deposits subject to check has increased greatly, the major part of the increase has to be ascribed to the increase in the quantity of money. only so far as the volume of deposits subject to check has increased relatively to the money in circulation, can the increase of deposits be regarded as an independent cause of the rise in prices. we have thus to consider the relative importance of the five causes affecting prices: . the quantity of money in circulation (m). . the volume of bank deposits subject to check considered relatively to money (m´/m). . the velocity of the former (v´). . the velocity of the latter (v). . the volume of trade (t). we may best compare the relative importance of these five magnitudes by answering the question: what would the result have been had any one of these magnitudes remained unchanged, assuming that the other four changed in the same manner that they actually did change. we find ( ) that if the money in circulation, m, had not changed, between the years and , for example, the price level of would have been per cent. lower than it actually was; ( ) that if m´/m, the relative deposits, had not changed, during the same period the price level in would have been per cent. lower than it actually was; ( ) if the velocity of circulation of money, v, had not changed, the price level for would have been per cent. lower; ( ) if the velocity of circulation of deposits, v´, had not changed, the price level in would have been per cent. lower; ( ) if t had not changed, the price level in would have been per cent. _higher_. thus the changes in the first four factors have tended to raise prices, while the change in t has tended to lower prices. the relative importance of the four price-raising causes may be stated in terms of the per cent. already given which represents how much lower prices would have been except for each of these causes separately considered. according to this test we find the relative importance of the four price-raising factors to be as follows: the importance of v is represented by , the importance of m´/m is represented by , the importance of v is represented by , the importance of m is represented by . that is, the increase in the quantity of money had an importance nearly double that of any other one price-raising factor, during the period mentioned. indirect influences on purchasing power[ ] thus far we have considered the level of prices as affected by the volume of trade, by the velocities of circulation of money and of deposits, and by the quantities of money and of deposits. these are the only influences which can _directly_ affect the level of prices. any other influences on prices must act through these five. there are myriads of such influences (outside of the equation of exchange) that affect prices through these five. it is our purpose ... to note the chief among them.... we shall first consider the outside influences that affect the volume of trade and, through it, the price level. the conditions which determine the extent of trade are numerous and technical. the most important may be classified as follows: . _conditions affecting producers._ (a) geographical differences in natural resources. (b) the division of labor. (c) knowledge of the technique of production. (d) the accumulation of capital. . _conditions affecting consumers._ (a) the extent and variety of human wants. . _conditions connecting producers and consumers._ (a) facilities for transportation. (b) relative freedom of trade. (c) character of monetary and banking systems. (d) business confidence. (a). it is evident that if all localities were exactly alike in their natural resources, in other words, in their comparative costs of production, no trade would be set up between them.... cattle raising in texas, the production of coal in pennsylvania, of oranges in florida, and of apples in oregon have increased the volume of trade for these communities respectively. (b). equally obvious is the influence of the division of labor.... (c).... the state of knowledge of production will affect trade. vast coal fields in china await development, largely for lack of knowledge of how to extract and market the coal. egypt awaits the advent of scientific agriculture, to usher in trade expansion. nowadays, trade schools in germany, england, and the united states are increasing and diffusing knowledge of productive technique. (d). but knowledge, to be of use, must be applied; and its application usually requires the aid of capital. the greater and the more productive the stock or capital in any community, the more goods it can put into the currents of trade.... since increase in trade tends to decrease the general level of prices, anything which tends to increase trade likewise tends to decrease the general level of prices. we conclude, therefore, that among the causes tending to decrease prices are increasing geographical or personal specialization, improved productive technique, and the accumulation of capital. the history of commerce shows that all these causes have been increasingly operative during a long period including the last century. consequently, there has been a constant tendency, from these sources at least, for prices to fall. (a).... an increase of wants, by leading to an increase in trade, tends to lower the price level. historically, during recent times through invention, education, and the emulation coming from increased contact in centers of population, there has been a great intensification and diversification of human wants and therefore increased trade. consequently, there has been from these causes a tendency of prices to fall. (a). anything which facilitates intercourse tends to increase trade. anything that interferes with intercourse tends to decrease trade. first of all, there are the mechanical facilities for transport. as macaulay said, with the exception of the alphabet and the printing press, no set of inventions has tended to alter civilization so much as those which abridge distance,--such as the railway, the steamship, the telephone, the telegraph, and that conveyer of information and advertisements, the newspaper. these all tend, therefore, to decrease prices. (b). trade barriers are not only physical but legal. a tariff between countries has the same influence in decreasing trade as a chain of mountains. the freer the trade, the more of it there will be.... (c). the development of efficient monetary and banking systems tends to increase trade. there have been times in the history of the world when money was in so uncertain a state that people hesitated to make many trade contracts because of the lack of knowledge of what would be required of them when the contract should be fulfilled. in the same way, when people cannot depend on the good faith or stability of banks, they will hesitate to use deposits and checks. (d). confidence, not only in banks in particular, but in business in general, is truly said to be "the soul of trade." without this confidence there cannot be a great volume of contracts. anything that tends to increase this confidence tends to increase trade.... we see, then, that prices will tend to fall through increase in trade, which may in turn be brought about by improved transportation, by increased freedom of trade, by improved monetary and banking systems, and by business confidence. historically, during recent years, all of these causes have tended to grow in power, except freedom of trade.... having examined those causes outside the equation which affect the volume of trade, our next task is to consider the outside causes that affect the velocities of circulation of money and of deposits. for the most part, the causes affecting one of these velocities affect the other also. these causes may be classified as follows: . _habits of the individual._ (a) as to thrift and hoarding. (b) as to book credit. (c) as to the use of checks. . _systems of payments in the community._ (a) as to frequency of receipts and of disbursements. (b) as to regularity of receipts and disbursements. (c) as to correspondence between times and amounts of receipts and disbursements. . _general causes._ (a) density of population. (b) rapidity of transportation. (a). taking these up in order, we may first consider what influence thrift has on the velocity of circulation. velocity of circulation of money is the same thing as its rate of turnover. it is found by dividing the total payments effected by money in a year by the amount of money in circulation in a year. it depends upon the rates of turnover of the individuals who compose the society. this velocity of circulation or rapidity of turnover of money is the greater for each individual the more he spends, with a given average amount of cash on hand; or the less average cash he keeps, with a given yearly expenditure.... (b). the habit of "charging," _i.e._, using book credit, tends to _increase_ the velocity of circulation of money, because the man who gets things "charged" does not need to keep _on hand_ as much money as he would if he made all payments in cash. a man who pays _cash_ daily needs to keep cash for daily contingencies. the system of cash payments, unlike the system of book credit, requires that money shall be kept on hand _in advance_ of purchases. evidently, if money must be provided in advance, it must be provided in larger quantities than when merely required to liquidate past debts.... but we have seen that to increase the rate of turnover will tend to increase the price level. therefore, book credit tends to increase the price level.... (c). the habit of using checks rather than money will also affect the velocity of circulation; because a depositor's surplus money will immediately be put into the bank in return for a right to draw by check.... we see, then, that three habits--spendthrift habits, the habit of charging, and the habit of using checks--all tend to raise the level of prices.... (a). the more frequently money or checks are received and disbursed, the shorter is the average interval between the receipt and the expenditure of money or checks and the more rapid is the velocity of circulation. this may best be seen from an example. a change from monthly to weekly wage payments tends to increase the velocity of circulation of money. if a laborer is paid weekly $ and reduces this evenly each day, ending each week empty-handed, his average cash ... would be a little over half of $ , or about $ . this makes his turnover nearly twice a week. under monthly payments the laborer who receives and spends an average of $ a day will have to spread the $ more or less evenly over the following days. if, at the next pay day, he comes out empty-handed, his average money during the month has been about $ . this makes his turnover about twice a month. thus the rate of turnover is more rapid under weekly than under monthly payments.... frequency of disbursements evidently has an effect similar to the effect of frequency of receipts; _i.e._, it tends to accelerate the velocity of turnover, or circulation. (b). _regularity_ of payments also facilitates the turnover. when the workingman can be fairly certain of both his receipts and expenditures, he can, by close calculation, adjust them so precisely as safely to end each payment cycle with an empty pocket. this habit is extremely common among certain classes of city laborers. on the other hand, if the receipts and expenditures are irregular, either in amount or in time, prudence requires the worker to keep a larger sum on hand, to insure against mishaps.... we may, therefore, conclude that regularity, both of receipts and of payments, tends to increase velocity of circulation. (c). next, consider the synchronizing of receipts and disbursements, _i. e._, making payments at the same intervals as obtaining receipts.... this arrangement obviates the necessity of keeping much money or deposits on hand, and therefore increases their velocity of circulation.... (a). the more densely populated a locality, the more rapid will be the velocity of circulation. there is definite evidence that this is true of bank deposits. the following figures give the velocities of circulation of deposits in ten cities, arranged in order of size: paris berlin brussels madrid rome lisbon indianapolis new haven athens santa barbara madrid is the only city seriously out of its order in respect to velocity of circulation. (b). again the more extensive and the speedier the transportation in general, the more rapid the circulation of money. anything which makes it easier to pass money from one person to another will tend to increase the velocity of circulation. railways have this effect.... mail and express, by facilitating the transmission of bank deposits and money, have likewise tended to increase their velocity of circulation. we conclude, then, that density of population and rapidity of transportation have tended to increase prices by increasing velocities. historically this concentration of population in cities has been an important factor in raising prices in the united states.... [summary] [ ]the purchasing power ... of money has been studied as the effect of five, and only five, groups of causes. the five groups are money, deposits, their velocities of circulation, and the volume of trade. these and their effects, prices, we saw to be connected by an equation called the equation of exchange, _mv + m'v' = sigmapq_. the five causes, in turn,... are themselves effects of antecedent causes lying entirely outside of the equation of exchange, as follows: the volume of trade will be increased, and therefore the price level correspondingly decreased by the differentiation of human wants; by diversification of industry; and by facilitation of transportation. the velocities of circulation will be increased, and therefore also the price level increased by improvident habits; by the use of book credit; and by rapid transportation. the quantity of money will be increased and therefore the price level increased correspondingly by the import and minting of money, and, antecedently, by the mining of the money metal; by the introduction of another and initially cheaper money metal through bimetallism; and by the issue of bank notes and other paper money. the quantity of deposits will be increased, and therefore the price level increased by extension of the banking system and by the use of book credit. the reverse causes produce, of course, reverse effects. thus, behind the five sets of causes which alone affect the purchasing power of money, we find over a dozen antecedent causes. if we chose to pursue the inquiry to still remoter stages, the number of causes would be found to increase at each stage in much the same way as the number of one's ancestors increases with each generation into the past. in the last analysis myriads of factors play upon the purchasing power of money; but it would be neither feasible nor profitable to catalogue them. the value of our analysis consists rather in simplifying the problem by setting forth clearly the five proximate causes through which all others whatsoever must operate. at the close of our study, as at the beginning, stands forth the equation of exchange as the great determinant of the purchasing power of money. j. laurence laughlin[ ]: to my mind, the following propositions contain the essence of the theory of prices.... as every one will appreciate, only general statements, without any limiting qualifications to speak of, can be given in so small a compass. . the price of a commodity is measured by the quantity of a given standard for which it will exchange. . a change of prices may be due to changes in the conditions affecting the supply (thus including expenses of production) of goods, as well as to changes in the demand for and supply of gold. a statistical statement of a change of price is not a statement of the cause of the change. . probably there is not so much difference of opinion regarding the theory of prices as is sometimes supposed. other causes being supposed constant, an increased supply of gold would tend to raise prices. no one can fail to see that, if by "money" is meant gold, a change in its quantity would, other things being equal, be a factor affecting prices. an increasing demand for gold, however, would work against the effect of an increasing supply. if the new demand offset the new supply, then, if changes of prices occurred, their cause must be sought in the influences touching the producing and marketing of goods. . the effective demand for goods (granting their utility) is limited by the buyer's purchasing power. this purchasing power is not identical with the quantity of the media of exchange in circulation, any more than the value of the total exchangeable wealth of the community is identical with the value of the total money in circulation. . the general level of prices is not independent of particular prices; since there can be no such thing as a general level, or average, of prices which is not the resultant of a number of particular prices each arrived at by individual buyers and sellers. the causes of price changes must be sought in the forces settling particular prices. this does not exclude the consideration of any causes affecting the value of the standard in which the prices of goods are expressed, because the standard is itself a particular commodity. . in particular cases, competitive prices in this country are arrived at by the higgling of the market, which depends on buyers' and sellers' judgment of the demand and supply of the commodity (_e. g._, wheat); and, when the price is fixed, the credit medium by which the commodity is passed from seller to buyer comes easily and naturally into existence and, of course, for a sum exactly equaling the price agreed upon, multiplied by the number of units of goods. price-making generally precedes the demand upon the media of exchange, and does not at all imply any necessary demand at the moment upon the standard in which the prices are expressed (cf. ). . the offer of "money" for goods is only a resultant of price-making forces previously at work, and does not measure the demand for goods (cf. ). that is, the quantity of the actual media of exchange thus brought into use is a result and not a cause of the price-making process. the supposed offer of money has no money as its basis, but is only the offer of a purchasing power, previously existing, based on saleable goods, which at the moment of payment appears expressed in terms of the standard. by credit devices the actual transfer of the standard is reduced to an inconsiderable minimum. in reality (as in foreign trade) goods are exchanged against goods. . the effect of credit on prices is to be found mainly in banking facilities by which goods are coined into means of payment, so that, expressed in terms of the standard gold, they may be exchanged against each other. thus credit devices relieve the standard to an incredibly great degree from the demand for the use of gold as a medium of exchange, and thus remove a demand, as trade increases, which would otherwise have enormously affected the value of gold. thus the effect of credit on the general level of prices in considerable periods of time is shown by a tendency to reduce the demand on the standard gold, and hence to prevent the tendency toward falling prices. . a general proposition is that banks are limited in making loans by the possession of capital, a bank of large capital and deposits being able to make large loans, a bank of small capital and deposits, small loans. a second proposition is that the demand for legitimate loans varies with the exchanges of goods and collateral and the opportunities for investment. with an increasing activity in business, however--either sound or speculative--the expansion of loans is limited by the resources of the bank. next, a bank trying to carry a certain amount of loans, must hold a specified proportion of reserves to demand liabilities under the rule of banking experience or law. the amount of its capital and the funds left with it determine the relative size of its loan item; and the sum of its loans and resultant deposits determine the amount of its reserves. the reserves of a bank are thus a consequence of the loan operations. this conclusion, however, as it affects the practical problem of the present day, is not, in my opinion, invalidated by the conceivable cases arising, when business tends to outrun banking facilities, in which anything that makes increasing reserves possible would increase the power of the banks to lend. when gold becomes increasingly abundant, the banks having large resources more easily get the gold reserves needed for their operations. it still remains true that the fact of an increased supply of gold does not of itself increase loans, unless conditions of business demand an increase in loans. therefore, the expansion of business is not a necessary consequence of an increasing supply of gold, any more than an expansion of railway traffic is the necessary consequence of an increasing supply of cars. if increasing goods are in existence to be transported, then, of course, there is an increasing demand for cars. likewise, if there are more bank resources and loans, there is an increasing demand for that which is lawful reserve; from which it is claimed that the use of new gold in bank reserves, under present conditions, is not the significant causal force which expands business and raises prices (although it may be contemporary with it). . the problem of explaining the general level of prices is one of arriving at the adjustment between two terms of a ratio (the standard on the one side, and goods on the other), each of which is influenced by supply and demand. gold being one, and goods being many, a cause working on gold alone, and important enough to show an appreciable effect, might explain a general movement of prices. in practical operation, however, because of the large existing stock of gold, very considerable additions may take place in the supply of gold without materially changing the world value of gold as related to goods in general. rapid changes of prices are hence more likely to be due to influences in the market for goods, to speculative changes of demand for goods, or to psychological forces working independently of facts.... in the problem of discovering the causes of changes in the level of prices, it is necessary first to reach a conclusion as to those causes which operate on the gold standard in which our prices are expressed. by so doing we may locate the general level--so far as the standard is concerned--or the one thing which might work as a cause common to all goods. the relation between gold and goods might be illustrated by the familiar mechanical illustration: a rod balanced on a fulcrum, on one end of which works the forces affecting the value of gold, and on the other end the forces affecting the value of particular goods. the relation between goods and gold being a ratio, as one end of the rod goes up, the other necessarily goes down. there are, as we all know, various forces at work to produce the resultant price level. we may here start from a proposition on which we can all agree. an increase in the quantity of the monetary standard in the world--such as gold--would tend, _other things being equal_, to lower its value and thus raise prices. in trying to find the causes in the price level at any given time (as in - ) it is necessary, therefore, after stating the facts as to the increase of gold, to examine into the influence of "the other things." to begin, we may take up the demand for gold, which, of course, is both monetary and non-monetary. first as to the non-monetary uses, such as abrasion, shipwreck, and disappearance in the arts: the statistics of consumption in the arts are unsatisfactory; at the best they are only estimates. although the total production of the world, - , was $ , , , , there is no evidence as to the available stock in . my belief is that there was not more than $ , , , .[ ] in the period of - , the production was $ , , , , and the consumption in the arts, at the average rate of $ , , a year requires a deduction of $ , , , , which leaves $ , , , . the arts in recent years are estimated to use more than $ , , .[ ] in the period, - , if $ , , , be deducted from the production of $ , , , we have $ , , , . thus the total available stock in would be about $ , , , . the production of the last four years, - , is about $ , , , , or, less the consumption in the arts, about $ , , , . the monetary demand for gold, on the other hand, has shown certain definite characteristics. whether it be prejudice, or enlightened business judgment, the commercial nations of the world have shown a persistent and continuing disposition to adopt a gold monetary system as soon as their own means, or the forthcoming supply of gold, has made it possible. the united states led in , when we declined to change the ratio in order to bring silver into circulation when only gold was in use. from - , germany, the countries of the latin union, austria-hungary, the united states (with the resumption in gold in ), and india (in ), in response to the preferences of the commercial world, placed themselves on the gold standard by legal enactments. the demand for gold all through this period was based upon considerations independent of the movement of prices. for this was a time of falling prices when much was heard of the appreciation of gold and the need of silver. in spite of this tendency toward falling prices, the movement toward the adoption of gold went on.... it was precisely this large new supply of gold which enabled the commercial nations to gratify their desire for what they believed was a more stable standard. as we enter the present period ( - ) we find this momentum towards the gold standard still in force: and other countries in emulation planned to put themselves on an equally stable standard with those whose means had permitted an earlier action--quite irrespective of the fact that this last was a period of rising prices, while the former was one of falling prices. in this period, russia, japan, various states in south america, such as peru, argentina, and brazil, and recently mexico, have emphasized the movement away from silver to gold. moreover, as backward lands, like turkey, parts of asia, egypt, and various districts of africa, have developed their resources and increased their trade, they have taken on gold in their monetary systems. with increasing trade also there are more exchanges of goods; hence, even in countries (like great britain and the united states) that do not use gold to speak of, except in reserves, there are increasing loans and deposits and thus a demand for more gold reserves. consequently, in countries long ago established on the gold standard there will be a steadily increasing demand for gold as exchanges expand. we find thus a special characteristic of the demand for gold (certainly not existing in the demand for silver). the power of developing countries to soak up new gold is as marked a part of present conditions as is the power of a porous and sandy soil to soak up a heavy rainfall. we must, therefore, take full account of the noticeable fact that the recent demand for gold seems about to keep pace with the new supply; that a shipment of gold from the mines to london is to-day eagerly competed for, not only by european countries, but by egypt, india, turkey, argentina, and brazil. consequently it may be of interest to see which countries have taken the largest amounts of gold into their stocks since : united states $ , , russia , , germany , , south american states , , british empire , , austria-hungary , , italy , , besides the demand for gold in the arts, and the apparent monetary demand, as thus already presented, we must not omit to take into account also the large stocks of gold held by banks and institutions which publish no statements. in the hands of large private institutions like those of the rothschilds, bleichroders, and others, great amounts of gold are carried. it is from such stores that the needs of states, such as austria-hungary, france, italy, and even the united states (in cleveland's administration), have been supplied without drawing down visible reserves. thus far, then, we have examined the one factor of demand for gold, among the "other things" (which were supposed to remain equal). there is abundant evidence to show that the demand for gold, in this recent period of rising prices ( - ) has been as strong as, or even stronger than, the demand for gold in the previous period ( - ) of falling prices. it looks very much as if we must seek for the causes of rising prices since in some of the "other things" not yet examined. there is no time, however, for extended discussion on these points.... the effects of tariffs and taxation, unionism and higher wages, and changing agricultural conditions in increasing expenses of production in all industries are so patent as to require no enlargement. immediately after the passage of the dingley act in , a large list of articles rose in price precipitously. moreover, just so far as higher money wages for the same work, or the same money wages for a reduced number of hours, have been granted without a corresponding increase in the efficiency of the labor, the expenses of producing goods in general--and consequently prices--have risen. but, without doubt, one of the most important factors in raising prices--directly and indirectly--has been the increased price of food due to the changing conditions of agriculture. this most influential cause of higher prices is one of the "other things" which has been at work quite independent of the quantity of new gold. moreover, the indirect effect of high prices of food produces the most serious practical problem. it wipes out all the gain of previous increases of wages, and drives laborers to repeat their demands for higher pay, thus working again to increase expenses of production. it is not too much to say that the gains of industry, shown by the fall in prices, as they stood about have been lost to us by the high tariffs of and the wastes of bad farming and the recent high costs of agriculture. our analysis would be inadequate, however, if we stopped here with our examination of expenses of production. the really practical problem is still before us in trying to analyze the forces at work fixing prices in that vague and dangerous margin between actual expenses of production and the prices in fact paid by the consumer.... the whole _raison d'être_ of monopolistic combinations is to control prices, and prevent active competition. as every economist knows, in the conditions under which many industries are to-day organized, expenses of production have no direct relation to prices. in such conditions, there is a field in which the policy of charging "what the traffic will bear" prevails; and this includes industries that are not public utilities. furthermore, we must face the fact of increasing riches not only in this country, but all over the world. new wealth makes a liberal spender. the retail dealer finding his expenses increasing and--even when they are not--tries the experiment of charging his richer customers an increasing price. the newly rich pay and do not feel it. but what can the poorer unorganized buyer do when retail prices are raised? what can he do if his meat bill, or his plumbing-repairs bill, rises enormously? the extravagance of the rich has increased the cost of traveling, the rates at hotels, the fees, the luxury of steamships and automobiles, the consumption of fruits and vegetables out of season once never thought of, and has generally raised the standard of expenditure. those of smaller income find they also must pay the higher prices. thus we have reached a point where we have to pay almost whatever any one asks. organized buyers are the only offset to organized sellers. moreover, rising prices due to high expenses of production, or to combinations of sellers, present a paradise for speculation. a movement upward based on facts can be easily converted into a further rise based only on speculative manipulation. a rise of prices which brings large profits to a combination, thus directly affects earnings and gives especial opportunity to speculation in the securities of industrials. hence, the field of speculation spreads from commodities to securities. the facts as to the movement of prices of securities are well shown in brookmire's economic charts since ; and, while the presence of gold serves as a fund of lawful money in reserves, the spread of speculation has gone on seemingly unaffected by the new supplies of gold. that is, speculative conditions may arise and disappear antecedent to and seemingly independent of the gold supplies. * * * * * d. f. houston[ ]: the discussion of money and prices to-day reminds one very strongly of the discussion forty years ago. now, as then, the opinion is that prices have risen; but now, as then, there is wide difference as to the explanation. now, as then, a highly respectable body of economists attribute the rise mainly to the new gold; and now, as then, a number of economists attribute the rise to influences immediately affecting the cost of production of commodities in general, instancing such things as labor unions, monopolies, extravagance, the tariff, general prosperity, etc.... that the tariff has played a part in the situation, i should of course not deny. by preventing us from securing supplies where they can be more economically produced, and by making it possible for domestic manufacturers to monopolize the market, and by tending to compel the payment for exports in gold, it has unquestionably played a part and is a notable factor.... in considering the tariff as a factor, however, we must not forget that we have had the tariff since the beginning, and that the rates have been nearly as high since the civil war as they are to-day; and we must remember, further, that in one of the great countries which has no protective tariff the tendency of price has been upward; furthermore, we must not overlook the fact that many of the tariff rates, which are very high now, are not effective or not nearly so effective as they were in the earlier period, and also that its influence is probably greater in things in which the rise of price has been less marked. i should not deny that labor unions and monopolies have had an influence in increasing price. the evidence seems to justify the conclusion that monopolies have had some effect in increasing price. i am not sure that there is sufficient evidence in regard to labor unions to enable us to form a conclusion.... much has been said in discussion about the influence of extravagance. this has played a part in similar discussions at all times; every era has its cry of extravagance, and it is not clear that it has been more marked in our time than in former times. and one thing is quite clear, that the extravagance, or economic waste, resulting from the prosecution of war and its after effects, has been conspicuously absent during the last fifteen years.... the stock of gold in the leading western commercial nations, with which we are concerned in discussing prices, probably did not exceed $ , , , at the end of . during the next fourteen years there was added to the stock of gold of these countries an amount nearly equal to the existing stock. in addition, a number of these countries enormously developed their credit devices. according to all economic law, these facts create a strong presumption that gold has been the main factor affecting price. no sufficient evidence has been presented to overthrow this presumption. * * * * * e. w. kemmerer[ ]: an adequate discussion of the papers presented by professors fisher and laughlin would require much more time than the few minutes at my disposal. i shall accordingly limit myself to a few points and support my conclusions principally by footnote references. this procedure is perhaps the more justifiable in view of the fact that my own philosophy of the relationship between money and prices is given in detail in the book[ ] on money and prices to which professor fisher has so generously referred.[ ] i have had the opportunity of reading in manuscript professor fisher's forthcoming book on price levels, of which his paper to-day represents one chapter, and find myself in substantial agreement with his main contentions. his discussion is a permanent contribution to monetary science of very great value. to a number of minor points, however, it seems to me, exception must be taken.... professor fisher's formula expressing the relationship between the circulating media and prices is essentially the same as my own,[ ] but he pays little attention to the factor of business confidence, which is a most important consideration in the interpretation of the formula. the ratio of deposit currency to bank reserves is a function of business confidence.[ ] the distinction professor fisher draws between the prices of individual commodities and the general price level appears to me, as to professor laughlin, to be untenable. it is, moreover, contradictory to his general philosophy of money. his index numbers recognize no general price level distinct from individual prices. he illustrates the point that the price of any individual commodity presupposes a general price level by saying that "the position of a particular wave in the ocean depends on the general level of the ocean." i can conceive of no such distinction between the general price level and individual prices as his statements seem to imply. general prices "are but a combination, or composite photograph, as it were, of individual prices."...[ ] passing to professor laughlin's paper, which has been presented to me merely in the form of an abstract, we find ten propositions, which to a considerable extent are repetitious. his first five propositions are rather commonplace generalizations and few economists will be disposed to dissent from their essential soundness. they place him much closer to the quantity theory of money than most of us, judging him from his previous writings, were disposed to think he would go; and in his third proposition he says, "probably there is not so much difference of mind regarding the theory of prices as is sometimes supposed." with reference to professor laughlin's fourth proposition it may be said that no economist of standing claims that purchasing power is "identical with the quantity of the media of exchange in circulation." effective purchasing power, however, in our modern business communities, does depend upon the possession of money or of the right to demand money. the amount of deposit currency which can be used at any time in purchasing goods is limited by bank reserves because commercial deposits are payable in money on demand at the order of the depositor. other assets, no matter how good, cannot be used for the purpose of meeting deposit obligations, except when the entire credit machinery breaks down and suspension is resorted to under the euphemistic name of clearing house loan certificates. professor laughlin's sixth and seventh points are essentially the same and may be considered together. he says: ... price-making generally precedes the demand upon the media of exchange, and does not at all imply any necessary demand at the moment upon the standard in which the prices are expressed.... the offer of money for goods is only a resultant of price-making forces previously at work, and does not measure the demand for goods.... that is, the quantity of the actual media of exchange thus brought into use is a result and not a cause of the price-making process.... this contention appears to me to result from a superficial view of the price-making process. the offer of money for goods and the offer of goods for money are of course not the first steps. each person has his own individual or subjective prices on all sorts of commodities; these subjective prices represent the valuations which he places upon the respective commodities in terms of the valuation which he places upon the money unit. the more of a particular commodity he has the lower his subjective valuation of a unit of that commodity; the more money he owns the lower his estimation of a dollar and the higher his subjective prices; and _vice versa_. through a process of competition, selection, and adaptation, some of these subjective prices develop into market prices, that is, prices at which both buyer and seller benefit, and at which therefore an exchange takes place. to paraphrase an old adage, the proof of the market price is in the exchange. it is a common observation that stock quotations to be of much value must show the number of sales effected at the prices quoted. a stock for which the maximum bids were and the minimum offers were , would not possess a market price in the strict sense of the word. the fact that sales have recently been made at a certain price, or are now being so made, is of course presumptive evidence that intending purchasers can buy at about that price. a market price, however, is the amount of money paid for a commodity, not the amount asked, offered, or promised. professor laughlin's ninth proposition i find very difficult to follow. his premise that reserves are "a consequence of the loan operations" is a dangerous half truth; they are also a consequence of most other kinds of banking operations, cash deposits, cash withdrawals and clearing house balances, foreign and domestic exchange operations, etc. his other premise, that "the fact of an increased supply of gold does not _of itself_ [the italics are mine] increase loans, unless the bank possesses the control of the capital which is a condition precedent to the loans," contains an element of truth, but is misleading. while an increased supply of gold does not of itself increase loans it normally has that result; and the bank's discount rate and the condition of its reserve are powerful factors in influencing its loan account. his premises, i believe, are not sound, and his conclusion, namely, that "the expansion of business is not a direct consequence of an increasing supply of gold, any more than an expansion of railway traffic is the direct consequence of an increasing supply of cars," would not follow from his premises, even if they were sound. the normal causal chain is more nearly this: increased gold production results in greatly increased amounts of gold coming into the monetary uses.[ ] this gold comes into the hands of individuals and is to a large extent deposited in banks; increased money incomes on the part of individuals lower their estimations of the value of the money unit, raise subjective prices, and as a consequence market prices; larger money deposits in banks result in larger reserves, banks do not make interest on money held in reserves, and accordingly take measures to invest such surplus money, keeping these reserves as low as is consistent with law and their ideas of safety;[ ] inducements to borrowers are made in the form of more favorable discount rates; collateral is not scrutinized so carefully; the speculative market is stimulated by increasing supplies of call money; confidence everywhere increases; new enterprises spring up and old ones are expanded; and in a short time the new gold is absorbed by a higher price level and an overstimulated business activity. this was the situation after the californian and australian gold discoveries of the last century and it has been the result of the greatly increased gold production of the last few years. professor laughlin's final point is that since the new demand for gold has roughly equalled the new supply, and that the changes in prices since must be sought mainly in the "other things," which have not remained equal. in support of this conclusion he offers two principal arguments. the first is as follows: ... because of the large existing stock of gold, very considerable changes may take place in the supply of gold without materially changing the world value of gold as related to goods in general. rapid changes of price are hence more likely to be due to influences in the market for goods, to speculative changes of demand for goods, or to psychological forces working independently of facts.... in reply it may be said that the production of gold since represents a very large percentage of the total supply. the soetbeer figures as supplemented by those of the director of the mint show that the world's gold production for the years - inclusive was in round numbers $ , , , ,[ ] and that for the eleven years - , was $ , , , ; in other words, for these eleven years it was over per cent. of the total for the preceding years. probably the effective supply represents a much larger proportion of recent gold because of ( ) the large amount of loss chiefly by abrasion of the gold produced in the earlier years, and of ( ) the greater degree to which this early gold has assumed specialized forms, such as jewelry, plate, etc. satisfactory index numbers of prices for recent years are not available for all the principal countries of the world. such as we have, however, point to a decided rise of prices in all gold standard countries since about . comparing standard price index numbers in six of the chief countries of the world for the years and , we find the general price level to have risen as follows:[ ] united states--bureau of labor figures . % canada--coats figures, (weighted) . % england--sauerbeck figures . % france--de foville, figures for export prices[ ] . % germany--hamburg figures . % italy--necco figures for export prices . % if we average these figures together, assigning the same importance to the figures of each country, in order to get a _rough_ idea of the movement of world prices in gold standard countries during the eleven years in question, we find that the average increase was . per cent. if we follow professor laughlin and compare the years and , we find the average increase in prices to have been . per cent., and the world's gold production for the years to to have been about per cent. of that for the preceding years. when to this is added the fact that the evidence points to a smaller percentage of the world's annual gold production going into the industrial uses than formerly, and the further fact that during the period in question the increase and improvements in the world's banking facilities have greatly economized the uses of money, we see that a very substantial increase in general prices would be expected, despite a great expansion of business. world prices in fact have not increased nearly as rapidly as the flow of gold into monetary uses since , not to mention the enormous development of deposit currency. the director of the mint estimates each year the amount of the world's new gold used in the industrial arts. computations i have made based upon these figures show a tendency for a decreasing percentage of the annual production to be used in the arts, although there is considerable irregularity. for the seven years - the average percentage was . , and for the seven years - it was . .[ ] professor laughlin's second argument in favor of the proposition that the recent rise in prices has not been due primarily to the increased gold production is one of the most beautiful examples of begging the question that i have seen in economic literature. he says: "in recent discussions one of the 'other' factors which has been slighted is the demand for gold since . the examination shows that the new demand in countries turning to the gold standard, and in those already using gold and extending their demand, amounts in round numbers to about $ , , , . hence the new demand has roughly equalled the new supply, since --a fact which jumps with the known conditions in the great financial markets like london, where new arrivals of gold are eagerly competed for by european banks." of course the demand for gold equals the supply, as does the demand for wheat or any other commodity, when one interprets demand and supply as one should, in terms of market prices. the general price level is the very thing which equilibrates the demand for gold and the supply. the higher price level about which we are talking is an expression of the absorption of most of this new gold into the world's circulation. banks and merchants eagerly compete for it, because higher prices require more money to do a given amount of exchange work, and rising prices stimulate business. * * * * * joseph french johnson[ ]: i am glad to observe that there appears to be a tendency toward agreement with regard to the fact that the value of money depends upon the demand for it and supply of it. professor laughlin likes the word standard better than i do. it suggests something permanent and fixed, whereas money is a very changeable thing. while i am in agreement with professor laughlin in the conclusion that the general level of prices depends upon the demand for and supply of money, i am unable to give assent to many of the propositions which he puts forward as links in the chain of reasoning leading to that conclusion. for example, professor laughlin says, "a change of prices may be due to changes in the demand for and supply of (thus including the expenses of production) goods as well as to changes in the demand for and supply of gold." this proposition is true with regard to changes in the prices of particular commodities. the price of wheat may rise or fall as a result of a change in the demand for or in the supply of wheat. the proposition, however, is not true with regard to a change in the general level of prices. an increase in the supply of goods will lower the level of prices for the simple reason that it will increase the demand for gold. i am not certain that i have understood professor laughlin's exposition of his theory, but he certainly seemed to me to argue that there could be a change in the general level of prices without any change whatever in the demand for or supply of gold. such a position, it seems to me, is absolutely untenable. that professor laughlin seeks to hold this untenable position, it seems to me, is made evident by the qualification with which he accepts the statement that a change in the quantity of money, other things being equal, would be a factor affecting prices. he says, "an increasing demand for gold, however, would work against the effect of an increasing supply. if the new demand offset the new supply, then, if changes of price occurred, their cause must be sought in the influences touching the producing and marketing of goods." the second conditional clause in that last sentence introduces an impossible supposition, for if a new supply of gold is offset by a new demand for it, there could be no change in the general level of prices, so that no cause for any change would have to be sought in the "influences touching the producing and marketing of goods." professor laughlin appears to have in mind forces affecting the general level of prices which are entirely hidden from my sight. a change in the level of prices means a change in the value of gold, and how can there be a change in that if the new demand for gold just offsets the new supply? professor laughlin's analysis of the price-making process is incomplete and misleading. he is correct when he says that the causes of price changes must be sought in the forces settling particular prices, but he is manifestly wrong when he states that the price of wheat is "arrived at by the higgling of the market, which depends on the buyers' and sellers' judgment of the demand for and supply of wheat." such higgling would determine only the value of wheat. the price of wheat is not fixed until buyer and seller have reached an agreement in their estimates as to the value not only of wheat, but also of money. if wheat is comparatively easy to get, the price falls. if money is easier to get, the price rises. the demand for and supply of money is evidently just as important in the determination of the price of wheat as is the demand for and supply of wheat itself. when professor laughlin says that the offer of money for goods is only a resultant of price-making forces previously at work, he must have in mind some price-making process and price-making forces of which i have never heard. i know of no market in which goods are lowered in price except for the reason that at the higher price not enough money is offered to absorb the supply; nor of any market in which goods are raised in price except for the reason that buyers are willing to offer more money for the goods. in his analysis of credit and its relation to the value of money, professor laughlin seems to me to have in mind a hypothetical financial world, the like of which does not and could not exist on earth. he strives to show that a bank's ability to make loans depends upon the amount of its capital and deposits, and that therefore any increase in the supply of gold would not in itself lead to an increase of loans. "expansion of business," he remarks, "is not a direct consequence of an increasing supply of gold any more than an expansion of railway traffic is the direct consequence of an increasing supply of cars." he is quite right if he means that an increase in the amount of gold will not necessarily cause the exchange of more goods. but this does not appear to be his meaning. he holds that the use of new gold in bank reserves cannot be a causal force raising prices, for the bankers cannot increase their loans, in his opinion, unless the condition of business demands such an increase. in his hypothetical financial world bankers are willing to carry idle stocks of gold and to wait until business conditions make necessary an increase in their loans. in the real financial world, of course, bankers do nothing of the sort. bankers with surplus gold immediately tempt borrowers by lowering the rate of discount and thus increasing the money demand for goods in the markets. as a result there is an irregular and general rise of prices. more goods may not be bought and sold and there may be no expansion of business, but expressed in terms of money the totals are bigger. there is no analogy between dollars and freight cars. the carrying capacity of a car is fixed and unchangeable, but the carrying capacity of a dollar is elastic--so elastic, in fact, that dollars are always fully loaded no matter how small the supply of goods. as professor laughlin points out, although he apparently does not see its significance, the new demand for gold since has "roughly equalled the new supply." surely it could not have been otherwise, and no statistics are necessary to prove the fact. * * * * * murray s. wildman[ ]: my comments on these interesting papers will be directed upon the methods employed, and certain assumptions involved, in the arguments of both. granting that professor fisher's analysis shows a perfect correspondence between the course of prices on the one hand and the quantity of money and credit instruments on the other hand, i am still unable to see which magnitudes are properly to be regarded as causes and which as effects. that variations in the value of gold and in the price level must be reciprocal, all will admit. if we regard m as denoting the gold supply for the present, a causal relation between m and p cannot be denied. but may it not be possible that variations in m´, or credit, and v and v´, the velocity of circulation of both money and credit, be simply in consequence of the variation in m and p? why is p the only passive term or why is it passive at all? suppose that the problem set was to discover the cause of credit expansion from to . would we not seek at once to explain it by reference to rising prices and greater volume of goods, making a broader basis for credit, while along with that is a greater gold supply which promotes the convertibility of an extended credit? then might we not invoke professor fisher's algebraic formula, with terms rearranged, and show by this method of reasoning, supported by statistical verification, that the high prices afford an adequate cause for the present expansion of credit? but we are seeking the cause or causes of rise in the price level. this is equivalent to seeking the cause of decline in the value of gold. does the "quantity theory" as newly expounded give us the solution? i think not. rather it shows us that as gold has grown in supply, and fallen in value, credit has grown in magnitude and in rapidity of circulation, and that these changes in values and volumes have gone hand in hand with proportional changes in the price level and in the magnitude of commodity exchanges. this view of the case brings me to substantial approval of professor laughlin's method of analysis and argument. that is, we must seek the facts regarding supply and demand as applied to gold, and those which bear upon supply and demand as touching goods, in so far as the demand for goods is expressed in offers of gold and gold representatives. here the algebraic formula would be invoked to support his reasoning since m´ and v and v´ may be regarded as factors in the demand for gold. to accept professor laughlin's method does not involve the necessity of his conclusions. the terms, by this method, do not lend themselves to exact mathematical statement and statistical proof, so conclusions cannot be exact and definite. this may be illustrated in a consideration of demand for gold. some say that demand has grown step by step with supply and therefore gold has not been cheapened. others say that supply has grown more rapidly than demand, and so gold has been cheapened and to that extent prices are raised. either statement may be wrong. i do not believe we have yet any reliable data regarding the demand for gold in the sense of a value-making factor. most efforts to measure demand are based on statistics of gold in use. if one can show that consumption of gold in the arts, in the circulation, and in greater bank reserves, has increased _pari passu_ with production, we are told that the value of gold has not been lowered by the greater supply. but statistics of consumption give no clue to demand in the value-determining sense. we have many staple commodities, such as wheat and cotton, whose price drops sharply when the supply exceeds a certain normal volume, even though the whole crop is consumed. statistically speaking, the demand for a cotton crop always rises as supply rises, and falls as supply falls, but that is because demand and supply become equated through a variation in price. demand, in this sense of quantity demanded, is in part a result rather than a cause of value. when we can properly speak of demand as potent for the determination of value, we are thinking of demand from the point of view of _intensity_ rather than the point of view of _magnitude_. but the demand which makes for value--demand intensively considered--is only measured by the purchasing power offered. applied to gold, i know of no measure of demand except in the goods and services offered in exchange. to say that goods and services offered for an ounce of gold in are less than are offered for an ounce of gold in , is simply to say that prices are higher. but it is these prices that we are trying to explain by giving the effect for the cause, when we say that demand has risen with supply. those staple commodities whose value falls off abruptly with any increase of supply beyond a customary stock are said to be subject to an inelastic demand, and those whose value declines uniformly with excessive supplies are said to have an elastic demand. is the demand for gold elastic, or is it inelastic? and is it possible by independent analysis to construct the curve of elasticity which properly belongs to gold, and so avoid circular reasoning from the very prices we are trying to explain? if the demand for gold is inelastic and the demand curve drops off abruptly after a certain supply is in evidence, the presumption is that in the conditions of gold production, rather than in the conditions of commodity production, lies the cause of our high prices. moreover, if this be the case, we can readily see the cause of cheapening of gold, even though the product of a single year bears a small proportion to the existing stock. if on the other hand the demand for gold be very elastic, so that it expands with growing supplies with no substantial alterations in value, then we are driven to seek the cause of high prices in influences directly touching the goods and services rather than in those directly affecting gold. it would seem therefore that both methods of treatment have left something to be desired. the algebraic analysis, even as verified, presents the relations between magnitudes without showing the cause of high prices. the argument directed immediately at the value of gold of necessity involves consideration of the demand for gold, which, as a price-making factor, remains an unknown quantity. * * * * * t. n. carver[ ]: professor fisher ... has demonstrated beyond all question the accuracy of his formula. the question remains, however, whether his formula supports his own conclusion or professor laughlin's. if, for example, it should be found that p is the cause of m, the formula would to that extent support professor laughlin's position. i believe that to a certain extent p is actually the cause of m. if the growing scarcity of agricultural land, or the increase in population and the increased demand for agricultural products without an increase in land, should increase the marginal cost of producing agricultural products to supply this larger demand, that would tend to increase the exchange value of these products, even according to the formula of cairnes as quoted by president houston.[ ] even without any increase in the gold supply, this would cause each unit of product to exchange for a little more gold; then, in order that a given number of exchanges in agricultural products could be carried on, it would be necessary to have a larger number of ounces of gold, or a larger number of gold coins, or some other form of money of given denominations to do the money work. this, in other words, would necessitate a larger supply of money: and, if other forms than gold were not forthcoming, it would necessitate that a larger proportion of the stock of gold should be coined into money in order to do the work. thus, without any increase whatever in the world's total gold supply, there would come to be an increase in the proportion of that supply used as money, or in the amount of gold coin actually used in circulation. i believe that this has taken place, and that it is one of the factors in the problem, although there has also been a very large increase in the gold supply to still further accentuate the tendency. * * * * * f. w. taussig[ ]: i congratulate professor fisher on his admirable paper. i am in accord with him in his method of reasoning and in all his essential results. his investigation of this subject adds another to the brilliant studies with which he has enriched economic science. it deserves to be said, perhaps, that the term m´ (deposits) in his equation is not entirely independent, but is in some degree a function of t. i say to some degree; it is dependent on t in part only, and not for very long periods. professor fisher has here treated it as dependent simply on m.... he has indicated the qualifications which must be attached to this dependence of deposits on bank reserves. he has pointed out that though a general dependence appears over long periods of time, it is affected by changes in banking ways, and by the tendency to build up a higher superstructure of deposits in times of active business. but there is also a connection between t, volume of trade, and m´. that is, for short periods--nay, for periods of some years--an increasing volume of trade tends of itself to bring about an increasing volume of deposits. (i may say, parenthetically, that "volume of trade" does not seem to me an apt expression; "units of commodities," the other phrase used by professor fisher, is better.) though i would by no means go the length of professor laughlin's reasoning, which seems to imply that every act of exchange supplies automatically its own medium of exchange, it does seem to me that our modern mechanism of deposit banking supplies an elastic source of deposits, which, for considerable periods, enables them to run _pari passu_ with the transactions and loans resting on them. in the end, an increase of deposits finds its limit in the volume of cash held by the banks. but there is some elasticity of adjustment, by which loans and deposits increase as fast as transactions or faster; and this accounts in no small degree for the rise in prices during periods of activity. the phenomenon shows itself most strikingly in stock exchange loans, especially in a center like new york. there the business creates for itself quasi-automatically its own medium of exchange. i suspect it is undue generalization from operations of this sort that has led professor laughlin to take his extreme position--a position which i can not but think untenable. some allowance for the temporary interaction between m´ and t is necessary for the completeness of professor fisher's reasoning. * * * * * ralph h. hess[ ]: professor fisher's formula (mv + m´v´ = pt) approximately expresses the mathematical equality of purchase and payment which cannot be questioned. i say _approximately_ because m´ (defined by professor fisher as "bank deposits subject to check"), if it be made to express an accurate measure of circulating credit, should include not only open bank accounts, but certain other values which constitute _current means of payment_, such as bankers' bills, trade bills, cashiers' checks, and certified checks.... the relation which professor taussig has pointed out between m´ and t (the _value of negotiable credit_ and the contemporary _volume of trade_) is not only possible, but, in any community of modernized commerce, is actual. moreover, a knowledge of the process by which commerce is financed by the existing mechanism of discount, loan, deposit, and draft justifies the conclusion that, if the volume of trade (t) be resolved into its factors, namely, _materials of trade_ and their _frequency of exchange_, the latter factor of t is quite commensurate with the velocity of credit (v´). to me it seems incontestable that the volume and velocity of credit currency, as represented by bank deposits and other circulating media, vary directly as the volume and value of the materials of trade in the process of exchange, and are, mathematically speaking, dependent functions thereof. granting this relation, an analysis of the equation of exchange establishes pt as the major determinant of m´v´, and, in so far as paper money may be authorized and issued upon the security of commercial assets, of m. that part of the money in circulation which does not derive its circulating powers from actual and potential commercial values is itself material of barter incorporating so-called intrinsic values. the conclusion is clear that p (price) is independent of all other terms and factors of professor fisher's equation, that v and v´ are determined by the mechanical circumstances and organization of exchange, and that the value of m and m´, taken collectively, is a spontaneous derivative of pt. the fundamental determinants of prices and of "price levels," therefore, are to be found outside of monetary and credit agencies _per se_. as to the nature and order of the price-making process and the actual forces behind price movements, i am in substantial accord with professor laughlin. that prices, individually and collectively considered, express the value-proportion of demand for and supply of goods on the market to demand for and "visible supply" of the standard commodity is fundamentally logical. nor is there occasion to quibble over the paradox of disturbed equilibrium of demand and supply. physically considered, the goods which objectify these terms are, of course, identical; but, in the valuation process, demand and supply denominate, respectively, _desire_ and _utility_--the generally acknowledged antecedents of value. price is the equalizing factor between the effective demand for gold and the effective demand for other goods, each taken in conventional units; and price changes are resultants of, and commensurate with, net variations in the value-factors of the standard and of the objects of exchange. referring to the nature of credit and the economic qualities of credit instruments, the somewhat figurative expression "goods coined into a means of payment" is a striking and accurate characterization. it is possible that all legitimate market values, under normal trade conditions, may be liquidized through credit agencies, and the goods in which they are incorporated be thus rendered immediately and conveniently exchangeable. this process may be consummated independently of prices and with slight regard to the actual supply of money. the truth of this assertion is, in fact, demonstrated daily in the marts of trade. * * * * * j. laurence laughlin[ ]: there is time to answer briefly only a few of the points raised by several speakers. first, professor fisher's equation of mv + m´v´ = pt is to my mind not a solution, but only a statement, of the problem of price levels. it can be read backward as well as forward. for instance, it does not follow that the level of prices (p) will rise with an increase of m´, since--as professor taussig has pointed out already--an active development of trade and industry (t) would itself be a reason for an increase of banking loans and deposits subject to check (m´), thus equalizing effects on both sides of the equation without necessarily increasing p. this result is, in fact, one of the points on which i have steadily insisted in my own exposition of the theory of prices and credit; and professor fisher's equation allows it to appear distinctly. his equation does not show causes; it states a static situation, into which various causes may be read. the facts between and disclose an increase of bank deposits of or per cent., and yet that period was distinguished as one of falling prices. therefore m´ cannot be regarded as having been proved to be a cause of higher prices. second, professor fisher ... seeks to establish a causal relation between the amount of money in circulation (m) and the amount of deposits (m´) which, in my judgment, is wholly unfounded. he has developed this in his paper in the _royal statistical journal_. the error consists in supposing that a man's deposit account at any time varies with the amount of money in his possession. rather, the deposit account varies with a man's wealth. the rich man does not carry much more money to pass from hand to hand than the man of moderate means. monetary habits in the community require a certain level of circulation for all persons, but the deposits of an individual may soar above the common level without regard to the money he keeps in circulation. his bank deposits are rather a measure of the saleable goods he has sold, "coined into means of payment." third, i well recognize the high position professor fisher occupies in the mathematical school of walras and others; but has he not made an error in stating the essence of the price relation in his mathematical symbols? so far as i understand him, he seems to deny the fundamental value-concept (on which there has hitherto been general agreement) that price is a ratio between goods and gold. in furtherance of that idea, he thinks that, before individual prices can be arrived at, the general price level must be ascertained. now, in my exposition using the ratio-concept, i explained in detail how the general level of prices might be affected by causes affecting the gold side of the ratio. therefore, i did not neglect to account for the general level and that too without doing violence to the accepted value-concept. but the ratio-concept (which professor fisher seems to deny) allows the forces acting on goods also to affect the general level of prices as i have shown. in my opinion, he wrongly works from a general level of prices to particular prices; while i hold that particular prices, or actual quotations, are the bases from which all averages, or price levels, are always and inevitably computed. moreover, in his diagrams, the level of prices he used was the one computed from individual quotations. hence his whole reasoning on the conformity of the statistics to the terms of his equation is vitiated. indeed the better agreement he finds--after elaborate statistical computations--between the elements and their result on prices ...--is due, i think, to relying on an equation which is nothing more than a statement that the whole is equal to the sum of its parts.... finally, when professor johnson suggests that i am wrong in stating that forces affecting the goods side of the price ratio have an influence on prices, he certainly cannot mean that conditions affecting the producing, marketing, and financing of goods have no effect on prices. how else, for instance, can we explain the rise of the prices of agricultural products? the special causes affecting them have little to do with the quantity of "money." moreover, the term "money" itself is used so loosely and vaguely that we can come to agreement on price theories only by first agreeing upon what we mean by "money." in my paper, i have discussed the relations of goods, and their prices, to gold. but, in this country, we use gold little as a medium by which goods are exchanged. thus the relation of the prices of goods to our media of exchange has been practically omitted. and yet the price-making process generally precedes the creation of the usual banking media of exchange by which most goods are exchanged. * * * * * irving fisher[ ]: in connection with the statement and explanation of the equation of exchange it was shown ( ) that prices vary directly as the quantity of money, provided the volume of trade and the velocities of circulation remain unchanged; ( ) that prices vary directly as the velocities of circulation (if these velocities vary together), provided the quantity of money and the volume of trade remain unchanged, and ( ) that prices vary inversely as the volume of trade, provided the quantity of money--and therefore deposits--and their velocities remain unchanged. let us now inquire how far these propositions are really _causal_ propositions. an examination of the influence of each of the six magnitudes on each of the other five will afford answers to the objections which have been raised to the quantity theory of money. to set forth all the facts and possibilities as to causation we need to study the effects of varying, one at a time, the various magnitudes in the equation of exchange. our first question is: given (say) a doubling of the quantity of money in circulation (_m_) what are the normal or ultimate effects on the other magnitudes in the equation of exchange, viz.: _m´_, _v_, _v´_, the _p_'s and the _q_'s? we have seen that normally the effect of doubling money in circulation (_m_) is to double deposits (_m´_) because under any given conditions of industry and civilization deposits tend to hold a fixed or normal ratio to money in circulation. hence the ultimate effect of a doubling in _m_ is the same as that of doubling both _m_ and _m´_. we propose next to show that this doubling of _m_ and _m´_ does not normally change _v_, _v´_ or the _q_'s, but only the _p_'s. the equation of exchange of itself does not affirm or deny these propositions. for aught the equation of exchange itself tells us, the quantities of money and deposits might even vary inversely as their respective velocities of circulation. were this true, an increase in the quantity of money would exhaust all its effects in reducing the velocity of circulation, and could not produce any effect on prices. if the opponents of the "quantity theory" could establish such a relationship, they would have proven their case despite the equation of exchange. but they have not even attempted to prove such a proposition. as a matter of fact, the velocities of circulation of money and of deposits depend, as will be seen, on technical conditions and bear no discoverable relation to the quantity of money in circulation. velocity of circulation is the average rate of "turnover", and depends on countless individual rates of turnover. these depend on individual habits. each person regulates his turnover to suit his convenience. a given rate of turnover for any person implies a given time of turnover--that is, an average length of time a dollar remains in his hands. he adjusts this time of turnover by adjusting his average quantity of pocket money, or till money, to suit his expenditures. he will try to avoid carrying too little lest, on occasion, he be unduly embarrassed; and on the other hand to avoid encumbrance, waste of interest, and risk of robbery, he will avoid carrying too much. each man's adjustment is, of course, somewhat rough, and dependent largely on the accident of the moment; but, in the long run and for a large number of people, the average rate of turnover, or what amounts to the same thing, the average time money remains in the same hands, will be very closely determined. it will depend on density of population, commercial customs, rapidity of transport, and other technical conditions, but not on the quantity of money and deposits nor on the price level. these may change without any effect on velocity. if the quantities of money and deposits are doubled, there is nothing, so far as velocity of circulation is concerned, to prevent the price level from doubling. on the contrary, doubling money, deposits, and prices would necessarily leave velocity quite unchanged. each individual would need to spend more money for the same goods, and to keep more on hand. the ratio of money expended to money on hand would not vary. if the number of dollars in circulation and in deposit should be doubled and a dollar should come to have only half its former purchasing power, the change would imply merely that twice as many dollars as before were expended by each person and twice as many kept on hand. the ratio of expenditure to stock on hand would be unaffected. if it be objected that this _assumes_ that with the doubling in _m_ and _m´_ there would be also a doubling of prices, we may meet the objection by putting the argument in a slightly different form. suppose, for a moment, that a doubling in the currency in circulation should not at once raise prices, but should halve the velocities instead; such a result would evidently upset for each individual the adjustment which he had made of cash on hand. prices being unchanged, he now has double the amount of money and deposits which his convenience had taught him to keep on hand. he will then try to get rid of the surplus money and deposits by buying goods. but as somebody else must be found to take the money off his hands, its mere transfer will not diminish the amount in the community. it will simply increase somebody else's surplus. everybody has money on his hands beyond what experience and convenience have shown to be necessary. everybody will want to exchange this relatively useless extra money for goods, and the desire so to do must surely drive up the price of goods. no one can deny that the effect of every one's desiring to spend more money will be to raise prices. obviously this tendency will continue until there is found another adjustment of quantities to expenditures, and the _v_'s are the same as originally. that is, if there is no change in the quantities sold (the _q_'s), the only possible effect of doubling _m_ and _m´_ will be a doubling of the _p_'s; for we have just seen that the _v_'s cannot be permanently reduced without causing people to have surplus money and deposits, and there cannot be surplus money and deposits without a desire to spend it, and there cannot be a desire to spend it without a rise in prices. in short, the only way to get rid of a plethora of money is to raise prices to correspond. so far as the surplus deposits are concerned, there might seem to be a way of getting rid of them by cancelling bank loans, but this would reduce the normal ratio which _m´_ bears to _m_, which we have seen tends to be maintained. we come back to the conclusion that the velocity of circulation either of money or deposits is independent of the quantity of money or of deposits. no reason has been, or, so far as is apparent, can be assigned, to show why the velocity of circulation of money, or deposits, should be different, when the quantity of money, or deposits, is great, from what it is when the quantity is small. there still remains one seeming way of escape from the conclusion that the sole effect of an increase in the quantity of money in circulation will be to increase prices. it may be claimed--in fact it has been claimed--that such an increase results in an increased volume of trade. we now proceed to show that (except during transition periods) the volume of trade, like the velocity of circulation of money, is independent of the quantity of money. an inflation of the currency cannot increase the product of farms and factories, nor the speed of freight trains or ships. the stream of business depends on natural resources and technical conditions, not on the quantity of money. the whole machinery of production, transportation, and sale is a matter of physical capacities and technique, none of which depend on the quantity of money. the only way in which the quantities of trade appear to be affected by the quantity of money is by influencing trades accessory to the creation of money and to the money metal. an increase of gold money will, as has been noted, bring with it an increase in the trade in gold objects. it will also bring about an increase in the sales of gold mining machinery, in gold miners' services, in assaying apparatus and labor. these changes may entail changes in associated trades. thus if more gold ornaments are sold, fewer silver ornaments and diamonds may be sold. again the issue of paper money may affect the paper and printing trades, the employment of bank and government clerks, etc. in fact, there is no end to the minute changes in the _q_'s which the changes mentioned, and others, might bring about. but from a practical or statistical point of view they amount to nothing, for they could not add to nor subtract one-tenth of per cent. from the general aggregate of trade. only a very few _q_'s would be appreciably affected, and those few very insignificant. we conclude, therefore, that a change in the quantity of money will not appreciably affect the quantities of goods sold for money. since, then, a doubling in the quantity of money: ( ) will normally double deposits subject to check in the same ratio, and ( ) will not appreciably affect either the velocity of circulation of money or of deposits or the volume of trade, it follows necessarily and mathematically that the level of prices must double. while, therefore, the equation of exchange, of itself, asserts no causal relations between quantity of money and price level, any more than it asserts a causal relation between any other two factors, yet, when we take into account conditions known quite apart from that equation, viz., that a change in _m_ produces a proportional change in _m´_, and no changes in _v_, _v´_, or the _q_'s, there is no possible escape from the conclusion that a change in the quantity of money (_m_) must _normally_ cause a proportional change in the price level (the _p_'s). while the equation of exchange is, if we choose, a mere "truism," based on the equivalence, in all purchases, of the money or checks expended, on the one hand, and what they buy, on the other, yet in view of supplementary knowledge as to the relation of _m_ to _m´_, and the non-relation of _m_ to _v_, _v´_, and the _q_'s, this equation is the means of demonstrating the fact that normally the _p_'s vary directly as _m_, that is, demonstrating the quantity theory. to throw away contemptuously the equation of exchange because it is so obviously true is to neglect the chance to formulate for economic science some of the most important and exact laws of which it is capable. we may now restate, then, in what causal sense the quantity theory is true. it is true in the sense that one of the _normal effects of an increase in the quantity of money is an exactly proportional increase in the general level of prices_. i have no desire, as some one has humorously suggested, to hide behind an equation, but i do find it necessary to take refuge behind my book on the _purchasing power of money_. so many new questions have been asked that, in the few moments at my disposal, i could not answer them all satisfactorily. i believe they have all been answered in the book referred to. for instance, a chapter has been devoted to transition periods in which it has been shown, as professor taussig has suggested, that during transition periods an increase in _t_ may cause an increase in _m´_. the testimony of ricardo [ ]let us suppose that the circulation of all countries were carried on by the precious metals only, and that the proportion which england possessed were one million; let us further suppose, that, at once, half of the currencies of all countries, excepting that of england, were suddenly annihilated, would it be possible for england to continue to retain the million which she before possessed? would not her currency become relatively excessive compared with that of other countries? if a quarter of wheat, for example, had been both in france and england of the same value as an ounce of coined gold, would not half an ounce now purchase it in france, whilst in england it continued of the same value as one ounce? could we by any laws, under such circumstances, prevent wheat or some other commodity (for all would be equally affected) from being imported into england, and gold coin from being exported? if ... the exportation of bullion were free, gold might rise per cent.; and for the same reason, if flemish schillings in hamburgh had before been of equal value with a pound sterling, - / schillings would now attain that value. if the currency of england only had been doubled, the effects would have been precisely the same. suppose, again, the case reversed, and that all other currencies remained as before, while half that of england was retrenched. if the coinage of money at the mint was on the present footing, would not the prices of commodities be so reduced here that cheapness would invite foreign purchasers, and would not this continue till the relative proportions in the different currencies were restored? if such would be the effects of a diminution of money below its natural level, and that such would be the consequences the most celebrated writers on political economy are agreed, how can it be justly contended that the increase or diminution of money has nothing to do either with the foreign exchanges, or with the price of bullion? now, a paper circulation, not convertible into specie, differs in its effects in no respect from a metallic currency, with the law against exportation strictly executed. supposing, then, the first case to occur whilst our circulation consisted wholly of paper, would not the exchanges fall, and the price of bullion rise in the manner which i have been representing; and would not our currency be depreciated, because it was no longer of the same value in the markets of the world as the bullion which it professed to represent? the fact of depreciation could not be denied, however the bank directors might assure the public that they never discounted but good bills for bona fide transactions; however they might assert that they never forced a note into circulation; that the quantity of money was no more than it had always been, and was only adequate to the wants of commerce, which had increased and not diminished;[ ] that the price of gold, which was here at twice its mint value, was equally high, or higher, abroad, as might be proved by sending an ounce of bullion to hamburgh, and having the produce remitted by bill payable in london bank notes; and that the increase or diminution of their notes could not possibly either affect the exchange or the price of bullion. all this, except the last, might be true, and yet would any man refuse his assent to the fact of the currency being depreciated? could the symptoms which i have been enumerating proceed from any other cause but a relative excess in our currency? could our currency be restored to its bullion value by any other means than by a reduction in its quantity, which should raise it to the value of the currencies of other countries; or by the increase of the precious metals, which lower the value of theirs to the level of ours? footnotes: [ ] _the purchasing power of money_, pp. - . the macmillan company. new york. . [ ] this theory, though often crudely formulated, has been accepted by locke, hume, adam smith, ricardo mill, walker, marshall, hadley, fetter, kemmerer and most writers on the subject. the roman julius paulus, about a. d., stated his belief that the value of money depends on its quantity. see zuckerkandl, _theorie des preises_: kemmerer, _money and credit instruments in their relation to general prices_, new york (holt), . it is true that many writers still oppose the quantity theory. see especially, laughlin, _principles of money_, new york (scribner). . [ ] see scott, "it has been a most fruitful source of false doctrines regarding monetary matters, and is constantly and successfully employed in defense of harmful legislation and as a means of preventing needed monetary reforms." _money and banking._ new york, , p. . [ ] [for a method of determining the velocity of the circulation of money, see appendix a.] [ ] it is important to bear in mind that wherever _p_ is used in this chapter it represents the index number, or scale of prices, at which the trade, _t_, is conducted.--editor. [ ] an almost opposite view is that of laughlin that normal credit cannot affect prices because it is not an offer of standard money and cannot affect the value of the standard which alone determines general prices. see the _principles of money_, new york (scribner), , p. . both views are inconsistent with that upheld ... [here]. [ ] this fact is apparently overlooked by laughlin when he argues that there is not "any reason for limiting the amount of the deposit currency, or the assumption of an absolute scarcity of specie reserves." see _principles of money_, p. . [ ] interesting changes in the magnitudes of the equation of exchange between and are given in the appended diagram, which is taken from a reprint of professor fisher's article, _the equation of exchange for , and the war_, the _american economic review_, vol. v, no. , june, .--editor. [ ] adapted from irving fisher. _recent changes in price levels and their causes_, bulletin of the american economic association. fourth series, no. , papers and discussions of the twenty-third annual meeting, december, , pp. - . [ ] irving fisher, _the purchasing power of money_, pp. - . [ ] _ibid._, pp. , . [ ] _causes of the changes in prices since ._ bulletin of the american economic association, fourth series, no. , papers and discussions of the twenty-third annual meeting, december, , pp. - . [ ] there is a possible error here of perhaps $ , , . [ ] the estimate for is $ , , . cf. u. s. report of director of mint, , p. . [ ] bulletin, am. econ. assoc., fourth series, no. , , pp. - . [ ] _ibid._, pp. - . [ ] _money and credit instruments in their relation to general prices_, d edition, . new york: henry holt & company. [ ] the passages referred to are omitted.--editor. [ ] kemmerer, _money and credit instruments_, pp. - , - . [ ] _ibid._, pp. - , - , - . [ ] _ibid._, p. . [see fisher: _purchasing power of money_, pp. - .] [ ] the value of gold bullion deposited at the united states mints and assay offices increased from $ , , for to $ , , for . figures furnished by the director of the mint. [ ] it is noteworthy that the reserves of the new york associated banks for example are usually kept very close to the legal reserve requirements. cf. sprague, _crises under the national banking system_, p. . [ ] gold produced before represents an insignificant part of the existing supply. [ ] useful tables summarizing all of these index numbers, except those of canada, are given by achille necco, in his article on _la curva dei prezzi delle merci in italia negli anni - _, in _la riforma sociale_, sept.-oct., . [ ] comparison is for and , figures for not being available. [ ] de launay thinks that the industrial consumption averages somewhere between and per cent. of the annual output, but believes that for several years past the industrial uses have been absorbing a decreasing proportion, though an increasing amount. (_the world's gold_, pp. - .) [ ] bulletin, am. econ. assoc., fourth series, no. , , pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, p. . [ ] the quotation here referred to is omitted.--editor. [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] adapted from _the purchasing power of money_, pp. - ; and bulletin of the american economic association, fourth series, no. . papers and discussions of the twenty-third annual meeting, december, . p. . [ ] david ricardo, _reply to mr. bosanquet's practical observations on the report of the bullion committee_, works, pp. - . john murray. london. . [ ] the bank could not on their own principles, then urge that most erroneous opinion, that the rate of interest would be affected in the money market if their issues were excessive, and would therefore cause their notes to return to them, because, in the case here supposed, the actual amount of the money of the world being greatly diminished, they must contend that the rate of interest would generally rise, and they might therefore increase their issues. if, after the able exposition of dr. smith, any further argument were necessary to prove that the rate of interest is governed wholly by the relation of the amount of capital with the means of employing it, and is entirely independent of the abundance or scarcity of the circulating medium, this illustration would i think afford it. chapter xii the gold exchange standard it is an essential feature of the gold exchange standard as it exists in the philippines, for example, that premiums charged by the government in manila for exchange on new york, and in new york for exchange on manila are fixed at a point somewhat below the gold export points in each case. thus the would-be exporter of gold in the philippines never finds it profitable to ship gold to new york. on the other hand, international bankers in new york never find it profitable to ship gold or currency to the philippines, because the authorised agent of the philippine government in new york always stands ready to sell in exchange for united states currency, drafts drawn upon manila at a premium less than the cost of shipping gold or currency. through a regulation of the supply of silver pesos in actual circulation in the philippines they are maintained at a definite ratio to--not gold in the philippines, but--gold, or its equivalent, in new york. the way in which the supply of local currency in the gold-exchange country is regulated will be made clear in what follows. the gold exchange standard has not entirely escaped criticism. professor j. shield nicholson has recently attacked this standard in india. (_economic journal_, june, .) it is his contention that inflation may occur in india, if it has not already occurred, on account of the "impeded convertibility of rupees into gold." after a certain point is reached in the inflation the decline in the general purchasing power of the rupee must be followed, he affirms, by a specific depreciation as regards gold; and then the main object of the plan would be defeated. he offers no evidence, however, that prices have risen faster in india than in gold standard countries. with the exception of mexico, where currency conditions have become extremely chaotic, the historical material here reprinted is in accord with the recent monetary history of the countries under discussion. [ ]when the government of british india sought, in , to give a fixed gold value to about £ , , in rupee silver, it undertook an experiment of great importance to the financial world, and one which was naturally viewed in many quarters with grave misgivings. the experience of fifteen years which have followed that experiment has taught many lessons in monetary science. it may, indeed, be said to have blazed a new path in the principles of money--at least, in their practical application. the effort to raise the coins to a fixed gold value by scarcity alone was not successful, but it led to other devices, which, imitated or improved upon in mexico, the philippines, and the straits settlements, as well as in india, have created a new type of monetary system which has come to bear the title of the gold exchange standard. the gold exchange standard differs in several respects from the limping standard. it has been the product of definite purpose and plan in the philippines and in mexico and to a certain extent in india. while in british india it has been, like the limping standard, a compromise with existing conditions, it has there, as elsewhere, received a definite form and substance which separated it from the limping standard as evolved in france and in other countries which found themselves with a large amount of legal-tender silver on their hands when the metal had fallen below the official parity. there are two other essential differences between the limping standard and the gold exchange standard. one is that the gold exchange standard contemplates a circulation of token coins of silver without any necessary concurrent circulation of gold or paper. the other is that the gold exchange standard contemplates definite and comprehensive measures to maintain the value of token coins at par with gold instead of relying purely upon custom and scarcity to give them value. the essential principle upon which the exchange standard has been established is that the value of money is governed by the law of supply and demand. so long as supply was indefinite and excessive, as under the system of the free coinage of silver, there was no way of preventing safely and effectively the decline in the gold value of the coins to the bullion value of their silver contents. the moment, however, that government undertook to limit the supply of coins to the demand for them, it took an important step to separate their value from that of their bullion contents and to give them a value based upon the demand for them as money signs required for carrying on exchanges. strangely enough, while this principle had been in operation for many years in the case of subsidiary coins, its bearing upon the use of silver in countries where the standard had been depreciating was not clearly comprehended until within recent years. those who understood the principle doubted its sufficiency to give a fixed value to silver coins as the sole medium of exchange, or they distrusted the ability of any government to judge accurately the number of coins required. upon the latter point they would have been correct if dependence had been placed upon guesswork or any empirical method of determining the amount needed. it remained to find the true solution of the problem by so regulating the quantity of the coins that it would respond automatically to the demands of trade. the correct method of doing this is through the system of exchange funds. as this system is operated in the philippines, it is not possible to obtain gold coin for silver certificates in small quantities; but it is possible always to obtain drafts upon new york at par, plus the usual charges for exchange between gold standard countries. these drafts have to be purchased with actual silver coin or coin certificates. in either case the coins and certificates are, by the requirements of the coinage law, held in the philippine treasury. the law does not permit their deposit by the treasury in current account at a bank, which would turn them back into the general circulation. for practical purposes the volume of currency in circulation is contracted to the same extent as if a corresponding amount of gold were taken from the circulation for export. when the current turns and rates for money become high in the philippines, philippine currency can be released for local circulation by the purchase in new york from the gold standard fund of bills upon the philippine treasury. this rule of locking up the proceeds of the sale of bills is not rigidly applied to the funds in new york, because the influence of the philippine purchases upon the local circulation there would be insignificant. on the contrary, the government obtains a generous interest rate, which has at times been as high as per cent., upon the deposit of philippine funds with new york bankers. during the stress of the autumn of considerable transfers of capital were made from manila to new york by means of the purchase of new york drafts from the philippine treasury. the process, often repeated even under less serious pressure, clearly shows that the monetary system of the philippines is linked to gold, and that capital can be freely transferred upon a gold basis between manila and other markets. the experience of fifteen years since the free coinage of rupees was first suspended in british india, of five years since the new system was established in the philippines, and of nearly four years since it was in operation in mexico, have settled most of the doubts which were felt when the experiment was undertaken in india. in the first place, it has been made clear that the value of the coins in exchange, as fixed by law, has not been influenced by variations in the price of silver bullion. this statement, of course, applies only to one side of the problem--the fall of the gold value of the silver in the coin below its face value. it would not be possible under any system yet discovered, except such uneconomic devices as prohibiting exportation, to prevent the disappearance of silver coins when the [bullion] value of their contents rises above the legal value in exchange. both the philippines and mexico have faced this menace to their monetary circulation since their systems were inaugurated, but both have succeeded in removing it. in the philippines the contents of the silver unit--the peso--was reduced in from about grains to grains in pure silver. the amount fixed by the law of was practically the same as the contents of the old mexican dollar. the adoption of a coin of this weight was caused partly by the desire to avoid the distrust which some feared might arise from reducing the weight. at the time of the passage of the law, moreover, the price of silver was nearly at the lowest point in its history, having touched the minimum of - / pence in january, , and being at an average price of - / pence in march. the adoption of so heavy a coin, however, was not in accordance with the original recommendation made by the present writer to the war department in november, . the weight then recommended was grains, nine-tenths fine, or about grains of pure silver. in mexico the rise of the silver coins above the legal gold value proved a blessing in disguise. it enabled mexico to go almost to an absolute gold standard by selling her silver at a premium. from may st, , to october nd, , the old silver piasters were exported to the amount of $ , , , while gold coinage was executed to the amount of $ , , (about £ , , ).[ ] the gold has gone chiefly into the reserves of the banks, which have in circulation about $ , , in notes. gold holdings of the banks, which were only $ , , in january, , were $ , , in october, , while silver holdings declined over the same period from $ , , to $ , , .[ ] this influx of gold came about because silver at pence was above the mexican coinage ratio of about to , and much of it was sold by the commission on money and exchange at a direct profit to the mexican treasury. in view of the subsequent fall in silver below pence, at which rate mexico is in a position to replenish her supply of subsidiary coinage, her statesmen may claim the credit of following the great rule of profit in the commercial world as well as on the stock exchange--to sell when things are dear and to buy when things are cheap. the coincidence in the rise of silver and the adoption of the mexican monetary reform in was in some degree accidental. it facilitated the reform, not only by introducing gold, but by removing the objections which would otherwise have been heard from the miners of silver to the rise in gold wages which would have accompanied a fixing of the exchange at a point above the value of silver bullion. it was the intention of the mexican government, however, to proceed resolutely, though deliberately, to a fixed exchange, and they would undoubtedly have accomplished this result, even if they had not been aided by the rise in the value of silver. its subsequent fall has in no wise impaired the stability of the gold standard. some fears were expressed in the philippines as to the willingness of the natives and of chinese traders to accept a silver coin at a gold value fixed by law which was obviously above its value as bullion. this difficulty has proved almost negligible. silver within less than three years has been above pence per ounce and below pence. it is doubtful if the government officials in india or the philippines have so much as taken note of the daily fluctuations since the price dropped below the legal parity of the coins, and it is certain that the exchange value of the coins has been in no wise impaired by their fall in bullion value. when the last reduction was made in the weight and fineness of the philippine coins, lowering by almost per cent. their silver contents, the precaution was taken of advising the public by means of an official circular, translated into the various languages and dialects of the islands, why the change had been made, and that it would not affect the exchange value of the coins. provincial and municipal treasurers were also directed to carry on a campaign of education among the people by way of explaining the character and effect of the change. the greatest menace to the value of the new coins lay with the chinese, for in china for many hundreds of years local bankers and merchants have adhered to the rule that a coin derived no value from the stamp, but was worth just what it would fetch on the scales. the chinese traders at first undertook to discriminate in this manner against the new coins of the philippines. in some cases they refused to receive them except at a discount varying from to per cent. they also offered in the new coins for in the old, evidently in the hope of exporting the old at a profit while they continued to be worth as bullion more than their legal gold value. the success of this discrimination was local and extremely short-lived. the first consignment of the new coins reached manila on may , , and when the treasurer of the islands prepared his annual report on october th, , he was able to make the following statement of conditions: at this time, october , the new coin is accepted without question in every part of the islands, and no reports or complaints have been received for the past two months as to discounting it, and, so far as can be ascertained, no premium is now paid for the old coin. in fact, the demand for the new coin for exchange purposes has so far exceeded the supply that it became necessary to withdraw nearly half a million of the new pesos from the banks to meet the requisitions therefor from the provinces. the hesitation which prevailed, therefore, in many quarters in regard to the ability of a government to overcome the conservatism of the east in its preference for coins of full bullion value has not been warranted by events. this demonstration is of importance if the exchange standard is to be considered for china. at present the government of china is not perhaps strong enough and sufficiently centralised to assure its subjects that it can give a definite gold value to a token coin and maintain it honestly and efficiently. the trial of the system, however, in the philippines, in british india, and in the straits settlements, in all of which there are many chinese, has probably so far cleared the air upon this point that the chinese imperial government would be able to establish the gold exchange system if it did so under sufficient guarantees to the financial world that it would be honestly and intelligently maintained. next in importance to the settlement of this question of native willingness to accept the new system may be considered the degree of difficulty in maintaining it. it is not surprising, perhaps, that when it was proposed in an incomplete form for british india, it should have been denounced as a "fair weather" device--"a leap in the dark," which would not stand the test of business depression, deficient crops, and an unfavourable balance of trade.[ ] the most serious difficulty which has been foreseen by critics of the gold exchange system relates to the sufficiency of the exchange funds. up to the period of the general panic of and the crop failure in india in the spring of , it might fairly be said, perhaps, that the system had not been subjected to any but "fair weather" conditions. the experience of india, however, has thrown striking light upon the possibilities and limitations of the system in time of stress. the test in india has been of such magnitude, moreover, that its results are much more conclusive than any test which might have been afforded in a smaller country dealing with a less enormous mass of token coins. if the test had come before the exchange funds had acquired a respectable size, the system might have been allowed to break down, through timidity and delay in taking proper measures of protection, and discredit have thus been cast upon it before it had been fairly tried. what happened in india was that the failure of the crops deprived the country of the usual means of compensating by exports the heavy imports of foreign goods which had been contracted for. it became necessary, under the settled principles of exchange, to find gold to fill the gap. usually the exchange account substantially balanced itself by the sale in london of council drafts upon the indian government to obtain gold to pay the interest on the debt held in england. these drafts were purchased by importers in london, and used to pay for the indian crops; but all through the spring of purchasers for drafts failed to appear, because there had been no considerable exports of indian crops to be paid for. hence council drafts were without a market, and for a moment it seemed that the link which bound the indian monetary system to the gold market of london had been severed, and that the silver rupee might drop as disastrously as the mexican dollar before its free coinage was suspended. this would have added the influence of an appalling disaster to the burden already imposed upon indian finance by the failure of the crops, for it would have compelled the indian importer of english goods to find a greatly increased number of rupees to meet his gold obligations in london. obviously, it was a disaster which, if it had occurred, would have invited the bankruptcy of the country, reflected lasting disgrace upon english financial foresight, and perhaps even have led to organised revolt. the indian government had available for meeting the crisis about £ , , , principally invested in securities in london. this fund, known as the gold standard reserve, was distinct from the currency reserve, consisting of gold received for currency notes, which amounted in the spring of to about £ , , . it was against the former fund that the indian government felt compelled to offer to sell exchange in india. such offers were made for a time in limited amounts of £ , each, but they proved substantially adequate for meeting the demand, and by early summer the demand fell below the supply. the offer of exchange in this form for rupees maintained the value of the rupee coinage, contracted the amount of rupees in circulation in india, and enabled the indian merchants to meet their obligations without the loss which they must have suffered if the currency had been allowed to depreciate in gold value. the actual sales of bills upon the exchange funds in london reached, between march th and august th, , the considerable total of £ , , . of this amount about £ , , was taken from the currency reserve in gold, which was "earmarked" at the bank of england, incidentally affording relief to the london money market which was keenly appreciated. most of the remainder was obtained by the sale of securities to an amount which reduced such holdings from £ , , on march st to £ , , on july st. the test to which the indian system, as the most important example of the gold exchange standard, was thus subjected was perhaps of a higher importance than was realised by those in the thick of the conflict. it was plainly intimated, however, in the annual report on financial conditions for that, if necessary, the indian government would have issued short-dated securities in order to still further replenish the exchange funds in london. this would have been the true means of meeting the situation if the existing fund had been unduly impaired. the argument against it would have been that the demand was indefinite, and might become so large as to be unmanageable. the fact that the demand for exchange was met without the issue of new securities and without trenching upon the reserve funds beyond the amount of £ , , out of £ , , affords pretty strong evidence that there is a natural limit to such demands. it is in this principle, that there is a natural limit to the possible drain upon the exchange funds, that the security of the new system lies.... it is only the supply of local currency on the margin of possible export demands which needs to be safeguarded. the substratum, which can never leave the country unless under the influence of an almost inconceivable economic cataclysm, is analogous in some respects to the "authorised" circulation of the bank of england. it represents the irreducible minimum below which the local need for currency can never fall. if the supply on the margin of the international exchange movement is adequately guarded, then the whole system is secure. if it were conceivable that the demand for exchange would equal the whole amount of the local currency, or even the half of it, then it would be necessary to maintain exchange funds equal to the whole amount of token coins or the half of them in order to insure safety. but obviously this could never be the case. this argument against the exchange standard is only a repetition of the dilemma sometimes presented by untrained minds in regard to bank-notes: what would happen if all the notes should be presented at one time for redemption? that question has been answered by banking experience; the question in regard to the gold exchange system has been and must be answered by experience in substantially the same manner. no country can be subjected to such stress as to consent to part with its entire monetary circulation, or even the half of it. on the contrary, every influence which tends to contract the circulation tends to create a condition which makes further contraction more difficult. rates for the loan of money are affected, prices of imported goods are influenced, imports fall off and exports increase, and inevitably in the modern money market local equilibrium is restored, often with considerable strain, but none the less without pulling down the pillars of the financial temple. the experience of last spring in india proves the adequacy of a reserve of or per cent. of the circulation to maintain the steady parity of a token coinage. there is apparently no evidence that serious distrust of the rupee arose, even when the government was hesitating as to just what steps should be taken to meet the demand for exchange. even if such distrust had arisen, however, it could have expressed itself through financial channels only by the demand for drafts on london. these would not have been very valuable to the average local tradesman except as he was able to sell them back again to the banks for the very rupees which had aroused his distrust. in this respect the gold exchange standard may be said to put a brake upon the disposition to export currency from fear alone, when the exportation is not demanded by the balance of trade. if any mistake was made in the management of the indian currency, it was in the investment of too large a proportion of the gold standard reserve in securities. while investment in securities is naturally attractive because of the income earned, and while it is not subject to just criticism while kept within certain limits, the possession of actual gold to a considerable amount is highly desirable. it would not be necessary, perhaps, that such gold should be "earmarked." if the indian government had a large deposit account in such an institution as the union of london and smith's bank, or the london city and midland, it would possess for the purposes of the indian government the character of gold. drafts against such a deposit could be sold without the discount or delay which might be required in disposing of securities. it seems highly desirable, therefore, in spite of the prudence with which the recent pressure was met, that at least or per cent. of the gold standard reserve should in the future be kept either in "earmarked" gold or in the form of demand deposits. in the case of the philippine islands the reserve is not "earmarked," but is at present entirely in the form of deposits with new york bankers. the problem in the philippines is really child's play compared to that in british india. the entire circulation of the philippine islands is about , , pesos (£ , , ), against which a large reserve has accumulated as the result of the recoinage at a reduced rate as well as by the profits on the original coinage. it is hardly conceivable that an emergency would arise which would impair this reserve; but if this should occur, the scratch of a pen in washington would remedy the situation. this would be accomplished by depositing gold or its equivalent in the exchange fund in new york to the credit of the war and navy, and placing an equivalent amount of local currency at the command of the military forces in the philippines. such a deposit would operate to increase the resources at the command of military disbursing officers in the islands without increasing the amount actually in circulation until the occasion arose to disburse it. the panama currency has been steadily maintained at par by friendly interchanges of this sort, even with a very insignificant official exchange fund. no governor of the philippines, therefore, need have any fear of his ability to maintain the parity of the philippine coinage. whether the exchange standard would stand the strain of a great war is yet to be subjected to practical test.[ ] it may be said, however, that its capacity to meet such a test would run upon all fours with the capacity of any monetary system which does not consist exclusively of gold coin. the experience of france in the war with prussia seemed to justify the suspension of specie payments for the purpose of husbanding the national stock of gold. the history of the spanish exchange, where the coins have followed the value of the bank-notes instead of that of silver bullion, is another case in point. both russia and japan, however, in the war of - , succeeded in maintaining complete convertibility of their bank-notes. there is no reason why the gold exchange standard should not be successfully maintained so long as the country where it was established retained its national independence and pursued a sound financial policy. the issue of large amounts of debt would not in itself impair the stability of the standard, unless the government, in order to obtain gold, ravished the exchange funds in financial centres. the questions involved would be substantially the same as those involved in maintaining the parity of bank-notes or paper money: first, the disposition of the government to maintain its credit; secondly, the resources which the government was able to command. without either good intentions or monetary resources, the monetary system, along with the fiscal system, would break down. it is not apparent, however, that a country operating upon the gold exchange system would find any greater difficulty in maintaining the system than the bank of japan had in maintaining the convertibility of its notes during the war with russia. if there were a disposition in time of war to transfer capital abroad by excessive demands upon the exchange funds, it could be counteracted in three ways. one would be the automatic influence of the deficiency of currency which would arise at home. another would be the issue of loans abroad, from which exchange demands could be met. a third would be the deliberate elevation by a small percentage of the charge for exchange. this would amount to a slight depreciation in the currency, but if kept within prudent bounds, it would probably permit the maintenance of an adequate circulation without disturbance to local prices and without even a theoretical depression below the or - / per cent. which affected the notes of the bank of france in the war of . the gold exchange system may indeed be said to be an extension of the bank-note system to token coins. the token coin is, in effect, a metallic bank-note, whose maintenance at gold par is subject to the rules of sound banking. its advantages over the bank-note in undeveloped countries are that it conforms to a strong prejudice in favour of "hard money," not subject to the vicissitudes of tropical climes, and that the output can be more safely regulated, where new coins are issued only for gold, than where a bank may increase its note issues to take over assets of speculative or doubtful character. in the advanced countries, with a highly organised credit system, gold, and gold alone, is the proper form of full legal-tender coin; but in the less advanced countries of the orient silver token coins have the advantage that they conform in size and denominations to the small scale of local transactions, that they are not so rapidly absorbed by hoarding, and that their very non-exportability enables the government to keep in circulation a quantity of currency which might under a different system be drained away to richer countries, and leave the community denuded of an adequate medium for carrying on exchanges. objections to the gold-exchange standard for the straits settlements answered [ ]... the establishment of the gold standard in the straits settlements ... in the spring of ... provided for the recoinage of the british and mexican dollars then circulating in the malay peninsula into new straits settlements dollars ... of the same weight and fineness as the british dollar, and for the subsequent raising of the value of these new dollars to an unannounced gold par by means of limiting the supply, in accordance with the principle by which india raised the gold value of the rupee.... the objections urged to the adoption of the gold-exchange standard are [were]: ( ) that it would unduly interfere with the [foreign exchange] business of the banks. ( ) that it would encourage banks to work on dangerously low cash balances, knowing as they would that they could obtain dollars of the government on a moment's notice by the purchase of cable transfers on singapore from the crown agents for the colonies in london. ( ) that there would be danger of the government's notes [a part of the circulating medium] depreciating unless they were redeemable in gold in the country itself. ( ) that the monetary circulation of the straits settlements was too small to make the plan feasible there. ( ) that the plan would require a larger reserve fund than would otherwise be necessary, because the government would be compelled to keep a reserve both in london and singapore; and that in each place the reserve would have to be large, because drafts on the fund through the sale of telegraphic transfers would not give the government any such warning in advance of the demands liable to be made as would enable it to replenish the reserve. the above arguments, all of which were urged upon the writer either by officials or business men in the straits settlements, do not appear to be conclusive for the following reasons, which may conveniently be stated in the same order as the objections.[ ] ( ) if the rates for the sale of government drafts were fixed at the "gold points," as they presumably would be under the gold-exchange standard, and if only drafts of large amounts were to be sold by the government, redemption by the sale of drafts would not interfere appreciably more with the business of the banks than would redemption in coin. under these circumstances the banks themselves would be the principal purchasers of government drafts, and such drafts would be purchased and forwarded merely in lieu of the shipment of sovereigns. ( ) the sale of telegraphic transfers, while desirable in the interest of currency elasticity, is by no means a necessary feature of the gold-exchange standard. if the government were opposed to making a minimum legal reserve requirement of banks, it could limit its sales of drafts to demand drafts or even, if need be, to short-time drafts. ( ) if government notes were redeemable in silver dollars on demand, and if the silver dollars were redeemable in gold exchange on demand, depreciation would be impossible in a country where the people have the confidence in the government which they have in the straits settlements. ( ) the system of the gold-exchange standard is better suited to a country with a small circulation than to one with a large circulation. it is evidently easier to maintain a small reserve abroad than a large one and the operations with a small reserve are less disturbing to the money market of the financial center in which the reserve is located. ( ) it is not probable that the straits settlements would require so large a reserve under the gold-exchange standard as it will under the system to be adopted. under either system it would need a sovereign reserve and a dollar reserve. under the system to be adopted both reserves will be located in singapore; under the gold-exchange standard the dollar reserve would be located in singapore and the sovereign reserve in london. the sale of cable transfers is not a necessary part of the system, as above pointed out; and, even if it were, the movement of market rates of exchange would ordinarily give ample warning of a demand for dollar drafts or sovereign drafts. emergency cases, if such should arise, could be met through the temporary transfer of funds to the gold reserve from the security portion of the note guarantee fund, or through the transfer of dollars to the credit of the home government in singapore in exchange for an equivalent amount of sovereigns placed to the credit of the straits government in london.... a prolonged and severe drain upon the reserve fund, which in a country like the straits settlements would be an extremely improbable contingency if the government withdrew from circulation dollars presented in the purchase of government drafts, could of course always be met by the forward sale on the london silver market of the redundant dollars piling up in the government's dollar reserve in singapore. the gold-exchange standard would probably enable the country to get along with a smaller gold reserve than will the system to be adopted, inasmuch as it would keep gold coins out of circulation and the demands upon it would be limited to the requirements of meeting foreign trade balances--the only monetary use to which the dollars could not be applied. the straits settlements, inasmuch as it is a country for whose trade requirements silver coins are better adapted than gold, and a country which is anxious to maintain its reserve at as small an expense as possible, would in fact seem to be a place peculiarly adapted to the gold-exchange standard. the premiums which the government would realize on its sale of exchange, together with the interest it would obtain on that part of its reserve deposited abroad, would doubtless yield sufficient profit, as in the philippines, to pay the expenses of administering the currency system and to provide in addition a substantial annual increment to the gold reserve. footnotes: [ ] charles a. conant, _the gold exchange standard in the light of experience, the economic journal_, vol. , june, , pp. - . [ ] _le marché financier en - _, p. . [ ] these figures are from the annual budget statements of the minister of finance. [ ] for some of these doubts see _london bankers' magazine_, october, , lxxxvi, p. . [ ] throughout august, , while sterling rates in other countries rose to unprecedented heights, india succeeded in maintaining rates on london in the neighborhood of the gold export point--a striking testimony to the soundness of the indian arrangements.--editor. [ ] e. w. kemmerer, _a gold standard for the straits settlements ii., political science quarterly_, vol. xxi, no. , p. , - . [ ] the answers given to the objections just stated have been confirmed and strengthened by the actual operation of the gold-exchange standard as later adopted by the straits settlements.--editor. chapter xiii a plan for a compensated dollar [ ]in the _purchasing power of money_ ( ) i sketched a plan for controlling the price level, _i. e._, standardizing the purchasing power of monetary units. this plan was presented more briefly, but in more popular language, before the international congress of chambers of commerce, at boston, september, . the details were most fully elaborated in the _quarterly journal of economics_, february, . following these and various other presentations of the subject, especially the discussion at the meeting of the american economic association in december, , the plan was widely criticized by economists, both favorably and unfavorably, as well as by the general public. on the whole the plan has been received with far more favor than i had dared to hope and even the adverse criticism has usually been tempered by a certain degree of approval. the object of the present paper is briefly to state the plan and to answer the more important and technical objections which have been raised. answers to the more popular objections, omitted from this article through lack of space, will appear in a book, _standardising the dollar_, which i hope to publish in . i shall begin with a skeleton statement of the plan; space is lacking for more. in brief, the plan is _virtually_ to vary each month the weight of the gold dollar, or other unit, and to vary it in such a way as to enable it always to have substantially the same general purchasing power. the word "virtually" is emphasized, lest, as has frequently happened, any one should imagine that the actual gold coins were to be recoined at a new weight each month. the simplest disposition of existing gold coins would be to call them in and issue paper certificates therefor. the virtual gold dollar would then be that varying quantum of gold _bullion_ in which each dollar of these certificates could be redeemed. the situation would be only slightly different from that at present, since very little actual gold now circulates; instead, the public uses gold certificates, obtained on the deposit of gold bullion at the treasury, and redeemable in gold bullion at the treasury at the rate of . grains, nine-tenths fine, per dollar. the only important change which would be introduced by the plan is in the redemption bullion; we would substitute for . a new figure each month. the gold miner, or other owners of bullion, would, just as now, deposit gold at the united states mint or treasury and receive paper representatives, while the jeweler, exporter, and other holders of these certificates would, just as now, present them to the treasury when gold bullion was desired. there would also be a small fee or "brassage," of, say, per cent. for "coinage," _i. e._, for depositing the bullion and obtaining its paper circulating representative. in other words, the government would buy gold bullion at per cent less than it sold it. this pair of prices, for buying and selling, would be shifted in unison, both up or both down, from month to month, it being provided, however, that no single shift should exceed per cent., a figure equal to the amount by which the two differ. the object of this proviso is to prevent speculation in gold. to determine each month what the pair of prices should be, or, what is practically the same thing, to determine what amount of gold bullion should be received and paid out in exchange for paper, recourse would be had to an official index number of prices. if, in any month, the index number is found to deviate from the initial par, the weight of bullion in which it shall be redeemable the next month is to be corrected in proportion to this deviation. thus, the depreciation of gold would lead to a heavier virtual dollar; and an appreciation, to a lighter virtual dollar. there are, of course, other details and possible variants of the plan, some of which will be referred to later when necessary. the objections to the plan are classified under the following heads: . "_the plan assumes the truth of the quantity theory of money._" there is nothing whatever in the plan itself which could not be accepted by those who reject the quantity theory altogether. on the contrary, the plan will seem simpler, i think, to those who believe a direct relationship exists between the purchasing power of the dollar and the bullion from which it is made--without any intermediation of the quantity of money--than it will seem to quantity theorists. . "_it contradicts the quantity theory._" this objection, the opposite of that above, is raised by some, who, like professor boissevain, believe in the quantity theory, but imagine that the operation of the plan could not affect the quantity of money at all (or would not affect it to the degree needed). but evidently an increase in the weight of the virtual dollar, _i. e._, a reduction in the price of gold bullion, would tend to contract the currency, by diverting gold from the mint into the arts; because its reduced price would cause an increased demand and consumption. a decrease, of course, would have the opposite effect. . "_it might aggravate the evils it seeks to remedy._" this objection, raised by professor taussig and a few others, is based on the preceding. it is claimed that an increase in coined money may take place for years "without visible effect on prices; then comes a flare-up, so to speak." i doubt if professor taussig meant the first half of this statement to be quite so strong. the evidence only justifies the statement that the rise is slow at first and rapid later while similarly the effect of a scarcity of money is slow at first and rapid later. professor taussig then proceeds to apply the same idea to my plan: the cumulative consequence would be like the cumulative consequence of a long continued decline in gold production. after a season or two of declining bank reserves, tight money, and so on, a sudden collapse might be occasioned, and apparently caused, by the announcement of some particular seigniorage adjustment. then there might be a decline in prices much greater than in proportion to the bullion change. but the working of the compensated dollar would not be in the least analogous to the operation of gold inflation or contraction, even as professor taussig supposes it. the plan always works cumulatively _toward_ par, never cumulatively _away from_ par. one often sees a wagon with its wheels on a street-railway track having some difficulty getting off; the front wheels have to be turned at a large angle before they are forced out of their grooves; then of a sudden they jump away. this is analogous to the delayed "flare-up" of prices which professor taussig supposes under the influence of a long continued decline or increase in the gold supply. but if the driver instead of trying to turn out is trying to keep the wagon on the track he will pull the horse back at every tendency to turn to the right or left. the more the horse turns to the right the harder will the driver endeavor to turn him to the left. clearly the effect of the driver's efforts will be to avert or delay, not to aggravate or hasten, any jumping out of the grooves which other causes may tend to produce. in other words, if it takes as much time as professor taussig fears for a pressure on prices to move them, then so much the more certain is it that, under the plan, deviations from par, though they may be persistent, cannot be either rapid or wide. a long continued small deviation gives plenty of time for the counter pressure exerted by the compensating device to accumulate and head off any wide deviation. suppose that, following professor taussig's ideas, some cause such as an increase of gold production would, in the absence of the compensated dollar plan, gradually lift the price level as follows: during the first year, not at all; during the second year, per cent.; during the third year, per cent.; after which would come a "flare-up" of per cent. we may suppose then that, if the plan were in operation during the first year, there being no deviation visible, there would be no change in the weight of the dollar. after the first month of the second year when prices were per cent. above par, the weight of the dollar would according to the plan be raised per cent. if this were unavailing, so that in the second month the deviation were still per cent., the weight of the dollar would be again increased per cent. every month, as long as the deviation of per cent. lasts, the weight of the dollar would receive an _additional_ per cent. unless some effect were produced on the supposed original schedule of deviations, the weight of the dollar of the second year would be increased per cent., and by the end of the third year by per cent. more, or per cent. in all. but it is clear that by this time, with so swollen a dollar, the "flare-up" scheduled for the fourth year could not occur, but that a counter movement would set in--in fact, would have set in long before the dollar became so heavily counterpoised. nor could the result of the counterpoise, even if so heavy, be to swing suddenly prices far below par. prices would, by hypothesis, yield slowly and again give time for taking the counterpoise off. if the price level sank, say to per cent. below par for six months, then to per cent. for another six months and to per cent. in the next six months, evidently the entire per cent. would be taken off in eighteen months (since × + × + × = ). the compensating device is thus similar to the governor on a steam engine. it is the balance wheel that is largest and hardest to move which is the most easily controlled by the governor. so if the "flare-up" theory is true, the system will work more perfectly than if it were not true. . "_it would not work unless every single mint in the world employed it._" this is an error. although it could be easily shown to be politically inadvisable for one nation alone to operate the plan, this would not be economically impossible. those who hold the contrary are deceived by the term "mint price." they reason that our mint price ($ . an ounce of gold, / fine) and england's mint price (£ _s._ - / _d._ for gold / fine) are now "the same," and that, consequently, if our price were lowered per cent., _i. e._, to $ . , while the english price remained unchanged, _all_ our gold would be taken to england to take advantage of the "higher" price there. but these comparisons between english and american prices are based on the present "par of exchange" ($ . of american money for the english sovereign): which par of exchange is in turn based on the relative weights of the dollar and the sovereign. as soon as our dollar were made per cent. heavier, not only would the new american mint price go down per cent., but the par of exchange would also go down per cent., to $ . . consequently, the new mint price of $ . , although in figures it is lower than the old, yet, being in heavier dollars, would still be "the same" as the english mint price of £ _s._ - / _d._ this sameness of mint price as between the two countries means at bottom merely that an ounce of gold in america is equivalent to an ounce of gold in england. it is true that each increase in the weight of the virtual dollar in america--in other words, each fall in the official american price of gold--would at first discourage the minting of gold in america. the miner would _at first_ send his gold to london, where the mint price was the same as formerly, and realize by selling exchange on the london credit thus obtained. but the rate of exchange would soon be affected through these very operations, by which he attempted to profit, and his profit would soon be reduced to zero; the export of gold to england would increase the supply of bills of exchange in america drawn on london and lower the rate of exchange until there would be no longer any profit in sending gold from the united states to england and selling exchange against it. when this happened it would be as profitable to sell gold to american mints at $ . per ounce as to ship it abroad; and $ . in america would be the exact equivalent at the new par of exchange ($ . ) of the english mint price of £ _s._ - / _d._ . "_the system would be destroyed by war._" professor taussig fears that if money were stabilized, the system would itself be upset by war. "any war would put an end to it." to this i would reply: first, that if war did put an end to it the system would do good so long as it lasted and its discontinuance would do no more harm than the existence of our present unscientific system is doing at all times; secondly i do not see any reason for thinking that war would put an end to it. possibly professor taussig has in mind the first form in which i explained the plan, _viz._, in my book, _the purchasing power of money_. in that form one country was to serve as a centre and all other countries were to have the gold exchange standard in terms of gold reserves in the central country, just as now the philippines have a gold exchange standard with reference to the united states and india with reference to england. professor taussig's objection would undoubtedly apply, to some extent, in cases where the plan was carried out through the gold exchange mechanism. but where the system was independently established in each country simply parallel to the systems in other countries, there would be no more need for its abandonment in case of war than for the abandonment now by germany of the gold standard because england, its enemy, has the gold standard also. we know, of course, that in time of war, the gold standard is often temporarily abandoned in favor of a paper standard; and the new proposal would not escape such a difficulty. this, however, would not be due to the international character of the plan, but to the exigencies of war. . "_the multiple standard is not ideal. especially is it faulty when the cause of price movements is entirely a matter of the abundance or scarcity of goods in general._" those who hold this objection point out that an ideal standard would not be one which always smooths out the price level but one which discriminates and leaves unchanged such rises and falls as are due to general scarcity and abundance of goods. there is much to be said in favor of such discrimination as an ideal. it must be admitted that the compensated dollar plan would not discriminate between changes in the price level due to the scarcity or abundance of goods in general and those due to changes in money and credit. it must be further admitted that a theoretically ideal standard would take some account of this distinction. but the compensated dollar plan does not claim to be ideal. the plan would simply correct the gold standard to make it conform to a multiple commodity standard. it does not pretend to correct the multiple commodity standard to make it conform to some "absolute" standard of value. such an ideal standard is as unattainable as is absolute space. changes in relative value indicate change in absolute value, either of goods or of money; but it is not possible for us to know, except in a general way, how much of the absolute change is in goods and how much in the dollar. on general principles we may be assured that the absolute change is wholly or mostly in the dollar. we economists in our measurements of value are in much the same predicament as the astronomers. our economical "fixed stars" are fixed only in a relative sense. we cannot measure the empty spaces of absolute value, but can only express values in terms of visible goods, the general average of which is the nearest approach to absolute invariability we can, in practice, reach. but if it were possible to measure absolute values to our universal satisfaction, in terms, say, of "marginal utility," or of "disutility of labor," or of anything else, there are no statistics by which we can realize such a standard in practice. the only readily available statistics by which we can correct our present standard are price statistics from the great markets. we can, by index numbers based on these price statistics, translate from gold into commodities, but as yet we cannot translate from commodities into any ideal or absolute standard. if i were treating of the problem of an ideal standard of value, i think i should be inclined to agree with professor marshall that a standard that represents a gradually descending scale of prices to keep pace with the "real" cheapening improvements in industrial processes is better than one which represents an absolute constancy of prices. but it would be quite impracticable to discover the exact rate of fall of prices which would correctly register the improvement going on in industry, and, moreover, it would, i believe, be so small as not to depart much from the mutiple standard. this i infer is also the opinion of professor marshall. professor kinley makes the very interesting suggestion that we can suppose a more ideal standard than the tabular by making our unit a definite percentage of the national annual dividend. this appeals to me as a rough and ready way of fixing a unit more nearly ideal than that fixed by the tabular standard. but it would certainly not be practicable. it would not even be quite ideal. but if professor kinley will measure his standard, the compensated dollar plan will be able to take care of it. in fact, if we could find a more absolute standard than the tabular standard and could accurately measure it in statistics, precisely the same method of compensating the dollar could be employed to keep the dollar in tune with that standard as with the tabular standard. the only difference would be that the guiding index would be different. the plan for compensating the dollar does not in essence consist in selecting the multiple or any other standard. it consists in a method of making the monetary unit conform to any standard chosen. but there is convincing evidence that the multiple standard is usually near enough to the ideal for all practical purposes and infinitely nearer than the gold standard. _while individual goods may vary greatly in absolute value, the general mass of goods will vary comparatively little and seldom._ there may be some absolute change in the general mass of commodities, but it must usually be extremely small in comparison with changes in any one commodity like gold. it is clear from the theory of chances that this must be the case. the odds are hundreds to one that the variations in absolute value in several hundred commodities will offset each other to a large degree. we very seldom have world feasts or world famines. if the corn crop is short in some places it is abundant in others. if it is short everywhere the crop of wheat or barley or something else is practically certain not to be. we cannot expect that everything will usually move in one and the same direction. if there is a war in japan, it is not likely that there will also be a war in india. a world war or even anything as near to a world war as the present conflict in europe is a most unusual thing. a standard composed of several hundred commodities must therefore be, in all human probability, more stable than a standard based, as is our present gold standard, on one commodity. bimetallists made much of this point when claiming that two metals joined together were steadier than one, just as two tipsy men walk more steadily arm in arm than separately. still more steady is the average of a hundred commodities just as a line of a hundred tipsy men abreast and holding each other's arms will march even more steadily than two. this is because it is wholly unlikely that every man in the line will lurch in the same direction at the same instant. the lurching of some in one direction can always be depended on to offset almost entirely the lurching of others in the other direction. this theory of probabilities in its application to the present rise of prices is, i believe, borne out by the facts. after a careful study of all available evidence, i am convinced that the present general rise in prices beginning in , cannot be traced to any simultaneous scarcity of goods. i refer the reader to _why is the dollar shrinking?_ where i have given the summary of the evidence. i think the facts are equally clear that the great fall in prices from to can not be laid, wholly at least, to the increasing plentifulness of goods. finally, even if we could measure and apply an absolute standard, it is doubtful if, in practice, it would be of any more service in regulating contracts, than a multiple standard. for after all, as i have tried to show in _appreciation and interest_ what we want in a contract is something that is _dependable_ rather than something that is absolutely constant; and the multiple standard gives dependability in terms of the ordinary staple necessities of life. if we could know that the dollar always means a definite collection of goods, we could know that the bondholder or the salaried man who gets a stated income of $ a month, would have the same command over actual goods, and such knowledge would be of great service. this whole subject i have discussed in chapter x of my _purchasing power of money_. . "_it would be inadequate to check rapid and large changes of the price level._" owing to the narrow limits, _e. g._, per cent. as stated, imposed on the monthly adjustments, it is quite true that a sudden and strong tendency of prices to rise or fall could not be completely checked. if prices were to rise per cent. per annum and the plan permitted no more rapid shift than per cent. per annum, this would leave only per cent. per annum uncorrected, or only one-fourth the rate at which prices would rise if wholly uncorrected. but half (or in this illustration three-quarters of) a loaf is better than no bread. moreover, such extreme cases are rare and when they occur there is all the keener need for mitigation even if it be somewhat inadequate. ultimately, of course, after the rapid spurt has abated, the counterpoise, in its relentless pursuit, would overtake the escaped price level and bring it back to par. . "_the correction always comes too late._" it is objected that the plan does not make any correction until actual deviation has occurred, and so the remedy always lags behind the disease. it is true that the corrections follow the deviations. they could not precede them unless we foreknew what the deviations were to be; and we could not afford to entrust the work of guessing to government officials. in this respect, as in others, the plan does not attain perfection; yet it is infinitely better than the present plan, which leaves the standard haphazard. it is also pointed out that after the correction is applied it may happen that prices will take the opposite turn, in which case the remedy actually aggravates the disease. but, taking the extremely fitful course of prices since and correcting it according to the plan, month by month, as shown in the _quarterly journal of economics_ diagram, we find that in nine cases out of ten the opposite is true. even in the few remaining cases the deflections were very slight and were, of course, soon corrected immediately after the following adjustments. if the corrections are sufficiently frequent, it is impossible not to maintain, in general, an extremely steady adjustment. when steering an automobile the chauffeur can only correct the deviation from its intended course _after_ the deviation has occurred; yet, by making these corrections sufficiently frequent, he can keep his course so steady that the aberrations are scarcely perceptible. there seems no reason why the monetary automobile cannot be driven almost equally straight. . "_the plan assumes that a per cent. fluctuation can be exactly corrected by a per cent. adjustment of the dollar's weight._" owing, i fear, to my own fault of phrasing, i have found that several people have acquired the mistaken impression that the plan requires, to be made at each adjustment, an increase of per cent. in the weight of the dollar for every per cent. _increase_ of the index number since the last adjustment; whereas actually the plan requires, to be made at each adjustment, an increase of per cent. in the weight of the dollar for every per cent. excess of the index _above par_ then outstanding. from this mistaken premise it has naturally been inferred that, in order that the plan should work correctly, a per cent. loading of the dollar would always have to exactly correct a per cent. change in the index number, and, very properly, the critics doubted the truth of this. but since the premise was mistaken the objection based on it disappears. . "_the plan would be sure to create dissatisfaction and quarrelling._" this fear is, i believe, wholly imaginary. there would be some ground for it if the proposal were to adopt the old "tabular standard" by correcting money payments through the addition to or subtraction from the debt of a certain number of dollars. under these circumstances the extra dollars paid or the dollars from which the debtors were excused would stand out definitely and would be a subject for debate and dispute, but if the tabular standard were merged in the actual money of the country the ordinary debtor and creditor would be as unaware of how his interests had been affected as he is now unaware of how his interests are affected by gold appreciation. it would still be true that to the ordinary man "a dollar is a dollar." if we cannot get the ordinary man to-day really excited over the fact that his monetary standard has affected him to the tune of some per cent. of his principal of fifteen years ago, it does not seem likely that he could get excited because some one tells him that the index number used in the "compensated dollar" plan robbed him of or per cent. as compared with some other possible system. the debtor class favored in large measure bimetallism, or free silver, as a means of helping them pay debts, while the creditor class opposed it. but this was a question of changing the standard, not of keeping it unchanged. if it were proposed to shorten the yardstick, undoubtedly many who would profit in the outstanding contracts would and ought to oppose it. but there is and can be no contest over efforts to keep the yardstick from changing. . "_it has never been tried._" true; but the proposal is, in mechanism, almost identical with the gold exchange device introduced by great britain to maintain the indian currency at par with gold. the system here proposed would really be to-day less of an innovation in principle than was the indian system when introduced and developed between and , while the evils it would correct are similar to, but vastly greater than, the evils for which the indian system was devised. the truth is, unless i am greatly mistaken, that the last named is the only strong objection to the plan in the minds of most of its critics; it is the constitutional objection to any change of the _status quo_. it is simply the temperamental opposition to anything new. as bunty well says in the play, "anything new is scandalous." the conservative temperament dislikes experiment because it is experiment. accordingly it is not surprising that we find many of the objectors saying, "let well enough alone," "let us 'rather bear those ills we have than fly to others that we know not of.'" these people seldom give assent to untried experiments; yet after the new plan has been tried and established they invariably turn about and become its most staunch supporters. this fact has been often illustrated in our monetary and banking system. nothing short of the shock of civil war was required to divert us from a state system of banking to a national one. in spite of the intolerable evils of the former, it was easy to find many arguments in its favor. after the change these arguments never reappeared. the same was true of slavery. but conservatism always yields gradually to pressure. its resistance is strong but has no resiliency. it is not like the resistance of a steel spring (which, when pushed in one direction, will bend back), but a mass of dough or putty which, though it resists impact strongly, yet when it is moved stays inert and does not return. under these circumstances, even if progress is made an inch at a time, it seems to me worth while to try to make it. the two steps first necessary have been taken, namely, the perfecting of the plan and the running the gauntlet of criticism. it is not impossible, judging from the many and authoritative endorsements of the plan, that it may be pushed rapidly toward realization. all depends on the opening up of opportunities. after the present war, for instance, it may be that "internationalism" will come into a new vogue and that some special opportunity will be afforded to bring the plan with its endorsements to the serious attention of the world's administrative officials. * * * * * [ ]it must be admitted at the outset that the plan, if carried out with iron consistency for a considerable stretch of time, would achieve the result mainly had in view--the prevention of a long-continued and considerable rise in prices. it might not achieve that result as smoothly and evenly as its proposer expects; and the qualifications just stated--that it must be carried out unflinchingly for a long period--should be borne in mind. no one who holds to the doctrine that the general range of prices is determined by the relation between the quantity of commodities and the volume of the circulating medium, and that the volume of the circulating medium in the end depends, _ceteris paribus_, on the amount of coined money, can do otherwise than admit the logical soundness of the scheme. he who maintains that the rise in prices during the last fifteen years is due to the greater gold supply must admit that a restriction of the monetary supply of gold will check the rise. the plan proposed is in essence one for a regulation in the monetary supply of gold. its effects must be the same in kind as those of a cessation of free coinage, with an apportioned limited coinage.... the question arises whether it would be feasible for one country alone to adopt the plan. it would be feasible, in the same sense that it would be feasible for all countries together to adopt it. one country alone, carrying it out with unflinching consistency, might secure the desired result, subject to the qualifications which have already been indicated. but that any one country would in fact adopt it alone seems to me in the highest degree improbable. consider for a moment the mode in which the scheme would work in detail if adopted by a single country. though the immediate effect upon general prices within the country would be unpredictable, the effect upon certain kinds of prices would be certain, predictable, almost instantaneous. exported commodities would feel the effect at once. their prices are determined, to use the current expression, by the foreign market. it would be more accurate to say that their prices are determined by the total market, domestic as well as foreign. but it is clear that their prices must be the same (due allowance being made for transportation charges and the like) within the country as without. now the immediate effect of a seigniorage would be, as professor fisher points out, a readjustment of the par of foreign exchange. the exporter would find the par of exchange lessened, and in terms of domestic money (compensated dollars) he would receive less than he got before. all commodities of export would fall in price at once, or fail to rise, to the extent of the seigniorage. other commodities probably would be unaffected for the moment. in the long run, no doubt, these other commodities (we may call them domestic commodities) would also be affected. but, to repeat, the rapidity and extent of the change in general prices is impossible of prediction. the exporters, none the less, would feel an immediate and unmistakable effect. beyond question they would be as hotly indignant with the plan as if an excise tax had been imposed on their commodities without any possibility of their raising the price of their products. consider for a moment what would be the state of mind in our cotton-exporting south. is it to be supposed that any set of legislators could resist the political pressure from the various exporting sections, and carry out the scheme unflinchingly? can we imagine a congressman telling his constituents that they need only wait a while, until all money incomes and all prices had adjusted themselves to the new conditions? that then nobody would be worse off or better off than before? to ask this sort of question is to answer it. the very proposal of the scheme in the halls of congress would invite the hot opposition of the exporting sections and industries. its immediate consequences for them would be seen quickly enough, and no promise of ultimate adjustment would lessen their hostility.... professor fisher has predicted that prices will rise further. he is disposed to believe that there will be not only a rise, but that there will be a considerable rise. i hesitate very greatly to enter the domain of prediction. i am inclined to believe that the rise in prices will not cease for the next decade; but whether it will be considerable or moderate or negligible in extent, i should not venture to say. predictions concerning the output from the mines are to be taken with the greatest caution. we all recall the predictions which suess made in . the distinguished geologist believed that the prospects of an increased production of gold were of the slightest, and that the world must fall back on the use of both metals. how different the course of events has been from that which he predicted! there are those who believe that the output of gold, so far from continuing to increase, has reached, or is approaching, its maximum. for myself, i should not be surprised if there were a cessation in growth, and should certainly be surprised if there were not a relaxation in the rate of growth. further: it deserves to be borne in mind that the total supply of the precious metals is now so much greater than it was twenty years ago that the same annual increment will have much less effect on prices. this is the familiar consequence of the durability of the precious metals.... finally, a circumstance should be borne in mind which bears not only upon the intrinsic desirability of a regulative plan, but also upon the attitude of the general public and the consequent political and industrial possibilities. economists are familiar with the difference between the phrase which they use in describing the new conditions, and that which is current in popular discussion. the economists speak of the "rise in prices"; the general public speaks of the "high cost of living." the difference in phraseology is not due simply to variation of the point of view. it results from the fact that very different phenomena are had in mind by the two sets of persons. the economist is thinking and reasoning about the change which has been of special interest for him--the general rise in prices. the man on the street is thinking about the exceptional rise in the prices of one important set of commodities. any one who will examine with care the index numbers of our bureau of labor will see what a marked rise, much beyond that of the general index number, has appeared in the prices of farm products, and especially in the prices of meat. that special advance has taken place within the last three or four years. it is precisely within this period that general attention has been turned to rising prices. what the public has had chiefly in mind has been the commodities of wide consumption. this, i believe, is the main cause of labor unrest.... whatever be the particular causes that have led to the high prices of food, economists agree that these causes will operate irrespective of any compensated dollar plan. this would simply serve, at its best, to keep general prices where they are, leaving each particular group of commodities subject to its own particular set of causes. if the compensated dollar plan were to be adopted, and if the prices of food should continue to mount, there would be disappointment for the general public, but nothing to surprise the economist. and conversely, it is entirely possible that the rise in the cost of living, that is, the special rise in the prices of foodstuffs, will reach its end irrespective of any monetary change whatever. the general rise in prices and money incomes ... is not unwelcome to the great majority of people. its incidental consequences are perceived and debated chiefly by the economists; such as the effects on the creditor class and the slowness of so-called fixed incomes to rise correspondingly. the general public is concerned chiefly with the conspicuous rise in the prices of foodstuffs, which is ascribable to causes very different from those that bring the general rise, and can be reached only by remedies very different.... footnotes: [ ] adapted from irving fisher, _objections to a compensated dollar answered_, reprint from _the american economic review_, vol. iv, no. , december, . [ ] f. w. taussig, _the plan for a compensated dollar_, _the quarterly journal of economics_, vol. , may, , pp. - . chapter xiv monetary systems of foreign countries england[ ] [ ]the monetary unit is the _pound_, or _sovereign_, equal to $ . , divided into _shillings_ of _pence_ each, each penny equal to _farthings_. originally the pound was a troy pound of silver, . fine. under the law of gold was made the standard and silver subsidiary. the coinage of gold is free, and to avoid delay the bank of england is required to buy all gold and pay for the same at once at the [minimum] rate of £ _s._ _d._ per ounce, a [maximum] charge of - / _d._ being imposed for the accommodation. silver is only coined on government account and the coinage ratio is . to one. they have the gold _sovereign_ (containing . grains pure gold), the unit of their currency, also _half-sovereigns_, _crowns_ ( _s._), _double florins_, ( _s._), _half-crowns_, _florins_, _shillings_, _six_ and _three pence_ pieces, _four pence_ (groat), _two pence_ and _penny_, all in silver, also _penny_, _half-penny_, and _farthing_ in bronze. a few english banks, operating under old charters, issue notes to a limited extent, which circulate as money. otherwise the paper currency of england and wales consists wholly of notes of the bank of england.... extraordinary measures were resorted to by the british government in the early stages of the european war of ; with the close of the war currency conditions will doubtless go back to normal, as described above. the government, also, under date of august , authorized an issue of currency notes, in denominations of £ and shillings.... these notes, which were first issued to the public august , were deposited with the bank of england for account of the british government, as the practical way of getting them into use; they were used for various purposes, including advances to banks at per cent. per annum, up to per cent. of their deposits; the volume outstanding december , , was £ , , ; the amount outstanding on june , , was £ , , . these notes were protected in part by securities and by an increasingly large gold reserve, exceeding per cent. in march, . postal orders were made legal tender and so remained until february , .... canada in the legislature of upper and lower canada formally adopted dollars and cents as the money in which public accounts should be kept. the confederation in adopted the same for the dominion, retaining, however, the sovereign. in the currency act prescribed the same for all accounts, providing also that the gold coins of the united states of america should be legal tender along with british sovereigns, the latter at a rating of $ . / . the silver and bronze tokens (including pieces of , , , , , and cents) had been supplied from the london mint, or from birmingham on its behalf, from to . after the confederation no more coins were issued for the separate provinces. the twenty-cent piece (though still retained by newfoundland) has not been struck for canada since . from january , , the whole supply of british and canadian coins was undertaken by the ottawa mint. by the ottawa mint act the dominion parliament undertook the support of a branch of the royal mint in ottawa, the administration to be in the hands of the british treasury. this system (the same as that of the australian branch mints, sydney, melbourne, perth) was preferred to the plan of an independent dominion mint because that was the only way of procuring the privilege of coining british sovereigns. a royal proclamation published on november , , duly established a branch of the royal mint at ottawa, and authorized the coinage of british sterling gold coins from dies prepared in england, such coins to rank with those struck in london. the depositor of gold bullion has the right to demand british sovereigns in exchange.... the british sovereign (or pound) is legal tender in canada at $ . . the american gold coins are also legal tender. canadian silver coins are parts fine, and have a slightly less amount of fine silver than united states of america silver coins of similar circulating values. the dollar, though sanctioned, has not yet been struck. paper currency consists of legal-tender dominion notes and bank-notes issued against the credit of the banks; there were at the end of , banks, with , branches in the dominion, in newfoundland and in the united states and other foreign countries.... on july , , just before the war, dominion notes were issuable without limit, providing the amount over $ , , was covered by gold. the volume at that time was $ , , . and the gold held amounted to $ , , . . as a consequence of the war the limit beyond which dominion notes may not ordinarily be issued without being entirely covered by gold was by an act passed in august increased from $ , , to $ , , .... british colonies the british west indies, as also guiana, make british gold legal tender. united states gold also circulates freely. there are a few banks with limited note-issuing power, and minor coins are similar to those of england. there is a growing use of united states currency. british honduras has a dollar unit, identical with that of the united states. british india has ... adopted the gold [-exchange] standard and india has for some years been largely absorbing gold; the _pound_ is the unit--the metallic currency, mainly silver, is maintained at parity with gold by an arbitrary valuation or rate of exchange. the principal coin is the _rupee_, equal to $ . ; by a fixed government rating rupees equal £ . there is a gold [-exchange] standard reserve for india, amounting, march , , to £ , , , about one-half held in india and one-half in london; it consists of gold and investments.... paper money is issued only by the government and is covered by gold, silver largely, and securities to some extent. the straits settlements have a _dollar_ currency, divided into _cents_; the value of the dollar was fixed by the government at _s._ _d._, on january , , and has since been maintained at approximately that rate, a gold [-exchange] standard reserve being accumulated for that purpose. the system is copied after that of india. hong kong, silver standard, is the exchange point between gold and silver countries, and hence important. the british _dollar_ of grains is the principal coin. it fluctuates in value with the value of silver bullion. australia and new zealand have the british system of banking. there are many banks, some with british charters, and many branches; they issue notes covered by gold. gold in large quantities has been produced in these states since . british africa and other minor eastern possessions have the british system, modified in various respects. egypt having recently been formally annexed by great britain, her monetary system will naturally be closely identified with that of england in the future. the english sovereign has been for many years the gold coin of common use. latin union the latin union consists of france, italy, belgium, switzerland and greece; they are bimetallic, both gold and silver being full legal tender, and the coinage ratio being - / to ; they have identical systems, and formed a union to maintain the parity of silver and gold, at the above ratio, by accepting each other's silver coins; while their systems are bimetallic in law, silver is now coined only in small denominations and on government account. the general adoption of the gold standard by other countries has embarrassed the efforts of the union to preserve the parity and also the interchangeability of silver coins between these nations. france france has the _franc_, equal to $ . , as the monetary unit; the principal gold coin is the _louis_, equal to francs. the paper currency of france is issued wholly by the bank of france, a private corporation, privately owned, but whose chief officers are appointed by the government, which thereby obtains a general control of policy and administration; the maximum amount of note-issue is fixed by law, arbitrarily, and by occasional increase is kept well ahead of the country's necessities; no fixed legal reserve is required, but the total note-issue must be covered by gold, silver, securities, and commercial paper; as a matter of fact it carries very large metallic reserves, and since it may lawfully pay its obligations in either gold or silver, it can always conserve its gold holdings by requiring a premium for the same, or withhold gold payment altogether. it has over branches and the same rate of discount obtains in all branches on the same day; it thus regulates and controls the interest rate throughout france, in the interest of uniformity and fairness; it may do business with banks or individuals and has many very small loans; its notes are a legal tender; the power to issue currency is one of its chief elements of banking power.... belgium belgium is bimetallic and its coins are the same as those of france and have unlimited lawful currency; bank-notes are issued only by one bank, privately owned; the government receives a share of the dividends in excess of per cent., and imposes a tax upon the note-issues; demand liabilities, including notes, must be protected by a coin reserve of - / per cent. and the notes must be covered by cash, commercial paper and securities. italy italy has the _lira_, equal to $ . , and divided into _centesimi_; her coins correspond to those of france; the bank of italy largely, and two other banks to a lesser extent, issue notes against their credit, limited, however, to three times their capital, unless covered by gold; the issue may be increased, but comes in for a tax of per cent. per annum and must be protected by a - / per cent. reserve in coin and foreign exchange.... switzerland switzerland's coinage system duplicates that of france, and her federal bank is very similar to the bank of france.... greece greece ... has for its monetary unit the _drachma_, equal to $ . . her coinage follows the latin union agreement. paper currency is issued both by the government and by banks, and both are depreciated. greece had to resort to emergency measures during the balkan war, which may have an influence upon her currency for some time. spain spain ... has the _peseta_, equal to $ . united states, as her unit. the bank of spain has the sole right to issue notes, which may equal five times its capital and must be protected by a per cent. coin reserve. gold commands a premium. silver is coined only on government account.... germany germany, gold standard, has for her currency unit the _mark_, of _pfennig_, equal to $ . ; the -mark piece contains the same amount of pure silver as the -franc piece and two united states half-dollars.... silver is legal tender to the amount of marks. the coins for her colonies are varied to suit local needs. austria-hungary austria-hungary, gold standard, has as its unit the _krone_, equal to $ . ; -krone and -krone pieces are coined in gold, also gold ducats, worth $ . ; silver coins are of various fineness.... portugal the portuguese government, by decree of may , , adopted a new monetary system and the coins will be placed in circulation as soon as possible. the unit of the system, excepting for her possessions in india, is the gold _escudo_,... equal to $ . american gold. the escudo is divided into equal parts called _centavos_.... multiples are , , and escudos. divisions of the escudo are of silver, with values of , , and centavos; subsidiary coins consist of bronze and nickel pieces. her currency is not maintained at a parity with gold. netherlands ... the unit is the _florin_ or _guilder_ of cents, equal to $ . . the -florin piece is the principal gold coin; the _ryksdaalder_ ( - / florins), the florin and half-florin in silver are legal tender, as well as all gold coins; silver is maintained at parity with gold by law; coinage of silver is only on government account; paper money is issued by a central bank and per cent. metallic (gold and silver) reserve is required against deposits as well as notes; the balance of the notes are covered by negotiable instruments. the central bank was organized in . banking in the netherlands is excellently managed. sweden--norway--denmark (scandinavian union) these have the gold standard and have for their unit the _krone_, equal to $ . united states currency; their subsidiary silver has various fineness; paper currency of sweden is issued by the royal bank, owned by the government; notes are legal tender and may be issued to a fixed amount in excess of gold on hand or in foreign banks, but must at all times have gold to the extent of at least , , _kroner_. norway has a single bank of issue, controlled by the state, which owns a majority of the stock; notes are legal tender and may be issued to twice the amount of gold on hand and in foreign banks. denmark's paper money is issued by a privately owned bank, but under strict control by the government; the notes are legal tender and may be issued to a sum , , kroner in excess of the gold on hand. russia russia is on a gold basis and has for its unit the _ruble_, of _kopecks_, equal to $ . in united states currency; the silver coins in common use are the ruble, one-half and one-fourth ruble; paper money is issued by the imperial bank, which is owned by the government and managed as part of its finance department; the law requires the coin reserve to equal two-thirds of the note issue.... japan japan maintains the gold standard and its unit is the _yen_, equal to $ . ; the yen is divided into _sen_, the sen into _rin_. the yen equals . grains of pure gold. the bank of japan may issue notes to the extent of $ , , upon securities, any amount upon specie, and also may issue further sums in excess of specie, subject to a tax of per cent. the stock of the bank is all privately owned. japan first copied the national banking system of the united states and after trial abandoned the same for a central bank. she has managed her finances and her banking with wonderful ability and great success. besides the bank of japan, there are many strong private banks, notably the yokohama specie bank. china china, silver basis, had for its unit the _tael_, divided into _cash_; there are said to be sixteen different kinds of tael in the different states of china; the most valuable is the "haikwan," or "_customs tael_," the one in which customs dues are reckoned, and this equalled $ . united states currency, october , . the cash is of base metal, with a square hole punched in the centre and is worth less than a mill in our currency. in the last years of the empire a new system of coinage was established and since continued by the republic. the unit is the _yuan_ of silver, worth $ . , but varies with the price of silver; one-half, one-fifth, and one-tenth yuan are also coined in silver and smaller coins in copper and brass.... philippines the unit of value is the _peso_, equal to $ . in united states currency. the fiscal affairs are administered by the united states and the currency is safe and maintained on [essentially] a gold basis. argentina at a time when the cultivation and development of trade relations with south america seem most alluring, we find a principal embarrassment in the currency and credit conditions which obtain in most south american states, but argentina, one of the most favored of south american states, has a stable and sound currency system. her unit is the _peso_, of _centavos_. the gold peso is equal to $ . in united states money. in the government took measures to acquire gold and fixed the relation of paper to gold at . per cent., and it has since been maintained at that level without fluctuation. this made the paper peso equal to about $ . gold. they have a very large gold reserve in their _caja de conversion_, , , pesos gold, which protects the paper money and gives it stability. gold payments were suspended temporarily at the commencement of the european war ( ), but paper money seems to have remained at par.... brazil brazil was formerly a colony of portugal, and naturally copies the parent country in her currency system. her unit is the _milreis_, of _reis_. nominally the gold standard prevails, but depreciated paper is the currency of her commerce. the milreis contains . grains of pure gold and is worth in united states currency $ . . in the government assumed the sole power to issue paper money, and strove to bring the same to a parity with gold; the arbitrary valuation put upon the milreis by the government was _d._ or $ . . on december , , the value of a milreis was raised to _d._ the government accumulated a conversion fund, understood to be $ , , to $ , , , but owing to crises at home and abroad it has not yet been able to make gold and paper notes interconvertible. brazil possesses an enormous area, and is wonderfully rich in undeveloped resources. her coffee and rubber are especially valuable and should take care of her international trade balances. in the near future her currency should become stable and free from fluctuation. brazilians receive important service from foreign banks and bankers. chili chili has the gold standard, but her paper currency is not maintained at a parity with gold; her unit is the _peso_, of _centavos_, of the value of _d._... footnotes: [ ] the following table, from _the monetary systems of the principal countries of the world_, compiled in the office of the director of the mint, washington, , gives the weight, fineness, etc., of the coins of great britain: gold -----------------+-------+------------+-------+--------+--------+-------- | | | | | pure |value in denominations. |weight.| fineness. | fine | weight.|gold or | united | | |weight.| |silver. |states |grams. |thousandths.|grams. |grains. |grains. | money. -----------------+-------+------------+-------+--------+--------+-------- pounds | . | - / | . | . | . |$ . pounds | . | - / | . | . | . | . sovereign | . | - / | . | . | . | . half sovereign | . | - / | . | . | . | . -----------------+-------+------------+-------+--------+--------+-------- silver -----------------+-------+------------+-------+--------+--------+-------- half crown | . | | . | . | . | $ . florin | . | | . | . | . | . shilling | . | | . | . | . | . sixpence | . | | . | . | . | . fourpence (groat)| . | | . | . | . | . threepence | . | | . | . | . | . twopence | . | | . | . | . | . penny | . | | . | . | . | . -----------------+-------+------------+-------+--------+--------+-------- [ ] a. barton hepburn, _a history of currency in the united states_, pp. - . the macmillan company. new york. . chapter xv the nature and functions of trust companies [ ]the trust company supplements the bank. through a long process of evolution the bank has developed as a means of facilitating the exchange of commodities. the trust company is a still further step in the same process, and, in a highly organized society, it meets needs which the bank is not able to supply. in a new community the general store forms the centre of the business life of the place. with growth and increasing trade, the private banker sees room for the profitable employment of his funds. the state or national bank meets the needs of further growth. success and the accumulation of wealth pave the way for the trust company. the bank is organized primarily to serve the needs of active commercial life; the trust company handles funds in less active circulation. it is customary for the courts to designate or approve certain trust companies as depositories for funds paid into court, and the effect of such designation or approval would be to relieve executors, trustees, or others acting in a fiduciary capacity and depositing with these companies from liability for loss through their failure. a person charged with due care in the selection of a depository could not be held to have been wanting in such care in choosing as a depository a trust company which the court has itself approved. the powers of trust companies vary in different states, and when they are created by special legislation, local companies are found with different charter privileges. the capital and surplus of these institutions are liable for their acts in fiduciary capacities, and in some states they are required to deposit with one of the state departments a fund as a special guarantee. the liability assumed is generally accepted by the courts in lieu of the bonds which individuals acting in similar capacities are required to give. the development of trust companies in the united states has been remarkably rapid. since , when the first legal authority was given for the exercise by corporations of fiduciary powers, they have steadily grown in number until there are now more than fifteen hundred, distributed as follows: alabama arizona arkansas california colorado connecticut delaware district of columbia florida georgia idaho illinois indiana iowa kansas kentucky louisiana maine maryland massachusetts michigan minnesota mississippi missouri montana nebraska nevada new hampshire new jersey new mexico new york north carolina north dakota ohio oklahoma oregon pennsylvania rhode island south carolina south dakota tennessee texas utah vermont virginia washington west virginia wisconsin wyoming hawaii ---- total their business in all departments has shown a steady increase, and the trust companies of the united states to-day carry deposits amounting to over $ , , , . net deposits in the national banks aggregate $ , , , . in some states commercial banking and trust powers are exercised by the same companies. in such cases, separate departments are maintained for the various classes of business. another method is for the same individuals to organize a national bank and a trust company, the former under national and the latter under state laws. the securities company or trust company organized under state laws and controlled by a national bank with the stock interest in the former distributed among the owners of the stock of the bank and evidenced by indorsement on its certificates is still another expedient which has been resorted to in order to enable a closely affiliated and controlled organization to exercise legitimate functions which are, however, outside the province of a national bank. the earning power of trust companies has equalled and even exceeded that of the banks, and the stock of those companies which are well established and doing a flourishing business sells at such a premium that investment in it at its market value gives a very low return. trust company failures have been few and far between, and where they have occurred they can be traced to a disregard of sound banking principles and to the assumption of unwarranted risks. even in the case of companies which have failed there is no record of any impairment of trust funds, whatever loss there was having been borne by the stockholders and, to a less degree, by the depositors. this fact, the result of the absolute separation of trust assets from assets belonging to the company, is the strongest argument for the employment of trust companies in fiduciary capacities, and explains their rapid growth in popular favor. the literature put out by these institutions invariably recites the advantages to be gained by dealing with them instead of with individuals. the following is a good example of such reasoning: the advantages of a trust company as trustee a trust company is preferable to individual trustees, because it possesses every quality of desirability which the individual lacks, to wit:-- ( ) its permanency: it does not die. ( ) it does not go abroad. ( ) it does not become insane. ( ) it does not imperil the trust by failure or dishonesty. ( ) its experience and judgment in trust matters are beyond dispute. ( ) it never neglects its work or hands it over to untrustworthy people. ( ) it does not refuse to act from caprice or on the ground of inexperience. ( ) it is invariably on hand during business hours and can be consulted at all times. ( ) its wide experience of trust business and trust securities is invaluable to the estate. ( ) it is absolutely confidential. ( ) it has no sympathies or antipathies and no politics. ( ) it can be relied upon to act up to its instructions. ( ) it does not resign. ( ) all new investments of value suitable for trust estates are offered in the first instance to trust companies, and in that way it has a choice of valuable security; and as its purchases are on a scale of magnitude, it can usually buy at a rate which is lower than that at which the individual trustee can purchase. the most common objection to the appointment of corporate trustees is thus stated by augustus peabody loring, esq.: the trust companies, which have of late years become so numerous, to a considerable extent do away with the element of personal risk attaching to an individual trustee; but they lack the advantages of personal management. these companies sometimes fail from improper management as utterly as individuals do, and as a rule the lack of personal management results in securing the minimum return only on the amount invested, and lacks the great advantages often secured by the able personal oversight of individual trustees. the question, after all, comes back to the personal qualifications of corporate officers and individuals. if the former are less capable than the latter, the fault is with the particular company--not the system, and if interest returns are sometimes less under corporate management, this fact is more than equalized by the added safety to the corpus of the estate. a "trustee company" has been suggested as a proper title for the company doing a legitimate trust business, and is the name used in australia and in new zealand. in some states the use of the word "trust" in corporate titles is now regulated by law. confusion has arisen in the popular mind between the trust company and the trusts or industrial combinations. the usual functions of a trust company are: banking in a more or less limited form, execution of corporate trusts, execution of individual trusts, care of securities and valuables. in addition, other functions are sometimes exercised, such as life, title, and fidelity insurance, and the business of becoming surety. the earlier companies in the united states were chartered to manage individual estates only and to act in certain fiduciary capacities; the recent development of the trust company has been in the direction of banking functions and corporate trust business. it is worthy to note that the life insurance companies which originally secured trust powers have, with but few exceptions, given up their life insurance business, and that most of the fidelity insurance and surety business is given over to companies which now make a specialty of such risks. the fact is being recognized that the assumption of vast risks contingent on future occurrences is not compatible with the absolute security which is essential in the transaction of legitimate trust business. banking the banking functions of trust companies may include any or all of the following: the receipt of money deposits payable on demand and subject to check, or payable at a fixed date, or according to special agreement. interest is usually allowed on all deposits above a fixed maximum amount or on the total sum. money advances secured by the hypothecation of stocks, bonds, life insurance policies, bonds and mortgages, or other personal property. real estate loans, secured by bond and mortgage. it is customary to loan not over two-thirds of the value of improved property; when the property is unimproved, not more than half. discounting paper is engaged in principally by companies transacting a commercial banking business. the purchase of unsecured paper is permitted in some states where discounting is not allowed. the purchase and sale of securities. trust companies sometimes guarantee issues of bonds, or at least set their stamp of approval upon them. the issue or guarantee of letters of credit, and the transaction of a foreign exchange business. the care of savings deposits. for this purpose a separate department is usually maintained. corporate trusts among the most important functions of a trust company are those relative to the business of other corporations: of late years the trust companies in the eastern cities have been selected as trustees instead of individuals whenever the law of the state where the property was situated allowed such selection. trust companies have manifold advantages over individuals in such a relationship; they do not die; the large amount of financial business which they daily transact provides them with the machinery for such purposes; while their well-known names stand as evidence to the purchasing public that at least the necessary formalities have been complied with. beyond that responsibility the trustees of corporation mortgages usually assume none. in recent years the trust companies have shown a tendency, when acting as mortgage trustees, to recognize a greater moral responsibility than they at first were willing to bear. trust companies did not, of course, intend to appear as in any way guaranteeing the bonds to which they certified, though that seems often to have been the erroneous opinion of the unthinking; but trustees now acknowledge themselves bound within the limits of the mortgage to use their influence to protect the interest of the bondholders. a trust company which should now allow the issue of unsecured bonds because of some glaring defect in the language of the mortgage, would not longer be morally excused by financial opinion, though perhaps held technically innocent.[ ] as trustee under corporate mortgages and trust deeds, the trust company acts for the bondholders. it is customary for it to authenticate each bond issued subject to the provisions of the mortgage, to represent the bondholders in case of default, and to exercise such other functions as may be provided in the mortgage. a generation ago it was customary for a railroad to name one or more individuals as trustees of the mortgages executed to secure bond issues. the development of trust companies and their manifest advantages over individuals in such a capacity has resulted in their absorbing almost all this business. trust companies are now generally appointed as trustees in corporation mortgages, and are also often named to succeed individuals who have died or resigned. the appointment is one of the most important and far reaching which the trust company can accept. its name and reputation serve as an assurance that the transaction is a regular one, and entered into in good faith. although the modern corporation mortgage is usually explicit in its terms to the effect that the trustee in no way guarantees the value of the security and assumes no liability except for its own negligence, yet the intimate connection between the trustee and the borrowing corporation in the minds of investors makes it necessary that care be taken not to assume trusteeships which may lead to a wrong use of the name and credit of the trust company. as trustee under mortgages securing bond issues, the title to the mortgaged property is vested in the trust company for the benefit of the security holders. the corporation owning the mortgaged property retains physical possession of it so long as the terms of the obligation are complied with, except in the case of securities pledged, which are usually lodged with the trustee. in case of default, however, it devolves upon the trustee to protect the interests of the bondholders, and this may necessitate the foreclosure of the mortgage and sale of the property. as fiscal agent it dispenses coupon and interest payments on bond issues, and dividends on stock. it receives sums set aside as sinking funds to provide for the retirement of obligations at maturity, or when bonds are subject to redemption, draws the specified amount by lot and pays the principal. as registrar the trust company authenticates certificates of stock and bonds in order to prevent an over-issue, and to reduce the chance of loss or theft. as transfer agent, the company attends to perfecting transfers of ownership for stock and bond issues or parts thereof. the new york stock exchange, like most other stock exchanges, in its constitution requires that all active listed stocks must be registered. this exchange also requires that a trust company or other agency shall not at the same time act as registrar and transfer agent of the same corporation. in the popular mind, and even in the minds of some trust company officers, the difference between the duties of the two positions has been more or less confused. both have been created to safeguard and facilitate the passing of title to shares of stock, but the duties of a transfer agent and a registrar are not synonymous; they are distinctive. one is called upon to examine and give clear titles to property transfers, and the other is merely to record such transfers. as manager of underwriting syndicates, the trust company issues the prospectus and markets the securities of corporations which are being launched, or of established companies which are putting out new securities. in railroad and other reorganizations, the trust company takes a prominent part, acting both as a depositary for, and as a representative of, the committees which formulate and execute the plans of reorganization. its officers often have a large share in the preparation of such plans. as assignee and receiver, the trust company acts in the same capacity for corporations as for individuals and firms or partnerships, assisting in winding up insolvent businesses and in conducting embarrassed ones. individual trusts the execution of individual trusts is the function originally assumed by trust companies. the various other forms of business which are now engaged in, have, with the exception of life insurance, been later developments of the trust company idea. the earliest power granted these companies was to receive moneys or other property, real or personal, in trust. the trust company now also acts as executor and administrator of the estates of decedents. as executor appointed by the will of a decedent, it takes out letters testamentary upon probate of the will, advertises, files inventory and appraisement, pays debts, collects claims, makes the requisite accounting to the probate or orphans' court, and makes distribution of the estate in accordance with the terms of the will and the court's decree. as administrator acting under appointment of the register of wills or probate court, it performs similar duties, distributing the estate in accordance with decedent's will if there is one, or if there is none, in accordance with the intestate laws of the state, which specify the order of succession and distributive shares in the case of estates of decedents leaving no wills. there are different kinds of administrators, in any of which capacities a trust company may be called upon to act. as trustee under will, the trust company carries out the provisions of the will, investing and managing the estate or particular fund in accordance with the directions of the testator. as such it may hold real and personal property. as trustee under deed or private agreement, a contract is entered into between the company and the owner of the property, by which the title to the property is vested in the corporation subject to the terms recited in the instrument. such deeds of trust may be revocable or irrevocable. marriage settlements are frequently made in this way. the trustee's duty in investing the funds is a double one; namely, to invest them securely so that the principal shall be preserved intact, and to invest them as productively as possible under his powers, so that they shall yield the best rate of interest obtainable for the benefit of the person or persons entitled to the income. he must hold the scales evenly, regarding scrupulously his duties to all beneficiaries. the popular idea that security is the only consideration is erroneous, as the trustee is equally bound to invest the funds as profitably as possible and cannot neglect one duty more than the other. the mistaken impression that the corporate trustee, even more than the individual, is mindful only of the safety of the principal and entirely loses sight of the question of income, has arisen from the restrictions as to investments imposed by law, and frequently also by the will or trust deed, and from the fact that the individual executor or trustee, rightly or wrongly, sometimes assumes risks and personal liability which the proper rules of a trust company would not permit it to assume. the executor or trustee is governed, as to the kinds of investments, by the directions of the will or deed of trust. this may require the purchase of "legal investments" only, or state that the trustee is not to be confined to securities prescribed by law, or give specific directions as to the classes of securities which are to be bought. the terms of such documents are always strictly construed by the courts; if no directions are given, the trustee is expected to buy only "legal" securities, and when he exceeds his powers he is held responsible for any loss. administrators and guardians without broader powers given by will are obliged to invest, except at their personal risk, in such securities as are sanctioned by law or directed by the court. some states prescribe by statute the securities in which a trustee may invest. "where there is no statute or decision of the highest court fixing the class of securities in which a trustee may invest, he can safely follow the rule prescribed for the investment of the funds of savings banks." in general, city, state, and united states bonds, first mortgages secured on improved real estate with ample margin, are among the investments sanctioned by law. as to real estate, stocks, and first mortgage bonds of railroad, manufacturing, and other corporations, the practice varies in the different states. loans on personal property, second mortgages, and other investments subject to prior liens or of a speculative character are excluded. all investments must possess "intrinsic" value; the courts hold trustees liable for any losses from speculative risks--but any gains accrue to the trust estate. other functions the trust company acts as guardian, curator, or committee of the estates, and in some states, of the persons of minors, those who are insane or mentally incompetent, spendthrifts, drunkards, and any other persons not legally qualified to take charge of their own affairs. in the case of a minor, the trust terminates on the ward's becoming of age; in other cases, when the disability is removed, or in accordance with a decree of court. these appointments are frequently made by order of court, and to it accounting must be made. in some states the company is styled "conservator" when caring for the estates of persons of unsound mind. when acting as attorney in fact, the company obtains its authority by virtue of a letter of attorney which usually is or can be recorded, conveying certain definitely specified powers. this may be either to perform a single act--such as to satisfy a mortgage--or may be broader and continuing, granting authority to sell and transfer securities and collect income. a general power of attorney, as the term indicates, is a delegation to another of the general powers of the person appointing--as to payments, collections, transfers of property, and all transactions of a business nature. as agent merely, the company takes charge of property, real or personal, for its owner, but such agency does not imply nor ordinarily include authority to sell or convey title. moreover, trust companies as agent often take up lines of business which they either cannot or would not engage in on their own account. thus, a trust company can act as agent for fire or life insurance companies, for water, gas, and other public service corporations. in new communities and where it is difficult to find responsible representatives, the trust company can often render efficient service and secure a steady income without risk by assuming agencies of various sorts. as assignee the trust company takes possession of the property assigned for the purpose of carrying out the terms of the deed of assignment in the interest both of the assignor and the creditors of the assignor. the deed of assignment is an acknowledgment of an embarrassed or insolvent condition, and the efforts of the assignee are directed to realizing as much as possible from the assets intrusted to its management. as receiver, the duties may be very similar to those of assignee, although they are usually broader in scope. the business may not be insolvent, and the application for the appointment of a receiver may be due to temporary difficulties only. by such an appointment the property is preserved intact and equal treatment is afforded creditors. an able receivership often results in the adjustment of difficulties and the return of the property to its owners on a paying basis. while in the case of assignee the appointment is by the individual, partnership, or corporation executing the deed of assignment which specifies the powers and duties of the assignee, in the case of receiver the appointment is by a court and the company so appointed acts as an appointee or ministerial officer of the court, and as such is directly subject to the court's orders. a trust company acting as receiver is better able than an individual to furnish additional capital, if amply secured, and thus successfully to meet the difficulties which withdrawal of credit and restricted capital have temporarily brought upon an otherwise prosperous business. the courts authorize the issue of receivers' certificates to provide funds for purchase of equipment and the proper maintenance of the property and conduct of the business when the creditors are benefited by such expenditures. such certificates may be made a first lien on all assets, taking precedence even of mortgages and other secured obligations. the receiver thus secures the capital necessary to make the property more productive and to secure the largest return from the business. as custodian or depositary, the trust company sometimes holds property the title to which is in dispute, delivering the same when the ownership is legally determined. in taking charge of escrows or conditional instruments or deeds delivered to a third party until the condition is performed, the trust company acts in a similar capacity, as the joint representative of both parties. the trust company acts as the representative of both the living and the dead in practically every legal relation in which an individual is qualified to act. its function is not only to keep intact the estate of which it has charge, but to look to and safeguard the interest of every beneficiary. care of securities and valuables the functions already recited have resulted in the assumption of the duty of caring for property other than that of the estates held in the trust department. in the safe deposit department, individual safes are rented, bulky packages--not containing stocks or bonds--are received on storage, certificates of deposit covering securities are issued, and provision is made for access to, and examination of, the property so deposited. for personal property received on storage, the charges are either according to bulk or value. wills are usually receipted for and kept without charge. insurance the examination and insurance of real estate titles is a later development often found in connection with the usual trust functions. fidelity insurance and suretyship providing against loss by reason of the dishonesty of individuals and the non-performance of obligations, contracts, etc., have often been combined with the various forms of trust company activity. they are, however, largely passing into the hands of corporations especially organized for the transaction of such business. compensation when acting as trustee under corporation mortgages, a definite charge may be made for accepting the trust, and a fixed amount per annum thereafter for paying coupons and performing other duties. for the certification of bonds it is usual to charge fifty cents per bond in the case of large issues, and one dollar for small issues. the figures, however, vary in different places. the charge for certifying the bonds may be the only one, although an additional charge is usually made for counsel fees. in case of default and consequent foreclosure of the mortgage, extra payment is made to the trustee covering all services incident to the foreclosure. for the disbursement of sinking funds, interest, or coupons, the temporary use of the money may be considered adequate compensation, if the amount involved is large. a commission on the sum distributed or a fixed amount is charged when acting as fiscal agent, apart from duties in other capacities. for acting as registrar or as transfer agent it is usual to make a fixed charge per annum, based on the amount of labor involved. the transfer agent is usually paid about twice as much as the registrar. compensation for acting as manager of an underwriting syndicate may be a fixed sum or a commission, according to the provisions of the underwriting agreement. for acting as depositary under plans of reorganization, assignee, or receiver, a lump sum is usually paid covering all services. agency work of various sorts is paid for in accordance with the usual practice in the business which is undertaken; a fixed sum, or a fixed sum and a commission, or a commission only, may be received. the trust company is in a position to render valuable, and often indispensable, aid to its corporate clients. large amounts being involved, the great railroad and industrial corporations are willing to pay well for such services. corporate trust business has, consequently, been a profitable field for the trust companies. government regulation an examination of the laws of the various states is interesting as showing the attempts which are being made at regulation. most of these laws have been enacted within recent years and to-day there are but few states which do not have such statutes on their books. the step which massachusetts first took in requiring a legal reserve to secure deposits has been followed by similar action in other states. in general, the wisdom of prohibiting companies which engage in the care of estates from assuming excessive risks is becoming better recognized. the promotion and underwriting of commercial ventures and the assumption of unknown risks are functions not compatible with the proper exercise of the duties of trustee or executor. the supervision of trust companies by the separate states provides an elastic system to supplement the rigidly guarded powers of the national banks, and can adapt itself to changing conditions and enlarging needs, leaving for solution according to the requirements of each section of the country such questions as proper functions, reserves, and the authority to establish branch offices. footnotes: [ ] adapted from kirkbride and sterrett, _the modern trust company_, pp. - , , , , - , , , . the macmillan company. . [ ] thomas l. greene, _corporation finance_, p. . chapter xvi savings banks [ ]the savings bank works with those unacquainted with the ways of business and who could not single handed take good care of their money, or invest it safely or profitably. the bank of discount is generally managed by business men versed in the ways of business, acquainted with monetary affairs, and able to conduct financial operations with intelligence. they combine their _capital_ in order to make it effective; the savings bank combines _savings_ in order to make them _capital_, and as such to acquire a power impossible to the scattered savings. the savings bank is for the saver; its funds are invested permanently, while the business bank opens its doors to business men and loans rather than invests its funds, and for a short time only. the latter deals with borrowers rather than savers, and serves for hire. the one serves best by keeping--the other by lending. one _aims_ at profit, while the other _never_ makes (or should make) profit an end. the savings bank is the receiving reservoir for the little springs, the bank of discount is the distributing reservoir for accumulated capital. we must get the last idea clearly in mind or we get a misconception of the savings bank. however much the element of interest may figure in the management, and whether we pay depositors per cent. or per cent., or no interest at all, the accumulation of interest is not to be compared in importance with the _accumulation of principal_. no man ever acquired riches at per cent. in fact, per cent. upon small deposits is so trifling a matter that it may be ignored in considering the greater value of the increase of capital. however desirable the accumulation of interest may be (and this in the course of years is considerable), the chief end and aim of the savings bank should be the _accumulation of principal_. classification of savings banks we may roughly classify savings institutions into: first, mutual (trustee), or philanthropic; second, stock (including "savings and trust companies"); third, co-operative, or democratic, as exemplified in the co-operative banks of europe. the first are usually managed by a self-perpetuating body of trustees, who do not share the earnings; the second are managed by the directors elected by the stockholders; the third are managed by officials elected by the members. a second classification may be made into public and private institutions; the first includes the postal and municipal banks; the private embraces the mutual, stock, and co-operative. a third classification may still be made into the "unit" and the chain system. in the unit system the bank is an independent entity and has no connection (aside from a managerial standpoint) with any other bank. the banks of the united states are all, excepting the postal savings banks and a few branch savings banks, of this character. in the second, the bank is but a part of a chain, as in the postal system, the municipal banks of germany, and the co-operative credit banks of europe. we shall briefly review each system. trustee savings banks the _original_ savings bank is the trustee bank. as hamilton says, "it stands for the attempt on the part of the well-to-do to improve the condition of the poorer classes, and involves a self-sacrificing service on the part of a few in the interest of the many." while many of the early savings banks partook of this character, others were organised from purely selfish motives and were characterised by bad management and bad faith from the start. a study of savings bank frauds will amply bear out this statement. the "spirit of commercialism" hereafter spoken of has invaded the domain of the mutual savings bank and it cannot in truth be said that some of the newer banks were organised from any spirit of philanthropy, although the management as a whole may be above suspicion and honorable in the highest degree. but, however this may be, the mutual savings bank is a product of the east and promises to remain so in spite of the fact that some of the western states have very good, if not excellent, savings bank laws. the distinguishing characteristic of the trustee savings bank is _mutuality_. _all_ the earnings of the bank, less reasonable administrative expenses and the apportionment to surplus or guaranty fund, are divided among the depositors in the form of interest. one or two features of the mutual bank may be mentioned. first, the investments of such institutions are usually carefully restricted, looking primarily to the element of safety; and as long as the trustees keep their funds so invested they cannot be held, either in law or morals, responsible for losses. second, the predominancy of the mortgage loan. the nature of the deposits being more or less permanent, investments of a permanent character may be made without fear of a sudden demand for their return on the part of depositors; and to safeguard the banks from such unexpected calls, quite generally trustee banks are permitted by law to require notice, the usual time being either sixty or ninety days. the third distinguishing feature is the self-perpetuation of the board of managers. no amount of money can _buy_ a man's way into a mutual savings bank. he cannot, as in stock concerns, buy enough stock to _vote himself_ into office--he can only gain office as the other men advocate his cause. and, on the contrary, he cannot be voted _out_ of office. only an act, such as bankruptcy (which voids his office), can affect him, and, like a supreme court judge, he is appointed during good behavior. the greatest weakness of the trustee bank is this: lacking the "essential element" that prompts men to undertake such ventures (profit), it does not appeal to the average man of means unless he is sentimentally inclined; and not being indispensable to trade and commerce, like a bank of discount, it does not come to be a commercial necessity. even in a great state like new york we find twenty-eight counties with no savings banks. and in many of these counties there are large and thriving towns and cities. thus the city of jamestown, with over , population, has no savings banks; while elmira, with over , population, has but one, and that with but half a million assets. from the viewpoint of intensive results, as tested by the volume of patronage accorded these institutions, a perusal of the statistics will demonstrate that in some places the trustee bank has had a remarkable record. for instance, in maine, a sparsely-settled state, and largely of a rural nature, we find one savings account to every of the population. more remarkable is vermont, the "green mountain state," where natural conditions would seem to be much more hostile to such development, we find per cent. of the population having savings bank accounts. new hampshire has an account for every - / of the population, while massachusetts heads the list, with seventy-five out of every hundred. new york has one to every three. "in seeking an explanation of this remarkable success of the trustee system," says hamilton, "we are reminded that new england is singularly separate and distinct in its customs, habits and ideals from the rest of the country. notwithstanding the large foreign population, the dominant type is more homogeneous and more anglo-saxon than it is in any other section, and therefore fixed customs have been more rigid and controlling. among the ideals behind the customs and institutions must be noted a stern, puritanical sense of simple living, industry and providence, and this spirit is so strong as to be well calculated to give color and direction to the philanthropic impulse. there is also an unusual amount of public spirit, of collective rather than a neighborly character, as seen in the institution of the town meeting." stock savings banks the stock savings bank, where it is a savings bank, and not a bank of discount under a savings title, differs in no essential degree from the mutual institution. the mutual bank belongs to the depositors; the stock bank to the stockholders. the mutual bank pays dividends to depositors only; the stock bank pays dividends to both stockholders and depositors. the stock bank does not pretend to be philanthropic in its management. it is purely a business proposition, and where the investments are of the accepted savings bank type, it can justly claim to be on a par with its mutual friends, provided, of course, that it measures up to the standard in its management. as is implied in the term "stock," it issues capital shares and pays dividends thereon. it has, therefore, the added protection of the stockholder's liability, which, together with the accumulated surplus, affords the element of strength so necessary in all financial concerns. it usually pays the depositors a stipulated rate of interest, and the profits beyond this belong to and are distributed to the stockholders as dividends. the partnership idea is entirely lacking, and the depositors get what they bargain for, while the surplus goes to those who invest, not necessarily their savings, but their _capital_, and assume all risks of the business. it could not in law or equity "scale down" its deposits to make good any losses--a feature peculiar to the mutual institution. in this respect one thing is certain: in so far as safety is concerned, especially in a young bank, the stock bank with the stockholders' liability is surely superior to the mutual, unless the trustees of the latter are of such high order and of such financial worth as to be able and _willing_ to assume the burden of any losses that may accrue until the surplus or guaranty fund affords ample protection. this was the trouble in the early days of the mutual savings banks in england. guaranty savings banks new hampshire is the only state in which "guaranty savings banks" are found. these are a combination of mutual and stock--a cross between the two. they do not transact a commercial business, being strictly savings banks in their functions, yet having "special deposits," which to all intents and purposes are capital stock. "the guaranty savings bank differs from the ordinary mutual savings bank in that it has capital stock or _special deposits_, as they are called. it pays a certain stipulated rate of interest to its _general_ depositors and _any surplus of earnings above this dividend is available for dividends on the capital stock or special deposits. these special deposits constitute a guaranty fund for the general depositors, and the charter ordinarily stipulates that the special deposits shall always equal per cent. of the deposits._" such institutions are savings banks in every sense of the word, but the strictly mutual feature is lacking in the specialising of part of the deposits and paying a higher rate of interest on these deposits. in new york state savings banks cannot take a "special deposit," but in new hampshire, in return for the higher interest rate, the special depositors assume all the risk of loss or depreciation, and, as in the case of stock concerns, they would be the first to suffer in the event of insolvency. municipal savings banks this form of savings banks properly belongs to a strong class of municipalities. they can only thrive in places where the local spirit is strong, the local government pure, and where the local officials are accustomed to wield a large measure of authority. accordingly, they have come into being and met with success in those countries where the early history of the town made a large measure of local autonomy a necessity. towns of this class possess the public spirit and the intelligent administration required for the success of such a public venture. they also possess a fund of gratuitous public service among the citizens which may be drawn upon when occasion requires. such banks are found in austria, france, italy, denmark, sweden, and japan. the best examples are to be found in germany, where they have been in operation for a long period of years. savings institutions exist here at present in great variety and number, including state or province savings banks, city savings banks, township savings banks, county savings banks, _bezirk_ (district) savings banks, private savings banks, and co-operative savings banks. these banks have some , , pass books out and their deposits amount to , , , marks ($ , , , ). these deposits are practically all guaranteed by the various municipalities of the empire, which condition forms a bulwark of confidence in the security of private wealth and earnings that cannot be shaken by hard times, panics, bank failures, etc. people's banks the co-operative banks of europe, otherwise called "people's banks," are essentially savings banks, in that they depend for their working capital upon the accumulated savings of their members. the aims of these banks are first _economic_, to enable the economically weak to make themselves financially strong by the power of combination; second, _moral_, to bring the members together in a unity of interests and to develop character by making thrift and good habits the groundwork of their operations; third, educational, to train in business methods and in the handling of money those whose scope has been narrow and whose experiences have been few in this regard. in the establishment of these banks, the cardinal rules have been: maximum of responsibility, minimum of risk, maximum of publicity. to secure the maximum of responsibility, unlimited liability has been accepted by the members in many cases; that is, each one pledging his all for the good of all; and, second, to secure the minimum of risk, character is made the basis of membership and good habits the prime requisite for membership. no investments are made in speculative enterprises, and the purposes for which the money is borrowed are closely inquired into and due care taken that the funds shall be applied for such purposes only. to secure the maximum of publicity the action of the bank in all matters is given the widest publicity possible in order that the work may have public inspection. the result of these simple rules has been that the poor have proven as good, if not better, creditors than the rich; for once losing credit they can never regain it except by the slow process of years of good behavior. the great pioneers in the "people's banks" were raiffeisen and schulze-delitzsch. they fully appreciated that any system that would succeed must descend to the level of its beneficiaries and they have admirably adapted the co-operative idea of banking. the localization of savings banks in the united states the home of the mutual savings bank is in the east, where it began operations in , and may even be said to be in the eastern states; for west of buffalo and south of baltimore, we find only savings banks of the mutual character. out of savings banks of the mutual type found in the united states, are found in new england, new york, and new jersey; and over one-half, or , are found in the two states of new york and massachusetts. maine, vermont, connecticut and new hampshire have , the total of which accounts for all but of the mutual savings banks in this country. the dearth of savings banks in pennsylvania is notable. it would seem strange that in a state of such character, where the mutual savings bank had its first test, and where in individual instances it has been extremely popular and successful, the failure of such an institution has been so pronounced; but pennsylvania is the home of the building and loan association (there are over , in operation), which seems in a measure at least, to fulfill the same purpose. from a pamphlet issued by the dollar savings bank of pittsburgh in , the striking sentence is gathered, that to-day at the end of half a century the dollar savings bank stands as the _only_ institution of its kind in western pennsylvania. as we go south and west the banks take on a more commercial aspect, and the savings bank as we know it in the east is a rarity, and the word "savings" in their title is a misnomer. this is particularly true of iowa, where we find practically all state banks using this word, and yet very few of them are other than banks of discount. the reason for the large number may be in the economic conditions of that state, and also the fact that banks may organise with as low as $ , in capital, making it possible to establish a bank in even the smallest place. in illinois, for instance, we find no distinctively savings banks, and in a city like chicago, where if the same success had attended the savings banks as it has in new york, upwards of a billion dollars would be on deposit, we find no strictly savings institution other than banks of discount and trust companies operating savings departments. the reasons for the absence of mutual savings banks in the west and south lie, no doubt, as hamilton suggests, in the fact that these sections were not settled from religious, but commercial motives; and the "spirit of new england" being lacking, the savings bank which requires a peculiar spirit of philanthropy, and age, as well, has not become a factor in the development of the country. in fact, the eleemosynary institution, such as the college, the hospital, or the savings bank, the former requiring endowments of money to become successful, and the latter the endowment of gratuitous management to become possible, is last to follow in the economic development of a community. another reason may be in the pre-ponderance of agriculture among the employments, which does not, until the country becomes highly prosperous, afford much in the way of idle funds which would go into the savings banks. the mutual savings bank is a product of the east and promises to remain so in spite of the fact that some of the western states have very good, if not excellent, savings banks laws. the dearth of savings banks in the south is, no doubt, due to the prostration following the civil war, which left the country drained of its resources; the general ignorance of banking functions, and the improvidence of the negro. postal savings banks the postal savings bank is not a bank, or a banking system, so much as it is an adjunct of the government; for the fundamental idea is that through the post office the government holds itself out as willing to accept the savings deposits of the people, invest them in its own securities and become absolutely responsible for the safe return of the funds when called for, with a nominal rate of interest. all the leading countries of the world except germany and switzerland now operate the postal savings banks. while the rules may differ in the details, the general scheme is the same, and a review in brief of the system of great britain will serve to illustrate the methods of operation of such an institution. the present system was established in england in . the deposits, at whatever office they may be made, can be withdrawn from any other office which transacts a savings bank business. the accounts are kept in london and all moneys are remitted to the headquarters, where it is handed over to the commissioners for the reduction of the national debt, who invest the funds in public securities. deposits may be made as low as one shilling or multiples thereof, and the limit of deposits for an individual is $ during one year or $ in all. charitable societies may deposit without limit. for the benefit of youthful depositors, who have not a shilling to deposit, cards are issued upon which stamps are placed as purchased, and when filled represent one shilling, and may be turned in as cash. school managers are urged to bring this plan to the attention of the pupils, and it has been productive of good results, over , schools having adopted this system. the interest rate is fixed at - / per cent. and never varies. american postal savings banks arguments for and against the establishment of postal savings banks in the united states. [ ]in spite of the numerous differences in the postal savings bank system of the forty-odd countries possessing them, there are certain fundamental features common to all. whatever else a postal savings bank may be, it is without exception an institution working principally through the post offices, and its primary object is the encouragement of thrift among the poorer classes by providing safe and convenient places for the deposit of savings at a comparatively low rate of interest. in the discussion of the postal savings bank proposition in this country, no one questioned the desirability of encouraging habits of economy and thrift on the part of the public, nor was there any question that adequate savings bank facilities should be provided for this purpose; the debate hinged very largely upon the question whether adequate facilities of this character were not already provided by private initiative. the advocates of a postal savings bank claimed that adequate savings facilities were not and could not be provided by private enterprise, because of the expense of conducting savings banks in small communities, and also in larger communities where the people were not yet educated to the saving habit; and they pointed particularly to the lack of savings facilities in the southern and western states.... ... the country is not nearly so well provided with banks receiving savings accounts as with post offices. in the united states there are square miles of territory to each bank carrying savings accounts and square miles to each post office; there is a population of , to each such bank and of , to each post office; and there are . post offices to each bank carrying savings accounts. a comparison of the figures for the different sections and states shows that it is in the southern, western, and pacific states that savings bank facilities are most lacking.... the new england, eastern, and middle western states are much better provided with banking facilities than are the other sections; but even in these states post office facilities are much more ample than savings bank facilities.... an objection repeatedly urged against the establishment of a postal savings bank was that it would prove a competitor to existing banks. the fear of such competition appears to have been the chief cause of the opposition of most members of the banking fraternity to all postal savings banks proposals. senator cummins of iowa said in the senate: the banks of the united states are opposed unanimously to the institution of a postal savings system.... i venture the assertion that during the nearly two years that i have been a member of this body ... i have received the protests of nearly every bank in my state against any such scheme, and those protests have usually been accompanied by a very large number of petitions, secured, i have no doubt, through the industry and energy of the bank officers. it was argued that postal savings banks would have an undue advantage over private institutions because of the great confidence in the government entertained by working people; and it was asserted that funds would be withdrawn from existing banks and deposited in the postal savings banks.... in reply, the advocates of postal savings banks claimed that existing banks had nothing to fear from governmental competition; that they had the advantages of an established clientele, higher interest rates, higher limits, if any, in the amounts that could be kept on deposit, and of the close personal and advisory relation which so often exists between a bank and its customers. they further argued that postal savings banks would be a help rather than a hindrance to other banks. they would educate the people to habits of thrift and would draw money out of hoards; and the deposits which they received would for the most part be transferred to other banks as soon as the limit fixed for postal savings banks deposits should be reached, or even before, as the depositor began to appreciate the safety of other banks and the advantage of their higher rate of interest.... the immediate occasion of the last active movement for a postal savings bank system in the united states was ... the losses and inconveniences arising from bank failures and from the suspension of cash payments in the panic of . naturally, therefore, the demand for great safety of savings deposits played an important part in the discussion. the advocates of postal savings banks cited figures showing the number of national bank failures and the losses involved, and similar figures for savings bank failures in certain states. they made much of the large amounts involved and of the hardships in individual cases. on the other hand, the opponents of the postal savings bank scheme quite generally dealt with percentage figures rather than with absolute amounts and showed that for recent years the average losses, in terms of percentage of the amounts on deposit, were almost infinitesimal. the figures cited for bank failures, so far as they relate to savings deposits, are so incomplete as to be of doubtful value in measuring the extent of the losses.... after all, such figures give us no adequate measure for losses of this kind. "among the experiences of working people none is more demoralizing and few are more cruel than loss of savings through failure of banks or absconding of individuals intrusted with funds." to such people there is cold comfort in the assurance that the average loss of savings bank depositors over a long period of years is but a fraction of a mill on a dollar. the loss is theirs: it is not distributed among all depositors. in urging that a postal savings bank would draw money from hoards into circulation, the advocates of the scheme claimed also that such a bank would keep in the united states money that would otherwise be sent abroad by foreigners.... much was made of the fact that every year many millions of dollars in money orders payable to self are bought for savings purposes.... in such cases the purchaser not only failed to receive any interest on his savings but was required to pay the money order fee. many immigrants, moreover, distrust american banks, and, being familiar with postal savings banks in their home countries and having great confidence in government institutions, remit their savings to these home banks. how extensively this is done we have no figures to show.... the main features of the system [ ]the postal savings bank system of the united states, which began operations january , , by the opening of a postal savings bank in each state, is under the control of a board of trustees, consisting of the postmaster-general, the secretary of the treasury, and the attorney-general. depositories for the receipt of such moneys are designated by the board. an initial appropriation of $ , was made to cover the cost of putting the law in operation, which was supplemented by another appropriation of $ , in the session of . any person over ten years of age may deposit, but no person shall have more than one postal savings bank account in his or her own right. upon making the first deposit, a _certificate of deposit_ is issued, which is to be surrendered when paid, and cancelled; or in the event of making a subsequent deposit is to be surrendered for one calling for a higher amount. the lowest deposit permitted is one dollar, the limit being $ in a calendar month; but to provide for small deposits, a postal savings card is issued for ten cents, to which may be attached postal savings stamps, which when filled will be accepted in lieu of one dollar. the interest rate allowed is per cent., credited once a year, and the highest balance permitted is $ to one person. withdrawals may be made on demand. the funds so received are to be deposited in national and state banks at - / per cent. interest. five per cent. of these deposits may be withdrawn and kept in the treasury of the united states as reserve. before becoming a depository, the bank must furnish as security government, state, or municipal bonds, the limit of deposits being an amount equal to the paid-up capital and one-half the surplus.... not over per cent. of the amount of such funds may be withdrawn by the trustees for investment in united states bonds, and it is the intent of the act that the residue of such funds amounting to per cent., shall remain on deposit in the banks in each state and territory willing to receive the same under the terms of the act, but may be withdrawn for investment in bonds under the direction of the president, "when in his judgment, the general welfare and interests of the united states so require." provision is also made for the conversion of savings bank deposits into united states bonds, at the request of depositors. "postal savings behind the scenes" speech of hon. carter b. keene, director of the united states postal savings system at the banquet of the investment bankers association of america at denver, colorado, tuesday evening, september , . _mr. toastmaster and gentlemen:_ i appreciate very highly your invitation to speak here to-night, also the words of commendation from your presiding officer. i have often wondered whether the fact that i am the only director of a big savings institution has anything to do with the ability of that institution to pay every depositor his money on demand. (laughter and applause.)... the toastmaster was wrong when he said that postal savings has nothing to do with investment bankers. we have a great deal to do with them. indirectly, we are one of their best customers. more than ninety-four million dollars in bonds are now with the treasurer of the united states as security for postal savings funds, and you gentlemen have largely supplied the banks with these bonds. sixteen million dollars are in state and territory bonds; city, town, and village bonds amount to forty-six millions; county bonds nine; miscellaneous bonds ten; and bonds of the united states government and its dependencies thirteen.... since i have been here this week i have heard billions and billions talked about.... i can hardly comprehend what a million is. but i want to tell you that in four and a half years the postal savings system of the united states has become custodian of sixty-eight million dollars, in cash, of the people's savings. let me lay emphasis on the _cash_, because big figures do not always mean cash. sixty-five million dollars of this money is on deposit in six thousand banks scattered throughout the country. in other words, practically all of the money we have collected has been released through the banks to channels of trade in the very localities where it originated. i am sure you will agree with me that this is a very creditable showing so far as dollars and cents are concerned. the federal reserve act, which went into effect on the th of november last, provided that postal savings funds should not be deposited in non-member banks. the attorney general for the united states has held that the prohibition relates to funds received on and after november th. therefore, postal savings on deposit in state institutions when the act became effective have been allowed to remain, except as it has been necessary to withdraw it to pay depositors. the post office department has made frequent investigations to determine where postal savings deposits come from; with the invariable result that they are found to come from chimney corners, mattresses, bootlegs, etc., but until very recently no effort has been made to ascertain where postal savings go when withdrawn. and this recent inquiry has been both gratifying and entertaining. it was found that in a vast majority of cases savings were withdrawn for very substantial reasons, prominent among them being payments on homes and the launching of small business enterprises. occasionally a hospital bill was paid. some depositors sent money to the old country to bring over a parent or a brother; a wedding trousseau here and there; and in colorado we have record of a withdrawal to buy an automobile. (laughter.) i am glad to say that there has been a very great change in the attitude of the banks toward postal savings in the last few years. at the outset, many bankers thought that postal savings was an unwarranted invasion of the domain of private enterprise and that the service would prove a severe drain on their established business. the opposite has been the result. the tarnished coins and soiled currency that come into our postal depositories represent hidden savings--money that is beyond the reach of any corporate banking institution no matter how sound it may be or how conservatively managed. this newly discovered money has been made available for commercial purposes in the very cities and localities from which it was withdrawn, so instead of being a drain on corporate banking institutions postal savings has added to the deposits of some six thousand banks more than sixty-five millions. the bankers now freely admit that postal savings has been a help to them, and it is no uncommon thing for banks, especially in the mining regions of the west, to urge the post office department to extend postal savings facilities in order that more money may be made available for local uses. among our , depositors every nation on the face of the earth is represented, also every conceivable occupation. the fisherman, the miner, the shoemaker, the preacher, the bank teller, the butcher, the baker, the candle-stick maker, all have accounts, but the great bulk of our deposits come from the men and women who work with their hands for a daily wage. the foreign born are our most numerous and liberal patrons. an interesting poll of depositors has just been made by the post office department and it was found that per cent. of all postal savings depositors were born outside the united states, while the american born comprise per cent. a still more surprising fact is that the foreign born own per cent. of all the deposits. the russians lead with $ , , to their credit, or . per cent. then follow the italians with $ , , , or . per cent.; natives of great britain and her colonies with $ , , , or . per cent.; the austrians with $ , , , or . per cent.; hungarians, $ , , , or . per cent.; germans, $ , , , or . per cent.; swedes, $ , , , or . per cent.; and greeks, $ , , , or . per cent. what a splendid vote of confidence on the part of our foreign-born citizens in the good faith of the united states. and in these figures also is a high testimonial to the industry and frugality of our newly acquired citizens. that they should take most kindly to postal savings is not remarkable when we consider that they were accustomed to a similar service in their native countries.... another thing that has induced foreigners to become postal savings depositors is the disastrous experiences many of them have had with so-called "private banks," usually operated by people of their own tongue. it is difficult to conceive of a more heinous crime than some of these so-called "bankers"--slick and persuasive--have committed in alluring credulous, hard-working men and women, to entrust their humble savings with them for the deliberate purpose of theft. i am glad to see that prosecuting officers have recently been aroused to the "private bank swindle" and that their promoters are getting the punishment they deserve. when europe got on fire last year, our postal savings receipts began to increase by leaps and bounds. during the fiscal year , the deposits jumped from $ , , to $ , , and more than , new accounts were opened. the war still has an influence upon postal savings deposits, but the more immediate cause of large deposits at this time is the remarkable revival of commercial activities. seven cities now have more than a million dollars on deposit, namely. new york, brooklyn, chicago, boston, detroit, san francisco, and portland, oregon. greater new york, including brooklyn and several other offices in the municipality, now have over one-fourth of all the money in the postal savings system. during the past fiscal year new york city gained per cent.; bridgeport, connecticut, per cent.; brooklyn, new york, per cent.; paterson, new jersey, per cent.; jersey city, new jersey, per cent.; detroit, michigan, per cent.; newark, new jersey, per cent.; akron, ohio, per cent.; gary, indiana, per cent.; pueblo, colorado, per cent. now, my friends, i come to a point that i hope will make an impression on your minds--a lasting impression--and that point is that the postal savings system from the first has been seriously handicapped by statutory restrictions on the amount that may be accepted. the law permits the acceptance of only one hundred dollars a month and five hundred dollars in all from a depositor. it has been shown that the foreign born are the largest patrons of our savings service and if this service is to reach its full measure of success we must recognize and respect the habits of the foreigner, and one of his habits is to save his money until he gets several hundred dollars together and then take the entire amount to the post office, just as he did in the old country. because the postmaster cannot accept all that is offered, the intending depositor very frequently goes away in resentment and disappointment without depositing a dollar.... it is the testimony of postmasters from all over the country that they are rejecting about as much money as they are taking in. the postmaster general last year recommended to congress that one thousand dollars be accepted with interest and that another thousand dollars be accepted without interest, but for safekeeping. that was a practical and reasonable recommendation--one which would meet all requirements in ninety-five per cent. of the cases. unfortunately the recommendation failed.... the postmaster general has indicated that he will repeat the recommendation in his forthcoming annual report and i sincerely hope that congress will promptly recognize the urgent need of the legislation. millions of dollars, my friends, are spent every year by uplift societies for the betterment of the foreigners. these foreigners, these begrimed, hard-working foreigners, come to our post offices and ask us to take their humble savings. how unfortunate that we cannot accept what they offer, within reasonable bounds. what an effective agency this would be in bettering in a most practical and permanent way the conditions of the very people we want to americanize as speedily as possible. ... we have five hundred and forty thousand depositors in the united states to-day and postal savings has a new and different story for each of them. it is not always the big things in life that change or fix our course. can't you remember when a few dollars or the want of a few dollars tipped you one way or the other in some important matter. who can estimate the happiness and prosperity that the starting of a postal savings account may lead to. it is a step, and an important one, in the right direction. some one has well said that the immigrant who opens a postal savings account steps unconsciously on a moving platform; one thing leads to another, and his deposit might lead him into local investment and investment into business and into citizenship. there is a very interesting human-interest side to postal savings in which every phase of good fortune and disaster is reflected. an aged couple at norfolk without the knowledge of each other had been carrying $ on their persons as a guaranty of respectable burial. they are now postal savings depositors. two sisters died in each other's arms in the _eastland_ disaster in chicago a few weeks ago--two working girls--and they had postal savings accounts for like amounts. their savings went to pay for their burial. one of uncle sam's bluejackets who went down on the ill-fated submarine _f- _ was the owner of a substantial postal savings account. gentlemen, the postal savings system means something more than a cold array of assets and liabilities, a balance sheet. way off in an isolated spot in russia a money order went not long ago to the home of a humble peasant. that money order represented the savings of a son who was drowned in the susquehanna river. a few weeks back, a thrifty mexican girl withdrew her savings from the post office at san diego, california, to buy a trousseau. after the honeymoon she returned to the office with her new husband and both opened postal savings accounts. last year leadville, colorado, struck a thrift note that was new in this country, so far as i know, and reference to it is particularly timely as christmas is approaching. a mining company in that city struck the note and i hope it will be heard from one end of this country to the other. it was this: last december an officer of the company went to the post office and opened a postal savings account for every employee--ninety in all--as a christmas present. he placed to the credit of each per cent. of what he had earned during the year. these christmas remembrances amounted to over fifteen hundred dollars. out of the ninety employees only five had previously opened postal savings accounts. now, i count that substantial charity; i call that well-directed charity. we have kept track of these particular deposits and the workmen who get their start through that christmas bounty are adding to their savings weekly by their own personal efforts. (applause.) gentlemen, as a rule, we in official life swing back and forth in a measured arc, and the little one can do is so small when compared with the mass of government activity that we feel insignificant and lost. but i feel, my friends, that in the postal savings system my associates and i are doing a positive good for humanity. i believe that we are making people better and happier because postal savings points the way from the sweat shop to the school--it stands for clean homes and empty alleys. each of you is a stockholder in the postal savings system and its success is your success. your dividends are in the better and happier american citizenship which it encourages and promotes. (applause.) footnotes: [ ] adapted from w. h. kniffin, _the savings bank and its practical work_, pp. - . the bankers publishing company. new york, . [ ] e. w. kemmerer, _the united states postal savings bank_, _political science quarterly_, vol. xxvi, no. , september, , pp. - . [ ] w. h. kniffin, _the savings bank and its practical work_, pp. , . the bankers publishing company, new york. . chapter xvii domestic exchange [ ]the banker has become the bookkeeper and settling agent of the business world. the products of a locality, let us say the state of georgia, move out to the markets of the world and create credits in favor of that locality on the books of banking institutions in the commercial centers, while at the same time a counter movement of commodities is under way from other localities into georgia, in like manner creating credits for those localities which are debits against georgia. the practical effect is that the commodities moving between these communities are exchanged and pay for themselves, the running accounts being kept and settlements effected in the banks. to illustrate the details: a dealer in cotton in atlanta makes a sale to a mill in fall river and receives in payment a check or draft drawn on a new york bank, which he deposits for the credit of his account in an atlanta bank, and which the latter forwards for the credit of its bank account in new york. meanwhile an atlanta merchant has bought goods in new york and in order to pay for them buys from the atlanta bank an order for the new york credit, and this when forwarded completes the circle of payments for cotton and goods. if we would extend the investigation to include the bank accounts of the fall river mill and the atlanta dealer we would find, first, that the mill account was built up constantly by deposits of checks and drafts received in payment for goods sold in all parts of the country and perhaps all over the world, with almost no deposits of cash, and that it was drawn down by checks for raw cotton, and supplies and large amounts of cash for the pay-rolls; second, that the cotton dealer's account was built up entirely by deposits of checks or drafts received for cotton shipments and drawn down by checks and cash payments to farmers for cotton. for payments at a distance bank credit in the form of a check or draft is [commonly] used.... the foregoing illustrates the movement of the exchanges constantly proceeding ... between ... different communities.... there is a network of relationship between banks through which each local community and market is connected with all other communities and markets.... no locality is so remote as to be outside of the circle and no community's sales and purchases are so scattered but that they can be brought together in the settlements. each bank is the center of a circle of which it is the clearing agent; all payments between its own customers may be made by a transfer of credit upon its books. if there are two banks or more banks in a town, all payments between their customers are resolved into offsets between these banks, and in like manner all payments between localities are resolved into offsets between banks, and if not settled in local centers are passed up to larger and larger clearing centers.... but while the cross-payments of trade may be depended upon in the long run to balance and settle themselves, it does not follow that they will do so from day to day, or that they coincide so closely that payments in money are never required. an individual's sales and purchases are seldom made at the same time, and the sales and purchases of communities are not constantly balanced. the trade of a one-crop farming district will not be so evenly balanced as one of a district in which mixed farming prevails, and in every industry there are periods, usually recurring every year, when the payments exceed the current income, and corresponding periods when income exceeds outgo.... a region like the cotton states, whose products move quickly to market, may have large credit balances at one season and at another be wanting to borrow.... the banker is an equalizing agency in the situation. he stands in the breach: he must either supply the missing offsets of credit, or, as a last resort, make the payments in money.... the entire system of settlements, with transfers and offsets and advances and interchange of capital and credit, is exceedingly interesting and wonderfully simple and effective, but depends for its effectiveness upon a scrupulous observance of the principle upon which it is based. that principle is the natural reciprocity of trade.... while there are balances from time to time in the exchanges ... between different localities ... which cannot be settled without shipments of money, they are usually met without inconvenience unless there is a disturbance of credit. exchange relations between chicago and new york [ ]... it should always be borne in mind that the fact that new york city is the country's dominating financial market results in making new york funds acceptable everywhere as a means of payment, and in making a ready market for new york exchange throughout the country for a large part of the year. throughout january money in chicago relative to that in new york city is cheap. exchange rates on new york are high and there is a considerable movement of cash from chicago to the eastern states--particularly to new york city.... just prior to january there is normally a large demand in chicago for new york exchange with which to meet dividend and interest payments due in new york, and the high rates thus created continue somewhat into the new year. the crop-moving and holiday demand, however, being over, money becomes relatively cheap in chicago and flows to new york city, where it can at least earn the per cent. paid by banks on bankers' balances, and where it is absorbed somewhat in speculative activity and in the higher security prices, which normally rule the latter part of january and the fore part of february. from the last of january to the fore part of march the demand for money in chicago relative to that in new york rapidly rises. exchange rates on new york fall to a low point, and shipments of cash to the eastern states are very small.... ... there is, however, no evidence of a movement of cash from the east to chicago in february, although there is something of a westward movement in march. during this period the relative demand for money in chicago is increased by the anticipated opening of navigation on the great lakes, for the opening of navigation gives rise to a large amount of new york exchange received in payment of grain bills. there is also a demand on the part of western bankers for currency to meet the spring needs of the western farmers. the first of march in many sections of the middle west is the commonest time for making settlements of interest and principal on farm mortgages. it is also a common date for paying farm rents. this spring advance in the value of money in chicago as compared with new york reaches its maximum early in march. the demand then falls off rapidly and with only temporary interruptions (the most noteworthy being about the first of may) until it reaches the low level of the early summer, the latter part of may. it continues at a low level until early in july, when the crop-moving advance begins.... about the first of july the relative demand for money in chicago and vicinity begins to increase, advancing rapidly, with minor interruptions, until early in september, and then maintaining a high level until the fore part of november. during this period exchange rates rule low and money moves in large quantities from the eastern states to chicago.... the primary cause for this increasing and large demand for money in chicago is of course the anticipated and actual crop-moving demand, there being no sufficiently strong eastern demand for money at the time to hold it back.... it has been found ... that during the last six to eight weeks of the year, after the crop-moving demand has to a large extent subsided, the relative demand for moneyed capital in both new york city and chicago is maintained until the time of january settlements at nearly the high level of the crop-moving period. a study of domestic exchange rates and of currency shipments shows that the relative demand for money is stronger during this period in new york city than in chicago, that exchange rates in chicago on new york rise, and that cash moves eastward.... money becomes relatively cheap in chicago and vicinity during these last six to eight weeks of the year, principally because of the return flow of currency previously shipped to the country districts for crop-moving purposes. there is also considerable demand at this time for new york exchange to meet payments in certain lines of goods, such as hardware and dry goods, that are due new york and new england houses by western establishments, and to make purchases for the holiday trade.... comparatively high exchange rates... [near] the end of the year are largely due to preparations for the january disbursements, which western concerns are called upon to make in new york city....[ ] exchange relations between st. louis and new york [ ]... general seasonal movements in the relative demand for money in st. louis (as compared with new york city), ... are fairly regular in their occurrence. from the beginning of the year until the fore part of may the demand appears to be moderate, exchange rates rule near par, and there is a moderate tendency for cash to move from st. louis to the eastern states, with almost no tendency to move in the opposite direction.... the first eighteen weeks of the year, st. louis bankers say, are a period of comparative inactivity in the local money market. concerning this period, a prominent st. louis banker writes: "for the first eighteen weeks in the year... there is comparatively no new york exchange making and also a nominal demand for it, and likewise an easy, quiet money market."... the second noticeable movement in the st. louis money market is the sharp decline in the relative demand for money from the fore part of may to about the first of june. exchange on new york rises rapidly at this time, and may is the month of heaviest shipments of cash to the east.... the high exchange rates in may, and the resulting eastward movement of money, are due largely to the fact that at about this time in st. louis the bills of boot, shoe, hardware, and dry goods merchants mature, and as their paper is held largely in the east, exchange is required in large amounts. the result is large payments to st. louis banks, the building up of their reserves, and resulting reduction of their credit balances in new york city. from the first of june to the first of november the demand for money in st. louis relative to that in new york city increases rapidly, advancing from the cheapest money in the year (twenty-first week) to the dearest money (forty-fourth week).... this greatly increasing relative demand for money in st. louis is, of course, attributable to the crop-moving requirements.... the cashier of a st. louis bank writes: "new york exchange... always goes to a discount here in the fall of the year, and this is caused by the large cotton drafts drawn in payment of cotton shipped out from the southwest. the banks down there either send us drafts drawn on new england points or new york, or else they send drafts drawn on the two large cotton buyers here, who, in turn, draw their drafts on eastern points. the result is a great deal of exchange comes in, for which there is a demand for currency." the resulting low rates of exchange continue as long as the cotton season lasts. during this crop-moving season there are heavy shipments of cash from st. louis to the southern states.... after about the first week in november the relative demand for money in st. louis falls off rapidly until about the first of december, and then fluctuates at a moderate level until the end of the year.... the rise in exchange and easing up of the st. louis money market in the latter part of november and in december is due to the decline in the crop-moving demand for cash, particularly in the south, and the return movement of cash from that section,... which begins the latter part of november. southern banks in settling their st. louis bills first use their eastern exchange and then ship currency. the upward movement of exchange is hastened shortly after the first of november by heavy purchases, for about four weeks, of new york exchange by dry goods, hardware, and boot-and-shoe houses for the purpose of settling their eastern accounts.... domestic exchange in san francisco on new york city [ ]... before taking up the subject of seasonal variations in san francisco domestic exchange rates on new york city, it may be well to observe that in a number of respects the san francisco domestic exchange market is a peculiar one. in the first place the principal kind of money in circulation is gold coin and this fact materially influences the range of domestic exchange fluctuations, _i. e._, the shipping points. concerning this matter i can do no better than quote from letters of mr. f. l. lipman of the wells fargo nevada national bank. mr. lipman writes (under date of february , ): "in the east the medium of exchange is paper or new gold by weight. in california it is current gold coin by tale, with a mingling of paper and new gold. the first effect of an upward movement of exchange, there, is that at about cents per $ , the currency shipping point is reached, which in due course, drains off our paper money. at approximately $ . per $ , the gold shipping point is reached. of course the only gold that can be economically shipped is new gold. now it not infrequently happens that the demand for remittance will be so great as to exhaust ( st) the currency and ( d) the new gold, leaving only our current gold, for which there is practically no shipping point, the discount on worn coin being practically prohibitory." a second peculiarity of the san francisco exchange market arises from the fact that san francisco, being the chief port city of the pacific coast and the seat of one of the united states mints and subtreasury offices, is the recipient of large quantities of gold from gold-producing regions, _i. e._, california, alaska, and australia. the united states mint will issue without any charge its transfer drafts on the subtreasury in new york in return for deposits of gold, the new product of mines, or for deposits of imported gold. "frequently," writes mr. lipman, "this usage is without influence on our local market, as when large importations of australian gold are received for new york on london account. at other times this practice of the treasury has a decided effect on our exchange market as, for instance, when the early gold shipments come down from alaska. these shipments command the service of the treasury department to the full amount thereof, while a portion at least of the proceeds is used in payment of local bills for supplies to alaska from this city. this throws on the market an additional supply of exchange when such exchange is desired. the owners of the gold, however, have the privilege of taking gold coin instead of eastern exchange from the treasury, and this alternative tends to bring exchange to about par. the government also influences exchange from the other side, by its willingness to transmit money by telegraph from new york and chicago to this city."... professor carl c. plehn of the university of california, suggests three other characteristics of the san francisco domestic exchange market, _i. e._, ( ) the close exchange relations with the orient, ( ) the fact that in san francisco, new york bills very frequently represent merely steps in a general arbitrage transaction, and ( ) the appreciable interest element involved in demand transactions because of the distance between san francisco and new york.... from the beginning of january to about the first of march there is a rapid decline in the relative demand for money in san francisco, resulting in the lowest level of the year during february. the average rate of exchange rose from cents discount in the first week to $ . premium in the seventh.... ... among the principal factors cheapening money in san francisco at this time and forcing up exchange may be mentioned: ( ) the fact that advances which have been made for the movement of general crops up and down the pacific coast are being repaid very rapidly; ( ) the demand for eastern exchange with which to pay bills incurred for holiday purchases; and, finally ( ), the latter part of february, the desire of taxpayers to discharge eastern obligations and get movable funds out of the state before the tax returns of the first monday in march are made to the assessor. from the fore part of march to the fore part of june the demand for money in san francisco relative to new york city tends to increase.... among the causes at work in reducing exchange rates at this time may be mentioned: ( ) the readjustment after the heavy demands for exchange which were made anticipatory of assessment day: ( ) preparation for the second installment of taxes which become delinquent the last monday in april; ( ) demand for funds by the large fruit canneries with which to buy sugar and tin in preparation for the annual fruit pack which begins in may; ( ) by may the shipping trade in green fruits has begun, giving rise to many eastern bills; ( ) demand for funds for equipping fishing companies going on long trips.... from about the st of july to the fore part of september there is an almost continuous increase in the relative demand for money in san francisco.... ... during august and september, particularly the latter month, substantial transfers of cash [are made] to san francisco by the united states subtreasury at new york. this decline in exchange is principally due to the large amount of eastern credits available locally at this time from the shipment of california products, especially green fruits, to eastern points; the returns for such shipments being usually available in either chicago or new york exchange.... the california hay and grain harvests cause considerable demand for funds by the middle of july, while the ships returning from the fisheries in august and september require large sums with which to pay their crews. from about the middle of september (thirty-fourth week) to the latter part of october (thirty-ninth week) new york exchange tends to rule at near par.... during these weeks the outward movements of grain, green fruit, and fish tend to force exchange down, while the fact that this is the quarter of large receipts of gold ... from alaska, making it a period of large receipts of gold bullion at the mint, and that the san francisco mint makes returns for this gold in gold coin or new york exchange, at the option of the owner of the bullion, tends to keep new york exchange at par. the demand for money in san francisco relative to new york city increases rapidly from the latter part of october to about the st of december when it reaches its highest point in the year.... november and december are the months of largest transfers of cash to san francisco by the united states subtreasury in new york. the fall in exchange during this period appears to be due primarily to the outward movement of dried fruits, such as raisins, prunes, and apricots. the banks pay out large amounts of actual coin which goes to the country, and receive in return drafts on eastern points which build up their eastern balances. this also represents the most active part of the northern grain season. the low point of the year for exchange is about the last week in november when the tax collector for the city and county of san francisco withdraws large sums of actual coin from circulation and locks much of it up in the vaults of the city hall. december is a month in which the relative demand for money in san francisco lightens considerably as the result of the rapid falling off of the crop-moving demand.... the demand for remittances to the east for january st settlements tends to force up exchange rates at the end of the year.... currency movements between new england and the eastern states [ ]... the distance between new york city and the principal new england cities is very small, and there is a great community of financial interest among these cities and new york. between new york city and boston the currency shipping points are only about cents premium and cents discount. single financial deals between new york city and boston are frequently of sufficient moment to lead to considerable shipments of currency, although exchange rates previously were only moderate. the relations among the clearing-house banks of boston and among those of other new england cities are close, so that when one bank is in need of new york funds it is liable to obtain them from another which may have more than it needs. for this reason, it is said, much less money is now received from new york city and shipped there than was the case a few years ago.... the domestic exchanges during the crisis of [ ] there is no part of our banking machinery which has received so little elucidation as that of the domestic exchanges. even for normal times the subject is obscure, and the writer therefore ventures upon an explanation of its course during a period of crisis with hesitation, and he is by no means confident that important considerations may not have been overlooked. as in the case of foreign exchange, domestic exchange rates fluctuate within limits fixed by the cost of shipping money, and also, in the case of cities distant from new york, by the loss of interest while currency is in transit. the quoted rates apply principally to business between banks, the rates being determined by demand and supply. a boston bank, for example, receives from its customers new york drafts and also checks drawn on banks in new york and its vicinity. all these items will serve to build up its balances in that city. on the other hand, its depositors have been sending out checks, many of which will in the course of time reach new york and reduce its balances there. the boston bank will also have received from banks of new york and from banks elsewhere items for collection in its vicinity, and remittance in ordinary course will be made by it in new york funds. similarly it has sent away items for collection to banks in other cities upon which it expects a like remittance. as a result of all these various influences the balances of the boston bank may either increase or decrease. if they increase it may be ready to sell exchange to other boston banks whose balances are running low. it may also happen that the bank is desirous of reducing its new york balances, and in that case it will also appear as a seller of exchange in the market. now, if in the course of a crisis clearing-house loan certificates become the principal or sole medium of payment between banks, it may well happen that a bank will be unwilling to sell exchange unless it is unusually well supplied with new york funds. by the sale of exchange it can at best only secure a favorable clearing-house balance, which will be settled in loan certificates, and if this balance should be unfavorable it can meet it by taking out certificates on its own account. each bank, therefore, to a greater extent than in normal times, is obliged to rely upon itself for means of payment in new york. the loan certificate does indeed yield a return or involve an expense of or per cent., while the return on new york balances is only per cent. this advantage does not, however, seem to have induced the banks to sell exchange as freely as in normal times. this is, however, not the only disturbing influence. the boston bank may have remitted to new york upon items collected by it for other banks--let us say those of philadelphia--but it may happen that the philadelphia banks delay or even discontinue remitting to new york upon items sent to them for collection by banks of boston and other cities. the boston bank can then no longer rely upon what would normally serve to build up its own new york balances. it will be simply acquiring a mass of unavailable credits at scattered points throughout the country. the supply of new york exchange which it might have been willing to sell is consequently diminished, and the premium on exchange must rise to a point at which it will tempt some of the banks to sell exchange, even though it intrenches upon their balances with agents which are available for reserve. the premium would naturally be especially high in those cities where the banks were most unwilling to reduce their new york balances. philadelphia seems a case in point, as its deposits with reserve agents, which were $ , , on august , were reduced to only $ , , on december . at that time the premium on currency in philadelphia ranged from $ . to $ per $ , . it is, therefore, a reasonable conclusion that the banks were strongly disinclined to make use of their new york balances. in a few cities it is probable that the premium reached a high level because the banks had exhausted their new york balances. st. louis may be mentioned as a probable example. being a central reserve city, its banks would naturally have only such balances in new york as normal business requirements made necessary. the dislocation of exchange elsewhere or the course of payments between new york and st. louis may have combined to produce such a balance of payments as would have required currency shipments if the st. louis banks had remitted promptly to new york. the extent to which banks in different cities delayed or refused to remit to new york on items collected by them for other banks cannot be determined. banks in one city, very naturally and honestly, were inclined to lay the blame upon banks elsewhere. the banks in other places, however, may not have been able to secure payment of the items sent to them for collection from other banks in their locality with the usual promptness. when every allowance has been made, however, there can be no question that banks in certain cities, in these as well as in other matters, adopted a policy wholly designed to strengthen themselves regardless of consequences. the general prevalence of the premium on new york exchange is, as we have seen, accounted for in part by the use of clearing-house loan certificates in settling balances between banks and by the delay in remitting in new york funds upon items collected for other banks. it seems probable, however, that, taking the country as a whole, the course of payments was favorable to the new york banks. at the beginning of november withdrawals for crop-moving purposes have in recent years begun to diminish, except to the south, and movements of money from eastern centers are distinctly in favor of new york at that season of the year. if this were indeed the case in , it affords still another reason for thinking that the new york banks might have met the crisis successfully without restricting payments. they would probably have been obliged to meet only withdrawals arising from lack of confidence and not real needs for crop-moving purposes, such as would have increased the difficulties of the situation had the crisis begun at the beginning of september. finally, it should be noted that the restriction of cash payments to depositors and the currency premium seem to have increased the demand for new york exchange. only in that city was it possible to buy any considerable quantity of money. many banks in various parts of the country purchased gold and currency at a premium in new york and, instead of drawing on their own balances, then entered their home market as purchasers of exchange which was remitted in payment. in the few instances where exchange was below par the currency premium was a more direct influence; but exchange could not have dropped to the low figures recorded in in the case of chicago [$ discount per $ , ], because the chicago banks in did not maintain payments among themselves as they had done on previous occasions. exchange was at a discount only in those cities where the course of payments was so strongly against new york that practically all the banks found their balances in that city increasing. chicago might have been expected to belong to this group, but its banks made extensive use of bills derived from grain exports to secure gold which was shipped directly to them. in general, exchange was at a discount, or at par only, in the southern states, the banks of which, by means of cotton sales, are normally in position to draw money from the northeastern part of the country during the late autumn. in conclusion, it should perhaps be pointed out that the quoted rates of exchange were often without much significance. the ordinary course of dealings was so completely disorganized in many places that the rates were purely nominal, representing little or no actual transactions. footnotes: [ ] frank a. vanderlip, _modern banking_, three addresses delivered at chautauqua, new york, august, , pp. - . the national city bank. new york. [?]. [ ] e. w. kemmerer, _seasonal variations in the relative demand for money and capital in the united states_. publication of the national monetary commission, senate document no. , st congress, _ d session_, pp. - . [ ] [owing to the growth of deposit banking among the farming classes, the increasing diversification of industry in the agricultural states, _sub-treasury operations_, and the offer of remunerative rates of interest on loans in new york during the fall, the net autumnal currency movement since has frequently been to new york. see e. m. patterson, _certain changes in new york's position as a financial center_, _journal of political economy_. vol. xxi, june, , pp. - .] [ ] e. w. kemmerer, _op. cit._, pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, . . [ ] o. m. w. sprague, _history of crises under the national banking system_, publications of the national monetary commission, senate document no. , st congress, _ d session_, pp. - . chapter xviii foreign exchange the nature of foreign exchange [ ]the bill, or order to pay money in a foreign centre, is the commodity that is actually bought and sold by dealers in foreign exchange, but it is better for the moment to leave bills out of consideration. they are only the tangible expression of the claim for money in another centre, and at this early stage of our inquiry it is better to keep our minds fixed on what is at the back of the bill, namely, the money in a foreign centre to which it gives its holder a claim. the french buyer of a bill on london buys it, as a rule, because by sending it to his english correspondent he can discharge a debt to him in english money. what he really buys with his francs is so many english pounds, and the labyrinth of the foreign exchanges is much easier to thread if, before we complicate the question by talking about bills, we keep our eye on the comparatively simple problem which is the key to the puzzle, namely, the exchange of one country's money for another's. thus stripped to its naked simplicity, the problem begins to look as if it were not a problem at all, and a critical inquirer may be excused for thinking that at least in the case of countries that use currencies based on the same metal, there ought to be no need for daily quotations of rates of exchange, because the relative value of their moneys ought to be constant. it is a natural question to ask, why should there be these daily fluctuations, and, since they are evidently there, what is the sense or purport of them? the answer is, that money in france and money in england are two different things, and the relative value of two different things is almost certain to fluctuate. quite apart from any differences in the fineness of gold coined by two different countries, or the ease or difficulty with which a credit instrument can be turned into gold, mere distance is quite enough to make the difference that will create fluctuation in price. new york and chicago use exactly the same currencies, but money in new york differs from money in chicago by being nearly a thousand miles away, and consequently there are frequent variations in their relative value. the english and australian sovereigns are identical in weight and fineness, but there is constant fluctuation in the buying power of the english sovereign as expressed in its brother that is circulating in the antipodes. these fluctuations are based on the same influence that sways the movements in the prices of all goods and services that are bought and sold, that is, the influence of supply and demand. just as the price of boots, consols, medical advice, football professionals, or anything else that can be the subject of a bargain, will depend in the end upon the number of people who want to buy them compared with that of those who want to sell them, at or near a certain figure, so the price of english pounds, when expressed in francs, guilders, milreis, or australian sovereigns, depends on the number of people abroad who have to buy money in england as compared with the number of those who have money in england to sell. people abroad have to buy money in england when they owe money to englishmen and want to pay it; and they have money in england to sell when englishmen owe them money. jacques bonhomme in paris has been selling shiploads of christmas kickshaws to john robinson in london, and so has thousands of english pounds due to him by the said robinson. but english pounds, as such, are not wanted by m. bonhomme. he wants to sell them, to turn them into francs, the currency of his own country, with which he makes his daily payments at home. on the other hand, there are always plenty of frenchmen who have imported english goods or have had services rendered by english bankers, or shipowners, or insurance companies, and so want to buy english money wherewith to pay their english creditors. so it follows that the price that m. bonhomme will get for his english pounds will depend on the value of goods and services that other frenchmen have been selling to england, so producing english pounds to be sold in paris, as compared with the value of the claims that have to be met in london, for the satisfaction of which english pounds have to be bought. if the amount of english money on offer is bigger than the amount wanted, down will go the price of the english pound as expressed in francs, and the seller in francs will get less in francs for his pound. if the amount of english money wanted is the bigger, the price will go up, and the seller will get more for his pound. when the price goes down, the exchange is said to move against london, because there is a depreciation in the value of the sovereign as expressed in francs. when it goes up the exchange moves in favour of london, because the buying power of the sovereign is enhanced. the process is exactly the same, and is even more simple and easy to understand when we take away the complication of the exchange of the moneys of two different nations, and look at it at work between two distant towns of the same country. if in the course of trade new york has large payments to make in chicago, money in chicago will be wanted in new york, and competition there will send up the price of it, so that a dollar in chicago will be worth more for the time being to new yorkers than a dollar in new york, and any new york bank or firm that has a balance or a credit in chicago will be able to dispose of it at a premium. the extent of this premium, however, will obviously be limited by the expense involved in sending lawful money, as the americans call it, from new york to chicago. if we suppose, for the sake of simplicity, that the cost of sending a dollar and insuring it is covered by a cent, no one in new york will pay much more than one dollar and a cent for a dollar in chicago. rather than do so he will send his dollar. he will probably pay a small fraction more to save himself the trouble and time involved by sending and insuring money, and this minute fraction that he will sacrifice is the opportunity of the exchange dealer, who will send money to chicago, and put himself in funds there, and so be able to supply money in chicago to any one in new york who will pay for it at the rate of one dollar and one cent plus any profit that the exchange dealer can squeeze out of him. viewed in this simple example the problem of exchange has few terrors. it is merely a question of the price of money in one place, as expressed in the same money in another, with fluctuations governed by supply and demand and limited by the cost of sending money from place to place. this limitation does not mean that supply and demand cease to govern the market, but merely that at a point supply can be increased to meet any demand by the despatch of currency. "favourable" and "unfavourable" exchanges [ ]the general feeling with regard to the function of the exchanges, as giving evidence of the mercantile (or rather monetary) situation of any country, is indicated by the usual phrase of a "favourable or unfavourable state of the exchanges." a phrase which occurs so frequently in all banking discussions that it cannot be passed over without remark. it may originally have implied the erroneous theory that the object of commerce is to attract gold, and that that country towards which the tide of bullion sets with the greatest force is _ipso facto_ the most prosperous. political economists, from their point of view, are correct in their statement that, as regards the country at large and the interchange of commodities, exports and imports are always balanced, and that both the words "unfavourable balance of trade" and "unfavourable exchanges" involve fallacy. but merchants and bankers are influenced by the feeling, that at any given moment they may be under greater liabilities for imports than they can temporarily meet, owing to the system of credit which disturbs the coincidence of payments for exports and imports, though their value may actually be equal; and further, by the anxiety as to the possibility of meeting these liabilities in that specific mode of payment to which they are pledged, namely, in gold or convertible notes. when, therefore, in banking treatises, it is said that the exchanges are favourable to any particular country, it should be understood that the intention is simply to state the fact that bills of that country upon foreign cities are difficult of sale, whilst bills drawn upon it from abroad are at a premium, indicating an eventual influx of specie. so, when it is said that the exchanges are unfavorable, a situation is described in which foreign bills are in great demand, and when, consequently, their value seems likely to be so enhanced as to render the export of bullion an unavoidable alternative. the origin and supply of foreign exchange [ ]underlying the whole business of foreign exchange is the way in which obligations between creditors in one country and debtors in another have come to be settled--by having the creditor draw a draft directly upon the debtor or upon some bank designated by him. john smith in london owes me money. i draw on him for pounds, take the draft around to my bank and sell it at, say, . , getting for it a check for $ . . i have my money, and i am out of the transaction. the fact that the gold in a new british sovereign (or pound sterling) is worth $ . in our money by no means proves, however, that drafts payable in pounds in london can always be bought or sold for $ . per pound. to reduce the case to a unit basis, suppose that you owed one pound in london, and that, finding it difficult to buy a draft to send in payment, you elected to send actual gold. the amount of gold necessary to settle your debt would cost $ . , in addition to which you would have to pay all the expenses of remitting. it would be cheaper, therefore, to pay considerably more than $ . for a one-pound draft, and you would probably bid up until somebody consented to sell you the draft you wanted. which goes to show that the mint par is not what governs the price at which drafts in pounds sterling can be bought, but that demand and supply are the controlling factors. there are exporters who have been shipping merchandise and selling foreign exchange against the shipments all their lives who have never even heard of a mint par of exchange. all they know is, that when exports are running large and bills in great quantity are being offered, bankers are willing to pay them only low rates--$ . or $ . , perhaps, for the commercial bills they want to sell for dollars. conversely, when exports are running light and bills drawn against shipments are scarce, bankers may be willing to pay . or . for them. for a clear understanding of the mechanics of the exchange market there is necessary a clear understanding of what the various forms of obligations are which bring foreign exchange into existence. practically all bills originate from one of the following causes: . merchandise has been shipped and the shipper draws his draft on the buyer or on a bank abroad designated by him. . securities have been sold abroad and the seller is drawing on the buyer for the purchase price. . foreign money is being loaned in this market, the operation necessitating the drawing of drafts on the lender. . finance-bills are being drawn, _i. e._, a banker abroad is allowing a banker here to draw on him in pounds sterling at or days' sight in order that the drawer of the drafts may sell them (for dollars) and use the proceeds until the drafts come due and have to be paid. . looking at these sources of supply in the order in which they are given, it is apparent, first, that a vast amount of foreign exchange originates from the direct export of merchandise from this country. not all merchandise is drawn against; in some cases the buyer abroad chooses rather to secure a dollar draft on some american bank and to send that in payment. but in the vast majority of cases the regular course is followed and the seller here draws on the buyer there. . the second source of supply is in the sale abroad of stocks and bonds. origin of bills from this source is apt to exert an important influence on rates, in that it is often sudden and often concentrated on a comparatively short period of time. the announcement of a single big bond issue, often, where it is an assured fact that a large part of it will be placed abroad, is enough to seriously depress the exchange market. bankers know that when the shipping abroad of the bonds begins, large amounts of bills drawn against them will be offered and that rates will in all probability be driven down. . the third great source of supply is in the draft which bankers in one country draw upon bankers in another in the operation of making international loans. the mechanism of such transactions will be treated in greater detail later on, but without any knowledge of the subject whatever, it is plain that the transfer of banking capital, say from england to the united states, can best be effected by having the american house draw upon the english bank which wants to lend the money. the arranging of these loans means the continuous creation of very large amounts of foreign exchange. . drawing of so-called "finance-bills," is the fourth source whence foreign exchange originates. whenever money rates become decidedly higher in one of the great markets than in the others, bankers at that point who have the requisite facilities and credit, arrange with bankers in other markets to allow them (the bankers at the point where money is high) to draw or days' sight bills. these bills can then be disposed of in the exchange market, dollars being realized on them, which can then be loaned out during the whole life of the bills. these are the principal sources from which foreign exchange originates--shipments of merchandise, sales abroad of securities, transfer of foreign banking capital to this side, sale of finance-bills. other causes of less importance--interest and profits on american capital invested in europe, for instance--are responsible for the existence of some quantity of exchange, but the great bulk of it originates from one of the four sources above set forth. the sources of the demand for foreign exchange[ ] turning now to consideration of the various sources from which spring the demand for foreign exchange, it appears that they can be divided about as follows: . the need for exchange with which to pay for imports of merchandise. . the need for exchange with which to pay for securities (american or foreign) purchased by us in europe. . the necessity of remitting abroad the interest and dividends on the huge sums of foreign capital invested here, and the money which foreigners domiciled in this country are continually sending home. . the necessity of remitting abroad freight and insurance money earned here by foreign companies. . money to cover american tourists' disbursements and expenses of wealthy americans living abroad. . the need of exchange with which to pay off maturing foreign short-loans and finance-bills. . payment for merchandise imported constitutes probably the most important source of demand for foreign exchange. practically the whole amount of our huge importations has had to be paid for with bills of exchange. whether the merchandise in question is cutlery manufactured in england or coffee grown in brazil, the chances are it will be paid for by a bill of exchange drawn on london or some other great european financial centre. . the second great source of demand originates out of the necessity of making payment for securities purchased abroad. so far as the american participation in foreign bond issues is concerned, the past few years have seen very great developments. security operations involving a demand for foreign exchange are, however, by no means confined to american participation in foreign bond issues. accumulated during the course of the past half century, there is a perfectly immense amount of american securities held all over europe. the greater part of this investment is in bonds and remains untouched for years at a stretch. but then there come times when, for one reason or another, waves of selling pass over the european holdings of "americans," and we are required to take back millions of dollars' worth of our stock and bonds. such selling movements do not really get very far below the surface--they do not, for instance, disturb the great blocks of american bonds in which so large a proportion of many of the big foreign fortunes are invested. the same thing is true with stocks, though in that case the selling movements are more frequent and less important. . so great is the foreign investment of capital in this country that the necessity of remitting the interest and dividends alone means another continuous demand for very large amounts of foreign exchange. estimates of how much european money is invested here are little better than guesses. the only sure thing about it is that the figures run well up into the billions and that several hundred millions of dollars' worth of interest and dividends must be sent across the water each year. at the interest periods at the beginning and middle of each year it becomes apparent how large a proportion of our bonds are held in europe and how great is the demand for exchange with which to make the remittances of accrued interest. at such times the incoming mails of the international banking houses bulge with great quantities of coupons sent over here for collection. for several weeks on either side of the two important interest periods, the exchange market feels the stimulus of the demand for exchange with which the proceeds of these masses of coupons are to be sent abroad. . freights and insurance are responsible for a fourth important source of demand for foreign exchange. a walk along william street in new york is all that is necessary to give a good idea of the number and importance of the foreign companies doing business in the united states. in some form or other all the premiums paid have to be sent to the other side. times come, of course, like the year of the baltimore fire, when losses by these foreign companies greatly outbalance premiums received, the business they do thus resulting in the actual creation of great amounts of foreign exchange, but in the long run--year in, year out--the remitting abroad of the premiums earned means a steady demand for exchange. with freights it is the same proposition, except that the proportion of american shipping business done by foreign companies is much greater than the proportion of insurance business done by foreign companies. an estimate that the yearly freight bill amounts to $ , , is probably not too high. that means that in the course of every year there is a demand for that amount of exchange with which to remit back what has been earned from us. . tourists' expenditures abroad are responsible for a further heavy demand for exchange. the sums spent by american tourists in foreign lands annually aggregate a very large amount--possibly as much as $ , , --all of which has eventually to be covered by remittances of exchange from this side. then again there must be considered the expenditures of wealthy americans who either live abroad entirely or else spend a large part of their time on the other side. by these expatriates money is spent extremely freely, their drafts on london and paris requiring the frequent replenishment, by remittances of exchange from this side, of their bank balances at those points. furthermore, there must be considered the great amounts of american capital transferred abroad by the marriage of wealthy american women with titled foreigners. such alliances mean not only the transfer of large amounts of capital _en bloc_, but mean as well, usually, an annual remittance of a very large sum of money. no account of the money drained out of the country in this way is kept, of course, but it is an item which certainly runs up into the tens of millions. . lastly, there is the demand for exchange originating from the paying off of the short-term loans which european bankers so continuously make in the american market. these loaning operations, it must be understood, both originate exchange and create a demand for it. they were mentioned as one of the sources from which exchange originates, and now as one of the sources from which, during the course of every year, springs a demand for a very great quantity of exchange. in a general way, it may be pointed out, the sources of demand for exchange conform with influences which cause exchange to go up, and the sources of supply of exchange constitute causes which make for low rates. it is to be noted, however, that money rates are a great factor influencing foreign exchange. whenever money is cheap at any given centre, and borrowers are bidding only low rates for its use, lenders seek a more profitable field for the employment of their capital. money rates in the new york market are not often less attractive than those in london, so that american floating capital is not generally employed in the english market, but it does occasionally come about that rates become abnormally low here and that bankers send away their balances to be loaned out at other points. such a time was the long period of stagnant money conditions following the panic. trust companies and banks who were paying interest on large deposits at that time sent very large amounts of money to the other side and kept big balances running with their correspondents at such points as amsterdam, copenhagen, st. petersburg, etc.--anywhere, in fact, where some little demand for money actually existed. demand for exchange with which to send this money abroad was a big factor in keeping exchange rates at their high level during all that long period. high money rates at some given foreign point as a factor in elevating exchange rates on that point might almost be considered as a corollary of low money here, but special considerations often govern such a condition and make it worth while to note its effect. suppose, for instance, that at a time when money market conditions all over the world are about normal, rates, for any given reason, begin to rise at some point, say london. instantly a flow of capital begins in that direction. in new york, paris, berlin, and other centres it is realized that london is bidding better rates for money than are obtainable locally, and bankers forthwith make preparations to increase the sterling balances they are employing in london. exchange on that particular point being in such demand, rates begin to rise, and continue to rise, according to the urgency of the demand. the international money markets are a most decidedly complex proposition, and there is literally never a time when several influences tending to put exchange rates up are not conflicting with several influences tending to put rates down. the actual movement of the rate represents the relative strength of the two sets of influences. to be able to "size up" the influences present and to gauge what movement of rates they will result in, is an operation requiring, first, knowledge, then judgment. the former qualification can perhaps be derived, in small degree, from study of the foregoing pages. the latter is a matter of mental calibre and experience. methods of financing imports and exports[ ] the foreign trade of the united states has increased during the last forty years about per cent.... this increase ... reflected not alone our own marvellous development, but as well the wonderful growth of trade throughout the world. the united states stands third among the countries of the world, its foreign trade being exceeded only by that of the united kingdom ... and germany.... our imports and exports[ ] are being financed more and more by means of what are known as commercial letters of credit.... an explanation of the operation of the commercial letter of credit will ... disclose the methods and conditions under which our imports are financed. the commercial letter of credit is an authorization, say of an american bank to its london correspondent, to honor drafts for its account drawn at various tenors by foreign shippers or others against shipments of merchandise to this country. these credits are of two kinds, documentary and clean. under the documentary credit the london bank is authorized to accept drafts for the account of the american bank only when the bill of exchange is accompanied by certain documents described in the letter of credit. these documents may be the bills of lading for the goods, consular invoices, insurance certificates and possibly other papers. probably a large proportion of such credits requires that drafts be drawn at sixty or ninety days' sight. so many elements of danger are involved in financing commodities under commercial letters of credit, even where the control of the goods is given to the bank issuing the credit or its agents, that the financial standing of those asking for credits must be the first consideration in their issuance. dishonesty on the part of the shipper, resulting in a drawing under the credit against forged documents or against shipments of inferior merchandise, is always possible, and the financial responsibility of the buyer of the credit is all that stands between the banker issuing the credit and a loss in such cases. in order to obtain a clear understanding of the working of a commercial letter of credit, we will take a concrete example and follow its every transaction. an importer of coffee (a) in new york purchases a certain number of bags of coffee from an exporter (b) in brazil. a agrees to furnish b with a commercial letter of credit. b is not in position, we will say, to await the arrival of the coffee in new york and the return of a remittance before receiving his pay. a on the other hand is unable to remit b for the coffee before its receipt and sale to his customers. a goes to his banker in new york and requests him to authorize b to draw upon the new york banker's london correspondent at ninety days' sight with bills of lading for coffee to the amount of the purchase attached to the draft, consular invoice and insurance certificate, if b is to furnish insurance. if a's banker is willing to extend the credit he writes a letter (or uses a printed form), requesting his london banker to accept b's drafts upon presentation under the conditions already mentioned and others of minor importance. this letter is issued in duplicate, one copy going to the london banker, the other being delivered to a. a then mails the copy received by him to b. b thereupon arranges to ship the coffee, obtains the bill of lading, invoice, etc., and takes them with the copy of the credit to his banker in brazil. a draft is then drawn on the london bank under the terms of the credit at ninety days' sight and is discounted by the brazilian banker, the proceeds being placed to the credit of b's account or given to him in the form of a check or cash. the brazilian banker then forwards the draft and documents, except such documents as the instructions may require to be forwarded direct to new york, to his london banker. he may secure discount of the bill at once by cable or await its arrival in london before doing so, or he may request his london banker to have the bill accepted and hold it for maturity. if the bill is discounted the brazilian banker may draw against it immediately and thus put himself in funds to purchase other coffee bills. upon receipt of the bill by the london correspondent it is presented to the london banker on whom it is drawn for acceptance. the acceptor bank examines the documents and if they are drawn according to the terms of the credit accepts the draft and returns it to the correspondent of the brazilian bank, retaining the documents, which it then forwards to the new york bank which opened the credit. in accepting the draft the london bank has in effect agreed to pay it at the end of ninety days, or, figuring grace, ninety-three days. upon maturity payment is made and the amount is charged to the account of the issuing new york bank. upon receipt of the documents the new york bank delivers them to its customer under a trust receipt or against collateral, and the latter is then in position to obtain the goods. ten days before the bill of exchange is due in london the new york bank collects the amount from a, together with the commission agreed upon when the credit was opened, and remits the amount to its london banker to meet the draft. on all such transactions the london banker, while not himself advancing any money, is extending a credit for which he charges the new york bank a commission. the result is that we are paying tribute to european bankers amounting to an immense sum annually for the purpose of financing our imports. the fact that london exchange is more marketable generally throughout the world than new york exchange is one of the principal reasons why it is necessary for us to issue credits upon london instead of upon new york. our imports are distributed generally throughout the united states. the importers, however, are mostly situated at the ports of entry. a very large proportion of them obtain their credits through new york institutions, although some of them deal direct with foreign bankers. probably a smaller proportion of our exports is financed by means of commercial letters of credit than of our imports. different commodities are handled in accordance with special customs which have grown up around them, due partly to trade conditions and partly to the nature of the products. sellers of grain usually draw at sixty days' sight upon the foreign buyer instead of under a bank credit. these bills, under the customs prevailing in most foreign countries, may be rebated by the foreign buyer whenever he desires to obtain the goods at the "bank rate" or per cent. under the bank rate, or such other rate as custom in the country on which the drafts are drawn requires. such drafts, with bills of lading and such other documents as are necessary, are purchased by american banks and are forwarded by them to their european correspondents. the american banker is obliged to advance the money on such paper, unless he draws his own time bills against them, until such time as they are rebated. in the case of grain bills the average time rebated is probably around fifty-six days, which places the american bank in possession of demand foreign exchange, against which it can draw in order to reimburse itself with the loss of a very few days' interest. flour bills, which are financed in the same manner as grain bills, usually run nearly to maturity before they are rebated, although the condition of the discount market sometimes influences the purchaser, and causes him to take the bills up more promptly. many foreign shipments are made under three-day sight bills, which uses the money of the american banks making the advance from four to seven days or more, depending upon whether the laws of the country on which the bills are drawn allow grace or not and whether the bills are purchased with intervening days before the sailing of steamers. other classes of bills are drawn at sight. this includes a portion of our lumber shipments and miscellaneous articles. where shipments are made on sailing vessels, drafts are frequently drawn at four or six months' sight, and many other transactions go through against cable payments. as nearly per cent. of our exports consist of cotton, the method under which it is financed is worthy of special consideration. cotton bills are ordinarily of two kinds: documentary payment bills and bills drawn upon bankers. documentary payment bills, which are drawn upon cotton merchants or spinners at sixty or ninety days' sight or other tenors, are handled in the same manner as flour bills. the cotton merchant accepts the draft upon presentation and rebates it when the goods arrive, or when he desires to obtain the cotton. a small percentage of cotton is handled in this way. most of the commodity is financed by means of credits opened by the foreign buyer through his banker. various abuses have developed under this system, which have caused losses running into millions of dollars to all of the various parties engaged in carrying the transactions to their close. these losses have only been possible because of the turning over of credits by the foreign buyers to irresponsible concerns in america in their endeavor to obtain cotton at lower prices than their competitors. a foreign buyer makes arrangements with certain american concerns to cable him offers of cotton. the american firms whose offers are accepted receive cablegrams from the buyer advising them of the acceptance of their offers and giving them the names of the foreign bankers on whom the drafts in payment of the cotton are to be drawn. the american sellers thereupon ship the cotton to the buyer under bills of lading drawn to the shipper's order and endorsed in blank. the bills of lading are then attached to drafts drawn upon the bankers designated by the buyer at the given tenor, which is usually sixty or ninety days. this exchange is then sold in the market to the highest bidder or it is forwarded to new york to be sold in the same manner upon arrival. the american exchange buyers have no means whatever of designating whose bills shall be upon the market, as the sellers are all agents of the european buyers. the american exchange houses in their need for exchange to meet the demands of their importers have accepted the bills offered in the market, each exchange man endeavoring to keep his "water line" on weak names as low as possible. if the european buyers only dealt with first-class houses only first-class bills would be offered, but when they deal with second- or third-rate houses, or houses with no standing whatever, such bills drawn upon prime european banks come upon the market. the american exchange buyers having the cotton as collateral while the drafts are on the water, and then having the acceptance of a prime european bank for the sixty or ninety days following before maturity of the draft, have accepted these risks, although unwillingly, for want of better bills. they endeavor to protect themselves as far as possible by trying to buy bills only of those in whose honesty they have reason to believe, whether they have any capital back of them or not. if the cotton were actually shipped under a bona fide order, any fluctuation in the value of the cotton which they accepted as collateral, although taken entirely without margin, would probably cause them neither loss nor friction. they have run the risk, however, of having forged documents forced upon them which did not represent goods, or exchange that was drawn without authority. lines which exchange buyers are willing to take from each cotton shipper before acceptance, and before the name of a prime european banker is added to the paper, have to be based upon this consideration. the old form of the cotton bill of lading which has been signed by freight agents or their assistants or others has been an instrument not possible to authenticate. this was particularly dangerous, due to the manner in which bills of lading were issued. they were formerly given out to the shippers, who filled them in and returned them to the railroad agent, who in turn often signed them without having any knowledge as to whether the goods called for by the bill of lading were in his possession or not. under a new system bills of lading are not to be given up until the goods are actually in possession of the railroads. this system, which calls for validation certificates, numbered and printed upon a specially protected water-mark paper, to be attached to the bills of lading in such manner as to make it practically impossible to remove them without detection, went into effect september , , and it is confidently hoped that it will give sufficient added safety to the bills of lading of american railroads to satisfy the foreign bankers. the very act of guaranteeing such bills is recognized by foreign bankers as being wrong in principle, and while they are requesting that american exchange buyers guarantee bills of lading for exports yet on the other hand they particularly call attention to the fact that no bills of lading which pass through their hands for imports to the united states are guaranteed by them in any way, shape, or manner. credit risks of drafts drawn on buyers abroad [ ]many american manufacturers do not realize the essential "credit" element of transactions on the basis of drafts drawn on _foreign customers_.... the exporter has received an order; he purchases the goods covered by this order from the manufacturer, and should the customer change his mind the exporter may suffer a loss. or the customer refuses to accept the goods, and the exporter may again suffer a loss. or the customer may accept the goods and the draft, but fail to pay, and the exporter once more is the loser.... ... the turning over of the bill of lading vests the property right to the goods in the customer. the customer either pays the value of the draft in cash ("documents against payment," abbreviated d/p) or accepts the draft for payment at some future date, which is the more customary course ("documents against acceptance," d/a). even in the case of d/p drafts, payment by the customer may be postponed; instead of paying cash he accepts the draft at one to three months, but neither the documents nor the goods are turned over to him. he may want to wait until he has sold the goods, on the basis of samples, perhaps, and the goods are warehoused until he can pay the amount of the draft into the bank or to the forwarding agency. this is frequently done in the far east. here the banks maintain so-called "godowns" for this purpose. the goods are occasionally turned over to the customer for warehousing purposes against the so-called "trust receipt." one important feature of "acceptance" of the draft by the customer is the fact that it forms an acknowledgment of indebtedness, which it is then unnecessary to prove item by item in case of litigation. in most countries acceptances are far simpler to collect judicially than open accounts. when an accepted draft is unpaid it is "protested," and the debtors may be proceeded against without further trouble. frequently open accounts may be neglected by a customer who may find himself for some reason short of immediately available funds, but to neglect the payment of an accepted draft is regarded in the trade and by banks as so serious a matter that the drawee would lose caste with the banks; oversea buyers endeavor in most cases to honor accepted drafts.... england draws few bills, but accepts many--the reason and the result [ ]it has been shown that, if two countries buy of each other to the same amount, their transactions need not give rise to two separate sets of bills, but that on the contrary, if the foreigner draws on us to the full value of his exports, the bills so created will be sent as remittances to the exporter on this side and will pay him for his sales. conversely, if the british exporter draws, there is no necessity for the other side to do so. what, then, are the facts? does the united kingdom, generally speaking, draw on abroad, or does the foreigner take the initiative by drawing on london? as a matter of fact, both sides draw; but, as all who are acquainted with the customs of trade are well aware, the bills drawn by great britain on abroad are vastly outnumbered by those drawn from abroad on london. owing chiefly to the magnitude of our trade, but also to several contributory causes--such as the stability of our currency; the certainty that a bill on london means gold and nothing but gold; the facility with which those who deserve credit can obtain it here; our freedom from invasion, etc.--london has become to a great extent the settling-place of europe and the world, and the seller, wherever he may be, of a good bill on london can always be sure of finding a buyer and of realizing a fair price. as the sale of a bill, moreover, carries the valuable advantage of ready money and a speedy turnover of capital, it is invariably preferred by the foreign exporter, who has consigned or sold produce to us, to the alternative plan of awaiting remittances from this side. the foreign importer, too, who has to pay for the goods he has bought, would rather do so by remitting to london than by allowing us to draw upon him. in the former case, the rate he has to pay depends upon his own success in higgling; in the latter, it is fixed by a london bill-broker, who has not the same interest in the matter. if the same considerations held good on this side also, our merchants and manufacturers might perhaps object to letting the foreigner have it all his own way; but, on the contrary, it appears to suit both buyers and sellers very well--the former, because in the majority of cases they would scarcely know how or where to buy suitable bills, and the latter, because the drawing and negotiation of a foreign bill requires a certain amount of knowledge of the exchanges, which they do not always possess, and entails a certain amount of trouble, which they would gladly be spared. there is also more risk of loss in drawing. in the latter case they have only their correspondent to look to, while on a london remittance they have the additional security of the other parties to the bill. practically speaking, therefore, the settlement of our foreign trade is effected by means of bills of exchange which are drawn and negotiated abroad, and are accepted and paid in london. to the student of the exchanges this fact is of considerable importance, for, as the rate of exchange between two countries--the price at which bills on the one are sold in the other--must be _fixed by the one that draws and negotiates the bill_, it follows that the exchanges between england and most other countries are controlled from the other side, and that we in london have scarcely part or say in the matter. the rate of exchange, for example, between england and the united states is fixed in new york; between england and brazil, in rio; between england and turkey, in constantinople; and so on. there may be exceptions, of which the indian exchange is the most notable, but that is the general rule, and it is one that should be carefully borne in mind. the same fact also supplies a reason for the solicitude with which the foreign trader watches the fluctuations of the exchange, and for the utter indifference with which they are regarded by the british trader. to the former, who intends maybe to draw a few hundred pounds on london in a day or two against the shipment he is preparing, the difference between selling his draft next week instead of this may mean, if the rate should move in his favor, the gain of an additional half per cent.; but to our home manufacturers, who sell their wares in sterling and stipulate for payment in bills on london, the see-saw of rates is but of academic interest. they pay attention to the _course of discount_, because they may have to melt some of their paper before pay-day comes round; but the course of the exchange--the question of the rate rising or falling--hardly concerns them at all. it is not sought to detract from the influence of the english-drawn foreign bill, or, as might be imagined, to explain it away altogether. on the contrary, paper to a considerable amount is, and will continue to be, negotiated on the royal exchange (though the total, if compared with that of the paper on london negotiated abroad, would appear quite insignificant).[ ] the object in view is merely to bring into prominence, and to impress on the reader, the essential principle that, while the position of every rate of exchange is the outcome of the market conditions _in the two countries combined_, the predominant mass of the dealings take place on the other side, so that, as a consequence, the real significance of the fluctuations can only be grasped by viewing them from the foreign [_e. g._, american] standpoint. the recent rise of the american acceptance market [ ]probably the most important effect at this time [ ] of the federal reserve act is the establishment of the american acceptance market. it may well be said that heretofore america has had no real money market. the only semblance of a money market previously existing in this country was the call loan market of new york city. that, however, did not truly reflect money conditions in this country, as it has more often reflected the secondary effect of some movement of the stock market. the development of a real money market in this country was greatly hampered by the lack of a standardized credit instrument. in every other country the bank acceptance in which the element of credit risk has been practically eliminated is the standard instrument of credit, and the discount rate of such paper marks the level of the money market. bank acceptances were not known in this country prior to the operation of the federal reserve act. for the benefit of those who may not be familiar with bank acceptances, i will briefly describe an operation giving rise to such acceptances. jones, an importer of coffee in new york, desires to purchase a cargo of coffee in rio de janeiro. he goes to his bank in new york and arranges with them to finance the deal. smith, the grower of the coffee in brazil, makes the shipment to new york and draws a ninety days' sight draft on the new york bank for the amount of his invoice. this draft he then sells to some brazilian bank.... the brazilian bank then sends the draft to new york. it is there presented to the new york bank for acceptance. the new york bank accepts the draft by writing the word "accepted" across the face of the draft and affixing its official signature thereto. the draft now becomes the primary obligation of the new york bank. of course, jones, for whose account the new york bank accepted the draft, has obligated himself to provide the new york bank with funds to meet the draft, but if he should fail to do so the new york bank must pay the acceptance nevertheless. it is, therefore, the direct obligation of the new york bank, and as such it commands the best discount rates current. this briefly is what is known as a bank acceptance, _i. e._, a draft drawn on and accepted by a prime bank or banker. although this business is still in its infancy, it has reached important proportions and there is an active market for them in new york city. a number of brokers have taken up the business of buying and selling acceptances. every morning they make the rounds of the various banks with the list of the acceptances they have for sale and the rates at which they are willing to sell them. incidentally, they also learn whether the banks have any acceptances for sale and at what rates. as the credit risk is practically eliminated, acceptances are a very attractive form of secondary reserve; they are, as a london banker once expressed it, a means of enabling the banker to eat his cake and have it too--the banker by investing his money in acceptances earns the discount and at the same time he knows that his money is instantly available in case of need, so that they are almost as available as cash. this explains why the discount rate on acceptances ranges so low. ninety days' sight acceptances sold in new york city at one time as low as per cent. per annum and to-day prime acceptances command the excellent rate of - / per cent. the economies and advantages of "dollar credits"[ ] many radical changes in the mechanism of international finance have occurred during the past fifteen months, since the beginning of the european war. not the least important among these changes, viewed from the standpoint of the american importer, is the evolution in the methods of financing our importations. our imports in the way of commodities such as hides, coffee, rubber, wool, etc., etc., run into hundreds of millions of dollars annually, and these are financed generally through the medium of commercial credits established by the purchaser in favor of the vendor of the merchandise. commercial credits, so called, are in effect a bank guarantee to the seller that his drafts covering certain merchandise, when drawn in accordance with the conditions prescribed in the credit, will meet with due honor on presentation to the accepting bank named in the credit instrument. in order merely to gain an idea as to the importance and volume of such transactions, it is only necessary to glance at the totals of a few of our principal imports. in the year we imported, among other commodities, the following: hides and skins $ , , . coffee , , . rubber , , . wool (unmanufactured) , , . prior to the outbreak of the war in europe, it is safe to assume that fully per cent. of the credits issued to cover these importations were passed through london in the form of sterling credits; that is to say, credits available by drafts drawn in pounds sterling on london. requests for the issuance of credits available by drafts drawn in united states dollars on new york were extremely rare, and they were issued only in exceptional cases. conditions have changed materially in this respect. the federal reserve act grants to national banks the privilege of accepting drafts or bills of exchange growing out of transactions involving the importation or exportation of goods. this acceptance privilege was accorded to national banks only a short time before the commencement of hostilities abroad, and this fact in conjunction with the resulting dislocation in the delicate machinery of international credit brought about by the war, together with the coincidental establishment of american branch banks in south america, has contributed in a large measure to bring about the use of what is known now as "dollar credits." as a factor in creating the existing demand for dollar credits, the establishment of american branch banks abroad cannot be emphasized too strongly. through these branch banks, a new and adequate medium for the liquidation of transactions as between the united states and certain south american countries, especially the argentine, brazil, and uruguay, has been placed at the disposal of our merchants. a direct channel is now open to the ebb and flow of credit transfer between the united states and the countries mentioned, and, as a natural sequence, the former disparity existing against the dollar, as compared with pounds sterling and the principal continental exchanges, has disappeared. the resulting equalization in the rates of exchange benefits the american merchant to the extent of relieving him of the tribute formerly paid to the indirect channels of liquidation, or, in other words, to the foreign banker. the dollar credit is of capital importance to every american merchant who is interested either directly or indirectly in the importation of commodities of any character. a study of the advantages accruing from this form of credit will demonstrate the desirability of its general employment as the vehicle for financing not only our own imports but also those of other countries. primarily, it is more economical than the sterling or continental credit, for the initial commission cost of issuance is lower. secondly, it is based on a known quantity, the dollar, a factor of supreme importance in these days of extreme and violent fluctuations in the exchange rates, and therefore all exchange risk is eliminated from the operation as far as the importer is concerned. maturities drawn under dollar credits are due and payable in dollars on a given date, and no question arises as to what the exchange rate on london may be ninety days after acceptance of the bill. under existing conditions in the new york money market, and considering the present low rates of interest actually in effect, the use of dollar credits is proving to be particularly attractive to the american importer as the medium for financing his importations. the rate of discount in new york for prime bank acceptances is - / @ - / per cent. per annum, and a broad, well-developed discount market now exists, with an ever-increasing demand in evidence for this class of paper. on the other hand, the rate of discount in london for prime ninety-day bills is - / per cent. per annum, with operations restricted in a far from normal market. a comparison of these two discount rates will show a difference in favor of new york of - / @ - / per cent. per annum. in addition to this difference in interest, there is also a difference in the initial cost in the form of commission for issuance, as between credits available by ninety-day drafts drawn on new york in dollars and those available by ninety-day drafts drawn on london in pounds sterling. this difference in commission in favor of new york will average / per cent. per annum, and when added to the saving in discount or interest already noted, will show a net saving on the dollar credit of @ - / per cent. per annum, which accrues to the importer through the use of dollar credits in his operations. quite apart from the direct economy to the individual resulting from the use of dollar credits, is the broader question of the economic value accruing to the nation as a whole through the designation of the dollar as the basis of value in our credit transactions with the rest of the world. since , when the total of our imports amounted to $ , , , , the volume of our imports has increased rapidly, and in , the total imports reached the enormous sum of $ , , , . these figures cover products from all parts of the world shipped direct to our own shores, and while no nation enjoys higher international credit than the united states, yet it is a fact that in order to finance the movement of our imports we have been compelled to have recourse to indirect channels and call on foreign money centers to furnish us with the necessary credit facilities to take care of a large part of our importations. naturally, we have been obliged to pay for this accommodation, and the service has cost us millions of dollars annually in interest, commissions, etc. these charges can be saved and an important economy effected, thus benefiting our commerce as a whole by the general designation of dollars in our foreign credit transactions. the purchasing power of the dollar in foreign markets is much greater to-day than it is in normal times because of the varying premium which the dollar commands at present practically throughout the world. the time is unquestionably opportune to increase the prestige of the dollar and to standardize its use in the liquidation of our direct purchases abroad. co-operation and concerted action on the part of our merchants to the end of generalizing the use of dollar credits is therefore a duty, which will bring about lasting benefit to the economic fabric of our commerce. the new york foreign exchange market[ ] a market may be defined as the coming together of buyers and sellers. it therefore involves all the mechanism necessary to facilitate their intercourse. one may speak of a general market or of a local market, of a market in one or in another place. thus, there is the new york market for the buying and selling of exchange on london. a bank in new haven, connecticut, may be a part of that market if it buys from and sells to it. that market includes, besides the commercial and industrial organizations which buy or sell drafts, all middlemen of whatever class who engage in the trade. the middlemen may be divided roughly into three classes. first may be mentioned banks which do a regular foreign exchange business, buying bills from those who have them to sell and selling their own drafts on foreign correspondents to persons desiring to remit. much of this business is done by foreign exchange banks which carry on little or no other business. some of it is done by ordinary commercial banks, such as united states national banks, in addition to their other banking business. second, we may call attention to those exchange dealers whose principal business is to buy commercial and bankers' bills, and to resell them, chiefly to banks. third are the independent brokers who make small commissions by bringing buyers and sellers together. these do not invest their own capital, do not, that is, buy bills of exchange in the market, but assist those desiring to sell bills to find buyers, and _vice versa_.... new york city practically absorbs by purchase all american foreign exchange [ ]there is, perhaps, no feature pertaining to banking throughout the country so dependent upon new york financiers, as foreign exchange. the very foundation of this branch of banking is constructed by the new york bankers, and from their banking houses emanate the basic prices and quotations upon which foreign bills are bought and sold throughout the united states. it is the custom of new york foreign exchange brokers to furnish their western clients, direct, or through their local representatives, daily market quotations, and to promptly advise them of fluctuations throughout the day. so closely is the west allied to the east, in this respect, that any interruption caused by delayed or suspended telegraphic service, immediately superinduces a practical standstill of exchange transactions, and operations thereafter must necessarily be made in the "dark" until free communication is again renewed between the cities.... the absorptive power of the new york market, to digest not only the surplus foreign exchange of the chicago market, but that of the entire united states as well, has been demonstrated for many years. the reason for this can be attributed to the fact that international trade balances are at the present day, and always will be, adjusted by the financiers of new york city. how money is made in foreign exchange--the operations of the foreign department [ ]complete description of the various forms of activity of the foreign exchange department of an important firm would fill a large volume, but there are certain stock operations in foreign exchange which are the basis of most of the transactions carried out and the understanding of which ought to go a long way toward making clear what the nature of the foreign exchange department's business really is. i. selling "demand" against "demand" the first and most elementary form of activity is, of course, the buying of demand bills at a certain price and the selling of the banker's own demand drafts against them at a higher price. a banker finds, for instance, that he can buy john smith & co.'s sight draft for £ , , on london, at the rate of . , and that he can sell his own draft for £ , on his london banking correspondent at . . all he has to do, therefore, is to buy john smith's draft for $ , , send it to london for credit of his account there, and then draw his own draft for £ , on the newly created balance, selling it for $ , . it cost him $ , to buy the commercial draft, and he has sold his own draft against it for $ , . his gross profit on the transaction, therefore, is $ . as may be imagined, not very much money is made in transactions exactly of this kind--the one cited is taken only because it illustrates the principle. for whether the banker sends over in every mail a bewildering assortment of every conceivable form of foreign exchange to be credited to his account abroad, or whether he confines himself to remittances of the simplest kind of bills, the idea remains exactly the same--he is depositing money to the credit of his account in order that he may have a balance on which he can draw. that is, indeed, the sum and substance of the exchange business of the foreign department of most banking houses--the maintaining of deposit accounts in banks at foreign centres on which deposit account the bank here is in a position to draw according to the wants and needs of its customers. ii. selling cables against demand exchange a "cable," so-called, differs from a sight draft only in that the banker abroad who is to pay out the money is advised to do so by means of a telegraphic message instead of by a bit of paper instructing him to "pay to the order of so and so." under ordinary circumstances foreign exchange dealers who engage in the business of selling cables carry adequate balances on the other side, balances which they keep replenishing by continuous remittances of demand exchange. iii. selling "demand" bills against remittances of long bills if there is a stock operation in the conduct of a foreign exchange business it is the selling by bankers of their demand bills of exchange against remittances of commercial and bankers' long paper. bills of the latter class make up the bulk of foreign exchange traded in, and its disposal naturally is the most important phase of foreign exchange business. what the foreign exchange business really is grounded on is the existence of commercial bills called into existence by exports of merchandise. buying and remitting commercial long bills is no pastime for an inexperienced man. entirely aside from the question of rate, and profit on the exchange end of the transaction, there must be taken into consideration the matter of the credit of the drawer and the drawee, the salability of the merchandise specified in the bill of lading, and a number of other important points. where documents accompany the draft and the merchandise is formally hypothecated to the buyer of the draft, it might not be thought that the standing of the drawer would be of such great importance. possession of the merchandise, it is true, gives the banker a certain form of security in case acceptance of the bill is refused by the parties on whom it is drawn or in case they refuse to pay it when it comes due, but the disposal of such collateral is a burdensome and often expensive operation. the banker in new york who buys a sixty-day draft drawn against a shipment of butter is presumably not an expert on the butter market and if he should be forced to sell the butter, might not be able to do so to the fullest possible advantage. employment of an expert agent is an expensive operation, and, moreover, there is always the danger of legal complication arising out of the banker's having sold the collateral. it is desirable in every way that if there is to be any trouble about the acceptance or payment of a draft, the banker should keep himself out of it. the successive steps in an actual transaction are as follows: the banker in new york having ascertained by cable the rate at which bills "to arrive" in london by a certain steamer will be discounted, buys the bills here and sends them over, with instructions that they be immediately discounted and the proceeds placed to his credit. on this resulting balance he will at once draw his demand draft and sell it in the open market. if, from selling this demand draft, he can realize more dollars than it cost him in dollars to put the balance over there, he has made a gross profit of the difference. to illustrate more specifically: a banker has bought, say, a £ , ninety days' sight prime draft, on london, documents deliverable on acceptance. this he has remitted to his foreign correspondent, and his foreign correspondent has had it stamped with the required "bill-stamp," has had it discounted, and after having taken his commission out of the proceeds, has had them placed to the credit of the american bank. in all this process the bill has lost weight. it arrived in london as £ , , but after commissions, bill-stamps, and ninety-three days' discount have been taken out of it, the amount is reduced well below £ , . the net proceeds going to make up the balance on which the american banker can draw his draft are, perhaps, not over £ . he paid so-and-so many dollars for the £ , ninety-day bill, originally. if he can realize that many dollars by selling a demand draft for £ he is even on the transaction. iv. the operation of making foreign loans in its influence upon the other markets, there is perhaps no more important phase of foreign exchange than the making of foreign loans in the american market. the mechanics of these foreign loaning operations, the way in which the money is transferred to this side, etc., will now be taken up. to begin at the very beginning, consider how favorable a field is the american market for the employment of europe's spare banking capital. almost invariably loaning rates in new york are higher than they are in london or paris. this is due, perhaps, to the fact that industry here runs on at a much faster pace than in england or france, or it may be due to the fact that we are a newer country, that there is no such accumulated fund of capital here as there is abroad. such a hypothesis for our own higher interest rates would seem to be supported by the fact that in germany, too, interest is consistently on a higher level than in london or paris, germany, like ourselves, being a vigorous industrial nation without any very great accumulated fund of capital saved by the people. but whatever the reason, the fact remains that in new york money rates are generally on so much more attractive a basis than they are abroad that there is practically never a time when there are not hundreds of millions of dollars of english and french money loaned out in this market. all through the past ten years london has at various times opened her reservoirs of capital and literally poured money into the american market. to take up the actual operation of loaning foreign money in the american market, suppose conditions to be such that an english bank's managers have made up their minds to loan out £ , in new york--not on joint account with the american correspondent, as is often done, but entirely independently. included in the arrangements for the transaction will be a stipulation as to whether the foreign bank loaning the money wants to loan it on the basis of receiving a commission and letting the borrower take the risk of how demand exchange may fluctuate during the life of the loan, or whether the lender prefers to lend at a fixed rate of interest, say per cent., and himself accept the risk of exchange. what the foregoing means will perhaps become more clear if it is realized that in the first case the american agent of the foreign lender draws a ninety days' sight sterling bill for, say, £ , on the lender, and hands the actual bill over to the parties here who want the money. upon the latter falls the task of selling the bill, and, ninety days later, when the time of repayment comes, the duty of returning a _demand_ bill for £ , , plus the stipulated commission. in the second kind of a loan the borrower has nothing to do with the exchange part of the transaction, the american banking agent of the foreign lender turning over to the borrower not a sterling draft but the dollar proceeds of a sterling draft. how the exchange market fluctuates in the meantime--what rate may have to be paid at the end of ninety days for the necessary demand draft--concerns the borrower not at all. he received dollars in the first place, and when the loan comes due he pays back dollars, plus , , or per cent., as the case may be. what rate has to be paid for the demand exchange affects the banker only, not the borrower. loans made under the first conditions are known as sterling, mark, or franc loans; the other kind are usually called "currency loans." at the risk of repetition, it is to be said that in the case of sterling loans the borrower pays a flat commission and takes the risk of what rate he may have to pay for demand exchange when the loan comes due. in the case of a currency loan the borrower knows nothing about the foreign exchange transaction. he receives dollars, and pays them back with a fixed rate of interest, leaving the whole question and risk of exchange to the lending banker. to illustrate the mechanism of one of these sterling loans. suppose the london bank, ltd., to have arranged with the new york bank to have the latter loan out £ , in the new york market. the new york bank draws £ , of ninety days' sight bills, and, satisfactory collateral having been deposited, turns them over to the brokerage house of smith & jones, the borrowers. smith & jones at once sell the £ , , receiving therefor, say, $ , . the bills sold by smith & jones find their way to london by the first steamer, are accepted and discounted. ninety days later they will come due and have to be paid, and ten days prior to their maturity the new york bank will be expecting smith & jones to send in a _demand_ draft for £ , , plus / per cent. commission, making £ additional. this £ , less its commission for having handled the loan, the new york bank will send to london, where it will arrive a couple of days before the £ , of ninety days' sight bills originally drawn on the london bank, ltd., mature. what each of the bankers concerned makes out of the transaction is plain enough. as to what smith & jones' ninety-day loan cost them, in addition to the flat / per cent. they had to pay, that depends upon what they realize from the sale of the ninety days' sight bills in the first place and secondly on what rate they had to pay for the demand bill for £ , . exchange may have gone up during the life of the loan, making the loan expensive, or it may have gone down, making the cost very little. plainly stated, unless they secured themselves by buying a "future" for the delivery of a £ , demand bill in ninety days at a fixed rate, messrs. smith & jones have been making a mild speculation in foreign exchange. if the same loan had been made on the other basis, the new york bank would have turned over to smith & jones not a _sterling bill_ for £ , , but the _dollar proceeds_ of such a bill, say a check for $ , . at the end of ninety days smith & jones would have had to pay back $ , , plus ninety days' interest at per cent., $ , , all of which cash, less commission, the new york bank would have invested in a demand bill of exchange and sent over to the london bank, ltd. whatever more than the £ , needed to pay off the maturing nineties such a demand draft amounted to, would be the london bank, ltd.'s profit. from all of which it is plainly to be seen that when the london bankers are willing to lend money here and figure that the exchange market is on the down track, they will insist upon doing their lending on the "currency loan" basis--taking the risk of exchange themselves. conversely, when loaning operations seem profitable but rates seem to be on the upturn, lenders will do their best to put their money out in the form of "sterling loans." bankers are not always right in their views, by any means, but as a general principle it can be said that when big amounts of foreign money offered in this market are all offered on the "sterling loan" basis, a rising exchange market is to be expected. from what has been said about the mechanism of making these foreign loans, it is evident that no transfer of cash actually takes place, and that what really happens is that the foreign banking institution lends out its credit instead of its cash. for in no case is the lender required to put up any money. the foreign lender is at no stage out of any actual capital, although it is true, of course, that he has obligated himself to pay the drafts on maturity, by "accepting" them. where, then, is the limit of what the foreign bankers can lend in the new york market? on one consideration only does that depend--the amount of accepted long bills which the london discount market will stand. for all the ninety days' sight bills drawn in the course of these transfers of credit must eventually be discounted in the london discount market, and when the london discount market refuses to absorb bills of this kind a material check is naturally administered to their creation. v. the drawing of finance-bills approaching the subject of finance-bills, the author is well aware that concerning this phase of the foreign exchange business there is a wide difference of opinion. finance-bills make money, but they make trouble, too. their existence is one of the chief points of contact between the foreign exchange and the other markets, and one of the principal reasons why a knowledge of foreign exchange is necessary to any well-rounded understanding of banking conditions. strictly speaking, a finance-bill is a long draft drawn by a banker of one country on a banker in another, sometimes secured by collateral, but more often not, and issued by the drawing banker for the purpose of raising money. such bills are not always distinguishable from the bills a banker in new york may draw on a banker in london in the operation of lending money for him, but in nature they are essentially different. whether or not any collateral is put up, the whole purpose of the drawing of finance-bills is to provide an easy way of raising money without the banker here having to go to some other bank to do it. the origin of the ordinary finance-bill is about as follows: a bank here in new york carries a good balance in london and works a substantial foreign exchange business in connection with the london bank where this balance is carried. a time comes when the new york banking house could advantageously use more money. arrangements are therefore made with the london bank whereby the london bank agrees to "accept" a certain amount of the american banker's long bills, for a commission. in the course of his regular business, then, the american banker simply draws that many more pounds sterling in long bills, sells them, and for the time being has the use of the money. in the great majority of cases no extra collateral is put up, nor is the london bank especially secured in any way. the american banker's credit is good enough to make the english banker willing, for a commission, to "accept" his drafts and obligate himself that the drafts will be paid at maturity. naturally, a house has to be in good standing and enjoy high credit not only here but on the other side before any reputable london bank can be induced to "accept" its finance paper. the ability to draw finance-bills of this kind often puts a house disposed to take chances with the movement of the exchange market into line for very considerable profit possibilities. suppose, for instance, that the manager of a house here figures that there is going to be a sharp break in foreign exchange. he, therefore, sells a line of ninety-day bills, putting himself technically short of the exchange market and banking on the chance of being able to buy in his "cover" cheaply when it comes time for him to cover. in the meantime he has the use of the money he derived from the sale of the "nineties" to do with as he pleases, and if he has figured the market aright, it may not cost him any more per pound to buy his "cover" than he realized from the sale of the long bills. in which case he would have had the use of the money for the whole three months practically free of interest. it is plain speculating in exchange--there is no getting away from it, and yet this practice of selling finance-bills gives such an opportunity to the exchange manager shrewd enough to read the situation aright to make money, that many of the big houses go in for it to a large extent. during the summer, for instance, if the outlook is for big crops, the situation is apt to commend itself to this kind of operation. money in the summer months is apt to be low and exchange high, affording a good basis on which to sell exchange. then, if the expected crops materialize, large amounts of exchange drawn against exports will come into the market, forcing down rates and giving the operator who has previously sold his long bills an excellent chance to cover them profitably as they come due. vi. arbitraging in exchange. arbitraging in exchange--the buying by a new york banker, for instance, through the medium of the london market, of exchange drawn on paris--is another broad and profitable field for the operations of the expert foreign exchange manager. take, for example, a time when exchange on paris is more plentiful in london than in new york--a shrewd new york exchange manager needing a draft on paris might well secure it in london rather than in his home city. between such cities rates are not apt to be wide enough apart to afford a wide margin of profit, but the chance for arbitraging does exist and is being continuously taken advantage of. so keenly, indeed, are the various rates in their possible relation to one another watched by the exchange men that it is next to impossible for them to "open up" to any appreciable extent. the chance to make even a slight profit by shifting balances is so quickly availed of that in the constant demand for exchange wherever any relative weakness is shown, there exists a force which keeps the whole structure at parity. the ability to buy drafts on paris relatively much cheaper at london than at new york, for instance, would be so quickly taken advantage of by half a dozen watchful exchange men that the london rate on paris would quickly enough be driven up to its right relative position. if a chance exists to sell a draft on london and then to put the requisite balance there through an arbitration involving paris, brussels, and amsterdam, the chances are that there will be some shrewd manager who will find it out and put through the transaction. some of the larger banking houses employ men who do little but look for just such opportunities. the foregoing are the main forms of activity of the average foreign department, though there are, of course, many other ways of making money out of foreign exchange. gold movements [ ]when there is a heavy demand for exchange and little supply, the price of exchange gradually advances. the banker, called on by his customers to draw exchange for them, finding few bills in the market that he can remit to cover his drafts, sends gold and directs its equivalent in foreign coin to be placed to his credit, and against this credit he draws. there may be no market abroad for our crops or manufactures; but gold need not be sold in order to produce money; it need only be coined. as this process can be carried on indefinitely, the cost of sending gold is obviously the limit beyond which the price of demand bills cannot advance. let us follow this transaction in detail. the pure gold contained in one english sovereign is exactly equal to the pure gold contained in $ . of our gold coins; so that, apart from charges and expenses, $ . of our gold will, when sent abroad, produce a credit of £ ; to this cost must be added freight, insurance, and other expenses, amounting to about one-fourth of per cent. this brings the cost of £ through shipment of gold to about $ . , which is, roughly, the gold export point for full weight coin. the exporting banker obtains his gold either by drawing gold coin from his bank or else by drawing suitable currency from his bank, and obtaining gold coin for it at the subtreasury. in either case, he obtains coin that has suffered more or less abrasion by handling, and this loss of weight by abrasion, amounting to perhaps one-tenth of per cent., increases the cost of his remittance. generally, however, the banker can obtain gold bars from the united states assay office at the nominal charge of one twenty-fifth of per cent., although at times a larger charge is made. the banker prefers bars, because on these there is no loss by abrasion; the government can afford to give bars, because their export prevents the export of coin, and so saves the cost of coining new money to replace that shipped. now for gold import. when there is a large volume of bills offered to bankers, perhaps by grain and cotton exporters, and but little demand from buyers of exchange, the market gradually declines in price, while new york bankers, sending abroad the bills they buy, with little occasion to draw against them, accumulate large sums to their credit in london, with no way of getting the money back to new york through operations in the exchange market. they are not, however, helpless; they can order gold sovereigns sent here, and, once here, can have them melted down at the united states assay office and coined into eagles and double eagles, which they can deposit with their banks. obviously, the amount received in dollars for each melted sovereign will mark the price the banker can afford to pay for sterling bills, and competition among bankers will prevent the rate of exchange from declining below this point by more than a fair margin of profit. the british sovereign, if full weight, will, when sent here and melted down, yield gold for which the united states assay office will pay $ . ; the expense of sending the sovereign, freight, insurance, cartage, and kegs, will amount to about one quarter of per cent., so that the net yield of the full weight sovereign in dollars will be $ . - / . but between the day on which the banker buys the bill of exchange in new york and the day on which he receives in new york the gold which the bill entitled him to collect in london, there must elapse the time needed to send the bill to london, plus the time needed to send the gold back (roughly fifteen days), during which period the banker loses the use of the money. this loss of interest must be deducted from the net yield of the imported sovereign, and thus, if money is worth per cent. per annum, the net yield of full weight sovereigns is brought down to about $ . - / , which is the gold import point for demand exchange, when money is worth per cent. per annum. losses by abrasion will bring down this point by perhaps one-tenth of per cent., to about $ . - / . when money is higher, the import point will be lower, and _vice versa_. there is therefore a margin of profit in buying demand bills and importing gold sovereigns against the purchase, whenever the rate for demand bills falls below the gold import point. active exchange bankers take advantage of this profit whenever exchange prices decline to the proper point, and their competition in buying bills to cover their gold importations stops further decline in exchange rates. it is interesting to note that during the recent crisis, when gold and currency were at a premium, bankers could sell the imported gold at a premium, and this constituted an additional and very large profit; gold importers could therefore pay higher prices than ordinarily for exchange bought to cover the importations, and the stress of competition so drove up the rate of exchange that gold was being imported at a profit, though exchange rates stood at what, under ordinary circumstances, would have been the gold export point. gold is, however, not always imported from england in the form of sovereigns. the bank of england has in its vaults large quantities of american eagles and double eagles exported to england in the past and held without melting. the bank also holds foreign coin and bar gold. any holder of bank of england notes can get sovereigns on demand--other gold he can get only as the result of a special bargain. when gold is wanted for export, the bank is often glad to sell bar gold or double eagles at rates somewhat more advantageous to the exporter than would be the export of sovereigns; this the bank can afford to do, for the expense of coining sovereigns to replace those exported is thus saved, while the exporter, if he can get bar gold on the same basis as sovereigns, avoids the losses of abrasion. eagles are even more advantageous to the exporter, for they are bought in england by weight and used in america by count; the banker therefore gets an advantage if they are light, so long as that lightness is not so great as to make them uncurrent--practically he buys them as light and uses them as full weight.... the mechanism of gold import to, and export from, germany is practically the same as with england, the reichsbank being required to give gold coin in exchange for its circulating notes. at times, however, german exchange has fallen below the theoretical gold import point, owing, not to the refusal of the reichsbank to give gold, but to the practical obstacles that at times are somehow placed in the way of free export of gold. the reichsbank does not refuse gold for its bank-notes, but german bankers say to their correspondents: "don't ask us to get gold for you, or we shall lose caste," and on such occasions german exchange rates drop to a point that is theoretically impossible. i do not mean to criticise them: german banks, when they refuse to demand gold of the reichsbank, do no more than our own banks and bankers did recently, when asked by foreign correspondents to collect in gold the maturing obligations of railroads and other corporations. as will be remembered, clearing-house funds rather than cash were at that time current here, and new york banks and bankers sent to their foreign correspondents the same answer as the germans have at times sent us. i cite the german instance in partial mitigation of censure of our own course rather than as a reproach to them. the bank of france is not compelled to give gold in exchange for its circulating notes; it may at its option give silver. thus, when it is inconvenient to give gold, the bank can refuse, or, if it prefers, it can exact a premium. this power has been very moderately and very wisely used by the bank to modify foreign demands on the one hand, and, on the other, to keep interest rates low for the requirements of internal trade. of course, when a premium is exacted, the french gold import point drops accordingly. between the gold export point and the gold import point, exchange fluctuates under the sway of conflicting currents and tendencies--i had almost said emotions, for these currents and tendencies have their rise in emotions, needs, and passions as varied as life itself, whether they be hunger as expressed in the grain bill, or love of elegance in the importation of silk, or forethought in the profitable investment of capital. this brief review will have made clear what is meant by a free gold market--a market in which current money can at all times be exchanged for gold without delay and without premium. such a market has great commercial advantages; its stability draws business to it. london is such a market, and its commercial and financial pre-eminence is in great measure due to that fact. paris is not such a market and does not pretend to be; berlin pretends to be, but cannot always be counted on; new york was believed to be before our recent panic. i have spoken of the exchange market as an economical mechanism, automatically making delicate international adjustments. in justification of that observation, let me direct attention to the manner in which gold, in moving from financial centre to financial centre, always travels by the most direct route, and that, too, not because some public official is charged with the duty of preventing waste, but because a private trader is trying to make a profit, and is incidentally serving the community; serving it perhaps better than if he had consciously determined to serve it. useful acts springing from self-interest have one very comforting aspect--we need have no misgivings as to their continuance. charity may grow weary or disgusted, but self-interest, once enlisted, may be counted on to continue in operation, whether it be the business man's self-interest in a profit or the professional man's self-interest in advancement and fame. of course, both the business man and the professional man, in addition to seeking the direct rewards of their labor, take an interest in their work as work and make it yield them pleasure. it is therefore satisfactory to know that, so long as the banker looks after his profits, gold will move by the most direct route. let us suppose the united states to be exporting a large quantity of cotton to england at a time when little merchandise is being imported here from england, but when much is being imported from france. if the volume of exports to england and of imports from france were large enough, we might conceivably be importing gold from england in payment of our produce, and exporting it to france in payment for her luxuries; but, in practice, gold does not move that way. every morning, the new york exchange banker learns by cable the paris market rate for demand bills on london. when, therefore, he finds a large volume of bills on london offered for sale, and little demand for such bills, while there is large demand for bills on paris and little supply, he determines, instead of drawing from new york against his purchases of london bills, to let his paris agent draw against these purchases, placing the proceeds to his credit in paris; against this credit in paris, the new york banker draws his bill in francs, having thus supplied via london the new york demand for bills on paris. he knows how many dollars each pound sterling costs him in new york, and the paris rate for bills on london tells him how many francs each pound sterling will net him in paris, and so he can calculate how many cents each franc will cost him. moreover, he is not the only banker in new york that receives cable quotations; and so with a large volume of london bills offered and little direct demand for such bills, and large demand for paris bills with little direct supply, we get a situation where new york bankers, competing with each other to buy the london bills for use via paris, prevent the price of sterling from falling to the gold import point; and then, as a result, these same bankers, competing with each other to supply the demand for paris bills, by their competition prevent the paris rate from rising to gold export point. lastly, they compete with each other in paris, where all are sellers of bills on london against their new york purchases of london bills, and by that competition they reduce the rate for london bills in paris to the point, at which, other things being equal, gold will go from london to paris. what has happened, therefore, is that instead of our importing gold from london, and then exporting it to paris, it has gone direct from london to paris. complications in the determination of gold points [ ]it is safe to assert that when the exchanges go down to the point at which it pays better to ship gold from london than to buy a bill, gold will go. but in the first place, experts always differ as to where that point begins; and in the second, gold often leaves london long before there is any question of its being the more profitable form of remittance. in fact, it may be asserted that the foreign exchanges very seldom go down to the export gold point, because gold begins to go before they can get there. it has often happened to me, when i was a financial journalist and had to try to find out the how and why of gold movements, to ask several of the most experienced and well-informed cambists in the city whether a gold shipment which had taken place had been made as a genuine exchange transaction or was done for some other reason, and to hear from one that there was a reasonable exchange profit on it, from another that there might be just a shade of a turn to be got out of it if you scraped it very hard with a knife, and from another that you could not find a particle of profit in it if you put it under a microscope for a week. so many complications have to be considered that the most eminent doctors may be pardoned for disagreeing. it may be objected that dealers in exchange, and the comparatively few firms that make a special study of gold shipping, are not in the business for their health, and that shipments would not happen if there were not some profit in them. this is perfectly true, but the profit need not be got from the exchange. as an exchange transaction it only pays to ship gold to america when bills on london can only be sold in new york at a lower price than gold would fetch if brought from london and exchanged into dollars in new york. if bills on london are selling at . - / , and gold can be bought and shipped and turned into dollars at the rate of . - / , after allowing for all charges and commissions and the loss of interest during transit, then the operation pays as an exchange transaction. if the dollars realized by the gold were at the rate of only . - / the importer would be no better off than if he had sold a bill; if they were at the rate of . - / he would be out of pocket on the business, viewed strictly as an exchange transaction. but this is by no means the only consideration. gold has such a magical fascination for moneyed mankind, and its movements are so eagerly discussed in their markets and newspapers, that it is often handled and shipped at a loss, especially in america, for the sake of the advertisement that the importing firm thereby gains for itself. moreover, imports of gold have a very stimulating effect on speculative stock markets, because an increase in the amount of gold available means a roughly corresponding increase in the amount of credit that bankers can give, so that when gold is known to be coming speculators know that credit will be cheaper for carrying their commitments, and will come in and buy, with a light heart, stock that they could not possibly pay for, but hope to pawn with their bankers until they can sell it at a higher price. and so unless the loss on the exchange side of the business is too great, it often pays the leaders of a bull campaign to import gold, having first laid in a line of stock, and make their profit by unloading during the fit of exhilaration produced by the news that the gold is on the way. or, again, quite apart from any speculative and spectacular motives behind gold shipments, it may pay bankers, in a country where rates for money are ruling high, to import gold at an apparent loss, because of the high rates that they get for the credit that they are thereby enabled to give. they thus, in effect, borrow gold, and recoup themselves by being able to lend, on profitable terms, larger amounts than they borrow, since they can always create credit to larger amounts than that of the gold in their vaults. sometimes, in fact, in times of pressure banks find themselves obliged to import gold so as to strengthen their position, whatever the loss on exchange may be. for instance, last september, when the berlin exchange was at the point at which, if theory ruled in these matters, berlin ought to have been thinking of packing up some gold to send to london, berlin was buying gold in london and shipping it to the fatherland, because there is always great pressure for currency in germany at the end of september when the interest on mortgages falls due and has to be paid in cash, with the result that the reichsbank's note circulation expands very rapidly and the backing of gold behind it has to be increased. sometimes, again, in order to attract gold, a central bank will give importers credit for gold that is on the way, so that they may be saved from loss of interest while the metal is afloat. thus the actual importer may make a profit on the shipment, not as a genuine exchange transaction, but at the expense of the central bank. in these cases two of the many functions performed by gold have to be considered. as a means of international remittance, it may not be as cheap as a bill, but it may have to be sent, not as a means of remittance, but because it is urgently wanted in the importing country as a make-weight for the balloon of credit. so we see that the grumbling bill broker who ... [said] that these confounded exchanges only work one way, was actually understating his case. not only do we [englishmen] always lose gold when the exchanges go against us, and often get none when they go in our favour, but we also often lose gold long before the exchanges are sufficiently against us to justify its going, and sometimes even when they are strongly in our favour. the effect on the exchange of an import or export of gold is, of course, just the same as that of the import or export of any other commodity--an import turns the exchange against us and an export turns it in our favour. if we send gold, for example, to germany we thereby meet a german claim on us or create a claim for ourselves on germany; in the former case the bills drawn on us will be less by the amount of the gold shipped, and the supply in berlin of bills on london will be less in relation to the demand, so that the tendency will be for the price of sovereigns, as expressed in marks, to rise. in the latter case some one in berlin will have a claim to meet in london and will have to bid there for a bill on london, and his bidding will have the same beneficent effect on the exchange. when we import gold, whether brought out of bankers' vaults, or dug out of the bowels of the earth, the country that sends it to us meets claims of ours on it or establishes claims on us. in either case the tendency is for the exchange to move against us. the handling of gold shipments [ ]whether in coined pieces or bars (bullion), the gold is packed in strong kegs or boxes, securely strapped with hoop iron, and carefully sealed with private seals; the latter to discover if tampered with en route. space is chartered from the steamship company, as in the case of merchandise, although nearly all large fast steamers have rooms especially constructed for such valuable cargo.... as an extra safeguard in case of large shipments, the steamship company details special armed men to guard the room day and night, and sometimes the shipper employs special detectives in citizens' clothes to watch the passengers on the trip, since it is generally known several days in advance when large shipments of gold are to be made. the silver exchanges [ ]... it is acknowledged that commerce between gold standard countries is satisfactory to all classes of traders, for both importers and exporters know exactly the return they may expect, but in trade between a silver-using country and one on a gold basis, a large measure of uncertainty invariably exists. whenever there is a fall in the gold value of silver, either the exporter in the gold standard country or the importer in the silver country must suffer. let us take the case of the exporter. we will suppose that a. blank & company, of manchester, calico printers, send goods to shanghai, which they hope to sell there for a total sum of, say, £ , . the price of silver when the shipment was despatched was, we will say, _d._ per standard ounce, and on this basis a. blank & company have calculated the selling price which is to yield them £ , . by the time the calico arrives in shanghai, the gold price of silver has dropped, we will suppose, to _d._ per standard ounce, and this obviously indicates that the manufacturers will receive one-fifth less for their wares, since they are paid in the currency of the province (taels in this instance), and when blank & company's money comes to be converted back into british gold pieces, they are face to face with the fact that the outturn is £ less than they had calculated: they have lost one-fifth, and receive £ only. this is, of course, an extreme case, as in the ordinary course silver would be unlikely to drop _d._ in the period between shipment and arrival of the goods in shanghai; but whatever the fall, the principle is the same, and the illustration serves to show exactly what happens. it is not only the british exporters who stand to lose in the lottery of trade with countries which have an unstable silver exchange; the capitalist also, and every class of investor, is liable to be adversely affected in operations with silver standard countries. the rate of exchange between such countries and gold standard countries is plainly the exchange between gold and silver; therefore, if a person has invested in undertakings in the silver country, when he receives his dividends in the currency of that country, he will obtain less for his dividend warrant on the london market in proportion to the fall in the price of silver--assuming that it does fall. conversely, he may reap a higher return on his investment if silver has gone up before the encashment of his dividend. finally, the principal is affected in the same way, whenever it is desired to convert it back into gold. a further example will show how this works out in practice. we may assume that an investor, encouraged by the chance of earning per cent. on his money, remits to china £ , . the price of silver on the st january, , was - / _d._ per ounce standard; on the st december, , - / _d._ for the sake of argument, we will imagine our investor sent the money out to the eastern country on the st january, , but circumstances made it advisable for him to recall his money at the end of december in the same year, when the metal had depreciated to - / _d._; in converting his principal back to british currency he will find himself faced with a sharp loss. silver, in which the investment stood, has dropped - / _d._ of its gold equivalent, roughly, one-seventh; consequently on conversion the gold value of his original £ , has fallen to about £ .... ... the exchanges of these silver standard countries ... [are] quoted in shillings and pence to the dollar, tael, or rupee, as the case may be, that is, the gold value of the respective silver coins. hong-kong, for instance, is quoted _s._ - / _d._ to the dollar, and shanghai, _s._ - / _d._ to the tael. the rates from these centres ... indicate the price for telegraphic transfers on london: the unit of exchange in the centres named being by general consent the rate for telegraphic transfers on london. let us take the shanghai rate as an example: _s._ - / _d._ per tael, means that for every silver tael the remitter hands over to the exchange bank in shanghai, _s._ - / _d._, or, to give it its real significance, a little less than one-eighth of a sovereign in gold, will be paid to the person in whose favour the remittance is made, as soon as a telegram can reach the bank's london branch.... ... besides the t. t. rate, as it is called for the sake of brevity, we have the four months' sight and six months' sight rates, which are the quotations for first-class bank bills. both quotations are higher than for the telegraphic transfers, that is to say, for every silver tael paid in shanghai the bank will allow more shillings and pence where it is a question of paying the gold value in london four or six months hence, than it would if the payment is to be made on demand or by wire. the reason is, that if a bill drawn on london, payable four months after sight, is sent, the remitter is bound to place the receiver in such a position that if the latter chooses to turn the bill into cash after it has been "sighted" and accepted, he will not be worse off than if the money had been sent by cable.... as may be gathered, therefore, the discount rates ruling on the london market are of great importance to the eastern bankers and exchange dealers: so important are they in fact, that it is necessary for each side to keep in direct telegraphic communication regarding the existing discount quotations and the probable trend of the markets.... ... the rate at which they are able to cover their drawing operations ... governs the price at which they will sell bills. if a banker has funds deposited with his correspondent upon which he can draw, well and good: if he has no balance with the agent, he must either provide the wherewithal to meet the bills which he has drawn, or, alternatively, he can instruct the agent to draw on him in reimbursement. finally, there comes a time,... when, as all other means of placing his correspondent in funds have been exhausted, the banker will be obliged to ship ... silver to be sold for what it will fetch.... it is fairly clear that the real trouble in eastern exchange lies in the fact that we have three main factors to deal with instead of two. in the gold exchanges we have simply the demand for and supply of bills and telegraphic transfers; in the silver exchanges the matter is complicated by the way in which we also have to depend upon the fluctuations in the price of silver on the london market.... shanghai draws on london for the cost of her exports and remits to london for the value of her imports, and the principal reason for this procedure is that the manufacturer in great britain does not wish to be bothered with the variations in exchange, although as the reader has seen, he may be pretty severely affected if silver has depreciated before his goods are sold. leaving that out of the question, however, we may take it that as all his expenses are payable in gold, he naturally prefers to deal in terms of that metal. consequently, goods shipped to china are nearly always paid for by remittances, or drawn for in sterling, which comes to the same thing. the chinese producer is on rather a different footing. his expenses are in silver, and in silver he wishes to be paid. his produce, however, he has sold to great britain for a gold price, and either he cannot afford to, or does not want to wait until a remittance can be sent by mail from london. the one way open to him is to draw in sterling and settle the rate of exchange on the spot, which he does and so makes an end of the matter.... footnotes: [ ] hartley withers, _money changing_, pp. - . e. p. dutton and company. new york. . [ ] adapted from the rt. hon. viscount goschen, _the theory of the foreign exchanges_, pp. - . effingham wilson. london. . [ ] adapted from franklin escher, _the elements of foreign exchange_, pp. - . bankers publishing company. new york. . [ ] _ibid._, pp. - , , - , . [ ] adapted from frederick i. kent, _financing our foreign trade_, the annals of the american academy of political and social science, vol. xxxvi, no. , november, , pp. - . [ ] [the method explained would apply without qualification to our imports generally prior to , whether coffee from brazil, hides from the levant or textiles from france. the recent and growing practice of drawing on new york rather than on london is discussed later in this chapter.] [ ] adapted from archibald j. wolfe, _foreign credits_, pp. , , special agents series--no. . department of commerce and labor. washington. . [ ] george clare, _the a b c of the foreign exchanges_, pp. - . macmillan and company. london. . [ ] [english bills drawn on our banks have increased in volume since , through the operation of the federal reserve act and the amended new york state bank law which make provision for the acceptance of time drafts by national and new york state banks, respectively.] [ ] john e. rovensky, _how the war affects practical operations in international exchange_, journal of the american bankers association, vol. , no. , june, , pp. , . [ ] joseph t. cosby, _the economies and advantages of "dollar credits."_ the national city bank. new york. . [ ] harry g. brown, _international trade and exchange_, pp. - . the macmillan company. new york. . [ ] anthony w. margraff, _international exchange_, pp. - . fergus printing company. chicago. . [ ] adapted from franklin escher, _elements of foreign exchange_, pp. - . bankers publishing company. . [ ] albert strauss, _gold movements and the foreign exchanges_, the currency problem and the present financial situation. a series of addresses delivered at columbia university, - , pp. - . the columbia university press. . [ ] hartley withers, _money changing_, pp. - . e. p. dutton and company. new york. . [ ] address by h. k. brooks. _lectures on commerce_, edited by henry rand hatfield, university of chicago publications of the college of commerce and administration, vol. i., pp. - . the university of chicago press. chicago. . [ ] william f. spalding, _foreign exchange and foreign bills in theory and in practice_, pp. - . sir isaac pitman & sons, ltd., bath, new york and melbourne. . chapter xix clearing houses the following discussion of clearing houses is confined mainly to the united states and england. references to the clearing houses of france and germany, where the introduction of the use of checks and the consequent development of clearing facilities have been tardy, are contained in the chapters devoted to the banking systems of those countries. i. in the united states a clearing house defined [ ]what is a clearing house? the supreme court of the state of pennsylvania has defined it thus: it is an ingenious device to simplify and facilitate the work of the banks in reaching an adjustment and payment of the daily balances due to and from each other at one time and in one place on each day. in practical operation it is a place where all the representatives of the banks in a given city meet, and, under the supervision of a competent committee or officer selected by the associated banks, settle their accounts with each other and make or receive payment of balances and so "clear" the transactions of the day for which the settlement is made. but we must go farther than this, for though originally designed as a labor-saving device, the clearing house has expanded far beyond those limits, until it has become a medium for united action among the banks in ways that did not exist even in the imagination of those who were instrumental in its inception. a clearing house, therefore, may be defined as a device to simplify and facilitate the daily exchanges of items and settlements of balances among the banks and a medium for united action upon all questions affecting their mutual welfare. methods of exchange in new york prior to [ ]during a comparatively short period immediately following the number of banks in new york increased from to . in the daily course of business each bank received checks and other items on each of the other banks, which had to be presented for collection. all such items on hand were assorted and listed on separate slips at the close of the day, and items coming in through the mail on the following morning were added at that time. to make the daily exchanges each bank sent out a porter with a book of entry, or pass book, together with the items to be exchanged. the receiving teller of the first bank visited entered the exchanges brought by the porter on the credit side of his book and the return exchanges on the debit side, who then hurried away to deliver and receive in like manner at the other banks. it often happened that five or six porters would meet at the same bank, thereby retarding one another's progress and causing much delay. considerable time was consumed in making the circuit. hence, the entry of the return items in the books of the several banks was delayed until the afternoon, at an hour when the other work of the bank was becoming urgent. a daily settlement of the balances was not attempted by the banks, owing to the time it would have required, but they informally agreed upon a weekly adjustment, the same to take place after the exchanges on friday morning. at that time the cashier of each bank drew a check for each of the several balances due it, and sent a porter out to collect them. at the same time the porter carried coin with which to pay balances due by his bank. after the settlement had been made, there was a meeting to adjust differences and bring order out of chaos. an old bank officer (j. s. gibbons), in describing the inconveniences and defects of this system, says that some of the more speculative banks took advantage of the weekly method of settlements by carrying a line of discounts to an amount greater than their legitimate resources would allow. thus, a bank would manage to carry a small debit balance of $ , or $ , with thirty or more institutions, making a total debit balance of, say, $ , on which it discounted paper. it was the practice to borrow enough on thursday to make the settlements on friday, and the return of the loan on saturday threw it again into the debtor column. virtually, therefore, the weekly settlements were nominal only, and to show that there was no attempt at economy of time and labor in making them, it is only necessary to say that the cashier drew a check for every balance due him, whereas a draft on one bank in favor of another might have settled two accounts at once. the banks were at liberty to draw on each other for their credit balances without waiting for the settlements on friday, and hence, when specie was needed, this was not infrequently done. but so far did many of the banks extend their loans and discounts that a single small draft by one bank on another would induce a general drawing and involve them all in confusion and virtual war on each other. three o'clock would arrive, with the line of drafts incomplete, thus enabling debtor banks ofttimes to add $ , to their specie, whereas creditor banks would find themselves at the close of the day depleted in perhaps twice that sum. the origin of the new york clearing house [ ]the desirability of a substitute for such a system had long been realized, but as yet no plausible scheme had been proposed. as early as a plan had been suggested by albert gallatin, which, to a very remarkable degree, coincided with the one ultimately adopted. but the times were not ripe for the scheme thus proposed. mr. gallatin was thinking in advance of the age. in time, however, the question began to be more generally discussed. for nearly a year it was under consideration, and finally it was deemed advisable to call a meeting to take decisive action upon it. on august , , presidents, vice-president, and cashiers, representing banks, assembled in the directors' room of the merchants' bank, and at this meeting a resolution was passed providing that "a committee be appointed to procure or hire a suitable room in or near wall street, for the purpose of holding meetings of the officers of the city banks; that the said committee be requested to submit a plan, at an adjourned meeting of this body, to simplify the system of making exchanges and settling the daily balances; and that when a room is procured or hired for the above purpose, the presidents or cashiers be requested to meet weekly until a plan is agreed upon." in compliance with this request, the committee presented a plan for the daily settlement of balances, at a meeting held on august , , which plan was amended so as to provide "that a room be procured for that purpose, sufficiently large to afford suitable accommodations." on september , , the scheme was adopted and the committee was "clothed with full power to hire a room, appoint a manager and clerks, and make all the necessary arrangements to carry the plan for a clearing house into effect." the date for beginning operations was fixed for october . accordingly, on the appointed day, the representatives of the banks, members of the association, met in a room which had been procured in the basement at no. wall street, and made the first exchanges. the total clearings on that day were $ , , . , and the balances were $ , , . . these clearings have since been eclipsed by over $ , , in the totals of a single bank. the clearing system in america was thus fairly launched, and from that time forth its success exceeded the expectations of even its most ardent projectors. the association consisted at that time of banks, banded together for their common good, which, as they then conceived, consisted solely in the exchange of items and settlement of balances at a uniform time and place. for nearly a year the operations were conducted without a constitution. the adoption of such an instrument was opposed, on the ground that it was not needed and might lead to a dangerous concentration of power in the hands of a few managers, who might use it for personal aggrandizement, or for the exercise of an arbitrary supervision. membership and admittance fees at new york [ ]the association at present ( ) consists of members[ ] ( national banks and state banks) and the united states subtreasury located at new york. the latter makes its exchanges only at the clearing house, its balances being settled at its own counter. it has no voice in the government of the association, and pays a nominal sum for actual expenses. the privilege which the subtreasury enjoys of making its exchanges through the clearing house is a matter of great accommodation both to the subtreasury and to the banks. the new york post-office clears through one of the members, but renders no compensation to the association for the privilege. the membership of the association since its organization has been constantly changing, owing to the admission and expulsion of members and voluntary withdrawals, as provided by the constitution. the association began with members, but by the list had declined to , the lowest number in the history of the clearing house. a membership of was attained in . on february , , the bank of the union was expelled and the clearing-house association was authorized to return to it whatever amount was necessary to offset its advances toward the expenses of the clearing house. in the following december the empire city bank was expelled and a similar resolution was passed but in no case thereafter were any such refunds made.... the constitution is very explicit in its terms governing the admission and conduct of members. applicants are first considered by the clearing-house committee and referred hence to the committee on admissions. the latter committee, if, in its opinion, after a careful examination, the applicants are qualified for membership, refers them to the association for final action, a three-fourths vote of those present being necessary for admission. banks may be elected to membership at any meeting of the association, but before being considered by the clearing-house committee each applicant must be shown to have an unimpaired capital or an unimpaired capital and surplus of at least $ , . each new member is required to signify its assent to the constitution, in the same manner as the original members, and pay an admission fee, according to capital, as follows: a bank the capital of which does not exceed $ , , must pay $ , ; a bank the capital of which exceeds $ , , must pay $ , . any member increasing its capital is required to pay in accordance with those rates. [ ]methods of settling balances there are no less than five different methods of settling balances, in whole or in part, without the use of money at the clearing house. they are ( ) by manager's check on debtor banks given to creditor banks; ( ) by borrowing and loaning balances without interest; ( ) by borrowing and loaning balances with interest; ( ) by the use of one or more of four forms of certificates, viz., gold and currency depository certificates, united states assistant treasurer certificates, and clearing-house loan certificates; and ( ) by draft on another city. when money is not used in the adjustment of balances at the clearing house, one of the most common methods of settlement is by manager's check on debtor banks in favor of creditor banks. in such cases the creditor banks send clerks to the clearing house to receive the manager's checks, which may be cashed by the debtor banks, exchanged for cashier's checks or exchange on another city, or sent through the clearings on another day. there is one important advantage of the manager's check over settlements in cash at the clearing house: by its use only one transfer of cash is necessary in making settlements, and thus the risk is greatly diminished. the second mode of settlement, other than on a cash basis, is by borrowing and loaning balances without interest. at chicago and pittsburg this method is practised as a matter of convenience to the several members. after the exchanges have been made and the balances determined, a certain length of time is devoted to this transfer. the third method is that of borrowing and loaning balances upon interest, as practised in boston. the fourth method is that of employing some form of certificate. many of the large clearing houses provide for a depository to receive in special trust such united states gold coin as any of the banks belonging to the association may voluntarily deposit with it for safekeeping, upon which certificates may be issued, to be used in the settlement of clearing-house balances. such certificates are usually issued in denominations of $ , and $ , , and are negotiable only among the associated banks. many of the clearing houses impose a fine for their transfer to any other party than a member of the association. coin certificates were devised by f. w. edmunds of new york, and came into use about . the bank of america first acted as a depository, but after the beginning of the greenback epoch the associated banks chose the united states subtreasury as such depository for both gold and currency. when the new clearing house in cedar street was occupied, the gold deposits were transferred to the magnificent vaults with which it is provided, and these at the present time hold a very heavy deposit of gold, as well as a very large amount of currency, against which have been issued clearing-house certificates as before mentioned. the associations in practically all of the large cities of the united states now use these gold depository certificates in the settlement of clearing-house balances. clearing-house loan certificates are issued only in emergencies. the period during which balances are settled by such instruments lasts usually only three or four months, or until the financial disturbance which called them forth has subsided. the fifth method is by draft on some other city. in some places the option is given of settling in cash or by draft, as at austin, tex.; charleston, s. c.; frederick, md.; jacksonville, fla.; kansas city, mo.; new orleans, la.; rochester, n. y.; and saginaw, mich. in others settlements are made exclusively by drafts on another city. among these are syracuse, n. y.; worcester, mass.; fall river, mass.; fremont, ohio; hartford, conn.; holyoke and lowell, mass.; and binghamton, n. y. sometimes foreign drafts are used in payments of equal thousands only, as at wilmington, del., and chester, pa. generally speaking, about per cent. of the clearing houses of the united states use drafts on other cities in paying their balances. about per cent. settle by manager's check, and about per cent. settle by cash alone, the remaining per cent. settling by a combination of two or more of the foregoing methods. clearing houses located in new england settle, as a rule, with drafts on boston or new york, or both. clearing houses in the vicinity of philadelphia usually settle with drafts on that city or on new york, and those located in that part of the country lying east of the mississippi river settle more or less by draft on new york or chicago. settlement is also sometimes made by draft on some of the larger cities, such as baltimore, washington, savannah, kansas city, detroit, omaha, and san francisco. [ ]ratio of balances to clearings the ratio of balances to clearings depends partly upon the number of banks, but much more upon the amount and character of their business and upon their relations one to another. this is illustrated by figures which have just been collected, covering the transactions for the year . at pittsburg, with members and non-members clearing through members, the balances were . per cent. of the clearings; at buffalo, with members and non-members, per cent.; at chicago, with members and non-members clearing through members, . per cent.; at philadelphia, with members and non-member, . per cent.; at st. louis, with members and non-members, . per cent.; while in new york, during the fifty-four years of its existence, the percentage of balances to clearings has been only . per cent., notwithstanding the operation of the united states assistant treasurer, who almost always has a heavy debit balance. the more nearly the banks stand on an equality with one another, the more nearly will their transactions approach a complete offset, which, of course, would leave no balance to settle. [ ]the nature of clearing-house loan certificates clearing-house certificates are of two kinds--those issued upon the deposit of gold coin (and in new york city and boston on gold and silver certificates and legal-tender notes) and those issued upon the deposit of collateral securities. the former are employed in ordinary times solely as a method of economizing time and labor and reducing risk in handling large sums of money. the latter are employed in times of financial disturbance or panic, and although both are intended for use solely in the settlement of balances at the clearing house, the circumstances that call them forth, the results effected by their use, and the part they play in banking economy have little or nothing in common. the certificates issued upon the deposit of gold, etc., are termed "clearing-house certificates," and those issued upon the deposit of collateral security are very properly termed "clearing-house loan certificates," with which latter only are we here concerned. clearing-house loan certificates may be defined as temporary loans made by the banks associated together as a clearing-house association, to the members thereof, for the purpose of settling clearing-house balances. such certificates are negotiable, as a rule, only among the members of the association, and are not in any sense to be regarded as currency. they are not even seen by the business community, and do not pass from bank to bank except in payment of clearing-house balances. to obtain an intelligent understanding of the real character and purpose of such certificates it will be well to treat somewhat of the circumstances under which they are issued. in the course of the present century the united states has undergone periodical derangements of business affairs, when confidence was displaced by mistrust, when the payment of debts became difficult, when property values declined, and business houses failed; when industry and trade were paralyzed, and general stagnation ensued in all lines of enterprise. in such times depositors in banks, stricken with fear and sometimes pressed by need, draw out their deposits, in many cases to such an extent as to render it difficult or even impossible for the banks to contract their loans sufficiently to meet the demands thus made upon them. under our currency system no adequate method is [was] provided for expanding the money volume as occasion demands, whereby the banks can continue their usual loans and discounts, and thus prevent a panic with all its evil consequences. hence it is left in a large measure to the financiers of each community to work out their own remedy, supplemented by such mutual assistance as a courteous regard for each other may dictate or as business relations may demand. quick to see the defects in our currency system, and the desirability of in some way supplying it, the bankers of new york, nearly fifty years ago, devised the scheme of issuing clearing-house loan certificates as a method of relief from temporary stringencies. subsequently, nearly all the clearing houses in the great centres adopted the same device, and by their heroic resort to the measure they have at different times relieved the business community of untold disaster, for which invaluable service they have justly received the grateful recognition of the entire country. the great value of clearing-house loan certificates lies in the fact that they take the place of money in settlements at the clearing house, and hence save the use of so much actual cash, leaving the amount to be used by the banks in making loans and discounts, and in meeting other obligations. the volume of currency, to all intents and purposes, is expanded by this means to the full amount of the certificates issued. the loan certificates are taken out by the clearing-house members through loan committees, specially appointed, and are used, as a rule, only in the payment of balances among the associated banks. thus, when the stringency in the money market seems sufficient to demand it, the clearing-house association meets and appoints a committee called the "loan committee," consisting usually of five bank officers, to act in concurrence with the president of the clearing-house association, who serves ex officio as a member. it is the duty of such committee to meet each morning at the clearing house and examine the collateral offered as security by the banks and issue loan certificates thereon, in such denominations and proportions to collaterals deposited as may be agreed upon. in the past the denominations have varied from cents to $ , in the different associations and in proportions varying from $ to $ of certificates to $ of collateral deposited. these loan certificates bear interest at rates varying from to per cent. per annum, payable by the banks to which they are issued to the banks receiving such certificates in settlement of daily balances. hence the interest charged against certain banks must exactly equal and offset that credited to certain other banks. the aim is to fix the rates sufficiently high to insure the retirement of the certificates as soon as the emergency which called them forth has passed by. as a rule they are retired by the banks, which take them out as soon as they have obtained sufficient cash to meet their daily obligations. notice is given by the debtor banks to the committee, calling for such certificates as they wish to retire, and the committee gives notice to the banks holding the same, stating that the interest will cease after a specified date. in due course the holders send the certificates to the clearing house for redemption. upon the retirement of the certificates the collateral deposited as security is surrendered by the committee in the same proportion to certificates turned in as was required for deposit at the time of issue. it is by no means the general practice for all the members to take out loan certificates when issues are arranged by the association. some banks are in such condition as to be able to weather the storm without them, while others are weak and in great need of relief. some banks regard their use of clearing-house loan certificates as a reflection upon their standing, and hence refuse to apply for them unless driven to it by sheer necessity. others regard it as in no way prejudicial to their interests, but rather as a patriotic movement in which all the banks should engage, both for the purpose of assisting their fellow-members and for the welfare of the community as a whole. clearing-house loan certificates and the equalization of reserves[ ] comparison of the course of events during the crisis of with that in subsequent crises shows a progressively increasing unwillingness or inability among the new york banks to make use of their cash reserves. in the new york banks at the outset of the crisis held an available reserve of $ , , . in the course of four weeks this was reduced to $ , , , and the ratio to deposit liabilities was then less than . per cent.[ ] suspension was not escaped in but it was of shorter duration than in later crises. the banks at that time were unable to increase their cash resources by any of the means which have been available in later crises. the government had no surplus of greenbacks, aside from about $ , , which was almost entirely secured and retained by the savings banks. banknotes could not be issued because the total circulation was at that time limited by law. finally, additional supplies of gold, secured through imports, were useless for ordinary banking purposes because the business of the country was then carried on by means of an inconvertible and depreciated paper currency. notwithstanding all these special difficulties, the new york banks, by continuing to use their reserves freely even after payments had been restricted, were able to restore confidence in a comparatively short time, and money began to flow back to them within three weeks after the outbreak of the crisis. in the new york banks were in what was for them an unusually strong condition at the beginning of the disturbance, having early in june a cash reserve exceeding per cent. of their net deposits. a succession of banking failures in the west and south led to heavy withdrawals from new york during the latter part of june and the beginning of july. then followed a lull and money began to be returned to new york. during the third week of july banking failures were renewed in the west and south and the drain was resumed. the positively unfavorable aspects of the situation were altogether similar to those of the previous month with the one further circumstance of a reduced cash reserve in new york. on the other hand, additional means with which to meet the situation were becoming available. at the end of july gold imports in large amount had been arranged. foreign purchases of our securities were heavy, reflecting increasing confidence in the repeal of the silver purchase law. arrangements had also been made which would certainly lead to a considerable increase in the issues of bank-notes during august and september. notwithstanding all these favorable circumstances the new york banks suspended, during the first week of august, when they still held a cash reserve of $ , , , more than per cent. of their deposit liabilities. in the new york banks restricted payments when they still held a cash reserve of more than $ , , and when the reserve ratio was also above per cent. both in and in suspension was not a measure of last resort taken after the banks had entirely exhausted their reserves and when there was no means of securing additional cash resources. moreover, after cash payments were restricted the policy of the banks was unlike that adopted in , in that the banks did not make further use of their reserves; they hoarded them and added to their amount, thus unduly prolonging the period of suspension. explanation of the failure of the banks in and to use their cash resources as completely as in is simple; but it is of the very greatest significance because it will bring to light the most serious element of weakness in our credit structure. [written before our banking reform of .] in and in the clearing-house loan certificate was the only device resorted to in order to secure the adoption of a common policy by the banks. in , as on earlier occasions when its use was authorized, provision was also made for the equalization of the reserves of the banks. thus in the clearing house association in addition to the customary arrangements for the issue of loan certificates adopted the following resolution: that in order to accomplish the purposes set forth in this agreement the legal tenders belonging to the associated banks shall be considered and treated as a common fund, held for mutual aid and protection, and the committee appointed shall have power to equalize the same by assessment or otherwise at their discretion. for this purpose a statement shall be made to the committee of the condition of such bank on the morning of every day, before the opening of business, which shall be sent with the exchanges to the manager of the clearing house, specifying the following items: ( ) loans and discounts. ( ) amount of loan certificates. ( ) amount of united states certificates of deposit and legal tender notes. ( ) amount of deposits deducting therefrom the amount of special gold deposits. two fairly distinct powers were given the clearing-house committee: the right to issue clearing-house certificates, and control over the currency portion of the reserves of the banks. this machinery was devised (according to tradition) after the crisis of by george s. coe, who for more than thirty years was president of the american exchange national bank. the purpose of the certificate was to remove certain serious difficulties which had become generally recognized during that crisis. the banks had pursued a policy of loan contraction which ultimately led to general suspension, because it had proved impossible to secure any agreement among them.[ ] the banks which were prepared to assist the business community with loans could not do so because they would be certain to be found with unfavorable clearing-house balances in favor of the banks which followed a more selfish course. the loan certificate provided a means of payment other than cash. what was more important, it took away the temptation from any single bank to seek to strengthen itself at the expense of its fellows, and rendered each bank more willing to assist the community with loans to the extent of its power. but in addition to the arrangement for the use of loan certificates provision was also made for what was called the equalization of reserves. the individual banks were not, of course, equally strong in reserves at the times when loan certificates were authorized. from that moment they would be unable to strengthen themselves, aside from the receipt of money from depositors, except in so far as the other banks should choose to meet unfavorable balances in cash. moreover, withdrawals of cash by depositors would not fall evenly upon the banks. some would find their reserves falling away rapidly with no adequate means of replenishing them. the enforced suspension of individual banks would pretty certainly involve the other banks in its train. finally, it would not be impossible for a bank to induce friendly depositors to present checks on other banks directly for cash payment, instead of depositing them for collection and probable payment in loan certificates, through the clearing house. the arrangement for equalizing reserves therefore diminished the likelihood of the banks working at cross purposes--a danger which the use of clearing-house certificates alone cannot entirely remove. these arrangements had enabled the banks to pass through periods of severe strain in and in without suspension. in both instances the use of the loan certificate was followed immediately by an increase in the loans of the banks, and in no short time by an increase in their reserves. the situation in was more serious, and as events proved, the reserve strength of the banks, while sufficient to carry them through the worst of the storm, was not enough to enable them to avoid the resort to suspension. in , the next occasion when clearing-house loan certificates were issued, the opposition to the provision for the equalization of reserves was so widespread that it does not appear that it was even formally considered. the ground for this opposition can be readily understood. in the practice of paying interest upon bankers' deposits was generally regarded with disfavor. only twelve of the clearing-house banks offered this inducement to attract deposits; but by this means they had secured the bulk of the balances of outside banks. it was in meeting the requirements of these banks that the reserves of all the banks were exhausted at that time. the noninterest paying banks entered into the arrangement for the equalization of reserves in expectation of securing a clearing-house rule against the practice of paying interest on deposits. but their efforts had resulted in failure. some of them had employed their reserves for the common good most reluctantly in , and the feeling against a similar arrangement in was naturally far stronger and more general. moreover, the working of the pooling agreement in had occasioned heart-burnings which had not entirely disappeared with the lapse of time. it was believed, and doubtless with reason, that some of the banks had evaded the obligations of the pooling agreement. it was said that some of the banks had encouraged special currency deposits so as not to be obliged to turn money into the common fund. further, as the arrangement had not included bank-notes, banks exchanged greenbacks for notes in order either to increase their holdings of cash or to secure money for payment over the counter. here we come upon an objection to the pooling arrangement which doubtless had much weight with the specially strong banks, although it is more apparent than real. in order to supply the pressing requirements of some banks, others who believed that they would have been able to meet all demands of their depositors were obliged to restrict payments. that such an expectation would have proved illusory later experience affords ample proof. when a large number of the banks in any locality suspend, the others cannot escape adopting the same course. but in the erroneousness of the belief had not been made clear by recent experience. the new york banks weathered the moderate storms of and without suspension, by means of the clearing-house loan certificate alone, and in the course of time all recollection of the arrangement for the equalization of reserves seems to have faded from the memory of the banking community. there was, however, in those years another potent influence which tended to lessen the likelihood of suspension following the issue of loan certificates. many banks were unwilling to take them out, fearing that such action would be regarded as a confession of weakness. the prejudice against them was indeed so strong that needed loan expansion did not follow the authorization of their issue. in the directors of the bank of commerce, then, as now, one of the most important banks of the city, passed a resolution urging other banks to relieve the situation by increasing loans and by taking out loan certificates. in only a small part of the balances between the banks was settled in certificates at first; but by the end of july practically all balances were settled in that way and suspension followed at once. in all the banks having unfavorable balances, with but one important exception, took out certificates on the first day that their issue was authorized, and suspension was then for the first time simultaneous with their issue. the connection between suspension and the use of clearing-house loan certificates as the sole medium of payment between the banks is simple and direct. the bank which receives a relatively large amount of drafts and checks on other banks from its customers cannot pay out cash indefinitely if it is unable to secure any money from the banks on which they are drawn. so long as only a few banks are taking out certificates and the bulk of payments are made in money, no difficulty is experienced; but as soon as all the banks make use of that medium, the suspension of the banks which have large numbers of correspondents soon becomes inevitable. the contention of bankers both in and in that they had not suspended since they had only refused to honor drafts on other banks was untenable. the clearing-house loan certificate was a device which the banks themselves had adopted and they had failed to provide any means for preventing partial suspension as the result of its use. the further contention of some bankers that they had suspended because they had no money to pay out was doubtless true of a few banks, but for that very reason other banks must have been all the stronger, probably well above their required reserve. that the arrangement for equalizing the reserves, adopted in , would have availed to prevent suspension on subsequent occasions, is highly probable, indeed a practical certainty. in events proved that the banks had maintained payments up to the very last of the succession of disasters with the results of which they had been contending. during august the number of bank failures was not large and none of them was of great importance. we cannot, of course, know how soon money would have begun to flow back to new york, but certainly the suspension of payments could hardly have hastened the movement. from the beginning of september the reported movements of currency showed a gain for the new york banks, and for the week ending september the gain was no less than $ , , . one month more of drain, therefore, was the most that the banks would have been obliged to endure, and for the needs of that month the banks would not, as in , have been confined to the single resource of the $ , , of the cash in their vaults.[ ] similarly, the enormous increase in the money supply of the country in november and december, , would have offset much of the loss of reserve which the banks would have incurred, if they had continued to meet all the demands of their customers for cash. and, finally, it may be observed that in the unlikely event that alarm had not been allayed and suspension in the end had become unavoidable, it would not have made any practical difference to depositors whether the reserves of the banks had been but per cent. rather than per cent. of their demand liabilities. clearing-house bank examinations[ ] most bank failures are due to the gradual acquirement of undesirable assets over a period of years, and if some authority exists with power to make recommendations of a remedial character, with the further power to enforce such recommendations, if necessary, there is little doubt that many bank failures would be averted. the panic of presented many striking examples of just what is intended to be here emphasized, viz., that under the careful supervision of a competent and reliable examiner many of the assets of the failed banks, upon which it was impossible for them to realize at a time when they needed their funds, would probably have been liquidated upon his recommendation and advice long before the necessity for such liquidation had arisen. mr. j. b. forgan of chicago, has recently said on this subject: a competent examiner--and there are many such now in the government employ--while he can not pass judgment on all the loans in a bank, can, after a careful examination, or a series of examinations, form a wonderfully correct judgment as to the general character of its assets and as to whether its management is good or bad, conservative or reckless, honest or dishonest. examinations, as they are now conducted, have a most beneficial influence on bank management, especially by way of restraint. the correspondence carried on by the comptroller, based on the examiners' reports, does an inestimable lot of good in the way of forcing bank officers to comply with the law and in compelling them to face and provide for known losses as they occur. supervision by examination does not, however, carry with it control of management and can not, therefore, be held responsible for either errors of judgment or lapses of integrity. examination is always an event after the act, having no control over a bank's initiative, which rests exclusively with the executive officers and directors, and depends entirely on their business ability, judgment, and honesty of purpose. the clearing-house association of chicago was the pioneer in the establishment of an independent system of clearing-house bank examinations in this country, its system having been inaugurated on june , , with results that have, to the present time, more than fulfilled the expectations of the bankers of that community[ ].... in substantially his own words the chicago examiner operates under the following conditions: the examinations extend to all the associated banks of chicago and to all non-member institutions. the work is conducted with the aid of five regular assistants, each fitted by experience to thoroughly do that part of the work assigned to him. the examinations include, besides a verification of the assets and liabilities of each bank, so far as is possible, an investigation into the workings of every department and are made as thorough as is practicable. after each examination the examiner prepares a detailed report in duplicate, describing the bank's loans, bonds, investments, and other assets, mentioning specially all loans, either direct or indirect, to officers, directors, or employees, or to corporations in which they may be interested. the report also contains a description of conditions found in every department. one of these reports is filed in the vaults of the clearing house, in the custody of the examiner, and the other is handed to the examined bank's president for the use of its directors. the individual directors are then notified that the examination has been made and that a copy of the examiner's report has been handed to the president for their use. in this way every director is given an opportunity to see the report, and the examiner, in every instance, insists upon receiving acknowledgment of the receipt of these notices. the detailed report retained by the examiner is not submitted to the clearing-house committee, under whose direct supervision he operates, unless the discovery of unusual conditions makes it necessary. a special report in brief form is prepared in every case and read to the clearing-house committee at meetings called for that purpose. the report is made in letter form, and describes in general terms the character of the examined bank's assets, points out all loans, direct or indirect, to officers, directors, or employees, or to corporations in which they may have an interest. it further describes all excessive and important loans, calls attention to any unwarranted conditions, gross irregularities, or dangerous tendencies, should any such exist, and expresses, in a general way, the examiner's opinion of each bank as he finds it. less than a year after the chicago clearing house association appointed its special examiner the associated banks of minneapolis took similar action. the conditions under which the minneapolis examiner operates are substantially the same as those governing the examiner at chicago, the principal difference being that instead of the examiner sending a copy of his report to the president of the examined bank and notifying each of the directors of such bank that he has made such examination and that the report is in the hands of the president of the institution, as is the rule of procedure at chicago, and which, in a measure, leaves it to the discretion of the directors whether they examine the report carefully and in detail, the original report is delivered by the examiner at minneapolis in person to the board of directors of each bank which he examines, at a meeting convened for that purpose. the report is read and the criticisms, if any, are fully discussed, and the recommendations considered. in this way no director can complain that he had not sufficient opportunity to become fully conversant with all the details of his bank. ii. clearing houses in england the london bankers' clearing house as the foremost example [ ]the exact origin of the london bankers' clearing house will probably never be determined, for, like other institutions whose purpose has been to save time and trouble, its system appears to have been gradually evolved.[ ] with the growth of the check system, each banker would daily find himself in possession of a number of drafts for the credit of his customers that needed collection at the offices of other bankers. this would necessitate each bank sending out one or more clerks on what became known as "walks" to obtain cash or notes for these drafts from the houses on which they were drawn. as in london alone there were some fifty or more private firms carrying on a banking business this necessitated a considerable amount of work and was attended with grave risk of robbery. it is probable, therefore, that arrangements were made by some of the bankers, as it is still done in some country towns, to meet at one bank one week and at another the next for the purpose of exchanging checks. but in consequence of the number of the london bankers this method would prove awkward, and about the year we find that the walk clerks from the city and west end banks had made a practice of meeting at lunch time at a public house called the five bells in dove court, lombard street, close to st. mary woolnoth church, and not so very far from the site of the bankers' clearing house of to-day. here in the public room, or according to tradition on the posts in the court outside, each day after lunch a rough system of exchange of checks was carried on between the clerks from each bank, the balances being settled in notes and cash. from this rough system has developed the efficient organization of to-day. in may, , the clearing house was closed for alterations and enlargement, and the business was temporarily carried on at the hall of commerce. here, on june , , applications for admission to the clearing house were received from the following joint-stock banks: the london and westminster, the london joint stock, the union bank of london, the commercial bank of london, and the london and county bank; and it was resolved "that the secretary be authorized to comply with such applications, subject to the payment of an annual sum to be fixed by the committee to reimburse them for the outlay that has been found necessary to afford accommodation for their admission." there were at this time private banks in the clearing house. following on the admission of the five premier joint-stock banks in there were frequent applications from other joint-stock banks--many from the moment of their foundation. but the wise reply of the committee was invariably that they did not "deem it expedient to take into consideration such applications from any banking establishment that has not been in operation at least for a period of twelve months." though the joint-stock banks had been admitted to the clearing house yet they were only allowed to rent seats there and had no share in the management, so for the support of their mutual interests they had a committee of their own which settled the rate to be given by the joint-stock banks in the london district for deposit money at seven days' notice. in the country bankers submitted a plan for establishing a country bankers' clearing house in london and proposed that the clearing house committee should appoint two or three of their number to unite with them as a working committee. the establishment of a separate country bankers' clearing house would have led to many inconveniences, and mr. john lubbock, now lord avebury, submitted a plan for carrying out a separate country clearing at the clearing house. the committee approved the plan and submitted it to the country bankers' committee, who also gave their approval. thus was instituted at the bankers' clearing house the country clearing, which more than all else has brought about the almost universal use of checks in england, to the exclusion of notes and coin. mr. lubbock's scheme was so well thought out that from its initiation to the present time the rules have had to be only very slightly modified. in the bank of england entered the clearing house to clear on one side only, the outside, for though the bank presents to the clearing bankers at the clearing house all checks payable by them, all checks and bills drawn on the bank are presented by the clearing bankers at the bank itself, and the proceeds placed to the credit of each bank's account. at the same time the governor of the bank of england was made ex officio a member of the committee of clearing bankers. after few changes were made in the working of the clearing house, the volume of the country and town clearings increased greatly, but the house proved capable of meeting any increase. friction between the old private bankers and the joint-stock banks grew less as amalgamations and absorptions increased, and before many years the committee of london clearing bankers and joint-stock banks committee amalgamated, it being agreed, as a condition of the joint-stock banks committee ceasing to exist, that all the banks would abide by the ruling of the committee as to the rate of deposit at seven days' notice. henceforth, every bank in the clearing house was entitled to have one representative on the committee. such representatives have hitherto been chosen solely from the board or the partners and are nominated by their banks and formally elected by the committee. the committee elects its own chairman, vice-chairman, and honorary secretary. this committee meets regularly on the first thursday in each month, thursday being the day on which the bank of england in normal times makes any alteration in the bank rate of discount, but it may be summoned by requisition at any time and meets automatically should the bank rate be altered, since this governs the rate of deposit allowed by the bankers. the committee has full power over all clearing house matters, and from the importance of the banks who compose the clearing house its opinion carries very great weight on all matters in the banking world. it is, however, controlled only by the mutual agreement of its members: and the decision of the majority of its members, though followed loyally, is never used with any ultimate power of compulsion in matters affecting banking in general. in a third clearing, the metropolitan, was established. hitherto, with the exception of one or two city offices which were included in the town clearing, the collection of drafts on london branches of the clearing banks had been effected by the post and by the sending out of walk clerks by each bank; but in it was determined to do away with such means of collection as far as possible and to collect the branch checks through the clearing house. this proved so successful that the west end banks were approached the following year, and with one exception readily consented to come into the new plan by which their clearing agents had delivered to them at the metropolitan clearing all checks drawn upon them. this clearing is the first clearing made each morning and is handled so expeditiously that even the most distant london branches get their checks almost earlier than under the old system. they have, therefore, plenty of time to go through them and to make returns of any checks that cannot be paid in time for such return checks to reach the clearing house early in the afternoon. there are now over banks and branches using this clearing. for the better defining of the three clearing areas--town, metropolitan, and country--the letters t m c have been placed in the corner of all bank checks. from february , , the date of the initiation of the metropolitan clearing, up to december of that year, £ , , was paid in this clearing, while for the year the total was £ , , , as compared with the town clearing total for that year of £ , , , and the country total of £ , , , , making in all a grand total of £ , , , , which figures, vast as they are, were a decrease of £ , , on the total £ , , , for the previous year, .[ ] the work entailed by such vast figures as these could scarcely have been dealt with by hand alone, but by the installation of adding machines the work is easily and quickly done. it must not be thought that all checks on london are presented through the clearing house, for checks on the london branches of the scotch banks and of the colonial and foreign banks are still presented over the counter. moreover, though it is mutually understood between the clearing banks that checks on each other will only be presented through the clearing house, this agreement has no legal binding. two exceptions are continually made; documents or goods have to be taken up against cash, and the owner before parting wishes to be certain of his money. in this case the presenting banker either presents his check for marking--that is to say, the paying banker having ascertained from his customer's account that there is sufficient money thereon, marks the check for payment, which has the same effect as if the banker had accepted it; or, as is becoming more usual, the paying banker gives one of his own drafts on the bank of england in exchange for the check. provincial clearings besides the london clearing house, which is an irregular building of no architectural features whatever, there are eight provincial clearing houses in england--birmingham, bristol, leeds, leicester, liverpool, manchester, newcastle and sheffield.[ ] two only of these clear over £ , , in the year. manchester cleared £ , , in , with an average weekly total of £ , , and an average daily total of £ , , , and liverpool £ , , . the others cleared in the same year from £ , , to £ , , . small figures, indeed, compared with london, where the highest total paid on any one day was, in , £ , , . in the highest total paid in one day in the london clearing was £ , , and the lowest £ , , . in london, as in the provincial places, the object of the clearing house is primarily the convenience of exchange of checks, not the regulation of banking, and little is regulated save, perhaps, the rate of interest to be paid on deposits at seven days' notice. in these days, too, when the tendency is strong for amalgamation, the local banks are dwarfed by their gigantic competitors, with their branches in many counties and head offices in london, with the result that london each year controls more of the banking in england and the provincial clearings cease more and more to be under local control, but are controlled by their london head offices. this may, if the present tendency of amalgamation continues,[ ] result in the committee of london clearing bankers becoming an important controlling body, but that time is not yet at hand, and though, as we have said, an expression of opinion on the part of the committee carries very great weight, yet anything like dictation would very properly be resented by the important and old-established banks in both london and the provinces that are outside the clearing house. footnotes: [ ] james g. cannon, _clearing houses_, publications of the national monetary commission, senate document, no. , st congress, _ nd session_, p. . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] members in . [ ] _ibid._, pp. , , - . [ ] _ibid._, p. . [ ] _ibid._, pp. - . [ ] o. m. w. sprague, _banking reform in the united states_, pp. - . harvard university. . [ ] the figures in the text refer to the legal tender holdings of the banks. the banks also held a considerable amount of specie but it was not a free asset as most of it had been received on special accounts payable in gold. including the specie holdings the reserve ratio was . per cent. [ ] c. f. dunbar, economic essays, chap. xvi. [ ] the increase in the amount of money in circulation for august, , was estimated at $ , , . [ ] james g. cannon, _clearing houses_. publications of the national monetary commission, senate document no. , st congress, _ d session_, pp. - . [ ] [a number of the more important cities such as st. paul, st. louis, and philadelphia, following the example of chicago and minneapolis, have instituted clearing house bank examinations since .] [ ] adapted from robert martin holland, _the london bankers clearing house_. publications of the national monetary commission, senate document no. , st congress. _ nd session_. [ ] the date of the establishment of the clearing house is not known. the clearing has, however, been in existence about years.--editor. [ ] [for the five years - , the total clearings of the london clearing house were in the neighborhood of £ , , , per annum of which the town, metropolitan, and country clearings were about , . , and . per cent., respectively.] [ ] [the approximate number of clearing houses outside of london, in england, in is twelve, but these are used only for local clearings. in addition, most of the towns in england and wales have a local exchange which is a clearing on a small scale.] [ ] this tendency has continued as to both the joint-stock and private banks.--editor. chapter xx state banks and trust companies since the passage of the national bank act [ ]the banking institutions of the united states other than national banks are ordinarily classified into (a) state banks, (b) trust companies, (c) stock savings banks, (d) mutual savings banks, and (e) private banks. the following pages deal with two of these classes, viz., state banks and trust companies. it will be desirable at the outset to distinguish them from the other classes, and to outline the history of legislation concerning them since . the term "state bank" has been used in the united states in several different senses; but whatever the variance in meaning, such banks have always had one common characteristic--incorporation under state authority. in the bank reports of some of the states, private banks are not distinguished from state banks. this is due to the fact that in these states incorporated and unincorporated banks are subject to the same regulation. a private bank, however, is an unincorporated bank. not all banking institutions incorporated by the states are state banks. mutual savings banks, stock savings banks, and trust companies are also corporations organized under state laws or charters granted by state legislatures. the distinction between mutual savings banks and state banks is clear. mutual savings banks do not have a capital stock and do not carry on a discount and deposit business--_i. e._, they do not discount commercial paper, and do not receive demand deposits payable on check. state banks, on the other hand, have a capital stock and carry on a discount and deposit business. many state banks, however, receive also savings deposits. the line of demarcation between state banks and stock savings banks is much less definitely marked. both state banks and stock savings banks have a capital stock. stock savings banks are primarily savings banks, and many of them do not do a discount and deposit business, but confine themselves to the savings bank business. but in several states the distinction between state banks and stock savings banks is of the most unsubstantial character, since the stock savings banks carry on the business of a commercial bank, receiving demand deposits payable on check, and discounting commercial paper. finally, the distinction between state banks and trust companies is not exactly the same in any two of the states. "state banks" then, as the term is used in the following pages, are banks of discount and deposit (as distinguished from savings banks, mutual and stock) incorporated by one of the states or territories (in contrast with private banks, which are unincorporated, and with national banks, which are organized under the national-bank act).[ ] in there were in the united states , state banks. owing to the repressive influence of the national-bank act, hastened in its effect by the per cent. tax on state-bank notes, the number of state banks had by fallen to . one result of this decline in the number and importance of state banks was the cessation of state banking legislation. the old laws regulating state banks of issue were swept away by code revisions, or remained obsolete and unchanged on the statute books. the number of state banks began to increase about . in a few states old banking laws intended for the regulation of banks of issue hampered their development, but in the remaining states they were left for a considerable period almost entirely without regulation. as late as , in his digest of the state statute law, mr. stimson said: it seems unnecessary to incorporate the state banking laws in this edition. nearly all the states, except the newer states and territories, have special chapters in their corporation acts concerning banks and moneyed institutions, but these chapters are usually of old date, and have practically been superseded for so long a time by the national banking laws that they have become obsolete in use and form. the increasing attention paid in recent years by the state legislatures to the regulation of the state banks has been partly due to the rapid growth of the banks in numbers and in financial importance; but it is to be accounted for primarily by a change of view as to the purpose of banking regulation. the antebellum state-bank regulations were intended to secure the safety of the bank note. although the depositor was protected by many of the regulations, this protection was purely incidental. the view that note-issuing banks alone required governmental regulation persisted for a considerable time after the passage of the national-bank act. since the national banks had a monopoly of the issue of bank notes, the regulation of state banks was considered needless. as the importance of note issue as a banking function decreased, banking regulation, as seen in the national-bank act, began to be considered desirable as a protection to depositors. the evolution of the trust company with the exception of the power to issue notes, which would be unavailable because of the tax on note issue, the powers of the state banks of to-day are essentially the same as the powers of the state banks which were in operation before the civil war. on the other hand, the trust company is a new type of banking institution, the functions of which are even yet not clearly defined. a great part of the legislation with reference to trust companies, therefore, has had to do with defining the powers of these corporations. the early laws for the incorporation of trust companies show the widest differences of opinion with regard to their field of operation. the one point of agreement appears to have been the idea that a corporation could administer trusts more advantageously and safely than an individual. but the companies in all the states were given additional powers more or less closely connected with their trust powers. some of the companies, chiefly the very early ones, were empowered to insure lives and to grant annuities. in a considerable number of states the companies were authorized to insure the fidelity of persons in positions of trust and in some states to insure titles to land. almost all the companies were empowered to do a safe-deposit business. among these powers there was a certain apparent connection. the power to insure the fidelity of trustees, administrators, and executors seemed a natural addition to the powers of a company which might act in such capacities. similarly, it appeared that the business of insuring titles to land was one which could be most economically conducted by a corporation which, in its capacity of trustee, would be a large owner of real estate. one other power was given to practically all the companies--the power to receive deposits of money in trust. the following quotation from the report of the massachusetts commissioners of savings banks for shows the use which it was expected would be made of this power: the trust company in worcester and the new england trust company in boston, both in successful operation, are the first of such corporations established in this state. they were incorporated after a very careful investigation by the legislature, with power to hold money in trust, and so restricted in making loans and investments as to afford the safety which the character of their business requires. a similar institution will soon be organized in northampton, and others are contemplated. they are well calculated to promote public interests by affording to the owners of capital not engaged in business many of the advantages secured by our savings-bank system for the savings of labor. the development of the trust company as reflected in the legislation with reference to its powers shows two main tendencies: ( ) the companies have to a very large extent given up the insuring of the fidelity of persons in positions of trust and the guaranteeing of land titles. ( ) they have largely increased their banking activities. . in some states which formerly authorised trust companies to insure the fidelity of persons in positions of trust, or to guarantee titles to real estate, the more recent laws do not permit the combination of such business with the business of a trust company. the fidelity insurance business during the past twenty years has been largely concentrated in the hands of a comparatively small number of companies which have agencies in all parts of the country and which do not undertake a trust or banking business. the elimination of fidelity insurance from the functions of the trust company has not been chiefly or even largely due to adverse legislation, but to the nature of the fidelity insurance business. the most successful conduct of that business appears to require, like other kinds of insurance, that the risks shall be numerous and widely distributed. these conditions are best met by companies which carry on business in many different places. for the most economical conduct of the title insurance business an expensive plant is necessary. the business in each city tends therefore to fall into the hands of a single company, which ordinarily finds it profitable to devote itself entirely to the one kind of business. at the present time, only a very small part of the trust companies in the united states insure titles to land. . the second great tendency in the development of the powers of the trust company--the enlargement of its banking powers--has also been primarily an economic development and not one due to legislative design. as has already been noted, the early trust companies ordinarily had power to receive trust deposits and to loan money. some such powers were necessary for the exercise of their trust functions. the opportunity to enlarge the banking powers of the companies lay in the difficulty of distinguishing clearly between the powers which it was intended to confer upon the trust companies and the banking powers possessed by state and national banks. in the greater number of the states the wording of the sections conferring powers to do a trust business was such that the trust companies were either held by the courts to be empowered to do a banking business, or, if the power to do such business seemed not to be granted, were able by some change in the method of doing the kind of banking business in question to bring it within the powers actually conferred. in missouri, for instance, since trust companies have been empowered to "receive money in trust and to accumulate the same at such rate as may be obtained or agreed upon or to allow such interest thereon as may be agreed." the supreme court of missouri in construing the power thereby conferred has held that a trust company can take only interest-bearing deposits, but that such deposits may be demand deposits payable on check. the rate of interest may, however, be nominal. in other states the trust companies have attained legal recognition of their banking powers by slow steps. the history of the pennsylvania trust companies affords an illustration. in the pennsylvania general corporation act of no provision was made for the formation of trust companies, but provision was made for the incorporation of title-insurance companies. by an amendment to the corporation act in title-insurance companies with a capital of at least $ , were given trust and fidelity-insurance powers; but it was expressly provided that such companies were not authorized thereby to do a banking business. in the trust companies were given the power to receive upon deposit for safekeeping valuable property of every description, and in trust companies were given power to "receive deposits of money and other personal property and to issue their obligations therefor ... and to loan money on real and personal securities." in the united states circuit court of pennsylvania decided that pennsylvania trust companies might legally receive demand as well as time deposits. pennsylvania trust companies apparently even now cannot discount commercial paper, but they may loan on it as collateral and may purchase it from the holder. the states in which the banking powers of the trust companies have been most narrowly restricted are iowa, michigan, nebraska, and wisconsin. in nebraska a trust company cannot do a banking business. in iowa trust companies cannot do a banking business except that they may receive time deposits and issue drafts on their depositories. in michigan trust companies are expressly forbidden to do "a general banking business." the michigan commissioner of banking in his report for complained, however, that the law was not clear as to the banking powers of the companies. in minnesota the trust companies may receive trust deposits, but may not "engage in any banking business except such as is expressly authorized for such a corporation." in wisconsin the extent of the power of trust companies to receive deposits was much debated until , when the legislature provided for the incorporation of "trust-company banks," which have power to receive time and savings deposits, but do not have power to receive deposits subject to check. the result of the two tendencies described above--the elimination of the insurance powers of the trust company and the addition of banking powers--has gradually standardized the powers of the trust company, until at the present time the trust company, as it appears in the corporation laws of most of the states, may be fairly well defined as a bank which has power to act in the capacity of trustee, administrator, guardian, or executor. in a number of states the legislation concerning trust companies deals with them explicitly from this standpoint. the illinois bank act of provided that any bank might have power to execute trusts by complying with the trust-company law. in alabama and tennessee any state bank may be appointed and may act as an executor, administrator, receiver, or guardian. in mississippi any bank with a paid-up capital of $ , may do a trust-company business. in georgia any trust company may acquire banking powers by complying with the laws regulating banks. in texas banks may acquire trust-company powers. the same tendency is shown in the important banking laws enacted in ohio in and california in . the gradual change from the view that the trust company is an institution of markedly different character from the ordinary bank of discount and deposit to the view that the trust company is merely a bank exercising functions additional to those exercised by the majority of banks has been the chief influence in determining the form of the legal regulations imposed upon trust companies. as long as the older view obtained, the regulations concerning trust companies were widely different from those imposed upon banks; but as the trust company has increased both the scope and amount of its banking business, the regulation of the banking business of the trust company has tended to become assimilated to the regulations imposed upon state banks. incorporation since state banks and trust companies have been incorporated by the use of one of three methods: ( ) by special charter; ( ) under the "business incorporation law"; ( ) under the general banking law. not very many of the states have used consecutively all three methods, for the special charter and the "business incorporation law" were used contemporaneously in different sections of the country. both have given place, in the great mass of states, to the general banking law. from to probably the greater number of the banks formed were incorporated under special acts; from to incorporation under the "business incorporation law" was the prevailing method, and since then the general banking law has become the almost universal method of incorporating banks and trust companies. capital and surplus requirements when the states began to give attention to the regulation of the banking business the question of capital received immediate attention. the national-bank act and the banking laws in new york and the middle west which had survived from the antebellum period contained provisions concerning the amount and payment of capital. a requirement with regard to capital was recognized as the central point in any system of bank regulation. the capital stock is a buffer interposed between the bank's creditors and losses which the bank may suffer. if there is no capital, losses may fall directly on the creditor, and the larger the capital stock, other things being equal, the less the likelihood of loss to the depositor. the states and territories may be divided roughly into two groups according to the amount of the smallest permissible capital for state banks: . in the eastern states and the more easterly of the middle western states, the banking laws, with one exception, require that banks shall have a capital of at least $ , . . in the other sections of the united states banks in most of the states are incorporated with a capital as small as $ , , although in a few of these states the smallest permissible capital is $ , , $ , , $ , , and $ , , and in one, north carolina, it is $ , . the amount of capital required, except in a few states, is not a uniform amount, but is graded, usually according to the size of the city in which the bank is located. in of the states and territories which require under a general law a specified amount of capital for the incorporation of state banks the amount of capital is thus graded. the grading of the amount of capital required according to the population of the place in which a bank is located has been chiefly due to the desire to bring about some adjustment between the capital of each bank and the volume of its business. it is assumed that the larger the business of the bank the greater the chance of its suffering large losses and the larger the capital necessary to protect its depositors against loss. it is also assumed that the size of the city in which it is located is a rough index of the volume of business done by a bank. under many of the state banking laws the grades are very numerous. the minute gradation of the capital requirements found in many of the state banking laws is due to the desire to encourage the formation of banks in the smaller cities and towns, for it is to be noted that in the greater part of the state laws the grades are not numerous for the larger places. obviously, if any law requiring a minimum capital for banks is to be effective, it must provide specifically for the payment either of all the capital or of a specified sum; otherwise the directors of the bank may require the payment of only a small part of the capital. the provision in the national-bank act concerning the payment of capital has been the model for similar provisions in the banking laws of a large number of the states. many of the state banking laws likewise contain the same provision as the national-bank act with reference to surplus. in several states the laws make no provision with reference to the amount of capital required for a trust company. in connecticut, delaware, new hampshire, and vermont, trust companies are incorporated only under special acts and the amount of their capital is determined in each particular case by the legislature. in rhode island trust companies are incorporated by a board which has power to fix the terms of incorporation, including the amount of capital. the first general laws for the incorporation of trust companies in the united states required such companies to have a much larger capital than that required for banks, but the later legislation shows a distinct tendency in the direction of lowering the requirements in regard to capital. in nearly all of the states, however, the requirement for trust companies is still substantially different from that for state banks. the smallest permissible capital for a trust company ranges from $ , in north carolina to $ , , in the district of columbia. the majority of the states, which provide that trust companies must have a specified minimum capital, do not permit the organization of trust companies with a smaller capital than $ , . in only one state, iowa, is the smallest permissible capital less for trust companies than for state banks; in six states it is the same; in all the others it is larger. the accumulation of a surplus is not required in so many states for trust companies as for banks. liability of stockholders with the practical prohibition of the issue of state bank notes in and the consequent decrease in the number of state banks, the liability of stockholders in state banks became in nearly all of the states, except where an additional liability was imposed by the constitution, the same as that of stockholders in ordinary business corporations. since , however, provisions imposing an additional liability on the stockholders of banking corporations have been placed in the banking and trust-company laws of nearly all the states in which state banks or trust companies have assumed any great importance. in the larger number of the states and territories the liability is a proportionate one, and the stockholders are responsible "equally and ratably and not one for another." the imposition of the statutory liability on the stockholders of state banks and trust companies has not proved of great service as a protection to bank creditors against loss. as yet little has been accomplished in the way of making the enforcement of the liability effective. restrictions on loans and discounts the desirability of some legal limitation on the extent of the liability to a banking institution which any one person, firm, or corporation may incur is largely due to the fact, that, since the american banking system is a system of independent banks, the resources of many of the banks are necessarily small in comparison with the needs of some of their customers for loans. a large manufacturing concern located in a small town may very well be able to use all the assets of the local bank. if the local bank were the branch of a larger bank, the mere fact that a large loan was wanted by a manufacturer in a small town would be of no significance, since the amount of the loan would be small compared with the total assets of the bank. moreover, in many banks a controlling interest is held by a person, firm, or corporation that is actively engaged in other business enterprises. such control is far more likely to be found in small banks than in large, and in a system of independent banks than in one of branch banks. one consequence of the close identification of interest thus brought about between banking and other business enterprises is the probability that loans will be made directly or indirectly to some one borrower to an amount larger than a proper distribution of risks would justify. the national-bank act in its original form provided that the total liabilities to any national bank of any person, company, corporation, or firm for money borrowed should not exceed one-tenth of the amount of the paid-in capital stock of the bank. the liabilities of the members of the firm or company were to be included in the liabilities of the firm or company. it was provided, however, that "the discount of bills of exchange in good faith against actually existing values and the discount of commercial or business paper actually owned by the person negotiating the same" should not be considered as money borrowed. this section of the national-bank act remained unchanged until , when it was amended so as to permit a single liability to be contracted equal to one-tenth of the capital and surplus, instead of one-tenth of capital only, but it was also provided that the liability should not, in any case, exceed per cent. of the capital stock. in the banking laws of seven states the limit on the amount of single liability is the same as under the national-bank act. the banking laws of almost all the other states permit a larger amount to be loaned on a single liability than is permitted by the national-bank act. in nearly all of those states in which trust companies have acquired full banking powers the provision limiting the amount of any single liability applies to both banks and trust companies. in only one state or territory--new mexico--is there such a provision for trust companies and none for state banks. in a few states--kansas, michigan, minnesota, missouri, montana, oklahoma, new jersey, nebraska, and wisconsin--there are limitations on the amount of a single liability for banks, but none for trust companies. loans to directors and officers in almost all the banking institutions of the united states the directors or a part of them are actively engaged also in other business enterprises; and in many cases they borrow from the banks or trust companies in which they are directors. moreover, in some banks one or two of the directors own a controlling interest, and are at the same time large borrowers. the possibility, in such cases, that larger loans may be made than the credit of those directors warrant is very considerable. the national-bank act contains no provisions regarding loans to directors, but in the laws of about one-half of the states attempts have been made to devise rules which would prevent the making of loans to directors in excess of the amount to which their credit entitles them. the requirement that loans to directors shall be formally approved by the board of directors is the one most frequently found. it has been thought that directors would be reluctant to vote for excessive loans to other directors if their vote is to be recorded. real estate loans there is no more characteristic difference between state banking laws and the national-bank act than the fact that, in almost all the states, state banks and trust companies may make loans on the security of real estate, whereas national banks are [were] prohibited from doing so [before the passage of the federal reserve act]. in some states, where the influence of the example of the national-bank act was strong enough at the beginning of state-bank regulation to secure the insertion in the state banking laws of the prohibition of real estate loans, it has later been found desirable to amend the laws in this respect. the pennsylvania general banking law of , for instance, did not permit banks to loan on real estate, but was amended in , so as to permit such loans to be made. in north dakota and south dakota, also, similar changes have been made in the banking laws. in trust companies in all the states and territories where incorporated under general laws were allowed to loan on the security of real estate. state banks so incorporated may also loan on real estate in all the states and territories except new mexico and rhode island. in rhode island, however, banks may loan on real estate part of their savings deposits. a few of the state banking and trust-company laws contain provisions limiting the amount which may be invested in real estate loans. not withstanding the disadvantages of real estate as a convertible asset, the power to loan on the security of real estate is a valuable one to many of the state banks.[ ] many banks, particularly those in the smaller towns and cities, if restricted to loans on personal security, find it difficult to fully employ their funds. there are not sufficient local loans of this kind to employ all the funds of the bank; and the amount not so employed, if it is to yield a revenue, must either be invested in outside commercial paper or deposited with banks in the great commercial cities. reserves in most of the antebellum state banking laws reserves were required only against note issue. in ohio, for example, the general banking law required a reserve of per cent., against circulation, but none whatever against deposits. several of the state banking laws which survived the destruction of the state bank-note issue contained, however, provisions requiring banks to hold a reserve against deposits; but in none of these states was the increase in the number of state banks important. in those states in which the state banks were organized under the "business incorporation laws" there were, of course, no reserve requirements. until a reserve was required for state banks in only three states, ohio, minnesota, connecticut, and in these the required reserves were small. even since the revival of state bank regulation, which began in , the requirement of a reserve has not been regarded in many of the states as an important part of the state banking law. the most striking and important difference between the reserve required by the national-bank act and the reserves required by the state banking laws is that under the national-bank act the reserve is a percentage of "deposits"--_i. e._, of all deposits--while under the banking laws of a majority of the states either no reserve is required against time or savings deposits, or a smaller amount of reserve is required than against demand deposits. none of the state banking laws require that the reserve of any class of banks shall consist wholly of cash in bank. all the laws permit balances in other banks to be counted at least as a part of the reserve. there are great differences among the laws, however, with respect to the amount which may be so counted. the laws in all the states leave the banks almost entirely free to deposit their funds in banks in the great commercial centres. the strong economic pressure toward concentration is thus left free to act toward drawing reserves into banks located in the reserve and central reserve cities. in the greater number of states which incorporate both state banks and trust companies the reserve requirement is the same for both classes of credit institutions. slight differences between the requirements for trust-company reserves and those for state-bank reserves are chiefly of two kinds. in the first place, the provisions for trust-company reserves more frequently permit the counting of bonds as a part of reserve; secondly, the provisions for differing amounts of reserve against time and demand deposits. in recent years there has been much complaint in some states that the reserves required for trust companies are inadequate. branch banks the most characteristic feature of american banking is the extent to which the banks and trust companies are independent institutions. the national-bank act makes no provision for the establishment of branch banks except in cases of the conversion of state banks which already have branches. such banks are allowed to retain their branches on condition that the capital is assigned to the mother bank and the branches in definite proportions, but only a few national banks have branches. under none of the state banking laws has there been built up an important system of branch banks. this has been partly due to the very general desire of each american community, no matter how small, to have its bank managed by its own citizens, and partly to the fact that in most of the states the establishment of branch banks is either explicitly forbidden or in no way provided for by law. in eight states--colorado, connecticut, mississippi, missouri, nevada, pennsylvania, texas, and wisconsin--the opening of branch offices is forbidden by specific enactment. in a large number of other states the banking laws make no provision for the establishment of branches, and it has been held in most of these states that the opening of branch offices is unlawful. the states in which state banks and trust companies are definitely permitted to have branches are california, delaware, florida, georgia, new york, oregon, rhode island, virginia, and washington. in louisiana, maine, and massachusetts trust companies may have branches. in maryland and north carolina branches are operated by some banks and trust companies which were chartered by special act. there are in several of these states, however, restrictions on the opening of branch offices. in new york and massachusetts branches may be established only in the city in which the principal office of the bank or trust company is located. in new york, moreover, only banks located in a city of , , inhabitants or over may have branches; but any trust company may have branches. in maine a trust company may establish branches only in the county in which it is located or in an adjoining county. in nearly all the states which permit banks or trust companies to establish branches one or both of two conditions are imposed. in the first place, additional capital is required for each branch bank over and above the amount of the parent bank. secondly, the establishment of a branch bank must be specifically authorized by some state official or officials. the number of branches of banks and trust companies cannot exceed a few hundred in the entire united states. compared with the total number of banks and trust companies this is a small development. moreover, the most important affiliations among banking institutions are among those located in the same city. the "chains" of country banks possess, for the most part, little vitality, and in the total banking business of the country they play an insignificant rôle. the great mass of state banks and trust companies are independent institutions. the most enduring affiliations at present existing among the banking institutions are those between a national bank and a trust company or a state bank and a trust company. the comparatively limited powers of the national banks and in some states of the state banks have made it desirable for many of these institutions to affiliate trust companies with themselves in order that desirable business may not be lost. further reason for the lack of branch banks in the united states [ ]it would seem that there must be a reason for this peculiarity [the small number of branches] in the banking system of the united states. in searching for this reason, the first fact of importance seems to be that, although the organization of branches has been permitted to the non-note-issuing banks in some of the states, they have not been organized, while in other countries they have been established in nearly every case. by note-issuing banks. this seems at once to indicate that in places where notes are the most important medium of exchange a connection of some sort exists between the issue of notes and the establishment of branches. the inducement to the establishment of branches by banks is, of course, the possibility of profit. but as has already been frequently pointed out, profit can be obtained only by making loans. these when greater than the amount of the capital, as it is necessary that they should be, can be made by the loan of funds left with banks by others or by the issue of circulating notes. it is also clear that, were the possibilities of loaning beyond the amount of the capital wholly or chiefly confined to one of these forms of liability--the other being unavailable, as in the case of the state bank notes whose issue is prohibited by the per cent. tax--and were this other form distasteful or impossible of introduction among the community where the branch was to be established, the motive for the creation of the branch would be absent. this motive has been wanting in many parts of the united states. by the laws of the united states, the issue of notes has been made impossible to all save national banks, and the capital of these banks has been limited to $ , as a minimum. banks other than national must, therefore, be established under state laws, some of which have permitted the organization of such institutions with capitals as low as $ , or $ , . they can, however, make use only of deposits as a means of loaning beyond the amount of their capital. but deposits do not provide a desirable form of currency for use in country districts. it follows, therefore, that the state-bank systems supply the deficiencies of the national system only in so far as they furnish independent banks of smaller capital than $ , ($ , since ). nor would it have been of material assistance had the organization of national banks of capitals smaller than $ , been allowed. as the system has worked out, the issue function has been a useless one. the compulsory deposit of bonds to secure circulation has hampered the banks in exercising this function, since the requirement to deposit bonds now cuts off all profit arising from the issue of notes. moreover, the rural communities are those where interest is highest, and hence where notes can least advantageously be issued under the present system of bond-deposit, owing to the high price of the bonds. these difficulties probably cannot be overcome by the establishment of banks of lower capitals than now exist. [ ]at the convention of the alabama bankers' association, held in birmingham in may, one of the speakers, whose topic was "state banks and their branches," closed a condemnatory address with the words: "we believe the days of the branch bank are numbered." two months later, at cooperstown, hon. e. b. vreeland told the bankers of new york state, at their convention: "no one will ever live to see the day when the branch banking system which prevails in canada and in germany and in england and in france will be tolerated by the people of the united states."... "the economies of the branch banking system are such that no other system can live beside it. it is just as sure as the sun will rise to-morrow that the branch banking system, if taken up in the united states, would in the end drive out of existence all the banks in every city and town in the country outside of the great financial centres. that is the experience of the world." if this statement means anything it is a confession that the system of local single-office banks is wasteful in operation, and it seems to me that it sets forth one reason why branch banks are inevitable. when a banking system is wasteful it is the stockholders, borrowers, and depositors who suffer from the circumstance, and as soon as they realize the fact its doom is sealed. it should be said here that it is not their economical operation alone that has enabled the branch banks to displace the small local banks in england, germany, and france. the branch institutions are cleaner, more efficient, and they provide better opportunities for the clerks and officers; they give a better and more complete service to the localities in which they work.... another reason is found in their stability during crises.... the new york state bank act of [ ] in june, , george c. van tuyl, jr., superintendent of banks of the state of new york, appointed a commission to look into the banking conditions of the state and to make a thorough revision of the law relating to banks. this commission conducted many public hearings; sought information from banking experts in this state and in other states; made a careful study of private banking conditions, rural credits, and other special banking problems of the state; and, finally, on february , , they presented their report in the form of a bill of some pages. after a good many amendments had been made to appease conflicting interests, the bill was passed and became law april , . in general, the new law marks a decided improvement and shows a commendable spirit of progressiveness. its framers believe that it is a law which may well become the model for other states, and there are some who say that it is without question the best balanced and most comprehensive state banking legislation which has ever been enacted. the new law was the outgrowth of the general agitation for banking reform which had swept over this country following the panic of . the inciting cause, however, was the passage of the federal reserve act which made it necessary to revise the state law so that the state banks either might join the federal system or be in a position to compete successfully against the national banks of the state, whose powers had been considerably enlarged by this act. in part, the law is modelled after the federal act, and, in part, european experience has been drawn upon. under the new law the state banks will have even more importance in the competition for banking business than in the past. from the point of view of banking power, the banks of deposit and discount and trust companies have aggregate deposits in excess of those of the national banks in the sum of $ , , .[ ] furthermore, it has been estimated that the total resources of the new york state banks are equivalent to per cent. of the aggregate resources of all banks in the united states, both state and national. superiority in banking power is one element in the strong competitive position of the state banks, and another element is the privileges granted to these banks under the new law which, in some respects, are superior to those granted the national banks under the federal law. in view of the fact that the state banks can enjoy either directly or indirectly most of the advantages of the federal system and also that in some particulars the state law gives them more liberal powers, it seems probable that these banks will continue to see an advantage in their state charters; and thus the amount of defection from the state system will be negligible. more real power has been given to the banking department in the provisions of the law. through investigation, authorization certificates, and regular uniform reports, the superintendent of banks has more direct control over the banks than ever before. besides the extension of the supervisory powers, the penal provisions of the act have been strengthened and made more exacting. . _features of the act relating to banks of deposit and discount and trust companies._ the reserves required against deposits were reduced substantially, and made nearly uniform with those required for national banks. the following table gives the percentage of reserve required and the percentage of reserve on hand which the new law specifies for these banks. ------------------------+---------------------+-------------------------- |banks of deposit and | | discount | trust companies |per cent. of deposits| per cent. of deposits ------------------------+----------+----------+----------+--------------- population | required | reserve | required | reserve | reserve | on hand | reserve | on hand ------------------------+----------+----------+----------+--------------- , , or over | | | | , , - , , | | | | elsewhere in the state | | | | or ------------------------+----------+----------+----------+--------------- the reserve requirements are made still more definite by the fact that the law compels the banks to keep one-half at least of the reserve on hand in "gold, gold bullion, gold coin, united states gold certificates, or united states notes: and the remainder in any form of currency authorized by the law of the united states other than federal reserve notes." among the powers granted to these banks is the power "to accept for payment at a future date, drafts drawn upon its customers and to issue letters of credit authorizing the holders thereof to draw drafts upon it or its correspondents at sight or on time not exceeding one year." this clause gives a much wider power to the state banks in the important matter of acceptances than its counterpart in the federal reserve act. in the one case both domestic and foreign acceptances may be made and handled without stipulation as to aggregate amount and bearing maturities of one year or less, while in the other case the acceptances are limited to those arising out of the importation or exportation of goods with maturities not exceeding six months. seemingly, the state banks have the advantage, and to this extent the state law is superior to the federal act. one other important forward step was taken in relation to this group of banks. they are given the privilege of establishing branches outside the state of new york, either in the united states or in foreign countries. this privilege is qualified, however, by the provision that no bank can establish such branches unless it has a combined capital and surplus of $ , , or over and the written approval of the superintendent of banks. although the old law permitted trust companies to establish branches in the place where they were incorporated, the practical effect was to limit branch banking to the city of new york. in this particular also the state banks have the advantage over the banks in the federal reserve system which are allowed to establish branches only in foreign countries. . _features relating to private banks and bankers._ the regulation of private banks and bankers is an entirely new departure in the law of this state. in the past the banking department had no authority to supervise that relatively large number of private bankers who receive deposits in small amounts from the wage-earning classes while conducting in connection therewith a mercantile or some other kind of business. mercantile firms like the siegel company, by paying a higher rate of interest upon deposits than savings banks, were able to obtain the savings of many small depositors. this money was invested in the business and secured only by the capital stock of the mercantile establishments. in case the firm failed there was no security back of these deposits but these same shares of stock, and so depositors were fortunate if they received in settlement even per cent. of their claims. such firms were not doing a legitimate banking business inasmuch as they did not keep their assets in liquid form and carried no reserve against deposits. the new act corrects this situation by giving the banking department authority to conduct independent investigations into any violation of the banking law by a corporation or individual. in the future a corporation which is in any way engaged in the business of banking cannot hide under the wing of the general corporation law when the banking department sees fit to make an investigation of its affairs. some of the specifications of this part of the law are all securities, property, and the evidences of title thereto in which the permanent capital and the deposits are invested are to be segregated and kept separate from all other property and assets of the private banker; depositors have a prior lien on the assets of the private banker, in case of insolvency or suspension of business; and, in addition, every private banker must maintain a reserve of per cent. against deposits in cities of the first class and a reserve of per cent. in any other city, one-tenth of which shall consist of reserve on hand and the remainder may be kept on deposit subject to call with banks approved by the superintendent of banks. these requirements will go far toward preventing the recurrence of such disasters as the siegel failure. . _features relating to co-operative credit._ within the last thirty years the agricultural methods of the state, in harmony with the agricultural methods throughout the united states, have undergone great changes. scientific farming, improved machinery, and changed market conditions have brought new problems in the field of agricultural credit. to-day agriculture has come to be in a real sense capitalistic and has in consequence laid new requirements on the credit structure of the nation. moreover, the period of large returns or satisfactory returns from an extensive and rather careless cultivation of the soil, which made possible an ignoring of unit cost, or, at least, brought the farmer to minimize the importance of such cost, has given way, so far as the successful farmer is concerned, to the careful estimates of cost and close calculations of profits on a narrow margin between unit cost and unit selling price. in the field of cost, the rate at which capital or money may be borrowed is no small factor; and with the high rates prevailing in the united states in comparison with those current in europe, the borrower in this country who pledges his land or agricultural products as security for a loan finds himself at a disadvantage. to meet this condition cheaper agricultural credit has been strongly urged. europe furnishes the example in her well-organized land banks and co-operative credit unions. already massachusetts has a law authorizing co-operative organizations for furnishing cheaper credit facilities to the agriculturalist, and in illinois there is a "crédit foncier" which has been in successful operation a number of years. new york state has put itself in line with this growing movement to furnish ample and cheaper credit to the farmer and the purchasers of real estate by putting into the new law provisions for the establishment of a land bank and co-operative credit unions. sections - authorize ten or more savings and loan associations, the aggregate resources of which shall not be less than $ , , , to form a land bank of the state of new york. this bank can "issue, sell and redeem debenture bonds secured by bonds and first mortgages made to or held by member associations" and "invest its capital and other funds in bonds secured by first mortgages on real estate situated within the territory in which its members are authorized to make loans." the bank is not permitted to do a general deposit business or incur any indebtedness upon notes and bonds in excess of twenty times the amount of its capital. the debenture bonds authorized by the act are to be issued in series of not less than $ , , and may be called on any interest day at - / provided a sixty-day notice is given. amortization payments upon mortgages which are given as collateral security for the debentures of the land bank shall be sufficient to liquidate the debt in a period not exceeding forty years. in article xi the law provides for the establishment of credit unions. a credit union may be organized by any seven or more persons with a share capital the par value of which shall not exceed $ . the objects of the credit union are: ( ) to loan money in small amounts on personal security or in larger amounts on endorsed notes at rates not exceeding per cent. per month, inclusive of all charges incident to the making of such loans; ( ) to receive the savings of its members in payment of shares on deposit; ( ) to borrow money to an amount not to exceed per cent. of its capital; ( ) to pay dividends on its share capital. as to the method of making loans, the law prescribes that a credit committee shall pass upon all applications for loans which must be made in writing and must state the purpose for which the loan is desired and the security offered. no loan will be made unless it receives the unanimous approval of the members of the committee present at the meeting, provided always a majority of the committee is present. with the land bank acting as a central clearing agency for the local savings and loan associations and the organization of many rural credit unions the problem of agricultural credit will be largely solved for new york state. this, however, all hinges on the proper functioning of the land bank and the co-operation of the farmers in the establishment of local credit unions. agriculturists as a class are slow to adopt new methods and it may be only after prolonged education that all the possibilities of this new legislation will be realized. footnotes: [ ] adapted from george e. barnett, _state banks and trust companies since the passage of the national bank-act_, publications of the national monetary commission. senate document no. , st congress, _second session_. [ ] [at least one savings bank has gained admittance to the federal reserve system as a "state" bank.] [ ] according to reports to the national monetary commission on april , , the loans of all the state banks in the united states on the security of real estate were . per cent. of their total loans and discounts. [ ] _the report of the monetary commission of the indianapolis convention_, pp. - . the university of chicago press. . [ ] adapted from h. m. p. eckardt, _branch banking among the state banks_, the annals of the american academy of political and social science, vol. , no. , november, pp. - . [ ] adapted from everett w. goodhue, _the revision of the new york state banking law_, the american economic review, vol. v, no. , pp. - . [ ] annual report of the superintendent of banks of the state of new york, jan. , , p. . chapter xxi the canadian banking system [ ]financially, canada is part of the united states. fully half the gold reserve upon which its credit system is based is lodged in the vaults of the new york clearing house. in any emergency requiring additional capital montreal, toronto, and winnipeg call on new york for funds just as do st. paul, kansas city, and new orleans. new york exchange is a current and universal medium in canada and is in constant demand among the banks. a canadian wishing to invest in securities that may be quickly marketed commonly turns to the new york market for stocks and bonds. yet the american banker visiting in canada, if he is unacquainted with the history of banking in his own country, finds himself in a land of financial novelties, for canada has a banking system unlike any in operation in the united states at the present time. twenty-nine banks, known as the "chartered banks," transact all the banking business of the dominion. they have , branches, and each may establish new branches without increase of its capital stock. [at the close of the year there were twenty-two banks with approximately , branches.] they issue notes without depositing security with the government and in such abundance that no other form of currency in denominations of $ and above is in circulation. notwithstanding the fact that the notes are "unsecured," their "goodness" is unquestioned among the canadian people. the system not new but to the student of the history of banking in the united states there is little that is radically new in the canadian system. he finds in it many of the practices and expedients that were found excellent in the united states in the first half of the nineteenth century, and is almost persuaded that but for the civil war what is now known as the canadian banking system would everywhere be called the american system. the fiscal exigencies of war, which have caused changes in the banking systems of most countries, have had no influence upon the development of banking in canada. during the first half of the nineteenth century the commercial and financial interests of canada and the united states were comparatively intimate and the financial institutions of both countries developed on similar lines. the safety-fund system, first introduced in the state of new york in , found favor also in canada and is still an integral part of the canadian banking system. branch banking, which was most successfully illustrated in this country by the state bank of indiana, and which now exists in some form or other in almost all countries except the united states, has always prevailed in canada. the importance of a prompt redemption of bank notes as exemplified in the old suffolk banking system in new england before the war, was fully realized in canada and is probably better illustrated in the present canadian system than in any other country. there bank notes and bank checks are treated as identical in nature, both being cleared with the same regularity and promptness. the so-called free banking system, which was first adopted in the state of new york in and thereafter adopted by eighteen other states of the union, was tried in canada in the fifties, but not on a large scale. this system, requiring that issues of bank notes should be secured by a segregated deposit of certain classes of stocks and bonds, has never met with approval among the leading bankers of canada. the canadian system is a product of evolution. it has taken its present form because of the commercial and financial needs of the canadian people. it was not created by lawyers or statesmen to meet a fiscal need of the government, but has grown up gradually under the fostering care of experienced bankers, no changes having been made until experience proved them necessary or advisable. the chartered banks transact the business which in the united states is divided among national banks, trust companies, private banks, and savings banks. they buy and sell commercial paper, discount the notes of their customers, lend money on stocks and bonds, make advances to farmers, and sometimes aid in the financing of railroads and industrial enterprises. to a canadian the word "bank" means one of the twenty-odd "chartered banks," for the law prohibits the use of the word "bank" by any other institution. other financial institutions the only other financial institutions in canada which possess much importance are the mortgage and loan companies. these usually operate under charters granted by the provincial legislatures and do a business similar to that of the farm and mortgage companies which once flourished in the united states, making loans to farmers for a term of years and taking farm mortgage for security. they also make loans upon urban and suburban real estate and thus aid in the upbuilding of the cities and their suburbs. the business of these institutions is made possible by the fact that the bank act does not permit the chartered banks to accept loans secured by real estate. the dominion government maintains a double system of savings banks. one set is managed by the post-office department, every post-office receiving deposits. the other set is managed by the finance department. the post-office department also sells annuities and old-age pensions. the money received through the savings banks is regarded as a loan from the people and is used, like money obtained by taxation, in the payment of the government's general expenses. the government is required to carry a gold reserve of per cent. against the savings deposits, but no assets are set aside for their security. the chartered banks pay the same rate of interest and get most of the business, for they offer facilities with which the government does not attempt to compete. most of the government's deposits come from the poorest and most ignorant classes, people who in all countries are suspicious of banks. some of the canadian cities maintain municipal savings banks, but they are of relatively small importance. trust companies in canada are not financial institutions. they are trust companies in fact as well as in name, their business being to act as trustee and administrator. a few of them accept deposits, although it is not certain that they have a right to do so. the bulk of the money they handle comes to them through the administration of estates and trust funds. private banking firms are almost unknown in canada, there being only two or three in the entire dominion, and these do a mortgage and loan business rather than a strictly commercial banking business. hence, if any one seeks to understand the financial or banking situation in canada, he must devote his attention in the main to the chartered banks. these through their branches furnish the loanable capital necessary for the support of the dominion's trade and industry and for much of its agricultural enterprise. to them the government turns when funds are needed for internal improvements or when the exchequer faces a deficit. the promoters of street railways, steam railways, steam railroads, and other permanent improvements take counsel with the managers of these chartered banks before they issue their securities. the banks as a rule do not invest their funds in the stocks or bonds of new enterprises, yet their managers are the men most familiar with the world's money markets and their approval, therefore, of any financial undertaking is highly esteemed. the essentials of the system a chartered bank in canada is a bank of branches, not a bank with branches. the parent bank, technically known as the "head office," neither takes deposits nor lends money. all the banking business is done by the branches, each enjoying considerable independence, but all subject to the supervision and control of the head office. the law places no restrictions upon the number or location of branches. canadian banks, therefore, have branches in foreign countries as well as in canada. process of incorporation the provisions of the bank act with respect to the organization of new banks are intended to guard against the entry of unfit or inexperienced persons into the banking business. the minimum required capital of a bank is $ , , of which all must be subscribed and one-half paid in before a new bank can open. at least five men of integrity and good financial standing must agree to act as provisional directors and secure a favorable report on their project from the parliamentary committee on banking and commerce. these men must agree to subscribe for fairly large blocks of stock, otherwise the committee will be inclined to reject their application. they must convince the committee that their project is a well considered one, that there is need for the new bank. if they satisfy the parliamentary committee it will be granted. the bank, however, cannot yet begin business. provisional directors now have merely the right to advertise and cause stock books to be opened. if inside of one year capital stock to the amount of $ , has been subscribed and $ , thereof paid in, the provisional directors may call a meeting of the shareholders, at which a board of regular directors shall be chosen. before this meeting is held at least $ , in cash must be paid over to the minister of finance. the regular directors must then apply to a body known as the treasury board for a certificate permitting the bank to issue notes and begin business and the treasury board may refuse this certificate unless it is entirely satisfied that all the requirements of the law have been met. delay on the part of the treasury board might prove fatal to the new enterprise, for if a new bank does not obtain a certificate within one year from the date of its incorporation, all the rights, powers, and privileges conferred by the act of incorporation cease. these requirements make it impossible to organize a new bank in canada with any degree of secrecy. note issues having obtained its charter, a new bank must open its head office in the place designated, and may then proceed to establish branches or agencies, upon the number and location of which the law places no restriction. under its charter it has authority to issue circulating notes up to the amount of its unimpaired paid-up capital in denominations of $ and multiples thereof. an amendment of the bank act passed july , , gives the bank the right to issue what may be called an emergency circulation during the crop-moving season (october to january ). during this period the legal maximum of the circulation of a bank is its paid-up capital plus per cent. of its combined paid-up capital and surplus or rest fund. this emergency circulation, which consists of notes in form and in other respects exactly like the regular issues, is subject to a tax at a rate not to exceed per cent. per annum, the rate being fixed by the governor in council. if a bank's circulation does not exceed its paid-up capital, it pays no tax. security of notes the law is silent on several subjects that seem of great importance to most bankers in the united states. for instance, it does not require that the banks shall deposit with a government official, or in any way set aside any kind of security for the protection of the note holder. it does not even require that the banks shall carry a cash reserve against either notes or deposits, nor does the law make the notes a legal tender for any payment. a bank need not accept the notes of other banks. the government does not guarantee the redemption of the notes. neither does it bind itself to receive them in payment of dues to itself. nevertheless the notes of the canadian banks are everywhere acceptable at par, the people apparently not being at all concerned about their "goodness." and their confidence in the note has been well justified, for nobody since has lost a dollar through the failure of a bank to redeem its notes. following are the legal requirements, which for twenty years have proved adequate protection for the note holder: . every bank must redeem its notes at its head office and in such commercial centres as are designated by the treasury board. the redemption cities are the same for all the banks. they are toronto, montreal, halifax, winnipeg, victoria, st. john, and charlottetown. . each bank must keep on deposit with the minister of finance a sum of lawful money (gold or dominion notes) equal to per cent. of its average circulation; the total so deposited is called the "circulation redemption fund." it is a guaranty or insurance fund for use, if need be, in the redemption of the notes of failed banks. . bank notes possess first lien upon the assets of a bank. . bank stockholders are liable to an assessment equal to the par value of their stock. . a bank must make to the minister of finance on or before the fifteenth of each month a detailed statement of its assets and liabilities on the last business day of the preceding month. this monthly return, the form for which is set forth in the act, must be signed by three general officers. . the canadian bankers' association, an incorporated body of which each bank is a member, is given supervision by the bank act of the issue and cancellation of notes and of the affairs of a failed bank. . the notes of a failed bank draw interest at per cent. from the date fixed for their redemption by the minister of finance, who may redeem them out of the assets of the bank or out of the "circulation redemption fund." importance of redemption each of these provisions of the law has its value and significance, but only the first is absolutely essential to the successful operation of the system. all the other provisions might be changed or abolished without impairment of the efficiency of the banking system. but the abolishment of this redemption system would at once give canada a new banking system. the bank note is _almost the sole circulating medium_ in canada, and the people have confidence in it because it is tested every day at the clearing houses and proves itself as good as gold. this daily test would probably not take place with the same regularity as now if the banks did not have branches or if they were obliged to deposit security against their issues. canadian banks are national, not local institutions. all but a few of them have branches in every part of the dominion, and these branches, as fast as they receive the notes of other banks, either send them in to the nearest redemption centre or convert them into lawful money--or its equivalent, a bill of exchange--through branches of the issuing banks located in the same towns. each bank is seeking, through its branches, to satisfy all the legitimate needs of the people for a circulating medium. when the note of a bank is in circulation it is earning money for the bank, but when it is in the vault or on the counter of the bank it is an idle and useless piece of paper. hence every bank always pays out its own notes through its branches and sends the notes of other banks in for redemption, thus increasing its own circulation and _strengthening its own reserve_. furthermore, if the banks were not allowed complete freedom of issue within the prescribed limit, but were required to deposit some form of security, as is required of the national banks in the united states, an investment or speculative risk would arise that would inevitably cause friction. if bonds were designated as security, bankers might often be tempted by high prices to sell their bonds and forego the profit on circulation for the sake of making a larger profit by the sale of the security. thus the volume of bank notes might contract even at a time when the people needed more currency. in such case, of course, canada would be obliged to import gold in order to fill the gap in the circulating medium. the circulation redemption fund the per cent. insurance fund for the redemption of the notes of failed banks is theoretically an important and prominent part of the system, yet practically it would seem to be of little consequence, for not once since has it been necessary to use a dollar of the fund. banks have failed, to be sure, but the notes of these banks have always been redeemed either out of the assets or by recourse to the double liability of the shareholders. it is a mistake to suppose that the people of canada have confidence in bank notes because of the existence of this redemption fund. the average business man knows nothing about the fund and if his attention were called to it as being a source of security for the bank notes, he would probably think a per cent. reserve altogether too small. the real reason why the people have faith in bank notes is because the notes are always honored by the banks and never fail to stand the test of the clearing house. in other words, they believe that bank notes are good for about the same reason that they believe the sun will rise in the east every twenty-four hours, and do not bother themselves about reasons. nevertheless this redemption fund does contribute to the strength of the banking system. it makes each bank to a certain extent liable for the mistakes of other banks, and as a result gives rise to a spirit of mutual watchfulness and helpfulness. other features of the system contribute to the same result, especially the fact that a canadian bank accepts from a depositor without indorsement the notes of other banks. since the banks have branches in agricultural and mining communities, often distant from the railroad by several days' journey, and these branches are accepting the notes of other banks and giving credit for them as if they were gold itself, it is evidently important that each banker should have all possible information with regard to the status and business of his competitors. as a result one finds among the bankers of canada a surprisingly intimate knowledge of each other's affairs. two negative qualities the two negative qualities of the canadian bank note--its lack of a legal-tender quality and of a government guaranty--at first sight may seem to readers in the united states a source of weakness. yet canadian bankers would doubtless all agree that nothing would be gained by making bank notes legal tender for any kind of payment or by making the government in any measure liable for their ultimate redemption. such measures would probably be rejected as likely to prove harmful. it would be like hampering a flying machine with unnecessary bars of steel. bank notes, like bank checks, are mere promises to pay money and are more convenient than money because they can be created as need for a medium of exchange arises. when either has done the work that called it into existence, it should disappear from circulation and be redeemed. if it is made a legal tender like money itself, or if its redemption is guaranteed by a strong government, there is always the danger that ignorant classes of people will regard it as money itself and withdraw it from circulation. the canadian government has nothing to do with the daily redemption of bank notes and does not guarantee that they shall be redeemed. it is custodian of the per cent. redemption fund and is under obligation to redeem the notes of failed banks out of this fund, but if a series of bank failures should exhaust it the note holder has no guaranty that government funds will be used for his relief. the possession by the note holder of a first lien upon the assets of a bank, including the funds that may be collected from shareholders on account of their double liability, gives rise to such general confidence in the ultimate convertibility of a bank note that the notes of a failed bank, on account of the interest they bear, sometimes command a premium. as a rule, the notes of such a bank are collected by the other banks and held until the date of redemption has been named by the minister of finance. canadian bankers' association the canadian bankers' association is an incorporated body with powers and duties prescribed in an amendment to the bank act passed in . each chartered bank is represented in the membership and has one vote. the association is required by law to supervise the issue of bank notes and to report to the government all over-issues, to look after the destruction of worn and mutilated notes, and to take charge of suspended banks. its headquarters are in ottawa. the expenses of the association are apportioned among the banks and do not apparently constitute a very heavy burden, for the secretary has an exceedingly small staff. all expenses incurred by the association on account of a suspended bank are, of course, a charge against the assets of the bank. when the notes of a bank are so worn or mutilated that it wishes to replace them with new notes, notice is sent to the secretary of the association, a date is fixed, and in the presence of the secretary the old notes are duly counted and taken to a furnace, where they are consumed in the presence of the secretary and other witnesses. after this solemn operation has been performed and the signatures of all parties observing it have been duly attested, new notes are issued by the association to replace those that have been destroyed. the clearing houses in the dominion are subject to regulation by the association. it also has the power to establish sub-sections and to do educational work by providing for lectures, competitive papers, examinations, etc. the _journal of the canadian bankers' association_, a quarterly publication of excellent quality, is edited by the secretary and is at present the only educational force at work among bank employees. elasticity of the circulation while the amount of notes that the chartered banks may issue is limited by the bank act to the amount of their paid-up capital, experience has proved that this legal limitation is only nominal and that the real and effective limit is imposed unconsciously and automatically by their customers and themselves. each constantly seeks to increase its issue of notes to the legal limit, yet the combined efforts of all are never able to force into circulation more notes than the people need. the reason why an excessive issue of bank notes in canada is impossible is found in the two following facts: . every bank must redeem its notes on demand in seven commercial centres in different parts of the dominion. . the monetary circulation of canada, exclusive of $ and $ bills, and "change" consists entirely of bank notes. the redemption system is an automatic and effectual check against inflation. it is easier to get notes redeemed in canada than it is to secure payment of checks in the united states, for the notes are redeemable at different points throughout the dominion and no exchange is ever charged. if a country merchant accumulates more currency than he desires to keep on hand, he deposits it, together with his checks and drafts, in the local branch of his bank. this branch immediately sorts out the notes of other banks and treats them as it does checks and drafts upon other banks, either sending them to the nearest redemption agency or using them as an offset in the local clearing house if the issuing banks have branches in the locality. the branches of a bank are not obliged to redeem the notes of the parent bank, but must accept them at par in the payment of all dues. thus each bank is doing its utmost to bring about the redemption of the notes of other banks. at the same time it is paying out its own notes to all customers who ask for cash, seeking to bring its circulation up to the limit. as a result of these operations, two powerful forces are constantly at work, one putting notes into circulation, the other retiring them, and the people of canada always have on hand just the amount of currency they need and no more. it is the people, not the banks, who determine how much the circulation of the banks shall be. bank notes have no competition the fact that the bank note has exclusive possession of the monetary field in canada is most important. his ignorance of this fact is one reason why the average banker or business man in the united states has been unable to get a practical understanding of the canadian system. its significance is easily seen. if canada, like the united states, had in circulation a lot of government notes in denominations of $ , $ , $ , the canadian banks would be able to increase their issues of bank notes almost without limit, for their new notes would simply take the place of the government notes, the latter going into bank reserves. the people of canada in making deposits would not discriminate against bank notes, but would deposit the government paper quite as freely as the bank paper. as a result, the amount of the government paper in circulation would gradually decrease and the amount of bank notes would increase. the volume of dominion notes in the vaults of the banks would expand, and as these notes are redeemable in gold the banks would feel justified in larger extension of their credit, so that an increase in deposits and current loans would ensue. under such circumstances such freedom of issue as is enjoyed by the canadian banks would doubtless result in inflation. but such conditions do not exist in canada. all the paper currency in the hands of the people, excepting $ and $ bills, is in the form of bank notes. there is no chance to substitute bank notes for government notes. hence, if at any time business relaxes and the need for money among the people grows less, an increasing tide of bank notes flows into the banks. the people who bring these notes do not ask for money in exchange, for to them the notes are money. they take bank notes to the banks just as people in the united states take greenbacks and silver certificates--to be exchanged for a deposit credit or account. no limit of issue really necessary theoretically there is no reason why any limit should be fixed upon the amount of notes which a bank may issue. even though a bank has a monopoly of issue in a country--like the bank of france--it nevertheless is unable to expand its circulation beyond the people's needs. such a bank, unless it should adopt a reckless policy of lending which would bring ruin quickly upon itself, can exercise very little influence upon the amount of currency in circulation. in a country like canada, where several banks are issuing currency, no single institution can enlarge its issue of notes beyond the needs of its own customers. if it should endeavor to do this by lending freely to customers who promised to use its notes in different parts of the country, the effort would be futile. the notes would quickly find their way into the branches of other banks and be sent in for redemption. like most other countries, however, canada has placed a limit on the note-issuing privilege, fixing it at the amount of a bank's paid-up capital. while there is no scientific necessity that such a limit be fixed in order to prevent the over-issue of notes, nevertheless there are other considerations which justify it. it is an indirect method of compelling banks to increase their capitalization _pari passu_ with the growth of their business. inasmuch as the capital of a bank is the stockholder's contribution toward its assets, it is exceedingly desirable that this contribution be made as large as possible, for, other things being equal, the strength of a bank varies with the amount of its capital. it is not unreasonable, therefore, to require that banks in return for the useful note-issuing privilege should be required to keep their capital resources large. when a canadian bank has reached the limit of its note issue--which has rarely happened--it begins at once to treat the notes of other banks very much as if they were its own. instead of going to the expense of sending them in for redemption, it uses them as counter money, paying them out to depositors in response to their calls for cash. if all the banks in canada should issue notes up to the limit, as some of them did during the exciting months of , and if the current rate of interest did not warrant the issue of the taxed notes provided for by the amendment of , the note circulation would immediately lose its elasticity. as further expansion would be impossible, the banks would have to meet any increasing demand for currency by paying out gold and dominion notes, thus depleting their reserves. such a situation would doubtless lead to a sharp advance in the discount rate and to the importation of gold. the practical limit under the legal it should be noted that the practical limit of note issue is about per cent. below the legal limit. the manager of a bank having a paid-up capital of $ , , begins to get nervous when his circulation equals $ , . his office may be in montreal and his bank may have branches in the far east and in the far west and in the mining wilderness of the north. some of these branches he can not reach by telegraph and some are distant a week by mail. he immediately sends warning to all the branches and cautions them against any large out-giving of notes and against entering into transactions which will be likely to lead to unusual demands for currency. on account of this situation, even in times of greatest pressure, the total issue of the banks is usually per cent. below the authorized limit. deposits the liabilities of canadian banks, like those of commercial banks in great britain and the united states, furnish a fairly correct index to the expansion of the country's credit. since the canadians, like other anglo-saxons, make free use of the check book in the settlement of both business and private accounts, any increase of bank loans and discounts is usually attended by a corresponding increase in deposits. when a canadian business man discounts his note at his bank he almost invariably leaves the proceeds on deposit with the bank. as he makes his payments by check his own deposit account declines, but the bank accounts of his creditors increase, so that the net result of borrowing in canada is an increase in the total of bank deposits. consequently, in good times, when the banks are freely extending credit, the deposits grow, and in periods of dullness and liquidation they decline. a growth of deposits, therefore, is commonly accepted as an indication of business and industrial activity. if a business man in canada has temporarily a large balance in his bank and realizes that he will not need the money for several months, he will either arrange for its entry as a time or savings bank account, or for the payment of interest on his balance as a current account. of course, the bankers do not encourage this practice, nor can it be indulged in by a depositor who is also a borrower. depositors of the class who are paid a small rate of interest--usually per cent.--by national and state banks in the united states, usually have savings department accounts in canada and get per cent. savings deposits always paid on demand on account of the fact that the time or savings bank deposits contain such a large proportion of money likely to be needed in business at any time, the banks regard both classes of deposit as being essentially the same form of liability. practically all the deposit liabilities of a canadian bank are payable on demand, although payment on two-thirds of them at the present time can not legally be demanded until after notice. custom has made it imperative that a canadian bank shall pay any and all of its depositors on demand. for any bank to refuse to let a depositor have his money when he calls for it would be regarded by the public as an acknowledgment of weakness. certainly no canadian bank would take the risk of making the experiment. canadian bankers feel that per cent. is too high a rate of interest to pay depositors. this rate is a matter of tacit agreement among the banks and no single bank can afford to lower it, for such action would cause it a loss of business. on the other hand, if any bank, hoping to increase its deposits, should offer to pay - / per cent. or per cent., its conduct would be looked upon with grave disapproval by its competitors. some of the new banks in recent years have obtained business in this manner and have been severely criticised by the managers of the older institutions. savings depositors not properly rewarded to an outsider it would seem that the savings bank depositor in canada is not generously treated. in the united states he gets per cent. on his savings even in the large cities. in canada, a country where real estate mortgages yield from to per cent. and the bonds of new corporations are selling at prices giving the investor a higher return than he can get in the united states, it is certain that a real savings bank could well afford to pay depositors per cent. it is doubtless true that per cent. is a higher rate of interest than most of the savings depositors in the chartered banks have a right to expect. a large part of these deposits are not savings deposits at all. nevertheless it is doubtful if the banks would be justified in a reduction of the rate. the right solution of the problem seems to lie in another direction, namely, in the making of a sharper distinction between demand and savings deposits. the funds received from both classes of depositors should not be treated alike. the money of savings bank depositors should be invested in bonds and mortgages and then could be made to yield a net return of over per cent. if the depositors were not allowed to check upon their accounts they would be a source of such little expense to a bank that it could easily afford to pay them interest at the rate of per cent. at the present time the banks are paying per cent. interest on money which they are lending to commercial borrowers and for the care of which they are maintaining an expensive force of clerks. depositors who have checking accounts might be allowed per cent. on large balances, but out-and-out savings depositors, people who make no use of the check book, are certainly entitled to a -per-cent. rate in a country where investment capital is as fruitful as it is in canada. strictly speaking, the savings departments of the chartered banks are not savings banks, for they do not pretend to devote their time funds to long-time investments. the amount of securities held by the banks is never equal to the amount of time deposits. a thorough reorganization of the savings departments of the chartered banks, to equip them for the real business of a savings bank, would not be possible without an amendment to the bank act, which now prohibits them from loaning money upon real estate or upon the security of real-estate mortgages. it is generally believed that this prohibition is commonly evaded by the banks through the acceptance of such mortgages as "additional security" after loans have been made. a savings bank, of course, must have the legal right to accept such security. no bankers' bank the indebtedness of banks to banks is not large in canada. the branch system makes it unnecessary for banks to carry balances in other institutions located in the financial centres. nearly every bank has a branch in either montreal or toronto and in these branches carries the major proportion of its cash reserve, so that branches in the far west or in the maritime provinces are always able to sell exchange on montreal or toronto. canada has no bankers' bank. the bank of montreal, which is the largest bank in the dominion, its assets being equal to about per cent. of the total, is often spoken of as the government bank because it is the largest government depositary, yet it holds a very small amount of funds belonging to other banks. amount of the reserve fixed by each bank it must not be supposed that the canadian banks do not carry adequate reserves. on the contrary, every bank manager gives to this subject daily and most conscientious thought. to the canadian banker the word "reserve" means a fund immediately available for the liquidation of liabilities. how much this fund ought to be depends altogether upon the amount and character of the liabilities to be protected. a canadian bank manager, having before him the amount of time deposits and demand deposits, respectively, knowing the probable future needs of the various depositors, being in constant touch with branch managers both by wire and by letter, and having back of him information born of many years' experience, easily determines how much his bank's reserve ought to be in order to assure its safety. the law neither helps nor hinders him; it simply requires that the bank shall satisfy the demands of depositors in accordance with the terms of the contract and that it shall redeem its notes on demand. the public by force of custom expects a bank to do a little more than the law requires, for its credit is bound to suffer if it take advantage of its legal privilege to delay payment upon time deposits. the manager is a hired man, sworn to do his utmost to protect the credit of the bank, trained for many years in its service, familiar with its history and its policy, anxious to guard his own reputation and character against criticism. under these circumstances it would be remarkable if he did not fix the amount of his bank's reserve nearer the ideal figure--if an ideal banking reserve is possible--than could possibly be done by a body of lawmakers or of any other men outside the bank. competition is not lacking in many respects banking competition is quite as active in canada as it is in the united states. apparently there are only two things which the banks do not like to do in order to attract business--lower the discount rate, or advance the rate paid on depositors' balances. there is no express agreement among the bankers on these points, but every banker knows that he would become _persona non grata_ among his brethren if he should discount certain kinds of paper at less than per cent., or pay his depositors on their monthly minimum balances more than per cent. per annum. in montreal and toronto large borrowers can get money at per cent., but the average merchant and manufacturer must pay . in winnipeg borrowers can do almost as well, but farther west the usual rate is per cent., and in some of the remoter districts merchants and farmers alike pay per cent. bankers do not believe in lowering the discount or interest rate unless they are compelled to do so in order to find a market for their funds. some of the older institutions would like to prevent competition from absorbing the minor profits which come from collections and transactions in exchange, but they are not entirely successful. the nominal or schedule charges for collections and exchange are frequently cut for the benefit of business men whose favor it is desired to propitiate. in their efforts to get new business, to be the first to open a branch in a promising new community, or to keep their regular customers from being dissatisfied, there seems to be the keenest kind of competition. few villages of people can complain that their banking facilities are less than they deserve, and many of them, with barely enough business to pay the expenses of one branch, are supplied with two. the recent rapid increase in the number of branches has been caused by the great expansion of the west and by the competition among the more progressive and energetic general managers, each desiring that his bank shall be the first in a promising field, even though his enterprise lead him to establish branches which at first do not pay expenses. in a new mining camp the first bank, like the first saloon or the first boarding house, usually begins business in a tent. some of the more conservative bank managers in canada think that new branches are being started in excess of the country's needs, but others are willing to take chances on the country's future and to charge considerable sums to the debit side of the profit and loss account in order to keep their institutions at the front in the great and developing west. banking in different provinces it is generally known that the eastern branches get heavy deposits and are creditors of the head office, and that the funds they collect are forwarded to the western branches, whose loans greatly exceed deposits. bankers will admit that this transference of funds takes place, but there is considerable grumbling about it in the old communities of the east, and the bankers fear that a monthly or even annual publication of the facts would keep them perpetually in hot water. a glance at clearing-house statistics leaves no doubt as to the banking importance of the western provinces or as to the relative financial quietude of the east. between and the total of canada's bank clearings increased per cent., but halifax gained only per cent., st. john only per cent., and quebec only per cent. on the other hand, toronto's clearings increased per cent., winnipeg's per cent., and vancouver's per cent. eastern provinces have suffered this transference of funds from sluggish to active communities is the inevitable result of a system of branch banking and is the cause of the tendency of the rate of interest toward uniformity in all parts of canada. whatever may be said against a system of branch banks, there can be no question that it does bring about a more even distribution of capital in a country than is possible under a system of independent local banks. canadian bank managers are anxious to put out their money where it is most wanted, for there they get the best possible rate of interest and obtain paper of the best quality. no matter where a manager's headquarters may be, he is most deeply concerned in three questions: ( ) where is idle money accumulating? ( ) how can he best draw it into his bank? ( ) in what parts of the dominion is money most needed? in localities of both kinds he establishes branches; in the one the branches accumulate deposits often much in excess of their loans, in the others the loans exceed the deposits. thus it happens that the savings of the eastern provinces, where the growth of industry and trade is slow and the demand for new capital is not increasing, are sent westward and loaned out to merchants and manufacturers and farmers of the new territories. the people of the east supply the capital for the development of the west, though many of them perhaps are entirely ignorant of the useful purpose their savings are made to perform. in the western cities of canada one hears no talk among business men about the scarcity of capital. a merchant or manufacturer in manitoba gets the money he needs as easily as does the merchant or manufacturer in toronto or montreal. justifiable as the bank's policy is from a national point of view, one can not help believing that the branch banking system has really checked the development of business and industry in the maritime provinces. if canada during the last thirty years had depended, like the united states, upon independent local banks, there would have been a plethora of capital in the east, and montreal, quebec, and halifax, like boston, new york, and philadelphia, would years ago have had and per cent. money, while winnipeg and other western cities, less populous than now, would still be paying per cent. a month. the relative cheapness of capital undoubtedly helped build up the prosperous industries of massachusetts. the same cause operating in the maritime provinces of canada would doubtless have led to the establishment there of industries of which the people under existing conditions have not ventured to dream. large use of deposit currency it is sometimes assumed that a free and large use of bank notes tends to discourage the use of the check book and the growth of bank deposits. on the continent of europe, for instance, where the notes of central banks supply all the currency the people need, the check book is comparatively little used. this fact is sometimes explained by the ease with which people can obtain bank notes for use in making all payments. experience in canada makes one doubt the validity of this explanation. the check book is almost as popular there as in the united states, and would probably be used still more than it is if the banks would adopt a policy as liberal as that in vogue in the united states. the canadian banks not only charge exchange on checks and drafts payable in other localities, but even charge exchange on checks drawn on their own branches. the charge is a small one and probably has no great effect one way or the other, yet it certainly does not encourage the increase of deposits or the use of the check book. when a canadian starts on a journey it is in a small way economical for him to fill his wallet with all the cash he expects to need. the notes of his bank will be taken at par everywhere throughout the country; his checks, even though he presents them at a branch of his bank, will be cashed only at a discount. notwithstanding this discrimination against the check, the deposits of canadian banks have grown much more rapidly than the note circulation and the inference is that the volume of deposit currency has increased at the same rapid pace. since the volume of notes has increased approximately per cent., while the deposits by the public showed a gain of per cent. these figures prove that business men in canada appreciate the advantages of the check as a means of payment, and that the proportion of business transactions settled by it is steadily increasing. banks silent partners in industry a large part of the so-called commercial paper of canadian banks is secured practically by title to goods in warehouses, factories, and wholesale stores. such security is more saleable than stocks and bonds, and paper having such security back of it is therefore better banking paper than notes secured by stock-market collateral. so far as would seem possible the canadian bank act makes merchandise of all kinds a sort of collateral security for bank advances. it assumes that if a bank advances capital for the conduct of a business it should have a claim upon all the assets of the business and upon all goods as they come and go in the course of trade. no matter how a merchant's stock may change in character, it all belongs to his bank in case he fails to take up his paper or meet his engagements. in the same way a manufacturer's stock of goods, the raw material and the finished products, no matter how they change from day to day and month to month, will become the property of his bank if he fails to pay his note. the law practically makes every bank a silent partner in many wholesale and manufacturing businesses and gives it many rights which no ordinary silent partner can acquire. it has the effect naturally of making bankers keep a close eye upon business conditions as well as upon the affairs of their individual borrowers. canadian bankers are interested in the lumber market, in the prices of metals, in changes in the tariff, and in the acquisition of foreign markets for canadian manufactures and products, even as the wall street banker is interested in the prices of stocks and bonds. he is in a sense the owner of merchandise of all kinds, and both trade and financial news has equal significance to him. a customer's line of credit in canada the banks are managed by men whose long experience in the business has taught them to avoid certain banking practices that are in vogue in other countries. realizing how important is the relation between a bank and its customer, they believe that this relation should be made as intimate and helpful as possible. among canadian bankers, therefore, it is part of the law and gospel of banking that a bank is entitled to full knowledge of the financial condition and business operations and prospects of its customers. hence a bank insists that its customers shall rely _entirely upon itself_, that they shall make a full statement of their affairs at least once a year, and that they shall begin each year with a clean slate. as a result of this policy a business man in canada deals exclusively with one bank. once a year he arranges with his bank for a line of credit and learns exactly the amount of paper he will be able to discount. if he happens to need less than he anticipated, he will not exhaust the credit allowed by the bank and will pay interest, of course, only upon such portion of the bank's funds as he actually utilizes. if, on the other hand, his business is unexpectedly large, giving opportunity to make bigger profits and creating the need for more capital, he will find the bank ready to increase his line of credit, provided the manager is satisfied that business conditions and prospects warrant expansion. under no circumstances, however, must the customer of a bank seek to raise funds elsewhere unless he first gets the consent of his bank. if he sells his notes in the open market, he must do it with the full knowledge of his bank or run the risk of being placed upon the "black list." as one would naturally expect, there is very little commercial paper floating about in the canadian money market. the bill broker is unknown. wholesalers and manufacturers, unless shipping to foreign countries, do not draw upon their customers. if credit is granted, it takes the form of a book account or of a promissory note. the promissory notes received by a manufacturer or wholesaler are deposited with his bank. the book accounts under ordinary conditions remain entirely at the disposal of the business, but in extraordinary cases, when the situation is not satisfactory, or if an additional credit at the bank is desired, an assignment of the book accounts to the bank may be required. during the harvest season heavy drafts are made upon the resources of the banks to provide for the movement of the grain crops of the west. in its advance of money for this purpose the law makes it possible for a bank always to have abundant security. under section of the bank act the buyer makes assignment to his bank of the grain purchased. when the grain is delivered to a railroad, the bill of lading becomes the property of the bank. when it reaches port arthur, or some other distributing point, and is stored in an elevator, the bank receives a warehouse receipt in exchange for the bill of lading; and when shipment is made to new york, to montreal, or to europe, the bank receives on surrendering the warehouse receipt the shipper's draft on the consignee, the bill of lading, and other documents. throughout the entire transaction, from the purchase from the farmer to the final sale to the eastern consumer, the bank practically has title to all agricultural products which are being moved by means of its funds. loans to farmers the branches of canadian banks in agricultural districts quite commonly lend assistance to farmers. they do not make a practice of taking mortgages on farm property, but lend outright on the farmer's credit, depending for their security upon his character as a man and ability as a farmer, and often as well upon a neighbor's indorsement. farmers' paper ranks high among the canadian bankers and constitutes a considerable proportion of the assets of some of the banks. the banks, of course, do not undertake to supply the farmer with anything more than working capital. they do not help him pay for his land and buildings, but they do let him have at least part of the money he needs for tools, wages, seed, stock, etc. despite the fact that these advances are unsecured by mortgage, the banks suffer very little loss on farm paper. call loans in canada and elsewhere after "current loans in canada" the next largest item among the assets is "call and short loans elsewhere than in canada." the call loans outside of canada consist mainly of loans in the new york market and are as a rule secured by collateral easily convertible into cash. these loans are regarded by canadian bankers as equivalent to cash and are figured by them as part of their reserve. only the larger banks make a practice of loaning on call in new york. the banks as financial institutions that the chartered banks of canada are financial as well as commercial institutions is evidenced by their holdings of stocks and bonds. these securities represent partly an investment carried as a secondary reserve and partly a business carried on for the benefit of their customers. in canada the demand for long-time investments is not large, but whatever market there is for securities is mainly in the hands of the chartered banks. an investor seeks the advice of a bank manager and often is able to obtain from him securities which satisfy his needs. the banks do not publish a list of their holdings, but it is generally taken for granted that they carry only gilt-edge securities. if a customer desires to obtain second or third rate securities, being eager for a high rate of return, a bank can accommodate him, not by selling him out of its own stock, but by negotiating the purchase of the desired securities in new york or london. as the wealth in canada increases and idle capital accumulates in excess of its immediate needs, this financial side of the business of canadian banks will doubtless expand. it may, indeed, during the next generation or two greatly expand and become an important feature of the chartered banks. they are in a position to take care of the business as it develops and will doubtless be able to prevent the establishment of any purely financial banking houses in canada. the revision of the bank act, [ ] the canadian bank act, as is well known, is subject to decennial revision. the last revision was due to take place in ; but owing to circumstances which it is not necessary here to describe, it was not until the present year that the work was finally undertaken. the leading features of the canadian banking system are so well known that they may be passed over, and the nature and causes of the recent changes in the act alone described. there were many minor modifications, but the essential changes effected were: ( ) provision for a shareholders' audit, ( ) the creation of central gold reserves, and ( ) the providing of additional facilities for making loans to farmers. in the recent revision of the act the public was most deeply concerned with the problem of securing an adequate system of bank inspection. the immediate reason for this was the disastrous failure of the farmers' bank. this institution had gambled away its resources on the keeley mine; and had, in its failure, brought many farmers as well as others to the verge of ruin. for several years previous, however, there had been an insistent demand for some sort of external bank inspection.... the banks as a whole have been opposed to any change in the method of inspection. the reason they advance is that the keynote of the organization of canadian banks has always been the centralization of responsibility; and they do not think it wise to divide that responsibility with any outside authority.... as far as the public is concerned it has no means of judging of the soundness of a bank except by examining the monthly returns which are required by law from each bank. these returns are fairly comprehensive, and have been made more so by the revision of the act this year. the minister of finance may call for supplementary information from any bank, whenever, in his judgment, such data are required to afford a fuller knowledge of a bank's affairs. of course, these returns can be taken only for what they are worth. in the case of several failed banks the returns were made with every degree of falsification, because no independent checking of the figures was possible. nevertheless, in obedience to the strong demand for some sort of independent bank examination, provision was made in the recent revision of the act for a shareholders' audit of each bank's affairs. the auditors are to be chosen by the shareholders from a list of forty names selected by the whole body of the general managers of the banks. the list must be submitted to the minister of finance for his approval. if one-third of the shareholders of a bank are dissatisfied with the auditor appointed by the majority, they may appeal to the minister for the appointment of another auditor. the auditors must submit a statement of their findings to the shareholders at the annual meeting, or on any other occasion the necessity may require. in addition the minister of finance may require a special return to be made to him, the cost of the service rendered being paid for by the government. canadians would be wise not to expect too much from this system of external examination. after all, it can do no more than verify a bank's statements and books.... in every large undertaking, the soundness of the transaction must depend, as before, upon the judgment of the general manager and the board of directors. the establishment of central gold reserves is the most important feature added to canada's banking system by the legislation of .... under the new act each bank may issue any amount of notes that it may desire, provided that it deposits with a board of trustees, at montreal, gold or dominion notes to the full amount of the notes issued. these notes are to be identical in form with the ordinary notes of the bank. the gold or dominion notes deposited with the trustees shall be returned to the bank whenever the notes which the bank has outstanding do not amount to the paid-up capital of the bank together with the amount of legal-tender money deposited with the trustees. in other words, the banks can still issue their notes up to the full amount of their paid-up capital, and an additional amount from september to the end of the following february, which may equal per cent. of a bank's combined capital and surplus. it is only for notes issued in excess of these amounts that legal-tender money must be deposited with the trustees at montreal. it should be observed, however, that the banks pay a tax of per cent. on the extra issue during the crop-moving period, whereas there is no tax upon gold-reserve notes. and as canadian banks are not required to keep a legal reserve against their demand liabilities, there is no reason why the idle gold in their reserves should not be sent to montreal to form the basis of new note issues, especially when it is considered that the gold may be recalled at once when no longer needed to cover notes. the ability to issue notes to any amount required, on a gold basis, will greatly strengthen the position of the banks. the third important new feature in the revision of the act is the power given to the banks to make loans to farmers on grain which is stored on the farm and still in the farmer's possession.... the permission granted them to loan money to farmers on stored grain in the latter's possession is an attempt to extend to the farmers aid similar to that hitherto granted to manufacturers and wholesalers alone. it should not be thought, however, that the banks have not always granted loans liberally to farmers.... the possibility of making advances to the farmers on their grain is expected to be of especial benefit to the west.... it is hoped that, under the new legislation, the farmer will be able to hold his grain for higher prices; and in the meantime secure accommodation from the banks to meet his obligations. many bankers, however, refuse to see any remedy for the situation in the new legislation. they maintain that it will involve too much risk to extend loans on grain over which the farmer continues to assert control. only the operation of time will enable us to estimate the value of this feature of the act. comparative figures of condition of canadian banks[ ] assets nov. , june , . gold and subsidiary coin-- in canada $ , , $ , , elsewhere , , , , ----------- ----------- total $ , , $ , , dominion notes , , , , deposit with min. of finance for security of note circulation , , , , deposit in central gold reserves , , , , due from banks , , , , loans and discounts , , , , bonds, securities, etc. , , , , call and short loans in canada , , , , call and short loans elsewhere than in canada , , , , other assets , , , , -------------- -------------- total $ , , , $ , , , liabilities capital authorized $ , , $ , , capital subscribed , , , , capital paid up , , , , reserve fund , , , , ------------ ------------ circulation , , , , government deposits , , , , demand deposits , , , , time deposits , , , , due to banks , , , , bills payable , , , , other liabilities , , , , -------------- -------------- total, not including capital or reserve fund $ , , , $ , , , note.--owing to the omission of the cents in the official reports, the footings in the above do not exactly agree with the totals given. footnotes: [ ] adapted from joseph french johnson, _the canadian banking system_, publications of the national monetary commission, senate document no. , st congress, _ d session_. [ ] w. w. swanson. _the revision of the canadian bank act_, american economic review, vol. , december, , pp. - . [ ] _the commercial and financial chronicle_, vol. , january , , p. . chapter xxii the english banking system foundation and growth of the bank of england [ ]about the year the government of william and mary experienced considerable difficulty in raising the necessary funds to prosecute the war with france; but "the hour brings the man." the man on this occasion was william paterson, a merchant of scotland, who had been educated for the church, but had led a varied and adventurous life. the scheme he presented for the consideration of the government for the relief of the situation was the foundation of a public joint-stock bank; which, in return for certain powers and privileges to be conferred, should advance money to the government.... ... the bill establishing the bank of england was successfully carried through parliament, and obtained the royal assent on the th april, . the basis of the bill was that £ , , should be voluntarily subscribed by the public, and that the subscribers should be incorporated into a body, to be known as "the governor and company of the bank of england." the whole of the sum forming the capital of the bank was to be lent to the government, for which the bank was to receive interest at the rate of per cent. per annum, together with an allowance of £ , per annum for management and expenses; making in all £ , per annum. it was also provided that the sum of £ , was to be raised by public subscription, for which the contributors were to receive certain terminable annuities. by its first charter, which was for ten years only, the bank of england was not allowed to borrow or owe more than the amount of its capital; which meant that it could issue notes to the extent of its capital and no more. if this amount were exceeded the members were liable for such excess, in their private capacities, in proportion to their holding of stock. the capital of the bank was subscribed in a few days, and when duly paid up, the agreed sum of £ , , was handed in to the exchequer.... the charter originally granted to the bank was for ten years only, as we have already seen; but this charter has from time to time been renewed, and also varied--sometimes in favour of the bank and sometimes curtailing its privileges. the monopoly of joint-stock banking was not granted to the bank by its first charter, but this monopoly was practically conferred on it in . the act passed in that year provides: that during the continuance of the said corporation of the governor and company of the bank of england, it shall not be lawful for any body politic or corporate whatsoever, created or to be created (other than the said governor and company of the bank of england), or for any other persons whatsoever, united or to be united in covenants or partnership, exceeding the number of six persons, in that part of great britain called england, to borrow, owe, or take up any sum or sums of money on their bills or notes, payable at demand, or at a less time than six months from the borrowing thereof.... we pass on now to the end of the eighteenth century, when the country was plunged into the throes of war and financial difficulty. up to this time the bank, since its foundation, had succeeded in meeting its notes when presented; but in the year a steady drain on the reserve of the bank commenced, owing to the fear of invasion. this drain began to assume a very serious aspect in the early part of , and it appeared probable that the bank would be subjected to the danger and humiliation of a temporary stoppage. the directors, fully aware of this danger ahead of them, laid the position before the government, and left the solution of the difficulty in its hands. after due consideration, an order in council was issued on the th february, , requiring the bank not to pay its notes in gold.... it was not until that the restriction was entirely withdrawn, although as a matter of fact the bank really resumed paying in cash on demand on may , , deeming it then safe to do so. although a period of safety and prosperity then appeared to have dawned, the bank was not quite clear of its troubles. the very prosperity of the times led imperceptibly to another period of distress and danger, culminating in the panic of .... in the bank of england, by arrangement with the government, agreed to establish branches in various parts of the country, and gave up their monopoly of joint-stock banking, except within a radius of sixty-five miles of london. the year , however, saw a further restriction in the powers of the bank, when, after protracted negotiations, and in return for a further renewal of its charter, the bank surrendered its monopoly of joint-stock banking entirely, provided that no bank having more than six partners might issue notes within the sixty-five-mile limit of london. it is a curious point that the charter of the bank never did restrict joint-stock banking in its present accepted form, but only the issue of notes by joint-stock bankers or banks having more than six partners. up to this time the issue of notes by a bank had been thought to be its main business; so much so, that it was believed to be useless to attempt to conduct a bank without power of issue, and consequently no joint-stock bank had been founded. but about this time the need of such institutions began to be felt, and the presumed monopoly of the bank of england was called in question--largely by mr. gilbart, the founder of the london and westminster bank. the bank tried to assert their monopoly, but without success, and in order to settle the matter effectually, the following clause was inserted in the act passed in dealing with the bank charter: be it therefore declared and enacted, that any body politic or corporate, or society, or company, or partnership, although consisting of more than six persons, may carry on the trade or business of banking in london, or within sixty-five miles thereof, provided that such body politic or corporate, or society, or company, or partnership, do not borrow, owe or take up in england, any sum or sums of money on their bills or notes payable on demand, or at any less time than six months from the borrowing thereof, during the continuance of the privileges granted by this act to the said governor and company of the bank of england. it may be noted that this act of constituted bank of england notes a legal tender, except by the bank itself or its branches.... peel's act or the bank charter act of , and its suspensions [ ]after the renewal of the charter in , the directors of the bank of england laid down as a principle on which their future operations were to be guided, that one-third of their liabilities should be kept in cash and bullion, and the remaining two-thirds in securities. if this principle had been acted on, the bank would have been saved from many of the troubles which shortly assailed it; but though the intentions of the directors were good, circumstances were too strong for them, and the actual proportions of cash and securities to liabilities, respectively, often differed materially from the standard laid down. this was notably the case during the periods of financial pressure which were experienced in the years and . in the year matters assumed a very serious aspect. in the early part of this year the amount of cash held by the bank was about one-third of the amount of securities, but during the year the amount invested in securities increased at the expense of the amount held in cash; and by september we find that securities stood at nearly £ , , , while the cash was reduced to a tenth of that figure, and stood at £ , , only. in order to avert a calamity which appeared to be impending, the bank arranged loans in paris and hamburg to the extent of between three and four millions. this manifest exhibition of weakness on the part of the bank led to the appointment of a committee of the house of commons to inquire into the matter. the committee condemned the principles on which the bank was working, but were powerless to effect any alteration, owing to the charter of the bank not expiring till . on the expiry of the charter, however, sir robert peel brought forward his famous act for remodelling the bank, and regulating the issues of the country banks throughout. england and wales. the act was passed on the th july, , and continues without alteration to the present day. the main provisions enacted thereby, briefly stated, are as follows: i. the issue department and the ordinary banking department of the bank of england were to be entirely separated as from the st august, . ii. on such separation taking place, securities to the value of £ , , (including the [book] debt due to the bank from the government) were to be transferred to the issue department, together with so much gold coin and bullion that the total so transferred should equal the total amount of notes then outstanding. thereafter (with the exception noted below) the issue department must not issue any notes in excess of a total of £ , , except in exchange for gold coin or bullion. iii. the issue department might not at any time hold more silver than one-fourth part of the gold held. as a matter of fact the issue department holds no silver. iv. notes might be demanded from the issue department by any person in exchange for gold at the rate of £ _s._ _d._ per standard ounce. v. if any banker having the power of issue on the th may, , should relinquish such issue, the issue department may be authorised to increase its issue of notes against securities to the extent of two-thirds of the issue so relinquished; but all the profits on such increased issue against securities were to belong to the government. vi. the bank must issue a weekly statement of the position of both its issue and banking departments, in a prescribed form. vii. bankers having the right to issue their own notes on the th may, , might continue such issue under certain conditions, and to an agreed amount; but no provision was made compelling such bankers to keep any reserve either in cash or securities against their issues. if any issue lapsed, from any cause, it could not be resuscitated; and no institutions could acquire the right of issue in the future. viii. banks consisting of more than six partners, though within the sixty-five-mile radius of london, might draw, accept, or endorse bills of exchange not being payable to bearer on demand. the first return issued by the bank in accordance with the regulations of the new act was that of the th september, , and was as follows: account of the liabilities and assets of the bank of england for the week ending th september, dr. issue department cr. notes issued £ , , government debt , , other securities , , gold coin and bullion , , silver bullion , , ----------- ----------- £ , , £ , , dr. banking department cr. proprietor's capital , , government securities , , rest , , other securities , , public deposits , , notes , , other deposits , , gold and silver coin , seven-day and other bills , , ----------- ----------- £ , , £ , , ... taken as a whole the act has worked well, and has succeeded, in combination with greater knowledge and foresight, in maintaining our banking system in a sound condition.... the main point of contention between the supporters and opponents of the act lies in its want of elasticity in time of need. under no circumstances can the bank increase its issue of notes against securities beyond the prescribed limit, without a breach of the law; but on three occasions in the past the law has been broken, though with the consent of the government, and subsequent confirmation of parliament.... we will now briefly review the ... occasions on which the bank act was suspended, and the effect of such suspensions. the first of these occasions was during the panic in the year --known as the "railway panic." shortly previous to this year a great accumulation of capital had led to a demand for new investments, which were duly provided for the public by those concerned with such matters. added to this, interest rates had ruled low for some time, and this conduced to a period of speculative activity. too much capital was put into fixed investments--chiefly railways--and in one session of parliament sanction was asked for various railway schemes involving a total capital of £ , , . wild gambling in railway stocks ensued, credit was inflated above all reason, and then the turn came. this was primarily due to a bad harvest and potato crop, causing a heavy importation of corn, and consequent export of gold. during the panic which ensued, the reserve of the bank of england fell to £ , , , but when the panic was at its height, the act, passed only three years before, was suspended. the bank was authorised to increase its accommodation to the public by exceeding, to an indefinite extent, the limit fixed for the issue of notes not secured against gold. the effect of this suspension of the act was immediate and complete. the fear that "there was not enough to go round" passed from men's minds. as a matter of fact, the issue on this occasion did not exceed the normal limit, the mere knowledge that the bank was empowered to exceed this limit proving sufficient to allay the panic. the second suspension of the bank act was due to the crisis of , a crisis that was brought about by reckless overtrading, and came upon the public very suddenly and with practically no warning.... the third suspension of the bank act took place in .[ ] many elements of disturbance to the money market had been in force during two or three preceding years. the civil war in america had resulted in gold being sent to this country; but the stoppage of the supply of cotton from america, owing to the war, disorganised one of our staple national industries, and supplies of cotton had to be obtained from elsewhere at high prices, and paid for in cash. hence a drain of gold set in on a large scale. in addition, a large speculation had been built up on credit in the stocks and shares of the many new limited liability companies which were formed at that time. general uneasiness began to prevail towards the end of ; in january, , the bank raised its discount rate to per cent., and a crisis began to develop rapidly.... on the th may the bank rate was raised to per cent. on the th may the failure of overend, gurney, and company--for upwards of ten millions--was announced, and the bank rate went to per cent. this failure was not made known till after business hours, so it was not till friday, the th may, --known as "black friday"--that the crisis reached its height. the stoppage of this large house affected the whole world, and general failure seemed imminent, when, in the afternoon of the day on which the failure became known, it was announced that the bank act was again suspended, and calm began to take the place of mania. but though the panic was allayed, many failures shortly took place, which delayed the quick restoration of a sense of security.... from the above brief records of the financial tragedies of the past, we see that on each occasion reckless speculation and overtrading had been allowed to reach a dangerous height before any steps were taken to check them, and on each occasion the check came too late. but we also see the marvellously quick effect which the suspension of the act had on the situation.... the functions of the bank of england [ ]the distinctive functions of the bank of england consist in its acting as: . banker to the british government. . banker to the joint stock and private banks. . (a) sole possessor of the right to issue notes which are legal tender in england; (b) sole possessor, among joint stock banks with an office in london, of the right to issue notes at all. . provider of emergency currency. . keeper of the gold reserve for british banking. . keeper of the gold reserve which is most readily available for the purposes of international banking. these various functions fit into and supplement one another, and though their diversity is sometimes pointed to as throwing too much responsibility onto one institution, it in fact enables the bank to carry out its duties with extraordinary ease, and with the least possible disturbance to the financial community. by the fact that it keeps the balances of the other banks, the bank of england is enabled to conduct the payment of the interest on the british debt largely by transfers in its books. by the fact that it keeps the balances of the government and has the monopoly of the legal-tender note issue, the bank has a great prestige in the eyes of the general public, which it communicates to the other banks which bank with it. there is an impression that the government is always behind the bank, and that the bank is always behind the other banks, and this feeling has certainly done much to foster the confidence of the british public in its banking system. a credit in the books of the bank of england has come to be regarded as just as good as so much gold; and the other banks, with one exception, habitually state their "cash in hand and at the bank of england" as one item in their balance sheets, as if there were no difference between an actual holding of gold or legal tender and a balance at the bank of england. it thus follows at times when an increase of currency is desirable, it can be expanded by an increase in the balances of the other banks at the bank of england, since they thus become possessed of more cash to be used as the basis of credit. for currency in england chiefly consists of cheques, and customers who apply to the banks for accommodation, by way of discount or advance, use it by drawing a cheque which is passed on and so creates a deposit; and expansion of currency thus consists chiefly in expansion of banking deposits. this expansion is only limited by the proportion between deposits and cash which the banks think fit to keep, and as long as they can increase their cash by increasing their credit in the bank of england's books the creation of currency can proceed without let or hindrance. their balances can be increased by borrowing from the bank of england, which is generally carried out not by the banks themselves but by their customers from whom they have called in loans, and the bank of england is thus enabled to provide emergency currency with great ease, by means of loans and discounts which are used to swell the balances of the other banks, which thus show an increase of the cash at the bank of england which they use as a basis for credit operations. the elasticity of the system is thus remarkable, and the merchants and bill brokers of london can by taking approved security to the bank of england, increase the basis of english credit in a few minutes by borrowing. . examining these functions of the bank of england in closer detail we find that its first and most obvious one, which originally brought it into being, of financing the british government and acting as its banker, is now perhaps its least difficult and important duty. apart from the prestige which it thus acquires and its close touch with the government and the officials of the treasury, the bank's position as government banker is of little direct material advantage. its duties as such, besides the normal relation between a bank and a customer, consist chiefly in making advances to the treasury in the shape of "deficiency advances" when the government balances are too low to admit of the payment of the quarterly interest on the british debt without replenishment, or against "ways and means" advances at times when the revenue is coming in more slowly than government expenditure is proceeding. it also, when the government has to borrow to a greater extent, manages its issues of treasury bills, or any loan operation that the government may have to undertake. . the second of the bank of england's distinctive functions--its acting as banker to the rest of the english banking community--is the one which throws upon it its most serious responsibilities and gives it most of its actual power and ease in working. the government gives it prestige in the eyes of the multitude, which considers that governments are omnipotent; the other banks give it the power of providing emergency currency by making entries in its books, and so acting as the easily efficient centre of a banking system in which elasticity and the economy of gold are carried to a perfection which is almost excessive. nevertheless, it pays heavily for its apparently privileged position as bankers' bank. at first sight it would appear that these customers, keeping a regular balance of twenty-odd millions, which varies little and on which the bank of england pays no interest, were a source of comfortable income and no anxiety to it. but in the first place it is obvious that a liability which is regarded as cash by the rest of the banking community requires special treatment by its custodian, and in practice it is so specially treated that the bank of england maintains a proportion of cash to liabilities which is fully twice as high as that of the strictest of the other banks. this proportion rarely is allowed to fall below per cent. and generally ranges between and per cent., and it need not be said that this high level of cash holding tells heavily on the earning power of the bank of england. moreover, it is its position as bankers' bank that exposes the bank of england to the responsibility of maintaining the gold reserve for english banking and being prepared to meet, in gold, any draft on london that any one abroad who has acquired or borrowed the right to draw wishes to turn into metal to be shipped to a foreign country. the amount of the bankers' balances is not separately stated, but is wrapped up in the total of the other deposits in the bank of england's weekly return. it is believed to average about millions in these days, and it is often contended that valuable light would be thrown on the monetary position if this item were separated from the balances of the other customers of the bank. many of the outer bankers are in favor of this change, but there is a serious practical objection to it, in that a dangerous impression might be created in the public mind if at any time it were seen that the bank's cash reserve was below its liability to its banking customers; and the separate publication of the bankers' balances might thus check the readiness with which the bank of england creates emergency credit. another suggestion that is sometimes made by the many critics of the existing order of things in english banking is that the banks should keep their cash reserves themselves; but this very revolutionary change would deprive the system of its two great advantages, a centralised organisation with a centre which specialises on the duties involved by acting as centre, and the extreme elasticity with which the present arrangements work. at the same time it must be admitted that the system by which the other banks treat their balances at the bank of england as cash leads to the existence of a vast amount of "cash" in england which on being looked into is found to consist of paper securities or promises to pay. . the bank of england's monopoly of note issue, which once gave it the monopoly of joint-stock banking in london, is now a matter of comparatively minor importance, owing to the change in english banking habits by which the cheque has ousted the bank note for the purpose of daily commercial payments, and the regulations which were imposed on the note issue by the bank act of . this monopoly was conferred on the bank in and was maintained until , when the implied monopoly in joint-stock banking was restricted to a sixty-five-mile radius around london. in joint-stock banks were established in london itself, since it had been discovered that the bank of england's alleged monopoly only reserved to it the privilege of note issue, and the private bankers in london had already found that it was more convenient to banker and customer to work by the system of deposit and cheque. the development of this system was quickened by the provisions of peel's act of , which, under the influence of banking disasters that had arisen out of reckless note issuing by private banking firms in the counties, laid down an iron rule for the regulation of note issues in england. none of the other note issuers were allowed to increase their issues under any circumstances, and the bank of england, for every additional note issued beyond £ , , , was to hold metal in its vaults. under the terms of peel's act one-fifth of this metal might be silver, and in the early returns issued by the bank under the act a certain amount of silver is found among the assets of the issue department. but since , no silver has been held in the issue department of the bank, and in , when the influence of the bimetallists on the existing government led to a proposal that the proportion of silver allowed by law should be held by the bank as backing for its note issue, public opinion expressed itself so vigorously that the suggestion was promptly buried. the bank's fiduciary note issue, thus fixed at £ , , , was only allowed to increase by the lapse of the issues of the existing issuers, the bank being empowered to increase it by two-thirds of the amount lapsed. the lapsing process has proceeded steadily by the amalgamation of country banks with banks which have london offices and so are prohibited by the bank's monopoly. and the bank's fiduciary issue has thus been raised from the original £ , , to £ , , . above this line it can not go except by means of the suspension of the bank act, which has been found necessary occasionally in the past. the english currency system is thus, as far as the law can rule it, entirely inelastic, but it has already been shown that even when the law of was passed, the cheque currency, over which the law exercises no restriction, was already driving out the note, and banks without any right of note issue had been eleven years established in london. the bank of england's note issue is now chiefly used by other banks as "till money," or part of the store of legal-tender cash they keep to meet demands on them. it has thus become part of the basis of credit in england, since the other banks roughly base their operations on their holding of cash in hand and at the bank of england. their cash at the bank of england has already been discussed above: their cash in hand consists of coin and notes, and since the latter have thus become part of the foundation on which the deposit liabilities of the other banks are based, there is reasonable ground for the contention often put forward by practical expert critics of the english system, that the fiduciary note issue should be reduced by the repayment by the government of the whole or part of a government debt of £ , , to the bank, which backs the greater part of it, and its replacement by gold. it is evident that the amount of metallic backing for a note issue which is intended to circulate as currency is a different matter from that required in the case of a note issue which is held by bankers as a reserve and used by them as a foundation for a pyramid of credit operations. . by the ease with which the bank of england provides emergency currency, it gives the english banking system the great advantage of extreme elasticity and adaptability; and it is enabled to do this by the fact that it acts as banker to the other banks, and that every credit which they have in its books is regarded by them and by the rest of the community as "cash" to be taken as practically equal to so much gold. this cash at the bank of england in the hands of the rest of bankers can be multiplied as rapidly as the bank of england is prepared to make advances, and as the mercantile and financial community can bring it bills for discount or securities to be borrowed on. there is no legal restriction of any sort or kind, and the close relations between the bank and its borrowing customers enable the necessary operations to be carried through with a celerity which is unrivalled, at any rate in the eastern hemisphere. the process works as follows: in every english bank balance sheet there will be found an item among the assets "cash at call or short notice," though in a few cases the slovenly habit is adopted of including this entry along with the cash in hand. this "cash," as it is called, really consists chiefly of loans made by the banks to the discount houses, and regarded by the banks as the most liquid of their resources. as such, it is at once made use of when for any reason, such as the many payments which have to be made on quarter days, or at the end of the half year when the preparation of balance sheets by firms and companies require an abnormal amount of cash for more or less ornamental purposes, the banks are subjected to extra pressure by their customers, who both withdraw actual currency from them for smaller payments, and require advances in order to show cash with bankers in their balance sheets. the banks in order to meet this pressure, and at the same time to preserve an adequate amount of cash in their own statements, call in their loans from the discount houses; the discount houses, at a point, can only repay them by borrowing from the bank of england and transferring the credit raised with it to the bankers, whose cash at the bank of england is thus increased. this book entry takes the place in their balance sheets of the legal-tender cash that their customers have withdrawn, and is used as the basis for the increased deposits that have been created by the loans of the bankers to their customers for ornamental purposes. similarly at the time of year when the transfer of the taxes to the government's balance reduces the cash at the bank of england held by the other banks the gap is filled by the loans made by the bank of england to the customers of the other banks. in short, by discounting and making advances the bank of england can at any time create book credits, which are regarded as cash by the english banking community, and on which the latter can base the credits which give the right to draw cheques, which are the most important part of the english currency. the extent to which the bank of england can create this credit is a matter for its own discretion, but any creation of it diminishes the proportion that it shows in its own weekly returns between its reserve and liabilities. consequently when it is applied to for amounts which bring that proportion too low the bank of england has to take steps to reinforce its cash reserve. . it has been shown that the bank of england keeps the balances of the other banks, and from this it follows that the latter look to it for gold or notes at times when the local commercial community requires an extra supply. at the end of every month, especially at the ends of the quarters or at times of national holidays, the bank's note circulation expands and coin is taken from it. the duty is thus thrown upon it of keeping an adequate supply of cash for home purposes, and, as has been already stated, its normal proportion of cash to liabilities is very much higher than that of the other banks. but these movements are tidal and regular, and though times of active trade increase slightly the demand for coin and note currency in england, the extensive and ever-growing use of the cheque reduces the importance of this part of the bank's duties. . much more important is the bank of england's duty as custodian of the gold store for international banking. london is the only european centre which is always prepared to honor its drafts in gold immediately and to any extent. consequently the bank of england has to be prepared to meet demands on it at any time from abroad, based on credits given to foreigners by the english banking community, and it has thus to observe the signs of financial weather in all parts of the world and to regulate the price of money in london so that the exchanges may not be allowed to become or remain adverse to a dangerous point. the difficulties of this task are increased by the extent to which the english banking community works independently of it, by accepting and discounting finance paper, and giving foreigners credits at rates which encourage their further creation. for the low and wholly unregulated proportion of cash to liabilities on which english banking works, enables the other banks to multiply credits ultimately based on the bank of england's reserve, leaving the responsibility for maintaining the reserve to the bank. this it does by raising its rate when necessary, and so, if it has control of the market and its rate is "effective"--a phrase which will be explained later--raising the general level of money rates in london. when its rate is not effective, the bank of england finds itself obliged to intervene in the outer money market--consisting of the other banks and their customers--and control the rates current in it. this it does by borrowing some of the floating funds in this market, so lessening their supply and forcing up the price of money. by means of this borrowing it diminishes the balances kept with it by the other banks, either directly or indirectly--directly if it borrows from them, indirectly if it borrows from their customers who hand the advance to it in the shape of a cheque on them. the result is that so much of the "cash at the bank of england," which the english banking community uses as part of its basis of credit, is wiped out, money--which in london generally means the price at which the bankers are prepared to lend for a day or for a short period to the discount houses--becomes dearer, the market rate of discount consequently tends to advance, the foreign exchanges move in favor of london, and the tide of gold sets in the direction of the bank of england's vaults, and it is enabled to replenish its reserve or check the drain on it. that the bank of england should have to go through this clumsy ceremony of borrowing money that it does not want, in order to deprive the outer market of a surplus which depresses discount rates in a manner that is dangerous owing to its effect on the foreign exchanges, arises from the want of connection between bank rate and market rate. in former days the london money market never had enough money to work without help from the bank of england. bagehot, in his great work on lombard street, published in , says that "at all ordinary moments there is not money enough in lombard street to discount all the bills in lombard street without taking some money from the bank of england." as long as this was so, bank rate--the price at which the bank would discount bills--was at all times an important influence on the market rate. since then, however, the business of credit making has been so quickly and skillfully extended that lombard street is frequently able to ignore bank rate, knowing that it will easily be able to supply its needs from the other banks, at rates which are normally below it. currency in england consists of cheques drawn against deposits which are largely created by the loans and discounts of the other banks. there is no legal limit whatever on the extent to which these loans and discounts can be multiplied, and the only limits imposed are those of publicity, which is applied rarely in all cases and in some not at all, and of the prudence with which the banks conduct their business. hence it follows that competition between the banks often impels them to continue to make advances or discount bills at low rates when the bank of england, as custodian of the english gold reserve, thinks it advisable in the interests of the foreign exchanges to impose a higher level. this it does by borrowing some of the credit manufactured by the other banks, in order to create artificial scarcity of money, and make its own official rate effective. it thus appears that the bank of england's official rate is often through long periods a mere empty symbol, bearing no actual relation to the real price of money in london; and only becomes effective, and a factor in the monetary position ( ) when the trade demand for credit is keen enough to tax the credit-making facilities of the other banks to their full extent, ( ) when the payment of taxes transfers large sums from the other banks to the government's account at the bank of england, so reducing the "cash at the bank" on which they build credit operations, and ( ) when, owing to foreign demands for gold, the bank of england takes measures, by borrowing, to restrict credits in the open market and to make its rate effective. in other respects its official rate differs materially from the rates quoted by ordinary dealers in credit. it does not fluctuate according to the supply and demand for bills, but is regularly fixed once a week at the meetings of the bank of england court on thursday morning. it is extremely rare for any change to be made in the bank of england rate on any day except thursday. instances occur rarely when some sudden change of position makes it essential, as at the end of , when the bank rate was raised to per cent. on a friday morning. in normal times the rate which is fixed on one thursday is maintained until the next, though the rate is only a minimum and the bank of england occasionally takes advantage of this fact and refuses to discount at its minimum, which still remains ostensibly the bank rate, while the bank actually makes a rather higher charge, which is usually made the official rate on the next thursday. but it must not be supposed that when bank rate is ineffective the bank of england is doing no business. it discounts bills and makes advances at market rates at its branches, and also at its head office to its private customers. bank rate may be described as the price at which the bank is prepared to discount in its official capacity as centre of the london market, and it is because appeal is only made in exceptional circumstances to the bank to provide credit in this capacity that bank rate is often ineffective. the joint-stock banks the most obvious function of the joint-stock banks of england is the business of taking care of money for customers and meeting cheques drawn against their balances. customers place money with them either on current or deposit account. on current account it can be withdrawn at any time and earns, as a rule, no interest. many banks make it a condition that unless the current account is maintained at a certain figure, generally £ , a charge shall be made for keeping it. a usual charge is £ _s._ _d._ each half year, but arrangements vary according to the terms agreed with different customers, and the keen competition now prevalent enables many to obtain the convenience of a bank account for nothing. sums left on deposit are generally placed for a week or longer, and if placed for a week the rate paid on them by the banks is generally - / per cent. below bank rate. out of this function of meeting checks drawn by customers against the sums deposited has grown the banker's chief duty, which is now the provision of cheque currency for the mercantile and financial community. currency in england consists of coins, notes, and cheques. the note issues are almost obsolete as currency, the bank of england's being used chiefly as reserve by the other banks, while the issues of the country banks are so small as to be negligible. most of the commercial and financial transactions of england to-day are settled by cheques drawn on the banks by their customers. these cheques are not legal tender, since it would obviously be impossible that a cheque drawn by an individual on a bank could be legally made acceptable by a creditor whether he wished to take it or not. there is no legal obligation of any sort on them to maintain any regular proportion between cash and liabilities, and as their position in this respect is only subjected to occasional publicity they are not obliged to consider even the effect upon their customers of any considerable variation in the proportion between cash and liabilities which they keep. the system thus works with extreme elasticity and banking facilities can be provided in england with extraordinary ease. it has of late years been frequently contended that the ease and elasticity with which it works have carried the english banking machinery to a somewhat extreme length in the matter of the economy of gold and legal tenders and the extent of the credit pyramid which it builds up on them. after the crisis of , lord goschen seems to have been strongly imbued with the conviction that the system had been carried too far. he therefore urged upon the london banks that they should make a monthly statement of their position, and this suggestion was adopted by the majority of them. the result was that they published a monthly statement showing how they stood on one day at the end of each month, and it thus followed that on one day at the end of each month the banks showed a proportion of cash to liabilities which they considered sufficiently adequate to stand the light of publicity. but the system has long been seen to be faulty, and a certain amount of abuse has grown up round it. it is strongly suspected, for example, that some of the banks which publish these statements make preparations for them by calling in loans or reducing their discounts for the day on which the statements are drawn up. as far as this is done the statement is to a certain extent misleading, and this practice of "window dressing," as it is called in lombard street, has been subject to frequent criticism, so much so that one of the leading london banks--the london and county--adopted early in the practice of showing its daily average cash holding, thus demonstrating that it was not in the habit of preparing a statement which did not represent its position fairly throughout the month. it has been stated by a president of the english bankers' institute that the proportion of cash to liabilities shown by country banks ranges down to a point as low as . per cent. no one can contend that this is an adequate cash basis for banking to work on, and as long as certain members of the banking community conduct their business on these lines an obvious hardship is involved on those which keep a more prudent and strong reserve of cash. it is contended by the big strong banks that their smaller brethren compete with them by providing more credit than they have any right to create, relying on their assistance in times of difficulty. apart from this danger of the over-multiplication of credit on an inadequate cash basis, the complete absence of any legal or other restrictions on the operations of english banking enables it to work with extraordinary ease and readiness. as long as good unpledged security, whether in the form of bills of exchange, commodities, or stock exchange securities, are available in the hands of customers the banks can advance against them to any extent that they consider prudent. prudence dictates in the case of a great majority of them that a certain proportion of cash to liabilities shall be maintained, but, as was shown above in dealing with the bank of england, the cash of english banking consists partly of credits with the bank of england. these credits with the bank of england, and consequently the cash credits of english banking, can be multiplied as rapidly as the bank of england is prepared to make advances or discount bills, and so give credit in its books. the bank of england must publish its account weekly, and it watches over its proportion of cash to liabilities with a vigilance which is greater than that of the rest of the banking community as a whole. nevertheless, its prudence in this respect is the only restriction on it, and we thus arrive at the conclusion that the chief function of the english joint stock banks, that of providing the mercantile community with currency and credit, can be carried out to any extent as long as their customers have security to offer and their proportion of cash remains adequate to their sense of prudence. and further, their proportion of cash can be increased as rapidly as the bank of england is prepared to make advances, which it can and does to an extent which again is only limited by its own prudence. besides this absence of outside regulation, the english monetary system is also distinguished by a remarkable lack of cohesion and co-operation among the members of its own body. except to a certain extent in the country districts, where the rates allowed to depositors and charged to customers are to a certain extent a matter of convention, english banking works almost entirely at the mercy of very keen internal competition. this extreme development of competition leaves the market liable to pronounced depression in rates at times when slackness of trade or other causes decrease the demand for credits. at these times the adroit bill brokers and discount houses, which are in some respects the most important borrowing customers of the banks in london, are enabled by the use of this weapon of competition to obtain loans from the banks at rates which are often below the price that the bankers are paying to their depositors. hence, it follows that in these times of monetary ease the credit machine goes on turning out its product at rates which are quite unremunerative and have a detrimental effect on the market rate of discount, and so on the foreign exchanges, thus increasing the difficulties of the bank of england, which at these times of extreme ease is without any control of the position. against this weakness of the system, however, must be set the advantage which the unrestricted and fiercely competitive manufacture of credit confers on the mercantile and trading community. a few words should be said concerning the form of cheques with which the english banks provide their customers as currency. legally a cheque is a bill of exchange drawn on a bank and payable on demand. that is to say, it is an order signed by a customer of the bank directing it to pay a certain sum to another party or to himself. the form, however, can be varied in various methods, increasing or diminishing the ease with which the cheque can be turned into cash. the cheque can be made payable to a b or bearer, and in this form can be taken to the bank drawn on and immediately turned into cash. when drawn to a b or order, a cheque has to be indorsed, or signed on the back, by a b before the bank drawn on will pay it. a still further restriction is the english system of crossing cheques, that is to say, of drawing two lines across the face of the cheque, by which mark it is shown that the cheque is not to be paid in cash across the counter by the bank drawn on, but must be paid into a bank by the payee, and so only becomes credited to him in his own banking account through the operations of the clearing house. it is evident that this protection greatly increases the safety of the cheque, since if it fell into the wrong hands its chance of being made fraudulent use of is greatly diminished. as the lines drawn across the face of the check by the bankers' customers are often faint and irregular, it has been found in practice that they lend themselves to the ingenuity of the fraudulent, who are easily enabled to erase them and so obtain possession of money that is not meant for them. some of the banks therefore print these crossing lines on all of the cheques that they issue to their customers to be filled in, and when the customer wishes to obtain cash from his bank on one of these cheques he is consequently obliged to write upon it "please pay cash," and sign this note upon it. the extensive use of crossed cheques thus tends to make the cheque still further an instrument which merely transfers banking credits from the books of one bank to another, since every crossed cheque implies that it can not be turned into cash directly, but can only transfer credit with one bank to credit with another. another restriction with which custom has protected the english cheque is the system of writing "not negotiable" on the face of it. these words do not mean that the cheque is really not negotiable, but their legal effect is that the holder of the cheque can not establish a better right to it than the party from whom he received it. if therefore the party from whom he received it had no right to it, his claim against the paying bank is _nil_. with these safeguards, and with the enormous convenience of being drawn to any amount to fit the exact requirements of each transaction, the cheque, although not legal tender, has been enabled to supersede the bank note in english currency. the chief function of the joint stock banks having thus been shown to be the provision of currency for the english community, it may further be noted that a remarkable development of their activity has been the rapidity with which they have covered england with branch establishments. it was estimated in that the total number of bank offices in the whole of the united kingdom was just over , ; at the present moment the aggregate branch offices of four of the english joint stock banks which are richest in respect of branch establishments have exceeded this total. one bank in england has over offices, one has over , two have over , three have more than , twelve have more than . this multiplication of branch offices has been carried out partly by the absorption by the joint-stock banks of the smaller institutions in the country, whether private or joint stock, and partly by the rapidity with which they have opened branches in the great provincial centres and their suburbs, and to a moderate extent in the small country towns. the result of it is to give the english monetary system the power of easily supplying the needs of the various parts of the community as the requirements of others ebb and flow. at the same time this rapid development increases the competition between the various english banks, which we have already shown to be carried to an almost excessive degree, and by the wide local distribution of their liabilities enhances the possibility of strain on them in times of difficulty. some of the banks include under the heading "cash at call and short notice" advances which they make to the stock exchange for the fortnightly periods that elapse between its settlements. the funds that they so use obviously have an important effect upon the marketability and price of securities in london. on the first day of every settlement it is usual to see rates quoted as those at which the banks are lending to their stock exchange clients for the financing of speculative commitments. in the arrangement of these rates a certain amount of combination and co-operation among the banks, or some of them, has grown up as a matter of custom, but since for this class of accommodation the bankers are subject to competition on the part of the agencies of the foreign banks and the big finance houses it is often found difficult to maintain even this amount of harmonious working among the bankers. it has been shown that the rate at which the banks make advances to the discount houses has an important effect upon the market rate of discount in london, but the banks exercise a still more important and direct effect upon this discount by being themselves large buyers of bills. it is impossible to gauge exactly the extent to which they hold bills among their assets, since many of them in their balance sheets include their discounts along with their loans and advances. among the many suggestions that reformers have put forward in the matter of english banking, one is that this item of the banks' holding of bills should be separately stated. but though this obscurity in the statements of the english banks makes it impossible to know the precise extent to which they hold bills, there is no doubt their purchases of them are on the whole the most important influence upon the market rate of discount in london. nearly all the discount houses, whose functions will be described later, buy bills, largely with the intention of reselling them to customers, among whom the joint-stock banks are the largest and most important and most regular buyers, and it is contended by the discount houses that the market rate of discount, for which they themselves are generally supposed to be responsible, is really and in fact regulated by the price at which the big joint-stock banks are prepared to buy. this being so, since the market rate of discount is perhaps the most important influence on the foreign exchanges and so on the inward and outward movements of gold, it will be seen that this function of the bankers is one of the greatest possible importance from the point of view of london's free market in gold. besides thus regulating the price at which bills of exchange can be discounted in london, the banks have in recent years taken an increasingly large and important part in the creation of bills of exchange by placing their acceptances at the disposal of their customers. the increasing extent to which the bankers have in recent years intruded into this class of business is a grievance that is resented rather keenly by the merchant firms, or accepting houses, as they are often called. it is contended by the latter that the business of acceptance is a special function for which special training is required, and that the joint-stock banks rarely have available the special abilities that make for its proper conduct. on the other hand, the high standing of the joint-stock banks and their big reserve resource in the shape of their uncalled capital makes their acceptances an exceptionally fine credit instrument, and it seems natural enough that they should, to a certain extent and within moderate limits, place these facilities at the service of their customers. finally it may be added that the english joint-stock banks are now showing a disposition to engage to some extent in the business of dealing in foreign exchange which has hitherto been left to the finance houses and foreign firms established in london. the london and county and the london city and midland banks have now established regular foreign exchange departments. this development is generally welcomed as a sign of a desire on the part of the banks to widen their horizon and to come into closer touch with the affairs of the financial world at large, but, as in the case of the banks' increasing interest in acceptance, there are some critics who consider that it is better for the bankers to stick to their obvious and highly important function of providing the community with credit and currency, and taking care of the money of their customers. the private banks any differences that exist between the private and joint-stock banks of england lie in their ownership rather than in their functions. their functions are the same, but the manner in which they carry them out is perhaps influenced to a slight extent by the fact, which really distinguishes them, that the private banks are owned by a few partners who generally conduct the business for themselves or exert more or less influence on it, while the joint-stock banks are managed by salaried directors and officials on behalf of a large body of shareholders formed into a public company, the shares in which can as a rule be bought and sold on the london stock exchange. since private enterprise naturally precedes joint-stock institutions, it goes without saying that the private banks of england were the pioneers of the banking business. there are still in existence private firms which were founded before the bank of england. a goldsmith called child was doing business of a banking character soon after , and child's bank still exists. hoare's bank was instituted in about , fourteen years before the bank of england received its charter. modern developments have almost driven them out of the field, and among the leading banks in the city of london only two are left which can still be called private in the old sense of the word. there are one or two other institutions which are on the borderland: and at the west end of the town several old firms, including child's and hoare's, have retained their old constitutions. the merchant bankers and accepting houses the most important function of the merchant bankers is not that of banking, but of accepting. banking, in the strict sense of the term, they do not engage in--that is to say, they are not prepared to meet claims upon them by an immediate payment of cash or legal tender over the counter, but by payment of a cheque on one of the banks in the stricter sense of the term. the function of the london accepting houses, though of enormous importance, is still to a certain extent subordinate to the judgment of the english banks. they finally decide whose paper is most readily negotiable, and, in times when the credit machine is felt to be somewhat out of gear, the bankers occasionally discriminate against the paper of firms which they consider to have been giving their acceptance too freely. in this respect, as in so many others, the bank of england remains the final arbiter, since the paper of an accepting house which is questioned by the other banks can be negotiated at the bank of england through a discount house, and the bank of england has before now intervened with effect when it considered that questions raised concerning certain acceptances have been without justification. this business of acceptance is one into which the other banks have themselves recently intruded with considerable effect, accepting bills for their customers, home and foreign, for a commission; and there is a certain apparent anomaly in the position which makes them guardians of the volume of acceptance created by the private firms and acceptors themselves on a steadily increasing scale. nevertheless, this anomaly has little or no untoward effect in practice. the bankers are naturally extremely cautious in raising any question as to the security of general credit in london, and they are in many ways closely connected with the private accepting houses, so that the system, which appears to be full of uncomfortable possibilities on paper, works easily enough in practice. other functions of the merchant firms and accepting houses are their activity in general finance and in exchange business. both these functions arise out of their old business as merchants, which gave them close connection both with the governments and the business communities of foreign countries. the discount houses the great volume and diversity of the bills of exchange which come into the london market to be melted and turned into present cash before their date of maturity has caused the existence of a class of dealers in bills (bill brokers) who specialise in handling them and may be regarded as intermediaries between the holders of the bills--that is to say, originally, the drawers of them, or their representatives, or any one else into whose hands they may have passed them on--and the bankers, who are the ultimate buyers and hold them as investments until maturity. it is the business of the discount houses to buy these bills on a wholesale scale, using for this purpose funds largely lent them by the banks, and to meet the requirements of the bankers with regard to the date named and quality of the bill, providing them out of the store that they keep constantly replenished. we have also seen that the discount houses fulfill a very important function by borrowing funds from the bankers at call and short notice. these funds are regarded by the bankers, and actually described in their balance sheets, as cash, cash at call, and short notice. it is a somewhat elastic extension of the term "cash" to apply it to money that is being lent to any borrower, even of the highest credit and against the most liquid possible collateral. but it is always assumed by the bankers that these funds placed in the discount market can be called in readily at any moment. that they can be called in is practically a fact; but it arises chiefly from the ability of the discount houses when pressed for repayment of these loans by the bankers to fill the gap in credit by an appeal to the bank of england and the production of fresh cash, as it is called, by borrowing from it. the discount houses take security to the bank of england and raise with it the right to draw cheques. these cheques they pay to their bankers, whose cash at the bank of england, which we have already seen to be regularly used as a part of the basis of credit in england, is thus increased. besides the money that they habitually borrow for short periods from bankers, the discount houses also have considerable amounts placed on deposit with them by other lenders, some of which they employ, especially in times when the volume of bills is comparatively small, by loans to the stock exchange for financing the speculative commitments of the public, and by holding or carrying securities of a reasonably liquid character. they also take some part in the underwriting of new loans and in the general financial business of the london market. [ ]it is impossible to exaggerate the importance of the functions which the bill brokers discharge in the london money market. they are only about twenty in number, including three joint stock companies. one or two of the brokers work on commission, as your brokers do, but the majority are really dealers in bills. that is, they buy or discount, and sell, or rediscount, bills of exchange. let me illustrate their method of working: a bank in new york may buy $ , , worth of sterling bills drawn on england and send them forward to its london agent to be discounted with the bill broker. the bill broker will discount these bills at, say, per cent. if he thinks rates are likely to fall, he will hold the bills; if he thinks them likely to rise, he will try to sell the bills at about - / per cent. or - / per cent. discount, thus making a profit on the transaction of / per cent. or / per cent. per annum. similarly he may discount large parcels of bills for eastern and south american banks. many of these bills will be bills drawn on and accepted by banks and finance houses. these are known as "bank bills." but on the other hand, the bill brokers are free buyers of "trade bills." the trade bill in england arises in the following way: trader a sells goods to trader b. he will draw a draft on trader b at, say, three months date. trader b will accept the draft and return it to trader a, who will discount it with his banker or with the bill broker. the rate of discount for trade bills is usually / per cent. per annum higher than the rate for bank bills. the essential feature of almost all the bills on the market is that they represent a commercial transaction, such as a sale of goods, where value passes. it is this that lends them their self-liquidating quality; for they are usually liquidated by the acceptor out of the proceeds of the resale of the goods during the currency of the bill. the bill broker not only employs his own capital in buying bills, but also money which he borrows from the banks and others at call or at short notice. enormous sums are employed in this way. interview with the governor and directors of the bank of england [ ]q. when does your present charter expire? a. the bank's exclusive privileges of banking continue subject to one year's notice and to repayment by the government of the debt of £ , , and of all other public debt held by the bank at the time. q. what is the par value and present selling price of your shares? a. the bank's capital is in the form of stock, £ of which is at present quoted at about £ . q. how many stockholders have you? a. there are at present over , accounts. q. is the stock fully paid? a. yes. q. have your shareholders any liabilities in addition to the ownership of shares? a. legal opinion is to the effect that there is no further liability on bank stock. q. is there any limit to the number of shares which may be held by any one person, and is your approval required before a transfer of your stock can be made? a. there is no limit--the bank's approval is not required. q. does every share have a vote at shareholders' meetings? a. to have a vote a proprietor must hold £ of stock, but no matter how much additional stock a proprietor may hold he can not have more than one vote. q. is there any custom restricting the class from which the directors may be selected? a. there is no legal restriction as to the class from which directors may be selected, except that they must be "natural-born subjects of england, or naturalized," but in actual practice the selection is confined to those who are, or have been, members of mercantile or financial houses, excluding bankers, brokers, bill discounters, or directors of other banks operating in the united kingdom. q. how many branches have you? a. there are eleven branches--two in london and nine in the provinces. q. is the business conducted at your branches of the same class as at your main office in london? a. yes. q. do your branches have business relations with merchants, farmers, and all classes of people in their respective localities? a. there are no restrictions of any kind as to the class of people with whom the bank has business relations. q. is the bank of england a member of the london clearing house? a. yes; but "on one side only," as it is termed. the bank of england presents, through the clearing house, all drafts drawn on clearing bankers paid in to it by its customers; but the clearing bankers do not present, through the clearing house, drafts on the bank of england paid in to them by their customers. such drafts are paid direct to the credit of their accounts at the bank of england. q. do you at any time allow interest on special deposits? a. it is not the practice of the bank to allow interest on any deposit. q. can you state approximately the average length of time and the average size of bills discounted by you? a. time, forty to fifty days; size, probably about £ , . q. what is the distinction between what are known as "prime bills" and other bills? a. a "prime" bill we should define as a bill accepted by a london or provincial bank in first-class credit or a merchant or merchant banker of the first class whose business it is to grant credits. q. do you discount any prime bills? a. yes. q. do you discount to any considerable amount for individuals and merchants? a. the bank discounts all approved bills offered to it by persons or firms having properly constituted accounts. q. is it your custom to employ surplus funds in purchase of bills from discount houses? a. no. q. do you rediscount bills for the joint stock or other banks? a. the bank is always prepared to rediscount for other banks at its official rate, and does a large business from time to time with the colonial and foreign exchange banks who are from the nature of their business always sellers of bills. q. would you charge a merchant house having a good account with you the bank rate or the market rate for prime bills? a. the market rate. q. to what extent does bank rate govern your discount and loan transactions? a. the rates for discount and loan transactions at the bank usually approximate more or less closely to the bank rate. q. do you at times discount bills for parties having no account with you? a. no. q. are a considerable number of your loans on call? a. none. q. when and under what conditions is the bank rate changed? a. the bank rate is raised with the object either of preventing gold from leaving the country, and lowered when it is completely out of touch with the market rate and circumstances do not render it necessary to induce the import of gold. q. does the bank sometimes borrow money in the open market for the purpose of raising the market rate? a. yes. q. do you sometimes sell consols for the same purpose? a. yes; on rare occasions. interview with sir felix schuster, governor of the union of london and smith's bank limited [ ]q. your bank is organised under the general companies acts as are all joint stock banks in england? a. yes. q. you are not under government supervision or examination? a. no. q. the authorised par of your stock is £ , and £ _s._ have been paid on each? a. yes. q. are your shares held by individuals and corporations? a. by individuals, not by corporations. there are upwards of , different shareholders. q. in the transfer of shares, do you require the name of the transferee to be submitted and approved before the transfer is made? a. yes. q. that of course is in order to insure the responsibility of your stockholder? a. this is in order to insure the responsibility of our stockholder, and to prevent one holder from securing too large a holding. furthermore we give no single proprietor more than votes, however large his holding may be. every shares carry one vote, so the holder of shares has a maximum number of votes. q. is that the usual custom with the joint-stock banks of england? a. i am afraid i cannot answer offhand. i suppose it is so in some cases, but the practice varies. q. in london there is usually a difference between the rates charged on loans and bills in favor of bills, is there not? a. yes. q. would you say that that difference is perhaps from one-half to per cent. in favor of the bill? a. it depends so very much on the circumstances of the moment that it is very difficult to generalise. at the present moment i would say a three months' bill is worth - / , and a three months' loan would be worth perhaps - / . q. were most of your branches organised by you or were most of them other institutions purchased by you? a. some of them were other institutions; some of them were organised by us; most of them were those old banking firms which were carried on as private businesses and have since become branches of our bank. q. the tendency is for the consolidation of banking in great britain, is it not? a. yes. q. very strongly in that direction? a. very strongly in that direction, yes. q. as a matter of fact, a large part of the commercial banking in england is done by about a dozen institutions, is it not? a. in liverpool and manchester there are very important local banks. however, it is no doubt the fact that four or five banks do about half the banking business. q. in the main you believe that the banking situation is stronger and better and the country is better served through the system of branches than through the independent banks? a. i am quite convinced of that, if only for one reason, that i do believe the indiscriminate granting of credits to the individual is injurious to himself, the private bankers being too much in the habit of regarding old family associations and not so careful as the joint-stock company would be, and he has accustomed people to trade on the credit that they get from the banker. i do not think that is banking business. the bank ought never to supply the trader with working capital. i think it is bad for the trader. q. is it not quite essential to the success of a financial institution doing a commercial business to become a member of the clearing house if it is to meet with a large degree of success? a. no. after all, there are only seventeen banks, i believe, now in the clearing house, but there are a great many other institutions who are not members of the clearing house and who do not suffer from that fact. scotch banks with branches here who do a large banking business are not members of the clearing house. there are all the colonial banks with head offices or branches in london and other large institutions; those are not members of the clearing house. there are barings and rothschilds; they are not members of the clearing house. q. would you say the bank of england is in any way a competitor of the other banks in england? a. yes. that is a source of very grave complaint by the other banks. q. the bank of england do not pay interest on any accounts? a. no; but in some cases they act as intermediaries for lending money. it is a very subtle distinction. q. while the bank rate is fixed and is to-day, say - / per cent., is it not a fact that the bank of england does some business for its customers and also purchases bills for their account at a lower rate? a. that is so, and that is one of the matters of complaint. by fixing the rate at - / per cent., or per cent., or per cent., they can regulate the rate we fix for our own customers. we regulate our deposit rate in accordance with the bank rate. we also regulate the rate we charge for our loans in accordance with the bank rate, and we are bound by it to a certain extent, and they themselves feel at liberty to depart from it. q. what does the bank rate mean; what does it govern in fact? a. it means the general charge to the trade of the country, because although we say that bills in the market are discounted at a lower rate than bank rate, yet there is a vast number of trade bills which are purely governed by the bank rate. q. we found both in germany and in france the question of the amount of reserves, either in specie or in bank, was regarded as of little importance by the bankers. they depend on the reichsbank and the bank of france for rediscount in times of need. a. both in france and in germany banks are much more dependent on the central institution than we are here. they lean on their central institution to a very great extent; for instance, the rediscounting of bills and borrowing from the central institution is, i believe, quite a usual occurrence. here it is an occurrence which would only take place in the last resort. as far as i am aware this bank has never as long as it has been in existence had one penny from the bank of england, whether by way of advance or by way of a discounted bill. we do not rediscount our bills in the market either; so every transaction we enter into we have to see through to the very end. interview with mr. charles gow, general manager of the london joint stock bank, limited [ ]q. your capital stock is £ authorised, £ paid? a. yes. q. does your board pass upon a new stockholder? a. yes. q. who really conducts the business of the bank? a. the managers, who are appointed by the directors; that is to say, myself and all those belonging to me. q. are most of your acceptances secured? a. every one. q. how are they secured, generally speaking? a. they are secured in the great majority of cases by bills of exchange, by first-class securities with plenty of margin, even by cash in hand to a moderate extent, and to a very small extent by bills of lading for produce shipped. that is a very small item. q. can you state the reason for accepting bills instead of furnishing the cash? a. we accept those bills because it happens to be the custom of the particular banks to draw a long bill. the customer himself who buys cotton in bombay, or wherever it may be, acts according to the custom there to draw a bill to a certain usance. now, for instance, with regard to an inland bill, we would not give credit of that sort to a man in london, but wherever there is a regular course of business abroad to draw at long usance we comply with it. q. what is the character of your bills discounted? a. those are all marketable bills, trade bills; you know what they are; they are between the manufacturer and the man to whom he sells. q. you always require two names? a. always. q. what does the form of obligation by the borrowers upon collateral take? a. just the same form as your promissory note. q. you have branches, have you not? a. we have about forty-odd branches all in london and close to london. q. you do not then endeavor to acquire a country business through your branches? a. for this reason, that we commenced as a purely london bank, and we have so far kept to that original determination of not launching out into country business, because, as i say, it differs from the ordinary london business. country business is not quite so liquid, and can not be. q. if you had an account of a man running, say, a hat store, his account was satisfactory in character and had been carried with you for several years, and he wanted to stock up on hats, there would be no way in which he could go to you and borrow the money with which to buy those goods unless it was through a guarantor? a. no. he would go then to the wholesaler from whom he would buy the goods, and give that wholesaler his bill, and that bill would be a discountable article, and that is how the money would be raised. q. do you ever allow overdrafts, as they do in scotland? a. they are not unheard of, but not a principle of our business. overdraft is a principle of country banking. q. my observation leads me to believe that the banking situation in london is practically controlled by twelve or fourteen of what are known as the london joint-stock banks, through their offices and through their branches? a. yes; i think that is right. however, there are still independent banks in the country, and i doubt whether amalgamation will go very much farther than it has gone. you see, these amalgamated banks have already become so large that they begin to get a little unwieldy. lloyds bank is an enormous thing, with $ , , of current and deposit accounts. q. would you say that the public are better served through these branches than they were through the independent banks? a. some say that they are not so well served, that accommodations are curtailed now as compared with what they used to be, and that i can understand to some extent, because, working a very large concern from one centre, you see, fiats will go forth, "cut that man's credit off," and not listen to taking a large view. they say, "i have enough of that kind of accommodation; i have shipbuilders or shipowners; i am not going to give out more than a proportion of my money into that particular trade; therefore, i will not have any more," whereas the independent banks would be perhaps a little more accommodating. q. if i were to go to you to-day with a ninety-day trade bill, the acceptor known to you as good, and also with a loan secured by pennsylvania railroad bonds, my loan to mature in ninety days, what rate would you charge me on those separate items? a. the bank rate to-day is - / per cent. you are a good customer, and i should charge you - / per cent. for discounting that trade bill, and i might charge you per cent., or even perhaps - / per cent. on the pennsylvania railroad collateral for this reason, that one is not as realisable as the other. when the bill becomes due it has to be paid, or i give it back to my customer, and say "give me the money for that." i can not quite say the same to him about his collateral. q. what per cent. of earnings on your capital did you show last year? a. roughly, our net earnings were per cent. it cost us per cent. of our gross earnings to run the business. q. what taxes do you have to pay? a. we pay income tax on all our earnings, and deduct from our gross profits. we are entitled to deduct, roughly speaking, our expenses, and then upon the remainder we have to pay the income tax, or whatever it is, at shilling in the pound, for instance, now. q. would you say that the bank of england is a popular banking institution among other banks in england? a. yes, i should say so decidedly. its popularity goes to this extent, that it is absolutely indispensable to them. some of them may grumble at this proceeding or that proceeding, but they have one and all to own that the bank of england is indispensable to them. q. as a matter of fact, if you had presented to the bank of england last fall some bills which had been negotiated through you which appeared to be finance bills, do you not think they might have gently hinted that it was not agreeable to them to have you negotiate any more finance bills? a. i may say they have that recourse, and they might say to me if i gave them any just cause for doing it, just the same as anybody else. q. in other words, the bank of england has such a commanding position here among the financial institutions which control all the finances of great britain that they dominate it when they choose to? a. when they choose. q. it is the custom of the bank to co-operate very cordially with the other banks, is it not? a. oh, yes; we are as free as free can be. there is very little conference, or anything of the kind; we are all pretty good friends all round. footnotes: [ ] f. straker, _the money market_, pp. - . methuen and company. london. . [ ] _ibid._, pp. - . [ ] [the fourth suspension occurred august , .] [ ] adapted from hartley withers, _the english banking system_, publications of the national monetary commission, senate document no. , st congress, _ nd session_, pp. - . [ ] james h. simpson, _some leading features of the london money and discount markets_, an address delivered at the annual banquet of the bankers of the city of new york, jan. , . (in banking and currency at home and abroad, distributed with the compliments of the national city bank.) [ ] adapted from _interviews on banking and currency systems of england, scotland, france, germany, switzerland, and italy_, publications of the national monetary commission, senate document no. , st congress, _ nd session_, pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . chapter xxiii the scotch banks [ ]the functions performed by the eight scotch banks and their , branches[ ] are essentially similar to those already described as being carried out by their english brethren. the differences between the currency systems of the two countries are in degree rather than in essence. in scotland the note issue has made a harder fight for its existence than in england, owing no doubt to the fact that the bank of england's monopoly did not extend to scotland and that the great scotch joint-stock banks therefore extended the system of using notes as currency, while the development of joint-stock banking in england was necessarily opposed to it, since joint-stock banks in england with an office in london were unable to issue notes. nevertheless, even in scotland the advantages of the cheque have told in its favour, and, as will be seen below, liabilities of scotch banks under note issue are now much smaller than those under deposit as current accounts. democracy of scotch banking the scotch note circulation increased from £ , , in to £ , , in . this increase, when compared with the fact that the note issues of the english country banks have during the same period diminished almost to vanishing point, shows that the bank note is much more tenacious of life north of the tweed. this is partly owing to the fact that in scotland notes may be issued of the denomination of £ , whereas in england the smallest allowed is of £ , so that the note was thus circulated more easily among the poorer classes in scotland and so gained and retained a hold upon a much wider circle of the community. in this respect, as in others, scotch banking is more democratic than english, and provides its facilities for a poorer and lower class of the community, though this distinction between the banking systems of the two countries is being rapidly diminished. especially in its early days it laid itself out much more readily to the encouragement of the small capitalist and borrower, often granting him facilities against security, or an absence of security, which would have been only regarded as feasible under quite exceptional circumstances in england. a very interesting system was at one time fairly general in scotland, and is even now by no means obsolete. it was the system described as that of cash credits, by which borrowers were able to go to banks and obtain advances against the joint personal security of themselves and one, or two, or three friends. by this means, in which a kind of co-operative responsibility was recognised as a security by the scotch bankers, very poor borrowers were enabled to obtain banking facilities, and many instances are recorded in which by a loan of this kind, of quite small importance from the banking point of view, foundations of fortunes have been laid and the general commercial prosperity of the community has been furthered in a very satisfactory manner. and even now the essential difference between scotch and english banking is this readiness of the former to take into consideration the personal standing of the applicant rather than the stuff or paper which he brings to it as security for an advance. use of notes as "till money" in relation to the establishment of branches banking by branches in scotland has proceeded even more rapidly than in england, and the percentage of branches per head of the population is higher in the northern part of the kingdom. this wide diffusion of banking facilities in scotland has been largely brought about by the fact that its banks, having the privilege of note issue, were able to hold their own notes as "till money," so economising in the matter of cash. the following passage is from a work entitled _scottish banking, - _, by a. w. kerr, author of a _history of banking in scotland_: were it not for the power to issue notes, and the readiness with which the public receive them, the banks could never have afforded to open a third of the branches which have been established. the reason for this is a very simple one. without the right of issue a bank must, at every one of its offices, hold the whole of its balance of cash in the shape of coin, or of notes of other banks, which, as far as it is concerned, are as unprofitable as coin. such balances entail a complete loss of interest which can only be borne where the amount of business is of considerable extent. there are probably not above (at most ) localities in scotland that would satisfy such conditions. when, however, a bank can hold its till money in the shape of notes, it is enabled to extend its operations into districts which would otherwise be quite inaccessible.... the authority of a practical scotch banker is equally emphatic on the point. mr. robert blyth, general manager of the union bank of scotland, read a paper at the thirty-first annual convention of the american banking association, in october, , on the subject of scottish banking. in the course of this very interesting paper he made the following statement: "it is in another quarter altogether that the scotch banks find the value of the £ note. it is the unissued notes in the tills of the branch offices, forming the till money at more than a thousand branches, wherein the real value lies. without them the banks would require to keep £ , , or £ , , of gold coin, not as a reserve but as till money. it is these £ notes which have enabled branch offices to be planted in every part of the country." it thus appears, from the highest possible authority, that the scotch banks are enabled by their right of note issue to economise gold to the extent of £ , , or £ , , , and it is amusing to observe how the objects aimed at by peel's legislation with regard to note issue have thus been defeated even more completely in scotland than in england. in england banking turned the flank of peel's act by developing the use of cheques, which superseded the note as the common form of payment in daily transactions. in scotland, banking evaded the spirit of peel's regulations, which were intended to insure that every addition to currency should be secured on an addition to the bullion held by it, by actually economising bullion to the extent of £ , , or £ , , . evasion of peel's act scotland used the same weapons as england, namely, the cheque and the development of deposit banking. the eight scotch banks have, according to their latest balance sheets, £ , , of notes outstanding, and £ , , of liability on deposits and drafts. with regard to the latter item peel's regulations had nothing to say, and since ordinary banking prudence demanded that some cash should be held against it, and since the gold held against notes was not specially earmarked as such, scotch banking was able to treat its cash against deposits as the basis both of its notes and deposits and so produce the economy which is boasted of by its champions. the law says nothing concerning cash to be held against deposits, and the metallic basis of these is probably extremely slender, if the cash held against notes is set on one side; but it is impossible to detect its actual amount, since the scotch banks include with their cash their balances at the bank of england, etc. and the net result is, that when the proportion of its cash to its total liabilities on notes and deposits is worked out it is found to be decidedly low, even when compared with english practice. for the eight banks taken together, gold and silver coin, notes of other banks, cash at bank of england, and cheques in course of transmission represent almost exactly per cent. of their note and deposit liabilities. it should be observed that the notes which the scotch banks hold as till money do not appear in their statements, for until they are issued they are not a liability, and though they are treated by the banks in practice as an asset, they can not figure as such in a balance sheet. that they are practically treated as such is witnessed by mr. blyth, as quoted above, when he says that without them the banks would require to keep £ , , or £ , , of gold coin. and it is, of course, this habit of regarding unissued notes as a banking asset in the shape of till money that accounts for the low reserve of actual cash that the scotch banks show. defects scotch banking is so generally regarded as one of the highest achievements of the banking intelligence that some hesitation is natural in criticising the system by which, according to its own evidence, it has obtained most of its success. at the same time, it is difficult to avoid the conclusion that a serious danger lurks in a system which regards a banker's unissued promise to pay in the light of a banking asset. mr. blyth points out that these unissued notes are "not a reserve but till money," but the distinction between till money and reserve is one upon which it is possible to lay too much stress. in assessing the strength of a bank it is usual to compare the amount of its cash in hand, as a whole, with the amount of its liability to the public on deposit and current account, etc., and note circulation if any. the cash in hand, as a whole, consists of the till money and cash reserve. if the till money consists to any extent of the bank's own promises to pay, it follows that the bank's cash reserve as a whole is to that extent weakened, for it need not be said that in case of serious trouble, which is a contingency of which all provident bankers have at all times to beware, a bank's own promises to pay would be of little service to it. if a bank's credit were doubted, these promises to pay would not be available for it in meeting demands upon it. at such periods the public requires from its bankers not promises to pay but physical gold. in scotland the confidence of the public in its bankers is so great, and the readiness with which it circulates their promises to pay appears to be so ingrained in the national character, that the contingency of the demand of the public for gold seems to be extremely remote. the criticism therefore which detects a weak point in this asset upon which scotch banking prides itself so highly may be said to be merely academic. nevertheless, when we examine scotch banking by the test of figures, we find that it does actually work, as indeed would be expected from the statement of its exponents, on a cash basis which is decidedly narrow. though the functions that they perform are practically the same as those of the english bankers, scotchmen have succeeded in avoiding the excessive competition in carrying them out which is a weakness of english banking. in scotland, on the other hand, cohesion and co-operation among the banks are carried to an extreme of which the mercantile community frequently complains. the banks are few and stand together like a close corporation; they agree absolutely and arbitrarily among themselves as to the rates they will allow to depositors, the rates at which they will advance or discount, and the terms and commissions for which they will do business for customers. the extent to which this regulation of the price of the product that they turn out is carried, is almost incredible from the english point of view, and though it is contended by the champions of the scotch system that it encourages that wholesome democratic influence in scotch banking which is in favor of the small borrower of limited resources, who is thus able to obtain accommodation on the same terms as much larger and more important customers, yet it must be obvious that the scotch banks, by making these hard and fast agreements among themselves as to the price of the accommodation that they will give, and maintaining it in every case, are in fact putting the same price upon a very different article. the result of it is beginning to tell upon them a little in these days, since, when the big scotch merchants and manufacturers find that their local bankers charge them the same rates for accommodation as the small tradesmen of the towns, they are naturally impelled to make arrangements to provide themselves with monetary facilities somewhere south of the tweed, where rates are ruled by the circumstances of each case, and competition and higgling often in times of monetary ease deliver the bankers into the hands of the borrowers. as it is, the scotch banks in regular conclave fix their rates in accordance with those current in the london money market or the bank of england's official minimum, and, having fixed them, stick to them. the system is very profitable to themselves, and their customers certainly can not complain on the whole of the facilities with which they provide them. nevertheless, the cast-iron rigor with which they work hand in hand in combination appears to be an excessive development of banking unity, and an ideal banking system would seem to lie somewhere in the middle between the excessive competition of the english bankers and the cast-iron combination of their scotch brethren. finally, it may be added that it is a little inaccurate to speak of a scotch banking system, if the phrase be taken to imply that scotch banking stands by itself and works on its own resources. in fact, it is only an appendage of the english system and relies habitually on drawing gold from the bank of england, as its centre and the keeper of its reserve. bank of scotland interview with sir george anderson, general manager[ ] q. when was the bank of scotland founded? a. in . q. when does your present charter expire? a. by act of parliament the "governor and company of the bank of scotland" have "perpetual succession." q. how many branches have you? a. one hundred and sixty-three branches and twelve sub-branches in scotland: also an office in london. q. how are your branches managed? a. by agents (managers at london and glasgow) appointed by the directors. q. do your branches have business relations with merchants, farmers, and all classes of people in their respective localities? a. yes. q. what is the law governing your note issues, and how are note issues limited and how secured? a. the bank is authorised to issue, without holding coin against them, notes to the value of £ , , but for any excess beyond that amount we must hold, at the head office, an equivalent value in gold coin, one-fourth of which may, however, be in silver coin. q. will you state (a) the class of bills usually discounted by you, giving the number of names required; (b) the minimum size; and (c) the maximum length of time to run? a. mercantile bills, also a few accommodation bills, usually two names; minimum, say, £ . the maximum length of time to run is six months. q. what classes of collateral are accepted by you for loans? a. personal security, marketable securities, life policies, mortgages over ships, shipping documents, etc. in the important banking centers of scotland lending against collateral security has become largely prevalent. q. do you rediscount bills from other banks? a. no. q. explain the phrase "cash credits," and upon what conditions are they given? a. a "cash credit" is a credit allowed, in virtue of which a customer may draw cheques on the bank until the balance due to us reaches a certain fixed limit. the account is an ordinary operative one, and interest is charged on the balances actually due to the bank from day to day. q. have you in mind how many branches you had ten years ago? a. one hundred and twenty. q. do you ever buy any shares of railroad or industrial companies? a. yes; of the highest class. q. do you ever own bank shares? a. no. royal bank of scotland interview with adam tait, cashier and general manager[ ] q. when was the royal bank of scotland founded? a. in the year . q. when does your present charter expire? a. it is perpetual. q. how many branches have you? a. one hundred and fifty-two. q. are all your branches of the same class, or have you main and subsidiary branches? a. in some cases there are sub-branches. some are mainly or almost entirely deposit branches; others have few deposits, but a large advance business. q. is the business conducted at your branches of the same class as at your office in london? a. no; the london office is itself a branch office and much of the ultimate settlement of balances takes place there. the conduct of the ordinary london business is on the same lines as that of any other london branch bank. no notes can be issued in london. q. do your branches have business relations with merchants, farmers, and all classes of people in their respective localities? a. yes, they have business relations with all classes of people. q. what is the law governing your note issues, and how are note issues limited and how secured? a. the act of parliament of governs our note issue. there is no limit to the amount of notes that may be issued, but the bank is required to hold gold (and silver to an extent not exceeding one-fifth of the total) against the notes in the hands of the public on the average of each month, and that at its head office in edinburgh--gold held at branch offices does not count--to an amount sufficient each week on saturday to cover the notes in the hands of the public in excess of a certain amount specified, £ , . q. to what extent are your notes legal tender in great britain? a. our notes are not legal tender at all. q. what other banks have the right of issue in scotland? a. the bank of scotland, the british linen bank, the commercial bank of scotland (limited), the national bank of scotland (limited), the north of scotland and town and county bank (limited), the union bank of scotland (limited), the clydesdale bank (limited). q. are the notes of your issuing banks secured; and if so, how? a. they are not secured. in case of the liquidation of the five last-named banks, however, their shareholders are unlimitedly liable for their notes and they are liable to contribute a sum necessary to restore to the general assets the sums that may have been paid out of the same in respect of claims under notes. q. what is the total amount of their outstanding issues? a. about £ , , . q. do you pay the government in the form of taxes or otherwise, either directly or indirectly, for your privilege of note issue? a. yes, we all pay a license duty of £ for each place at which notes are issued, and a tax of _s._ _d._ per £ , or a penny per £ , on the average amount of notes in the hands of the public at the close of each week. q. is it your custom to carry a fixed amount in government securities? a. yes, but the amount is not rigidly fixed. q. do you discount any but prime bills? a. yes; we do all classes of business. q. is it your custom to employ surplus funds in purchase of bills from discount houses? a. yes; bills accepted by london banks. q. do you rediscount bills for other banks? a. no; except for foreign or colonial banks who are correspondents. q. is the bank, through its branches, employed by other banks to any considerable extent for the transfer of funds from one city to another? a. yes. q. what, if any, artificial means are taken by you to secure changes in the volume of currency (notes and coin) to make it responsive to business demands? a. none are deemed necessary. our system works automatically. our note issue is unlimited; we are only required to provide gold to cover the amount in the hands of the public at the close of each week and on the average of each four weeks. q. what is the customary charge for acceptance of a ninety-day bill? a. five shillings per cent. q. your acceptance constitutes what is known in london as a prime bill? a. yes. q. do you pay interest on both current accounts and deposit accounts? a. it is our custom to pay interest on deposits only. in london, however, it is different; there interest is allowed in special cases on large balances on current accounts if left for some time. q. how does the bank rate affect the rate allowed by you on deposit? a. the scotch banks all allow the same rate and charge the same rates for discounts and overdrafts, and these are fixed relatively to the bank of england rate. our deposit rate is usually - / per cent. under the minimum bank rate. q. were most of your branches organised by you or were most of them other institutions purchased by you? a. most of them were originated by ourselves. q. have you in mind how many branches you had ten years ago? a. about . q. what relations do the scotch banks bear to the bank of england? do they deal with it directly? a. the royal bank of scotland has an account with the bank of england, which has been in operation since , and it collects bills and cheques for the bank of england all over scotland. q. do you regard your system of currency issue as sufficiently elastic for your needs? a. yes; there never has been any difficulty. moreover, no scotch bank has ever failed to pay its creditors, including the holders of notes, in full. commercial bank of scotland (limited) interview with alexander bogie, general manager[ ] q. when was the commercial bank of scotland (limited) founded? a. in the year . q. when does your present charter expire? a. it is not limited in point of time. q. has the government any voice in the management of the bank or any interest in it through the ownership of shares? a. none. q. have the managers of the branches full control of the business in granting discounts, etc.; if not, what discretion is usually given them? a. agents have power to grant advances, but subject to the approval of head office. in advances of considerable amount, an agent's duty is to get authority from the head office before granting it. the discretion allowed is dependent on the size of the branch and the nature of the business and the class of customer, and on the record of the agent. by our system of reports on advances (weekly, monthly, and quarterly) we keep in close touch with the advances and means of borrowers. the london branch is, of course, on different lines, and our manager there has greater powers than an agent at a branch in scotland. q. is the business conducted at your branches of the same class as at your main office in edinburgh? a. yes; very much the same. the head office has administrative work and supervision of branches, investment, etc., which does not, of course, arise elsewhere. q. do you discount to any considerable amount for individuals and merchants? a. yes; it would perhaps be well to point out that in scotland a large portion of advances made to traders are granted in the form of overdrafts on current accounts. _the number and amount of bills in scotland are less now than in former years. cash payments for the purpose of obtaining discount are more frequent, and the number of bills discounted by wholesale houses is reduced in consequence._ q. is it your custom to employ surplus funds in purchase of bills from discount houses? a. only occasionally, when rates suit. q. do you rediscount bills for other banks? a. it is not our practice to do so. q. to what extent does bank rate govern your discount and loan transactions? a. in ordinary transactions, altogether. in all transactions the bank rate governs as regards the minimum. q. explain the phrase "cash credits," and upon what conditions are they given? a. a cash credit account is an operative current account in security of which the principal debtor and two or more co-obligants have granted a personal bond in favor of the bank. the account is operated upon by the principal debtor, but all the parties are bound as principals and are jointly and severally liable to the bank.[ ] q. is the bank, through its branches, employed by other banks to any considerable extent for the transfer of funds from one city to another? a. we act as correspondents for the large english and irish banks and for colonial and foreign banks. q. do you favor the issue of £ notes? why? a. yes; under the scottish system, as it enables the banks to plant branches at little expense and so to open up the trade of the country in all districts and directions. q. it is your practice to employ your surplus funds in the purchase of prime bills through bill brokers? a. we occasionally have such transactions. q. were most of your branches organised by you, or were most of them other institutions purchased by you? a. all of them were organised by ourselves. q. is the question of the amount of reserves, either in specie or in bank, regarded as of importance by scotch bankers? a. i should think so, though i only know positively my own opinion. q. do you ever buy any shares of railroad or industrial companies? a. no industrial company shares and only gilt-edged railway stocks. q. do you ever own bank shares? a. no. union bank of scotland (limited) interview with robert blyth, general manager[ ] q. when was the union bank of scotland (limited) founded? a. in . q. when does your present charter expire? a. the bank has no charter expiring at any specified time. it is incorporated under the companies acts. q. have the obligations of the bank to the public or to the government been changed from time to time? a. the liability of the shareholders was formerly unlimited, but when the bank became registered under the companies act, , the liability of the shareholders--unless in respect of notes--was limited to the amount of the uncalled capital. q. the tendency is for the consolidation of banking in great britain, is it not? a. it is, but this tendency set in at a much earlier period in scotland than it has done in england. q. do you rediscount bills for other banks? a. yes; but only to a very limited extent. q. is private banking carried on in scotland? a. private banking ceased to exist in scotland prior to . q. do you ever buy any shares of railroad or industrial companies? a. no. q. do you ever own bank shares? a. no. footnotes: [ ] adapted from hartley withers, _the english banking system_. publication of the national monetary commission, senate document no. , st congress, _ nd session_, pp. - . [ ] (september, ). [ ] adapted from _interviews on the banking and currency systems of england, scotland, france, germany, switzerland and italy_, publications of the national monetary commission, senate document no. . st congress, _ nd session_, pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] the cash credit system, sometimes pointed to as a unique feature of scotch banking, is by no means unknown in england.--editor. [ ] _ibid._, pp. - . chapter xxiv the french banking system the bank of france [ ]the bank of france was established in the year , and was at first an entirely private concern, with a capital of $ , , . among the first subscribers were napoleon bonaparte, hortense beauharnais, and bearers of names which are still prominent in the french banking world, such as mallet, hottinguer, seillers, etc. at that time, the privilege of issuing notes was not confined to a single bank. but in the bank of france was placed under state control, and, by and by, the other issuing banks disappeared, by amalgamation or otherwise, and the bank of france became, and has ever remained since, the only issuing bank in continental france. the present capital is $ , , , all paid, divided in $ shares.... [francs are given in terms of dollars.] these shares are held by the public, the average being about - / shares for each shareholder. one-third of the shares are held by persons possessing only one share. they are dealt in freely in the market, their quotation being at present about per cent. the profits go to the shareholders, as in every other company. in the bank earned a net profit of $ , , . the last yearly dividend was paid at the rate of . per cent.... the governor of the bank of france and the two sub-governors are appointed by the state. they are assisted by fifteen regents, nominated by the meeting of the shareholders. the same meeting appoints three censors whom you would call auditors. the board, composed of the governors and regents, decides all questions concerning the rate of discount on loans, the issue of notes, etc. three of the regents, assisted by twelve shareholders chosen from amongst the prominent members of the commercial and industrial profession, compose the "discount committee," which meets at least three times a week and decides upon the acceptance or refusal of the bills presented for discount.... the notes are ... legal tender, but, of course, may be exchanged, at sight, against cash--i don't say against gold, as i will explain presently. the denominations circulating at present are $ , $ , $ , and $ . one dollar and $ notes were issued at critical times, but have been withdrawn since. in case of need, they would be resorted to again, and in this respect i should like to mention the fact, demonstrated by experience, that even where the circulation is already sufficient, a supplementary issue of small notes--unless, of course, the amount be too unreasonable--is much less likely to depreciate the currency than an issue of larger ones. in a certain sense, we may consider that a country which refrains from issuing small notes in normal times, possesses _ipso facto_ a valuable reserve in case of emergency.... i need not recall the remarkable rôle played by the bank of france, under the leadership of its very distinguished governor, m. pallain, during critical periods such as , when that institution succeeded in keeping the french discount rate on an exceptionally moderate level, while giving valuable and effective aid, at the same time, to the london market. how is this successful policy of the bank of france materially possible? precisely because it has the option to pay in silver as well as in gold. when the situation is such that withdrawals of yellow metal are to be feared, the bank quotes a premium on gold. at present, for instance, the quotation is about one-tenth of one per cent. premium, that is to say, you will only get $ in gold against $ , in notes. if you want to get $ , cash, you can get them, but in silver. as a consequence, there is no necessity to raise the discount rate in order to protect the gold reserve, and french commerce has the privilege of benefiting, as a rule, by the lowest rate of discount in the world. thus the average bank rate, in , was . per cent. in france, as against . per cent. in england, and . per cent. in germany. if we consider a period of fifteen years, from to , the average rates are: _per cent._ france . holland . england . belgium . switzerland . austria . germany . cash holdings of the bank of france [ ]the undeniable characteristic of our present currency system is that it presents a transition between the money system and the clearing system, the ultimate form of which we are unable accurately to define. this period of transition, which began when the idea of genuine credit was conceived, will last for centuries before we can rid ourselves of money as a medium. the system of purely fiduciary currency, which is in process of becoming firmly established, is not yet sufficiently stable to prevent us from being thrust rudely back into the old ways whenever we exceed the limits of our resources. crises afford a striking proof of this fact. the initial period, the precursor of the crisis, is nothing but an abnormal extension of credit and of speculation. at such times the need of leaning upon the solid foundation of metallic currency is felt with a new intensity; and when, with a blindness resulting from overconfidence, this need has been neglected, when, from a disregard of the functions of money, a crisis is brought about by the violent rupture of the equilibrium of credit, gold at once resumes its rights, is sought for on all sides, and, according to the seriousness of the offence, exacts complete amends, with the honors of a premium as high as it may choose to make. it clearly appears, therefore, that this quest for simplification in the means of credit, which each nation ardently pursues in the interest of its own industrial and commercial development, demands the greatest circumspection. in developing credit, metallic currency must not be too much overlooked. we must not lose sight of the fact that "credit, in order to be solid and permanent, must have a solid and permanent foundation." the first care of the architect who is about to erect a great building is to secure for it a broad and firm foundation. likewise, in the vast and continuous upbuilding of a nation's credit, the metallic base requires the most attentive and enlightened consideration. to provide for it, the entire resources of the state are not too great. it is difficult to understand how, in certain countries, an undertaking of such universal interest should be left to private enterprise. how can the latter be powerful enough to accumulate holdings in currency which may have to remain idle for long periods, and which can unflinchingly resist all assaults and all storms? in france a system which has already passed the hundred-year mark and has been particularly fortunate as to results, intrusts the bank of france with the duty of building up and preserving the metal holdings, and this great organisation shows itself fully worthy of the confidence which the government has always reposed in it. during its long career the bank has never ceased to control credit with rare foresight and a remarkably steady hand. from up to the present time the cash holdings of the bank of france have not ceased to grow. but the bank, of its own volition, could not have made such an accumulation. the exchanges are usually in our favor, owing to our position as lenders to foreign countries and to the extent of our exports, and this for many years past has resulted in the continual flowing of the precious metal into the vaults of the bank of france. in thirty-five years the amount of our metallic reserves has increased almost threefold. and it is worthy of note that while the amount of circulation increases together with that of discounts, loans, and current accounts, the fact is nevertheless established that the bank note tends to be more and more exclusively represented by cash holdings. the silver holdings are continually diminishing, while the total holdings have increased. indeed, the bank of france avails itself of every opportunity to relieve its coffers of this depreciated currency. since a considerable portion of the holdings have been absorbed by the recoinage of a certain number of -franc pieces into subsidiary coins. place of the bank of france in the distribution of credit we purpose now to investigate the organs of french credit, and to assign to each of these organs its function, in order then to ascertain what operations the bank of france can perform and within what limitations. we have therefore to examine ( ) the function of local banks and of financial institutions; ( ) in what manner the bank of france promotes the free distribution of credit; ( ) in what measure the bank must control credit. local banks and the financial institutions the natural organs for the distribution of credit are the banks, but not all are able to spread it or popularise it in the same degree. thus the "haute banque" (the great banking interests of paris), solely engaged in operations of higher speculation or in international financial relations, does not interest us. the function of distribution is reserved for the local banks and the financial institutions, while the function of the bank of france is to preside over this distribution. local banks, pre-eminent less than one hundred years ago, have gradually seen their field of activity growing smaller, and a large number of them have been amalgamated with great institutions, possessed of much greater resources, with branches over the entire country, and, it must be said, free from the routine which caused the downfall of many provincial houses. with their decline we greatly regret to see the disappearance of personal credit, which it is more and more difficult to make available. the _intuitus personae_ (the judgment of character), which may serve as a basis for credit granted to a neighbor by a neighbor, can not be considered by a corporation official who has almost no means of estimating the solvency of individuals except from the material and tangible side. the local banks, as far as they have survived, have adopted methods which do not bring them into competition with their powerful rivals. they have been obliged to grant long-term credits or content themselves with being intermediaries for the bank of france in granting credits to parties known to them, generally farmers or small landed proprietors, with a view to rediscounting the paper. on this point again there is cause to regret, if not their disappearance, at least their effacement. the institutions for agricultural credit, in spite of all the attention they have received, have not yet been able to replace the local banks in the distribution of personal credit applied to agriculture. the great financial institutions, of which the four most important are the crédit lyonnais, the comptoir national d'escompte de paris, the société générale, and the crédit industriel et commercial, have a much more important part in the distribution of credit. thanks to their numerous agencies, to their attractive conduct of business, with the service of a courteous and attentive staff, they have gradually taught the people new habits in investment and confidence in credit, to such a degree that he who but yesterday hoarded in a stocking prefers to-day, if not to speculate on the bourse, at least to make deposits in the savings banks. the great financial institutions have done much to give even the lowest classes confidence in credit, and to introduce a system of clearing. in closer contact with the public than the bank of france, which is restricted by having to protect the reserve of which we have spoken, these institutions are able more readily and effectually to reach and to mould the public. but that is not their only service nor the only reason for their existence. there are transactions which they alone undertake, which they alone can undertake, and which must be performed because they are in the line of progress. these operations are sources of profit in the same way as are discounts and loans for the bank of france. such are demand deposits, stock-market orders, and the flotation of securities. these operations cannot be undertaken by the local banks. occupied for the most part with long-term dealings, they have no use for deposits payable on demand. if they should have such deposits, their total would never reach a sufficient proportion safely to permit the investing of an important amount. on the other hand, the bank of france does not and, even if it wished, cannot compete with the financial institutions in undertaking such operations. neither the acceptance of interest-paying deposits nor the flotation of securities can come within the province of a bank of issue. the flotation of securities necessitates a certain contingent responsibility, and the institutions which place securities on the market sometimes engage their credit for very large sums, which are sufficiently guaranteed by their capital, but the credit which is intended to safeguard the stability of the bank note cannot be pledged for that purpose. it happens that the bank of france sometimes transmits subscriptions, but this is a gratuitous and entirely voluntary service. in no case can the bank take for its own account bundles of securities in order to dispose of them to the public. the purchase and sale of securities, which is so profitable a business in all financial institutions, could never, it is clear, be a successful undertaking in the bank of france. the staff of the bank has no special information as to the various securities dealt in on the bourse, and cannot, therefore, give valuable advice. its rôle would apparently be confined to handing out the financial journals and passively awaiting orders. if it should act otherwise, the staff would engage the moral responsibility of the bank of france; but the bank, evidently reluctant to undertake such operations, prefers to leave that field to its auxiliaries, the financial institutions. however, at the present time, the bank of france tends to compete with these institutions for the purpose of maintaining sound conditions of credit which inclines more and more to speculation. thus it is extending its department for the purchase and sale of securities in order to safeguard a poorly informed public against the excesses of speculation which dazzle with the hope of an always illusive gain. in what manner the bank of france promotes the free distribution of credit in france thus the bank of france must leave entire freedom of action to the financial institutions and must not encroach, theoretically at least, on their functions, which, as has been shown, differ materially from its own. the bank even owes them its protection, since they are valuable auxiliaries in pursuing its aim of extending credit as liberally as our metallic base permits. in the interest of the public the cash holdings are daily at their disposal. the help and protection of which we speak are not mere passive professions. unfortunately, there have already been numerous cases where the bank has had to interfere in order to bring effective assistance to private banks. the bank has, of course, acted thus for the welfare of the entire community, but also for the satisfaction of protecting its auxiliaries with all its power in the fulfilment of a difficult task. let us recall the failure of the société des dépôts et comptes courants, in the beginning of . "the bank of france, after exacting such security as the concern could still offer and, furthermore, the guaranty of several large banking institutions, for the purpose of limiting possible losses, authorised discounts to the amount of , , . francs. thanks to this assistance, all deposits were paid off, and the dreaded effects of a panic were once more averted."[ ] however, in spite of the precautions that had been taken, the liquidation was slow. whenever the financial institutions have found themselves in need of effective pecuniary assistance, the bank of france has regarded it a duty to help them, and in normal times, by assisting them with its resources, it facilitates liberal credits. in what measure the bank must control credit it may happen that the great financial institutions expand too rapidly or unwisely this or that branch of credit. mindful, above all, of their own interest, which is but natural, they have no especial regard for the public welfare, their only aim being to make their capital bear fruit and to pay large dividends to their shareholders. the bank of france aspires to a nobler ideal, and many of its policies are primarily for the public good. the development of credit is an extremely delicate matter; there are many instances where the application of this agency has led to great catastrophes. it is undoubtedly impossible to exercise a strict supervision over the financial institutions; any such measure would soon appear vexatious and would be, moreover, contrary to our spirit of liberty and independence. but we can quite justly ask whether these concerns are fully sheltered against disasters; whether nothing can happen to them of a nature to shake their credit; and in such a contingency what should be the attitude of the bank of france. the preceding instance, and others that might be referred to, inform us sufficiently as to the possibility of failures. the house of baring bros., the union générale, and others enjoyed an immense credit, thought to be unshakable, and the events of a day flatly contradicted that opinion. in the course of the discussion concerning the last renewal of the charter of the bank of france, much was said as to the possibility of allowing a certain interest to depositors in the bank.... m. burdeau[ ] has shown that it is impossible for the bank of france to become a bank of deposit. the issue of bank notes and the receipt of interest-bearing deposits are absolutely incompatible services. their union in a single hand "would replace the present organization by an entirely new one, which, in case of a crisis, would offer much less vitality and power of resistance." for us it is sufficient to know that the payment to depositors of per cent. on deposits subject to check would attract to the bank nearly all inactive funds, and that a sum in the neighbourhood of , , , francs would leave the private banks. this would be their death-blow--a result which we are unwilling to contemplate. by their very nature the financial institutions are liable to weakness, and for the public good there must be some means of supporting them. for this reason the bank of france, which presides over the distribution of credit, can permit the expansion of its auxiliaries only up to the point where its help would suffice to prevent the collapse of the market. such a measure appears imperative in a country where the protecting wisdom of the bank of france has always been relied upon. fortunate land, fortunate institution, which excites the envy of foreigners, especially of england, where the least failure may result in disastrous consequences. thus the banks of deposit have contributed to progress by gathering and giving life to sums previously lying scattered and idle. they are valuable auxiliaries in the distribution of credit. for this reason they deserve help and protection. the bank, the mission of which is of a wider and loftier scope,[ ] has shown on many occasions that its helpfulness is not a pretence; daily, in fact, it assists them by rediscounting their bills. the prosperity of the financial institutions has continually increased. it is associated with the confidence and growing security of our times.[ ] but the bank must be ready to meet even improbable contingencies in order to be in a position to recapture the market with a sure hand as soon as danger threatens it. under these circumstances, what can the bank do? in the first place, it can utilise its powerful reserve which has been accumulated for this purpose. it can, in the next place, curb the action of the banks by competing with them when they appear to enter upon a dangerous course, and by showing them what steps to take.[ ] on the other hand, there is a whole series of operations which private banks do not undertake, or do not tend to develop as they deserve. directed by self-interest toward the more profitable transactions, they somewhat neglect the others. the bank of france finds no one engaged in these less remunerative operations, and is, moreover, the better able to undertake them itself, because they are not incompatible with the duties of a bank of issue. foremost, perhaps, among these operations is the popularising of credit by means of an ever increasing number of small loans, frequently accepting as pledge securities such as state rentes, bonds of the crédit foncier, of cities, railroads, and industrials. an enormous transfer business is also carried on for both banks and the public at very low cost. moreover, the bank clears large sums, annually relieving the clearing house of this burden. the small business man, much more than the small rentier, reaps continually greater benefit from the advantages offered to the public by the bank of france. we shall here simply call to mind the dates of some innovations favorable to the democratisation of credit. january , .--creation of transfer drafts. april , .--creation of transferable certificates of deposit. january , .--reduction of interest on loans against bars and coin from per cent. to per cent. .--loans against rentes and public securities. .--daily discounting of paper except on holidays. law of june , , article .--option of replacing the third signature, exacted for discount, by deposit of any french public securities. decree of march , .--similar option of replacing by warehouse receipts. law of november , .--admission of bills for discount carrying the signature of an agricultural syndicate. the minimum for bills discounted is reduced to francs. there is here a whole series of measures, which, with the assurance of a cordial welcome, should induce the small business man to trade with the bank. the bank accepts large quantities of small paper with small signatures, and it finds itself, accordingly, in normal times deprived of first-rate paper, of that which is as good as gold in international commerce. gilt-edged paper always finds its market at lower rates than in the bank, and m. d'eichthal, a regent of the bank, wrote as far back as fifty years ago: "whatever may be the discount rate, among the bills discounted there will be found but few with the signatures of the rothschilds, the hottinguers, and other houses of the same rank. those are delicacies which always command a premium."[ ]... the bank has always resolutely undertaken to carry through a whole series of operations which could not show great profit; above all, it has unremittingly aimed to be of service to the greatest number. the number of bills discounted grows continuously, while the total amounts, smaller during the most prosperous periods, invariably increase in periods of tight money. the average amount and term of bills is francs for twenty days. this result would be considerably modified, if we were to take into account the bills handed in for collection only, the average value of which hardly exceeds to francs. territorial expansion of the bank of france with its growth in extent the bank has not only developed its services to meet new business needs, by providing an increased staff, and larger, more attractive, and better conducted offices, but it has also endeavored to reach a more and more widely extended territory. indeed, the mere fact that the bank has entered a place, if only to make collections there, gives a favorable turn to credit conditions; credit becomes cheaper, in that the basis for money rates becomes the official discount rate, because the financial institutions have then a more economical method of replenishing their cash. the smallest provincial town where the bank has entered is, therefore, in regard to low money rates, as favored as paris. exchange between cities, particularly when joined with a special commission, reaches sometimes a considerable sum. as soon as the bank opens its branch, exchange is no longer possible. therefore, whenever the charter of the bank has been renewed, the legislator, in response to the wishes of the public, has wisely required new territorial expansion of the bank. if the bank has not always taken the initiative in this mode of expansion, it is because it has been restrained by several motives. in the first place, the opening of new offices entails considerable expense. it is necessary to count upon several years of deficit, during which the running expenses, including salaries of staff, are just as high as if the profits were large. we could name several cities which for years have shown constant deficits. it can therefore be understood that the bank of france, which is already established in the towns most important from a commercial standpoint, and which, by means of its collecting department, touches towns of less importance, extends its service only with caution to new localities, since each new branch must necessarily produce a larger and more persistent deficit. thus territorial expansion is for the bank an ever-increasing burden; it is equivalent to an additional tax imposed by the legislature at every renewal of the charter. the bank submits to this with good grace for the benefit of the public. in the second place, there is a limit to that expansion. where the bank has no branches, the financial institutions may take root and develop among a population which appreciates their services. their profits come largely, it appears, from small towns, where competition is less keen. we have already said enough concerning the service of these institutions in the development of french credit to show the danger of inflicting upon them fresh injury. on whatever side the bank desires to expand it finds this limit. if the bank encroaches a little on all sides, the result may be very appreciable. the territorial expansion is further perceptibly increased by what is known in the bank as the exterior accounts. this system, of quite recent origin, allows any person not residing in the town where the branch is established to enjoy the same privileges as residents. business may be transacted by mail with the aid of certain accounting forms, which often differ from those used for ordinary accounts. each transaction is the subject of a special report, addressed to the customer by the branch. not only is the transaction itself reported, but useful information as to the position of the account is also given, thus permitting the customer to follow the movement of the account until the half-yearly statement is sent. this department is highly esteemed by the suburban public, and renders many services to landed proprietors and to farmers, especially in the cattle-raising trade. thus the direct expansion, which, as has been seen, meets with serious obstacles, is assisted by this indirect expansion.[ ] evidently we are far from realising the attractive dream of a france no longer deprived in part of banking facilities, but with all bills taken at par because the bank would reach everywhere. but for the sake of this end, no doubt desirable in itself, is it worth while to go to extremes for a scarcely perceptible advantage, to disturb an institution in other respects strong and useful, and thus perhaps to risk disorganising the general credit system of france? on the contrary, we should be content with and even congratulate ourselves upon a progress which leads us, slowly perhaps, but surely, toward the realisation of credit on low terms everywhere and for all. the bank of france and agricultural credit "there is no such thing as agricultural credit; there is only credit," said m. dupin in .[ ] matters have not changed since. it is certain, for instance, that scotland, which for a long time was the classical land of pauperism, owes its prosperity to the banks, which, by developing credit in favor of agriculture, have entirely transformed the soil and the country. indeed, more than any other, the scotch farmer needed credit, and more than any other he has benefited by it. it may be said that personal credit is peculiar to agriculture. thus it suffered as a result of the evolution already mentioned, which, by causing the disappearance of local banks or by giving them a new direction, struck a fatal blow to personal credit. we know that "agricultural credit" includes loans from seed-time to harvest. the first labor done, the first loan made to the land can only be repaid much later. the average time necessary for agricultural loans is five or six months at least. now, for other reasons the by-laws of the bank prohibit the discounting of paper having more than ninety days to run. by a special favor which would not be accorded in business, where each loan has a different object, the bank allows the renewals necessary for agricultural loans, which almost exclusively take the form of bills payable to order. the bill returned to the maker on the day of maturity is renewed the following day. the date of maturity alone is changed. a very important agricultural industry, which we have already mentioned, is that of cattle-raising. the cattlemen are, for the most part, customers of the bank wherever it has a branch. this customer of a somewhat special kind appears, by the very nature of his trade, to be indicated as a suitable client for the bank and not for the financial institutions. the bank permits the cattlemen to indorse each other's paper, and thus can accommodate them without intermediaries. there results a very useful co-operation. moreover, by using the bank the cattlemen effect great savings, the full value of which they alone can estimate. after the law of july , , and the legislation that followed, it might have been expected that the use of agricultural warehouse receipts would be greatly extended. this legislation makes a serious exception to the common law for the benefit of agriculture. it "constitutes the landowner, so to speak, a public warehouse. it is he who, without any other controlling appraisement, makes declaration as to quantity and commercial value to the clerk of the justice of the peace. in short, the agriculturist enjoys a confidence which so far has been denied to industry and commerce." notwithstanding this favor, the agricultural warehouse receipts are little used,[ ] and the bank, despite its willingness to take them freely, regrets to find them among its discounts in such very small number. our survey would not be complete should we fail to say a word concerning the agricultural credit associations, of which also much was expected and which have only in a very limited measure fulfilled the high hopes of their founders.[ ] for the support of agricultural credit the state draws from two sources the funds required to supply the organs of distribution, the local and regional associations. the first source is the loan of , , francs made by the bank on november , , when the charter was renewed. this amount, like the , , francs already advanced in and , bears no interest. the second source is the yearly payment made by the bank of france on the profit-yielding circulation. this payment cannot be less than , , francs yearly, and more often it is in the neighborhood of , , francs. all these sums, intended for agriculture, are distributed by the government, and are used in endowing the associations of agricultural credit. the regional associations, which are the pivot of the present organisation, are self-governing societies, with a capital of their own. this capital, added to the advance made by the state, is invested in first-class securities, which are then deposited in the bank of france, as discount guarantee to take the place of the third signature, if need be. the local offices send their paper to the regional office, which then takes it to the bank, as the needs of funds are felt. such is the part of the bank of france in the distribution of agricultural credit. effective intervention was obviously very difficult, yet the bank has contrived, even beyond its legal obligations, to give the benefit of its credit to agriculture, which so justly deserves the care it is receiving. the bank of france interview with m. pallain, governor of the bank of france[ ] q. is the bank of france ever attacked in the controversies between political parties? a. no charge has ever been made that the bank favored or aided any political party. there is never any claim that politics enters in any degree into the management of the bank. q. is the capital entirely private property? a. yes. all the shares are divided between , shareholders, of whom about , have not more than one share. q. how are your branches managed? a. all branches are managed by a manager, assisted by a local board of directors, selected from among the best qualified commercial, industrial, and agricultural representatives in the region. q. do the branches have business relations with the merchants, farmers, and all classes of people of the locality? a. yes, they are open to everybody. q. you have, i suppose, in the branches regular clients who have an account with you? a. yes, and a considerable number of them. q. do your branches do the same kind of business as the branches of the crédit lyonnais? a. the bank of france and its numerous branches do all banking business consistent with the laws properly regulating a bank of issue. q. a bill drawn in new york on france, on a bank, for instance, the crédit lyonnais, at paris, and accepted by it, would it be admissible for discount? a. yes, if it bore, besides the signature of the french establishment accepting it, at least one other french signature; that of the person presenting it, for instance, having a current account at the bank of france. q. a part of your portfolio comes from rediscounting for banks? a. certainly, and it is an important part. q. could you give us an estimate of the proportion of bills which are discounted for banks and those discounted for other customers? a. i should estimate that about per cent. of the paper now held bears the signature of some bank as one of the indorsers; but it is manifest to us that the number of merchants and manufacturers who appreciate the facilities given by the bank for direct discounting and who profit by it increases perceptibly every day. q. does the bank of france make the same charge for the discount of bills and for loans upon collateral? a. the bank usually charges somewhat more for loans upon collateral than for the discount of bills. the rates at present are per cent. and per cent., respectively. q. could we obtain an estimate of the percentage of the deposits of the other banks at the bank of france in comparison with the whole of such deposits? a. in the credit establishments which you will visit you will be able to establish the fact that the liquid cash is, in comparison with their turnover, relatively very small. in france we consider that the strength of a bank consists more in the composition of its portfolio, _i. e._, in the value of its commercial bills, rather than in the importance of its cash reserve. q. is the amount of all taxes paid by the bank to the state included in your report? a. yes. the public charges of the bank in were more than , , francs, whereas the profits distributed were , , francs. q. have you a system of transfers similar to that used by the reichsbank? a. yes, this system, in france, dates as far back as a century or more. q. what is your method of transfer? a. transfers from place to place are made by simple notification to branches. q. are the other banks accustomed to use the bank of france in order to transfer their funds? a. the greater part of the banks use no other method, even to increase the cash in one of their branches in a remote part of france. q. is the bank of france subject to examination by the government? a. there is no regular system of examination, but the minister of finance has the right to ask for information whenever he chooses. q. is the bank of france regarded as a bank for banks or as a bank for the people? a. the bank of france remained for a long time, indeed, the bank for banks, but since it has covered so much territory with its numerous branches; since the minimum amount of all its operations has been lowered; since it has opened deposit accounts to all, it is already and it tends to become more and more--as you ask--the bank of all the french public. q. is there any contention in banking or economic circles that it is necessary to restore or extend the right of issue to banks, other than the bank of france, to enable them to increase their own profits or to afford adequate facilities to borrowers or to meet legitimate business demands? a. the unity of issue was achieved in france in , and at no time since then has there been any question, in responsible circles, of a possible return to plurality of issue. the same tendency is leading, little by little, to an absolute monopoly in england, germany, and even in italy. i think that it would also be interesting for you to examine the recent example of switzerland, which had its note-issue system founded, as in america, on the plurality of banks and which has now substituted for this system one single privileged bank. this transformation has received popular approval by referendum. q. does the export of gold reduce the volume of notes? a. not necessarily. it may happen that among our assets a certain fraction of the gold is replaced by an equal amount of bills in our portfolio, and that without changing the total of notes in circulation. q. there is nothing in the law requiring your notes to be covered by a certain proportion of gold? a. no regulation of this kind exists in our legislation. q. do you rely upon raising the rates of discount to stimulate the importation and to prevent the exportation of gold? a. it is a principle consecrated by experience that the supreme means of defence for an issue bank, to protect its metallic reserve, is to raise the rate of discount, and we never lose sight of this principle. however, the extent of our reserves allows us to contemplate without emotion important variations of our metallic stock, and we only exceptionally have recourse to a measure which is always painful for commerce and industry. the stability and the moderation of the rate of discount are considered as precious advantages, which the french market owes to the organisation and traditional conduct of the bank of france. q. would you like to express an opinion as to why the bank of france is able to hold its gold with a bank rate of per cent. when the rates elsewhere are higher? a. the causes of this phenomenon are multiple. theory teaches us that capital goes where it can obtain the highest remuneration, but in considering this remuneration account must be taken of risks; these are numerous and of different kinds; i mean, of course, commercial risks; risk of losing on exchange when the capital is brought back, etc. this at once explains why it is possible in france to maintain a rate of discount lower than elsewhere. french capitalists might fear, perhaps, that the higher interest obtainable outside might be offset or more than offset by the risks incurred. account must be taken, secondly, of the situation always held by france as a creditor nation, and which by the constant income of capital which it assures to us certainly contributes to counter-balance the current of exportation which might result from the lowering of the rate of discount. q. does the bank of france sometimes take steps to maintain the bank rate by the purchase of bills in the market or otherwise? a. no, never. q. the tradition and the reputation of the bank of france make it important that it should hold a larger reserve than any other bank in the world? a. it is true that france keeps locked up in its bank a proportionately larger amount of specie than any other country, but this policy is not without important compensations. suppose the french public, changing its mind, should reduce by one-half its monetary reserve of which the bank is the guardian. it would gain thereafter the interest on perhaps two milliards of francs released and which would have become productive--that is to say, a saving of from to millions of francs per year at the maximum--but if one reflects that it would lose the advantage of the reduced rates of discount which the extent and character of our reserves enable us to maintain and from which all french production profits; that it would lose, in addition, the sentiment of absolute security, of complete financial independence, which every crisis has strengthened, one would be less tempted to conclude--with certain critics--that the policy of maintaining heavy reserves, the natural expression of the country's instincts, is an unwise policy from an economic and practical standpoint. q. you have, i believe, no requirement of law by which the bank of france is obliged to purchase gold at a certain fixed price? a. the bank buys gold according to the tariff of the mint, but it is not obliged to do so. private individuals, instead of having their money coined for themselves, find it more advantageous to sell their ingots to the bank, which has them coined when needed. the crÉdit lyonnais interviews with baron brincard, administrateur dÉlÉguÉ, and other officials of the crÉdit lyonnais[ ] q. what is the date of the organisation of the crédit lyonnais? a. july , . q. under what law was it organised? a. we are under the general law, a general companies law. q. what is the minimum amount of capital required? a. there is no minimum, but at least one-fourth of the capital is required by law to be actually paid in. q. how many shareholders have you? a. our capital is divided into , shares, but as many of these shares are issued to "bearer" we do not know how many shareholders we have. q. the cash in hand is merely carried for the necessities of business? a. yes. any bank, if it has need for additional cash, may present for rediscount at the bank of france the bills and other commercial paper which it has in its vaults. q. what per cent. of your deposits do you intend to carry in cash either in your own vaults or in other banks? a. eight to per cent. on the average. q. does the bank of france ever loan below its published rate? a. no. it never does. q. it is not, i believe, the policy of your bank to buy public securities in large amounts? a. no. our idea is to buy all the commercial paper that we can get. that is our business. at present it is almost impossible to get any commercial paper because business is so slack; therefore, we are obliged to go outside and buy treasury bills. q. to what kinds of banks do you lend on collateral? a. mostly foreign banks; for instance, banks in new orleans during the cotton season. it is not to our interest to lend to french banks. we lend money to foreign banks and to french merchants, but never to foreign merchants or to french banks. we never lend on real estate. that is the business of the crédit foncier. q. do you own all of the securities you sell, or do you take orders and buy and sell them on commission? a. the greater part of our transactions are made on commission. q. in your statement of liabilities you show deposits about $ , , , and current accounts about $ , , . will you kindly explain the difference between these two accounts? a. deposits are sums of money deposited, especially by private people. accounts current represent the balances to the credit of business people. q. if i come here and open an account with you and make a deposit and say i want to transact business with you, borrowing money from time to time, and depositing and drawing daily, would you put that account in your "accounts current"? a. if you were not a merchant, you would have a deposit account opened for your daily deposits and drawings. your account could never show a debit balance and the amounts which you might borrow would have to be secured by deposit of securities and would be placed under the item "loans on securities." if you were a merchant, an account current would be opened for the requirements of your business, and this account could become debtor. q. deposits and current accounts are payable on demand? a. yes; on demand. deposits are made up of sums deposited by customers whose accounts are not active; they are more in the nature of reserve deposits, whereas current accounts represent deposits made by customers mostly in active business. q. do you pay interest on practically all of your deposits and current accounts? a. yes. q. do you find that the bank of france competes with you in any way? a. in no way. q. they receive accounts from individuals and small tradesmen in the branches, do they not? a. yes; but they do not grant uncovered credits. there is no competition between the bank of france and the other banks, because they do not do the same kind of business. the bank of france receives deposits, but does not allow interest upon them; it only discounts bills with three signatures; it is the bankers' bank; it acts as the regulator of the money market. q. do its branches receive deposits? a. yes; they receive deposits, without allowing any interest. in times when money is cheap the rate of discount of the bank of france is rarely below per cent., and in the crédit lyonnais and other banks the rate may be sensibly below that of the bank of france. q. can you state the number of employés in the crédit lyonnais? a. about , . it varies according to the time of year. q. are all of the important banks in the city of paris members of the clearing house? a. yes; about of the most important. q. how frequently are the clearings made? a. three times a day. as a matter of fact, our clearing house is not so important as yours in america. q. the clearing houses in the cities of france are in no sense a factor; they are merely the machinery through which the cheques are cleared, are they not? a. to our knowledge there is but one clearing house; it is in paris and is merely a mechanism for settling balances. q. are you examined at any time and in any way by the government? a. no. the control of the government is limited to the supervision for taxes, to which every company is subject. q. your relations with the bank of france are very intimate and cordial, are they not? a. yes. q. is that true with all the banks in france? a. the bank of france is quite impartial; it gives no preference to any one; there is no favoritism. q. i understand none of the farmers or peasants will use cheques. a. the use is extremely rare. q. how about your tradesmen all through the small towns, and the doctor and lawyer and professional man; would they draw the money out and pay their bills in cash? a. certainly; most of them. q. when you establish a branch in a small town, you generally find a local independent bank there. can this local bank compete with you? a. there are certain places where the private banks have kept on, but the tendency is for the private banker to disappear. we take small sums and have numerous branches. one great distinction is that the private bank is always in the hands of a family. a man who originally starts a private bank may be a good banker, financier, and business man, but it does not always follow that his son, who in all likelihood will inherit the business, will be capable of running it. our joint-stock banks do not go from father to son, but are always under efficient management. q. what proportion of your own payments are made in gold? a. a very small proportion. the people prefer notes. q. do the french people hoard money as much as formerly? a. no; it is becoming more the custom to put money in the banks. thirty years ago they kept the money at home. comptoir d'escompte interview with m. ullmann, director of the comptoir d'escompte[ ] q. one of the things that we have in mind is to inquire in regard to the character of the business done by your branches. a. yes. we are especially a discount bank and our customers are mostly commercial people engaged in commerce and industry, so that our principal business in our branch offices consists in discounting commercial paper, in making advances against securities, goods, or warehouse receipts, or sometimes giving blank credits to our customers for commercial requirements. q. have you stock in other banks which you control? a. we are interested in the banque de l'indo chine, which is an issue bank in the french colonies, but we do not control it; we hold a certain amount of shares. q. are there any other banks which you control? a. no. q. you have not been in the habit of buying up other banks? a. no. the system here is to establish agencies of our own; the germans, on the contrary, control other banks in order to arrive at the same result, viz., to get as much influence as possible throughout the country. we try to come to the same result by establishing our own agencies. q. is that true of the crédit lyonnais? a. the crédit lyonnais and the société générale have the same system. q. is it usual for large banks in paris to confine their underwriting operations to bond syndicates? a. yes; banks receiving deposits, such as the crédit lyonnais and the société générale, do not usually participate in syndicate operations covering the _shares_ of industrial concerns; other banks, such as the banque de paris et des pays-bas, do so, but they are not deposit banks. they have more liberty to engage their own capital in any enterprise. q. you are not restricted by law in doing any business you please? a. no; it is only the custom and rules of our society. q. if there were a large industrial corporation in france which wanted to develop its business and issue bonds upon it, and if they were customers of yours of unquestioned financial standing, would you take their bonds and sell them? a. yes. q. but not their stock? a. if they were a well-known concern we would sell their shares too; we have done so. q. is there co-operation between the large banks? a. we meet very often and often have common interests in business. q. do you, in a sense, divide the field? i suppose you have a certain field in which you do business and other banks do not; turkey, for instance? a. turkey is reserved for the banque ottomane. q. take the electrical business, for instance. a. as far as we are concerned we are connected with the thomson-houston; and it is natural if the thomson-houston and their friends have any business to do, that they deal with us. q. there is nothing in the law which restricts you to any class of investment? a. no. q. and nothing that requires you to keep any reserve; that is, any amount of cash as against your liabilities? a. no. q. is the bank of france your principal reliance in case you need money? do you think it necessary to carry any additional reserve? a. under our french system we consider the commercial paper we keep in the portfolio a cash reserve, as we can rediscount it at the bank of france. we know the bank of france will discount these bills and thus enable us to convert the bills instantly into cash; this is the basis of the french banking system. q. outside of paris it happens that you have branches at many of the same places as the bank of france; is there competition between the branches of the bank of france and your own branches? a. no; the bank of france does more rediscounting than discounting, and the bank of france also has more conservative rules than the other banks. we may lend under the bank of france rate, so our clients have an interest in keeping their accounts with us. q. you do not consider the bank of france as an active competitor? a. no; competition is greater with the crédit lyonnais and with the other private banks than with the bank of france. q. you do considerable rediscounting of bills, i take it? a. yes. q. at a lower rate than the bank of france? a. frequently. q. is the development of branches a matter of recent times? a. yes; we began the system of establishing branches about twenty years ago. q. how many employés have you? a. including the country, something like , . q. have you a pension system for your employés? a. our clerks consent to a rebate of per cent. on their salaries, and we duplicate this rebate by a voluntary contribution, in order to constitute a pension fund; it amounts now to about , , francs. q. if a new bank were to be organised here, would it be admitted as a member of the clearing house? a. certainly. q. you have no new banks except the union parisienne? a. there is also the banque française, managed by m. rouvier, who formerly was premier. banque de paris et des pays-bas interview with m. moret, manager of the banque de paris et des pays-bas[ ] q. we assume that your business is in many respects quite unlike that of the other joint-stock banks? a. yes; in some respects. q. what is the difference? a. the société générale, crédit lyonnais, etc., receive deposits from the public; they invest these deposits and try to make the most of them, paying a small rate of interest on them; they also loan money on commercial paper which can be rediscounted at the bank of france. here we are more a business bank; we do not care for deposits from the public; we work with our own money, with the money which is the capital of the bank, and we are occasionally assisted by the capital of the directors, the people who sit around this table, who are all rich people and some of them bankers. as a rule we do not receive deposits from the public. q. but you do receive some deposits? a. we receive the deposits of big companies which we have created or promoted or whose stocks we have issued--they are our customers--but we do not receive deposits of small accounts from the public. q. what is your capital? a. , , francs. q. you have current accounts-- , , francs? a. they are current accounts, from manufacturing concerns, railway companies, big organisations of any kind. q. you have a considerable foreign business? a. we have connections all over the world, and very often we take an interest in business abroad. q. do you operate more particularly in one part of the world than in another? a. no; although we have only three branches--one in brussels, one in amsterdam, and one in geneva. q. do you endeavor to carry any special amount of cash at the bank of france? or are you indifferent as to the amount of balance you have there? a. we always calculate what sum each day will be likely to be withdrawn; besides which we always have a large amount of commercial paper which we could rediscount at the bank of france at once. therefore we keep just enough cash in vault to meet any cheques which may be presented. q. do you carry an account in new york? a. we lend money to bankers there. different kinds of loans, some are at sixty days or ninety days. q. you are not restricted in any way as to the character of the undertakings you may make? a. no; we can do as we like. q. do you specialise in practice or do you consider propositions of various kinds? a. all sorts of propositions, railway building, harbors, tramways, electrical enterprises, etc. q. do you sometimes take an interest in business such as placing pennsylvania railroad and union pacific bonds? a. yes. q. you frequently act as managers of syndicates which might include the other banks of france? a. very often we take the head of syndicates. q. you are the leading bank in that business in france? a. they say so. q. is there cordial co-operation between the banks of paris and the bank of france, generally speaking? a. yes; business as a rule is done, when it is a big business, with several of these big societies or banks, and perhaps with all of them together. q. are there particular corporations in which you have a permanent interest? a. yes; so as to have some control in certain large companies. q. what do you think of the attitude of the government toward the bank of france? that is to say, are they exacting more and more from it? a. i do not think that they exact too much from it. the shares of the bank of france are always very high in price; it has not hurt at all the development of the bank. crÉdit foncier de france interview with m. touchard, secretary[ ] q. is the crédit foncier a public institution? a. yes, it is a mixed institution; it is at the same time a joint-stock company and a society under the control of the government by reason of privileges which the government has granted to it. q. who are the shareholders? a. any one; the shares are dealt in on the bourse. the firm capital is at present , , francs; the shares are issued at francs. q. what dividend do you pay? a. we now pay per cent.; for several years it was only per cent. q. does the government receive no income from it? a. no; on the contrary, the government began by giving us a subsidy of , , francs; that was at the beginning, in , in order to help us make loans at a rate advantageous for that time. this subsidy was not renewed, and the state does not intervene now, except occasionally to exercise its control. q. does the company appoint the officers? a. the government appoints the governor and the two sub-governors. there must also be three treasurers-general among the members of the council of administration. these treasurers, as well as the other administrators, are named by the general assembly of stockholders; but before presenting their names to this assembly, it is customary to obtain the approval of the minister of finance. q. do you pay the same taxes as the other banks? a. yes. we are treated like any ordinary bank. we have the special privilege of issuing bonds secured by mortgages. it is a very complicated system in france; there are legal complications which would render it impossible for any corporation to undertake the business unless it had special privileges. q. are you confined by law to business with mortgages? a. we have two principal kinds of operations--mortgage loans and communal loans. the total business of the two branches of operations amounts at present to about , , , francs. operations on so large a scale involve a considerable transfer of funds, and make necessary a treasury service requiring, of course, the use of banking methods. our statutes, therefore, recognise our right to carry on ordinary banking operations, within certain rather sharply defined limits. q. how is your banking business limited? a. we are allowed to receive deposits up to a maximum of , , francs. q. do you invest in securities other than mortgages? a. we employ our deposit funds in discounting commercial bills on condition that they have two signatures and can be presented to the bank of france; that is to say, they must not run over three months. q. you take mortgages on private estates? a. our mortgages may be on houses or on rural property. q. what is the precise relationship of the stockholders to the business of the company? have they really a voice in the administration? a. the two hundred largest stockholders meet once a year to ratify accounts, vote the dividend, and consider the questions docketed for the day of the meeting. q. what is the usual length of time for mortgages on real estate? a. our statutes allow us to loan for seventy-five years on ordinary rural or city property. in the case of summer resorts and certain other property liable to depreciate rapidly, for the sake of prudence we do not generally lend for more than thirty years; besides, the borrowers always have the right to repay at any time, and they often avail themselves of this right, so that the average length of our loans is much less--hardly exceeding fifteen or twenty years. q. what is the cost for amortisation in the long mortgages on property in the country? a. the amortisation is spread over the whole duration of the loan, so that the total of the interest paid and the capital reimbursed forms a constant yearly annuity. q. do you employ your amortisation funds to buy new mortgages? a. yes; we lend again. q. may you call your bonds at par? are they payable at par at your option? a. in our recent issue we have put that clause in, viz., that we can redeem our bonds at par. generally we only redeem a certain portion of them each year, which are drawn by lottery. q. what is the minimum size of your mortgages on private estates? a. there is no minimum; but we do not care to make very small loans because it costs too much to foreclose. q. what percentage of your total business is in the country and what in the city? a. about one-half in paris, and our best business is in paris. the urban mortgages cause us less difficulty, and the tendency is for the proportion of them to increase. q. who are the subscribers to the bonds, and what are the usual sums subscribed? are they small or large? a. they are bought by small people, and generally remain in the hands of persons of small capital. this is one of the reasons why their quotations show so little fluctuation. q. do you lend on farms? a. yes. up to one-half, except on forest land, vineyards, and the like, on which we lend only one-third. we do not lend on mines. on factory buildings we lend only on the value of the ground and of the building, independently of its industrial value. q. what other institutions of this character are there in france? a. there are no others; we no longer have a _legal_ monopoly, but we very nearly have a _practical_ monopoly. there are private individuals who make mortgage loans, but no large company makes this the principal feature of its business. q. how long has it been the privilege of the crédit foncier to add lotteries to its loans? a. it has done so from the beginning, although we are obliged to ask the permission of the minister, but it is on that account that we have been able to place our bonds so low. caisse des dÉpÔts et consignations interview with m. delatour, general director of the caisse des dÉpÔts et consignations[ ] q. we should like to know the general character of the business conducted by your institution. a. the mission of the caisse des dépôts et consignations is to receive, hold, and repay all private funds intrusted to the state either voluntarily or under compulsion. q. you say that you also do an insurance business. what do you mean by that? a. the insurance office, managed by the caisse, issues policies of life insurance, insurance payable after death or in case of accident, like any private insurance company. as regards accidents to employés while at work, it insures only against such accidents as cause death or permanent total or partial incapacity for work. q. is this a corporation? a. the caisse des dépôts et consignations is not a corporation. it is a state organism, but, while charging the caisse with the management of all private funds, which may be turned over to it by the state under different headings, the legislature bestows upon it full autonomy, in order to avoid even a semblance of possible confusion in the handling of private moneys with the handling of public moneys. moreover, it has placed the caisse under the direct supervision and the guaranty of the legislative powers. q. what is done with the profits realised from the business? a. profits earned by the caisse on deposits of the savings banks are turned over to the reserve and guaranty fund of savings banks. q. what restrictions govern the investment of your funds? a. as long-term investments, we make loans to departments and municipalities, sometimes to the state; we take government rentes, treasury securities, guaranteed railroad bonds, etc. as short-term investments, we take treasury bonds, bonds of the monte de piété of paris (municipal pawnshop), etc. finally, we keep large sums in cash, either in our own vaults or to our credit in the treasury and the bank of france, which, for that purpose, keep account currents on demand for us. q. you do not, as a rule, invest in mortgages? a. no; owing to the difficulty in disposing of such investments. q. you purchase no bills and do no commercial business whatever? a. no; that rôle is played by the bank of france. sometimes we make advances on securities, but only on treasury bonds. q. your organisation is quite unique in the world, is it not? a. there is nothing like it in england or america, but there are similar institutions in belgium and italy, for instance. in france this institution is highly appreciated by the lawmakers, who steadily increase its functions, and the number of laws and regulations governing the caisse is ever growing. q. it is customary in france for savings banks to carry their reserve with this establishment? a. the savings banks are bound to turn over to us all they receive from their depositors, except such sums as may be required to meet immediate demands. q. then, as a matter of fact, this is a central bank for the savings banks of france? a. precisely. crÉdit agricole interview with m. decharme, chef du service du crÉdit mutuel et de la coopÉration agricole at the ministÈre de l'agriculture[ ] q. what is the nature of the business of the crédit agricole and when was it instituted? a. the first law was in . the first bank was opened in . the crédit agricole is based upon local organisations. france is divided into departments, in each of which we are to have a regional bank (_caisse régionale_); and we hope eventually to have a local office (_caisse locale_) in each commune of each department. among these , communes there are many which are cities, which naturally would not have agricultural banks. there are only out of the departments in france which have not already established a regional bank. q. who furnishes the capital? a. the basis of the system is the local office of the crédit agricole in which each member--local farmers--has one or many shares of francs, but on which he has to pay only francs down. on payment of these francs he becomes a stockholder. when a local office has been established it turns all of its capital over to the regional office. then comes the state which advances to the regional bank an amount four times the capital which has been subscribed by the local banks. the money given by the government is not really given; it is lent without charge, without interest. q. for what purposes can this capital be used? a. the regional office does not lend directly to the farmers; it lends to the local office, and the local office has a board of directors which examines the demands of the various members. q. under what conditions do they make loans to farmers, and are their loans confined entirely to people engaged in agriculture? a. the state loans to the regional office without interest; the regional office loans to the local office at per cent.: the local office loans to the farmers at between - / and per cent.; in the northern region at - / per cent.; in the southern at per cent. q. under what conditions? a. the farmer who wants to borrow from the local office draws a bill upon himself, takes it to the local office, and the board of administration there considers it. if they approve it, the president signs it--and it has then two signatures--and then sends it to the regional office; if the regional office has plenty of money they will lend the money directly; if not, the president of the regional office signs it--it has then three signatures and is bankable paper--and it is taken to the bank of france. during the crisis in the south of france last year in the wine-growing region at montpellier, the centre, the regional office had one million capital; the government then added ; that made , but they lent at that office all together millions, and the difference was obtained from the bank of france in the way described by using paper with three signatures. before the founding of these agricultural societies it would have been difficult for a farmer to obtain the three signatures necessary to borrow from the bank of france, and what happened last year in the south of france could not have occurred before the organisation of the crédit agricole. it should be added there has never been one cent lost by the crédit agricole. q. are all loans made to members? a. yes; exclusively to members. q. who can become a member? a. farmers; agricultural workmen are excluded. we do not lend to people for nourishment to support themselves. we lend them money to increase the production of the land. q. must a man have some share in the crops? a. we lend money to buy a horse, a cow, or to buy fertilizer. we will lend to a man who rents a farm, but does not own it, to buy machinery, cattle, etc., but we will not lend to a man who wants to borrow the money for his own consumption; we do not lend money for a man to buy a coat, for instance. these local offices are in communities where everybody knows everybody else, and they always ask what the man wants to borrow for, and if he says he wants francs to buy a cow, they watch him, and if four or five days afterwards he has no cow, they know it. as the liability is without limit, the other members of the locality would be responsible. at the beginning the farmers were afraid of unlimited liability, and on that account they had to make it limited, but now, in all of the new offices, the responsibility is unlimited. q. what are your co-operative societies? a. they are societies for the production, preservation, sale, or transformation of agricultural products. there are co-operative agricultural societies in the wine-growing regions which have their own wine cellar; there are co-operative dairy societies for making butter and cheese; there are also co-operative societies which use waterfalls and electricity; co-operative mills to grind corn; co-operative railways to bring beet roots to the sugar refinery; co-operative distilleries and co-operative warehouses for corn. to these co-operative societies we make loans for twenty-five years. the government loans without charge to the regional office and the regional office lends to these co-operative societies for twenty-five years at per cent. q. what is the security? a. the guarantee is the consolidated liability of all of the members of these co-operative societies and also a mortgage upon their real estate; their responsibility is absolutely without limit. q. do you compete at all with the branches of the other banks or with the bank of france? a. no; we have an entirely different class of customers. q. is there any other institution of this character in france, or do you practically cover the field? a. the members of these local offices are people who up to the time these local offices were organised had never had any banking connection at all. the only persons with whom the local offices compete are individuals who used to loan to farmers at very high rates of interest. footnotes: [ ] m. robert masson, sous-directeur du crédit lyonnais, _the bank of france_, an address delivered at the annual banquet of the bankers of the city of new york, january , . [ ] adapted from maurice patron, _the bank of france in its relation to national and international credit_. publications of the national monetary commission, senate document no. , st congress, _ d session_. [ ] "compte rendu de l'assemblée générale des actionnaires de la banque de france," . [ ] burdeau, "discours sur le renouvellement du privilège de la banque de france," june and july , , in the officiel of june and july . [ ] the bank of france, during periods of quiet and prosperity, aims at a gradual effacement, at a more complete retreat toward a very high but very restricted sphere of economic activity. but as soon as the least trouble appears ... the bank assumes again its place at the head of our great financial institutions. (brouilhet, "le nouveau régime de la banque de france." revue d'economie politique, .) [ ] the discounts and loans of the financial institutions are growing in importance, and are steadily increasing in proportion to those of the bank. this condition, revealed by statistics, is in itself not alarming, but it once more justifies that intervention, so many motives for which we have brought out. [ ] it seems that this protective mission especially applies to the department for stock market orders, originally reserved for the customers of the bank, and later opened to everybody. thus it prevents the financial institutions from driving us toward excessive speculation. this purpose explains, according to our notion, the growth and broadening of the business of stock market orders at the bank of france. [ ] p. coq, "les circulations en banque," paris, guillaumin, , p. . [ ] the indirect expansion might be increased by wider use of the "crossed check." it will be long before we may expect good results from this practice, since we are as yet too far from the time when this check, almost unknown in france, will be currently used. [ ] journal officiel, , p. . [ ] the main reason lies in the numerous formalities which the law of april , , has simplified but not suppressed, in the many expenses caused by the organisation, and also, it appears, in the inexperience of some of the officials. the clerks of the justices of the peace, intrusted with the delicate and novel functions of registrars of chattel mortgages, are, as a rule, little fitted to perform them. [ ] the model of these institutions came to us from foreign countries; but the foreign differ from ours materially, because of the diversity of their origin. with our neighbors, the movement began slowly in the lowest levels of the rural population. with us, on the contrary, the system of agricultural associations began at the top. thus, these institutions penetrate only with difficulty into the rural districts, where economic education has but just begun. [ ] adapted from _interviews on the banking and currency systems of england, scotland, france, germany, switzerland, and italy_. publications of the national monetary commission, senate document no. , st congress, _ nd session_, pp. - . [ ] adapted from _interviews on the banking and currency systems of england, scotland, france, germany, switzerland and italy_. publications of the national monetary commission, senate document no. , st congress, _ nd session_, pp. - . [ ] adapted from _interviews on the banking and currency systems of england, scotland, france, germany, switzerland, and italy_. publications of the national monetary commission, senate document no. , st congress, _ nd session_, pp. - . [ ] adapted from _interviews on the banking and currency systems of england, scotland, france, germany, switzerland, and italy_. publications of the national monetary commission, senate document, no. , st congress, _ nd session_, pp. - . [ ] adapted from _interviews on the banking and currency systems of england, scotland, france, germany, switzerland, and italy_, publications of the national monetary commission, senate document, no. , st congress, _ nd session_, pp. - . [ ] adapted from _interviews on the banking and currency systems of england, scotland, france, germany, switzerland, and italy_, publications of the national monetary commission, senate document, no. , st congress, _ nd session_, pp. - . [ ] adapted from _interviews on the banking and currency systems of england, scotland, france, germany, switzerland, and italy_. publications of the national monetary commission, senate document, no. , st congress, _ nd session_, pp. - . chapter xxv the german banking system banking arrangements in germany [ ]various systems can be adopted in the banking profession for the transaction of business. the most lucrative method, at all events the one in which the power of large capital is most effectively turned to account, is that of the rothschild firms, whose example was followed by many large private concerns at home and abroad. these firms avoid troublesome current business, maintain only a few connections, and concentrate their whole energies on isolated but important ventures and undertakings in which, owing to the large amount of means immediately required, no competition worth mentioning existed before the growth of capable joint-stock banks. up to the middle of last century these firms actually possessed a monopoly so far as the loan issues of most european states were concerned, and they earned enormous profits according to present-day ideas. in the course of the last decades, however, this monopoly has been done away with so far as european states are concerned and only prevails to a limited extent in some foreign countries. since that time the rothschilds have devoted themselves to several large industrial enterprises, such as the russian naphtha industry, the spanish copper and quicksilver mines, etc. another system consists in the division of work and specialisation, customary in england, but which has been frequently abandoned of late. in england the issuing and syndicate business is carried on by special houses which, like rothschild, do not call themselves bankers, but merchants. brokers and jobbers carry on stock broking on the stock exchange and in the open market, the former (theoretically at least) on account of third persons and the latter on their own account. it is the exclusive business of other firms to place credit at the disposal of home and foreign firms by giving acceptance to bills. these firms, strange to say, are mostly of german origin (frühling & goschen, frederik huth & co., kleinwort & sons, etc.), and carry on business in such a reliable manner that they are allowed to enter into bill obligations amounting to more than five times their estimated means. the clearing and deposit banks manage moneys on account of third parties. it must be noted that the division of labour and its operation are based on free business practice in england without any legal compulsion. consequently, no opposition is offered in that country to the different methods of carrying on business employed by the so-called foreign banks, _i. e._, the numerous branches of continental banks, including the branch offices of the deutsche bank, the dresdner bank, and the disconto-gesellschaft, despite the fact that their competition is unpleasant for the english institutions. in germany, in consequence of business requirements and also of the small amount of capital in the country at the beginning of its modern economic development, the peculiar system has developed that credit banks combine all kinds of financial business (generally with the sole exception of mortgage-credit transactions), so that every customer can settle all his financial affairs in one spot on comparatively the cheapest terms possible. account-current transactions form the fundamental branch of business. the bank undertakes all the financial business of its client in return for a moderate commission on the turnover calculated on that side of the account which happens to be the greater, makes and receives payments, collects bills, checks, and other documents, and pays, or charges, interest on the balance, generally at per cent. below the reichsbank discount rate for credit balances and per cent. above the reichsbank discount rate for balances debited. the bank discounts the bills received by its customers, special arrangements being made as to the limit of the amount and terms, according to the quality of the bill, _i. e._, according to the trustworthiness of the other persons figuring on it. should a customer require foreign bills to settle his liabilities abroad, _i. e._, checks or bills payable in the country concerned, the bank provides them from its own stock or draws bills or checks to the amount desired on its agents or correspondents in the country in question. should the debit balance not be a merely temporary one, or one soon covered by fresh receipts, the granting of special credit is necessary, and arrangements have to be made as to the amount and conditions of the same. such credit is either covered or uncovered credit. the cover consists principally of current securities with a margin against fluctuations according to the nature of the security, and which is higher for shares than for securities bearing a fixed rate of interest. uncovered credit is only granted in exceptional cases to others than business men--as a rule only to first-class mercantile firms of repute, whose affairs are in strict order. bankers and other firms with large cash transactions keep a so-called "cheque" account at their bank in addition to the chief account, in which no debit balances may occur; no interest is paid on the amount deposited, which is always kept in suitable proportion to the payments made, but, on the other hand, no turnover commission is charged. those customers are appreciated most who claim credit during their buying seasons, but who not only pay back the borrowed money during their selling season, but who have balances to their credit. this is the case with a great number of commercial firms and in many branches of industry, more especially in berlin. the seasons in different branches occurring at different times of the year, it follows that a large bank, with branches and connections in all industrial parts of germany, has the advantage of a suitable distribution of accounts among all branches of trade, etc., and the best possible adjustment of its debit and credit arrangements. the debtors in a bank's balance sheet comprise not only those who have received advances of ready money but also those to whom the bank has granted credit by bill acceptance; the bill drawn by the debtor and accepted by the bank is discounted elsewhere. it is the duty of the drawer of the bill to cover it before it matures, and when the bill is accepted he is booked simultaneously as a debtor to the bank under _the date of maturity_. whether the general public will make an extensive use of checks is doubtful. in england the conditions necessary for check transactions exist, as every one has a banking account, and all payments to be made or received are effected through the banks. to germans this seems very strange; a large part of the public cannot keep a banking account, and when it is in a position to do so either expects high rates of interest or keeps no permanent balances and pays no commissions. under such circumstances there is no sense, from a business point of view, in the shoemaker, who has no banking account, accepting a check, which he has to cash, instead of ready money; for the shoemaker has to take an unprofitable walk, and the bank has to examine the check, pay and book it, and in some cases notify by letter the customer of its payment. the ingenuous idea prevails that by some cabalistic method of procedure the bank earns something by such transactions that in reality only cause irksome work. the reichsbank, with a creative and organising spirit, laid the foundations of the system of payments by means of transfers to, and deductions from accounts current that obtains in germany, the so-called giro system.[ ] it was in every way preordained for this creative work, for at the time of its foundation it was the only financial institution whose activities extended over the whole empire, while in the territorially restricted and immature banking systems of those days the conditions were lacking for the development either of a giro business or of a system of payments by means of checks. in the giro system, with its splendid organisation, the reichsbank has created an institution that has given the german system of payments its characteristic stamp, just as the apparatus of checks and clearing houses has imparted a typical character to the system of payments in other countries, like england and the united states. the giro business in germany, however, is far from having attained the dimensions that the use of checks has in england and america. the number of long-distance transfers is about double that of the locals. this is as it should be, as it is mainly in the matter of long-distance transfers that the giro system has the advantage over the method of payment by check. in the matter of local transfers, on the other hand, giro and check are probably about on a level with respect to the number of transactions. to prevent themselves from being ruined by the competition of the reichsbank, the private banks of issue[ ] have been obliged to offer various inducements to their customers in the matter of the giro business. they make no demands in regard to a minimum balance, pay interest on deposits, do not oblige their customers to domicile bills drawn on them at the bank, and exact no charge from persons having no account with them who desire to have sums placed to the account of depositors (to some extent also making cash payments free to third parties who are nondepositors for account of depositors). the private banks of issue sustained a severe blow in on the occasion of the renewal of the bank laws through the provision prohibiting them from discounting bills at a lower rate than the reichsbank whenever its rate reaches or exceeds per cent. and not allowing them to go more than one-fourth of per cent. below the official rate and one-eighth of per cent. below whatever private rate the reichsbank may have whenever the bank rate is below per cent. these trammels imposed upon the principal business of the banks was bound to affect their giro business injuriously in spite of the efforts made to counteract the mischief by the establishment (especially in württemberg) of many new branches and agencies. these banks of issue have never had any great importance as regards the giro business, and even at the present day the volume of their transactions is relatively insignificant. the post-check system supplements in a most effective manner the giro system of the reichsbank in that it brings in connection with the five hundred establishments (more or less) of the reichsbank about , post-offices and post agencies. as all the post stations are included in the post-check system, the reichsbank's network of branches is spread out uniformly in a compact manner over the whole empire. the post-check system, inaugurated january , , would more appropriately be termed the post giro system. for at bottom its purpose is to become a giro system, a system of monetary transfers by means of assignments to, and deductions from accounts current. what it is aiming at is to make it unnecessary for german letter carriers to be lugging around millions in cash every day. the money sent through the german post-office in amounted to no less than - / billion marks. the post-check system has this in common with the giro system of the reichsbank that it extends over the whole length and breadth of the german empire, while the activity of all other institutions carrying on a system of giro, as well as check, payments, with the exception of the union of the schulze-delitzsch credit associations, is territorially or locally restricted. the giro network and that of the post-check system are connected with each other by certain channels that render it possible for payments to travel unhindered from the one system over to the other without the intervention of cash. general sketch of bank and credit organisation in germany [ ]germany witnessed a tremendous economic expansion during the twenty-year period - . there occurred a considerable increase and extensive circulation of capital. this movement of capital naturally passes through the banks and is brought about by them. as collectors and distributors of capital, the banks are, so to speak, the focal points of economic life. we are here concerned with three kinds of credit institutions--the note banks (banks of issue), the credit banks, and the land credit institutions (mortgage banks and land mortgage associations). banks of issue the present organisation of the note-bank system is based on the bank act of march , , and the supplement to this act of june , . even previous to the founding of the german empire the greater part of germany had become united commercially through the formation of the customs union (zollverein). similar further movements toward union, however, had met with but little success in the domain of currency and with none whatever in that of banking. in the newly founded german empire seven different monetary systems were in existence, and as all german states, with the exception of the free city of bremen, were on a silver basis, there was above all a great want of a well regulated and adequate circulation of gold coin. the prevalence of paper circulation was felt in the most annoying manner. thirty-two banks had the right to issue notes, and in the absence of adequate legislation, it was found on many occasions that the notes issued were not sufficiently secured. the first step which the government took to improve these conditions was the act of december , , concerning the coining of imperial gold pieces. the coinage act of july , , which proclaimed the gold standard for the empire, formally completed the organisation of the german currency system. it was recognised more and more that, in order to give effect to the gold standard, which for the time being existed merely on paper, and in order to regulate and supervise the entire currency circulation, the establishment of a central bank was an absolute necessity. this consideration finally led to the establishment of the german reichsbank, which came into being on january , , absorbing at the same time the bank of prussia (note bank). the predominance of the reichsbank over the private note banks was secured through its considerably larger capital, further through the volume of its tax-free note contingent, which exceeded considerably the amount of all the other contingents, and which subsequently was to increase still more through the accretion of the contingents of the note banks which might renounce their rights of issue. commercial banks and their relation to industry and commerce the close relation of the so-called regular banking business to that of the floating of enterprises, the trading in and the issue of shares is typical of the organisation of the german credit-bank system. the development of the railroad system beginning about the middle of the last century, which caused a considerable demand for and circulation of capital, and the greater extension of state credit, induced the banks to turn to the flotation and issue business. the period following the founding of the german empire, as mentioned before, witnessed a vigorous development of german industry, especially of the mining and (beginning with the nineties) of the electrical industries, which required a continuous inflow of new capital. at the same time german foreign commerce, particularly with oversea countries, kept on steadily increasing. under such conditions the economic policy of the banks of placing the funds entrusted to them at the service of the new development must be regarded as perfectly proper. the banks furthered this development by forming stock companies, granting long-term credit, assuming shares and bonds, placing the new industrials on the stock market and selling them to the public. there is no doubt that but for their policy of furthering the industries, the economic development of germany would have taken considerably longer than has been the case. in order to obtain the means for granting industrial credit and to dispose of the enormous amounts of newly created industrial securities, it was and is necessary to attract in as large a measure as possible the surplus funds of the community available for capital investments. for this purpose the joint-stock banks spread a network of deposit branches, destined to serve as reservoirs for the inflow of available funds, and at the same time as distributors for the industrial securities created. with the same end in view the large berlin banks, either through the acquisition or exchange of stock (for permanent investment), entered into friendly alliances with the provincial banks. it cannot be said that the banks created our industries, since the funds which are gathered by the banks in increasing volume are mainly the result of the increasing productivity of capital invested in industrial undertakings. it is true, however, that the creative power which in a comparatively short time placed german industry in its present commanding position took its origin with the men who put to practical use and in the interest of economic progress of the nation the achievements and inventions in the domain of science and technique. it is the undisputed merit of the persons at the head of the banks that they appreciated those endeavours and supported them by advancing the requisite capital, oftentimes incurring great risks for the banks. it is almost self-evident that the banks, which in carrying out their policy of furthering industry had often to assume considerable risks, have tried to secure, and in a large measure have succeeded in securing, a lasting and decisive control over industrial corporations. until the seventies of the last century the financial regulation of german foreign oversea trade had been almost exclusively in the hands of london banks. the establishment in of the deutsche bank at berlin meant a turning point in this regard. the founders of the deutsche bank had recognised that there existed in the organisation of the german banking and credit system a gap which had to be filled in order to render german foreign trade independent of the english intermediary, and to secure for german commerce a firm position in the international market. it was rather difficult to carry out this programme during the early years, the more so, because germany at that time had no gold standard and bills of exchange made out in various kinds of currency were neither known nor liked in the international market. the introduction of the gold standard in germany in did away with these difficulties, and by establishing branches at the central points of german oversea trade (bremen and hamburg) and by opening an agency in london the deutsche bank succeeded in vigorously furthering its programme. very much later the other berlin joint-stock banks, especially the disconto gesellschaft and the dresdner bank, followed the example of the deutsche bank, and during the last years particularly the berlin joint-stock banks have shown great energy in extending the sphere of their interests abroad. among the customers of the joint-stock credit banks figure chiefly members of the commercial and industrial classes, who obtain from these banks both their long- and short-term credit, and in the second place holders of medium-sized and large agricultural property, who apply to them for short-term "operation" credit. the credit demands of the members of the small-farm class and of the small independent producers are generally met by the co-operative credit societies. land credit institutions as regards the credit on landed property there is hardly a country with an organisation as perfect as germany. the beginning of this organisation dates back about one hundred and thirty years. the prussian state had emerged from the storms of the seven years' war ( - ) as a recognised european power, but the sacrifices of the years of war had completely exhausted the country. as the landed nobility was then the principal support of the state and was so regarded by the government, it became a matter of public interest to relieve the financial distress of the landed proprietors by enabling them to pay off systematically their mortgage debts. the efforts in this direction, in which the prussian king, frederick the great, personally took an active part, led to the creation of the land-mortgage associations (_landschaften_), which must be considered the first important step toward the organisation of land credit. "landschaften" are associations endowed with the rights of a corporation and operating under state control. their boards of directors have the attributes of official authority. they are autonomous institutions within the limits set by the state supervision. the landschaften obtain the funds for the granting of credit through the issues of letters of mortgage or mortgage bonds--_i. e._, as a rule, the borrowers receive the loan in the shape of mortgage bonds of the association, and it is left to them to negotiate these bonds on the stock exchange. at first the letters of mortgage were made out on a certain estate (estate debentures). but as the purchaser of such letters of mortgage was forced to keep watch over the condition and management of the mortgaged estate--even though the association itself maintained permanent control of the debtor--the sphere of circulation and the ease with which these bonds could be sold were naturally limited. it was only when the issue of corporate mortgage bonds was started, the security of which was guaranteed either by the entire mortgage claims of the association or the collective responsibility of their members, and when these bonds were given a large market through their admission to exchange transactions, that the highest degree of mobility was reached. it was mainly to meet the needs of credit on urban real estate that mortgage banks (_hypothekenbanken_) were created, and thus a special organisation of city real estate credit was formed. the greater number of the mortgage banks now in existence was founded during the decade to ; practically all the others were founded during the building boom of - . most of the mortgage banks cater exclusively to the demand for real estate credit; some others combine this specialty with other lines of banking. while the land-mortgage associations are based on the principle of co-operation and do not pursue a profit-making policy, the mortgage banks have been founded as joint-stock companies. the capital stock serves as working capital as well as guaranty fund. bonds are issued against acquired mortgages and secured by the latter. almost all these banks issue their bonds to bearer, a privilege granted them by the state. inasmuch as the bonds are held in many cases by small investors, the state, in order to protect the interests of these bondholders, from the very beginning secured to itself the right of control, limiting at the same time the field of operation of these banks by certain legal enactments and regulations. on the whole, interest rates on mortgage loans are subject to but slight variations. it should be remarked, however, that the borrower when obtaining a mortgage loan has to pay a bonus the rate of which will be considerably higher in times when money is scarce than in times when its supply is redundant. in times of a large increase in the supply of bonds the mortgage banks may go into the market to buy their own bonds. such action prevents serious fluctuations in the quotations of these securities and fits them to be objects of permanent as well as temporary investments, including the investment of funds which must be kept in liquid shape. in the present day when complaints are urged against the great indebtedness of country landowners, the fact must not be lost sight of that the transition from extensive to intensive operations in agriculture could not have been accomplished without a wide use of mortgage credit, and that such development was necessary to feed the rapidly increasing population of the country. moreover, through this great growth in the population a basis was created for industrial activity on a large scale. raiffeisen and schulze-delitzsch banks [ ]the raiffeisen bank is the schulze-delitzsch bank applied to the country, with the variations required and justified by the difference of environment. the model rules of the raiffeisen societies state that: "the object of the society is to improve the situation of its members both materially and morally, to take the necessary steps for the same, to obtain through the common guarantee the necessary capital for granting loans to members for the development of their business and their household, and to bring idle capital into productive use, for which purpose a savings bank will be attached to the society." one word in the above, viz., "morally," intimates at the outset a distinctive trait. raiffeisen always kept the moral aspect very prominently before him. he insisted that all the members of his institutions should profess the christian virtues. in his propaganda he used to the full the one intelligent power in rural districts, the parish priest or pastor. with their help he developed a new parochial life around the village bank. with their help he touched in the peasant the chord of neighbourly affection and stirred him to give it practical effect. what is the structure of a raiffeisen bank? and, first of all, whence comes the working capital? the subscribed capital of the bank is practically nil; there is nothing but the universal unlimited liability of the associating members. schulze-delitzsch, dealing with industrialists subject to unseen risks, who operated in trade matters out of sight and control of the society, obliged his associates to subscribe a considerable share capital, not only as a proof of thrift, but as a material guarantee for their individual and corporate debts. raiffeisen, dealing with agriculturists and villagers, demanded no such security, since each member possessed in his little farm, his cattle or implements, material guarantee far beyond those of any subscribed share. in addition he avoided the danger to which a share bank is always exposed, namely, that the concern may be run for the benefit of a few non-borrowing shareholders, rather than for that of the general credit-seeking members. unfortunately this natural difference was elevated, or rather dragged down, into an issue of principle; and the law of , drawn up under the guidance of the schulze-delitzsch party, insisted that every co-operative society should have shares. the raiffeisen societies comply with this by nominal shares of (say) marks[ ] on which no dividend is declared; though, occasionally, some of the annual profit is indirectly returned to individuals in the shape of a slight addition to deposit rates and a slight deduction from loan charges, calculated at the end of the year. because raiffeisen wished to create credit among small agriculturists out of the immaterial asset of mutual knowledge, he limited the size of each society to a single village. for his purpose he was right, but his partisans are not right when they look askance at the larger areas of the town bank, where the nature of the members' business and the society's control is different. all profits remain the collective property of the society, to be used for the society's good. they are divided into two classes of reserve fund--( ) reserve fund proper; ( ) foundation fund. the former is regulated in the same way as in town banks. the second corresponds to the shareholders' dividend. it is undesirable to have nothing beyond an ordinary reserve fund, because money thus placed can only be withdrawn to cover losses: while if placed in the foundation fund it can be used for positive improvements, such as the extension of premises or the establishment of a burial fund. in actual figures, the reserve funds are not so strong as in the town bank, owing in part to the lower loan charges. the loan capital, as in the town banks, is made up of small savings and deposits. it is drawn, either from within the area covered by the bank, in which case it comes both from members and non-members, the former being where possible rewarded at slightly higher rates in order to encourage membership; or from without the area, in which case it of necessity comes from non-members. savings are received in sums from one mark upwards: the smaller amounts being collected by penny stamp books, similar to those used in the post office savings banks of england. the willingness with which the peasants bring their savings to the bank is a triumphant proof of raiffeisen's contention that the small agriculturists by a combination of unlimited liability and close supervision can become absolutely credit-worthy. no savings since the foundation of the first village bank have ever been lost through bankruptcy. in addition the bank obtains credit from a central bank with which it has a current account. the funds thus raised are utilised for three kinds of credit--( ) simple loans; ( ) current accounts; ( ) property transfers. current accounts are rare except in villages where there is a little industry. with regard to the simple loan, the security, as in town banks, is personal pledge, land mortgage, or (very rarely) deposit of collateral. the personal pledge, as with schulze-delitzsch, is the most frequent. but raiffeisen interpreted it more strictly than schulze-delitzsch. not only must the credit-seeker produce an outside testimony to his character: he must also convince his society that he really merits this testimony. the member of the schulze-delitzsch bank is accepted on the strength of his general business reputation, added to his security, personal or material. the member of the raiffeisen bank, though he have the best of pledges, is rejected unless he is known in his private life to be virtuous and industrious. the man of doubtful sobriety has no chance of obtaining anything from a country bank. if it happen that an applicant is little known or new in the district, so that no one will go pledge for him, then the society, provided it is convinced of his good character, will grant a loan against land mortgage. this is not to be confused with the real credit granted by a land bank, where the value of the estate alone is considered. it is personal credit with a material caution, and it is not a long-term loan. furthermore, the society requires to know not only the character of the borrower, but also the specific object for which his loan is destined. it must be satisfied not only that the borrower wishes to employ the loan in his business, but also that the operation proposed is likely to turn out successful. property transfers are not strictly credit business. they are in the nature of investments for superfluous money, just as a town bank might invest in railway shares, with the difference that the investment is local and designed to meet indirectly the credit wants of members. the nature of the operation is as follows: a dies, leaving his estate to his heirs; and these, perhaps because they wish to leave the neighbourhood or because they want ready money for other reasons, put up the estate for sale in allotments. or perhaps a during his lifetime wishes to get rid of a part of his estate. x, y, z, neighbouring peasants, are buyers, but they can pay only gradually--which they are allowed to do by law. the credit bank steps in as intermediary. it pays to the heirs of a or to a himself, as the case may be, the price of the estate minus a small commission. x, y, z become the debtors of the credit society, paying off their debt by regular instalments, which include principal and interest. the bank cuts out small traffickers in land, usually jews, to the benefit of sellers and buyers. it benefits the sellers by charging them a moderate instead of an extravagant commission: the buyers by saving them from permanent relationship with land dealers who seek their ruin. the bank insists on regular payment of the instalments, because it wants its money back, while the dealer is constantly tempting the buyers to fall into arrears in order that he may eventually acquire the land himself. there is a second form of property transfer, where the bank not only acts as intermediary but itself holds the estate for a time. some land dealer, having obtained a mortgage on the estate of a, demands payment. a cannot pay and is forced to sell his estate by public auction. the dealer forces the sale, just when the estate market is likely to be most unfavourable, hoping to buy the estate for himself at an absurdly low rate. thereupon the bank steps in; it bids against the dealer, and if he does not offer a good price, buys the estate itself and resells it later in the year, when the market is more favourable. in this way a can pay off his debts at once. moreover, the bank does not keep the difference between the price of purchase and final resale. after the deduction of a moderate commission, it is handed over to a, who thus obtains a further sum with which he can make a fresh start. these dealings in property transfers are confined to southwest germany, where estates are sold to be split up into little lots. the banks only enter on these transactions where the following conditions are satisfied--(a) where they have a superfluity of money over and above that needed in their ordinary loan business; (b) where some party to the transaction is a member of the society: either the seller or the buyer or the creditors of the seller holding second and third mortgages, who would obtain nothing were the estate sold below its real value. what is the nature of the machinery by which this work is conducted? a raiffeisen bank is never what a schulze-delitzsch bank sometimes is; a handsome building with barred windows, within which are a number of clerks discharging a constant round of business, while the directors interview special clients in a room apart. it is a small single room, probably at the back of a farm building, opened twice a week and presided over by a single occupant--the accountant. business is apt to proceed desultorily; a small child brings in a few savings; an hour afterwards a palsied old man, signing by a cross, draws out a couple of pounds, and so on to the end of the day. but this is the unimportant part of the business. the really important part is the weekly meeting of the directors, half a dozen in number, who meet to discuss the various credit claims which have arisen. they are unpaid, as by the nature of their work they can afford to be. the accountant, their executive clerk who keeps the books, "the soul of the society," as raiffeisen called him, is the only salaried official. the committee of supervision and the general assembly function as in the town banks; except that their control is more decided, probably because their knowledge is more on a level with that of the directorate, which is itself unspecialised. what are the results achieved by the rural bank, thus operating and thus controlled? more than ten times the number of country banks grant only one-sixth of the credit afforded by the town banks. the total membership of the country banks is nearly twice as large, but the average membership per bank is nearly seven times as small. the average credit advanced per member is marks. the average rate of interest is not exactly known; it appears to be between and per cent., _i. e._, nearly per cent. cheaper than in the town bank. the duration of loans varies between one and ten years in accordance with the requirements of agriculture. they are repayable in small instalments, covering principal and interest, although the member may repay in lump if he wishes. the loan can always be called on four weeks' notice, but the right is never exercised, unless the borrower is allowing his property to deteriorate or is becoming insolvent through extravagance or has misapplied money lent for a particular purpose. the inculcation of punctuality in payment, as a moral duty, was the hardest of raiffeisen's tasks, as it was his greatest triumph. if it be asked finally what raiffeisen banks have done, which other banks have not, it may be replied that raiffeisen created out of hopeless chaos the only kind of credit organisation possible for the small agriculturist. industry necessarily brings business men together to some extent. agriculture in itself holds the farmer apart, and preserves him in lonely ignorance to be the victim of the perambulating money-lender. to-day more than per cent. of the independent agriculturists of germany are members of rural banks; and another per cent., chiefly the larger farmers, are members of town banks. the non-co-operative agriculturist is becoming the exception. the raiffeisen banks are thickest in the southwest of germany, the home of the small peasant proprietors. indeed the change wrought in many of these villages is nothing short of a revolution. the experience of the parent village bank may serve in illustration: "about an hour's walk from neuwied on the rhine is situated on a plateau bordering the westerwald the little village of anhausen. the district is not very fertile and the inhabitants are mostly small peasant proprietors, some with only sufficient land to graze a single ox or cow. an owner of ten acres is a rich man. before the year the village presented a sorry aspect; rickety buildings, untidy yards, in rainy weather running with filth; the inhabitants themselves ragged and immoral; drunkenness and quarrelling universal. houses and oxen belonged with few exceptions to jewish dealers. agricultural implements were scanty and dilapidated; and badly-worked fields brought in poor returns. the villagers had lost confidence and hope, they were the serfs of dealers and usurers. to-day anhausen is a clean and friendly-looking village, the buildings well kept, the farmyards clean even on work days. the inhabitants are well if simply clothed, and their manners are reputable. they own the cattle in their stalls. they are out of debt to dealers and usurers. modern implements are used by nearly every farmer, the value of the farms has risen and the fields, carefully and thoroughly cultivated, yield large crops." and this change, which is something more than statistics can express, is the work of a simple raiffeisen bank. both town and country banks are formed into higher unions for general organisation and educational propaganda; the country banks also unite for credit business. the partisans of the town banks are apt to pride themselves on their complete self-sufficiency. they forget that this is possible for them, not because they have sufficient funds in their own coffers to supply every credit need, but because an increasing part of their business is conducted through the trade bill of exchange, which is a marketable commodity that can be rediscounted by any outside bank, the imperial bank, the dresdner bank or any other. but agricultural societies, inasmuch as their loan papers cannot readily be bought and sold on the open market, require a special organisation. hence central organisations act as money equalisers between the different societies. in some districts money is superabundant, in others it is deficient. the central bank acts as a channel through which the abundance of one district can be drawn to supply the scarcity of another, the operations being conducted by means of current accounts with both parties. in germany as a whole the societies of small agriculturists of the southwest have always an abundance of money, which is one reason why they dispense so much of their funds in the purchase of property transfers. the societies of large agriculturists in the northeast (the ost-elbien provinces), where the capital employed on each farm is large and the population thin, are as a whole in continual want of it. interview with herr kleemann, director of the dresdner bank [ ]q. when were the first of your co-operative societies organised? a. in . they were organised on a voluntary basis and for philanthropic purposes. they developed very rapidly. the first form which developed was for the purchase of means of subsistence, such as sugar, coffee, grain, wine, cigars, etc. then they bought agricultural machinery, threshing machines, etc., which they would rent to small farmers in the country who could not purchase such machinery. they also formed societies to build houses for peasants and working people. there might be six or seven with different purposes. later on schulze-delitzsch came to the conclusion that it would serve working people and small tradesmen to have co-operative societies founded simply for the purpose of extending credit to them. that was the last development in the system. q. how many kinds of co-operative societies are there in germany? a. it is very difficult to classify them. the raiffeisen societies are confined to prussia. there are other organisations in saxony, bavaria, and different states in germany. q. the attitude of the reichsbank is the same toward them as toward any other bank? a. yes; and their bills are frequently offered and taken by the reichsbank as from other institutions. q. do they carry their reserve with the reichsbank or with the dresdner bank? a. principally with the dresdner bank, because they get interest upon it. q. do they pay interest on deposits? a. they pay an average of per cent., which may be considered as an almost permanent rate. the money they get is in most cases money for a long period. they have to compete with the savings banks. q. are the small societies at all in competition with the reichsbank, where they have a branch? a. no. there is no competition. they do a business which the reichsbank would not do. they give credit to people who would not suit the reichsbank, because they could not give the guarantee. the reichsbank interviews with herr dr. von glasenapp, vice-president, and herr dr. von lumm, director, of the reichsbank[ ] q. by whom are the shares of the reichsbank owned? a. it is all private ownership. the shares are held mostly in germany and holland, and distributed in small lots. q. would the bank discount a bill drawn by one merchant and accepted by another? a. yes. the reichsbank is not only a bank for banks, but for the commercial and industrial enterprises of the empire. q. if a railroad finds it necessary to make improvements and wants to borrow money could they get money at the reichsbank? a. only on collateral acceptable by the reichsbank. the railroad would probably in such a case go to private banks to be financed. q. assume that there is a manufacturer in bremen, making well-known articles, which he ships to a merchant in berlin and draws a bill against that merchant, would it be a satisfactory bill to the reichsbank? a. yes; but in that instance also the merchant would probably go to the private bank, where he would get a better rate of discount. q. if there were a severe money stringency, would he still go to his bank? a. yes; that would probably be the case, and his bank might afterwards take his bills to the reichsbank. q. what is the smallest bill the bank will discount? a. we have no minimum. we discount bills as low as marks. q. upon what kind of a bill does the farmer secure an advance from the bank? a. he sells his produce, draws a bill upon the purchaser, and takes the bill to the bank as any other man would do, or a bill might be drawn upon a farmer and accepted by him. q. when he borrows money in the spring with which to buy seeds, how does he secure the cash? a. he goes to his own bank for that. there are co-operative societies for this purpose, which are a great factor in germany. q. will the manager of a branch of the reichsbank renew a farmer's three months' bill if desired? a. yes; an exception is made for the farmer. other bills are not renewed. q. the bank rate is per cent. does that mean per cent. is charged on three months' bills? a. the reichsbank has only one rate of discount. there was a time when the reichsbank did a similar business to that which the bank of england does now, _i. e._, that they would purchase in the market prime bills at a more favourable rate, but in it was decided to have but one rate for everybody. q. please state the reason for the change of policy. a. the most important reason was that it was thought that a great central institution like the reichsbank, with its tasks and duties to the whole of the community, ought not to make a distinction of any class, or make an exception in favour of any one. it is the policy of the bank to serve all alike. q. is the reichsbank disposed to favour every application for discount or loans if the character of the offering be satisfactory? a. it is their duty to listen to every one who comes for accommodation, whether he has an account or not. the principle of the reichsbank is not to serve a part of the community, but the whole. the reichsbank is for everybody. q. are your deposits subject to check? a. the money is drawn against check. there are two kinds of check--white and pink. the white is for withdrawing cash over the counter, the pink for making transfers. q. have you different classes of deposits? a. no. q. do you pay interest on your deposits? a. the reichsbank does not pay interest on money deposited with it. it receives money on deposit and for transfer. most large houses keep an account with the reichsbank. the reichsbank does a large transfer business for them. q. is it the custom for banks in berlin and other important centres to carry balances in the reichsbank as a part of their reserve? a. it is the custom for the banks to keep a large part of their cash with the reichsbank. they keep only a small amount of cash in their tills. q. is that true of banks in other cities than berlin? a. yes. q. does the reichsbank pay the same taxes that the other banks do? for instance, income tax and other taxes? a. no; we are free from the government income tax, and the license fees, but we must pay the real-estate tax. q. what is the relation between this bank and other banks, such as the deutsche and the dresdner--that is, as to the character of business transacted? are you not competitors? a. it may be said that the reichsbank is more restricted by law. at a private bank the rate of discount may be much cheaper than at the reichsbank. the private banker knows his clients, and he may be willing to accept from them a bill that the reichsbank would not and could not accept. q. then there is to some extent competition? a. yes; but that competition is not large. it is not felt that the reichsbank is a competitor of other banks, but it is a public institution. the reichsbank has its official rate, which is higher than the private rate. a bank will take bills on its own account running three months or more and hold them, and in case of need will take bills running ten days or less to the reichsbank for discount. the reichsbank pays no interest and acts as agent for transfer of currency and credit to all parts of the empire without charge. q. has there been any feeling that your branches were supplanting the private local banks in small towns? a. there may have been some instances where a banker may have been dissatisfied at the reichsbank opening a branch in his locality, but as a rule the banks at such a place are quite pleased to have the reichsbank open a branch in order that they may have the benefits of its facilities. q. the government deposits are received and treated exactly the same as the deposits of farmers? a. yes. the business for the government and its departments is handled the same as for others, and no interest is paid on deposits. there is, however, one exception; every private institution is required to keep a minimum balance to its credit, but not so with the departments of the government. the empire keeps in the aggregate sufficient to compensate. q. do you always charge a higher rate of discount for bills when you have a large amount of taxed notes outstanding? a. no. on occasions the reichsbank has not increased its rate of discount above per cent. at times we have discounted even at per cent., when we have had to pay a tax of per cent. q. it has been suggested to us as a matter of policy in times of stress that it would be better for you to add the per cent. tax to the rate of discount. a. the reichsbank must be considered in the first place as a public institution which has to take care of the public interest, and secondarily as a money-making institution. q. is there any restriction as to the percentage of silver in your reserve? a. no; but there is another law, the coinage act, by which the amount of silver coined depends upon the population. they do not coin more than marks per capita. q. what steps do you take to increase your gold reserve or to protect it? a. we always have a large amount of bills of exchange payable in foreign countries, payable in gold. we also increase the rate of discount. we consider that the latter measure is the only effective one. we also make advances without interest to importers for the time the gold is in transit; we do that even in times when the ordinary gold import point is not reached. then we may raise our tariff for the purchase of foreign gold coins, as the bank of england does. q. do you take any steps to prevent exports of gold? we have been told that it is the habit of the reichsbank, in case of large exports of gold from germany, to suggest to the other banks that it is not agreeable to have the gold exported. a. it has never been the case and never will be the case that any such suggestion has been made by the reichsbank to anybody. kÖnigliche seehandlung (royal sea-trade society) interview with herr geh. oberfinanzrat lottner, director of the royal seehandlung, prussian state bank[ ] q. when was this bank organised? a. in . q. what is the capital of the bank? a. one hundred million marks. q. by whom are the shares owned? a. there are no shares; the capital is owned by the bank, which may be regarded as a juristic person, an independent legal subject. q. who invested the money? a. the money was originally invested by stockholders in the time of frederick ii, but afterwards the shareholders gave up their stock, for which they were paid. the shares were mostly owned by the king and by his associates, and they handed them over to the bank, so the capital is really owned by the bank itself. the proceeds in excess of all the expenses are paid to the prussian state. q. who is responsible for the conduct of the business? a. the president. q. has he associated with him directors? a. no; he is personally responsible. q. by whom is the president appointed? a. by the king of prussia for life. q. what are the particular functions of the bank? a. in the first place, it is an organisation to help the state of prussia. the principal part of the business is to finance the loans of the state. it may undertake the loans alone, but as a rule it heads a syndicate of the large banks. q. do you compete for deposits from merchants, manufacturing concerns, banks, etc., with the deutsche bank or the dresdner bank? a. yes, to some extent. it is not our intention to do so, but of course we practically compete in some ways. our rates on deposits are less favorable than those of these banks. q. do you take real estate mortgages? a. no. q. you are known as the sea-trade (seehandlung) society. why is that? a. frederick the great founded the seehandlung to promote prussian trade, especially the oversea trade. at one time this company had a salt monopoly and a wax monopoly. the salt which came into the different ports of prussia and the wax which came from poland were bought up by the seehandlung. at one time the seehandlung also had mills, spinning and weaving plants, iron foundries, and river steamers. we still own two industrial establishments, the flour mills in bromberg and a linen spinnery in landeshut in silesia. q. a large percentage of your funds is loaned on the stock exchange? a. yes. q. and your discount business is comparatively insignificant? a. not insignificant, but small compared with our loans on the stock exchange. q. do you receive promissory notes from customers? a. no. q. do you transact business of any other character than that heretofore mentioned? a. we have a branch known as the royal loan office, which lends money in small amounts upon the pledge of different kinds of goods as security. this was established in . in we made , loans upon watches, jewels, clothing, etc., at an average of marks per loan. two-thirds of the borrowers are labourers; last year about per cent. were widows and spinsters, also a few were mechanics--occasionally professional men--artists, actors, and the like. our rate is very low, per cent. for the year, which is low compared with the ordinary pawnshops. no other banks conduct a business of this class. deutsche bank interviews with herr paul mankiewitz, director, and herr a. blinzig, alternate, of the deutsche bank[ ] q. when was your bank organised? a. in the year . q. how is your stock owned? a. by a large number of shareholders. our shareholders are principally in germany, but also in england, france, austria, and elsewhere. q. what does the item "shares in other banks," $ , , , represent? a. this represents the purchase by us of practically the controlling interest in independent banks in the empire. we are represented upon each board and we are kept closely informed of the business. our return is in the dividends. q. a large percentage of the stock exchange business is really handled through the incorporated banks, is it not? a. yes. we ourselves have fifty members on the stock exchange. q. you mean that the deutsche bank has fifty men, members of the stock exchange, who trade there on the floor? a. yes. there is quite a difference, however, in our method of handling the business from that followed in new york. we do not have the margin system. most of our customers who do not pay in full pay at least for half the amount involved in the purchase. q. are the clearing-house associations important factors in the cities in germany? a. no. they are not associations of importance or power, but merely pieces of machinery through which cheques are cleared. q. you all go to the reichsbank to clear? a. yes; once a day. there are clearing houses and members in the empire. q. what taxes do you have to pay? a. we pay to the state per cent. on our income remaining after deduction of - / per cent. of our share capital, which is exempt, and to the city of berlin per cent. on our income. all banks pay on the same basis. q. is there a limit to the amount of discretion given to the branch directors on first-class bills? a. each of the main branches has a fixed capital arbitrarily set aside by the deutsche bank. they have a sum according to the importance of the branch, and they must do business according to it. q. the reichsbank has branches everywhere? a. yes; in every place where there is sufficient business. it has about branches. we transferred through the reichsbank last year , , , marks. our strength is the reichsbank. our branch in bremen, for instance, wants money when cotton shipments start, and the money is transferred to them. the importers in bremen sell the cotton to the large manufacturers. when they get the money the money comes back to us. q. in london the joint-stock banks usually pay interest at about - / per cent. below the bank rate. in the country they have to pay more. what is the custom here? a. there is no strict rule. the bank rate is now per cent. and we allow - / per cent. on call money. in the interior our branches allow a little more. it is the same as in england. q. does the bank rate influence your rate for discounts? a. yes; we are influenced. the bank rate is now per cent. and our private discount rate is - / per cent. q. if a mercantile customer came with a four months' bill satisfactory in character, what would be the rate to him? a. we have no fixed rate. it depends upon the man and the bill. q. how do you invest your surplus funds when you have no demand from customers? a. we buy bills in the open market, or accept offerings made to us from houses desiring to borrow. dresdner bank interviews with herr schuster and herr nathan, directors of the dresdner bank[ ] q. what is the date of your organisation? a. . q. in practice, you and all other banks endeavour to fully employ all available funds? a. yes; we only carry in the reichsbank and other banks sufficient cash for the conduct of business. q. you regard your item "bills discounted" as one of practical reserve? a. yes; it is immediately convertible into cash at the reichsbank. q. referring to the item "shares in other banks," $ , , , do you control all banks in which you have any interest? a. yes; practically. we probably have not the majority of the stock in any bank; but our holdings are sufficiently large to give us control. q. is the tendency toward bank consolidation? are the smaller banks becoming more closely affiliated with the larger banks? a. yes; because it serves a mutual advantage. the smaller bank needs better facilities to take care of the increasing business. if a bank wants to increase its capital, and the shareholders do not care to subscribe for the increase, the new shares are frequently offered to us. we look out for the business of these banks in the centres and give them participations in some of our important undertakings. q. in great britain we found that banking interests were practically controlled by from to large banks. does that condition prevail in germany? a. no; but the tendency is in that direction. one difference between the banks of england and germany is this--in england the primary purpose of the banks seems to be to secure large earnings for their shareholders. in germany our banks are largely responsible for the development in the empire, having fostered and built up its industries. q. would it be any reflection upon a bank if it should go to the reichsbank for discounts or loans in easy times? a. no; we seldom go in easy times, however, because there is no need of our doing so. q. is there strong competition between the important banks of berlin or do they work more or less together? a. of course there is strong competition between the large, important banks, but there is no lack of harmony, and they very frequently work together in syndicate operations. while it is the desire and endeavour of each bank to build up its business, it must be recognised that each institution has more or less its own field of operation, which is in a measure respected by the other banks. as, for instance, the deutsche bank has done a very large volume of business with turkey, and business emanating from that source is expected to and naturally does go to the deutsche bank, while another institution may have been largely identified with roumania, or another with some large local interest. we ourselves are recognised as representing the krupp interest and have just recently formed a syndicate to finance one of their operations. q. our understanding is that a merchant, a customer of yours, may arrange with you for a credit of, say, , marks, which may or may not be secured, and may draw a ninety-day bill upon you for that amount. he may send that bill to the deutsche bank for discount. if the deutsche bank will discount it, they present it to you and you accept it. will you kindly state why this custom prevails? a. one reason is that it makes a bill which is acceptable at the reichsbank and is a prime bill. we receive one-fourth of per cent., or more, for our acceptance, and the deutsche bank, or any other bank discounting, invests its money at a rate for the period. it might be that we would prefer to give our customers a cash credit rather than to accept his bill, in which event we would so arrange. q. then this practically enables you to sell your credit without using your cash? a. yes. q. we understand this is the usual custom in germany. a. yes. q. is it not a fact that in the last analysis the customer who uses the money usually pays more than the bank rate--that is, would it not cost him, in such a transaction to-day, say or per cent., while the bank rate is per cent.? a. yes. q. is it your endeavour to reach the small country towns? a. no. q. in the united states we have brokers who handle commercial paper, and many of the banks purchase it to employ their surplus funds. in london we found discount houses whose sole business was to handle paper for sale to banks to employ their surplus funds. what corresponds to that agency in berlin? a. in berlin there are two brokers who handle prime bills, but they are not an important factor. q. how do you employ your surplus funds? a. we buy bills in the market or through these brokers. q. in employing your surplus funds do you buy any other bills than those which the reichsbank would accept? a. no. q. would you consider the issue of taxed notes by the reichsbank in a sense an evidence of an abnormal condition? a. no: on the contrary, it is quite normal. last year it happened twenty-five times. q. in times of trouble do the large banks, like your own, the deutsche bank, and disconto, co-operate with the reichsbank in an endeavour to prevent the exportation of gold? a. yes. opinions are divided as to whether it is for the good of our country to do so or not. last year, for instance, many people asked for gold. it was refused at first in some quarters; later we shipped freely. q. are you members of the stock exchange? a. all banks and bankers are members of the stock exchange. q. by virtue of their being banks? a. yes; they have to pay a tax for the exchange. q. are the seats expensive? a. no. you do not buy a seat. there is no limit to the number of people admitted. we have from twenty to thirty people go to execute our orders. bank des berliner kassen-vereins interview with herr hoppenstedt[ ] q. when was this bank organised? a. in , under the general companies act. q. what are its particular functions? a. this bank might be called strictly a clearing bank. it clears transactions made on the stock exchange and also cheques on banks which do not clear through the reichsbank clearing house. as you know, our banks do a large stock exchange business. it is their custom to send to us all securities sold to others clearing through us with a list of the purchasers. we charge the purchasers the amounts due from them and credit the amounts received from them, balancing every night. the securities are delivered to the various purchasers. _some settlements are made daily and others monthly._ a large volume of cheques and bills are also cleared. this is simply a clearing business. q. you show loans and discounts in your statement. what is the character of these? a. we invest our funds in first-class loans and prime bills. q. is this bank owned by the other banks? a. it is partly owned by other banks. there is also a commission of shareholders of the bank, among whom are the first banks of our city. these are members of our board. q. is it the custom for all banks which clear through you to have a balance in order to facilitate the payment of debits through clearing? a. yes. footnotes: [ ] adapted from geh. oberfinanzrat waldemar mueller, _the organization of credit and banking arrangements in germany_; max wittner and siegfried wolff, _the method of payment by means of bank-account transfers and the use of checks in germany_. publications of the national monetary commission, senate document no. , st congress, _ nd session_, pp. - . [ ] in order to facilitate its giro business and reduce the friction to a minimum, the reichsbank has special printed forms prepared for the various kinds of transactions, the use of which is made compulsory on the public. for a simple transfer of money from one customer to another, whether they be in the same town or in different places, the "red check" is employed, which is filled out by the party making the transfer and handed in to the bank. it is not a check in the proper sense of the term, but is so called because the printed forms resemble checks and are put up in books in the same way as checks. the word "check" does not occur in the printed matter of the blank; neither is the instrument transferable. when a number of payments are made simultaneously the party making the transfers is furnished with a blanket form on which the names of the individual firms and the various sums are entered and which has to be accompanied by a red check covering the aggregate amount. for the so-called "great banks" of berlin, some of which have a volume of transfer transactions amounting to as much as one hundred transfers for each bank per diem, there are blanket forms which are of a different colour for each bank. when cash is wanted the so-called "white check" is employed. this is a legally constituted check. there are special printed forms for the use of those who have no account with the reichsbank. [ ] banks of issue were formerly numerous in germany. gradually, however, nearly all of them renounced the privilege of issue, as the laws relating to banking made their existence as banks of issue more and more difficult. at the present time there are only such banks besides the reichsbank, viz.: the bayerische notenbank, the wurttembergische notenbank, the sachsische bank, and the badische bank. [ ] adapted from robert franz, _the statistical history of the german banking system, - _, publications of the national monetary commission, senate document no. , st congress, _ nd session_, pp. - . [ ] adapted from c.r. fay, _co-operation at home and abroad_, pp. - , . p.s. king and son, london. . [ ] occasionally even as low as _d._ or less. [ ] adapted from _interviews on the banking and currency systems of england, scotland, france, germany, switzerland, and italy_, publications of the national monetary commission, senate document no. , st congress, d. session, pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] _ibid._, pp. , . chapter xxvi banking in south america [ ]the special interest in south american banking which exists at this time is the product of at least four distinct factors: first. it has been evident for some years that the trade between north and south america is rapidly developing. in the ten years, - , the exports from the united states to the ten republics of south america increased per cent. against an increase of all our exports during the same period of per cent. in spite of inexperience, crude methods, lack of banks and of ships we have made notable gains in south american trade. there seems to be no reason to question the probability of a continued rapid increase during the next few years. our growing surplus for foreign investment second. other forces have gradually been bringing this country more and more into the position of looking for investment opportunities abroad. while it is true that the united states is a debtor nation in the sense that a large amount (estimated at $ , , , to $ , , , ) of european capital is invested here, it is also true, on the other hand, that the national income has for some years been sufficient to meet annual payments abroad, to make large fresh investments in our own enterprises, and still to leave a considerable surplus for investment in neighbouring countries. it is estimated that american capital in mexico and canada amounts approximately to $ , , , . in south america there are already american investments of perhaps $ , , to $ , , . as the national income and savings expand and as the opportunities for exceptionally profitable investment within this country decrease, it is clear that there must be a stronger and stronger tendency toward investment abroad. the immense sums, for instance, that have been flowing into railroad construction and rebuilding will not be needed to so great an extent in future. a considerable proportion of this overflow of capital may certainly be expected to spread into south america. greater lending power of banks third. the adoption of the federal reserve system has made a remarkable improvement in the handling of gold and of credit. it has released and made available for other forms of financing great sums which were formerly tied up in scattered reserves. we have only to look at the monetary history of the german empire during the last forty years to see how powerful an influence on industry, trade, and investment is exerted by the centralisation and control of bank reserves. the london _statist_ has calculated the ultimate increased lending power of american banks, under the federal reserve system, at $ , , , . european war fourth. the european war has suddenly stimulated the tendencies which were previously evident. it has temporarily cut off a considerable amount of european trade in south america, thus leaving an opening for even more rapid development of our trade than would otherwise have taken place. it has deprived south america for a period of several years of the steady inflow of european capital. it has enormously increased the exports and decreased the imports of this country, thus placing suddenly at our disposal greatly enlarged financial power, possibly as much as $ , , , per annum above normal. its ultimate effect, we may safely assume, must be to increase considerably rates of interest the world over, thus stimulating the tendency toward an enlarged outflow of capital from the united states into neighbouring countries. by reason of the war the same kind of a situation that would otherwise have developed slowly in a period of years now confronts us suddenly when we are as yet in a state of financial unpreparedness. the new machinery provided by the federal reserve act is not yet fully utilised or adjusted in its final form. it will require careful study, combined with prompt action, to utilise the financial opportunities now before us with greatest advantage to all concerned. english banks in south america although english interests have share holdings in other institutions, there are only five banks in south america that stand out as unmistakably british. in the order of their development, these are the london and river plate, london and brazilian, british bank of south america, anglo-south american bank, and commercial bank of spanish america. each institution, with one exception, has concentrated on one country, in which it has established most of its branches and to which it has devoted its first efforts. the exception is the british bank of south america, which has followed the contrary policy of having only a few branches strategically located in important cities; in other words, this bank has concentrated on selected cities rather than on a given territory. english trade and banks develop together the development of commercial banking by british interests has everywhere gone hand in hand with the development of british investment and british trade. the accounts of the railways, mercantile firms, steamship lines, public utilities, and other enterprises conducted by their fellow countrymen form the great bulk of the business of the four leading institutions; the commercial bank of spanish america is, however, operating under different conditions. indeed, it may even be said--again speaking in broad terms--that the english banks have made comparatively little effort to secure the accounts of domestic enterprises. it is certainly safe to say that they have not made efforts in this field at all comparable with the efforts of the german, spanish, french, and italian banks. it is interesting to note also in this connection that the management and even the clerical force are, with few exceptions, brought over from england. after more than fifty years the three leading institutions remain as distinctively british as they were at the beginning. german banks in south america to understand the energetic development of german banks in south america during the last forty-five years we must consider the conditions prevailing in germany during that period and the strong forces working toward industrial and banking expansion. beginning immediately after the franco-prussian war of - , german industrial interests, with the strong support of the german government, began to struggle more vigorously and more effectively than ever before for a larger share of trade in international markets, particularly in the far east and in south america. it was clearly realised that germany needed a large and rapidly growing export trade in order to maintain her own prosperous development. in order to get this trade it was necessary to follow a definite programme which included the provision of better shipping facilities and of better facilities for financing. up to that time germany had been fully as dependent as the united states is to-day upon foreign ships and foreign banks. it was also clearly realised that the tendency was toward large scale production in most industries and that those concerns which could secure large sales in the world-wide markets would soon come to enjoy an overwhelming advantage over smaller competitors. the german industries, in conjunction with the great german banks, began to follow, therefore, a programme of concentration, which has since gone steadily forward. these two forces--expansion in foreign markets and concentration at home--have had a controlling influence on germany's foreign trade, and incidentally on her foreign banking. other influences in bank expansion another influence of importance is the fairly well-marked division of german industrial interests into a small number of groups, each one of which centres about and is allied to one of the great banks. to some extent this is true in other countries, especially where banking is centralised--notably in canada, for instance--but it is especially clear and well recognised in germany. hence each one of the great banks is under especially strong pressure to foster and develop the interests of its important clients, even at the expense of some temporary risk or sacrifice for itself. this is doubtless the primary motive which has induced the great german banks one after another to enter foreign fields. there is a wide-spread notion outside germany that the german government has itself actively intervened for the purpose of stimulating foreign trade expansion and has brought pressure to bear on german banking interests, leading them to push ahead more rapidly than their private business interests would have required. this idea may or may not be correct; so far as the writer is aware there is no special evidence pertaining to south american banking development to sustain it. at any rate, it is easy to explain the policy of these banks as being based upon purely business considerations. as a matter of fact, there has probably been much exaggeration of the thought that the german banks are primarily self-sacrificing instruments of an ambitious national programme rather than ordinary business enterprises. the statement is frequently repeated that the english banks in south america aim first and all the time for profits, while the german banks aim for development of their national interests. of the four large german banks in south america only one is remarkable for energetic and successful expansion. the others have been moderately successful. the difference is to all appearances chiefly due to management. although these four banks were presumably designed primarily to advance the business interests of the banks which organised them, they have incidentally had a powerful influence on investment of capital and on trade. the german manufacturers of machinery, steel products, and the like, have been especially helped by the ability of the german banks, both in south america and at home, to help in finding capital and in financing. the german banks have not found political or economic conditions in south america which were insuperable obstacles to sound or profitable banking. other banking institutions other nationalities besides the english and the germans have invaded the banking field in south america. the french, the italians, and the spanish have all been active, particularly on the east coast, and are represented by large institutions. american banks only after the federal reserve act went into force in november, , was it possible for any bank organised under the national-bank act of the united states to establish branches abroad. the act restricts this privilege to institutions having capital and surplus of $ , , or more, and gives the federal reserve board discretion to withhold its consent. up to this writing the only institution which has taken advantage of the powers granted by the federal reserve act to enter south america is the national city bank of new york, which has established branches in buenos aires, montevideo, rio de janeiro, santos, and são paulo. other branches will probably be established in the near future. especial attention is being given to the collection of credit information. the bank also maintains a foreign trade department, which gives information and advice to its depositors as to building up business abroad. this department is now equipped to make specific reports on trade openings in argentina, uruguay, brazil, colombia, and venezuela. the buenos aires branch, which was the one first established, is understood to have done a satisfactory amount of exchange business. it stood ninth in volume of clearings in january, , among the twenty-odd commercial banks of that city. the other branches have not been in operation long enough to show clear results. the branches in argentina (including the subbranch at montevideo) and brazil have each $ , , allocated to them--though this is purely formal, as the bank's whole capital and surplus are behind the obligations of every branch. the expansion of the national city bank in south america has been much more rapid than that of any preceding institutions, including even the aggressive german banks. as a natural result, there is apparently less effort at this stage to build up local connections and influence in each city. so far the policy of the national city bank appears to be to furnish foreign trade facilities to american exporters over as wide a territory as possible, rather than to concentrate its activities in any restricted region. other national banks in this country are known to be desirous of aiding in the financing of foreign trade, but have not up to this time found it practicable to take action under the provisions of the banking law as it now stands. domestic banks there are many important and successful banks in south american countries which are strictly domestic institutions, not only incorporated under the laws of the country in which they do business, but owned and managed by local interests. the notion sometimes seriously put forward that south american banking is almost wholly in the hands of foreigners is quite unfounded. it is true that trading operations are generally handled either by foreign houses or by houses in which there is a strong foreign influence and that the financing of nearly all foreign trade and of much local trade is likely to go to foreign banks. but the accounts of the rest of the domestic trading firms, of land owners, and of governmental corporations, as a rule, gravitate toward the domestic banks. following is an approximate statement of the total of deposits and credits in account current in each south american country on or about december , , and an estimate of the distribution between foreign and domestic institutions: ---------------------+-------------+------------------+------------------ countries. | total bank | in | in | deposits. | european banks. | domestic banks. ---------------------+-------------+------------+-----+------------+----- | | amount. | per | amount. | per | | |cent.| |cent. | | | | | brazil | $ , , | $ , , | |$ , , | uruguay | , , | , , | | , , | argentina | , , | , , | | , , | paraguay | , , | | | , , | +-------------+------------+-----+------------+----- total, east coast | , , | , , | | , , | | | | | | chile | , , | , , | | , , | bolivia | , , | , , | | , , | peru | , , | , , | | , , | ecuador | , , | | | , , | +-------------+------------+-----+------------+----- total, west coast | , , | , , | | , , | | | | | | colombia | , , | | | , , | venezuela | , , | | | , , | +-------------+------------+-----+------------+----- total, north coast | , , | | | , , | | | | | | total, south america | , , , | , , | | , , | ---------------------+-------------+------------+-----+------------+----- the great banco de la nación argentina (bank of the argentine nation) is an official institution, all the shares of which are owned by the national government. it is a successor of the former national bank, which was driven into insolvency in the great financial crisis of and was afterwards liquidated. although it was organised during a period of disaster and there were many prophecies of its certain failure, the bank of the argentine nation has had a wonderful development and to-day ranks as the seventeenth in size among the great banks of the world. the bank pays no dividends, but carries per cent. of its profits to the credit of capital account and per cent. to reserves. entirely through this process the capital and reserve funds have increased from approximately $ , , in to over $ , , at the present time. during the same period deposits have grown from $ , , to $ , , , and discounts and advances from $ , , to $ , , . there are now more than branches. the bank differs from most other governmental institutions in that it carries on distinctly a commercial banking business more or less in competition with private commercial banks. until the crisis of it did no rediscounting for other banks, and even during the crisis its activities in assisting other banks were much restricted. land mortgage banks in several of the south american countries there is a well-organised system of land-mortgage banks following european models. in some cases the banks are owned and operated by the national government and in other cases receive some special support or guarantee. the plan under which they all operate is the following: the owner of land who desires to raise money on mortgage approaches the bank and requests an investigation and appraisal, the expenses of which he usually pays. if the property is shown to be unencumbered with prior claims and meets other conditions, the bank delivers to the owner the mortgage bonds in convenient denominations up to a given proportion, usually per cent., of the appraised value. these mortgage bonds are part of a series and are themselves secured, not by any specific piece of property, but by all the property covered by the series; they are also backed by the credit of the issuing bank. the owner of the property then offers the bonds for sale through a broker, and in this way obtains the desired funds. he pays the bank a small commission, from one-fourth of per cent. to per cent., for its services. in argentina, where this system is developed to its highest extent, these land-mortgage bonds are known as "cedulas," and are issued by the banco hipotecario nacional (national land mortgage bank). at the present time the argentine "cedulas" tend to sell on a per cent. basis, more or less. uruguay, brazil, and chile all have similar issues, which sell on bases ranging from to per cent. or even higher. broadly speaking, and without attempting to assign a definite value to any one of these issues, they are sound, conservatively issued, well protected, and under normal conditions readily marketable. the more important issues have been widely sold in england, france, and belgium. if they were properly introduced and made well-known in the united states, there is no reason to question their finding a good market here also. side by side with the land-mortgage banks there are operating in the argentine a number of english mortgage companies, which directly invest their own funds in land mortgages and have earned highly satisfactory profits. in several countries there are state-owned savings banks, a large portion of the funds of which also go into land mortgages. conditions of commercial banking a banking business, like any other, must adapt itself to surrounding conditions, including laws, business customs, precedents created by older banks, and the like. in south america these conditions differ in a number of respects from those which prevail in the united states. probably the first impression of most observers gives an exaggerated idea of the differences. however, they should be fully and carefully considered. the chief differences that directly affect banking operations are the following: ( ) comparative absence of banking regulation on the part of governments or associations; ( ) national colonies; ( ) social character of business relations; ( ) lack of highly developed economic organisation; ( ) relatively high and stable rates of interest; and ( ) in some countries fluctuating currencies. the first five of these circumstances call for brief comment. little control or co-operation not only is there a marked absence of laws directly applicable to banking concerns, but there is also an equally noteworthy absence of control exercised either by the government or by associations among the banks. even the large governmental or semi-governmental banks in brazil, uruguay, argentina, chile, and bolivia are competitive with the other banks. whatever influence they exercise is secured through their active and direct competition, not through any special authority over the other banks conferred upon them. in the fall of , for the first time, there was some rediscounting of the paper held by other banks on the part of the bank of the argentine nation and of the bank of the republic of uruguay; but this tendency did not go far. the other banks objected to placing information as to their relations with customers in the hands of the governmental institutions. in other countries there has not been even this much of an attempt toward fulfilling the functions of a central bank of rediscount. it is difficult to secure in most of the south american cities even the most elementary kind of co-operation among the banking institutions. how is it possible that they should continue to stand apart when they would obviously gain so much by coming together? a partial answer is to be found in the peculiarity that has already been pointed out, namely, the fact that many of the more powerful institutions are the offspring of european countries. each one is fighting to support the trade of a certain well-defined group of clients. the national antagonisms among them are deep-seated and sometimes virulent. all this was true even before the european war. it will be tenfold true for a number of years to follow. national colonies this leads to mention of the second condition, one which operates in favour of european-owned banks to the relative disadvantage perhaps of american banks. this condition is the presence in some of the large south american cities, notably buenos aires, of a large colony representing each one of several important european nations. naturally the tendency of each colony is to support banks of its own nationality. on the whole, although this matter of national affiliations is undoubtedly a factor to be reckoned with, it appears to be by no means decisive. the german banks, for instance, have been able to expand with much greater rapidity than we should have been justified in expecting on the basis of their national trade and national colonies alone. this is true likewise of the italian and french banks. a great proportion of the business men of south america, even those of foreign origin, are governed less by their national sentiments than by their business interests. personal character of business dealings to an observer accustomed to european or american methods, one of the most striking features of business life in the south american cities is its strongly personal and social flavour. we are accustomed in this country to emphasise the principle that friendship is not a safe guide in business dealings. in south america the contrary is more nearly true. family ties are apt to be a controlling factor in choosing partners and employés. if one's ultimate object is to have business dealings with a firm, he must first cultivate the personal friendship of the head of the firm. social relations and business relations become confused, and it is hopeless to expect the purely impersonal view of a business proposition that is considered correct in this country. like all sweeping statements, this one is subject to exceptions. there are many american, german, and english firms, especially in buenos aires, which prefer what we denominate "businesslike methods," but they are not numerous enough to give the tone to business life. this is a condition which directly affects banking practice. it makes it very difficult, for example, to introduce the custom of securing full financial statements from all applicants for credit. the request for a statement is apt to be construed (as was the case in this country not many years ago) as a reflection on the personal honesty and credit standing of the applicant. for the same reason it is difficult, and may frequently be poor policy, for a bank officer to ask a customer a direct question as to the status of his business. he is likely not to take an impersonal attitude toward the question, but to resent it as if it were an attempt to pry into his purely personal affairs. consequently, all business men, including bankers, are forced to rely to a great extent in estimating the credit standing of individuals and firms on their personal impressions, on such information as they are able to secure through indirect hints and questions and on the business gossip which they pick up. it must be remembered that, except for buenos aires, most of the business communities are comparatively small and isolated. there is little opportunity, therefore, for long-continued fraud. a man who shows traces of dishonesty is much more plainly marked than in larger communities. as a consequence, the lack of the machinery and the customs that we consider indispensable in extending credit does not prevent the formation of correct ideas as to the wealth and character of a business man. undeveloped economic organisation most of the south american countries, we should keep in mind, are still sparsely populated and have no need for the elaborate machinery of trade and finance which exists in europe and north america. the region farthest advanced in its economic development, the river plate basin, may be roughly compared to agricultural states like iowa, kansas, and nebraska as they were thirty years ago. farming methods are usually not economical. the small farmers have little money of their own, their lands are heavily mortgaged, and they are "carried" from one crop to another by the local general retailer, who makes advances to them both in goods and in money. the retailer must in turn secure liberal credits from wholesalers, who are in their turn partly "carried" by the banks. there is no clear-cut distinction between dealers in commodities and bankers, for the dealers are forced to finance most of their own sales. such an arrangement of course favours extravagant credits, high prices, speculation, and crises, just as it did in the united states. it is rapidly giving way to a more complex organisation, in which the farmer has funds of his own, does his short-term borrowing at a bank, and pays cash for his purchases. without attempting to comment on intermediate grades of organisation we may consider briefly the manner in which trade and finance are conducted in the north coast countries. an officer of a bank there asserts that banking in the north coast countries is not to any great extent a matter of handling currency or money funds. the intermediary system of brokers, merchants, and other middlemen between the producer and his market, to which we are accustomed, is lacking, and the banker must take the place of all of them. he must himself inspect and sell produce. loans are made, for instance, secured by growing crops; the bank sends a man to the plantation to look over the coffee or cocoa, or whatever the crop may be, and report on its condition and prospects; to protect itself the bank sees that it is properly prepared for shipment, and takes care of the sale in the new york, london, or hamburg market. the bank collects the proceeds and credits the customer with his share. interest rates run from to per cent. and commissions for selling from to per cent. interest rates interest rates average considerably higher--even making allowance for increased risk--in south america than in the united states. they are, however, much more stable and more uniform over the whole continent. the uniformity is no doubt to be ascribed chiefly to the large english and german banks, with their branches in several different countries and their ready access to european financial centres. the stability in rates over a period of years is presumably due in part to the relatively gradual development of banking, commerce, and production, so that sudden shifts in the demand for and supply of banking capital are not frequent. there are, however, a number of exceptions to the general stability. in argentina the crop-moving season creates, though to a much smaller extent, the same kind of extra demand for currency as in the united states, and tends to make some seasonal variations in discount rates. they vary from as low as per cent. to as high as per cent., but do not normally move far from or per cent. compensation of directorate the german, french, italian, spanish, and many of the domestic banks, especially in argentina and peru, follow the european custom of compensating the home office directorate by allowing them a fixed percentage of the net profits. the president, manager, founder, and others may also be compensated in the same way. the net profits of the banco español del río de la plata are distributed: - / per cent. to certain specified charities, per cent. to the founder, per cent. to the reserve fund, per cent. to the directors and managers, - / per cent. to the fund for employés, per cent. to the shareholders for dividends and dividend reserves; those of the banco de italia y río de la plata: / per cent. to charity, per cent. to the reserve fund, per cent. to the directorate, - / per cent. to the fund for employés, per cent. to the shareholders. there is apparently no general rule which governs the distribution except possibly that the larger the bank the smaller is the percentage for the directorate and management. in england the directors are more likely to receive a fixed compensation. whether this plan of having a paid directorate works better than the american method of having a directorate made up usually of some of the larger shareholders, whose payment is purely nominal, is an open question. it is largely a matter of national custom. classes of business of foreign banks first. the foreign banks in south america usually start by devoting a large proportion of their energy and capital to operations in exchange. second. in this connection they purchase and make advances against commercial bills drawn on importers in the countries where they are doing business. third. at the same time the home office in london, hamburg, or berlin is probably developing a business in acceptances which involves comparatively little direct expense and allows considerable profits. fourth. all south american banks are called upon to handle collection of drafts and sometimes to take care of ordinary mercantile transactions, both on a commission basis. fifth. an activity which may be of some importance from the beginning consists of underwriting and selling securities. sixth. as quickly as possible the foreign banks build up a local account current and loan and discount business. seventh. some of the banks, especially the german banks, have participations in syndicates and in industrial enterprises. eighth. in some branches they receive money and securities for safekeeping or rent safe-deposit boxes. ninth. many banks have savings and mortgage-loan departments. none of the distinctively foreign banks in south america has as yet issued circulating notes; this is being done, however, by some of the domestic banks in which foreign capital is heavily interested. there may, of course, be other miscellaneous activities. footnotes: [ ] adapted from william h. lough, _banking opportunities in south america_, department of commerce, special agents series, no. . washington. . chapter xxvii agricultural credit in the united states while agricultural credit has been a subject of intermittent discussion in the united states for almost a generation, the movement has had its main development within recent years. in november, , the american bankers' association created a committee to study land and agricultural credit at home and abroad. in march, , american ambassadors and ministers were instructed by the state department to gather information concerning rural credit institutions in europe. a year later the southern commercial congress also instituted a careful investigation. these acts, and reports published gave the movement a national character and scope. several states, such as massachusetts, new york, and missouri, have recently made legislative provision for rural credit institutions and during the last two years very numerous bills pertaining to rural credit have been introduced in congress. it seems not unlikely that legislation providing for the establishment of a federal system of land banks and rural credit associations, subsidized by the government, will be enacted in the near future. the functions and work of rural credit institutions in europe, briefly discussed in the first two selections of this chapter, are treated more fully in connection with the chapters on the banking systems of european countries, notably those of germany and france. [ ]various european nations, with soil naturally inferior to ours, have established agricultural credit and thereby have greatly eased the burden of the cost of living. hitherto we have lived on the bountiful overflow of our rich land, and the pinch of necessity has not been felt; but now our population has grown enormous, our standards of living have been greatly raised, and our land is showing the effect of generations of taking out with very little putting back. we must do better or suffer. by the installation of agricultural credit, farming will not only be made more profitable, but it will in the end make country life more attractive. the banking system of to-day is adapted to the needs of manufacture and commerce. the processes of nature are so much slower, however, that banking for farmers must be organised on a basis of credit for much longer periods. our present system of borrowing on land is by mortgages running from three to five years, the entire principal coming due at one time. this is expensive, involving renewals, and dangerous from the possibility of the mortgage falling due at a time of restricted credit so that it cannot be renewed. on the continent of europe this business is handled by so-called land-mortgage banks, or rather associations. the mortgages granted are pledged for the security of bonds which the institution issues and sells in the general market. these bonds have no fixed maturity, but can be retired at par or some small premium at any time. when the borrower mortgages his land to the bank he agrees to pay a certain fixed sum semi-annually. this is called the "annuity" and is composed of the annual interest plus an amount, generally / per cent., toward the reduction of the principal of the debt and known as "amortisation," and an additional amount, about / per cent., toward the expenses of the bank. the borrower, therefore, at once begins to extinguish the principal of the debt; and as each year the principal decreases, the interest, of course, decreases also, and, the annuity being fixed, the proportion of it applicable toward the extinction of the mortgage increases. thus it happens that, beginning with a payment of / per cent. toward principal, the mortgage bearing per cent. to - / per cent., which are the general rates, the entire debt is extinguished in between fifty and sixty years. the mortgaging of land is known as long-term credit, and it may be handled by joint-stock institutions or by associations of borrowers, but in institutions furnishing the credit required by farmers for working capital, such as the purchase of seeds, fertilizer, payment for labour, etc., which is known as short-term credit, the aim that the borrower should be primarily considered rather than the lender assumes fundamental importance. on the continent of europe a solution of the problem of short-term credit is found in the organisation of banks by the application of so-called co-operative principles. the purpose is to provide organisations in which the borrower receives consideration rather than the lender, also to keep the money of any body of individuals for the use of that body. under our present system a great deal of money belonging to farmers finds its way into wall street. at present the lenders are organised; whereas the borrower stands alone. agricultural credit conditions in the united states [ ]the united states, although the leading country of the world in the amount of its agricultural products and in the extent of its banking business, is behind nearly every other progressive country of importance in the development of agricultural credit, _i. e._, short-time non-mortgage credit. our manufacturing and commercial businesses are financed largely by means of such credit, and the capital invested in these industries is thereby rendered manifoldly efficient; not so with agriculture. most farmers apparently make little or no use of short-time credit. there seems to be a wide acceptance in this country even among the farmers themselves of the dictum of louis xiv, that: "credit supports agriculture, as the cord supports the hanged." is this a correct description of the situation? if so, what is the explanation, and what remedies if any are needed? the object of this paper is to throw light upon the answers to these questions. first, as to existing banking facilities for agricultural credit, and their utilization by farmers. it is well known that the banking capital of the country is concentrated to a great extent in our large cities--to a greater extent than it would be if we had a well-developed system of branch banks like canada--and that the banks of these cities are prevented by reason of their location from making many agricultural loans, even if they were so inclined. of the , national banks in the united states september , , or . per cent. were located in the dozen largest cities of the country.[ ] the national banks of these twelve cities, representing but per cent. of the population of the country, had per cent. of the national banking capital (capital, surplus, and undivided profits), per cent. of the individual deposits, and per cent. of the loans. it should be noted, however, that since the act of , authorizing the establishment of national banks with a capital of less than $ , in small towns, there has been a continual and rapid increase in the number of national banks in small communities. on september , , out of the total , national banks there were , with a capital of $ , , and therefore presumably located in towns of less than , population, with a capital between $ , and $ , , and therefore presumably in towns of less than , population, and , with a capital between $ , and $ , . except for banks in towns not exceeding , population, the law as amended in does not permit any national bank to be organized with a capital less than $ , . are the national banks which are accessible to farmers in a position under the law to meet farmers' needs? the answer to this question must be in the affirmative. aside from the fact that national banks are not permitted to make loans on real estate security,[ ] there is no restriction in the national banking act which would interfere with loans to farmers for agricultural purposes. personal security alone is legally acceptable; the range of possible collateral security is practically unlimited; and there is no limitation fixed by law as to the period of loans. national banks therefore have a very free hand in regard to loans to farmers. when we inquire concerning agricultural credit in banks under state charters we find conditions varying with the different states, but, with a few minor qualifications, it may be said that the state banking laws are free from restrictions that would hamper state banks and trust companies in extending credit liberally to responsible farmers. they are in a much better position in one respect to deal with farmers than are national banks, that is, in the matter of accepting real estate security. no state denies state banks this privilege, and such restrictions as exist upon its exercise are generally not onerous. if commercial banks are comparatively unhampered by law in making short-time loans to farmers, it may be asked: to what extent are such loans made? unfortunately practically no information is available on this question. in answer to an inquiry the comptroller of the currency wrote, under date of may of this year, that no information with reference to short-time loans made to farmers by national banks had ever been compiled by the comptroller's office. the writer has found no trace of any investigation of this subject by state banking departments. for about a year he has taken occasion to inquire at every opportunity of individual bankers concerning their experience with regard to loans to farmers in different parts of the country. the replies received are so divergent that no conclusion can be drawn from them, except that the practice varies widely in different sections of the country and even in different communities in the same section, and that probably the farmers of the north central and western states borrow of commercial banks more than do those of the eastern and southern states. there is not sufficient evidence, however, for this latter inference to make it much more than a guess. in the absence of any comprehensive data, i shall resort to the unsatisfactory but representative replies from different parts of the country. neither of the two national banks in the city of ithaca, n. y., makes any appreciable amount of loans to farmers. both claim to be willing to do so, but say there is practically no demand. in some of the neighboring cities, however, such loans by national banks are more common. the cashier of a national bank in a town of about population in an agricultural section of northeastern pennsylvania writes: our farmers as a rule are not large borrowers and want loans only in small amounts for short periods. farmers in general will not go on each other's paper no matter how good the parties are, for they have been so often taken in by wild-cat schemes that they are shy when their names are required to be placed upon paper. they realize also that they are not familiar with business methods in the commercial world and dare not trust themselves. there is a moderate amount of borrowing by farmers in western new jersey. estimates made by bankers in princeton as to the proportion of farmers in that neighborhood who borrow for short periods of local banks vary from to per cent. a former president of a national bank in indianapolis writes: we came very little in contact with farmers. we made special effort to secure such business by sending to a considerable mailing list of carefully selected farmers, circulars and personal letters ... but the business did not come. my inference was that they dealt with the nearby small banks. of the situation in lafayette, indiana, a former vice-president of a national bank, writes: about per cent. of our business was with farmers. they borrow frequently from commercial banks, funds to be used for crop planting, crop gathering, purchase of agricultural machinery, improvements on the farm, purchase of cattle, and the carrying of cattle or hogs to maturity. through indiana these farmers' loans are very usual in the country banks, many preferring state charters so they may make these loans not only on personal but also on mortgage security. farmers are seldom able to give any but personal or mortgage security. a large percentage of them are sufficiently responsible to be entitled to and to receive reasonable credit without security. farmers seem to endorse for each other much more readily than do those of other classes.... the reason is, i think, clear. each knows pretty much everything about his neighbor's financial status, the amount and value of his land, his live-stock, and other visible personal property, the amount of any mortgage and when due. so much being thus in the open there is less of the secretive habit, so that the extent of the invisible personal property and debts is apt to be known. a similar report comes from a national bank in lincoln, nebraska, from which the following extracts are taken: the farmers of this state have need of accommodations of this kind to carry them through the crop season. as a matter of fact, they use short-time credit to fully as great an extent as do the business men in the city and smaller towns. in fact, i think it is true that in the smaller towns the bankers favor the farmers in preference to the small business men.... there is no doubt about the average well-to-do farmer in this state being able to furnish satisfactory security aside from mortgaging his farm for such temporary loans within any reasonable limitations. in some cases the banks take chattel mortgages on cattle or other live-stock, and in some cases where the farmer has a good equity in his farm they will not hesitate to take his personal note. while i do not know that there is any particular difference between farmers and other classes in this state as to their willingness to go security for each other, yet very little of this is done any more. there was a time when it was not an uncommon thing, but it has become less and less until now there is very little signing done for others. in fact, the farmers feel that they are able to take care of themselves and do not ask others to sign with them, and are able to handle themselves without such an endorsement. this is true of all classes in this state. i have never felt that in this locality farmers suffered in any way from lack of credit facilities.... a former bank examiner in the state of california, himself a farmer, writes: the farmers of california do not to any considerable extent make a practice of borrowing money from local banks or money lenders for short periods.... in reviewing the various bank examiners' reports on some state banks i recall very few instances of crop mortgages, and it impresses me that in many of the cases the mortgage was taken to obtain additional security for loans previously granted and secured otherwise. i think it would be safe to say that the bankers as a rule have not favored short-time unsecured loans to farmers. they are, however, fast awakening to the fact that as a rule these are the safest loans a bank can make, and are making an effort to get in closer touch with the farmer. it would also be safe to say that the average small farmer does not as yet realize that he _can_ obtain such credit at a bank. our farmers as a class are exceedingly reluctant "to go each other's security." two-name paper is mostly confined to commercial transactions. a college professor in the state of washington informs me that short-time loans to farmers are common in that state, but that frequently the rate of interest charged is per cent. higher than that on commercial loans--the explanation commonly given being that a farmer borrowing generally reduces the resulting deposit credit more rapidly than does a merchant. in the southern states, particularly in the cotton, rice, and tobacco sections, the use of crop liens for short-time loans appears to be much greater than in other sections of the country.[ ] such meager testimony as i have been able to secure seems to show that the amount of short-time agricultural credit extended by banks in the south is relatively small but rather rapidly increasing. the banks are catering more and more to this class of business. other evidence might be cited, but the above gives a fair picture of the situation as revealed by all the testimony received--a confused picture of widely varying conditions. public opinion is now being aroused on the subject of agricultural credit, and pressure is liable to be brought for hasty and perhaps radical legislation. obviously, the first step to be taken in the interest of a sane solution of the problem is to find out exactly what the problem is. to this end the writer would urge strongly the need of investigations by the comptroller of the currency and by the various state banking departments of the present facilities and practices in the matter of agricultural loans. in view of the increasing public interest in the subject the investigations cannot be undertaken too soon. although the farmers in any section of the country may not resort to the banks for short-time credit it does not follow that they are not receiving such credit. as a matter of fact they are often receiving it on a considerable scale and in the most expensive way. _i. e._, in the form of book credits with merchants. it is a common practice throughout the country for farmers to run up book accounts with local merchants during the spring and summer to be paid in the fall when the crops are sold. when this is done on any considerable scale the farmer probably pays more than bank interest under the guise of prices; and this is particularly true when he obligates himself to sell his crops to the creditor merchant. in the south this practice is carried to the extreme in the familiar "store-lien" system which holds many farmers in the cotton belt in a condition bordering on perpetual servitude. the custom is for the farmer to buy supplies of the local general store on credit for the year, agreeing to sell to the merchant his cotton crop in the fall, thereby cancelling the debt. a crop lien is generally given, and the merchant often dictates the character and the amount of the planting. the prices paid for cotton under this system are liable to be exceptionally low, and the prices paid by the farmer for his supplies exceptionally high. the system has proven a curse to many sections of the south. witnesses before the united states industrial commission estimated the interest rates imposed by this system at from per cent. upwards. mr. george k. holmes of the united states department of agriculture testified: the rate of interest on the liens on the cotton crop of the south, it is safe to say, probably averages per cent. a year. all cotton men will agree that it is at least that. the store system of the south is a sort of peonage; that is what it amounts to with the cotton planter.[ ] since the industrial commission's report was published the banking facilities of the south have been greatly increased, and the banks are coming into closer touch with farmers, with the result that the store-lien system is gradually breaking down. another form of credit to farmers is that obtained from dealers in farm implements and machinery which the farmers frequently buy on time, paying interest during the credit period. one informant, who has been a bank examiner, writes from california--and his testimony is applicable to many other sections of the country: the new generation of merchants is not disposed to carry the farmer as of old and insists that overdue accounts be covered by promissory notes which are in turn hypothecated with their bank. in other words a clearer demarcation of function is being gradually brought about to the best interests of all concerned. such in general is the present situation in the united states in the matter of short-time agricultural credit as evidenced by the very indefinite and scant information available. what are the causes? perhaps in them will appear some suggestions for the remedy. the chief reasons for the backwardness of the united states as compared with europe with regard to agricultural credit may be briefly summarized as follows: ( ) our wonderful agricultural domain where good land could be had almost for the asking, and where for generations land was so cheap and labor and capital so dear that intensive cultivation was generally unprofitable. ( ) the prosperity of our farmers who have not been forced by dire necessity to resort to credit as were the farmers of germany at the middle of the last century when the raiffeisen co-operative banks were first organized. ( ) the nomadic character of a considerable part of our agricultural population as it has moved continually westward in taking up of new lands, and more recently as it has been retracing its steps or moving northward. ( ) the isolation of our farmers in this country of large farms and "magnificent distances." ( ) the rapid growth of the manufacturing and commercial business of the country--and that largely in the hands of the same class of people who control the bulk of the banking business.[ ] add to these circumstances the obstacles which farmers always encounter in the matter of credit, as compared with manufacturers and merchants, obstacles such as the uncertainty of crops and the strongly seasonal character of the farmer's credit demands, and we have a sufficient explanation for the backwardness of agricultural credit in this country. to emphasize most of these causes, however, is to brand oneself as belonging to a past generation. our domain of free arable land is practically gone; good farms must be bought, and for them ever increasing prices must be paid.[ ] the era of hand cultivation is giving way to that of farm machinery propelled by horse-power and even by steam, gasoline, or electricity, with its resulting great increase in the efficiency of labor. eleven years ago the editor of _the dakota farmer_, in his testimony before the united states industrial commission, put the matter tersely, and with little exaggeration, as affecting his own section of the country, at least, when he said: "when i first worked out it took five binders to follow a machine, one man to rake off, and one to carry the bundles together. now the hired girl frequently drives a machine that does the whole business."[ ] some idea of the extent of this increase may be obtained by reference to the following figures compiled from census reports: value of farm implements and machinery in the u. s.[ ] _year_ _value_ _per cent. , increase_ $ , [ ] the increase in the value of farm implements and machinery per acre of land in farms from to was from $ . to $ . , or . per cent. an analysis of the figures for farm machinery by geographic divisions shows a marked difference in the rates of increase, but the tendency in all sections during the last forty years has been decidedly upwards, the greatest growth having been witnessed in the decade ending . during that decade the lowest rate of increase in any section was that of new england, per cent., and the highest that of the mountain states, per cent.[ ] another development which is making larger demands upon the farmer for working capital is the increasing use of artificial fertilizers, the expenditure for which in the united states approximately doubled from to . as the result of such tendencies and of the rapid depletion of our free domain, farming in the united states is losing its old-time kinship to mining and becoming more like manufacturing. more and better machinery and more power are needed on most farms in the interest of efficiency. this calls for short-time credit. but a supply of good machinery requires a fair sized farm for its efficient utilization--hence the need for larger farms and for mortgage credit to make their purchase possible. upon this subject there are some very illuminating data in warren and livermore's _agricultural survey_ of four townships in tompkins county, n. y., from which the following is quoted: the value of farm machinery increases rapidly with the size of the farm.... any one who has ever made a list of the necessary farm machinery will see at once how inadequately these small farms are equipped. yet their machinery costs nearly twice as much per acre as that on the larger farms that have nearly three times as much machinery. machinery can be used more effectively on large farms. one mower, one hay rake, one tedder, one hay loader, one corn harvester, one grain harvester, one grain drill, one manure spreader, one potato digger, one potato planter, can do their work on a acre farm as readily as on a small farm. few of the small farms have half of these tools. if a small farm does have nearly all the list, it cannot use them enough to pay for the investment. the more efficient and numerous machines become, the larger our farms should be. it is interesting to notice how many of the tools are of very recent development. almost half of the value of farm machinery on a well-equipped farm is invested in machinery that has been perfected in the last few years. much the same situation exists in regard to an adequate equipment of horses. three or four horses are the smallest number that can be used efficiently with modern machinery.... the small farms have not enough horses to make efficient teams and yet they are over-supplied with horses compared with their area. on these farms there are only acres per horse. on the largest farms, one horse farms three times this area, with no resulting decrease in crop yields.... when we consider the cost of keeping a horse we see what a great advantage the larger farms have. forces like these are counteracting what is commonly thought of as the normal tendency of agriculture to move toward more intensive cultivation _on small farms_, with the result that the average amount of improved farm land per farm actually increased instead of diminishing in the united states during the last decade. this does not mean less intensive cultivation, in fact quite the contrary; it means more intensive cultivation, but by the efficient utilization of good machinery and of power. it means further, as said above, a demand for mortgage credit for the purpose of enlarging farms--and that, at rapidly increasing farm prices. the farming population is becoming more settled now that the free lands are practically gone and the frontier has disappeared.[ ] the isolation of the farmer is rapidly becoming a thing of the past, with the advent of rural free delivery, rural telephone, the automobile, and the parcels post. the farmer no longer buys gold-bricks nor is duped by fraudulent lightning-rod schemes except in the pages of the comic supplements. when seeking credit the farmer can offer better security than ever before. his markets are larger, better organized, more certain, and more accessible. the risk of crop failure is less, thanks to the wonderful progress of scientific agriculture. there are few pests which cannot now be readily controlled by the intelligent farmer, who takes time by the forelock. the problem of moisture is growing less serious every year with the improvements in irrigation, dry farming, and the more scientific diversification of crops. conditions then point to an increasing need for agricultural credit, and to improving circumstances for its safe development. if the time is ripe for a greater use of bank credit in agriculture, how is that credit to be obtained? broadly speaking, four methods may be mentioned, only the last two of which are deserving of much attention at the present time. they are: ( ) establish government agricultural banks; ( ) adopt the egyptian plan of a government guaranty to an agricultural bank established with private capital; ( ) encourage the farmers to organize co-operative credit societies on some such plan as the raiffeisen or schulze-delitzsch banks of germany; ( ) utilize more effectively in the interest of the farmer our present banking machinery, and improve it where it is defective. the suggestion of an agricultural bank owned and operated by government, either state or federal, is not worthy of serious consideration in this country at the present time. the history of such banks both in europe and america has generally been a disastrous one, although a few have succeeded. some exist to-day which are performing useful services to farmers, notably in the line of mortgage credit, among which may be mentioned those of the australian states and new zealand,[ ] and the recently established one in the philippine islands. the success of such institutions is not such as to justify any attempt to establish them in the united states, at least until every reasonable effort has been made to solve the problem by means of private and co-operative effort. the other plan, commonly known as the egyptian plan[ ] from its most important example, seeks to eliminate the evils of a purely government bank and to take advantage of its meritorious features. in egypt the agricultural bank is owned and financed by private capital; it enjoys, however a government guaranty of principal and of per cent. interest. its administrative expenses are kept low by an arrangement with the egyptian government by which the government tax collectors make collection of instalments on the bank's loans at the time of the collection of the regular land tax, for which the bank pays a small commission. the agricultural bank of egypt has had a phenomenal success, rendering an invaluable service to the egyptian fellaheen, and at the same time yielding good profits to its owners. it was this type of bank that the united states government authorized established in the philippines by the act of march , , but the interest guaranty of per cent. has so far proved too low to attract capital into the enterprise.[ ] a bank organized on the egyptian plan is well adapted to do pioneer work among ignorant farmers, where the apparent risks and heavy administrative expenses prevent private capital from entering the field. a government guaranty, however, hardly seems necessary in the united states, and our people would probably look askance at any proposal for a great agricultural bank or banks of this type with branches scattered throughout the country. it is contrary to our banking traditions, and, like the plan for a strictly government bank, should not be thought of until plans for meeting the need by private initiative have been fairly tried and found wanting. when one considers the question of the improvement of agricultural credit in the united states one instinctively thinks of the co-operative credit banks of the old world, because of their phenomenal success for a half century and more, the simplicity of their structures, the ease with which they may be established, and their ready adaptability to the widely varying conditions found in a great country like the united states. the description of the wonderful success of these institutions as told by henry w. wolff in his _people's banks_ reads like a fairy story. although the success of co-operative banks has been great in nearly every country of continental europe, nowhere else has it been so great as in germany, the country of their origin, and it is to germany one naturally turns first for suggestions. there we find four types of co-operative credit banks, landschaften, ritterschaften, schulze-delitzsch banks and raiffeisen banks. the first two are co-operative associations loaning money on land mortgages, and securing funds largely through the issue of bonds against the collective mortgages. being concerned with long-time mortgage credit they do not fall within the province of this paper. the other two types of banks deal especially with short-time credit, the one chiefly in the towns and cities, and the other with farmers in the rural communities. it is with the latter that we are most concerned. let us therefore consider briefly the essential features of the raiffeisen system. these features are: ( ) organization on the strictly co-operative principle, none but members having the right to borrow, although non-members may make deposits. ( ) limitation of loan operations to a very small area in which all farmers are acquainted with each other. a bank's field of business, the founder believed, should not cover a parish of less than people nor of more than , . the banks were to be, therefore, purely neighborhood affairs. there is a sympathetic but well-informed neighborhood opinion which prevents the squandering of loans. ( ) unlimited liability of all members for the debts of the bank, a necessary corollary of which is the provision that membership is obtained only by election by those already members. ( ) the working capital of the bank is obtained chiefly from the following sources: (a) small savings "drawn, either from within the area covered by the bank, in which case it comes both from members and non-members, the former being rewarded where possible at slightly higher rates in order to encourage membership; or from without the area, in which case it of necessity comes from non-members."[ ] (b) loans from the provincial bank of the district, or more importantly from the central bank of the empire at which the local bank keeps a current account and with which it may rediscount its paper. funds are also sometimes obtained from other banks or from private individuals. (c) a purely nominal share capital which the banks did not originally have, and which they have been forced against their will to issue. the requirement is now usually met by the issue of a few low-priced shares of which no member can hold more than one and upon which no dividend is paid. (d) two surplus funds called reserve funds; one used exclusively to cover losses, and the other being the principal reserve fund (_stiftungsfund_), commonly used for "positive improvements, such as the extension of the premises or the establishment of a burial fund."[ ] in this fund must be placed two-thirds of the annual profits. the fund cannot be distributed among the members, even though the bank be dissolved. in such a case it is held in trust for a time for a new bank, should one be established, and if no such bank is established it must be used for some work of public utility. a recent publication of the international institute of agriculture[ ] analyses the total working capital of the rural banks of germany for the year as follows: _amount percentage in marks , _ share capital . . reserves . . deposits on current account . . savings deposits , . . other liabilities[ ] . . total working capital , . . the striking fact brought out by these figures is that out of nearly two billion marks placed at the disposal of farmers, less than[ ] . per cent. was furnished by outsiders, while more than . per cent., was provided by the savings and other deposits of the farmers themselves and of the local public. ( ) a fifth feature of the raiffeisen system is that the bank's administrative organization is simple and democratic. final authority on local questions resides in the general meeting in which every member has one vote. there is elected annually a committee of management consisting usually of five or six directors who meet weekly. as a check upon this executive committee there is also elected annually a council of supervision consisting of from six to nine members. a biennial audit is made of the accounts of each bank by an accountant employed by the district or central union. the books of the bank, except the individual deposit ledger, are open to the inspection of all members. officers of the local banks serve without compensation, except the treasurer who has no vote in the making of loans.... ( ) advances take two forms: the ordinary loan (of which the name is sufficiently descriptive), and the current account which is similar to the scotch cash credit. the latter constitute about a third[ ] of the total and show a tendency to increase in proportion to the ordinary loans. the period of the ordinary loan varies from six months to three years; and in exceptional cases it may be even longer.[ ] loans are repayable in instalments covering interest and part of the principal, or in lump sums. banks reserve the right to call a loan on four weeks' notice. the average credit advanced per member is marks, and the average interest rate probably somewhere between and per cent. although mortgage and other collateral security is sometimes accepted, the banks' chief reliance is personal security, and the great bulk of the loans are made on two-name paper. the raiffeisen banks are organized into provincial federations with provincial banks at their head, and these in turn into a national federation with a central bank at its head. these provincial banks and the central bank "equalize the need of credit of the individual banks, supplying them with money when required and employing their surplus funds."[ ] a large proportion of the german co-operative banks and other co-operative agricultural societies are federated in a single national organization, the national federation of darmstadt.[ ] such are the leading features of the greatest agricultural credit system of the world. to the american the surprising thing about it all is that such co-operative credit banks are practically unknown in the united states, although there has been a remarkable development here in recent years of other forms of co-operation among farmers.[ ] this surprise is the greater when one bears in mind that "whole counties have been populated in the northwest by european agriculturists who came from neighborhoods where they were familiar with agricultural co-operative credit, and yet not a society of co-operative credit for these immigrants has been established from the beginning to the present time."...[ ] what is needed now--and possibly about all that will be needed in the future--is a campaign of education among the farmers themselves rather than one of legislation; although the development of such societies will doubtless be furthered in many states by legislation, such as was recently enacted in massachusetts (ch. , acts of ), freeing them from some of the hampering provisions of the general banking act of the state. conditions are so widely different in different sections of the country, and among different classes in the same section, that co-operative agricultural credit societies will need to be given a fairly free hand in such matters as limited or unlimited liability, the amount of share capital, receipt of deposits, etc., so that they may adapt themselves to local needs. a reasonable amount of government supervision on the part of the banking departments of the states seems desirable. passing now to the question of the better utilization of our existing banking machinery, we may consider it first from the standpoint of the government, then from that of the banks, and finally from that of the farmers themselves. the provisions of the national banking act _(revised statutes_, sec. ) are too rigid in the matter of loans on real estate security.[ ] national banks are, of course, intended to be banks for business men, and their assets should be quick assets in so far as their liabilities are quick liabilities. but it should not be overlooked that the modern farmer is a business man, that he needs active credit for the efficient conduct of his current business, and that land is the only kind of collateral many farmers can give that is acceptable to bankers. many worthy farmers are not willing and some are not able to secure satisfactory endorsers to their paper. crop liens, except in the south, are not usually very acceptable to banks. the ability of the farmer to give mortgage security to national banks in case of need would often prove a great help. furthermore, now that a majority of our national banks have savings departments, and that savings deposits might wisely be made withdrawable subject to advance notice, it is not unreasonable that these banks should be permitted to invest at least a substantial part of their savings funds in the same kinds of mortgage securities that are open to the investment of funds of savings banks; provided, of course, that due care be taken to prevent the juggling of accounts between the commercial department and the savings department of the bank. another form of desirable legislation in the interest of the farmer consists in the abandonment of our unscientific bond secured bank-note circulation for a scientific system, and in the rendering of our deposit currency more elastic. the more the farmer resorts to bank credit as a means of financing his current business the more will he suffer from the seasonal inelasticity of our bank-note and deposit currency. farming business is pre-eminently seasonal in character; the farmers over the greater part of the country need funds most at about the same times of the year, _i.e._, the fall and spring. a great increase in the demand for currency and capital, say in the fall, under an inelastic currency and credit system like our own, means to the farmer, highest interest rates at just the time when he needs most to borrow, greatest scarcity of cash at just the time when his need for cash is the most urgent, and prices depressed by a tight money market at the time of the year when he has most to sell. it is doubtful if any class of people in the country would benefit more from a thoroughgoing reform of our banking system than would the farmers. the apportionment of responsibility between farmer and banker for their not having gotten together better is an impossible task. although some exceptions must be made, particularly in the middle west, as a general proposition neither has appreciated the opportunity which the other offered. the banker must be brought to realize that one of the best kinds of paper in the world is short-time business paper bearing the names of two responsible farmers. he should be an adviser and friend to the farmer as much as to the city customer. he should make the farmer feel that a productive loan to him is not of the nature of a favor reluctantly granted--as so many farmers complain--but rather a business proposition profitable to both, as gladly given as it is received. he should further co-operate with the local business men in preparing financial ratings of farmers, to fill the gap left by the inability, to be hoped temporary, of mercantile credit agencies to rate farmers as extensively as they do other business men of like capital. the farmer, on the other hand, must be educated by the banker, the press, and the agricultural school and college, to the advantages of credit as a mean to the more efficient working of his farm. this should be done with caution, for credit is a two-edged sword. the farmer should be encouraged to borrow only when it is very clear that he can use additional capital so productively that it will pay. but what industrious farmer could not use profitably some additional capital every year, could he obtain it at as reasonable rates as does the merchant? the farmer must learn to keep careful accounts. he must be made to realize that the banks are open to him as to other business men, and that the bulk of the country's short-time commercial loans, as likewise of the agricultural loans of europe, are made on the very same security he is capable of giving, _i.e._, two-name paper of honest, industrious business men. farm credit in a northwestern state[ ] long-time loans in north dakota the average farm mortgage runs for . years; and the average interest rate is approximately per cent. (accurately . per cent.). this per cent. does not include the expense of abstracting titles, examining the property, and the recording of the mortgage. these fees are invariably paid by the borrower. nor does this interest rate of per cent. take account of the bonus that is frequently exacted, in the newer regions, from the borrower for the privilege of securing a loan; nor does it allow for the sum the borrower loses in paying his yearly interest in advance, which is deducted from the principal. while the practice of exacting a bonus is not common, it is generally the custom to deduct the entire year's interest in advance; assuming an per cent. rate, the farmer therefore pays $ interest not on $ , but on $ , which brings the rate up to . per cent. while the average prevailing rate, according to our returns, is approximately per cent., the rate varies in different parts of the state, depending upon the local conditions. the rates are lowest in the eastern tier of counties, and rise gradually towards the western part of the state, where the rate runs up to and per cent., which is also the rate in the eastern part of montana. that the per cent. rate is quite general for a large part of the state is evidenced from the fact that of the counties report an average rate of per cent. or more. in only counties is the rate less than per cent., and in no county does the average fall below per cent. the above figures are conservative. they are based on returns submitted by bankers who would naturally understate rather than overstate the rate of interest charged in their respective localities. furthermore, we have a check on these bank returns in the replies received from farmers. as a rule the rates reported by bankers and farmers are nearly identical in their respective counties. it is safe to conclude, therefore, that the average rate on farm mortgages for the entire state is about per cent. short-time loans short-time loans are of two kinds, bank loans and book credit advanced by retail stores. the bank loan is made on the farmer's note, generally unsecured, though often secured by a chattel mortgage. according to the reports received from banks, the average length of time for these short-time loans is - / months; and the average rate of interest is . per cent. the average rate reported by farmers residing in different counties was . per cent. an effort was made to compare rates paid by farmers with those paid by business men on short-time loans in the same locality. the same banks that reported an average of . per cent. to farmers averaged only . per cent. on loans made to merchants and manufacturers. fully out of the reporting banks stated that the rate was higher for agricultural short-time loans than for commercial loans; reported the rate to be the same for both classes; and only reported a lower rate for the farmer. as north dakota, however, is not a manufacturing nor a jobbing state, commercial paper is scarce, and consequently comparisons of the above nature are apt to be misleading. the significant fact remains that the farmer pays from to per cent. on small loans, for short periods of time. store or book credit is a form of short-time loan which is perhaps more important than bank credit. in a state where the bank charges a high rate of interest, the farmer is more likely to buy merchandise on credit than to borrow from the bank and pay cash. the north dakota farmer is rarely denied credit at a country store. to secure information on this form of credit, questionnaires were mailed to implement and hardware dealers, as well as to farmers. one question asked of implement dealers was: "what percentage of farmers pay cash in buying farm machinery?" the answer from firms, located in counties, was that only per cent. of the farmers pay cash, per cent. buying on time. out of farmers reporting only pay cash in buying machinery and supplies. these book accounts run anywhere from three months to two years; the average account is carried about one year ( . months). the farmer contemplates making payment immediately after his prospective crop is marketed. in case of crop failure the retailer will carry the account over until the next harvest season. it is quite common for the dealer to obtain a note from the farmer--the note generally bearing a per cent. interest rate from the date of issue. often, however, the note does not begin to bear interest until the farmer has failed to make payment at the expected time, that is, immediately following the harvesting season. the implement and hardware dealers reported an average of . per cent. interest per year on these notes. it is more difficult to secure uniform information from dealers on the subject of book credits, especially with reference to the interest rates charged on such accounts. the practice varies. usually an interest rate is added to the credit price depending on the duration of the account. there is no common discount rate for cash purchases, though per cent. is most common, that is, per cent. of the credit price. this brings the credit price of a $ binder down to $ for cash. as a matter of fact all dealers quote two prices, the cash and the credit price, the difference between the two depending upon the reputation of the buyer, the shrewdness of the seller, and the degree of competition in the particular locality. on this point, replies from farmers do not differ materially from the replies of the implement dealers. the difference between the cash price and the credit price of a binder is usually given as $ to $ , and a wagon or plough, as $ to $ . the general discount rate is per cent. off the credit price. the implement dealers and the farmers are all agreed that cash payments would be preferable if rates on bank loans were reduced. the farmer, however, is often afraid to approach the banker for a loan. on the other hand, the farmer does not always see that the book credit is quite as expensive as bank credit, if not more so. the prevailing high bank rate, however, from per cent. to per cent. on short-time loans, does not encourage cash payments. are the foregoing rates too high as compared with rates in other communities? the _crop reporter_ for april, , shows interest rates on short-time loans in every state in the union. in , the north dakota rate exceeded that of all other states; in , it exceeded all but oklahoma. farmers as a rule think that rates are fixed arbitrarily by the bankers and other money lenders in the community. that fundamental laws of supply and demand have any controlling influence is apt to be overlooked. without attempting to justify the high rates let us state some of the conditions which help to explain them. the demand for capital in a growing state is always greater than can be met by the local supply. in , north dakota farms were mortgaged for $ , , ; in , for $ , , ; in it will doubtless reach $ , , . outside capital is attracted into the state by high rates of interest. two life insurance companies, the union central of cincinnati and the northwestern mutual of milwaukee, loan heavily in the state. in the union central life insurance company reported a total investment of $ , , . in north dakota real estate. local banks use farm mortgages in borrowing money from banks in large cities outside of the state. every town and village has its money-lender who acts as agent for foreign investors in farm mortgages. banks within the state compete for capital by offering high rates of interest on time deposits, and pay all the way from - / to per cent. interest on deposits. the rate on loans must necessarily be higher under these circumstances than where banks are paying - / and per cent. interest. the high interest rate paid on bank deposits is evidence of the lack of local capital to satisfy the local demand. the inability to attract foreign capital on lower terms is due primarily to the character of the investment. the newness of the state, the instability of its population, the character of its agriculture, all make for uncertainty. hence the speculative character of the farm mortgage as security for a loan. in the eastern counties where the land has long been under cultivation, where the population is more stable, and where mixed farming has in a large measure supplanted the bonanza wheat farm, rates are correspondingly lower than in the newer portions of the state. as the element of risk is eliminated from investments, interest rates will come down. at least this seems to be the consensus of opinion among bankers. the character of the farming is frequently mentioned as a prominent factor in the credit situation. a crop failure under a single crop system, such as is practised in north dakota, is likely to find the farmer in bad straits. the payment of interest on the mortgage is delayed or deferred. the local bank or loan company is obliged either to carry the farmer along for a year or to foreclose. since many farm mortgages are held by outside investors, the annoyance is sufficient to reflect itself in an increased rate of interest. because of this fact many bankers are urging mixed farming as a means of reducing rates. this aspect of the question is well expressed in a communication from a banker in stark county who says: it is our belief that the scarcity of money and the high interest rates are largely due to poor farming. the people having money to loan know well that our farmers here have a very uncertain income according to their present methods of farming, and would expect a much higher rate commensurate with the risk taken when they can find people where money can be placed more safely. as conditions are here now, some people have not paid all their interest, for at least three or sometimes four years. in the older slates, like iowa for example, where people farm well, interest rates are much lower. as soon as our farmers can show that they are safe and will take care of their obligations promptly, they can command the lowest interest rates that may exist. we believe it more necessary to work on better farming methods, encouraging them, than on better interest rates, for the lower interest rates are a natural consequence of better farming. another factor is the character of the population. one prominent banker says of north dakota farmers: "they lack a sense of responsibility. farm loans require constant care, hence high rates." another complaint is: "farmers are careless in not making prompt payment or renewals of obligations." some bankers think the high rates due to too much borrowing; that is, too much liberality in the loaning of money. injudicious loaning leads to extravagance, and naturally calls for high rates to offset the risks involved. one banker in analyzing the situation claims that the legal restrictions placed on the loaning power of banks is responsible for unduly high rates. in support of this view it might be stated that while the total farm mortgages in the state in reached the $ , , mark, the power to loan on real estate by all banks, state and national, was less than $ , , . banks are forced to loan on the personal note of the farmer, secured by a mortgage, instead of taking a direct mortgage on the property. other banks turn these mortgage loans over to trust companies, and collect a commission from the farmer for placing the mortgage. commissions are responsible for at least from one to two per cent. of the rate when loans are handled by real estate agents and loan companies. in the case of loans by life insurance companies, the state agent generally receives one per cent. and the local agent, at interior points, receives one per cent. two per cent. could be saved by the farmer if the money could be borrowed directly from the investor, without the aid of an agent. allowing, however, for all these local conditions--the great demand for capital in a new and developing country, the inability to attract sufficient outside capital because of the risky character of investments, the irresponsible character of some elements in the population, the character of farming methods, the commission agent, and the legal restrictions handicapping banks--allowing for all these conditions, and because of some of them, it is believed that the farmers by organizing co-operative credit associations could reduce the rate of interest on both long- and short-time loans; and, furthermore, that such co-operative credit facilities would be a means of improving the methods of farming, would encourage stability in population, and would make the farmer feel that he is not being discriminated against in the borrowing and employment of capital. cattle loan banks[ ] consumers desiring a reduction in the cost of food supplies will be interested in a study of the operations of cattle loan companies and in the development which these may reasonably attain as a result of the provision in the federal reserve act for the rediscounting of agricultural paper. the cattle loan company, commonly referred to as "cattle bank," is a middleman between borrowing cattle-owners and lending bank-managers. its business methods and forms closely parallel those of real estate mortgage loan companies except for the fact that cattle loans are of shorter duration and secured by mortgages of the chattel variety. cattle loan companies, incorporated under state charters, have been operating in such cities as fort worth, denver, east st. louis, st. joseph, portland, south st. paul, omaha ( ), and kansas city ( ), some of them for over twelve years; and one is now being organized in chicago. these companies have a paid-in capital stock ranging from $ , to $ , , and are usually closely affiliated with a national or state bank, as are trust companies in the larger cities. these companies are informed of desired loans through country bankers, or by receipt of direct applications, the latter usually from the larger "cattle-growers." in some cases the company on its own initiative urges cattlemen in whom it has particular confidence to undertake feeding operations at a time when the beef market offers a favorable opportunity for such production. in every case a salaried examiner of the company inspects the plant and herd of the cattle-grower and his personal capacity and integrity before the granting of a loan. and thereafter the examiner, on his regular circuit, maintains a continuous inspection and volunteers advice designed to protect the value of the security given for the loan. when a loan application has been acted upon favorably, a promissory note and chattel mortgage are taken. the funds of the company then advanced to the borrowers may be utilized to buy more cattle, to pay outstanding debts such as those for feeding expense, or, as is often the case, to buy the very cattle which are pledged as security for the loan. in a few cases where the cattle-grower enjoys an exceptional credit, funds will be advanced for the full purchase price of a herd for seasonal feeding purposes, or to develop two-year-olds into finished four-year-old beef cattle. the loans granted are seldom less than per cent. of the known value of the cattle. to secure a buyer for the note and mortgage is the second primary function of the cattle loan company. if the loan is a small one, usually $ , , it may be sold entire, the chattel mortgage assigned and the note indorsed to the buyer. if the loan is a larger one, of $ , to $ , , it is necessary to subdivide it in order to provide a ready sale. the mortgage and note are assigned in parts of $ , , $ , , or other denominations, to suit the convenience of the buyers of the paper. in this case the assigned parts, since they are indorsed by the loan company, are equivalent to a "debenture" issue secured by a pledge of specified assets held by the company for the protection of the note-holders. the size of mortgage loan most frequently made is $ , , while loans of $ , are exceptional. the business of cattle loan companies approaches closely to the functions of the commercial paper broker. the cattle loan company has an advantage over the commercial paper broker in that the favorable location of the company--always at the receiving cattle-market of the district in which its loans are exclusively placed--enables it fully to protect its interest by claiming the proceeds of sales of mortgaged cattle. this is particularly true in the case of range cattle, which can be readily identified by the mortgaged brands. to cover expenses of administration the cattle loan company secures for itself a part of the interest paid on the loan. the rate charged the borrower is usually determined by conditions in the locality where it is made, sometimes running as high as per cent., and again, influenced by general rates for capital, falling as low as per cent. from this gross interest charge a commission has to be given to the local banker who makes the loan, expenses of examination and management must be met, and an appropriation made to a contingency reserve fund to cover occasional losses incurred from the circumstance that the companies usually become surety, by indorsement, for the final payment of all the loans which they have placed with lenders. these deductions determine what may be safely paid to eastern purchasers of the paper, usually or per cent. holders of cattle paper have never suffered in times of financial panic from failure to pay at maturity. cattle, like grain, are a cash commodity purchased by retailers and sold by them, largely for cash, to satisfy a relatively constant consuming demand. this characteristic is retained even in time of panic. maturities are usually six months for feeding purposes; and less often of two and one-half years for developing two-year-olds for market. this two and one-half year paper is occasionally converted into the six-month variety by the sale of notes running for six months, based upon the two-and-one-half year mortgage. these notes are taken up at maturity by the loan company and reissued or renewed for like succeeding periods until the original loan is repaid. in the past this form of loan has not been so desirable as it will be in the near future. it has been a relatively long-term investment; and while perfectly liquid at maturity and enjoying a good rate of return, it has not possessed a sufficiently wide market to insure salability at those times when the demands of depositors and local customers for accommodation press in upon the investing bank. this difficulty will be fully corrected by the expected operations of the federal reserve act. eastern bankers possessing these six-month notes will probably find them readily rediscountable with the local federal reserve bank at any time up to maturity. and a considerable amount of two-and-one-half year notes may be held to advantage, since, if properly selected with successive maturities, one-fifth of their total amount will be immediately rediscountable when necessary. by rendering this form of agricultural paper liquid before maturity the federal reserve act will have become a most important influence for enlarging the amount of capital devoted to this branch of industry. already eastern bankers have scouts touring the western states to study this form of banking with a view to investing several millions of dollars each. interest rates upon these loans will unquestionably be reduced in time through such increased competition of lenders. the loan companies will hardly suffer, however. while charging the cattle-grower less, they will be enjoying a larger turnover and should welcome this new development. the four or five million dollars placed in such loans yearly by the average loan company, as at present constituted, is but a fraction of the loans that may be placed by them within a few years. by reducing the interest cost charged to cattle-growers an important service will have been performed for the consumer. such a reduction will increase, in the first instance, the cattle-man's profit and induce him to increase his holdings. the benefit of increased production at lowered expense should, in time, be passed on to the final consumer of beef. this phase of the operations of the federal reserve act will be of distinct benefit, and possibly also the least dangerous of all forms of legislation designed to assist american agriculture. footnotes: [ ] adapted from r. b. van cortland. _what is agricultural credit? north american review_, vol. , april, , pp. - . [ ] e. w. kemmerer, _agricultural credit in the united states, the american economic review_, vol. , no. , december, , pp. - . [ ] new york, chicago, philadelphia, st. louis, boston, cleveland, baltimore, pittsburgh, detroit, san francisco, milwaukee, and cincinnati. for buffalo, the tenth city in population, cincinnati, the thirteenth city, was substituted, since for buffalo, which is not a reserve city, satisfactory banking figures are not available. [ ] [national banks are now permitted to lend on real estate security by the federal reserve act passed in .] [ ] cf. testimony before united states industrial commission (_report._ x, under subjects of "credit system" and "crop lien system," _passim_.) [ ] _report_. x, p. . [ ] in some states farmers themselves own considerable amounts of bank capital. this is said to be particularly true of iowa. [ ] the average value per acre of farm land in the united states rose from $ . in to $ . in , a rise of per cent. _thirteenth census, bulletin on farms and farm property_, p. . [ ] _report_, x, p. . [ ] exclusive of alaska and hawaii. [ ] values in gold. [ ] cf. _twelfth census_, v, pp. xxix and xxx. and _thirteenth census, bulletin on farm and farm property by states_, pp. and . [ ] every census since has shown a larger percentage of the native population living in state or territory of birth. [ ] on this subject see the writer's article on "agricultural credit" in l. h. bailey's _cyclopedia of american agriculture_, iv, p. ; and his _report to the treasurer of the philippine islands on the advisability of establishing a government agricultural bank in the philippine islands_, pp. - , - . [ ] cf. e. w. kemmerer, _report to the secretary of war and to the philippine commission, on the agricultural bank of egypt_. (manila, p. i.: . also published by bureau of insular affairs, washington, d. c.) [ ] cf. e. w. kemmerer, _an agricultural bank for the philippines, yale review_, november, , pp. - . [ ] c. r. fay, _co-operation at home and abroad_, p. . (new york; macmillan, .) [ ] fay, _co-operation_, etc., p. . [ ] _an outline of the european co-operative credit systems_, pp. and . [ ] under "other liabilities" are included in addition to other items the funds which the banks have borrowed from banks and individual capitalists. [ ] the capital of the district banks and of the central bank came largely from the local banks. [ ] in the figures for germany were: loans on current account, m , , and loans for fixed periods, m , , , . the international institute of agriculture, _an outline_, etc., p. . [ ] _idem_. [ ] _ibid._, p. . [ ] _idem_. [ ] "farmers' economic co-operation in the united states has developed enormously during the period under review [ - ], and it safe to say that at the present time more than half of the , , farms are represented in economic co-operation; the fraction is much larger if it is based on the total number of medium and better sorts of farmers to which the co-operators mostly belong." the most prominent objects are: insurance, creameries, cheese factories, co-operative selling organizations of numerous kinds, co-operative buying organizations, co-operative warehouses, co-operative telephones, co-operative irrigation, etc. _annual report of the secretary of agriculture _, pp. , . [ ] quoted from a letter from mr. george k. holmes, statistician of the department of agriculture, washington, d. c. [ ] for a statement of the more liberal privileges concerning the making continued: of loans on mortgage security conferred on national banks by the federal reserve act see p. .--editor. [ ] adapted from meyer jacobstein, _farm credit in a northwestern state, american economic review_, vol. , september, , pp. - . [ ] j. f. ebersole. _cattle loan banks, the journal of political economy_, vol. . no. , june, , pp. - . chapter xxviii the concentration of control of money and credit have we a money trust? [ ]if by a "money trust" is meant-- an established and well-defined identity and community of interest between a few leaders of finance which has been created and is held together through stock holdings, interlocking directorates, and other forms of domination over banks, trust companies, railroads, public-service and industrial corporations, and which has resulted in a vast and growing concentration of control of money and credit in the hands of a comparatively few men-- your committee has no hesitation in asserting as the result of its investigation that this condition, largely developed within the past five years, exists in this country to-day. the parties to this combination or understanding or community of interest, by whatever name it may be called, may be conveniently classified, for the purpose of differentiation, into four separate groups. first. the first, which for convenience of statement we will call the inner group, consists of j. p. morgan & co., the recognised leaders, and george f. baker and james stillman in their individual capacities and in their joint administration and control of the first national bank, the national city bank, the national bank of commerce, the chase national bank, the guaranty trust co., and the bankers trust co., with total known resources, in these corporations alone, in excess of $ , , , , and of a number of smaller but important financial institutions. this takes no account of the personal fortunes of these gentlemen. second. closely allied with this inner or primary group, and indeed related to them practically as partners in many of their larger financial enterprises, are the powerful international banking houses of lee, higginson & co. and kidder, peabody & co., with three affiliated banks in boston--the national shawmut bank, the first national bank, and the old colony trust co.--having at least more than half of the total resources of all the boston banks; also with interests and representation in other important new england financial institutions. third. in new york city the international banking house of messrs. kuhn, loeb & co., with its large foreign clientele and connections, whilst only qualifiedly allied with the inner group, and only in isolated transactions, yet through its close relations with the national city bank and the national bank of commerce and other financial institutions with which it has recently allied itself has many interests in common, conducting large joint-account transactions with them, especially in recent years, and having what virtually amounts to an understanding not to compete, which is defended as a principle of "banking ethics." together they have with a few exceptions pre-empted the banking business of the important railways of the country. fourth. in chicago this inner group associates with and makes issues of securities in joint account or through underwriting participations primarily with the first national bank and the illinois trust & savings bank, and has more or less friendly business relations with the continental & commercial national bank, which participates at times in the underwriting of security issues by the inner group. these are the three largest financial institutions in chicago, with combined resources (including the two affiliated and controlled state institutions of the two national banks) of $ , , . radiating from these principal groups and closely affiliated with them are smaller but important banking houses, such as kissel kinnicut & co., white. weld & co., and harvey fisk & sons, who receive large and lucrative patronage from the dominating groups and are used by the latter as jobbers or distributors of securities the issuing of which they control, but which for reasons of their own they prefer not to have issued or distributed under their own names. messrs. lee, higginson & co., besides being partners with the inner group, are also frequently utilised in this service because of their facilities as distributors of securities. beyond these inner groups and subgroups are banks and bankers throughout the country who co-operate with them in underwriting or guaranteeing the sale of securities offered to the public and who also act as distributors of such securities. it was impossible to learn the identity of these corporations, owing to the unwillingness of the members of the inner group to disclose the names of their underwriters, but sufficient appears to justify the statement that there are at least hundreds of them and that they extend into many of the cities throughout this and foreign countries. the patronage thus proceeding from the inner group and its subgroups is of great value to these banks and bankers, who are thus tied by self-interest to the great issuing houses and may be regarded as a part of this vast financial organisation. such patronage yields no inconsiderable part of the income of these banks and bankers and without much risk on account of the facilities of the principal groups for placing issues of securities through their domination of great banks and trust companies and their other domestic affiliations and their foreign connections. the underwriting commissions on issues made by this inner group are usually easily earned and do not ordinarily involve the underwriters in the purchase of the underwritten securities. their interest in the transaction is generally adjusted, unless they choose to purchase part of the securities, by the payment to them of a commission. there are, however, occasions on which this is not the case. the underwriters are then required to take the securities. bankers and brokers are so anxious to be permitted to participate in these transactions under the lead of the inner group that as a rule they join when invited to do so, regardless of their approval of the particular business, lest by refusing they should thereafter cease to be invited. it can hardly be expected that the banks, trust companies, and other institutions that are thus seeking participations from this inner group would be likely to engage in business of a character that would be displeasing to the latter or that would interfere with their plans or prestige. and so the protection that can be offered by the members of this inner group constitutes the safest refuge of our great industrial combinations and railroad systems against future competition. the powerful grip of these gentlemen is upon the throttle that controls the wheels of credit and upon their signal those wheels will turn or stop. in the case of the pending new york subway financing of $ , , of bonds by messrs. morgan & co. and their associates, mr. davison estimated that there were from to such underwriters who were apparently glad to agree that messrs. morgan & co., the first national bank, and the national city bank should receive per cent.--equal to $ , , --for forming this syndicate, thus relieving themselves from all liability, whilst the underwriters assumed the risk of what the bonds would realise and of being required to take their share of the unsold portion. this transaction furnishes a fair illustration of the basis on which this inner group is able to capitalise its financial power. it may be that this recently concentrated money power so far has not been abused otherwise than in the possible exaction of excessive profits through absence of competition. whilst no evidence of abuse has come to the attention of the committee from impartial sources, neither has there been adequate proof or opportunity for proof on the subject. here again the data have not been available. sufficient has, however, been developed to demonstrate that neither potentially competing banking institutions nor competing railroad or industrial corporations should be subject to a common source of private control. your committee is convinced that however well founded may be the assurances of good intentions by those now holding the places of power which have been thus created, the situation is fraught with too great peril to our institutions to be tolerated. the borrower and the money trust [ ]some trusts are denounced because of their attitude toward their employés. many trusts are efficient or inefficient because of the way their millions of labourers work. but let us be fair to big business. why not examine its one branch where labour is almost absent, where there is no brawn and all brain? banking the most logical of trusts a bank in new york city gave its employés a christmas present equal to half their annual salary. the bank had assets of $ , , . a fine example, you say, to other great business concerns! but the bank had only fifty employés. in the entire country there are probably not more than , persons engaged in banking, either directly or indirectly. the banker has, relatively speaking, no human factor to consider. and that factor with a concern like the united states steel corporation or the pennsylvania railroad is mammoth, almost baffling. the banker deals not in the production or distribution of wealth itself (in both of which much labor is needed), but solely in the paper representatives of wealth, money, and credit. thus he can apply far more directly than the manufacturer or railroad manager the economies and efficiencies of big business. banking--the business of dealing in money and credit--is the most logical of trusts. and in practice it has justified the theory. where banks have become larger they have become stronger, where co-operation and concentration have gone far, there safety and effectiveness have reached a high pitch.... banking is the one central business of all--it is the business of businesses. so if it has become more efficient as the trust idea, or at least the principle of concentration, has gained sway, how can we have too much concentration and who is there to complain?... if the bankers have, faithfully and well, handled the trust of extending credit to the limit of their ability, yet when the president of the second bank in size in the country acknowledges himself to be one of about a dozen men in whose hands the power of extending credit is, in the last analysis, concentrated--then it is high time, seriously and fearlessly, to consider the subject.... three main factors are in the main responsible for the concentration of the control of credit and they are the growth of big banks, the growth of big industries, and the financial laws of the country.... no lack of banking facilities however great the concentration of money power in this country, it cannot truthfully be said that banking facilities are not also increasing. figures taken from the reports of the national monetary commission and other official sources show that the number of banks is mounting up faster than either wealth or population.... where the money has gone when one first realises the extent of this country's banking resources he is properly astonished. but how evenly are these resources distributed? it is commonly known that banking facilities in the southern and western sections of the country are small indeed as compared with the new england, eastern, central, and pacific coast sections, where large cities abound. to illustrate, in , when the total banking power was close to twenty-one billions, more than half was represented by forty-seven cities, and close to one-quarter was held by the two hundred banks in new york and chicago. in other words about per cent. of the country's banks held close to one-quarter of the country's banking power. now it is a well-known fact that an individual or corporation with large resources and large business exerts an influence in his particular field far in excess of his actual mathematical percentage of the total resources or business. thus the dominating position of the big banks is even greater than mere figures indicate. but there is still another fact which centralises and cements their power. the only banks which are really large are in a few cities, and the larger they are, the more they tend to the very greatest centres of population. thus toward the end of , there were banking institutions with deposits of $ , , or more, of which sixty-two were in new york city. there were thirty-six institutions with deposits of $ , , or more. sixteen of these were in new york city and four in chicago. there were ten with deposits of $ , , or more, and of these, seven were in new york and two in chicago. of the ten largest trust companies six were in new york, three in chicago, and one in boston. these great banks and trust companies are of very recent growth. twenty years ago the deposits of our largest bank were one-twentieth of what they are to-day. at the first inauguration of president mckinley, which was really not so far back as the dark ages, there was no bank in new york with more than $ , , of deposits. now there are six banks each with more than $ , , of deposits. a trust company in new york city, which had deposits of $ , , five years ago, now has deposits of $ , , and its twenty-eight directors sit [ ] in boards of other banking institutions with resources of $ , , , . when it comes to actual cash we find the position of the new york and chicago banks even more dominant.... consolidation--a steady process despite the disproportionate size of new york and chicago banks their number is steadily decreasing. this is because the process of consolidation proceeds just as steadily. in there were fifty-three banks in the new york clearing house association, and in there were fifty, although in the meantime the amount of business had increased twenty times. there are now less than banks in new york, or ten less than ten years ago, although in that time cash holdings have doubled and deposits have increased a third. in ten years no less than banks have gone out of existence, generally through absorption into larger institutions.... in chicago the same process of consolidation has gone on. one chicago trust company has absorbed six others in eight years. new york and chicago are by no means the only cities in which the obvious tendency is to have fewer but larger banks. look about at random. akron, ohio, where the rubber industry has recently become of more than local importance, has felt the necessity of banks large enough to carry on its trade, and consolidation has resulted. in detroit, where the automobile trade has set in motion a great industrial development, the old detroit national has absorbed the american exchange national. in seattle, nashville, wilmington, portland, philadelphia, baltimore, san francisco, and louisville there have been many recent mergers and absorptions. in cincinnati one of the largest institutions in the ohio valley has been formed by the absorption of the merchants' national by the first national. as for boston the desire of her capitalists to make new england more powerful in the business life of the country has led to the recent absorption of the city trust company by the old colony and the steady growth of three financial institutions, the shawmut national bank, the first national bank, and the old colony trust company, these three far exceeding all others in size.... how the law has fostered affiliation ... one great cause of the concentration of banking and financial power into a few hands has been the consolidation of banking resources into a few great units and the friendly affiliations of these units. but these units have not grown big merely because their managers or owners willed it so. the banking and currency laws of the country have forced money into a few centres. the banks of new york city employ--mainly in financial or stock market loans--about $ , , which belongs to banks in other parts of the country. naturally this concentration of money in a few banks "places these banks in a position to control the issuing or granting of credit"--to use the exact words of the president of one of them--"thereby placing the money power in the hands of a comparatively small number of men." but this gravitation of money to new york is because the money is idle and is hunting a job, and not because of any process of usurpation, manipulation, or combination. it naturally arises under and by virtue of the reserve requirements of our national banking act.... the bulk of idle country bank cash which finds employment in new york comes here because of the existing reserve system, and there are several great banks in both new york and chicago which have few customers other than the thousands of country banks whose "correspondents" they are. the corporation and the bank thus banking and financial power is concentrated in a few hands not only by the growth of great banks and by the laws of the country, but also by the legitimate business practices which have grown up under these laws. but the massing of this power in a few vast, centralised units has been a development of the last ten or fifteen years only. that is, it has been coincident with the development of trusts and combinations. big business and big banking have gone hand in hand. each has made the other possible. by law a bank cannot loan more than one-tenth of its capital and surplus to any one customer. but the customers have grown into behemoths. how then could the banks fail to grow? before trusts existed and before small railroads were united into large systems the few banking houses of magnitude which existed in wall street had engaged in merchant banking, for the industries and railroads had not been large enough to attract their attention. these small industries and railroads were controlled by their owners, and their capital requirements were supplied largely in the localities in which they were situated. but as railroads and industries were consolidated it was found necessary to apply to the larger new york banking firms to supply the funds. these bankers had european connections as well as close affiliations with the big national banks and life insurance companies, and were able not only to furnish the needed capital but also undertook to market the securities of the newly formed combinations. thus a few banking houses, of which j. p. morgan & co. is the chief example, became in a way responsible for these new creations and naturally assumed charge not only of their finances, but to some extent of their other affairs. thus the headquarters of the trusts and railroads gradually moved to new york. in the treasuries of these companies were vast sums of money to be banked, and it was inevitable that most of it should be placed in new york banks. the average daily balance of the united states steel corporation is about $ , , and the american tobacco company has perhaps $ , , . there is also the standard oil company, whose balance is perhaps as large. these few financial groups, j. p. morgan & co., kuhn, loeb & co., and the capitalists identified with the national city bank and the first national bank, along with a few others, are primarily in the business of selling securities and loaning money upon them. in fact they may be described as the great security issuing houses. such influence as their members or directors may exert over railroad and other corporations is largely due to their ability to dispose of securities and to give these securities the stamp of soundness and conservatism. here it may be added that men like j. p. morgan would not be directors in so many corporations if their advice and assistance were not eagerly sought. in the small village a small group of men own the bank, the coal yard, the ice-plant, the trolley line, the gas plant, and the little factories. every day of the year these men, in their different capacities, have to trade with themselves in the purchase of supplies, etc., for their different companies, one from another. no one thinks of accusing them of double dealing, and yet the situation differs not a whit from the vast system of interlocking bank and corporate directors in new york except in degree and in fact, which, however, is vital, that the new york system affects the whole commonwealth whereas the business convolutions of deacon jones of jones' corners do not. now it must not be supposed that bankers such as mr. morgan and his partners are usually large owners in the companies they influence or even control. often they do not own per cent. of the stock of the banks they dominate. often they become directors with but a few shares of qualifying stock. still more often their influence is exerted merely as financial advisers. often they nominate the president of a railroad or manufacturing company as morgan & co. nominated the president of the atlas portland cement company. often the bankers take no part in the direction of companies until these companies have shown incapacity or have had for any reason, business or governmental, to be reorganised, either in form or management. recent cases which come under one or the other of these heads are the wabash railroad, the united states motors co., the westinghouse electric & manufacturing company, the international paper company, the american tobacco company and the american sugar refining company. harmony the watchword there is little evidence to show any actual agreement or even arrangement among the great financial groups. through interlocking directors and the wide following of smaller firms which each of the big groups has, the whole big banking situation in new york is closely knit together. there is a carefully fostered community of interest even among hostile groups, each group having a director or two, like a financial ambassador, in the other banks.[ ] in the past there has been keen rivalry. historically the morgan and first national bank groups have long been close, and two members of the morgan firm were taken from the first national bank. at one time these two groups bitterly fought the other two powerful groups--the kuhn, loeb-national city bank interests. but in recent years harmony has prevailed.... it must be remembered that the four banking groups are now managed for the most part by young men. these young men are more accustomed to the ways of conciliation than were the late e. h. harriman, and john d. rockefeller and j. p. morgan. the younger men trouble themselves little with the former conflicts of morgan, hill, rockefeller, schiff, stillman, harriman, and ryan. they have forgotten even the accusations and charges which the life insurance scandals made public. their aim is more impersonal--it is to "develop business," and the surest way to do that is by working harmoniously together. money power not distinctly american striking as the concentration of banking, money, and financial power seems, it is no greater here than abroad, perhaps not so great. in london there are banks with fifty millions of capital, or twice as much as our one largest bank, and deposits of nearly four hundred millions of dollars, or twice as much as our largest bank. even canada, with a population less than one-tenth of ours, has a bank as great as our greatest. relatively its big banks are bigger than ours. concentration in canada has gone much farther than here. six banks in the dominion hold half its entire banking resources. the autocratic power wielded by the score of great canadian banks would start a revolution in this country. germany and france long ago went through the process of bank consolidation. why, then, do we hear few complaints from abroad? here is a problem to be faced with intellectual honesty. money power may be a bad thing, but let us not be so dishonest as to declare it a new thing. the new york clearing house association may wield power too autocratic, but let it not be overlooked that a similar organisation in london, with only one-third as many members, has long exercised as great power without raising any hue and cry of a money trust. also consider germany. if you have the time and courage to undertake such a task, go through the ponderous volume issued by the national monetary commission telling of the actual results of the great bank system in that country. it is a weary task reading the long-winded testimony of herr professor doctor governor this and that, but it is worth the labour. we are told that great banks are more amenable to public opinion than smaller scattered institutions, that the government is more ably assisted in its financial operations, that fewer reckless loans are made. quicker prognostication of crises, whether on the bourse or in commerce and industry, quicker adoption of preventive measures thereby lessening the effects of crises, are other services rendered by concentrated banking in germany.... in , when there was far less both of co-operation and concentration among the banks of this country than there is to-day, each bank standing weakly isolated and alone, frantically grasped all the cash it could muster. when the panic storm broke banks struggled to call in loans and line their vaults with cash. business was crippled; industry was squeezed dry of its lifeblood. last year when germany was threatened with both war and panic, trouble was averted by the german "money trust," which loaned more than $ , , . it takes no expert knowledge of finance or banking to perceive that a few great, strong banks, or many smaller ones (provided they are welded closely together) can meet a storm more calmly than scattered, unconnected institutions. where is the vital difference? if concentration is a good thing, how can there be too much of it? here is the answer. concentrated power without responsibility may be the worst possible thing. the other great financial nations have money trusts ... too, but each is capped by a vast central bank, more or less a government institution, and from the necessity of the case operated not only with a view to the general welfare but more or less openly and publicly.... the american "money trust" is strictly private, responsible to no one. it may act philanthropically if it chooses, but it is governed by nothing but choice. the money kings can, if they wish, exact any price. r. h. thomas, former president of the new york stock exchange, told the pujo committee how wall street had finally to turn to one man, j. p. morgan, in the panic of , to save it from complete disaster. he did not know where the relief came from, in what form, nor with what conditions. it just came. since at that time the entire country was dependent upon wall street because its surplus money was there, there is no escaping the fact that the whole financial situation of the country was at the mercy of one man. a per cent. rate for loans would be inconceivable in one of the european financial centres because the central banks of europe are the guarantors of the stability of the money market. the central banks of europe depend upon no man, selfish or altruistic. they are the public financial regulators of the whole nation. has the money power been used to crush and squeeze?... suppose that it has not been so used. nevertheless, its control is in the hands of a few men. even if their action be honest and intended for the public interest, they are necessarily most interested in the great undertakings in which we have seen them to be engaged. by reason of these limitations they must check and limit, if they do not destroy, genuine economic freedom and competition.... a handful of men, responsible to no one but themselves and god, have become masters of the lifeblood of commerce and industry. that this power has been more rapidly concentrated into their hands than the people have supposed is the unavoidable conclusion of this article. from private persons, acting in private, and dominated in the main by private motives there cannot be expected the wisest and broadest direction of the flow of money--the lifeblood of business. these men have not asked for this power. they know it is too great for them. on the whole they have behaved with singular restraint. but only a fool would suppose that the best system for financing the small farmer in florida or the small tin can manufacturer in oregon is to turn over the entire money power of the nation to j. p. morgan and a few other private persons. how under such a system could the great trusts fail to thrive at the expense of the small man? the banks and railway finance [ ]close relationships of railways with banks or other credit institutions have grown up naturally through the need for new capital constantly imposed upon an expanding railway system. some railways have been fortunate enough to possess a relatively stable body of stockholders whose confidence in the management is so complete that new funds can be raised by direct appeal of the management to the stockholders without the intervention of outside financial interests. but these cases have thus far been rare in american railway finance. when the policy calls for the raising of funds by the issuance of bonds rather than stock, the appeal is to a wider and to an anonymous public rather than to a corporation's own stockholders. frequently the appeal must be to a class of investors situated in another section of the country or even in a foreign country. most railways have not the technical organization nor the established market necessary to handle their issues easily, and usually it is found that in spite of the often exorbitantly high commissions which the bankers exact for their services, the net result is more satisfactory than that secured through the railway's own efforts. to the extent that this is the case, the bankers are performing a service of genuine economic value, and it must be concluded that under present conditions such service cannot readily be dispensed with. assuming this service as a necessity, the next step is for the banker to seek representation upon the railway board. his house has made itself responsible for a large issue of securities. it appeals to the investing public, not technically guaranteeing the issue, but practically doing so because of solicitude that its reputation for the handling of high-grade securities shall not be impaired. it seeks therefore to protect its own standing, and at the same time to make the securities more attractive to its customers, by demanding a place on the board of directors from which it can follow in detail the employment of the funds secured through its assistance. large investors like life insurance companies, savings banks, fire insurance companies, guaranty companies, trust companies, demand as a prerequisite to purchase of securities that the underwriting house shall be represented on the board. the railway's credit--its ability to sell its issues--is dependent frequently upon the presence on its directorate of this representative. however, the banker is not in the position solely of a spectator or a detective. his expert advice is sought and usually followed. often he is in a position where he can stipulate conditions under which alone he will undertake to provide the funds required, and such stipulations are frequently of immense influence in furthering efficient railway management. a recent example is found in the furnishing of money to the chesapeake and ohio railway company by kuhn, loeb & co. under a stipulation that the road must put back into its property each year a certain amount of its earnings. instances might be multiplied in which railway corporations have been saved from disaster and set upon their feet through the aid of those who have furnished the funds, and who have stipulated in connection therewith that in order to insure their knowledge of all transactions, and to give them a position from which they might bring their influence to bear, they should be granted representation on the railway board. of course it must be admitted that the power of the banker may be misused to his own private advantage. the power is there--the power to refuse funds--the power that comes from command of enormous sources of capital, the prestige gained by years of successful experience. men who have attained such a position have the personal qualities that give them naturally a commanding place in any council of business men. when such men dominate the policy of a railway and the results are disastrous, it is exceedingly difficult fairly to fix the responsibility and assess the blame. the line between good faith and good judgment or between personal ambition that amounts to breach of trust, and a misplaced optimism concerning the outcome of a specific policy, is a very difficult line to draw. although praise and blame cannot be assigned with any precision between mr. morgan and mr. mellen in the unfortunate new haven situation, it is the prevailing opinion of the new england public that it has not been benefited greatly by the presence on the new haven board of the distinguished banker member. generally speaking, however, the powerful banking interests have thrown their influence in the direction of railway efficiency and the public advantage. if our judgment as to the desirability of the relationship of railways and credit institutions is to be determined solely by results, we must conclude that the balance swings heavily in favor of the continuance of the present policy. however, opposition to the close association of financial houses and railways has not sprung from any such favorable relationships as we have here described. it grows rather out of the concentration and monopolization of credit. a powerful banking house which has identified its interests with that of one railway system is in position, because of its direct influence on the railway and its close affiliation with all other sources of credit, seriously to hamper if not altogether to prevent the securing of credit by a rival interest. this power over credit is not confined to one city or to one section of the country, but it reaches every section and even extends beyond national boundaries into the foreign sources of investment funds. local or small enterprises requiring only moderate underwriting are frequently financed independently, but it is an acknowledged fact testified to by the large bankers themselves that with rare exceptions issues of securities in large amounts, except when taken up by the stockholders, must receive at least the tacit approval of the big financial group. participation by the smaller banking houses in future underwritings depends upon loyalty to the syndicate in whatever enterprises are now being offered. the little fellows are inclined to respect a suggestion not to assist an enterprise of a character likely to interfere with undertakings already financed by the large interests. this informal but none the less effective network of alliances tends to destroy the competitive market for capital, and to restrict the railways to one source of credit. there does not appear to be any serious competition among the large bankers, but rather an understanding in the nature of a division of the field. a railway obtains the services of a single banking house which acts as its fiscal agent, underwrites its securities, receives its deposits, and has a representative on the railway's board of directors. when the railway becomes involved in financial difficulties, the same banking house organizes protective committees, devises reorganization schemes, and creates voting trusts. as mr. brandeis has put it, it adds to its duty as midwife also that of undertaker. is this relationship potentially dangerous for the railways and the public? the late mr. morgan, in his illuminating testimony in the money trust investigation, took the position that the situation might be dangerous in the hands of the wrong men, but he clearly implied that there had been no bad results thus far and there were not likely to be in the future with a continuance of the present leadership. his argument reminds one of the young lady who "when she was good was very, very good, and when she was bad she was horrid." yet this view is that of most of the financial leaders who appeared before the pujo committee.... mr. davison and mr. schiff both opposed the policy of concentration through interlocking at the point where the representative of the two interests might wield a dominating influence, but they found it difficult to fix that point. mr. baker, who took the position that safety lies in the personnel of the men, that in good hands interlocking could not do any harm, but in bad hands would be very bad, concluded nevertheless that the movement of concentration had gone about far enough. and mr. george m. reynolds, of chicago, thus frankly expressed himself: "i am inclined to think that the concentration, having gone to the extent it has, does constitute a menace." and again, "i think a more wide distribution of the power of credit ... would really be better in the long run." when asked the direct question, "do you approve of the identity of directors or interlocking directorates in potentially competing institutions?" he replied, "personally i do not believe that is the best policy." it should be kept in mind that there is no evidence on record that this power has been used oppressively otherwise than in the rate of commission charged. many of the bankers insist that the monopolization of credit is a physical impossibility.... there is, nevertheless, a concentration of credit in comparatively few hands. if the conclusions thus far established are sound, it becomes clear that the real evil resulting from the interlocking of railways and credit houses, if any evil exists, arises primarily out of the relation of credit institutions to each other, rather than out of their relation to the railways through representation on railway boards. were this interlocking of railways and banks to be wholly prohibited without any alteration in the organization of the credit market, i am unable to see how the situation would be changed materially. the tendency on the part of the bankers would still be to follow the law of "banking ethics" and divide the field; a railway would still employ a single banking house as its fiscal agent, and this banking house would still exercise a powerful influence in determining the policy of the railway. at the same time the railway would be deprived of the presence on its board of a financial expert whose experience might be drawn upon in the detail of management day by day. as mr. reynolds has admitted, the menace is in the concentration of credit. such power may not thus far have been misused. but as the pujo committee has said, "whenever the incentive is at hand, the machinery is ready." those who have the public welfare at heart have no right to assume that such power will never be used to the personal interest of the bankers themselves and to the injury of the public. while i have no great enthusiasm for the popular pastime of rushing to washington for a statute whenever the economic machinery fails to run smoothly, i am in sympathy with those who are studying the problem of the restoration of an open competitive market for capital. however, this is a problem of extraordinary difficulty, and i do not myself see the way at present to its solution. i am aware that congress has enacted legislation with the purpose of destroying this concentration of credit, and that many look upon the clayton act, so far as it touches our problem, as a distinct step in advance. personally i am sceptical as to its efficacy in its present form. the opportunities for evasion are too numerous. however, it can be laid down as a general rule that all statutory enactment which really endures is a product of successive increments of legislation--the result of experimental tests and the knowledge that is gained by experience. it is no argument against the interlocking provisions of the clayton act that they do not solve the problem and that they can be evaded readily. such an attitude of timidity and pessimism assumed twenty-five years ago would never have given us our present air-tight interstate commerce act. it may well be, however, that no relief can be found short of the radical step of employing government credit in aid of public-service industries. so vital is the necessity of the service to the people that the time may come when government loans to transportation corporations will appear to be a logical and natural step. but this is a digression. once this free market for capital is assured, the question again arises, shall the railway board of directors contain banker members? obviously the only purpose that the railway could then have in admitting bankers to its directorate would be the opportunity to utilize their experience in the direct management of the property. quite as obviously the principal motive of the banker in accepting membership on a railway board would be to represent the underwriters and to act as fiscal agent. but with the capital market competitive, i can find no serious objection to such relationship. even under present conditions the banker in the majority of cases respects his trust, refuses to vote on questions involving his personal interest, and performs loyally his service to the railway; but his mere presence on the board as the embodiment of the railway's only source of credit may be sufficient to control the situation in his behoof. however, with a free credit market, the dominating position of the banker largely disappears and he becomes what he ought to be, an expert adviser on financial matters. it may be asked why, if the banker is now to confine his activities to what mr. loree has called the "necessarily intimate relation between the banker and the seeker for accommodation," this cannot be accomplished in the same manner as in unincorporated businesses without putting the banker on the directorate. in reply attention may be called to the fact that even in the case of unincorporated businesses, the credit departments of the large banks are virtually in the position of directors, so intimate and comprehensive is their influence and advice. but more than this the business of a railroad is so complex and extensive, its activities are so multifarious, that an intimacy with its affairs sufficient to make the banker's counsel of value would be impossible except by actual presence on the directorate. under these changed conditions of credit, i can see greater opportunity for the utilization of the service of expert bankers in railway management. directorships which have been monopolized in the hands of a few banker specialists in railway securities should then be more widely distributed. it is quite impossible to believe that expert banking talent available for this service is as rare as the present situation would suggest, in which the abilities of a relatively few men are made to do duty in dozens of corporations. this absurd situation springs not from a scarcity of talent but from the narrow market for credit. a liberation of that market would bring latent ability from its hiding-places, and by the infusion of new blood would stimulate the management of our railway enterprises. it would open this field of activity to men "who have been obliged to serve when their abilities entitled them to direct." footnotes: [ ] adapted from the _report of the committee appointed to investigate the concentration of control of money and credit_, d congress, d session, pp. - . [ ] adapted from albert w. atwood, _the borrower and the money trust, review of reviews_, vol. , august. , pp. - . [ ] [interlocking directorates among the more important banks were prohibited by the clayton act, passed in . see p. .] [ ] frank haigh dixon, _the economic significance of interlocking directorates in railway finance, the journal of political economy_, vol. , no. , february, , pp. - . chapter xxix crises the nature of an economic crisis [ ]a definition of an economic "crisis" is, like most other definitions, very difficult to construct. by way of introduction we shall quote a few chosen somewhat at random. adolph wagner, the german economist, expresses his idea by saying: "crises imply ... the overwhelming and simultaneous occurrence of inability on the part of independent _entrepreneurs_ to pay their debts." this is similar to the statement of john stuart mill: "there is said to be a commercial crisis when a great number of merchants and traders at once either have, or apprehend that they shall have, a difficulty in meeting their engagements." professor e. d. jones says: "a crisis is the sudden application of a critical conservatism to business transactions, leading to such a demand for liquidation as to cause a widespread inability among business men to meet their obligations." senator theodore e. burton states: "the word crisis, if employed with entire accuracy, describes a period of acute disturbance in the business world, the prevailing features of which are the breakdown of credit and prices and the destruction of confidence. it has especially to do with the relations of debtor and creditor." none of these definitions gives so clear an idea as does a brief description. probably no one has ever pictured the crisis and the associated events more effectively than did frederick engels in his little volume, _socialism: utopian and scientific_: as a matter of fact, since , when the first general crisis broke out, the whole industrial and commercial world, production and exchange among all civilized peoples and their more or less barbaric hangers-on, are thrown out of joint about once every ten years. commerce is at a standstill, the markets are glutted, products accumulate, as multitudinous as they are unsaleable, hard cash disappears, credit vanishes, factories are closed, the mass of the workers are in want of the means of subsistence; bankruptcy follows upon bankruptcy, execution upon execution. the stagnation lasts for years; productive forces and products are wasted and destroyed wholesale, until the accumulated mass of commodities finally filter off, more or less depreciated in value, until production and exchange gradually begin to move again. little by little the pace quickens. it becomes a trot. the industrial trot breaks into a canter, the canter in turn grows into the headlong gallop of a perfect steeplechase of industry, commercial credit, and speculation, which finally, after breakneck leaps, ends where it began--in the ditch of a crisis. and so over and over again. perhaps even this vivid word picture will be less impressive to some than a few facts as to the serious effects of the crisis and the depression that follows it. professor wesley c. mitchell in his recent volume entitled _business cycles_ has recorded the significant features of the crisis of in england and the united states and the following points have been taken from his account. by the middle of the summer evidences of difficulty had begun to appear in england. british railway stocks had fallen off in price; the shipbuilding yards had few new contracts; costs of production had become so great that many manufacturers were refusing to take new business at the ruling quotations; the building trades were dull; the ratio of net to gross railway receipts declined; commodity prices began to drop; bank clearings fell off; imports gained less rapidly; and the percentage of trade union members unemployed rose from . per cent. at the end of april to . per cent. by the close of august. these difficulties came to a climax in the latter half of the year, being intensified by the crash in the united states. the bank rate of the bank of england rose from - / to per cent., where it remained for nearly two months. during this period the market rate averaged from - / to - / per cent. imports and exports showed smaller and smaller increases over the preceding year and in the early months of began to decline; clearings fell off sharply and trade union unemployment increased to nearly per cent. during the latter months of . in the united states, where the crisis degenerated into a panic, conditions were much worse. in advance of the actual outbreak of the panic there was for months evidence of a tension in the investment market. copper especially fell in price and was followed by copper stocks. this precipitated difficulty among a group of banks that were more or less closely identified with the copper interests. runs were started and a number of banks were forced to suspend payments. a scramble for cash followed, spreading from new york throughout the united states and accompanied by very serious consequences. among the worst of the effects were a premium on currency which rose at one time as high as per cent.; the necessity of introducing numerous substitutes for cash; a demoralization of the domestic and foreign exchange markets that caused heavy losses both to bankers and to business men, while the amount and the prices of securities dealt in on the stock exchanges seriously declined. during november and december currency was at a premium of from / to per cent. call loan rates were erratic, going as high as per cent. in the latter part of october and fluctuating between and per cent. as late as during the latter half of december. during november there was a decline in the amount of time loans and the quoted rates ranged from to per cent. in october, to per cent. in november, and to per cent. in december. worse still was the stoppage of business by those enterprises that could not pay the high rates and could make no special arrangements to secure lower ones. business failures in the united states which had been as low as in the last week of , were for the week ending december , , and for the week ending january , . in the second quarter of there were , and for the first quarter of there were , . these derangements of business would seem to be of interest primarily to the bankers and brokers or to the large borrowers--to the capitalist class. the counterpart of the picture is to be found in the effect of the crisis upon the man of small means and upon the poor. inability to borrow may mean considerable inconvenience or even financial ruin for the man of large affairs but it does not usually mean actual suffering. nevertheless his failure to secure funds and the necessity of selling his securities or commodities at a low price may force him to close his factory, to delay extensions, or at least to curtail operations. he receives fewer orders for goods and as a result buys smaller amounts of raw materials and lessens his own output. this means reductions of wages and discharge of workmen. some writers have urged that the workingman receives a fixed wage and does not assume industrial risks, which are borne by the capitalist or entrepreneur. such a statement is fallacious. the employee participates in the risks of modern industry and suffers from a business derangement far more severely than his employer. the capitalist secures less profits but with his accumulated savings ordinarily endures no real privation, while large numbers of the workers with little or no savings face actual hunger or starvation. demands upon charitable organizations increase, bread lines grow longer, and suffering becomes widespread and intense until the crisis and the ensuing depression are over.... the crisis of in the light of history [ ]... from one point of view ... every economic crisis is a financial crisis. for since values are expressed in terms of money, and since the modern business superstructure is erected on the basis of credit, every economic revulsion expresses itself through the medium of a change in prices; and since the bank is the center of credit operations, every crisis inevitably involves a revolution in the conditions of credit. from this point of view, all crises may be declared to be financial crises. from another standpoint, however, a distinction may be drawn between financial crises proper and commercial or industrial crises in the larger sense. there may be a financial panic or crisis due primarily to temporary and sudden oscillations in the condition of the money market or in the price of securities. such oscillations, sharp and sudden though they be, may have but little relation, whether of effect or of cause, to the general commercial and industrial interests. of this character, for instance, were the original black friday in england, in , its namesake, the famous black friday in in new york, as well as many spasmodic fluctuations due either to political rumors like that which followed the venezuelan message of , or to temporary speculative manipulations, like the northern pacific "squeeze" of . of a distinctly different nature are those wider disturbances which are traceable to more general economic causes and which, even though they culminate in acute financial trouble, are followed by an industrial and commercial depression of more or less magnitude. into which category is to be put the crisis of ; and if in the latter, what were its causes? at the outset it must be remembered that crises are essentially modern phenomena. we have had financial transactions, and that, too, on a large scale, for many centuries and in many civilizations. but crises, in contradistinction to temporary panics, have existed in england only since the middle of the eighteenth, and in other countries only since the beginning of the nineteenth, century. the first crisis in england, barring the financial flurry connected with the south sea scheme in , was that of , followed by the minor disturbances of and , and the more widespread convulsions of , , and . the first crisis in the united states was that of ; and it was not until that we find the first international crisis, spreading from the united states to england and then to france. in germany the period of important crises was ushered in even later. crises, in other words, are products of modern economic life. modern economic life, however, has as its basal characteristic industrial capitalism, with the factory system and the newer methods of production for a wide market. this transition to modern industrial capitalism began in england in the latter half of the eighteenth century, was initiated in america in the first two decades of the nineteenth century, and took place on the continent at a later date, last of all in germany. the explanation of crises must therefore be sought in some feature of our modern capitalistic life. the current explanations may be divided into two categories. of these the first includes what might be termed the superficial theories. thus it is commonly stated that the outbreak of a crisis is due to lack of confidence--as if the lack of confidence was not in itself the very thing which needs to be explained. of still slighter value is the attempt to associate a crisis with some particular governmental policy, or with some action of a country's executive. such puerile interpretations have commonly been confined to countries like the united states, where the political passions of a democracy have had the fullest sway. thus the crisis of was ascribed by the republicans to the impending democratic tariff of ; and the crisis of has by some been termed the "roosevelt panic," utterly oblivious of the fact that from the time of president jackson, who was held responsible for the troubles of , every successive crisis has had its presidential scapegoat, and has been followed by a political revulsion. the crisis of helped to weaken the democrats; the crisis of resulted in a popular majority for tilden; the crisis of put cleveland into the presidential chair; and the crisis of , with the ensuing depression, brought the republicans back to power. opposed to these popular, but wholly unfounded, interpretations is the second class of explanations, which seek to burrow beneath the surface and to discover the more occult and fundamental causes of the periodicity of crises. here we find an interesting and progressive series of attempts to grapple with the difficulties of the problem. for a long time economists and business men advanced the theory of overproduction, forgetful of the fact that there really cannot be any such phenomenon as too much actual production of wealth. with the disappearance of this doctrine there came into prominence its variant, which put the emphasis on relative, rather than absolute, or universal overproduction, that is, the overproduction of some things and the underproduction of others. this theory also failed to command general assent, for the reason that no one could show in what respects there was any underproduction of wealth, or any lack of particular products during the years preceding a crisis. others again, have sought the causal fact in underconsumption, alleging that the larger consumption of wealth will in itself take up all the slack of production, and thus obviate a crisis. this explanation also is inadequate, because it overlooks the fact that the real falling off in consumption comes after the crisis has developed and not before; in fact, the period of prosperity which precedes a crisis is generally marked by a prodigious increase in consumption. the socialists, again, seek to explain crises by the existence of private property in the means of production, and contend that if we were to cease the exploitation of the laborer by the modern capitalistic method, crises would disappear. while, however, agreeing in this general conclusion, they differ in their detailed analyses. thus rodbertus maintains that the secret of crises is to be found in the fact that the progress of industry causes a continually greater output of product, while the exclusion of the laboring classes from any participation in this increased productivity involves a relative diminution in demand, and thus ultimately a fall in price, culminating in a crisis. marx, on the other hand, puts the emphasis on the fact that the necessary fall in the rate of profits (which, according to him, is a result of the surplus value, or exploitation theory) is incompatible with the greatly increased productivity of fixed capital inherent in the present system, and that the clashing of these two incongruous tendencies of modern industrial life brings about a relative overproduction of capital, and gives rise to periodical explosions. this view, finally, is sharply criticised by the latest and ablest of the socialist theorists, tugan-baranowsky, who in turn maintains that crises are due primarily to the fact that under the modern system it is impossible to invest the fresh accumulations of capital proportionally in all branches of industry, and that it is this relative disproportion of accumulated capital to the particular demand that causes the anarchy of the market and the recurrent convulsions of industry. while the socialist scholars have undoubtedly made valuable contributions to the discussion of the problem, they, like the earlier economists, have erred in laying stress on the question of technical production rather than, as is done by the more recent economic thinkers, on that of business enterprise and capitalization. this is manifestly not the place to elaborate a general theory of crises. if we attempt, however, to give the bare outline of the modern explanation. it would be approximately as follows: the problem of crises or industrial depressions is one of relative capitalization. under the present system of enterprise, production is carried on in mass for a prospective market, rather than as formerly in small quantities to fill a definite order. even if it be contended that certain factories nowadays are busy with producing to order, it is none the less true that numerous plants are continually being erected in the expectation that orders will be received in the future. the good times, or periods of rising prices, may be due to many causes--either in general to an augmented gold output, or in particular to the increase in the demand for some special product, whether in the iron industry through a new navy program, or in the clothing industry through the outbreak of a war, or in any other industry through a change of fashion or what not. prices first rise in the particular enterprise, production augments, the movement spreads to other lines of business, and the new enterprises are financed by loans from the banks or trust companies, or by the sale of securities on a capitalization proportionate to the anticipated earnings. in times of buoyancy we are continually capitalizing anticipated earnings and future hopes, and we do this through the utilization of credit on a large scale. we build railways, put millions into steel plants, "boom" land sites, and form combinations of all kinds, employing the credit facilities granted by the banks, or throwing the securities on the stock market. we "water" the stock or, if that be forbidden by law, we drive the market quotations to a high point, because we think that this is warranted by prospective earnings. sometimes we say that we capitalize the good will or, in the case of quasi-public enterprises, the franchise; but in all cases we capitalize the future because we believe that we shall earn an income which will justify this capitalization. the peculiarity, however, of an up-grade movement which rests on modern credit facilities is that we wear magnifying glasses or look at the future in too roseate a light. it is a natural tendency of human nature to capitalize one's hopes and expectations too liberally. if this is done on a continually larger scale, the capitalization becomes so great that actual earnings do not come up to our anticipations or the fear of a discrepancy between actual and estimated earnings begins to obsess us. it becomes necessary to reduce the capitalization to its true dimensions, _i. e._, to a sum proportioned to actual earnings. this process of readjustment of overcapitalized values obviously involves loss; but readjustment there must be. if the realization of its necessity is sudden, we have a crisis or panic. in the height of the period of exaltation or prosperity, something happens to disturb confidence. a chance occurrence, a mere rumor, may suffice. some bank considers its credit too heavily engaged, or suspects the adequacy of the collateral. just at the flood of the tide, when new demands are constantly being made, it finds itself unable or unwilling to respond. its refusal starts or intensifies the feeling of insecurity, and with the inability of some important concern to meet its obligations, a failure occurs and the crisis is precipitated. if, on the other hand, the situation is well handled, and if the readjustment of the overcapitalized values to actual earning capacity can be brought about more gradually, we have, in lieu of a crisis, a liquidation and a period of depression which lasts until the up-grade movement again sets in. crises, therefore, are not necessarily the result of increased technical production. the important point is not production, but capitalization. there may be overcapitalization, without overproduction. overproduction of particular things may indeed accompany overcapitalization, but the stress must be laid, not on the relation between production and consumption, as the old writers assumed, but on the discrepancy between the investment and its returns. while the general features of a crisis are thus everywhere the same, the details differ in each case. sometimes it is the banks that fail first, sometimes the general business enterprises. sometimes it is the railway securities that first feel the strain, at other times "the industrials," and at still other times the raw materials. sometimes the bolt comes out of the clear sky with prices at a maximum, sometimes it is only the last stage of a period of liquidation with progressively lower prices. but however unpredictable and seemingly inscrutable the actual course of events, the fundamental explanation is always the necessary readjustment of capitalization to actual earning capacity. that this is true of all our crises can be seen from a hasty review. the crisis of was the result of the first utilization of modern capitalist methods in america. the period of the war of was marked by three facts: first, the industrial revolution in new england and the introduction of the factory system in the textile industry; second, the great development of internal improvements through canal and turnpike companies; third, the sudden multiplication of banks to finance the new enterprises. the consequence was the so-called "golden age," which lasted for several years, until checked by the immense imports from england after the war, and destroyed by the collapse of the overcapitalized undertakings. it was well into the twenties before the country recovered from the industrial depression, and then came the second up-grade movement, which culminated in . this was primarily a land and transportation, rather than a purely industrial, phenomenon. the canals and turnpikes in the east were now being replaced by railways, and the spread of slavery caused a rush of cotton planters, not only to the black belt, but to the pine barrens and hill country of the south. it was primarily land values that were being overcapitalized, and the process went on to such an extent that the annual land revenues of the government now exceeded the total governmental receipts from all sources of a few years before. finally, to finance this land movement there were called into being hundreds of the "coon-box" banks, that found a champion in president jackson in his war against the bank of the united states. as the period of exaltation had been unexampled, so the collapse was proportionally great. the crisis of , followed as it was by those of and , was still more serious than that of . it was again well-nigh a decade before the readjustment of values had been completed. the following decade was in turn marked by five striking facts: first, the gold discoveries of california and australia, which soon initiated a general rise of prices; second, the consummation of the revolution in the media of transportation by land and water, and the settlement of the entire mississippi valley, the most fertile portion of the continent; third, the abolition of the corn laws in england and the opening up of a market for our incipient surplus of wheat; fourth, the era of industrial invention which resulted in the application of capitalistic methods to new classes of enterprise besides the old textile industries; and fifth, the development of free banking with the "wild-cat" institutions to provide the credit facilities for this prodigious overcapitalization. the crisis of , which was the inevitable result, was perhaps still more acute than its predecessors. the continuance of its depressing influence on industry, however, was checked by the economic effects of the civil war, which gave an artificial stimulus to many forms of enterprise. in the period immediately succeeding the war, great changes again occurred. the transcontinental roads were completed and the eastern trunk lines consolidated; the great wheat fields of the country were opened up under the new homestead laws, and the period of large exports began; the bessemer process revolutionized the iron industry, and the factory system was now applied to boots, sewing-machines, and agricultural implements; the great copper and silver deposits were developed, and the petroleum output grew apace; while the greenbacks and the greenback movement fomented the process of inflation. the discrepancy between the capitalization and the actual earning capacity of the country's business enterprises again became so overwhelming that the necessary readjustment took the form of the convulsion of --a convulsion the depressing effects of which were felt with almost increasing severity for six years. the crises of and were both less intensive and more short-lived than their predecessors, for reasons which it is now not difficult to explain. the resumption of specie payment in was rendered possible, and was followed by a series of abundant crops which revivified enterprise, and which were aided by the use of agricultural machinery on a large scale. the energy and the capital of the nation, however, were devoted in increasing measure to the transportation industry. this resulted in a perfect orgy of new railroad construction, the entire mileage of the country increasing in five years by per cent. as the overcapitalization was primarily a railway overcapitalization, the resulting reaction of was essentially a railway crisis, leading to but indirect and temporary disturbances in industry at large. within a year or two recovery was general, and the prosperous years from onward were reflected in the existence of a huge surplus of governmental revenues. the live-stock and meat-packing business attained its high-water mark; the textile industries made great progress in the finer grades, and the ready-made clothing industry assumed vast dimensions; the iron and steel industry was revolutionized anew by the invention of the open-hearth process and the utilization of cheap ore from the lake superior region; the south was being quickly developed by the northern capital that poured into the cotton mills and the coal and iron mines; electricity was applied to industry on an increasing scale, and the country took rapid strides in its evolution from an agricultural to an industrial community. the movement of overcapitalization, however, was somewhat checked by two important facts: the downward tilt of world prices in general, which had been falling since and which were fast reaching their lowest point; and the relative shrinkage, not only in the amount of the wheat crop, but also in the value of both the wheat and the cotton crops. the resulting reaction of , which was itself partly due to the ill-timed experiments with silver legislation, was as a consequence neither so profound nor so long-continued, since the discrepancy between anticipated and actual values turned out not to be so excessive. when we come particularly to the crisis of , we find that the general causes were very much the same. the last decade has been characterized by the most unexampled prosperity in our history. the most striking initial cause is the prodigious increase in the gold supply. whereas the annual average value of the output of gold was under one hundred millions in the first half of the eighties, and only a hundred and twelve millions in the second half, it has grown with such enormous strides that during the past two years it has reached an annual value of about four hundred millions. the result has been a constant rise of prices from the minimum level of . the rapid accumulation of gold, much of which went into the bank reserves, enabled the financial institutions to expand their credit facilities many fold, and as a consequence enterprise flourished in every direction. during the last decade the record crops of cereals and cotton, the extension of dry farming, the effects of irrigation on fruit culture, the development of truck farms, and the unparalleled increase of immigration led to a remarkable enhancement of land values throughout the length and breadth of the land; the output of coal doubled, that of petroleum more than doubled, and that of pig iron, as well as of steel, actually trebled; the huge combinations of capital, now spreading to every form of enterprise, effected prodigious economies and revolutionized business methods; and the transition from the agricultural to the industrial phase of economic development proceeded with unlooked-for celerity. values were pushed up on all sides and the hopes of a prosperous community were capitalized with a recklessness born of unbounded faith. the pace was too rapid; the reaction was bound to ensue. in the late autumn of the revulsion was precipitated, with all the familiar accompaniments of an acute panic such as the collapse of several financial institutions, the sudden curtailment of loans, leading to the failures of some prominent business concerns, the hoarding of money, the appearance of a premium on currency, going to over per cent., and the frantic efforts of the financiers to relieve the situation by the importation of gold, the issue of clearing-house certificates and the interference of government through the dubious expedients of the placing of a new bond issue and the emission of treasury loan certificates. the crisis of , however, is on the whole not comparable either to that of or to that of , for reasons which have thus far perhaps not been adequately discussed. these reasons may be classed under five heads. in the first place, the very magnitude of the country's resources has been a favorable factor. the unparalleled prosperity of the past decade has made possible the accumulation of a vast reserve in the case, not only of the great corporations, but also of the average business man. this reserve has acted as a buffer to the shock of reaction, and has softened the impact through a speedy restoration of confidence in the excellence of the country's assets and in the real solvency of business. secondly, the crops, while not those of a bumper year, have been large and valuable. it is significant that almost each of our great crises in the past has been preceded either by the failure of the harvest at home or by the existence of such a bountiful output abroad as greatly to reduce prices. it must be remembered that, notwithstanding all recent developments, this country is still primarily agricultural, and that upon the varying extent of our great staple crops depends in large measure the effective demand which sets and keeps in motion the wheels of business activity. by a fortunate coincidence, the crisis was attended by a phenomenon which in ordinary times would have spelled prosperity, and which in this extraordinary conjuncture helped to bring back normal conditions. in the third place, the overcapitalization of values was somewhat less conspicuous than hitherto in our greatest industry--that of transportation. some of our former crises have, as we know, been brought on primarily by the speculative building of railroads. but whereas in the early eighties the annual increase of construction reached ten and eleven thousand miles, during the past five years, with a railway system three times as large, the annual increment of new construction was only four or five thousand miles. the consequence has been that with the rapid upbuilding of the country the railways have grown up to their capitalization, until it is now reasonably certain that there has been for some little time scarcely any actual overcapitalization. a striking proof of the absence of any real discrepancy between normal values and the capitalization of actual earning capacity is afforded by the congestion of traffic of a year or two ago; and even with only normal business activity it is computed that, in order to prevent this congestion in future and to maintain the railways at a reasonable standard of efficiency, there will be required an annual investment of over a billion dollars. fourthly, the crisis of was preceded by a period of gradual liquidation. general prices of commodities, with a few notable exceptions like that of copper, were indeed high until well-nigh the outbreak of the panic. but the prices of securities had for some time undergone a marked shrinkage. some, quite mistakenly, attribute this shrinkage to lack of confidence engendered by the governmental policy toward industry; others, with equal readiness and no less extravagance, ascribe it to the distress caused by the exposure of the methods of "high finance" in positions of trusteeship. in reality, however, the depreciation in securities was caused chiefly by the rise in the rate of interest. in fact the one phenomenon is really the other; for where earnings remain unchanged, the capitalization of the earnings depends on the rate of interest. if it be objected that the price of stocks fell because of the apprehended decrease of future earnings, due to lack of confidence, the retort is obvious that this would not suffice to explain the equal or still greater fall in the capital value of bonds, private or public, with a fixed rate of interest. the depreciation was not national, but international, in character; and it applied not only to our railway and industrial securities, but to the english "consols" as well. the rise in the interest rate, which explains the fall in the capital value of securities, was due to several causes. first and foremost is the increase in the gold output. for, as is now well established by economic theory and reinforced by the observations of practical men, while any increase in the supply of loanable funds on the call-money market temporarily reduces the "money rate," an increase in the general supply of standard money in the community, on the contrary, raises not only the price level of all commodities, but the price for the use of capital, which we call the general rate of interest. the increase of money as the standard of value inevitably tends to increase the general rate of interest. again, since the rate of interest is always adjusted to the earnings of the fund of capital at the margin of its employment, the rate of interest has risen because there has been relatively less capital available for employment. the fund of free capital has been rapidly diminishing during the past few years. hundreds of millions were destroyed in the boer and japanese wars; hundreds of millions more disappeared through the destruction of san francisco and valparaiso; and countless millions in addition have been utilized to finance the more or less dubious schemes which have sprung up in all countries during the years of prosperity. even though there was no great overcapitalization of railroads and even though many of the industrial enterprises were really legitimate, the discounting of the future was not quite ample, and the capital was invested more rapidly than the immediate returns would warrant. the replacement fund, in other words, was neither quite large enough nor quite active enough; and with the gradual exhaustion of the available free capital, interest rates necessarily rose and security values as a consequence fell. the period of liquidation was thus a fortunate event. by checking the movement of exaltation and preventing the level of prices from being so extreme, it kept the reaction from being so great. where the crest of the wave is lower, the shock of its break is less. had the ascent of prices and values gone on unhindered, the convulsion of would have been far more severe. from this point of view, even those who mistakenly persist in ascribing the lack of confidence to the president ought in reality to be grateful to him; for to the extent that he may be said to have superinduced the liquidation of the spring and summer, he assuredly contributed to mitigate the shock of the inevitable reaction in the autumn. the fifth and final cause of the lesser magnitude of the crisis is the development of trusts. until we attain the right perspective, it is always difficult to get a correct view of the far-reaching changes which are taking place under our very eyes. especially true is this of such a veritable revolution as is typified by the modern concentration and integration of industry into the vast combinations known as trusts. there are indeed many disquieting and untoward symptoms in the development of which this is not the place to speak. but as against the undoubted perils of what we are all now coming to recognize as an inevitable process, we sometimes forget to put at least one countervailing advantage which is of especial importance in this connection. the modern trust, as typified in its most developed form by the united states steel corporation, is apt to exert an undeniably steadying influence on prices. precisely because of the immense interests at stake, and the danger of a reaction, the trust with its consummately able management tends toward conservatism. as compared with the action of a horde of small competitors under similar conditions, it is apt during a period of prosperity to refrain from marking up prices to the top notch, and is likely to make a more adequate provision for the contingencies of the market. with this greater moderation is apt to be associated a more accurate prevision, which succeeds in a more correct adjustment of present investment to future needs. the drift of business enterprise in its newer form is thus toward a relative checking of the discrepancy between estimated and actual earnings, or, in other words, toward a retardation in the process of overcapitalization. the history of trusts is still too recent, and in not all of them are we yet able to discern the working out of what ultimately will come to be recognized as the real laws of their evolution. to those, however, who comprehend what this revolution in business enterprise really implies, it can scarcely be doubted that the fruit of this steadying influence and of the better adaptation of the present to the future is already perceptible. notwithstanding the quite unexampled prosperity of the last decade, the tempo of overcapitalization has been relatively less rapid and the process of readjustment throughout the world of enterprise has therefore been less extreme. industry has slackened rather than collapsed, and the disturbance itself has been comparatively short-lived, with the prospects of an early rebound. the influence of trusts in moderating crises and in minimizing depressions will doubtless become more apparent with each ensuing decade in the history of modern industry. while the general causes which are responsible for the crisis of have been recounted above, there still remains one point of fundamental importance. if we compare our economic history with that of europe, we observe that acute financial crises have there almost passed away. england has had no severe convulsion since , and in france and germany also the disturbances are more and more assuming the form of periodic industrial depressions rather than of acute financial crises. the responsibility for the continuance in this country of a phenomenon which is in large measure vanishing elsewhere rests beyond all peradventure of doubt on the inadequacy of our currency system. current theories of crises two points of agreement [ ]wide divergences of opinion continue to exist among competent writers upon crises; but in recent years substantial agreement has been reached upon two points of fundamental importance. crises are no longer treated as sudden catastrophes which interrupt the "normal" course of business, as episodes which can be understood without investigation of the intervening years. on the contrary, the crisis is regarded as but the most dramatic and the briefest of the three phases of a business cycle--prosperity, crisis, and depression.[ ] modern discussions endeavor to show why a crisis is followed by depression, and depression by prosperity, quite as much as to show why prosperity is followed by a crisis. in a word, the theory of crises has grown into the theory of business cycles.[ ] this wider grasp of the problem has discredited the view that crises are due to abnormal conditions which tempt industry and trade to forsake their beaten paths and temporarily befog the judgment of business men and investors, or to misguided legislation, unsound business practices, imperfect banking organization, and the like.[ ] as business cycles have continued to run their round decade after decade in all nations of highly developed business organization, the idea that each crisis may be accounted for by some special cause has become less tenable. on the contrary, the explanations in favor to-day ascribe the recurrence of crises after periods of prosperity to some inherent characteristic of economic organization or activity. the complex processes which make up business life are analyzed to discover why they inevitably work out a change from good times to bad and from bad times to good. the influence of special conditions is admitted, of course, but rather as a factor which complicates the process than as the leading cause of crises. beveridge's "competition theory" among these theories which seek to account not for crises but for the cyclical fluctuations of economic activity, the "competition theory" tentatively advanced by beveridge is one of the simplest. in most instances, he begins, production is carried on by several or many establishments, each acting independently, and each seeking to do as large a share of the business as possible. whenever the demand for their wares increases, each competitor tries to engross a larger portion of the market. "inevitably, therefore, all the producers together tend to overshoot the demand and to glut the market for a time. this is a result not of wild speculation nor of miscalculation of the total demand; it must be a normal incident wherever competition has a place at all." such activity among producers constitutes the period of prosperity. but sooner or later the glutting of the market becomes apparent, and then the crisis comes, because the goods cannot all be sold at a profit. prices fall, production is checked, and a period of depression ensues. gradually, however, the slackened rate of production allows the accumulated stocks to be cleared, perhaps below cost price, perhaps by waiting until demand grows up to supply. when this excess of demand over supply has once again become patent, business recovers. depression yields to prosperity, competitors again vie with each other to increase their shares in the output, after a few years the market is glutted again, and a new crisis comes, to be followed once more by depression. thus business cycles are due in the last resort to "the simple and well nigh universal fact of industrial competition."[ ] may's theory of the discrepancy between wages and productivity like beveridge, may conceives crises to result immediately from the glutting of markets for industrial products. but may offers a quite different analysis of the cause of gluts. the continually growing productivity of industry makes necessary a corresponding growth of the market, if disaster is to be avoided. but to enable producers to sell their growing output promptly prices must be reduced and wages must be raised in proportion as the supply of goods increases. for it is only by combining an increase in the money income of the mass of the population with a decrease in the cost of commodities that a country's home markets can be kept expanding with the progress of industrial methods. periods of prosperity attended by rising prices necessarily violate this condition of business hygiene and inevitably end by glutting markets. then come crises, which restore the body politic to health by forcing down prices to the point where consumers can purchase the supplies which are offered. the germ of the trouble, then, is the tendency of prices to rise during periods of increasing productivity. accordingly, may urges as remedy a legal limitation of the rate of profits, in order that producers may be forced to reduce prices as they increase output.[ ] hobson's theory of over-saving a third explanation of how markets come to be glutted periodically is offered by hobson's theory of over-saving. hobson holds that at any given time "there is an exact proportion of the current income which, in accordance with existing arts of production and existing foresight, is required to set up new capital so as to make provision for the maximum consumption throughout the near future." now, if in a period of prosperity the rate of consumption should rise _pari passu_ with the rate of production, there is no inherent reason why the prosperity might not continue indefinitely. but in modern societies, a considerable portion of the wealth produced belongs to a small class. in active times their incomes rise more rapidly than their consumption and the surplus income is perforce saved. there results for the community as a whole a slight deficiency of spending and a corresponding excess of saving. the wealthy class seeks to invest its new savings in productive enterprises--thereby increasing the supply of goods and also increasing the incomes from which further savings will be made. this process runs cumulatively during the years of prosperity until finally the markets become congested with goods which cannot be sold at a profit. then prices fall, liquidation ensues, capital is written down, and the incomes of the wealthy class are so reduced that savings fall below the proper proportion to spending. during this period of depression the glut of goods weighing upon the market is gradually worked off, and the prospect of profitable investment slowly returns. saving rises again to the right proportion to spending and good times prevail for a season. but after a while the chronic impulse towards over-saving becomes fully operative once more, and soon or late begets another congestion of the markets and this congestion begets another depression. proximately, then, the cause of alternating prosperity and depression is the tendency toward over-saving; ultimately it is the existence of the surplus incomes which lead to over-saving.[ ] hull's theory of the changing costs of construction an american business man, george h. hull, has recently drawn from his experience of practical affairs conclusions which resemble those drawn by [a german] professor spiethoff, from his theoretical analysis of economic records. high prices of construction, runs his thesis, is the hitherto "unknown cause of the mysterious depressions" from which the industrial nations suffer. in demonstrating the thesis, hull contends that agriculture, commerce, and finance fluctuate within relatively narrow limits. agriculture provides the necessities of life, commerce distributes them, and finance adjusts the bills. the volume of all this business is fairly constant, because the demand for necessities is incapable of sudden expansion or contraction. industry, on the contrary, may expand or contract indefinitely--especially that part of industry devoted to construction work. for the sources of "booms" and depressions, therefore, we must look to the enterprises which build and equip houses, stores, factories, railways, docks, and the like. of the huge total of construction, which hull believes to make over three-quarters of all industrial operations, at least two-thirds, even in the busiest of years, consists of repairs, replacements, and such extensions as are required by the growth of population. this portion of construction is necessary and must be executed every year. but the remaining portion is "optional construction," and is undertaken or not according as investors see a liberal or a meagre profit in providing new equipment. now, when the costs of construction fall low enough to arouse "the bargain-counter instinct," many of "the far-seeing ones who hold the purse-strings of the country" let heavy contracts, and their example is followed by the less shrewd. the addition of the resulting new business to the regular volume of "necessity construction" plus the provision of ordinary consumers' goods creates a "boom." but, after a year or two, contractors discover that their order books call for more work than they can get labor and materials to finish on contract time. when this oversold condition of the contracting trades is realized, the prices of labor and of raw materials rise rapidly. the estimated cost of construction on new contracts then becomes excessive. shrewd investors therefore begin to defer the execution of their plans for extending permanent equipment, and the letting of fresh contracts declines apace. as they gradually complete work on their old contracts, all the enterprises making iron, steel, lumber, cement, brick, stone, etc., then face a serious shrinkage of business. just as the execution of the large contracts for "optional construction," let in the low-priced period, brought on prosperity, so the smallness of such contracts, let in the high-price period, now brings on depression. then the prices of construction fall until they arouse "the bargain-counter instinct" of investors once more, and the cycle begins afresh. while hull grants that panics are often caused by strictly financial disorders, he holds that all industrial depressions are caused by high prices of construction, and foreshadowed by high prices of iron. consequently he believes that depressions could be prevented from occurring if the government would collect and publish monthly "all pertinent information in relation to the existing volume of construction under contract for future months, and all pertinent information in relation to the capacity of the country to produce construction materials to meet the demand thus indicated."[ ] sombart's theory of the uneven expansion in the production of organic and inorganic goods sombart, like many of the recent german writers, finds ill-proportioned production the chief cause of crises; but he thinks it inaccurate to say that the overproduction is in industrial equipment. for during the german "boom" which collapsed in - , overproduction was quite as marked in industries making equipment for electric lighting systems, telephone plants, street railways, dwellings, bicycles, etc., as in industries making machines. the real lack of proportion he sees in the unlike degree of expansion in industries using organic and inorganic materials. the inorganic industries, typified by steel, can expand to an enormous extent within a brief period without being seriously hampered by scarcity of raw materials. the organic industries, typified by cotton-spinning, on the contrary, are always in precarious dependence upon the year's harvests. in the organic industries, one may say, the condition of business is determined by the harvests; in the inorganic industries the condition of business determines the production of raw materials. the modern crisis, then, following upon a period of prosperity, is substantially the result of the different rhythm of production in the organic and inorganic realms. the organic industries dependent upon harvests cannot keep pace with the inorganic when the latter are being rapidly extended by heavy investments of capital.[ ] carver's theory of the dissimilar price fluctuations of producers' and consumers' goods carver has suggested a way of accounting for business cycles by applying the laws of value which govern producers' goods. he points out that a comparatively small change in a factory's selling prices will cause a much greater change in its profits, if volume of output and expenses remain the same. since the value of the factory as a going concern is the capitalized value of its prospective profits, a large increase of profits will cause a large increase of the factory's value, provided the high profits are expected to continue long. hence the law that "the value of producers' goods tends to fluctuate more violently than the value of consumers' goods." it follows that: "a slight rise in the price of consumers' goods will so increase the value of the producers' goods which enter into their production as to lead to larger investments in producers' goods. the resulting larger market for producers' goods again stimulates the production of such goods, and withdraws productive energy from the creation of consumers' goods. this for the time tends to raise the price of consumers' goods still higher, and this again to stimulate still further the creation of producers' goods. there is no check to this tendency until the new stock of producers' goods begin to pour upon the market an increased flow of consumers' goods. this tends to produce a fall in their value, which in turn produces a still greater fall in the value of producers' goods, and so the process goes." thus, once more, prosperity breeds crisis and depression; but this time the reason is found in the dissimilar fluctuations which the laws of value establish for the goods which people use and the equipment with which they are made.[ ] fisher's theory of the lagging adjustment of interest another interesting suggestion comes from irving fisher. by statistics he has shown that when for any reason prices begin to rise, interest rates advance, but not fast enough to offset the decline in the purchasing power of the principal caused by the rise of prices. during such periods, accordingly, borrowers on the whole get the better of lenders and make high profits. since the borrowers consist largely of active business men, precisely the class of greatest foresight, they grasp the situation more quickly than lenders. as a result of their desire to profit by their opportunity, loans are rapidly extended. this extension is effected largely by the lending of bank credits, that is, by the increasing of deposit currency. the greater volume of the currency combines with more rapid circulation of money and checks to increase prices again, and so to start the whole process anew on a higher level. "there is thus set up a vicious circle, which will continue just as long as the rate of interest fails to make a proper adjustment to put on the brakes and prevent over-borrowing." "but the rise in interest, though belated, is progressive, and, as soon as it overtakes the rate of rise in prices, the whole situation is changed." borrowers can no longer hope to make great profits, and the demand for loans ceases to expand. further, the higher rate of interest reduces the price of many of the securities used as collateral for loans. business men "who have counted on renewing their loans at the former rates and for the former amounts are unable to do so. it follows that some of them are destined to fail." there follow suspicions regarding the solvency of the banks, runs for cash, forced curtailment of loans, and exceedingly high rates of interest--in short, the phenomena of crisis. the contraction of loans is accompanied by a reduction of deposit currency and a slower circulation both of money and of checks. hence prices decline. again the rate of interest follows; but just as it was slow to rise so now it is slow to fall. then the business men who borrow find that the sluggish adjustment of interest reduces their profits. therefore loans, and the deposits based on loans, contract again. but the shrinking volume of deposit currency causes a further fall of prices, and once more interest lags behind and renews the process. thus the phase of depressions runs cumulatively until at last the progressive reduction of interest has overtaken the fall of prices. at this point business men find their profits rising to the normal level. borrowing becomes freer, the volume of deposit currency swells, prices start upward, and the cycle begins afresh.[ ] * * * * * beveridge ascribes crises to industrial competition, may to the disproportion between the increase in wages and in productivity, hobson to over-saving,... hull to high costs of construction, lescure to declining prospects of profits,... [seligman] to a discrepancy between anticipated profits and current capitalization, sombart to the unlike rhythm of production in the organic and inorganic realms, carver to the dissimilar price fluctuations of producers' and consumers' goods, fisher to the slowness with which interest rates are adjusted to changes in the price level. one seeking to understand the recurrent ebb and flow of economic activity characteristic of the present day finds these numerous explanations both suggestive and perplexing. all are plausible, but which is valid? none necessarily excludes all the others, but which is the most important? each may account for certain phenomena; does any one account for all the phenomena? or can these rival explanations be combined in such a fashion as to make a consistent theory which is wholly adequate? mitchell's theory of business cycles [ ]only by putting any theory to the practical test of accounting for actual business experience can its value be determined. the case for the present theory, therefore, and also the case against it, is to be found not in the easy summary which follows, but in the difficult chapters which precede,[ ] or better still in an independent effort to use it in interpreting the ceaseless ebb and flow of economic activity. . the cumulation of prosperity with whatever phase of the business cycle analysis begins, it must take for granted the conditions brought about by the preceding phase, postponing explanation of these assumptions until it has worked around the cycle and come again to its starting point. a revival of activity, then, starts with this legacy from depression: a level of prices low in comparison with the prices of prosperity, drastic reductions in the costs of doing business, narrow margins of profit, liberal bank reserves, a conservative policy in capitalizing business enterprises and in granting credits, moderate stocks of goods, and cautious buying. for reasons which will appear in the sequel, such conditions are accompanied by an expansion in the physical volume of trade. though slow at first, this expansion is cumulative. now it is only a question of time when an increase in the amount of business transacted which grows more rapid as it proceeds will turn dullness into activity. left to itself, this transformation is effected by slow degrees; but it is often hastened by some propitious event arising from other than domestic business sources, such as exceptionally profitable harvests, heavy purchases of supplies by government, or a marked increase in the export demand for the products of home industry. even when a revival of activity is confined at first within a narrow range of industries or within some single section of the country, it soon spreads to other parts of the business field. for the active enterprises must buy more materials, wares, and current supplies from other enterprises, the latter from still others, and so on without assignable limits. meanwhile all enterprises which become busier employ more labor, use more borrowed money, and make higher profits. there results an increase in family incomes and an expansion of consumers' demand, which likewise spreads out in ever widening circles. shopkeepers pass on larger orders for consumers' goods to wholesale merchants, manufacturers, importers, and producers of raw materials. all these enterprises require more supplies of various kinds for handling their growing trade, and increase the sums which they pay out to employés, lenders, and proprietors--thus stimulating afresh the demand for both producers' and consumers' goods. soon or late this expansion of orders reaches back to the enterprises from which the impetus to greater activity was first received, and then this whole complicated series of reactions begins afresh at a higher pitch of intensity. all this while, the revival of activity is instilling a feeling of optimism among business men, and this feeling both justifies itself and heightens the forces which engendered it by making every one readier to buy with freedom. while the price level is often sagging slowly when a revival begins, the cumulative expansion in the physical volume of trade presently stops the fall and starts a rise. for, when enterprises have in sight as much business as they can handle with their existing facilities of standard efficiency, they stand out for higher prices on additional orders. this policy prevails even in the most keenly competitive trades, because additional orders can be executed only by breaking in new hands, starting old machinery, buying new equipment, or making some other change which involves increased expense. the expectation of its coming hastens the advance. buyers are anxious to secure or to contract for large supplies while the low level of quotations continues, and the first definite signs of an upward trend of quotations brings out a sudden rush of orders. like the increase in the physical volume of business, the rise of prices spreads rapidly; for every advance of quotations puts pressure upon some one to recoup himself by making a compensatory advance in the prices of what he has to sell. the resulting changes in prices are far from even, not only as between different commodities, but also as between different parts of the system of prices. retail prices lag behind wholesale, the prices of staple consumers' behind the prices of staple producers' goods, and the prices of finished products behind the prices of their raw materials. among raw materials, the prices of mineral products reflect the changed business conditions more regularly than do the prices of raw animal, farm, or forest products. wages rise often more promptly, but always in less degree than wholesale prices; discount rates rise sometimes more slowly than commodities and sometimes more rapidly; interest rates on long loans always more sluggishly in the early stages of revival, while the prices of stocks--particularly of common stocks--both precede and exceed commodity prices on the rise. the causes of these differences in the promptness and the energy with which various classes of prices respond to the stimulus of business activity are found partly in differences of organization between the markets for commodities, labor, loans, and securities; partly in the technical circumstances affecting the relative demand for and supply of these several classes of goods; and partly in the adjusting of selling prices to changes in the aggregate of buying prices which a business enterprise pays, rather than to changes in the prices of the particular goods bought for resale. in the great majority of enterprises, larger profits result from these divergent price fluctuations coupled with the greater physical volume of sales. for, while the prices of raw materials and of wares bought for resale usually, and the prices of bank loans often, rise faster than selling prices, the prices of labor lag far behind, and the prices which make up supplementary costs, _i. e._, interest, rent, depreciation, insurance, salaries for general officials and the like, are mainly stereotyped for a time by old agreements regarding salaries, leases, and bonds. this increase of profits, combined with the prevalence of business optimism, leads to a marked expansion of investments. of course the heavy orders for machinery, the large contracts for new construction, etc., which result, swell still further the physical volume of business, and render yet stronger the forces which are driving prices upward. indeed, the salient characteristic of this phase of the business cycle is the cumulative working of the various processes which are converting a revival of trade into intense prosperity. not only does every increase in the physical volume of trade cause other increases, every convert to optimism makes new converts, and every advance of prices furnishes an incentive for fresh advances; but the growth of trade also helps to spread optimism and to raise prices, while optimism and rising prices both support each other and stimulate the growth of trade. finally, as has just been said, the changes going forward in these three factors swell profits and encourage investments, while high profits and heavy investments react by augmenting trade, justifying optimism, and raising prices. . how prosperity breeds a crisis while the processes just sketched work cumulatively for a time to enhance prosperity, they also cause a slow accumulation of stresses within the balanced system of business--stresses which ultimately undermine the conditions upon which prosperity rests. among these stresses is the gradual increase in the costs of doing business. the decline in supplementary costs per unit of output ceases when enterprises have once secured all the business they can handle with their standard equipment, and a slow increase of these costs begins when the expiration of old contracts makes necessary renewals at the high rates of interest, rent, and salaries which prevail in prosperity. meanwhile prime costs, wages and raw materials, rise at a relatively rapid rate. equipment which is antiquated and plants which are ill located or otherwise work at some disadvantage are brought again into operation. the price of labor rises, not only because standard rates of wages go up, but also because of the prevalence of higher pay for overtime. more serious still is the fact that the efficiency of labor declines, because overtime brings weariness, because of the employment of "undesirables," and because crews cannot be driven at top speed when jobs are more numerous than men to fill them. the prices of raw materials continue to rise faster on the average than the selling prices of products. finally, the numerous small wastes, incident to the conduct of business enterprises, creep up when managers are hurried by a press of orders demanding prompt delivery. a second stress is the accumulating tension of the investment and money markets. the supply of funds available at the old rates of interest for the purchase of bonds, for lending on mortgages, and the like, fails to keep pace with the rapidly swelling demand. it becomes difficult to negotiate new issues of securities except on onerous terms, and men of affairs complain of the "scarcity of capital." nor does the supply of bank loans grow fast enough to keep up with the demand. for the supply is limited by the reserves which bankers hold against their expanding demand liabilities. full employment and active retail trade cause such a large amount of money to remain suspended in active circulation that the cash left in the banks increases rather slowly, even when the gold output is rising most rapidly. on the other hand, the demand for bank loans grows not only with the physical volume of trade, but also with the rise of prices, and with the desire of men of affairs to use their own funds for controlling as many business ventures as possible. moreover, this demand is relatively inelastic, since many borrowers think they can pay high rates of discount for a few months and still make profits on their turnover, and since the corporations which are unwilling to sell long-time bonds at the hard terms which have come to prevail try to raise part of the funds they require by discounting one- or two-year notes. tension in the bond and money markets is unfavorable to the continuance of prosperity, not only because high rates of interest reduce the prospective margins of profit, but also because they check the expansion in the volume of trade out of which prosperity developed. many projected ventures are relinquished or postponed, either because borrowers conclude that the interest would absorb too much of their profits, or because lenders refuse to extend their commitments farther. there is one important group of enterprises which suffers an especially severe check from this cause in conjunction with high prices--the group which depends primarily upon the demand for industrial equipment. in the earlier stages of prosperity, this group usually enjoys a season of exceptionally intense activity. but when the market for bonds becomes stringent, and--what is often more important--when the cost of construction has become high, business enterprises and individual capitalists alike defer the execution of many plans for extending old and erecting new plants. as a result, contracts for this kind of work become less numerous as the climax of prosperity approaches. then the steel mills, foundries, machine factories, copper smelters, quarries, lumber mills, cement plants, construction companies, general contractors, and the like find their orders for future delivery falling off. while for the present they may be working at high pressure to complete old contracts within the stipulated time, they face a serious restriction of trade in the near future. the imposing fabric of prosperity is built with a liberal factor of safety: but the larger grows the structure the more severe become these internal stresses. the only effective means of preventing disaster while continuing to build is to raise selling prices time after time high enough to offset the encroachments of costs upon profits, to cancel the advancing rates of interest, and to keep investors willing to contract for fresh industrial equipment. but it is impossible to keep selling prices rising for an indefinite time. in default of other checks, the inadequacy of cash reserves would ultimately compel the banks to refuse a further expansion of loans upon any terms. but before this stage has been reached, the rise of prices is stopped by the consequences of its own inevitable inequalities. these inequalities become more glaring the higher the general level is forced; after a time they threaten serious reduction of profits to certain business enterprises, and the troubles of these victims dissolve that confidence in the security of credits with which the whole towering structure of prosperity has been cemented. what, then, are the lines of business in which selling prices cannot be raised sufficiently to prevent a reduction of profits? there are certain lines in which selling prices are stereotyped by law, by public commissions, by contracts of long term, by custom, or by business policy, and in which no advance, or but meagre advances can be made. there are other lines in which prices are always subject to the incalculable chances of the harvests, and in which the market value of all accumulated stocks of materials and finished goods wavers with the crop reports. there are always some lines in which the recent construction of new equipment has increased the capacity for production faster than the demand for their wares has expanded under the repressing influence of the high prices which must be charged to prevent a reduction of profits. the unwillingness of investors to let fresh contracts threatens loss not only to contracting firms of all sorts, but also to all the enterprises from whom they buy materials and supplies. the high rates of interest not only check the current demand for wares of various kinds, but also clog the effort to maintain prices by keeping large stocks of goods off the market until they can be sold to better advantage. finally, the very success of other enterprises in raising selling prices fast enough to defend their profits aggravates the difficulties of the men who are in trouble. for to the latter every further rise of prices for products which they buy means a further strain upon their already stretched resources. as prosperity approaches its height, then, a sharp contrast develops between the business prospects of different enterprises. many, probably the majority, are making more money than at any previous stage of the business cycle. but an important minority, at least, face the prospect of declining profits. the more intense prosperity becomes, the larger grows this threatened group. it is only a question of time when these conditions, bred by prosperity, will force some radical readjustment. now such a decline of profits threatens worse consequences than the failure to realize expected dividends. for it arouses doubt concerning the security of outstanding credits. business credit is based primarily upon the capitalized value of present and prospective profits, and the volume of credits outstanding at the zenith of prosperity is adjusted to the great expectations which prevail when the volume of trade is enormous, when prices are high, and when men of affairs are optimistic. the rise of interest rates has already narrowed the margins of security behind credits by reducing the capitalized value of given profits. when profits themselves begin to waver the case becomes worse. cautious creditors fear lest the shrinkage in the market rating of the business enterprises which owe them money will leave no adequate security for repayment. hence they begin to refuse renewals of old loans to the enterprises which cannot stave off a decline of profits, and to press for a settlement of outstanding accounts. thus prosperity ultimately brings on conditions which start a liquidation of the huge credits which it has piled up. and in the course of this liquidation prosperity merges into crisis. . crises and panics once begun, the process of liquidation extends rapidly, partly because most enterprises which are called upon to settle their maturing obligations in turn put similar pressure upon their own debtors, and partly because, despite all efforts to keep secret what is going forward, news presently leaks out and other creditors take alarm. while this financial readjustment is under way, the problem of making profits on current transactions is subordinated to the more vital problem of maintaining solvency. business managers concentrate their energies upon providing for their outstanding liabilities and upon nursing their financial resources, instead of upon pushing their sales. in consequence, the volume of new orders falls off rapidly. that is, the factors which were already dimming the prospects of profits in certain lines of business are reinforced and extended. even when the overwhelming majority of enterprises meet the demand for payment with success, the tenor of business developments therefore undergoes a change. expansion gives place to contraction, though without a violent wrench. discount rates rise higher than usual, securities and commodities fall in price, and as old orders are completed working forces are reduced; but there is no epidemic of bankruptcies, no run upon banks, and no spasmodic interruption of the ordinary business processes. at the opposite extreme from crises of this mild order stand the crises which degenerate into panics. when the process of liquidation reaches a weak link in the chain of interlocking credits and the bankruptcy of some conspicuous enterprise spreads unreasoning alarm among the business public, then the banks are suddenly forced to meet a double strain--a sharp increase in the demand for loans, and a sharp increase in the demand for repayment of deposits. if the banks prove able to honor both demands without flinching, the alarm quickly subsides. but if, as has happened twice in america since , many solvent business men are refused accommodation at any price, and if depositors are refused payment in full, the alarm turns into panic. a restriction of payments by the banks gives rise to a premium upon currency, to hoarding of cash, and to the use of various unlawful substitutes for money. a refusal by the banks to expand their loans, still more a policy of contraction, sends interest rates up to three or four times their usual figures, and causes forced suspensions and bankruptcies. there follow appeals to the government for extraordinary aid, frantic efforts to import gold, the issue of clearing-house loan certificates, and an increase of bank-note circulation as rapid as the existing system permits. collections fall into arrears, domestic-exchange rates are dislocated, workmen are discharged because employers cannot get money for pay-rolls or fear lest they cannot get pay for goods when delivered, stocks fall to extremely low levels, even the best bonds decline somewhat in price, commodity markets are disorganized by sacrifice sales, and the volume of business is violently contracted. that crises still degenerate on occasion into panics in america, but not in england, france, or germany, arises primarily from differences in banking organization and practice. in each of the three european countries, the banking system as a whole is so organized by the prevalence of branch banking and the existence of a central bank that reserves which bear a small proportion to the aggregate demand liabilities of all the offices can be applied when and where they are most needed. the central bank not only carries a reserve which is far in excess of immediate requirements in ordinary times, but also uses this reserve boldly in times of stress, presenting in both these respects a marked contrast to the policy of american banks. as a result, european business men need not fear either a refusal to lend or a restriction of payments by the banks on which they depend. and panic has small chance to develop where the depositor can get his money at need and the solvent business man can borrow. [written before the establishment of the federal reserve system.] . depression the close of a panic is usually followed by the reopening of numerous enterprises which had been shut during the weeks of severest pressure. but this prompt revival of activity is partial and short-lived. it is based chiefly upon the finishing of orders received but not completely executed in the preceding period of prosperity, or upon the effort to work up and market large stocks of materials already on hand or contracted for. it comes to an end as this work is gradually finished, because new orders are not forthcoming in sufficient volume to keep the mills and factories busy. there follows a period during which depression spreads over the whole field of business and grows more severe. consumers' demand declines in consequence of wholesale discharges of wage-earners, the gradual exhaustion of past savings, and the reduction of other classes of family incomes. with consumers' demand falls the business demand for raw materials, current supplies, and equipment used in making consumers' goods. still more severe is the shrinkage of investors' demand for construction work of all kinds, since few individuals or enterprises care to sink money in new business ventures so long as trade remains depressed and the price level is declining. the contraction in the physical volume of business which results from these several shrinkages in demand is cumulative, since every reduction of employment causes a reduction of consumers' demand, and every decline in consumers' demand depresses current business demand and discourages investment, thereby causing further discharges of employés and reducing consumers' demand once more. with the contraction in the physical volume of trade goes a fall of prices. for, when current orders are insufficient to employ the existing equipment for production, competition for what business is to be had becomes keener. this decline spreads through the regular commercial channels which connect one enterprise with another, and is cumulative, since every reduction in price facilitates, if it does not force, reductions in other prices, and the latter reductions react in their turn to cause fresh reductions at the starting point. as the rise of prices which accompanied revival, so the fall which accompanies depression is characterized by certain regularly recurring differences in degree. wholesale prices fall faster than retail, the prices of producers' goods faster than those of consumers' goods, and the prices of raw materials faster than those of manufactured products. the prices of raw mineral products follow a more regular course than those of raw forest, farm, or animal products. as compared with general index numbers of commodity prices at wholesale, index numbers of wages and interest on long-time loans decline in less degree, while index numbers of discount rates and of stocks decline in greater degree. the only important group of prices to rise in the face of depression is that of high-grade bonds. of course the contraction in the physical volume of trade and the fall of prices reduce the margin of present and prospective profits, spread discouragement among business men, and check enterprise. but they also set in motion certain processes of readjustment by which depression is gradually overcome. the prime costs of doing business are reduced by the rapid fall in the prices of raw materials and of bank loans, by the marked increase in the efficiency of labor which comes when employment is scarce and men are anxious to hold their jobs, and by close economy on the part of managers. supplementary costs also are reduced by reorganizing enterprises which have actually become or which threaten to become insolvent, by the sale of other enterprises at low figures, by reduction of rentals and refunding of loans, by charging off bad debts and writing down depreciated properties, and by admitting that a recapitalization of business enterprises--corresponding to the lower prices of stocks--has been effected on the basis of lower profits. while these reductions in costs are still being made, the demand for goods ceases to shrink and then begins slowly to expand--a change which usually comes in the second or third year of depression. accumulated stocks left over from prosperity are gradually exhausted, and current consumption requires current production. clothing, furniture, machinery and other moderately durable articles which have been used as long as possible are finally discarded and replaced. population continues to increase at a fairly uniform rate: the new mouths must be fed and the new backs clothed. new tastes appear among consumers and new methods among producers, giving rise to demand for novel products. most important of all, the investment demand for industrial equipment revives; for though saving may slacken it does not cease, with the cessation of foreclosure sales and corporate reorganizations the opportunities to buy into old enterprises at bargain prices become fewer, capitalists become less timid as the crisis recedes into the past, the low rates of interest on long-term bonds encourage borrowing, the accumulated technical improvements of several years may be utilized, and contracts can be let on most favorable conditions as to cost and prompt execution. once these various forces have set the physical volume of trade to expanding again, the increase proves cumulative, though for a time the pace of growth is kept slow by the continued sagging of prices. but while the latter maintains the pressure upon business men and prevents the increased volume of orders from producing a rapid rise of profits, still business prospects become gradually brighter. old debts have been paid, accumulated stocks of commodities have been absorbed, weak enterprises have been reorganized, the banks are strong-all the clouds upon the financial horizon have disappeared. everything is ready for a revival of activity, which will begin whenever some fortunate circumstance gives a sudden fillip to demand, or, in the absence of such an event, when the slow growth of the volume of business has filled order books and paved the way for a new rise of prices. such is the stage of the business cycle with which the analysis began, and, having accounted for its own beginning, the analysis ends. moore's "rainfall" theory [ ]to professor moore the fundamental problem of economic dynamics is to formulate the law governing the "ebb and flow of economic life" which is "the most general and characteristic phenomenon of a changing society." the motto of the department of agriculture of the united states--"agriculture is the foundation of manufacture and commerce"--is significant and that the farmer is at the mercy of the weather is proverbial. there may be such a close connection between the weather, the crops, and crises that we shall be able to find in weather changes the cause of crises. an examination of all the numerous factors involved in the problem would be a stupendous task and professor moore limits himself to a consideration of a selected few. "the variation in the quantity of the rainfall is one of the weather changes known to have a marked effect upon the yield of the crops." hence the inquiry is directed to an examination of the "appropriate data with reference to three things: ( ) the periodicity of rainfall; ( ) the effect of rainfall on the crops; ( ) the relation of the yield of the crops to economic cycles." the study is a statistical one conducted with the greatest of care to avoid error and the conclusions are deserving of the most careful consideration. all generalizations are made carefully and used cautiously with a full realization that a limited area--the upper mississippi valley--has been used and a period of only seventy-two years surveyed. of the numerous climatic factors only rainfall has been examined. remembering that these limitations are fully realized we may state the conclusions in professor moore's own words: "the fundamental, persistent cause of the cycles in the yield of the crops is the cyclical movement in the weather conditions represented by the rhythmically changing amount of rainfall; the cyclical movement in the yield of the crops is the fundamental, persistent cause of economic cycles." this should be supplemented with a statement of the law that has been sought and which may be formulated thus: the weather conditions represented by the rainfall in the central part of the united states, and probably in other continental areas, pass through cycles of approximately thirty-three years and eight years in duration, causing like cycles in the yield per acre of the crops; these cycles of crops constitute the natural, material current which drags upon its surface the lagging, rhythmically changing values and prices with which the economist is more immediately concerned.... in conclusion we may merely observe that many theories are obviously presented to defend some of the other views of their advocates. the connection of the socialist theory with the socialistic idea of value is an obvious one. it may also be true that interest in some particular phase of study may cause the investigator to overlook the importance of other elements in the problem. thus to professor moore climatic conditions seem of great importance, while professor mitchell relegates them to a very minor position. as time passes it will doubtless be possible to estimate the significance of each factor with more accuracy. when this is done a more satisfactory theory can be formulated and methods of prevention and alleviation employed to better advantage. stringent money and financial panics[ ] is there any tendency for financial panics to occur more frequently in the seasons of the year when the money market is normally stringent? it has been found that the two periods of the year in which the money market is most likely to be strained are the periods of the spring trade revival (about march and april) and that of the crop-moving demand in the fall; and that the two periods of the easiest money market are the "readjustment period," extending from about the middle of january to about the first of march, and the period of the summer depression, extending through the summer months. of the eight panics which have occurred since , four occurred in the fall or early winter (_i. e._, those of , , , and ); and one (_i. e._, that of ) extended from march until well along in november. out of a total of twenty-one minor panics or "panicky periods" occurring between and , inclusive, nine occurred during the fall and early winter, eight during the spring, one began in may and extended into june, three occurred during the summer months, and one occurred in february. the evidence accordingly points to a tendency for the panics to occur during the seasons normally characterized by a stringent money market. how banks should handle panics [ ]whatever persons--one bank or many banks--in any country hold the banking reserve of that country, ought at the very beginning of an unfavourable foreign exchange at once to raise the rate of interest, so as to prevent their reserve from being diminished farther, and so as to replenish it by imports of bullion.... a domestic drain is very different. such a drain arises from a disturbance of credit within the country, and the difficulty of dealing with it is the greater, because it is often caused, or at least often enhanced, by a foreign drain. times without number the public have been alarmed mainly because they saw that the banking reserve was already low, and that it was daily getting lower. the two maladies--an external drain and an internal--often attack the money market at once. what then ought to be done? in opposition to what might be at first sight supposed, the best way for the bank or banks who have the custody of the bank reserve to deal with a drain arising from internal discredit, is to lend freely. the first instinct of every one is the contrary. there being a large demand on a fund which you want to preserve, the most obvious way to preserve it is to hoard it--to get in as much as you can, and to let nothing go out which you can help. but every banker knows that this is not the way to diminish discredit. this discredit means, "an opinion that you have not got any money," and to dissipate that opinion, you must, if possible, show that you have money: you must employ it for the public benefit in order that the public may know that you have it. the time for economy and for accumulation is before. a good banker will have accumulated in ordinary times the reserve he is to make use of in extraordinary times. ordinarily discredit does not at first settle on any particular bank, still less does it at first concentrate itself on the bank or banks holding the principal cash reserve. these banks are almost sure to be those in best credit, or they would not be in that position, and, having the reserve, they are likely to look stronger and seem stronger than any others. at first, incipient panic amounts to a kind of vague conversation: is a b as good as he used to be? has not c d lost money? and a thousand such questions. a hundred people are talked about, and a thousand think--"am i talked about, or am i not?" "is my credit as good as it used to be, or is it less?" and every day, as a panic grows, this floating suspicion becomes both more intense and more diffused; it attacks more persons, and attacks them all more virulently than at first. all men of experience, therefore, try to "strengthen themselves," as it is called, in the early stage of a panic; they borrow money while they can; they come to their banker and offer bills for discount, which commonly they would not have offered for days or weeks to come. and if the merchant be a regular customer, a banker does not like to refuse, because if he does he will be said, or may be said, to be in want of money, and so may attract the panic to himself. not only merchants but all persons under pecuniary liabilities--present or imminent--feel this wish to "strengthen themselves," and in proportion to those liabilities.... a panic, in a word, is a species of neuralgia, and according to the rules of science you must not starve it. the holders of the cash reserve must be ready not only to keep it for their own liabilities, but to advance it most freely for the liabilities of others. they must lend to merchants, to minor bankers, to "this man and that man," whenever the security is good. in wild periods of alarm, one failure makes many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them. the way in which the panic of was stopped by advancing money has been described in so broad and graphic a way that the passage has become classical. "we lent it," said mr. harmon, on behalf of the bank of england, "by every possible means and in modes we had never adopted before; we took in stock on security, we purchased exchequer bills, we made advances on exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the bank, and we were not on some occasions over-nice. seeing the dreadful state in which the public were, we rendered every assistance in our power." after a day or two of this treatment, the entire panic subsided, and the "city" was quite calm. the problem of managing a panic must not be thought of as mainly a "banking" problem. it is primarily a mercantile one. all merchants are under liabilities; they have bills to meet soon,... are dependent on borrowing money, and large merchants are dependent on borrowing much money. at the slightest symptom of panic many merchants want to borrow more than usual; they think they will supply themselves with the means of meeting their bills while those means are still forthcoming. if the bankers gratify the merchants, they must lend largely just when they like it least; if they do not gratify them, there is a panic. on the surface there seems a great inconsistency in all this. first, you establish in some bank or banks a certain reserve; you make of it or them a kind of ultimate treasury, where the last shilling of the country is deposited and kept. and then you go on to say that this final treasury is also to be the last lending-house; that out of it unbounded, or at any rate immense, advances are to be made when no one else lends. this seems like saying--first, that the reserve should be kept, and then that it should not be kept. but there is no puzzle in the matter. the ultimate banking reserve of a country (by whomsoever kept) is not kept out of show, but for certain essential purposes, and one of those purposes is the meeting of a demand for cash caused by an alarm within the country. it is not unreasonable that our ultimate treasure in particular cases should be lent; on the contrary, we keep that treasure for the very reason that in particular cases it should be lent. when reduced to abstract principle, the subject comes to this. an "alarm" is an opinion that the money of certain persons will not pay their creditors when those creditors want to be paid. if possible, that alarm is best met by enabling those persons to pay their creditors to the very moment. for this purpose only a little money is wanted. if that alarm is not so met, it aggravates into a panic, which is an opinion that most people, or very many people, will not pay their creditors; and this too can only be met by enabling all those persons to pay what they owe, which takes a great deal of money. no one has enough money, or anything like enough, but the holders of the bank reserve.... ... before , an issue of notes [of the bank of england], as in , to quell a panic entirely internal did not diminish the bullion reserve. the notes went out, but they did not return. they were issued as loans to the public, but the public wanted no more; they never presented them for payment; they never asked that sovereigns should be given for them. but the acceptance of a great liability during an augmenting alarm, though not as bad as an equal advance of cash, [_i. e._, specie] is the thing next worst. at any moment the cash may be demanded. supposing the panic to grow, it will be demanded, and the reserve will be lessened accordingly.... "on extraordinary occasions," says ricardo, "a general panic may seize the country, when every one becomes desirous of possessing himself of the precious metals as the most convenient mode of realizing or concealing his property--against such panic banks have no security on any system." the bank or banks which hold the reserve may last a little longer than the others; but if apprehension pass a certain bound, they must perish too. the use of credit is, that it enables debtors to use a certain part of the money their creditors have lent them. if all those creditors demand all that money at once, they cannot have it, for that which their debtors have used, is for the time employed, and not to be obtained. with the advantages of credit we must take the disadvantages, too; but to lessen them as much as we can; we must keep a great store of ready money always available, and advance out of it very freely in periods of panic, and in times of incipient alarm. footnotes: [ ] e. m. patterson, _the theories advanced in explanation of economic crises. annals of american academy of political and social science_, vol. , may, , pp. - . [ ] address by edwin r. a. seligman, _the crisis of in the light of history_, in _the currency problem and the present financial situation_, a series of addresses delivered at columbia university, - , ix-xxv. the columbia university press, . [ ] wesley clair mitchell, _business cycles_, _pp._ - . the university of california press. berkeley, . [ ] the not infrequent statement that prosperity sometimes merges into depression without the intervention of a crisis means simply that the writers understand by crisis a violent disturbance of business conditions. it is in closer accord with every-day usage to call such occurrences "panics," and to apply the term "crisis" to the transition from prosperity to depression even when accomplished quietly. on closer inspection, a business cycle is often found to be complicated by minor changes, such as the interruption of depression by a premature resumption of activity, the occurrence of a pause or even a slight crisis in the midst of prosperity, and the like. but for the present it is wise to confine attention to the broadest features of the cycle. [ ] compare w. sombart, _versuch, einer systematik der wirtschaftskrisen_, archiv für sozialwissenschaft, , pp. - . [ ] the first type of theories mentioned in the preceding section. [ ] w. h. beveridge, _unemployment_, ed. (london, ), chapter iv. [ ] r.e. may, _das grundgesetz der wirtschaftskrisen_ (berlin, ). [ ] i have followed mr. hobson's latest exposition, _the industrial system_ (london, ), chapters iii and xviii. [ ] george h. hull, _industrial depressions_ (new york, ), p. . [ ] w. sombart, _die störungen im deutschen wirtschaftsleben_, schriften des vereins für socialpolitik, vol. , pp. - . [ ] t. n. carver, "a suggestion for a theory of industrial depressions," _quarterly journal of economics_, may, , pp. - . [ ] irving fisher, _the purchasing power of money_ (new york, ), chapter iv, and chapter xi, §§ , , . compare the same writer's summary statement of his theory in _moody's magazine_, february, , pp. - , and h. g. brown's paper "typical commercial crises _versus_ a money panic," _yale review_, august, . [ ] adapted from wesley clair mitchell, _business cycles_, pp. - . the university of california press. . [ ] the extract here reproduced is from the concluding chapter of the work indicated.--editor. [ ] e. m. patterson, _the theories advanced in explanation of economic crises_. _annals of american academy of political and social science_, vol. , may, , pp. , , . [ ] e. w. kemmerer, _seasonal variations in the relative demand for currency and capital in the united states_, p. . publications of the national monetary commission, senate document no. , st congress, d session. [ ] walter bagehot, _lombard street_, pp. - . charles scribner's sons. new york. . (first edition, .) chapter xxx the weaknesses of our banking system prior to the establishment of the federal reserve system conflicting opinions [ ]for fifty years the united states has lived rather happily under the national bank act, born in the strife of the civil war and developed in the period of the nation's greatest expansion and growth. this act has, by its record, earned for itself a place as a great piece of constructive legislation; and the recognition of this fact is responsible for the preservation of our national banking system almost intact under the federal reserve act. the national bank act removed the ills of wild-cat banking, which so afflicted the country prior to the civil war; gave us an absolutely safe form of money which, although not legal tender, is taken without question by everyone; and has made possible an enormous expansion in the banking resources and facilities of the country. in spite of the denunciation and abuse which have been heaped upon it, the act has been reasonably satisfactory in operation. anyone who reviews the figures of the material growth and prosperity of the nation and the rise of its financial power will be forced to the conclusion that no act that was fundamentally unsound could have been an integral part of the achievement of such a notable record. designed for the purpose of encouraging a system of independent banks, the act has been responsible, directly and indirectly, for the creation of some twenty-five thousand banking institutions in this country, practically all of which are independent of each other. instead of a small banking class and an equally small group of banks, all under the domination of one or a very few interests, we have developed a system of banking which has sprung from the people, and which is closer to the people than that of any other country. [ ]we have grown and prospered in spite of an imperfect, repressing, and perilous banking and currency system. we have grown as a vine sometimes forces its way through a crevice in a wall, our very growth inviting disaster and death, our wonderful vitality hastening catastrophe.... over fifty years of growth under the old banking act has been forced by the generosity of the soil of a new land, by the unconquerable energy and resiliency of a virile and courageous people; yet it has been interrupted by periods of business depression and stagnation; our progress punctuated by panics, discreditable, appalling--to many ruinous.... the immediate results ... have been crashing of banks and commercial houses, the wholesale stoppage of industries, the wiping away or cruel draining of the results of honest thrift, denial to willing and hungry labor of the opportunity to earn bread and shelter. [ ]a physician would probably say that what primarily ails our currency system and causes panics and desperate stringencies is something akin to _arteriosclerosis_. the veins and arteries of credit, which in order to function properly ought to be elastic and contractile like rubber, are hard and brittle as glass. when subjected to unusual strain they can yield but little and are very liable to rupture, and when once stretched they are apt to remain over-enlarged.... the temporary act of may , , which relaxed the rigor of the law in moments of critical emergency [as to note issues] by permitting additions to the currency to be based upon other security by payment of a heavy and increasing tax, was no real solution of the situation. it contained no provision to render the currency responsive to ordinary fluctuations in currency demand, and resort to its provisions in times of great stress might easily precipitate a panic if one did not already exist. it was only enacted for six years, and was only regarded by its sponsors as a temporary palliative pending the preparation of a permanent cure. _one universally recognized essential ... of a proper banking and currency plan is provision for a more flexible and responsive note issue_. inflexibility of ledger balances when we turn to credit in the form of ledger balances or "deposits" and enquire as to the causes of their inflexibility, the explanation also rests in quite familiar facts. there are two peculiar features of our banking system which are practically without counterpart in other important countries, and which render ledger balances or deposit credits in this country less flexible and responsive than such balances or credits are elsewhere. the _first_ is the rigidity of our reserve laws, and the _second_ is the lack of any bankers' bank or similar institution, with ample resources and lending power, from which the banks can replenish their own reserves when necessary. rigid reserve requirements outside of the united states i know of only one other country in which the law requires a cash reserve to be held against deposits. that country is holland, and the law applies to only one institution, the bank of the netherlands, and that institution does not hold enough deposits to make it worth mentioning in this connection (less than $ , , ). our national banking law, however, and the banking laws of most of the states are unreasonably and unsoundly rigorous in this regard. not only must stated proportions of all deposits be held by the banks in reserve, but these reserves, according to the law, can never under any circumstances be used. it is very much as if the government, having established naval and military reserve forces in times of peace, were to insist that these forces should not be used in time of war, in order to maintain them intact as reserves. whenever the cash held by a bank has fallen to the required minimum, the bank cannot legally continue to extend accommodation. it cannot issue more notes unless it has additional government bonds to deposit for their security, and it cannot enlarge its ledger balances unless it has additional reserves. no matter what may be the stress of an emergency, or whether it is due to war, catastrophe, or unreasoning fear, there are no legal means for relaxing this requirement. and so, in moments of great sensitiveness and anxiety, legal spokes are apt to be suddenly thrust into the wheels of credit, and the whole machinery of business brought crunching to a standstill. _a second essential then of any adequate currency plan is some provision which will render the reserve requirements pliable and the reserves of possible use._ need of bankers' bank our banks also have less flexibility in their power to lend ledger balances than the banks of practically all other countries for another reason, because of the lack of any permanent institution or institutions which can perform for them services similar to those which they perform for their customers. an individual bank makes the money of each and all of its customers flexible in amount, by rendering it of mutual service, and available to those who most need it, when they most need it, and, in order that the money of individual banks may be similarly flexible in amount, of mutual service to each other and available to those institutions which most need it, when they most need it, they require in their turn some agency which will do for them severally and jointly what they do for the general public.... it does not matter what such an agency may be called. it may be a discount bureau, or a rediscount bureau, a national clearing house, or a national or regional reserve association. out of deference to those great financial experts who write the banking clauses of political platforms and whose bans and edicts are blessed with sacerdotal infallibility, when such an institution is proposed for this country, it must not be called a central bank. such an institution is perhaps most plainly designated if it is called a "bankers' bank," but by whatever name it is referred to, the need of such an institution is the fact of primary importance in the american banking situation. just as an individual bank economizes and mobilizes and makes flexible in amount the funds of individual members of a community, so a bankers' bank mobilizes and economizes and makes flexible in amount the money of the banks. it collects money from institutions and localities when and where they do not need it, and lends it to others when and where they do. in like manner the active deposits of the various banks, as they are not all wanted simultaneously, furnish the bankers' banks with a large surplus reserve of lending power, which in turn is an invaluable source of flexibility to the individual banks. by its means they can, if need be, rediscount their commercial paper, exchange their unmatured assets for actual cash, and secure its still better known credit in place of their own. by its means their reserves can be replenished and their lending power made responsive to the needs of their communities. a bankers' bank makes it possible for the money of the individual banks to do many times the work it would do if left in the separate institutions, and to do it far more effectively. it is the only ultimate safeguard, the only scientific deposit guarantee, the only sound basis of flexibility in any banking system. as some philosopher once said of god--if such an institution did not already exist, people would certainly have to invent one, and, as we have no such institution permanently and legally established in america to-day, _the prime essential of any sufficient banking plan is the equipment of our system in some way or other with the facilities of a bankers' bank_. the parcellation of reserves [ ]if the absolute certainty of ability to pay all depositors in money on demand be taken as the _summum bonum_ of banking, an idea which quite generally prevails among the unthinking, it is interesting to reckon the cost. a bank has no fairy wand with a wave of which it can transmute into gold the amounts due it, whether represented by borrowers' notes or balances due from other banks. such repayments have an element of uncertainty which pervades all human affairs. all uncertainty could be eliminated only by having in money on hand an amount equal to the total of liabilities to depositors. a deposit with a bank would then be simply a warehousing transaction. if a readjustment to such a condition were accomplished, and if we consider only the ultimate result, and not the cataclysm of the process, it would clearly prove such an extinguishing restriction of commerce as would cost fabulously more than the value of the advantage gained. it would be like preferring the constitution of a jelly-fish to that of a human being in order to avoid the hazard of fracturing a bone. only by having banks which employ in loans a part of depositors' capital lodged with them, can the best interests of the whole people be served, even if this entails something less than an absolute certainty of power to liquidate deposits on demand. that banking system must then be best which combines equally the largest measure of each of two elements: the use in commerce of funds deposited, and the certainty of paying depositors in money on demand. turning now to the vast system of banks throughout the country, if the separate reserves of all the banks were gathered into one mass, available to meet the demands of depositors for payment in money, whether made in maine or texas, new york or california, the banks of the whole system would be able to operate with the highest degree of safety by having a total sum of money equal to only a small percentage of the aggregate amount owing to depositors, and consequently would be able to lend for use in the commerce of the country the greater proportion of the funds deposited. the total of deposits and withdrawals made throughout the country would very nearly offset one another. very little of the reserve money would actually be used. a special requirement of one section would represent only a small percentage of the total massed reserves. the country has such vast area, and the requirements in different parts so vary in season that a deficiency of money in some sections would find a measurably offsetting surplus in others. while theoretically an institution so constituted would be strongest and most efficient, none such exists, and no one would advocate such a system. omniscience and omnipotence would be required for its wise administration. but the conclusion seems clear that only in proportion to the massing of reserves can efficiency in lending for commerce be combined with strength to pay depositors. the greater the proportion of the entire reserves gathered into one mass, the greater the efficiency and strength rendered possible. this principle is fundamental. the fundamental defect of our banking system, then, is the parcellation of the entire reserves among the separate self-independent banks, necessitating either a wastefully large proportion of reserve for assured ability to pay, with correspondingly inefficient service to commerce, or efficient service with the hazard of unexpected exhaustion of reserves and consequent inability to make good the contracts to pay depositors in money on demand. [ ]if after a prolonged drought a thunderstorm threatens, what would be the consequence if the wise mayor of a town should attempt to meet the danger of fire by distributing the available water, giving each house owner one pailful? when the lightning strikes, the unfortunate householder will in vain fight the fire with his one pailful of water, while the other citizens will all frantically hold on to their own little supply, their only defence in the face of danger. the fire will spread and resistance will be impossible. if, however, instead of uselessly dividing the water, it had remained concentrated in one reservoir with an effective system of pipes to direct it where it was wanted for short, energetic, and efficient use, the town would have been safe. we have parallel conditions in our currency system, but, ridiculous as these may appear, our true condition is even more preposterous. for not only is the water uselessly distributed into , pails, but we are permitted to use the water only in small portions at a time, in proportion as the house burns down. if the structure consists of four floors, we must keep one-fourth of the contents of our pail for each floor. we must not try to extinguish the fire by freely using the water in the beginning. that would not be fair to the other floors. let the fire spread and give each part of the house, as it burns, its equal and inefficient proportion of water. _pereat mundus, fiat justitia!_ redeposited or overlapping reserves [ ]if we are to understand the radical change which will be worked by the federal reserve act in the reserve situation in this country it is necessary to examine at some length the system heretofore prevailing. under the national bank act these banks were divided into three groups or classes, referred to as the country banks, the reserve city banks and the central reserve city banks. there are three central reserve cities: new york, chicago, and st. louis. every national bank in these cities is a central reserve city bank. the reserve cities are forty-seven in number and include the larger cities of the country. every bank not situated in any one of the three central reserve cities or the forty-seven reserve cities is a country bank. this last term includes all the national banks of the smaller cities in the country, of the manufacturing towns and communities of new england and the middle states and thousands of national institutions doing business in the agricultural sections. ~the country banks.~--the country banks, by the terms of the national bank act, are required to keep a cash reserve at all times equal to per cent. of their deposits. under the old law the country bank must keep only per cent. of this required reserve in its own vaults, while it is allowed to deposit per cent. of the required reserve on call in such national banks in any of the reserve cities or central reserve cities as may be approved as "reserve agents" for it by the comptroller of the currency.... ~the reserve and central reserve cities.~--the second class of national banks, known as reserve city banks, includes all national banks located in forty-seven cities of the country, which from time to time have been designated as reserve cities. every national bank in them is required to keep a reserve at all times equal to at least per cent. of its deposits. it must be borne in mind that the deposits of a reserve city bank include not only what the banker refers to as individual deposits--the deposits of individuals, firms, partnerships, and corporations--but also deposits which have been made with the reserve city bank by country banks, for which it is the reserve agent. a reserve city bank is permitted by the national bank act to keep one-half of its required reserve on deposit, subject to withdrawal on demand, in a national bank or banks in a central reserve city, approved by the comptroller of the currency, as its reserve agent.... every national bank within the central reserve cities must keep a reserve equal in amount to at least per cent. of its deposits, including not only individual deposits but deposits by bankers for whom it acts as reserve agent or correspondent. ~the reasons for the system.~--this rather complicated system of reserves was authorized by congress because it was necessary to allow the banks of the country districts or smaller cities to keep reserves in other banks in the larger centres of trade in order to facilitate the commercial exchanges of the country; and also because it was necessary to have some means by which banks of the larger cities could finance payments for their customers in the great centres of the country, especially in new york, chicago, and st. louis.... ~its weaknesses.~--our system of deposited reserves has failed miserably in times of stress, although it has worked reasonably well in ordinary times. it is contended that it has, to a large degree, built up the great centres, and more especially new york city, at the expense of country districts. it has been responsible for the seasonal withdrawal of money which was at one time a most serious embarrassment to business, especially in new york, chicago, and other large cities in the fall months, but which has practically disappeared in new york city since the panic of .... it was not until the system of deposited reserves brought about the panic of that the country at large became convinced that this feature of the national banking system was vicious, dangerous, and likely to produce trouble at any time. with this conviction began the movement which finally ended in the enactment of the federal reserve act. ~much of our reserve fictitious.~--as a matter of fact, the actual available reserves of the three classes of national banks in the country are much less than is indicated by the percentage specified in the act quoted above.... this condition is referred to frequently as the pyramiding of reserves, which means, in substance, that the national banks of this country, omitting from consideration the state banks where the same conditions exist in an even more aggravated form, are doing business largely upon a paper reserve, which experience has shown is utterly useless in times of panic. the seven thousand five hundred and nine national banks held cash and paper reserves on october , , as follows: _cash in vaults._ _due from banks._ country banks $ , , $ , , reserve city banks. , , , , central reserve city banks , , ------------ ------------ $ , , $ , , as a matter of fact the national banks of the country held $ , , in cash as against total deposits subject to reserve requirements of $ , , , , or about . per cent. of the liabilities subject to the requirements. ~dangers of the system.~--so conclusive are the lessons to be learned from the experience of the last half century with the system of redeposited reserves, that there is a practical unanimity among bankers and financial experts that the reserves of our banks, with the exception of the money actually held in the vaults, are, in the words of william ingle, vice-president of the merchants and mechanics national bank of baltimore, "a great deal of a delusion and a snare." in every panic, the country banks and the reserve city banks have found that it has been impossible for them to secure the return of the portion of these reserves which has been redeposited in new york, chicago, and st. louis. at a time of great stress, when the banks have been subjected to a drain, they have been suddenly bereft of the support which, in theory, should have been forthcoming from their reserve agents, and have been forced to depend upon the per cent. or - / per cent. reserve, which was contained in their own vaults. what is even worse, the outbreak of a panic in new york city, where every panic of the last half century has started, was the signal for the suspension of cash payments by every bank in the country, within a few hours.... thus a local panic, in many cases occurring when business conditions were exceedingly prosperous and healthy, has completely disorganized the exchanges of the country and brought business to a standstill. the perverse elasticity of national bank notes [ ]... it is not quite correct to call our national bank notes inelastic. they are decidedly elastic. the trouble is that their elasticity is of a wrong sort; they expand when there is need of contraction, and contract when the need is for more currency. by calling the notes inelastic we mean that their volume does not correspond automatically to the need for currency. this is true, and is one of the most serious defects of the bond-secured notes.... the demand for currency depends upon the volume of business to be transacted, and is continually in a state of fluctuation. various causes have only to be mentioned to explain the unequal demand at different times. we have thus the payments of salaries, bills, etc., coming usually, on the first of each month. then there are the quarterly payments of dividends, interest, etc., falling generally on the first of january and at intervals of three months thereafter during the year. above all, we have in this country a regularly recurring seasonal change in the volume of business, due to the harvesting and moving of the crops every fall and early winter. besides these normal fluctuations in the demand for currency there are of course such abnormal circumstances as business emergencies, panics, depressions, etc., which at irregular intervals call for expansion or contraction of the currency. to meet all these varied demands an elastic currency is a necessity. the most serious evils of inelasticity in this country are seen in connection with the annual handling of the crops. it may be safely said that for this purpose the united states needs every fall at least one hundred and fifty million dollars of extra currency. since our monetary system contains no really elastic element, this extra business of the fall has to be done with little or no increase of the country's currency. the crops must be handled by means of a shifting of currency from one part of the country to another. in the spring and early summer the agricultural districts are apt to have more money than they need. accordingly, the country banks are in the habit of depositing part of their reserves in banks situated in the reserve cities. a large part of these sums eventually finds its way into the money markets of new york and other eastern cities, where a low rate of interest is paid to outside banks for such deposits. now comes the harvest season, and a demand goes up from the country banks for the return of their deposits. every fall the clearing-house banks of new york city alone give up about fifty millions of "lawful money" to meet this demand.[ ] of course this means a tight money market. in the spring and summer the funds obtained from the country banks were loaned out or used as reserves for deposits. money was in excess, interest rates were low, and speculation was encouraged. now loans must be called in and deposits reduced. this sudden contraction is a hard blow to all business interests. it is especially hard on the speculators, and their desperate demands cause the enormous rates on call loans which are witnessed every fall on the new york money market.... it has ... been suggested that the inelasticity of the national bank notes does not mean that their volume never changes. as a matter of fact, the circulation has been marked by enormous fluctuations, and these fluctuations, having no relation to the demands of business, have simply aggravated the evils of inelasticity which have been described. thus, between june , , and june , , the total volume of bank notes outstanding declined from $ , , to $ , , , a decrease of $ , , , or per cent. this retirement of half the circulation came during a decade marked by large growth in population and wealth, and by remarkable industrial expansion and business activity. the reason for this decline lies in the fact that the government was using part of its large surplus revenue to pay off the debt. in eleven years the treasury paid $ , , , , reducing the debt by more than half, something without parallel in the history of public finance. the retirement of half the debt caused a scarcity of united states bonds, and their prices went soaring. four per cents of rose from - in to - in . the inevitable result was the decline of circulation. the opposite course of events has been seen in recent years.... [the subjoined diagram (suggested by a similar one for - , accompanying the article a part of which is here reproduced) illustrates the comparative seasonal elasticity of the notes of our national banks and the circulation of the chartered banks of canada for the period - . the marked expansion of national bank notes in was due to the crisis brought on by the outbreak of the european war. the aldrich-vreeland notes which were issued in that emergency were retired in a few months and the volume of national bank notes assumed normal proportions. for the canadian statistics involved the editor is indebted to mr. g. w. morley, secretary of the canadian bankers' association.] [illustration] national bank notes unsound and unsafe [ ]... any correct system of credit currency must be based on a foundation of gold. bank credit is issued in the two forms of deposits and notes. the former are based on a reserve of gold, the latter are not. we have here a fundamental weakness of our bank-note system. under proper banking methods, deposits cannot expand without a proportional increase of the gold reserves of the banks. this furnishes the natural and necessary check to inflation. our bank notes, however, have no such connecting link with the business and the monetary stock of the world. the basis of the american bank-note currency is the government debt, a very inferior kind of foundation. such a system carries with it the possibility of paper money inflation of a peculiarly dangerous kind, because its real meaning is apt to be concealed. for example, between january , , and january , , the volume of national bank notes outstanding increased from $ , , to $ , , , an expansion of $ , , . in other words, the circulation nearly trebled in eight years. the cause of this great increase was not the need of more currency but the changes in the national bank act made in , changes which made the establishment of national banks easier and the issue of notes more profitable.... the future is likely to witness further expansion, unless some change is made in our system.... it is undoubtedly the present intention to give ... to future [bond] issues [the privilege of being used as security for notes]. indeed, unless this privilege is given, there will be no market for the per cent. bonds. we may expect, therefore, to see each issue made the basis of a further increase in the volume of bank notes. all this means inflation, and inflation by means of a circulating medium having no connection with the gold stock of the world. to make room for the additional currency, gold must be forced to leave the country, and our whole monetary system, by no means too strong to-day, will be weakened at its foundation. this is the fundamental difference between expansion of credit by means of deposits and expansion by means of national bank notes. the one is based on gold; the other is based on the government debt. when deposits expand, the reserves of the banks must increase proportionately and, if carried far enough, the result must be to bring in gold rather than to force it out. in like manner, deposits cannot for any considerable time be in excess of business needs. but bank notes may be increased indefinitely, if the government only borrows enough, and the result will be the expulsion of gold whenever the currency becomes redundant. that this is an actually present danger is sufficiently demonstrated by the recent action of the secretary of the treasury, who has seen fit to add to the national debt at a time when the treasury had a surplus of over millions, for the sole purpose of increasing the circulation of the national banks. our currency system can never be sound until the bank circulation is entirely divorced from the government debt. the danger of inflating our monetary system with bank notes having no gold reserve back of them is all the more serious from the fact that the notes of the national banks are used as reserves by state banks, private banks, trust companies, etc. they are part of the "cash reserves" on which these banks base their deposits. thus we have a system of credit based on credit, and any weakness in the national bank note is carried over and multiplied in the deposits of other banks. the complete _reductio ad absurdum_ of this multiple credit system came when at a recent convention of the american bankers' association it was seriously proposed that it be made lawful for national banks to count their notes as "lawful money" in their own reserves. there is good reason to believe that this is actually practised to some extent by national banks to-day, though the practice is, of course, illegal. the safety of the national bank notes is seldom questioned. whenever the evils of our currency system are pointed out and plans for asset currency or other reforms are proposed, the reformer is apt to be met by the reply that, at any rate, our bank notes are perfectly safe, and we had better put up with their other shortcomings rather than launch out on new schemes which may possibly sacrifice that safety which we now enjoy. the foregoing discussion should already have cast some suspicion on this complacent attitude. it will be further weakened by a closer analysis of the basis of the national bank circulation. national banks may issue their notes up to the amount of their paid-up capital, and up to per cent. of the par value of united states bonds deposited with the treasury, but never in excess of the market value of the bonds. the notes are engraved by the government and issued to the banks. when signed by the proper officers of the bank, they become the bank's promise to pay upon demand and may be issued for circulation. the united states treasury is also required by law to redeem on demand all notes of national banks presented to it. for this purpose each bank must keep with the treasury a reserve fund equal to per cent. of its circulation. the duty of the treasury to pay notes on demand, however, is not limited to the amount of this reserve, but applies to all notes properly presented. in case of the failure of a national bank, the treasury is required by law to immediately redeem all its notes. the treasury is secured against loss by the bonds deposited, by the per cent. cash reserve, by its prior lien on the assets of the banks, and by the personal liability of the stockholders for an amount equal to their stock investments. it is thus seen that the popular idea that the holder of a national bank note is secured against loss by the government bonds deposited in washington is not strictly correct. what protects the holder of a note is the absolute responsibility of the treasury to redeem all notes on demand. the bonds are to secure the treasury, not the individual noteholder, against loss. the noteholder is secured so long as the treasury is able to meet its legal obligations. let us examine the character of our government bonds as security to enable the treasury to meet its obligations. to understand the situation, it should be remembered that the leading purpose in the establishment of the national banking system was not the creation of a scientific currency system. the national bank act was a war measure enacted largely for the purpose of improving the market for government bonds during the civil war. it was for this purpose that the circulation of state banks was forced out of existence by a per cent. tax and the right of issue restricted to national banks on condition of the deposit of government bonds as security. in the accomplishment of this purpose the act has been eminently successful. united states bonds have been given a new utility over and above their utility as an investment. from the very beginning, this has given them an added value and enabled the government to borrow at lower rates of interest than it would otherwise have had to pay. the act of march , , made provision for the ultimate refunding of all the united states debt into per cent. bonds, and gave an added inducement to the use of these bonds as note security by lowering the annual tax on circulation from per cent. to one-half of per cent., provided the notes were secured by the new per cent. bonds. all bonds issued since have borne per cent. interest. yet the market value of these bonds has always stood above par.... obviously, this value is not based on earnings. british consols paying - / per cent. are to-day quoted in the neighborhood of , which makes them yield about per cent. on the investment. the french and german per cent. loans are both considerably below par. united states bonds have been given an artificial value through their use as security for bank circulation. the national banks to-day hold for this purpose about two-thirds of the total funded debt of the united states. remove this privilege from the national debt, and we should see the per cent. bonds (which compose two-thirds of the interest-bearing debt of the united states) fall to perhaps seventy cents on the dollar, very likely even lower. here we have a remarkable situation. our national bank notes are safe because they are secured by government bonds, and our government bonds are valuable because they are security for national bank notes. this looks very much like lifting oneself by one's bootstraps. if we are to cling to the bond-secured note system, this matter of the artificial value of government bonds will become an important practical problem whenever it becomes necessary for the united states to make any addition to its debt. either the rate of interest will have to be raised to per cent. or higher, or, if that alternative is rejected, means will have to be found to induce the banks to use the greater part of the new loans as security for additional note issues.[ ] in practical effect, this is only a thinly disguised resort to the time-honored but now thoroughly discredited practice of compelling the people to use the government debt as a circulating medium. the bearing of this matter on the safety of the national bank note is simple. the burden of the ultimate redemption of the bank notes has been placed on the shoulders of the treasury, to add to its other burdens of maintaining the value of the greenbacks and of the silver dollars. if loss of confidence in the bank notes should ever lead people to demand their wholesale redemption, the treasury would have to meet the demand in gold. but the moment it tried to sell the bonds, it would find there was no market for them except at a discount of perhaps or per cent. it is true that the treasury would still be able to recoup itself for this loss in the value of the bonds by exercising its prior lien on the assets of the banks. but this leads us to the important conclusion that the final security for our bond-secured notes rests on the assets of the banks after all. a more striking argument for asset currency could hardly be discovered. it must be remembered, however, that the foreclosure by the government of its claim on the assets of the national banks would cut into the wealth on which deposits are based and so have a most disastrous effect on the deposit system. the pressure upon the government to refrain from such a crushing blow to credit would be overwhelming. it is almost inconceivable that in time of panic or a national crisis the government would resort to such a procedure. almost any alternative would be preferred. it would not be too difficult a matter for the government to persuade itself that the wiser and safer course would be to suspend specie payments, perhaps even declaring the bank notes a legal tender. a more plausible case could be made out in favor of such action than was found sufficient to justify the issue of the greenbacks of the civil war. yet such action would mean the breakdown of our financial system. this is, of course, looking into the future and anticipating a state of disaster which may never come. but a system which bids fair to break down in time of disaster should be remodelled before disaster comes. and we should not rest too confidently in the notion that disaster can never reach us. it is only thirteen years ago [ ] that the burden of supporting its paper and silver currency brought the united states within twenty-four hours of suspension.... speculation involved in the issue of notes [ ]when a banker takes out currency he engages in two distinct transactions and enters upon two different hazards. in one transaction he assumes the risk and holds the expectation of greater profit for taking out circulation. since buying bonds and taking out circulation most of the time shows some theoretical profit over loaning direct, presumably if there were no other consideration, most of the time our bankers would keep outstanding all the notes they could. in the other transaction, however, the banker engages in a speculation in government securities. as a matter of fact, if the price of government bonds advances, the profit from taking out circulation declines; but our banker is pretty likely to view with equanimity the declining circulation profit when he considers the profit he is making in his speculation in bonds. on the other hand, as the price of government bonds declines, circulation grows more profitable. the banker is likely to view this with sour satisfaction when he looks on his loss in his bond speculation. profit or loss in the bond speculation is likely to outbalance loss or profit in the circulation transaction.[ ] let us examine the situation more closely. just what is the profit or loss from taking out circulation? in the first place the bank gets the regular current money rates on the loans it makes through issuing notes. also it gets the interest on the government bonds it buys. this, of course, means the real interest, or income on the investment, called basis, taking into consideration coupon interest, price paid, and date of maturity. excepting for the tax of / per cent. on the circulation taken out ( per cent. if taken out on the 's or 's) and for the expenses attendant on taking out circulation, which the government actuaries compute to average $ on the $ , , this interest on the government bonds looks like clear "velvet." it would be, too, if the banker did not have to pay more for the bonds than the amount of circulation he can take out against them. to figure his net profit he must deduct from the gain items just stated what he would have made if he had loaned his funds direct instead of investing in bonds. expressed as an algebraic equation the situation becomes much clearer. let x = current money rate; y = basis rate at which government bonds are bought; z = price of government bonds; b = circulation received ($ , used as basis of calculation); c = taxes, redemption, and other circulation expenses. (as already stated, government actuaries have calculated that circulation expenses average to cost the banks $ on the $ , of circulation taken out. taxes depend on whether the 's, in which case the tax is / per cent., or the 's or 's, in which case the tax is per cent., are bought. taxes, then, amount to either b(. ) or b(. ). we can take b as a constant in our calculations and base all our computations on taking out $ , of circulation.) the equation of profit or loss on taking out circulation then reads: yz + bx - xz - c = profit or loss. but circulation taken out (b) can never be greater than the amount of money paid for the bonds (z). if government bonds should be at par or at a discount, the nominal profit would always be just the basis interest on the bonds, less the tax and the cost of taking out circulation, or a constant advantage in the case of the 's of . per cent. for the purpose of this discussion we will consider only the 's of . in the regular case, then, the money paid for the bonds (z) is greater than the amount of circulation received (b). with that statement in mind we can draw certain very definite conclusions about our circulation direct from the equation we have formed; z is greater than b. repeating the equation in order to have it directly before us: yz + bx - xz - c = profit or loss. then as the current interest rate (x) increases, if all the other quantities remain constant, the negative influence in the equation grows greater, or profit from circulation decreases. we can, then, make definitely: statement i _if all other circumstances remain the same, circulation grows less profitable as the current money rate advances._ as business increases and the demand for both credit and money increases, as reflected in the rising interest rates, taking out circulation _cæteris paribus_, with the inexorability of a mathematical law, becomes _less_ profitable. further, there is an intimate relationship between y and z. if the price of bonds (z) declines, the basis rate (y) must advance. as a matter of fact as z declines yz grows greater. if, then, x remains constant and z declines the influence of the negative quantities of the equation is growing less. then follows: statement ii _as the price of bonds declines, if the current interest rate remains constant, the profit from taking out circulation increases._ that gives the absolute mathematical basis for such general statements as that "the price of bonds is too high to make circulation profitable." these two facts set out in statement i and statement ii place the banker who has taken out circulation between the devil and the deep, blue sea. if the price of bonds remains the same and the current interest rate rises, his circulation grows steadily less profitable. a decline in the price of bonds affords the only offset to an increasing interest rate. but if the price of bonds declines enough to offset the advance in the current interest rate, the banks must mark off enough profits to cover the loss on the capital value of the bonds. speculating in securities properly forms no part of a bank's business. it is an anomalous situation that in order to fulfil a proper function of note issue a bank should have to undertake such an improper speculation. the lack of adjustment between bank notes and deposits [ ]under our present currency system the volume of money in circulation is perfectly flexible. it constantly expands and contracts in automatic adjustment to the requirements of trade and the convenience of the people. an increase in the volume of cash transactions brings promptly an increase in the volume of currency in circulation through the current withdrawals of money exceeding the current deposits of money. a lessening in the volume of cash transactions promptly drives unneeded currency out of circulation through the deposits of money exceeding the withdrawals. no other system could provide a currency which would adjust its volume in circulation more exactly to the needs of trade and the preferences of the people. there is a ceaseless flow of the money in circulation into bank reserves, and of money in bank reserves into circulation--ceaseless except in an occasional crisis when the natural flow of money from bank reserves into circulation is arbitrarily stopped by banks refusing, for self-protection, to continue paying out to the point of exhausting reserves. while the volume of money in circulation is thus perfectly and automatically adjusted to trade requirements, it is to be noted that this flexibility arises from the flow back and forth, between the mass of money in circulation and the mass in bank reserves. in this lies the main economic defect of our present currency system. an expansion in the volume of money in circulation entails a corresponding contraction in the volume of bank reserves, and necessarily a corresponding contraction in loans. a period of expanding business would naturally be attended by both an increased volume of loans and an increased volume of cash transactions, such as increased pay-rolls, increased retail sales. increased cash transactions cause a larger volume of money to flow into circulation. but this flow is out of bank reserves, thus contracting them and necessitating a contraction of loans depending upon them, at the very time when loans would naturally expand. obviously, if business becomes very active, the effect upon bank reserves is so adverse, and the contraction of loans depending upon reserves so important, that embarrassment is widespread and panic ensues. the main defect, then, of our present currency system is that the volume of currency in circulation has its adjustment in the flow from bank reserves into money in circulation and from money in circulation into bank reserves, causing a contraction of bank reserves and the loans depending on them as business expands. a remedy would be the use of bank notes through which the volume of currency in circulation would have its adjustment in the flow from bank deposits into bank notes in circulation, and from bank notes in circulation into bank deposits, thus protecting from disturbance both bank reserves and the loans based on them. the commercial paper situation in the united states [ ]... at the present time the commercial paper situation in the united states is peculiar. "commercial paper" in the old and strict sense is little used in this country. "trade paper," as it is now called, arises in less than per cent. of the credit transactions in the united states.[ ] in some lines of trade, especially where a local wholesaler does a large business with small tradesmen, the wholesaler will extend credit by taking the retailers' notes; but in obtaining credit for himself the wholesaler will not surrender control of the bundle of retailers' notes, preferring instead to give simply his own note on a general understanding with his banker that the personal note rests on, and is fully covered by, the retailers' notes.[ ] the wholesaler hesitates to surrender to the banker the notes that he receives because he fears that his competitors might get some inkling of his trade connections, etc. in general, "trade paper" is used to settle accounts only when the credit terms are still long, that is, four months or more.[ ] what generally passes as "commercial paper" in the united states is single-name paper. as in the case of the wholesaler referred to above, the borrower of bank credit in these days offers for discount simply his own promissory note. some of this paper, particularly corporation notes, carries indorsements, but these are largely "accommodation" indorsements, which may buttress the security of the paper but which indicate nothing as to its purpose. the wide use of single-name paper in this country is largely explained by the fact that the prevailing terms of payment in business transactions are net in or days, with a discount for payment in cash within variously from days to one month. the cash discount allowed is usually so large that a purchaser can ill afford not to take advantage of it. two per cent. discount for cash within days, for example, with " days net" is equivalent to a return of per cent. per annum on one's capital. in actual practice the allowance is often even more liberal. hence where competition is at all keen the business man is practically forced to adopt the system of cash payments, depending upon his bank to advance to him, on his own notes, the necessary funds. moreover, so broadly has the custom of taking cash discounts spread that a failure to take advantage of them is generally regarded as an indication of weakness, and tends to undermine general confidence in the business man's credit standing. hence the necessity for maintaining his credit rating, as well as competition, virtually forces the business man into making anticipatory cash payments and thus, more or less as a consequence, into the general practice of discounting his personal paper.[ ] furthermore, as business operations have grown to a larger and larger scale, especially in the case of large corporate enterprises, the credit needs of business have in many cases expanded beyond the capacity of the local banks to supply them. the necessity arose, therefore, to go elsewhere for accommodation. this was met in some cases by the opening of bank accounts in other centers, but obvious difficulties and restrictions attend this method of procedure. more elastic possibilities and fewer difficulties grew out of the employment of middlemen to market the paper over the country as a whole on the best available terms. hence the note-broker is to-day an important factor in the discount market. as a result of the note-broker's activities there has come to be established an extensive open market for commercial (single-name) paper in this country, and the rates at which such paper is discounted are regularly reported in the daily newspapers. this development of a commercial-paper market reflects, of course, a considerable development of the demand of the banks for this form of investment.[ ] "country banks" especially have in the last few years heavily increased their purchases in the open market, because the necessity of writing off heavy losses due to the shrinkage of bond values has tended to make them more timid about investing in securities, and because they have also learned by experience that paper purchased through a broker does not have to be renewed, as does most of the purely local paper.[ ] this development has, of course, tended to put an increasingly heavy responsibility on the note-broker and has brought about, at least to some extent, a readjustment of his business methods. at first note-brokers simply solicited paper from merchants and charged a brokerage fee. latterly, the custom has grown up for the broker to buy up the paper outright.[ ] this forces the broker "to stand between the maker and the bank," and to the extent that any given piece of paper may be left on his hands, even though he does not indorse the paper that he sells, it compels him to be very circumspect about the paper that he purchases. moreover, some banks now purchase paper with an option of return within a specified period, making it a point carefully to inquire about the maker of the paper before the option expires. in the last few years banks as well as brokers have established carefully organized credit departments, the purpose of which is, through careful inquiry into the character and standing of sellers of paper, to enable both brokers and bankers to select paper with sounder discrimination. this characteristically american discount system differs greatly from that which prevails in europe. abroad, single-name paper is very little used.[ ] the european banker demands more than one signature, not only as a guaranty of security, but also as an assurance of the validity of the transaction out of which the paper offered for discount grew. when the prospective borrower, for some sufficient reason, does not wish to divulge the names of his clients, as would be necessary if he drew bills on them, he may arrange with his bank for an overdraft (known as a cash advance),[ ] or by paying a small commission he may get the bank to "accept" a bill drawn directly on it. with a bank's acceptance a bill, even though drawn by the humblest shopkeeper, becomes a prime investment and may be sold openly on the market at the lowest terms that prevail.[ ] on the continent bank acceptances thus open the market widely to all who can arrange for them, while the open market for single-name paper in this country is restricted to large firms of established reputations. in view of the prevailing practice in europe it is interesting to inquire why in america there should have been this peculiar development in the discount field. it has been pointed out that before the civil war trade paper, as it is now called, was pretty generally used, but the exigencies growing out of the war completely changed the situation. the excessive issue of the greenbacks and the uncertain value of credit instruments covering any appreciable period of time led sellers to endeavor to bring business to a cash basis. credits were shortened to or even to days, and strong emphasis was placed on immediate payment. with cash discounts alluringly liberal, merchants could ill afford to forego them, and cash payments tended to become more and more common. big houses offered single-name paper to raise the needed funds, and little by little the older system of settling by the promissory note of the debtor was supplanted by the system of selling on open account, with the choice given to the debtor of a liberal discount for cash or the payment of the due amount "net" at the expiration of a relatively short credit period. the transition was hastened by the development of the practice of selling goods by sample instead of by personal selection from an accumulated stock. under the old practice the buyer bought under the rule of _caveat emptor_, but when purchasing by sample he had a right to demand that the delivered goods attain the standard of the sample, and there grew up in consequence the doctrine of "implied warranties." these warranties have in some lines been pushed very far,[ ] but in any case the buyer would hesitate to pay for goods until he had had a chance to inspect them, and hence he would as a rule demand that they be consigned to him on open account. the seller, however, cannot afford to wait for payment until his accounts become due. too much of his capital would be tied up. he is forced, therefore, to go to his banker and, on the basis of his accounts receivable, to offer his own note and thus to obtain release of the capital otherwise temporarily beyond reach.... single-name paper virtually monopolizes the field.... no system of bank acceptances and the absence of an open discount market [ ]the weakness of our banking system as compared with the systems of europe may very certainly be attributed in part to the omission of the bank act to permit bank acceptances. it is a weakness, furthermore, which involves the country in serious economic loss. without a national discount market, the great majority of our merchants and manufacturers are compelled to confine their borrowings to american capital, either through the discounting of their paper with their local banks or through its sale to note brokers. all but the strongest and largest are practically excluded from the benefits of foreign competition for their paper. aside from the great concerns with international ramifications, which are able to arrange their own credits abroad, our merchants and manufacturers are not benefited by low foreign discount rates, except in so far as note brokers, who make it a practice to borrow in europe with commercial paper as collateral, are better able to finance their purchases. what is more, they receive relatively little advantage from an accumulation of funds in new york banks. low call loan rates have an indirect rather than a direct effect on the rate which the mercantile community has to pay for money. low call rates, in other words, are an indication more especially of stagnation in the stock market than of a lack of demand for accommodation from merchants and manufacturers. such rates do not act as a stimulus to trade in general any more than high call rates act as an immediate check to over-expansion. it is not only in our domestic trade that the country suffers through the want of a discount market. without bank acceptances we are at a distinct disadvantage in connection with our foreign trade. our importers, unable to open credits with their banks, as is done abroad, are not in a position to finance their purchases upon as favorable a basis as the importers in other countries, as english cotton spinners, for example. the english spinner about to purchase cotton in america arranges for his bank to accept sixty or ninety days' sight bills drawn on it by the american shipper. the latter draws his bills on the english bank and attaches the documents covering the shipment, such as the bills of lading, insurance certificates, invoices, etc. he then sells them to a new york bank, thereby receiving immediate payment for his cotton. the new york bank forwards the bills to its london correspondent, which presents them for acceptance to the bank upon which they are drawn. upon the acceptance of the bills the documents are delivered to the accepting bank, which then turns them over to the spinner upon whatever arrangement has previously been made. the accepted bills are discounted by the new york bank in london and the proceeds placed to its credit there. the new york bank can afford to pay a high rate for such bills, as they are drawn on prime bankers, rendering certain their ultimate payment. the purchase of the bills does not, moreover, necessitate any outlay of money, as against the credit to be received through the discount of the bills the new york bank can immediately sell its checks on london. without such banking facilities--that is, the ability to arrange with his bank to accept time bills drawn on it by a foreign shipper, the american importer is compelled to finance his purchases in either one of two ways. he may pay for the goods at once by remitting funds direct to the shipper. this, however, ordinarily necessitates the negotiation by the importer of a loan on his promissory note. if he is not in a position to secure such an advance he must shift the burden of providing funds to finance the shipment, from the time it is forwarded until it is to be paid for, upon the foreign shipper, who is then in a position to exact terms more favorable to himself through an adjustment of prices. the practice in connection with this method of making payment for foreign purchases is for the shipper to draw his draft on the american importer and turn it over to his banker to forward for collection. such drafts, drawn as they are on individual importers and not on banks whose standing is well known abroad, must be sent for collection since there is no general market for them. practically the only way in which a foreign shipper can realize immediately on bills of this character is to dispose of them to his own banker or get him to make an advance on them. either of these two methods of financing our imports is expensive even when the time between the shipment and the receipt of the goods is short. when the time is much longer, as in the case of imports from south america and the far east, the cost is almost prohibitive--that is, so great that we can not compete on an even basis with foreign buyers. in fact, we might be practically excluded from these markets if a makeshift were not possible. our importer gets around our lack of banking facilities by having his bank arrange a credit with its london correspondent. he receives an undertaking, called a commercial letter of credit, giving the terms of the credit--that is, the name of the london bank upon which the bills are to be drawn, the amount which may be drawn, the character of the goods which are to be purchased, the tenor of the bills, and the documents which must accompany them. on the strength of such a letter of credit, the shipper in south america, for example, is able to dispose of his bills on london and thus receive immediate payment for his goods. the local bank which buys the bills sends them with the documents to its london correspondent, which presents the bills to the bank on which they are drawn--that is, the bank with which the credit was opened. upon the acceptance of the bills the documents are delivered. they are then sent by the london accepting bank to the new york bank which opened the credit and the latter delivers them to the importer against his trust receipt. twelve days prior to the maturity of the bills in london the new york bank presents a statement to the importer indicating the amount of pounds sterling which must be remitted to london to provide for their payment at maturity or rather a bill stated in dollars for the amount of pounds sterling drawn under the credit. in this purchase of exchange the importer makes payment for his goods. this method while workable is obviously cumbersome, yet it is practically the only one which the american importer can follow in connection with such imports. it is expensive for the importer, for not only must he pay his bank a commission for arranging the credit, but there is included in this commission a charge made by the london bank for its acceptance. further than that the importer must take a material risk in exchange. at the time a credit is opened the cost of remitting, say £ , to take up the bills in london, might be only $ , , or at the rate of $ . , whereas by the time the bills actually mature exchange may have risen and cost him $ . , or $ , . as a result of the inability of our banks to finance imports through the acceptance of time bills, american importers are, then, made dependent to a large extent upon london, and are required to pay london a considerable annual tribute in the way of acceptance commissions. this practice not only adds to the importance of london and militates against the development of new york as a financial center, but it at the same time works serious injury to our export trade. since time bills can not be drawn on our banks from foreign points against shipments of goods to the united states, there are consequently in such foreign countries very few bills which can be purchased for remittance to the united states in payment for goods which have been bought here. in other words, under our present banking system our imports do not create a supply of exchange on new york, for example, which can be sold in foreign countries to those who have payments to make in new york. this means that our exporters are also, to their great disadvantage, made dependent upon london. it means that when they are shipping goods to south america and to the orient they can not, when they are subject to competition, advantageously bill them in united states dollars. they naturally do not care to value their goods in local currency--that is, in the money of the country to which the goods are going--so their only alternative is to value them in francs or marks or sterling, preferably the latter, owing to the distribution and extent of british trade, creating throughout the world, as it does under the english banking system, a fairly constant supply of and demand for exchange on london. when we come to bill our goods in sterling, however, it is at once seen that our exporters are obliged to take a risk of exchange, which is a serious handicap when competing with british exporters. our exporters who are to receive payment for their goods in sterling must previously decide on what rate of exchange will make the transaction profitable. if, in an effort to safeguard themselves against a loss in exchange, they calculate on too low a rate for the ultimate conversion of their sterling into dollars, their prices become unfavorable compared to those made by british exporters and they lose the business. if they do not calculate on a sufficiently low rate they get the business but lose money on the transaction through a loss in exchange. the prohibition of bank acceptances not only acts as a hamper upon our domestic and foreign trade, but is detrimental to our banks as well. it is the small country bank which is chiefly affected. the business of the country bank, so far as the employment of its funds is concerned, may be divided into two classes--that which relates to advances to local customers and that connected with the investment of its surplus. it is in respect to the latter that the matter of acceptances is important. under the present limitations of the national bank act there are three principal ways in which a country bank may render its surplus funds productive. it may deposit them with its reserve agent. this means a low interest return, too low in fact to permit of only a relatively small amount being thus employed. it may invest in bonds. in this way an increased interest return can be secured, providing a wise selection of securities is made, but it partakes of the nature of speculation. the third way is to buy commercial paper. such purchases give an ample interest return and there is no savor of speculation. even this method of employing a bank's funds, however, is far from satisfactory. it means the investment in a security for the strength of which the bank must depend on the word of note brokers, the rating of the mercantile agencies, or the opinion of some correspondent bank. it means, furthermore, the tying up of the bank's funds for a fixed period. if national banks were permitted to accept time bills the country bank could then invest its funds in paper bearing the guaranty of some great bank with whose standing it is perfectly familiar. risk such as now has to be taken would be eliminated. what is vital, however, is that with a national discount market an investment in a bank-accepted bill is one which could be realized upon immediately. commercial paper and bank acceptances are both discountable. the prime difference between them, as affecting a country bank, is that they are not both readily rediscountable. herein probably lies the reason for the strong prejudice against rediscounts which exists among bankers in the united states. in this country when a bank discounts a piece of commercial paper it is discounting something which for its security depends solely on its maker. should the bank desire to realize on this paper it could do so by rediscounting it, but such a rediscount would be practically equivalent to a loan to the bank on the strength of its own name. in other words, to rediscount its commercial paper would affect a bank's credit. to ask for a rediscount is to ask for accommodation. this would not be the case with bank-accepted bills. if such bills were discounted by a country bank as a means of investing its surplus and it was desired to realize on them such a rediscount would be made not on the name of the country bank, but on the name of the accepting bank. a rediscount in this instance would not constitute a loan to the country bank and would have absolutely no effect on its credit. it would merely indicate that some more profitable business had arisen in which to employ its funds or that it was desirous of increasing its reserve. since the reserves of interior banks are so largely concentrated with them and it is essential that they keep their assets in an especially liquid condition, the prohibition of bank acceptances works injury to the banks at the country's financial center, new york, in a different way. it deprives them of what london banks, for example, have--that is, a mass of the soundest securities against which to loan their money on call or in which they may invest their funds for very brief periods--bills of exchange, covering genuine commercial transactions, bearing the acceptance of prime bankers. unquestionably such securities as a basis for loans are preferable to stock and bonds, but without them new york banks must have recourse to day-to-day loans on the stock exchange. moreover, when the demand for such loans is limited. new york banks are forced into the keenest kind of competition, a competition which, as has been pointed out, is not only of little benefit to trade but which, through the lowering of the money rate, actually stimulates speculation. furthermore, without a steady money rate such as exists in countries possessing discount markets, new york banks are left with no reasonable or satisfactory basis upon which to fix a rate of interest to pay for the deposits of country banks. in london interest on bank deposits is fixed at a certain percentage below the bank of england discount rate, usually - / per cent.--that is, a rate which fluctuates with the value of money and normally leaves a certain margin of profit to the london bank. the same practice is followed in all the great financial centers of europe. with us, country banks receive a fixed rate of interest for their deposits, usually per cent., the year around, regardless of fluctuations in the value of money. the unscientific nature of such a rate is obvious. when the call loan rate is high country banks do not receive interest in proportion to the value of their deposits. when it is low the new york banks pay more interest than the deposits are worth. in the latter instance the new york banks are forced into injurious competition with one another. they are in much the same position as competing railroads were earlier in our history, with results similarly baneful. with the railroads it was worth while to secure traffic even at a losing rate, as no matter what the return it helped, if only a little, toward meeting fixed charges. oftentimes with the new york banks to-day any rate which they can secure for their money whether losing or not is acceptable as helping to meet this fixed interest charge on bank deposits. to pay per cent. for deposits and to keep a per cent. reserve a bank must loan its money at - / per cent., to come out even, taking into consideration the actual expense of making and recording the transaction. it is better to loan at - / per cent., however, than to let the money lie idle. it is better to lose per cent. than to lose the entire - / per cent., as would be done in case no loans at all were made, clerk-hire being just as much a fixed charge as interest. with the amendment of the national bank act, to permit the acceptance of time bills, such ruinous competition would cease. the funds of the banks would come to be principally invested in trade paper and stock-exchange loans would be relegated to a position of secondary importance, as in london and on the continent. the field for the investment of their deposits would be greatly broadened, to the benefit both of the banks and trade in general. to remedy this primary defect in our banking system, to make possible the financing of our domestic and foreign trade along the lines which have proved so advantageous in other countries, to provide negotiable paper of a character suitable to the investment of foreign funds, paper which can not only be discounted but rediscounted, to give trade the advantage of bank surpluses accumulated both in the country at large and in new york, to lessen the evils of speculation, to afford a reasonable basis for the calculation of interest rates on bank deposits in central reserve cities, to bring new york into the circle of those financial centers between which funds move naturally as discount rates rise or decline, to secure the advantage of the competition of foreign capital for our trade paper, can be put in the way of accomplishment by the insertion of a paragraph or two in the national bank act. * * * * * [ ]the european financial system is constructed upon discounts as its foundation; the american system is constructed upon bonds and stocks as its foundation. bank notes in europe are issued mainly against bullion and discounts; in the united states mainly against bullion and bonds. the quick assets held by european banks against their deposits consist of discounts or call loans, largely secured by discounts. the quick assets of american banks ... are primarily call loans on stock and bond collateral. in europe the daily plus and minus of money requirements are adjusted by the use of the discount market--that is to say, in a final analysis, by purchase or sale of bills. (calling in or putting out money on call where the loans are secured by bills amounts, in effect, to a sale or a purchase of bills.) in a last analysis this means that in europe attempts to liquidate are primarily appeals to the whole nation to liquidate its temporary commercial investments, the brunt of such liquidation being borne by the entire community, and the pressure being constantly subdivided, every member of the community thus contributing his share. as a majority of discounts represent goods in process of production or on the way to consumption, liquidation with them primarily expresses itself by a falling off in new production, while the consumer, on the other hand, can not stop consuming and must therefore continue to pay. the brunt is thus borne by the whole nation and adjustment follows without violent convulsions. in sharp contrast with such a system the attempts to liquidate in the united states are directed primarily at the contractors of stock exchange loans. this means that a comparatively limited number of debtors are called upon to sell their securities. this they can do only by finding new investors, who, as a rule, are at such times comparatively rare, because when acute pressure arises it generally originates in the inability of the investor to purchase because of lack of funds or in his unwillingness by reason of his distrust of the financial situation. the concomitant of this is that those forced to sell securities at such times must offer them at sufficiently reduced prices to bring about an entire change in the attitude of the investor. the difficulty here is that violent reductions of prices in themselves cause distrust, and low prices caused by distrust not only frighten away purchasers but, in addition, unsettle the owners of securities and thus cause them to join the ranks of the sellers. an acute convulsion, therefore, must inevitably follow before the tide can be turned.... of course, general liquidation in europe includes a liquidation of securities, just as liquidation in the united states also includes liquidation of commercial paper as it matures. but the difference is that in europe bills will be the main factor and securities will play a much more subordinate part, while with us just the reverse is true. the essential conditions for the establishment of an international discount market [ ]the essential conditions for the establishment of an international discount market are: . every bill offered for discount should be based on a commercial transaction where value passes. finance or accommodation bills should be extremely rare and capable of satisfactory explanation. . it follows that almost invariably the bill will arise out of a sale of goods and will be in the form of a draft by the seller upon the buyer, and accepted by the buyer. . it will thus be a two-name bill, and not an individual promissory note. how far you can change your system in this respect and how far the powers of your new federal banks can be used to induce such a change, is a question which i cannot pretend to answer, but which you will no doubt be able to answer. . the bill should be drawn for a period neither too long nor too short. the period should be sufficient to allow of a resale of the goods on which the bill is based, thus making the bill in a sense self-liquidating. the usual period is three months. . while there should be a large proportion of trade bills, there should be a still larger proportion of acceptances by banks and finance houses, based, of course, on collateral, which usually takes the form of imported produce. in germany, however, i understand that banks accept a good many drafts arising out of internal transactions. . if the market is not to be merely a home market, but international: that is, attractive to foreign bill buyers, an important and desirable step would be the opening of american banks or branches of american banks in foreign exchange centres, such as london, paris, berlin, amsterdam, buenos aires, shanghai, and so on, and these banks should always be prepared to encourage american bills by buying, at reasonable rates of exchange, bills on new york, chicago, and other american centres, payable in dollars. . your usury laws would have to be modified so as to allow discount rates to move freely upwards if required. . your federal reserve banks which are intended to be the equivalent of the central banks of other countries, such as the bank of england, bank of france, and the reichsbank, should be prepared to rediscount approved bills at all times and to any extent. the advantages to you of such a market would be the same advantages that we possess, namely, liquid employment for short money; power to meet demands for money without disorganizing stock exchange prices; power to check overtrading at home, and finally, power to check a foreign drain of gold. cash stock exchange dealings [ ]in england, france, and germany there exist monthly or half-monthly settlements of stock exchange transactions, and as stock exchange loans run from one settlement to the next the amount of money employed on the stock exchange between settlements remains stationary. if, at the settlement, it develops that commitments on the stock exchange have increased and that a larger amount of money is needed there, so much additional money will under normal circumstances be withdrawn from the bill market and go into the stock exchange. if less money is wanted on the stock exchange, so much more will go into the bill market. without entering upon a discussion of the question of cash stock exchange dealings versus stock exchange dealings per settlement (for which, be it said in passing, a suitable method of weekly stock exchange settlements can probably be devised for this country, combined with provisions for proper margining in order to prevent over-stimulation to gambling), we are, for the purposes of this article, interested only in the effect of this method of cash dealings on the whole financial system. an exclusive system of cash dealings brings about the pre-ponderance of the call loan on stock exchange collateral. but for the existence of the seducing call loan, which is one of the gravest dangers and curses of our system, we should have been forced to develop our bill market as a regulator of our daily money requirements. in that case, instead of seeing the idle money of the whole nation poured into stock exchange loans when trade is inactive--thus unduly stimulating speculation when it should be discouraged--and again withdrawing money from the stock exchanges in order to provide for the business of the whole nation when trade becomes active--thus bringing about anxiety and convulsions on the stock exchange in the face of prosperity--we should have a system based on bills; that is to say, based on the broad foundations consisting of the commerce and trade of the whole nation, and we should then enjoy an almost uniform rate of interest all over the country, gently rising and falling within moderate bounds, instead of the violent fluctuations and unbearable conditions to which we are now subjected. the aggregate amount invested by a nation in trade and commerce should be and is many times the amount invested in stock exchange loans, which latter represent undigested securities and securities carried for speculative investors. our way of doing business may be illustrated by two adjoining reservoirs, one small and one very large. the small one represents the stock exchange and contains the call loans; the large one represents the general business of the country, as expressed by commerce and industry. in europe the small reservoir is regulated by pumping water into it from the large one or by withdrawing water from it into the large one. in this way the outflow and inflow of the large reservoir are scarcely perceptible, and yet there is no difficulty in regulating the small one. with us, the reverse is done. if there is a shortage of water in the large reservoir we draw on the small one and, in order to increase the water in the large reservoir by perhaps an inch, we empty the small one altogether, or else in order to decrease the amount of water in the large reservoir by an inch, we fill the small one to overflowing. no power to lend on real estate[ ] most of the restrictions in the national banking law have to do with loans, reserves, or the issue of notes. of these the restrictions upon loans are by far the most serious impediment in competing for business with state banks and trust companies. for the banks outside the large cities this is particularly true of the provision which forbids loans upon real estate as security. this restriction is based upon a sound banking principle, learned after much bitter experience. but the experience which led to a complete prohibition of real estate loans was gained amid the economic conditions of the first half of the last century, and the principle itself is one which is applicable only to a particular form of banking organization. while the country was in process of settlement, with an abundance of unoccupied fertile land, real estate was a security of most uncertain value. moreover, the wildest of the speculative movements which preceded all our early crises were invariably in land. at present, land values are far more stable, and real estate is everywhere included among the most conservative of investments, proper for all with the one exception of commercial banks. for banks, all of whose obligations are payable upon demand, the real estate loan, quite regardless of its safety, is wisely considered unsuitable. such loans are commonly wanted by borrowers for a considerable period of time and, therefore, they can not readily be reduced in amount even by an individual bank. in other words, they are not liquid. but the importance of this quality in all its assets disappears when a bank begins to acquire time or savings deposits, as well as those payable on demand.... the example of the trust companies shows that a great variety of financial business can be carried on safely and profitably under a single management. failures among them have been comparatively few in number, and it would be difficult to find a single instance of disaster which could be attributed to the variety of business carried on. some of the advantages which the banks would derive if they were able to lend on real estate are so evident that they require little more than mere mention. it would give them more of the most profitable kind of business, that which has its origin in the neighborhood of the bank. the immediate return is generally greater than can be secured from the employment of funds in the money centers or in the purchase of paper from note brokers. moreover, in fostering the growth of wealth and population in its locality a bank is laying a solid foundation for the future expansion of its own business. finally, the ability to lend on real estate will often enable a bank to secure valuable customers who would otherwise go elsewhere. it has been the unpleasant experience of many a national banker to be obliged to refuse a loan to a would-be borrower who has nothing but real estate to offer as security and to see him enter a neighboring state bank or trust company where there was no legal obstacle to the transaction. relations once established are pretty certain to continue even after the borrower has security which falls within the provisions of the national law. there are then at least three distinct advantages which may be expected to follow if the national banks are permitted to lend on real estate. it would be profitable for the banks; it would be of advantage to the localities served by the banks; and, finally, it would enable the banks to compete with state institutions upon a more equal footing,[ ] thus checking to some extent the relative decline of banking under the national law. the independent treasury as a source of weakness in our banking system[ ] for many years the banks of this country have conducted a persistent agitation for the abolition of the independent treasury system. it has been their contention that the independent treasury was an archaic and inefficient system of administering the finances of the nation; that it worked serious hardship upon the banks and the business of the country, and that any system of reform should include its abolition. the treasury is, in reality, a central bank of deposit with branches, run by the government, in which the government is the only depositor, and from which there are no borrowers. the central office of the treasury is situated in washington, while there are ten subtreasuries or branches scattered among the various large cities of the country. the most important subtreasury, from the standpoint of the volume of business handled, is located in new york city.... the united states is the only large nation in the world which has a treasury system of this sort, and this fact has been made much of in the agitation for its abolition. difficulties arising from the treasury system there is no room for dispute that many features of the independent treasury have, in the past, been the source of serious difficulties. however, we must recognize that within the last decade, and particularly within the last two or three years, most of the glaring defects have been eliminated through a liberalization in methods, involving, in brief, a deposit of a very considerable amount of the government's money in national banks rather than carrying it locked up in the vaults of the treasury, through more liberal administrative regulations by which payments to the treasury could be made with certified checks, and through facilitating in other ways the transactions of business men with the treasury department. correspondence of treasury receipts and disbursements ... the real criticism against the treasury is that it causes the tying up of money, not over a series of years, but during the months in which the banking system of the country most needs it. this condition is the result of the lack of correspondence between government receipts and disbursements. during the first four months of the year the receipts are less than in any other period. during the month of may, the receipts sharply increase, reaching their maximum about the first of june, and continuing at a very high rate over that month. in july the income falls off, reaching by the end of the month a point a little above that which prevailed in april, after which it gradually increases during august and september. about october first the tide turns and the receipts fall off sharply during that month, while during december the revenue again increases. as contrasted with this the government expenditures change only in a general way.... exaggeration of treasury evils it should be stated that whatever embarrassment exists because of this condition, and which as a matter of fact has been grossly exaggerated, is found almost entirely in new york city. however, in order to reduce as much as possible the objections raised by the bankers and to prevent money being taken out of circulation and buried in the treasury, where it would be of no service to the country, the secretary of the treasury, on january , , issued the following order, which inaugurated a radical change in the manner of handling and disbursing the public funds. the objects to be accomplished were announced in the order as follows: "for the purpose of bringing the ordinary fiscal transactions of the federal government more nearly into harmony with present business practices, it has been determined that the daily receipts of the government shall be placed with the national bank depositaries to the credit of the treasurer of the united states. disbursements will be made by warrant or check drawn on the treasurer, but payable by national bank depositaries, as well as by the treasury and subtreasuries." secretary mcadoo, in his report for the fiscal year ending june , , in speaking of this, stated that while it had caused some embarrassment "the difficulties at first encountered are disappearing, and the system appears to respond to the public requirements, and to be accomplishing the purposes for which it was devised." lack of central control [ ]there is no country in the world where the volume of currency in circulation and the demand for bank credits fluctuate more widely than in the united states. this is due to the great expanse of our territory, to the annual harvest requirements of the agricultural sections, to the prevailing business activity and enterprise, and to the rapid and unequal increase of population and wealth in different sections. furthermore, there is no country in the world where intelligent control over bank credits and bank reserves is needed more than in the united states. there are in the united states nearly seven thousand national banks, besides twice as many state banks and trust companies. each of these institutions acts for its individual interest alone, independently of the others, and the prevailing tendency of each at all times is to expand its credits to the limit permitted by law. the country banks lend their surplus resources in the form of deposits at interest to the banks in the larger cities, and the banks in the principal money centres commonly expand their credits as much as practicable by lending on call such sums as they deem it unsafe to lend on time or by discount of commercial paper. each bank with a deposit in another bank assumes that, in case of need, it can strengthen its reserve by drawing upon this deposit; but it fails to consider that, when thus it strengthens its own reserve, it must to the same extent weaken the reserve of the other bank, and that the deposits of banks with other banks add no strength to the general credit situation. each bank that has loaned money on call assumes that, in case of need, it can strengthen its reserve by calling such loans; but it fails to consider that, generally, when a loan is called the borrower is obliged to borrow the same sum from some other bank, although a high rate of interest may be exacted, and, therefore, that call loans affect the security of the entire bank situation practically to the same extent as time loans. in the united states there is no way of regulating the supply of bank credits and of holding part of the potential supply in reserve for periods of financial stringency. consequently, nearly always there is either an over-abundance of money (meaning credit which the banks are ready to lend) or a money famine. it has been argued that the volume of credits granted by the banks depends upon business activity and upon the consequent demand for credit and not upon the power of the banks to grant credits, and, therefore, that low interest rates have little effect in causing an expansion of bank credits. experience, however, shows that the contrary is the case, at least in the united states. it is true that, when there is loss of confidence and when business is depressed, interest rates are low, because there is less currency in circulation and more in the bank reserves, while at the same time the demand for bank credits is diminished. it is true, also, that low interest rates will not stimulate speculation and enterprise unless people have confidence and are ready to speculate and to embark in new enterprises. but we know by experience that when people are in a mood for speculation and for business expansion low interest rates operate as a powerful stimulus to speculation and business expansion. a leading banker has said: "in the long run commerce suffers more from the periods of over-abundance (of money) than from those of scarcity. the origin of each recurring period of tight money can be traced to preceding periods of easy money. whenever money becomes so over-abundant that bankers, in order to keep it earning something, have to force it out at abnormally low rates of interest, the foundations are laid for a period of stringency in the not far distant future, for then speculation is encouraged, prices are inflated, and all sorts of securities are floated until the money market is glutted with them."[ ] [the need of intelligent control over discount rates and bank credits is (was) imperative.] absence of regulation of ratio of deposits to capital and surplus [ ]the reports of condition of the national banks, according to the statements of september , , to the comptroller of the currency, show that, on an average, the total deposits of all national banks amount to about four and six-tenths times their total capital and surplus. this means that the average capital and surplus of these banks is equal to approximately per cent. of the total amount of deposits. there are, however, national banks whose deposits amount to ten or more times their capital and surplus, and in these cases the margin of protection to depositors is only per cent. or less of the sum total of deposits. usually the amount of money which a bank has invested in loans approximates the amount of its deposits. in the case of a bank whose loans equal its deposits, and whose deposits are approximately ten times its capital and surplus, it is obvious that the loss of over per cent. in loans would wipe out both capital and surplus and destroy the solvency of the bank, rendering it unable to pay its depositors. the view is held by many practical bankers and experienced economists that it is not sound banking for an active commercial bank to be allowed to receive deposits in excess of ten times its capital and surplus. i am firmly impressed with the correctness of this view, and respectfully recommend to the congress that the national-bank act be amended so as to provide that no national bank shall be permitted to hold deposits in excess of ten times its unimpaired capital and surplus. perhaps it might be wiser to make this limitation eight times the capital and surplus. such a limitation need not interfere with the growth and development of the bank. when its deposits approach an amount equal to ten times its capital and surplus, or whatever other limitation may be fixed, arrangements may be made to increase its capital. a bank whose deposits amount to ten times the capital and surplus, if efficiently managed, should be so profitable that there would be no difficulty in providing for an increase of capital by the sale of additional stock, and when the proposed increase shall have been authorized by two-thirds of its stockholders and approved by the comptroller of the currency, it can be made promptly effective. a commercial bank whose capital and surplus amount to less than one-tenth of its deposits is, except possibly under very exceptional conditions, doing business on too small a capital and upon too narrow a margin for safety, and does not furnish its creditors the protection to which they are entitled against unexpected losses and contingencies which are liable to, and do, so frequently arise.... banking abuses [ ]... among the many abuses and violations of law and regulations with which the department has to contend are excessive loans; overdrafts; loose and unbusinesslike methods of accounting; excessive borrowings by the banks; investment of the bank's funds in securities not authorized by law; charging of usurious rates of interest; unlawful loans on real estate; excessive loans to officers, clerks, and employés of the bank employing them; loans to a bank's officers or employés and others through "dummies"; loaning money, directly or indirectly, upon the bank's own stock; transaction of a brokerage or commission business by the bank's executive officers, the commissions thus collected being sometimes appropriated personally by the officers and sometimes going directly or indirectly to the bank; false statements of directors as to ownership of stock; false statements made by bank officers, such as including as cash or cash items memoranda of moneys due from one source or another which do not represent actual cash and can not be immediately converted into cash; and failure or refusal when so directed to charge off bad debts and other ascertained losses; delay on the part of directors in taking the oath of office. for many of the offences indicated the only penalty which can be enforced by the comptroller's office is the forfeiture of the bank's charter by suit in the united states court. this in many cases would prove a great hardship to innocent stockholders and depositors, and can only be resorted to with much reluctance by this office.... usurious interest rates [ ]all the national banks of the country have been required in each report of condition made to the comptroller's office since january last to state under oath the highest rate of interest they have charged since the preceding report and the average rate of interest charged by them on all loans since the preceding report. the reports received at the comptroller's office show indisputably that in some states and sections borrowers, especially small borrowers, have been and are being subjected to extortions and exactions which the average man would consider impossible in this enlightened age. one thousand and twenty banks in different sections of the country, out of the total of , banks, admitted that they were receiving an average of per cent. or more--some an average of per cent.--on all their loans. those receiving an average of per cent. and upwards included banks in illinois, in minnesota, in missouri, in georgia, in florida, in alabama, in louisiana, in texas, in arkansas, in tennessee, in north dakota, in south dakota, in nebraska, in kansas, in montana, in wyoming, in colorado, in new mexico, in oklahoma, in washington, in oregon, in california, in utah, in nevada, and banks in idaho. let me illustrate the methods of some of these bankers by giving you the facts and figures as taken from the sworn statements submitted to the comptroller's office by the national banks in two particular states in the southwest. in one of these states there were banks which reported that they charged a maximum rate of interest ranging from per cent. to per cent. per annum, banks whose maximum rate ranged between per cent. and per cent. per annum, banks which charged between per cent. per annum and per cent. per annum, banks whose maximum rate was from per cent. to per cent. per annum, and banks which owned up to having charged maximum rates ranging between per cent. and , per cent. most of these disgraceful and unprecedented rates were for comparatively small loans.... these figures are not results of the rule, applied by many banks, not to pass a loan on their books for less than a dollar.... when we find loans made by national banks for $ , $ , $ , $ , $ , and $ , or more, at , , , or , per cent., it is merely a hideous gamble on how long the borrower can keep starvation from his door and live and work. yet i am told on good authority that in one state, largely agricultural, reports from nearly banks--lending chiefly or largely to farmers--show losses of only a fraction of per cent. on farmers' loans, while the average interest rate in these particular banks is per cent. to per cent.--and the maximum rate per cent. or per cent., the banks paying large dividends. we read much of the infernos of the slums of the great cities, of degradation and misery and squalor, of the grinding callousness of tenement landlords and sweatshop operators. here in the country we find bankers, men in business that should be the most respectable, as it is the most responsible, of all secular avocations, literally crushing the faces of their neighbors, deliberately fastening their fangs in the very heart of poverty.... a well thought out, carefully constructed, conservative system of rural credits for the development of agriculture and the increase of our wealth and resources by offering encouragement and opportunity to the ambitious farmer will come presently. when it comes all of us will share the splendid results.... bankers' view of usurious interest rates [ ]on february the following statement was "given out" from the office of the comptroller of the currency: the comptroller of the currency received to-day from the farmers' grain dealers' association of iowa notification of the adoption at the convention of that association in des moines, iowa, on the th instant, of the following resolution: _be it resolved_, by the farmers' grain dealers' association of iowa, representing , members, as follows: that we are as much opposed to bank discrimination in interest rates as to railroad discrimination in freight rates. we oppose private control of the public currency. that we strongly commend the comptroller of the currency for his courageous exposure of bank usury; and we unalterably oppose the efforts of the guilty parties to abolish his office. there has been no better statement of the comptroller's position than is here given--credit standing and variations of it must have no influence on interest rates and anyone who wishes his office abolished is guilty of usury; or, conversely, only those guilty of usury wish the office abolished. the statement is inadequate only in the failure to define what is meant by "private control of the public currency." footnotes: [ ] conway and patterson, _the operation of the new bank act_, pp. , . j. b. lippincott company, philadelphia, . [ ] john skelton williams, comptroller of the currency, _democracy in banking_, address delivered before the annual convention of the north carolina bankers' association, raleigh, may , . printed in _congressional record_, d congress, d session, vol. , pp. - . [ ] a. piatt andrew, _the essential and the unessential in currency legislation_, in questions of public policy, addresses delivered in the page lecture series, , before the senior class of the sheffield scientific school, yale university, pp. - . yale university press, new haven, connecticut, . [ ] adapted from john perrin, _what is wrong with our banking and currency system?, the journal of political economy_, vol. , no. , december, , pp. - . [ ] paul m. warburg. _the discount system in europe_, publications of the national monetary commission, senate document, no. , st congress, nd session, pp. , . [ ] conway and patterson, _the operation of the new bank act_, pp. - . j. b. lippincott company. philadelphia. . [ ] fred rogers fairchild, _bond-secured bank notes and elasticity_, _the outlook_, vol. , no. , march , , pp. - . [ ] [as was pointed out in an earlier chapter, the autumnal demand for currency in the agricultural sections of the country has fallen off appreciably since .] [ ] fred rogers fairchild. _fundamental defects of the bond-secured bank notes_, _bankers magazine_, vol. lxxvi, no. , april, , pp. - . [ ] we are not considering the third alternative of issuing bonds at a heavy discount. [ ] adapted from w. h. lyon, _a gamble in governments_, _moody's magazine_, vol. xi, no. , january, , pp. - . [ ] [in this extract the explanation of the so-called perverse elasticity of our national bank notes is given incidentally but very clearly.] [ ] adapted from john perrin, _what is wrong with our banking and currency system?_, _the journal of political economy_, vol. , no. december, , pp. - . [ ] eugene e. agger. _the commercial paper debate. the journal of political economy_, vol. , no. , july, , pp. - . [ ] _annalist_, march , , p. . [ ] _annalist_, march , , p. . [ ] j. j. klein, _annalist_, march , , p. . [ ] _ibid._ [ ] during over $ , , , in notes were sold by reputable brokers, and they represented in these transactions from , to , concerns. in one large eastern state over two-thirds of the state banks and trust companies regularly invest a portion of their funds in this class of paper (j. a. broderick, _finance_, october , , p. ). on august , , according to the report of the comptroller of the currency, the national banks held over six billions of dollars of commercial paper, most of which was single-name. [ ] _financier_, june , . [ ] j. g. cannon, _financial age_, october , . [ ] p. m. warburg, _the discount system in europe_, in report of the national monetary commission. [ ] _ibid._: see also william jacobs, _bank acceptances_, in report of the national monetary commission. [ ] warburg, _loc. cit._ [ ] e. d. page, _annalist_, march , , p. . [ ] lawrence merton jacobs, _bank acceptances_, publications of the national monetary commission, senate document no. , st congress, d session, pp. - . [ ] paul m. warburg, _the discount system in europe_, publications of the national monetary commission, senate document, no. , st congress, nd session, pp. - . [ ] adapted from james h. simpson, general manager, bank of liverpool, ltd., _some leading features of the london money and discount markets_, an address delivered at the annual banquet of the bankers of the city of new york, january , . [ ] paul m. warburg, op. cit., pp. - . [ ] o. w. m. sprague, _banking reform in the united states_, pp. - , harvard university, . [ ] the importance of real estate to the state banking institutions is shown in the special report from the banks of the united states on april , , recently published by the national monetary commission. for state banks real estate loans and mortgages amounted to $ , , or - / per cent. of total resources and for the trust companies to $ , , , more than per cent. of their resources. [ ] conway and patterson, _the operation of the new bank act_, pp. - . j. b. lippincott company. philadelphia, . [ ] victor morawetz, _the banking and currency problem in the united states_, pp. - . north american review publishing company. . [ ] from an address by mr. james b. forgan to the texas bankers' association. [ ] report of the comptroller of the currency, , pp. , . [ ] _ibid._, pp. , . [ ] john skelton williams, address before the kentucky bankers' association, october , . _the commercial and financial chronicle_, vol. , no. , october , , pp. , . [ ] _journal of the american bankers' association_, vol. viii, no. , march, , pp. - . chapter xxxi the federal reserve system the federal reserve act[ ] the spirit and objects of the act the primary purpose of the federal reserve act of december , , is to make certain that there will always be an available supply of money and credit in this country with which to meet unusual banking requirements. banks of a new class, to be known as federal reserve banks, are to be established, and upon these banks is to rest the heavy responsibility of supporting the structure of credit in periods of financial strain. the new banks are expected to keep themselves in a condition of such strength in ordinary times that the other banks may safely rely upon them for all needed cash and credit in emergencies. in the past, the banks in this country, when subjected to financial pressure, have relied mainly upon loan contraction and the selling of securities. in future it is expected that they will resort to the federal reserve banks, securing additional funds from these by rediscounting commercial loans. if the new arrangements work well, loans in future will not be reduced merely for the purpose of strengthening the banks. loan contraction will take place only when there is evidence of an over-extended condition of business; and even then contraction will be carried through gradually, so as to conserve all interests so far as may be possible. under the new system a most important influence, if not the most important single influence determining the character of banking operations, will be just the reverse of what it has been in the past. to meet the heavy responsibilities placed upon the federal reserve banks, two things are absolutely essential--good management, and ample powers and resources. good management cannot be secured with certainty by means of legislative provisions, however carefully designed with that end in view. in the particular instance of the federal reserve act, an ingenious combination of government and banking influence in selecting the management is provided. purely banking operations are very largely to be handled by boards of directors, a majority of the membership of which is to be chosen by banks. general supervision, and for some purposes control, is placed with the federal reserve board, which is to be appointed by the president of the united states, by and with the advice and consent of the senate. experience alone can determine the wisdom of these arrangements for securing effective management. the federal reserve banks are to exercise wide powers, and would seem likely to have ample resources. the country is to be divided into not less than eight, nor more than twelve districts, in each of which a federal reserve bank is to be established.[ ] all national banks are required, and qualified state banking institutions are invited, to subscribe to the capital of the reserve bank in their district. subscribing banks, to be known as member banks, are required to keep a part of their reserve with their federal reserve bank. these banks will presumably receive most if not all of the general funds of the united states government. they will provide an elastic currency, issuing notes secured by their commercial assets. they are also empowered to undertake the business of collecting, and clearing checks throughout the entire country, thus providing an organization for making settlements between banks in different places, the lack of which has been one of the most serious defects in our banking system. each federal reserve bank will be a central bank for the section of the country which it is to serve. it will have all the responsibilities and most of the powers of central banks in the various european countries; but largely because the system is to be superimposed upon a fully developed banking system, some important provisions of the federal reserve act are unlike anything to be found in european legislation. the federal reserve banks are to receive deposits from the government and from member banks only. ordinarily they will lend to member banks only. all european central banks, though the bulk of their business is with banks and bankers, may deal with the general public and do so. the most striking divergence from european example, however, is the really novel plan of a system of regional banks in place of a single central bank. but the extent of this divergence is generally exaggerated. political boundaries are indeed in large measure economic and financial boundaries as well; but central banks in the european countries do act and react upon each other, often working in harmony, and yet at times very much at cross purposes. if all europe were brought under a single government, very likely the various existing central banks would be merged into a single institution. in some respects this would be advantageous, but it would not be absolutely necessary. certainly european arrangements are not so fundamentally unlike those of a system of regional banks in a single country of great size, as to afford ground for the opinion that in setting up this system foreign experience has been altogether disregarded. the various considerations which led to the adoption of the plan for regional banks, rather than a single central institution, deserve careful attention, since they indicate the spirit and purpose of the federal reserve act. a single central bank was the solution of the banking problem reached without a dissenting voice by the members of the national monetary commission. the bill which the commission prepared was a notable achievement. pioneer work though much of it necessarily was, very few defects on the technical banking side were disclosed in the discussion which followed the statement of the proposed measure. its provisions regarding banking operations, including relations with other banks, are embodied with few changes of an essential character in the federal reserve act. most of the important differences between the bill and the federal reserve act reflect differences in spirit and purpose rather than in methods. a central bank and also the system of regional banks necessarily involve placing somewhere very extensive power to influence and control credit. in the present temper of public opinion, the possession of great economic power is not tolerated in the absence of a large measure of government supervision and control. but unfortunately, in framing its measure the monetary commission failed to realize the fundamental importance of this consideration as a factor in securing general public approval. in devising a form of organization, competent management and approval in banking circles were evidently the controlling factors. an organization was proposed under which out of forty-five directors, but three were to represent the government, the remainder being selected in various ways by bankers. support from some who were the most bitter opponents of the measure might have been secured if the bill had provided for a larger measure of government control; but an equal or even greater number of adherents would probably have been lost. under the plan of the commission and indeed under any central bank plan, government supervision and control cannot be made effective without at the same time placing the details of operation in charge of government officials. few of the most ardent advocates of a central bank were prepared to take this extreme step. under the plan of organization of regional banks, the difficulty of combining government control and private management vanished. purely banking matters, such as the granting of loans, could be placed with boards entirely or mainly composed of persons selected by the bankers whose funds were to provide most of the necessary resources. on the other hand, supervision and whatever measure of control might be deemed advisable, could be placed with a board mainly or entirely appointed by the president of the united states. differences of opinion may be entertained regarding the particular arrangements in the federal reserve act for selecting the various administrative bodies, and regarding the division of power between the directorates of the federal reserve banks and the federal reserve board. if experience should disclose defects in this form of organization, it is flexible enough to permit at any time an extension of government or of banking influence. another important advantage of the regional system is to be noted. the operation of a central bank would be far more likely to give rise to sectional antagonism. this danger was apparently fully realized by the members of the national monetary commission, and elaborate arrangements for selecting the management were devised in order to make certain that each section of the country should be properly represented. but obviously regional banks, managed by local people, are very much more certain to meet this requirement. apparently it was an endeavor to remove still further the danger of sectional dissatisfaction that led the monetary commission to make its one serious departure from sound banking principle in framing its bill. a provision was inserted requiring rediscounts to be made at a uniform rate throughout the entire country, regardless of the wide differences in the demand and supply of capital, which occasion the existing wide differences in lending rates. under the regional plan no such indefensible provision was found necessary. this important feature of the federal reserve act outweighs such advantages in economy of resources and effectiveness in management as were sacrificed in substituting for a central bank the regional banks. the monetary commission in framing its bill seems to have been guided by two principles generally wise in legislation--the scope of the measure was limited to the single purpose of removing purely banking defects in our banking system, and no greater departure from existing arrangements was proposed than was essential for the purpose in hand. the federal reserve act certainly runs counter to the first of these principles. its primary purpose is similar to that of the bill of the monetary commission; but a secondary purpose evidently exercised a potent influence. this purpose was to decentralize credits by lessening the concentration of banking funds in a few large banks in the chief financial centers, and especially in new york. the regional system itself gained much support because it was believed by many that it would lessen the financial predominance of new york city. no comprehensive scheme of legislation with this object in view was inserted in the bill; but wherever two or more means of accomplishing the primary purpose of the bill were open, that one was evidently selected which it was believed might tend toward decentralization. in general the desire to decentralize credits explains why the act makes very much greater changes in existing arrangements than were proposed in the bill of the monetary commission. in the latter, the practice of depositing a part of the required reserves of the banks with reserve agents was left undisturbed. under the terms of the federal reserve act, such deposits are to be reduced by successive installments, and discontinued entirely three years after the passage of the act. from a purely banking point of view, much can be said for this great change; but it was certainly not absolutely necessary in order to secure the desired improvements in the working of our banking system. the new banking institutions for which the federal reserve act makes provision cannot be put in successful operation (and in this it resembles the bill of the monetary commission) unless a considerable number of the existing banks enter into relations with them. an institution might have been established with large capital, and a monopoly of the right of note issue, authorized to act as government fiscal agent, and to deal with the general public. such an institution would presumably in the course of time have become a central bank, the main reliance of other banks in emergencies. in order to avoid competition with existing banks, the act provides that the receipt of deposits by the federal reserve banks, and their normal lending operations shall be confined to those banks which subscribe to the capital and maintain balances with them. obviously, then, if banks in large numbers do not accept the arrangement, subscribing to the capital and relying upon the new banks for accommodation, the system cannot be put into effective operation. moreover, it is necessary that many banks shall enter the system at the outset. an attitude of hesitation would change to one of positive distrust, if the initial response were inadequate. in the case of the bill of the monetary commission, reliance was placed simply upon the attractiveness of the measure. no bank would have suffered positive loss from failure to enter the system, though certain slight inducements were held out to those banks which accepted the arrangement at the outset. whether a sufficient number of banks would have entered that system, if it had been established, may be thought probable but is not certain. bankers are naturally and properly a conservative class and the inclination of many would have been to wait until the system was in successful operation. the attitude of bankers toward the federal reserve act while it was passing through congress was distinctly unfavorable. most of its provisions already referred to, as well as others in which it differed from the monetary commission bill, were disliked. it was evident that in the absence of positive pressure, the number of banks which would accept its terms would be too small to make successful operation possible. no attempt was made, however, to insert provisions which would bring pressure upon state banking institutions. perhaps it would be possible, either under the inter-state commerce or the postal clause in the constitution; but it would have been contrary to the constitutional traditions of the party in power, and it was not necessary. if the national banks very generally enter the system, the resources of the federal reserve banks will be sufficient to test the effectiveness of the measure. accordingly the federal reserve act contains a number of provisions designed to bring pressure to bear upon these to enter the system immediately. failure to accept the terms of the act within one year after its passage involves forfeiture of the national charter. this alone would be no great business sacrifice, since banking in most states is quite as profitable under a state as under a national charter. loss of the national charter, however, involves a loss of the right to issue bank notes and calls for the deposit of lawful money in washington equivalent to the amount of outstanding circulation. most national bank notes are secured by per cent. government bonds, the price of which, in the absence of the circulation privilege, would be perhaps about two-thirds of the price (somewhat above par) at which they were purchased by the banks. no considerable number of national banks could refuse to enter the system without involving themselves in a heavy immediate loss. a further provision in the act puts more immediate pressure upon the national banks in reserve cities. if within sixty days after the passage of the act, a reserve agent bank fails to signify acceptance of its terms, it must cease to exercise the reserve-holding right upon thirty days' notice from the federal reserve board. many bankers bitterly condemned the compulsory features in the act while it was on its passage through congress. this feeling was perfectly natural, but it was not very generally shared outside banking circles. impartially considered, the act imposes no unreasonable burden upon those who have invested capital in national banks. no one fears the loss of the funds which may be subscribed to the capital stock of the federal reserve banks or placed on deposit with them. if loss should be incurred, it would be primarily due to unsound banking on the part of the boards of directors of the reserve banks, a majority of the membership of which is to be chosen by the banks themselves. some bankers have doubted whether the act would prove an effective measure of banking reform; but few if any have felt that results under its operation could possibly be more unsatisfactory than those under the present system; and all agree that it is a long step toward a perfected system. organization the new system is to be organized under the supervision and direction of the "reserve bank organization committee," consisting of the secretary of the treasury, the secretary of agriculture, and the comptroller of the currency. the most important function of this committee is to determine, "with due regard to the convenience and the customary course of business," the number and area of the federal reserve districts into which the country is to be divided, and to designate the city in each district in which a federal reserve bank is to be established. not less than eight, nor more than twelve districts are to be created. this is a most difficult task. however carefully the initial lines of demarcation may be drawn, more or less modification is to be expected after there has been some experience with the working of the system. changes in area of districts, and additional districts if the organization committee designates less than twelve, may be made at any time in the future by the federal reserve board. while the rivalry of cities may tempt the committee to start the system with a larger number, it is to be hoped that it will be found feasible to begin with no more than eight or nine districts. the problems which will confront the management of the federal reserve banks are in many respects unlike those with which our bankers have had experience. a somewhat higher average of capacity in the management may more confidently be looked for if the smaller number of banks is established. moreover, especially at the outset, mere size will contribute not a little to the prestige of the banks, and so inspire public confidence in the new system. a greater variety of occupations in large areas will lessen, though not much, extremes of seasonal variation in demands for accommodation upon the federal reserve banks. then, too, the task of the federal reserve board in supervising and co-ordinating the system will be materially simplified, if the minimum rather than the maximum number of federal districts is decided upon. within sixty days after the passage of the act, in other words before february , , national banks are required, and properly qualified state banks are invited, to signify their acceptance of the terms of the act. within thirty days after the reserve districts have been designated, each national bank must subscribe to the capital of the reserve bank of its district an amount equal to per cent. of its capital and surplus. one-sixth of this subscription is to be paid at the call of the organization committee, another sixth within three months, and still another within six months thereafter. the remaining half of the subscription may be called at any time by the federal reserve board. all these payments are to be made in gold or in gold certificates. it will be observed that the exact time when the system will be established is uncertain. the organization committee is only required to designate the reserve districts as soon as is practicable; thirty days is then allowed for the banks to subscribe; and payments will begin sometime thereafter at the call of the committee.... after the minimum capital (four million dollars for any federal reserve bank) has been subscribed, the certificate of organization is to be executed by any five member banks designated for the purpose by the organization committee. the final duty of the committee will be to supervise all arrangements for the election of the six of the nine directors of each federal reserve bank, who are to be chosen by the member banks. for electoral purposes the banks of each district are to be divided into three groups--each group to "contain as nearly as may be one-third of the aggregate number of the member banks ... and as nearly as may be banks of similar capitalization." while the number of banks in each group will be the same, the capitalization will be very different. all the banks with a capitalization above the average in a district will certainly be in one group; those of somewhat less than average capital, in the second group; while the third group will be composed of banks having a very small capitalization. under this ingenious arrangement, it is evident that the direct influence of the banks of the large cities in selecting the directorates of the federal reserve banks is limited. local alignments are also avoided. on the other hand, this is not a grouping to which the banks have been accustomed in the past, and therefore there is some uncertainty as to whether at the outset it will be conducive to the selection of capable directorates. each group of banks is to choose two directors: a class a director, who is to be an active banker representing the stock-holding banks, and a class b director, who must be actively engaged in commerce, agriculture, or some other industrial pursuit in his district. the board of directors of each member bank is to elect a district reserve elector. candidates for the position of director of a federal reserve bank may be nominated by any member bank; but nomination is not necessary. electors are to signify their first, second, and other choices for one director in each class on a preferential ballot. in addition to the six directors chosen by the banks, three directors (class c) are to be appointed by the federal reserve board. two of these must be persons of "tested banking experience," one to serve as chairman of the board of directors and district reserve agent, the other as deputy chairman and deputy reserve agent. these reserve agents are the official representatives of the reserve board, through whom it will exercise its powers of supervision and control over the reserve banks. the act contains no provision regarding the officers to whom the operation of the banks will be entrusted. presumably each board of directors will appoint one of its members (probably one of the class a directors) as president and manager. the term of office of all directors is three years, but at the outset they are to be classified so that the term of one director of each of the three classes shall expire annually. the appointment of class c directors will be the first duty of the federal reserve board; inasmuch as the organization of the system can hardly be completed before the beginning of the summer, the appointment of this board could be deferred until that time. the selection of these directors for each of the eight or more federal reserve banks is, however, no small task in itself; and since public confidence in the new system will largely be based at the outset upon the character of the federal reserve board, its early selection is much to be desired. the federal reserve board itself is to consist of seven members: the secretary of the treasury and comptroller of the currency _ex officio_, and five members appointed by the president of the united states by and with the [advice and] consent of the senate. of the five appointed members, at least two must be persons experienced in banking or finance. not more than one shall be appointed from any federal reserve district, and due regard is to be given to the different commercial, industrial, and geographical divisions of the country. the term of office of the appointed members is ten years; but those first selected are to serve one for two, one for four years, and so on, so that the term of office of one member may expire every two years. under this arrangement a majority of the board, in the absence of death and resignation, will never be reconstituted at any one time. each president will select two of the appointed members: one in the second year of his term of office, and one in the fourth. the secretary of the treasury will, of course, be a new member appointed at the beginning of each presidential term. the term of office of the comptroller of the currency is for five years, so that here a variable element is introduced. it may happen that some presidents will never appoint more than three members during their term of office. generally, however, each president will appoint four members; but the last appointment, giving a majority on the board, will not be made until his final year of office. lack of continuity and the possibility of a political board were much greater under the provisions for selecting the federal reserve board which were in the measure at various stages while it was passing through congress. the arrangements finally adopted would seem to make it reasonably certain that the federal reserve board will be free from both these defects. organization of the system will be complete[ ] with the selection of the members of the federal advisory council. this council is to consist of as many members as there are federal reserve districts, the board of directors of each federal reserve bank selecting one member. the function and powers of the council are purely consultative. it is to meet regularly four times each year at washington, and at other times there or elsewhere if deemed necessary by the council itself. it is authorized to confer directly with the federal reserve board, to call for information, and make oral or written representations concerning matters within the jurisdiction of the federal reserve board. it may prove to be an important part of the organization, but this does not seem probable. with a scattered membership and holding regular meetings only at long intervals, it is not to be expected that the council will be in close touch with the federal reserve board, or in a position to formulate policies and urge them effectively. from individual members of the council, the federal reserve board should secure valuable information regarding conditions in different parts of the country; but the work of the council itself as an organized body seems likely to be of a formal and perfunctory nature. the importance of the council would doubtless have been measurably increased if the proposal had been adopted that its chairman should sit, even though without a vote, on the federal reserve board. capital, earnings, deposits of the federal reserve banks since the capital stock of each of the federal reserve banks is to be exactly per cent. of the capital and surplus of the member banks in its district, it will always be subject to slight variations. if all national banks enter the system at the outset, the total subscribed capital of the federal reserve banks will be a little more than one hundred million dollars. subscriptions may perhaps fall somewhat below this amount, since with the exception of the reserve agent banks, no penalty attaches to failure to subscribe until twelve months after the passage of the act. few state banking institutions will enter the system at the beginning. in many states legislation is necessary to permit them to invest in the stock of the federal reserve banks, and to enable them to count balances with the federal reserve banks as a part of their required reserves. it is to be presumed also, that such institutions, since they can enter at any time, will wait to see whether the system is working to the satisfaction of neighboring national banks.[ ] there will always be wide differences between the capital and other resources of the various federal reserve banks. neither the capital nor the resources of existing banks can be made the basis for dividing the country into federal reserve districts. geographical consideration will necessarily require the creation of a number of districts in sparsely settled parts of the country, in which banking resources are comparatively small. no federal reserve bank may, however, be established until it has a subscribed capital stock of at least four million dollars. it would, therefore, seem to follow that the organization committee is precluded from forming any district in which per cent. of the capital and surplus of the national and state banks is less than this minimum amount. there are indeed provisions in the act designed to meet the contingency of failure by banks to subscribe in sufficient numbers to provide a minimum capital; but they would not seem to authorize the organization committee to create districts in which resort to these provisions would be inevitable.[ ] whether the capital of the federal reserve banks is large or small is a matter of no great importance. subscriptions to capital provide a comparatively small part of the resources of banks. the capital is an indication that those conducting a bank have something at stake, and is also a margin of safety against loss to depositors. these federal reserve banks are, however, to accept deposits from banks only, and are ordinarily to confine their dealings to the banks. in these circumstances, there is practically no difference between the funds which the federal reserve banks will secure from member banks in payment of subscriptions to capital stock, and the funds which will be deposited with them by member banks. the depositors are the stockholders and, therefore, there is no separate interest to be protected by a margin of safety. shareholders in the reserve banks are entitled to a cumulative dividend of per cent. a limited dividend is obviously wise, since it tends to eliminate the profit-making motive in the management. whether all the federal reserve banks will regularly earn the per cent. dividend is, of course, not certain; but it seems highly probable, since the danger of serious losses is remote, and interest will presumably not be paid to the member banks on their balances. all earnings in excess of the dividend are to be paid to the government of the united states as a franchise tax; but half of these surplus earnings are to be paid into a surplus fund until it has become per cent. of the capital stock. whatever is received by the government from the federal reserve banks is to be used at the discretion of the secretary of the treasury, either to increase the gold reserve against united states notes or for the reduction of the interest-bearing debt. the federal reserve banks will doubtless secure very large resources through the deposit with them of the moneys held in the general fund of the treasury of the united states, although no power over the disposition which shall be made of these funds is granted either to the federal reserve banks or to the federal reserve board. entire discretion remains with the secretary of the treasury. he may continue the independent treasury system without change; he may continue to deposit funds with member banks, just as hitherto he has placed deposits with national banks; and finally he may deposit with any or all of the federal reserve banks, using them as government fiscal agencies. the responsibility of the secretary of the treasury is in no way changed. almost certainly in practice, however, the bulk of the free funds of the government will be placed with the federal reserve banks, and doubtless the opinion of the federal reserve board will determine the distribution of these funds between the various banks. the lion's share of the cash resources of the federal reserve banks will come from the reserves and working balances deposited with them by member banks. under the terms of the act, part of the required reserves of member banks _must_ be placed with federal reserve banks. this is a novelty in central banking legislation, but is based upon sound principle, and is especially to be commended for this country where, on account of the absence of branch banking, the number of banks to be served by the regional banks will be very great. it makes certain some increase in the resources of the federal reserve banks, along with the expansion of the credit liabilities of the member banks. it also lessens somewhat the danger of unnecessary withdrawals of funds from the reserve banks in emergencies. reserve requirements of the national banking law are radically changed. in addition to the requirement that a part of the reserve of the banks be kept with the federal reserve banks, the reserve ratio is reduced for all classes of banks: the practice of keeping a part of the reserve of country and reserve city banks with reserve agents is to be discontinued; and a distinction for reserve purposes is made between time and demand deposits. some of these changes become effective as soon as the new system is established; others are to be made in a succession of steps and completed three years after the passage of the act. time deposits are to comprise deposits payable after thirty days, and are to include certificates of deposit and savings accounts subject to thirty days' notice. a reserve of per cent. is required against these deposits, and no distinction is made between country and city banks. this low reserve requirement will certainly lead the banks to encourage the conversion of demand obligations into time obligations. a relatively large part of the deposits of banks in most european countries is payable at notice. it is obviously an arrangement which shields the banks somewhat from the effects of sudden waves of distrust. against demand deposits the ratio of reserves is also to be reduced at once; but the existing classification of banks is to be retained. the required ratio for country banks is reduced from to per cent., for reserve city banks, from to per cent., and for central reserve city banks from to per cent. a provision in the bill excluding from reserves the per cent. fund held in washington against outstanding circulation is a slight offset to this reduction in reserve ratios. as regards the banks in central reserve cities, the initial arrangement regarding the disposition to be made of their reserve is also the _final_ arrangement. they must hold / of their reserve in vault, / in their federal reserve bank, and the remaining / either in vault or with their federal reserve bank. other banks are allowed a period of transition. reserve city banks for three years must hold / of their reserve in vault, thereafter / ; for twelve months they must keep with their federal reserve bank / , adding an additional / every six months; so that at the end of two years they will have a deposit of / . during the three year period the remainder of the reserve may be deposited with reserve agent banks in a central reserve city, or by what would seem to be an inadvertent extension of existing practice with those in reserve cities; but thereafter it must be either in vault or with a federal reserve bank. country banks must hold in vault / of their reserve for three years, thereafter / ; for twelve months must deposit with their federal reserve bank / , and an additional / every six months until / are deposited at the end of two years. the remainder of the reserve may be kept for three years with reserve agent banks, but at the end of that period must be either in vault or in a federal reserve bank. whether these changes in reserves, together with payments by the banks of subscriptions to the capital stock of the reserve banks, will make necessary any considerable amount of loan contraction, cannot be precisely determined. if numbers of state banking institutions enter the system at the beginning, some strain may be occasioned, since, although these requirements are less than those to which the national banks have been subject, they exceed those imposed upon banks by the law of many of the states. in order to enable the banks to avoid contraction, the act contains a provision under which one-half of each instalment of reserve to be placed in reserve banks may be received in the form of the kinds of commercial bills of exchange which the reserve banks may purchase in the open market. it is, however, most unlikely that the banks will be able to make much use of this arrangement, because of the scanty amount of such paper available. federal reserve notes and national bank notes the power to issue notes is a useful but not indispensable resource for institutions having the responsibilities which are placed upon the federal reserve banks. the issue of notes by a central bank enables it to supply domestic requirements for currency without reducing its holdings of reserve money. in the absence of the right of issue, it would only be necessary to accumulate in ordinary times a somewhat greater amount of reserve money, to provide for seasonal and emergency needs. general public confidence in the federal reserve banks would, however, be far less secure if they were not empowered to issue notes. this is because of the exaggerated importance almost universally attached to the right of note issue, even in countries in which the check has become a universal medium of payment. the particular provisions in the act regarding the issue of notes are extremely complicated, and are in some respects quite without precedent. the notes for which provision was made in the bill of the monetary commission were to be bank notes pure and simple, subject to a variety of restrictions designed to keep the total amount issued within safe limits. the notes which are to be issued under the provisions of the act are certainly quite as well safeguarded in this respect. in addition, the notes are made obligations of the government of the united states, which also undertakes to redeem them at washington. the obligation of the government is in addition to and does not take the place of any banking safeguard. it is designed to meet the desires of the very large number of people throughout the country who believe that the issue of money is a government function. to many bankers and others familiar with our past financial history, this provision in the bill was most distasteful. their opposition, though natural, was, however, neither very practical nor reasonable. it was based very largely upon the fear that the government obligation on the notes would prove an entering wedge for an issue of fiat money at some future time. but paper money cannot be issued under the terms of the act for the purpose of meeting government expenditures. additional legislation would be necessary, and the possibility of such legislation is not appreciably increased by making the notes which are to be issued by the reserve banks an obligation of the government. on the other hand, this provision won many friends for this important piece of banking legislation; it allayed opposition which would always have been a serious menace to the permanence of the new system. the quantity of the new notes which may be issued is wholly within the control of the federal reserve board; but the initiative in taking out circulation rests entirely with the boards of directors of the reserve banks. applications for notes may be made at any time by a reserve bank to its district reserve agent, the member of its board of directors who is the medium of communication between the bank and the board. rediscounted commercial loans equal in amount to the notes applied for must be deposited with the agent, and a reserve in gold of per cent. must be maintained. (a reserve of per cent. in gold or lawful money is required against deposits.) the board may grant in whole or in part, or reject entirely, applications for notes, and may also impose such interest charge upon the notes as it may deem advisable. the notes are to be a prior lien on the assets of the issuing banks, and there is, therefore, no possibility of loss to note holders, nor any to the government on account of the obligation which it assumes. such part of the per cent. gold reserve against the notes as may be deemed advisable by the secretary of the treasury, but in no case less than per cent., must be deposited in the treasury of the united states for the redemption of the notes in washington. each reserve bank is required to redeem not only its own notes but also those of the other reserve banks either in gold or in lawful money; redemption in washington is in gold alone. in practice it is certain that reserve banks will redeem the notes in gold over the counter; and it is also certain that slight use will be made of the redemption machinery at washington. member banks will certainly deposit the notes with their own reserve banks, which are required to accept the notes of other banks at par. the reserve banks, in turn, are required under the law to return for redemption the notes issued by other reserve banks. redemption at washington has apparently been provided because national bank notes are redeemed there in large volume every year; a result of the circumstance that the present number of issuing banks is so large as to make counter redemption much more costly. various provisions in the act are evidently designed to keep the issue of notes within safe limits; but not much reliance should be placed upon them. reserve banks may not, under penalty of a prohibitive tax of per cent., pay out the notes of other reserve banks. if these banks, like the scotch banks, were working in the same territory, regular redemption would check over-issue on the part of any one of them. but under a system of regional banks, each with its own territory, there will be only a very irregular relation between the amount of notes put out by any one and the amount which will be received by the others. moreover, it should be borne in mind that regular redemption is no check whatever upon general expansion, either in the form of notes or of deposits, when all banks are expanding credit at the same time. not much effect also in checking over-issue is to be looked for from those provisions in the act which require a per cent. reserve in gold and impose a graduated tax upon reserve deficiencies. a considerable part of the total reserves of the reserve banks is certain to be in gold; and deposit liabilities are certain to be vastly greater than those for notes in circulation. the circumstances are hardly conceivable in which a reserve bank would not have an amount of gold in its entire reserve ample to provide a gold reserve for such notes as it might issue. the special tax on note reserve deficiency can therefore be readily evaded by shifting the deficiency to the reserve against deposits. deficient reserves are only allowed when reserve requirements are suspended by the federal reserve board. the board is to impose a graduated tax on all deficiencies except in the note reserve. on note reserve deficiencies, the tax imposed in the law is to be added to the rate of discount of the reserve banks. the arrangement would seem to be a most unworkable one, since there is no means of knowing to what extent a borrowing bank will have occasion to use the proceeds of its loan in the form of notes. fortunately this provision of the act is never likely to become operative. after all, for proper use of the right of issue under the act the main reliance must and should be on wise and experienced management for the reserve banks, and above all on a conservative federal reserve board. restrictions which would make over-issue impossible would also deprive the right of issue of all usefulness as a means of extending credit. moreover, the danger of the over-expansion of credit in the form of deposits is vastly greater than it is in the form of bank notes in any country in which deposit credits have become the more important credit medium. one of the most perplexing questions that presented itself in framing the act was the disposition to be made of the national bank notes and the per cent. government bonds which secure very nearly all of them. when the measure reached the senate, it contained provisions which contemplated the gradual substitution of federal reserve notes for the national bank notes. but when it was pointed out that this would require the reserve banks regularly to rediscount at least seven hundred million dollars of commercial paper, in order to support the existing volume of currency, it was felt that some other arrangement must be made. a plan to unify all the varieties of paper money now in circulation, with the exception of the silver certificate, by the issue of an equal amount of united states notes, backed by an ample gold reserve, found influential support; but it was wisely decided to present this in a separate measure. the particular provisions regarding the national bank notes and the bonds contained in the act should be regarded, therefore, as a temporary arrangement pending future legislation. in order to avoid the contraction of the currency which would follow the refusal of many national banks to enter the system, each reserve bank is authorized to purchase bonds and take out circulation similar in all respects to the notes issued by the national banks. after the end of a period of two years, additional bonds may be purchased, but only from member banks, and at the discretion of the federal reserve board. member banks desiring to retire circulation and dispose of their bonds, may make application to the board, which may require the reserve banks to purchase them. no more than twenty-five million dollars of bonds may be purchased in any one year, and the amount purchased is to be distributed among the various reserve banks in proportion to their capital stock. bonds thus purchased may be used as a basis for additional national bank notes by the reserve banks, or they may be converted into per cent. government obligations--one-half into thirty-year per cent. bonds, and one-half into one-year per cent. notes, both issues without the circulation privilege. in taking the one-year notes, a reserve bank enters into an obligation to purchase an equal amount at each successive maturity for thirty years. the purpose of the notes is to provide the reserve banks with a readily marketable asset, the sale of which abroad may prove serviceable in periods of strain, and the domestic sale of which will enable the reserve banks to make their discount rates effective in the money market. government short-term obligations are used for these purposes by many of the european central banks. the existing volume of national bank notes will not be reduced under the terms of the act, except in so far as the reserve banks convert per cent. bonds into per cent. bonds or notes. there may even be some slight increase in the total of national bank notes in circulation, since banks may use for this purpose the small quantity of bonds not already absorbed in this way. little concern, however, need be felt because the national bank notes are not to be retired. present requirements for money to be used outside the banks are sufficient to absorb all the notes at present; and with the growth in population a somewhat greater quantity could be absorbed in future. lending operations of the federal reserve banks the normal lending operations of the federal reserve banks are limited to the rediscounting for member banks of commercial loans maturing within ninety days. commercial loans are generally defined in the act as "notes, drafts, and bills of exchange arising out of actual commercial transactions; that is, notes, drafts, and bills of exchange issued or drawn for agricultural, industrial, or commercial purposes, or the proceeds of which have been used or are to be used for such purposes." the federal reserve board is authorized to define more precisely the nature and character of eligible paper. to make assurance doubly sure, the rediscount of loans secured by stocks and bonds is specifically prohibited. the act also provides that six months' maturities of paper drawn and used for agricultural purposes or based on live stock may be rediscounted. in confining rediscounts to commercial loans, the act is more stringent than that governing the operations of central banks in europe. in practice, however, the bulk of the loans of these institutions are in connection with commercial transactions. while this restriction may in some particular emergency hamper the reserve banks in giving assistance to some threatened bank, it is upon the whole amply justifiable. under our banking system in the past the collateral loan has enjoyed a prestige which it is hoped will be transferred to commercial loans. exclusion of collateral loans from rediscount will certainly contribute much to bring this about. the restriction also gives the public greater confidence that the resources of the reserve banks will be generally available throughout the entire country. one of the reasons which has been advanced for confining rediscounts to commercial loans is based upon certain misconceptions of the true nature of commercial paper--misconceptions which, if adopted by the management of the reserve banks in formulating their policy, may have disastrous consequences. it has been contended on all sides during the last few years that commercial paper was from its very nature liquid; and further, that credit could therefore safely be granted to an extent limited only by the amount of such paper. both of these contentions are hopelessly fallacious. in an emergency, no kind of loan is liquid to any considerable extent. business cannot suddenly be deprived of the amount of credit to which it has become adjusted. it is, indeed, often said that loans based upon any commodity entering into general consumption can be quickly liquidated. this can be done as regards any particular loan; but supplies for the immediate and distant future must be in process of production and they will require a new batch of loans. the view that credit can be safely granted to the full extent of merchandise in process of distribution and even in process of manufacture is equally fallacious. credit affects price. liberal discounts may cause speculative advances in commodity prices, stimulating excessive prices by wholesalers, jobbers, and retailers, as well as by speculative holders pure and simple. there is no mechanical or statistical test for the amount of credit which may be safely granted, whether the loans be commercial or collateral. over-expansion is possible by both operations. commercial loans will become the most liquid asset that member banks can hold, simply because they can be rediscounted with the reserve banks. a smaller amount of bank funds will be employed in the call loan market. but whatever amount remains available for that use will be subject to far less seasonal fluctuation both in volume and in rates. the retention of fixed reserve ratios, even though they may be suspended by the federal reserve board, will probably lead many city banks to use the call loan market to a moderate extent, since it will enable them to avoid the necessity of resorting to the reserve banks for rediscounts whenever reserves momentarily drop below legal requirements. a somewhat larger proportion of time loans will doubtless be used in connection with stock exchange dealings; but the available supply of call money will presumably be sufficient to permit the continuance of the present american practice of daily delivery of securities. at the outset, on account of the widespread prejudice among bankers against rediscounting, the demand for accommodation from the reserve banks may not be large; but this prejudice will surely die away in time, and most if not all of the reserve banks will suffer from no lack of regular business, except in periods of business depression. member banks in those parts of the country in which the supply of credit is inadequate for local requirements will lend more closely, while banks which regularly have more funds than can be thus employed will purchase more commercial paper from note brokers and perhaps rediscount for banks in those parts of the country in which rates are normally high. aside from the government account, member banks are to provide the funds for the reserve banking system. competition with member banks would therefore and justly occasion serious dissatisfaction. managed by boards of directors a majority of the membership of which is to be selected by the member banks, there would seem to be little danger of serious competition from the reserve banks. nevertheless the act places such restrictions upon dealings by the reserve banks with the general public that little or no competition will be possible. the reserve banks are permitted to engage in three kinds of open market operations: ( ) dealings in government securities, and also in obligations of the states and local bodies, maturing within six months and issued in anticipation of taxes; ( ) dealings in foreign exchange; and ( ) dealings in domestic bills of exchange. the purchase and sale of government bonds and notes and state and local short-term obligations require no detailed consideration. in periods of inactive demand for rediscounts, investments of this kind will doubtless be made by the reserve banks in order to employ surplus funds. the right to engage in foreign exchange dealings will also be similarly useful, surplus funds being invested in foreign bills. moreover, if any of the reserve banks find that their resources are regularly in excess of domestic requirements, they may be used to facilitate the financing of the foreign trade of the country with domestic capital. it is also very generally believed that the power to engage in foreign exchange operations may be so used that it will be possible to rely upon securing abundant foreign funds in periods of financial strain. this is most unlikely. it is entirely possible for a small country to rely upon holdings of foreign bills as a means of influencing the foreign exchanges, and even for such supplies of gold as may be needed on occasions when confidence is threatened. but the banks of a large country must rely mainly upon domestic resources, since the amount of cash and credit needed in an emergency is too great to be secured from foreign money markets. it should be the policy of the reserve banks to maintain themselves in a condition of such abundant strength as to be wholly independent of foreign assistance. moreover, if they maintain strong reserves in ordinary times, they will not be disturbed on account of gold exports. gold exports amounting to fifty, or even a hundred million dollars should not be made the occasion for obstructive measures such as are adopted by many of the european central banks. measures of this kind are generally an indication that the credit structure rests upon an inadequate foundation. new york has been a free gold market in the past, and even under our imperfect banking system, there has always been a sufficient amount of gold for every banking purpose. moreover, restrictions placed upon gold movements can have but temporary effects; in the long run the distribution of gold among the various commercial countries is determined by fundamental influences which override all such artificial barriers. the act permits only one kind of banking business between reserve banks and the general public. they are allowed to buy and sell to or from individuals, firms, and corporations, as well as domestic and foreign banks, bills of exchange of the kinds which are made eligible for rediscount. the purpose of this provision in the act is to enable the reserve banks to secure some employment for their funds when the demand for rediscounts slackens, and to develop a broad discount market. a broad discount market may be developed under the new banking arrangements; but the prediction is ventured that this provision in the act will not contribute to its development and that in general it will be barren of results. it should be observed that the promissory note, the usual borrowing instrument in this country, although it may be used for rediscounting purposes, cannot be bought and sold in the open market by the reserve banks. aside from foreign trade, the mercantile bill of exchange, payable at a future date, has largely fallen into disuse in most advanced commercial countries. more and more cash payments are either insisted upon, or are favored by the offer of trade discounts for cash considerably greater than bank discounts. when a purchaser pays cash, obviously a mercantile time bill of exchange cannot come into existence. in european countries, many purchasers who pay at once often draw a bill of exchange on their own bank and, after it has been accepted, discount it in the open market. in this country banks are to be allowed under the act to accept only bills drawn in connection with merchandise exports and imports. material will, therefore, be lacking for a broad discount market, if its development is dependent upon open market operations by the reserve banks. fortunately the development of a broad discount market does not require open market operations on their part. a broad discount market is one to which many borrowers resort with full assurance that they will find many lenders. even under past banking arrangements, many borrowers and lenders have been brought together through note brokers; but owing to the lack of an available supply of cash and credit with which to meet emergencies, this market has been subject to violent perturbations, and at times dealings have been almost entirely discontinued. in the future a solvent borrower will feel more certain that his paper can always be marketed by his note broker; and banks will purchase more largely, since they will prefer to use such paper for rediscounting purposes rather than that of their own regular customers. additional powers of national banks nearly half of the national banks have established savings departments and now hold more than eight hundred millions of savings deposits. this has been a recent development, and one for which there was no specific authority in the national banking law; but under the liberal interpretation of that law by the comptroller of the currency in recent years, it has been permitted because it was not forbidden. many have doubted, however, whether the banks could enforce the thirty and sixty days' notice of the withdrawal of deposits which, following the practice of regular savings banks, appeared on the passbooks issued to depositors. this uncertainty has been removed by implication by the new act, which includes in its definition of time deposits, savings accounts subject to at least thirty days' notice. it is of course a great advantage to the national banks, that in the employment of these deposits they are subject to much less restriction than is imposed upon savings banks in many of the states. subject to the permission of the federal reserve board, and when not in contravention of state laws, national banks may act as trustees, executors, administrators, and registrars of stocks and bonds. many banks will find this a useful extension of their powers. if trust companies may properly engage in banking, there can be no good reason why banks should not undertake trust functions. the department store principle in banking has made rapid headway in most countries in recent years. under proper supervision every kind of reasonable and safe financial business can be handled by a single institution safely and in a way which is convenient for the business community. in some states legislation may be necessary to permit national banks to undertake trust functions. in massachusetts, it seems to be the opinion among lawyers that no legislation is required. inability to lend on mortgage security has been the most serious disadvantage experienced by country national banks in competition with state institutions. land has been by far the best local security available over large parts of the country. rural bankers have, in fact, taken it into account in making loans and by various devices have succeeded in making it the security for many of the loans which they have granted. under the federal reserve act all banks, except those in central reserve cities, may lend for periods not exceeding five years per cent. of their capital and surplus, or one-third of their time deposits, on the security of unencumbered and improved farm land to per cent. of its market value. two changes are made in the law for the purpose of facilitating financial business with foreign countries. national banks having a capital of at least one million dollars may establish foreign branches, subject to the approval of the federal reserve board, and to such regulations as it may formulate for conducting this business. banks may also accept bills of exchange maturing within six months drawn in connection with exports and imports of merchandise. these are desirable changes in the law. it is not, however, probable that many foreign branches will be established in the near future, and it is most unlikely that the american acceptance will make rapid headway in foreign markets. the scope of the following provision in the act is uncertain. "other than the usual salary or director's fee paid to any officer, director, or employee of a member bank, and other than a reasonable fee paid by said bank to such officer, director, or employee for services rendered to such bank, no officer, director, employee, or attorney of a member bank shall be a beneficiary of, or receive, directly or indirectly, any fee, commission, gift, or other consideration for or in connection with any transaction or business of the bank." this prohibition obviously covers payments to bank directors and officers in return for aid in securing accommodation from the banks. it may be held that all purchases by a bank of commercial paper from a firm of note brokers, or of securities from a banking house, are forbidden if any of the partners of such firms are on its board of directors. in this event, a few banks would lose valuable directors; but the question of the wisdom of such exclusion is too complex to be given consideration in this paper.[ ] supervisory functions of the federal reserve board a variety of functions of a supervisory or administrative nature are to be exercised by the federal reserve board. it is to formulate detailed regulations regarding various matters concerning which only general provisions are contained in the act. among important matters regarding which the board is to formulate regulations may be mentioned: rules for conducting branch offices; the regulation of state banks which become member banks; rules defining precisely commercial loans eligible for rediscount; and the regulations for the operation of foreign branches.[ ] the board is to exercise many supervisory functions over the reserve banks which are similar to those which have long been exercised by the comptroller of the currency over the national banks. examination of the reserve banks is under its direction. there must be one examination each year, and additional examinations must be ordered upon the application of ten member banks.[ ] the board is also to publish once each week, a statement showing the condition of each reserve bank, and a consolidated statement for all these institutions. it is also given a number of important powers to be exercised at its discretion. it may suspend reserve requirements for a period of thirty days, and renew such suspension for successive fifteen day periods. for violations of law, it may suspend the operation of a reserve bank, and administer or liquidate it. the board may also reclassify cities as reserve or central reserve cities, or terminate their designation as such. the method of banking reform which has now been adopted, necessarily involves placing somewhere enormous power to expand credit. this power cannot be surrounded by sufficient safeguards to prevent all possibility of its misuse, because in so doing, its wise use would be quite as seriously interfered with. competent management is therefore absolutely essential if satisfactory results are to follow the passage of the federal reserve act. in the operation of the new system, the boards of directors of the reserve banks may prove the most important part of the organization; or that place may be occupied by the federal reserve board. the boards of directors will exercise all the ordinary powers of such boards, except in so far as they are subject to control by the board. all the loans of the reserve banks are to be made by the boards of those banks. in this matter, the board has no power whatever, except that it may require, on the affirmative vote of five members, one reserve bank to rediscount paper for others. here is a power that seems to be designed merely to prevent any working at cross purposes among the reserve banks. few or no occasions for its use will present themselves if all the reserve banks are well managed by their own boards. all rates of discount are to be fixed in the first instance by the boards, subject to review and determination by the federal board. here again the decision of the reserve bank boards is altogether unlikely to be overruled if these banks are skilfully managed. [illustration: the federal reserve districts] the power of the federal reserve board to restrain the reserve banks is vastly greater than its power to force them to take positive action which might lead to the inflation of credit. this was clearly the purpose in view in giving the board the more important of its many powers. it may, for example, reject applications of reserve banks for notes, but this will not endanger assets, it will simply lessen power to expand operations. its power over the discount rates of reserve banks will obviously be more effective when used to advance rates which it deems too low than it will be if used to enforce a rate lower than the management approves. the directors of the reserve bank would still determine the amount of accommodation which it might safely grant to member banks at the enforced low rate. officers and directors of reserve banks may be removed at any time by the federal board, which is merely required to communicate its reasons for removal in writing; but the right of member banks to choose successors will still remain. while it is impossible to make any prediction as to the relative place which the reserve bank directors and the federal board will hold, it is evident that, in the absence of harmonious co-operation, the system will not work smoothly, even if it can be made to work at all. if all the reserve banks and the federal board adopt a wise and conservative policy, the system will surely work well. if the reserve banks alone are conservative, the system may work well but with much friction. if the federal board alone is conservative, it may force good results from the system. on the other hand, if some of the reserve banks and the federal board are reckless, the system will probably break down; and if all the reserve banks and the federal board adopt a reckless policy, the results will be disastrous. both the directors of reserve banks, and the federal board will be confronted with numerous problems, many novel and some intricate. the possibilities of the new system cannot be foreseen, and the extent and nature of the responsibilities resting upon the reserve banks cannot be determined beforehand.... the federal reserve act--an experiment [ ]banking is the most delicate and sensitive of all businesses in which men engage. it goes without saying that it is a business in which the law maker should not needlessly interfere. perhaps some of you may not know that modern banking is a product of evolution. in this respect it is like all great human institutions. no language worth while was ever invented by a human being. speech, with all its intricacies and inconsistencies of grammar and syntax, was not planned by some master mind centuries ago, but is the result of countless ages of effort on the part of the human animal, guided only by his sub-conscious intelligence--that which we call instinct in the lower animals--to give expression to his emotions and his more or less hazy concepts. language, like the comb in which the bee stores its honey, has come to us as the product of the labor of our ancestors through many millions of years. money, credit, and banking are in like manner evolutionary products. if we attempt to tinker with them artificially without regard to the lessons of experience and in disregard of the forces of evolution, believing that our reason transcends the consolidated experience of our ancestry, we shall meet the fate that we deserve, the fate of the conceited bee who thinks he can improve the honey comb, or of the conceited grammarian who would make me walk a literary bridge of sighs for saying "it is me."... i am quite willing to admit that in some of its details the federal reserve act[ ] has taken leaves from the experience of banking institutions of this and other countries, but in its essentials, in its anatomy, in its bony structure as it has been called, it is an animal absolutely unknown to the natural history of finance. let me briefly call attention to the following novelties in banking: first. it provides for a system of twelve competing banking institutions which shall control the currency supply of this country, and over which there shall be no controlling body with power sufficient to compel them to regard the national welfare in the issue of currency and in the extension of their credit. it is taken for granted that the financial welfare of the people will be safe provided that these competing regional banks are required to hold gold or lawful money reserves of per cent. against deposits and per cent. gold (free from tax) against notes, and are not permitted to issue notes except upon deposit of good commercial paper.[ ] second. the act provides that the federal reserve banks shall have the right to deal only with banks, nay more, they may deal only with such banks as have contributed to their capital stock. this again is a novelty in the banking world. if these banks are to be in touch with all american business and industry and be powerful agents for the prevention and alleviation of panic, why should they be thus restricted in their operations? third. the capital of these regional banks is not a matter of voluntary subscription. it is not founded on business principles. the framers of the measure seemed to fear lest the banks they were planning might not prove profitable investments, hence, they have provided that our national banks must subscribe the necessary capital or forfeit their charters. no country on this green and prosperous earth has ever found it necessary to resort to such undemocratic compulsion in order to persuade people to go into the profitable business of banking. fourth. the bank notes issued by these federal reserve banks are called government obligations and must be redeemed on demand by the united states treasury. in no country will you find that any such bank note has ever been issued or even proposed, and i submit that in the united states, whose people for half a century have confessedly been subject to periods of anxiety and distress and panic because of the government's liability for the daily redemption of paper money, this provision of the federal reserve act is amazing, inexplicable, and indefensible. the united states treasury is not a bank and is not made one by this act. it cannot control the issue of the notes, nor the credit operations of the banks who do issue them. why then should the treasury be compelled to redeem these notes? fifth. the federal reserve act provides for an arbitrary shifting of bank reserves such as has never been attempted before. nobody can foretell what the result will be, but we know nothing of the sort has ever been attempted before and we also know that many banks will be obliged to reduce their loans and discounts, and that their customers, the business men of the country, may suffer serious losses in consequence. the united states has tried many financial experiments--indeed, our present national banking system was an experiment in finance and has been found wanting--but the federal reserve act, if it could be put on exhibition in a world's financial museum, would, i feel sure, be voted the newest and most spectacular thing we have yet constructed. the federal reserve act and democracy in banking [ ]beneath his skin every american citizen of every station and avocation, and whatever party name he may wear, is a democrat in all the essentials and fundamentals. that is, he is attached passionately to the principles of local self-government, of the widest individual liberty compatible with the general weal and order of society. this new currency measure is democratic essentially. it looks to decentralisation of direct financial control, to financial local self-government, so far as is consistent with stability and the general safety; to a currency which will be worth its face value everywhere, which will be based on the actual values it purports to represent, as well as the faith and credit of the general government, and which yet will be elastic, expanding to meet needs where and when they develop, receding when not needed; a system fitted to meet any emergency, moving smoothly and noiselessly for the ordinary uses of business in tranquil times. too much money and too little money are alike evil and dangerous. opinions differ as to which is the worse. probably one is as bad as the other. the design of the new law is to supply just enough money or credit, when and where business needs it, to create for our commerce, as has been said, foundations so even, so broadly laid, and so deeply planted that they can not be shaken. as it is, the country bleeds and sweats to the big financial centres. take the south as an instance--and the conditions with which you here in north carolina are familiar exist everywhere in the country. most of our railway systems are controlled frequently through the trust known as the voting trust--by men who are interested in the great banks in the three central reserve cities. so it happens that the large deposits of the railways, their collections from the southern people, as also from the western people, are sent on largely to those banks. the same is true of the telegraph and telephone companies, the life and fire insurance companies, and of many of the larger manufacturing enterprises. the merchants and manufacturers of north carolina pay their freight bills to the railways. the money goes largely and promptly to new york, and is lent out and used there in stock-market operations, or as the directors of the banks, who are also often the directors of the roads and other corporations, may elect. of course there is no law which provides for the carrying of the reserves and bank balances of railways and industrial corporations in the central reserve cities, where the national banks of the country have also been accustomed to keep their reserves. when north carolina needs money to move the cotton crop her banks must call on new york for money which should be in their own vaults; for the return of money paid in here in freight bills, insurance premiums, and otherwise; and your banks sometimes think themselves lucky if they can be allowed the use of any part of it.... it is not hard to see how centralization of financial resources and money supply and concentration of financial power has been forced, and the invisible and irresponsible despotism created by acts of congress and policies of government made necessary by those acts. now, we do not propose to use violence to force disintegration and decentralization, to do anything with a jolt and a jerk. it is understood clearly that to rush headlong and at full speed over an evil or an obstacle may cause derailment or jarring, uncomfortable and bad for passengers. the thought or plan, as i understand it, is to invite decentralization, to encourage it, to give opportunity for it, to make local self-government possible, to remove the influences which draw to a few centres the money that is paid out to the corporations and deposited in the local banks.... the law does not require a single business man to change his account from the bank with which he has kept it or any business man or bank to suspend dealings with the bank or banks in the central reserve or reserve cities with which they have in the past been doing business. it does offer to banks freedom of choice. it says to the banker that he can follow his preferences, sentiments, or habit in selecting the source of his borrowing; and the member banker of any federal reserve district may feel free and peaceful and at ease when he knows that he has in his portfolio notes, drafts, and bills of exchange arising out of actual commercial transactions, which he can convert into money at his federal reserve bank with greater ease and promptness than it has sometimes been possible for him to withdraw his cash balances from his reserve agents and almost with as much ease as it has ever been possible to draw on credit balances with any correspondent. he is not dependent on the whims or fortunes of any other bank. he need not shiver at the prospect of abundant crops for fear he may not have available the funds with which to meet demands for moving them. he will know that if he needs money to accommodate the bank's customers he can, as a matter of right, call on his federal reserve bank. among other benefits the new currency law, by its direct system of clearances, will release and make available for purposes of trade and commerce hundreds of millions of dollars which under the old system have been tied up in tedious processes of collection. it will also save to banks and to merchants and business men generally some millions of dollars which they are now paying, directly and indirectly, for the collection of country checks and checks on outside cities. to refer more particularly to your own district, the fifth, i will try to explain to you how the new method will work in transactions of domestic exchange. in this district, embracing the states of north and south carolina, virginia, west virginia (except four counties), the district of columbia, and maryland, there are some member banks. a cotton mill at columbia, s. c., under the old plan sends its check on its columbia bank for a shipment of coal to the coal company at bluefield, w. va. the local bank at bluefield forwards this check to its correspondent in richmond. this correspondent sends the check to its own correspondent in columbia, who makes the collection from the columbia bank and then draws a check on new york for new york exchange, which it remits to richmond. the richmond bank thereupon notifies the bluefield bank of the collection of the item. the collection and exchange charges on distant country banks amount usually to from one-tenth to one-fourth of per cent., or possibly more, and probably a week or more elapses between the remittance of the south carolina check to the bluefield bank and the time when the bluefield bank gets its report that the item has been collected and placed to its credit in richmond. under the new currency act "every federal reserve bank shall receive on deposit at par from member banks ... checks and drafts drawn upon any of its depositors." that means that the bluefield bank receiving the check on the columbia, s. c., bank mails it to the federal reserve bank at richmond. the federal reserve bank at richmond thereupon charges the columbia bank with the amount of the check, credits the bluefield bank with the proceeds, and notifies the two banks accordingly. the federal reserve act also provides that each federal reserve bank shall receive at par, and credit accordingly, all checks and drafts drawn upon any of its member banks, from every other federal reserve bank; that all checks and drafts drawn by any depositor--that is to say, by any member bank--on any federal reserve bank shall be received and credited at par by every other federal reserve bank. this means that the checks of the member banks in the country towns throughout these five states are worth their full face value, without deduction for exchange or collection charges, to every other member bank, and that the amount of each check may be cashed at par immediately, without following the devious and roundabout courses now observed in the collection of checks. virtually every bank in the fifth district is only one night distant from richmond, and a check mailed one afternoon in the most distant portions of the district should reach richmond the following day in time to be included in that day's operations of the federal reserve bank. let us now consider another aspect of the new law: under the old national bank act a national bank with a capital of, say, $ , , deposits of, say, $ , , , bills receivable amounting to $ , , , and $ , reserve, would only be permitted to borrow a total of $ , , the amount of its capital. if a run should start on such a bank, the amount which it could raise by loans, if strictly held to the old law, would be but $ , , the amount of its capital, which might be quite inadequate to meet a run, and the bank, though thoroughly solvent, might be forced to suspend. under the new law, however, if a bank with $ , capital and deposits of $ , , should have loaned $ , , to its customers on commercial paper and should encounter an unexpected run, in addition to borrowing $ , , the amount of its capital, such a bank would have authority to rediscount with the federal reserve bank of which it is a member, notes, drafts, and bills of exchange issued or drawn for agricultural, industrial, or commercial purposes, having not more than ninety days to run, to any reasonable extent which may be approved by the federal reserve bank to which application for such rediscounts may be made.... we can not overestimate the value of the additional security which this provision of the act confers upon every honestly, capably managed member bank, and the relief from strain and anxiety and from the fear and apprehension of panics and unreasoning runs which it gives to the officers of every member bank. another important change provided by the federal reserve act is the new arrangement for the compensation of national bank examiners. under the present law the compensation of national bank examiners is based, except as to reserve cities, on the capital stock of the bank examined. under the operations of this law a national bank examiner has been receiving for the examination of a certain national bank in the fifth district, with over $ , , of assets and many thousands of accounts, the munificent sum of $ . it is, of course, clear that an examiner could make only an imperfect examination of such a bank in the space of three days at a compensation of, say, $ per day, out of which $ allowance he has to pay his own railroad fare, hotel expenses, as well as clerical assistance. it is not unnatural that but few examiners would willingly spend the ten days or two weeks which it might require to make a thorough examination of such a bank when he is running personally in debt in doing so. under the new currency law the federal reserve board, upon the recommendation of the comptroller of the currency, is given authority to fix the compensation of bank examiners on the basis of annual salary, so that those banks which need additional time and attention from the examiner may receive the careful, close scrutiny which the case may call for. it is believed that the new system of bank examinations will reduce materially the number of bank failures and enable the department to check up many abuses and correct many evil situations which in the past have been ignored or glossed over by examiners in their hasty and incomplete investigations. i thank you, gentlemen, for the opportunity to address you. approaching the study of this new and revolutionary measure with the caution natural to every man trained in banking under the system with which we have grown up, i have become more thoroughly aroused to its merits and more deeply impressed as i have watched the methods of construction, the processes of growth, and have considered the underlying principles directing those who did the work. the elasticity of note issue under the new currency law[ ] to anyone who has been interested in currency reform for, say, twenty years, probably nothing is more striking than the change in emphasis which has taken place among the advocates of reform during this period. the typical reform plan of the earlier time, for example the so-called baltimore plan brought forward in , devoted itself almost exclusively to providing a thoroughly elastic note issue, based on ordinary assets. in contrast, the new law has as its central, primary object the organization into at least regional unity of something like the entire banking system of the country. doubtless this difference in the two reform plans was not altogether due to a fundamental difference of opinion with respect to what would be the ideal scheme. the reformers of the earlier period were not indifferent to the need for centralized organization in the banking system. but they considered any scheme involving a central bank, like the old bank of the united states, quite chimerical; and they were probably right. but times change; and men change with them. for one reason or another we have all become more tolerant of centralization in business matters, as also more tolerant of that increase in governmental control which increased centralization in business seems to make necessary. with at least fairly general approval, a system of regional organization has been set up, involving a very high degree of centralization and a very high degree of governmental control. but with this change in the method of reform, it became inevitable that the more important ends which earlier schemes sought to accomplish by giving the note a high degree of elasticity should be, in no small measure, attained by other means. in consequence, the need for elasticity in the note issue will be much diminished under the new law. nevertheless, it is admitted that this need will not disappear altogether. elasticity in the note issue will be wanted partly to assist in utilizing the newer methods of dealing with the difficulties involved and partly to supplement those newer methods. accordingly, the question "how far does the note issue under the new system seem likely to prove an elastic one?" is still important. from the beginnings of agitation for currency reform the advocates of elasticity have recognized more or less clearly two kinds: ( ) what we may call _seasonal_ or ordinary elasticity, and ( ) what we may call _emergency_ elasticity. by the former was meant the power of a note issue to adjust its volume to those moderate changes in the need for money which show themselves in the course of an ordinary year. by emergency elasticity was meant the power of a note issue to adjust its volume to those extraordinary changes in need which connect themselves with the typical banking panic. the evils which it was believed that seasonal or ordinary elasticity would remedy were principally ( ) the summer shortage of currency for moving crops, together with the temporary but more or less serious stringency in the new york money market which accompanies that shortage, and ( ) the plethora or excess of currency which usually appears three or four months after the crop-moving period has terminated. the evils which emergency elasticity was expected to relieve were principally ( ) the stringency which precipitates the panic, ( ) the money famine consequent on general bank suspension after the panic has fully developed, and ( ) the glut of currency which attends the depression following a panic, often leading to excessive exports of gold and thus endangering the whole credit system of the country. let us, now, take up seasonal or ordinary elasticity, and ask ourselves whether the new notes are likely to possess this characteristic. first, how about the expansibility needed to supply adequate funds for crop-moving? at this point, it must at once be admitted that the new currency does not meet the demands of the case in quite the thoroughgoing way which the earlier schemes thought to be necessary. the ideal of the earlier plans was to provide an adequate and easily utilized power of issue, located at the very place where the need for expansion is felt, _i. e._, in the local bank. the new law gives up this idea entirely. the local bank will not have power to issue the new currency at all. in so far as its customers are to get any benefit from that currency the benefit must come through two channels which the country bank could use in getting the needed funds, even if the currency had no expansibility, namely, ( ) calling in its balances kept with banks more centrally situated, and ( ) borrowing from such central banks. in other words, the new power of issue will help out in the crop-moving period merely because it will put the reserve banks in a better position to respond to the call of the country banks for the return of their own balances and for advances on discounted paper. judged from this point of view only, the elasticity provided by the new law is doubtless adequate. if the reserve banks have not kept themselves in a position to meet the calls of their country members from money already in possession, they will surely be able to put themselves into such a position by expanding their issue of notes. in one sense, then, the new issue has adequate expansibility for ordinary needs. there still perhaps remains a doubt whether effective elasticity is after all assured, for it is not clear that the country bank which needs money for crop-moving purposes will have the wherewithal to get advances from the reserve bank--that is, that it will have paper of the proper kind and in sufficient amount for rediscount. however, it seems probable that the act as finally passed has met this need by providing that agricultural paper shall be admitted on rather more liberal terms than paper arising out of ordinary commercial or manufacturing business. if this be so, it would seem that the provisions of the new law for securing one phase of seasonal elasticity--expansibility--are fairly adequate. passing, now, to the other side of elasticity--_i.e._, contractility--can we say as much? will the new issues promptly retire when their special task is over? _prima facie_, the verdict here is less favorable than in the previous case. in general, there are two principal processes by which a note circulation may be contracted: ( ) _driving_ the notes out of circulation, and ( ) _drawing_ them out. in so far as the former process is depended upon, means are devised to make sure that the notes shall persistently return to the issuer even against his will--they shall have good homing power. by the second process, it is made to the advantage of the issuer of the notes to hasten their withdrawal himself. as respects insuring contractility by the former of these processes, the act certainly cannot claim to promise high efficiency. the driving-out process requires roughly the fulfilment of two conditions: ( ) keeping the channels for the return of notes to the issuer fairly open, and ( ) supplying outsiders with a motive for sending the notes home. as regards the former of these conditions, the new system probably is all right. the return of the notes to the issuer seems not to be impeded by the inconvenience or expensiveness of the process. all member banks and all reserve banks must receive these notes; and the reserve banks will probably have branches within easy reach of any part of the district. hence, any holder desiring to get notes back to the issuing bank will find the process easy and the way open. but good homing power requires more than this. it requires, namely, that adequate motives be supplied to people generally, or, at least, to banks generally, for seeing that the notes get back. it is not enough that the track be smooth; people must desire to use it. now, earlier plans for securing elasticity relied on two principal motives for inducing holders to send notes back to the issuer: ( ) the desire of such holders to make room for their own notes, and ( ) their desire to exchange money which has various limitations imposed upon it for money which is free from those limitations. it is plain that the new system makes only a limited use of the former of these methods of procedure. _within_ the district for which any particular reserve bank is the central bank, this particular force will be practically inoperative; for the power to issue notes on the basis of common assets is not given to any but the reserve banks, and the profitableness of the power to issue the old type of note has always proved too low to induce banks generally to take much trouble to get their own notes into circulation. as between the reserve banks of the different districts, however, this particular motive will, of course, be more or less in evidence, since these reserve banks will all be competitors for this opportunity. but even here the motive in question will not play a large part, since more effective means for insuring the return of the notes from outside reserve banks are provided in other parts of the law. as regards the second motive for returning idle notes--that is, the desire to exchange a money subject to various limitations or disabilities for one not subject to those limitations--the new act does somewhat better than it does in respect to the first motive. it is, indeed, true that, within their own district, no special disability, like being forbidden to be paid out by other banks, is put on the new notes. but they are always subject to the disability of not being legal reserve money in the case of federal banks; and hence such banks will be more or less disposed to return the notes issued by their own reserve banks, in order to exchange them for reserve money. it may be doubted, however, whether in ordinary times this will prove a very potent force, since country banks will usually keep reserves considerably in excess of legal requirements, and so will not need to discriminate nicely between the two sorts of money. as between different districts, the case for the homing power of the new notes is rather stronger, since reserve banks are prohibited from paying out the notes of other reserve banks under penalty of a per cent. tax. even here, however, the provisions are none too adequate. while the notes of a particular reserve bank must not be paid out by the reserve banks of other districts, there is no prohibition against their being paid out by the member banks of other districts; and it is doubtful whether there is sufficient motive to induce said member banks of other districts to send in these notes to their own reserve banks and so start them on their homeward journey. the desire to exchange money which cannot be used as reserve for that which can be would have some force; but, under many circumstances, it would probably prove rather inadequate. another disability which contributes to the homing power of a bank note, and which is actually used in the case of our old note, is not used with this new note--i mean, the fact that they are not receivable for customs dues. the decision to omit this provision was perhaps wise; but it throws out a potent motive for sending notes home, and thus throws away an opportunity to make better provision for their contractility. on the whole, then, it must be acknowledged that, in so far as homing power is dependent on giving to outsiders strong and persistent motives for sending notes home, the new law is not altogether satisfactory. we have seen that there is very little in the new system to secure that the notes shall have good homing power--shall get home by what we have called the _driving-in_ process. is the system better off as respects the _drawing-in_ process? are matters so arranged that the issuing bank will have the power and the desire to withdraw its notes--or at least contract the currency proportionately--when the need for the notes has fallen off? as respects the first part--making sure that the issuing bank shall have the power to retire its notes, or at any rate to effect a corresponding contraction of the currency--the new system is practically perfect, as indeed was the old one. that is, any reserve bank desiring to contract its note obligations may at its discretion deposit with the federal reserve agent reserve notes, gold, or lawful money. obviously, this, if not strictly a contraction of its note circulation, at least brings about the desired contraction of the general circulation. when, however, we consider the provisions of the new law for insuring that reserve banks shall desire to contract their circulation when the special need has passed, we find that the law does not promise quite so well. the favorite device for accomplishing this result has been, of course, a tax on issues, similar to the per cent. tax of the german system. apparently, the new law provides for something equivalent to this in the shape of an interest charge by the federal reserve board, the rate to be fixed by said board. how far this device will prove effective in practice it is not safe to predict. in order that it should induce the banks to contract their circulation, circumstances must have arisen under which the issuing bank would be earning on its outstanding notes a profit smaller than the tax itself. now, it does not seem certain that an excessive issue of notes would necessarily bring about this condition. in the first place, in the absence of good homing power, a volume of notes in excess of business needs would not necessarily cause an accumulation of those notes in the vaults of the bank issuing them. secondly, so long as member banks are free to keep their balances in banking institutions other than their reserve banks, an excess of notes would not necessarily cause the general cash holdings of reserve banks to be abnormally large. for, so long as the ordinary new york banks are permitted to pay interest on bankers' balances, country banks will to a considerable extent keep their balances with these outside new york banks; and it seems not unlikely that the excessive monetary stock thus accumulating in new york city would, instead of getting into the hands of the new york reserve bank, largely remain in the hands of the outside banking institutions and be employed more or less as it has been in the past, that is, in financing doubtful enterprises and supporting excessive speculation. but if the reserve banks do not feel the pressure of excessive issues in the shape of accumulations of notes or some form of money in their own vaults, they may conceivably be able to invest advantageously all the funds in their possession, and, in that case, the rate of interest charged by the federal reserve board will not furnish an adequate motive for the retirement of their issues. doubtless, however, this may in some degree be answered by saying that even an excess which was felt only outside the reserve bank would, after all, compel the reserve bank to contract its issues, since it would lower the rate of discount so greatly that reserve banks could not profitably invest their ordinary holdings, and consequently would wish to get rid of the interest charge. perhaps this is true; but it would by no means insure the prompt and full contraction which most reformers have considered desirable. from the foregoing it would seem that one of the devices for inducing the reserve banks to contract their issues after the need for them had passed--that is, charging interest upon such issues--is not certain, at any rate, to prove adequate; it will not surely eliminate the winter plethora in new york city which is supposed to stimulate and support excessive stock speculation. but the new law contains another provision which may be viewed as a device for supplying the issuing banks with a motive for contracting their issues, namely, the requirement that such banks shall keep a gold reserve equal to per cent. of their issues. is this likely to prove effective? probably not. whatever might be true in panicky times, it seems certain that in an ordinary year the gold holdings of a reserve bank will be much above per cent. of its note issue. if this be true, the maintenance of this per cent. could become difficult only when the excess of money was so great as to cause a dangerous exportation of gold from the country, and this surely would show a very inadequate degree of contractility. in short, the new law does not insure that issuing banks shall be sufficiently disposed to draw in their notes any more than it insures that outsiders will drive them in. it would seem, then, that the new law does not promise to give to the note issue the degree of contractility which has hitherto been considered desirable. in other words, there is some point in the fear expressed by many bankers that the new law will result in note inflation--at least in so far as the avoiding of this danger is dependent on the contractility of the note issue. very likely, however, the possibility of such inflation is sufficiently guarded against by other provisions of the law. we have discussed the adequacy of the new note issue in respect to seasonal or ordinary elasticity. we pass on now to consider its adequacy in respect to emergency elasticity--the elasticity which enables a currency to adjust itself to those extraordinary fluctuations in need which mark a banking panic and the depression that follows. broadly speaking, it is pretty certain that at this point the new law will get a more favorable verdict than in the previous case. as pointed out in an earlier connection, the banking panic, when fully developed, gives rise to three difficulties and so to three needs: ( ) funds to relieve the antecedent stringency which threatens a complete collapse of the credit structure; ( ) a circulating medium for ordinary trade when a general suspension of payment by the banks has brought on a money famine; and ( ) a prompt and thoroughgoing contraction of the circulation in the depression which follows the panic. now, there surely can be no doubt that, under the new law, the availability of an issue sufficient in volume instantly to relieve the antecedent stringency, and so to put a stop to a panic before it had developed serious dimensions, is assured. in fact, it is not at all improbable that, under the new system, the reserve banks will be able to check the development of such a panic at the very outset without increasing at all their note issues. but, if this does not prove true--if it turns out that more currency is needed for this purpose--there would seem to be no shadow of doubt that the new system will insure the forthcoming of such currency both of a quality and in a quantity which will be fully adequate to the task put upon it. ( ) the notes to be issued, being obligations of the federal treasury, will be as acceptable as gold even on the eve of a panic. ( ) there is no limit to the absolute amount of these notes. ( ) the practical limit set by the requirement that discounted paper shall be furnished as a basis for their issue is of no real significance, since such paper will undoubtedly be vastly greater in volume than any need which could arise. accordingly, there can be no doubt that the new system provides all the expansibility needed to abort, or reduce to comparative harmlessness, any panic which might arise. a word now with respect to the second need which an emergency circulation is supposed to meet, that is, an ordinary circulating medium for trade when banks have by common consent suspended payment. in the first place, if we are right in supposing that the new law will surely prevent any panic from reaching such a degree of intensity, it is obvious that we shall not have occasion to meet the particular difficulty here under consideration--that our note issue will not be called on to display this particular sort of elasticity. if, however, it be supposed that the foregoing prediction does not turn out to be correct--if experience proves that panics can still go so far as to cause banks generally to suspend payments, to hold on to every form of reasonably solid money, and to try to satisfy the public with substitutes--our verdict for the new currency would necessarily be less favorable. we should have to admit that the new law does little or nothing to relieve such a situation. broadly speaking, the new money will be altogether too good to meet this particular need. banks that had reached a stage of panic sufficiently intense to cause them to suspend payment--to hoard the ordinary forms of money--would be sure to hoard money as good as those notes are bound to be. that is, the new issue would immediately pass into hoards, as did the greenbacks which the secretary of the treasury reissued during the panic of , and, therefore, would bring little if any relief to the currency famine which had developed. in fact, it is almost impossible to conceive any form of note fitted for this particular task except one which was so bad that there was no danger of its being hoarded. that is, the only proper way to meet this particular need of a severe panic is to make sure that it does not arise at all; and, in this respect, the new law promises well. we come, finally, to the third need which emergency elasticity is supposed to meet, that is, a prompt and great contraction of the circulation when the panic has passed and the inevitable business depression consequent upon such a panic has set in. here, again, though not in the same degree as in the last case, if the new law proves as successful as many conservative students expect, the need in question will be little, if at all, experienced. we shall usually escape the extreme business inflation of the antepanic period; the panic itself will be much abated, if not completely eliminated; and, in consequence, the trade reaction which naturally follows a panic will be much diminished in intensity. if this turns out to be true, the circulation will never again show such an extraordinary glut as characterized the winter of - . nevertheless, it can hardly be doubted that, after even an incipient panic, there will be some reaction, and consequently a more or less plethoric condition of the currency will follow. will the new issue have sufficient contractility to meet this need? earlier in this paper we have seen that the conditions attached to the new issue are in general not favorable to contractility, in that they do not provide for either the prompt driving home or the prompt drawing home of the notes when the necessity for their issue is past. outsiders lack adequate motives for sending the notes home; issuers lack adequate motives for calling them home. the case for emergency contractility, however, is somewhat better than the case for ordinary contractility. first, it is probable that the homing power of the note will prove greater at such a time than in an ordinary year, for, at such a time, outside banks will not be able to find investments for their funds, since speculative trading will disappear altogether and business generally will be at a very low ebb. again, it seems certain that the issuing bank will, in this case, have more than the usual motive for bringing about a contraction of the circulation. the chief reason why such a bank may not be eager in ordinary times to hasten the retirement of its notes is the fact that, provided the notes do not accumulate in its own vaults, such a bank will gain more by using the funds in its possession to make loans than it would by using them to retire notes, assuming that the interest charge made by the federal reserve board is not placed excessively high. but it is practically certain that, in the depression which follows a panic, no reserve bank will have opportunities for keeping all of its funds busy; and since, in that case, the interest charge, however small, will be a dead loss, the bank will have adequate motive for effecting, as promptly as possible, an adequate contraction of its note liabilities. this motive would be still further strengthened should the glut prove sufficient to cause a decided drain of gold, since, in that case, the reserve banks will find difficulty in maintaining the required per cent. reserve. on the whole, then, we seem warranted in affirming that, as respects emergency elasticity, the new notes will give no serious disappointment. finally, as respects elasticity in general, though the note issue, viewed by itself, does not seem quite fitted to satisfy the tests which an old-fashioned advocate of elasticity is inclined to impose upon it, yet, when we take the new law as a whole, it seems not unreasonable to affirm that it promises to accomplish, directly or indirectly, most of the ends which we had hoped to attain through elasticity and hence promises to give us a system which in essentials is truly and adequately elastic. notes printed and issued [ ]during the year the circulation of federal reserve notes has increased to $ , , as of december , . believing that the country should be prepared against any contingency, the board had authorized the printing of about $ , , of these notes. almost one-quarter of the total supply printed has been placed in circulation. on december , , however, only $ , , of notes secured by commercial paper pledged with the federal reserve agents was outstanding as an obligation of the federal reserve banks. the liability of the federal reserve banks as to the remainder has been discharged by the deposit with the federal reserve agents of a like amount of gold and lawful money. this result has been achieved by the federal reserve banks in responding to requirements, for currency by issuing federal reserve notes rather than by parting with gold. while the gold pledged with the federal reserve agents represents a very valuable protection in case of a substantial demand for gold, it must be observed that the process is expensive without, at the same time, giving to the federal reserve banks that additional strength and lending power which they would secure in case the law were amended so that the federal reserve banks would remain liable for the outstanding notes, but, on the other hand, would retain property title to the gold delivered to the federal reserve agents, which, in that case, would not be paid in to extinguish the liability upon the notes but would be deposited as collateral security against them. impounding gold [ ]on november , , the first shipment of federal reserve notes was received by the federal reserve agent [of the federal reserve bank of new york] from the comptroller of the currency. on november the bank pledged with the federal reserve agent $ , of commercial paper rediscounted by member banks and received from him a similar amount of federal reserve notes. these notes were not required by the banks which made the rediscounts, as they had already withdrawn by checks the credits so established. they were taken by this bank for its general use. the issue of federal reserve notes gave the reserve bank the opportunity of affording to its member banks complete interchangeability between book and note credits. the bank therefore established the policy of issuing federal reserve notes freely to any member bank desiring them whether the credit thus withdrawn was established by it through rediscounting, or the deposit of checks, or the deposit of gold or lawful money. in practice, however, most credits withdrawn by notes have been established by the deposit of checks which have been collected by this bank in gold or lawful money through the clearing house. accordingly, the accumulation of cover in the hands of the federal reserve agent has been mainly gold, with but a small amount of rediscounts. the processes provided by the act for the issue of federal reserve notes to the reserve bank permit complete interchangeability between gold and rediscounts held by the agent. gold may be substituted for rediscounts and rediscounts for gold, in accordance with the requirements of the reserve bank. during the entire period its requirements have been for notes with which it might exercise its statutory right to "exchange federal reserve notes for gold, gold coin, or gold certificates." the policy of the federal reserve bank has resulted in greatly strengthening its gold position and its ability to assist its member banks or other federal reserve banks should they at any future time seek credit in order to withdraw gold for domestic or foreign uses. through this policy also it has been able potentially, at least, to retard the expansion of credit by impounding in the hands of the agent a large volume of gold which might otherwise have found its way into bank reserves already superabundant. furthermore, through this policy it has been able to take the first step toward accomplishing one of the purposes of the act set forth in its title, _e. g._, "to furnish an elastic currency." there are two forms of elasticity, one of _quantity_ and the other of _quality_, both provided for in the act. from the point of view of cover, the gold certificate is completely inelastic. it stands at one extreme of our currency, with a dollar of gold set aside behind each dollar of paper. at the other extreme stands the national-bank note, with only cents of gold set aside behind each dollar of paper. the assets of the issuing bank make it good, but its elasticity is nullified by the requirement that it must be secured dollar for dollar by government bonds. between these two extremes the federal reserve note, a new form of currency, has been introduced. for each dollar of this paper there is set aside from cents to $ of gold. as in the case of the national-bank note, the obligation of the united states and the assets of the issuing bank secure it. the process in which this and other federal reserve banks have been engaged is the substitution, as a circulating medium, of a note which is elastic in quality for the inelastic gold certificate. gold is the most uneconomical medium of hand-to-hand circulation since, when held in bank reserves, it will support a volume of credit equal to four or five times its own volume. what the reserve bank does in accumulating gold behind its federal reserve notes is to establish with the holder of each note a credit which may be availed of whenever the occasion requires. with this credit established it can convert at will its gold-covered notes into notes covered partly by gold and partly by commercial paper. in times when credit is becoming strained and bank reserves need strengthening or when gold must be exported, this conversion will take place, and after the strain is over the gold cover will be restored through the repayment of the rediscounts substituted for it. in this way elasticity of quality in our currency is obtainable. but it should not be construed as in any way a deterioration of the currency contemplated by the act. quite the reverse is true. the act provides for the issue of federal reserve notes in unlimited amounts, with cents of gold behind each dollar of paper. this is elasticity of quantity and it becomes operative with the minimum of gold cover. elasticity of quality, on the other hand, operates with a gold cover always above the per cent. minimum and ranging as high as per cent. in order to be prepared for any currency demands which might be made upon it, the federal reserve bank of new york in the spring of adopted the policy of having printed and keeping constantly on hand a supply of federal reserve notes substantially in excess of the amount of emergency currency which, experience shows, this district might be called upon to supply. the maintenance of this policy and of the policy of issuing federal reserve notes freely has entailed a heavy cost upon this bank. unissued federal reserve notes are carried at cost on the books of the bank, and at the end of each month the amount of notes issued to the bank during the month is charged off at cost. the shipment of notes unfit for circulation to the comptroller of the currency at washington for cancellation and destruction is a further item of expense in connection with the maintenance of these policies. the directors and officers of the bank, however, feel that the results accomplished amply justify the expense incurred, and consider that the added strength furnished the bank by the gold thus accumulated is perhaps the most important result of the operations of the period. some reduction has already been made in the cost of printing federal reserve notes, and it is to be hoped that further experience and study will enable other substantial reductions to be made in the cost of preparing for issue what has already become an important element of the circulating medium of the country. the act provides that all expenses in connection with the issue and redemption of federal reserve notes shall be borne by the federal reserve banks, and in view of the service the banks are performing in accumulating gold through the medium of these notes, the feeling is quite general among their officers that the notes should be furnished to them at the lowest possible cost consistent with the high quality of workmanship required. the design of the notes is not altogether satisfactory for efficient handling. in sorting notes it is necessary to be able readily to distinguish between notes of this bank and notes of other reserve banks. this would be greatly facilitated if the printing of the distinctive number and letter of each bank were made more general on the face of the note. the financial policy of the federal reserve banks[ ] it seems clear that the cardinal principle in the management of the federal reserve banks will be to disregard the course which will lead to maximum profits, following instead the path which will lead to the greatest safety and which will permit these banks to be of the greatest service to the nation. large reserves should be maintained, and these should consist chiefly of gold. the payment of interest upon bankers' deposits and government deposits should be avoided, if possible, for the reason that the payment of interest will force the keeping of smaller reserves, if the cumulative dividend is to be earned. the banks should be managed, not from the standpoint of profit, but from the standpoint of safety. yet this is but one side of the policy of the federal reserve banks. their power and influence can be made to extend much farther than would result solely from the wise management of their own affairs. these banks are the financial trustees of the nation. the country will look to them to see that they exercise over the member banks a closer supervision and discipline than has been possible in the past. supplementing a negative control by the bank examiners, who are powerless so long as the letter of the law is observed, the federal reserve banks will be a great positive force. the federal reserve banks, with the approval of the federal reserve agent or the federal reserve board, may conduct examinations of a member bank, both for the purpose of ascertaining its condition, and, what will be of equal importance, for the purpose of determining the lines of credit which are being extended by it. in the long run, the greatest work which the federal reserve banks can do for the business men of this country is to improve and standardize the methods of commercial borrowing. i believe it is possible for these banks, with the approval of the federal reserve board, under the power just quoted, to establish a comprehensive credit information clearing service through which the aggregate loans of all large borrowers can be known by any bank official and through which excessive borrowing or the lending of money to concerns pursuing unwise financial policies can be checked before disaster overtakes them. this is one of the greatest needs of our banking system.... relations of federal reserve banks with member banks[ ] the aim of this bank [federal reserve bank of new york] at all times has been to maintain frank and friendly relations with its member banks. at every meeting of the new york or new jersey bankers' associations, or of their groups, to which invitations have been received, one or more of the directors or officers have been present and discussed the development of the various functions of the system. when the establishment of an intradistrict collection system was under consideration, the directors and officers invited representative member bankers from all parts of the district to confer with them at the office of the bank. the plan finally adopted was thoroughly discussed in all its aspects and a consensus of opinion seemed to prevail that it was a fair and reasonable plan. when the conditions under which state banks should be admitted to the reserve system were under consideration three conferences were held by the directors and officers of the bank, one with national bankers, one with state bankers, and one with trust company officers, from various parts of the district, to ascertain their views upon the question at issue. in every case the policy has been pursued of dealing frankly with those present, in order that they might understand fully how the action under consideration would affect them. the officers have expressed themselves at all times as desirous of establishing personal relations with officers of member banks and have invited them to call at the bank when in new york city. yet a year has gone by and officers of probably not over per cent. of the member banks have done so. many of them still have the feeling that the bank is a branch of the government. their experience with the government consists principally of the statutory and supervisory relationship which exists between them and the comptroller's office. the conception of the relation of this institution with them as co-operative makes headway slowly. the fact that the national banks were practically compelled to join the system naturally retards the development of the co-operative idea. the change of attitude, upon which the success of the system will ultimately depend, will probably come slowly, but there are already signs, as we enter upon the second year of the system, that the banks are getting more accustomed to it and appreciate the results it has already accomplished. it is hoped that during the coming year, with organization pressure somewhat lessened, more time can be devoted by the officers to developing personal relations with the officers of member banks. the present attitude of the member banks toward the reserve bank may be summarized as follows: the new york city banks, upon which the strain of all crises first and chiefly falls, fully understand the value and benefits of the system. while regretting the loss of bank deposits which will probably be drawn from them (estimated to be as high as $ , , ), they are nevertheless hearty supporters of the system, at all times co-operative in their attitude. many of the banks in other large cities are unable to take full advantage of the lowered reserve requirements, but in spite of the loss of interest on their reserve balance, most of them understand what the system in its larger aspects means for american banking and generally give it their support. while the same may be said of many of the country banks, yet it is among the country banks as a class that most of the apathy and hostility to the federal reserve system which still persists is found. their opportunities and earnings are relatively small, and in order to live they must figure closely. they feel the loss of interest on reserve deposits; the absence, as yet, of dividends on their capital contribution; and the prospective loss or decrease of the exchange they generally charge on remitting for checks drawn upon them. many banks in industrial centres are precluded by the activity of their business from taking advantage of the reduction in the required reserve. they believe that they will, in fact, be required to carry an even larger reserve than heretofore in order to obtain collection service for notes, drafts, and non-member bank checks and the various other services now rendered by their reserve agents, but not yet undertaken, by the reserve banks. it is very natural that they should view with reluctance the termination or diminution of long-standing business associations with their reserve agents. few of them, as yet, conceive of the reserve bank as their active reserve agent, performing all the services which go with the relationship. the dormant accounts most of the banks maintain with the reserve bank are, perhaps, indicative of their attitude toward it. relatively few banks of this district are borrowers; in good times and bad they have been able when necessary to borrow from their city correspondents on bonds or on the indorsement of their directors, two avenues which are now to be closed to them. the rediscounting privilege has been little availed of and the larger functions of the federal reserve system, such as influencing domestic rates and international gold movements through the development of a discount market and by dealing in foreign bills, appear remote from their spheres of activity. they feel that the system has few advantages to offer in return for the cost it entails upon them. all of these points will be felt with increasing acuteness by the country banker as his reserve transfers approach completion and as reduced balances result in reduced service from his city correspondent. his point of view is outlined thus frankly in order that the difficulties he sees may be clearly recognized and steps taken gradually to remove them. the development of a more satisfied relationship requires progress on the part of the reserve bank and a willingness to co-operate on the part of the country banker. the reserve bank should organize a complete collection system embracing the handling of notes, drafts, and items on non-member banks, which eventually will bring all the members into daily active relations with the bank. it must be ready to act for member banks in the purchase, sale, and custody of securities; to supply credit information on names whose paper is offered by brokers; to give its members information concerning methods of developing the new functions which the act authorizes them to exercise; to perform the services now rendered by their reserve agents; and generally to assist them in every reasonable way. the member banks should look upon the reserve bank not as an alien but as their own institution. they own all its capital and most of its resources, and they control its management through the directors they elect, subject always to the supervision of the reserve board. at the reserve bank they may borrow as a standing right and not as a favor which may be cut off. they no longer have to buy or carry bonds to serve as security for loans; the paper of their own customers, large or small, will now serve as their security. while panics in the past may not have affected them, they have been disastrous to the business interests of the country, who are their customers; and their contributions to the reserve bank should be recognized as a form of insurance not merely for themselves but for their customers as well. if this insurance is expensive and makes some changes in the nature of their business, the act should be carefully studied with a view to making the most of the new functions it provides. new avenues of activity should be looked for. the banks which will get the most out of membership are those which are the first to see and develop the opportunities it provides and to educate their customers to the protection and facilities they will enjoy through the system. the occasion is a favorable one also for the correction of abuses. customers will do things in the name of the federal reserve system which they have never done before. the experience of banks in using the forms provided by the reserve bank to get statements from their borrowers is evidence of this. the occasion should be seized also to increase the balances of depositors who carry unprofitable accounts. to assist member banks in studying their accounts this bank has had under preparation by chartered public accountants a reasonably simple form for analyzing accounts which may be obtained by banks desiring to use it. it is the duty of the directors and officers to understand not only the problems of the reserve bank but those of the member banks as well; and it has been their endeavor during the past year to give special study to those of the country bank. several suggestions for the relief of the country bank have come to their notice. one of these, which the american bankers' association at its seattle convention favored, was to permit the per cent. of reserve which the member bank may carry either in its vaults or in the reserve bank, to be deposited with member banks not more than miles distant and count as reserve. this seems to be contrary to the spirit and intent of the act, which is primarily to centralize reserves in federal reserve banks. another suggestion which seems more worthy of consideration is that the percentage of reserve required for country banks should be somewhat further reduced. when the reserve transfers are completed checks in transit can no longer count as reserves. it is clear, therefore, that the reserve reduction contemplated by the act will not be realized in practice. a further reduction in the reserve requirements would, in the case of many banks, result in a reserve less than the amount their business actually required, and would enable them to carry the amount thus freed wherever it would best serve their particular business, and, if they so desired, to maintain some relations with present city correspondents. it would lead away from the present rigidity of bank reserves toward greater flexibility and a better understanding of their meaning and purpose. relations between the federal reserve bank of minneapolis and its members [ ]the ninth federal reserve bank has sought to make the federal reserve act fully operative within its district. during the spring of it had opportunity to demonstrate its effectiveness in meeting the requirements of agriculture in the northwest during the planting season, and rediscounted liberally for member banks, in order to enable them to better satisfy the requirements of farmers. it relieved local pressure at a number of points where manufacturing enterprises and general business were depressed because of war conditions, and had opportunity to show that it can efficiently meet the demands of industry. again, in the fall of the year, when an adverse season had created large amounts of immature corn, it was able to perform a very valuable service in assisting member banks to meet the requirements of farmers who were suddenly compelled to make provision for utilizing a valuable forage crop. during the prevalence of the foot-and-mouth disease it was able to come to the assistance of many banks in the western part of its territory, which had applications for loans from numerous stockmen who had cattle ready for market, but were unable to ship on account of quarantine conditions. the service above indicated, while not perhaps of notable consequence in any single case, consists in the aggregate of a very valuable degree of assistance, which would not have been available except for the federal reserve bank, and without which, portions of the district would have encountered considerable hardships. relations between the federal reserve bank of boston and its member banks [ ]owing to the unusual conditions existing in the money market, and to the fact that the reserve city banks offer facilities to the country banks which this bank has not yet developed, more particularly in connection with the collection of checks and other items, the latter banks have carried only their minimum reserve requirements with this bank and have used its facilities only to a limited extent. the relations between country bank officials and the officials of this bank have been most cordial. while many of the banks in this district are borrowing, most of them find it much more convenient to go to their correspondent bank and borrow, either in the form of a demand loan, with or without collateral, or against a certificate of deposit. the comptroller's calls on the several dates show the total borrowings of member banks in the district as compared with their rediscounts with this bank, as follows: _total _borrowed, borrowed._ f.r.b._ dec. , $ , , $ , mar. , , , , may , , , , june , , , , sept. , , , , nov. , , , , the officials of the city banks on the other hand are apparently satisfied with the progress made in the development of this bank's functions. while but few of the boston banks have rediscounted with us, almost all have intimated that should occasion arise they would do so. furthermore, several boston banks have entered into the acceptance business to a large extent, and the assistance that this bank has given in the matter of rates and market for acceptances has done much to bring it into favor with those banks. the boston banks have also used this bank to a large extent in exchange transactions, and the services offered by the gold settlement fund have been used almost exclusively by those banks. thus far boston banks have received more benefits from this bank than have the other banks in this district. a possible exception to this is in aroostook county, me., where, owing to an unusual situation surrounding the principal industry, the potato crop, banks have relied on this bank to a considerable extent to carry them through a trying period. the moral effect of having the federal reserve bank of boston stand behind them was not only appreciated by those banks, but enabled them to handle their business much more satisfactorily and to finance themselves without having to call upon this bank to an undue extent for rediscounts or without embarrassing their customers. federal reserve banks and the acceptance market [ ]the right to accept drafts was conferred on new york state banking institutions by the act of april , . shortly afterwards a few acceptances were reported, principally against securities. it was not until the derangement of international credit facilities at the opening of the european war that american bankers' acceptances, especially those relating to foreign commerce, came into existence in substantial volume. at that time some of the trust companies with foreign connections extended credits freely to their customers to replace credits formerly granted by european banks which had been either withdrawn or reduced; they also accepted drafts in large volume. on and after may , , member banks were authorized also to accept drafts drawn upon them involving the importation or exportation of goods.... the monthly purchases of acceptances by this bank [the federal reserve bank of new york] in the new york market have been: _number_ _number_ _of pieces._ _amount._ _of pieces._ _amount._ _for itself._ _for other reserve banks._ february , , . , , . march , , . , , . april , , . , , . may , . , , . june , , . , . july , , . , , . august , , . , , . september , , . , , . october , , . , , . november , , . , , . december , , . , , . total , , , . , , , . the policy pursued by this bank thus far has been to purchase good acceptances whether or not the acceptor was a member bank.... the reserve bank and the market rate for the discount of such bills in new york has been for nearly a year, and is now, lower than the rate for similar bills in london. the relatively small volume of such credits which american banks have succeeded in making operative even under the unusually favorable opportunity which the war presents for their extension, is evidence of the difficulty which will be encountered in developing the acceptance business in the united states. some of the fundamental difficulties are: ( ) the disinclination to break old banking connections. ( ) the difficulty of educating handlers of bills in distant places as to american credits. ( ) the lack of bill buyers in foreign countries who will quote as low rates on dollar as on sterling bills. ( ) the natural prejudice of bill buyers in foreign countries in favor of a bill of known currency and against a bill of as yet unknown currency. ( ) the lack of men trained to exercise the judgment and financial responsibility required of them as managers of branches or agencies which american banks might establish in foreign countries. ( ) the inferior communications for both goods and mail between the united states and foreign countries as compared with those between great britain and foreign countries. only time, experience, and patient effort will remove these handicaps to the elevation of dollar exchange to its proper position in international finance. the business, however, is developing and will continue to grow as our banking machinery and connections extend throughout the world. the act permits member banks to accept an amount of bills not exceeding per cent. of their capital and surplus. by the amendment of march , , under certain conditions they may be authorized by the federal reserve board to accept up to per cent. of the capital and surplus. the following banks in this district have received such authorization: _amount of capital and surplus._ bank of new york, new york $ , , mechanics & metals national bank, new york , , atlantic national bank, new york , , american exchange national bank, new york , , as this bank has probably been the largest single purchaser of bankers' acceptances, it has been able, as it gained experience, to exert some influence toward standardizing practice and form.... the amended regulation[ ] issued september , , considerably broadened the field of acceptances eligible for purchase and encouraged an increased volume of these instruments. the further amended regulation issued december , , covering the purchase of bankers' acceptances arising out of domestic transactions relates to a class of bills which national banks are not authorized to accept. when accepted by institutions of high credit they have a ready market, though at a fractionally higher rate than acceptances based on foreign transactions. [ ]new england imports a large volume of hides and wool from south america and cotton and jute from the orient and other sections of the world. these shipments in the past have been financed through credits drawn on european centers. since the opening of the federal reserve banks these foreign trade transactions have been financed to a large extent through dollar credits drawn on this country and the acceptances arising there from have found a ready market in the federal reserve banks. several of the member banks in this district have entered this new field of finance and the federal reserve bank of boston has used every effort to further and develop that business, not only by buying a large amount of that class of paper, but also through furnishing favorable forward discount rates to assist in protecting its member banks. the following member banks have entered this field: . first national bank, boston, mass. . fourth-atlantic national bank, boston, mass. . merchants national bank, boston, mass. . national shawmut bank, boston, mass. . old colony trust co., boston, mass. . second national bank, boston, mass. . merchants national bank, worcester, mass. under special permission of the federal reserve board the first national bank, of boston, and the national shawmut bank, of boston, have been given authority to accept up to per cent. of their capital and surplus. it is of interest to note that the former bank has reported the largest amount of acceptances of any member bank of the federal reserve system. clearings and collections in practice [ ]section of the federal reserve act made general provision for the establishment of a system of clearance of checks throughout the united states, each federal reserve bank being required to act as a clearing house for its members if directed by the federal reserve board, while the federal reserve board was authorized to clear for the reserve banks themselves. the board had from the first recognized its duty to make this provision of the law effective as fully and at as early a date as conditions would permit; and in its first report spoke of this as "one of the most important responsibilities with which it is charged under the act." so, regarding its duty in this particular, it undertook early in the preparation of a general circular and regulations intended to provide for the clearing of checks within the several federal reserve districts, while it also took under advisement the establishment of a gold settlement fund at washington for the purpose of clearing obligations between federal reserve banks. the latter undertaking has been carried to a successful conclusion and the gold settlement fund has been in full and satisfactory operation since about the first of june. the board, however, had not advanced far with its work relating to the intradistrict branch of the clearance system before technical and other difficulties began to make their appearance. many banks, both city and country, throughout the system were opposed to the enforcement of the provisions of the law because of the loss of exchange charges which would thereby be entailed upon them. legal questions were also raised, it being argued that there is no power to compel a member bank not located in a federal reserve city to pay or have charged to its account at the federal reserve bank of its district a check which it had not seen and approved prior to the time of presentation at its own counter. for the purpose of ascertaining the board's powers in this connection the opinion of the attorney general has been requested. while the board was not inclined to attach undue importance to objections based upon self-interest, it felt that it must take cognizance of all legal objections, and it recognized that the clearing question was essentially a reserve problem rather than a technical question or a mere matter of administration. inasmuch as the federal reserve act had granted a period of three years within which to effect the final transfer of reserves to federal reserve banks (balances with correspondents counting as reserves in the meantime), there was a certain ground for objection to the immediate introduction of complete clearance at federal reserve banks. as is well known, reserve balances in some reserve cities have heretofore been used for the purpose of providing for exchange and collection operations, and so long as this function on the part of city correspondents continued there was some argument in favor of deferring any compulsory application of par clearance at the reserve banks. study of the problem, moreover, shows that, pending the time when state banks enter the system in larger numbers, it may be necessary for some member banks to collect and clear through their correspondents in reserve cities. so complex was the situation and so serious the difficulty involved in the compulsory application of any system, however carefully conceived, that the board felt it would be well if member banks could be brought to recognize of their own free will the advantages of a general and nation-wide clearing system--advantages which would inure not only to the benefit of the public at large, but ultimately to the direct benefit of the member banks themselves from the purely business standpoint. it therefore took under favorable consideration the question of a voluntary clearing system. both the difficulties of a compulsory plan and the probable merits of a voluntary system had been strongly represented to the board by the governors of the respective federal reserve banks who at various meetings had thoroughly canvassed the whole situation. under a plan, proposed by the governors, which in most districts became effective during june, , provision was made for the acceptance at par by the federal reserve bank of each district of checks drawn upon any member bank of that district which had previously assented to the provisions of the scheme. it was hoped that a very large number of member banks would promptly affiliate themselves with the new system of clearing and that the natural force of economic competition would ultimately attract to it those who at first might hesitate. this system, as already stated, became operative in most districts during june, . prior to this whole discussion, however, two districts had already undertaken the application of the clearing provision of the law. early in december, , district no. and district no. (kansas city and st. louis) had sought and obtained permission to apply to their members a complete system of required clearing. this system had been in full operation in both districts prior to the general application of the voluntary system. upon the inauguration of the latter the directors of the federal reserve bank of st. louis deemed it wise to offer to their member banks the option of withdrawing from the clearance system if they so desired; but so successful had been the working of the plan that comparatively few retired, about per cent. of all continuing their membership. the federal reserve bank of kansas city continued its required system as before for the benefit of all its member banks, numbering . as about banks continued their membership in the st. louis district, a total of approximately , was included in the clearing system of the two districts in question. outside of these two districts about , member banks voluntarily affiliated themselves with the clearing system within a short time after its inauguration, and there was a subsequent net inward movement of about additional members, making approximately , banks which of their own free will have assented to the voluntary clearing plan. this is considerably less than per cent, of the institutions eligible for membership, and the proportion has been so small as to prove a severe disappointment to those who had confidently expected that the foresight and enlightened self-interest of the member banks would speedily accomplish the desired result. some progress has been made through the action of the banks, both member and non-member, in improving exchange conditions and in providing for the clearance of country checks at points where this practice has never before prevailed; but in the main comparatively small advance has thus far been made in rendering effective the provisions of the law requiring the standardization of exchange and clearance practices. this slowness is largely due to the failure of jobbers and merchants to appreciate the advantages of the clearance system and to enlarge its membership by insisting that their own banks join and co-operate in the plan. the subject has recently been reopened at the conferences between the governors of the federal reserve banks, the federal reserve agents, the transit managers of the reserve banks, and the board itself, with a view to extending the present system not only in the several districts themselves but as between the various districts. for many years it has been lawful for banks to count as reserves deposits with other banks. it was never the intention of the federal reserve act that member banks should continue the maintenance of these reserve accounts. on the contrary, the full meaning of the act is manifestly opposed to such an idea. it is the plain conception of the act that the reserve banks should, to a very large extent, if not entirely, perform the work that is now being done by correspondent banks in this respect. this means that the reserve balances to be carried in the future by the reserve banks instead of by the correspondent banks should serve as the basis for a system of clearing and collecting the exchanges of the country. whatever can be done to bring about the prompt and effective use of this new system of bank settlement will be done. branches and agencies [ ]the question of branches of federal reserve banks has received careful attention during the past year. there has been intimation from several quarters that the establishment of a branch at a given point would be acceptable to the banks of that place. only in one instance--that of new orleans--did the board receive a definite request from a federal reserve bank to establish a branch. believing that new orleans and the adjacent territory could make advantageous use of this additional banking machinery, the board authorized the establishment of a branch of the federal reserve bank of atlanta to be located in new orleans, and this branch was opened for business on september . operations at the new orleans branch have proceeded satisfactorily, and the institution has been of considerable use to the local banks. the branch is already more than self-supporting. investigation and experience have seemed to show that, at least for some years to come, the organization of branches with completely equipped offices, vaults, and the like, and with a full staff of salaried officials, will be too heavy an expense for most of the reserve banks, yet, that valuable service could be performed by local offices of the several banks in not a few places. the board has, therefore, had under consideration the question whether establishing local agencies might not meet the requirements of the case better than the more fully organized branch office. competent legal opinion is to the effect that the creation of such local offices is permissible under the terms of the law, and the board believes that it may prove practicable to meet banking necessities in many sections of the country by this means. proposed amendments to federal reserve act[ ] a year's experience in the operation of the federal reserve act has confirmed the board in its profound conviction that the act has been one of the most beneficial pieces of legislation ever adopted by congress. not only have its fundamental principles been fully vindicated but in most details the working of the measure has been successful. the act, however, is a progressive piece of legislation and creates new conditions as the result of its own operation. modification in its terms growing in part out of these new conditions will subsequently be required from time to time. for the present the board presents the following suggestions for amendments to the act: ( ) in addition to powers now possessed in this connection by federal reserve banks and national banks, the latter should be permitted to subscribe for and hold stock in banks organized for the special purpose of doing a banking business in foreign countries. ( ) with the approval of the federal reserve board the issue of federal reserve notes to federal reserve banks should be permitted either against the deposit of an equal amount, face value, of notes, drafts, bills of exchange, and bankers' acceptances acquired by federal reserve banks under sections and of the act, or of gold, or of both, provided, however, that gold so deposited with a federal reserve agent shall count as part of the reserve required by the act to be maintained by the bank against such notes outstanding. ( ) the acceptance system, provision for which is made in foreign trade operations by the federal reserve act, should be extended to the domestic trade in so far as relates to documentary acceptances secured by shipping documents or warehouse receipts, covering readily marketable commodities or against the pledge of goods actually sold. there can be but little question of the safety of such acceptances, and their use will tend to equalize interest rates the country over and help to broaden the discount market. ( ) permission should be granted to national banks to establish branch offices within the city, or within the county, in which they are located. ( ) in order to enable member banks to obtain prompt and economical accommodations for periods not to exceed fifteen days, the federal reserve banks should be permitted to make advances to member banks against their promissory notes secured by such notes, drafts, bills of exchange, and bankers' acceptances as the law at present permits to be rediscounted or purchased; or against the deposit or pledge of united states government bonds, the purchase of which is now permitted under the law. ( ) the board furthermore recommends that the power of national banks to make loans on farm lands as provided in section be extended so as to permit any national bank not situated in a central reserve city to make loans secured by improved and unencumbered farm land situated within its federal reserve district, or within a radius of miles from the place in which such bank is located, irrespective of district lines. it also recommends that the powers of national banks be further extended to permit any such bank to make loans on any improved and unencumbered real estate located within miles of the place in which such bank is located, irrespective of district lines; provided, however, that the aggregate of farm land loans and other real estate loans made by any national bank shall not exceed per centum of its capital and surplus or one-third of its time deposits; and provided further, that no such real estate loan, as distinguished from a farm land loan, shall exceed a period of one year nor exceed per centum of the actual value of the property offered as security. it is believed that the enactment of these amendments will, besides enlarging the usefulness of the national banks, result in greatly strengthening the operation of the federal reserve act, and more completely realize the purposes of its framers. the text of the amendments designed to carry out these recommendations will be submitted by the board at an early date. the board has under consideration other suggestions for amendments to the federal reserve act concerning which no conclusions have yet been reached, and regarding which the board will take occasion to submit its views to the congress at an appropriate time in the future. statement of condition of federal reserve banks.[ ] _combined resources and liabilities of all federal reserve banks as at close of business on the last friday of each month during ._ resources. [in thousands of dollars.] ---------------------------+---------+---------+---------+---------+---------+ | dec. | jan. | feb. | mar. | apr. | | . | . | . | . | . | | . | | | | | ---------------------------+---------+---------+---------+---------+---------+ gold coins and certificates| | | | | | in vault | , | , | , | , | , | gold settlement fund | | | | | | gold redemption fund | | | | | | +---------+---------+---------+---------+---------+ total gold reserve | , | , | , | , | , | legal tender notes, silver,| | | | | | etc. | , | , | , | , | , | +---------+---------+---------+---------+---------+ total reserve | , | , | , | , | , | commercial paper | , | , | , | , | , | bankers' acceptances | | | , | , | , | united states bonds | | , | , | , | , | municipal warrants | | , | , | , | , | federal reserve notes, | | | | | | net assets | , | , | , | , | , | due from other federal | | | | | | reserve banks, net | , | , | , | , | , | all other resources | , | , | , | , | , | +---------+---------+---------+---------+---------+ total resources | , | , | , | , | , | ---------------------------+---------+---------+---------+---------+---------+ liabilities. ---------------------------+---------+---------+---------+---------+---------+ | dec. | jan. | feb. | mar. | apr. | | . | . | . | . | . | | . | | | | | ---------------------------+---------+---------+---------+---------+---------+ capital paid in | , | , | , | , | , | government deposits | | | | | | reserve deposits, net | , | , | , | , | , | federal reserve notes, | | | | | | net liability | , | , | , | , | , | all other liabilities | | | | | , | +---------+---------+---------+---------+---------+ total liabilities | , | , | , | , | , | ---------------------------+---------+---------+---------+---------+---------+ resources. (continued) [in thousands of dollars.] ---------------------------+---------+---------+---------+---------+---------+ | may. | june | july | aug. | sept. | | . | . | . | . | . | | | | | | | ---------------------------+---------+---------+---------+---------+---------+ gold coins and certificates| | | | | | in vault | , | , | , | , | , | gold settlement fund | , | , | , | , | , | gold redemption fund | , | , | , | , | , | |---------+---------+---------+---------+---------+ total gold reserve | , | , | , | , | , | legal tender notes, silver,| | | | | | etc. | , | , | , | , | , | +---------+---------+---------+---------+---------+ total reserve | , | , | , | , | , | commercial paper | , | , | , | , | , | bankers' acceptances | , | , | , | , | , | united states bonds | , | , | , | , | , | municipal warrants | , | , | , | , | , | federal reserve notes, | | | | | | net assets | , | , | , | , | , | due from other federal | | | | | | reserve banks, net | , | , | , | , | , | all other resources | , | , | , | , | , | +---------+---------+---------+---------+---------+ total resources | , | , | , | , | , | ---------------------------+---------+---------+---------+---------+---------+ liabilities. ---------------------------+---------+---------+---------+---------+---------+ | may | june | july | aug. | sept. | | . | . | . | . | . | | | | | | | ---------------------------+---------+---------+---------+---------+---------+ capital paid in | , | , | , | , | , | government deposits | | | | | , | reserve deposits, net | , | , | , | , | , | federal reserve notes, | | | | | | net liability | , | , | , | , | , | all other liabilities | , | , | , | , | , | ---------------------------+---------+---------+---------+---------+---------+ total liabilities | , | , | , | , | , | ---------------------------+---------+---------+---------+---------+---------+ resources. (continued) [in thousands of dollars.] ----------------------------+---------+---------+--------- | oct. | nov. | dec. | . | . | . | | | ----------------------------+---------+---------+--------- gold coins and certificates | | | in vault | , | , | , gold settlement fund | , | , | , gold redemption fund | , | , | , +---------+---------+--------- total gold reserve | , | , | , legal tender notes, silver, | | | etc. | , | , | , +---------+---------+--------- total reserve | , | , | , commercial paper | , | , | , bankers' acceptances | , | , | , united states bonds | , | , | , municipal warrants | , | , | , federal reserve notes, | | | net assets | , | , | , due from other federal | | | reserve banks, net | , | , | , all other resources | , | , | , |---------+---------+--------- total resources | , | , | , ----------------------------+---------+---------+--------- liabilities. ----------------------------+---------+---------+--------- | oct. | nov. | dec. | . | . | . | | | ----------------------------+---------|---------+--------- capital paid in | , | , | , government deposits | , | , | , reserve deposits, net | , | , | , federal reserve notes, | | | net liability | , | , | , all other liabilities | , | , | , ----------------------------+---------+---------+--------- total liabilities | , | , | , ----------------------------+---------+---------+--------- footnotes: [ ] o. m. w. sprague, _the federal reserve act of _, _the quarterly journal of economics_, vol. , no. , february, , pp. - . [ ] [the country has been divided into twelve districts in each of which a federal reserve bank began operations november , .] [ ] after the reserve banks have been in operation long enough to be running smoothly, not a few branches will doubtless be organized. branches are to have boards of directors, three of the members of which are to be chosen by the federal reserve board, and four by the directors of the parent reserve bank. branches are to be operated under rules and regulations approved by the federal reserve board. [ ] state banks and trust companies are eligible for membership, if they have a sufficient capital to entitle them to become national banks in the places where they are situated. on becoming member banks, they must comply with the provisions of the national banking law regarding reserves, examinations (the state examinations may be accepted), and various other general provisions of the national banking law. [ ] in case subscriptions by the banks of a district are inadequate, stock is to be offered to the general public; and if the response of the public is inadequate, the stock is to be taken by the government of the united states. neither privately owned nor government stock is entitled to voting power. [in no district were subscriptions by the banks "inadequate."] [ ] the inability of the pujo money trust committee to secure desired information from the banks evidently occasioned the following clause: "no bank shall be subject to any visitatorial powers other than such as are authorized by law, or vested in the courts of justice, or such as shall be or shall have been exercised or directed by congress, or by either house thereof, or by any committee of congress of either house duly authorized." [ ] [several of the more important regulations of the federal reserve board are contained in appendix b.] [ ] the law regarding the examination of national banks is recast. the only important changes are that hereafter all examiners are to be paid salaries, and that the federal reserve banks are empowered to conduct special examinations of member banks. [ ] adapted from joseph french johnson, _fundamental weakness of the glass-owen bill_, an address delivered before the economic club of new york city, monday evening, november , . [ ] although the address in part here reproduced was delivered as a criticism of the glass-owen bill, one of the measures that led up to the passage of the federal reserve act, that criticism, as a result of a few slight changes made, applies with almost equal force to the federal reserve act itself. the preceding article by professor sprague answers with striking directness professor johnson's trenchant argument.--editor. [ ] [it is commonly held that ample controlling power has been conferred upon the federal reserve board by the act as finally passed. it is of interest that senator owen listened to the address of which an adaptation is here given.] [ ] john skelton williams, comptroller of the currency, "democracy in banking," an address delivered before the annual convention of the north carolina bankers' association in the house of representatives at the capitol at raleigh, may , . printed in _congressional record_, d congress, d session, vol. , pp. - . [ ] f. m. taylor, _the elasticity of note issue under the new currency law_. _the journal of political economy_, vol. , no. , may, , pp. - . [ ] _second annual report of the federal reserve board_, p. . . [ ] _first annual report of the federal reserve bank of new york_, pp. , . . [ ] thomas conway, jr., _the financial policy of the federal reserve banks_, _the journal of political economy_, vol. , no. , april, , pp. - . [ ] _first annual report of the federal reserve bank of new york_, pp. - . . [ ] second annual report of the federal reserve board, pp. , . . [ ] _ibid._, pp. - . [ ] _ibid._, pp. - . [ ] [for regulations issued by the federal reserve board see appendix b.] [ ] _second annual report of the federal reserve board_, pp. . , . [ ] _ibid._, pp. - . [ ] _ibid._, p. . [ ] _ibid._, pp. , . [ ] _ibid._, pp. , . chapter xxxii the early events of the european war in relation to money banking and finance american finance and the european war [ ]during the half-century that has elapsed since the civil war, there has probably been no period of six months within which there have occurred transformations of so far-reaching a nature in american banking and finance as during the half-year between july , , and january , . it will be long before the full meaning and significance of these events are thoroughly understood; for what has been done cannot be finally interpreted until facts which have not yet been ascertained have developed their consequences. on the other hand, it would be impossible to forecast the ultimate effect of the european war should any one of certain tendencies which are still at least possible be fully carried out. what has already taken place, however, comprises a range of events full of important lessons and significant for the light they throw upon the methods to be employed in the near future in the management of industrial and commercial enterprises. this experience has been particularly rich in its bearing upon the relationship between banking and finance in the strict sense of the terms on the one hand, and the future of commerce and industry in general on the other. though it be true that only hasty thinkers will endeavor to draw final conclusions from what has thus far occurred, it is, nevertheless, also true that much can be learned from the mere marshaling of recent events in their relation one to another. i upon the outbreak of the european war, it was at once evident to all that very striking changes would result in every department of business life. there was, of course, at the outset no knowledge of the strategy or probable methods to be employed by any of the belligerents, and the general attitude of the business community was based upon the assumption that commerce would, for a time at least, become nearly impossible. as a corollary to that assumption, there prevailed the belief in many circles that american indebtedness to foreign countries would have to be liquidated in cash, and that this process would result in draining away from the united states a corresponding amount of gold. it was natural, therefore, that the first phenomenon of the war should be the suspension of dealings which it was believed would promote this gold movement, or would cause more serious trouble in any direction than would otherwise be inevitable. the closing of the principal stock exchanges of the country almost immediately upon the definite announcement that war was unavoidable was thus dictated by two considerations: ( ) the belief that prices for stocks and other securities would be reduced to a point so low as to bring about the repurchase of the securities by americans, who would then be obliged to pay for them in gold; ( ) the belief that, in consequence of this reduction of prices, many bank loans based upon securities would have to be "called," thereby bringing about failures and incidentally assisting in the movement of specie out of the country. in the case of the cotton exchanges, it was at once perceived that the cotton crop, which is so largely produced for export, could not now move abroad with any degree of facility, and that the demand for cotton would undoubtedly be slack. the very fact of the war, therefore, implied heavy reductions in the price of cotton, and the closing of the cotton exchanges was a measure of self-preservation on the part of the operators, who decided to protect themselves against the inevitable failures which would result from the fulfilment of existing contracts at very low prices. to close the exchanges would result in gaining time, and would, therefore, enable operators to meet their maturing obligations, besides perhaps affording an opportunity for actual recovery in cotton prices. this very fact, however, of the closing of the exchanges and the consequent removal of any other established method of determining prices for standard securities and for a staple like cotton involved most profound and far-reaching effects. the exchanges had closed in previous years, but never for the reasons which now controlled them. that they should close because of the fear of failure and the loss of gold implied a serious danger of disaster which appealed powerfully to the public mind, and which presented a problem that could not be explained away. the fact that, coincident with this closing of the exchanges, international trade was practically suspended for several days, and was seriously interrupted for several weeks, until british vessels assumed virtual control of the north atlantic, tended greatly to increase the public anxiety. it formed, apparently, good ground for the suspension of business operations and for the non-fulfilment of contracts, even when the very difficult conditions did not themselves compel a recourse to such methods. the fact that foreign countries had adopted legislation deferring the date when debts need be paid or contracts fulfilled, although not paralleled here, produced a sympathetic influence upon business in the united states, which practically resulted in the partial or tentative adoption of a somewhat similar relaxation of commercial requirements in many industries and branches of trade. it is notable that the produce exchange of new york and the other grain exchanges of the country continued in operation and did an enormous business in spite of the prevailing conditions. this was due to the fact that grain of all kinds, provisions, and every sort of food-stuff were, for the time being, subject to a very rapid upward movement. it was early perceived that a long continuance of the war would bring about a steady advance in the prices of all food products, the markets for which are not dependent upon temporary fluctuations for support, but are subject to far-reaching and semi-permanent influences. the fact that these exchanges continued open while those whose staples were subject to decline closed so speedily, naturally produced its own effect upon the public mind. many who had thought the exchanges invariably faithful registers of price fluctuations were now reluctantly obliged to confess that this could not be the case, since those exchanges where prices were rising continued to operate without interruption, while those where prices were falling were obliged to suspend business. from one point of view, undoubtedly, the closing of the stock and cotton exchanges tended still further to deepen the attitude of dissatisfaction with these institutions that had been prevalent for some years among the american public. on the other hand, however, as time went on, it became clear that the exchanges of the country and the service they performed when in operation were being appreciated as never before by the conservative popular mind of the nation. with the exchanges closed it was seen that the lack of a regular and established market subject to natural conditions meant suffering and inability to secure the advantage of free competition in the establishment of the price of products. this view was once more emphasized when, later on, the cotton exchanges reopened; for it was then seen that the effect of trading upon the exchanges was to advance the price of the staple rather than to lower it, a view the precise reverse of that which had been originally prevalent for a long time past. both in the psychological, as well as in the actual, effect of these closings, and in the influence the episode exerted upon public opinion, the suspension of the exchanges throughout the united states must be regarded as a fact of first-rate importance in the financial history of the united states during the european war. ii even without the suspension of certain classes of trading throughout the country, partially due as it was to the frenzied demand of european holders of american investments for money, the strain thrown upon our banks as a result of the great change in conditions would have been enormous. the closing of the exchanges, as already seen, had relieved matters to some extent by enabling the banks to avoid the calling of loans, and thereby to avoid the necessity of forcing customers into liquidation, with the resultant disastrous effect upon themselves. but on the other hand, the suspension of operations and the corresponding loss by the public would, it was felt, tend to the hoarding of legal-tender money. in order to meet this situation, the banks in many of the large financial centres sought to limit specie payments, taking out emergency currency and clearing-house certificates for the purpose of meeting their indebtedness to the public and to one another.... a phase of this phenomenon was seen in the tremendous rise in foreign exchange rates, the rates becoming practically prohibitive and thereby causing what amounted to a suspension of financial relationship between the united states and foreign countries, particularly great britain. iii it was early understood that the real difficulty and danger in the international situation did not lie in the superficial symptoms of trouble, but were found much deeper, being directly due to the fact that international business had been practically suspended as the result of the war. this was a factor of prime and material importance in the whole situation, because the maintenance of established relations between the united states and foreign countries was directly dependent upon the regular exportation of goods. as was customary during the summer months, there had been large expenditures by american tourists in europe; and we had become indebted to other countries, particularly great britain, for material sums in excess of what we were currently able to liquidate. this was on the assumption, as usual, that such indebtedness would be liquidated through the shipment of agricultural products, particularly of cotton, the country's principal cash crop. the breakdown of trade with europe through the inability of vessels to run regularly at the outset of the war, and through the reduction of buying power, due to the interruption of all regular industrial, commercial, and financial operations, meant that in the absence of some restoration of the normal course of business it would be necessary to find other means of liquidating our obligations to foreign countries. the first phase of the difficulty was met by investigating the extent of international indebtedness, which, in the absence of other means of payment, would necessitate the draining-away of gold from the united states. such an investigation was undertaken by the federal reserve board, which, by sending out questions to the principal international bankers of the country, succeeded in forming a more or less trustworthy estimate of the indebtedness on current accounts, these being, of course, of varying maturities extending over several months. the problem thus raised was how to provide for liquidating the debts without losing so much of the underlying gold supply as to impair the convertibility of american securities, and therewith general confidence in american ability to meet obligations. the two chief proposals put forward for bridging over the period of difficulty were the establishment of a joint gold fund by the bankers of the country, and the undertaking of negotiations with great britain whereby some relaxation of foreign demands on the united states might be arranged for. these two phases of policy may best be cursorily sketched at this point. since the new banks had not yet been established and could not be put into operation for some weeks, it was deemed desirable to furnish a makeshift substitute for the co-operative effort which would have been available for the relief of the situation had the banks been in existence. it was therefore determined to suggest to a number of representative bankers the establishment of a joint gold fund to be used in providing exchange on great britain, and to have this joint fund developed at the earliest possible moment. a letter was consequently sent out to the presidents of clearing-house associations throughout the country, under date of september , in which request was made for subscriptions to a fund intended to aggregate about one hundred million dollars. this letter had previously been considered and approved at meetings of representative bankers summoned to meet in washington on september and respectively, and was, therefore, issued with their moral support. the answer to this invitation was prompt and effective, a total of over one hundred and eight million dollars being subscribed and rendered available. it was almost immediately evident that the operation of this fund was proving decidedly beneficial notwithstanding that only a comparatively small percentage of the amount subscribed was asked for, and that a still smaller percentage was actually used to furnish a basis for gold shipments. nevertheless, it seemed, during the ten days immediately following the completion of the subscriptions, as if there might be need for still further relief to the situation. some of those who were closely connected with the administration of the gold exchange fund brought the subject to the attention of the secretary of the treasury and he extended an invitation to the british government to send representatives to this country mainly for the purpose of considering the possibility of further adjustment, in the event that the united states did not succeed in liquidating its indebtedness to great britain by the natural movement of commodities within a reasonably early period. the british government designated sir george paish and mr. b. p. blackett, who came to the united states and on october held a conference with the federal reserve board. subsequently another conference, attended by a number of representative bankers, was also held and the situation was discussed in very great detail. meantime the establishment of a better understanding with reference to commodities to be considered as contraband and the more effective policing of the north atlantic rendered possible the restoration of trade with european nations, and the development of the export trade proceeded with a speed which showed that current obligations of the united states to great britain and other countries would be liquidated at an early date without any necessity for further interference. by the time the reserve banks were ready to open [november ], exchange sales on london had fallen to normal, and there was, therefore, no danger that when opened the reserve banks might, as was for a time feared by some, find their gold rapidly drawn away from them in order to meet the requirements of the gold export movement. in another way it was deemed desirable that the federal reserve board should help to facilitate the restoration of customary conditions in the financial market. almost immediately after the outbreak of war it was seen that, unless hostilities should terminate within a very much shorter period than anyone thought likely, serious injury would be inflicted upon the cotton-producing states. as is well known, the cotton crop is largely grown for export, about two-thirds of the total production of the united states being annually sold abroad. it happened that an unusually large crop had been planted and was approaching maturity at the moment of the outbreak of the war. this would in any event have depressed prices of cotton, even under ordinary conditions. the almost immediate closing of the cotton exchanges of the country was, however, precipitated by reason of the interruption to the movement of cotton and the general understanding that, in view of the great area involved in the hostilities, it would not be reasonable to expect a normal demand for the staple to manifest itself. with the exchanges closed, and with shipments of cotton interrupted, the price was unstable and abnormally low, many sales undoubtedly having occurred at five cents per pound. inasmuch as the cotton crop is raised very largely upon credit, it was necessary to provide some means whereby the southern planter could be assisted to such extension of accommodation as he might require in meeting the obligations he would ordinarily have provided for by the sale of his crop in the open market. various suggestions were brought to the attention of the federal reserve board, one of them being that of mr. festus j. wade of st. louis, who suggested, both to the board and to the secretary of the treasury, the establishment of a cotton loan fund somewhat similar in purpose and management to the gold exchange fund. after very anxious consideration, the conclusion was reached that some measure of the sort would probably furnish relief to cotton-growers. various conferences were held with banking interests for the purpose of securing their co-operation and advice in regard to the matter. ultimately the bankers of new york pledged fifty million dollars in subscriptions to the fund, provided that fifty millions more should be raised from other bankers in non-cotton-producing states. it was understood that to the one hundred million dollars thus raised should be added thirty-five million dollars contributed by the bankers of the cotton-producing states under a special plan devised for that purpose.[ ] iv it was not, however, through any of these artificial means that real relief was brought to the community. while bankers were laboring to perfect the gold fund, and while the negotiations with great britain were in progress, foreign trade was being re-established through the effective policing of the north atlantic, the re-establishment of demands, and the resumption of the ordinary course of business. what took place during the months of august and september can be understood from ... comparative figures for importation and exportation which make an impressive showing of the suffering to which the united states was subjected through this decline in business. with the opening of october there came, however, a decided improvement. time had now been given for the establishment of normal conditions.... v with foreign trade in a fair way to recover, it was still necessary to secure a restoration of normal trade conditions within the united states, and for this purpose the thing most fundamentally necessary was the setting in motion of the federal reserve banking system which had been provided for by act of congress the d of december preceding. the time intervening between december , , and the opening of the war had been occupied in carrying out the preliminaries of organization; but it still remained for the federal reserve board, the controlling mechanism of the new system, to appoint officers and to provide for the active operation of the banks under its direction. the first detail to which the board necessarily addressed itself was the completion of the boards of directors of the several institutions, it being necessary to select and elect three in each institution, or thirty-six in all. the task required an elaborate process of comparison of the names and qualifications of the several candidates and was not completed until early in october. with the announcement of the thirty-six directors, it was possible to proceed to the active opening of the institutions. the board called for the first payment of capital stock on november , and the secretary of the treasury, who by law had been vested with that function, named november as the actual date for opening.... the establishment of the system ... greatly relieved the banking situation.... sec. of the federal reserve act provided for a readjustment of reserves upon a new and lower basis.... this readjustment, by the terms of the law, took effect immediately upon the establishment of the new banks, _i. e._, on november . from the outbreak of hostilities in europe, there had been a difficult reserve situation in most of the financial centers, new york banks particularly being much of the time largely under their reserve requirements because of the heavy drafts made upon them by interior banks and by the public. the change in reserve requirements, however, made a very material alteration in this condition of affairs, and released, not only in new york, but throughout the country, a very considerable amount of funds which had previously been held by the banks in order to bring themselves within the requirements of law. precisely what amount of reserves was thus released throughout the country has not been accurately estimated, and probably cannot be. it is, however, an undoubted fact that the release of actual cash was very large, and that the release of lending power as computed on the basis of reserves on the part of member banks was correspondingly larger. member banks were thereby enabled to extend loans to their customers very much more freely than they had previously been able to do, while at the same time they were able to grant lower rates of interest in due proportion. the prevailing rate of discount for prime commercial paper in new york at the beginning of november was about per cent., while other paper was considerably higher than that figure, and even more difficult conditions prevailed elsewhere. the opening of the reserve system enabled new york banks, because of the very great relief given to them through the release of reserves, to reduce this rate largely, and within two weeks after the new banks had come into existence prevailing interest rates for the best paper went as low as - / per cent. and per cent. while acceptances, which had been provided for by the federal reserve act, were marketed at a still lower rate. in some parts of the south, northern bankers were able to grant accommodation as low as per cent. and in considerable amounts. in view of the greater ease and material relief which was thus accorded, the federal reserve banks were naturally not called upon to assist member banks with accommodation, such banks naturally refraining from asking aid when they themselves were fully able to meet the situation. the opening of the reserve banks released, as already shown, a large amount of bank funds, and thereby rendered it possible to extend many loans which otherwise could not have been carried by the banks. it was also seen, soon after november , that the existence of the cotton fund, as was the case with the gold fund, had done its work by stimulating confidence and by leading to a more liberal extension of credit. with the cotton fund available for long-time loans, and with short-term credit much more freely extended by member banks in view of the reduction of national bank reserve requirements, it was possible for the reserve banks to open with full confidence that the work thus done in safeguarding the situation would relieve them from undue strain, while fully protecting the cotton-producers who were willing to pay a moderate rate of interest in order to carry their cotton until such time as would enable them to realize full market value for it. as has been shown by the secretary of the treasury in his annual report,[ ] an early phenomenon of the war was the issue by clearing-houses in many cities of clearing-house certificates. simultaneously therewith large quantities of emergency currency were issued under the provisions of the act of , which had been amended and extended by the federal reserve act, and which were still further amended by congress on august , so as to permit the freer issue of notes.... the total amount of the emergency currency taken out by associations had aggregated about three hundred and eighty million dollars, but it is probable that the clearing-house certificates were issued to a considerably larger sum. the channels of circulation were thus clogged long before the end of the summer, notwithstanding the fact that large quantities of gold and gold certificates were withdrawn and hoarded either by banks or by individuals. this condition of affairs made it certain that the reserve banks, upon their organization, would not be instantly pressed for the issue of reserve notes. two factors combined to produce this result--the circumstance that many banks had placed their best paper with the national currency associations in order to protect emergency currency, and the further circumstance that the tax on this currency at the lower rate established by congress would not, for some considerable time, be likely to approximate the rate of discount which every bank would have to pay to federal reserve banks in order to get the rediscounts that would enable them to obtain the notes they needed. combined with these factors was, of course, the natural inertia which in all such cases tends to prevent the withdrawal of one kind of currency and the issue of another. upon the organization of the federal reserve banks, moreover, the urgent pressure for note accommodation passed away as quickly as it had come. gold reappeared in circulation at an early date, and the retirement both of the clearing-house certificates and of the emergency currency was undertaken. in those cities where rates of interest on clearing-house certificates were very high, the reserve banks aided in the retirement of the certificates remaining in circulation. the emergency currency itself immediately began to be retired by its issuers.... had the reserve banks been in operation at the beginning of august, they would naturally have supplied the great volume of currency which was called for; but not having done so, a field of business which would naturally be theirs has been temporarily taken from them by reason of the fact that it was occupied by the clearing-house certificates and emergency notes.[ ] vi the result of the restoration of trade, banking, and credit to earlier and more normal conditions has been steadily apparent. cotton exchanges reopened on november , and stock exchanges opened for restricted trading shortly thereafter. in brief, by the close of the year, the phenomenal conditions growing directly out of the european war had been met and overcome. it is a notable fact that under the wholly unusual circumstances prevailing, the recovery was so prompt and effective. what share in this early improvement is to be assigned to the organization of the new banking system and to the effectiveness with which the treasury department co-operated in meeting the needs of the country cannot accurately be stated, and will probably afford grounds for difference of opinion. that it was great cannot be denied.... national bank failures and suspensions-- compared with and [ ] a comparison of the failures and suspensions of national banks during the past year with failures and suspensions in the panic periods of and may be interesting at this time. the figures show that for the months ended october , , national banks, with aggregate capital stock of $ , , , failed or suspended payment. the total liabilities of these banks (in the case of receiverships claims proved) amounted to $ , , . in the case of six recent failures, the figures of total liabilities, less capital, surplus, and undivided profits, are used in lieu of the "claims proved," no report of the latter having yet been received as to these six banks. for the months ending october , , national banks suspended, with capital of $ , , . sixty-five banks, with total capital stock of $ , , , were insolvent and required the appointment of receivers; , with capital stock aggregating $ , , , were able to resume business; and , with capital stock of $ , , , were placed in charge of examiners in the expectation of resumption. the total liabilities of failed and suspended banks for the period mentioned was $ , , --in the case of failed banks, "claims proved" being considered as "total liabilities." during the six-months period from october , , to april , , there were national bank failures and suspensions, and the total liabilities (in the case of receiverships these being "claims proved") were $ , , ; the total capital stock, $ , , . of these banks, however, , with capital stock of $ , , and liabilities of $ , , , resumed business. it is worthy of special note that in the crisis of , unlike the panics of and , there was no suspension of currency payments on the part of the banks of this country, either in the large cities or in the smaller towns. in the panics of and , in addition to clearing-house checks, many artificial methods of supplying a temporary currency were resorted to, while actual currency commanded a premium of from per cent. to per cent.--$ in currency costing anywhere from $ to $ , or more, in certified bank checks. in the banks of the country were enabled, as a result of the instant and active co-operation of the treasury department, and through the operations of the act of may , , as amended by the federal reserve act, to supply actual currency, even during the period of greatest stringency, to their customers and correspondents, both over the counter and in response to requests for shipments. whenever any indications were seen of an attempt or disposition on the part of any solvent bank or banks to withhold or suspend cash payments, the subject was taken up immediately by the treasury department, and payments of currency over the counter and shipments by the banks upon demand, from the centers to the nearby and far-off districts, and vice versa, have been maintained practically without interruption throughout this crisis. the effects of the war with special reference to the central banks of france, germany, and england i [ ]in france the gold held by the bank of france (february, ) is, in actual quantity, larger by about per cent. than that held in normal times before the war. instead of former gold reserves of about $ , , , they are now well over $ , , , . the percentage of gold to the notes--the main demand liability--has, of course, fallen from about to per cent. because of the increase of notes from about $ , , , to $ , , , . this increased supply of gold has come from hoardings and private holdings which have been placed at the disposal of the bank in return for bank-notes. there has been no reduction of this gold fund through demands from note-holders, since the bank was freed from redemption in gold at the very beginning of the war. that is, notes of the bank of france are inconvertible. as contrasted with the dollar of the united states, when expressed in bills of exchange between new york and paris, the bank of france note has depreciated nearly per cent. any paper money not having immediate redemption will depreciate. as regards the future it is a question of ultimate redemption. with so large an available gold supply, there can be little question as to the future intention or probability of redeeming the notes in gold. it looks very much as if the same policy adopted in the war of - had been consciously followed. then, also, the _cours forcee_ was declared, and the gold carefully retained in the vaults of the bank. the presence of a large gold fund was an assurance of the ability to return to specie payments after the close of the war. the war was short, and the notes were not seriously depreciated, bearing a discount as compared with gold of - / to per cent. in the present war, the same steps have been taken; but this war is extending over a much longer time than the former one, and the depreciation has already become much greater. it is equally clear, however, that if the gold were now to be paid out for redemption uses, it would become scattered, exported, and might even pass through holland or switzerland into germany. the increase and preservation of this large fund of gold is the strongest evidence of the ability of the bank to resume the gold redemption of its notes soon after the close of the war. the actual time, however will depend upon the rapidity with which the government can repay some of its large loans from the bank, since the excessive note issues have been largely due to loans to the state. ii in germany, likewise, every effort has been made to accumulate gold, even though the notes of the reichsbank were made inconvertible at the beginning of the war. not only was the requirement to redeem the notes in coin removed, but the regulations regarding a tax upon all notes uncovered by a specie beyond a specified _kontingent_ were suspended. thus, restrictions on the limit of note issues do not exist; and they have risen from about $ , , before the war to about $ , , , (february, ), while the stock of coin and bullion has changed from about $ , , to over $ , , . that is, the coin, which is mostly gold, is about per cent. of the notes. here, again there is an obvious tendency to increase and maintain the gold reserves so that germany may have the means of resuming gold payments at no great time after the close of the war. the campaign to collect gold from the public and from hoards was remarkable. it was successfully made a test of patriotism to hand in gold in return for reichsbank notes, and a house-to-house canvass in many places resulted in providing the gold which so signally increased the reserves behind the notes. of course, the usual international operations for obtaining gold were denied to germany. it was this campaign which was imitated by france. at the present time, certainly, no thought has ever occurred to germans that they would not go back to a gold basis. nevertheless, germany has clearly fallen into the same confusion of mind which characterized our own policy in regard to the issue of greenbacks in the civil war. we confused the monetary with the fiscal functions of the treasury. so has germany. thinking the war would be short and decisive, to be followed by large indemnities levied on her enemies, she had expected to finance her expenditure by temporary expedients. that is, the government was led into the policy of borrowing through the increase of monetary forms. it does not change the principle that this increase of paper money was not made solely by imperial treasury notes, but by a very large addition to the circulation in the form of reichsbank notes and _darlehnskassen_ notes. it was the loans by the reichsbank to the government which undoubtedly caused the main increase in the notes of this bank (just as was true of the bank of france), and the reduction of these issues, and their redemption in gold, will depend directly on the power and readiness of the government to pay off its obligations to the reichsbank after the war. the amount of borrowing by processes which led to an increase of the circulation was necessarily limited; and very soon borrowing through issues of paper money had to be followed by regular fiscal operations in the form of long- or short-term bonds which would not affect the quantity of the circulation. expenses could not well be met to any extent by current taxation, because taxes were already high, and in the few years before the war, no doubt in anticipation of it, some four or five hundred million dollars in taxes over and above normal taxation had already been levied. in a non-recurring tax of $ , , had been imposed on the wealthier classes. in addition a bonded debt, since the war, has been floated to the amount of $ , , , over and above the existing public debt before the war of about $ , , , . but all these fiscal operations should be, for our present purposes, separated from monetary operations. the carrying of these heavy government debts is a question of the future production of goods, of commerce, and of saving. whatever the burden of debts, the gold question is concerned with the mechanism of exchange by which taxes, subscriptions to loans, payments by the government for munitions and supplies, current purchases of goods by the public, payments to and by banks, are made. at present this medium is paper money depreciated, as in the case of the reichsbank notes, by nearly per cent. of course, the darlehnskassen issues would follow the value set by the notes of the reichsbank. it is interesting to mention that the increase of paper money has not been in answer to any need of the public for additional media of exchange; for ordinary business transactions have decreased, and would require a less quantity of money. it was an error not to separate borrowing entirely from monetary issues. moreover, as bearing on the maintenance of the gold standard after the war, it is worth noting that the rule requiring the reichsbank to keep one-third of its note issues covered by gold has not been violated. at last reports (february, ) the gold item stood at $ , , , as against $ , , , notes, or about . per cent. that is, the greatest efforts have been made to concentrate the gold holdings of the nation, including the "war chest" of about $ , , , in the reserves of the reichsbank. at the same time no gold is paid out in redemption of notes, nor is it allowed to be exported. some sums have been sent to holland in a vain attempt to support german exchange in that country; but the difficulty in exchange rates lies deeper than the relative supply of and demand for bills, since the depreciation of german paper money determines the general level about which the fluctuations of exchange due to demand and supply range. in fact, wherever gold is not freely moved in international exchange there are no shipping points, and hence no limits to which exchange can fall short of the discount of the paper in terms of gold. iii as regards great britain, the gold standard is yet preserved for all practical purposes. to her credit be it said that she has not fallen into the error of borrowing by excessive issues of paper money; so far she has not confused the fiscal with the monetary functions of the treasury. she resorted at once to fiscal operations in the form of heavy taxation and loans in the form of short-time treasury bills and longer-term bonds. the issue of government paper money is, indeed, a new departure; but its purpose has been more distinctly monetary than fiscal. the currency notes are emergency notes, issued under the act of august , , directly by the treasury, and not by the bank of england, although authorized by the same act which suspended the bank act in regard to additional issues of bank notes not covered by gold. in other crises the act of has been suspended to allow more notes based on consols than permitted by the act (_i. e._, above the £ , , ). in august, , such a suspension was in the future made legal, if authorized by the treasury, thus avoiding the old resort to a bill of indemnity by parliament. but in spite of the usual suspension of the bank act, no use was made of it. that is, a demand for more currency in the hands of the public could have been supplied by the bank, but was not. in truth, the lloyd george currency notes need not have been issued. nevertheless, when once issued, they made unnecessary any resort to additional bank of england notes. there was no need of both. but in one respect the currency notes helped to maintain the country's gold standard. by issuing them in small denominations of one pound, and ten shillings, they replaced the gold in general use for these denominations, and allowed it to be used as reserves. yet, it must be remembered that sound policy required a gold reserve (which has been generally kept at about per cent.) behind these currency notes, so that the whole amount of gold replaced was not, in fact, a gain. as all know, the question of gold for great britain pivots on the reserves of the bank of england, which is the agent for the government, receiving its taxes and paying out its expenses, as well as the holder of reserves for other banks--being thus a bankers' bank, as well as a national agent. moreover, the reserves mentioned, and which are of prime importance, are those of the banking department--and these are chiefly bank of england notes (not gold). the percentage of reserves to deposits, which marks the safety line for england, refers to the items in the banking department. these notes, however, are protected (except the bottom layer of £ , , covered by consols), pound for pound, by gold in the issue department. hence, they can be turned into gold at any moment. then, to what do these facts lead us? simply that gold has increased just in proportion to the issue of bank notes. in addition, the currency notes of the government served in the place _pro tanto_ of the bank of england notes. hence, at the end of the war, the provision for redemption of bank of england notes will work automatically. nor can there be any question as to the gold being there to redeem them; for they cannot get out without a previous deposit of gold. indeed, the questions of difficulty cannot arise regarding the basic currency of great britain; they will arise, if at all, in connection with the assets in the loan item of the banking department, since they will determine the safety of the deposits chiefly created as the result of loans. the bank discounted large sums of pre-moratorium acceptances and paper; and yet even in these assets it is protected by the guarantee of the government. darlehnskassen and other financial novelties in germany [ ]germany, at the outbreak of the war, removed the limit of notes issuable by the reichsbank without tax; created about , darlehnskassen (loan banks), located throughout the empire, wherever the reichsbank maintained a branch; they were started without capital, in lieu of which they issued _darlehnskassen scheine_ (imperial loan bank notes) in denominations of one mark and upwards, the aggregate amount being limited to , , , marks; these banks made loans against stocks, shares, produce, any personal property of a non-perishable character, as collateral, and issued certificates, having the quality of bank notes, to the borrowers; the loans ran for three and sometimes six months; the minimum loan was marks; a very wide margin of safety was required, making the loans good beyond question; these certificates were receivable for public dues and by the reichsbank; the smaller denominations circulated as money, the reichsbank received the larger, giving its notes in exchange; these certificates were not legal tender, but were given the quality of gold and "may be considered by the reichsbank as gold cover, which means that against marks of these scheine in its vault the reichsbank is allowed to issue marks of its own notes." (i. de bruyn.)[ ]... sir edward h. holden, president of the london city and midland bank, in a speech to his board of directors, january , , said: germany proceeded to establish war loan banks, war credit banks and war aid banks under the patronage of corporations, municipalities and private financiers, and to make use of the mortgage banks already established.... the mortgage banks are under the control of chambers of commerce and municipalities, and they make advances on the mortgage of properties by an issue of notes.... germany made greater use (than of the darlehnskassen) of the mortgage banks, the notes of which are identical in power and use with the notes of the darlehnskassen. another part of their scheme was to relieve the pressure on insurance companies (life), by forming an insurance bank, which advanced per cent. on the value of policies. these advances were paid on notes which were exchanged for reichsbank notes in the same way as the notes of the darlehnskassen and mortgage banks. germany, with characteristic system and detail, provided different kinds of banks to deal with different phases of the situation. war credit banks were designed to aid germans whose credits became unavailable, owing to the exigencies of the war, as for instance those who had sold and shipped goods abroad (the enemy's country), whose accounts would be temporarily uncollectible, and those who might be otherwise embarrassed in their foreign trade because of the interruption of business caused by the war. war credit banks were more general in their dealings than war loan banks. in germany, business is largely done upon credit, and especially so by small concerns and individuals, who possess no extended bank credit nor available collateral, and hence are not in position to make use of the reichsbank or other commercial banks, or the darlehnskassen. a german banker says: "it was deemed advisable to create an institution of an intermediary character which would bear the greater share of the risks involved. the so-called war credit banks are designed to serve this purpose. they were established throughout the country, have their own capital, and the obligations undertaken by them are guaranteed, and losses, if any, refunded by the respective municipalities and commercial associations. the war credit bank of greater berlin, for instance, was established with a capital of millions of marks, of which per cent. are fully paid in. in addition thereto, there is a liability of . million marks by official bodies of commercial organizations." still another kind of war credit bank was created on the co-operative plan to assist the middle and lower classes. through the instrumentality of these institutions, a large amount of credit instruments, possessing a currency function, was brought into existence in germany.... the war and the world's financial centre [ ]with the end of the moratorium on november , it may be said that the crisis produced by the outbreak of war was over. when peace comes and prices [of securities] adapt themselves to the new price of capital that the present destruction of some eight to ten millions of it a day will bring about, and creditors begin to try to collect debts from impoverished debtors in war-wasted countries, then there will be a new set of problems, the acuteness of which will largely depend on the length of the war and the extent to which the fighters are worn out. these problems will exercise all the ingenuity and strength that lombard street can muster. for the present it is enough to see how we stand at the end of the opening period of the war, and what have been the effects of the financial tornado with which its beginning was heralded.... the crisis of last august was the greatest evidence of london's strength as a financial centre that it could have desired or dreamt of. it was so strong that it did not know how strong it was. consequently, being a little flustered by the suddenness of the outbreak of war, on a scale that mankind had never seen before, it made the mistake of asking its debtors to repay it, not the thousands of millions that it had lent in the form of permanent investment, but the comparatively trifling amount--perhaps or millions--that it had lent in the shape of bills of exchange drawn on it, and other forms of short credits. thereby it put the rest of the economically civilized world, for the time being, into the bankruptcy court, and so, finding that none of its debtors could pay, it thought itself obliged to ask for time from its own creditors at home. foreign creditors it had none, except paris. it sent gold to paris as fast as it could be shipped and insured, and so seems to have liquidated its debt. for when a market in exchange reopened after the first shock of war, the paris cheque soon steadied itself at a more or less normal level, above the point at which gold could be sent to france as an exchange operation. it is possible, however, that london was still in debt to paris, and that paris preferred for obvious reasons to leave its money on this side of the channel. of the three possible rivals to london as a financial centre, paris was the only one that gave any evidence of real financial strength. behind paris stands the enormous power of the thrifty french investor, who probably accumulates a greater proportion of his income than anybody in the world, except, perhaps, some classes of scotsmen. this accumulating power of the french gives the paris money market a position of first-rate importance in the financial world, because capital has to be saved, and a saving people has capital to lend. the advantage that london holds in its more elastic credit system is partly balanced by the advantage given to paris by the thrifty habits of the french people. if paris adopted a more businesslike policy with regard to her huge store of gold, which she has hitherto seemed to regard as a precious asset to be sat on and protected by the charge of a premium to audacious people who want to withdraw a bit of it, she might, in normal times, be a much more dangerous rival to london than she is. but it need hardly be said that paris, as a financial centre, was soon wrapped in the cloud of war and invasion, and had no chance of making any effort to oust london from her pride of chief place. berlin was equally cut off from competition, for berlin had to devote herself to the task of financing war for germany. moreover, the rapid depreciation in the value of the mark that took place before the war began showed that germany was still a debtor country in the short-loan market. the berlin exchange, while war was as yet only a dreaded possibility, rose from m. pf. to m. pf. germany invests money abroad, but she seems to borrow as much, and more, in the discount markets of london and paris. so it came to pass that, in spite of the big sales of securities that she had thrown on the markets of new york and london, she still had to pay when the big day of settlement came, and to pay so fast that she had not a bill on london left to pay with. it was the chance of a century for new york. american ambition has long ago informed the world that the united states, having been the world's granary, is now the world's most progressive manufacturer, and means soon to be the world's banker. this may happen some day, and might have happened already if american policy in currency, financial and fiscal matters had been more enlightened, and if her people had been more thrifty. but they have tied their credit system in the bonds of narrow banking laws and their trade in those of a cramping tariff. these bonds they have just begun to shake off, and if the crisis had happened a few years later they might perhaps have made a bid for london's place as world banker. but it is hardly likely, for the development of the enormous resources of the country still craves for much more capital than its people can provide. the united states is still a debtor to the world at large and seems likely to be so for some time to come, and it is doubtful whether even new york, with all its skill in the jugglery of finance, can make itself a great banking centre as long as its heavy balance of indebtedness is always waiting to turn the world's exchanges against it, whenever the monetary sky is overcast. it was the chance of a century, but new york could not take it. when london called in its credits from other countries, any centre that could have said to these countries, "we will give you the credit that london has cut off, and lend you the money to pay london," would have stepped straight on to london's financial throne and set london a very difficult task to regain it after the war was over. in spite of the large amounts of gold taken from america to europe before the war, the united states had still a huge store within its borders--some estimates of it ranged up to millions sterling. if the united states had had the courage to use this mountain of metal and let other countries draw on it, london would have had more gold than it knew what to do with, and new york would have had a big slice of london's business. the united states were at peace, and, with all the chief countries of this antiquated hemisphere engaged in the mediæval business of killing one another's citizens and destroying one another's property, the united states might have been expected to leap into the position of economic leadership. but america feared to use its gold, and held on to it as tightly as it could, fearful of internal trouble and a run on its banks if too much of the metal went abroad. in new york, as in most other centres, the question of the moment was, not to take london's business, but to pay what she owed to london and to buy bills on london at skyrocket prices wherever they could be found. the strength of the fat old money-lender, whom the australian papers, angry with him because he did not lend fast enough, used to call john bull cohen, was never more wonderfully made manifest. strength in money bags is not everything--very far from it--but at least j. b. cohen can claim that he has made good use of it. he has peopled and fertilized the uttermost ends of the earth with his sons and his capital, and he alone among the nations has had the courage and the homely wit to throw his ports open to all and to tell all the peoples of the world to send their stuff along if it is worth buying. moreover, he has lately shown that, in spite of all his alleged decadence, he can still tuck up his sleeves on occasion and fight at least as well as anybody else. so far was new york from being able to supplant london that, as we have seen, the united states had to make special arrangements to tide over the difficulty which london's claims on her had produced.... the american government found it necessary to ask officials of the british treasury to come over and help it to find ways and means for meeting part of the debt of the united states to england, without shipping any more american gold. this could only be done by england's giving america some sort of credit to take the place of the finance bills and other forms of accommodation which lombard street had withdrawn. at the same time there is no doubt that new york did some of the business for herself that london had formerly done for her. if she was not in a position to finance other countries, she did make a beginning in financing her own imports. exporters of goods from south america to the united states who had formerly taken payment by drawing bills on london, and were no longer able to do so, drew on financial institutions in new york instead. some of these bills were used to make three-cornered payments from south america to london, and a very costly means of payment they were to the debtor, owing to the high rate of discount in new york, and the depreciation of the american dollar as compared with the pound sterling.... it seems likely that this business of financing american trade new york will keep in her own hands to a greater extent than she did before. probably she would have taken more of it to herself even if there had been no war. her new banking legislation has included in its aim the establishment of branches of american banks abroad, and the development of acceptance business in new york. it could not be expected that new york would always be content to see the greater part of america's external trade financed with english credit. her next step will be to endeavor to finance other people's trade, and she is already beginning to set about taking it, being assisted by lombard street's shyness in the matter of new acceptance business. if the war should be long continued, its appalling drain on the combatants ought to help her by exhausting the rivals whom she hopes to drive out of the field. so far, then, from the late crisis having given any evidence of weakness on the part of london, or of any likelihood that she will lose her supremacy as the world's banker, the commanding strength of her portion has been made abundantly manifest. the only weak point was not in her armor but in that of her foreign customers. the question arises whether she was wise in lending so much to debtors who showed such unanimous inability to pay on the due dates. i have heard it contended by a disinterested and well-qualified critic, that the risk run by lombard street in allowing bills to be drawn on her from all parts of the world against goods shipped from one country to another, has been shown by the late crisis to be too great to be worth the candle. bills drawn against goods coming to england are safe enough, for as long as the goods come to port and can be sold for them, the acceptor is sure of his money. but when the goods go from china to peru, and peru finds that it cannot remit to meet the bill, the acceptor is inconvenienced, and the bank or bill broker who holds the bill finds that he has got a security which was not quite as gilt-edged as he thought it. this is all quite true, but contrariwise it may be argued that this sort of world crisis is not going to happen again very soon, and that if all finance had to be arranged on the theory that it was likely to recur frequently, there would be very little finance of any kind. these bills drawn against international shipments of goods do much to make the bill on london popular all over the world, and if they are to be frowned on there will be a considerable restriction of international commerce, which will react unpleasantly on england. in ordinary times these bills are safe enough, if due precautions are taken. if mistakes are made they happen rarely and the resources of the accepting houses are easily able to repair the damage. as to finance bills, it has already been admitted that much credit was given by their means which was used for purposes with which bills of exchange ought not to be associated. the essence of a bill of exchange is that it has to be met at its due date, and so it should only be drawn to finance some commercial operation that will mature before the bill falls due, or to provide means of remittance when they are scarce, owing to seasonal causes which will have passed before the bill's maturity. when rolling credits, as they are called, are established, which go on from year to year, each bill being met by drawing another, and the money so raised in the borrowing country is put into bricks and mortar or machinery or other forms of fixed capital, the uses of the bill of exchange are being strained. when a jolt comes to the machinery and the rolling credit stops rolling, it is not possible to sell the factory or plant to provide a means of remittance. but there is no doubt that for a time, at least, this kind of finance bill is likely to be scarcer than it was; in fact, as we have seen, it was the excessive suddenness of the fit of virtue that seized lombard street on this subject that made the crisis more acute than it need have been, by reducing the means of remittance and so keeping the exchanges at an abnormal point. lombard street has thus shown that it has fully learnt the only lesson that the external side of the crisis had to teach it. too many finance bills of the wrong kind were out, and lombard street saw the fact so clearly that for some weeks it rang with the cry that there must never be any more finance bills of any kind at all. this exaggerated view is already discredited, and there is good reason to hope that opinion will settle down to a sensible midway path, taking the finance bill as a quite legitimate and necessary convenience, dangerous only when abused and distorted.... mr. withers a good englishman [ ]mr. withers is a very good englishman indeed and points out with pardonable pride how the london market stood the shock which rocked the rest of the financial world to its very foundations. what would have been his attitude had the book been written a little later, however, when the pound sterling had fallen to a discount of over per cent. as compared with the dollar, is an interesting subject of speculation. london financing the world is, from the englishman's point of view, an inspiring sight, but the pound sterling obtainable in new york for $ . ... is something which it would be interesting to hear mr. withers explain. _war and lombard street_ treats only with the beginning of a very big subject. it is sincerely to be hoped that a little later we shall have a continuation of the work from mr. withers' pen. america's chance of holding world purse-strings[ ] since the outbreak of the war new york has assumed a position of leadership in international banking. will this position be permanent or will its duration be limited practically to the period of the war? is the mantle of world financial leadership about to pass from london to new york, as it passed after the napoleonic wars from amsterdam to london? these are questions which many are asking, but which no one can answer positively, because so much depends upon those incalculable items--the duration of the war and the financial strength of the belligerents at its close.... at the end of our provincial banking system was overhauled by the federal reserve act, and put in shape to meet the needs of our growing trade, both domestic and foreign. by this act american commercial paper, which previously had been essentially local paper, was given an opportunity to assume a national, or even international, character, through the provisions for bank acceptances, rediscount, and "open market operations." an open discount market began to develop on american soil; and slowly, but surely, short-time paper of an international character and standing began to appear.... by the beginning of , therefore, it may be said, that the way was opened for our financial metropolis, new york, to play an increasingly important rôle in the international money market, and that there was already a movement in that direction. to this movement the european war gave a strong impetus, and to-day new york clearly holds the premier position in the field of international finance, although at a time when national finance in the leading countries of europe has assumed proportions never before dreamed of. the european exchange markets have been demoralized, and specie payments among the belligerent countries of europe have become little more than a name. on the other hand, "dollar exchange" is now quoted in the principal cities of latin america, the orient, and australia; and the american trade with those sections, which was formerly financed chiefly through london, is now being financed directly, and in dollars.... the united states has brought back home from a billion to two billion dollars' worth of the six billion dollars' worth of its securities estimated to have been held abroad, and is preparing to take more, either by purchase or as security for loans. it has loaned upwards of a billion dollars to the belligerent countries, and has had a net importation of gold during the year just closed greater than that of any five years of its history. our banks are carrying heavy surplus reserves, those of the new york clearing house banks alone on december having amounted to $ , , , and the gold reserve against net liabilities of the twelve federal reserve banks on december having amounted to per cent.; and this, at a time when the large gold reserves of the european banks are strained to the breaking point by the tremendous liabilities placed upon them. our export trade has reached unprecedented heights, and for the year was approximately equal to twice that of .... this war is likely to leave her [england] still with a secure position, a great and loyal colonial empire, an efficient banking system, and the control of the seas. her position as a creditor nation will lie greatly weakened, and she may even become a heavy debtor nation, but her foreign trade connections have been so long and so well established that it does not seem likely that they will be permanently impaired in any large degree by the readjustments necessitated by the war. if she disposes of her latin-american and asiatic investments to the united states she will doubtless greatly weaken her trade position in those countries, but the present evidence is that these will be about the last foreign investments she will dispose of. so far we have not made great progress in securing europe's latin-american trade. europe discontinued financing latin america at the same time that she discontinued her normal trading with latin america. for us to take her place it became necessary for us to loan before we could sell and buy. but loaning to european belligerents and selling war supplies offered larger immediate profits; and so our chief efforts have been turned eastward rather than southward. an analysis of our large export trade of last year shows that much of it was of a very abnormal character, and gives promise of being but temporary. the following figures comparing the exports of a few selected commodities for the ten months ended october, , with those for the same period of will make this point clear: _ten months ended oct. _ _commodities. . ._ breadstuffs $ , , $ , , iron and steel and mfrs. thereof, incl. wire , , , , meat products , , , , animals (notable horses and mules) , , , , explosives , , , , cars, carriages, etc. , , , , leather and mfrs. thereof , , , , a glance at these articles will show that most of them were intended chiefly for military uses, and that their heavy exportation presumably will be but temporary. it is interesting to note that some other articles of customary export showed large declines in as compared with . during the same ten months' period, for example, our exports of agricultural implements (and parts) declined from $ , , in to $ , , in ; of wood and manufactures thereof, from $ , , to $ , , ; of fertilizers, from $ , , to $ , , ; and of sewing machines, from $ , , to $ , , . viewed from the standpoint of the destination of the articles exported, the significant fact is that the increase in exports was chiefly to europe, and not to central and south america and asia--the places in which we have been strenuously endeavoring in recent years to build up a permanent export trade.... ... after the war is over europe will presumably discontinue, or greatly reduce, her importations from the united states of most of the articles which figured so largely in the great increase of . as her needs tend to become normal again she will immediately endeavor to resume her old-time trade connections, both import and export, at least in so far as the trading centres are in countries that were friendly or neutral during the war. in seeking to re-establish these connections the merchants of the belligerent countries will be strongly backed by their governments, which the war will have made more socialistic and more aggressive. they will have a great advantage in the fact of long-established business relations, and in the fact that the war trade will have been to such a large extent abnormal, both as regards the products dealt in and the parties to the trade. europe's banking machinery in south and central america, although it may not be very actively functioning in these trying times, still exists, and will be ready to resume its former activities as soon as peace is declared.... on the basis of london stock exchange listings british investments in latin america early in were computed at nearly $ , , , . germany also has a large number of banking establishments in south america and heavy investments.... united states investments in south america are very small as compared with those of england and germany, while only one american bank has established branches on that continent. these branches are only five in number, and the oldest of them is but a little over a year old. the conclusion seems clear that the war will need to be very long and very disastrous to england; and american merchants, bankers, and investors will need to be much more active and far-sighted in their exploitation of south american opportunities than they have been in the past, if london is to yield to new york her financial premiership for south america. other obstacles to new york's becoming permanently the world's financial centre are its great distance from the financial markets of europe, america's small merchant marine, its provincial protective tariff policy, the absence of an adequate supply of men possessing the necessary training both in foreign languages and in commerce and international finance to go into these foreign fields and to "tie them up" commercially and financially with the united states, and the slowness with which our recently reorganized banking system and our american discount market must grow, as regards international business, if it is to have roots that are strong and grow deep. the united states has before it a great opportunity. much depends upon the foresight with which americans prepare themselves to meet the tremendous readjustments that will be demanded at the close of the war. that will be the supreme test. now is the time to build for the future, and to avoid paying too much attention to immediate profits. new york can hardly be expected to succeed to london's position as the world's financial centre, at least for some time to come; dollar exchange will not at once take permanent rank ahead of sterling, or even alongside it; none the less, if the united states refuses to be blinded by the glamour of large immediate profits from a type of trade that is necessarily abnormal and temporary, and if she seriously turns her attention to the opportunities now open to her in latin america, she will make a long step forward in the direction of financial leadership. footnotes: [ ] h. parker willis, _american finance and the european war_, _the journal of political economy_, vol. , no. . february, , pp. - . [ ] a fuller account of the gold fund and cotton loan plans will be found in the _first annual report of the federal reserve board_, washington, january , . [ ] _report of secretary of the treasury_, december , . [ ] _first annual report of the federal reserve board_, p. . [ ] _report of the comptroller of the currency_, , pp. , . [ ] j. laurence laughlin, _will the gold basis survive in europe?_, _the annalist_, vol. , no. , feb. , , pp. , . [ ] a. barton hepburn, _a history of currency in the united states_, pp. - . the macmillan company. new york. . [ ] of boissevain co. [ ] hartley withers, _war and lombard street_, pp. - . e. p. dutton and company. . [ ] franklin escher, review of _war and lombard street_, _the american economic review_, vol. , no. , september, , pp. - . [ ] e. w. kemmerer, _america's chance of holding world purse-strings_, _the annalist_, vol. , no. , jan. , , pp. - , . appendix a an approximate formula for determining the velocity of the circulation of money [ ]for the purpose of tracing the circulation of money, and measuring it by bank records,[ ] we may classify the persons who use money in purchase of goods into three groups: . commercial depositors, _i. e._, all engaged in business--firms, companies, and others--who have bank deposits mainly or wholly apart from personal accounts. . all other depositors, chiefly private persons. . all who, like most wage earners, are not depositors at all. these three classes we shall distinguish as "commercial depositors," "other depositors," and "nondepositors," or c, o, and n. the money in the possession of "commercial depositors" we shall call "till money," and the rest "pocket money." the three groups necessarily include all in the community who circulate money. by circulating money is meant expending it in exchange, not for some other circulating medium, as checks, but for goods.... ... the category of "commercial depositors" coincides for all practical purposes with the category of business establishments. "other depositors" include most proprietors, professional, and salaried persons. almost no wage earners are included, and almost no business establishments or business men in a business capacity.... ... although "other depositors" include most proprietors and professional and salaried persons, yet some proprietors and professional men, especially in rural communities, and some salaried persons, chiefly small clerks, are "nondepositors."... ... "nondepositors" consist chiefly of those who are classed in statistics as wage earners. while there are some wage earners who are depositors,[ ] they are rare: and while there are some "nondepositors" who are not wage earners, especially (as just indicated) the agricultural proprietors (farmers) and small clerks, the amount of money circulated by them is small in comparison with the total circulation. while the line separating wages and salaries is not definitely marked in theory, it is usually easily recognised in practice.... we may now picture concretely the main currents of the monetary flow, including the circulation of money in exchange for goods.... [the figure here given] illustrates the three principal types. [illustration] the corners of the triangle, c, o, and n, represent the three groups of "commercial depositors," "other depositors," and "nondepositors," and the b's represent banks. the arrows represent the flow of money from each of these four categories to the others. thus b_{o} represents the annual withdrawals from banks by "other depositors," o_{c} the spending of this withdrawn money by "other depositors" among "commercial depositors," and c_{b} the return of the money from the "commercial depositors" to the banks. this circuit (b_{o} o_{c} c_{b}) of three links is very common. a second type of circuit is represented by a chain of four arrows (b_{o} o_{n} n_{c} c_{b}). it is illustrated by private depositors drawing money (b_{o}), and paying wages (o_{n}) to servants who in turn spend the money (n_{c}) among tradesmen who finally deposit it (c_{b}). a third type of circuit, also fourfold, is represented by the arrows b_{c} c_{n} n_{c} c_{b}. it is illustrated by commercial firms cashing their checks at banks (b_{c}) for pay rolls, with the cash so obtained paying wages (c_{n}) to workmen who spend it (n_{c}) among other tradesmen who redeposit it in banks (c_{b}). these three types are not the only ones, but they are so much more important than any others that they merit out undivided attention before a completer study is undertaken.... [the accompanying figure] has been constructed for the purpose of exhibiting them uncomplicated by other details. it will be noted that not all of the flows described are examples of the _circulation_ of money. as already indicated, money may be said to circulate only when it passes in exchange for _goods_. its entrance into and exit from banks is a flow, but not a circulation against goods. in the diagram the horizontal arrows represent such mere banking operations, not true circulation. on the other hand, the arrows along the sides of the triangle represent actual circulation. the diagram shows four such arrows, representing the four chief types of circulation: o_{c} payments of money from "other depositors" to "commercial depositors" in the purchase of goods; o_{o} payments from "other depositors" to "nondepositors," as when a housewife pays wages; c_{n} payments from "commercial depositors" to "nondepositors," as when a firm pays wages; and n_{c} payments from "nondepositors" to "commercial depositors," as when a wage earner buys goods of a merchant. there four types of circulation of money occur in the three circuits already described, being sandwiched between the flows from and to the banks. the first, o_{c}, is contained within the circuit b_{o} o_{c} c_{b} and, since no "nondepositors" intervene, represents money changing hands once between its withdrawal from bank and its redeposit there. the remaining types (o_{n}, c_{n}, and n_{c}) are contained within the two other circuits (b_{o} o_{n} n_{c} c_{b} and b_{c} c_{n} n_{c} c_{b}), and, owing to the fact that "nondepositors" intervene, represent money circulating twice between withdrawal and redeposit. in short, one of the three circuits (b_{o} o_{c} c_{b}) shows money circulating once out of bank. both the others pass through n, and show money circulating twice out of bank. the diagram, then, represents all circulating money as springing from and returning to the banks; all of it as circulating at least once in the interim; and that portion handled by "nondepositors" as circulating once in addition. therefore, the total circulation exceeds the total flow from and to banks by the amount flowing through "nondepositors." in other words, the total circulation in the diagram is simply the sum of the annual money flowing from and to banks and the money handled by "nondepositors." the quotient of this sum divided by the amount of money in circulation will give approximately the velocity of circulation of money.... footnotes: [ ] irving fisher, _purchasing power of money_, appendix xii. pp. - . _the macmillan company. new york. ._ [ ] for a complete formula for determining the velocity of the circulation of money see pages - , of the purchasing power of money. [ ] the term "depositors," as here used, does not, of course, include savings bank depositors. a savings bank is not a true bank of deposit, providing circulating credit. appendix b some regulations of the federal reserve board federal reserve board washington, january , . acceptance of statements in lieu of certificates as to character of commercial paper whenever a member bank shall offer for rediscount any note, draft, or bill of exchange bearing the indorsement of such member bank, with waiver of demand notice and protest, the directors or executive committee of the federal reserve bank may, until july , , accept as evidence that the proceeds of such note, draft, or bill of exchange were or are to be used for agricultural, industrial, or commercial purposes (and that such notes, drafts, or bills of exchange in other respects comply with the regulations of the board), a written statement from the officer of the applying bank that of his own knowledge and belief the original loan was made for one of the purposes mentioned, and that the provisions of the act and regulations issued by the board have been complied with. charles s. hamlin, governor. h. parker willis, secretary. federal reserve board washington, april , . bankers' acceptances i definition in this regulation the term "acceptance" is defined as a draft or bill of exchange drawn to order, having a definite maturity, and payable in dollars, in the united states, the obligation to pay which has been accepted by an acknowledgment written or stamped and signed across the face of the instrument by the party on whom it is drawn; such agreement to be to the effect that the acceptor will pay at maturity according to the tenor of such draft or bill without qualifying conditions. ii statutory requirements under sections and section of the federal reserve act as amended provides that: (a) any federal reserve bank may discount acceptances: ( ) which are based on the importation or exportation of goods; ( ) which have a maturity at time of discount of not more than three months; and ( ) which are indorsed by at least one member bank. (b) the amount of acceptances so discounted shall at no time exceed one-half the paid-up capital stock and surplus of the bank for which the rediscounts are made, except by authority of the federal reserve board and of such general regulations as said board may prescribe, but not to exceed the capital stock and surplus of such bank. (c) the aggregate of notes and bills bearing the signature or indorsement of any one person, company, firm, or corporation rediscounted for any one bank shall at no time exceed per centum of the unimpaired capital and surplus of said bank; but this restriction shall not apply to the discount of bills of exchange drawn in good faith against actually existing values. section of the federal reserve act permits federal reserve banks, under regulations to be prescribed by the federal reserve board, to purchase and sell in the open market bankers' acceptances, with or without the indorsement of member bank. iii ruling the federal reserve board, exercising its power of regulation with reference to paragraph ii (b) hereof, rules as follows: any federal reserve bank shall be permitted to discount for any member bank "bankers' acceptances" as hereinafter defined up to an amount not to exceed the capital stock and surplus of the bank for which the rediscounts are made. iv eligibility the federal reserve board has determined that, until further order, to be eligible for discount under section , by federal reserve banks, at the rates to be established for bankers' acceptances: (a) acceptances must comply with the provisions of paragraph ii (a), (b), (c) hereof; (b) acceptances must have been made by a member bank, non-member bank, trust company, or by some private banking firm, person, company, or corporation engaged in the business of accepting or discounting. such acceptances will hereafter be referred to as "bankers'" acceptances;[ ] (c) a banker's acceptance must be drawn by a commercial, industrial, or agricultural concern (that is some person, firm, company, or corporation) directly connected with the importation or exportation of the goods involved in the transaction in which the acceptance originated, or by a "banker." in the latter case the goods, the importation or exportation of which is to be financed by the acceptance, must be clearly specified in the agreement with or the letter of advice to the acceptor. the bill must not be drawn or renewed after the goods have been surrendered to the purchaser or consignee. (d) a banker's acceptance must bear on its face or be accompanied by evidence in form satisfactory to a federal reserve bank that it originated in an actual _bona fide_ sale or consignment involving the importation or exportation of goods. such evidence may consist of a certificate on or accompanying the acceptance to the following effect: this acceptance is based upon a transaction involving the importation or exportation of goods. reference no. ----. name of acceptor ----. (e) bankers' acceptances, other than those of member banks, shall be eligible only after the acceptors shall have agreed in writing to furnish to the federal reserve banks of their respective districts, upon request, information concerning the nature of the transactions against which acceptances (certified or bearing evidence under iv (d) hereof) have been made. (f) a bill of exchange accepted by a "banker" may be considered as drawn in good faith against "actually existing values," under ii (c) hereof, when the acceptor is secured by a lien on or by transfer of title to the goods to be transported; or, in case of release of the goods before payment of the acceptance, by the substitution of other adequate security; (g) except in so far as they may be secured by a lien on or by transfer of the title to the goods to be transported, as under (f), the bills of any person, firm, company, or corporation, drawn on and accepted by any private banking firm, person, company, or corporation (other than a bank or trust company) engaged in the business of discounting and accepting, and discounted by a federal reserve bank, shall at no time exceed in the aggregate a sum equal to per centum of the paid-in capital of such federal reserve bank; (h) the aggregate of acceptances of any private banking firm, person, company, or corporation (other than a bank or trust company) engaged in the business of discounting or accepting, discounted or purchased by a federal reserve bank, shall at no time exceed a sum equal to per centum of the paid-in capital of such federal reserve bank. to be eligible for purchase by federal reserve banks under section , bankers' acceptances must comply with all requirements and be subject to all limitations hereinbefore stated, except that they need not be indorsed by a member bank: _provided, however_, that no federal reserve bank shall purchase the acceptance of a "banker" other than a member bank which does not bear the indorsement of a member bank, unless a federal reserve bank has first secured a satisfactory statement of the financial condition of the acceptor in form to be approved by the federal reserve board. v policy as to purchases while it would appear impracticable to fix a maximum sum or percentage up to which federal reserve banks may invest in bankers' acceptances, both under section and section , it will be necessary to watch carefully the aggregate amount to be held from time to time. in framing their policy with respect to transactions in acceptances, federal reserve banks will have to consider not only the local demands to be expected from their own members, but also requirements to be met in other districts. the plan to be followed must in each case adapt itself to the constantly varying needs of the country. charles s. hamlin, governor. h. parker willis, secretary. federal reserve board washington, april , . acceptance by member banks by act of congress approved march , , section (paragraphs , , and of the federal reserve act) was amended and re-enacted so as to read as follows: any federal reserve bank may discount acceptances which are based on the importation or exportation of goods and which have a maturity at time of discount of not more than three months and indorsed by at least one member bank. the amount of acceptances so discounted shall at no time exceed one-half the paid-up and unimpaired capital stock and surplus of the bank for which the rediscounts are made, except by authority of the federal reserve board, under such general regulations as said board may prescribe, but not to exceed the capital stock and surplus of such bank. the aggregate of such notes and bills bearing the signature or indorsement of any one such person, company, firm, or corporation rediscounted for any one bank shall at no time exceed per centum of the unimpaired capital and surplus of said bank; but this restriction shall not apply to the discount of bills of exchange drawn in good faith against actually existing values. any member bank may accept drafts or bills of exchange drawn upon it and growing out of transactions involving the importation of exportation of goods having not more than six months' sight to run; but no bank shall accept such bills to an amount equal at any time in the aggregate to more than one-half of its paid-up and unimpaired capital stock and surplus, except by authority of the federal reserve board, under such general regulations as said board may prescribe, but not to exceed the capital stock and surplus of such bank, and such regulations shall apply to all banks alike, regardless of the amount of capital stock and surplus. in order to give effect to the above amendment of the law, the federal reserve board issues the appended regulation k, series of , stating the conditions under which member banks may accept, up to per cent. of their capital and surplus, drafts or bills of exchange growing out of transactions involving the importation or exportation of goods and having not more than six months' sight to run. charles s. hamlin, governor. h. parker willis, secretary. federal reserve board washington, may , . clearings between federal reserve banks i statutory provisions under section "the federal reserve board shall make and promulgate from time to time regulations governing the transfer of funds and charges therefore among federal reserve banks and their branches, and may at its discretion exercise the functions of a clearing house for such federal reserve banks, or may designate a federal reserve bank to exercise such functions, and may also require each such bank to exercise the functions of a clearing house for its member banks." ii general provisions in the exercise of the functions of the clearing house authorised under the provisions of section , quoted above, the federal reserve board and the federal reserve banks will be governed by and subject to the following regulations and the federal reserve board will be the custodian of the funds hereinafter termed the gold settlement fund. the board will appoint a settling agent who shall keep the necessary records and accounts. iii deposits in the gold settlement fund (a) each federal reserve bank shall, not later than may , , forward to the treasury or the nearest sub-treasury, for credit to the account of the gold settlement fund $ , , in gold, gold certificates or gold order certificates, and, in addition, an amount at least equal to its net indebtedness due to all federal reserve banks. (b) the treasurer of the united states or assistant treasurer will, in accordance with arrangements made with the treasury department, advise the federal reserve board, by mail or telegraph, of the receipt of all funds deposited on account of the gold settlement fund, and the treasurer will issue and deliver to the federal reserve board gold order certificates made "payable to the order of the federal reserve board" covering the sum so deposited. (c) each federal reserve bank shall maintain a balance in the gold settlement fund of not less than $ , , . (d) excess balances may, at the convenience of each federal reserve bank, remain deposited with the gold settlement fund. iv custody of funds (a) a safe in the treasury vault will be set apart for the exclusive use of the federal reserve board. (b) to open the treasury vault, the presence of two persons designated by the secretary of the treasury is required. the combination of the safe set apart for the use of the board will be controlled by two persons designated by the board. (c) a vault record shall be kept, giving a memorandum of all entrances to the safe, by whom made, for what purpose, and the certificates deposited or withdrawn. each entry on the vault record book shall be signed by the persons having access to the safe. v accounts in its relations with other federal reserve banks each federal reserve bank shall keep an account showing balances "due to" other federal reserve banks representing the proceeds of items which it has actually collected, and payments and transfers which have been made to it for the account of such other federal reserve banks; and an account showing balances "due from" other federal reserve banks representing the proceeds of items which it has sent to such other federal reserve banks, and payments and transfer which have been made to such other federal reserve banks for its account. vi procedure (a) at the close of business each wednesday night, each federal reserve bank shall telegraph to the federal reserve board, confirming such telegram by mail, the amounts in even thousands due to each other federal reserve bank as of that date, as indicated by its "due to" account provided for in rule v. if wednesday is a holiday in the state in which a federal reserve bank is located, then such bank shall telegraph as herein provided on tuesday, at the close of business. (b) the settling agent shall, on each thursday, make the proper debits and credits in the accounts of each federal reserve bank with the gold settlement fund, and shall telegraph to each bank the amounts, in even thousands, of credits to its settlement account, giving the name of each federal reserve bank from which each of its credits was received and also its net debit or credit balance in the weekly settlement. (c) each federal reserve bank shall, on receipt of the telegram from the settling agent, debit the "due to" federal reserve banks' accounts, and shall credit the gold settlement fund; and shall credit the "due from" federal reserve banks' accounts and charge the gold settlement fund. the difference between the total debits and credits shall equal the net debit or credit to the gold settlement fund, as advised in the telegram from the settling agent. vii deficits (a) should the debit settlement balance of any federal reserve bank be in excess of the amount of its credit in the gold settlement fund, such deficit must be immediately covered either by the deposit of gold, gold certificates, or gold order certificates in the treasury or nearest sub-treasury, or by credit operations with other federal reserve banks which have an excess balance with the gold settlement fund. any delay in covering such deficit shall be subject to such charge as the federal reserve board may impose. (b) as required in iii (c) of this regulation, each federal reserve bank shall maintain a balance in the gold settlement fund of not less than $ , , . should the credit balance of any federal reserve bank in such fund fall below $ , , , such bank shall restore its balance to that amount in either manner indicated under vii (a) of this regulation on or before tuesday of the following week. viii excess balances any excess balance shall, on request, either by telegraph or letter, of the federal reserve bank to which it is due, be refunded by the return to the reserve bank of the gold order certificates held by the gold settlement fund properly indorsed; or by the indorsement and delivery to the treasurer of a like amount of such certificates for which he will give in exchange bearer gold certificates, which the federal reserve board may send by registered mail, insured, to the banks, if they want funds other than gold order certificates, or in lieu of such payment, the treasurer may by wire or mail direct payment to be made by a sub-treasury office through the medium of the general account, provided funds are held in such office available for the purpose. gold order certificates will, when presented at the office of the treasurer of the united states or any sub-treasury, bearing the signatures of duly authorised officers of the federal reserve bank, be payable in gold or gold certificates. if the treasury finds it necessary to ship from one point to another in order to have the gold or gold certificates available at the sub-treasury to which such gold order certificates are presented, the federal reserve board will, for the account of the gold settlement fund, refund any expense incurred by the treasury in making such shipments. ix reserve each federal reserve bank shall count as a part of its legal reserve the funds standing to the credit of its account on the books of the gold settlement fund. x expenses cost of operation of and shipment of currency by the gold settlement fund shall be apportioned by a semi-annual accounting among the federal reserve banks on a basis to be hereafter determined by the board after consultations with the federal reserve banks. xi audit at least once in each three months an audit shall be made of the gold settlement fund by a representative of the federal reserve board and representative appointed by the federal reserve banks. xii the federal reserve board reserves the right to add to, alter, or amend these regulations. charles s. hamlin, governor. h. parker willis, secretary. federal reserve board washington, june , . membership of state banks i statutory requirements specific provisions of the federal reserve act applicable to state banks and trust companies which become member banks are quoted at the end of this regulation. ii banks eligible for membership a state bank or a trust company to be eligible for membership in a federal reserve bank must comply with the following conditions: ( ) it must have been incorporated under a special or general law of the state or district in which it is located. ( ) it must have a minimum paid-up unimpaired capital stock as follows: in cities or towns not exceeding , inhabitants, $ , . in cities or towns exceeding , but not exceeding , inhabitants, $ , . in cities or towns exceeding , but not exceeding , inhabitants, $ , . in cities exceeding , inhabitants, $ , . iii application for membership any eligible state bank or trust company may make application on form , made a part of this regulation, to the federal reserve agent of its district for an amount of capital stock in the federal reserve bank of such district equal to per cent. of the paid-up capital stock and surplus of such state bank or trust company.[ ] upon receipt of such application the federal reserve agent shall submit the same to a committee composed of the federal reserve agent, the governor of the federal reserve bank, and at least one other member of the board of directors of such bank, to be appointed by such board, but no class a director whose bank is in the same city or town as the applying bank or trust company shall be a member of such committee. this committee shall, after receiving the report of such examination as may be required by the federal reserve bank in pursuance of directions from the federal reserve board, consider the application and transmit it to the federal reserve board with its report and recommendations. iv approval of application in passing upon an application the federal reserve board will consider especially: ( ) the financial condition of the applying bank or trust company and the general character of its management. ( ) whether the nature of the powers exercised by the said bank or trust company and its charter provisions are consistent with the proper conduct of the business of banking and with membership in the federal reserve bank. ( ) whether the laws of the state or district in which the applying bank or trust company is located contain provisions likely to interfere with the proper regulation and supervision of member banks. if, in the judgment of the federal reserve board, an applying bank or trust company conforms to all the requirements of the federal reserve act and these regulations, and is otherwise qualified for membership, the board will issue a certificate of approval. whenever the board may deem it necessary, it will impose such conditions as will insure compliance with the act and these regulations. when the certificate of approval and any conditions contained therein have been accepted by the applying bank or trust company, stock in the federal reserve bank of the district in which the applying bank or trust company is located shall be issued and paid for under the regulations of the federal reserve act provided for national banks which become stockholders in the federal reserve banks. v powers and restrictions every state bank or trust company while a member of the federal reserve system: ( ) shall retain its full charter and statutory rights as a state bank or trust company, and may continue to exercise the same functions as before admission, except as provided in the federal reserve act and the regulations of the federal reserve board, including any conditions embodied in the certificate of approval. ( ) shall invest only in loans on real estate or mortgages of a character and to an extent which, considering the nature of its liabilities, will not impair its liquid condition. ( ) shall adjust, to conform with the requirements of the federal reserve act and these regulations, within such reasonable time as may be determined by the board in each case, any loans it may have at the time of its admission to membership which are secured by its own stock, or any loans to one person, firm, or corporation aggregating more than per cent. of its capital and surplus or more than per cent. of its capital, or any real estate loans which, in the judgment of the federal reserve board, impair its liquid condition. ( ) shall maintain such improvements and changes in its banking practice as may have been specifically required of it by the federal reserve board as a condition of its admission, and shall not lower the standard of banking then required of it: and ( ) shall enjoy all the privileges an observe all those requirements of the federal reserve act and of the regulations of the federal reserve board applicable to state banks and trust companies which have become member banks. vi withdrawals any state bank or trust company desiring to withdraw from membership in a federal reserve bank may do so twelve months after written notice of its intention to withdraw shall have been filed with the federal reserve board. the board will immediately notify the federal reserve bank of the receipt of such notice. at the expiration of said twelve months, such bank or trust company shall surrender all of its holdings of capital stock in the federal reserve bank, which stock shall then be cancelled and the withdrawing bank or trust company shall thereupon be released from its stock subscription not previously called. such bank or trust company shall, immediately upon the cancellation of its stock, cease to be a member of the federal reserve bank, and the federal reserve bank shall then refund to such bank or trust company a sum equal to the cash-paid subscription on the shares surrendered, with interest at the rate of one-half of one per centum per month computed from the last dividend, if earned, not to exceed the book value thereof, and the reserve deposits, less any liability of such member to the federal reserve bank: _provided_, that no federal reserve bank shall, except by the specific authority of the federal reserve board, cancel within the same calendar year more than per cent. of its capital stock for the purpose of effecting voluntary withdrawals during that year. all applications, including therein any on which action may have been deferred because in excess of the aforesaid per cent. limitation, will be dealt with in the order in which they were originally filed with the board. any state bank or trust company desiring to withdraw from membership at the expiration of the twelve months' notice, notwithstanding the fact that the federal reserve bank has previously cancelled per cent. of its stock during the same calendar year, may do so. in such case, however, the federal reserve bank shall not be required to repay to the withdrawing bank or trust company the sums due as above, until such time as its stock would have been cancelled had it not exercised this option. the federal reserve bank shall, however, give a receipt for the stock surrendered. vii examinations every state bank or trust company, while a member of the federal reserve system, shall be subject to such examinations as may be prescribed by the federal reserve board in pursuance to the provisions of the federal reserve act. in order to avoid duplication, the board will exercise the broad discretion vested in it by the act in accepting examinations of state banks and trust companies made by state authorities wherever these are satisfactory to the board and are found to be of the same standard of thoroughness as national bank examinations, and where in addition satisfactory arrangements for co-operation in the matter of examination between the designated examiners of the board and those of the states already exist or can be effected with state authorities. examiners from the staff of the board or of the federal reserve banks will, whenever desirable, be designated by the board to act with the examination staff of the state in order that uniformity in the standard of examination may be assured. viii future regulations the federal reserve board reserves the right to make such amendments and adopt and issue, from time to time, such further regulations authorised by the act as it may deem necessary, but no amendment of section vi of these regulations, relating to voluntary withdrawals, shall take effect until six months after its adoption and issue by the board. charles s. hamlin, governor. h. parker willis, secretary. footnotes: [ ] drafts and bills of exchange eligible for rediscount under section , other than "bankers'" acceptances, have been dealt with by regulation b, series of . [ ] three per cent. has already been called from national and other member banks, but the remainder of the subscription or any part of it shall be subject to call if deemed necessary by the federal reserve board. transcriber's notes: . page scan source: http://books.google.com/books?id=e i aaaamaaj . the diphthong oe is represented by [oe]. ovington's bank by the same author * * * * * the house of the wolf the new rector the story of francis cludde a gentleman of france the man in black under the red robe my lady rotha memoirs of a minister of france the red cockade shrewsbury the castle inn sophia count hannibal in kings' byways the long night the abbess of vlaye starvecrow farm chippinge laid up in lavender the wild geese the great house ovington's bank by stanley j. weyman author of "a gentleman of france," "count hannibal," "the castle inn," "the great house," etc., etc. new york longmans, green and co. fifth avenue copyright, by stanley j. weyman made in the united states ovington's bank chapter i it was market day at aldersbury, the old county town of aldshire, and the busiest hour of the day. the clock of st. juliana's was on the point of striking three, and the streets below it were thronged. the gentry, indeed, were beginning to take themselves homeward; a carriage and four, with postillions in yellow jackets, awaited its letters before the post office, and near at hand a red-wheeled tandem-cart, the horses tossing their small, keen heads, hung on the movements of its master, who was gossipping on the steps of ovington's bank, on bride hill. but only the vans bound to the more distant valleys had yet started on their lagging journey; the farmers' gigs, the hucksters' carts, the pack-asses still lingered, filling the streets with a chattering, moving multitude. white-coated yeomen and their wives jostled their betters--but with humble apologies--in the low-browed shops, or hardily pushed smocked-frocks from the narrow pavements, or clung together in obstinate groups in the roadway. loud was the babel about the yards of the inns, loudest where the taprooms poured forth those who, having dined well, had also drunk deep, after the fashion of our great-grandsires. through all this medley and hubbub a young man threaded his way. he wore a blue coat with gilt buttons, a waistcoat to match, and drab trousers, and as he hurried along, his hat tilted back, he greeted gentle and simple with the same laughing nod. he had the carriage of one who had a fixed position in the world and knew his worth; and so attractive was his smile, so gallant his confidence, that liking ran before him, and two out of three of the faces that he encountered mirrored his good humor. as he passed along the high street, and skirted the market place, where the quaint stone figure of an ancient prince, great in his day, looked down on the turmoil from the front of the market house, he glanced up at the clock, noted the imminence of the hour, and quickened his pace. a man touched him on the sleeve. "mr. bourdillon, sir," he said, trying to stop him, "by your leave! i want to----" "not now. not now, broadway," the young man answered quickly. "i'm meeting the mail." and before the other had fairly taken in his words he was a dozen paces away, now slipping deftly between two lurching farmers, now coasting about the more obstinate groups. a moment later st. juliana's clock, hard put to it to raise its wheezy voice above the noise, struck the hour. the young man slackened his pace. he was in time, but only barely in time, for as he paused, the distant notes of the guard's bugle sprang like fairy music above the turbid current of sound and gave notice that the coach was at hand. hurriedly gigs and carts drew aside, the crowd sought the pavements, the more sober drew the heedless out of danger, half a dozen voices cried "look out! have a care!" and with a last shrill tantivy! tantivy! tantivy! the four sweating bays, the leaders cantering, the wheelers trotting, the bars all taut, emerged from the crest of the steep cop, and the holyhead mail, within a minute of its time, drew up before the door of the lion, the royal arms shining bravely from its red panels. shop-keepers ran to their doors, the crowd closed up about it, the yokels gaped--for who in those days felt no interest in its advent! by that coach had come, eleven years before, the news of the abdication of the corsican and the close of the great war. laurelled and flagged, it had thrilled the town a year afterwards with the tidings of waterloo. later it had signalled the death of the old blind king, and later still, the acquittal--as all the world regarded it--of queen caroline. ah, how the crowd had cheered then! and how lustily old squire griffin of garth, the great-uncle of this young man, now come to meet the mail, had longed to lay his cane about their disloyal shoulders! the coachman, who had driven the eleven-mile stage from haygate in fifty-eight minutes, unbuckled and flung down the reins. the guard thrust his bugle into its case, tossed a bundle of journals to the waiting boys, and stepped nimbly to the ground. the passengers followed more slowly, stamping their chilled feet, and stretching their cramped limbs. some, who were strangers, looked about them with a travelled air, or hastened to the blazing fires that shone from the lion windows, while two or three who were at their journey's end bustled about, rescuing shawls and portmanteaux, or dived into inner pockets for the coachman's fee. the last to appear, a man, rather below the middle height, in a handsome caped travelling-coat, was in no hurry. he stepped out at his ease and found the young man who has been described at his side. "that you, arthur?" he said, his face lighting up. "all well?" "all well, sir. let me take that!" "isn't rodd here? ah!" to a second young man, plainer, darker, and more soberly garbed, who had silently appeared at his forerunner's elbow. "take this, rodd, will you?" handing him a small leather case. "don't let it go, until it is on my table. all well?" "all well, sir, thank you." "then go on at once, will you? i will follow with mr. bourdillon. give me your arm, arthur." he looked about him as he spoke. one or two hats were lifted, he acknowledged the courtesy with a smile. "betty well?" "you'll find her at the window looking out. all gone swimmingly, i hope, sir?" "swimmingly?" the traveller paused on the word, perhaps questioning its propriety; and he did not continue until they had disengaged themselves from the group round the coach. he and the young man came, though there was nothing to show this, from different grades of society, and the one was thirty years older than the other and some inches shorter. yet there was a likeness. the lower part of the face in each was strong, and a certain brightness in the eyes, that was alertness in the younger man and keenness in the elder, told of a sanguine temperament; and they were both good-looking. "swimmingly?" the traveller repeated when they had freed themselves from their immediate neighbors. "well, if you choose to put it that way, yes. but, it's wonderful, wonderful," in a lower tone, as he paused an instant to acknowledge an acquaintance, "the state of things up there, my boy." "still rising?" "rising as if things would never fall. and upon my word i don't know why, with the marvellous progress everything is making--but i'll tell you all that later. it's a full market. is acherley at the bank?" "yes, and sir charles. they came a little before time." "clement is with them, i suppose?" "well, no, sir." "don't say he's away to-day!" in a tone of vexation. "i'm afraid he is," arthur admitted. "but they are all right. i offered sir charles the paper, but they preferred to wait outside." "d----n!" muttered the other, nodding right and left. "too bad of the boy! too bad! no," to the person who had lain in wait for bourdillon and now put himself in their way, "i can't stop now, mr. broadway." "but, mr. ovington! just a----" "not now!" ovington answered curtly. "call to-morrow." and when they had left the man behind, "what does he want?" "what they all want," arthur answered, smiling. "a good thing, sir." "but he isn't a customer." "no, but he will be to-morrow," the young man rejoined. "they are all agog. they've got it that you can make a man's fortune by a word, and of course they want their fortunes made." "ah!" the other ejaculated drily. "but seriously, look about you, arthur. did you ever see a greater change in men's faces--from what they were this time two years? even the farmers!" "well, they are doing well." "better, at any rate. better, even they. yes, mr. wolley," to a stout man, much wrapped up, who put himself in the way, "follow us, please. sir charles is waiting. better," ovington continued to his companion, as the man fell behind, "and prices rising, and demand--demand spreading in everything." "including stocks?" "including stocks. i've some news for sir charles, that, if he has any doubts about joining us, will fix him. well, here we are, and i'm glad to be at home. we'll go in by the house door, arthur, or betty will be disappointed." the bank stood on bride hill, looking along the high street. the position was excellent and the house good. still, it was no more than a house, for in banks were not the institutions that they have since become; they had still for rivals the old stocking and the cracked teapot, and among banks, ovington's at aldersbury was neither of long standing nor of more than local repute. mr. ovington led the way into the house, and had barely removed his hat when a girl flew down the wide oak staircase and flung herself upon him. "oh, father!" she cried. "here at last! aren't you cold? aren't you starving?" "pretty well for that," he replied, stroking her hair in a way that proved that, whatever he was to others, he had a soft spot for his daughter. "pretty well for that, betty." "well, there's a good fire! come and warm yourself!" "that's what i can't do, my dear," he said, taking off his great coat. "business first." "but i thought you had done all that in london?" pouting. "not all, but some. i shall be an hour, perhaps more." she shot a mutinous glance at arthur. "why can't he do it? and mr. rodd?" "you think we are old enough, betty?" "apprentices should be seen, and not heard!" she snapped. arthur's position at the bank had been hardly understood at first, and in some fit of mischief, betty, determined not to bow down to his pretensions, had christened him the "apprentice." "i thought that that proverb applied to children," he retorted. the girl was a beauty, dark and vivid, but small, and young enough to feel the gibe. before she could retaliate, however, her father intervened. "where's clement?" he asked. "i know that he is not here." "tell-tale!" she flung at arthur. "if you must know, father," mildly, "i think that he's----" "mooning somewhere, i suppose, instead of being in the bank, as he should be. and market day of all days! there, come, bourdillon, i mustn't keep sir charles and acherley waiting." he led the way to the rear of the hall, where a door on the left led into the bank parlor. betty made a face after them. in the parlor which lay behind the public office were two men. one, seated in an arm-chair by the fire, was reading the _morning post_. the other stood at the window, his very shoulders expressing his impatience. but it was to the former, a tall, middle-aged man, stiff and pompous, with thin sandy hair but kindly eyes, that ovington made the first advance. "i am sorry to have kept you waiting, sir charles," he said. "very sorry. but i assure you i have not wasted a minute. mr. acherley," to the other, "pardon me, will you? just a word with sir charles before we begin." and leaving bourdillon to make himself agreeable to the impatient acherley, ovington drew sir charles woosenham aside. "i have gone a little beyond my instructions," he said in a low tone, "and sold your monte reales." the baronet's face fell. "sold!" he ejaculated. "parted with them? but i never--my dear sir, i never----" "authorized a sale?" the banker agreed suavely. "no, perfectly right, sir charles. but i was on the spot and i felt myself responsible. there was a favorable turn and--" forestalling the other as he would have interrupted--"my rule is little and sure--little and sure, and sell on a fair rise. i don't think you will be dissatisfied with the transaction." but sir charles's displeasure showed itself in his face. he was a man of family and influence, honorable and straightforward, but his abilities were hardly on a par with his position, and though he had at times an inkling of the fact it only made him the more jealous of interference. "but i never contemplated," he said, the blood rising to his face, "never for a moment, that you would part with the stocks without reference to me, mr. ovington." "precisely, precisely--without your authority, sir charles--except at a really good profit. i think that four or five hundred was mentioned? just so. well, if you will look at this draft, which of course includes the price of the stocks--they cost, if i remember, fourteen hundred or thereabouts--you will, i hope--i really hope--approve of what i did." sir charles adjusted his glasses, and frowned at the paper. he was prepared to be displeased and to show it. "two thousand six hundred," he muttered, "two thousand six hundred and twenty-seven!" his jaw dropping in his surprise. "two thousand six--really! ah, well, i certainly think--" with a quick change to cordiality that would have amused an onlooker--"that you acted for the best. i am obliged to you, much obliged, mr. ovington. a handsome profit." "i felt sure that you would approve," the banker assented gravely. "shall bourdillon put the draft--arthur, be good enough to place this draft to sir charles woosenham's account. and tell mr. wolley and mr. grounds--i think they are waiting--to come in. i ask your pardon, mr. acherley," approaching him in turn. "no plum for me, i suppose?" growled that gentleman, whom the gist of the interview with sir charles had not escaped. he was a tall, hatchet-faced, dissipated-looking man, of an old family, acherley of acherley. he had been a dandy with brummell, had shaken his elbow at watier's when crockford managed it, had dined at the pavilion; now he vegetated in the country on a mortgaged estate, and on sundays attended cock-fights behind the village public-house. "well, not to-day," ovington answered pleasantly. "but when we have shaken the tree a little----" "one may fall, you think?" "i hope so. you will be unlucky if one does not." the two men who had been summoned came in, each after his fashion. wolley entered first, endeavoring to mask under a swaggering manner his consciousness that he stood in the presence of his betters. a clothier from the valleys and one of ovington's earliest customers, he had raised himself, as the banker had, and from the same stratum; but by enlarging instead of selling his mill. during the war he had made much money and had come to attribute his success a little more to his abilities and a little less to circumstances than was the fact. of late there were whispers that in the financial storm of ' , which had followed the close of the war, he had come near the rocks; but if so he had put a bold face on the crisis, and by steadily putting himself forward he had impressed most men with a belief in his wealth. "afternoon, sir charles," he grunted with as much ease as he could compass. "afternoon," to acherley. he took a seat at the table and slapped down his hat. he was here on business and he meant to show that he knew what business was. grounds, who followed, was a man of a different type. he was a maltster and had been a dairyman; a leading tradesman in the town, cautious, penurious, timid, putting pound to pound without saying much about it, and owning that respect for his superiors which became one in his position. until lately he had hoarded his savings, or put them into the five per cents.; he had distrusted even the oldest bank. but progress was in the air, new enterprises, new discoveries were the talk of the town, the interest on the five per cents. had been reduced to four, and in a rare moment of rashness, he had taken a hint dropped by ovington, had ventured, and won. he still trembled at his temerity, he still vowed in wakeful moments that he would return to the old safe road, but in the meantime easy gains tempted him and he was now fairly embarked on modern courses. he was a byword in aldersbury for caution and shrewdness, and his adhesion to any scheme would, as ovington well knew, commend it to the town. he hung back, but, "come, mr. grounds, take a seat," said the banker. "you know sir charles and mr. acherley? sir charles, will you sit on my right, and mr. acherley here, if you please? bourdillon, will you take a note? we are met, as you know, gentlemen, to consider the formation of a joint stock company, to be called"--he consulted a paper--"the valleys steam railroad company, for the purpose of connecting the woollen business of the valleys with the town, and of providing the public with a superior mode of transport. the bill for the manchester and liverpool railroad is on the point of passing, and that great enterprise is as good as carried through. the bill for the london and birmingham railroad is before the house; a bill for a line from birmingham to aldersbury is preparing. those projects are, gentlemen, in stronger hands than ours, and it might seem to some to be too early to anticipate their success and to provide the continuation we propose. but nothing is more certain than that the spoils are to those who are first in the field. the stockton and darlington railway is proving what can be done by steam in the transport of the heaviest goods. there a single engine draws a load of fifty tons at the rate of six miles an hour, and has been known to convey a load of passengers at fifteen miles. higher speeds are thought to be possible----" "i'll never believe it!" wolley growled, anxious to assert himself. "but not desirable," ovington continued blandly. "at any rate, if we wait too long----" "there's no talk of waiting!" acherley exclaimed. neither he nor sir charles was in the habit of meeting on an equal footing the men with whom they were sitting to-day; he found the position galling, and what was to be done he was anxious should be done quickly. he had heard the banker's exordium before. "no, we are here to act," ovington assented, with an eye on grounds, for whose benefit he had been talking. "but on sober and well-considered lines. we are all agreed, i think, that such a railroad will be a benefit to the trade and district?" now, to this proposition not one of those present would have assented a year before. "steam railroads?" they would have cried, "fantastic and impossible!" but the years and had been years not only of great prosperity but of abnormal progress. the seven lean years, the years of depression and repression, which had followed waterloo had come to an end. the losses of war had been made good, and simultaneously a more liberal spirit had been infused into the government. men had breathed freely, had looked about them, had begun to hope and to venture, to talk of a new world. demand had overtaken and outrun supply, large profits had been made, money had become cheap, and, fostered by credit, the growth of enterprise throughout the country had been marvellous. it was as if, after the frosts of winter, the south wind had blown and sleeping life had everywhere awakened. men doubled their operations and still had money to spare. they put the money in the funds--the funds rose until they paid no more than three per cent. dissatisfied, men sought other channels for their savings, nor sought in vain. joint stock companies arose on every side. projects, good and bad, sprang up like mushrooms in a night. old lodes and new harbors, old canals and new fisheries, were taken in hand, and for all these there seemed to be capital. shares rose to a premium before the companies were floated, and soon the bounds of our shores were found to be too narrow for british enterprise. at that moment the separation of the south american countries from spain fell out, and these were at once seen to offer new outlets. the romantic were dazzled with legends of mines of gold and pockets of diamonds, while the gravest saw gain in pampas waving with wheat and prairies grazed by countless herds. it was felt, even by the most cautious, that a new era had set in. trade, soaring on a continual rise in prices, was to know no bounds. if the golden age of commerce had not begun, something very like it had come to bless the british merchant. under such circumstances the valleys railroad seemed a practical thing even to grounds, and ovington's question was answered by a general assent. "very good, gentlemen," he resumed. "then i may take that as agreed." he proceeded to enter upon the details of the scheme. the length of the line would be fourteen miles. the capital was to be £ , , divided into shares of £ each, £ a share to be paid at once, the sum so raised to be used for the preliminary expenses; £ s. per share to be paid three months later, and the rest to be called up as required. the directors' qualification would be fifty shares. the number of directors would be seven--the five gentlemen now present and two to be named, as to whom he would have a word to say by-and-by. mr. bourdillon, of whose abilities he thought highly--here several at the table looked kindly at the young man--and who for other reasons was eminently fitted for the position, would be secretary. "but will the forty-five thousand be enough, sir?" grounds ventured timidly. he alone was not directly interested in the venture. wolley was the tenant of a large mill. sir charles was the owner of two mills and the hamlets about them, acherley of a third. ovington had various interests. "to complete the line, mr. grounds? we believe so. to provide the engine and coaches another fifteen thousand will be needed, but this may be more cheaply raised by a mortgage." sir charles shied at the word. "i don't like a mortgage, mr. ovington," he said. "no, d----n a mortgage!" acherley chimed in. he had had much experience of them. "the point is this," the banker explained. "the road once completed, we shall be able to raise the fifteen thousand at five per cent. if we issue shares they must partake, equally with ourselves, in the profits, which may be fifteen, twenty, perhaps twenty-five per cent." a twinkle of greed passed from eye to eye. fifteen, twenty, twenty-five per cent.! ho, ho! "the next question," ovington continued, "is important. we cannot use the highway, the gradients and angles render that impossible. we must acquire a right of way; but, fortunately, the estates we run over are few, no more than thirteen in all, and for a full third of the distance they are represented at this table." he bowed gracefully to the two landowners. "sir charles will, of course, be president of the road and chairman of the directors. we are fortunate in having at our head a country gentleman who has"--he bowed again--"the enlightenment to see that the landed interest is best served by making commerce contributory to its well-being." "but what about the game?" sir charles asked anxiously. "you don't think----" "on that point the greatest care will be taken. we shall see that no covert is closely approached." "and the--you won't bring the line within sight of----" "of the park? god forbid! the amenities of every estate must be carefully guarded. and, of course, a fair price for the right of way will be agreed. seven of the smaller landowners i have sounded, and we shall have no trouble with them. the largest estate outstanding----" "is my landlord's, i'll bet!" wolley exclaimed. "yes--is garth. mr. griffin's." wolley laughed rudely. "garth? ay, you'll have your work cut out there!" "oh. i don't know!" "i do. and you'll find i'm right." "well, i hope----" "you may hope what you like!" sir charles shuddered at the man's brusqueness. "the squire's a hard nut to crack, and so you'll find, banker. if you can get him to do a thing he don't wish to do, you'll be the first that ever has. he hates the name of trade as he hates the devil!" the baronet sat up. "trade?" he exclaimed. "oh! but i am not aware, sir, that this is---- surely a railroad is on another footing?" alarm was written on his face. "quite!" ovington struck in. "entirely different! another thing altogether, sir charles. there can be only one opinion on that." "of course, if i thought i was entering on anything like----" "a railroad is on an entirely different footing," the banker repeated, with an angry glance at wolley, who, unrepentant, continued to stare before him, a sneer on his face. "on an entirely different footing. even mr. griffin, prejudiced as i venture with all respect to think he is--even he would agree to that. but i have considered the difficulty, gentlemen, and i have no doubt we can surmount it. i propose to see him on monday, accompanied by mr. bourdillon, his great-nephew, and between us i have no doubt that we shall be able to persuade him." acherley looked over his shoulder at the secretary, who sat at a small table at ovington's elbow. "like the job, arthur?" he asked. "i think sir charles's example will go a long way with him," bourdillon answered. he was a tactful young man. the banker put the interruption aside. "i shall see mr. griffin on monday, and with your consent, gentlemen, i propose to offer him the sixth seat at the board." "quite right, quite right," sir charles murmured, much relieved. "he'll not take it!" wolley persisted. "my dear sir!" "you will see i am right." "well, there are more ways than one. at any rate i will see him and report to the next meeting, when, with the chairman's approbation, we shall draw up the prospectus. in that connection"--he consulted his paper--"i have already received overtures from customers of the bank for four hundred shares." there was a murmur of applause and grounds's face betrayed relief. "then sir charles has put himself down for three hundred." he bowed deferentially to woosenham. "mr. acherley for one hundred and fifty, mr. wolley has taken up one hundred and twenty-five, and mr. grounds--i have not heard from mr. grounds, and there is no hurry. no hurry at all!" but grounds, feeling that all eyes were on him, and feeling also uncomfortable in his company, took the fence up to which he had been brought. he murmured that he would take one hundred and twenty-five. "excellent!" said ovington. "and i, on behalf of the bank, propose to take four hundred." again there was a murmur of applause. "so that before we go to the public we have already one-third of the shares taken up. that being so, i feel no doubt that we shall start at a premium before we cut the first sod." there followed a movement of feet, an outburst of hilarity. for this was what they all wished to hear; this was the point. chairs were pushed back, and sir charles, who was as fearful for his prestige as grounds for his money, recovered his cheerfulness. even acherley became good-humored. "well, here's to the valleys railroad!" he cried. "damme, we ought to have something to drink it in!" the banker ignored this, and sir charles spoke. "but as to the seventh seat at the board? we have not arranged that, i think?" he liked to show that nothing escaped him, and that if he was above business he could still, when he condescended, be a business man. "no," ovington agreed. "but i suggest that, with your permission, we hold that over. there may be a big subscriber taking three or four hundred shares?" "quite so, quite so." "somebody may come forward, and the larger the applications the higher the premium, gentlemen." again eyes glistened, and there was a new movement. woosenham took his leave, bowing to wolley and grounds, and shaking hands with the others. acherley went with him and ovington accompanied them, bare-headed, to sir charles's carriage, which was waiting before the bank. as he returned wolley waylaid him and drew him into a corner. a conference took place, the banker turning the money in his fob as he listened, his face grave. presently the clothier entered on a second explanation. in the end ovington nodded. he called rodd from the counter and gave an order. he left his customer in the bank. when he re-entered the parlor grounds had disappeared, and arthur, who was bending over his, papers, looked up. "wolley wanted his notes renewed, i suppose?" he said. the bank had few secrets for this shrewd young man, who had learnt as much of business in eighteen months as rodd the cashier had learned in ten years, or as clement ovington would learn in twenty. the banker nodded. "and three hundred more on his standing loan." arthur whistled. "i wonder you go on carrying him, sir." "if i cut him loose now----" "there would be a loss, of course." "yes, but that is not all, lad. where would the railroad scheme be? gone. and that's not all, either. his fall would deal a blow to credit. the money that we are drawing out of the old stockings and the cracked tea-pots would go back to them. half the clothiers in the valley would shiver, and neither i nor you would be able to say where the trouble would stop, or who would be in the _gazette_ next week. no, we must carry him for the present, and pay for his railway shares too. but we shall hold them, and the profits will eventually come to us. and if the railway is made, it will raise the value of mills and increase our security; so that whether he goes on or we have to take the mills over--which heaven forbid!--the ground will be firmer. it went well?" "splendidly! the way you managed them!" the lad laughed. "what is it?" "grounds asked me if i did not think that you were like the pictures of old boney. i said i did. the napoleon of finance, i told him. only, i added, you knew a deal better where to stop." ovington shook his head at the flatterer, but was pleased with the flattery. more than once, people had stopped him in the street and told him that he was like napoleon. it was not only that he was stout and of middle height, with his head sunk between his shoulders; but he had the classic profile, the waxen complexion, the dominating brow and keen bright eyes, nay, something of the air of power of the great exile who had died three years before. and he had something, too, of his ambition. sprung from nothing, a self-made man, he seemed in his neighbors' eyes to have already reached a wonderful eminence. but in his own eyes he was still low on the hill of fortune. he was still a country banker, and new at that. but if the wave of prosperity which was sweeping over the country and which had already wrought so many changes, if this could be taken at the flood, nothing, he believed, was beyond him. he dreamed of a union with dean's, the old conservative steady-going bank of the town; of branches here and branches there; finally of an amalgamation with a london bank, of threadneedle street, and a directorship--but arthur was speaking. "you managed grounds splendidly," he said. "i'll wager he's sweating over what he's done! but do you think--" he looked keenly at the banker as he put the question, for he was eager to know what was in his mind--"the thing will succeed, sir?" "the railroad?" "yes." "i think that the shares will go to a premium. and i see no reason why the railroad should not do. if i did not think so, i should not be fostering it. it may take time and, of course, more money than we think. but if nothing occurs to dash the public--no, i don't see why it should not succeed. and if it does it will give such an impetus to the trade of the valleys, three-fourths of which passes through our hands, as will repay us many times over." "i am glad you think so. i was not sure." "because i led grounds a little? oh, that was fair enough. it does not follow from that, that honesty is not the banker's only policy. make no mistake about that. but i am going into the house now. just bring me the note-issue book, will you? i must see how we stand. i shall be in the dining-room." but when arthur went into the house a few minutes later he met betty, who was crossing the hall. "your father wanted this book," he said. "will you take it to him?" but betty put her hands behind her back. "why? where are you going?" "you have forgotten that it is saturday. i am going home." "horrid saturday! i thought that to-night, with father just back----" "i wouldn't go? if i don't my mother will think that the skies have fallen. besides, i am riding clement's mare, and if i don't go, how is he to come back?" "as you go at other times. on his feet." "ah, well, very soon i shall have a horse of my own. you'll see, betty. we are all going to make our fortunes now." "fortunes?"--with disdain. "whose?" "your father's for one." "silly! he's made his." "then yours--and mine, betty. yours and mine--and clement's." "i don't think he'll thank you." "then rodd's. but, no, we'll not make rodd's. we'll not make rodd's, betty." "and why not mr. rodd's?" "never mind. we'll not make it," mischievously. "i wonder why you've got such a color, betty?" and as she snatched the book from him and threatened him with it, "good-bye till monday. i'm late now, and it will be dark before i am out of the town." with a gay nod he vanished through the door that led into the bank. she looked after him, the book in her hand. her lip curled. "rodd indeed!" she murmured. "rodd? as if i should ever--oh, isn't he provoking!" chapter ii the village of garthmyle, where arthur had his home, lay in the lap of the border hills more than seven miles from aldersbury, and night had veiled the landscape when he rode over the bridge and up the village street. the squat church-tower, firm and enduring as the hopes it embodied, rose four-square above the thatched dwellings, and some half-mile away the rider could discern or imagine the blur of trees that masked garth, on its sister eminence. but the bounds of the valley, in the mouth of which the village nestled, were obscured by darkness; the steep limestone wall which fenced it on one side and the more distant wooded hills that sloped gently to it on the other were alike hidden. it was only when arthur had passed through the hamlet, where all doors were closed against the chill of a january night, and he had ridden a few paces down the hillock, that the lights of the cottage broke upon his view. many a time had they, friendly beacons of home and rest, greeted him at that point. not that arthur saw them as beacons, for at no time was he much given to sentiment. his outlook on life was too direct and vivid for that, and to-day in particular his mind was teeming with more practical thoughts, with hopes and plans and calculations. but the lights meant that a dull ride over a rough road was at an end, and so far they gave him pleasure. he opened the gate and rode round to the stable, gave up the horse to pugh, the man-of-all-work, and made his way into the house. he entered upon a scene as cheerful as any lights shining on weary traveller could promise. in a fair-sized room a clear grate held a coal fire, the flames of which danced on the red-papered walls. a kettle bubbled on the hob, a tea-tray gleamed on the table, and between the two a lady and gentleman sat, eating crumpets; the lady with much elegance and a napkin spread over her lavender silk dress, the gentleman in a green cutaway coat with basket buttons--a coat that ill concealed the splashed gaiters for which he had more than once asked pardon. but fair as things looked on the surface, all was not perfect even in this pleasant interior. the lady held herself stiffly, and her eyes rested rather more often than was courteous on the spatter-dashes. secretly she thought her company not good enough for her, while the gentleman was frankly bored. neither was finding the other as congenial as a first glance suggested, and it would have been hard to say which found arthur's entrance the more welcome interruption. "hallo, mother!" he said, stooping carelessly to kiss her. "hallo, clement." "my dear arthur!" the lady cried, the lappets of her cap shaking as she embraced him. "how late you are! that horrid bank! i am sure that some day you will be robbed and murdered on your way home!" "i! no, mother. i don't bring the money, more's the pity! i am late, am i? the worse for clement, who has to ride home. but i have been doing your work, my lad, so you mustn't grumble. what did you get?" "a brace and a wood-pigeon. has my father come?" "yes, he has come, and i am afraid has a wigging in store for you. but--a brace and a wood-pigeon? lord, man," with a little contempt in his tone, "what do you do with your gun all day? why, acherley told me that in that rough between the two fallows above the brook----" "oh, arthur," mrs. bourdillon interposed, "never mind that!" she had condescended sufficiently, she thought, and wished to hear no more of clement ovington's doings. "i've something more important to tell you, much more important. i've had a shock, a dreadful shock to-day." she was a faded lady, rather foolish than wise, and very elegant: one who made the most of such troubles as she had, and the opening her son now heard was one which he had heard often before. "what's the matter now, mother?" he asked, stooping to warm his hands. "your uncle has been here." "well, that's no new thing." "but he has behaved dreadfully, perfectly dreadfully to me." "i don't know that that is new, either." "he began again about your refusal to take orders, and your going into that dreadful bank instead." arthur shrugged his shoulders. "that's one for you, clement." "oh, that wasn't the half," the lady continued, unbending. "he said, there was the living, three hundred and fifty a year, and old mr. trubshaw seventy-eight. and he'd have to sell it and put in a stranger and have quarrels about tithes. he stood there with his great stick in his hand and his eyes glaring at me like an angry cat's, and scolded me till i didn't know whether i stood on my head or my heels. he wanted to know where you got your low tastes from." "there you are again, clement!" "and your wish to go into trade, and i answered him quite sharp that you didn't get them from me; as for mr. bourdillon's grandfather, who had the plantations in jamaica, it wasn't the same at all, as everybody knows and agrees that nothing is genteeler than the west indies with black men to do the work!" "you confounded him there, mother, i'm sure. but as we have heard something like this before, and clement is not much interested, if that is all----" "oh, but it is not all! very far from it!" mrs. bourdillon's head shook till the lappets swung again. "the worst is to come. he said that we had had the cottage rent-free for four years--and i'm sure i don't know who has a better right to it--but that that was while he still hoped that you were going to live like a gentleman, like the griffins before you--and i am sure the bourdillons were gentry, or i should have been the last to marry your father! but as you seemed to be set on going your own way and into the bank for good--and i must say i told him it wasn't any wish of mine and i'd said all i could against it, as you know, and mr. clement knows the same--why, it was but right that we should pay rent like other people! and it would be thirty pounds a year from lady day!" "the d--d old hunks!" arthur cried. he had listened unmoved to his mother's tirade, but this touched him. "well, he is a curmudgeon! thirty pounds a year? well, i'm d--d! and all because i won't starve as a parson!" but his mother rose in arms at that. "starve as a parson!" she cried. "why, i think you are as bad, one as the other. i'm sure your father never starved!" "no, i know, mother. he was passing rich on four hundred pounds a year. but that is not going to do for me." "well, i don't know what you want!" "my dear mother, i've told you before what i want." arthur was fast regaining the good temper that he seldom lost. "if i were a bishop's son and could look to be a bishop, or if i were an archdeacon's son with the prospect of a fat prebend and a rectory or two with it, i'd take orders. but with no prospect except the garthmyle living, and with tithes falling----" "but haven't i told you over and over again that you have only to make-up to--but there, i haven't told you that jos was with him, and i will say this for her, that she looked as ashamed for him as i am sure i was! i declare i was sorry for the girl and she not daring to put in a word--such an old bear as he is to her!" "poor jos!" arthur said. "she has not a very bright life of it. but this does not interest clement, and we're keeping him." the young man had indeed made more than one attempt to take leave, but every time he had moved mrs. bourdillon had either ignored him, or by a stately gesture had claimed his silence. he rose now. "i dare say you know my cousin?" arthur said. "i've seen her," clement answered; and his mind went back to the only occasion on which he had remarked miss griffin. it had been at the last race ball at aldersbury that he had noticed her--a gentle, sweet-faced girl, plainly and even dowdily dressed, and so closely guarded by her proud old dragon of a father that, warned by the fate of others and aware that his name was not likely to find favor with the squire, he had shrunk from seeking an introduction. but he had noticed that she sat out more than she danced; sat, indeed, in a kind of isolation, fenced in by the old man, and regarded with glances of half-scornful pity by girls more smartly dressed. he had had time to watch her, for he also, though for different reasons, had been a little without the pale, and he had found her face attractive. he had imagined how differently she would look were she suitably dressed. "yes," he continued, recalling it, "she was at the last race ball, i think." "and a mighty poor time she had of it," arthur answered, half carelessly, half contemptuously. "poor jos! she hasn't at any time much of a life with my beauty of an uncle. twopence to get and a penny to spend!" mrs. bourdillon protested. "i do wish you would not talk of your cousin like that," she said. "you know that she's your uncle's heiress, and if you only----" arthur cut her short. "there! there! you don't remember, mother, that clement has seven miles to ride before his supper. let him go now! he'll be late enough." that was the end, and the two young men went out together. when arthur returned, the tea had been removed and his mother was seated at her tambour work. he took his stand before the fire. "confounded old screw!" he fumed. "thirty pounds a year? and he's three thousand, if he's a penny! and more likely four!" "well, it may be yours some day," with a sniff. "i'm sure jos is ready enough." "she'll have to do as he tells her." "but garth must be hers." "and still she'll have to do as he tells her. don't you know yet, mother, that jos has no more will than a mouse? but never mind, we can afford his thirty pounds. ovington is giving me a hundred and fifty, and i'm to have another hundred as secretary to this new company--that's news for you. with your two hundred and fifty we shall be able to pay his rent and still be better off than before. i shall buy a nag--packham has one to sell--and move to better rooms in town." "but you'll still be in that dreadful bank," mrs. bourdillon sighed. "really, arthur, with so much money it seems a pity you should lower yourself to it." he had some admirable qualities besides the gaiety, the alertness, the good looks that charmed all comers; ay, and besides the rather uncommon head for figures and for business which came, perhaps, of his huguenot ancestry, and had commended him to the banker. of these qualities patience with his mother was one. so, instead of snubbing her, "why dreadful?" he asked good-humoredly. "because all our county fogies look down on it? because having nothing but land, and drawing all their importance from land, they're jealous of the money that is shouldering them out and threatening their pride of place? listen to me, mother. there is a change coming! whether they see it or not, and i think they do see it, there is a change coming, and stiff as they hold themselves, they will have to give way to it. three thousand a year? four thousand? why, if ovington lives another ten years what do you think that he will be worth? not three thousand a year, but ten, fifteen, twenty thousand!" "arthur!" "it is true, mother. ay, twenty, it is possible! and do you think that when he can buy up half a dozen of these thickheaded squires who can just add two to two and make four--that he'll not count? do you think that they'll be able to put him on one side? no! and they know it. they see that the big manufacturers and the big ironmasters and the big bankers who are putting together hundreds of thousands are going to push in among them and can't be kept out! and therefore trade, as they call it, stinks in their nostrils!" "oh, arthur, how horrid!" mrs. bourdillon protested, "you are growing as coarse as your uncle. and i'm sure we don't want a lot of vulgar purse-proud----" "purse-proud? and what is the squire? land-proud! but," growing more calm, "never mind that. you will take a different view when i tell you something that i heard to-day. ovington let drop a word about a partnership." "la, arthur, but----" "a partnership! nothing definite, nothing to bind, and not yet, but in the future. it was but a hint. but think of it, mother! it is what i have been aiming at all along, but i didn't expect to hear of it yet. not one or two hundred a year, but say, five hundred to begin with, and three, four, five thousand by and by! five thousand!" his eyes sparkled and he threw back the hair from his forehead with a characteristic gesture. "five thousand a year! think of that and don't talk to me of orders. take orders! be a beggarly parson while i have that in my power, and in my power while i am still young! for trust me, with ovington at the helm and the tide at flood we shall move. we shall move, mother! the money is there, lying there, lying everywhere to be picked up. and we shall pick it up." "you take my breath away!" his mother protested, her faded, delicate face unusually flushed. "five thousand a year! gracious me! why, it is more than your uncle has!" she raised her mittened hands in protest. "oh, it is impossible!" the vision overcame her. but "it is perfectly possible," he repeated. "clement is of no use. he is for ever wanting to be out of doors--a farmer spoiled. rodd's a mere mechanic. ovington cannot do it all, and he sees it. he must have someone he can trust. and then it is not only that i suit him. i am what he is not--a gentleman." "if you could have it without going to the bank!" mrs. bourdillon said. and she sighed, golden as was the vision. but before they parted his eloquence had almost persuaded her. she had heard such things, had listened to such hopes, had been dazzled by such sums that she was well-nigh reconciled even to that which the old squire dubbed "the trade of usury." chapter iii meanwhile clement ovington jogged homeward through the darkness, his thoughts divided between the discussion at which he had made an unwilling third, and the objects about him which were never without interest for this young man. he had an ear, and a very sharp one, for the piping of the pee-wits in the low land by the river, and the owl's cadenced cry in the trees about garth. he marked the stars shining in a depth of heaven opened amid the flying wrack of clouds; he picked out jupiter sailing with supreme dominion, and the dog-star travelling across the southern tract. his eye caught the gleam of water on a meadow, and he reflected that old gregory would never do any good with that ground until he made some stone drains in it. not a sound in the sleeping woods, not the barking of a dog at a lonely homestead--and he knew every farm by name and sight and quality--escaped him; nor the shape of a covert, blurred though it was and leafless. but amid all these interests, and more than once, his thoughts as he rode turned inwards, and he pictured the face of the girl at the ball. long forgotten, it recurred to him with strange persistence. he was an out-of-door man, and that, in his position, was the pity of it. aldersbury school--and aldersbury was a very famous school in those days--and cambridge had done little to alter the tendency: possibly the latter, seated in the midst of wide open spaces, under a wide sky, the fens its neighbors, had done something to strengthen his bent. bourdillon thought of him with contempt, as a clodhopper, a rustic, hinting that he was a throwback to an ancestor, not too remote, who had followed the plough and whistled for want of thought. but he did clement an injustice. it was possible that in his love of the soil he was a throwback; he would have made, and indeed he was, a good ploughman. he had learnt the trick with avidity, giving good money, solid silver shillings, that hodge might rest while he worked. but, a ploughman, he would not have turned a clod without noticing its quality, nor sown a seed without considering its fitness, nor observed a rare plant without wondering why it grew in that position, nor looked up without drawing from the sky some sign of the weather or the hour. much less would he have gazed down a woodland glade, flecked with sunlight, without perceiving its beauty. he was, indeed, both in practice and theory a lover of nature; breathing freely its open air, understanding its moods, asking nothing better than to be allowed to turn them to his purpose. though he was no great reader, he read wordsworth, and many a line was fixed in his memory and, on occasions when he was alone, rose to his lips. but he hated the desk and he hated figures. his thoughts as he stood behind the bank counter, or drummed his restless heels against the legs of his high stool, were far away in fallow and stubble, or where the trout, that he could tickle as to the manner born, lay under the caving bank. and to his father and to those who judged him by the bank standard, and felt for him half scornful liking, he seemed to be an inefficient, a trifler. they said in aldersbury that it was lucky for him that he had a father. perhaps of all about him it was from that father that he could expect the least sympathy. ovington was not only a banker, he was a banker to whom his business was everything. he had created it. it had made him. it was not in his eyes a mere adjunct, as in the eyes of one born in the purple and to the leisure which invites to the higher uses of wealth. able he was, and according to his lights honorable; but a narrow education had confined his views, and he saw in his money merely the means to rise in the world and eventually to become one of the landed class which at that time monopolized all power and all influence, political as well as social. such a man could only see in clement a failure, a reversion to the yeoman type, and own with sorrow the irony of fortune that so often delights to hand on the sceptre of an oliver to a "tumble-down-dick." only from betty, young and romantic, yet possessed of a woman's intuitive power of understanding others, could clement look for any sympathy. and even betty doubted while she loved--for she had also that other attribute of woman, a basis of sound common-sense. she admired her father. she saw more clearly than clement what he had done for them and to what he was raising them. and she could not but grieve that clement was not, more like him, that clement could not fall in with his wishes and devote himself to the attainment of the end for which the elder man had worked. she could enter into the father's disappointment as well as into the son's distaste. meanwhile clement, dreaming now of a girl's face, now of a new drill which he had seen that morning, now of the passing sights and sounds which would have escaped nine men out of ten but had a meaning for him, drew near to the town. he topped the last eminence, he rode under the ancient oak, whence, tradition had it, a famous welshman had watched the wreck of his fortunes on a pitched field. finally he saw, rising from the river before him, the amphitheatre of dim lights that was the town. descending he crossed the bridge. he sighed as he did so. for to him to pass from the silent lands and to enter the brawling streets where apprentices were putting up the shutters and beggars were raking among heaps of market garbage was to fall half way from the clouds. to right and left the inns were roaring drunken choruses, drabs stood in the mouths of the alleys--dubbed in aldersbury "shuts"--tradesmen were hastening to wet their profits at the crown or the gullet. when at last he heard the house door clang behind him, and breathed the confined air of the bank, redolent for him of ledgers and day-books, the fall was complete. he reached the earth. if he had not done so, his sister's face when he entered the dining-room would have brought him to his level. "my eye and betty martin!" she said. "but you've done it now, my lad!" "what's the matter?" "father will tell you that. he's in his room and as black as thunder. he came home by the mail at three--sir charles waiting, mr. acherley waiting, the bank full, no clement! you are in for it. you are to go to him the moment you come in." he looked longingly at the table where supper awaited him. "what did he say?" he asked. "he said all i have said and d--n besides. it's no good looking at the table, my lad. you must see him first and then i'll give you your supper." "all right!" he replied, and he turned to the door with something of a swagger. but betty, whose moods were as changeable as the winds, and whose thoughts were much graver than her words, was at the door before him. she took him by the lapel of his coat and looked up in his face. "you won't forget that you're in fault, clem, will you?" she said in a small voice. "remember that if he had not worked there would be no walking about with a gun or a rod for you. and no looking at new drills, whatever they are, for i know that that is what you had in your mind this morning. he's a good dad, clem--better than most. you won't forget that, will you?" "but after all a man must----" "suppose you forget that '_after all_,'" she said sagely. "the truth is you have played truant, haven't you? and you must take your medicine. go and take it like a good boy. there are but three of us, clem." she knew how to appeal to him, and how to move him; she knew that at bottom he was fond of his father. he nodded and went, knocked at his father's door and, tamed by his sister's words, took his scolding--and it was a sharp scolding--with patience. things were going well with the banker, he had had his usual four glasses of port, and he might not have spoken so sharply if the contrast between the idle and the industrious apprentice had not been thrust upon him that day with a force which had startled him. that little hint of a partnership had not been dropped without a pang. he was jealous for his son, and he spoke out. "if you think," he said, tapping the ledger before him, to give point to his words, "that because you've been to cambridge this job is below you, you're mistaken, clement. and if you think that you can do it in your spare time, you're still more mistaken. it's no easy task, i can tell you, to make a bank and keep a bank, and manage your neighbor's money as well as your own, and if you think it is, you're wrong. to make a hundred thousand pounds is a deal harder than to make latin verses--or to go tramping the country on a market day with your gun! that's not business! that's not business, and once for all, if you are not going to help me, i warn you that i must find someone who will! and i shall not have far to look!" "i'm afraid, sir, that i have not got a turn for it," clement pleaded. "but what have you a turn for? you shoot, but i'm hanged if you bring home much game. and you fish, but i suppose you give the fish away. and you're out of town, idling and doing god knows what, three days in the week! no turn for it? no will to do it, you mean. do you ever think," the banker continued, joining the fingers of his two hands as he sat back in his chair, and looking over them at the culprit, "where you would be and what you would be doing if i had not toiled for you? if i had not made the business at which you do not condescend to work? i had to make my own way. my grandfather was little better than a laborer, and but for what i've done you might be a clerk at a pound a week, and a bad clerk, too! or behind a shop-counter, if you liked it better. and if things go wrong with me--for i'd have you remember that nothing in this world is quite safe--that is where you may still be! still, my lad!" for the first time clement looked his father fairly in the face--and pleased him. "well, sir," he said, "if things go wrong i hope you won't find me wanting. nor ungrateful for what you have done for us. i know how much it is. but i'm not bourdillon, and i've not got his head for figures." "you've not got his application. that's the mischief! your heart's not in it." "well, i don't know that it is," clement admitted. "i suppose you couldn't----" he hesitated, a new hope kindled within him. he looked at his father doubtfully. "couldn't what?" "release me from the bank, sir? and give me a--a very small capital to----" "to go and idle upon?" the banker exclaimed, and thumped the ledger in his indignation at an idea so preposterous. "no, by g--d, i couldn't! pay you to go idling about the country, more like a dying duck in a thunder-storm, as i am told you do, than a man! find you capital and see you loiter your life away with your hands in your pockets? no, i couldn't, my boy, and i would not if i could! capital, indeed? give you capital? for what?" "i could take a farm," sullenly, "and i shouldn't idle. i can work hard enough when i like my work. and i know something about farming, and i believe i could make it pay." the other gasped. to the banker, with his mind on thousands, with his plans and hopes for the future, with his golden visions of lombard street and financial sway, to talk of a farm and of making it pay! it seemed--it seemed worse than lunacy. his son must be out of his mind. he stared at him, honestly wondering. "a farm!" he ejaculated at last. "and make it pay? go back to the clodhopping life your grandfather lived before you and from which i lifted you? peddle with pennies and sell ducks and chickens in the market? why--why, i don't know what to say to you?" "i like an outdoor life," clement pleaded, his face scarlet. "like a--like a----" ovington could find no word to express his feelings and with an effort he swallowed them down. "look here, clement," he said more mildly; "what's come to you? what is it that is amiss with you? whatever it is you must straighten it out, boy; there must be an end of this folly, for folly it is. understand me, the day that you go out of the bank you go to stand on your own legs, without help from me. if you are prepared to do that?" "i don't say that i could--at first." "then while i keep you i shall certainly do it on my own terms. so, if you please, i will hear no more of this. go back to your desk, go back to your desk, sir, and do your duty. i sent you to cambridge at butler's suggestion, but i begin to fear that it was the biggest mistake of my life. i declare i never heard such nonsense except from a man in love. i suppose you are not in love, eh?" "no!" clement cried angrily, and he went out. for he could not own to his father that he was in love; in love with the brown earth, the woods, and the wide straggling hedge-rows, with the whispering wind and the music of the river on the shallows, with the silence and immensity of night. had he done so, he would have spoken a language which his father did not and could not understand. and if he had gone a step farther and told him that he felt drawn to those who plodded up and down the wide stubbles, who cut and bound the thick hedge-rows, who wrought hand in hand with nature day in and day out, whose lives were spent in an unending struggle with the soil until at last they sank and mingled with it--if he had told him that he felt his kinship with those humble folk who had gone before him, he would only have mystified him, only have angered him the more. yet so it was. and he could not change himself. he went slowly to his supper and to betty, owning defeat; acknowledging his father's strength of purpose, acknowledging his father's right, yet vexed at his own impotence. life pulsed strongly within him. he longed to do something. he longed to battle, the wind in his teeth and the rain in his face, with some toil, some labor that would try his strength and task his muscles, and send him home at sunset weary and satisfied. instead he saw before him an endless succession of days spent with his head in a ledger and his heels on the bar of his stool, while the sun shone in at the windows of the bank and the flies buzzed sleepily about him; days arid and tedious, shared with no companion more interesting than rodd, who, excellent fellow, was not amusing, or more congenial than bourdillon, who patronized him when he was not using him. and in future he would have to be more punctual, more regular, more assiduous! it was a dreary prospect. he ate his supper in morose silence until betty, who had been quick to read the upshot of the interview in his face, came behind him and ruffled his hair. "good boy!" she whispered, leaning over him. "his days shall be long in the land!" "i wish to heaven," he answered, "they were in the land! i am sure they will be long enough in the bank!" but after that he recovered his temper. chapter iv in remote hamlets a few churches still recall the fashion of garthmyle. it was a wide church of two aisles having clear windows, through which a flood of cold light fell on the whitewashed walls, and on the maze of square pews, some colored drab, some a pale blue, through which narrow alleys, ending in culs-de-sac, wound at random. the griffin memorials, though the earliest were of tudor date, were small and mean, and the one warm scrap of color in the church was furnished by the faded red curtain which ran on iron rods round the squire's pew and protected his head from draughts. that curtain was watched with alarm by many, for at a certain point in the service it was the squire's wont to draw it aside, and to stand for a time with his back to the east while his hard eyes roved over the congregation. woe to the absentees! his scrutiny completed, with a grunt which carried terror to the hearts of their families, he would draw the curtain, turn about again, and compose himself to sleep. in its severity and bleakness the church fairly matched the man, who, old and gaunt and grey, was its central figure; who, like it, embodied, meagrely and plainly as he dressed, the greatness of old associations, and like it, if in a hard and forbidding way, owned and exacted an unchanging standard of duty. for he was the squire. whatever might be done elsewhere, nothing was done in that parish without him. the parson, aged and apathetic, knew better than to cross his will--had he not to get in his tithes? the farmers were his tenants, the overseers rested in the hollow of his hand. hardly a man was hired and no man was relieved, no old wife sent back to her distant settlement, no lad apprenticed, but as he pleased. he was the squire. on sundays the tenants waited in the churchyard until he arrived, and it was this which deceived arthur when, mrs. bourdillon feeling unequal to the service, he reached the church next morning. he found the porch empty, and concluding that his uncle had entered, he made his way to the cottage pew, which was abreast of the great man's. but in the act of sitting down he saw, glancing round the red curtain, that josina was alone. it struck him then that it would be pleasant to sit beside her and entertain himself with her conscious face, and he crossed over and let himself into the squire's pew. he had the satisfaction of seeing the blood mount swiftly to her cheeks, but the next moment he found the old man--who had that morning sent word that he would be late--at his elbow, in the act of entering behind him. it was too late to retreat, and with a face as hot as josina's he stumbled over the straw-covered footstool and sat down on her other hand. he knew that the squire would resent his presence after what had happened, and when he stood up his ears were tingling. but he soon recovered himself. he saw the comic side of the situation, and long before the sermon was over, he found himself sufficiently at ease to enjoy some of the _agréments_ which he had foreseen. carved roughly with a penknife on the front of the pew was a heart surmounting two clasped hands. below each hand were initials--his own and josina's; and he never let the girl forget the august afternoon, three years before, when he had induced her to do her share. she had refused many times; then, like eve in the garden, she had succumbed on a drowsy afternoon when they had had the pew to themselves and the drone of the preacher's voice had barely risen above the hum of the bees. she had been little more than a child at the time, and ever since that day the apple had been to her both sweet and bitter. for she was not a child now, and, a woman, she rebelled against arthur's power to bring the blood to her cheeks and to play--with looks rather than words, for of these he was chary--upon feelings which she could not mask. of late resentment had been more and more gaining the upper hand with her. but to-day she forgave. she feared that which might pass between him and his uncle at the close of the service, and she had not the heart to be angry. however, when the dreaded moment came she was pleasantly disappointed. when they reached the porch, "take my seat, take my meat," the squire said grimly. "are you coming up?" "if i may, sir? "i want a word with you." this was not promising, but it might have been worse, and little more was said as the three passed, the congregation standing uncovered, down the churchyard walk and along the road to garth. the squire, always taciturn, strode on in silence, his eyes on his fields. the other two said little, feeling trouble in the air. fortunately at the early dinner there was a fourth to mend matters in the shape of miss peacock, the squire's housekeeper. she was a distant relation who had spent most of her life at garth; who considered the squire the first of men, his will as law, and who from josina's earliest days had set her an example of servile obedience. to ask what mr. griffin did not offer, to doubt where he had laid down the law, was to miss peacock flat treason; and where a stronger mind might have moulded the girl to a firmer shape, the old maid's influence had wrought in the other direction. a tall meagre spinster, a weak replica of the squire, she came of generations of women who had been ruled by their men and trained to take the second place. the squire's two wives, his first, whose only child had fallen, a boy-ensign, at alexandria, his second, josina's mother, had held the same tradition, and josina promised to abide by it. when the peacock rose jos hesitated. the squire saw it. "do you go, girl," he said. "be off!" for once she wavered--she feared what might happen between the two. but "do you hear?" the squire growled. "go when you are told." she went then, but arthur could not restrain his indignation. "poor jos!" he muttered. unluckily the squire heard the words, and "poor jos!" he repeated, scowling at the offender. "what the devil do you mean, sir? poor jos, indeed? confound your impudence! what do you mean?" arthur quailed, but he was not lacking in wit. "only that women like a secret, sir," he said. "and a woman, shut out, fancies that there is a secret." "umph! a devilish lot you know about women!" the old man snarled. "but never mind that. i saw your mother yesterday." "so she told me, sir." "ay! and i dare say you didn't like what she told you! but i want you to understand, young man, once for all, that you've got to choose between aldersbury and garth. do you hear? i've done my duty. i kept the living for you, as i promised your father, and whether you take it or not, i expect you to do yours, and to live as the griffins have lived before you. who the devil is this man ovington? why do you want to mix yourself up with him? eh? a man whose father touched his hat to me and would no more have thought of sitting at my table than my butler would! there, pass the bottle." "would you have no man rise, sir?" arthur ventured. "rise?" the squire glared at him from under his great bushy eyebrows. "it's not to his rise, it's to your fall i object, sir. a d--d silly scheme this, and one i won't have. d'you hear, i won't have it." arthur kept his temper, oppressed by the other's violence. "still, you must own, sir, that times are changed," he said. "changed? damnably changed when a griffin wants to go into trade in aldersbury." "but banking is hardly a trade." "not a trade? of course it's a trade--if usury is a trade! if pawn-broking is a trade! if loan-jobbing is a trade! of course it's a trade." the gibe stung arthur and he plucked up spirit. "at any rate, it is a lucrative one," he rejoined. "and i've never heard, sir, that you were indifferent to money." "oh! because i'm going to charge your mother rent? well, isn't the cottage mine? or because fifty years ago i came into a cumbered estate and have pinched and saved and starved to clear it? saved? i have saved. but i've saved out of the land like a gentleman, and like my fathers before me, and not by usury. not by money-jobbing. and if you expect to benefit--but there, fill your glass, and let's hear your tongue. what do you say to it?" "as to the living," arthur said mildly, "i don't think you consider, sir, that what was a decent livelihood no longer keeps a gentleman as a gentleman. times are changed, incomes are changed, men are richer. i see men everywhere making fortunes by what you call trade, sir; making fortunes and buying estates and founding houses." "and shouldering out the old gentry? ay, damme, and i see it too," the squire retorted, taking the word out of his mouth. "i see plenty of it. and you think to be one of them, do you? to join them and be another peel, or one of pitt's money-bag peers? that's in your mind, is it? a mr. coutts? and to buy out my lord and drive your coach and four into aldersbury, and splash dirt over better men than yourself?" "i should be not the less a griffin." "a griffin with dirty hands!" with contempt. "that's what you'd be. and vote radical and prate of reform and scorn the land that bred you. and talk of the rights of men and money-bags, eh? that's your notion, is it, by g--d?" "of course, sir, if you look at it in that way----" "that's the way i do look at it!" the squire brought down his hand on the table with a force that shook the glasses and spilled some of his wine. "and it's the way you've got to look at it, or there won't be much between you and me--or you and mine. or mine, do you hear! i'll have no tradesman at garth and none of that way of thinking. so you'd best give heed before it's too late. you'd best look at it all ways." "very well, sir." "any more wine?" "no, thank you." arthur's head was high. he did not lack spirit. "then hear my last word. i won't have it! that's plain. that's plain, and now you know. and, hark ye, as you go out, send peacock to me." but before arthur had made his way out, the squire's voice was heard, roaring for josina. when miss peacock presented herself, "not you! who the devil wants you?" he stormed. "send the girl! d'you hear? send the girl!" and when josina, scared and trembling, came in her turn, "shut the door!" he commanded. "and listen! i've had a talk with that puppy, who thinks that he knows more than his betters. d--n his impertinence, coming into my pew when he thought i was elsewhere! but i know very well why he came, young woman, sneaking in to sit beside you and make sheep's eyes when my back was turned. now, do you listen to me. you'll keep him at arm's length. do you hear, miss? you'll have nothing to say to him unless i give you leave. he's got to do with me now, and it depends on me whether there's any more of it. i know what he wants, but by g--d, i'm your father, and if he does not mend his manners, he goes to the right-about. so let me hear of no more billing and cooing and meeting in pews, unless i give the word! d'you understand, girl?" "but i think you're mistaken, sir," poor jos ventured. "i don't think that he means----" "i know what he means. and so do you. but never you mind! till i say the word there's an end of it. the puppy, with his peels and his peers! men my father wouldn't have--but there, you understand now, and you'll obey, or i'll know the reason why!" "then he's not to come to garth, sir?" but the squire checked at that. family feeling and the pride of hospitality were strong in him, and to forbid his only nephew the family house went beyond his mind at present. "to garth?" angrily. "who said anything about garth? no, miss, but when he comes, you'll stand him off. you know very well how to do it, though you look as if butter wouldn't melt in your mouth! you'll see that he keeps his distance. and let me have no tears, or--d----n the fellow, he's spoiled my nap. there, go! go! i might as well have a swarm of wasps about me as such folks! pack o' fools and idiots! go into a bank, indeed!" jos did go, and shutting herself up in her room would not open to miss peacock, who came fluttering to the door to learn what was amiss. and she cried a little, but it was as much in humiliation as grief. her father was holding her on offer, to be given or withheld, as he pleased, while all the time she doubted, and more than doubted, if he to whom she was on offer, he from whom she was withheld, wanted her. there was the rub. for arthur, ever since he had begun to attend at the bank, had been strangely silent. he had looked and smiled and teased her, had pressed her hand or touched her hair, but in sport rather than in earnest, meaning little. and she had been quick to see this, and with the womanly pride, of which, gentle and timid as she was, she had her share, she had schooled herself to accept the new situation. now, her father had taken arthur's suit for granted and humbled her. so jos cried a little. but they were not very bitter tears. chapter v arthur was taken aback by his uncle's harshness, and he made haste to be at the bank early enough on the monday to anticipate the banker's departure for garth. he was certain that to approach the squire at this moment in the matter of the railroad was to invite disaster, and he gave ovington such an account of the quarrel as he thought would deter him from going over at present. but the banker had a belief in himself which success and experience in the management of men had increased. he was convinced that self-interest was the spring which moved nine men out of ten, and though he admitted that the family quarrel was untimely, he did not agree that as between the squire and a good bargain it would have weight. "but i assure you, sir, he's like a bear with a sore head," arthur urged. "a bear will come to the honey if its head be sore," the banker answered, smiling. "and perhaps upset the hive?" ovington laughed. "not in this case, i think. and we must risk something. time presses and he blocks the way. however, i'll let it stand over for a week and then i'll go alone. we must have your uncle." accordingly a week later, discarding the tilbury and smart man-servant that he had lately set up, he rode over to garth, considering as he journeyed the man whom he was going to meet and of whom, in spite of his self-assurance, he stood in some awe. round aldersbury were larger landowners and richer men than the squire. but his family and his name were old, and by virtue of long possession he stood high among the gentry of the county. he had succeeded at twenty-two to a property neglected and loaded with debt, and his father's friends--this was far back in the old king's reign--had advised him to sell; let him keep the house and the home-farm and pay his debts with the rest. but pride of race was strong in him, he had seen that to sell was to lose the position which his forbears had held, and he had refused. instead he had set himself to free the estate, and he had pared, he had pinched, he had almost starved himself and others. he had become a byword for parsimony. in the end, having benefited much by enclosures in the 'nineties, he had succeeded. but no sooner had he deposited in the bank the money to pay off the last charge than the loss of his only son had darkened his success. he had married again--he was by this time past middle age--but only a daughter had come of the marriage, and by that time to put shilling to shilling and acre to acre had become a habit of which he could not break himself, though he knew that only a woman would follow him at garth. withal he was a great aristocrat, a tory of the tories, stern and unbending. fear of france and of french doctrines and pride in his caste were in his blood. the _quarterly review_ ranked with him after his bible, and very little after it. reform under the most moderate aspect was to him a shorter name for revolution. he believed implicitly in his class, and did not believe in any other class. manufacturers and traders he hated and distrusted, and of late jealousy had been added to hatred and distrust. the inclusion of such men in the magistracy, the elevation of peel to the ministry had made him fancy that there was something in the queen's case after all; when canning and huskisson had also risen to power he had said that lord liverpool was aging and the duke was no longer the man he had been. he was narrow, choleric, proud, miserly; he had been known to carry an old log a hundred yards to add it to his wood-pile, and to travel a league to look for a lost sixpence. he dressed shabbily, which was not so much remarked now that dandies aped coachmen, as it had been in his younger days; and he rode about his fields on an old white mare which he was believed to hold in affection next after his estate and much before his daughter. he ruled his parish with a high hand. he had no mercy for poachers. but he was honest and he was just. the farmers must pay the wage he laid down--it was a shilling above the allowed rate. but the men must work it out, and woe betide the idle; they had best seek work abroad, and heaven help them if a foreign parish sent them home. in one thing he was before his time; he was resolved that no able-bodied man should share in the rates. the farmers growled, the laborers grumbled, there were hard cases. but he was obdurate--work your worth, or starve! and presently it began to be noticed that the parish was better off than its neighbors. he was a tyrant, but a just tyrant. such was the man whom ovington was going to meet, and from whose avarice he hoped much. he had made his market of it once, for it was by playing on it that he had lured the squire from dean's, and so had gained one of his dearest triumphs over the old aldersbury bank. his hopes would not have been lessened had he heard a dialogue which was at that moment proceeding in the stable-yard at garth to an accompaniment of clattering pails and swishing besoms. "he've no bowels!" thomas the groom declared with bitterness. "he be that hard and grasping he've no bowels for nobody!" old fewtrell, the squire's ancient bailiff, sniggered. "he'd none for you, thomas," he said, "when you come back gallus drunk from baschurch fair. none of your manchester tricks with me, says squire, and, lord, how he did leather 'ee." thomas did not like the reminiscence. "what other be i saying!" he snarled. "he've no bowels even for his own flesh and blood! did'ee ever watch him in church? well, where be he a-looking? at his son's moniment as is at his elbow? never see him, never see him, not once!" "well, i dunno as i 'ave, either," fewtrell admitted. "no, his eyes is allus on t'other side, a-counting up the griffins before him, and filling himself up wi' pride." "dunno as i couldn't see it another way," said the bailiff thoughtfully. "what other way? never to look at his own son's moniment?" "well, mebbe----" "mebbe?" thomas cried with scorn. "look at his darter! he ain't but one, and he be swilling o' money! do he make much of her, james fewtrell? and titivate her, and pull her ears bytimes same as you with your grand-darters? and get her a horse as you might call a horse? you know he don't. if she's not quick, it's a nod and be damned, same as to you and me!" old fewtrell considered. "not right out the same," he decided. "right out, i say. you've been with him all your life. you've never knowed no other and you're getting old, and calamity, he be old too, and may put up with it. but i don't starve for no squire, and i'm for more wage. i was in aldersbury saturday and wages is up and more work than men! while here i'm a-toiling for what you got twenty year ago. but not me! i bin to manchester. and so i'm going to tell squire." the bailiff grinned. "mebbe he'll take a stick same as before." "he'd best not!" thomas said, with an ugly look. "he'd best take care, or----" "whist! whist! lad. you be playing for trouble. here be squire." the squire glared at them, but he did not stop. he stalked into the house and, passing through it, went out by the front door. he intended to turn right-handed, and enter the high-terraced garden facing south, in which he was wont to take, even in winter, a few turns of a morning. but something caught his eye, and he paused. "who's this?" he muttered, and shading his eyes made out a moment later that the stranger was ovington. a visit from him was rare enough to be a portent, and the figure of his bank balance passed through the squire's mind. had he been rash? ovington's was a new concern; was anything wrong? then another idea, hardly more welcome, occurred to him: had the banker come on his nephew's account? if so--however, he would soon know, for the visitor was by this time half-way up the winding drive, sunk between high banks, which, leaving the road a third of a mile from the house, presently forked, the left branch swerving through a grove of beech trees to the front entrance, the right making straight for the stables. the squire met his visitor at the gate and, raising his voice, shouted for thomas. "i am sorry to trespass on you so early," ovington said as he dismounted. "a little matter of business, mr. griffin, if i may trouble you." the old man did not say that it was no trespass, but he stood aside punctiliously for the other to precede him through the gate. then, "you'll stay to eat something after your ride?" he said. "no, i thank you. i must be in town by noon." "a glass of madeira?" "nothing, squire, i thank you. my business will not take long." by this time they stood in the room in which the squire lived and did his business. he pointed courteously to a chair. he was shabby, in well-worn homespun and gaiters, and the room was shabby, walled with bound quarterlies and old farm books, and littered with spurs and dog leashes--its main window looked into the stable yard. but there was about the man a dignity implied rather than expressed, which the spruce banker in his shining hessians owned and envied. the squire could look at men so that they grew uneasy under his eye, and for a moment, owning his domination, the visitor doubted of success. but then again the room was so shabby. he took heart of grace. "i shouldn't trouble you, mr. griffin," he said, sitting back with an assumption of ease, while the squire from his old leather chair observed him warily, "except on a matter of importance. you will have heard that there is a scheme on foot to increase the value of the woollen industry by introducing a steam railroad. this is a new invention which, i admit, has not yet been proved, but i have examined it as a business man, and i think that much is to be expected from it. a limited company is being formed to carry out the plan, if it prove to be feasible. sir charles woosenham has agreed to be chairman, mr. acherley and other gentlemen of the county are taking part, and i am commissioned by them to approach you. i have the plans here----" "what do you want?" the squire's tone was uncompromising. he made no movement towards taking the plans. "if you will allow me to explain?" the old man sat back in his chair. "the railroad will be a continuation of the birmingham and aldersbury railroad, which is in strong hands at birmingham. such a scheme would be too large for us. that, again, is a continuation of the london and birmingham railroad." "built?" "oh no. not yet, of course." "begun, then?" "no, but----" "projected?" "precisely, projected, the plans approved, the bill in preparation." "but nothing done?" "nothing actually done as yet," the banker admitted, somewhat dashed. "but if we wait until these works are finished we shall find ourselves anticipated. "ah!" "we wish, therefore, to be early in the field. much has appeared in the papers about this mode of transport, and you are doubtless familiar with it. i have myself inquired into it, and the opinion of financial men in london is that these railroads will be very lucrative, paying dividends of from ten to twenty-five per cent." the squire raised his eyebrows. "i have the plans here," the banker continued, once more producing them. "our road runs over the land of six small owners, who have all agreed to the terms offered. it then enters on the woosenham outlying property, and thence, before reaching mr. acherley's, proceeds over the garth estate, serving your mills, the tenant of one of which joins our board. if you will look at the plans?" again ovington held them out. but the old man put them aside. "i don't want to see them," he said. "but, squire, if you would kindly glance----" "i don't want to see them. what do you want?" ovington paused to consider the most favorable light in which he could place the matter. "first, mr. griffin, your presence on the board. we attach the highest importance to that. secondly, a way-leave over your land for which the company will pay--pay most handsomely, although the value added to your mills will far exceed the immediate profit." "you want to carry your railroad over garth?" "yes." "not a yard!" the old man tapped the table before him. "not a foot!" "but our terms--if you would allow me to explain them?" "i don't want to hear them. i am not going to sell my birthright, whatever they are. you don't understand me? well, you can understand this." and abruptly the squire sat up. "i'll have none of your d--d smoking, stinking steam-wagons on my land in my time! oh, i've read about them in more places than the papers, sir, and i'll not sell my birthright and my people's birthright--of clean air and clean water and clean soil for any mess of pottage you can offer! that's my answer, mr. ovington." "but the railroad will not come within a mile of garth." "it will not come on to my land! i am not blind, sir. suppose you succeed. suppose you drive the mails and coaches and the stage-wagons off the road. where shall i sell my coach-horses and hackneys and my tenants their heavy nags? and their corn and their beans? no, by g--d," stopping ovington, who wished to interrupt him. "you may delude some of my neighbors, sir, and you may know more about money-making, where it is no question how the money is made, than i do! but i'll see that you don't delude me! a pack of navigators upsetting the country, killing game and robbing hen-roosts, raising wages and teaching honest folks tricks? not here! if woosenham knew his own business, and acherley were not up to his neck in debt, they'd not let themselves be led by the nose by----" "by whom, sir?" ovington was on his feet by this time, his eyes smoldering, his face paler than usual. they confronted each other. it was the meeting, the collision of two powers, of two worlds, the old and the new. "by whom, sir?" the squire replied sternly--he too had risen. "by one whose interests and breeding are wholly different from theirs and who looks at things from another standpoint! that's by whom, sir. and one word more, mr. ovington. you have the name of being a clever man and i never doubted it until to-day; but have a care that you are not over clever, sir. have a care that you do not lead your friends and yourself into more trouble than you think for! i read the papers and i see that everybody is to grow rich between saturday and monday. well, i don't know as much about money business as you do, but i am an old man, and i have never seen a time when everybody grew rich and nobody was the loser." ovington had controlled himself well; and he still controlled himself, but there was a dangerous light in his eyes. "i am sorry," he said, "that you can give me no better answer, mr. griffin. we hoped to have, and we set some value on your support. but there are, of course--other ways." "you may take your railroad any way you like, so long as you don't bring it over garth." "i don't mean that. if the railroad is made at all it must pass over garth--the property stretches across the valley. but the bill, when presented, will contain the same powers which are given in the later canal acts--a single proprietor cannot be allowed to stand in the way of the public interests, mr. griffin." "you mean--by g--d, sir," the squire broke out, "you mean that you will take my land whether i will or no?" "i am not using any threat." "but you do use a threat!" roared the squire, towering tall and gaunt above his opponent. "you do use a threat! you come here----" "i came here--" the other answered--he was quietly drawing on his gloves--"to put an excellent business investment before you, mr. griffin. as you do not think it worth while to entertain it, i can only regret that i have wasted your time and my own." "pish!" said the squire. "very good. then with your permission i will seek my horse." the old man turned to the window and opened it. "thomas," he shouted violently. "mr. ovington's horse." when he turned again. "perhaps you may still think better of it," ovington said. he had regained command of himself. "i ought to have mentioned that your nephew has consented to act as secretary to the company." "the more fool he!" the squire snarled. "my nephew! what the devil is he doing in your company? or for the matter of that in your bank either?" "i think he sees more clearly than you that times are changed." "ay," the old man retorted, full of wrath, and well aware that the other had found a joint in his armor. "and he had best have a care that these fine times don't lead him into trouble!" "i hope not, i hope not. good-day, mr. griffin. i can find my way out. don't let me trouble you." "i will see you out, if you please. after you, sir." then, with an effort which cost him much, but which he thought was due to his position, "you are sure that you will take nothing?" "nothing, i thank you." the squire saw his visitor to the door; but he did not stay to see him ride away. he went back to his room and to a side window at which it was his custom to spend much time. it looked over the narrow vale, little more than a glen, which the eminence, on which the house stood, cut off from the main valley. it looked on its green slopes, on the fern-fringed brook that babbled and tossed in its bottom, on the black and white mill that spanned the stream, and on the thirty acre covert that clothed the farther side and climbed to the foot of the great limestone wall that towered alike above house and glen and rose itself to the knees of the boundary hills. and looking on all this, the squire in fancy saw the railroad scoring and smirching and spoiling his beloved acres. it was nothing to him, that in fact the railroad would pass up the middle of the broad vale behind him--he ignored that. he saw the hated thing sweep by below him, a long black ugly snake, spewing smoke and steam over the green meadows, fouling the waters, darkening the air. "not in my time, by g--d!" he muttered, his knees quivering a little under him--for he was an aging man and the scene had tried him. "not in my time!" and at the thought that he, the owner of all, hill and vale, within his sight, and the descendant of generations of owners--that he had been threatened by this upstart, this loan-monger, this town-bred creature of a day, he swore with fresh vigor. he had at any rate the fires of indignation to warm him, and the satisfaction of knowing that he had spoken his mind and had not had the worst of the bout. but the banker's feelings as he jogged homewards on his hackney were not so happy. in spite of bourdillon's warning he had been confident that he would gain his end. he had fancied that he knew his man and could manage him. he had believed that the golden lure would not fail. but it had failed, and the old man's gibes accompanied him, and like barbed arrows clung to his memory and poisoned his content. it was not the worst that he must return and own that arthur had been wiser than he; that he must inform his colleagues that his embassy had failed. worse than either was the hurt to his pride. certain things that the squire had said about money-making, his sneer about the difference in breeding, his warning that the banker might yet find that he had been too clever--these had pricked him to the quick, and the last had even caused him a pang of uneasiness. and then the squire had shown so clearly the gulf that in his eyes lay between them! ay, it was that which rankled: the knowledge, sharply brought home to him, that no matter what his success, no matter what his wealth, nor how the common herd bowed down to him, this man and his like would ever hold themselves above him, would always look down on him. the fence about them he could not cross. add thousands to thousands as he might, and though he conquered lombard street, these men would not admit him of their number. they would ever hold him at arm's length, would deal out to him a cold politeness. he could never be of them. as a rule ovington was too big a man to harbor spite, but as he rode and fumed, a plan which he had already considered put on a new aspect, and by and by his brow relaxed and he smote his thigh. something tickled him and he laughed. he thought that he saw a way to avenge himself and to annoy his enemy, and by the time he reached the bank he was himself again. indeed, he had not been human if he had not by that time owned that whatever garth thought of him he was something in aldersbury. three times men stopped him, one crossing the street to intercept him, one running bare-headed from a shop, a third seizing his rein. and all three sought favors, or craved advice, all, as they retreated, did so, eyed askance by those who lacked their courage or their impudence. for the tide of speculation was still rising in the country, and even in aldersbury had reached many a back-parlor where the old stocking or the money-box was scarcely out of date. thousands sold their three per cents., and the proceeds had to go somewhere, and other proceeds, for behind all there was real prosperity. men's money poured first into a higher and then into a lower grade of security and raised each in turn, so that fortunes were made with astonishing speed. the banks gave extended credit; everything rose. many who had bought in fear found that they had cleared a profit before they had had time to tremble. they sold, and still there were others to take their place. it seemed as if all had only to buy and to sell and to grow rich. only the very cautious stood aside, and one by one even these slid tempted into the stream. the more venturesome hazarded their money afar, buying shares in steamship companies in the west indies, in diamond mines in brazil, or in cattle companies in mexico. the more prudent preferred undertakings which they could see and which their limited horizon could compass, and to these such a local scheme as the valleys railroad held out a tempting bait. they knew nothing about a railroad, but they knew that steam had been applied to ocean travel, and they knew aldersbury and the woollen district. here was something the growth and progress of which they could watch, and which once begun could not vanish in a night. then the silence of those within and the rumors spread without added to its attractions. each man felt that his neighbor was stealing a march upon him, and that if he were not quick he would not get in on equal terms. one of ovington's waylayers wished to know if the limit at which he had been advised to sell his stock was likely to be reached. "i sold on saturday," the banker answered, "two pounds above your limit, davies. the money will be in the bank in a week." he spoke with napoleonic curtness, and rode on, leaving the man, amazed and jubilant, to calculate his gains. the next wanted advice. he had a hundred in hand if mr. ovington would not think it too small. "call to-morrow--no, thursday," ovington said, hardly looking at him. "i'll see you then." the third ran bare-headed out of a shop. he was a man of more weight, purslow the big draper on bride hill, who had been twice mayor of aldersbury; a tradesman, bald and sleek, whom fortune had raised so rapidly that old subservience was continually at odds with new importance. "just a word, mr. ovington," he stuttered, "a word, sir, by your leave? i'm a good customer." he had not laid aside his black apron but merely twisted it round his waist, a sure sign, in these days of his greatness, that he was flustered. the banker nodded. "none better, purslow," he answered. "what is it?" "what i says, then--excuse me--is, if grounds, why not me? why not me, sir?" "i don't quite----" "if he's to be on the board, he and his mash-tubs----" "oh!" the banker looked grave. "you are thinking of the railroad, purslow?" "to be sure! what else?--excuse me, sir! and what i say is, if grounds, why not me? i've been mayor twice and him not even on the council? and i'm not a pauper, as none knows better than you, mr. ovington. if it's only that i'm a tradesman, why, there ought to be a tradesman on it, and i'll be bound as many will follow my lead as grounds'." the banker seemed to consider. "look here, purslow," he said, "you are doing very well, not a man in aldersbury better. take my advice and stick to the shop." "and slave for every penny i make!" "slow and sure is a good rule." "oh, damn slow and sure!" cried the draper, forgetting his manners. "no offence, sir, i'm sure. excuse me. but slow and sure, while grounds is paid for every time he crosses the street, and doubles his money while he wears out his breeches!" "well," said ovington, with apparent reluctance, "i'll think it over. but to sit on the board means putting in money, purslow. you know that, of course." "and haven't i the money?" the man cried, inflamed by opposition. "can't i put down penny for penny with grounds? ay, though i've served the town twice, and him not even on the council!" "well, i'll bear it in mind. i can say no more than that," ovington rejoined. "i must consult sir charles. it's a responsible position, purslow. and, of course, where there are large profits, as we hope there may be, there must be risk. there must be some risk. don't forget that. still," touching up his horse with his heel, "i'll see what i can do." he gained the bank without further stay, and there the stir and bustle which his practised eye was quick to mark sustained the note already struck. there were customers coming and going: some paying in, others seeking to have bills renewed, or a loan on securities that they might pay calls, or accommodation of one kind or another. but with easy money these demands could be granted, and many a parcel of ovington's notes passed out amid smiling and general content. the january sun was shining as if march winds would never blow, and credit seemed to be a thing to be had for the asking. it was only within the last seven years that ovington's had ventured on an issue of notes. then, a little before the resumption of cash payments, they had put them forth with a tentative, "if you had rather have bank paper it's here." some had had the bad taste to prefer the abraham newlands, a few had even asked for dean's notes. but borrowers cannot be choosers, the notes had gradually got abroad, and though at first they had returned with the rapidity of a homing pigeon, the readiness with which they were cashed wrought its effect, and by this time the public were accustomed to them. dean's notes bore a big d, and ovington's, for the benefit of those who could not read, were stamped with a large co., for charles ovington. alone with his daughter that evening the banker referred to this. "betty," he said, after a long silence, "i am going to make a change. i am going to turn co. into company." she understood him at once, and "oh, father!" she cried, laying down her work. "who is it? is it arthur?" "would you like that?" she replied by another question. "is he really so clever?" "he's a gentleman--that's much. and a griffin, and that's more, in a place like this. and he's--yes, he's certainly clever." "cleverer than mr. rodd?" "rodd! pooh! arthur's worth two of him." "quite the industrious apprentice!" she murmured, her hands in her lap. "well, you know," lightly, "what happened to the industrious apprentice, betty?" she colored. "he married his master's daughter, didn't he? but there are two words to that, father. quite two words." "well, i am going to offer him a small share. anything more will depend upon himself--and clement." she sighed. "poor clement!" "poor clement!" the banker repeated her words pettishly. "not poor clement, but idle clement! can you do nothing with that boy? put no sense into him? he's good for nothing in the world except to moon about with a gun. last night he began to talk to me about cobbett and some new wheat. new wheat, indeed! rubbish!" "but i think," timidly, "that he does understand about those things, father." "and what good will they do him? i wish he understood a little more about banking! why, even rodd is worth two of him. he's not in the bank four days in the week. where is he to-day?" "i am afraid that he took his gun--but it was the last day of the season. he said that he would not be out again. he has been really better lately." "though i was away!" the banker exclaimed. and he said some strong things upon the subject, to which betty had to listen. however, he had recovered his temper when he sent for arthur next day. he bade him close the door. "i want to speak to you," he said; then he paused a moment while arthur waited, his color rising. "it's about yourself. when you came to me i did not expect much from the experiment. i thought that you would soon tire of it, being what you are. but you have stood to it, and you have shown a considerable aptitude for the business. and i have made up my mind to take you in--on conditions, of course." arthur's eyes sparkled. he had not hoped that the offer would be made so soon, and, much moved, he tried to express his thanks. "you may be sure that i shall do my best, sir," he said. "i believe you will, lad. i believe you will. indeed, i am thinking of myself as well as of you. i had not intended to make the offer so soon--you are young and could wait. but you will have to bring in a certain sum, and capital can be used at present to great advantage." arthur looked grave. "i am afraid, sir----" "oh, i'll make it easy," ovington said. "this is my offer. you will put in five thousand pounds, and will receive for three years twelve per cent upon this in lieu of your present salary of one hundred and fifty--the hundred you are to be paid as secretary to the company is beside the matter. at the end of three years, if we are both satisfied, you will take an eighth share--otherwise you will draw out your money. on my death, if you remain in the bank, your share will be increased to a third on your bringing in another five thousand. you know enough about the accounts to know----" "that it's a most generous offer," arthur exclaimed, his face aglow. and with the frankness and enthusiasm, the sparkling eye and ready word that won him so many friends, he expressed his thanks. "well, lad," the other answered pleasantly, "i like you. still, you had better take a short time to consider the matter." "i want no time," arthur declared. "my only difficulty is about the money. my mother's six thousand is charged on garth, you see." this was a fact well known to ovington, and one which he had taken into his reckoning. perhaps, but for it, he had not been making the offer at this moment. but he concealed his satisfaction and a smile, and "isn't there a provision for calling it up?" he said. "yes, there is--at three months. but i am afraid that my mother----" "surely she would not object under the circumstances. the increased income might be divided between you so that it would be to her profit as well as to your advantage to make the change. three months, eh? well, suppose we say the money to be paid and the articles of partnership to be signed four months from now?" difficulties never loomed very large in this young man's eyes. "very good, sir," he said. "upon my honor, i don't know how to thank you." "it won't be all on your side," the banker answered good-humoredly. "your name's worth something, and you are keen. i wish to heaven you could infect clement with a tithe of your keenness." "i'll try, sir," arthur replied. at that moment he felt that he could move mountains. "well, that's settled, then. send rodd to me, will you, and do you see if i have left my pocket-book in the house. betty may know where it is." arthur went through the bank, stepping on air. he gave rodd his message, and in a twinkling he was in the house. as he crossed the hall his heart beat high. lord, how he would work! what feats of banking he would perform! how great would he make ovington's, so that not only aldshire but lombard street should ring with its fame! what wealth would he not pile up, what power would he not build upon it, and how he would crow, in the days to come, over the dull-witted clod-hopping squires from whom he sprang, and who had not the brains to see that the world was changing about them and their reign approaching its end! for at this moment he felt that he had it in him to work miracles. the greatest things seemed easy. the fortunes of ovington's lay in the future, the cycle half turned--to what a point might they not carry them! during the last twelve months he had seen money earned with an ease which made all things appear possible; and alert, eager, sanguine, with an inborn talent for business, he felt that he had but to rise with the flowing tide to reach any position which wealth could offer in the coming age--that age which enterprise and industry, the loan, the mill, the furnace were to make their own. the age of gold! he burst into song. he stopped. "betty!" he cried. "who is that rude boy?" the girl retorted, appearing on the stairs above him. he bowed with ceremony, his hand on his heart, his eyes dancing. "you see before you the industrious apprentice!" he said. "he has received the commendation of his master. it remains only that he should lay his success at the feet of--his master's daughter!" she blushed, despite herself. "how silly you are!" she cried. but when he set his foot on the lowest stair as if to join her, she fled nimbly up and escaped. on the landing above she stood. "congratulations, sir," she said, looking over the balusters. "but a little less forwardness and a little more modesty, if you please! it was not in your articles that you should call me betty." "they are cancelled! they are gone!" he retorted. "come down, betty! come down and i will tell you such things!" but she only made a mocking face at him and vanished. a moment later her voice broke forth somewhere in the upper part of the house. she, too, was singing. chapter vi between the village and garth the fields sank gently, to rise again to the clump of beeches which masked the house. on the farther side the ground fell more sharply into the narrow valley over which the squire's window looked, and which separated the knoll whereon garth stood from the cliffs. beyond the brook that babbled down this valley and turned the mill rose, first, a meadow or two, and then the thirty acre covert, a tangle of birches and mountain-ashes which climbed to the foot of the rock-wall. over this green trough, which up-stream and down merged in the broad vale, an air of peace, of remoteness and seclusion brooded, making it the delight of those who, morning and evening, looked down on it from the house. viewed from the other side, from the cliffs, the scene made a different impression. not the intervening valley but the house held the eye. it was not large, but the knoll on which it stood was scarped on that side, and the walls of weathered brick rose straight from the rock, fortress-like and imposing, displaying all their mass. the gables and the stacks of fluted chimneys dated only from dutch william, but tradition had it that a strong place, castell coch, had once stood on the same site; and fragments of pointed windows and gothic work, built into the walls, bore out the story. the road leaving the village made a right-angled turn round garth and then, ascending, ran through the upper part of the thirty acres, skirting the foot of the rocks. along the lower edge of the covert, between wood and water, there ran also a field-path, a right-of-way much execrated by the squire. it led by a sinuous course to the acherley property, and, alas, for good resolutions, along it on the afternoon of the very day which saw the elder ovington at garth came clement ovington, sauntering as usual. he carried a gun, but he carried it as he might have carried a stick, for he had long passed the bounds within which he had a right to shoot; and at all times, his shooting was as much an excuse for a walk among the objects he loved as anything else. he had left his horse at the griffin arms in the village, and he might have made his way thither more quickly by the road. but at the cost of an extra mile he had preferred to walk back by the brook, observing as he went things new and old; the dipper curtseying on its stone, the water-vole perched to perform its toilet on the leaf of a brook-plant, the first green shoots of the wheat piercing through the soil, an old laborer who was not sorry to unbend his back, and whose memory held the facts and figures of fifty-year-old harvests. the day was mild, the sun shone, clement was happy. why, oh, why were there such things as banks in the world? at a stile which crossed the path he came to a stand. something had caught his eye. it was a trifle, to which nine men out of ten would not have given a thought, for it was no more than a clump of snowdrops in the wood on his right. but a shaft of wintry sunshine, striking athwart the tiny globes, lifted them, star-like, above the brown leaves about them, and he paused, admiring them--thinking no evil, and far from foreseeing what was to happen. he wondered if they were wild, or--and he looked about for any trace of human hands--a keeper's cottage might have stood here. he saw no trace, but still he stood, entranced by the white blossoms that, virgin-like, bowed meek heads to the sunlight that visited them. he might have paused longer, if a sound had not brought him abruptly to earth. he turned. to his dismay he saw a girl, three or four paces from him, waiting to cross the stile. how long she had waited, how long watched him, he did not know, and in confusion--for he had not dreamed that there was a human being within a mile of him--and with a hurried snatch at his hat, he moved out of the way. the girl stepped forward, coloring a little, for she foresaw that she must climb the stile under the young man's eye. instinctively, he held out a hand to assist her, and in the act--he never knew how, nor did she--the gun slipped from his grasp, or the trigger caught in a bramble. a sheet of flame tore between them, the blast of the powder rent the air. "o my god!" clement cried, and he reeled back, shielding his eyes with his hands. the smoke hid the girl, and for a long moment, a moment of such agony as he had never known, clement's heart stood still. what had he done? oh, what had he done at last, with his cursed carelessness! had he killed her? slowly, the smoke cleared away, and he saw the girl. she was on her feet--thank god, she was on her feet! she was clinging with both hands to the stile. but was she--"are you--are you----" he tried to frame words, his voice a mere whistle. she clung in silence to the rail, her face whiter than the quilted bonnet she wore. but he saw--thank god, he saw no wound, no blood, no hurt, and his own blood moved again, his lungs filled again with a mighty inspiration. "for pity's sake, say you are not hurt!" he prayed. "for god's sake, speak!" but the shock had robbed her of speech, and he feared that she was going to swoon. he looked helplessly at the brook. if she did, what ought he to do? "oh, a curse on my carelessness!" he cried. "i shall never, never forgive myself." it had in truth been a narrow, a most narrow escape, and at last she found words to say so. "i heard the shot--pass," she whispered, and shuddering closed her eyes again, overcome by the remembrance. "but you are not hurt? they did pass!" the horror of that which might have been, of that which had so nearly been, overcame him anew, gave a fresh poignancy to his tone. "you are sure--sure that you are not hurt?" "no, i am not hurt," she whispered. "but i am very--very frightened. don't speak to me. i shall be right--in a minute." "can i do anything? get you some water?" she shook her head and he stood, looking solicitously at her, still fearing that she might swoon, and wondering afresh what he ought to do if she did. but after a minute or so she sighed, and a little color came back to her face. "it was near, oh, so near!" she whispered, and she covered her face with her hands. presently, and more certainly, "why did you have it--at full cock?" she asked. "god knows!" he owned. "it was unpardonable. but that is what i am! i am a fool, and forget things. i was thinking of something else, i did not hear you come up, and when i found you there i was startled." "i saw." she smiled faintly. "but it was--careless." "horribly! horribly careless! it was wicked!" he could not humble himself enough. she was herself now, and she looked at him, took him in, and was sorry for him. she removed her hands from the rail, and though her fingers trembled she straightened her bonnet. "you are mr. ovington?" "yes. and you are miss griffin, are you not?" "yes," smiling tremulously. "may i help you over the stile? oh, your basket!" she saw that it lay some yards away, blackened by powder, one corner shot away; so narrow had been the escape! he had a feeling of sickness as he took it up. "you must not go on alone," he said. "you might faint." "not now. but i shall not go on. what----" her eyes strayed to the wood, and curiosity stirred in her. "what were you looking at so intently, mr. ovington, that you did not hear me?" he colored. "oh, nothing!" "but it must have been something!" her curiosity was strengthened. "well, if you wish to know," he confessed, shamefacedly, "i was looking at those snowdrops." "those snowdrops?" "don't you see how the sunlight touches them? what a little island of light they make among the brown leaves?" "how odd!" she stared at the snowdrops and then at him. "i thought that only painters and poets, mr. wordsworth and people like that, noticed those things. but perhaps you are a poet?" "goodness, no!" he cried. "a poet? but i am fond of looking at things--out of doors, you know. a little way back"--he pointed up-stream, the way he had come--"i saw a rat sitting on a lily leaf, cleaning its whiskers in the sun--the prettiest thing you ever saw. and an old man working at bache's told me that he--but lord, i beg your pardon! how can i talk of such things when i remember----?" he stopped, overcome by the recollection of that through which they had passed. she, for her part, was inclined to ask him to go on, but remembered that this, all this was very irregular. what would her father say? and miss peacock? yet, if this was irregular, so was the adventure itself. she would never forget his face of horror, the appeal in his eyes, his poignant anxiety. no, it was impossible to act as if nothing had happened between them, impossible to be stiff and to talk at arm's length about prunes and prisms with a person who had all but taken her life--and who was so very penitent. and then it was all so interesting, so out of the common, so like the things that happened in books, like that dreadful fall from the cobb at lyme in "persuasion." and he was not ordinary, not like other people. he looked at snowdrops! but she must not linger now. later, when she was alone in her room, she could piece it together and make a whole of it, and think of it, and compass the full wonder of the adventure. but she must go now. she told him so, the primness in her tone reflecting her thoughts. "will you kindly give me the basket?" "i am going to carry it," he said. "you must not go alone. indeed you must not, miss griffin. you may feel it more by and by. you may--go off suddenly." "oh," she replied, smiling, "i shall not go off, as you call it, now." "i will only come as far as the mill," humbly. "please let me do that." she could not say no, it could hardly be expected of her; and she turned with him. "i shall never forgive myself," he repeated. "never! never! i shall dream of the moment when i lost sight of you in the smoke and thought that i had killed you. it was horrible! horrible! it will come back to me often." he thought so much of it that he was moving away without his gun, leaving it lying on the ground. it was she who reminded him. "are you not going to take your gun?" she asked. he went back for it, covered afresh with confusion. what a stupid fellow she must think him! she waited while he fetched it, and as she waited she had a new and not unpleasant sensation. never before had she been on these terms with a man. the men whom she had known had always taken the upper hand with her. her father, arthur even, had either played with her or condescended to her. in her experience it was the woman's part to be ordered and directed, to give way and to be silent. but here the parts were reversed. this man--she had seen how he looked at her, how he humbled himself before her! and he was--interesting. as he came back to her carrying the gun, she eyed him with attention. she took note of him. he was not handsome, as arthur was. he had not arthur's sparkle, his brilliance, his gay appeal, the carriage of the head that challenged men and won women. but he was not ugly, he was brown and clean and straight, and he looked strong. he bent to her as if he had been a knight and she his lady, and his eyes, grey and thoughtful--she had seen how they looked at her. now, she had never given much thought to any man's eyes before, and that she did so now, and criticised and formed an opinion of them, implied a change of attitude, a change in her relations and the man's; and instinctively she acknowledged this by the lead she took. "it seems so strange," she said half-playfully--when had she ever rallied a man before?--"that you should think of such things as you do. snowdrops, i mean. i thought you were a banker, mr. ovington." "a very bad banker," he replied ruefully. "to tell the truth, miss griffin, i hate banking. pounds, shillings, and pence--and this!" he pointed to the country about them, the stream, the sylvan path they were treading, the wood beside them, with its depths gilded here and there by a ray of the sun. "a desk and a ledger--and this! oh, i hate them! i would like to live out of doors. i want"--in a burst of candor--"to live my own life! to be able to follow my own bent and make the most of myself." "perhaps," she said with naïveté, "you would like to be a country gentleman?" and indeed the lot of a country gentleman in that day was an enviable one. "oh no," he said, his tone deprecating the idea. he did not aspire to that. "but what, then?" she did not understand. "have you no ambition?" "i'd like to be--a farmer, if i had my way." that surprised as well as dashed her. she thought of her father's tenants and her face fell. "oh, but," she said, "a farmer? why?" he was not like any farmer she had ever seen. but he would not be dashed. "to make two blades of grass grow where one grew before," he answered stoutly, though he knew that he had sunk in her eyes. "just that; but after all isn't that worth doing? isn't that better than burying your head in a ledger and counting other folk's money while the sun shines out of doors, and the rain falls sweetly, and the earth smells fresh and pure? besides, it is all i am good for, miss griffin. i do think i understand a bit about that. i've read books about it and i've kept my eyes open, and--and what one likes one does well, you know." "but farmers----" "oh, i know," sorrowfully, "it must seem a very low thing to you." "farmers don't look at snowdrops, mr. ovington," with a gleam of fun in her eyes. "don't they? then they ought to, and they'd learn a lot that they don't know now. i've met men, laboring men who can't read or write, and it's wonderful the things they know about the land and the way plants grow on it, and the live things that are only seen at night, or stealing to their homes at daybreak. and there's a new wheat, a wheat i was reading about yesterday, cobbett's corn, it is called, that i am sure would do about here if anyone would try it. but there," remembering himself and to whom he was talking, "this can have no interest for you. only wouldn't you rather plod home weary at night, feeling that you had done something, and with all this"--he waved his hand--"sinking to rest about you, and the horses going down to water, and the cattle lowing to be let into the byres, and--and all that," growing confused, as he felt her eyes upon him, "than get up from a set of ledgers with your head aching and your eyes muddled with figures?" "i'm afraid i have not tried either," she said. but she smiled. she found him new, his notions unlike those of the people about her, and certainly unlike those of a common farmer. she did not comprehend all his half-expressed thoughts, but not for that was she the less resolved to remember them, and to think of them at her leisure. for the present here was the mill, and they must part. at the mill the field-path which they were following fell into a lane, which on the right rose steeply to the road, on the left crossed a cart-bridge, shaken perpetually by the roar and wet with the spray of the great mill-wheel. thence it wound upwards, rough and stony, to the back premises of garth. he, too, knew that this division of the ways meant parting, and humility clothed him. "heavens, what a fool i've been," he said, blushing, as he met her eyes. "what must you think of me, prating about myself when i ought to have been thinking only of you and asking your pardon." "for nearly shooting me?" "yes--and thank god, thank god," with emotion, "that it was not worse." "i do." "i ought never to carry a gun again!" "i won't exact that penalty." she looked at him very kindly. "and you will forgive me? you will do your best to forgive me?" "i will do my best, if you will not carry off my basket," she replied, for he was turning away with the basket on his arm. "thank you," as he restored it, and in his embarrassment nearly dropped his gun. "good-bye." "you are sure that you will be safe now?" "if you have no fresh accident with your firearms," she laughed. "please be careful." she nodded, and turned and tripped away. but she had hardly left him, she had not passed ten paces beyond the bridge, before her mood changed. the cloak of playfulness fell from her, reaction did its work. the color left her cheeks, her knees shook as she remembered. she felt again the hot blast on her cheek, lived through the flash, the shock, the onset of faintness. again she clung to the stile, giddy, breathless, the landscape dancing about her. and through the haze she saw his face, white, drawn, terror-stricken--saw it and strove vainly to reassure him. and now--now he was soothing her. he was pouring out his penitence, he was upbraiding himself. presently she was herself again; her spirits rising, she was playing with him, chiding him, exercising a new sense of power, becoming the recipient of a man's thoughts, a man's hopes and ambitions. the color was back in her cheeks now, her knees were steady, she could walk. she went on, but slowly and more slowly, full of thought, reviewing what had happened. until, near the garden door, she was roughly brought to earth. miss peacock, visiting the yard on some domestic errand, had discerned her. "josina!" she cried. "my certy, girl, but you have been quick! i wish the maids were half as quick when they go! a whole afternoon is not enough for them to walk a mile. but you've not brought the eggs?" "i didn't go," said josina. "i was frightened by a gun." "a gun?" "and i felt a little faint." "faint? why, you've got the color of a rose, girl. faint? well, when i want galeny eggs again i shan't send you. where was it?" "under the thirty acres--by the stile. a gun went off, and----" "sho!" miss peacock cried contemptuously. "a gun went off, indeed! at your age, josina! i don't know what girls are coming to! if you don't take care you'll be all nerves and vapors like your aunt at the cottage! go and take a dose of gilly-flower-water this minute, and the less said to your father the better. why, you'd never hear the end of it! afraid because a gun went off!" josina agreed that it was very silly, and went quickly up to her room. yes, the less said about it the better! chapter vii the terraced garden at garth rested to the south and east on a sustaining wall so high that to build it to-day would tax the resources of three squires. unfortunately, either for defence or protection from the weather, the wall rose high on the inner side also, so that he who walked in the garden might enjoy the mellow tints of the old brickwork, but had no view of the country except through certain loop-holes, gable-shaped, which pierced the wall at intervals, like the port-holes of a battleship. if the lover of landscape wanted more, he must climb half a dozen steps to a raised walk which ran along the south side. thence he could look, as from an eyrie, on the green meadows below him, or away to the line of hills to westward, or turning about he could overlook the operations of the gardener at his feet. more, if it rained or blew there was at the south-west corner, and entered from the raised walk, an ancient dutch summer-house of brick, with a pyramidal roof. it had large windows and, with much at garth that served for ornament rather than utility, it was decayed, time and damp having almost effaced its dim frescoes. but tradition hallowed it, for it was said that william of orange, after dining in the hall at the oaken table which still bore the date , had smoked his pipe and drunk his schnapps in this summer-house; and thence had watched the roll of the bowls and the play of the bias on the turf below. for in those days the garden had been a bowling green. there on summer evenings the squire would still drink his port, but in winter the place was little used, tools desecrated it, and tubers took refuge in it. so when josina began about this time to frequent it, and, as winter yielded to the first breath of spring, began to carry her work thither of an afternoon, miss peacock should have had her suspicions. but the good lady saw nothing, being a busy woman. thomas the groom did remark the fact, for idle hands make watchful eyes, but for a time he was none the wiser. "what's young miss doing up there?" he asked himself. "must be tarnation cold! and her look's fine, too! ay, 'tis well to be them as has nought to do but traipse up and down and sniff the air!" naturally it did not at once occur to him that the summer-house commanded a view of the path which ran along the brook side; nor did he suppose that miss had any purpose, when, as might happen perhaps once a week, she would leave her station at the window and in an aimless fashion wander down to the mill--and beyond it. she might be following a duck inclined to sit, or later--for turkeys will stray--be searching for a turkey's nest. she might be doing fifty things, indeed--she was sometimes so long away. but the time did come when, being by chance at the mill, thomas saw a second figure on the path beside the water, and he laid by the knowledge for future use. he was a sly fellow, not much in favor with the other servants. presently there came a cold saturday in march, a wet, windy day, when to saunter by the brook would have too odd an air. but would it have an odd look, josina wondered, standing before the glass in her room, if she ran across to the cottage for ten minutes about sunset? the bank closed early on saturdays, and men were not subject to the weather as women were. twice she put on her bonnet, and twice she took it off and put it back in its box--she could not make up her mind. he might think that she followed him. he might think her bold. or suppose that when they met before others, she blushed; or that they thought the meeting strange? and, after all, he might not be there--he was no favorite with mrs. bourdillon, and his heart might fail him. in the end the bonnet was put away, but it is to be feared that that evening jos was a little snappish with miss peacock when arraigned for some act of forgetfulness. had she gone she might have come off no better than clement, who, braving all things, did go. mrs. bourdillon did not, indeed, say when he entered, "what, here again?" but her manner spoke for her, and arthur, who had arrived before his time, received the visitor with less than his usual good humor. clement's explanation, that he had left his gun, fell flat, and so chilly were the two that he stayed but twenty minutes, then faltered an excuse, and went off with his tail between his legs. he did not guess that he had intruded on a family difference, a trouble of some standing, which the passage of weeks had but aggravated. it turned on ovington's offer, which arthur, pluming himself on his success and proud of his prospects, had lost no time in conveying to his mother. he had supposed that she would see the thing with his eyes, and be as highly delighted. to become a partner so early, to share at his age in the rising fortunes of the house! surely she would believe in him now, if she had never believed in him before. but mrs. bourdillon had been imbued by her husband with one fixed idea--that whatever happened she must never touch her capital; that under no circumstances must she spend it, or transfer it or alienate it. that way lay ruin. no sooner, therefore, had arthur come to that part of his story than she had taken fright; and nothing that he had been able to say, no assurance that he had been able to give, no gilded future that he had been able to paint, had sufficed to move the good woman from her position. "of course," she said, looking at him piteously, for she hated to oppose him, "i'm not saying that it does not sound nice, dear." "it is nice! very nice!" "but i'm older than you, and oh, dear, dear, i've known what disappointment is! i remember when your father thought that he had the promise of the benthall living and we bought the drawing-room carpet, though it was blue and buff and your father did not like the color--something to do with a fox, i remember, though to be sure a fox is red! well, my dear," drumming with her fingers on her lap in a placid way that maddened her listener, "he was just as confident as you are, and after all the bishop gave the living to his own cousin, and the money thrown clean away, and the carpet too large for any room we had, and woven of one piece so that we couldn't cut it! i'm sure that was a lesson to me that there's many a slip between the cup and the lip. believe me, a bird in the hand----" "but this is in the hand!" arthur cried, restraining himself with difficulty. "this is in the hand!" "well, i don't know how that may be. i never was a business woman, whatever your uncle may say when he is in his tantrums. but i do know that your father told me, nine or ten times----" "and you've told me a hundred times!" "well, and i'm sure your uncle would say the same! but, indeed, i don't know what he wouldn't say if he knew what we were thinking of!" "the truth is, mother, you are afraid of the squire." "and if i am," plaintively, "it is all very well for you, arthur, who are away six days out of seven. but i'm here and he's here. and i have to listen to him. and if this money is lost----" "but it cannot be lost, i tell you!" "well, if it is lost, we shall both be beggars! oh, dear, dear, i'm sure if your father told me once he told me a hundred times----" "damn!" arthur cried, fairly losing his temper at last. "the truth is, mother, that my father knew nothing about money." at that, however, mrs. bourdillon began to cry and arthur found himself obliged to drop the matter for the time. he saw, too, that he was on the wrong tack, and a few days later, under pressure of necessity, he tried another. he humbled himself, he wheedled, he cajoled; and when he had by this means got on the right side of his mother he spoke of ovington's success. "in a few years he will be worth a quarter of a million," he said. the figure flustered her. "why, that's----" "a quarter of a million," he repeated impressively. "and that's why i consider this the chance of my life, mother. it is such an opportunity as i shall never have again. it is within my reach now, and surely, surely," his voice shook with the fervor of his pleading, "you will not be the one to dash it from my lips?" he laid his hand upon her wrist. "and ruin your son's life, mother?" she was shaken. "you know, if i thought it was for your good!" "it is! it is, mother!" "i'd do anything to make you happy, arthur! but i don't believe," with a sigh, "that whatever i did your uncle would pay the money." "is it his money or yours?" "why, of course, arthur, i thought that you knew that it was your father's." she was very simple, and her pride was touched. "and now it is yours. and i suppose that some day--i hope it will be a long day, mother--it will be mine. believe me, you've only to write to my uncle and tell him that you have decided to call it up, and he will pay it as a matter of course. shall i write the letter for you to sign?" mrs. bourdillon looked piteously at him. she was very, very unwilling to comply, but what was she to do? between love of him and fear of the squire, what was she to do? poor woman, she did not know. but he was with her, the squire was absent, and she was about to acquiesce when a last argument occurred to her. "but you are forgetting," she said, "if your uncle takes offence, and i'm sure he will, he'll come between you and josina." "well, that is his look-out." "arthur! you don't mean that you've changed your mind, and you so fond of her? and the girl heir to garth and all her father's money!" "i say nothing about it," arthur declared. "if he chooses to come between us that will be his doing, not mine." "but garth!" mrs. bourdillon was altogether at sea. "my dear boy, you are not thinking! why, lord ha' mercy on us, where would you find such another, young and pretty and all, and garth in her pocket? why, if it were only on jos's account you'd be mad to quarrel with him." "i'm not going to quarrel with him," arthur replied sullenly. "if he chooses to quarrel with me, well, she's not the only heiress in the world." his mother held up her hands. "oh dear me," she said wearily. "i give it up, i don't understand you. but i'm only a woman and i suppose i don't understand anything." he was accustomed to command and she to be guided. he saw that she was wavering, and he plied her afresh, and in the end, though not without another outburst of tears, he succeeded. he fetched the pen, he smoothed the paper, and before he handed his mother her bed-candle he had got the fateful letter written, and had even by lavishing on her unusual signs of affection brought a smile to her face. "it will be all right, mother, you'll see," he urged as he watched her mount the stairs. "it will be all right! you'll see me a millionaire yet." and then he made a mistake which was to cost him dearly. he left the letter on the mantel-shelf. an hour later, when he had been some time in bed, he heard a door open and he sat up and listened. even then, had he acted on the instant, it might have availed. but he hesitated, arguing down his misgivings, and it was only when he caught the sound of footsteps stealthily re-ascending that he jumped out of bed and lit a candle. he slipped downstairs, but he was too late. the letter was gone. he went up to bed again, and though he wondered at the queer ways of women he did not as yet doubt the issue. he would recover the letter in the morning and send it. the end would be the same. there, however, he was wrong. mrs. bourdillon was a weak woman, but weakness has its own obstinacy, and by the morning she had reflected. the sum charged on garth was her whole fortune, her sole support, and were it lost she would be penniless, with no one to look to except the squire, whom she would have offended beyond forgiveness. true, arthur laughed at the idea of loss, and he was clever. but he was young and sanguine, and before now she had heard of mothers beggared through the ill-fortune or the errors of their children. what if that should be her lot! nor was this the only thought which pressed upon her mind. that arthur should marry josina and succeed to garth had been for years her darling scheme, and she could not, in spite of the hopes with which he had for the moment dazzled her, imagine any future for him comparable to that. but if he would marry josina and succeed to garth he must not offend his uncle. so, when arthur came down in the morning, and with assumed carelessness asked for the letter she put him off. it was sunday. she would not discuss business on sunday, it would not be lucky. on monday, when, determined to stand no more nonsense, he returned to the subject, she took refuge in tears. it was cruel of him to press her so, when--when she was not well! she had not made up her mind. she did not know what she should do. to tears there is no answer, and, angry as he was, he had to start for aldersbury, leaving the matter unsettled, much to his disgust and alarm, for the time was running on. and that was the beginning of a tragedy in the little house under garthmyle. it was a struggle between strength and weakness, and weakness, as usual, sought shelter in subterfuge. when arthur came home at the end of the week his mother took care to have company, and he could not get a word with her. she had no time for business--it must wait. on the next saturday she was not well, and kept her bed, and on the sunday met him with the same fretful plea--she would do no business on sunday! then, convinced at last that she had made up her mind to thwart him, he hardened his heart. he loved his mother, and to go beyond a certain point did not consort with his easy nature, but he had no option; the thing must be done if his prospects were not to be wrecked. he became hard, cruel, almost brutal; threatening to leave her, threatening to take himself off altogether, harassing her week after week, in what should have been her happiest hours, with pictures of the poverty, the obscurity, the hopelessness to which she was condemning him! and, worst of all, torturing her with doubts that after all he might be right. and still she resisted, and weak, foolish woman as she was, resisted with an obstinacy that was infinitely provoking. meanwhile only two things supported her: her love for him, and the belief that she was defending his best interests and that some day he would thank her. she was saving him from himself. the odds were great, she was unaccustomed to oppose him, and still she withstood him. she would not sign the letter. but she suffered, and suffered terribly. she took to bringing in guests as buffers between them, and once or twice she brought in josina. the girl, who knew them both so well, could not fail to see that there was something wrong, that something marred the relations between mother and son. arthur's moody brow, his silence, or his snappish answers, no less than mrs. bourdillon's scared manner, left her in no doubt of that. but she fancied that this was only another instance of the law of man's temper and woman's endurance--that law to which she knew but one exception. and if the girl hugged that exception, trembling and hoping, to her breast, if arthur's coldness was a relief to her, if she cared little for any secret but her own, she was no more of a mystery to them than they were to her. when the door closed behind her, and, accompanied by a maid, she crossed the dark fields, she thought no more about them. the two ceased--such is the selfishness of love--to exist for her. her thoughts were engrossed by another, by one who until lately had been a stranger, but whose figure now excluded the world from her view. her secret monopolized her, closed her heart, blinded her eyes. such is the law of love--at a certain stage in its growth. meanwhile life at the cottage went on in this miserable fashion until april had come in and the daffodils were in full bloom in the meadows beside the river. and still arthur could not succeed in his object, and wondering what the banker thought of the delay and his silence, was almost beside himself with chagrin. then there came a welcome breathing space. ovington despatched him to london on an important and confidential mission. he was to be away rather more than a fortnight, and the relief was much even to him. to his mother it had been more, if he had not, with politic cruelty, kept from her the cause of his absence. she feared that he was about to carry out his threat and to make a home elsewhere--that this was the end, that he was going to leave her. and perhaps, she thought, she had been wrong. perhaps, after all, she had sacrificed his love and lost his dear presence for nothing! it was a sad easter that she passed, lonely and anxious, in the little house. chapter viii it was in the third week of april that arthur returned to aldersbury. ovington had not failed to let his correspondents know that the lad was no common mercantile person, but came of a county family and had connections; and arthur had been fêted by the bank's agents and made much of by their friends. the negotiation which ovington had entrusted to him had gone well, as all things went well at this time. his abilities had been recognized in more than one counting-house, and in the general elation and success, civilities and hospitality had been showered upon him. mothers and daughters had exerted themselves to please the nephew--it was whispered the heir--of the aldshire magnate; and what arthur's letters of credit had not gained for him, his handsome face and good breeding had won. he came back, therefore, on the best of terms with himself and more in love than ever with the career which he had laid out. and, but for the money difficulty, and his mother's obstinacy, he would have seen all things in rose color. he returned at the moment when speculation in aldersbury--and aldersbury was in this but a gauge of the whole country--was approaching its fever point. the four per cent, consols, which not long before had stood at , were . the three per cents., which had been , had risen to . india stock was booming at , and these prices, which would have seemed incredible to a former generation, were justified by the large profits accruing from trade and seeking investment. they were, indeed, nothing beside the heights to which more speculative stocks were being hurried. shares in one mine, bought at ten pounds, changed hands at a hundred and fifty. shares in another, on which seventy pounds had been paid, were sold at thirteen hundred. an instalment of £ was paid on one purchase, and ten days later the stock was sold for one hundred and forty! under such circumstances new ventures were daily issued to meet the demand. proposals for thirty companies came out in a week, and still there appeared to be money for all, for the banks, tempted by the prevailing prosperity, increased their issues of notes. it seemed an easy thing to borrow at seven per cent., and lay out the money at ten or fifteen, with certainty of a gain in capital. men who had never speculated saw their neighbors grow rich, and themselves risked a hundred and doubled it, ventured two and saw themselves the possessers of six. it was like, said one, picking up money in a hat. it was like, said another, baling it up in a bucket. there seemed to be money everywhere--money for all. peers and clergymen, shop-keepers and maiden ladies, servants even, speculated; while those who knew something of the market, or who could allot shares in new ventures, were courted and flattered, drawn into corners and consulted by troops of friends. all this came to its height at the end of april, and arthur, sanguine and eager, laden with the latest news from lombard street, returned to aldersbury to revel in it. he trod the cop and the high street as if he walked on air. he moved amid the excitement like a young god. his nod was confidence, his smile a promise. a few months before he had doubted. he had viewed the rising current of speculation from without, and had had his misgivings. now the stream had caught him, and if he ever reflected that there might be rocks ahead, he flattered himself that he would be among the first to take the alarm. the confidence which he owed to youth, the banker drew from a past of unvarying success. but the elder man did have his moments of mistrust. there were hours when he saw hazards in front, and the days on which he did not call for the note issues were few. but even he found it easier to go with the current, and once or twice, so high was his opinion of arthur's abilities, he let himself be persuaded by him. then the mere bustle was exhilarating. the door of the bank that never rested, the crowded counter, the incense of the streets, the whispers where he passed, all had their intoxicating effect. the power to put a hundred pounds into a man's pocket--who can abstain from, who is not flattered by, the use of this, who can at all times close his mouth? and often one thing leads to another, and advice is the prelude to a loan. it was above all when the railroad scheme was to the fore that the banker realized his importance. it was his, he had made it, and it was on its behalf that he was disposed to put his hand out farthest. the board, upon sir charles's proposal--the fruit of a hint dropped by ovington--had fixed the fourth market-day in april for the opening of the subscription list. though the season was late, the farmers would be more or less at liberty; and as it happened the day turned out to be one of the few fine days of that spring. the sun, rarely seen of late, shone, the public curiosity was tickled, the town was full, men in the streets quoted the tea-kettle and explained the powers of steam; and arthur, as he forged his way through the good-tempered, white-coated throng, felt to the full his importance. near the door of the bank he met purslow, and the draper seized his arm. "one moment, sir, excuse me," he whispered. "i've a little more i can spare at a pinch. what do you advise, mr. bourdillon?" arthur knew that it was not in his province to advise, and he shook his head. "you must ask mr. ovington," he said. "and he that busy that he'll snap my nose off! and you're just from london. come, mr. bourdillon, just for two or three hundred pounds. a good 'un! a real good 'un! i know you know one!" arthur gave way. the man's wheedling tone, the sense of power, the ability to confer a favor were too much for him. he named the antwerp navigation company. "but don't stop in too long," he added. and he snatched himself away, and hurried on, and many were those who found his frank eager face irresistible. as he ploughed his way through the crowd, his head on a level with the tallest, he seemed to be success itself. his careless greeting met everywhere a cheery answer, and more than one threw after him, "there goes the old squire's nevvy! see him? he's a clever 'un if ever there was one!" they gave him credit for knowing mysteries dark to them, yet withal they owned a link with him. he too belonged to the land. a link with him and some pride in him. in the parlor where the board met he had something of the same effect. sir charles and acherley had taken their seats and were talking of county matters, their backs turned on their fellows. wolley stood before the fire, glowering at them and resenting his exclusion. grounds sat meekly on a chair within the door. but arthur's appearance changed all. he had a word or a smile for each. he set grounds at his ease, he had a joke for sir charles and acherley, he joined wolley before the fire. ovington, who had left the room for a moment, noted the change, and his heart warmed to the secretary. "he will do," he told himself, as he turned to the business of the meeting. "come, mr. wolley, come, mr. grounds," he said, "pull up your chairs, if you please. it has struck twelve and the bank should be open to receive applications at half-past. i conveyed your invitation, gentlemen, to mr. purslow two days ago, and i am happy to tell you that he takes two hundred shares, so that over one-third of the capital will be subscribed before we go to the public. i suppose, gentlemen, you would wish him to take his seat at once?" sir charles and acherley nodded, wolley looked sullen but said nothing, grounds submitted. neither he nor wolley was over-pleased at sharing with another the honor of sitting with the gentry. but it had to be done. "bring him in, bourdillon," ovington said. purslow, who was in waiting, slid into the room and took his seat, between pride and humility. "i have reason to believe, gentlemen," ovington continued, "that the capital will be subscribed within twenty-four hours. it is for you to say how long the list shall remain open." "not too long," said sir charles, sapiently. "shall i say forty-eight hours? agreed, gentlemen? very good. then a notice to that effect shall be posted outside the bank at once. will you see to that, bourdillon?" "and what of mr. griffin?" wolley blurted out the question before ovington could restrain him. the clothier was anxious to show purslow that he was at home in his company. "to be sure," ovington answered smoothly. "that is the only point, gentlemen, in which my expectations have not been borne out. the interview between mr. griffin and myself was disappointing, but i hoped to be able to tell you to-day that we were a little more forward. mr. wolley, however, has handed me a letter which he has received from garth, and it is certainly----" "a d----d unpleasant letter," wolley struck in. "the old squire don't mince matters." he had predicted that his landlord would not come in, and he was pleased to see his opinion confirmed. "he says i'd better be careful, for if i and my fine railroad come to grief i need not look to him for time. by the lord," with unction, "i know that, railroad or no railroad! he'd put me out as soon as look at me!" sir charles shuffled his papers uncomfortably. to hear a man like wolley discuss his landlord shocked him--he felt it a kind of treason to listen to such talk. he feared--he feared more than ever--that the caustic old squire was thinking him a fool for mixing himself up with this business. good heavens, if, after all, it ended in disaster! acherley took it differently. he cared nothing for griffin's opinion; he was in money difficulties and had passed far beyond that. he laughed. "put you out? i'll swear he would! there's no fool like an old fool! but he won't have the chance." "no, i think not," ovington said blandly. "but his attitude presents difficulties, and i am sure that our chairman will agree with me that if we can meet his views, it will be worth some sacrifice." "can't arthur get round him?" acherley suggested. "no," arthur replied, smiling. "perhaps if you----" "will you see him, mr. acherley?" "oh, i'll see him!" carelessly. "i don't say i shall persuade him." "still, we shall have done what we can to meet his views," the banker replied. "if we fail we must fall back--on my part most reluctantly--on the compulsory clauses. but that is looking ahead, and we need not consider it at present. i don't think that there is anything else? it is close on the half-hour. will you see, bourdillon, if all is ready in the bank?" arthur went out, leaving the door ajar. there came through the opening a murmur of voices and the noise of shuffling feet. ovington turned over the papers before him. "in the event of the subscriptions exceeding the sum required, what day will suit you to allot? thursday, sir charles?" "friday would suit me better." "friday be it then, if mr. acherley--good. on friday at noon, gentlemen. yes, bourdillon?" arthur did not sit down. he was smiling. "it's something of a sight," he said. "by jove it is! i think you ought to see it." ovington nodded, and they rose, some merely curious, others eager to show themselves in their new role of dignity. arthur opened the door and stood aside. beyond the door the cashier's desk with its green curtains formed a screen which masked their presence. ovington separated the curtains, and sir charles and acherley peeped between them. the others looked round the desk. the space devoted to the public was full. it hummed with low voices, but above the hum sharp sentences from time to time rang out. "here, don't push! it's struck, mr. rodd! hand 'em out!" then, louder than these, a lusty voice bawled, "here, get out o' my road! i want money for a cheque, man!" the two clerks were at the counter, with piles of application forms before them and their eyes on the clock. clement and rodd stood in the background. the impassive attitude of the four contrasted strikingly with the scene beyond the counter, where eighteen or twenty persons elbowed and pushed one another, their flushed faces eloquent of the spirit of greed. for it had got about that there was easy money and much money to be made out of the railroad shares--to be made in particular by those who were first in the field. some looked to make the money by a sale at a premium, others foresaw a profit but hardly knew how it was to come, more had heard of men who had suddenly grown rich, and fancied that this was their chance. they had but to sign a form and pay an instalment, and profit would flow in, they did not care whence. they were certain, indeed, but of one thing, that there was gain in it; and with every moment their number grew, for with every moment a newcomer forced his way, smiling, into the bank. meantime the crowd gave good-humored vent to their impatience. "let's have 'em! hand 'em out!" they murmured. what if there were not enough to go round? the man with the cheque, hopelessly wedged in, protested. "there, someone hand it on," he cried at last. "and pass me out the money, d--n you! and let me get out of this." the slip was passed from hand to hand, and "how'll you have it, mr. boumphry?" rodd asked. "in shares!" cried a wit. "notes and a pound in silver," gasped boumphry, who thought the world had gone mad. "and dunno get on my back, man!" to one behind him. "i'm not a bullock! here, how'm i to count it when i canna get----" "a form!" cried a second wit. "neither can we, farmer! come, out with 'em, gentlemen. hullo, mr. purslow! that you? ha' you turned banker?" the draper, who had showed himself over-confidently, fell back purple with blushes. "certainly an odd sight," said the banker quietly. "it promises well, i think, sir charles." "hanged well!" said acherley. sir charles acquiesced. "er, i think so," he said. "i certainly think so." but he felt himself a little out of place. the minute hand touched the half-hour, and the clerks began to distribute the papers. after watching the scene for a moment the board separated, its members passing out modestly through the house door. they parted on the pavement, even sir charles unbending a little and the saturnine acherley chuckling to himself as visions of fools and fat premiums floated before him. it was a vision which they all shared in their different ways. arthur was about to join the workers in the bank when ovington beckoned him into the dining-room. "you can be spared for a moment," he said. "come in here. i want to speak to you." he closed the door. "i've been considering the matter i discussed with you some time ago, lad, and i think that the time has come when it should be settled. but you've said nothing about it and i've been wondering if anything was wrong. if so, you had better tell me." "well, sir----" the banker was shrewd. "is it the money that is the trouble?" the moment that arthur had been dreading was come, and he braced himself to meet it. "i'm afraid that there has been some difficulty," he said, "but i think now----" "have you given your uncle notice?" arthur hesitated. if he avowed that they had not given his uncle notice, how weak, how inept he would appear in the other's eyes! a wave of exasperation shook him, as he saw the strait into which his mother's obstinacy was forcing him. the opportunity which he valued so highly, the opening on which he had staked so much--was he to forfeit them through her folly? no, a hundred times, no! he would not let her ruin him, and, "yes, we have given it," he said, "but very late, i'm afraid. my mother had her doubts and i had to overcome them. i'm sorry, sir, that there has been this delay." "but the notice has been given now?" "yes." "then in three months, as i understand----" "the money will be ready, sir." he spoke stoutly; the die was cast now, and he must go through with it. after all it was not his fault, but his mother's; and for the rest, if the notice was not already given it should be this very day. "it will be ready in three months, but not earlier, i am afraid." ovington reflected. "well," he said, "that must do. and we won't wait. we will sign the agreement now and it shall take effect from next monday, the payment to be made within three months. go through the articles"--he opened his desk and took a paper from it and gave it to arthur--"and come in with one of the clerks at five o'clock and we will complete it." arthur hardly knew what to bay. "it's uncommonly kind of you, sir!" he stammered. "you may be sure i shall do my best to repay your kindness." "well, i like you," the banker rejoined. "and, of course, i see my own advantage in it. so that is settled." arthur went out taking the paper with him, but in the passage he paused, his face gloomy. after all it was not too late. he could go back and tell ovington that his mother--but no, he could not risk the banker's good opinion. his mother must do it. she must do it. he was not going to see the chance of a lifetime wasted--for a silly scruple. he moved at last, and as he went into the bank he jostled two persons who, sheltered by the cashier's desk, were watching, as the board had watched a few minutes before, the scene of excitement which the bank presented. the one was betty, the other was rodd, the cashier. it had occurred to rodd that the girl would like to view a thing so unusual, and he had slipped out and fetched her. they faced about, startled by the contact. "oh, it's you!" said betty. "yes," drily. "what are you doing here, betty?" "i came to see the lottery drawn," she retorted, making a face at him. "mr. rodd fetched me. no one else remembered me." "well, i should have thought that he--ain't you wanted, rodd?" there was a new tone in arthur's voice. "mr. clement seems to have his hands full." rodd's face reddened under the rebuke. for a moment he seemed about to answer, then he thought better of it. he left them and went to the counter. "and what would you have thought?" betty asked pertly, reverting to the sentence that he had not finished. "only that rodd might be better employed--at his work. this is just the job he is fit for, giving out forms." "and clement, too, i suppose? it is his job, too?" "when he's here to do it," with a faint sneer. "that is not too often, betty." "well, more often of late, anyway. do you know what mr. rodd says?" "no." "he says that he has seen just such a crowd as this in a bank before. at manchester seventeen years ago, when he was a boy. there was a run on the bank in which his father worked, and people fought for places as they are fighting to-day. he does not seem to think it--lucky." "what else does he think?" arthur retorted with contempt. "what other rubbish? he'd better mind his own business and do his work. he ought to know more than to say such things to you or to anyone." betty stared. "dear me," she replied, "we are high and mighty to-day! hoity toity!" and turning her shoulder on him, she became absorbed in the scene before her. but that evening she was more than usually grave, and when her father, pouring out his fourth and last glass of port--for he was an abstemious man--told her that the partnership articles had been signed that afternoon, she nodded. "yes, i knew," she said sagely. "how, betty? i didn't tell you. i have told no one. did arthur?" "no, father, not in so many words. but i guessed it." and during the rest of the evening she was unusually pensive. chapter ix spring was late that year. it was the third week in april before the last streak of snow faded from the hills, or the showers of sleet ceased to starve the land. morning after morning the squire tapped his glass and looked abroad for fine weather. the barley-sowing might wait, but the oats would not wait, and at a time when there should have been abundant grass he was still carrying hay to the racks. the lambs were doing ill. morning after morning, with an old caped driving-coat cast about his shoulders and a shabby hunting-cap on his grey head, he would walk down to the little bridge that carried the drive over the stream. there, a gaunt high-shouldered figure, he would stand, looking morosely out over the wet fields. the distant hills were clothed in mist, the nearer heights wore light caps, down the vale the clear rain-soaked air showed sombre woods and red soil, with here and there a lop-sided elm, bursting into bud, and reddening to match the furrows. "we shall lose one in ten of the lambs," he thought, "and not a sound foot in the flock!" one morning as he stood there he saw a man turn off the road and come shambling towards him. it was pugh, the man-of-all-work at the cottage, and in his disgust at things in general, the squire cursed him for a lazy rascal. "i suppose they've nothing to do," he growled, "that they send the rogue traipsing the roads at this hour!" aloud, "what do you want, my man?" he asked. pugh quaked under the squire's hard eyes. "a letter from the mistress, your honor." "any answer?" reluctantly pugh gave up the hope of beer with calamy the butler. "i'd no orders to wait, sir." "then off you go! i've all the idlers here i want, my lad." the squire had not his glasses with him, and he turned the letter over to no purpose. returning to his room he could not find them, and the delay aggravated a temper already oppressed by the weather. he shouted for his spectacles, and when miss peacock, hurrying nervously to his aid, suggested that they might be in the prayer book from which he had read the psalm that morning, he called her a fool. eventually, it was there that they were found, on which he dismissed her with a flea in her ear. "if you knew they were there, why did you leave them there!" he stormed. "silly fools women be!" but when he had read the letter, he neither stormed nor swore. his anger was too deep. here was folly, indeed, and worse than folly, ingratitude! after all these years, after forty years, during which he had paid them their five per cent. to the day, five per cent. secured as money could not be secured in these harum-scarum days--to demand their pound of flesh and to demand it in this fashion! without warning, without consulting him, the head of the family! it was enough to make any man swear, and presently he did swear after the manner of the day. "it's that young fool," he thought. "he's written it and she's signed it. and if they have their way in five years the money will be gone, every farthing, and the woman will come begging to me! but no, madam," with rising passion, "i'll see you farther before i'll pay down a penny to be frittered away by that young jackanapes! i'll go this moment and tell her what i think of her, and see if she's the impudence to face it out!" he clapped on his hat and seized his cane. but when he had flung the door wide, pride spoke and he paused. no, he would not lower himself, he would not debate it with her. he would take no notice--that, by g--d, was what he would do. the letter should be as if it had not been written, and as to paying the money, why if they dared to go to law he would go all lengths to thwart them! he was like many in that day, violent, obstinate men who had lived all their lives among dependents and could not believe that the law, which they administered to others, applied to them. occasionally they had a rude awakening. but the old squire did not lack a sense of justice, which, obscured in trifles, became apparent in greater matters. this quality came to his rescue now, and as he grew cooler his attitude changed. if the woman, silly and scatterbrained as she was, and led by the nose by that impudent son of hers--if she persisted, she should have the money, and take the consequences. the six thousand was a charge; it must be met if she held to it. little by little he accustomed himself to the thought. the money must be paid, and to pay it he must sell his cherished securities. he had no more than four hundred, odd--he knew the exact figure--in the bank. the rest must be raised by selling his india stock, but he hated to think of it. and the demand, made without warning, hurt his pride. he took his lunch, a hunch of bread and a glass of ale, standing at the sideboard in the dining-room. it was an airy room, panelled, like most of the rooms at garth, and the pale blue paint, which many a year earlier had been laid on the oak, was dingy and wearing off in places. his den lay behind it. on the farther side of the hall was the drawing-room, white-panelled and spacious, furnished sparsely and stiffly, with spindle-legged tables, and long-backed stuart chairs set against the wall. it opened into a dull library never used, and containing hardly a book later than junius' letters or burke's speeches. above, under the sloping roofs of the attics, were chests of discarded clothes, wig-boxes and queerly-shaped carriage-trunks, which nowadays would furnish forth a fancy-ball, an old-time collection almost as curious as that which miss berry once viewed under the attics of the villa pamphili, but dusty, moth-eaten, unregarded, unvalued. cold and bare, the house owned everywhere the pinch of the squire's parsimony; there was nothing in it new, and little that was beautiful. but it was large and shadowy, the bedrooms smelled of lavender, the drawing-room of potpourri, and in summer the wind blew through it from the hay-field, and garden scents filled the lower rooms. an hour later, having determined how he would act, the old man walked across to the cottage. as he approached the plank-bridge which crossed the river at the foot of the garden he caught a glimpse of a petticoat on the rough lawn. he had no sooner seen it than it vanished, and he was not surprised. his face was grim as he crossed the bridge, and walking up to the side door struck on it with his cane. she was all of a tremble when she came to him, and for that he was prepared. that did not surprise him. it was due to him. but he expected that she would excuse herself and fib and protest and shift her ground, and pour forth a torrent of silly explanations, as in his experience women always did. but mrs. bourdillon took him aback by doing none of these things. she was white-faced and frightened, but, strange thing in a woman, she was dumb, or nearly dumb. almost all she had to say or would say, almost all that he could draw from her was that it was her letter--yes, it was her letter. she repeated that several times. and she meant it? she meant what she had written? yes, oh yes, she did. certainly, she did. it was her letter. but beyond that she had nothing to say, and at length, harshly, but not as harshly as he had intended, "what do you mean, then," he asked, "to do with the money, ma'am, eh? i suppose you know that much?" "i am putting it into the bank," she replied, her eyes averted. "arthur is going--to be taken in." "into the bank?" the squire glared at her. "into ovington's?" "yes, into ovington's," she answered, with the courage of despair. "where he will get twelve per cent. for it." she spoke in the tone of one who repeated a lesson. he struck the floor with his cane. "and you think that it will be safe there? safe, ma'am, safe?" "i hope so," she faltered. "hope so, by g--d? hope so!" he rapped out, honestly amazed. "and that's all. hope so! well, all i can say is that i hope you mayn't live to regret your folly. twelve per cent. indeed! twelve----" he was going to say more, but the silly woman burst into tears and wept with such self-abandonment that she fairly silenced him. after watching her a moment, "well, there, there, ma'am, it's no good crying like that," he said irritably. "but damme, it beats me! it beats me. if that is the way you look at it, why do you do it? why do you do it? of course you'll have the money. but when it's gone, don't come to me for more. and don't say i didn't warn you! there, there, ma'am!" moved by her grief, "for heaven's sake don't go on like that! don't--god bless me, if i live to be a hundred, if i shall ever understand women!" he went away, routed by her tears and almost as much perplexed as he was enraged. "if the woman feels like that about it, why does she call up the money?" he asked himself. "hope that it won't be lost! hope, indeed! no, i'll never understand the silly fools. never! hope, indeed! but i suppose that it's that son of hers has befooled her." he saw, of course, that it was arthur who had pushed her to it, and his anger against him and against ovington grew. he would take his balance from ovington's on the very next market day. he would go back to dean's, though it meant eating humble pie. he thought of other schemes of vengeance, yet knew that when the time came he would not act upon them. he was in a savage mood as he crossed the stable-yard at garth, and unluckily his eye fell upon thomas, who was seated on a shaft in a corner of the cart-shed. the man espied him at the same moment and hurried away a paper--it looked like a newspaper--over which he had been poring. now, the squire hated idleness, but he hated still more to see a newspaper in one of his men's hands. a laborer who could read was, in his opinion, a laborer spoiled, and his wrath blazed up. "you d--d idle rascal!" he roared, shaking his cane at the man. "that's what you do in my time, is it! read some blackguard twopenny trash when you should be cleaning harness! confound you, if i catch you again with a paper, you go that minute! d'you hear? d'you think that that's what i pay you for?" the worm will turn, and thomas, who had been spelling out an inspiring speech by one henry hunt, did turn. "pay me? you pay me little enough!" he answered sullenly. the squire could hardly believe his ears. that one of his men should answer him! "ay, little enough!" the man repeated impudently. "beggarly pay, and 'tis time you knew it, master." the squire gasped. thomas was a garthmyle man, who ten years before had migrated to lancashire. later he had returned--some said that he had got into trouble up north. however that may be, the squire had wanted a groom, and thomas had offered himself at low wages and been taken. the village thought that the squire had been wrong, for thomas had learned more tricks in manchester than just to read the newspaper, and, always an ill-conditioned fellow, was fond of airing his learning in the ale-house. perhaps the squire now saw that he had made a mistake; or perhaps he was too angry to consider the matter. "time i knew it?" he cried, as soon as he could recover himself. "why, you idle, worthless vagabond, do you think that i do not know what you're worth? ain't you getting what i've always given?" "that's where it be!" "eh!" "that's where it be! i'm getting what you gave thirty years agone! and you soaking in money, master, and getting bigger rents and bigger profits. ain't i to have my share of it?" "share of it!" the old man ejaculated, thunderstruck by an argument as new as the man's insolence. "share of it!" "why not?" thomas knew his case desperate, and was bent on having something to repeat to the awe-struck circle at the griffin arms. "why not?" "why, begad?" the squire exclaimed, staring at him. "you're the most impudent fellow i ever set eyes on!" "you'll see more like me before you die!" thomas answered darkly. "in hard times didn't we share 'em and fair clem? and now profits are up, the world's full of money, as i hear in aldersbury, and be you to take all and us none?" it was a revelation to the squire. share? share with his men? could there be a fool so foolish as to look at the matter thus? laborers were laborers, and he'd always seen that they had enough in the worst times to keep soul and body together. the duty of seeing that they had as much as would do that was his; and he had always owned it and discharged it. if man, woman or child had starved in garthmyle he would have blamed himself severely. but the notion that they should have more because times were good, the notion that aught besides the county rate of wages, softened by feudal charity, entered into the question, was a heresy as new to him as it was preposterous. "you don't know what you are talking about," he said, surprise diminishing his anger. "don't i?" the man answered, his little eyes sparkling with spite. "well there's some things i know as you don't. you'd ought to go to the summer-house a bit more, master, and you'd learn. you'd ought to walk in the garden. there's goings-on and meetings and partings as you don't know, i'll go bail! but t'aint my business and i say nought. i do my work." "i'll find another to do it this day month," said the squire. "and you'll take that for notice, my man. you'll do your duty while you're here, and if i find one of the horses sick or sorry, you'll sleep in jail. that's enough. i want no more of your talk!" he went into the house. things had come to a pretty pass, when one of his men could face him out like that. the sooner he made a change and saw the rogue out of garthmyle the better! he flung his stick into a corner and his hat on the table and damned the times. he would put the matter out of his mind. but it would not go. the taunt the man had flung at him at the last haunted him. what did the rogue mean? and at whom was he hinting? was arthur working against him in his own house as well as opposing him out of doors? if so, by heaven, he would soon put an end to it! and by and by, unable to resist the temptation--but not until he had sent thomas away on an errand--he went heavily out and into the terraced garden. he climbed to the raised walk and looked abroad, his brow gloomy. the day had mended and the sun was trying to break through the clouds. the sheep were feeding along the brook-side, the lambs were running races under the hedgerows, or curling themselves up on sheltered banks. but the scene, which usually gratified him, failed to please to-day, for presently he espied a figure moving near the mill and made out that the figure was josina's. from time to time the girl stooped. she appeared to be picking primroses. it was the idle hour of the day, and there was no reason why she should not be taking her pleasure. but the squire's brow grew darker as he marked her lingering steps and uncertain movements. more than once he fancied that she looked behind her, and by and by with an oath he turned, clumped down the steps, and left the garden. he had not quite reached the mill when she saw him descending to meet her. he fancied that he read guilt in her face, and his old heart sank at the sight. "what are you doing?" he asked, confronting her and striking the ground with his cane. "eh? what are you doing here, girl? out with it! you've a tongue, i suppose?" she looked as if she could sink into the ground, but she found her voice. "i've been gathering--these, sir," she faltered, holding out her basket. "ay, at the rate of one a minute! i watched you. now, listen to me. you listen to me, young woman. and take warning. if you're hanging about to meet that young fool, i'll not have it. do you hear? i'll not have it!" she looked at him piteously, the color gone from her face. "i--i don't think--i understand, sir," she quavered. "oh, you understand well enough!" he retorted, his suspicions turned to certainty. "and none of your woman's tricks with me! i've done with master arthur, and you've done with him too. if he comes about the place he's to be sent to the right-about. that's my order, and that's all about it. do you hear?" she affected to be surprised, and a little color trickled into her cheeks. but he took this for one of her woman's wiles--they were deceivers, all of them. "do you mean, sir," she stammered, "that i am not to see arthur?" "you're neither to see him nor speak to him nor listen to him! there's to be an end of it. now, are you going to obey me, girl?" she looked as if butter would not melt in her mouth. "yes, sir," she answered meekly. "i shall obey you if those are your orders." he was surprised by the readiness of her assent, and he looked at her suspiciously. "umph!" he grunted. "that sounds well, and it will be well for you, girl, if you keep to it. for i mean it. let there be no mistake about that." "i shall do as you wish, of course, sir." "he's behaved badly, d--d badly! but if you are sensible i'll say no more. only understand me, you've got to give him up." "yes, sir." "from this day? now, do you understand?" "yes, sir." after that he had no more to say. he required obedience, and he should have been glad to receive it. but, to tell the truth, he was a little at a loss. girls were silly--such was his creed--and it behoved them to be guided by their elders. if they did not suffer themselves to be guided, they must be brought into line sharply. but somewhere, far down in the old man's heart, and unacknowledged even by himself, lay an odd feeling--a feeling of something like disappointment. in his young days girls had not been so ready, so very ready, to surrender their lovers. he had even known them to fight for them. he was perplexed. chapter x they were standing on the narrow strip of sward between the wood and the stream, which the gun accident had for ever made memorable to them. the stile rose between them, but seeing that his hands rested on hers, and his eyes dwelt unrebuked on her conscious face, the barrier was but as the equator, which divides but does not separate; the sacrifice to propriety was less than it seemed. spring had come with a rush, the hedges were everywhere bursting into leaf. in the thirty acres which climbed the hill above them, the thrushes were singing their may-day song, and beside them the brook rippled and sparkled in the sunshine. all nature rejoiced, and the pulse of youth leapt to the universal rhythm. the maiden's eyes repeated what the man's lips uttered, and for the time to love and to be loved was all in all. "to think," he murmured, "that if i had not been so awkward we should not have known one another!" and, silly man, he thought this the height of wisdom. "and the snowdrops!" she, alas, was on the same plane of sapience. "but when--when did you first, clem?" "from the first moment we met! from the very first, jos!" "when i saw you standing here? and looking----" "oh, from long before that!" he declared. and his eyes challenged denial. "from the hour when i saw you at the race ball in the assembly room--ages, ages ago!" she savored the thought and found it delicious, and she longed to hear it repeated. "but you did not know me then. how could you--love me?" "how could i not? how could i see you and not love you?" he babbled. "how was it possible i should not? were we not made for one another? you don't doubt that? and you," jealously, "when, sweet, did you first--think of me?" alas, she could only go back to the moment when she had tripped heart-whole round the corner of the wood, and seen him standing, solitary, wrapped in thought, a romantic figure. but though, to her shame, she could only go back to that, it thrilled her, it made her immensely happy, to think that he had loved her first, that his heart had gone out to her before she knew him, that he had chosen her even before he had spoken to her. ay, chosen her, little regarded as she was, and shabby, and insignificant amid the gay throng of the ballroom! she had been cinderella then, but she had found her glass slipper now--and her fairy prince. and so on, and so on, with sweet and foolish repetitions. for this was the latest of a dozen meetings, and love had long ago challenged love. many an afternoon had clement waited under the wood, and with wonder and reverence seen the maid come tripping along the green towards him. many a time had he thought a seven-mile ride a small price to pay for the chance, the mere chance, of a meeting, for the distant glimpse of a bonnet, even for the privilege of touching the pebble set for a token on the stile. so that it is to be feared that, if market days had found him more often at his desk, there had been other days, golden days and not a few, when the bank had not held him, when he had stolen away to play truant in this enchanted country. but then, how great had been the temptation, how compelling the lure, how fair the maid! no, he had not played quite fairly with his father. but the thought of that weighed lightly on him. for this that had come to him, this love that glorified all things, even as spring the face of nature, that filled his mind with a thousand images, each more enchanting than the last, and inspired his imagination with a magic not its own,--this visited a man but once; whereas he would have long years in which he might redeem the time, long years in which he might warm his father's heart by an attendance at the desk that should shame rodd himself! ay, and he would! he would! even the sacrifice of his own tastes, his own wishes seemed in his present mood a small surrender, and one he owed and fain would pay. for he was in love with goodness, he longed to put himself right with all. he longed to do his duty to all, he who walked with a firmer step, who trod the soil with a conquering foot, who found new beauties in star and flower, he, so happy, so proud, so blessed! but this being his mood, there was a burden which weighed on him, and weighing on him more heavily every day, and that was the part which he was playing towards the squire. it had long galled him, when absent from her; of late it had begun to mar his delight in her presence. the role of secret lover had charmed for a time--what more shy, more elusive, more retiring than young love? and what more secret? fain would it shun all eyes. but he had now reached a farther stage, and being honest, and almost quixotic by nature, he could not without pain fall day by day below the ideals which his fancy set up. to-day he had come to meet josina with a fixed resolve, and a mind wound to the pitch of action; and presently into the fair pool of her content--yet quaking as he did so lest he should seem to hint a fault--he cast the stone. "and now, jos," he said, his eyes looking bravely into hers, "i must see your father." "my father!" fear sprang into her eyes. she stiffened. "yes, dear," he repeated. "i must see your father--and speak to him. there is no other course possible." color, love, joy, all fled from her face. she shivered. "my father!" she stammered, pale to the lips. "oh, it is impossible! it is impossible! you would not do it!" she would have withdrawn her hands if he had not held them. "you cannot, cannot mean it! have you thought what you are saying?" "i have, indeed," he said, sobered by her fear, and full of pity for her. "i lay awake for hours last night thinking of it. but there is no other course, jos, no other course--if we would be happy." "but, oh, you don't know him!" she cried, panic-stricken. and her terror wrung his heart. "you don't know him! or what he will think of me!" "nothing very bad," he rejoined. but more than ever, more than before, his conscience accused him. he felt that the shame which burned her face and in a moment gave way to the pallor of fear was the measure of his guilt; and in proportion as he winced under that knowledge, and under the knowledge that it was she who must pay the heavier penalty, he took blame to himself and was strengthened in his resolve. "listen, jos," he said bravely. "listen! and let me tell you what i mean. and, dearest, do not tremble as you are trembling. i am not going to tell him to-day. but tell him i must some day--and soon, if we do not wish him to learn it from others." she shuddered. all had been so bright, so new, so joyous; and now she was to pay the price. and the price had a very terrible aspect for her. fate, a cruel, pitiless fate, was closing upon her. she could not speak, but her eyes, her quivering lips, pleaded with him for mercy. he had expected that, and he steeled himself, showing thereby the good metal that was in him. "yes," he said firmly, "we must, jos. and for a better reason than that. because if we do not, if we continue to deceive your father, he will not only have reason to be angry with you, but to despise me; to look upon me as a poor unmanly thing, jos, a coward who dared not face him, a craven who dared not ask him for what he valued above all the world! who stole it from him in the dark and behind his back! as it is he will be angry enough. he will look down upon me, and with justice. and at first he will say 'no,' and i fear he will separate us, and there will be no more meetings, and we may have to wait. but if we are brave, if we trust one another and are true to one another--and, alas, you will have to bear the worst--if we can bear and be strong, in the end, believe me, jos, it will come right." "never," she cried, despairing, "never! he will never allow it!" "then----" "oh," she prayed, "can we not go on as we are?" "no, we cannot." he was firm. "we cannot. by and by you would discover that for yourself, and you, as well as he, would have cause to despise me. for consider, jos, think, dear. if i do not seek you for my wife, what is before us? to what can we look forward? to what future? what end? only to perpetual alarms, and some day, when we least expect it, to discovery--to discovery that will cover me with disgrace." she did not answer. she had taken her hands from him, she had taken herself from him. she leant on the stile, her face hidden. but he dared not give way, nor would he let himself be repulsed; and very tenderly he laid his hand on her shoulder. "it is natural that you should be frightened," he said. "but if i, too, am frightened; if, seeing the proper course, i do not take it, how can you ever trust me or depend on me? what am i then but a coward? what is the worth of my love, jos, if i have not the courage to ask for you?" "but he will want to know----" her shoulders heaved in her agitation, "he will want to know----" "how we met? i know. and how we loved? yes, i am afraid so. and he will be angry with you, and you will suffer, and i shall be god knows how wretched! but if i do not go to him, how much more angry will he be! and how much more ground for anger will he have! if we continue to meet it cannot be long kept from him, and then how much worse will it be! and i, with not a word to say for myself, with no defence, no plea! i, who shall not then seem to him to be even a man." "but he is so--so hard!" she whispered, her face still hidden. "i know, dear. and so firmly set in his prejudice and his pride. i know. he will think me so far below you; he hates the bank and all connected with it. he holds me a mere clerk, not one of his class, and low, dear, i know it. but"--his voice rose a tone--"i am not low, jos, and you have discovered it. and now i must prove it to him. i must prove it. and to make a beginning, i must be no coward. i must not be afraid of him. for you, the times are past when he could ill-treat you. and he loves you." "he is very hard," she murmured. it was his punishment throughout, that though his heart was wrung for her he could not bear her share of the suffering. but he dared not and he would not give way. "he will make me give you up." he had thought of that and was ready for it. "that must depend upon you," he said very soberly. "for my part, dear--but my part is easy--i shall never give you up. never! but if the trial be too sore for you who must bear the heavier burden, if you feel that our love is not worth the price you must pay, then i will never reproach you, jos, never. if you decide on that i will not say one word against it; no, nor think one harsh thought of you. and then we need not tell him. but we must not meet again." she trembled; and it was natural, it was very natural, that she should tremble. it was an age when discipline was strict and even harsh, and she had been bred up in awe of her father, and in that absolute subjection to him of which the women about her set the example. children were then to be seen and not heard. girls were expected to have neither wills nor views of their own. and in her case this was not all. the squire was a hard man. he was a man of whom those about him stood in awe, and who if he had any of the softer affections hid them under a mask of unpleasing reserve. proud as he was of his caste, he kept his daughter short of money and short of clothes. he saw her go shabby without a qualm, and penniless, and rejoiced that she could not get into mischief. if she lost a shilling on an errand or overpaid a bill, he stormed and raved at her. had she run up a debt he would have driven her from the room with oaths. so that if, under the dry husk, there was any kernel, any softer feeling--either for her or for the young boy who had died in his first uniform at alexandria--she had no clue to the fact, and certainly no suspicion of it. nor was even this the whole. one thing was known to josina which was not known to clement. garth was entailed upon her. even the squire could not deprive her of the estate, and in the character of his heir she wore for the old man a preciousness with which affection had nothing to do. what he might have permitted to his daughter was matter for grim conjecture. but that he would ever let his heiress, her whose hand was weighted with the rents of garth, and with the wide lands he loved--that he would ever let her wed at her pleasure or out of her class--this appeared to josina of all things the most unlikely. it was no wonder then that the girl hesitated before she answered, or that clement's face grew grave, his heart heavy, as he waited. but he had that insight into the feelings of others which imagination alone can give, and while she wavered or seemed to waver, he felt none of the resentment which comes of wounded love. rather he was filled with a great pity for her, a deep tenderness. for it was he who was in fault, he told himself. it was he who had made the overtures, he who had wooed and won her fancy, he who had done this. it was his selfishness, his thoughtlessness, his imprudence which had brought them to this pass, a pass whence they could neither advance without suffering nor draw back with honor. so that if she who must encounter a father's anger proved unequal to the test, if the love, which he did not doubt, was still too weak to face the ordeal, it did not lie with him to blame her--even on this day when bird and flower and leaf sang love's pæan. no, perish the thought! he would never blame her. with infinite tenderness, forgiving her beforehand, he touched her bowed head. at that, at that touch, she looked up at last, and with a leap of the heart he read her answer in her eyes. he read there a love and a courage equal to his own; for, after all, she was her father's daughter, she too came of an old proud race. "you shall tell him," she said, smiling through her tears. "and i will bear what comes of it. but they shall never separate us, clem, never, never, if you will be true to me." "true to you!" he cried, worshipping her, adoring her. "oh, jos!" "and love me a little always?" "love you? oh, my darling!" the words choked him. "it shall be as you say! it shall be always as you say!" she was clinging to him now. "i will do as you tell me! i will always--oh, but you mustn't, you mustn't," between tears and smiles, for his arms were about her now, and the poor ineffectual stile had ceased to be even an equator. "but i must tell you. i love you more now, clement, more, more because i can trust you. you are strong and will do what is right." "at your cost!" he cried, shaken to the depths--and he thought her the most wonderful, the bravest, the noblest woman in the world. "ah, jos, if i could bear it for you!" "i will bear it," she answered. "and it will not last. and see, i am not afraid now--or only a little! i shall think of you, and it will be nothing." oh, but the birds were singing now and the brook was sparkling as it rippled over the shallows towards the deep pool. presently, "when will you tell him?" she asked; and she asked it, with scarce a quaver in her voice. "as soon as i can. the sooner the better. this is saturday. i will see him on monday morning." "but isn't that--market-day?" faintly. "can you get away?" "does anything matter beside this?" he replied. "the sooner, dear, the tooth is pulled, the better. there is only, one thing i fear." "i think you fear nothing," she rejoined, gazing at him with admiring eyes. "but what is it?" "that someone should be before us. that someone should tell him before i do. and he should think us what we are not, jos--cowards." "i see," she answered thoughtfully. "yes," with a sigh. "then, on monday. i shall sleep the better when it is over, even if i sleep in disgrace." "i know," he said; and he saw with a pang that her color ebbed. but her eyes still met his and were brave, and she smiled to reassure him. "i will not mind what comes," she whispered, "if only we are not parted." "we shall not be parted for ever," he assured her. "if we are true to one another, not even your father can part us--in the end." chapter xi josina had put a brave face on the matter, but when she came down to breakfast on the monday, the girl was almost sick with apprehension. her hands were cold, and as she sat at table she could not raise her eyes from her plate. the habit of years is not to be overcome in an hour, and that which the girl had to face was beyond doubt formidable. she had passed out of childhood, but in that house she was still a child. she was expected to be silent, to efface herself before her elders, to have no views but their views, and no wishes that went beyond theirs. her daily life was laid out for her, and she must conform or she would be called to heel. on love and marriage she must have no mind of her own, but must think as her father permitted. if he chose she would be her cousin's wife, if he did not choose the two would be parted. she could guess how he would treat her is she resisted his will, or even his whim, in that matter. and now she must resist his will in a far worse case. arthur was her cousin. but clement? she was not supposed even to know him. yet she must own him, she must avow her love for him, she must confess to secret meetings with him and stolen interviews. she must be prepared for looks of horror, for uplifted hands and scandalized faces, and to hear shameful things said of him; to hear him spoken of as an upstart, belonging to a class beneath her, a person with whom she ought never to have come in contact, one whom her father would not think of admitting to his table! and through all, she who was so weak, so timid, so subject, must be firm. she must not flinch. as she sat at table she was conscious of her pale cheeks, and trembled lest the others should notice them. she fancied that her father's face already wore an ominous gloom. "if you've orders for town," he flung at miss peacock as he rose, "you'll need be quick with them. i'm going in at ten." miss peacock was all of a flutter. "but i thought, sir, that the bench did not sit----" "you'd best not think," he retorted. "ten, i said." that seemed to promise a blessed respite, and the color returned to josina's cheeks. clement could hardly arrive before eleven, and for this day she might be safe. but on the heels of relief followed reflection. the respite meant another sleepless night, another day of apprehension, more hours of fear; the girl was glad and she was sorry. the spirit warred with the flesh. she did not know what she wished. and, after all, clement might appear before ten. she watched the clock and watched her father and in returning suspense hung upon his movements. how he lingered, now hunting for a lost paper, now grumbling over a seed-bill, now drawing on his boots with the old horn-handled hooks which had been his father's! and the clock--how slowly it moved! it wanted eight, it wanted five, it wanted two minutes of ten. the hour struck. and still the squire loitered outside, talking to old fewtrell--when at any moment clement might ride up! the fact was that thomas was late, and the squire was saying what he thought of him. "confound him, he thinks, because he's going, he can do as he likes!" he fumed. "but i'll learn him! let me catch him in the village a week after he leaves, and i'll jail him for a vagrant! such impudence as he gave me the other day i never heard in my life! he'll go wide of here for a character!" "i dunno as i'd say too much to him," the old bailiff advised. "he's a queer customer, squire, as you'd ought to have seen before now!" "he'll find me a queer customer if he starts spouting again! why, damme," irritably, "one might almost think you agreed with him!" old fewtrell screwed up his face. "no," he said slowly, "i'm not saying as i agree with him. but there's summat in what he says, begging your pardon, squire." "summat? why, man," in astonishment, "are you tarred with the same brush?" "you know me, master, better'n that," the old man replied. "an' i bin with you fifty years and more. but, certain sure, times is changed and we're no better for the change." "but you get as much?" "mebbe in malt, but not in meal. in money, mebbe--i'm not saying a little more, master. but here's where 'tis. we'd the common before the war, and run for a cow and geese, and wood for the picking, and if a lad fancied to put up a hut on the waste 'twas five shillings a year; and a rood o' potato ground--it wasn't missed. 'twas neither here nor there. but 'tisn't so now. where be the common? well, you know, squire, laid down in wheat these twenty years, and if a lad squatted now, he'd not be long of hearing of it. we've the money, but we're not so well off. that's where 'tis." the squire scowled. "well, i'm d--d!" he said. "you've been with me fifty years, and----" and then fortunately or unfortunately the curricle came round and the squire, despising fewtrell's hint, turned his wrath upon the groom, called him a lazy scoundrel, and cursed him up hill and down dale. the man took it in silence, to the bailiff's surprise, but his sullen face did not augur well for the day, and when he had climbed to the back-seat--with a scramble and a grazed knee, for the squire started the horses with no thought for him--he shook his fist at the old man's back. fewtrell saw the gesture, and felt a vague uneasiness, for he had heard thomas say ugly things. but then the man had been in liquor, and probably he didn't mean them. the squire rattled the horses down the steep drive with the confidence of one who had done the same thing a thousand times. turning to the left a furlong beyond the gate, he made for garthmyle where, at the bridge, he fell into the highway. he had driven a mile along this when he saw a horseman coming along the road to meet him, and he fell to wondering who it was. his sight was good at a distance, and he fancied that he had seen the young spark before, though he could not put a name to him. but he saw that he rode a good nag, and he was not surprised when the other reined up and, raising his hat, showed that he wished to speak. it was clement, of course, and with a little more wisdom or a little less courage he would not have stopped the old man. he would have seen that the moment was not propitious, and that his business could hardly be done on the highway. but in his intense eagerness to set himself right, and his anxiety lest chance should forestall him, he dared not let the opportunity pass, and his hand was raised before he had well considered what he would say. the squire pulled up his horses. "d'you want me?" he asked, civilly enough. "if i may trouble you, sir," clement answered as bravely as he could. "it's on important business, or--or i wouldn't detain you." already, his heart in his mouth, he saw the difficulty in which he had placed himself. how could he speak before the man? or on the road? the squire considered him. "business, eh?" he said. "with me? well, i know your face, young gentleman, but i can't put a name to you." "i am mr. ovington's son, clement ovington, sir." all the squire's civility left him. "the devil you are!" he exclaimed. "well, i'm going to the bank. i like to do my business across the counter, young sir, to be plain, and not in the road." "but this is business--of a different sort, sir," clement stammered, painfully aware of the change in the other's tone, as well as of the servant, who was all a-grin behind his master's shoulder. "if i could have a word with you--apart, sir? or perhaps--if i called at garth tomorrow?" "why?" "it is upon private business, mr. griffin," clement replied, his face burning. "did your father send you?" "no." "then i don't see," the squire replied, scowling at him from under his bushy eyebrows, "what business you can have with me. there can be none, young man, that can't be done across the counter. it is only upon business that i know your father, and i don't know you at all. i don't know why you stopped me." clement was scarlet with mortification. "if i could see you a few minutes--alone, sir, i think i could explain what it is." "you will see me at the bank in an hour," the old man retorted. "anything you have to say you can say there. as it is, i am going to close my account with your father, and after that the less i hear your name the better i shall be pleased. at present you're wasting my time. i don't know why you stopped me. good morning." and in a lower tone, but one that was perfectly audible to clement, "d--d young counterskipper," he muttered, as he started the horses. "business with me, indeed! confound his impudence!" he drove off at speed, leaving clement seated on his horse in the middle of the road, a prey to feelings that may be imagined. he had made a bad beginning, and his humiliation was complete. "young counterskipper!" that rankled--yet in time he might smile at that. but the tone, and the manner, the conviction that under no circumstances could there be anything between them, any relations, any equality--this bit deeper and wounded more permanently. the squire's view, that he addressed one of another class and another grade, one with whom he could have no more in common than with the servant behind him, could not have been made more plain if he had known the object of the lad's application. if he had known it! good heavens, if he said so much now, what would he have said in that case? certainly, the task which love had set this young man was not an easy one. no wonder josina had been frightened. he had--he had certainly made a mess of it. his ears burned, as he sat on his horse and recalled the other's words. meanwhile the squire drove on, and with the air and movement he recovered his temper. as he drew near to the town the market-traffic increased, and sitting high on his seat he swept by many a humble gig and plodding farm-cart, and acknowledged with a flicker of his whip-hand many a bared head and hasty obeisance. he was not loved; men who are bent on getting a pennyworth for their penny are not loved. but he was regardful of his own people, and in all companies he was fearless and could hold his own. men did not love him, but they trusted him, knowing exactly what they might expect from him. and he was griffin of garth, one of the few in whose hands were all county power and all county influence. as he drove down the hill toward the west bridge, seeing with the eye of memory the airy towers and lofty gateways of the older bridge that had once stood there and for centuries had bridled the wild welsh, his bodily eyes noted the team of the out-going coach which he had a share in horsing. and the coachman, proudly and with respect, named him to the box-seat. from the bridge the town, girdled by the shining river, climbs pyramid-wise up the sides of a cleft hill, an ancient castle guarding the one narrow pass by which a man may enter it on foot. the smiling plain, in the midst of which it rises, is itself embraced at a distance by a ring of hills, broken at one point only, which happens to correspond with the guarded isthmus; on which side, and some four miles away, was fought many centuries ago a famous battle. it is a proud town, looking out over a proud county, a county still based on ancient tradition, on old names and great estates, standing solid and four-square against the invasion that even in the squire's day threatened it--invasion of new men and new money, of birmingham and liverpool and manchester. the airy streets and crowded shuts run down on all sides from the market place to the green meadows and leafy gardens that the river laps: green meadows on which the chapels and quiet cloisters of religious houses once nestled under the shelter of the walls. the squire could remember the place when his father and his like had had their town houses in it, and in winter had removed their families to it; when the weekly assemblies at the lion had been gay with cards and dancing, and in the cockpit behind the inn mains of cocks had been fought with the gentlemen of cheshire or staffordshire; when fine ladies with long canes and red-heeled shoes had promenaded under the lime trees beside the river, and the town in its season had been a little bath. those days, and the lumbering coaches-and-six which had brought in the families, were gone, and the staple of the town, its trade in woollens and welsh flannels, was also on the decline. but it was still a thriving place, and if the county people no longer filled it in winter, their stately houses survived, and older houses than theirs, of brick and timber, quaint and gabled, that made the streets a joy to antiquaries. the squire passed by many a one, with beetling roof and two-storied porch, as he drove up maerdol. his first and most pressing business was at the bank, and he would not be himself until he had got it off his mind. he would show that d--d ovington what he thought of him! he would teach him a lesson--luring away that young man and pouching his money. ay, begad he would! chapter xii but as the squire turned to the left by the stalls he saw his lawyer, frederick welsh--rather above most lawyers were the welsh brothers, by-blows it was said of a great house--and welsh stopped him. "you're wanted at the bench, squire, if you please," he said. "his lordship is there, and they are waiting for you." "but it's not time--by an hour, man!" "no, but it's a special case, and will take all day, i'm afraid. his lordship says that he won't begin until you come. it's that case of----" the lawyer whispered a few words. "and the chief constable does not quite trust--you understand? he's anxious that you should be there." the squire resigned himself, "very well, i'll come," he said. he could go to the bank afterwards, but he might not have complied so readily if his vanity had not been tickled. the justices of that day bore a heavier burden than their successors--_hodie nominis umbrae_. with no police force they had to take the initiative in the detection as well as in the punishment of crime. marked men, belonging to a privileged class, they had to do invidious things and to enforce obnoxious laws. they represented the executive, and they shared alike its odium and its fearlessness. for hardly anything is more remarkable in the history of that time than the courage of the men who held the reins. unpopular, assailed by sedition, undermined by conspiracy, and pressed upon by an ever-growing public feeling, the few held on unblenching, firm in the belief that repression was the only policy, and doubting nothing less than their right to rule. they dined and drank, and presented a smiling face to the world, but great and small they ran their risks, and that they did not go unscathed, the fate of perceval and of castlereagh, the collapse of liverpool, and the shortened lives of many a lesser man gave proof. but even among the firm there are degrees, and in all bodies it is on the shoulders of one or two that the onus falls. of the one or two in aldshire, the squire was one. my lord might fill the chair, sir charles might assent, but it was to griffin that their eyes wandered when an unpleasant decision had to be taken or the public showed its teeth. and the old man knew that this was so, and was proud of it. to-day, however, as he watched the long hand move round the clock, he had less patience than usual. because he must be at the bank before it closed, everything seemed to work against him. the witnesses were sullen, the evidence dragged, acherley went off on a false scent, and being whipped back, turned crusty. the squire fidgeted and scowled, and then, twenty minutes before the bank closed, and when with his eyes on the clock he was growing desperate, the chairman suggested that they should break off for a quarter of an hour. "confound me, if i can sit any longer," he said. "i must have a mouthful of something, griffin." the squire seldom took more than a hunch of bread at mid-day and could do without that, but he was glad to agree, and a minute later he was crossing the market place towards the bank. it happened that business was brisk at the moment. rodd, at a side desk, was showing a customer how to draw a cheque. at the main counter a knot of farmers were producing, with protruding tongues and hunched shoulders, something which might pass for a signature. two clerks were aiding them, and for a moment the squire stood unseen and unregarded. impatiently he tapped the counter with his stick, on which rodd saw him, and, deserting his task, came hurriedly to him. the squire thrust his cheque across the counter. "in gold," he said. the cashier scanned the cheque, his hand in the till. "four, seven, six-ten," he murmured. then his face grew serious, and without glancing at the squire he consulted a book which lay beside him. "four, seven, six-ten," he repeated. "i am afraid--one moment, if you please, sir!" breaking off he made two steps to a door behind him and disappeared through it. he returned a moment later, followed by ovington himself. the banker's face was grave, but his tone retained its usual blandness. "good day, mr. griffin," he said. "you are drawing the whole of your balance, i see. i trust that that does not mean that you are--making any change?" "that is what it does mean, sir," the squire answered. "of course, it is entirely your affair----" "entirely." "but we are most anxious to accommodate you. if there is anything that we can put right, any cause of dissatisfaction----" "no," said the squire grimly. "there is nothing that you can put right. it is only that i do not choose to do business with my family." the banker bowed with dignity. the incident was not altogether unexpected. "with most people, a connection of the kind would be in our favor," he said. "not with me. and as my time is short----" the banker bowed. "in gold, i think? may we not send it for you? it will be no trouble." "no, i thank you," the squire grunted, hating the other for his courtesy. "i will take it, if you please." "put it in a strong bag, mr. rodd," ovington said. "i shall still hope, mr. griffin, that you will think better of it." and, bowing, he wished the squire "good day," and retired. rodd was a first-class cashier, but he felt the squire eyes boring into him, and he was twice as long in counting out the gold as he should have been. the consequence was that when the squire left the bank, the hour had struck, dean's was closed, and the bench was waiting for him. he paused on the steps considering what he should do. he could not leave so large a sum unguarded in the justices' room, nor could he conveniently take it with him into the court. at that moment his eyes fell on purslow, the draper, who was standing at the door of his shop, and he crossed over to him. "here, man, put this in your safe and turn the key on it," he said. "i shall call for it in an hour or two." "honored, i am sure," said the gratified tradesman, as he took the bag. but when he felt its weight and guessed what was in it, "excuse me, sir. hadn't you better seal it, sir?" he said. "it seems to be a large sum." "no need. i shall call for it in an hour. lock it up yourself, purslow. that's all." purslow, as pleased as if the squire had given him a large order, assured him that he would do so, and the old man stalked across to the court, where business kept him, fidgeting and impatient, until hard on seven. nor did he get away then without unpleasantness. for unluckily acherley, who had been charged to approach him about the railroad, had been snubbed in the course of the day. always an ill-humored man, he saw his way to pay the squire out, and chose this moment to broach the delicate subject. he did it with as little tact as temper. "'pon my honor, griffin, you know--about this railroad," he said, tackling the old man abruptly, as they were putting on their coats. "you really must open your eyes, man, and move with the times. the devil's in it if we can stand still always. you might as well go back to your old tie-wig, you know. you are blocking the way, and if you won't think of your own interests, you ought to think of the town. i can tell you," bluntly, "you are making yourself d--d unpopular there." very seldom of late had anyone spoken to the squire in that tone, and his temper was up in a minute. "unpopular? i don't understand you," he snapped. "well, you ought to!" "unpopular? what's that? unpopular, sir! what the devil have we in this room to do with popularity? i make my horse go my way, i don't go his, nor ask if he likes it. damn your popularity!" acherley had his answer on his tongue, but woosenham interposed. "but, after all, griffin," he said mildly, "we must move with the times--even if we don't give way to the crowd. there's no man whose opinion i value more than yours, as you know, but i think you do us an injustice." "an injustice?" the squire sneered. "not i! the fact is, woosenham, you are letting others use you for a stalking horse. some are fools, and some--i leave you to put a name to them! if you'd give two thoughts to this railroad yourself, you'd see that you have nothing to gain by it, except money that you can do without! while you stand to lose more than money, and that's your good name!" sir charles changed color. "my good name?" he said, bristling feebly. "i don't understand you, griffin." one of the others, seeing a quarrel in prospect, intervened. "there, there," he said, hoping to pour oil on the troubled waters. "griffin doesn't mean it, woosenham. he doesn't mean----" "but i do mean it," the old man insisted. "i mean every word of it." he felt that the general sense was against him, but that was nothing to him. wasn't he the oldest present, and wasn't it his duty to stop this folly if he could? "i tell you plainly, woosenham," he continued, "it isn't only your affair, if you lend your name to this business. you take it up, and a lot of fools who know nothing about it, who know less, by g--d, than you do, will take it up too! and will put their money in it and go daundering up and down quoting you as if you were solomon! and that tickles you! but what will they say of you if the affair turns out to be a swindle--another south sea bubble, by g--d! and half the town and half the country are ruined by it! what'll they say of you then--and of us?" acherley could be silent no longer. "nobody's going to be ruined by it!" he retorted--he saw that sir charles looked much disturbed. "nobody! if you ask me, i think what you're saying is d--d nonsense." "it may be," the squire said sternly. "but just another word, please. i want you to understand, woosenham, that this is not your affair only. it touches every one of us. what are we in this room? if we are those to whom the administration of this county is entrusted, let us act as such--and keep our hands clean. but if we are a set of money-changers and bill-mongers," with contempt, "stalking horses for such men as ovington the banker, dirtying our hands with all the tricks of the money market--that's another matter. but i warn you--you can't be both. and for my part--we don't any longer wear swords to show we are gentlemen, but i'm hanged if i'll wear an apron or have anything to do with this business. a railroad? faugh! as if horses' legs and telford's roads aren't good enough for us, or as if tea-kettles will ever beat the wonder coach--fifteen hours to london." acherley had been restrained with difficulty, and he now broke loose. "griffin," he cried, "you're damned offensive! if you wore a sword as you used to----" "pooh! pooh!" said the squire and shrugged his shoulders, while sir charles, terribly put out both by the violence of the scene and by the picture which the squire had drawn, put in a feeble protest. "i must say," he said, "i think this uncalled for, griffin. i think you might have spared us this. you may not agree with us----" "but damme if he shall insult us!" acherley cried, trembling with passion. "pooh, pooh!" said the squire again. "i'm an old man, and it is useless to talk to me in that strain. i've spoken my mind, and----" "ay, and you horse two of the coaches!" acherley retorted. "and make a profit by that, dirty or no! but where'd your profit be, if your father who rode post to london had stood pat where he was? and set himself against coaches as you set yourself against the railroad?" that was a shrewd hit and the squire did not meet it. instead, "well, right or wrong," he said, "that's my opinion. and right or wrong, no railroad crosses my land, and that's my last word!" "we'll see about that," acherley answered, bubbling with rage. "there are more ways than one of cooking a goose." "just so. but----," with a steady look at him, "which is the cook and which is the goose, acherley? perhaps you'll find that out some day." and the squire clapped on his hat--he had already put on his shabby old driving coat. but he had still a word to say. "i'm the oldest man here," he said, looking round upon them, "and i may take a liberty and ask no man's pleasure. you, woosenham, and you gentlemen, let this railroad alone. if you are going to move at twenty-five miles an hour, then, depend upon it, more things will move than you wot of, and more than you'll like. ay, you'll have movement--movement enough and changes enough if you go on! so i say, leave it alone, gentlemen. that's my advice." he went out with that and stamped down the stairs. he had not sought the encounter, and, now that he was alone, his knees shook a little under him. but he had held his own and spoken his mind, and on the whole he was content with himself. the same could not be said of those whom he had warned. acherley, indeed, abused him freely, but the majority were impressed, and sir charles, who respected his opinion, was sorely shaken. he put no trust in acherley, whose debts and difficulties were known, and ovington was not there to reassure him. he valued the good opinion of his world, and what, he reflected, if the squire were right? what if in going into this scheme he had made a mistake? the picture that griffin had drawn of town and country pointing the finger at him rose like a nightmare before him, and would, he knew, accompany him home and darken his dinner-table. and ovington? ovington was doubtless a clever man and, as a banker, well versed in these enterprises. but fauntleroy--fauntleroy, with whose name the world had rung these twelve months past, he, too, had been clever and enterprising and plausible. yet what a fate had been his, and what losses had befallen all who had trusted him, all who had been involved with him! sir charles went home an unhappy man. he wished that griffin had not warned him, or that he had warned him earlier. of what use was a warning when his lot was cast and he was the head and front of the matter, president of the company, chairman of the board? meanwhile the squire stood on the steps of the court house, cursing his man. the curricle was not there, thomas was not there, it was growing dark, and a huge pile of clouds, looming above the roofs to westward, threatened tempest. the shopkeepers were putting up their shutters, the packmen binding up their bundles, stall-keepers hurrying away their trestles, and the market place, strewn with the rubbish and debris of the day, showed dreary by the failing light. in the high street there was still some traffic, and in the lanes and alleys around candles began to shine out. a one-legged sailor, caterwauling on a crazy fiddle, had gathered a small crowd before one of the taverns. "hang the man! where is he?" the squire muttered, looking about him with a disgusted eye, and wishing himself at home. "where is the rogue?" then thomas, driving slowly and orating to a couple of men who walked beside the carriage, came into view. the squire roared at him, and thomas, taken by surprise, whipped up his horses so sharply that he knocked over a hawker's basket. still storming at him the old man climbed to his seat and took the reins. he drove round the corner into bride hill, and stopped at purslow's door. the draper was at the carriage wheel before it stopped. he had the bag in his hand, but he did not at once hand it up. "excuse me, excuse the liberty, sir," he said, lowering his voice and glancing at thomas, "but it's a large sum, sir, and it's late. hadn't i better keep it till morning?" the squire snapped at him. "morning? rubbish, man! put it in." he made room for the bag at his feet. but the draper still hesitated. "it will be dark in ten minutes, sir, and the road--it's true, no one has been stopped of late, but----" "i've never been stopped in my life," the squire rejoined. "put it in, man, and don't be a fool. who's to stop me between here and garth?" purslow muttered something about the safe side, but he complied. he handed in the bag, which gave out a clinking sound as it settled itself beside the squire's feet. the old man nodded his thanks and started his horses. he drove down bride hill, and by the stalls, where the taps were humming, and the inns were doing a great business. passing one or two belated carts, he turned to the right and descended to the bridge, the old houses with their galleries and gables looming above him as for three centuries they had loomed above the traveller by the welsh road. he rumbled over the bridge, the wide river flowing dark below him. then he trotted sharply up westwell, passing by the inns that in old days had served those who arrived after the gates were closed. now he faced the open country and the wet west wind, and he settled himself down in his seat and shook up his horses. as he did so his foot touched the bag, and again the gold gave out a clinking sound. chapter xiii the squire in his inmost heart had not derived much satisfaction from his visit to the bank. he had left it with an uneasy feeling that the step he had taken had not produced the intended effect. ovington had accepted the loss of his custom, not indeed with indifference, but with dignity, and in a manner which left the old man little upon which to plume himself. the withdrawal of his custom wore in the retrospect too much of the look of spite, and he came near to regretting it, as he drove along. had he been present at an interview which took place after he had retired, he might have been better pleased. the banker had not been many minutes in the parlor, chewing the cud of the affair, before he was interrupted by his cashier. in this there was nothing unusual; routine required rodd's presence in the parlor several times in the day. but his manner on the present occasion, and the way in which he closed the door, prepared ovington for something new, and "what is it, rodd?" he asked, leaning back in his chair, and disposing himself to listen. "can i have a word with you, sir?" "certainly." the banker's face told nothing. rodd's was that of a man who had made up his mind to a plunge. "what is it?" "i have been wishing to speak for some time, sir," rodd faltered. "this----" ovington understood at once that he referred to the squire's matter--"i don't like it, sir, and i have been with you ten years, and i feel--i ought to speak." ovington shrugged his shoulders. "i don't like it either," he said. "but it is of less importance than you think, rodd. i know why mr. griffin did it. and we are not now where we were. the withdrawal of a few hundreds or the loss of a customer----" again he shrugged his shoulders. "no," rodd said gravely. "if nothing more follows, sir." "why should anything follow? i know his reasons." "but the town doesn't. and if it gets about, sir?" "it won't do us much damage. we've lost customers before, yet always gained more than we lost. but there, rodd, that is not what you came in to say. what is it?" he spoke lightly, but he felt more surprise than he showed. rodd was a model cashier, performing his duties in a precise, plodding fashion that had often excited arthur's ridicule; but hitherto he had never ventured an opinion on the policy of the bank, nor betrayed the least curiosity respecting its secrets. "what is it?" ovington repeated. "what has frightened you, man?" "we've a lot of notes out, sir!" the banker looked thoughtfully at the glasses he held in his hand. "true," he said. "quite true. but trade is brisk, and the demand for credit is large. we must meet the demand, rodd, as far as we can--with safety. that's our business." "and we've a lot of money out--that could not be got in in a hurry, sir." "yes," the banker admitted, "but that is our business, too. if we did not put our money out we might close the bank to-morrow. that much of the money cannot be got in at a minute's notice is a thing we cannot avoid." the perspiration stood on rodd's forehead, but he persisted. "if it were all on bills, sir, i would not say a word. but there is a lot on overdraft." "well secured." "while things are up. but if things went down, sir? there's wolley's account. i suspect that the last bills we discounted for him were accommodation. indeed, i am sure of it. and his overdraft is heavy." "we hold the lease of his mill." "but you don't want to run the mill!" rodd replied, putting his finger on the weak point. the banker reflected. "that's the worst account we have. the worst, isn't it?" "mr. acherley's, sir." "well, yes. there might be a sounder account than that. but what is it?" he looked directly at the other. "i want to know what has opened your mouth? have you heard anything? what makes you think that things are going down?" "mr. griffin----" "no." the banker shook his head. "that won't do, rodd. you had this in your mind before he came in. you are pat with wolley and mr. acherley; bad accounts both, as all banks have bad accounts here and there. but it's true--we've been giving our customers rope, and they have bought things that may fall. still, they've made money, a good deal of money, and we've kept a fair margin and obliged them at the same time. all legitimate business. there must be something in your mind besides this, i'm sure. what is it, lad?" the cashier turned a dull red, but before he could answer the door behind him opened. arthur came in. he looked at the banker, and from him to rodd, and his suspicions were aroused. "it's four o'clock, sir," he said, and looked again at rodd as if to ask what he was doing there. but rodd held his ground, and the banker explained. "rodd is a little alarmed for us," he said, and it was difficult to be sure whether he spoke in jest or in earnest. "he thinks we're going too fast. putting our hand out too far. he mentions wolley's account, and acherley's. "i was speaking generally," rodd muttered. he looked sullen. arthur shrugged his shoulders. "i stand corrected," he said. "i didn't know that rodd ever went beyond his ledgers." "oh, he's quite right to speak his mind. we are all in the same boat--though we do not all steer." "well, i'm glad of that, sir." "still," mildly, "it is a good thing to have an opinion." "if it be worth anything." "if opinions are going----" betty had opened the door behind the banker's chair, and was standing on the threshold--"wouldn't you like to have mine, father?" "to be sure," arthur said. "why not, indeed? let us have it. why not have everybody's? and send for the cook, sir, and the two clerks--to advise us?" betty dropped a curtsy. "thank you, i am flattered." "betty, you've no business here," her father said. "you mustn't stop unless you can keep your opinions to yourself." "but what has happened?" she asked, looking around in wonder. "mr. griffin has withdrawn his account." "and rodd," arthur added, with more heat than the occasion seemed to demand, "thinks that we had better put up the shutters!" "no, no," the banker said. "we must do him justice. he thinks that we are going a little too far, that's all. and that the loss of mr. griffin's account is a danger signal. that's what you mean, man, isn't it?" rodd nodded, his face stubborn. he stood alone, divided from the other three by the table, for arthur had passed round it and placed himself at ovington's elbow. "his view," the banker continued, polishing his glasses with his handkerchief and looking thoughtfully at them, "is that if there came a check in trade and a fall in values, the bank might find its resources strained--i'll put it that way." arthur sneered. "singular wisdom! but a fall--a general fall at any rate--what sign is there of it?" he was provoked by the banker's way of taking it. ovington seemed to be attaching absurd weight to rodd's suggestion. "none!" contemptuously. "not a jot." "there's been a universal rise," rodd muttered. "in a moment? without warning?" "no, but----" "but fiddlesticks!" arthur retorted. of late it seemed as if his good humor had deserted him, and this was not the first sign he had given of an uncertain temper. still, the phase was so new that two of those present looked curiously at him, and his consciousness of this added to his irritation. "rodd's no better than an old woman," he continued. "five per cent. and a mortgage in a strong box is about his measure. if you are going to listen to every croaker who is frightened by a shadow, you may as well close the bank, sir, and put the money out on rodd's terms!" "still rodd means us well," the banker said thoughtfully, "and a little caution is never out of place in a bank. what i want to get from him is--has he anything definite to tell us? wolley? have you heard anything about wolley, rodd?" "no, sir." "then what is it? what is it, man?" but rodd, brought to bay, only looked more stubborn. "it's no more than i've told you, sir," he muttered, "it's just a feeling. things must come down some day." "oh, damn!" arthur exclaimed, out of patience, and thinking that the banker was making altogether too much of it--and of rodd. "if he were a weather-glass----" "or a woman!" interjected betty, who was observing all with bright inscrutable eyes. "but as he isn't either," arthur continued impatiently, "i fail to see why you make so much of it! of course, things will come down some day, but if he thinks that with your experience you are blind to anything he is likely to see, he's no better than a fool! because my uncle, for reasons which you understand, sir, has drawn out four hundred pounds, he thinks every customer is going to leave us, and ovington's must put up the shutters! the truth is, he knows nothing about it, and if he wishes to damage the bank he is going the right way to do it!" "would you like my opinion, father?" betty asked. "no," sharply, "certainly not, child. where's clement?" "well, i'm afraid he's away." "again? then he is behaving very badly!" "that was the opinion i was going to give," the girl answered. "that some were behaving better than others." "if," arthur cried, "you mean me----" "there, enough," said her father. "be silent, betty. you've no business to be here." "still, people should behave themselves," she replied, her eyes sparkling. arthur had his answer ready, but ovington forestalled him. "very good, rodd," he said. "a word on the side of caution is never out of place in a bank. but i am not blind, and all that you have told me is in my mind. thank you. you can go now." it was a dismissal, and rodd took it as such, and felt, as he had never felt before, his subordinate position. why he did so, and why, as he withdrew under arthur's eye, he resented the situation, he best knew. but it is possible that two of the others had some inkling of the cause. when he had gone, "there's an old woman for you!" arthur exclaimed. "i wonder that you had the patience to listen to him, sir." but ovington shook his head. "i listened because there are times when a straw shows which way the wind blows." "but you don't think that there is anything in what he said?" "i shall remember what he said. the time may be coming to take in sail--to keep a good look-out, lad, and be careful. you have been with us--how long? two years. ay, but years of expansion, of rising prices, of growing trade. but i have seen other times--other times." he shook his head. "still, there is no sign of a change, sir?" "you've seen one to-day. what is in rodd's head may be in others, and what is in men's heads soon reflects itself in their conduct." it was the first word, the first hint, the first presage of evil; of a fall, of bad weather, of a storm, distant as yet, and seen even by the clearest eyes only as a cloud no bigger than a man's hand. but the word had been spoken. the hint had been given. and to arthur, who had paid a high price for prosperity--how high only he could say--the presage seemed an outrage. the idea that the prosperity he had bought was not a certainty, that the craft on which he had embarked his fortune was, like other ships, at the mercy of storm and tempest, that like other ships it might founder with all its freight, was entirely new to him. so new that for a moment his face betrayed the impression it made. then he told himself that the thing was incredible, that he started at shadows, and his natural confidence rebounded. "oh, damn rodd!" he cried--and he said it with all his heart. "he's a croaker by nature!" "still, we won't damn him," the banker answered mildly. "on the contrary, we will profit by his warning. but go now. i have a letter to write. and do you go, too, betty, and make tea for us." he turned to his papers, and arthur, after a moment's hesitation, followed betty into the house. overtaking her in the hall, "betty, what is the matter?" he asked. and when the girl took no notice, but went on with her chin in the air as if he had not spoken, he seized her arm. "come," he said, "i am not going to have this. what is it?" "what should it be! i don't know what you mean," she retorted. "oh yes, you do. what took you--to back up that ass in the bank just now?" then betty astonished him. "i didn't think he wanted any backing," she said, her eyes bright. "he seemed to me to talk sense, and someone else nonsense." "but you're not----" "a partner in ovington's? no, mr. bourdillon, i am not--thank heaven! and so my head is not turned, and i can keep my temper and mind my manners." "oh, it's mr. bourdillon now, is it?" "yes--if you are going to behave to my friends as you did this afternoon." "your friends!" scornfully. "you include rodd, do you? rodd, betty?" "yes, i do, and i am not too proud to do so. nor too proud to be angry when i see a man ten years younger than he is slap him in the face! i am not so spoiled that i think everyone beneath me!" "so it's rodd now?" "it's as much rodd now," her cheeks hot, her eyes sparkling, "as it was anyone else before! just as much and just as little. you flatter yourself, sir!" "but, betty," in a coaxing tone, "little spitfire that you are, can't you guess why i was short with rodd? can't you guess why i don't particularly love him? but you do guess. rodd is what he is--nothing! but when he lifts his eyes above him--when he dares to make eyes at you--i am not going to be silent." "now you are impertinent!" she replied. "as impertinent as you were mean before. yes, mean, mean! when you knew he could not answer you! mean!" and without waiting for a reply she ran up the stairs. he went to one of the windows of the dining-room and looked across bride hill and along the high street, full at that hour of market people. but he did not see them, his thoughts were busy with what had happened. he could not believe that betty had any feeling for rodd. the man was dull, commonplace, a plodder, and not young; he was well over thirty. no, the idea was preposterous. and it was still more absurd to suppose that if he, arthur, threw the handkerchief--or even fluttered it in her direction, for dear little thing as she was, he had not quite made up his mind--she would hesitate to accept him, or would let any thought of rodd weigh with her. still, he would let her temper cool, he would not stay to tea. instead, he would by and by ride his new horse out to the cottage. he had not been home for the weekend. he had left mrs. bourdillon to come to herself and recover her good humor in solitude. now he would make it up with her, and while he was there he might as well get a peep at josina--it was a long time since he had seen her. if betty chose to adopt this unpleasant line, why, she could not blame him if he amused himself. chapter xiv for a time after the squire had driven away, clement had sat his horse and stared after him, and in his rage had wished him dead. he had prepared himself for opposition, he had looked to be repulsed--he had expected nothing else. but in the scene which his fancy had pictured, his part had been one of dignity; he had owned his aspirations like a man, he had admitted his insufficiency with modesty, he had pleaded the power of love with eloquence, he had won even from the squire a meed of unwilling approbation. but the scene, as played, had run on other lines. the old man had crushed him. he had sworn at him, refused to listen to him, had insulted him, had treated him as no better than a shop-boy. and all this had cut to the quick. for clement, born after ovington had risen from the ranks, had his pride and his self-respect, and humiliated, he cursed with all his soul the prejudice and hide-bound narrowness of the squire and all his caste. for the time he was more than a radical, he was a republican. if by a gesture he could have swept away king and commons, lords and justices, he would not have held his hand. it took him some time to recover, and it was only when he found himself, he hardly knew how, upon the bridge at garthmyle that he grew more cool. even then he was not quite himself. he had vowed that he would not see josina again until he had claimed her from her father; but the squire's treatment, he now felt, had absolved him from this, and the temptation to see her was great. he longed to pour out his mind to her, and to tell her how he had been insulted, how he had been treated. perhaps, even, he must say farewell to her--he must give her up. for he was not all hero, and the task before him seemed for the time too prodigious, the labor too little hopeful. the hydra had so many heads, and roared so fearfully that for a moment his courage sank before it--and his love. he felt that he must yield, that he must see josina and tell her so. in any event she ought to know what had happened, and presently he put up his horse at the inn and made by a roundabout road for their meeting-place by the brook. there was but a chance that she would visit it, and in the meantime he had to exercise what patience he might. his castles in the air had fallen and he had not the spirit to rebuild them. he sat gazing moodily on the rippling face of the water, or watched the ousel curtsying on its stone; and he almost despaired. he had known the squire to be formidable, he now knew him to be impossible. he looked down the stream to where garth, lofty and fortress-like, raised its twisted chimneys above the trees, and he shook his fist at it. remote and islanded on its knoll, rising amid ancestral trees, it stood for all that the squire stood for--governance, privilege, tradition, the past--all the things he had not, all the things that mocked him. he lingered there, savoring his melancholy, until the sun went down behind the hills, and then, attacked by the pangs of hunger, he made his way back to the village inn. here he satisfied his appetite on such home-baked bread and yellow butter and nut-brown ale as are not in these degenerate times; and for wellnigh an hour he sat brooding in the sanded parlor surrounded by china cats and dogs--they too, would be of value nowadays. at length with a heavy heart--for what was he to do next?--he rode out of the yard, and crossing the bridge under the shadowy bulk of the squat church tower, he set his horse's head for home. it was nearly dark. what was he to do next? he did not know, but as he rode through the gloom, the solemn hills falling back on either side and the dark plain widening before him, he took courage; he began to consider, with some return of hope, what lay before him, and how he must proceed--if he were not to give up. clearly he must face the squire, but it must be in the squire's own house, where the squire must hear him. the old man might insult him, rave at him, order him out, but before he was put out he would speak and ask for josina, though the roof fell. there should be no further mistake. and he would let the squire know, if it came to that, that he was a man, as good as other men. by heaven he would! he was not all hero. but there were some heroic parts about him, and he determined that the very next morning he would ride out and would beard the hydra in its den, be its heads ever so many. he would win his lady-love or perish! by this time he was half-way home. the market traffic on the road had ceased, the moon had not yet risen, the night lay calm and still about him. presently as he crossed a wet, rushy flat, one of the loneliest parts of the way, he saw the lights of a vehicle coming towards him. the road at that point had not been long enclosed, and a broad strip of common still survived on either hand, so that moving on this the horse's hoofs made no sound save a soft plop-plop where the ground was wettest. he could hear, therefore, while still afar off, the tramp of a pair of horses driven at a trot, and it occurred to him that this might be the squire returning late. if he could have avoided the meeting he would have done so, though it was unlikely that the squire would recognize him in the dark. but to turn aside would be foolish. "hang me if i am going to be afraid of him!" he thought. and he touched up his horse with his heel. then an odd thing happened. while the carriage was still fifty yards from him, one of the lights went out. his eyes missed it, but his brain had barely taken in the fact when the second vanished also, as if the vehicle had sunk into the ground. at the same moment a cry reached his ears, followed by a clatter of hoofs on the road as if the horses were being sharply pulled up. clement took his horse by the head and bent forward, striving to make out what was passing. a dull sound, as of a heavy body striking the road reached him, followed by a silence that seemed ominous. even the wind appeared to have hushed its whisper through the rushes. "hallo!" he shouted. "what is it? is anything the matter?" he urged his horse forward. his cry was lost in the crack of a whip, he heard the horses break away, and without farther warning they came down upon him at a gallop, the carriage bounding wildly behind them. he had just time to thrust his nag to the side, and they were on him and past him, and whirling down the road--a mere shadow, but as perilous and almost as noisy as a thunderbolt. there was no doubt now that an accident had happened, but before he could give help he had to master his horse, which had wheeled about; and so a few seconds elapsed before he reached the scene--reached it with his heart in his mouth--for who could say with what emergency he might not have to deal? certainly with a tragedy, for the first thing he made out was the form of a man stooping over another who lay in the road. clement drew a breath of relief as he slipped from his saddle--he would not have to meet the crisis alone. but as his foot touched the ground, he saw the stooping man raise his hand with something in it, and he knew instinctively that it was raised not to help but to strike. he shouted, and the blow hung in the air. the man, taken by surprise, straightened himself, turned, and saw clement at his elbow. he hesitated; then, with an oath, he aimed his blow at the new-comer. clement parried it, rather by instinct than with intention, and so weakly, that the other's weapon beat down his guard and cut his cheek-bone. he staggered back and the villain raised his cudgel again. had the second blow fallen where it was aimed, it would have finished the business. but clement, aware now that he fought for his life, sprang within the other's guard, and before the cudgel alighted, gripped him by the neckcloth. the man gave ground, tripped backwards over the body that lay behind him, and in a twinkling the two were rolling together on the road, clement striving to beat in the ruffian's face with the butt-end of his whip, while the man tried vainly to shorten his weapon and use it to purpose. it was a desperate struggle, in the mire, in the darkness--a struggle for life carried on in a silence that was broken only by the combatants' breathing and a rare oath. twice each rolled the other, and once clement, having the upper hand became aware that the fight had its spectator. he had a glimpse of a ghastly face, one side of which had been mangled by a murderous blow--a face that glared at them with its remaining eye. he guessed rather than saw that the man lying in the road had raised himself on an elbow, and he heard a gasping "at him, lad! well done, lad!" then in a turn of the struggle he lost the vision. his opponent had him by the throat, he was undermost again--and desperate. his one thought now was to kill--to kill the brute-beast whose teeth threatened his cheek, whose hot breath burned his face, whose hands gripped his throat. he struck again and again, and eventually, supple and young, and perhaps the stronger, he freed himself and staggered to his feet, raising his whip to strike. but the same thing happened to him which had happened to his assailant. as he stepped back to give power to the blow, he fell over the third man. he came down heavily, and for a moment he was at the other's mercy. fortunately the rascal's courage was at an end. he got to his feet, but instead of pursuing his advantage, he snatched up something that lay on the ground, and sped away down the road, as quickly as his legs could carry him. clement recovered his feet, but more slowly, for the fall had shaken him. still, his desire for vengeance was hot, and he set off in pursuit. the man had a good start, however, and presently, leaving the road and leaping the ditch, made off across the open common. to follow farther promised little, for in a few seconds his figure, already shadowy, melted into the darkness of the fields. clement gave up the chase, and turned back, panting and out of breath. he did not feel his wound, much less did he feel the misgivings which had beset him when he came upon the scene. instead, he experienced a new and thrilling elation. he had measured his strength against an enemy, he had faced death in fight, he felt himself equal to any and every event. even when stooping over the prostrate figure he saw the mangled and bleeding face turned up to the sky it did not daunt him, nor the darkness, nor the loneliness. the injured man seemed to be aware of his presence for he made an attempt to rise; but he failed, and would have fallen back on the road if clement, dropping on one knee, had not sustained his head on the other. it was the squire. so much he saw; but it was a squire past not only scolding but speech, whom he held in his arms and whose head he supported. to all clement's questions he made no answer. it was much if he still breathed. clement glanced about him, and his confidence began to leave him. what was he to do? he could not go for help, leaving the old man lying in the road; yet it was impossible to do much in the dark, either to ascertain the extent of the squire's hurt, or to use means to stanch it. the moon had not yet risen, the plain stretched dark about them, no sound except the melancholy whisper of the wind in the rushes reached him. there was no house near and it was growing late. no one might pass for hours. fortunately when he had reached this stage he remembered that he had his tinder box and matches in his pocket, and he fumbled for them with his disengaged hand. with an effort, he got them out. but to strike a light and catch it in the huddled posture in which he knelt was not easy, and it was only after a score of attempts that the match caught the flame. even so, the light it gave was faint, but it revealed the squire's face, and clement saw, with a shudder, that the left eye and temple were terribly battered. but he saw, too, that the old man was conscious, for he uttered a groan, and peered with the uninjured eye at the face that bent over him. "good lad!" he muttered, "good lad!" and he added broken words which conveyed to clement's mind that it was his man who had attacked him. then--his face was so turned that it was within a few inches of clement's shoulder--"you're bloody, lad," he muttered. "he's spoiled your coat, the d--d rascal!" with that he seemed to slip back into unconsciousness, and the light went out. it left clement in a strait to know what he ought to do, or rather what he could do. help he must get, and speedily, if he would save the squire's life, but his horse was gone, and to walk away for help, leaving the old man lying in the mud of the way seemed inhuman. he must at least carry him to the side of the road. the task was no light one, for the squire was tall, though not stout; and before clement stooped to it he cast a last look round. but silence still wrapped all, and he was gathering his strength to lift the dead weight, when a sound caught his ear, and he raised himself. a moment, and joy!--he caught the far-off beat of hoofs on the turf. someone was coming, approaching him from the direction of aldersbury. he shouted, shouted his loudest and waited. yes, he was not mistaken. the soft plop-plop of hoofs grew louder, two forms loomed out of the darkness, a horse shied, a man swore. "here!" clement cried. "here! take care! there's a man in the road." "where?" then, "confound you, you nearly had me down! are you hurt?" "no, but" "i've got your horse. i met him a couple of miles this side of the town. what has----" clement broke in. "there's bad work here!" he cried, his voice shaky. now that help was at hand and the peril was over, he began to feel what he had gone through. "for god's sake get down and help me. your uncle's man has robbed him and, i fear, murdered him." "the squire?" "yes, yes. he's lying here, half dead. we must get him to the side of the road at once." arthur slipped from his saddle, and holding the reins of the two horses, approached the group as nearly as the frightened beasts would let him. "quiet, fools!" he cried angrily. and then, "good heavens!" in a whisper, as he peered awe-stricken at the injured man. "is he dead?" "no, but he's terribly mauled. and we must get help. help, man, and quickly, if it is to be of any use. shall i go?" "no, no, i'll go," arthur answered, recoiling. what he had seen had given him no desire to take clement's place. "garthmyle is the nearer, and i shall not be long. i'll tie up your horse--that'll be best." there was an old thorn-tree standing solitary in the waste not many yards away: a tree destined to be pointed out for years to come as marking the spot where the old squire was robbed. arthur tied clement's horse to this, then together they lifted the old man and carried him to the side of the road. the moment that this was done, arthur sprang on his horse and started off. "back soon," he shouted. clement had not seen his way to object, but it was with a heavy heart that he resigned himself to another period of painful waiting. he was cold, his face smarted, and at any moment the old man might die on his hands. meantime he could do nothing but wait. or yes, he could do something; chilled as he was, he took off his coat, and rolling it up, he slipped it under the insensible head. little had he thought that morning that he would ever pity the squire. but he did. the man who had driven away from him, hard, aggressive, indomitable, asking no man's help and meeting all men's eyes with the gaze of a master, now lay at his feet, crushed and broken; lay with his head on the coat of the man he had despised, dependent on him for the poor service that still might avail him. clement felt the pathos of it, and the pity. and his heart was sore for josina. how would she meet, how bear the shock that a short hour must inflict on her? he was thinking of her, when, long before he had dared to expect relief, he heard a sound that resolved itself into the rattle of wheels. yes, there was a carriage coming along the road. arthur had been fortunate. he had come upon the squire's horses, which had been brought to a stand with the near wheels of the curricle wedged in the ditch. he had found them greedily feeding, and he had let his own nag go, and had captured the runaways. he had drawn the carriage out of the ditch, and here he was. "thank god!" clement cried. "i think that he is still alive." "and we've got to lift him in," said arthur, more practical. "he's a big weight." it was not an easy task. but they tied up the horses to the thorn-tree, and lifting the old man between them, they carried him with what care they might to the carriage, raised him, heavy and helpless as he was, to the step, and then, while one maintained him there, the other climbed in and lifted him to the front seat. clement got up behind and supported his shoulders and head, while arthur, first tying the saddle-horse behind the carriage, released the pair, and with the reins in his hands scrambled to his place. the thing was done and cleverly done, and they set off. but they dared not travel at more than a walk, and never had the three miles to garthmyle seemed so long or so tedious. they were both anxious and both excited. but while in clement's mind pity, a sense of the tragedy before him, and thought for josina contended with an honest pride in what he had done, the other, as they drove along, was already calculating chances and busy with contingencies. the squire's death--if the squire died--would work a great change, an immense change. things which had yesterday been too doubtful and too distant to deserve much thought would be within reach, would be his for the asking. and he was the more inclined to consider this because betty--dear little creature as she was--had shown a spirit that day that was not to his liking. whereas josina, mild and docile--it might be that after all she would suit him better. and garth--garth with its wide acres and its rich rent-roll would be hers; garth that would give any man a position to be envied. its charms, while uncertain and dependent on the whim and caprice of an arbitrary old man, had not fixed him, for to attain to them he must give up other things, equally to his mind. but now the case was or might be altered. he must wait and watch events, and keep an open mind. if the squire died---- a word or two passed between the couple, but for the most part they were silent. once and again the squire moaned, and so proved that he still lived. at last, where the road to garth branched off, at the entrance to the village, they saw a light in front, and old fewtrell carrying a lanthorn met them. the squire's absence had alarmed the house, and he had come thus far in quest of news. "oh, lord, ha' mercy! lord, ha' mercy!" the old fellow quavered as he lifted his lanthorn and the light disclosed the group in the carriage, and his master's huddled form and ghastly visage. "miss jos said 'twas so! said as summat had happened him! beside herself, she be! she've been down at the gate this half-hour waiting on him!" "don't let her see him," clement cried. "go, man, and send her back." but, "that's no good," arthur objected with more sense but less feeling. "she must see him. this is women's work, we can do nothing. let fewtrell take your place and do you go for the doctor. you know where he lives, and you'll go twice as quick as he will, and there's no more that you can do. take your horse." clement was unwilling to go, unwilling to have no farther part in the matter. but he could not refuse. things were as they were; in spite of all that he had done and suffered, he had no place there, no standing in the house, no right beside his mistress or call to think for her. he was a stranger, an outsider, and when he had fetched the doctor, there would, as arthur had said, be nothing more that he could do. nothing more, though as he rode over the bridge and trotted through the village his heart was bursting with pity for her whom he could not comfort, could not see; from whose side in her troubles and her self-arraignment--for he knew that she would reproach herself--he must be banished. it was hard. chapter xv the squire was late. a hundred years ago night fell more seriously. it closed in on a countryside less peopled, on houses and hamlets more distant, and divided by greater risks of flood and field. the dark hours were longer and haunted by graver apprehensions. every journey had to be made on horses or behind them, roads were rough and miry, fords were plenty, bridges scarce. sturdy rogues abounded, and to double every peril it was still the habit of most men to drink deep. few returned sober from market, fewer from fair or merry-making. for many, therefore, the coming of night meant the coming of fear. children, watching the great moths fluttering against the low ceiling, or round the rush-light that cast such gloomy shadows, thought that their elders would never come upstairs to bed. lone women, quaking in remote dwellings, remembered the gibbet where the treacherous inn-keeper still moulded, and fancied every creak the coming of a man in a crape mask. thousands suffered nightly because the goodman lingered abroad, or the son was absent, and in many a window the light was set at dusk to guide the master by the pool. on market evenings women stole trembling down the lane that the sound of wheels might the sooner dispel their fears. at garth it was youth not age that first caught the alarm. for josina's conscience troubled her, and before even miss peacock, most fidgety of old maids, had seen cause to fear, the girl was standing in the darkness before the door, listening and uneasy. the squire was seldom late; it could not be that clement had met him and there had been a--but no, clement was not the man to raise his hand against his elder--the thought was dismissed as soon as formed. yet why did not the squire come? lights began to shine through the casements, she saw the candles brought into the dining-room, the darkness thickened about her, only the trunks of the nearer beeches gave back a gleam. and she felt that if anything had happened to him she could never forgive herself. shivering, less with cold than with apprehension, she peered down the drive. he had been later than this before, but then her conscience had been quiet, she had not deceived him, she had had nothing with which to reproach herself on his account. presently, "josina, what are you doing there?" miss peacock cried. she had come to the open door and discovered the girl. she began to scold. "come in this minute, child! what are you starving the house for, standing there?" but josina did not budge. "he is very late," she said. "late? what nonsense! and what if he is late? what good can you do, standing out there? i declare one might suppose your father was one of those skimble-skambles that can't pass a tavern door, to hear you talk! and thomas with him! come in at once when i tell you! as if i should not be the first to cry out if anything were wrong. late indeed--why, goodness gracious, i declare it's nearly eight. what can have become of him, child? and calamy and those good-for-nothing girls warming their knees at the fire, and no more caring if their master is in the river than--josina, do you hear? do you know that your father is still out? calamy!" ringing a hand-bell that stood on the table in the hall, "calamy! are you all asleep? don't you know that your master is not in, and it is nearly eight?" calamy was the butler. a tall, lanthorn-jawed man, he would have looked lugubrious in the king's scarlet which he had once worn; in his professional black, or in his shirt sleeves, cleaning plate, he was melancholy itself. and his modes and manners were at least as mournful as his aspect--no man so sure as "old calamity" to see the dark side of things or to put it before others. it was whispered that he had been a dissenter, and why the squire, who hated a ranter as he hated the devil, had ever engaged him, much less kept him, was a puzzle to garthmyle. that he had been his son's servant and had been with the boy when he died, might have seemed a sufficient reason, had the squire been other than he was. but no one supposed that such a thing weighed with the old man--he was of too hard a grain. yet at garth, calamy had lived for a score of years, and been suffered with a patience which might have stood to the credit of more reasonable men. "nearly eight!" miss peacock flung at him, and repeated her statement. "we've put the dinner back, ma'am." "put the dinner back! and that's all you think of, when at any minute your master--oh, dear, dear, what can have happened to him?" "well, it's a dark night, ma'am, to be sure." "gracious goodness, can't i see that? if thomas weren't with him----" the butler shook his head. "under notice, ma'am," he said. "i think the worst of thomas. on a dark night, with thomas----" miss peacock gasped. "i should say my prayers, ma'am," the butler murmured softly. miss peacock stared, aghast. "under notice?" she cried. "well, of all the--'deed, and i wish you were all under notice, if that is the best you've got to say." "hadn't you better," said josina from the darkness outside, "send fewtrell to meet him with a lanthorn?" "and get my nose bitten off when your father comes home! la, bless me, i don't know what to do! and no one else to do a thing!" "send him, calamy," said josina. calamy retired. miss peacock looked out, a shawl about her head. "jos! where are you?" she cried. "come in at once, girl. do you think i am going to be left alone, and the door open? jos! jos!" but josina was gone, groping her way down the drive. when fewtrell followed with his lanthorn he came on her sitting on the bridge, and he got a rare start, thinking it was a ghost. "lord a'mighty!" he cried as the light fell on her pale face. "aren't you afraid to sit there by yourself, miss?" but josina was not afraid, and after a word or two he shambled away, the lanthorn swinging in his hand. the girl watched the light go bobbing along as far the highway fifty yards on, saw it travel to the left along the road, lost it for some moments, then marked it again, a faint blur of light, moving towards the village. presently it vanished and she was left alone with her fears. she strained her ears to catch the first sound of wheels. the stream murmured beneath her, a sick sheep coughed, the breeze whispered in the hedges, the cry of an owl, thrice repeated, sank into silence. but that was all, and in the presence of the silent world about her, of the all-enveloping night, of the solemn stars shining as they had shone from eternity, the girl knew herself infinitely helpless, without remedy against the stroke of impending fate. she recognized that lighted rooms and glowing fires and the indoor life did but deceive; that they did but blind the mind to the immensity of things, to the real issues, to life and death and eternity. anguished, she owned that a good conscience was the only refuge, and that she had it not. she had deceived her father, and it would be her fate to endure a lasting remorse. at last, her eyes opened, she fancied that she detected behind the mask a father's face. but too late, for the bridge which he had crossed innumerable times, the drive, rough and rutted, yet the harbinger of home, which he had climbed from boyhood to age, the threshold which he had trodden so often as master--they would know him no more! at the thought she broke down and wept, feeling all its poignancy, all its pitifulness, and finding for the moment no support in clement, no recompense in a love which deceit and secrecy had tainted. doubtless she would not have taken things so hardly had she not been overwrought; and, as it was, the first sound that reached her from the garthmyle road brought her to her feet. a light showed, moving from that direction, travelling slowly through the darkness. it vanished, and she held her breath. it came into view again, and she groped her way forward until she stood in the road. the light was close at hand now, though viewed from the front it moved so little that her worst forebodings were confirmed. but now, now that she saw her fears justified, the woman's fortitude, that in enduring is so much greater than man's, came to her aid, and it was with a calmness that surprised herself that she awaited the slow procession, discerned by the lanthorn-light her father's huddled form, and in a trembling voice asked if he still lived. "yes, yes!" arthur cried, and hastened to reassure her. "he will do yet, but he is hurt. go back, jos, and get his bed ready, and hot water, and some linen. the doctor will be here in a minute." his voice, firm and collected, struck the right note, and the girl answered to it bravely. she made no lamentation, shed no tears--there would be time for tears later--but gathering up her skirts she sped up the drive, and before the carriage had passed the bridge she had given the alarm in the house. there, in a moment, all was confusion. miss peacock, whatever fears she had expressed, was ill prepared for the fact, and it was josina, who, steadied by that half-hour of self-examination, stilled the outcry of the maids, gave the needful orders, and seconded calamy in carrying them out, had candles placed on the stairs, and with her own hand brought out a stout chair. when the carriage, the lanthorn gleaming sombrely on the shining trunks, drew slowly out of the darkness, she was there with lights and brandy. for her the worst was over. the scared faces of the women, their stifled cries and confused hovering, were but a background to her steady courage. still, even she yielded the first place to arthur. whatever pity or horror he had felt, he had had time to overcome, and to think both of the present and the future. and he rose to the occasion. he directed, arranged, and was himself the foremost worker. by the time mr. farmer, the village doctor, arrived, he had done much which had to be done. the squire had been carried upstairs, and lay, breathing stertorously, on his great four-post bed with the dingy drab curtains and the two watch-pockets at the head; and everything which could be of use had been brought to hand. the doctor shut out the frightened maids and shut out miss peacock. but arthur was only at the beginning of his resources. his nerve was good and he aided farmer in his examination, while jos, standing out of sight behind the curtain, calm but quivering in every nerve, handed to him or to calamy what they needed. even then, however, and while he was thus employed, arthur found occasion to whisper a cheering word to the girl, to reassure her and give her hope. he forced her to take a glass of wine, and when calamy, shaking his head, muttered that he had known a man to recover who had been worse hurt--but he was a strong young fellow--he damned the butler for an old fool, regardless of the fact that coming from calamy this was a cheerful prognostic. presently he made her go downstairs. "nothing more can be done now," said he. "the doctor thinks well of him so far. he and i will stay with him to-night. you must save yourself, jos. you will be needed to-morrow." he left the room with her, and as she would not go to bed he made her lie down on a couch, and covered her with a cloak. he had dropped the tone of patronage, almost of persiflage, which he had used to her of late, and he was kindness itself, behaving to her as a brother; so that she did not know how to be thankful enough for his presence, or for the relief from responsibility which it afforded. afterwards, looking back on that long, strange night, during which lights burned in the rooms till dawn, and odd meals were served at odd times, and stealthy feet trod the stairs, and scared faces peeped in only to be withdrawn--looking back on that strange night, and its happenings, it seemed to her that without him she could not have lived through the hours. in truth there was not much sleep for anyone. the village doctor, who lived in top-boots, and went his rounds on horse-back, and by old-fashioned people was called the apothecary, could say nothing for certain; in the morning he might be able to do so. but in the morning--well, perhaps by night, when the patient came to himself, he might be able to form an opinion. to arthur he was more candid. the eye was beyond hope--it could not be saved, and he feared that the other eye was injured; and there was serious concussion. he played with his fob seals and looked sagely over his gold-rimmed spectacles as he mouthed his phrases. whether there was a fracture he could not say at present. he had seen in a long life and a country practice many such cases, and was skilful in treating them. but--no active measures. "dr. quiet," he said, "dr. quiet, the best of the faculty, my dear. if he does not always effect a cure, he makes no mistakes. we must leave it to him." so morning came, and passed, and noon; and still nothing more could be done. with the afternoon reaction set in; the house resigned itself to rest. two or three stole away to sleep. arthur dozed in an arm-chair. the clock struck with abnormal clearness, the cluck of a hen in the yard was heard in the attics. so the hours passed until sunset surprised a yawning house, and in the parlor they pressed one another to eat, and in the kitchen unusual luxuries were consumed with a ghoulish enjoyment, and no fear of the housekeeper. and still farmer could add nothing. they must wait and hope. dr. quiet! he praised him afresh in the same words. some hours earlier, and before josina, after much scolding by miss peacock, had retired to her room to lie down, arthur had told his story. he did not go into details. "it would only shock you, jos," he said. "it was thomas, of course, and i hope to heaven he'll swing for it. i suppose he knew that your father was carrying a large sum, and he must have struck him, possibly as he turned to say something, and then thrown him out. we must set the hue and cry after him, but clement will see to that. it was lucky that he turned up when he did." she drew a sharp breath; this was the first she had heard of clement. and in her surprise "clement?" she exclaimed. then, covering her confusion as well as she could, "mr. ovington? do you mean--he was there, arthur?" "by good luck he was, just when he was wanted. poor chap. i can tell you it knocked him fairly down. all the same, i don't know what might not have happened if he had not come up. i sent him for farmer, and it saved time." "i did not know that he had been there," she murmured, too self-conscious to ask further questions. "well, you wouldn't, of course. he'd been fishing, i fancy, and came along just when it made all the difference. i don't know what i should have done without him." "and thomas? you are sure that it was thomas? what became of him?" "he made off across the fields. it was dark and useless to follow him--we had other things to think of, as you may imagine. ten to one he has made for manchester, but clement will see to that. oh, we'll have him! but there, i'll not tell you any more, jos. you look ill as it is, and it will only spoil your sleep. do you go upstairs and lie down, or you will never be able to go on." and, miss peacock fussily seconding his advice, jos consented and went. arthur's manner had been kind, and jos thought him kind. a brother could not have been more anxious to spare her unpleasant details. but, told as he had told it, the story left her under the impression that clement's part had been secondary only, and slight, and that if there were a person to whom she owed the preservation of her father's life, it was arthur, and arthur only. which she was the more ready to believe, in view of the masterly way in which he had managed all at the house, had taken the upper hand in all, and saved her, and spared her. yet arthur had been careful to state no facts which could be contradicted by evidence, should the whole come out--at an inquest, for instance. he had foreseen the possibility of that, and had been careful. indeed, it was with that in his mind that he had--well, that he had not gone into details. chapter xvi clement had walked with the doctor to the door and had secured a last word with arthur outside, but he had not ventured to enter the house, much less to ask for josina. he knew how heavily the shock would fall on her, and his heart was wrung for her. but he knew also, or he guessed, that the poignancy of her grief would be sharpened by remorse, and he felt that in the first outburst of self-reproach his presence would be the last she would welcome. it was not a pleasant thought for a lover; but then how much worse, he reflected, would it have been for her, had she never made up her mind to confession. and in his own person how much better he now stood. he had saved the squire's life, and had saved it in circumstances that must do him credit. he had run his risks, and been put to the test, and he had come manfully out of it; and he still felt that elation of spirit, that readiness to do and dare, to meet fresh ventures, which attends on a crisis successfully encountered. he was not in a mood to be dashed by trifles therefore, or arthur, when he came out to speak to him, would have dashed him, for arthur was rather short with him. "you can do nothing here," he said. "we are tumbling over one another. get after that rascal. he has got away with four hundred in gold and we must recover it. watkins at the griffin may know where he'll make for." "he's in livery, isn't he?" "begad, so he is! i'd not thought of that! i'll have his place watched in case he steals back to change. but do you see watkins." clement took his dismissal meekly and went to watkins. he soon learned all that the inn-keeper knew, which amounted to no more than a conviction that thomas would make for manchester. watkins shook his head over the livery. the rascal was no fool; he'd have got rid of that. "oh, he's a clever chap, sir, and a gallus bad one." he continued. "he'd talk here that daring that he'd lift the hair on my head. but i never thought that he'd devil enough," in a tone of admiration, "to attack the squire! well, he'll swing this time, if he's taken! you're not in very good fettle yourself, sir. you know that your cheek's bleeding?" "it's nothing. and you think he'll make for manchester?" "as sure as sure! he's done that this time, sir, as he never can be safe but in a crowd. and where'd he go but where he knows? he'll be in manchester before tomorrow night, and it'll take you all your time, sir, finding him there! it's a mortal big place, i understand, and he'll have got rid of his livery, depend on it!" "i'll find him," clement said. and he meant it. his blood was hot, he had tasted of adventure and he found it more to his liking than day-books and ledgers. and already he had made up his mind that it was his business to pursue thomas. he was angered by the rascal's cowardly attack upon an old man, and were it only for that he would take him. but apart from that he saw that if he recovered the squire's money it would be another point to his credit--if the squire recovered. if the old man did not, well, still he would have done something. as he rode home, and passed the scene of the robbery, he laid his plans. he would leave the search in that district to the head constable at aldersbury. but he expected little from this. in those days if a man was robbed it was the man's own business and that of his friends to follow the thief and seize him if they could. in london the bow street runners saw to it, and in one or two of the big cities there were police officers organized on similar lines. but in the country there were only parish constables, elderly men, often chosen because they were past work. clement knew, then, that he must rely on himself, and he tried to imagine what thomas would do, and what route he would take if he made for manchester. not through aldersbury, for there he would run the risk of recognition. nor would he venture into either of the direct roads thence--through congleton or by tarporley; for it was along these roads that he would be likely to be followed. how, then? through chester, clement fancied. the man was already on the chester side of aldersbury, and he could make at once for that place, while in the full stream of traffic between chester and manchester his traces would be lost. travelling on foot and by night, he might reach chester about ten in the morning, and probably, having money and being footsore, he would take the first manchester coach that left after ten. at this point clement found himself crossing the west bridge, the faint scattered lights of the town rising to a point before him. his first business was to knock up the constable and tell his tale. this done, he made for the bank, where he found the household awaiting his coming in some alarm, for it was close on midnight. here he had to tell his story afresh, amid expressions of wonder and pity, while betty fetched sponge and water and bathed his cheek; nor, modestly as he related his doings, could he quite conceal the part that he had played. the banker listened, approved, and for once experienced a new sensation. he was proud of his son. moreover, as a dramatic sequel to the squire's withdrawal of the money, the story touched him home. then clement, as he ate his supper, came to his point. "i'm going after him," he said. the banker objected. "it's not your business, my lad," he said. "you've done enough, i'm sure." "but the point is--it's bank money, sir." clement had grown cunning. "it was--this morning." "and he was a client this morning--and may be tomorrow." the banker considered. there was something in that; and this sudden interest in the bank was gratifying. yet--yet he did not quite understand it. "you seem to be confoundedly taken up with this," he said, "but i don't see why you need mix yourself up with it farther. the scoundrel's neck is in a halter and he won't be taken without a struggle. have you thought of that?" "i'd take him if he were ten," clement said--and blushed at his own enthusiasm. he muttered something about the man being a villain, and the sooner he was laid by the heels the better. "yes, by someone. but i don't see why you need be the one." "anyway, i'm going to do it, sir," clement replied with unexpected independence. "i shall go by the nantwich coach at half-past five, drop off at altringham, and catch him as he goes through. true, if he goes by frodsham i may miss him, but i fancy that the morning coach by frodsham leaves chester too early for him. and, after all, i can't stop every bolt-hole." ovington wondered anew, seeing his son in a new light. this was not the idler with his eyes on the ledger and his thoughts abroad, whom he had known in the bank, but a young man with purpose in his glance and a cut on his cheek-bone, who looked as if he could be ugly if it came to a pinch. a quite new clement--or new at any rate to him. he reflected. the affair would be talked of, and certainly it would be a feather in the bank's cap if the money, which the squire had withdrawn, were recovered through the bank's exertions. viewed in that light there was method in the lad's madness, whatever had bitten him, "well, i think it is a dangerous business," he said at last, "and it is not your business. but go, if you will, only you must take payne with you." payne was the bank man-of-all-work, but clement would not hear of payne. if he could be called at five, he asked no more. even if all the seats on the victory were booked, they would find room for him somewhere. "but your face?" betty said. "isn't it painful? it's turning black." "i'll bet that villain's is as black!" he retorted. "i know i got home on him once. only let me be called." but his father saw that, as he passed through the hall, he took one of the bank pistols out of the case in which they were kept, and slipped it into his pocket. the banker wondered anew, and felt perhaps more anxiety than he showed. at any rate, it was he who called the lad at five and saw that he drank the coffee that betty had prepared, and that he ate something. at the last, indeed, clement feared that his father might offer to accompany him, but he did not. possibly he had decided that if his son was bent on proving his mettle in this odd business, it was wisest not to balk him. the sun was rising as clement's coach rattled down the foregate between the old norman towers that crown the castle hill, and the long austere front of the school, with its wide low casements twinkling in the first beams. early milk-carts drew aside to give the coach passage, white-eyed sweeps gazed enviously after it, mob-caps at windows dreamt of holidays and sighed to be on it and away. soon it burst merrily from the crowded houses and met the morning freshness and the open country and the rolling fields. the mists were rising from the valley behind, as the horses breasted the ascent above the old battle-field, swept down the farther slope, and at eight miles an hour climbed up armour hill between meadows sparkling with dew and coverts flickering with conies. down the hill at a canter, which presently carried it rejoicing into wem. there the first relay was waiting, and away again they went, bowling over the barren gorse-clad heath that brought them presently through narrow twisting streets to the white lion at whitchurch. again, "horses on!" and merrily they travelled down the gentle slope to the cheshire plain, where miles of green country spread themselves in the sunshine, a land of fatness and plenty, of cheese and milk and slow-running brooks. the clock on nantwich church was showing a half after eight, as with a long flourish from the bugle they passed below it, and halted for breakfast at the crown, in the stubborn old round-head town. half an hour to refresh, topping up with a glass of famous nantwich ale, and away again. but now the sun was high, the world abroad, the roads were alive with traffic. onwards from nantwich, where they began to run alongside the ellesmere canal, with its painted barges and gay market boats, the road took on a new importance, and many a smiling wayside house, lion or swan, cheered the travellers on their way. spanking four-in-hands, handled by lusty coachmen, the autocrats of the road, chaises-and-four with postboys in green or yellow, white-coated farmers and parsons on hackneys, commercials in gigs, and publicans in tax-carts, pedlars, packmen, the one-legged sailor, and punch and judy--all these met or passed them; and huge wains laden with manchester goods and driven by teamsters in smocks with long whips on their shoulders. and the inns! the inns, with their swaying signs and open windows, their benches crowded with loungers and their yards echoing with the cry of "next team!"--the inns, with their groaning tables and huge joints and gleaming silver, these came so often, swaggered so loudly, imposed themselves so royally, that half the life of the road seemed to be in and about them. and clement saw it all and rejoiced in it all, though his eyes never ceased to search for a dour-looking man with a bruised face. he rejoiced in the cantering horses and the abounding life about him, in the freedom of it and the joyousness of it, his pulses leaping in tune with it; and not the less in tune, so splendid a thing is it to be young and in love, because he had fought a fight and slept only three hours. he watched it all pass before him, and if he had ever believed in his father's scheme of an iron way and iron horses he lost faith in it now. for it was impossible to believe that any iron road running across fields and waste places could vie with this splendid highway, this orderly procession of coaches, travelling and stopping and meeting with the regularity of a weaver's shuttle, these long lines of laden wagons, these swift chaises horsed at every stage! he saw stables that sheltered a hundred roadsters and were not full; ostlers to whom a handful of oats in every peck gave a gentleman's income; teams that were clothed and curried as tenderly as children; mighty caravanserais full to the attics. a whole machinery of transport passed under his wondering eyes, and the railway, the valleys railway--he smiled at it as at the dream of a visionary. they swept through northwich before noon, and an hour later clement dropped off the coach in front of the bowling green inn at altringham, and knew that his task lay before him. the little town had no church, but it boasted for its size more bustle than he had expected, and as he eyed its busy streets and its flow of traffic his spirits sank; it did not call itself one of the gates of manchester for nothing. however, he had not come to stand idle, and the first step, to seek out a constable, was easy. but to secure that worthy's aid--he was but a deputy, a pot-bellied, spectacled shoemaker--was another matter. the man rolled up his leather apron and pushed his horn-rimmed glasses on to his forehead, but he shook his head. "a very desperate villain," he said, "a very desperate villain! but lor', master, a dark sullen chap with a black eye and legs a little bandy? why, i be dark and i be bandy, and for black eyes--i'm afeared there's more than one o' that cut on the road." "but not to-day," clement urged. "he'll come through to-day or to-night." "ay, and more likely night than day. but how be i to see if he's a blackened peeper in the dark! i can't haul a gentleman off a coach to ask the color of his eyes." "well, anyway, do your best." "we might bill him and cry him?" "that's it! do that!" clement saw that that was about the extent of the help he would get in this quarter. "send the crier to me at the bowling green, and i'll write a bill--five pounds reward for information!" the constable's eyes twinkled. "now you're on a line, master," he said. "now we'll do summat, maybe!" clement took the hint and bettered the line with a crownpiece, and hastening back to his inn he took seisin of a seat in the coffee room which commanded the main street. here he wrote out a bill, and bribed a waiter to keep the place for him: and in it he sat patiently, scanning every person who passed. but so many passed that an hour had not elapsed before he held his task hopeless, though he continued to perform it. the constable had undertaken to go round the inns and to set a watch on a side street; and the bill might do something. but his fancy pictured half a dozen by-ways through the town, or the man might avoid the town, or he might go by another route. altogether it began to seem a hopeless task, his fancied sagacity a silly conceit. but he had undertaken the task, and as he had told his father he could not close all holes. he could only set his snare across the largest and hope for the best. presently he heard the crier ring his bell and cry his man. "oh yes! oh yes! oh yes!" and the rest of it, ending with "god save the king!" and that cheered him for a while. that was something. but as hour after hour went by and coaches, carriages, and postchaises stopped and started before the door, and pedestrians passed, and still no thomas appeared--though half a dozen times he ran out to take a nearer view of some traveller, or to inspect a slumberer in a hay-cart--he began to despair. there were so many chances against him. so many straws floated by, half seen in the current. but clement was dogged. he persisted, though hope had almost abandoned him, and it was long after midnight before, sinking with fatigue, he left his post. even so he was out again by six, but if there was anything of which he was now certain, it was that the villain had gone by in the night. still he remained, his eyes roving ceaselessly over the passers-by, who were now few, now many, as the current ran fast or slow, as some coach high-laden drew up before the door with a noisy fanfaronade, or some heavy wagon toiled slowly by. it was in one of these slack intervals, when the street was tolerably empty, that his eyes fell on a man who was loitering on the other side of the way. the man had his hands in his pockets and a straw in his mouth, and he seemed to be a mere idler; but as his eyes met clement's he winked. then, with an almost imperceptible gesture of the head, he lounged away in the direction of the inn yard. clement doubted if anything was meant, but grasping at every chance he hurried out and found the man standing in the yard, his hands in his pockets, the straw in his mouth. he was staring at an object, which, to judge from his aspect, could have no possible interest for him--a pump. "do you want me?" clement asked. "mebbe, mister. do you see that stable?" "well?" "d'you go in there and i'll--mebbe i'll join you." but clement was suspicious. "i am not going out of sight of the street," he said. "lord!" contemptuously. "your man's gone these six hours. he's many a mile on by now! you come into the stable." the fellow's looks did not commend him. he was blear-eyed and under-sized, wearing a mangy rabbit-skin waistcoat, and no coat. he had the air of a postboy run to seed. still, clement thought it better to go with him, and in the stable, "be you the gent that offered five pounds?" the man asked, turning upon him. "i am." "then fork out, squire. open your purse, and i'll open my mouth." "if you come with me to the constable----" "not i. i ben't sharing with no constable. that is flat." "well, what do you know?" "what you want to know. howsumdever, if you'll give me your word you'll act the gentleman?" "who are you, my lad?" "ostler at the barley sheaf in malthouse lane. you're on? right. i see, you're a gentleman. well, your chap come in 'bout eleven last night on an empty dray from chester. he had four sacks of corn with him." "oh, but that can't be the man!" clement exclaimed, his face falling. "you listen, mister. he had four sacks of corn with him, and wagoner, he'd bargained to carry him to manchester. but they had quarrelled, and t'other chucked off his sacks in our yard, and there was pretty nigh a fight. wagoner he went off and left him cursing, and he offered me a shilling to find him a lift to manchester first thing i' the morning. 'bout daylight there come in a hay-cart, but driver'd only take the man and not the forage. howsumdever, he said at last he'd take one sack, and your chap up and asked me would i take care of t'other three till he sent for 'em. i see he was mighty keen to get on, and i sez, 'no,' sez i, 'but i'll buy 'em cheap.' 'right,' sez he, and surprising little bones about it, and lets me have 'em cheap! so thinks i, who's this as chucks away money, and as he climbed up i managed to knock off his tile and see his eye was painted, and he the very spot of your bill! i'd half a mind to stop him, but he was over-weight for me--i'm a little chap--and i let him go.' he added some details which satisfied clement that the traveller was really thomas. "did you hear where he was going to in manchester?" "five pound, mister!" the man held out his grimy paw. clement did not like the cunning in the bleary eyes, but he had gone so far that he could hardly draw back. he counted out four one-pound notes. "now then?" he said, showing the fifth, but keeping a firm hold on it. "the lad that took him is jerry stott--of the apple-tree inn in fennel street. you go to him, mister. one of these will do it." clement gave him the other note. "he didn't tell you where he was going?" "he very particlar did not. but i'm thinking you'll net him at jerry's. do you take one of nadin's boys. he's a desperate-looking chap. he gave you that punch in the face, i guess?" with interest. "he did." "ah, well, you marked him. but you get one of nadin's boys. you'll not take him easy." chapter xvii clement did not let the grass grow under his feet. an hour later he was rattling over the stony pavements and through the crowded streets of the busy town, which had grown in a short hundred years from something little more than a village, to be the second centre of wealth and population, of poverty and crime, within the seas; a centre on which the eye of government rested with unwinking vigilance, for without a voice in parliament and with half of its citizens deprived of civic rights--since half were nonconformists--it was the focus of all the discontent in the country. in manchester, if anywhere, flourished the agitation against the test acts and the movement for reform. thence had started the famous blanketeers, there six years before had taken place the peterloo massacre. thence as by the million filaments of some great web was roused or calmed the vast industrial world of lancashire. the thunder of the power-loom that had created it, the roar of the laden drays that shook it, deafened the wondering stranger, but more formidable and momentous than either, had he known it, was the half-heard murmur of an underworld striving to be free. clement had never visited the cotton-town before, and on a more commonplace errand he might have allowed himself to be daunted by a turmoil and bustle as new to him as it was uncongenial. but with his mind set on one thing, he heeded his surroundings only as they threatened to balk his aim, and he had himself driven directly to the police office, over which the notorious nadin had so lately presided that for most people it still went by his name. fearless, resolute, and not too scrupulous, the man had through twenty troublous years combated the forces alike of disorder and of liberty; and before london had yet acquired an efficient police, he had gathered round him a body of men equal at least to the bow street runners. he had passed, but his methods survived; and half an hour after clement had entered the office he issued from it accompanied by a hard-bitten, sharp-eyed man in a tall beaver hat and a long wide-skirted coat. "the apple tree? oh, the apple tree's on the square," he informed clement. "and jerry stott? no harm in him, sir, either. he'll speak when he sees me." "you don't think we need another man?" "there's one following. no use to go in a bunch. he'll watch the front, and we'll go in by the yard. got a barker, sir?" "yes." "'fraid so. well, don't use it--show it if you like. law's law, and a live dog's worth more than its hide. ay, that's chetham's. queer old place, and--sharp's the word, here we are," as they turned off long mill gate, and entered the yard of an old-fashioned house, over the door of which hung the sign of an apple-tree. the place was quiet, in comparison with the street they had left, and "here's jerry," the officer added, as they espied a young fellow, who in a corner of the enclosure was striving to raise to his shoulder a truss of hay. he ceased his efforts when he saw them. "we want a word with you," said the officer. the man eyed them with dismay. "i never thout 'at he'd come to thee," he said. "the chap you brought in this morning?" "ay, sure." "happen yes and happen no," the policeman replied. "what's it all about?" "if he says i took his eauts he be a leear. i wurna wi' the sack, not to say alone 'at is, not five minutes, and yo' may look at t' sack and see all's theer as ever was! never a handfu' missing, tho' the chap he cursed and swore an' took on, the mout ha' been eauts o' gowd! he's a leear iv he says i tetched 'em, but i never thout he'd t' brass to come to thee." "why not, lad?" "'cause i' the end he let up and steared at t' sack leek a steck pig, and then he fell a shriking 'i worse shap than ever, and away he goes as iv a dog had bit him and down t' long gate hell for leather!" "which way? i see. did he take the oats?" "not he, nor t' bag. an after mekking setch a din about his eauts! i war no wi' 'em five minutes." the officer declined to commit himself. "let us see them," he said. jerry led them to a tumble-down, black and white building at the rear of the yard, with lattice work in its crazy windows and an old date over the door. they followed him up a ladder and into a loft, where were a frowsy bed or two, some old pack-saddles, and two or three stools made out of casks sawn in two. on the floor in one place lay a heap of oats trampled this way and that, and beside the heap an empty sack. the officer picked up the sack, shook it and examined it. "what do you make of it?" clement asked. "i don't know what to make of it. here, you, jerry, fetch me a corn measure!" and when he had thus rid them of the lad, "he may be carrying out orders and telling a flash tale to put us off. or he may be telling the truth, and in that case it looks as if someone had been a mite brighter than your man and cleared his stuff." "but where is it?" "ah! just so, i'd like to know," shaking his head. "yes, jerry, measure it back into the sack. how much is there?" the lad began to gather up the oats and replace them in the bag, while the two men looked on, perplexed and undecided. suddenly clement stooped--a scrap of cord, doubtless the cord which had tied the neck of the sack, had caught his eye. he picked it up, looked at it, then, with a word, he handed it to the officer. "i think that settles it," he said, his eyes shining. there was a tiny twist of straw-plait, like a rosette, knotted about the cord and still adhering to it. nadin's man looked at the plait and for a moment did not understand. then his face cleared. "by joseph! you're right, sir!" he exclaimed, and slapped his thigh. "and sharp, sharp too. you'd ought to be one of us! that settles it, it's the backtrack we've to look to, but i'll take no chances." and turning to the lad and addressing him in his harshest voice, "see here, in an hour we shall know if you've told us the truth. if you've not it will be the new bailey and a pair of iron garters for you. so if you've aught to add, out with it! it's your last chance, jerry stott." but the lad protested that he'd told all the truth. it had happened just as he had told them. the officer turned to clement. "i think he's on the square," he said, "but i'll have him watched." and he led the way down the ladder. when they reached the street, he stepped out smartly, making nothing of the crowd and bustle, the lumbering drays and over-hanging cranes through which they had to thread their way. "we'll catch the altringham stage at the cross if we're sharp," he said. "it'll be quicker than getting out a po'chay and a lot cheaper." they caught the stage, and alighted in altringham before five. a walk of as many minutes brought them to the barley sheaf, a wagoner's house at the corner of a lane in the poorest part of the town. the ostler, from whom clement had so lately parted, stood leaning against a post at the entrance to the yard, his hands still in his pockets and the straw still in his mouth. when he saw them a grin broke up his ugly face. "he've been here," he cried, "but," triumphantly, "i've routed him, mister! i sent him all ways!" the officer did not respond. "why, the devil, didn't you seize him?" he growled. "what, me? and him double my size? and a desperate villain? 'deed, i'd to save my skin, mister, and only yon lad and a couple of childer in the yard when he come. i see him first, sneaking a look round this yere post, and thinks i, it'll be a knife in the back or a punch in the face for me if he's heard i've rapped. so, first's better than last, thinks i, and seeing as he hung back i up to him bold as brass, but with one eye on the lad too, and sez i, 'can you read?' sez i. he looked at me's if he'd have my blood, but there was the lad and the childer a-staring, so 'ay, i can,' says he, 'and can read you, you thieving villain!' 'well, if you can read, read that,' sez i, and pointed to a bill as was posted on the gate. 'i can't,' sez he, 'and, happen you can tell me what 'tis all about.' he looks, and he sees 'tis the bill about he, and painting him to the life. anyways, he turns the color o' whey and he gives me a look as if he'd cut out my inwards, but he sees it's no good, for there was the lad and the childer, and he slinks off. ay, i routed him, i did, little as i be, mister!" "right!" said nadin's man. "and now do you show us the sack as you changed for his." the man's face fell amazingly, but clement noted that he looked surprised rather than frightened. "eh?" he exclaimed. "lord, now, who told you, mister? he didn't know." "never mind who told us. we know, and that's enough. there was a twist o' plait round the cord?" "there were." "you said nothing about it before. but out with it now, and do you take care, my lad." "well, who axed me? exchange is no robbery and i ain't afeard. 'twas just this way. he sold me three sacks, 's i told you, squire, and i was hauling 'em off to stable when 'not that one!' says he sharp. so then i look at t' one he was so set on keeping, and when his back was turned i hefted it sly-like, and it seemed to me a good bit heavier than t' others. then i spied the bit o' plait about the cord, and thinks i, being no fule, 'tis a mark. and when he went in for a squib o' cordial wi' jerry stott i shifted t' mark to another sack and loaded up, and off he goes and he none the wiser, and no harm done. exchange is no robbery and you can't do nowt to me for that." "i don't know," said the officer darkly. "let us see the sack." "you're not agoing----" "do you hear? jump, unless you want to get into trouble. you show us that sack, and be quick about it, my lad." grumbling, but not daring to refuse, the old man led the way into the stables, and there in an empty stall the three sacks stood upright. "which is the one you filched?" asked the man from manchester. reluctantly the ostler pointed it out. "then you get me a horse-cloth." "you're not going--well, a wilful man must have his way. will that serve you? but if my oats is spilled and spiled----" nadin's man paid no heed to his remonstrance, but in a trice cut the cord that tied the sack's mouth, tipped it on its side, and let the grain pour out in a golden stream. a golden stream it proved to be, for in a twinkling something sparkled amid the corn, and here and there a sovereign glittered. to clement and the officer who had read the riddle, this was no great surprise, though they viewed it with smiling satisfaction. but the old man, stuck dumb by the sight of the treasure that had been for a time in his power, turned a dirty white. he stood gazing at the vision of wealth, greed in his eyes, his hands working convulsively; and presently in a choked voice, "o, lord! o, lord!" he muttered. "you'll not take t' all! you'll not take t' all! . it were mine. i bought it." "you came nigh to buying a pair o' bracelets," the officer replied grimly. "you with stolen property in your possession to talk o'--thank your stars your neck's not to answer for it! no, we don't need your help. you sheer off. we can count it without you. you've done pretty well as it is. sheer off, unless you want the handcuffs on you!" the old ostler went, measuring the five pounds which he had made by the treasure he had lost, and finding no comfort in the possession of that which only an hour before had been a fortune to gloat over. but there was no help for it. he had to swallow his rage. the officer called after him to bring a sieve. he brought it sullenly, and his part was done. all that was left to him was a vision of gold that grew more dazzling with each telling of the tale. and very, very often he told it. when he was gone they gathered up the oats and riddled them through the sieve and recovered four hundred and thirty pounds. thomas had taken a mere handful for his spending. as clement counted it, sovereign by sovereign, into a knotted handkerchief which the other held, he, too, gloated over it, for it spelled success. but the money reckoned and the handkerchief knotted up, "and now for the man," he said. but nadin's man shook his head. "we'd be weeks and not get him," he said. "you'd best leave him to us, sir. we'll bill him in manchester and make the flash kens too hot for him. but there's no knowing which way he'll turn. may be to liverpool, or as like as not to aldersbury. chaps like him are pigeons for homing. back they go, though they know they'll be taken." in the end clement decided to stand content, and having given his assistant a liberal fee, he took his seat next morning on the victory coach, travelling by chester to aldersbury. he was not vain, but it was with some exultation that he began his journey, that he faced again the free-blowing winds and the open pastures, heard the cheery notes of the bugle, and viewed the old-fashioned marketplaces and roistering inns, some of which he had passed three days before. he had not failed. he had done something; and he thought of jos, and he thought of the squire, and he thanked providence that had put it in his power to turn the tables on the old man. surely after what he had done the squire must consider him. surely after services so notable--and lord, what luck he had had--the squire would be willing to listen to him? he recalled the desperate struggle in the road, and the old man's "at him, good lad! at him!" and he thought of the sum--no small sum, and the old man was avaricious--which his promptness had recovered. his hopes ran high. to be sure, there was another side to it. the squire might not recover, and then--but he refused to dwell on that contingency. no, the squire must recover, must receive and reward him, must own that after all he was something better than a clerk or a shopboy. and all things would be well, all roads be made smooth, all difficulties be cleared away. and in time he and jos--his eyes shone. of course in the elation of the hour and flushed by success, he ignored facts which he would have been wiser to remember, and over-leapt obstacles which were not small. a little thought would have taught him that the squire was not the man to change his views in an hour, or to swallow the prejudices of a life-time because a young chap had done him a service. to be beholden to a man, and to give him your daughter, are things far apart. and this clement in cooler moments would have seen. but he was young and in love, and he had done something; and the sun shone and the air was sweet, and if, as the coach swung gaily up the foregate between school and castle, his heart beat high and he already foresaw a triumphant issue, who shall blame him? at any rate his case was altered, and in comparison with his position a few days before, he stood well. he alighted at the door of the lion, and by a coincidence which was to have its consequences the first person he met in the high street was arthur bourdillon. "hallo!" arthur cried, his face lighting up. "back already, man? have you done anything?" "i've got the money," clement replied. and he waved the bag. "and thomas?" "no, he gave us the slip for the time. but i've got the money, except a dozen pounds or so." "the deuce you have!" the other answered--and it was not quite clear whether he were pleased or not. "how did you do it? tell us all about it." he drew clement aside on to some steps at the foot of st. juliana's church. clement ran briefly over his adventures. when he had done, "deuced sharp of you," arthur said. "devilish sharp, i must say! now, if you'll hand over i'll take it out to garth. i am on my way there, i'm just starting, and i haven't a moment to spare. if you'll hand over----" but clement made no move to hand over. instead, "how is he?" he asked. "oh, pretty bad." "will he get over it?" "farmer thinks so. but there's no hope for the eye, and he doubts about the other eye. he's not to use it for six weeks at least." "he's in bed?" "lord, yes, and will be in bed for heaven knows how long--if he ever gets up from it. why, man, he's had the deuce of a shake. the wonder is that he's alive, and it's long odds that he'll never be the same man again." "that's bad," clement said. "and how is----" he was going to inquire after miss griffin, but arthur broke in on him. "ask the rest another time," he said. "i can't stay now. i'm taking out things that are wanted in a hurry and the curricle is waiting. this is the first day i've been in town, for there's no one there to do anything except my cousin and the old peahen. so hand over, old chap, and i'll take the stuff out. it will do the old man more good than all the doctor's medicine." clement hesitated. if he had not been carrying the money, he might have made an excuse. he might at any rate have delayed the act. but the money was the squire's, he could give no reason for taking it to the bank, and he had not that hardness of fibre, that indifference to the feelings of others which was needed if he was to say boldly that it was he who had recovered the money and he who was going to hand it over. still he did hesitate, something telling him that the demand was unreasonable. then arthur's coolness, his assumption that what he proposed was the natural course did its work. clement handed over the bag. "right," arthur said, weighing it in his hand. "you counted it, i suppose? four hundred and thirty, or thereabouts?" "that's it." "good! see you soon. good-bye!" and well pleased with himself, chuckling a little--for clement's discomfiture had not escaped him--arthur hurried away. and clement went his way. but reality had touched his golden dreams, and they had melted. the sun still shone, but it did not shine for him, and he no longer walked with his head in the air. it was not only that, by resigning the money and entrusting its return to another, he had lost the advantage on which he had counted, but he had been worsted. he had failed, in the contest of wits and wills, and, abuse his ill-luck as he might, he owed the failure to himself--to his own weakness. he saw it. it was possible that arthur had acted in innocence. but clement doubted this, and he doubted it the more the longer he thought of it. he fancied that he recognized a thing which had happened before: that this was not the first time that arthur had taken the upper hand with him and jockeyed him into the worse position. as he crossed the threshold of the bank, his self-confidence fell from him, he felt himself slip into the old atmosphere, he became once more the inefficient. nor was it any comfort to him that his father saw the matter in the same light, and after listening with an appreciative face and some surprise to his earlier adventures, made no effort to hide the chagrin that he felt at the _dénouement_. "but why--why in the world did you do that?" he exclaimed. "give up the money after you had done the work? and to bourdillon, who had no more right to it than you had? good heavens, lad, it was the act of a fool! i'd not be surprised if old griffin never heard your name in connection with it!" "oh, i don't think arthur----" "well, i do." the banker was vexed. "it's clear that arthur is a deal sharper than you. as for the squire, i hear that he is only half-conscious, and what he hears, if he ever hears the tale at all, will make little impression on him. now if he had seen you, and you'd handed over the money--if he had seen you, then the bank and you would have got the credit." "still, clem did recover it," betty said. "ay, but who will ever know that he did?" "still he did, and i believe that he'll get a message from garth to-morrow. now, see if you don't, clem. or the next day." but no message came on the morrow, or on the next day. no message came at all; and though it was possible to attribute this to the squire's condition--for he was reported to be very ill--and clement did his best to attribute it to that and to keep up his spirits, the tide of time wears away even hope, and presently he began to see that he had built on the sand. at any rate no message and no acknowledgment came, unless a perfunctory word of thanks dropped by arthur counted as such. and clement had soon to recognize that what he had done, he might as well, for any good it was likely to do him, have left undone. his father, who had no thought of anything but his son's credit, was merely chagrined. but with clement, who had built high hopes upon the event, hopes of which his father and betty little dreamed, the wound went far deeper. chapter xviii the squire raised himself painfully on his elbow and hid the bag between pillow and tester, where he could assure himself of its presence by a touch. then he sank back with a grunt of relief and his hand went to the keys, which also had their home under his pillow. he clung to them--they were his badge of authority, of power. while he had them, sightless as he was, he was still master; about his room, the oak-panelled chamber, spacious but shabby, with the uneven floor and the low wide casement, the life of the house still circled. "good lad!" he muttered. "good lad! jos?" "yes, father." she rose and came towards him. "where's arthur?" "he went out with your message." "to be sure! to be sure! i'm forgetting." but, once started on the road to recovery, he did not forget much. from his high, four-post bed with the drab hangings in which his father and grandfather had died, he gripped house and lands in a firm grip. morning by morning he would have his report of the lambs, of the wheat, of the hay-corps, of the ploughing on the eight acres where the swedish turnips were to go. he would know what corn went to the mill, what mutton to the house. the bounds-fence that farmer bache had neglected was not forgotten, nor the young colt that he had decided to take against farmer price's arrears, nor the lease for lives that involved a knotty point of which he proved himself to be in complete possession. indeed, he showed himself indomitable, the old heart in him still strong; so that neither the shock that he had borne, nor the pain that he had suffered, nor the possibility of permanent blindness which they could not wholly hide from him, sufficed to subdue or unman him. only in one or two things was a change apparent. he reverted more often to an older and ruder form of speech familiar to him when george the third was young, but which of late he had only used when talking with his tenants. he said "dunno you do this!" and "i wunt ha' that!" used "ship" for sheep, and "goold" for gold, called thomas a "gallus bad rascal," and the like. and in another and more important point he was changed. for eyes he must now depend on someone, and though he showed that he liked to have jos about him and bore with her when the pea-hen's fussiness drove him to bad words, it was soon clear that the person he chose was arthur. arthur was restored, and more than restored to favor. it was "where's arthur?" a score of times a day. arthur must come, must go, must be ever at his elbow. he must check such and such an account, see the overseers about such an one, speak to the constable about another, go into aldersbury about the lease. even when arthur was absent the squire's thoughts ran on him, and often he would mutter "good lad! good lad!" when he thought himself alone. it was a real _bouleversement_, but josina, supposing that arthur had saved her father's life at the risk of his own, and had then added to his merit by recovering the lost money, found it natural enough. for the full details of the robbery had never been told to her. "better leave it alone, jos," arthur had said when she had again shown a desire to know more. "it was a horrid business and you won't want to dream of it. another minute and that d--d villain would have--but there, i'd advise you to leave it alone." jos, suspecting nothing, had not demurred, but on the contrary had thought arthur as modest as he was brave. and the doctor, with an eye to his patient's well-being, had taken the same view. "put no questions to him," he said, "and don't talk to him about it. time enough to go into it by and by, when the shock's worn off. the odds are that he will remember nothing that happened just before the scoundrel struck his--that's the common thing--and so much the better, my dear. let sleeping dogs lie, or, as we doctors say, don't think about your stomach till your victuals trouble you." so josina knew no particulars except that arthur had saved his uncle's life, and clement--she shuddered as she thought of it--had come up in time to be of service. and no one at garth knew more. but, knowing so much, it was not surprising to her that arthur should be restored to favor, and, lately forbidden the house, should now rule it as a master. and clearly arthur, also, found the position natural, so easily did he fall into it. he was up and down the old shallow stairs--which the squire, true to the fashions of his youth, had never carpeted--a dozen times a day. he was as often in and out of his uncle's bedroom, or sitting on the deep window-seat on which generations of mothers had sunned their babes; and all this with a laugh and a cheery word that wondrously brightened the sick room. alert, quick, serviceable, and willing to take any responsibility, he made himself a favorite with all. even calamy, who shook his head over every improvement in the squire, and murmured much of the "old lamp flickering before it went out," grew hopeful in his presence. miss peacock adored him. he put josina's nose out of joint. of the young fellow, whose moodiness had of late perplexed his companions in the bank, not a trace remained. had they seen him as he was now they might have been tempted to think that a weight had been lifted from him. but he seemed, for the time, to have forgotten the bank. he rarely mentioned the ovingtons. there was one at garth, however, who had not forgotten either the bank or the ovingtons; and proved it presently to arthur's surprise. "jos," said the squire one afternoon. and when she had replied that she was there, "where is arthur?" "i think he has just come in, sir." "prop me up. and send him to me. do you leave us." she went, wondering a little for she had not been dismissed before. she sent arthur, who, after his usual fashion, scaled the stairs at three bounds. he found the old man sitting up in the shadow of the curtains, a grotesque figure with his bandaged head. the air of the room was not so much musty as ancient, savoring of worm-eaten wood and long decayed lavender, and linen laid by in presses. on each side of the drab tester hung a dim flat portrait, faded and melancholy, in a carved wooden frame, unglazed; below each hung a sampler. "you sent for me, sir?" "ay. when's that money due?" the question was so unexpected that for a moment arthur did not take it in. then the blood rushed to his face. "my mother's money, sir?" "what else? what other money is there, that's due? i forget things but i dunno forget that." "you don't forget much, sir," arthur replied cheerfully. "but there's no hurry about that." "when?" "well, in two months from the twenty-first, sir. but there is not the least hurry." "this is the seventeenth?" "yes, sir." "well, i'll pay and ha' done with it. but i'll ha' to sell stock. east india stock it is. what are they at, lad?" "somewhere about two hundred and seventy odd, i think, sir." "and how do you sell 'em?" the squire knew a good deal about buying stock but little about selling it, and he winced as he put the question. but he bore the pang gallantly, for had not the boy earned his right to the money and to his own way? ay, and earned it by a service as great as one man could perform for another? for the squire had no more reason than those about him to doubt that he owed his life to his nephew. he had found him beside his bed when he had recovered his senses, and putting together this and certain words which had fallen from others, and adding his own hazy impressions of the happenings of the night, and of the young man on whose shoulder he had leant, he had never questioned the fact. "how do you go about to sell 'em?" he repeated. "i suppose you know?" "oh, yes, sir, it's my business," arthur replied. "you have to get a transfer--they are issued at the india house. you've only to sign it before two witnesses. it is quite simple, sir." "well, i can do that. do you see to it, lad." "you wouldn't wish to do it through ovington's?" "no!" the squire rapped out. "do it yourself. and lose no time. write at once." "very well, sir. i suppose you have the certificates?" "'course i have," annoyed. "isn't the stock mine?" "very good, sir. i'll see to it." "well, see to it. and, mark ye, when you're in aldersbury see welshes, and tell them i'm waiting for that lease of lives. i signed the agreement for the new lease six weeks ago and i should ha' had the lease by now. stir 'em up, and say i must have it. the longer i'm waiting the longer the bill will be! i know 'em, damn 'em, though welshes are not the worst." when he had settled this he wanted a letter written, and arthur sat down at the oaken bureau that stood between the windows, its faded green lining stained with the ink of a century and its pigeon-holes crammed with receipts and sample-bags. while he wrote his thoughts were busy with the matter that they had just discussed, but it was not until he found himself standing at a window outside the room, staring with unseeing eyes over the green vale, that he brought his thoughts to a head, and knew that even at the eleventh hour he hesitated. yes, he hesitated. the thing that he had so much desired, that had presented itself to him in such golden hues, that had dazzled his ambition and absorbed his mind, was within his grasp now, ready to be garnered--and yet he hesitated. ovington was a just man and beyond doubt would release him and cancel the partnership agreement, if he desired to have it cancelled. and he was very near to desiring it at this moment. for he saw now that there were other things to be garnered--garth, its broad acres, its fine rent-roll, the old man's savings, josina. secure of the squire's favor he had but to stretch out his hand, and all these things might be his; might certainly be his if he gave up the bank and his prospects there. that step, if he took it, would remove his uncle's last objection; it would bind him to him by a triple bond. and it would do more. it would ease his own mind, by erasing from the past--for he would no longer need the five thousand--a thing which troubled his conscience and harassed him when he lay awake at night. it would erase that blot, it would make all clean behind him, and it would at the same time remove the impalpable barrier that had risen between him and his mother. it was still in his power to do all this. a word would do it. he had only to go back to the squire and tell him that he had changed his mind, that he no longer wanted the money, and was not going into the bank. he hesitated, standing at the window, looking on the green vale and the hillside beyond it. yes, he might do it. but what if he repented later? and what security had he for those other things? his uncle might live for years, long years, might live to quarrel with him and discard him. did not the proverb say that it was ill-work waiting for dead men's shoes? and josina? doubtless he might win josina, for the wooing; he had no doubt about that. but he was not sure that he wanted josina. he decided at last that the question might wait. until he had written the letter to the brokers, until then, at any rate, either course was open to him. he went downstairs. in the wainscoted hall, small and square, with a high narrow window on each side of the door, his mother and josina were sitting on one of the window seats. the door stood open, the spring air and the sunshine poured in. "i'm telling her that she's not looking well," his mother said, as he joined them. "she spends too much time in that room," he answered. then, after a moment's thought, rattling the money in his fob, "is farmer coming to-day?" "no." the girl spoke listlessly. "i don't think he is." "he's made a wonderful recovery," his mother observed. "yes--if it's a real recovery." "at any rate, the doctor hopes that he may come downstairs in ten days. and then, i'm afraid, we shall have josina to nurse." the girl protested that she was well, quite well. but her heavy eyes and the shadows under them belied her words. "well, i'm off to town," he said, "i have to see welshes for him." he left them, and ten minutes later he was on the road to aldersbury, still undecided, still uncertain what course he would pursue, and at one moment accusing himself of a weakness that deserved the contempt of every strong man, at another praising moderation and a country life. had he had eyes and ears for the things about him as he rode, he might have found much to support the latter view. the cawing of rooks, the murmur of wood-doves, the scents of late spring filled the balmy air. the sky was pure blue, and beneath it the pastures shone yellow with buttercups. tree and field, bank and hedge-row rioted in freshest green, save where the oak wood, slow to change and careless of fashion, clung to its orange garb, or the hawthorn stood out, a globe of snow. the cuckoo and the early corncrake told of coming summer, and behind him the welsh hills simmered in the first heat of the year. clement, had he passed that way, would have noted it all, and in the delight of the eye and the spring-tide of all growing things would have found ground to rejoice, whatever his trouble. but arthur, wrapt in his own thoughts, barely noticed these things. he rode with his eyes fixed on his horse's ears, and only roused himself when he saw the very man whom he wished to see coming to meet him. it was dr. farmer, in the mahogany-topped boots, the frilled shirt, and the old black coat--shaped as are our dress coats but buttoned tightly round the waist--which the dust of a dozen summers and every road in the district had whitened. "hallo, doctor!" arthur cried as they met. "are you going up to the house to-day?" "no, mr. bourdillon. but i can if necessary. how is he?" "that is what i want you to tell me. one can't talk freely at the house and i have a reason for wishing to know. how is he, doctor?" "do you mean----" "has this really shaken him? will he be the same man again?" "i see." farmer rubbed his chin with the horn-handle of his riding-crop. "well--i see no reason at present why he should not be. he's one in a hundred, you know. sound heart, good digestion, a little gouty--but tough. tough! you never know, of course. there may be some harm we haven't detected, but i should say that he had a good few years of life in him yet." "ah!" "of course, an unusual recovery--from such injuries. and i say nothing about the sight. i'm not hopeful of that." "well," said arthur. "i'll tell you why i asked. there's a question arisen about a lease for lives--his is one. but you won't talk, of course." farmer nodded. he found it quite natural. leases for lives were still common, and doctors were often consulted as to the value of lives which survived or which it was proposed to insert. with another word or two they parted and arthur rode on. but he no longer doubted. to wait for eight or ten years, dependent on the whims of an arbitrary and crotchety old man? no! only in a moment of imbecility could he have dreamed of resigning for this, the golden opportunities that the new world, opening before him, offered to all who had the courage to seize them. he had been mad to think of it, and now he was sane. garth was worth a mass. he might have served a year or two for it. but seven, or it might be ten? no. besides, why should he not take the squire at his word and make the best of both worlds, and availing himself of the favor he had gained, employ the one to exploit the other? he had his foot in at garth and he was no fool, he could make himself useful. already, he was well aware, he had made himself liked. it was noon when he rode into aldersbury, the town basking in the first warmth of the year, the dogs lying stretched in the sunshine. and he was in luck, for, having met farmer, he now met frederick welsh coming down maerdol. the lawyer, honestly concerned for his old friend, was urgent in inquiry, and when he had heard the news, "thank god!" he said. "i'm as pleased to hear that as if i'd made a ten-pound note! aldshire without the squire--things would be changing, indeed!" arthur told him what the squire had said about the lease. but that was another matter. the squire was too impatient. "he's got his agreement. we'll draw the lease as soon as we can," the lawyer said. "the office is full, and more haste less speed. we'll let him know when it's ready." like all old firms he was dilatory. there was no hurry. all in good time. they parted, and arthur rode up the street, alert and smiling, and many eyes followed him--followed him with envy. he worked at the bank, he had his rooms on the town walls, he chatted freely with this townsman and that. he was not proud. but they never forgot who he was. they did not talk to him as they talked even to ovington. ovington had risen and was rich, but he came as they came, of common clay. but this young man, riding up the street in the sunshine, smiling and nodding this way and that, his hand on his thigh, belonged to another order. he was a griffin--a griffin of garth. he might lose his all, his money might fly from him, but he would still be a griffin, one of the caste that ruled as well as reigned, that held in its grasp power and patronage. they looked after him with envy. chapter xix the week in early june which witnessed arthur's return to his seat at the bank--that and the following week which saw his mother's five thousand pounds paid over for his share in the concern--saw the tide of prosperity which during two years had been constantly swelling, reach its extreme point. the commerce and wealth of the country, as they rose higher and higher in this flood-time of fortune, astonished even the casual observer. their increase seemed to be without limit; they answered to every call. they not only filled the old channels, but over-ran them, irrigating, in appearance at least, a thousand fields hitherto untilled. abroad, the flag of commerce was said to fly where it had never flown before; its clippers brought merchandise not only from the indies, east and west, and tea from china, and wool from sydney, and rich stuffs from the levant, but argosies laden with freight still more precious were--or were reported to be--on their way from that new southern continent on the opening of which to british trade so many hopes depended. the gold and silver of peru, the diamonds of brazil, the untapped wealth of the plate were believed to be afloat and ready to be exchanged for the produce of our looms and spindles, our ovens and forges. nor was that produce likely to fail, for at home the glow of foundries, working night-shifts, lit up the northern sky, and in many a lancashire or yorkshire dale, old factories, brought again into service, shook, almost to falling, under the thunder of the power-loom. mills and mines, potteries and iron-works changed hands from day to day, at ever-rising prices. men who had never invested before, save in the field at their gate, or the house under their eyes, rushed eagerly to take shares in these ventures, and in thousands of offices and parlors conned their securities, summed up the swelling total of their gains, and rushed to buy and buy again, with a command of credit which seemed to have no bottom. to provide that credit, the banks widened their operations, increased, on the security of stocks ever rising in value, their over-drafts, issued batch after batch of fresh notes. the most cautious admitted that accommodation must keep step with trade; and the huge strides which this was making, the changed conditions, the wider outlook, the calling in of the new world to augment the wealth of the old--all seemed to demand an advance which promised to be as profitable as it was warranted. to the ordinary eye the sun of prosperity shone in an unclouded sky. even the experienced, though they scanned the heavens with care, saw nothing to dismay them. only here and there an old fogey whose memory went back to the crisis of ' , or to the famous black monday of twenty years earlier, uttered a note of warning; or some mechanical clerk, of the stamp of rodd, sunk in a rut of routine, muttered of accommodation bills where his employer saw only legitimate trade. but their croakings, feeble at best, were lost in the joyous babble of an exchange, enriched by commissions, and drunk with success. it was a new era. it was the age of gold. it was the fruit of conditions long maturing. men's labor, aided by machinery, was henceforth to be so productive that no man need be poor, all might be rich. experts, reviewing the progress which had been made and the changes which had been wrought during the last fifty years, said these things; and the vulgar took them up and repeated them. the bank of england acted as if they were true. the rate of discount was low. and while all men thus stretched out their hands to catch the golden manna aldersbury was not idle. the appetite for gain grows by what it feeds upon and aldersbury appetites had been whetted by early successes in their own field. the woollen mills, sharing in the general prosperity of the last two years, had done well, and more than one mill had changed hands at unheard-of prices. the valleys were said to be full of money which, or part of it, trickled into the town, improving a trade already brisk. many had made large gains by outside speculations and had boasted of them. report had multiplied their profits, others had joined in and they too had gained, and their gains had fired the greed of their neighbors. some had followed up their first successes. others prepared to extend their businesses, built new premises, put in new-fangled glass windows, and by their action gave an impetus to subordinate trades, and spread still farther the sense of well-being. on the top of all this had come the valleys railroad scheme, backed by ovington's bank, and offering to everyone a chance of speculating on his door-step: a scheme which while it appealed to local pride, had a specious look of safety, since the railway was to be built under the shareholders' own eyes, across the fields they knew, and by men whom they saw going in and out every day. there was a great run on it. some of the gentry, following the old squire's example, held aloof, but others put their hundreds into it, not much believing in it but finding it an amusing gamble. the townsfolk took it more seriously, with the result that a week after allotment the shares were changing hands at a premium of thirty shillings and there was still a busy market in them. some who, tempted by the premium, sold at a profit suspected as soon as they had sold that they had thrown away their one chance of wealth, and went into the market and bought again, and so the rise was maintained and even extended. more than once ovington put in a word of caution, reminding his customers that the first sod was not yet cut, that all the work was to do, that even the bill was not yet passed. but his warnings were disregarded. to the majority it seemed a short and easy way to fortune, and they wondered that they had been so simple in the past as to know nothing of it. it was by this way, they now saw, that ovington had risen to wealth, while they, poor fools, not yet admitted to the secret, had gaped and wondered. and what a secret it was! to rise in the morning richer by fifty pounds than they had gone to bed! to retire at night with another fifty as good as in the bank, or in the old and now despised stocking! the slow increment of trade seemed mean and despicable beside their hourly growing profits, made while men slept or dined, made, as a leading tradesman pithily said, while they wore out their breeches on their chairs! few troubled themselves about the bill, or the cutting of the first sod, or considered how long it would be before the railroad was at work! fewer still asked themselves whether this untried scheme would ever pay. it was enough for them that the shares were ever rising, that men were always to be found to buy them at the current price, and that they themselves were growing richer week by week. for the directors these were great days! they walked bride hill and the market place with their heads high and their toes turned out. they talked in loud voices in the streets. they got together in corners and whispered, their brows heavy with the weight of affairs. they were great men. the banker, it is true, did not like the pitch to which the thing was being carried, but it was his business to wear a cheerful face, and he had no misgivings to speak of, though he knew that success was a long way off. and even on him the prosperity of the venture had some effect. sir charles and acherley, too, were not of those who openly exulted; it is possible that the latter sold a few shares, or even a good many shares. but purslow and grounds and wolley? who shall describe the importance which sat upon their brows, the dignity of their strut, the gravity of their nod, the mock humility of their reticence? never did they go in or go out without the consciousness that the eyes of passers-by were upon them! theirs to make men's fortunes by a hint--and their bearing betrayed that they knew it. purslow's apron was discarded, no longer did he come out to customers in the street; if he still rubbed one hand over the other it was in self-content. grounds was dazzled, and wore his sunday clothes on week-days. wolley, always a braggart, swaggered and talked, closed his eyes to his commitments and remembered only his gains. he talked of buying another mill, he even entered into a negotiation with that in view. he was convinced that safety lay in daring, and that this was the golden moment, if he would free himself from the net of debt that for years had been weaving itself about him. he assumed the airs of a rich man, but he was not the worst. the draper, if more honest, had less brains, and success threw him off his balance. "a little country 'ouse," he said, speaking among his familiars. "i'm thinking of buying a little country 'ouse. two miles from town. a nice distance." he recalled the fact that the founder of sir charles's family had been mayor of aldersbury in the days of queen bess, and had bought the estate with money made in the town. "who knows," with humility--"my lad's a good lad--what may come of it? after all there is nothing like land." grounds shook his head. "i don't know. it doesn't double----" "double itself in a month, grounds? no. but all in good time. all in good time. 'istory repeats itself. my lad may be a parliament-man, yet. i saw ovington this morning." two months before it would have been "mr. ovington." "he's sold those anglo-mexicans for me and it beats all! a gold-mine! bought at forty, sold at seventy-two! he wanted me to pay off the bank, but not i, grounds. when you can borrow at seven and double the money in a month! no, no! truth is, he's jealous. he gets only seven per cent. and sees me coining! of course he wants his money. no, no, i said." grounds looked doubtful. he was too cautious to operate on borrowed money. "i don't know. after all, enough is as good as a feast, purslow." purslow prodded him playfully. "ay, but what is enough?" he chuckled. "no. we've been let in and i mean to stay in. there's plenty of fools grubbing along in the old way, but you and me, we are inside now, grounds, and i mean to stay in. the days of five per cent are gone for you and me. gone! 'twarn't by five per cent. that ovington got where he is." "my wife wants a silk dress." "let 'er 'ave it! and come to me for it! you can afford it!" he strutted off. "grounds all over!" he muttered. "close; d--d close! hasn't the pluck of a mouse--and a year ago he could buy me twice over!" in fancy he saw his jack a college-man and counsellor, and by and by he passed various parks and halls before his mental vision and saw jack seated in them, saw him sir john purslow, saw him member for aldersbury. he held his head high as he marched across the street to his shop, jingling the silver in his fob. queen bess, indeed, what were queen bess's days to these? but a man cannot talk big without paying for the luxury. the draper's foreman asked for higher wages; his second hand also. purslow gave the rise, but, reminded that their pay was in arrear, "no, jenkins, no," he said. "you must wait. hang it, man, do you think i've nothing better to do with my money in these days than pay you fellows to the day? 'ere! 'ere's a pound on account. let it run! let it run! all in good time, man. fancy my credit's good enough?" and instead of meeting the last acceptance that he'd given to his cloth-merchant, he took it up with another bill at two months--a thing he had never done before. "credit! credit's the thing in these days," he said, winking. "cash? excuse me! out of date, man, with them that knows. credit's the 'orse!" arthur bourdillon wore his honors more modestly, and courted the mean with success. but even he felt the intoxication of this noontide prosperity. at garth he had doubted, and suffered scruples to weigh with him. but no sooner had he returned to the bank than the atmosphere of money enveloped him, and discerning that it was now in his power to make the best of two worlds, hitherto inconsistent, he plunged with gusto into the business. as secretary of the company he was a person to be courted; as a partner, now recognized, in the bank, he was more. he felt himself capable of all, for had not all succeeded with him? and awake to the fact that the times were abnormal--though he did not deduce from this the lesson he should have drawn--he thanked his stars that he was there to profit by them, and to make the most of them. he was beyond doubt an asset to the bank. his birth, his manners, his good looks, the infection of his laugh made him a favorite with gentle and simple. and then he worked. he had energy, he was tireless, no task was too hard or too long for him. but he labored under one disadvantage, though he did not know it. he had had experience of the rise, not of the fall. as far back as he had been connected with ovington's, trade had continued to expand, things had gone well; and by nature he was sanguine and leant towards the bold policy. he threw his weight on that side, and, able and self-confident, he made himself felt. even ovington yielded to the thrust of his opinion, was swayed by him, and at times, perhaps, put a little out of his course. not that arthur was without his troubles. naturally and inevitably a cloud had fallen on the relation, friendly hitherto, between him and clement. clement had grown cool to him, and the change was unwelcome, for it was in arthur's nature to love popularity and to thrive and to bask in the sunshine of it. but it could not be helped. without breaking eggs one could not make omelettes. clement blamed him, he knew, feeling, and with reason, that what he had done deserved acknowledgment, and that it lay with arthur to see that justice was done. and arthur, for his part, would have gladly acquitted himself of the debt had it consisted with his own interests. but it did not. had he suspected the tie between clement and josina he might have acted otherwise. he might have foreseen the possibility of clement's gaining the old man's ear, might have scented danger, and played a more cautious game. but he knew nothing of this. garth and clement stood apart in his mind. clement and josina were as far as he knew barely acquainted. he was aware, therefore, of no special reason why clement should desire to stand well at garth, while he felt sure that his friend was the last person to push a claim, or to thrust himself uninvited on the squire's gratitude. accordingly, and the more as the banker had not himself taken up the quarrel, he put it aside as of no great importance. he shrugged his shoulders and told himself that clement would come round. the cloud would pass, and its cause be forgotten. in the meantime he ignored it. he met clement's hostility with bland unconsciousness, smiled and was pleasant. he was too busy a man to be troubled by trifles. he was not going to be turned from his course by the passing frown of a silly fellow, who could not hold an advantage when he had won it. betty was another matter. betty was behaving ill and showing temper, in league apparently with her brother and sympathizing with him. she was changed from the betty of old days. he had lost his hold upon her, and though this fell in well enough with the change in his views--or the possible change, for he had not quite made up his mind--it pricked his conceit as much as it surprised him. moreover, the girl had a sharp tongue and was not above using it, so that more than once he smarted under its lash. "fine feathers make fine birds!" she said, as arthur came bounding into the house one day and all but collided with her. "only they should be your own, mr. daw!" "oh, i give your father all the credit," he replied, "only i do some of the work. but you used not to be so critical, betty." "no? well, i'll tell you why if you like." "oh, i don't want to know." "no, i don't think you do!" the girl retorted. "but i'll tell you. i thought your feathers were your own then. now--i should be uneasy if i were you." "why?" "you might fall among crows and be plucked. i can tell you, you'd be a sorry sight in your own feathers!" he turned a dusky red. the shaft had gone home, but he tried to hide the wound. "a dull bird, eh?" he said, affecting to misunderstand her. "well, i thought you liked dull birds. i couldn't be duller than rodd, and you don't find fault with him." it was a return shot, aimed only to cover his retreat. but the shot told in a way that surprised him. betty reddened to her hair, and her eyes snapped. "at any rate, mr. rodd is what he seems!" she cried. "oh! oh!" "he's not hollow!" "no! of course not. a most witty, bright, amusing gentleman, the pink of fashion, and--what is it?--the mould of form! hollow? oh, no, betty, very solid, i should say--and stolid!" with a grin. "not a roaring blade, perhaps--i could hardly call him that, but a sound, substantial, wooden--gentleman! i am sure that your father values him highly as a clerk, and would value him still more highly as----" "what?" "i need not put it into words--but it lies with you to qualify him for the post. rodd? well, well, times are changed, betty! but we live and learn." "you have a good deal to learn," she cried, bristling with anger, "about women!" he got away then, retiring in good order and pleased that he had not had the worst of it; hoping, too, that he had closed the little spitfire's mouth. but there he found himself mistaken. the young lady was of a high courage, and perhaps had been a little spoiled. where she once felt contempt she made no bones about showing it, and whenever they met, her frankness, sharpened by a woman's intuition, kept him on tenter-hooks. "you seem to think very ill of me," he said once. "and yet you trouble yourself a good deal about me." "you make a mistake!" she replied. "i am not troubling myself about you. i'm thinking of my father." "ah! now you are out of my reach. that's beyond me." "i wish he were!" "he knows his own business." "i hope he does!" she riposted. and though it was the memory of rodd's warning that supplied the dart, the animosity that sped it had another source. the truth was that her brother had at last taken her into his confidence. it was not without great unhappiness that he had seen all the hopes which he had built upon the squire's gratitude come to nothing. he had hoped, and for a time had been even confident; but nothing had happened, no message, no summons had reached him. the events of that night might have been a dream, as far as he was concerned. yet he could not see his way to blow his own trumpet, or proclaim what he had done. he stood no better than before, and indeed his position was worse. for as long as the squire lay bedridden and ill he could not go to him. even when the report came that he was mending, clement hesitated. to go to him, basing his claim on what had happened, to go to him and tell the story, as he must, with his own lips--this presented difficulties from which a man with delicate feelings might well shrink! meanwhile a veil had fallen between him and josina. he had sworn that he would not see her again until he could claim her, and he supposed her to be engrossed by her father's illness and tied to his bedside. he even, with a lover's insight, inferred the remorse which she felt and her recoil from a continuance of their relations. meanwhile he did not know what to do. he did not see any outlet. he was in an impasse with no prospect of delivery. and while he felt that arthur had behaved ungenerously, while he even suspected that his friend had taken the credit which was his own due, he had no clue to his motives, or his schemes. it was betty who first saw into the dark place. for one day, longing as lovers long for a confidante, he had told her all, from the first meeting with josina to his final parting from the girl by the brook, and his brief and unfortunate interview with her father on the road. the romance charmed betty, the audacity of it dazzled her; for, a woman, she perceived more clearly than clement the gulf between the town and the country, the new and the old. she listened to his tale with sighs and tears and little endearments, and led him on from one thing to another. she could not hear too much of a story that hardly a woman alive could have heard with indifference. she praised josina to the top of his bent, and if she could not give him much hope, she gave sympathy. and, shrewdly, in her own mind she put things together. "arthur is off with the old love," she thought, "and on with the new." he had changed sides, and that explained many things. so, with hardly any premises, she jumped to a conclusion so nearly correct that, could arthur have read her mind, he would have winced even more than he did under the thrusts of her satire. but she did not tell clement. her suspicions were not founded on reason, and they would only alarm him, and he was gloomy enough as it was. instead, she cheered him and bade him be patient. something might turn up, and in no case could much be done until the squire was well enough to leave his room. at bottom she was not hopeful. she saw arrayed between clement and his love a host of difficulties, apart from arthur's machinations. the pride of class, the old man's obstinacy, the young girl's timidity, josina's wealth--these were obstacles hard to surmount. and arthur was on the spot ready to raise new barriers, should these be overcome. chapter xx the money for arthur's share in the bank had been paid over in the early part of june, but the transaction had not gone through with the smoothness which he had anticipated. he had found himself up against a thing which he had not taken into his reckoning; the jealousy with which the old and the rich are apt to guard the secret of their wealth, a jealousy in the squire's case aggravated by his blindness. arthur had felt the check and was forced to own, with some alarm, that high as he stood in favor, a little thing might upset him. he had written to the brokers, requesting them to sell sufficient india stock to bring in a sum of six thousand pounds. they had replied that they could not carry out the order unless they had the particulars of the stock and of the amount standing in the squire's name at the india house. but when arthur took the letter to the squire's room and read it to him, the outcome surprised him. the old man sat up in bed and confounded him by the vigor of his answer. "want to know how much i hold?" he cried. "d--n their impudence! then they'll not know! want to look at my books and see what i'm worth! what next? what is it to them what i hold? you bid 'em sell--" beating the counterpane with his stick--"you bid 'em sell two thousand two hundred pounds--at two hundred and seventy-five, that's near the mark! that's all they've got to do, the impudent puppies! do you write, d'you hear, and tell 'em to do it!" arthur cursed the old man's unreasonableness, and wondered what he was to do. if there was going to be all this difficulty about the particulars, what about the certificates? how was he to get them? for the squire as he sat erect, thrusting forward his bandaged head, and clutching the stick that lay beside him, grew almost threatening. he was in arms in defence of his moneybags and his secrets, and his nephew saw that it would take a bolder man than himself to cross him. he hesitated. "i am afraid, sir," he ventured at last, "there's a difficulty here that i had not foreseen. the certificates----" "they don't want the certificates--yet! don't they say so? plain as a pikestaff!" "perhaps, sir," doubtfully. "if welshes have got them----" "welshes have not got them!" arthur did not know what to say to that. at last, in a tone as reasonable as he could compass, "i am afraid the difficulty is, sir," he said, "that they cannot make out a transfer until they have the particulars; which i fancy we can only get from the certificates." "then they may go to blazes!" the squire replied, and he lay down with his face to the wall. not he! there might be officials at the india house who knew this or that and welshes, who had acted for him in making one purchase or another, might know a part. but to no living man had he ever entrusted the secret of his fortune, or the result of those long years of stinting and sparing and saving that had cleared the mortgaged estate, and had been continued because habit was strong and age is penurious. no, to no man living! that was his secret while the breath was in him. afterwards--but he was not going to give it up yet. presently he bade arthur go, and arthur went, troubled in his mind, and much less assured of his position than he had been an hour before. he thanked his stars that he had not given way to the temptation to cut loose from the bank. it would never have done, he saw that now. and how was he going to extract his money, his six thousand, from this unreasonable old dotard--for so he styled him in his wrath? however, the riddle solved itself before many hours had passed. that afternoon he was absent, and jos, about whom miss peacock was growing anxious, had gone out to take the air. the butler, left on guard, occupied himself with laying the table in the dining-room, where, if the squire tapped the floor, he could hear him. he heard no summons, but presently as he went about his work he heard someone moving upstairs and he pricked up his ears. surely the squire was not getting out of bed? weak and blind as he was--but again he heard heavy footsteps, and, thoroughly alarmed, the man lost no time. he hurried up the stairs, and entered his master's room. the squire was out of bed. he was on his feet, clinging to the post at the foot of the bed, and feeling helplessly about him with the other hand. "lord, ha' mercy!" calamy cried, eying the gaunt figure with dismay. he hastened forward to support it. the squire collapsed on the bed as soon as he was touched. "i canna do it," he groaned, "i canna do it. it's going round wi' me. who is it?" "calamy, sir," the butler answered, and added bluntly, "if you want to get into your coffin, master, you're going the right way to do it!" "anyway, i canna do it," the squire repeated, and remained motionless for a moment. "i couldn't manage the stairs if 'twere ever so." "you'd manage 'em one way. you'd fall down 'em. you get to bed, sir. you get to bed. there, i'll heave you up." "i'm weaker than i thought," the squire muttered. he suffered himself to be put into bed. "you've lost blood, sir, that's what it is," the butler said. "and at your age it's not to be replaced in a week, nor a fortnight. you lie still, sir. maybe in a month you'll be tramping the stairs. but blindfold--it's the lord's mercy as you didn't fall and only stop in kingdom come! for if fall you did, i don't know where else you'd stop." "i'm afraid so. anyway i canna do it!" "only feet foremost." the squire sighed and turned himself to the wall, perhaps to hide the tear that helplessness forced from old eyes. he couldn't do it, and he must put up with the consequences. he could not any longer be sufficient to himself. it was a sad thought, but apparently he made up his mind to it, for twenty-four hours later, when jos and arthur were with him, he sent the girl away. when she had gone he sought under the pillow for his keys, and after handling them for a time, "is the door shut? and no one here but you?" "we are quite alone, sir." "no one within hearing, lad?" "not a soul, sir." "it's not that i mistrust the wench," the squire muttered. "she's a griffin and a good girl, a good girl. but she's a tongue like other women." by this time he had found what he wanted, and holding the bunch by one of the keys he offered it to arthur. "that's the key. now you listen to me. go down to the dining-room, and don't you do anything till you've locked the door and seen there's no one at the windows. the panel, right side of the fireplace--are you minding me? ay? well, pass your hand down the moulding next the hearth and you'll feel a crack across it, and, an inch below, another. they're so small you as good as can't see them, when you know they're there. twist that bit, top part to the right, and you'll see a key-hole. turn the key and pull, and the panel comes open, and you'll see a cupboard door behind it. same key unlocks it. are you minding me?" "i am, sir, i quite understand." "well, on the middle shelf--you'll see a box. the key to that box is the next on the bunch. open it and you will have the india stock certificates." the squire sighed and for a moment was silent. "there's one for two thousand two hundred, which will do it. bring it here. you needn't," drily, "go routing among the others, once you've found it. then lock up, and slip the moulding into place. but be sure, lad, before you do aught, that the door is locked." "i will be careful," arthur assured him. "i quite understand, sir." "it's not that i distrust jos," the squire repeated--as if he defended himself against an accusation. "but tell a secret to a woman, and you tell it to the parish." "shall i do it now, sir?" "ay. and bring back the keys. don't let 'em out of your hands." arthur went downstairs, and as he descended the shallow steps he smiled. men, even the sharpest of men, were easy to manage if you had patience. the afternoon was drawing in. the corners in the hall were growing dim. the sky seen through the open door was pale green. the air came in from the garden, sweet but chilly, laden with the scent of lilac and gilly flowers. a single rook cawed. the peace of the country was upon all. he could hear his mother and josina talking somewhere within the house. he slipped into the dining-room and, locking himself in, looked round him. the paint on the panelled walls was faded, blistered in places by the sun, or soiled where elbows had rubbed it or the butler's tray standing against it through long years, had marked it. the panels were large, dating from dutch william or anne, of chestnut and set in heavy mouldings. arthur glanced at the windows to make sure that he was unseen, then he stepped to the hearth and felt for and found the bit of moulding, in front of which, though he had forgotten to mention it, the squire had hung an old almanac. arthur twisted the upper end to the right, uncovered the key-hole, and within a minute had the inner door open. it masked a cupboard, contrived in the thickness of the chimney-breast, perhaps at the time when the open shaft had been closed and a smaller fireplace had been inserted. inside, two shelves formed three receptacles. in the uppermost were parcels of old letters secured with dusty and faded ribands, and piled at random one on another--the relics of the love-letters or law-letters of past generations. in the lowest compartment were bigger bundles secured with straps, which arthur judged to contain leases and farm agreements, and the like. some were of late date--he took up one or two bundles and looked at the endorsements--none of them appeared to be very old. the middle space displayed a row of old ledgers and farm books, and standing alone before them a small iron box. it was with this no doubt that his business lay and he tried his key in it. the key fitted. he opened the box. it contained three certificates and, though he had been bidden not to rout among them, he felt it his duty to ascertain--for he would probably have to inform the brokers--what was the total of the squire's holding. they all three represented india stock, and arthur's eyes glistened as he noted the amount and figured up the value in his mind. one, as the squire had said, was for two thousand two hundred, the other two were for two thousand five hundred each. arthur calculated that at the price of the day they were worth little short of twenty thousand pounds. he withdrew the smallest certificate and locked the box. he had done his errand, but as he went about to close the cupboard-door he paused. he had seen old letters, and modern agreements and the like. but no old deeds. where did the squire keep the title deeds of garth? they were not here. at welshes? perhaps. arthur glanced at the other side of the fireplace. there, precisely corresponding with the almanac which he had removed, hung an old-fashioned silver sconce with a flat back serving for a reflector. a pair of snuffers flanked the candle-holder on one side, an extinguisher on the other. it was a piece which arthur had admired for its age but had never seen in use. he stared at it, and as he closed the cupboard and panel by which he stood, and replaced the bit of moulding, he hesitated. with the keys in his hand he cast a glance at the windows, then he crossed the hearth, took down the sconce, and ran his fingers down the moulding. yes, here were the cracks, barely to be discovered by the fingers and not at all by the eye. the bit of moulding, when he twisted it, moved stiffly, but it moved. with another glance over his shoulder he inserted the key, then he listened. all was quiet in the house. outside, a wood-pigeon coo'd in a neighboring tree while a solitary rook uttered a shrill "bah-doo! bah-doo!" not the common caw, but a cry that he had often heard. something in the stealthiness of his movements and the stillness of the house, whispered a warning to him, and he paused, his arm raised. yet--why not? what could come of it? knowledge was always useful, and if his business had lain with this second cupboard his uncle would have sent him to it as freely as to the other. with an effort he shook off his scruples, and to satisfy himself that he was doing no wrong he laughed. he turned the key and swung back the panel. he unlocked and opened the inner door. here there were but two divisions. the lower one was piled high with plate; with a part, of a dinner-service, cups, bowls, candlesticks, wine-jugs, salt-cellers--a collection that, tarnished and dull as the pieces were, made arthur's mouth water. among them lay half a dozen leather cases which he fancied held jewellery, and more than a dozen bulky parcels--spoons and forks and the like. they had not been disturbed, it was plain, for years, and he dared not touch them. on the shelf were two iron boxes, and arrayed before them four parcels of deeds, old and discolored, with ends of green riband hanging from them, and here and there a great seal--one seal was of lead. they gave out a damp, sour smell, the odor of slowly decaying sheepskin. three of the parcels related to farms which the squire had bought within arthur's memory. the fourth and largest bundle, in a coarse wrapper, neatly bound about with straps, had a label attached to it, "the title deeds of the garth estate," and thrust under one of the straps was a folded slip of parchment. arthur opened this and saw that it was a memorandum, dated fifty years before, of the deposit of the deeds to secure the repayment of thirty-eight thousand pounds and interest. below were receipts for instalments repaid at intervals of years, and opposite the last receipt appeared, in the squire's hand "cancelled and deeds returned--thank god for his mercies!" arthur felt a thrill of sympathy as he read the words. he returned the slip to its place and softly closed the door. he swung back the panel and secured it. he replaced the silver sconce. but though two inches of wood now intervened, he retained a vision of the bundle of deeds. it was not large, he could have carried it under his arm. but it meant, that little parcel, power, wealth, position, the garth estate! it spoke to arthur the banker--for whom wealth lay in broad acres themselves, the farms and water-mills, the pieces of paper, not in gold and silver--as eloquently as the coverts and dingles, the wide-flung hill-side that he loved, spoke to the squire. for the first time arthur coveted garth, valuing it not as the squire did for what it was, hill and dale spread under heaven, but for what it was worth, for what might be made of it, for the uses to which it might be put. "he has added to it. one could raise fifty thousand on it," he thought. and with fifty thousand what could one not do? with fifty thousand pounds, free money, added to the bank's resources, what might not be done? it was a golden vision that he saw, as he stood in the evening stillness with the scent of roses stealing into the room, and the wood-pigeon cooing softly in the tree outside. ay, what might he not do! but the squire might be growing suspicious. he roused himself, saw that all was as he had found it, and unlocking the door, he went upstairs. "you've been a long time about it, young man," the squire grumbled. "what's amiss?" but arthur was ready with his answer. "you told me to go about it quietly, sir. so i waited until the coast was clear. it's a capital hiding-place. it's not to be found in a minute even when you know where it is." "ay, ay. it would take a clever rogue to find it," complacently. "i suppose it's old, sir?" "my grandfather put it in when the scots were at derby. and, mark ye, no one knows of it but frederick welsh--and now you. d'you be careful and keep your mouth shut, lad. you ha' got the certificate?" "yes, sir." "well, go about the business and get it done. and now do you send jos to me." arthur made a mental note that the old man was changing at last--was losing that hard grip on all about him which he had maintained for half a century; and he was confirmed in this idea by the ease with which the india stock transaction presently went through. the brokers showed themselves unusually complaisant. they wrote that, as the matter was personal to him, they were anxious that nothing should go wrong; and, as his customer was blind, they were forwarding with the transfer on which the particulars had been inserted a duplicate in blank, in order that if the former were spoiled in the execution delay might be avoided. this was irregular, but if the duplicate were not needed, it could be returned and no harm done. arthur thought this polite of them, and was flattered; he felt that he was a client of value. but as it turned out the duplicate was not needed; the squire made nothing of the formality. his hand once directed to the proper place, he signed his name boldly and plainly--as he did most things; and arthur and jos added their signatures as witnesses. ten days later the money was received, and five-sixths of it was paid over to the bank. the duplicate transfer, overlooked at the moment, lay on the squire's bureau until it did not seem worth while to return it. then arthur, tired of coming upon it every day, thrust it out of sight in a pigeonhole. he had other things to think of, indeed, for he was in high feather in these days, while the summer sun climbed slowly to the zenith and began again to sink. he had two-fold interests. after a long day spent in the bank he would ride out of town in the cool of the evening, and passing down the winding streets under the gables of the old black and white houses, he would cross the west bridge. bucketing his horse up the rise that led from the river, he would leave the town behind and see before him the road running straight and dusty towards the sunset-glow, which still shone above the welsh hills. from the fields on either side came the sharp sound of the scythe-stone, the laughter of hay-makers, the call of the wagoner to his team, the creaking of the laden wheels over the turf. partridges dusting themselves in the road scuttled out of his way and presently took wing; rabbits watched him from the covert-edge. the corncrake's persistent note spoke rather of the hot hours that were past than of the evening air that cooled his cheek. an aged simpleton in a smocked frock, the clown of the country-side, danced a jig before an ale-house; a stray bullock gazed patiently at him from a pound. the country-side lay quiet about him, and despite himself he owned the charm of peace, the fall of night, the end of labor. but his thoughts still dwelt on the day's work. there had been a discussion over wolley's account. wolley had been behaving ill. ignoring the claim of the bank he had assigned a number of his railway shares to meet a bill discounted elsewhere. the natural course would have been to insist on the lien and to retain the shares. but the consequences, as ovington saw, might be serious. the step might not only involve the bank in a loss, which he still hoped to avoid, but it might imply taking over the mill--and it is not the business of bankers to run mills. arthur, on the other hand, who did not like the man, would have cut the knot and sent him to the devil. in the end ovington had decided against arthur. "we must be careful," the banker had said. "credit is like a house of cards. you take one card away, you do not know how many may fall." "but if we don't teach him a lesson now?" "quite true, lad. but--well, i will see him. if, as rodd thinks, he is drawing bills on men of straw, whose acceptances are worthless----" "that would be the devil!" "there will be an end of him--but not of him only. we must go warily, lad. to throw him down now----" the banker shook his head. "no, we will give him one more chance. i will talk to him." "i should not have the patience." "that is one of the things you have to learn." arthur reviewed the conversation as he rode, and retained his own opinion. he thought ovington too apprehensive. he would himself have played a bolder game and cut wolley and his losses, if losses there must be. then, shrugging his shoulders, he dismissed the matter and allowed his thoughts to go before him to garth, to the old man, to his favor, and the path it opened to josina. yes, josina. he was not doing much there, but there was no hurry, and despite the charms of garth he had not quite made up his mind. when he did, he anticipated no difficulty. still something was due to her, were it only as a matter of form; and she was pale and sweet and appealing. a little love-making would not be unpleasant these summer evenings, though he had so far held off, haunted by a foolish hankering after betty: betty with her sparkle and color, her wit and high spirit, ay, and her very temper, mutinous little rebel as she was--her temper which, manlike, he longed to tame. ten minutes later saw him in the squire's room, entertaining him with scraps of county gossip and the latest news from town. into the dull room, with its drab hanging and shadowy portraits, where the old man sat by his fireless grate, he came like a gleam of sunshine, his laugh lighting up the dim places, his voice expelling the tedium of the long day. he brought with him the new quarterly, or the last _morning post_. he had news of what sir harry had lost at goodwood, of mytton's last scrape, of the poaching affray at my lord's. he had a joke for josina and a teasing word for miss peacock--who idolized him. and he had tact. he could listen as well as talk. he heard with interest who had called to ask after the squire, whose landau and outriders had turned on the narrow sweep, and whose curricle; what humbler visitors had left their respects at the stables or the backdoor, and what was calamy's last scrap of dolefulness. he was the universal favorite. he had taken the length of the squire's foot; it had been an easier matter than he had anticipated. but even in his cup there was a sour drop. he had his occasional misgivings and now and then he suffered a shock. one day it was, "what about your coat, lad?" "my coat?" arthur stared at the old man. he did not understand. "ay. you thought that i'd forgotten it. but i'm not that shaken. what about it?" now, between the darkness of the night and the confusion, arthur had not noticed the damage done to clement's overcoat. consequently he could make nothing of the squire's words and he tried to pass the matter off. "oh, it's all right, sir," he said. he waited for something to enlighten him. "can you wear it?" "oh yes." "the deuce you can!" the squire was surprised. "then all i can say is, you've found a d--d good cleaner, lad. if you got that blood off--but as you did, all's well. i was afeared i'd owe you a new coat, my boy. i'd not forgotten it, but i knew that you'd not be wearing it this weather, and i thought in another week or two i'd be getting this bandage off. then i'd see how it was, and what we could do with it." arthur understood then, and a thrill of alarm ran through him. what if the squire began--but no, the danger was over, and as quickly as possible he rid himself of fear. he was not a fool to start at shadows. things were going so well with him that he had no mind to spare for trifles, and no time to look aside. chapter xxi july had passed into august. who was it who whispered the first word of doubt? of misgiving? where was felt the first shiver of distrust? what lips first let drop the fatal syllables, a fall? who in the secrecy of some bank-parlor or some discounter's office, sitting at the centre of the spider's web of credit, felt a single filament, stretched it may be across half a world, shiver, and relax? and, refusing to draw the unwelcome inference, sceptical of danger, felt perhaps a second shock, ever so slight and ever so distant; and then, reading the message aright, began to narrow his commitments, to draw in his resources, to call in his money, to turn into gold his paper wealth? and so from that dark office or parlor in fenchurch street or change alley, set in motion, obscurely, imperceptibly at first, the mighty impetus that was to reach to such tremendous ends? who? probably no one knew then, and certainly no one can say now. but it is certain that in the late summer of that year, while the squire sat blinded in his drab-hued room at garth, and ovington's hummed with business, and arthur rode gaily to and fro between the two, the thing happened. some one, some bank, perhaps some great speculator with irons in many fires and many lands, took fright and acted on his fears--but silently, stealthily, as is the manner of such. or it may have been a manufacturer on a great scale who looked abroad and fancied that he saw, though still a long way off, that bugbear of manufacturers, a glut. at any rate there came a check, unmarked by the vast majority, but of which a whisper began to pass round the inner recesses of lombard street--a fall, such as there had been a few months earlier, but which then had been speedily made good. aldersbury lay far beyond the warning, or if a hint of it reached ovington, it did not go beyond him. he did not pass it on, even to arthur, much less did it reach others. sir charles, secluded within his park walls, was not in the way of hearing such things, and acherley and his like were busy with preparations for autumn sport, getting out their guns and seeing that their pink coats were aired and their mahogany tops were brought to the right color. wolley had his own troubles, and dealt with them after his own reckless fashion, which was to retire one bill by another; he found it all he could do to provide for to-day, without thinking what to-morrow might bring forth, should his woollen goods become unsaleable, or his bills fail to find discounters. and the multitude, grounds and purslow and their followers, were happy, secure in their ignorance, foreseeing no evil. this was the state of things at aldersbury, as summer passed into autumn. men still added up their investments, and reckoned the amount of their fortunes and chuckled over what they had made, and added to the sum what they were sure of making, when the shares of this mine or that canal company rose another five or ten points. their wealth on paper was still, to them, solid, abiding wealth, to be garnered and laid by and enjoyed when it pleased them. and trade seemed still to flourish, though not quite so briskly. there was still a demand for goods though not quite so urgent a demand--and the price stuck a little. the railway shares still stood at the high premium to which they had risen, though for the moment they did not seem to be inclined to go higher. but about the end of september--perhaps some one in london or birmingham or liverpool had twitched the filament which connected it with aldersbury--ovington called arthur back as he was leaving the parlor at the close of the day's business. "wait a moment," he said, "i want you. i have been thinking things over, lad, and i am not quite comfortable about them." "is it wolley?" wolley's case had been before them that morning and sharp things had been said about his trading methods. "no, it's not wolley." having got so far ovington paused, and arthur noticed that his face was grave. "no, though wolley is a part of it. i am always uneasy about him. but----" "what is it, sir?" "it is the general situation, lad. i don't like it. i've an impression that things have gone farther than they should. there is an amount of inflation that, if things go smoothly, will be gradually reduced and no harm done. but we have a large sum of money out"--he touched the pile of papers before him--"and i should like to see it lessened. i hardly know why, but i do not feel that the position is healthy." "but our money is well covered." "as things are." "and we are as solvent, sir, as----" "as need be, with the ordinary time to meet the calls that may be made upon us. but in the event of a sudden fall, of one big failure leading to another--in the event of a sudden rush to present our notes?" "even then, sir, we are well secured. we should have no difficulty in finding accommodation." "in ordinary circumstances, no--and if we alone needed it. we could go to a. or b. or c, and there would be no difficulty. we have the money's worth and a good margin. but if a. and b. and c. were also short, what then, lad?" arthur felt something approaching contempt. the banker was inventing bogies, imagining dangers, dreaming of difficulties where none existed. he saw him in a new light, and discovered him to be timorous. "but that state of things is not likely to occur," he objected. "perhaps not, but if it did?" "have you had any hint?" "no. but i see that iron is down--since saturday. and the manchester market was flat yesterday." "things that have happened before," arthur said. "i think, sir, it is really wolley's affair that is troubling you." "if it ended with wolley it would be a small matter. no, i am not thinking of that." he looked before him and drummed upon the table with his fingers. "but the positions calls for--caution. we must go no farther. we must be careful how we grant accommodation no matter who applies for it. we must raise our reserve. see, if you please, that we do not discount a single bill without recourse to me--though, of course, you will let nothing be noticed on the other side of the counter." "very good," arthur said. but he thought that the other's caution was running away with him. the sky seemed clear to him--he could discern no sign of a storm, and he did not reflect that, as he had never been present at a storm, the signs might escape him. "very good," he said, "i'll tell rodd. i am sure it will please him," and with that tiny sting, he went out. the conversation had been held behind closed doors, yet it had its effect. a chill seemed to fall upon the bank. the air became less genial. ovington's face grew both keen and watchful. arthur, perplexed and puzzled, was more brusque, his speech shorter. rodd's face reflected his superiors' gravity. only clement, going about his branch of the work with his usual stolid indifference, perceived no change in the temperature, and, depressed before, was only a degree nearer to the mean level. poor clement! there are situations in which it is hard to play the hero, and he found himself in one of them. he had vowed that there should be no more meetings and no more love-making until he had faced and conquered his dragon. but meanwhile the dragon lay sick and blind at the bottom of its den, guarded by its very weakness from attack, while every hour and every day that saw nothing done seemed to remove clement farther from his mistress, seemed to set a greater distance between them, seemed to blacken his face in her eyes. yet what could he do? how could he wrest himself from the inaction--it must seem to her the ignoble inaction--which pressed upon him? she watched--he pictured her watching from her tower, or more precisely from the terraced garden at garth, for the deliverance which did not come, for the knight whose trumpet never sounded! she watched, while he, weak and shiftless, hung back in uncertainty, the inefficient he had ever been! ay, that he had ever been! it was that which hurt him. it was the sense of that which wasted his spirits as sorely as the impatience, the fever, of thwarted love. the spell of vigor which had for a few days lifted him out of himself, and given him the force to meet and to impress his fellows, had not only failed to win any real advantage, but failing, it had left him less self-reliant than before. for he saw now where he had failed. he saw that with the winning-card in his hand he had allowed himself to be defeated by arthur, and to be jockeyed out of all the fruits of his labor, simply because he had lacked the moral courage, the hardness of fibre, the stiffness to stand by his own! and he feared that it would ever be so. arthur had got the better of him, and the knowledge depressed him to the ground. he was not a man. he was a weakling, a dreamer, good for neither one thing nor another! as useless outside the bank as at his desk, below and not above the daily tasks that he secretly despised. yet what could he do? what was it in his power to do? he asked himself that question a hundred times. he could not force himself on the squire, ill and confined to his bed as he was--and be sure, arthur did not make the best of his uncle's condition. he could only wait, though to wait was intolerable. he could only wait, while poor josina first doubted, then despaired! wait while first hope, and then faith, and in the end love died in her breast! wait, till she thought herself abandoned! of course in his impatience and his humility clement exaggerated both the delay and its results. the days seemed weeks to him, the weeks months. he fancied it a year since he had seen josina. he did not consider that she was no stranger to his difficulties, nor reflect that though his silence might try her, and his absence cause her unhappiness, she might still approve both the one and the other. as a fact, the lesson which he had taught her at their last meeting had been driven home by the remorse that had tortured her on that dreadful night; and lonely hours in the sick room, much watching, and many a thought of what might have been, had strengthened the impression. but clement did not know this. he pictured the girl as losing all faith in him, and as the weeks ran on, the time came when he could bear the delay no longer, when he felt that he must either do something, or write himself down a coward. so one day, after hearing in the town that the squire was able to leave his room, he wrote to josina. he told her that he should call on the morrow and see her father. and on the morrow he rode over, blind for once to the changes of nature, of landscape and cloudscape that surrounded him. but he never reached the house, for at the little bridge at the foot of the drive josina met him, and eager as he had been to see his sweetheart and to hear her voice, he was checked by the change in her. it was a change which went deeper than mere physical alteration, though that, too, was there. the girl was paler, finer, more spiritual. trouble and anxiety had laid their mark on her. he had left her girl, he found her woman. a new look, a look of purpose, of decision, gave another cast to her features. she was the first to speak, and her words bore out the change in her. "you must come no farther, clement," she said. and then as their hands met and their eyes, the color flamed in her cheeks, her head drooped flowerlike, she was for an instant the old josina, the girl he had wooed by the brook, who had many a time fallen on his breast. but for a moment only. then, "you cannot see him yet," she announced. "not yet, for a long time, clem. i met you here that i might stop you, and that there might be no misunderstanding--and no more secrets." and this she had certainly secured, for the place which she had chosen for their meeting was overlooked, though at a distance, by the doorway of the house, and by all the walks about it. but he was not to be so put off. "i must see him," he said, and he told himself that he must not be moved by her pleadings. it was natural that she should fear, but he must not fear--and indeed he had passed beyond fear. "no, dear," as she began to protest, "you must let me judge of this." he held her hands firmly as he looked down at her. "i have suffered enough, i have suffered as much as i can bear. i have had no sight of you and no word of you for months, and i cannot endure this longer. every hour of every day i have felt myself a coward, a deserter, a do-nothing! i have had to bear this, and i have borne it. but now--now that your father is downstairs----" "you can still do nothing," she said. "believe, believe me," earnestly, "you can do nothing. dear clement," and the tenderness which she strove to suppress betrayed itself in her tone, "you must be guided by me, you must indeed. i am with my father, and i know, i know that he cannot bear it now. i know that it would be cruel to tell him now. he is blind. blind, clement! and he trusts me, he has to trust me. to tell him now would be to destroy his faith in me, to shock him and to frighten him--irreparably. you must go back now--now at once." "what?" he cried. "and do nothing? and lose you?" the pathos of her appeal had passed him by, and only his love and his jealousy spoke. "no," she answered soberly, "you will not lose me, if you have patience." "but have you patience?" "i must have." "and i am to do nothing?" he spoke with energy, almost with anger. "to go on doing nothing? i am to stand by and--and play the coward still--go on playing it?" her face quivered, for he hurt her. he was selfish, he was cruel; yet she understood, and loved him for his cruelty. but she answered him firmly. "nothing until i send for you," she said. "you do not think, clem. he is blind! he is dependent on me for everything. if i tell him in his weakness that i have deceived him, he will lose faith in me, he will distrust me, he will distrust everyone. he will be alone in his darkness." it began to come home to him. "blind?" he repeated. "yes." "but for good? do you mean--quite blind?" "ah, i don't know!" she cried, unable to control her voice. "i don't know. dr. farmer does not know, the physician who came from birmingham to see him does not know. they say that they have hopes--and i don't know! but i fear." he was silent then, touched with pity, feeling at length the pathos of it, feeling it almost as she felt it. but after a pause, during which she stood watching his face, "and if he does not recover his sight?" "god forbid!" "i say god forbid too, with all my heart. still, if he does not--what then? when may i----" "when the time comes," she answered, "and of that i must be the judge. yes, clement," with resolution. "i must be the judge, for i alone know how he is, and i alone can choose the occasion." the delay was very bitter to him. he had ridden out determined to put. his fate to the test, to let nothing stand between him and his love, to over-ride excuses; and he could not in a moment make up his mind to be thwarted. "and i must wait? i must go on waiting? eating my heart out--doing nothing?" "there is no other way. indeed, indeed there is not." "but it is too much. it is too much, jos, that you ask!" "then, clement----" "well?" "you must give me up." she spoke firmly but her lips quivered, and there were tears in her eyes. he was silent. at last, "do you wish me to do that?" he said. she looked at him for answer, and his doubts, if he had doubted her, his distrust, if it had been possible for him to distrust her, vanished. his heart melted. they were a very simple pair of lovers, moved by simple impulses. "forgive me, oh, forgive me, dear!" he cried. "but mine is a hard task, a hard task. you do not know what it is to wait, to wait and to do nothing!" "do i not?" her eyes were swimming. "is it not that which i am doing every day, clem? but i have faith in you, and i believe in you. i believe that all will come right in the end. if you trust me, as i trust you, and have to trust you----" "i will, i will," he cried, repentant, remorseful, recognizing in her a new decision, a new sweetheart, and doing homage to the strength that trial and suffering had given her. "i will trust you, trust you--and wait!" her eyes thanked him, and her hands; and after this there was little more to be said. she was anxious that he should go, and they parted. he rode back to aldersbury, thinking less of himself and more of her, and something too of the old man, who, blind and shorn of his strength, had now to lean on women, and suspicious by habit must now trust others, whether he would or no. clement had imagination, and by its light he saw the pathos of the squire's position; of his helplessness in the midst of the great possessions he had gathered, and the acres that he had added, acre to acre. he who had loved to look on hill and covert and know them his own, to whom every copse and hedgerow was a friend, who had watched his marches so jealously and known the rotation of every field, must now fume and fret, thinking them neglected, suspecting waste, doubting everyone, lacking but a little of doubting even his daughter. "poor chap!" he muttered, "poor old chap!" he was sorry for the squire, but he was even more sorry for himself. any other, he felt, would have surmounted the obstacles that stopped him, or by one road or another would have gone round them. but he was no good, he was useless. even his sweetheart--this in a little spirit of bitterness--took the upper hand and guided him and imposed her will on him. he was nothing. in the bank he grew more taciturn, doing his business with less spirit than before, suspecting arthur and avoiding speech with him, meeting his careless smile with a stolid face. his father, rodd too, deemed him jealous of the new partner, and his father, growing in these days a little sharp in temper, spoke to him about it. "you took no interest in the business," he said, "and i had to find some one who would take an interest and be of use to me. now you are making difficulties and causing unpleasantness. you are behaving ill, clement." but clement only shrugged his shoulders. he had become indifferent. he had his own burden to bear. chapter xxii arthur, on the other hand, felt that things were going well with him. a few months earlier he had decided that a partnership in ovington's would be cheaply bought at the cost of a rupture with his uncle. now he had the partnership, he could look forward to the wealth and importance which it would bring--and he had not to pay the price. on the contrary, his views now took in all that he had been prepared to resign, as well as all that he had hoped to gain. they took in garth, and he saw himself figuring not only as the financier whose operations covered many fields, and whose riches were ever increasing, but as the landed squire, the man of family, whose birth and acres must give him a position in society which no mere wealth could confer. the unlucky night which had cost the old man so much, had been for arthur the birth-night of fortune. he could date from it a favor, proof, as he now believed, against chance and change, a favor upon which it seemed unlikely that he could ever overdraw. for since his easy victory on the question of the india stock, he had become convinced that the squire was failing. the old man, once so formidable, was changed; he had grown, if not weak, yet dependent. and it could hardly be otherwise, arthur reflected. the loss of sight was a paralyzing deprivation, and it had fallen on the owner of garth at a time of life when any shock must sap the strength and lower the vitality. for a while his will had reacted, he had seemed to bear up against the blow, but age will be served, and of late he had grown more silent and apathetic. arthur had read the signs and drawn the conclusion, and was now sure that, blind and shaken, the old man would never again be the man he had been, or assert himself against an influence which a subtler brain would know how to weave about him. arthur was thinking of this as he rode into town one morning in november, his back turned to the hills and the romance of them, his face to the plain. it was early in the month. st. luke's summer, prolonged that year, had come to an end a day or two before, and the air was raw, the outlook sombre. under a canopy of grey mist, the thinning hedge-rows and dripping woods showed dark against clear blue distances. but in the warmth of his thoughts the rider was proof against weather, and when he came to the sedgy spot, never more dreary to the view than to-day, which thomas had chosen for his attack on the squire, he smiled. that little patch of ground had done much for him, but at a price, of course--for there he had lost a friend, a good easy friend in clement. and betty--betty, whose coolness had caused him more than one honest pang--he had no doubt that there had come a change in her, too, from that date. but one had to pay a price for everything, and these were but small spots on the sun of his success. soon he had put the thought of them from him, and, abreast of the first houses of the town, began to employ his mind on the work of the day--revolving this and that, matters outside routine which would demand his attention. he knew what was likely to arise. rarely in these days did he enter aldersbury without a feeling of elation. the very air of the town inspired him. the life of the streets, the movement of the markets, the sight of the shopkeepers at their doors, the stir and bustle had their appeal for him. he felt himself on his own ground; it was here and not in the waste places that his work lay, here that he was formed to conquer, here that he was conquering fortune. garth was very well--a grand, a splendid reserve; but as he rode up the steep streets to the bank, he felt that here was his vocation. he sniffed the battle, his eyes grew brighter, his figure more alert. from some huguenot ancestor had descended the huguenot appetite for business, the huguenot ability to succeed. this morning, however, he did not reach the bank in his happiest mood. purslow, the irrepressible purslow, stopped him, with a long face and a plaint to match. "those antwerp shares, mr. bourdillon! excuse me, have you heard? they're down again--down twenty-five since wednesday! and that's on to five, as they fell the week before! thirty down, sir! i'm in a regular stew about it! excuse me, sir, but if they fall much more----" "you've held too long, purslow," arthur replied. "i told you it was a quick shot. a fortnight ago you'd have got out with a good profit. why didn't you?" "but they were rising--rising nicely. and i thought, sir----" "you thought you'd hold them for a bit more? that was the long and short of it, wasn't it? well, my advice to you now is to get out while you can make a profit." "sell?" the draper exclaimed. "now?" it is hard to say what he had expected, but something more than this. "but i should not clear more than--why, i shouldn't make----" "better make what you can," arthur replied, and rode on a little more cavalierly than he would have ridden a few months before. he did not reflect how easy it is to sow the seeds of distrust. purslow, left alone to make the best of cold comfort, felt for the first time that his interests were not the one care of the bank. for the first time he saw the bank as something apart, a machine, cold, impassive, indifferent, proceeding on its course unmoved by his fortunes, good or bad, his losses or his gains. it was a picture that chilled him, and set him thinking. arthur, meantime, left his horse at the stables and let himself into the bank by the house-door. as he laid his hat and whip on the table in the hall, he caught the sound of an angry voice. it came from the bank parlor. he hesitated an instant, then he made up his mind, and stepping that way he opened the door. the voice was wolley's. the man was on his feet, angry, protesting, gesticulating. ovington, his lips set, the pallor of his handsome face faintly tinged with color, sat behind his table, his elbows on the arms of his chair, his fingertips meeting. arthur took it all in. then, "you don't want me?" he said, and he made as if he would close the door again. "i thought that you were alone, sir." "no, stay," ovington answered. "you may as well hear what mr. wolley has to say, though i have told him already----" "what?" the clothier cried rudely. "come! let's have it in plain words!" "that we can discount no more bills for him until the account against him is reduced. you know as well as i do, mr. wolley, that you have been drawing more bills and larger bills than your trade justifies." "but i have to meet the paper i've accepted for wool, haven't i? and if my customers don't pay cash--as you know it is not the custom to pay--where am i to get the cash to pay the wool men?" the banker took up one of two bills that lay on the table before him. "drawn on samuel willias, manchester," he said. "that's a new name. who is he?" "a customer. who should he be?" "that's the point," ovington replied coldly. "is he? and this other bill. a new name, too. besides, we've already discounted your usual bills. these bills are additional. my own opinion is that they are accommodation bills, and that you, and not the acceptors, will have to meet them. in any case," dropping the slips on the table, "we are not going to take them." "you won't cash them? not on no terms?" "no, we are going no further, wolley," the banker replied firmly. "if you like i will send for the bill-book and ledger and tell you exactly what you owe, on bills and overdraft. i know it is a large amount, and you have made, as far as i can judge, no effort to reduce it. the time has come when we must stop the advances." "and you'll not discount these bills?" "no!" "then, by g--d, it's not i will be the only one to be ruined!" the man exclaimed, and he struck the table with his fist. the veins on his forehead swelled, his coarse mottled face became disfigured with rage. he glared at the banker. but even as ovington met his gaze, there came a change. the perspiration sprang out on his forehead, his face turned pale and flabby, he seemed to shrink and wilt. the ruin, which recklessness and improvidence had hidden from him, rose before him, certain and imminent. he saw his mill, his house, his all gone from him, saw himself a drunken, ruined, shiftless loafer, cadging about public-houses! "for god's sake!" he pleaded, "do it this once, mr. ovington. meet just these two, and i'll swear they'll be the last. meet these." "no," the banker said. "we go no farther." perhaps the thought that he and ovington had risen from the ranks together, that for years they had been equals, and that now the one refused his help to the other, rose and mocked the unhappy man. at any rate, his rage flared up anew. he swore violently. "well, there's more than i will go down, then!" he said. "and more than will suit your book, banker! wise as you think yourself, there's more bills out than you know of!" "i am sorry to hear it." "ay, and you'll be more sorry by and by!" viciously. "sorry for yourself and sorry that you did not give me a little more help, d--n you! are you going to? best think twice about it before you say no!" "not a penny," ovington rejoined sternly. "after what you have admitted i should be foolish indeed to do so. you've had my last word, mr. wolley." "then damn your last word and you too!" the clothier retorted, and went out, cursing, into the bank, shouting aloud as he passed through it, that they were a set of bloodsuckers and that he'd have the law of them! clement from his desk eyed him steadily. rodd and the clerks looked startled. the customers--there were but two, but they were two too many for such a scene--eyed each other uneasily. a moment, and clement, after shifting his papers uncertainly, left his desk and went into the parlor. ovington and arthur had not moved. "what's the matter?" clement asked. the occurrence had roused him from his apathy. he looked from the one to the other, a challenge in his eyes. "only what we've been expecting for some time," his father answered. "wolley has asked for further credit and i've had to say, no. i've given him too much rope as it is, and we shall lose by him. he's an ill-conditioned fellow, and he is taking it ill." "he wants a drubbing," said clement. "that is not in our line," ovington replied mildly. "but," he continued--for he was not sorry to have the chance of taking his son into his confidence--"we are going to have plenty to think of that is in our line. wolley will fail, and we shall lose by him; and i have no doubt that he is right in saying that he will bring down others. we must look to ourselves and draw in, as i warned bourdillon some time ago. that noisy fellow may do us harm, and we must be ready to meet it." arthur looked thoughtful. "antwerps have fallen," he said. "i wish it were only antwerps!" the banker answered. "you haven't seen the mail? or friday's prices? there's a fall in nearly everything. true," looking from one to the other, "i've expected it--sooner or later; and it has come, or is coming. yes, rodd? what is it?" the cashier had opened the door. "hamar," he said in a low voice, "wants to know if we will buy him fifty of the railroad shares and advance him the face value on the security of the shares. he'll find the premium himself. he thinks they are cheap after the drop last week." the banker shook his head. "no," he said. "we can't do it, tell mr. hamar." "it would support the shares," arthur suggested. "with our money. yes! but we've enough locked up in them already. tell him, rodd, that i am sorry, but it is not convenient at present." "they are still at a premium of thirty shillings," arthur put in. "is the door shut, rodd?" "yes, sir." "thirty shillings? and that might run off in a week, mr. secretary. no, the time is come when we must not shilly-shally. i see your view and the refusal may do harm. but we have enough money locked up in the railway, and with the outlook such as it is, i will not increase the note issues. they are already too large, as we may discover. we must say no, rodd, but tell him to come and see me this evening, and i will explain." the cashier nodded and went out. ovington gazed thoughtfully at his joined finger-tips. "is the door closed?" he asked again, and assured that it was, he looked thoughtfully from one to the other of the young men. he seemed to be measuring them, considering how far he could trust them, how far it would be well to take them into his confidence. then, "we are going to meet a crisis," he said. "i have now no doubt about that. all over the country the banks have increased their issues, and hold a vast quantity of pawned stock. if the fall in values is continued, the banks must throw the stock on the market, and there will be a general fall. at the same time they will be obliged to restrict credit and refuse discounts, which will force traders to throw goods on the market to meet their obligations. goods as well as stocks will fall. alarm will follow, and presently there will be a run on a weak bank and it will close its doors. then there will be a panic, and a run on other banks--a run proportioned in violence to the amount of credit granted in the last two years. we may have to meet a run on deposits at the same time that we may be called upon to cash every note that we have issued." "impossible!" arthur cried. "we could not do it." "if you mean that the run is impossible," the banker answered quietly, "i much fear that events will confute you. if you mean that we could not meet our obligations, well, we must strain every nerve to do so. we must retain all the cash that comes in, and we must issue no more notes, create no more credit. but even this we must do with discretion, and above all not a whisper must pass beyond this room. i will speak to rodd. hamar i will see this evening, and do what i can to sweeten the refusal. we must wear confident faces however grave the crisis. we are solvent, amply solvent, if time be given us to realize our resources; but time may not be given us, and we may have to make great sacrifices. you may be inclined to blame me----" he paused, and looked from one to the other--arthur stood frowning, his eyes on the carpet--"that i did not take the alarm earlier? well, i ought to have done so, perhaps. but----" "nobody blames you, sir!" it was clement who spoke, clement, in whom the last few minutes had made a marked change. his dulness and listlessness had fallen from him, he stood upright and alert. the imagination which had balked at the routine of banking, faced a crisis with alacrity, and conscious that he had hitherto failed his father, he welcomed with zest the opportunity of proving his loyalty, "nobody blames you, sir!" he repeated firmly. "we are here to stand by you, and i am confident that we shall win through. if any bank can stand, ovington's will stand. and if we don't win through, if the public insists on cutting its own throat, well"--a little ashamed of his own enthusiasm--"we shall still believe in you, sir, you may be sure of that!" "but isn't--isn't all this a little premature?" arthur asked, his tone cold and business-like. "i don't understand why you think that all this is coming upon us at a moment's notice, sir? without warning?" "not quite without warning," the banker rejoined with patience. clement's declaration of faith had moved him more deeply than he showed, and, having that, he could bear a little disappointment. "i have hinted more than once, arthur, that i was uneasy. but why, you ask, this sudden alarm--now? well, look at richardson's list of last friday's prices. you have not seen it. exchequer bills that a week ago were at par are at a discount. india stock are down five points on the day--a large fall for such a stock. new four per cents, have fallen , bank stock that stood at ten days ago is . these are not panic falls, but they are serious figures. with bank stock falling ten points in as many days, what will happen to the immense mass of speculative securities held by the public, and on much of which calls are due? it will be down this week; next week the banks will have to throw it out to save their margins, and customers to pay their calls. it will fall, and fall. the week after, perhaps, panic! a rush to draw deposits, or a rush to cash notes, or, probably, both." "then you think--you must think"--arthur's voice was not quite under his control--"that there is danger?" "it would be as foolish in me to deny it here," the banker replied gravely, "as it would be reckless in me to affirm it outside. there is danger. we shall run a risk, but i believe that we shall win through, though, it may be, by a narrow margin. and a little thing might upset us." arthur was not of an anxious temperament--far from it. but he had committed himself to the bank. he had involved himself in its fortunes in no ordinary way. he had joined it against the wishes of his friends and in the teeth of the prejudices of his caste. he had staked his reputation for judgment upon its success, and assured that it would give him in the future all for which he thirsted, he had deemed himself far-sighted, and others fools. in doing this he had never dreamt of failure, he had never weighed the possibility of loss. not once had he reflected that he might turn out to be wrong and robbed of the prize--might in the end be a laughing-stock! now as the possibility of all this, as the thought of failure, complete and final, flooded his mind and shook his self-confidence, he flinched. danger! danger, owned to by ovington himself! ah, he ought to have known! he ought to have suspected that fortunes were not so easily made! he ought to have reflected that ovington's was not dean's! that it was but a young bank, ill-rooted as yet--and speculative! ay, speculative! such a bank might fall, he was almost certain now that it would fall, as easily as it had risen! it was a nerve-shaking vision that rose before him, and for a moment he could not hide his disorder. at any rate, he could not hide it from two jealous eyes. clement saw and condemned--not fully understanding all that this meant to the other or the sudden strain which it put upon him. a moment and arthur was himself again, and his first words recovered for him the elder man's confidence. they were practical. "how much--i mean, what extra amount of reserve," he asked, "would make us safe?" "just so," and in the banker's eyes there shone a gleam of relief. "well, if we had twelve thousand pounds, in addition to our existing assets, i think--nay, i am confident that that would place us out of danger." "twelve thousand pounds." "yes. it is not a large sum. but it might make all the difference if it came to a pinch." "in cash?" "in gold, or bank paper. or in such securities as could be realized even in a crisis. twelve thousand added to our reserve--i think i may say with confidence that with that we could meet any run that could be made upon us." "there is no doubt that we are solvent, sir?" "you should know that as well as i do." "we could realize the twelve thousand eventually?" "of course, or we should not be solvent without it." for once ovington spoke a little impatiently. "then could we not," arthur asked, "by laying our accounts before our london agents obtain the necessary help, sir?" "if we were the only bank likely to be in peril, of course we could. and even as it is, you are so far right that i had already determined to do that. it is the obvious course, and my bag is being packed in the house--i shall go to town by the afternoon coach. and now," rising to his feet, "we have been together long enough--we must be careful to cause no suspicion. do you, clement, see massy, the wine-merchant to-day, and tell him that i will take, to lay down, the ten dozen of ' port that he offered me. and ask the two welshes to dine with me on friday--i shall return on thursday. and get some oysters from hamar's--two barrels--and have one or two people to dine while i am away. and, cheerful faces, boys--and still tongues. and now go. i must put into shape the accounts that i shall need in town." he dismissed them with calmness, but he did not at once fall to work upon the papers. his serenity was that of the commander who, on the eve of battle, reviews the issues of the morrow, and habituated to the chances of war, knows that he may be defeated, but makes his dispositions, folds his cloak about him, and lies down to sleep. but under the cloak of the commander, and behind the mask that deceives those about him, is still the man, with the man's hopes and fears, and cares and anxieties, which habit has rendered tolerable, and pride enables him to veil. but they are there. they are there. as he sat, he thought of his rise, of his success, of step won after step; of the praise of men and the jealousy of rivals which wealth had won for him; and of the new machine that he had built up--ovington's. and he knew that if fate went against him, there might in a very short time be an end of all. yesterday he and wolley had been equals. they had risen from obscurity together. to-day wolley was a bankrupt. to-morrow--they might be again equal in their fall, and ovington's a thing to wonder at. dean's would chuckle, and some would call him a fool and some a rogue, and all an upstart--one who had not been able to keep his head. he would be ruined, and they would find no name too bad for him. he thought of betty. how would she bear it? he had made much of her and spoiled her, she had been the apple of his eye. she had known only the days of his prosperity. how would she bear it, how take it? he sighed. he turned at last to the papers. chapter xxiii it was with a firmer tread that clement went back to his desk in the bank. he had pleased his father and he was pleased with himself. here at last was something to do. here at last was something to fight. here at last was mettle in the banking business that suited him; and not a mere counting of figures and reckoning of pennies, and taking in at four per cent. and putting out at eight. his gaze, passing over the ledger that lay before him, focussed itself on the unconscious customers beyond the counter. he had the air of challenging them, of defying them. they were the enemy. it was their folly, their greed, their selfishness, their insensate desire to save themselves, let who would perish, that menaced the bank, that threatened the security, the well-being, the happiness of better men. it was a battle and they were the enemy. he scowled at them. supposing them to have sense, patience, unselfishness, there would be no battle and no danger. but he knew that they had it not in them. no, they would rush in at the first alarm, like a flock of silly sheep, and thrusting and pushing and trampling one another down, would run, each bent on his own safety, blindly on ruin. from this moment the bank became to him a place of interest and color, instead of that which it had been. where there was danger there was romance. even rodd, adding up a customer's pass-book, his face more thoughtful than usual, wore a halo, for he stood in peril. if the shutters went up rodd would suffer with his betters. he would lose his place, he would be thrown on the world. he would lose, too, the trifle which he had on deposit in the bank. and even rodd might have his plans and aims and ambitions, might be hoping for a rise, might be looking to marry some day--and some one! pheugh! clement's mouth opened, he stared aghast--stared at the wire blind that obscured the lower half of the nearer window, as if all his faculties were absorbed in reading the familiar legend, knab s'notgnivo, that showed darkly upon it. customers, rodd, the bank, all vanished. for he had forgotten! he had forgotten josina! in contemplating what was exciting in the struggle before him he had forgotten that his stake was greater than the stake of others--that it was immeasurably greater. for it was josina. he stood far enough below her as it was, separated from her by a height of pride and prejudice and convention, which he must scale if he would reach her. but he had one point in his favor--as things were. his father was wealthy, and standing a-tiptoe on his father's money-bags he might possibly aspire to her hand. so uplifted, so advantaged he might hope to grasp that hand, and in the end, by boldness and resolution, to make it his own. that was the position as long as all went well at the bank: and it was a position difficult enough. but if the money-bags crumbled and sank beneath his feet? if in the crisis that was coming they toppled over, and his father failed, as he might fail? if he lost the footing, the one footing that money now gave him? then her hand would be altogether out of his reach, she would be far above him. he could not hope to reach her, could not hope to gain her, could not in honor even aspire to her? he saw that now. his stake was josina, and the battle lost, he lost josina. he had been brave enough until he thought of that, reckless even, welcoming the trumpet call. but seeing that, and seeing it suddenly, he groaned. the sound recalled him to himself, and he winced, remembering his father's injunction to show a cheerful front. that he should have failed so soon! he looked guiltily at arthur. had he heard? but arthur had not heard. he was standing at a desk attached to the wall, his back towards clement, his side-face to the window. he had not heard, because his thoughts had been elsewhere, and strange to say, the subject which had engaged them had been also josina. the banker's warning had been a sharp blow to him. he was practical. he prided himself on the quality, and he foresaw no pleasure in a contest in which the success that was his be-all and end-all would be hazarded. true, his mercurial spirit had already begun to rise, and with every minute he leant more and more to the opinion that the alarm was groundless. he thought that the banker was scaring himself, and seeing bogies where no bogies were--as if forsooth a little fall meant a great catastrophe, or all the customers would leave the bank because wolley did! but he none the less for that looked abroad. prudently he reviewed the resources that would remain to him in the event of defeat, and like a cautious general he determined beforehand his line of retreat. that line was plain. if the bank failed, if a thing so cruel and incredible could happen, he still had garth. he still had garth to fall back upon, its lands, its wealth, its position. the bank might go, and ovington--confound him for the silly mismanagement that had brought things to this!--might go into limbo with it, and clement and rodd and the rest of them--after all, it was their native level! but for him, born in the purple, there would still be garth. only he must be quick. he must not lose a day or an hour. if he waited too long, word of the bank's embarrassments might reach the old man, re-awaken his prejudices, warp his mind, and all might be lost. the influence on which he counted for success might cease to be his, and in a moment he might find himself out in the cold. weakened as the squire was, it would not be wise to trust too much to the change in him! no, he must do it at once. he would ride out that very day, and gain, as he did not doubt that he would gain, the squire's permission to speak to josina. he would leave no room for accidents, and, setting these aside, he did not doubt the result. he carried out his intention in spite of some demur on clement's part, who in his new-born zeal thought that in his father's absence the other ought to remain on the spot. but arthur had the habit of the upper hand, and with a contemptuous fling at clement's own truancies, took it now. he was at garth before sunset of the short november day, and he had not sat in the squire's room ten minutes before chance gave him the opening he desired. the old man had been listening to the town news, and apparently had been engrossed in it. but suddenly, he leant forward, and poked arthur with the end of his stick. "here do you tell me!" he said. "what ails the girl? i've no eyes, but i've ears, and there's something. what's amiss with her, eh?" "do you mean josina, sir?" "who else, man? i asked you what's the matter with her. d'you think i don't know that there is something? i've all my senses but one, thank god, and i can hear if i can't see! what is it?" arthur saw in a moment that here was the opportunity, he needed, and he made haste to seize it. "the truth is, sir----" he said with a candor which was attractive. "i was going to speak to you about josina, i have been wishing to do so for some time." "eh? well?" "i have said nothing to her. but it is possible that she may be aware of my feelings." "oh, that's it, is it?" the squire said drily. it was impossible to say whether he was pleased or not. "if i had your permission to speak to her, sir?" arthur felt, now that he had come to the point, just the amount of nervousness which was becoming. "we have been brought up together, and i don't think that i can be taking you by surprise." "and you think it will be no surprise to her?" "well, sir," modestly, "i think it will not." "more ways of killing a cat than drowning it, eh? that's it, is it? haven't spoken, but let her know? and you want my leave?" "yes, sir, to ask her to be my wife," arthur said frankly. "it has been my wish for some time, but i have hesitated. of course, i am no great match for her, but i am of her blood, and----" he paused. he did not know what to add, and the squire did not help him, and for the first time arthur felt a pang of uneasiness. this was not lessened when the old man asked, "how long has this been going on, eh?" "oh, for a long time, sir--on my side," arthur answered. there was an ominous silence. the squire might be taking it well or ill--it was impossible to judge. he had not changed his attitude and still sat, leaning forward, his hands on his stick, impenetrable behind his bandages. it struck arthur that he might have been premature; that he might have put his favor to too high a test. it might have been wiser to work upon josina, and wait and see how things turned out. at last. "she'll not go out of this house," the squire said. and he sighed in a way unusual with him, even when he had been at his worst. "that's understood. there's room for you here, and any brats you may have. that's understood, eh?" sharply. "willingly, sir," arthur answered. a great weight had been lifted from him. "and you'll take her name, do you hear?" "of course, sir. i shall be proud to do so." the squire sighed, and again he was silent. "then--then i may speak to her, sir?" "wait a bit! wait a bit!" the squire had more to say, it appeared. "you'll leave the bank, of course?" arthur's mind, trained to calculation, reviewed the position. most heartily he wished--though he thought that ovington's views were unnecessarily dark--that he could leave the bank. but he could not. the moment when ovington might have released him, when the cancellation of the articles had been possible, was past. the banker could no longer afford to cancel them, or to lose the five thousand pounds that arthur had brought in. he hesitated, and the old man read his hesitation, and was wroth. "you heard what i said?" he growled, and he struck his stick upon the floor. "do you think i am going to have my daughter's husband counterskipping in aldersbury? cheek by jowl with every grocer and linen-draper in the town? bad enough as it is, bad enough, but when you're jos's husband--no, by g--d, that's flat! you'll leave the bank, and you'll leave it at once, or you're no son-in-law for me. i'll not have the name of griffin dragged in the dirt." arthur had not anticipated this, though he might easily have foreseen it; and he cursed his folly. he ought to have known that the old question would be raised, and that it would revive the squire's antagonism. he was like a fox caught in a trap, nay, like a fox that has put its own foot in the trap; and he had no time to give any but a candid answer. "i am afraid, sir," he said. "i mean--i am quite willing to comply with your wishes. but unfortunately there's a difficulty. i am tied to the bank for three years. at the end of three years----" "three years be d--d!" in a passion the squire struck his stick on the floor. "three years! i'm to sit here for three years while you go in and out, partner with ovington! then my answer is, no! no! do you hear? i'll not have it." the perspiration stood on arthur's brow. here was a _débâcle!_ an end, crushing and complete, to all his hopes! desperately he tried to explain himself and mend matters. "if i could act for myself, sir," he said, "i would leave the bank to-morrow. but the agreement----" "agreement? don't talk to me of agreements! you could ha' helped it!" the squire snarled. "you could ha' helped it! only you would go on! you went in against my advice! and for the agreement, who but a fool would ha' signed such an agreement? no, you may go, my lad. as you ha' brewed you may bake! you may go! if i'd known this was going on, i'd not ha' seen so much of you, you may be sure of that! as it is, good-day! good-day to you!" it was indeed a _débâcle_; and arthur could hardly believe his ears, or that he stood in his own shoes. in a moment, in one moment he had fallen from the height of favor and the pinnacle of influence, and disowned and defeated, he could hardly take in the mischance that had befallen him. slowly he got to his feet, and as soon as he could master his voice, "i'm grieved, sir," he answered, "more grieved than i, can say, that you should take it like this--when i have no choice. i am sorry for my own sake." "ay, ay!" with grim irony. "i can believe that." "and sorry for josina's." he could think of no further plea at the moment--he must wait and hope for the best; and he moved towards the door, cursing his folly, his all but incredible folly, but finding no remedy. his hand was on the latch of the door when "wait!" the old man said. arthur turned and waited; wondering, even hoping. the squire sat, looking straight before him, if that might be said of a blind man, and presently he sighed. then, "here, come back!" he ordered. but again for awhile he said no more, and arthur waited, completely in the dark as to what was working in the other's mind. at last. "there, maybe i've been hasty," the old man muttered, "and not thought of all. will you leave the bank when you can, young man?" "of course, i will, sir!" arthur cried. "then--then you may speak to her," the squire said reluctantly, and he marked the reluctance with another sigh. and so, as suddenly as he had raised the objection, he withdrew it, to arthur's intense astonishment. only one conclusion could he draw--that the squire was indeed failing. and on that, with a hastily murmured word of thanks, he escaped from the room, hardly knowing whether he walked on his head or his feet. lord, what a near thing it had been. and yet--no! the squire--it must be that--was a failing man. he had no longer the strength or the stubbornness to hold to the course that his whims or his crabbed humor suggested. the danger might not have been so real or substantial, after all. yet the relief was great, and coming on miss peacock, who was crossing the hall with a bowl in her hand, he seized her by the waist and whirled her round, bowl and all. "hallo, peacock! hallo, peacock!" he cried in the exuberance of his joy. "where's jos?" "let go!" she cried. "you'll have it over! what's come to you?" "where's jos? where's jos?" "good gracious, how should i know? there, be quiet," in pretended anger, though she liked it well enough. "what's come to you? if you must know, she's moping in her room. it's where i find her most times when she's not catching cold in the gardenhouse, and her father's noticed it at last. he's in a pretty stew about her, and if you ask me, i don't think that she's ever got over that night." "i'll cure her!" arthur cried in a glow, and he gave miss peacock another twirl. but he had no opportunity of trying his cure that evening, for jos, when she came downstairs, kept close to her father, and it was not until after breakfast on the morrow that he saw her go into the garden through the side-door, a relic of the older house that had once stood there. to frame it a stone arch of tudor date had been filled in, and on either side of this, outlined in stone on the brick wall, was a pointed window of three lights. but arthur's thoughts as he followed jos into the garden were far from such dry-as-dust matters. the reaction after fear, the assurance that all was well, intoxicated him, and in a glow of spirits that defied the november day he strode down the walk under boughs that half-bare, and over leaves that half-shrivelled, owned alike the touch of autumn. he caught sight of a skirt on the raised walk at the farther end of the garden and he made for it, bounding up the four steps with a light foot and a lover's haste. a handsome young fellow, with a conquering air! jos was leaning on the wall, a shawl about her shoulders, her eyes bent on the mill and the thirty acres; and her presence in that place on that not too cheerful morning, and her pensive stillness, might have set him wondering, had he given himself time to think. but he was full of his purpose, he viewed her only as she affected it, and he saw nothing except what he wished to see. when, hearing his footsteps, she turned, her color did not rise--and that too might have told him something. but had he spared this a thought, it would only have been to think that her color would rise soon enough when he spoke. "jos!" he cried, while some paces still separated them. "i've seen your father! and i've spoken to him!" he waved his hand as one proclaiming a victory. but what victory? jos was as much in the dark as if he had never paid court to her in those far-off days. "is anything the matter?" she asked, and she turned as if she would go back to the house. but he barred the way. "nothing," he said. "why should there be? on the contrary, dear. don't i tell you that i've spoken to the squire? and he says that i may speak to you." "to me?" she looked at him candidly, with no inkling in her mind of what he meant. "yes! my dear girl, don't you understand? he has given me leave to speak to you--to ask you to be my wife?" and as her lips parted and she gazed at him in astonishment, he took possession of her hand. the position was all in favor of a lover, for the parapet was behind her, and she could not escape if she would; while the ordeal through which he had passed gave this lover an ardor that he might otherwise have lacked. "jos, dear," he continued, looking into her eyes, "i've waited--waited patiently, knowing that it was useless to speak until he gave me leave. but now"--after all, love-making with that pretty startled face before him, that trembling hand in his, was not unpleasant--"i come to you--for my reward." "but, arthur," she protested, almost too much surprised for words, "i had no idea----" "come, don't say that! don't say that, jos dear! no idea? why, hasn't it always been this way with us! since the day that we cut our names on the old pew? haven't i seen you blush like a rose when you looked at it--many and many a time? and if i haven't dared to make love to you of late, surely you have known what was in my mind? have we not always been meaning this--you and i?" she was thunder-struck. had it been really so? could he be right? had she been blind, and had he been feeling all this while she guessed nothing of it? she looked at him in distress, in increasing distress. "but indeed, indeed," she said, "i have not been meaning it, arthur, i have not, indeed!" "not?" incredulously. "you've not known that i----" "no!" she protested. "and i don't think that it has always been so with us." then, collecting herself and in a firmer voice, "no, arthur, not lately, i am sure. i don't think that it has been so on your side--i don't, indeed. and i'm sure that i have not thought of this myself." "jos!" "no, arthur, i have not, indeed." "you haven't seen that i loved you?" "no. and," looking him steadily in the face, "i am not sure that you do." "then let me tell you that i do. i do!" and he tried to possess himself of her other hand, and there was a little struggle between them. "dear, dear girl, i do love you," he swore. "and i want you, i want you for my wife. and your father permits it. do you understand--i don't think you do? he sanctions it." he would have put his arm round her, thinking to overcome her bashfulness, thinking that this was but maidenly pride, waiting to be conquered. but she freed herself with unexpected vigor and slipped from him. "no, i don't wish it!" she said. and her attitude and her tone were so resolute, that he could no longer deceive himself. "no! listen, arthur." she was pale, but there was a surprising firmness in her face. "listen! i do not believe that you love me. you have given me no cause to think so these many months. such a boy and girl affection as was once between us might have grown into love in time, had you wished it. but you did not seem to wish it, and it has not. what you feel is not love." "you know so much about love!" he scoffed. he was taken aback, but he tried to laugh--tried to pass it off. but she did not give way. "i know what love is," she answered firmly. and then, without apparent cause, a burning blush rose to her very hair. yet, in defiance of this, she repeated her words. "i know what love is, and i do not believe that you feel it for me. and i am sure, quite sure, arthur," in a lower tone, "that i do not feel it for you. i could not be your wife." "jos!" he pleaded earnestly. "you are joking! surely you are joking." "no, i am not joking. i do not wish to hurt you. i am grieved if i do hurt you. but that is the truth. i do not want to marry you." he stared at her. at last she had compelled him to believe her, and he reddened with anger; only to turn pale, a moment later, as a picture of himself humiliated and rejected, his plans spoiled by the fancy of this foolish girl, rose before him. he could not understand it; it seemed incredible. and there must be some reason? desperately he clutched at the thought that she was afraid of her father. she had not grasped the fact that the squire had sanctioned his suit, and, controlling his voice as well as he could, "are you really in earnest, jos?" he said. "do you understand that your father is willing? that it is indeed his wish that we should marry?" "i cannot help it." "but--love?" though he tried to keep his temper his voice was growing sharp. "what, after all, do you know of--love?" and rapidly his mind ran over the possibilities. no, there could be no one else. she knew few, and among them no one who could have courted her without his knowledge. for, strange to say, no inkling of the meetings between clement and his cousin had reached him. they had all taken place within a few weeks, they had ceased some months back, and though there were probably some in the house who had seen things and drawn their conclusions, the favorers of young love are many, and no one save thomas had tried to make mischief. no, there could be no one, he decided; it was just a silly girl's romantic notion. "and how can you say," he continued, "that mine is not real love? what do you know of it? believe me, jos, you are playing with your happiness. and with mine." "i do not think so," she answered gravely. "as to my own, i am sure, arthur. i do not love you and i cannot marry you." "and that is your answer?" "yes, it must be." he forced a laugh. "well, it will be news for your father," he said. "a clever game you have played, miss jos! never tell me that it is not in women's nature to play the coquette after this. why, if i had treated you as you have treated me--and made a fool of me! made a fool of me!" he reiterated passionately, unable to control his chagrin--"i should deserve to be whipped!" and afraid that he would break down before her and disgrace his manhood, he turned about, sprang down the steps and savagely spurning, savagely trampling under foot the shrivelled leaves, he strode across the garden to the house. "the little fool!" he muttered, and he clenched his hands as if he could have crushed her within them. "the little fool!" he was angry, he was very angry, for hitherto fortune had spoiled him. he had been successful, as men with a single aim usually are successful. he had attained to most of the things which he had desired. now to fail where he had deemed himself most sure, to be repulsed where he had fancied that he had only to stoop, to be scorned where he had thought that he had but to throw the handkerchief, to be rejected and rejected by jos--it was enough to make any man angry, to make any man grind his teeth and swear! and how--how in the world was he to explain the matter to his uncle? how account to him for his confidence in the issue? his cheeks burned as he thought of it. he was angry. but his wrath was no match for the disappointment that warred with it and presently, as passion waned, overcame it. he had to face and to weigh the consequences. the loss of jos meant much more than the loss of a mild and biddable wife with a certain charm of her own. it meant the loss of garth, of the influence that belonged to it, the importance that flowed from it, the position it conferred. it meant the loss of a thing which he had come to consider as his own. the caprice of this obstinate girl robbed him of that which he had bought by a long servitude, by much patience, by many a tiresome ride between town and country! there, in that loss, was the true pinch! but he must think of it. he must take time to review the position and consider how he might deal with it. it might be that all was not yet lost--even at garth. in the meantime he avoided seeing his uncle, and muttering a word to miss peacock, he had his horse saddled. he mounted in the yard and descended the drive at his usual pace. but as soon as he had gained the road, he lashed his nag into a canter, and set his face for town. at worst the bank remained, and he must see that it did remain. he must not let himself be scared by ovington's alarms. if a crisis came he must tackle the business as he alone could tackle business, and all would be well. he was sure of it. withal he was spared one pang, the pang of disappointed love. chapter xxiv arthur was at the bank by noon, and up to that time nothing had occurred to justify the banker's apprehensions or to alarm the most timid. business seemed to be a little slack, the bank door had a rest, and there was less coming and going. but in the main things appeared to be moving as usual, and arthur, standing at his desk in an atmosphere as far removed as possible from that of garth, had time to review the check that he had received at josina's hands, and to consider whether, with the squire's help, it might not still be repaired. but an hour or two later a thing occurred which might have passed unnoticed at another time, but on that day had a meaning for three out of the five in the bank. the door opened a little more abruptly than usual, a man pushed his way in. he was a publican in a fair way of business in the town, a smug ruddy-gilled man who, in his younger days, had been a pugilist at birmingham and still ran a cock-pit behind the spotted dog, between the foregate and the river. he stepped to the counter, his small shrewd eyes roving slyly from one to another. arthur went forward to attend to him. "what is it, mr. brownjohn?" he asked. but already his suspicions were aroused. "well, sir," the man answered bluntly, "what we most of us want, sir. the rhino!" "then you've come to the right shop for that," arthur rejoined, falling into his humor. "how much?" "how's my account, sir?" arthur consulted the book which he took from a ledge below the counter. in our time he would have scribbled the sum on a scrap of paper and passed the paper over in silence. but in those days many customers would have been none the wiser for that, for they could not read. so, "one, four, two, and three and six-pence," he said. "well, i'll take it," the publican announced, gazing straight before him. arthur understood, but not a muscle of his face betrayed his knowledge. "brewers' day?" he said lightly. "mr. rodd, draw a cheque for mr. brownjohn. one four two, three and six. better leave five pounds to keep the account open?" "oh, well!" mr. brownjohn was a little taken aback. "yes, sir, very well." "one three seven, rodd, three and six." and while the customer, laboriously and with a crimsoning face, scrawled his signature on the cheque, arthur opened a drawer and counted out the amount in ovington's notes. "twenty-seven fives, and two, three, six," he muttered, pushing it over. "you'll find that right, i think." brownjohn had had his lesson from wolley, who put up at his house, but he had not learnt it perfectly. he took the notes, and thumbed them over, wetting his thumb as he turned each, and he found the tale correct. "much obliged, gentlemen," he muttered, and with a perspiring brow he effected his retreat. already he doubted--so willingly had his money been paid--if he had been wise. he was glad that he had left the five pounds. but the door had hardly closed on him before arthur asked the cashier how much gold he had in the cash drawer. "the usual, sir. one hundred and fifty and thirty-two, thirty-three, thirty-four--one hundred and eighty-four." "fetch up two hundred more before mr. brownjohn comes back," arthur said. "don't lose time." rodd did not like arthur, but he did silent homage to his sharpness. he hastened to the safe and was back in two minutes with twenty rouleaux of sovereigns. "shall i break them, sir?" he asked. "yes, i think so. ah!" as the door swung open and one of the welsh brothers entered. it was mr. frederick. arthur nodded. "good day, welsh, i was thinking of you. i fancy clement wants to see you." "right--in one moment," the lawyer replied. "just put that----" but arthur saw that he had a cheque to pay in--he banked at dean's but had clients' accounts with them--and he broke in on his business. "clement," he said, "here's welsh. just give him your father's message." clement came forward with his father's invitation--oysters and whist at five on friday--and his opinion on a glass of ' he was laying down? he kept the lawyer in talk for a minute or two, and then, as arthur had shrewdly calculated, the door opened and brownjohn slid in. the man's face was red, and he looked heartily ashamed of himself, but he put down his notes on the counter. he was going to speak when, "in a moment, brownjohn," arthur said. "what is it, mr. welsh?" "just put this to the hobdays' account," the lawyer answered recalled to his business. "fifty-four pounds two shillings and five-pence. and, by the way, are you going to garth on saturday?" "on saturday, or sunday, yes. can i do anything for you!" "will you tell the squire that that lease will be ready for signature on saturday week. if you don't mind i'll send it over by you. it will save me a journey." "good. i'll tell him. he has been fretting about it. good-day! now, mr. brownjohn?" "i'd like cash for these," the innkeeper mumbled, thrusting forward the notes, but looking thoroughly ill at ease. "man alive, why didn't you say so?" arthur answered, good-humoredly, "and save yourself the trouble of two journeys? mr. rodd, cash for these, please. i've forgotten something i must tell welsh!" and flinging the cash drawer wide open, he raised the counter-flap and hurried after the lawyer. rodd knew what was expected of him, and he took out several fistsful of gold and rattled it down before him. rapidly, as if he handled so many peas, he counted out and thrust aside mr. brownjohn's portion, swiftly reckoned it a second time, then swept the balance back into the open drawer. "i think you'll find that right," he said. "better count it. how's your little girl that was ailing, mr. brownjohn?" brownjohn muttered something, his face lighting up. then he counted his gold and sneaked out, impressed, as arthur had intended he should be, with his own unimportance, and more inclined than before to think that he had made a mistake in following wolley's advice. but before the bank closed that day two other customers came in and drew out the greater part of their balances. they were both men connected in one way or another with the clothier, and the thing stopped there. the following day was uneventful, but the drawings had been unusual, and the two young clerks might have exchanged notes upon the subject if their elders had not appeared so entirely unconscious. as it was, it was impossible for them to think that anything out of the common had happened. worse, and far more important, than this matter was the fact that stocks and shares continued to fall all that week. night after night the arrival of the famous "wonder," the fast coach which did the journey from london in fifteen hours, was awaited by men who thought nothing of the wintry weather if they might have the latest news. afternoon after afternoon the journals brought by the mail were fought for and opened in the street by men whose faces grew longer as the week ran on. some strode up jauntily, and joined themselves to the group of loungers before the coach-office, while others sneaked up privily, went no farther than the fringe of the crowd, and there, gravitating together by twos and threes, conferred in low voices over prices and changes. some, until the coach arrived, lurked in a neighboring churchyard, raised above the street, and glancing suspiciously at one another affected to be immersed in the study of crumbling gravestones; while a few made a pretence of being surprised, as they passed, by the arrival of the mail, or hiding themselves in doorways appeared only at the last moment, and when they believed that they might do so unobserved. one thing was noticeable of nearly all these; that they avoided one another's eyes, as if, declining to observe others, they became themselves unseen. once possessed of the paper they behaved in different ways, according as they were of a sanguine or despondent nature. some tore the sheet open at once, devoured a particular column and stamped or swore, or sometimes flung the paper underfoot. others sneaked off to the churchyard or to some neighboring nook, and there, unable to wait longer, opened the journal with shaking fingers; while a few--and these perhaps had the most at stake--dared not trust themselves to learn the news where they might by any chance be overlooked, but hurried homewards through "shuts" and by-lanes, and locked themselves in their offices, afraid to let even their wives come near them. for the news was very serious to very many; the more so as, inexperienced in speculation, they clung for the most part to the hope of a recovery, and could not bring themselves to sell at a lower figure than that which they might have got a week before. much less could they bring themselves to sell at an actual loss. they had sat down to play a winning game, and they could not now believe that the seats were reversed, and that they were liable to lose all that they had gained, nay, in many cases much more than their stake. amazed, they saw stocks falling, crumbling, nay, sinking to a nominal value, while large calls on them remained to be paid, and loans on them to be repaid. no wonder that they stared aghast, or that many after a period of stupefaction, at a state of things so new and so paralyzing, began to feel that it was neck or nothing with them, and bought when they should have sold, seeing that in any case the price to which stock was falling meant their ruin. for a time indeed there was no public outcry and no great excitement on the surface. for a time men kept their troubles to themselves, jealous lest they should get abroad, and few suspected how common was their plight or how many shared it. men talk of their gains but not of their losses, and the last thing desired by a business man on the brink of ruin is that his position should be made public. but those behind the scenes feared only the more for the morrow; for with this ferment of fear and suspense working beneath the surface it was impossible to say at what moment an eruption might not take place or where the ruin would stop. one thing was certain, that it would not be confined to the speculators, for many a sober trader, who had never bought shares in his life, would fail, beggared by the bankruptcy of his debtors. ovington returned on the friday, and arthur met him at the lion, as he had met him eleven months before. they played their parts well--so well that even arthur did not learn the news until the door of the bank had closed behind them and they were closeted with clement in the dining-room. then they learned that the news was bad--as bad as it could be. the banker retained his composure and told his story with calmness, but he looked very weary. williams'--williams and co. were ovington's correspondents in london--would do nothing, he told them. "they would not re-discount a single bill nor hear of an acceptance. my own opinion is that they cannot." arthur looked much disturbed. "as bad as that," he said, "is it?" "yes, and i believe, nay, i am sure, lad, that they fear for themselves. i saw the younger williams. he gave me good words, but that was all; and he looked ill and harassed to the last degree. there was a frightened look about them all. i told them that if they would re-discount fifteen thousand pounds of sound short bills, we should need no further help, and might by and by be able to help others. but he would do nothing. i said i should go to the bank. he let out--though he was very close--that others had done so, and that the bank would do nothing. he hinted that they were short of gold there, and saw nothing for it but a policy of restriction. however, i went there, of course. they were very civil, but they told me frankly that it was impossible to help all who came to them; that they must protect their reserve. they were inclined to find fault, and said it was credit recklessly granted that had produced the trouble, and the only cure was restriction." "but surely," arthur protested, "where a bank is able to show that it is solvent?" "i argued it with them. i told them that i agreed that the cure was to draw in, but that they should have entered on that path earlier; that to enter on it now suddenly and without discrimination after a period of laxity was the way to bring on the worst disaster the country had ever known. that to give help where it could be shown that moderate help would suffice, to support the sound and let the rotten go was the proper policy, and would limit the trouble. but i could not persuade them. they would not take the best bills, would in fact take nothing, discount nothing, would hardly advance even on government securities. when i left them----" "yes?" the banker had paused, his face betraying emotion. "i heard a rumor about pole's." "pole's? pole's!" arthur cried, astounded; and he turned a shade paler. "sir peter pole and co.? you don't mean it, sir? why, if they go scores of country banks will go! scores! they are agents for sixty or seventy, aren't they?" the banker nodded. his weariness was more and more apparent. "yes, pole's," he said gloomily. "and i heard it on good authority. the truth is--it has not extended to the public yet, but in the banks there is panic already. they do not know where the first crash will come, or who may be affected. and any moment the scare may spread to the public. when it does it will run through the country like wild-fire. it will be here in twenty-four hours. it will shake even dean's. it will shake us down. my god! when i think that for the lack of ten or twelve thousand pounds--which a year ago we could have raised three times over with the stroke of a pen--just for the lack of that a sound business like this----" he broke off, unable to control his voice. he could not continue. clement went out softly, and for a minute or so there was silence in the room, broken only by the ticking of the clock, the noise of wheels in the street, the voices of passers-by--voices that drifted in and died away again, as the speakers walked by on the pavement. opposite the bank, at the corner of the market place, two dogs were fighting before a barber's shop. a woman drove them off with an umbrella. her "shoo! shoo!" was audible in the silence of the room. before either spoke again, clement returned. he bore a decanter of port, a glass, a slice of cake. "d'you take this, sir," he said. "you are worn out. and never fear," cheerily, "we shall pull through yet, sir. there will surely be some who will see that it will pay better to help us than to pull us down." the banker smiled at him, but his hand shook as he poured out the wine. "i hope so," he said. "but we must buckle to. it will try us all. a run once started--have there been any withdrawals?" they told him what had happened and described the state of feeling in the town. rodd had been going about, gauging it quietly. he could do so more easily, and with less suspicion, than the partners. people were more free with him. ovington held his glass before him by the stem and looked thoughtfully at it. "that reminds me," he said, "rodd had some money with us--three hundred on deposit, i think. he had better have it. it will make no difference one way or the other, and he cannot afford to lose it." arthur looked doubtful. "three hundred," he said, "might make the difference." "well, it might, of course," the banker admitted wearily. "but he had better have it. i should not like him to suffer." "no," clement said. "he must have it. shall i see to it now? the sooner the better." no one demurred, and he left the room. when he had gone arthur rose and walked to the window. he looked out. presently he turned. "as to that twelve thousand?" he said. "that you said would pull us through? is there no way of getting it? can't you think of any way, sir?" "i am afraid not," ovington answered, shaking his head. "i see no way. i've strained our resources, i've tried every way. i see no way unless----" "yes, sir? unless?" "unless--and i am afraid that there is no chance of that--your uncle could be induced to come forward and support us--in your interest." arthur laughed aloud, but there was no mirth in the sound. "if that is your hope, if you have any idea of that kind, sir," he said, "i am afraid you don't know him yet. i know nothing less likely." "i am afraid that you are right. still, your future is at stake. i am sorry that it is so, lad, but there it is. and if it could be made clear to him that he ran no risk?" "but could it? could it?" "he would run no risk." "but could he be brought to see that?" arthur spoke sharply, almost with contempt. "of course he could not! if you knew what his attitude is towards banks generally, and bankers, you would see the absurdity of it! he hates the very name of ovington's." the other yielded. "just so," he said. even to him the idea was unpalatable. "it was only a forlorn hope, a wild idea, lad, and i'll say no more about it. it comes to this, that we must depend on ourselves, show a brave face, and hope for the best." but arthur, though he had scoffed at the suggestion which ovington had made, could not refrain from turning it over in his mind. he had courage enough for anything, and it was not the lack of that which hindered him from entertaining the project. the storm which was gathering ahead, and which threatened the shipwreck of his cherished ambition and his dearest hopes, was terrible to him, and to escape from its fury he would have faced any man, had that been all. but that was not all. he had other interests. if he applied to the squire and the squire took it amiss, as it was pretty certain that he would, then not only would no good be done and no point be gained, but the life-boat, on which he might himself escape, if things came to the worst, would be shipwrecked also. for that life-boat consisted in the squire's influence with josina. the squire's word might still prevail with the girl, silly and unpractical as she was. it was a chance; no more than a chance, arthur recognized that. but at garth the old man's will had always been law, and if he could be brought to put his foot down, arthur could not believe that josina would resist him. and amid the wreck of so many hopes and so many ambitions, every chance, even a desperate chance, was of value. but if he was to retain the squire's favor, if he was to fall back on his influence, he must do nothing to forfeit that favor. certainly he must not hazard it by acting on a suggestion as ill-timed and hopeless as that which the banker had put forward. not to save the bank, not to save ovington, not to save anyone! the more, as he felt sure that the application would do none of these things. ovington did not know the old man. he did, and he was not going to sink his craft, crank and frail as it already was, by taking in passengers. chapter xxv while the leaven of uneasiness, fermenting into fear, and liable at any moment to breed panic, worked in aldersbury, turning the sallow bilious and the sanguine irritable--while the contents of the mail-bag and the _gazette_ were awaited with growing apprehension, and inklings of the truth, leaking out, were turning to water the hearts of those who depended on the speculators, life at garth was proceeding after its ordinary fashion. no word of what was impending, or might be impending, travelled so far. no echo of the alarm that assailed the ears of terrified men, forced on a sudden to face unimagined disaster, broke the silence of the drab room, where the squire sat brooding, or of the garden where josina spent hours, pacing the raised walk and looking down on that strip of sward where the water skirted the thirty acres wood. that strip of sward where she had met him, that view from the garden were all that now remained to her of clement, all that proved to her that the past was not a dream; and they did much to keep hope alive in her breast, and to hold her firm in her resolve. so precious indeed were the associations they recalled, that while, with the hardness of a woman who loves elsewhere, she felt little sympathy with arthur in his disappointment, she actively resented the fact that he had chosen to address her there, and so had profaned the one spot, on which with some approach to nearness, she could dream of clement. living a life so retired, and with little to distract her, she gave herself to long thoughts of her lover, and lived and lived again the stolen moments which she had spent with him. it was on these that she nourished her courage and strengthened her will; for, bred to submission and educated to obey, it was no small thing that she contemplated. nor could she have raised herself to the pitch of determination which she had reached had she not gained elevation from the thought that the matter now rested in her own hands, and that all clement's trust and all his dependence were on her. she must be true to him or she would fail him indeed. honor no less than love required her to be firm, let her timid heart beat as it might. on wet days she sat in the dutch summer-house, the squat tower with the pyramidal roof and fox-vane on top, which flanked the raised walk, and had, when viewed from below, the look of a bastion. but the day after ovington's return happened to be fine. it was one of those days of mild sunshine and soft air, which occur in late autumn or early winter and, by reason of their rarity, linger in the memory; and she was walking in the garden when, an hour before noon, calamy came to tell her that "the master" was asking for her. "and very peevish," he added, shaking his head as he stalked away under the apple-trees, "as he's like to be, more and more till the end." she overtook the man in the hall. "is he alone, calamy?" she asked. "ay, but your a'nt's been with him. he's for going up the hill." "up the hill?" "ay, he's one that will walk while he can. but the next time, i'm thinking," shaking his head again, "it won't be his feet he'll go out on." "mrs. bourdillon has gone?" "ay, miss, she's gone--as we're all going," despondently, "sooner or later. she brought some paper, for i heard her reading to him. it would be his will, i expect." josina thought the supposition most unlikely, for if her father was close with his money he was at least as close with his affairs. as long as she could remember he had held himself in a crabbed reserve, he had moved a silent master in a dependent world, even his rare outbursts of anger had rather emphasized than broken his reticence. and since the attack which had consigned him to darkness he had grown even more taciturn. he had not repelled sympathy; he had rendered it impossible by ignoring the existence of a cause for it. while all about him had feared for his sight and, as hope faded, had dreaded the question which they believed to be trembling on his lips, he had either never hoped, or, drawing his own conclusions, had abandoned hope. at any rate, he had never asked. instead he sat--when arthur was not there to enliven him or fewtrell to report to him--wrapped in his own thoughts, too proud to complain or too insensible to feel, and silent. whatever he thought, whatever he feared, he hid all behind an impenetrable mask; and whether pride or patience or resignation were behind that mark, none knew. complaint, pity, sympathy, these, he seemed to say, were for the herd. he had ruled; darkness and helplessness had come upon him, but he was still the master. arthur might think that he failed, but those who were always about him saw few signs of it. to-day, when josina entered his room she found him on his feet, one hand resting on the table, the other on his cane. "get your hat and cloak," he said. "i am going up the hill." so far his longest excursion had been to the mill, and josina thought that she ought to remonstrate. "won't it be too far, sir?" she said. "do as i say, girl. and tell calamy to bring my hat and coat." she obeyed him, and a minute later they left the house by the yard door. he walked with a firm step, his hand sometimes on her shoulder, sometimes on her arm; but aware how easily she might forget to warn him of an obstacle, or to allow for his passage, she accompanied him with her heart in her mouth. yet she owned a certain sweetness in his dependence on her, in the weight of his hand on her shoulder, in his nearness. before they left the yard he halted. "look in the pig-styes," he said. "tell me if that idle dog has cleaned them?" she went and looked, and assured him that they were in their usual state. he grunted, and they moved on. passing beneath the gable end of the summer-house they descended the steep, rutted lane which led to the mill. "the first day of the year was such a day," the squire muttered, and raised his face that the sun might fall upon it. when they came to the narrow bridge beside the mill, with its roughened causeway eternally shaken by the roar and wet with the spray of the overshot wheel, she trembled. there was no parapet, and the bridge was barely wide enough to permit them to pass abreast. but he showed no fear, he stepped on to it firmly, and on the crown he halted. "look what water is in the pound," he said. "had i not better wait--till you are over, sir?" "do as i say, girl! do as i say!" he struck his cane impatiently on the stones. she left him unwillingly, and more than once looked back, but always to see him standing, gaunt and slightly stooping, his sightless eyes bent on the groaning, laboring wheel, on the silvery cascade that poured over its black flanges, on the fragment of rainbow that glittered where the sun shot the spray with colors. he was seeing it all, as he had seen it a thousand times: in childhood, when he had lingered and wondered before it, fascinated by the rush and awed by the thunder of the falling water; in youth, when with gun or rod he had just glanced at it in passing; in manhood, when it had come to be one of the amenities of the property, and he had measured its condition with an owner's eye; ay, and in later life, when to see it had been rather to call up memories, than to form new impressions. now, he would never see it again with his eyes, and he knew it. and yet he had never seen it more clearly than he did to-day, as he stood in darkness, with the cold breath of the water-fall on his cheek. she grasped something of this as she hurried back, and satisfied as to the pound he went on. they ascended the lane which, on the farther side of the brook, led to the highway, and crossing the road began to climb the rough track, that wound up through that part of the covert which was above the road. here and there a clump of hollies, a spreading yew, a patch of young beech to which the leaves still clung, blocked the view, but for the most part the eye passed unobstructed athwart trees stripped of foliage, and disclosing here a huge boulder, there a pile of moss-grown stones. a climb of a third of a mile, much of it steep, brought them without mishap--though a hundred times she trembled lest he should trip--to the abrupt glacis of sward that fringed, and in places ran up into, the limestone face. it was broken by huge stones, precariously stayed in their descent, or by outcrops of rock from which sprang slender birches, light, graceful, their white bark shining. "are we clear of the wood?" he asked, lifting his face to meet the breeze. "yes, sir." he turned leftwards. "there's a flat stone with a holly to north of it. d'you see it? i'll sit there." she led him to it and he sat down on the stone, his stick between his knees, the sunshine on his face. she sat beside him, and as she looked over the expanse of pleasant vale and the ring of hills that compassed it about, the sense of his blindness moved her almost to tears. at their feet garth, its red walls, its buildings and yards and policies, lay as on a plan. beyond it, the tower of garthmyle church rose in the middle distance, a few thatched roofs peeping through the half-leafless trees about it. leftwards the valley narrowed as the welsh hills closed in, while to their right it melted into the smiling plain with its nestling villages, its rows of poplars, its shining streams. she fancied that he had been in the habit of coming to this place, and the thought that he saw no more from it now than when he sat in his room below, that he viewed nothing of the bright landscape spread beneath her own eyes, swelled her breast with pity. she could have cast her arms about him and wept as she strove to comfort him--could have sworn to him that while he lived her eyes should be his! ay, she could have done this, all this--if he had been other than he was! perhaps it was as well--or perhaps it was not as well--that she did not give way to the impulse. for presently in a voice as dry as usual, "do you see the gable of wolley's mill, girl? carry your eyes right of the hill, over the coppice at the corner of archer's leasow?" she told him that she could see it. "that's two miles away. it's the farthest i own in that direction, but there's a slip of acherley's land between us and it. now look down the valley--d'you see five poplars in a row?" "yes, sir, i see them." "that's our boundary towards the town. behind us we march with the watershed. facing us--the boundary is the far fence of whittall's farm at the foot of the hills." "the black and white house, sir?" "ay. well, look at it, girl. there's five thousand acres and a bit over; and there's two hundred and ninety people living on it--there's barely one of them i don't know. i've looked after them, but i've not cosseted them, and don't you cosset them. and it's not only the people; there's not a field i don't know nor a bit of coppice that i can't see, nor a slate roof that i have not slated, and the lord knows how much of it i've drained. it's been ours, the heart of it since queen bess, and part of it since mary; sometimes logged with debt, and then again cleared. i came into it logged, and i've cleared it. it's come down, sometimes straight, sometimes sideways, but always in a man's hands. well, it will soon be in a girl's. in two or three years, more or less, it will be yours, my girl. and do you mark what i say to you this day. you're the heir of tail, and i couldn't take it from you, if i would--but do you mark me!" he found her hand and gripped it so hard as to give her pain, but she would not wince. "don't you part with an acre of it! not with an acre of it! not with an acre of it! do you hear me, girl; or i think i'll turn in my grave! if you are bidden to do it when your son comes of age, you think of me and of this day, and don't put your hand to it! hold to the land, hold to the land, and they as come after you shall hold up their heads as we have held ours! it isn't money, it isn't land bought with money, it's the land that's come down, that will keep griffins where griffins have been. when i am gone do you mark that! whatever betide, let 'em say what they like, don't you be one of those that sell their birthright, the right to govern, for a mess of pottage!" "i will remember, sir!" she said with tears. "i will, i will indeed!" "ay, never forget it, don't you forget this day. i ha' brought you up the hill on purpose to show you that. for fifty years i have spared and lived niggardly and put shilling to shilling to clear that land and to drain it and round it--and may be, for acherley is a random spendthrift, i'll yet add that strip of his to it! i've lived for the land, that those who come after me may govern their corner as griffins have governed it time out of mind. i've done my duty by the people and the land. don't you forget to do yours." she told him earnestly that she never would--she never would. after that he was silent awhile. he let her hand go. but presently, and without warning, "why don't you ha' the lad?" josina was surprised and yet not surprised; or if surprised at all, it was at her own calmness. her color ebbed, but she neither trembled nor faltered. she had not even to summon up the thought of clement. the charge to which she had just listened clothed her with a dignity which the prospect, spread before her eyes and insensibly raising her mind to higher issues, helped to support. "i couldn't, sir," she said quietly. "i do not love him." "don't love him?" the squire repeated--yet not half so angrily as she expected. "what's amiss with him?"' "nothing, sir. but i do not love him." "love? bah! love'll come! maids ha' naught to do with love! when they're married love'll come fast enough, i'll warrant! the lad's straight and comely and a proper age--and what else do you want? what else do you want, eh? he's of your own blood, and if he's wild ideas 'tis better than wild oats, and he'll give them up. he's promised me that, or i'd never ha' said yes to him! why, girl!" with sudden exasperation, "'twas only the other day you were peaking and puling for him! peaking and puling like a sick sparrow, and i was saying, no! and now--why, damme, what do you mean by it?" "it was all a mistake, sir," she said with dignity. "i never did think of him, or wish for him. it was a mistake." "a mistake! what do you mean?" "you bade me think no more of him, and i obeyed. but--but i never had any thought of him." that did irritate the old man; it seemed to him that she played with him. in a rage he struck his cane on the ground. "damme!" he exclaimed. "that's womanlike all over! give her what she wants and she doesn't want it. but, see here, i'll not have it, girl. i know your flimsies and you've got to have him! do you hear?" he was enraged by this queer twist in her, and he blustered. but his anger--and he felt it--lacked something of force. he did not know how to bring it to bear. and when she did not reply to him at once, "do you forget that he saved my life?" he cried, dropping to a lower level. "d'you forget that, you ungrateful wench?" "but he did not save mine, sir!" she answered, with astonishing spirit. "yet it is mine that you ask me to give him. and indeed, indeed, sir, he does not love me." "then why should he want you?" he retorted. "but he'll soon make you sure of that, if you'll let him. and you've got to take him. you've got to take him. let's ha' no more words about it. i've said the word." "but i've not, sir," she replied, with that new and astonishing courage of hers. "and i cannot say it. i am grateful to him, i shall ever be grateful to him for saving you--and he is my cousin. but he does not love me, he has never made love to me. and am i, your daughter, to--to accept him, the moment it suits him to marry me?" that touched the squire's pride. it gave him to think. "never made love to you?" he exclaimed. "what do you mean, girl?" "until he came to me in the garden on tuesday he never--he never gave me reason to think that he would come. am i," with a tremor of indignation in her voice, "of so little account, is that which you have just told me that i may some day bring to him so little, that i must put all in his hand the moment he chooses to lift it?" the squire was bothered by that, and "you are like all women!" he exclaimed. "i don't know where to ha' you. that's where it is. you twist and you turn, and you fib----" "i am not fibbing, sir." "and you've as many quirks as--as a hunted hare. there's no holding you! my father would ha' locked you up with bread and water till you did what you were told, and my mother'd ha' boxed your ears till she put some sense into you. but we're a d--d silly generation. we're too soft!" she minded this little, as long as he did not put her to the supreme test; as long as he did not ask her if there was anyone else, any other lover. but his mind was now busy with arthur. was it true that the young spark was thinking more of garth than of the girl? more of the heiress than of the sweetheart? more of lucre than of love? if so, d--n his impudence! he deserved what he had got! from which point it was but a step to thoughts of the bank. ay, arthur was certainly one who had his plans for getting on, and getting on in ways to which no griffin had stooped before. was this of a piece with them? the doubt had a cooling effect upon him. while josina trembled lest the fateful question should still be put, and clenched her little hands as she summoned up fortitude to meet it--while she tried to still the fluttering of her heart, the old man relapsed into thought, muttered inarticulately, fell silent. she would have given much to know the direction of his thoughts. at last, "well, you're so clever you must settle your own affairs," he grumbled. "i'm d--d if i understand either of you, girl or man. in my time if a wench said no, we took her and hugged her till she said yes! we didn't go to her father. but since the old king died there's no red blood in the country--it's all telling and no kissing. there, i've done with it. maybe when he turns his back on you, you'll be wanting him fast enough." "no, sir, never!" she answered, overwhelmed by a victory so complete. "anyway, don't come fretting to me if you do! your aunt told me that you were pining for him, but i'm hanged if she knows more than i do--or happen you don't know your own mind. now look out, and tell me if they've finished thatching that wagoner's cottage at the bache?" "yes, sir. i can see the new straw from here," she said. "have they brought it down over the eaves?" "i'm afraid i can't see that. it's too far." "mind me to ask fewtrell. now get me home. where's your arm? i'll go down through the new planting." "but it's not so safe, sir," she remonstrated. "there's the stone stile, and----" "when i canna get over the stone stile i'll not come up the hill. i want to see the planting. d'you take me that way and tell me if the rabbits ha' got in. march, girl!" she obeyed him, but in fear and trembling, for there was not only the awkward stile to climb, but the track ran over outcrops of rocks on which even a careful walker might slip. however, he crossed the stile with ease, aided less by her arm than by his own memory of its shape, and of every stone that neighbored it; and it was only over the treacherous surface of the rock that he showed himself really dependent on her care. memory could not help him here, and here it was, as he leant on her shoulder, that she felt, her breast swelling with pity, the real, the blood tie between them. her heart went out to him, and her eyes were dim with tears when at length they stood again on the high road, and viewed, on a level with themselves but divided from them by the trough of green meadows in which the brook ran, the gables and twisted chimneys, the buttressed walls, that gave to garth its air of a fortress. the girl gazed at it, the old man's hand still on her shoulder. it was her home: she knew no other, she had never been fifty miles from it. it stood for peace, safety, protection. she loved it--never more than now, and never as much as now. and never as much as now had she loved her father; never before had she understood him so well. the last hour had wrought a change, dimly suspected by both, in their relations. they stood on a level--more on a level, at any rate; with no gulf between them but the natural interval of years, a green valley as it were, which the eyes of understanding and the light foot of love could cross at will. chapter xxvi a week and a day went by after the banker's return and there was no run upon the bank. but afar off, in london and manchester and liverpool, and even in birmingham, there were shocks and upheavals, failures and talk of failures, fear in high places, ruin in low. for there was no doubt about the crisis now. the wheels of trade, which had for some time been running sluggishly, stopped. it was impossible to sell goods, for the prudent and foreseeing had already flung their products upon the market, and glutted it, and later, others had come in and, forced to find money, had sold down and down, procuring cash at any sacrifice. now it was impossible to sell at all. men with the shelves of their warehouses loaded with goods, men whose names in ordinary times were good for thousands, could not find money to meet their trade bills, to pay their wages, to discharge their household accounts. and it was still less possible to sell shares, for shares, even sound shares, had on a sudden become waste paper. the bubble companies, created during the frenzy of the past two years, were bursting on every side, and the public, unable to discriminate, no longer put faith in anything. rudely awakened, they opened their eyes to reality. they saw that they had dreamed, and been helped to dream. they discovered that skates and warming pans were in no great request in the tropics, and could not be exported thither at a profit of five hundred per cent. they saw that churns and milkmaids, freighted to lands where the cattle ran wild on the pampas and oil was preferred to butter, were no certain basis on which to build a fortune. their visions of south american argosies melted into thin air. the silver from la plata which they had pictured as entering the mouth of the thames, or at worst as within sight from the lizard, was discovered to be reposing in the darkness of unopened seams. the pearling ships were yet to build, the divers to teach, and, for the diamonds of the brazils which this man or that man had seen lying in skin packages at the door of the bank of england, they now twinkled in a cold and distant heaven, as unapproachable as the seven stars of orion. the canals existed on paper, the railways were in the air, the harbors could not be found even on the map. the shares of companies which had passed from hand to hand at fourfold and tenfold their face value fell with appalling rapidity. they fell and fell until they were in many cases worth no more than the paper on which they were printed. and the bursting of these shams, which had never owned the smallest chance of success, brought about the fall of ventures better founded. the good suffered with the bad. presently no man would buy a share, no man would look at a share, no bank advance on its security. men saw their fortunes melt day by day as snow melts under an april sun. they saw themselves stripped, within a few weeks or even days, of wealth, of a competence, in too many cases of their all. and the ruin was widespread. it reached many a man who had never gambled or speculated. business runs on the wheels of credit, and those wheels are connected by a million unseen cogs. let one wheel stop and it is impossible to say where the stoppage will cease, or how many will be affected by it. so it was now. the honest tradesman and the manufacturer, striving to leave a competence to a family nurtured in comfort, were involved in one common ruin with the spendthrift and the speculator. the credit of all was suspect; from all alike the sources of accommodation were cut off. each in his turn involved his neighbor, and brought him down. there was a great panic. the centres of commerce and trade were convulsed. the kings of finance feared for themselves and closed their pockets. the bank of england would help no one. men who had never sought aid before, men who had held their heads high, waited, vain petitioners, at its doors. fortunately for ovington's, aldersbury lay at some distance from the centres of disturbance, and for a time, though the storm grumbled and crackled on the horizon, the town remained calm. but it was such a calm as holds the tropic seas in a breathless grip, before the typhoon, breaking from the black canopy overhead, whirls the doomed bark away, as a leaf is swept before our temperate blasts. throughout those six days, though little happened, anything, it was felt, might happen. the arrival of every coach was a thing to listen for, the opening of every mail-bag a terror, the presentation of every bill a pang, the payment of every note a thing at which to wince; while the sense of danger, borne like some infection on the air, spread mysteriously from town to village, and village to hamlet, to penetrate at last wherever one man depended on another for profit or for subsistence. and that was everywhere. a storm impended, and no man knew where it would break, or on whom it would fall. each looked in his neighbor's face and, seeing his fear reflected, wondered, and perhaps suspected. if so-and-so failed, would not such-an-one be in trouble? and if such-an-one "went," what of blank--with whom he himself had business? the feeling which prevailed did not in the main go beyond uneasiness and suspicion. but, in quarters where the facts were known and the peril was clearly discerned, these days of waiting were days--nay, every day was a week--of the most poignant anxiety. in banks, where those behind the scenes knew that not only their own stability and their own fortunes were at stake, but that if they failed there would be lamentation in a score of villages and loss in a hundred homes, endurance was strained to the breaking point. to show a cheerful face to customers, to chat over the counter with an easy air, to smile on a visitor who might be bringing in the bowstring, to listen unmoved to the murmur in the street that might presage bad news--these things made demands on nerve and patience which could not be met without distress. and every hour that passed, every post that came in, added to the strain. under this burden ovington's bearing was beyond praise. the work of his life--and he was over-old to begin it again--was in danger, and doubtless he thought of his daughter and his son. but he never faltered. he had, it is true, to support him the sense, of responsibility, which steels the heart of the born leader, even as it turns to water that of the pretender; he knew, and doubtless he was strengthened by the knowledge, that all depended on him, on his calmness, his judgment, his resources; that all looked to him for guidance and encouragement, watched his face, and marked his demeanor. but even so, he was the admiration of those in the secret. not even napoleon, supping amid his marshals, and turning over to sleep beside the watch-fire on the night before a battle, was more wonderful. his son swore fealty to him a dozen times a day. rodd, who had received his money in silence, and now stood to lose no more than his place, followed him with worshipping eyes and, perhaps, an easier mind. the clerks, who perforce had gained some inkling of the position, were relieved by his calmness, and spread abroad the confidence that they drew from him. even arthur, who bore the trial less well, admired his leader, suspected at times that he had some secret hope or some undisclosed resources, and more than once suffered himself to be plucked from depression by his example. the truth was that while financial ability was common to both, their training had been different. the elder man had been always successful, but he had been forced to strive and struggle; he had climbed but slowly at the start, and there had been more than one epoch in his career when he had stood face to face with defeat. he had won through, but he had never shut his eyes to the possibility of failure, or to the fact that in a business, which in those days witnessed every twenty years a disastrous upheaval, no man could count on, though with prudence he might anticipate, a lasting success. he had accepted his profession with its drawbacks as well as its advantages. he had not closed his eyes to its risks. he had viewed it whole. arthur, on the other hand, plunging into it with avidity at a time when all smiled and the sky was cloudless, had supposed that if he were once admitted to the bank his fortune was made, and his future secured. he knew indeed, and if challenged he would have owned, that banking was a precarious enterprise; that banks had broken. he knew that many had closed their doors in ' , still more on one black day in ' . he was aware that in the last forty years scores of bankers had failed, that some had taken their own lives, that one at least had suffered the last penalty of the law. but he had taken these things to be exceptions--things which might, indeed, recur, but not within his experience--just as in our day, though railway accidents are not uncommon, no man for that reason refrains from travelling. at any rate the thought of failure had not entered into arthur's mind, and mainly for this reason he, who in fair weather had been most confident and whose ability had shone most brightly, now cut an indifferent figure. it was not that his talent or his judgment failed; in these he still threw clement and rodd into the shade. but the risk, suddenly disclosed, was too much for him. it depressed him. he grew crabbed and soured, his temper flashing out on small provocation. he sneered at rodd, he snubbed the clerks. when it was necessary to refuse a request for credit--and the necessity arose a dozen times a day--his manner lacked the suavity that makes the best of a bad thing. in very truth they were trying times. men who had bought shares through ovington's, and might have sold them at a profit but had not, could not understand why the bank would not now advance money on the security of the shares, would not even pay calls on them, and had only advice, and that unpalatable, at their service. they came to the parlor and argued, pleaded, threatened, stormed. they would close their accounts, they would remove them to dean's, they would publish the treatment that they had received! again, there were those who had bought railway shares, which were now at a considerable discount and looked like falling farther; the bank had issued them--they looked to the bank to take them off their hands. more trying still were the applications of those who, suddenly pressed for money, came, pallid and wiping their foreheads with bandanna handkerchiefs, to plead desperately for a small overdraft, for twenty, forty, seventy pounds--just enough to pay the weekly wage-bill, or to meet their household outgoings, or to settle with some pressing creditor. for all creditors were now pressing. no man gave time, no man trusted another, and for those in the bank the question was, how long would they trust ovington's? for every man who left the doors of the bank after a futile visit, every man who went away with his request declined, became a potential enemy, whose complaint or chance word might breed suspicion. "still, every day is a day gained," the banker said as he dropped his mask on the friday afternoon and sank wearily into a chair. it was closing time, and the clerks could be heard moving in the outer room, putting away books, counting the cash, locking the drawers. another day had passed without special pressure. "time is everything." arthur shrugged his shoulders. "it would be, if it were money." "well, i think that we are doing capitally--capitally so far," said clement. "i am glad you are satisfied," arthur retorted. "we are four hundred down on the day! i can't think, sir"--peevishly--"why you let purslow have that seventy pounds." "well, he is a very old customer," the banker replied patiently, "and he's hard hit--he wanted it for wages, and i fear that he's behindhand with them. and if we withhold all help, my boy, we shall certainly precipitate a run. on monday those bills of badger's fall due, and i think will be met. we shall receive eleven hundred from them. on tuesday another bill for three hundred and fifty matures, and i think is good. if we can go on till wednesday we shall be a little stronger to meet the crisis than we are to-day. and we can only live from day to day"--wearily. "if pole's bank goes"--he glanced doubtfully at the door--"i fear that williams's will follow. and then----" "there will be the devil to pay!" "well, we must try to pay him!" "bravo, sir!" clement cried. "that's the way to talk." "yes, it is no use to dwell on the dark side," his father agreed. "all the same"--he was silent a while, reviewing the position and making calculations which he had made a hundred times before--"all the same, it would make all the difference if we had that twelve thousand pounds in reserve." "by jove, yes!" arthur exclaimed. for a moment hope animated his face. "can you think of no way of getting it, sir?" the banker shook his head. "i have tried every quarter," he said, "and strained every resource. i cannot. i'm afraid we must fight our battle as we are." arthur gazed at the floor. the elder man looked at him and thought again of the squire. but he would not renew his suggestion. arthur knew better than he what was possible in that quarter, and if he saw no hope, there doubtless was no hope. at best the idea had been fantastic, in view of the prejudice which the squire entertained against the bank. while they pondered, the door opened, and all three looked sharply round, the movement betraying the state of their nerves. but it was only betty who entered--a little graver and a little older than the betty of eight or nine months before, but with the same gleam of humor in her eyes. "what a conclave!" she cried. she looked round on them. "yes," arthur answered drily. "it wants only rodd to be complete." "just so." she made a face. "how much you think of him lately!" "and unfortunately he's taken his little all and left us." the shot told. her eyes gleamed, and she colored with anger. "what do you mean? dad"--brusquely--"what does he mean?" "only that we thought it better," the banker explained, "to make rodd safe by paying him the little he has with us." "and he took it--of course?" the banker smiled. "of course he took it," he said. "he would have been foolish if he had not. it was only a deposit, and there was no reason why he should risk it with us--as things are." "oh, i see. things are as bad as that, are they? any other rats?"--with a withering look at arthur. "i am afraid that there is no one else who can leave," her father answered. "the gangway is down now, my dear, and we sink or swim together." "ah! well, i fancy there's one of the rats in the dining-room now. that is what i came to tell you. he wants to see you, dad." "who is it?" "mr. acherley." ovington shrugged his shoulders. "well, it is after hours," he said, "but--i'll see him." that broke up the meeting. the banker went out to interview his visitor, who had been standing for some minutes at one of the windows of the dining-room, looking out on the slender stream of traffic that passed up and down the pavement or slid round the opposite corner into the market place. acherley was not of those who go round about when a direct and more brutal approach will serve. broken fortunes had soured rather than tamed him, and though, when there had been something to be gained by it, he had known how to treat the banker with an easy familiarity, the contempt in which he held men of that class made it more natural to him to bully than to fawn. before he had turned to the street for amusement he had surveyed the furniture of the room with a morose eye, had damned the upstart's impudence for setting himself up with such things, and consoled himself with the reflection that he would soon see it under the hammer. "and a d--d good job, too!" he had muttered. "what the blazes does he want with a kidney wine-table and a plate-chest! it will serve bourdillon right for lowering himself to such people!" when the banker came to him he made no apology for the lateness of his visit, but "hallo!" he said bluntly, "i want a little talk with you. but short's the word. fact is, i find i've more of those railway shares than it suits me to keep, ovington, and i want you to take a hundred off my hands. i hear they're fetching two-ten." "one-ten," the banker said. "they are barely that." "two-ten," acherley repeated, as if the other had not spoken. "that's my price. i suppose the bank will accommodate me by taking them?" ovington looked steadily at him. "do you mean the shares you pledged with us? if so, i am afraid that in any event we shall have to put them on the market soon. the margin has nearly run off." "oh, hang those!"--lightly. "you may as well account for them at the same price--two and a half. i'll consider that settled. but i've a hundred more that i don't want to keep, and it's those i am talking about. you'll take them, i suppose--for cash, of course? i'm a little pressed at present, and want the money." "i am afraid that i must say, no," ovington said. "we are not buying any more, even at thirty shillings. as to those we hold, if you wish us to sell them at once--and i am inclined to think that we ought to----" "steady, steady! not so fast!" acherley let the mask fall, and, drawing himself to his full height--and tall and lean, in his long riding coat shaped to the figure, he looked imposing and insolent enough--he tapped his teeth with the handle of his riding whip. "not so fast, man! think it over!"--with an ugly smile. "i've been of use to you. it is your turn to be of use to me. i want to be rid of these shares." "naturally. but we don't wish to take them, mr. acherley." acherley glowered at him. "you mean," he said, "that the bank can't afford to take them? if that's your meaning----" "it does not suit us to take them." "but by g--d you've got to take them! d'you hear, sir? you've got to take them, or take the consequences! i went into this to oblige you." "not at all," ovington said. "you came into it with your eyes open, and with a view to the improvement of your property, if the enterprise proved a success. no man came into it with eyes more open! to be frank with you----" but acherley cut him short. "oh, d--n all that!" he cried. "i did not come here to palaver. the long and short of it is you've got to take the shares, or, by gad, i go out of this room and i say what i think! and you'll take the consequences. there's talk enough in the town already as you know. it only needs another punch, one more good punch, and you're out of the ring and in the sponging house. and your beautiful bank you know where. you know that as well as i do, my good man. and if you want a friend instead of an enemy you'll oblige me, and no words about it. that's flat!" the room was growing dark. ovington stood facing such light as there was. he looked very pale. "yes, that's quite flat," he said. "very good. then what do you say to it?" "what i said before--no! no, mr. acherley!" "what? do you mean it? why, if you are such a fool as not to know your own interests----" "i do know them--very well," ovington said, resolutely taking him up. "i know what you want and i know what you offer. it is, as you say, quite flat, and i'll be equally--flat! your support is not worth the price. and i warn you, mr. acherley, and i beg you to take notice, that if you say a word against the solvency of the bank after this---after this threat--you will be held accountable to the law. and more than that, i can assure you of another thing. if, as you believe, there is going to be trouble, it is you and such as you who will be the first to suffer. your creditors----" "the devil take them! and you!" the gentleman cried, stung to fury. "why, you swollen little frog!" losing all control over himself, "you don't think my support worth buying, don't you? you don't think it's worth a dirty hundred or two of your scrapings! then i tell you i'll put my foot on you--by g--d, i will! yes! i'll tread you down into the mud you sprang from! if you were a gentleman i'd shoot you on the flash at eight o'clock to-morrow, and eat my breakfast afterwards! you to talk to me! you, you little spawn from the gutter! i've a good mind to thrash you within an inch of your life, but there'll be those ready enough to do that for me by and by--ay, and plenty, by g--d!" he towered over the banker, and he looked threatening enough, but ovington did not flinch. he went to the door and threw it open. "there's the door, mr. acherley!" he said. for a moment the gentleman hesitated. but the banker's firm front prevailed, and with a gesture, half menacing, half contemptuous, acherley stalked out. "the worse for you!" he said. "you'll be sorry for this! by george, you will be sorry for this next week!" "good evening," said the banker--he was trembling with passion. "i warn you to be careful what you say, or the law will deal with you." and he stood his ground until the other, shrugging his shoulders and flinging behind him a last curse, had passed through the door. then he closed the door and went back to the fireplace. he sat down. the matter was no surprise to him. he knew his man, and neither the demand nor the threat was unexpected. but he knew, too, that acherley was shrewd, and that the demand and the threat were ominous signs. more forcibly than anything that had yet occurred, they brought before him the desperate nature of the crisis, and the likelihood that, before a week went by, the worst would happen. he would be compelled to put up the shutters. the bank would stop. and with the bank would go all that he had won by a life of continuous labor: the position that he had built up, the status that he had gained, the reputation that he had achieved, the fortune which he had won and which had so much exceeded his early hopes. the things with which he had surrounded himself, they too, tokens of his success, the outward and handsome signs of his rise in life, many of them landmarks, milestones on the path of triumph--they too would go. he looked sadly on them. he saw them, he too, under the hammer: saw the mocking, heedless crowd handling them, dividing them, jeering at his short-lived splendor, gibing at his folly in surrounding himself with them. ay, and one here and there would have cause to say more bitter things. for some--not many, he hoped, but some--would be losers with him. some homes would be broken up, some old men beggared: and all would be laid at his door. his name would be a byword. there would be little said of the sufferers' imprudence or folly or rashness: he would be the scapegoat for all, he and the bank he had founded. ovington's bank! they would tell the story of it through years to come--would smile at its rise, deride its fall, make of it a town tale, the tale of a man's arrogance, and of the speedy nemesis which had punished it! he was a proud man, and the thought of these things, the visions that they called up, tortured him. at times, he had borne himself a little too highly, had presumed on his success, had said a word too much. well, all that would be repaid now with interest, ay, with compound interest. the room was growing dark, as dark as his thoughts. the fire glowed, a mere handful of red embers, in the grate. now and again men went by the windows, talking--talking, it might be, of him: anxious, suspicious, greedy, ready at a word to ruin themselves and him, to cut their own throats in their selfish panic. they had only to use common sense, to control themselves, and no man would lose a penny. but they would have no common sense. they would rush in and destroy all, their own and his. for no bank called upon to pay in a day all that it owed could do so, any more than an insurance office could at any moment pay all its lives. but they would not blame themselves. they would blame him--and his! he groaned as he thought of his children. clement, indeed, might and must fend for himself. and he would--he had proved it of late days by his courage and cheerfulness, and the father's heart warmed to him. but betty? gay, fearless, laughing betty, the light of his home, the joy of his life! who, born when fortune had already begun to smile on him, had never known poverty or care or mean shifts! for whom he had been ambitious, whom he had thought to see well married--married into the county, it might be! poor betty! there would be an end of that now. past his prime and discredited, he could not hope to make more than a pittance, happy if he could earn some two or three pounds a week in some such situation as rodd's. and she must sink with him and accept such a home as he could support, in place of this spacious old town-house, with its oaken wainscots and its wide, shallow stairs, and its cheerful garden at the back. his love suffered equally with his pride. he was thinking so deeply that he did not hear the door open, or a light foot cross the room. he did not suspect that he was observed until a pair of warm young arms slid round his neck, and betty's curls brushed his check. "in the dumps, father?" she said. "and in the dark--and alone? poor father! is it as bad as that? but you have not given up hope? we are not ruined yet?" "god forbid!" he said, hardly able, on finding her so close to him, to control his voice. "but we may be, betty." "and what then?" she clasped him more closely to her. "might not worse things happen to us? might you not die and i be left alone? or might i not die, and you lose me? or clement? you are pleased with clement, father, aren't you? he may not be as clever as--as some people. but you know he's there when you want him. suppose you lost us?" "true, child. but you don't know what poverty is--after wealth, betty--how narrowing, how irksome, how it galls at every point! you don't know what it is to live on two or three pounds a week, in two or three rooms!" "they will bring us the closer together," said betty. "and to be looked down upon by those who have been your equals, and shunned by those who have been your friends!" "nice friends! we shall do better without them!" "and things will be said of me, things it will be hard to listen to!" "they won't say them to me," said betty. "or look out for my nails, ma'am! besides, they won't be true, and who cares, father! lizzie clough said yesterday i'd a cast in one eye, but does it worry me? not a scrap. and we'll shut the door on our two or three rooms and let them--go hang! as long as we are together we can face anything, father--we can live on two pounds or two shillings or two pence. and consider! you might never have known what clement was, how lively, how brave, how"--with a funny little laugh--"like me," hugging him to her, "if this had not happened--that's not going to happen after all." he sighed. he dealt with figures, she with fancy. "i hope not," he said. "at any rate i've two good children, and if it does come to the worst----" "we'll lock ourselves in and our false friends out!" she said; and for a moment after that she was silent. then, "tell me, father, why did mr. rodd take that money--when you need all that you can get together, and he knows it? for he's taking the plate to birmingham to pledge, isn't he? so he must know it." "he is, if----" "if it comes to the worst? i know. then why did he take his money, when he knew how things stood?" "why did he take his own when we offered it?" the banker replied. "why shouldn't he, child? it was his own, and business is business. he would have been very foolish if he had not taken it. he's not a man who can afford to lose it." "oh!" said betty. and for some minutes she said no more. then she roused herself, poked the fire, and rang for the lamp. chapter xxvii "well," said the squire peevishly, "i can do no more. girls ha' their whimsies, and it's much if you can hinder 'em running after mr. wrong without forcing 'em to take mr. right. at any rate i've said what i could for you, lad, and the end was as if i hadn't. you must fight your own battle. jos hasn't"--this would never have occurred to the squire in his seeing days--"too gay a life of it, and if you're not man enough to get on the soft side of her, with a clear field, why, damme, you don't deserve to have her." "i was well enough with her," arthur said resentfully, "till lately. but she is changed, sir." "well, like enough. girls are like that." "there may be--someone else." the squire snorted. "who?" he said. "who?"--more roughly. "you're talking nonsense." arthur could not say who. he could not name anyone. so far as he knew there could not be anyone. but his temper, chafed by a week of suspense and anxiety, was not smoothed by the old man's refusal to do more. and then to fail with josina! to be rejected by josina, the simple girl whom, in his heart, he had regarded as a _pis alter_, on whom he had designed to confer a half-contemptuous affection, on whose youthful fancy he had played for his pastime! this was enough to try him, apart from the fact that things in aldersbury looked black, and that, losing her, he lost the consolation prize to which he had looked forward to make all good. so, taken to task by the squire, he did not at once assent. "who?" he repeated gloomily. "ah, i don't know." "nor i!" the squire retorted. "there is nobody. truth is, my lad, the man who has been robbed sees a face in every bush. however, there 'tis. i've said my say, and i've done with it. did you bring those deeds from welsh's?" arthur swallowed his mortification as best he might--fortunately the old man could not see his face. "yes," he said. "i left them downstairs." the squire had caught a cold, sitting out on the hill on the saturday, and had been for some days in his bedroom. "well, i'm going to pay wages now," he rejoined. "bring 'em up after dinner and i'll sign 'em. you and the girl or peacock can witness them. and, hark you--here, wait a minute!" irascibly, for arthur, giving as much rein to his temper as he dared, had turned on his heel and was marching off. "take my keys and open the safe-cupboard downstairs, and bring me up the agreement. i've got to compare it with the lease--i shan't sign it without! lock the door, d'you hear, before you open the cupboard, and have a care no one sees you." "very well," arthur said, and was half-way to the door when again, as if to try his patience, the old man stopped him. "what's this they're saying about ovington's, eh? 'bout the bank? pretty thing, if he's let you in and your money too! but i'm not surprised. i told you you were a fool, young man, to dirty your hands in that bag, whatever you thought to get out of it. and if you're not going to get anything out of it, but to leave your own in, as i hear talk of--what then? come, let's hear what you have to say about it! i'd like to know." "i don't know what you've heard, sir," arthur answered, sparring for time. for self-control, provoking as the old man was, he had no longer need to fight. for he had seen, the moment the squire spoke, that here, here if he chose to avail himself of it, was his chance of the twelve thousand! here was an opening, if he had the courage to seize it. granted the chance was desperate, and the opening unpromising--a poorer or less promising could hardly be. and the courage necessary was great. but here it was. the squire himself had brought up the subject. he knew of the rumors: he had broken the ice. here it was, and for a moment, uncertain, wavering, giddy with the swift interchange of _pros_ and _cons_, arthur tried for time--time to think. "what was it? what did you hear, sir?" he asked. "what did i hear?" the squire answered. "why, that they're d--d suspicious of them in the town. and i don't wonder. up in a night, and cut off in a day, like a rotten mushroom!" he spoke with gusto, forgetting for the moment what this might mean to his listener; who, on his side, hardly heeded the brutality, so absorbed was he in the question which he must answer--the question whether it would be wise or foolish, ruin or salvation, to ask the squire for help. "he'll be another fauntleroy, 'fore he's done," the old man went on with relish. "he'll stretch a rope, you'll see if he won't! i told him as much myself. i told him as much in those very words the day he came here about his confounded silly toy of a railroad. he might take in woosenham and a lot of other fools, i told him, but he did not deceive me. now i hear that he's going to burst up, and where'll you be, my lad? where'll you be? by gad, you may be in the dock with him!" certainly he might speak on that. the old man was harsh and hard-fisted, but he was also hard-headed and very shrewd; and conceivably the case might be so put to him that he might see his profit in it. certainly it might be so put that he might see a fair prospect of saving his nephew's five thousand at no great risk to himself. the books might be laid before him, the figures be taken out. the precise situation made clear. there was--it could not be put higher than this--just a slender chance that he would listen, prejudiced as he was. but twelve thousand! it was such a stupendous sum to name. it needed such audacity to ask for it. and yet it was that or nothing. less might not serve; while to ask for less, to ask for anything at all, might cost the petitioner the favor he had won--his standing in the house, and the advantages which the squire's support might still gain for him. and then it was such a forlorn hope, such a desperate, feckless venture! no, he would be a fool to risk it. he dared not do it. he had not the face. yet, for a few seconds after the squire had ceased to speak, arthur hesitated, confession trembling on his lips. the twelve thousand would make all good, save all, redeem all--ay, and bind ovington to him in bonds of steel. but no, he dared not. he would be a fool to speak. and instead of the words that had risen to his lips, "i think you mistake, sir," he said coldly. "i think you'll find that this is all cry and little wool! of course money is tight, and there is trouble in the city. i've heard talk of two or three weak banks being in difficulties, and i should not wonder if one or two of them stopped payment between this and christmas. we are told that it is likely. but we are perfectly solvent. it will take more than talk to bring ovington's down." "umph!" the squire grumbled. "well, maybe, maybe. you talk as if you knew, and you ought to know. i hope you do know. after all--i don't want you to lose your money--gad, a pretty fool you'd look, my lad! a pretty fool, indeed! but as for ovington, a confounded rascal, who thinks himself a gentleman because he has filled his purse at some poor devil's expense--i'd see him break with pleasure." "i don't think you'll have the pleasure this time!" arthur retorted with a bitterness which he could not repress--a bitterness caused as much by his own doubts as by the other's harshness. he left the room without more, the keys in his hand, and went downstairs. it wanted about an hour of the squire's dinner-time, but calamy had laid the table early, and the dining-room was dark. arthur carried in a lamp from the hall, and himself closed the shutters. he locked the door. then he opened the nearer panel and the cupboard behind it, and sought for and found the agreement--but all mechanically, his mind still running on the squire's words, and now approving of the course he had taken, now doubting if he had not missed his opportunity. the agreement in his hand, his errand done, he closed the cupboard door, and was preparing to close the panel, when, with his hand still on it, he paused. more clearly than when his bodily eyes had rested upon them he saw the contents of the cupboard. and one thing in particular, a small thing, but it was on this that his mind focussed itself--the iron box containing the india stock. he saw it before him; it stood out dark, its every outline sharp. and with equal clearness he saw its contents, the two certificates that remained in it. he recalled the value of them, and almost against his will he calculated their worth at the price of the day. india stock, sound and safe security as it was, had fallen more than thirty points since the squire had sold. it stood to-day, he thought, at two hundred and forty or a little over or a little under--somewhere about that. at the lowest figure five thousand pounds would fetch--just twelve thousand, he calculated. twelve thousand! he stood staring at the door, and even by the yellow light of the lamp his face looked pale. twelve thousand! and upstairs in a pigeon-hole of the old bureau, where he had carelessly thrust it, was the blank transfer. it seemed providential. it seemed as if the stock--stock to the precise amount he required--had been placed there for a purpose. twelve thousand! and realizable, no matter what the pinch. if he borrowed it for a month, what harm would there be? or what risk? the bank was solvent, he knew that: give it time, and it would stand as strong as ever. within a month, or two months at the most, he could replace the stock, and no one would be the wiser. and the bank and his own fortune would be saved. whereas--whereas, if the bank failed, he lost everything. and what was it his uncle had said? "a pretty fool you will look!" it was true, it was horribly true. he would be the laughing stock of the county. men of his own class would say with a sneer that it served him right. and the squire--what would he say? his life would be a hell! still he hesitated, though he told himself that it was not by boggling at trifles that men arrived at great ends--nor by poltroonery. and who would be the loser? no one. it would be all gain. the squire, if he had common sense, would be the first to wish it done. yet, as he felt through the bunch, with fingers that shook a little, for the small key that opened the box, he glanced fearfully over his shoulder. but the door of the room was locked, the windows were shuttered: no one could see him. no one could ever say what he had done in that room. and he was lawfully there, at the squire's own request, on his errand. five minutes later he closed the door, closed the panel. he took up the lamp with a steady hand and left the room. he went into the squire's bedroom to return the keys, loitered a minute or two at the bureau, then he went to his own room. on the table lay the lease and the counterpart that he had brought from aldersbury for the old man's signature. he closed and locked the door. it was some hour and a half later that, having finished dinner--and he had talked more fluently at the meal, and with less restraint than of late--he rose from the table with miss peacock and josina. "i'll come with you," he said. "i shall have my wine upstairs." and then, turning to miss peacock, "the squire will want you to witness his signature," he said. "will you come? he has to sign some deeds that welsh's have sent." miss peacock bewailed herself. she was in a flurry at the prospect. "oh, dear, dear," she said, "i wish he didn't! i am all of a twitter, and then he scolds me. i am sure to put my name in the wrong place, or write his or something." josina laughed. "what will you give me to go instead?" she asked. "come? but, there, i'll go. in fact, he told me before dinner that i was to go." she moved towards the door. but arthur did not move. he looked disturbed. "i don't think that that will do," he said slowly. "considering what it is--i think the peahen would be the better." "but if she doesn't like it?" jos objected. "and i must go, arthur, for he told me to go. so the sooner the better. we have sat longer than usual, and, though calamy is with him, he won't like to be kept waiting." arthur seemed to consider it. "oh, very well," he said at last. he followed her from the room. the squire was sitting before the fire, at the small round table at which he had eaten his meal. a decanter of port and a couple of glasses stood at his elbow. two candles in tall silver candlesticks shed a circle of light on the table, and showed up his white head and his hands, but failed to illumine the larger part of the room. the great bed with its drab hangings, the lofty press with its brass handles, the dark windsor chairs, now lurked in and now sprang from the shadows, as the fire flickered up or sank. on the verge of the circle of light the butler moved mysteriously, now appearing, now disappearing; now coming forward to set an inkstand and goose-quills beside the decanter, now withdrawing to pile unseen plates upon an unseen tray. the squire was tapping impatiently on the table when they entered. "well, you're in no hurry for your wine to-night," he said. "have you brought the papers? you might have a'most written them in the time you've been." "sorry, sir," said arthur. "they are here. will you sit here, jos?" "nay, nay, she must be near by," the old man objected. his hearing was still good. "close up! close up, girl! i want her eyes. and do you fill your glass. now have you all ready? then do you read me the agreement first, that i may see if the lease tallies. and read slowly, lad, slowly. calamy?" "i am here, sir," lugubriously. "where we'll be tomorrow----" "d--n you, don't whine, man, but snuff the candles. and then get out. do you hear?" calamy mumbled that it would be all the same at the latter end. he went out with his tray, and closed the door behind him. "now!" said the squire, and obediently to the word arthur began to read. once or twice his voice failed him, and he had to clear his throat. josina would have thought that he was nervous, had she ever known him nervous. fortunately, the document was short, as legal documents go, and some five minutes, during which the squire sat listening intently, saw it at an end. "umph! sounds all right," he commented. "sight o' words! but there, they've got to charge. now do you give the girl the counterpart, and do you read the lease, lad, and read it slowly, so as i may understand. and hark you, jos, speak up if there is any differ--nail it like a rat, girl, and don't go to sleep over it! don't you let me be cheated. welsh is as honest, and i'd as lief trust him, as another, but if aught's amiss it's not he that will suffer, nor the confounded scamp of a clerk that made the mistake. and see you there's no erasures: i'm lawyer enough to know that. now, slow, lad, slow," he commanded, "so that i can take it in." arthur complied, and began to read slowly and carefully. but again he had more than once to stop, his voice failing. he explained it by saying that the light was not good, and he rose to snuff the candles. the lease, too, was longer than the agreement, and was full of verbiage, and it took some time to read, and some patience. but at long last the delivery clause was reached. no discrepancy or erasure had been discovered, and the squire, whose attention had never faltered--he was an excellent man of affairs--declared himself satisfied. "well, there," he said, in a tone of relief, "that's done! drink up, lad, and wet your throttle." he turned himself squarely to the table. "give me the pen i used last," he continued. "and do you guide my hand to the right place." "i am afraid your pen was left to dry," arthur said, "and the nib has opened. you'll have to use a new one, sir, and try it first. and--the sand? we shall want that. i am afraid it is downstairs. if josina would not mind running down for it?" "pooh! pooh! never mind the sand! let 'em dry o' themselves. less chance of blotting. where's the pen?"--holding out his hand for it. "here, sir. will you try it on this? if you'll write your name in full, as if you were signing the deeds"--he guided the squire's hand to the place--"i shall see if it is right--and straight." "ay, ay, best be careful," the squire agreed, squaring himself to his task. "'twon't do to spoil 'em. here?" "yes--just as you are now." the old man bent over the table, his white hair shining in the centre of the little circle of light cast by the candles. slowly and laboriously, in a tense silence, while arthur, leaning over his shoulder, followed each movement of the pen, and josina, half in light, half in shadow, watched them both from the farther side of the table, he wrote his name. it was a perfect signature, though rather bolder and larger than usual, and "excellent!" arthur cried in a tone of relief, which betrayed the anxiety he had felt. "good! it could not be better! well done, sir!" he removed the paper as he spoke, but in the act looked sharply across at josina. the girl's eyes were upon him, but her face was in shadow, and he could not read its expression. he hesitated a moment, the paper in his hand, then he laid it on the table beside him--and out of her reach. "right!" said the squire. "then, now for business. let's have the lease. my hand's in now." arthur laid it before him, and guided his hand to the place. "is there ink enough in the pen?" the old man asked. "quite enough, sir. it won't do to blot it." "right, lad, right!" the squire wrote his name. "now the counterpart!" he continued briskly, holding the quill suspended. arthur put it before him. he signed it, steadily and clearly. "all right?" he asked. "quite right. couldn't be better, sir." "then, thank god that's done!" he sank back in his chair, and raised his hand to take off his glasses, then remembered himself. "pheugh!" he said, "it's a job when you can't see." but it was plain that he was pleased with himself. arthur turned to josina. "your turn next!" he said; and he gave her the pen. he put the lease before her, and pointed to the place where she was to sign. she was not as nervous as miss peacock, but she was anxious to make no mistake. "here?" she asked. "yes, there. be careful." arthur snuffed the candles, and as he did so he glanced over his shoulder, his eyes searching the shadows. then he leant over her, watching her pen. she wrote her name, slowly and carefully. "good!" he said, and he removed the document. he set another before her, and silently showed her with his finger where to write. she wrote her name. "now here," he said. "here! but wait! is there enough ink in the pen?" she dipped the pen in the inkpot to make sure, and shook it, that there might be no danger of a blot. again she wrote her name. "capital!" he said. his voice betrayed relief. "that's done, and well done! couldn't be better. now it's my turn." "but"--jos looked up in doubt, the pen still in her hand--"but i've signed three, arthur! i thought there were but two." "three!" exclaimed the squire, turning his head, his attention caught. "damme!"--peevishly--"what mess has the girl made now?" it was part of his creed that in matters of business no woman was to be trusted to do the smallest thing as it should be done. but arthur only laughed. "no mess, sir," he said. "only a goose of herself! she has witnessed your trial signature as well as the others. that's all. i thought i could make her do it, and she did it as solemnly as you like!" he laughed a little loudly. "i shall keep that jos." the squire, pleased with himself, and glad that the business was over, was in a good humor, and he joined in the laugh. "it will teach you not to be too free with your signature, my girl," he said. "when you come some day to have a cheque book, you'll find that that won't do! won't do, at all! well, thank god, that's done." arthur, who was stooping over the table, adding his own name, completed his task. he stood up. "yes, sir, that's done. done!" he repeated in an odd, rising tone. "and now--the lease goes back to welsh's. shall i lock up the counterpart--downstairs, sir?" "no, lad," the squire announced. "i'll do that myself o' monday." "but it's no trouble, sir." he held out his hand for the keys. "and perhaps the sooner it's locked up--the tenant's signed it, and it is complete now--the safer." but, "no, no, time enough!" the squire persisted. "i'll put it back on monday. i am not so helpless now i can't manage that, and i shall be downstairs o' monday." for a moment arthur hesitated. he looked as if something troubled him. but in the end, "very good, sir. then that's all?" he said. "ay; put the counterpart in the old bureau there. 'twill be safe there till monday. how's the wine? fill my glass and fill your own, lad. you can go, jos. tell calamy to come to me at half-past nine." chapter xxviii the next day, sunday, was raw and wet. mist blotted out the hills, and beneath it the vale mourned. the trees dripped sadly, pools gathered about the roots of the beeches, the down-spouts of the eaves gurgled softly in the ears of those who sat near the windows. miss peacock alone ventured to church in the afternoon, arthur walking with her as far as the door, and then going on to the cottage to have tea with his mother. josina stayed at home in attendance on her father, but ten minutes after the others had left the house, he dismissed her with a fractious word. she went down to the dining-room, where she could hear his summons if he tapped the floor. she poked up the smouldering logs, and looked through the windows at the dreary scene--the day was already drawing in--then, settling herself before the fire, she opened a book. but she did not read, indeed she hardly pretended to read, for across the page of the sunday volume, in black capitals, blotting out the type, forcing itself on her brain, insistent, inexorable, unavoidable, the word "when?" imprinted itself. ay, when? when was she going to summon clement, and give him leave to speak? when was she going to keep her word, to make a clean breast of it to her father and confront the storm, the violence of which her worst fears could not picture or exaggerate? "when?" with every day of the past fortnight the question had confronted her with growing insistence. now, in this idle hour, with the house silent about her, with nothing to distract her thoughts, it rose before her, grim as the outlook. it would not be denied, it came between her and the page, it forced itself upon her, it called for, nay, it insisted upon, an answer. when? there was no longer any hope that the squire would regain his sight, no longer any fear for his general health. he was as well as he ever would be, as well able to bear the disclosure. delay on that ground was a plea which could no longer avail her or deceive her. then, when? or rather, why not now? her conscience told her, as it had told her often of late, that she was playing the coward, proving false to her word, betraying clement--clement whom she loved, and whom, craven as she was, she feared to acknowledge. then, when? surely now, or not at all. alas, the longer she dwelt on the avowal she must make, the more appalling the ordeal appeared. her father, indeed, had been more gentle of late; that walk on the hill had brought them closer together, and since then he had shown himself more human. glimpses of sympathy, even of affection, had peeped through the chinks of his harshness. but how difficult was the position! she must own to stolen meetings, to underhand practices, to things disreputable; she must proclaim, maid as she was, her love. and her love for whom? a stranger, and worse than a stranger--a nobody. then apart from her father's contempt for the class to which clement belonged, and with which he was less in sympathy than with the peasants on his lands, his prejudice against the ovingtons was itself a thing to frighten her! hardly a day passed that he did not utter some jibe at their expense, or some word that betrayed how sorely arthur's defection rankled. and then his blindness--that added the last touch of deceit to her conduct, that made worse and more clandestine what had been bad before. as she thought of it, and imagined the avowal and the way in which he would take it, the color left her cheeks and she shivered with fright. she did not know how she could do it, or how she could live through it. he would lose all faith in her. he would pluck from his heart even that affection for her which she had begun to discern under the mask of his sternness--to discern and to cherish. yet time pressed, she could no longer palter with her love, she must be true to clement now or false, she must suffer for him now or play the coward. she had given him her word. was she to go back on it? oh, never! never! she thought, and pressed her hands together. those spring days when she had walked with him beside the brook, when his coming had been sunshine and her pulses had leapt at the sound of his footsteps, when his eyes had lured the heart from her and the touch of his lips had awakened the woman in her, when she had passed whole days and nights in sweet musings on him--oh, never! no, he had urged her to be brave, to be true, to be worthy of him; and she must be. she must face all for him. and it would be but for a time. he had said that her father might separate them, and would separate them: but if they were true to one another---- "miss! miss josina!" she turned, her dream cut short, and saw molly, the kitchen-maid, standing in the doorway. she was surprised, for the stillness of a sunday afternoon held the house--it was the servants' hour, and one at which they were seldom to be found, even when wanted. "what is it?" she asked, and stood up, alarmed. "has my father called?" he might have rapped, and deep in thought she might not have heard him. "no, miss," molly answered--and heaven knows if molly had an inkling of the secret, but certainly her face was bright with mischief. "there is a gentleman asking for you, if you please, miss. he bid me give you this." she held out a three-cornered note. josina's face burned. "a gentleman?" she faltered. "yes, miss, a young gentleman," molly answered demurely. josina took the note--what else could she do?--and opened it with shaking fingers. for a moment, such was her confusion, she failed to read the few words it contained. then she collected herself--the words became plain: "very urgent--forgive me and see me for ten minutes.--c." very urgent? it must be urgent indeed, or, after all she had said, he would not come to her unbidden. she hesitated, looking doubtfully and shamefacedly at molly. but the eyes of young kitchen-maids are sharp, and probably this was not the first glimpse molly had had of the young mistress's love story, or of the young gentleman. "you can slip out easy, miss," she said, "and not a soul the wiser. they are all off about their business." "where is he?" "he's under the garden wall, miss--down the lane." jos took her courage in her hands. she snatched up a shawl from the hall-table, and with hot cheeks she went out through the back regions, molly accompanying her as far as the yard. "i'll be about the place, miss," the girl said--if no one else was enjoying herself, she was. "i'll rattle the milk-pail if--if you're wanted." josina drew the shawl about her head, and went down the yard, passing on her right the old stable, which bore over its door the same date as the table in the hall-- . a moment, and she saw clement waiting for her under the eaves of the dutch summer-house, of which the sustaining wall overhung the lane, and, with the last of the opposing outhouses, formed a sort of entrance to the yard. she had been red enough under molly's gaze, resenting the confederacy which she could not avoid. but the color left her face as her eyes met her lover's, and she saw how sad and downcast he looked, and how changed from the clement of her meetings. he was shabby, too--he who had always been so neat--so that even before he spoke she divined that there was something amiss, and knew at last, too, that there was nothing that she would not do, no risk that she would not run, no anger or storm that she would not face for this man before her. the mother in her awoke, and longed to comfort him and shield him, to give all for him. "clement!" she cried, and, trembling, she held out her hands to him. "dear clement! what is it?" he took her hands and held them; and if he had taken her in his arms she would have forgiven him and clung to him. but he did not. he seemed even to hold her from him. "forgive me, dear, for sending for you," he said. "i thought to catch you going into church, but you were not there, and there was nothing for it but this. jos, i have bad news." "bad news?" she exclaimed. "what? don't keep me waiting, clement! what bad news?" "the worst for me," he said. "for we must part. i have come to say good-bye." "good-bye?" oh, it was impossible! it was not, it could not be that! "what do you mean?" she cried, and her eyes pleaded with him to take it back. "tell me! you cannot mean that we must part." "i do," he said soberly. "something has happened, dear--something that must divide us. be brave, and i will tell you." "you must," she said. he told his story--rapidly, in clear short phrases which he had rehearsed many times as he covered the seven miles from aldersbury on this dreary errand. he told her all, that which no one else must know, that which she must not reveal. they expected a run on the bank. they were sure, indeed, that a run must come, and though the issue was not yet quite certain, though his father still had hope, he had, himself, no hope. within a week he would be a poor man, little better than a beggar, dependent on his own exertions; with no single claim, no possible pretensions to her hand, no ground on which he could appeal to her father. it must be at an end between them, and he preferred to let her know now rather than to wait until the blow had fallen. he thought himself bound in honor to release her while he still had some footing, some show of equality with her. she smiled when she had heard him out. she smiled in his face. "but if i will not be released?" she said. and then, before he could answer her, she bade him tell her more. what was this run? what did it mean? she did not understand. he told her in detail, and, while he told her, they stood, two pathetic figures in the mist and rain that dripped slowly and sadly from the eaves of the dutch summerhouse. she stood, pressing her hands together, trying to comprehend. and he hid nothing: telling her even of the ten or twelve thousand that, did they possess it, would save them; telling her that which had decided him to bid her farewell--an item of news which had reached the bank on the previous evening, after arthur had left for garth. the great house of poles, with a wide connection among country banks, had closed its doors; and not only that, but williams's, ovington's agents, had followed suit within six hours. the tidings had come by special messenger, but would be known in the town in the morning, and would certainly cause a panic and a run on both banks. that news had been the last straw, he said. it had pushed him to a decision. he had felt that he must give her back her word, and without the loss of a day must put it in her power to say that there was nothing between them. once and again, as he told his tale, she put in a question, or uttered a pitying exclamation. but for the most part she listened in silence, controlling herself, suppressing the agitation which shook her. when he had done, she put a question, but it was one so irrelevant, so unexpected, so far from the mark, that it acted on him like a douche of cold water. "what have you done to your coat?" she asked. "my coat?" "yes." she pointed to his shoulder. he glanced down at his coat, but he felt the check. surely the ways of women were strange, their manner of taking things past finding out. he explained, but he could not hide his chagrin. "i wasn't thinking, and took the first that came to hand," he said--"an old one. does it matter?" but she continued to stare at it. he was wearing a riding coat, high in the collar, long in the skirts, shaped to the figure. on the light buff of the cloth a stain spread downwards from shoulder to breast. the right arm and cuff, too, were discolored, and it said much for the disorder of his thoughts that he had ridden from town without noticing it. she eyed the stain with distaste, with something like a shudder. "it is blood," she said, "isn't it?" he shrugged his shoulders, yet himself viewed it askance. "yes," he said. "i don't know how you knew. i wore it that night, you know. i did not mean to wear it again, but in my hurry----" "do you mean the night that my father was hurt?" "yes." "you held him up in the carriage?" "yes, but--" squinting at it--"i don't think that it was done then. i believe it was done when i was picking him up in the road, jos, before bourdillon came. indeed, i remember that your father noticed it--before he fainted, you know." "my father noticed it?" "well, oddly enough, he did." "while you were supporting him?" there was a strange light in her eyes, and the blood had come back to her cheeks. "but where was thomas--the man--then?" "oh, he had gone off, across the fields." "before arthur came up, do you mean?" "to be sure, some time before. however----" but, "no, clement, i want to understand this," she insisted, breaking in on him. her voice betrayed her excitement, and to hold him to the point she laid her hands on his shoulders, standing before him and close to him. "tell me again, and clearly. do you mean that it was you who drove thomas off? before arthur came up?" he stared. "well, of course it was," he said. "didn't you know that? didn't arthur tell you?" she avoided the question, and instead, "then it was your coat that was spoiled?" she said. "this coat?" "well, of course it was. you can see that." she looked at him, her cheeks flushed, her pride in him showing in her eyes. he had indeed justified her choice of him, her belief in him, her confidence in him. he had done this and had said nothing. the day was cold, and she was not warmly clad, but she felt no cold--now. it was raining, but she was no longer aware of it. there had sprung up in her heart, not only courage, but a faint, a very faint hope. he had come to dash her down, to fill her cup of sorrow to the brim, to leave her lonely in the world and comfortless--for never, never could she love another! and instead he had given her hope--a hope forlorn and far off, gleaming faint as the small stars in distant cassiopeia, and often doubt, like an evening mist, would veil it. but it sparkled, she saw it, she drew courage from it. meanwhile, surprised by the turn her thoughts had taken, he was still more surprised by the change in her looks, the color in her cheeks, the light in her eyes. he did not understand, and for a moment, seeing himself no hope but only sorrow and parting, he was tempted to think that she trifled. what mattered it what coat he wore, or what had stained it, or the details of a story old now, and which he supposed to be as well known to her as to him? perhaps she did not comprehend, and, "jos," he said, inviting her to be serious, "do you understand that this is our parting?" but "no! no!" she said resolutely. "we are not going to part." "but don't you see," sadly, "that i cannot go to your father now? that next week we may be beggars, and my father a ruined man? i could ask no man, even a poor man, for his daughter now. i must work to live, work as a clerk--as, i don't know what, jos, but in some position far removed from your life, and far removed from your class. i could not speak to your father now, and it is that which has brought me to you to--to say good-bye, dearest--to part, jos! the gates are closed, we must go out of the garden, dear. and you"--he looked at her with yearning eyes--"must forgive me, before we part." "perhaps we are not going to part," she said. he shook his head. he would not deceive her. "nothing else is possible," he said. "perhaps, and perhaps not. at any rate," putting her hands in his, and looking at him with brave, loving eyes, "i would not undo one of those days--in the garden! no, nor an hour of them. they are precious to me. and for forgiving, i have nothing to forgive and nothing to regret, if we never meet again, clement. but we shall meet. what if you have to begin the world again? we are both young. you will work for me. and do you think that i will not wait for you, wait until you have climbed up again, or until something happens to bring us together? do you not know that i love you more now, far more, in your unhappiness--that you are more to me, a thousand times more to-day--than in your prosperity?" "oh, jos!" he could say no more, but his swimming eyes spoke for him. "but you must leave it to me now," she continued. "after all, things may turn out better than you think. you may not be ruined. people may not be so foolish as to want all their money at once. have hope, and--and remember that i am always here, though you do not see me or hear from me; that i am always here, thinking of you, waiting for you, loving you, always yours, clement, till you come--though it be ten years hence." "oh, jos!" his eyes were overflowing now. "you believe me, you do believe me, don't you?" she said. "and now you must go. but kiss me first. no, i do not mind who sees us, or who knows that i am yours now. i am past that." he took her in his arms and kissed her, not as he would have kissed her an hour before, with passion, but in reverence and humility, in love too sacred for words. never till now had he known what a woman's love was, how much it gave, how little it asked, how pure in its highest form it could be--and how strong! nor ever till now had he known her, this girl to whom he had once presumed to teach firmness, whose weakness he had taken on himself to guide, whom he had thought to encourage, to strengthen, to arm--he, who had not been worthy to kiss the hem of her robe! oh, the wonderful power of love, which had transformed her! which had made her what she was, and now laid him in the dust before her! work for her, wait for her, live for her? ah, would he not, and deem himself happy though the years brought him no nearer, though the memory of her, transfiguring his whole life, proved his only and full reward! chapter xxix an hour after arthur had left the house on the monday morning josina went slowly up the stairs to her father's room. she was young and the stairs were shallow, but the girl's knees shook under her as she mounted them, as she mounted them one by one, while her hand trembled on the banister. before now the knees of brave men, going on forlorn hopes, have shaken under them, but, like these men, josina went on, she ascended step by step. she was frightened, she was horribly frightened, but she had made a vow to herself and she would carry it out. how she would carry it out, how she would find words to blurt out the truth, how she would have the courage to live through that which would follow, she did not know, she could not conceive. but her mind was fixed. she reached the shabby landing on which two or three sheep-skins laid at the doors of the rooms served for carpet, and there, indeed, she paused awhile and pressed her hand to her side to still the beating of her heart. she gazed through the window. on the sweep below, calamy was shaking out the cloth, while two or three hens clucked about his feet, and a cat seated at a distance watched the operation with dignity. in the field beyond the brook a dog barked joyously as it rounded up some sheep. miss peacock's voice, scolding a maid, came up from below. all was going on as usual, going on callous and heedless: while she--she had that before her which turned her sick and faint, which for her, timid and subject, was almost worse than death. and with her on this forlorn hope went no comrades, no tramp of marching feet, no watching eyes of thousands, no bugle note to cheer her. only clement's shade--waiting. she might still draw back. but when she had once spoken there could be no drawing back. a voice whispered in her ear that she had better think it over--just once more, better wait a little longer to see if aught would happen, revolve it once again in her mind. possibly there might be some other, some easier, some safer way. but she knew what that whisper meant, and she turned from the window and grasped the handle of the door. she went in. her father was sitting beside the fire. his back was towards her, he was smoking his after-breakfast pipe. she might still retreat, or--or she might say what she liked, ask perhaps if he wanted anything. he would never suspect, never conceive in his wildest moments the thing that she had come to confess. it was not too late even now--to draw back. she went to the other side of the table on which his elbow rested, and she stood there, steadying herself by a hand which she laid on the table. she was sick with fear, her tongue clung to her mouth, her very lips were white. but she forced herself to speak. "father, i have something--to tell you," she said. "eh?" he turned sharply. "what's that?" she had not been able to control her voice, and he knew in a moment that something was wrong. "what ha' you been doing?" now! now, or never! the words she had so often repeated to herself rang in her ears. "do you know who it was," she said, "who saved you that night, sir? the night you were--hurt?" he turned himself a little more towards her. "who? who it was?" he repeated. "what art talking about, girl? why, the lad, to be sure. who else?" "no, sir," she said, shaking from head to foot, so that the table rocked audibly under her hand. "it was mr. ovington's son. and--and i love him. and he wishes to marry me." the squire did not say a word. he sat, his head erect still as a stone. "and i want--to help him," she added, her voice dying away with the words. her knees were so weak, that but for the support of the table she must have sunk on the floor. still the squire did not speak. his jaw had fallen. he sat, arrested in the attitude of listening, his face partly turned from her, his pipe held stiffly in his hand. at last, "ovington's son wants to marry you?" he repeated, in a tone so even that it might have deceived many. "he saved your life!" she cried. she clung desperately to that. "and you love him?" "oh, i do! i do!" he paused as if he still listened, still expected more. then in a low voice, "the girl is mad," he muttered. "my god, the girl is mad! or i am mad! blind and mad, like the old king! ay, blind and mad!" he let the pipe fall from his hand to the floor, and he groped for his stick that he might rap and summon assistance. but in his agitation he could not find the stick. then, as he still felt for it with a flurried hand, nature or despair prompted her, and the girl who had never caressed him in her life, never taken a liberty with him, never ventured on the smallest familiarity, never gone beyond the morning and evening kiss, timidly given and frigidly received, sank on the floor and clasped his knees, pressed herself against him. "oh, father, father! i am not mad," she cried, "i am not mad. hear me! oh, hear me!" a pause, and then, "i have deceived you, i am not worthy, but you are my father! i have only, only you, who can help me! have mercy on me, for i do love him. i do love him! i----" her voice failed her, but she continued to cling to him, to press her head against his body, mutely to implore him, and plead with him. "my god!" he ejaculated. he sat upright, stiff, looking before him with sightless eyes; as far as he could withholding himself from her, but not actively repelling her. after an interval, "tell me," he muttered. that, even that, was more than she had expected from him. he had not struck her, he had not cursed her, and she took some courage. she told him in broken words, but with sufficient clearness, of her first meeting with clement, of the gun-shot by the brook, of her narrow escape and the meetings that had followed. once, in a burst of rage, he silenced her. "the rascal! oh, the d--d rascal!" he cried, and she flinched. but she went on, telling him of clement's resolve that he must be told, of that unfortunate meeting with him on the road, and then of that second encounter the same night, when clement had come to his rescue. there he stopped her. "how do you know?" he asked. "how do you know? how dare you say----" and now he did make a movement as if to repel her and put her from him. but she would not be repulsed. she clung to him, telling him of the coat, of the great stains that she had seen upon it; and at last, "why did you hide this?" broke from him. "why didn't you tell me?" she told him that she had not known, that the part which clement had taken on that night was new to her also. "but you see him?" he snarled, speaking a little more like himself. "you see him!" "twice only--twice only since that night," she vowed. "indeed, indeed, sir, only twice. once he came to speak to you and tell you, but you were ill, and i would not let him. and yesterday he came to--to give me up, to say good-bye. only twice, sir, as god sees me! he would not. he showed me that we had been wrong. he said," sobbing bitterly, "that we must be open or--or we must be nothing--nothing to one another!" "open? open!" the squire almost shouted. "d--d open! shutting the stable door when the horse is gone. d--n his openness!" and then, "good lord! good lord!" with almost as much amazement as anger in his voice. that all this should have been going on and he know nothing about it! that his girl, this child as he had deemed her, should have been doing this under his very eyes! under his very eyes! "good lord!" but then rage got the upper hand once more, and he cursed clement with passion, and again made a movement as if he would rise and throw her off. "to steal a man's child! the villain!" "oh, don't call him that!" she cried. "he is good, father. indeed, indeed, he is good. and he saved your life." he sat back at that, as if her words shifted his thoughts to another matter. "tell me again," he said, sternly, but more calmly. "he told you this tale yesterday, did he? well, tell me as he told you, do you hear? and mind you, if you're lying, you slut, he or you, 'twill come up! i am blind, and you may think to deceive me now as you have deceived me before----" "never, never again, sir!" she vowed. then she told him afresh, from point to point, what she had learned on the sunday. "then the lad didn't come up till after?" "arthur? no, sir. not till after thomas was gone. and it was clement who followed thomas to birmingham and got the money back." for clement had told her that also. when she had done, the squire leant forward and felt again for his stick, as if he were now equipped and ready for action. "well, you begone," he said, harshly. "you begone, now. i'll see to this." but, "not till you forgive me," she entreated, holding him close, and pressing her face against his unwilling breast. "and there's more, there's more, sir," in growing agitation, "i must tell you. be good to me, oh, be good to me! forgive me and help him." "help him!" the squire cried, and this time he was indeed amazed. "i help him! help the man who has gone behind my back and stolen my girl! help the man who--let me go! do you hear me, girl! let me get up, you shameless hussy!" growing moment by moment more himself, as he recovered from the shock of her disclosure, and could measure its extent. "how do i know what you are? or what he mayn't have done to you? help, indeed? help the d--d rascal who has robbed me? who has dared to raise his eyes to my girl--a griffin? who----" "he saved your life," she cried, pleading desperately with him, though he strove to free himself. "oh, father, he saved your life! and i love him! i love him! if you part us i shall die." he could not struggle against her young strength, and he gave up the attempt to free himself. he sank back in his chair. "d--n the girl!" he cried. he sat silent, breathing hard. and she--she had told him, and she still lived! she had told him and he had not cursed her, he had not struck her to the ground, he had not even succeeded in putting her from him! she had told him, and the world still moved about her, his gold watch, which lay on the table on a level with her head, still ticked, the dog still barked in the field below. miss peacock's voice could still be heard, invoking calamy's presence. she had told him, and he was still her father, nay, if she was not deceived, he was more truly her father, nearer to her, more her own, than he had ever been before. presently, "ovington's son! ovington's son!" he muttered in a tone of wonder. "good god! couldn't you find a man?" "he is a man," she pleaded, "indeed, indeed, he is!" "ay, and you are a woman!" bitterly. "fire and tow! a few kisses and you are aflame for him. for shame, girl, for shame! and how am i to be sure it's no worse? ain't you ashamed of yourself?" she shivered, but she was silent. "deceiving your father when he was blind!" she clung to him. he felt her trembling convulsively. after that he sat for a time as if exhausted, suffering her embrace, and silent save when at rare intervals an oath broke from him, or, in a gust of passion, he struck his hand on the arm of his chair. once, "my father would ha' spurned you from the house," he cried, "you jade." she did not answer, and a new idea striking him, he sat up sharply. "but what--what the devil is all this about? what's all this, if it's over and--and done with?" his tone was almost jubilant. "if he's off with it? maybe, girl, i'll forgive you, bad as you've been, if--if that's so. do you say it's over?" "no, no!" she cried. "he came----" "you told me----" "he came to say good-bye to me, because----" and then in words the most moving that she could find, words sped from her heart, winged by her love, she explained clement's errand, the position at the bank, the crisis, the menace of ruin, the need of help. the squire listened, his business instincts aroused, until he grasped her meaning. then he struck his hand on the table. "and he thought that i should help them!" he cried, with grim satisfaction. "he thought that, did he?" and he would not listen to her protests that it was not clement, that it was not clement, it was she who--"he thought that? i see it now, i see it all! but the fool, the fool, to think that! why, i wouldn't stretch out my little finger to save his father from hell! and he thought that? he took me for as big a fool as the silly girl he had flattered and lured, and thought he could use, to save them from perdition! as if he had not done me harm enough! as if he hadn't stolen my daughter from me, he'd steal my purse! why, he must be the most d--d impudent, cunning thief that ever trod shoe leather. he must be a cock of a pretty hackle, indeed. he should go far, by g--d, with the nerve he has. far, by g--d! my daughter first and my purse afterwards! this son of an upstart, whose grandfather would have sat in my servants' hall, he'd steal my----" "no, no!" she protested. "yes, yes! yes, yes! but he'll find that he's not got a girl to deal with now! help him? save his bank? pluck him from the debtors' prison he's due to rot in! why, i'll see him--in hell first!" she had risen and moved from him. she was standing on the other side of the table now. "he saved your life!" she cried. and she, too, was changed. she spoke with something of his passion. "he saved your life!" she repeated, and she stamped her foot on the floor. "well, the devil thank him for it!" the squire cried with zest. "and you," with fresh anger, "do you begone, girl! get out of my room before you try my patience too far!" he waved his stick at her. "go, or i'll call up calamy and have you put out! do you hear? do you hear? you ungrateful, shameless slut! go!" she had fancied victory, incredible, unhoped-for-victory to be almost within her grasp; and lo, it was dashed from her hand, it was farther from her than ever. and she could do no more. courage, strength, hope were spent, shaken as she was by the emotions of the past hour. she could no no more; a little more and he might strike her. she crept out weeping, and went, blinded by her tears, up the stairs, up, stair by stair, to hide herself in her room. there had been a moment when she had fancied that he was melting, but all had been in vain. she had come close to him, but in the end he had put her from him. he had thrust her farther from him than before. her only consolation, if consolation she had, was that she had spoken, that the truth was known, that she had no longer any secret to weigh her down. but she had failed. chapter xxx meantime the old man, left to himself, sat for a while, deeply moved. he breathed quickly, wiping his brow from time to time with a hand that trembled, and for some minutes it was upon the last and the least unwelcome aspect of the matter that he dwelt. so that was the point of it all, was it? that was the end and the aim of this clandestine, this disgraceful intrigue! this conspiracy! they had made this silly woman-child, soft like all her sex, their puppet, and using her they had thought that he, too, might be drawn into their game and used and exploited for their profit. but they had been mad, mad, as they would learn, to think it. they must have been mad to dream of it. or desperate. ay, that must be it. desperate! but as he grew cooler, and the first impulse, so natural in him, to pin his enemies and shake them, began to lose its force, less pleasant aspects of the matter rose before him. for the girl and her nonsense and her bad, bad behavior, he did not tell himself, he would not allow, that it was that which hurt him most. on the contrary, he affected to put that from him--for the time. he told himself and strove to believe that he could deal with it when it pleased him. he could easily put an end to that folly. girls were only girls, and she'd forget. he would deal with that later. but arthur's five thousand--that would be lost, if the girl's story were true. five thousand! it was a fine sum and a d--d pity! the squire's avarice rose in arms as he thought of it. five thousand! and that silly woman, arthur's mother--he would have to provide for her. she would be penniless, almost penniless. and arthur himself? confound him, what had the lad been doing? why had he been silent about the bank's difficulties and the peril in which his money stood? for, it was only two days ago that he had denied the existence of any peril. and then, again, what was this story about that unlucky night which had cost him his sight? if it really was young ovington who had come to his rescue and beaten off thomas, why had not arthur said so? why had he never let fall a single word about him, never mentioned the young fellow's name, never given him the credit that--that was certainly due to him, rogue as he was, if this story were true. there was something odd about that--the squire moved uneasily in his chair--something underhand and--and fishy! he had a glimpse of arthur in a new light, and he did not like what he saw. he liked it almost less, if that were possible, than he liked another thing--the idea that this young ovington's silence was creditable to him. if it were indeed he who had done the thing, why had he been quiet all this time, and never even said "i did it"? if a gentleman had behaved after that fashion, the squire would have known what to think of it. but that this low-bred young cub, who had behaved so disgracefully to his daughter, should bear himself in that way--no, he was not going to believe it. after all, the world wasn't turned upside down to that extent. no! for in his connection with the girl the young scamp had shown what he was--a sneaking, underhand, interloping puppy. in connection with his girl! as he thought of it, the veins swelled on the squire's forehead and he shook with rage. his girl! "damn him! damn him!" he cried, trembling with passion. and again and again he cursed the man who had dared to raise his eyes to a griffin--who had stolen his child's heart from him. no fate, no punishment, no lot was too bad for such a one. help him! help him, indeed! the squire laughed mirthlessly at the notion. after that there remained only his daughter to think of, and as he came back to her and to her share in the matter, more, far more than he wished, recurred to his memory: her prayers and her pleading, her clinging arms and her caresses, the tears that had fallen on his hands, her warm, slender body pressed against his. he could not forget the sound of her voice in his ears, nor the touch of her hand, nor the feel of her body. words that she had used returned and beat on his old heart, and beat and beat again, tormenting him, trying him, softening, ay, softening him. he thought of the boy, dead these many years at alexandria, and, yes, she was all that he had, all. and he must thwart her, he must make her unhappy. it was his duty. she knew not what she asked. and she had behaved ill, ay, very ill. but on that, with a vividness which the reflection had never assumed before--for the old man, like other old men, did not feel old--he saw that he had but a very short span to live--a year or two, or it might be three or four years. the last page of his life was all but turned, the book was near its end. two or three years and all that he treasured would be hers. even now he was dependent on her for care and affection, and to the last he must be dependent. a little while and she would be alone, her own mistress; and he who had ruled his lands and his people for more than half a century would be a memory. a memory of what? again, and yet again, he felt her arms about his knees, her little head pressed against his breast. again and yet again her tears, her prayers beat upon his heart. she was a silly woman-child, a fool; but a dear fool, made dear to him in the very hour of her misbehavior. it was his duty to deny her. it was for him to order, for her to obey. and yet, "he saved your life!" that cry so oft repeated, so often dinned into his ears, that, too, came back to him. and before he was aware of it he was wondering what manner of man this young fellow was, what spell he had woven about the girl, whence his power over her. and why had the man been silent about that night? had he in truth intended to beard him and claim her in the road that morning--when they met? he remembered it. the son of that man, ovington! lord almighty! it could hardly be worse. and yet "he saved your life!" the squire could not get over that--if it were true. if it were really true. he thought upon it long, forced out of the usual current of his life. miss peacock, bringing up his frugal luncheon, found him silent, sunk low in his chair, his chin upon his breast. so he appeared when anyone stole in during the next two hours to attend to the fire or to light his pipe. calamy, safe outside the door, uttered his misgivings. "it's the torpor," he told miss peacock, shaking his head. "that's how it takes them before the end, miss. i've seen it often. the torpor! he'll not be long now!" miss peacock scolded the butler, but was none the less impressed, and presently she sought josina, who was lying down in her room with a headache. she imparted her fears to the girl, and unwillingly jos rose, and bathed her face and tidied her hair, and by and by came out. she must take up the burden of life again. by that time miss peacock had disappeared, and josina went down alone. half-way down the upper flight she halted, for she heard a slow, heavy step descending the stairs below her. she looked down the well of the staircase, and to her astonishment she saw her father going down before her, stair by stair, his hand on the rail, a paper and his stick in the other hand. it was not the first time that he had done such a thing, but hitherto some one had always gone with him, to aid him should aid be necessary. josina's first impulse was to hurry after him, but seeing the paper in his hand and recognizing, as she fancied, the agreement that he had signed on the saturday, she followed him softly, without letting him know that she was there. he reached the foot of the staircase, and with an accustomed hand he groped for and found the door of the dining-room. he pushed open the door and went in. he closed the door behind him, and distinctly--the house was very quiet, it was the dead of the afternoon--she heard him turn the key in the lock. that alarmed her, for if he fell or met with an accident, there would be a difficulty in assisting him. she moved to the door and listened. she heard him passing slowly and carefully across the floor, she heard the table creak under his hand, as he reached it. a moment later her ear caught the jingle of a bunch of keys. his visit had a purpose, then. he might be going to deposit the lease, but she could not imagine where. his papers were in his own room or in his bedroom. and calamy had the wine, it could not be that he wanted. for a moment her thoughts reverted to her own trouble, and she sighed. then she caught again the jingle of keys, and she listened, her head bent low. what could he be doing? and would he be able to find the door again? presently the silence was broken by an oath, followed by a rustling sound, as if he were handling papers. this lasted for quite a minute, and then there came from the room a strange, half-strangled cry, a cry that stopped the beating of her heart. she seized the handle of the door and turned it, shook it. but the door, as she knew, was locked, and, terrified, she cried, "father! father! what is it? what is it?" she beat on the door. he did not answer, but she heard him coming towards her, moving at random, striking against the table, overturning a chair. she trembled for him; he might fall at any moment, and the door was locked. but he did not fall. he reached the door and turned the key. the door opened. she saw him. her fears had not been baseless. the light in the doorway was poor on that cheerless december day, but it was enough to show her that the squire's face was distorted and drawn, altered by some strange shock. and he was shaking in all his limbs. the moment that she touched him he gripped her arm, and "come here! come here!" he ordered, his voice piping and high. "lock the door! lock the door, girl!" and when she had done this, "do you see that cupboard? d'you see it?" she was alarmed, for, whatever might be its cause, she was sure that the excitement under which he labored was dangerous for him. but she had her wits about her, and the nerved herself to do what he wanted. she saw the open cupboard, of the existence of which she had not known, but she showed no surprise. "yes, i see it, sir," she said. she put his arm through hers, striving to calm him by her presence. he drew her across the room till they stood before the cupboard. "do you see a box?" he demanded, hardly able to articulate the words in his haste. "ay? then do you look in it, girl! look in it. what is there in it? tell me, girl. tell me quick! what is in it?" the box, its lid raised, stood on the shelf before him, and he laid his trembling hand on it. she looked into it. "it is empty, sir," she said. "empty? quite empty?" "yes, sir, quite empty." "nothing in it?" desperately. "are you sure, girl? can you see nothing? nothing?" "nothing, sir, i am quite sure," she said. "there is nothing in it." "no papers?" "no, sir, no papers." an idea seemed to strike him. "they may ha' fallen on the floor," he exclaimed. "look! look all about, girl! look! ah," and there was something like agony in the cry, "curse this blindness! i am helpless, helpless as a child! can you see no papers--on the floor, wench! thin papers? no? nor on the shelves?" "no, sir. there is the lease you signed on saturday. that is all." "for god's sake, make no mistake, make no mistake, girl!" he cried in irrepressible agitation. "look! look 'em over. two papers--thin papers--no great size they are." she saw that there was something very much amiss, and she searched carefully, but there were no loose papers to be seen. there were boxes on one shelf and bundles of deeds below them, and a great many packets of letters on a shelf above them, but all tied up. she could see no loose papers. none! he seemed on the verge of collapse, but a new thought came to his support, and he drew her, almost as if he could see, to the other side of the hearth. there he felt for and found the moulding of the panel, he fumbled for the keyhole. but his shaking hands would not do his will, and with a tremulous curse he gave the key to her, and obeying his half-intelligible directions, she unlocked and threw wide first the panel and then the door of the second cupboard. "two small papers! thin papers!" he reiterated. "look! look, girl! are they there? some one may have moved them. he may have put them here. search, girl, search!" but though she obeyed him, looking everywhere, a single glance showed her that there were no two papers there, papers such as he had described. she told him what she saw--the bundles of ancient deeds, the tarnished plate, the jewel cases. "but no--no loose papers?" "no, sir, i can see none." convinced at last, he uttered an exceeding bitter cry, a cry that went to the girl's heart. "then he has robbed me!" he said. "he has robbed me! a griffin, and he has robbed me! get--get me a chair, girl." horrified, she helped him to a chair, and he sank into it, and with a shaking hand he sought for his handkerchief and wiped the moisture from his lips. then his hands fell until they rested on his lap, his chin dropped on his breast. two tears ran down his withered cheeks. "a griffin!" he whispered. "a griffin! and he has robbed me!" chapter xxxi in aldersbury there had been a simmering of excitement through all the hours of that monday. at the corner of the market place on which the little statue of the ancient prince looked down, in the shops on bride hill, in the high street under the shadow of st. juliana's, knots of people had gathered, discussing, some with scared faces and low voices, others with the gusto of unconcern, the rumors of troubles that came through from chester, from manchester, from the capital; that fell from the lips of guards in inn-yards, and leaked from the boots of coaches before the lion. gibbon's, one of the chief banks at birmingham, had closed its doors, garrard's had stopped payment at hereford, there was panic on the stones in manchester, a bank had failed at liverpool. it was reported that a director had hung himself, a score had fled to boulogne, dark stories of ' and ' were revived. it was asserted that the bank of england had run out of gold, that cash payments would be again suspended. in a dozen forms these and wilder statements ran from mouth to mouth, gathered weight as they went, blanched men's faces and turned traders' hearts to water. but the worst, it was agreed, would not be known until the afternoon coaches came in and brought the mails from london. then--ah, then, people would see what they would see! idle men, with empty pockets, revelled in news which promised to bring all to their level. and malice played its part. wolley, who had little but a debtor's prison in prospect, was in town and talking, bent on revenge, and the few who had already withdrawn their accounts from ovington's were also busy; foxes who had lost their tails, they felt themselves marked men until others followed their example. meanwhile, purslow and such as were in his case lay low, sweated in their shop-parlors, conned their ledgers with haggard faces, or snarled at their womenfolk. gone now was the pride in stock and scrip, and bounding profits! gone even the pride in a directorship. purslow, perhaps, more than anyone was to be pitied. a year before he had been prosperous, purse-proud, free from debt, with a good business. now his every penny was sunk in unsaleable securities, his credit was pledged to the bank, his counter was idle, while trade creditors whom in the race for wealth he had neglected were pressing him hard. worst of all, he did not know where he could turn to obtain even the small sum needed to pay the next month's wages. but, though the pot was boiling in aldersbury as elsewhere, it did not at once boil over. the day passed without any serious run on either of the banks. men were alarmed, they got together in corners, they whispered, they marked with jealous eyes who entered and who left the banks. they muttered much of what they would do on the morrow, or when the london mail came in, or when they had made up their minds. but to walk into ovington's and face the clerks and do the deed required courage; and for the most part they were not so convinced of danger, or fearful of loss, as to be ready to face the ordeal. they might draw their money and look foolish afterwards. consequently they hung about, putting off the act, waiting to see what others would do. the hours slipped by and the excitement grew, but still they waited, watching their neighbors and doing nothing, but prepared at any moment to rush in and jostle one another in their panic. "by g--d, i'll see i get my money!" said one. "you wait, mr. lello! you wait and----" in another part, "i'd draw it, i'd draw it, tom, if i were you! after all, it's your own money. why, confound it, man, what are you afraid of?" "i ain't afraid of anything," tom replied surlily. "but ovington gave me a leg-up last december, and i'm hanged if i like to go in and----" "and ask for your own? well, you are a ninny!" "maybe. may--be," jingling the money in his fob. "but i'll wait. i'll wait till to-morrow. no harm done afore then!" a third had left dean's under a cloud, and if he quarrelled with ovington's, where was he to go? while a fourth had bills falling due, and did not quite see his way. he might be landing a trout and losing a salmon. he would see how things went. plenty of time! but though this was the general attitude, and the monday passed without a run of any consequence, a certain number of accounts were closed, and the excitement felt boded ill for the morrow. it waxed rather than waned as the day went on, and ovington's heart would have been heavy and his alarm keen if the one had not been lightened and the other dispersed by the good news which arthur had brought from garth that morning--the almost incredibly good news! aldersbury, however, was in ignorance of that news, and when clement issued from the bank a few minutes after the doors had closed, there were still knots of people hanging about the corners of the market place, watching the bank. he viewed them with a sardonic eye, and could afford to do so; for his heart was light like his father's, and he could smile at that which, but for the good news of the morning, would have chilled him with apprehension. he turned from the door, intending to seek the lime-walks by the river, and, late as it was, to get a breath of fresh air after the confinement of the day. but his intention was never carried out. he had not gone half a dozen yards down the street before his ear caught the sound of a horse breasting bride hill at an unusual pace, and something in the speed at which it approached warned him of ill. he waited, and his fears were confirmed. the vehicle, a gig, drew up at the door of the bank, and the driver, a country lad, began to get down. clement retraced the half-dozen steps that he had taken. "who is it you want?" he asked. the lad sat down again in his seat. "be mr. arthur here, sir?" he inquired. "mr. bourdillon?" "ay, sure, sir." "no, he is not." "well, i be to follow 'ee wheresomever he be, axing your pardon!" "i'm afraid you can't do that, my lad," clement explained. "he's gone to london. he went by coach this morning." the lad scratched his head. "o lord!" he said. "what be i to do? i was to bring him back, whether or no. squire's orders." "squire griffin?" "ay, sure, sir. he's in a taking, and mun see him, whether or no! mortal put about he were!" clement thought rapidly, the vague alarm which he had felt taking solid shape. what if the squire had repented of his generosity? what if the help, heaven-sent, beyond hope and beyond expectation, which had removed their fears, were after all to fail them? clement's heart sank. "who sent you?" he asked. "the young lady?" "ay, sure. and she were in a taking, too. crazy she were." clement leapt to a decision. he laid his hand on the rail of the gig. "look here," he said. "you'd better take me out instead, and, at any rate, i can explain." "but it were mr. arthur----" "i know, but he's half-way to london by now. and he won't be back till thursday." he climbed up, and the lad accepted his decision and turned the horse. they trotted down the hill between the dimly lighted shops, past observers who recognized the garth gig, by groups of men who loitered and shivered before the tavern doors. they swung sharply into maerdol, where the peaks of the gables on either hand rose against a pale sky, and a moment later they were crossing the bridge, and felt the cold waft of the river breeze on their faces. two minutes saw them trotting steadily across the open country, the lights of the town behind them. clement sat silent, lost in thought, wondering if he were doing right, and fearing much that the squire had repented of his generosity and was minded to recall it. if that were so, the awakening from the hopes which he had raised, and the dream of security in which they had lost themselves, would be a cruel shock. clement shrank from thinking what its effect would be on his father, whose relief had betrayed the full measure of his fears. and his own case was hardly better, for it was not only his fortune that was at stake and that he had thought saved. he had given rein, also, to his hopes. he had let them carry him far into a roseate country where the sun shone and josina smiled, and all the difficulties that had divided them melted into air. there might be need of time and patience; but with time and patience he had fancied that he might win his way. it was cruel, indeed, then if the old man at garth had changed his mind, if he had played with them, only to deceive them, only to disappoint them! and clement could not but fear that it was so. the closing day, the wintry air, the prospect before him, as they swung across the darkening land, seemed to confirm his fears and oppress him with misgivings. a long cloud, fish-shaped, hung lowering across the western sky; below it, along the horizon, a narrow strip of angry yellow, unnaturally bright, threw the black, jagged outline of the hills into violent contrast, and shed a pale light on the intervening plain. ay, he feared the worst. he could think of nothing else that could be the cause of this sudden, this agitated summons. the squire must have repented. he had changed his mind, and---- but here they were at the bridge. the cottages of the hamlet showed here and there a spark of light. they turned to the left, and five minutes later--the horse quickening its pace as they approached its stable--they were winding up the sunken drive under the stark limbs of the beeches. the house stood above them, a sombre pile, its chimneys half obscured by the trees. heavily clement let himself down, to find calamy at his elbow. the man had been waiting for him in the dimly lighted doorway. "mr. bourdillon has gone to london," clement explained. "i have come instead if i can be of any use." then he saw that the butler did not know him, and "i am mr. clement ovington," he added. "you'd better ask your master if he would like to see me." "there's times when the devil'd be welcome," the man replied bluntly. "it's tears and lamentations and woe in the house this night, but god knows what it's all about, for i don't. come in, come in, sir, in heaven's name, but i'm fearing it's little good. the devil has us in his tail, and if the master goes through the night--but this way, sir--this way!" he opened a door on the left of the hall, pushed the astonished clement into the room, and over his shoulder, "here's one from the bank, at any rate," he proclaimed. "maybe he'll do." clement took in the scene as he entered, and drew from it an instant impression of ill. the room was in disorder, lighted only by a pair of candles, the slender flames of which were reflected, islanded in blackness, in the two tall windows that, bald and uncurtained, let in the night. the fire, a pile of wood ashes neglected or forgotten, was almost out, and beside it a cupboard-door gaped widely open. a chair lay overturned on the floor, and in another sat the squire, gaunt and upright, muttering to himself and gesticulating with his stick, while over him, her curls falling about her neck, her face tragic and tear-stained, hung his daughter, her shadow cast grotesquely on the wall behind her. she had a glass in her hand, and by her on the table, from which the cloth had fallen to the floor, stood water and a medicine bottle. in their absorption neither of the two had heard calamy's words, and for a moment clement stood in doubt, staring at them and feeling that he had been wrong to come. the trouble, whatever it was, could not be what he had feared. then, as he moved, half minded to withdraw, josina heard him, and turned. in her amazement, "clement!" she cried. "you!" the squire turned in his chair. "who?" he exclaimed. "who's there? has he come?" the girl hesitated. the hand that rested on the old man's shoulder trembled. then--oh, bravely she took her courage in her hands, and "it is clement who has come," she said--acknowledging him so firmly that clement marvelled to hear her. "clement?" the old man repeated the word mechanically, and for a moment he sought in his mind who clement might be. then he found the answer, and "one of them, eh?" he muttered--but not in the voice that clement had anticipated. "so he won't face me? coward as well as rogue, is he? and a griffin! my god, a griffin! so he's sent him?" "where is arthur?" josina asked sharply. "he left for london this morning--by the coach." "ay, ay," the squire said. "that's it." clement plucked up courage. "and hearing that you wanted him, i came to explain. i feared from what the messenger said that there was something amiss." "something amiss!" the squire repeated the words in an indescribable tone. "that's what he calls it! something amiss!" clement looked from one to the other. "if there is anything i can do?" "you?" bluntly. "why, you be one of them!" "no!" josina interposed. "no, father. he has no part in it! i swear he has not!" but, "one of them! one of them!" the squire repeated in the same stubborn tone, yet without lifting his voice. "no!" josina repeated as firmly as before; and the hand that rested on her father's shoulder slid round his neck. she held him half embraced. "but he may tell you what has happened. he may explain, sir?" "explain!" the squire muttered. contempt could go no farther. "shall i tell him, sir?" "you're a fool, girl! the man knows." "i am sure he does not!" she said. again clement thought that it was time to interpose, "indeed i do not, sir," he said. "i am entirely in the dark." in truth, looking on what he did, seeing before him the unfamiliar room, the dark staring windows, and the old man so unlike himself and so like king lear or some figure of tragedy, he was tempted to think the scene a dream. "if you will tell me what is the matter, perhaps i can help. arthur left this morning for london. he went to raise the money with which he was entrusted----" "entrusted?" the squire cried with something of his old energy. he raised his head and struck the floor with his stick. "entrusted? that's what you call it, is it?" clement stared. "i don't understand," he said. "what did he tell you?" josina asked. "for heaven's sake speak, clement! tell us what he told you." "ay," the squire chimed in. "tell us how you managed it. now it's done, let's hear it." for the time scorn, a weary kind of scorn, had taken the place of anger and subdued him to its level. but clement was still at sea. "managed it?" he repeated. "what do you----" "tell us, tell us--from the beginning!" jos cried, at the end of her patience. "about this money? what did arthur tell you? what did he tell you--this morning?" then for the first time clement saw what was in question, and he braced himself to meet the shock which he foresaw. "he told us," he said, "what mr. griffin had consented to do--that he had given him securities for twelve thousand pounds for the use of the bank and to support its credit. he had the stock with him, and he received from the bank, in return for it, an undertaking to replace the amount two months after date with interest at seven per cent. it was thought best that he should take it to london himself, as it was so large a sum and time was everything. and he went by the coach this morning--to realize the money." josina shivered. "he took it without authority," she said, her voice low. "he stole it," the squire said, "out of that cupboard." "oh, but that's impossible, sir!" clement replied with eagerness. he felt an immense relief, for he thought that he saw light. he took note of the squire's condition, and he fancied that his memory, if not his mind, had given way. he had forgotten what he had done. that was it! "that's impossible, sir," he repeated firmly. "he had a proper transfer of the stock--india stock it was--signed and witnessed and all in order." "signed and witnessed?" the squire ejaculated. "signed and--signed, your grandmother! so that's your story, is it? signed and witnessed, eh?" but clement was beginning to be angry. "yes, sir," he said. "that is our story, and it is true." he thought that he had hit on the truth, and he clung to it. the squire had signed and the next minute had forgotten the whole transaction--clement had heard of such cases. "he had the transfer with him," he continued, "signed by you and witnessed by himself and--and miss griffin. i saw it myself. i saw the signatures, and i have seen yours, sir, often enough on a cheque to know it. the transfer was perfectly in order." "in whose favor, young man?" "our brokers', sir." the squire flared up. "i did not sign it!" he cried. "it's a lie, sir! i signed nothing! nothing!" but josina intervened. she, poor girl, saw light. "yes," she said, "my father did sign something--on saturday after dinner. but it was a lease. i and arthur witnessed it." "and what has that to do with it?" the squire asked passionately. "what the devil has that to do with it? i signed a lease and--and a counterpart. i signed no transfer of stock, never put hand to it! never! what has the lease to do with it?" but josina was firm. "i am afraid i see now, sir," she said. "you remember that you signed a paper to try your pen? and i signed it too, father, by mistake? you remember? ah!"--with a gesture of despair--"if i had only not signed it!" the squire groaned. he, too, saw it now. he saw it, and his head sank on his breast. "forger as well as thief!" he muttered. "and a griffin!" and clement's heart sank too as he met the girl's anguished eyes and viewed the squire's bowed head and the shame and despair that clothed themselves in an apathy so unlike the man. he saw that here was a tragedy indeed, a tragedy fitly framed in that desolate room with its windows staring on the night and its air of catastrophe; a tragedy passing bank failures or the loss of fortune. and in his mind he cursed the offender. but even as the words rose to his lips, doubt stayed them. there was, there must be, some mistake. the thing could not be. he knew arthur, he thought that he knew arthur; he knew even the darker side of him--his selfishness, his lack of thought for others, his desire to get on and to grow rich. but this thing arthur never could have done! clement recalled his gay, smiling face, his frank bearing, his care-free eyes, the habit he had of casting back a lock from his brow. no, he could not have done this thing. "no, sir, no!" he cried impulsively. "there is some mistake! i swear there is! i am sure of it." "you've the securities?" "yes, but i am sure----" "you're all in it," the squire said drearily. and then, with energy and in a voice quivering with rage, "he's learned this at your d--d counter, sir! that's where it is. it's like to like, that's where it is. like to like! i might ha' known what would happen, when the lad set his mind on leaving our ways and taking up with yours. i might ha' known that that was the blackest day our old house had ever seen--when he left the path his fathers trod and chose yours. you can't touch pitch and keep your hands clean. you ha' stole my daughter--d--n you, sir! and you ha' taught him to steal my money. i mind me i bid your father think o' fauntleroy, i never thought he was breeding up a fauntleroy in my house." and, striking the table with all his old vitality, "you are thieves! thieves all o' you! and you ha' taught my lad to thieve!" "that is not true!" clement cried. "not a word of that is true!" "you ha' stole my daughter!" clement winced. she had told him, then. "and now you ha' stole my money!" "that, at least, is not true!" he held up his head. he stepped forward and laid his hand on the table. "that is not true," he repeated firmly. "yon do not know my father, mr. griffin, though you may think you do. he would see the bank break a hundred times, he would see every penny pass from him, before he would do this that you say has been done. your nephew told us what i have told you, and we believed him--naturally we believed him. we never suspected. not a suspicion crossed my father's mind or mine. we saw the certificates, we saw the transfer, we knew your handwriting. it was in order, and----" "and you thought--you ha' the impudence to tell me that you thought that i should throw thousands, ay, thousands upon thousands into the gutter--to save your bank?" "we believed what we were told," clement maintained. "why not--as you put the question, sir? your nephew had five thousand pounds at stake. his share in the bank was at stake. he knew as well as we did that with this assistance the bank was secure. we supposed that for his sake and the sake of his prospects----" "i don't believe it!" the squire retorted. "i'll never believe it. your father's a trader. i know 'em, and what their notion of honesty is. and you tell me----" "i tell you that a trader is nothing if he be not honest!" clement cried hotly. "honesty is to him what honor is to you, mr. griffin. but we'll leave my father's name out of this, if you please, sir. you may say what you like of me. i have deserved it." "no," said josina. "yes, i have deserved it, and i am ashamed of myself--and proud of myself. but my father has done nothing and known nothing. and for this money, when he learns the truth, mr. griffin, he will not touch one penny of it with one of his fingers. it shall be returned to you, every farthing of it, as soon as we can lay our hands on it. every penny of it shall be returned to you--at once!" "ay," dryly, "when you have had the use of it!" "no, at once! without the loss of an hour!" "you be found out," said the old man bitterly. "you be found out! that's it!" clement read an appeal in josina's eyes, and he stayed the retort that rose to his lips. "at any rate the money shall be restored," he said--"at once. i will start for town to-night, and if i can overtake"--he paused, unwilling to utter arthur's name--"if i can overtake him before he transfers the stock, the securities shall be returned to you. in that case no harm will be done." "no harm!" the squire ejaculated. he raised his hand and let it fall in a gesture of despair. "no harm?" but clement was determined not to dwell on that side of it. "if i am not able to do that," he continued, "the proceeds shall be placed in your hands without the delay of an hour. in which case you must let the signature pass--as good, sir." "never!" the old man cried, and struck his hand on the table. "but after all it is yours," clement argued. "and you must see, sir----" "never! never!" the squire repeated passionately. "you will not say that in cold blood!" clement rejoined, and from that moment he took a higher tone, as if he felt that, strange as the call was, it lay with him now to guide this unhappy household. "you have not considered, and you must consider, mr. griffin," he continued, "before you do that, what the consequences may be. if you deny your signature, and anyone, the india house or anyone, stands to lose, steps may be taken which may prove--fatal. fatal, sir! a point may be reached beyond which even your influence, and all you may then be willing to do, may not avail to save your nephew." the squire groaned. clement's words called up before him and before josina, not only the thing which arthur had done, but the position in which he had placed himself. in this room, in this very room in which men of honor--dull and prejudiced, perhaps, but men of honor, and proud of their honor--had lived and moved for generations, he, their descendant, had done this thing. the beams had stood, the house had not fallen on him. but to josina's eyes the candles seemed to burn more mournfully, the windows to stare more darkly on the night, the ashes on the hearth to speak of desolation and a house abandoned and fallen. clement hoped that his appeal had succeeded, but he was disappointed. the old man in his bitterness and unreason was not to be moved--at any rate as yet. he would listen to no arguments, and he suspected those who argued with him. "i'll never acknowledge it!" he said. "no, i'll never acknowledge it. i'll not lie for him, come what may! he has done the thing and disgraced our blood, and what matter who knows it--he has done it! he has made his bed and must lie on it! he went into your bank and learned your tricks, and now you'd have me hush it up! but i won't, d--n you! i'll not lie for you, or for him!" clement had a retort on his lips--for what could be more unfair than this? but again josina's eyes implored him to be silent, and he crushed back the words. he believed that by and by the squire would see the thing differently, but for the moment he could do no more, and he turned to the door. there in the doorway, and for one moment, josina's hands met his, she had one word with him. "you will save him if you can, clement?" she murmured. "yes," he promised her, "i will save him if i can." chapter xxxii if the news which arthur had conveyed to the bank on that monday morning had been much to clement, it had been more to his father. it had brought to ovington immense relief at the moment when he had least reason to expect it. the banker had not hidden the position from those who must needs work with him; but even to them he had not imparted the full measure of his fears, much less the extent of the suffering which those fears occasioned him. the anxiety that kept him sleepless, the calculations that tormented his pillow, the regret with which he reviewed the past, the responsibility for the losses of others that depressed him--he had kept these things to himself, or at most had dropped but a hint of them to his beloved betty. but they had been very real to him and very terrible. the spectre of bankruptcy--with all the horror which it connoted for the mercantile mind--had loomed before him for weeks past, had haunted and menaced him; and its sudden exorcism on this monday morning meant a relief which he dared not put into words to others and shrank from admitting even to himself. he who had held his head so high--no longer need he anticipate the moment when he would be condemned as a reckless adventurer, whose fall had been as rapid as his rise, and whom the wiseacres of aldersbury had doomed to failure from the first! that had been the bitterest drop in his cup, and to know that he need not drain it, was indeed a blessed respite. still, he had received the news with composure, and through the day he had moved to and fro doing his work with accuracy. but it was in a pleasant dream that he had followed his usual routine, and many a time he paused to tell himself that the thing was a fact, that dean's would not now triumph over him, nor his enemies now scoff at him. on the contrary, he might hope to emerge from the tempest stronger than before, and with his credit enhanced by the stress through which he had ridden. business was business, but in the midst of it the banker had more than once to stand and be thankful. and with reason. for if he who has inherited success and lives to see it threatened suffers a pang, that pang is as nothing besides the humiliation of the man who has raised himself; who has outstripped his fellows, challenged their admiration, defied their jealousy, trampled on their pride; who has been the creator of his own greatness, and now sees that greatness in ruins. he had escaped that. he had escaped that, thank god! more than once the two words passed his lips; and in secret his thoughts turned to the great chief of men to whom in his own mind and with a rather absurd vanity he had compared himself. thank god that his own little star had not sunk like his into darkness! it was relief, it was salvation. and that evening, as the banker sat after his five o'clock dinner and sipped his fourth and last glass of port and basked in the genial heat of the fire, while his daughter knitted on the farther side of the hearth, he owned himself a happy man. he measured the danger, he winced at the narrow margin by which he had escaped it--but he had escaped! dean's, staid, long-established, slow-going dean's, which had viewed his notes askance, had doubted his stability and predicted his failure, dean's which had slyly put many a spoke in his wheel, would not triumph. nay, after this, would not he, too, rank as sound and staid and well established, he who had also ridden out the storm? for in crises men and banks age rapidly; they are measured rather by events than by years. those who had mistrusted him would mistrust him no longer; those who had dubbed him new would now count him old. as he stretched his legs to meet the genial heat and sank lower in his chair he could have purred in his thankfulness. things had fallen out well, after all; he saw rosy visions in the fire. schemes which had lain dormant in his mind awoke. his london agents had failed, but others would compete for his business, and on better terms. the squire who had so marvellously come to his aid would bring back his account, and his example would be followed. he would extend, opening branches at bretton and monk's castle and blankminster, and the railroad? he was not quite sure what he would do about the railroad; possibly he might decide that the time was not ripe for it, and in that case he might wind up the company, return the money, and himself meet the expenses incurred. the loss would not be great, and the effect would be prodigious. it would be a napoleonic stroke--he would consider it. he lost himself in visions of prosperity. and it would be all for clement and betty. he looked across the hearth at the girl who sat knitting under the lamp-light, and his eyes caressed her, his heart loved her. she would make a great match. failing arthur--and of late arthur and she had not seemed to hit it off--there would be others. there would be others, well-born, who would be glad to take her and her dowry. he saw her driving into town in her carriage, with a crest on the panels. it was she who cut short his thoughts. she looked at the clock. "i can't think where clement is," she said. "you don't think that there is anything wrong, dad?" "wrong? no," he answered. "why should there be!" "but he disappeared so strangely. he said nothing about missing his dinner." "he was to check some figures with rodd this evening. he may have gone to his rooms." "but--without his dinner?" but the banker was not in the mood to trouble himself about trifles. the lamp shone clear and mellow, the fire crackled pleasantly, a warm comfort wrapped him round, the port had a flavor that he had not perceived in it of late. instead of replying to betty's question he measured the decanter with his eye, decided that it was a special occasion, and filled himself another glass. "ovington's bank," he said as he raised it to his lips. but that to which he really drank was the home that he saw about him, saved from rain, made secure. betty smiled. "you're relieved to-night, dad." "well, i am, betty," he admitted. "yes, i am--and thankful." "and that queer old man! i wonder," as she turned her knitting on her knee, "why he did it." "i suppose for arthur's sake. he'd have lost pretty heavily--for him." "but you didn't expect that mr. griffin would come forward?" the banker allowed it. "no," he said. "i don't know that i ever expected anything less. such things don't happen, my girl, very often. but he will be no loser, and i suppose arthur convinced him of that. he is shrewd, and, once convinced, he would see that it was the only thing to do." "but not many people would have been convinced?" "no, perhaps not." betty knitted awhile. "i thought that he hated the bank?" she said, as she paused to rub her chin with a needle. "he does--and me. but he loves his money, my dear." "still it isn't his. it is arthur's." "true. but he's a man who cannot bear to see money lost. he thinks a good deal of it." "he is not alone in that," betty exclaimed. "sometimes i feel that i hate money! people grow so fond of it. they think only of themselves, even when you've been ever so good to them." "well, it's human nature," the banker replied equably. "i don't know who it is that you have in your mind, my dear, but it applies to most people." he was going to say more when the door opened. "mr. rodd is here, asking for mr. clement, sir," the maid said. "he was to meet him at half after six, and----" "ask mr. rodd to come in." the cashier entered shyly. in his dark suit, with his black stock and stiff carriage, he made no figure, where arthur, or even clement, would have shone. but there were women in aldersbury who said that he had fine eyes, eyes with something of a dog's gentleness in them; and arthur so far agreed that he dubbed him a dull, mechanical dog, and often made fun of him as such. but perhaps arthur did not always see to the bottom of things. ovington pushed the decanter and a glass towards him. "a glass of wine, rodd," he said genially. he was not of those who undervalued his cashier, though he knew his limitations. "the bank!" he said. "and those who have stood by it!" betty added softly. rodd drank the toast with a muttered word. "mr. rodd has not the same reason to be thankful that we have," betty continued carelessly, holding her knitting up to the lamp. "why not?" her father did not understand. "why," innocently, as she lowered the knitting again, "he does not stand to lose anything, does he?" "except his place," the cashier objected, his eyes on his glass. "just so," the banker rejoined. "and in that event," moved to unusual frankness, "we should have been all out together. and rodd might not have been the worst off, my girl. "exactly," betty said. "i'm sure that he would take care of that." the cashier opened his mouth to speak, but checked himself, and drank off his wine. then, as he rose, "if you know where mr. clement is, sir----" "i don't. i can't think what has become of him," the banker explained. "he went out about four, and since then--hallo! that's some one in a hurry. it sounds like a fire." a vehicle had burst in on the evening stillness. it came clattering at a reckless pace up bride hill. it passed the bank, it rattled noisily around the corner of the market place, and pounded away down the high street. "more likely some one hastening to get out of danger," said betty. "_a sauve qui peut_, mr. rodd--if you know what that means." the clerk, with a flushed cheek, avoided the question. "it might be some one trying to catch the seven o'clock coach, sir," he said. "very likely. and if so he's failed, for he's coming back again. ay, here he comes, and he stopping here, by jove! i hope that nothing's wrong." the vehicle had, indeed, stopped abruptly before the house. they heard some one alight on the pavement, a latchkey was thrust into the door. "it's clement!" the banker exclaimed, his eyes on the door. "i hope he does not bring bad news! well, lad?" as clement in his overcoat, his hat on his head, appeared in the doorway. "what is it? is anything wrong?" "very much wrong!" his son replied curtly, and he closed the door behind him. he was pale, and his splashed coat and neck-shawl tied awry, no less than his agitated face, confirmed their fears. "out with it, lad! what is it? his father asked, fearing he knew not what. "bad news, sir!" was the answer. "i'm sorry to say i bring very bad news!" "what?" "that loan of mr. griffin's----" "the twelve thousand? yes?"--anxiously--"well?" "it's a fraud, sir! a cursed fraud!" there was a tense silence. then, "impossible!" the banker exclaimed. but he grasped a chair to steady himself. his face had turned grey. "the squire knows nothing of it!" clement struck his open hand on the back of a chair. "he never signed the transfer! he never gave any authority for the loan!" "no, no, that's impossible!" ovington straightened himself with a sigh of relief. what mare's nest, what bee in the bonnet, was this? the lad was dreaming--must be dreaming. "impossible!" he repeated. "i saw it, man, and read it! and i know the old man's signature as well as i know my own. you must be dreaming." "i am not, sir!" clement answered, and added bitterly, "it was arthur who was dreaming! dreaming or worse, d--n him!"--the pent-up excitement of the evening finding vent at last, and the sight of his father's stricken face whetting his rage. "he has robbed, ay, robbed his uncle, and dishonored us! that is what he has done, sir. i am not dreaming! i wish to heaven i were!" the banker no longer protested. "well--tell us!" he said weakly. "it's hard on you, sir----" "never mind me! tell me what you know." they stood round clement, amazed and shocked, fearing the worst and yet incredulous, while he, his weary face and travel-stained figure at odds with the lighted room and the comfort about him, told his story. the banker listened. he still hoped, hoped to detect some flaw, to perceive some misunderstanding--so much, so very much, hung upon it. but even on his mind the truth at last forced itself, and monstrous as the story, incredible as arthur's action still appeared, he had at last to accept it and its consequences--its consequences! he seemed to grow years older as he listened, but when clement had done, and the whole shameful story was told, he made no comment. the position, indeed, was no worse than it had been twenty-four hours before. he might still hope against hope, that, by putting a bold face on matters, and by a dexterous use of his resources, he might ride out the storm. but the reaction from a triumphant confidence was so sudden, the failure of his recent expectations so overwhelming, that even his firm spirit yielded. he sank into his chair. betty laid her hand on his shoulder and whispered some word of comfort in his ear, but he said nothing. it was clement who spoke the first word. "i am going after him," he said, his tone hard and practical. "i have thought it out, and by posting all night i may be in london by noon to-morrow, and i may intercept him either at the brokers' or at the india house before he has sold the stock. in that case i may be in time to stop him." "why?" the banker asked, looking up. "what have we to do with him? why should we stop him?" "for our own sakes as well as his," clement answered firmly. "for our own good name, which is bound up with his. think, think, sir, of the harm it will do us if there is a prosecution--and the old man swears that he will not acknowledge the signature! besides i have promised to stop him--if i can. if i am too late to do that, and he has sold the stock, i can still get possession of the money, and it must be our business to return it to the owner without the loss of an hour. of an hour, sir!" clement repeated earnestly. "we must repudiate this transaction from the outset. we must wash our hands of it at once, if it be only to clear our own name." the banker looked dazed. "but," he said, as if his mind were beginning to work again, "why should we--take all this trouble?" he hesitated, then he began again. "we have done nothing. we are innocent. why should we----" "stop him?" "ay, or be in such a hurry to return the money? it is no fault of ours if it does come to our hands. and, remember, if it lies with us only a week"--he looked at his son, his face troubled--"only a week, the position is such----" "no! no!" clement cried, and for once he spoke preemptorily. "not for a day, father, not for an hour! and when you have thought it over as i have, when you have had time to think it over, you will see that. you will be the first, the very first, to see that, and to say that we must have no part or share with bourdillon in this; that if we must go down we will go down with clean hands. to avail ourselves of this money, even for a day, and though it would save the bank twice over, would be to make us accomplices----" the banker stood up. "right!" he said firmly. "you are right, lad!" he drew a deep breath, the color returned to his face. he laid his hand on clement's shoulder. "you are quite right, my boy, and i wasn't myself when i said that. you shall have no reason to blush for your father. you are quite right. we will repudiate the transaction from the first. we will have neither art nor part in it. we will return the money the moment it comes into your hands!" "thank god, sir, that you see it as i do." "i do, i do! the money shall be paid over at once, though the shutters go up the next hour. and we will fight our battle as we must have fought it if this had never happened." "with clean hands, at any rate, sir." "yes, lad, with clean hands." "oh, father, that's splendid!" betty cried, and she pressed herself against him. "but as for clement going, he must be worn out. could not mr. rodd go?" "rodd will be of more use to you here," clement said. "you will be short-handed as it is." "we shall pay out the more slowly," the banker answered with grim humor. "and i doubt, besides," said clement, "if bourdillon would listen to rodd." "will he listen to you?" "he will have to, or face the consequences!" and clement looked as if he meant it: a hard clement this, with a new note in his voice. "from the india house to bow street is not very far, and he will certainly go to bow street--or the mansion house--if he does not see reason. but he will." "he may, if you are with him before he parts with the securities. but from this to noon to-morrow you will not do it in that time, my lad, at night? winter time, too? you'll never do it!" but clement averred that he would--in fourteen hours, with good luck. it was for that reason that he had gone straight to the lion and ordered a chaise for eight o'clock and sent on word by the seven o'clock coach for a relay to be ready at the heygate inn. he had also asked the lion to pass on word by any chaise starting in front of him. "so i hope for two or three stages i shall find the horses ready. betty, pack up some food for me, that's a good girl. i've only twenty minutes." "and your travelling cloak?" she cried. "i'll air it." "you must eat something before you start," said his father. "yes, i will. and, rodd, do you get me the bank pistols--and see that they are loaded!" the banker nodded. "yea, you'd better take them," he said. "it's an immense sum--if you bring it back. it would be a terrible business if you were robbed." "ay, for then we should share the blame," clement answered drily. "that wouldn't do, would it? but let me get the money, and i'll not be robbed, sir." they parted, hurrying to and fro on their several errands, the banker fetching money for the journey, rodd loading the pistols, betty setting food before the traveller and cutting sandwiches for the journey, clement himself making some change in his dress. for ten minutes a cheerful stir reigned in the house. but ovington, though he yielded to this and watched his son at his meal and filled his glass, and played his part, did but feign. he knew that within a few minutes the door would close on clement, the house would relapse into silence, the lights would go out, and he would be left to face the failure of all the hopes, the plans and expectations which he had entertained through the day. the odds against him, which had not seemed overwhelming twenty-four hours before, now appeared invincible and not to be resisted. he felt that the fates were opposed to him. he had had his chance, and it had been withdrawn. as he climbed the stairs to bed, climbed them slowly and with heavy feet, he read ruin in the flame of his candle. as he undressed he heard the voices of revellers passing the house at midnight, on their way from the raven or the talbot, and he suspected derision in their tones. he fancied that they were talking of him, jeering at him, rejoicing in his fall. in bed he lay long awake, calculating, and trying to make of four, five. could he hold out till wednesday? till thursday? or would panic running through the town on the morrow, like fire amid tinder, kindle the crowd and hurl it, inflamed with greed and fear, upon his slender defences? he was buying honesty at a great price. but he thought of clement and betty, and towards morning he fell asleep. chapter xxxiii travelling in the old coaching days was not all hardship. it had its own, its peculiar pleasures. a writer of that time dwells with eloquence on the rapture with which he viewed a fine sunrise from the outside of a fast coach on the great north road; on the appetite with which he fell to upon a five o'clock breakfast at doncaster, on the delight with which he heard the nightingales sing on a fine night as he swept through henley, on the satisfaction of seeing old shoreditch church, which betokened the end of the journey. men did not then hurry at headlong speed along iron rails, with their heads buried in a newspaper or in the latest novel. they learned to know and had time to view the objects of interest that fringed the highway--to recognize the farm at which the great durham ox was bred, and the house in which the equally great sir isaac newton was born. if these things were strange to the travellers and their appearance promised a good fee, the coachman condescended from his greatness and affably pointed them out. but to sit through the long winter night, changing each hour from one damp and musty post-chaise to another, to stamp and fume and fret while horses were put to at every stage, to scold an endless succession of incoming and fee an endless series of out-going postboys, each more sleepy and sullen than the last--this was another matter. to be delayed here and checked there and overcharged everywhere, to be fobbed off with the worst teams--always reserved for night travellers--and to find, once started on the long fourteen-mile stage, that the off-wheeler was dead lame, to fall asleep and to be aroused with every hour--these were the miseries, and costly miseries they were, of old-world journeying. this was its seamy side. and many a time clement, stamping his stone-cold feet in wind-swept inn yards, or ringing ostlers' bells in stone-paved passages, repented that he had started, repented that he had ever undertaken the task. why had he, he asked himself more than once that bitter night. what was arthur bourdillon to him that he should spend himself in an effort as toilsome as it promised to be vain, to hold him back from the completion of his roguery? would arthur ever thank him? far from it. and josina? josina, brave, loving josina, who had risen to heights of which he thrilled to think, she might indeed thank him--and that should be enough for him. but what could she do to requite him, apart from her father? and the squire at garth had stated his position, nor even if he relented was he one to pour himself out in gratitude--he who hated the name of ovington, and laid all this at their door. it would be much if he ever noticed him with more than a grunt, or ever gave one thought to his exertions or their motive. no, he had let a quixotic, a foolish impulse run away with him! he should have waited until arthur had brought down the money, and then he should have returned it. that had been the simple, the matter-of-fact course, and all that it had been incumbent on him to do. as it was, for what was he spending himself and undergoing these hardships? to hasten the ruin of the bank, to meet failure half-way, to render his father penniless a few hours earlier, rather than later. to mask a rascality that need never be disclosed, since no one would hear of it unless the squire talked. yes, he had been a fool to hurl himself thus through the night, chilled to the bone, with fevered head and ice-cold feet, when he might have been a hundred times better employed in supporting his father in his need, in putting a brave front on things, and smiling in the face of suspicion. to be sure, it was only as the night advanced, or rather in the small hours of the morning, when his ardor had died down and josina's pleading face was no longer before him, and the spirit of adventure was low in him, that he entertained these thoughts. for a time all went well. he found his relay waiting for him at the heygate inn by wellington, where the name of the lion was all-powerful; and after covering at top speed the short stage that followed, he drove, still full of warmth and courage, into wolverhampton at a quarter before eleven. over thirty miles in three hours! he met with a little delay there; the horses had to be fetched from another stable, in another street. but he got away in the end, and ten minutes later he was driving over a land most desolate by day, but by night lurid with the flares of a hundred furnace-fires. he rattled up to the castle at birmingham at half an hour after midnight, found the house still lighted and lively, and by dint of scolding and bribing was presently on the road again with a fresh team, and making for coventry, with every inclination to think that the difficulties of posting by night had been much exaggerated. but here his good luck left him. at the half-way stage he met with disaster. he had passed the up coach half an hour before, and no orders now anticipated him. when he reached the stone bridge there were no horses; on the contrary, there were three travellers waiting there, clamorous to get on to birmingham. unwarily he jumped out of his chaise, and "no horses?" he cried. "impossible! there must be horses!" but the ostler gave him no more than a stolid stare. "nary a nag!" he replied coolly. "nor like to be, master, wi' every quaker in birmingham gadding up and down as if his life 'ung on it! why, if i've----" "quakers? what the devil do you mean?" clement cried, thinking that the man was reflecting on him. "well, quakers or drab-coated gentry like yourself!" the man replied, unmoved. "and every one wi' pistols and a money bag! seems that's what they're looking for--money, so i hear. such a driving and foraging up and down the land these days, it's a wonder the horses' hoofs bean't worn off." "then," said clement, turning about, "i'll take these on to meriden." but the waiting travellers had already climbed into the chaise and were in possession, and the postboy had turned his horses. and, "no, no, you'll not do that," said the ostler. "custom of the road, master! custom of the road! you must change and wait your turn." "but there must be something on," clement cried in despair, seeing himself detained here, perhaps for the whole night. "naught! nary a 'oof in the yard, nor a lad!" the man replied. "you'd best take a bed." "but when will there be horses?" "maybe something'll come in by daylight--like enough." "by daylight? oh, confound you!" cried clement, enraged. "then i'll walk on to meriden." "walk? walk on to----" the ostler couldn't voice his astonishment. "walk?" "ay, walk, and be hanged to you!" clement cried, and without another word plunged into the darkness of the long, straight road, his bag in his hand. the road ran plain and wide before him, he couldn't miss it; the distance, according to paterson, which he had in his handbag, was no more than two miles, and he thought that he could do it in half an hour. but, once away, under the trees, under the midnight sky, in the silence and darkness of the country-side, the fever of his spirits made the distance seem intolerable. as he tramped along the lonely road, doubtful of the wisdom of his action, the feeling of strangeness and homelessness, the sense of the uselessness of what he was doing, grew upon him. at this rate he might as well walk to london! what if there were no horses at meriden? or if he were stayed farther up the road? he counted the stages between him and london, and he had time and enough to despair of reaching it, before he at last, at a good four miles an hour, strode out of the night into the semicircle of light which fell upon the road before the bull's head at meriden. thank heaven, there were lights in the house and people awake, and some hope still! and more than hope, for almost before he had crossed the threshold a sleepy boots came out of the bar and met him, and "horses? which way, sir? up? i'll ring the ostler's bell, sir!" clement could have blessed him. "double money to coventry if i leave the door in ten minutes!" he cried, taking out his watch. and ten minutes later--or in so little over that time as didn't count--he was climbing into a chaise and driving away: so well organized after all--and all defects granted--was the posting system that at that time covered england. to be sure, he was on one of the great roads, and the bull's head at meriden was a house of fame. he had availed himself of the interval to swallow a snack and a glass of brandy and water, and he was the warmer for the exercise and in better spirits; pluming himself a little, too, on the resolution which had plucked him from his difficulty at the stone bridge. but he had lost the greater part of an hour, and the clocks at coventry were close on three when he rattled through the narrow, twisting streets of that city. here, early as was the hour, he caught rumors of the panic, and hints were dropped by the night-men in the inn yard--in sly reply, perhaps, to his adjurations to hasten--of desperate men hurrying to and fro, and buying with gold the speed which meant fortune and life to them. something was said of a banker who had shot himself at northampton--or was it nottingham?--of london runners who had passed through in pursuit of a defaulter; of a bank that had stopped, "up the road." "and there'll be more before all's over," said his informant darkly. "but it's well to be them while it lasts! they've money to burn, it seems." clement wondered if this was an allusion to the crown piece that he had offered. at any rate the ill-omened tale haunted him as he left the city behind him, and, after passing under the cross on knightlow hill, and over the black heath about dunsmoor, committed himself to the long, monotonous stretch of road that, unbroken by any striking features, and regularly dotted with small towns that hardly rose above villages, extended dull mile after dull mile to london. the rumble of the chaise and the exertions he had made began to incline him to sleep, but the cold bit into his bones, his feet were growing numb, and as often as he nodded off in his corner he slid down and awoke himself. sleet, too, was beginning to fall, and the ill-fitting windows leaked, and it was a very morose person who turned out in the rain at dunchurch. however, luck was with him, and he got on without delay to daventry, and had to be roused from sleep when his postboy pulled up before the famous old wheat-sheaf that, wakeful and alight, was ready with its welcome. here cheerful fires were burning and everything was done for him. a chaise had just come in from towcester. the horses' mouths were washed out while he swallowed a crust and another glass of brandy and water, the horses were turned round, and he was away again. he composed himself, shivering, in the warmer corner, and, thanking his stars that he had got off, was beginning to nod, when the chaise suddenly tilted to one side and he slid across the seat. he sat up in alarm and felt the near wheels clawing at the ditch, and thought that he was over. a moment of suspense, and through the fog that dimmed the window-panes flaming lights blazed above him and over him, and the down mails thundered by, coach behind coach--three coaches, the road quivering beneath them, the horses cantering, the guards replying with a volley of abuse to the postboy's shout of alarm. huge, lighted monsters, by night the bullies of the road, they were come and gone in an instant, leaving him staring with dazzled eyes into the darkness. but the shave had not bettered his temper. the stage seemed a long one, the horses slow, and he was fretting and fuming mightily, and by no means as grateful as he should have been for the luck that had hitherto attended him, when at last he jogged into towcester. alas, the inn here was awake, indeed, in a somnolent, grumpy, sullen fashion, but there were no horses. "not a chance of them," said the sleepy boots, nicking a dirty napkin towards the coffee room. "there are two business gents waiting there to get on--life and death, 'cording to them. they're going up same way as you are, and they've first call. and there's a gentleman and his servant for birmingham--down, they are, and been waiting since eleven o'clock and swearing tremendous!" "then i'll take mine on!" clement said, and whipped out into the night and ran to his chaise. but he was too late. the gentleman's servant had been on the watch, he had made his bargain and stepped in, and his master was hurrying out to join him. "the devil!" cried clement, now wide awake and very angry. "that's pretty sharp!" "yes, sir, sharp's the word," said the boots. it was evident that night work had made him a misanthrope, or something else had soured him. "they'd be no good for brickhill anyway. it's a long stage. you'll take a bed?" "bed be hanged!" said clement, wondering what he should do. this seemed to be a dead stop, and very black he looked. at last, "i'll go to the yard," he said. "there's nobody up. you'd best----" and again the boots advised a bed. "nobody up? oh, hang it!" said clement, and stood and thought, very much at a standstill. what could he do? there was a clock in the passage. he looked at it. it was close on six, and he had nearly sixty miles to travel. save for the delay at the stone bridge, he had done well. he had kept his postboy up to the mark: he had spared neither money nor prayers, nor, it must be added, curses. he had done a very considerable feat, the difficulties of night porting considered. but he had still fifty-eight miles before him, and if he could not get on now he had done nothing. he had only wasted his money. "any up coach due?" "not before eight o'clock," said the boots cynically. "beaches the saracen's head, snowhill, at three-thirty. you are one of these moneyed gents, i suppose? things is queer in town, i hear--crashes and what not, something terrible, i am told. blue ruin and worse. the master here"--becoming suddenly confidential--"he's in it. it's u-p with him! they seized his horses yesterday. that's why--" he winked mysteriously towards the silent stables. "wouldn't trust him, and couldn't send a bailiff with every team. that's why!" "who seized them?" clement asked listlessly. but he awoke a second later to the meaning of his words. "hollins, church farm yonder. bill for hay and straw. d'you know him?" "no, but--here! d'you see this?" clement plucked out a crown piece, his eyes alight. "is there a postboy here? that's the point! asleep or awake! quick, man!" "a postboy? well, there's old sam--he can ride. but what's the use of a postboy when there's no horses?" "wake him! bring him here!" clement retorted, on fire with an idea, and waving the crown piece. "d'you hear? bring him here and this is yours. but sharp's the word. go, go and get him, man, it will be worth his while. haul him out! tell him he must come! it's money, tell him!" the boots caught the infection and went, and for three or four minutes clement stamped up and down in a fever of anxiety. by and by the postboy came, half dressed, sulky, and rubbing his eyes. clement seized him by the shoulders, shook him, pounded him, pounded his idea into him, bribed him. five minutes later they were hurrying towards the church, passing here and there a yawning laborer plodding through the darkness to his work. the farmer at hollins's was dressing, and opened his window to swear at them and at the noise the dogs were making. but, "three pounds! three pounds for horses to brickhill!" clement cried. the proper charge was twenty-six shillings at the eighteen-penny night scale, and the man listened. "you can come with me and keep possession!" clement urged, seeing that he hesitated. "you run no risk! i'll be answerable." three pounds was money, much money in those days. it was good interest on his unpaid bill, and mr. hollins gave way. he flung down the key of the stables, and hurrying down after it, helped to harness the horses by the light of a lanthorn. that done, however, the good man took fright at the novelty, almost the impudence of the thing, and demanded his money. "half now, and half at brickhill," clement replied, and the sight of the cash settled the matter. mr. hollins opened the yard gate, and two minutes later they were off, the farmer's wife staring after them from the doorway and, with a leaning to the safe side, shrilly stating her opinion that her husband was a fool and would lose his nags. "never fear," clement said to the man. "only don't spare them! time is money to me this morning!" fortunately, the horses had done no work the previous day and had been well fed. they were fresh, and the old postboy, feeling himself in luck, and exhilarated by what he called "as queer a start as ever was," was determined to merit the largest fee. the farmer, as they whirled down windmill hill at a pace that carried them over the ascent and past plum park, fidgeted uneasily in his seat, fearing broken knees and what not. but seeing then that the postboy steadied his pair and knew his business, he let it pass. as far as stony stratford the road was with them, and thence to fenny stratford they pushed on at a good pace. it was broad daylight by now, the road was full of life and movement, they met and passed other travellers, other chaises, one or two of the early morning coaches. men, topping and tailing turnips, stood and watched them from the fields, a gleam of december sunrise warmed the landscape. to the tedious nightmare of the long, dark hours, with their endless stages and sleepy turn-outs and shadowy postillions, their yawning inns and midnight meals, had succeeded sober daylight, plodding realities, waking life; and clement should have owned the relief. but he did not, for a simple reason. during the night the end had been far off and uncertain, a thing not yet to be dwelt upon or considered. now the end was within sight, a few hours must determine it one way or the other, and his anxiety as the time passed, and now the horses slackened their pace to climb a rise, now were detained by a flock of sheep, centred itself upon it. he had endured so much that he might intercept arthur before the deed was done and the false transfer used, that to fail josina now, to be too late now, was a thing not to be considered. chapter xxxiv still, the daylight had one good effect, it completed the reassurance of mr. hollins. he could see his man now, and judging him to be good for the money, he gave way to greed and proposed to run the horses on to dunstable. clement thought that he might do worse and agreed, merely halting for five minutes at the george at brickhill, to administer a quart of ale apiece to the nags, and to take one themselves. then they pressed on to dunstable, which they reached at half-past eight. even so, clement had still thirty miles to cover. but the postboy, a sportsman with his heart in the game, had ridden in, waving his whip and shouting for horses, and his good word spread like magic. two minutes let the yard know that here was a golden customer, an out-and-outer, and almost before clement could swallow a cup of scalding coffee and pocket a hot roll he had wrung the farmer's hand, fee'd old sam to his heart's content, and was away again, on the ten-mile downhill stage to st. albans. they cantered most of the way, the postboy's whip in the air and the chaise running after the horses, and did the distance triumphantly in forty-three minutes. then on, with the reputation of a good paymaster, to barnet--barnet, that seemed to be almost as good as london. luck could not have stood by him better, and, now the sun shone, they raced with taxed-carts, and flashed by sober clergymen jogging along on their hacks. the midnight shifts to which he had been put, the despairing struggle about meriden and dunchurch, were a dream. he was in the fairway now, though the pace was not so good, and the hills, with windmills atop, seemed to be set on the road at intervals on purpose to delay him. still he was near the end of his journey, and he began to consider all the alternatives to success, all the various ways in which he might yet fail. he might miss bourdillon; he began to be sure that he would miss him. either he would be at the india office when bourdillon was at the brokers', or at brokers' when he was at the india office; and, failing the india office or the brokers', he had no clue to him. or his quarry would have left town already, with the treasure in his possession. or they might pass one another in the streets, or even on the road. he would be too late and he would fail, after all his exertions! he began to feel sure of it. yes, he had certainly been a fool not to think at starting of the hundred chances, the scores of accidents that might occur to prevent their meeting. and every minute that he spent on the road made things worse. he had had yonder windmill in sight this half-hour--and it seemed no nearer. he fidgeted to and fro, lowered a window and raised it again, scolded the postboy, flung himself back in the chaise. at the green man at barnet he got sulkily into his last chaise, and they pounded down five miles of a gentle slope, then drove stoutly up the easy ascent to highgate. by this time the notion that bourdillon would pass him unseen had got such hold upon him--though it was the unlikeliest thing in the world that arthur could have got through his business so early--that his eyes raked every chaise they met, and a crowded coach by which they sped, as it crawled up the southern side of the hill, filled him with the darkest apprehensions. had he given a moment's thought to the state of the market, to the pressure of business which it must cause, and to the crowd, greedy for transfers, in which arthur must take his turn, he would have seen that this fear was groundless. however, the true state of things was by and by brought home to his mind. he had directed the postboy to take him direct to the brokers' in the city, and he had hardly exchanged the pleasant country roads of highbury and islington, with their villas and cow-farms, for the noisy, dirty thoroughfares of north london, before he was struck by the evidences of excitement that met his eyes. lads, shouting raucously, ran about the busier streets, selling broadsheets, which were fought for and bought up with greedy haste. a stream of walkers, with their faces set one way, hastened along almost as fast as his post-chaise. busy groups stood at the street corners, debating and gesticulating. as he advanced still farther, and crossed the boundary and began to thread the narrow streets of the city--it wanted a half hour of noon--he found himself hampered and almost stopped by the crowd which thronged the roadway, and seemed in its preoccupation to be insensible to the obstacles that barred its way and into which it cannoned at every stride. and still, with each yard that he advanced, the press increased. the signs of ferment became more evident. distracted men, hatless and red-hot with haste, regardless of everything but the errand on which they were bent, sprang from offices, hurled themselves through the press, leaped on their fellows' backs, tore on their way; while those whom they had maltreated did not even look round, but continued their talk, unaware of the outrage. some pushed through the press, so deep in thought that they saw no one and might have walked a country lane, while others, meeting as by appointment, seized one another, shook one another, bawled in each other's faces as if both had become suddenly deaf. and now and again the whole tormented mass, seething in the narrow lanes or narrower alleys, swayed this way or that under the impulse of some unknown mysterious impulse, some warning, some call to action. clement had never seen anything like it, and he viewed it with awe, his ears deafened by the babel or pierced by the shrill cries of the news-sellers who constantly bawled, "panic! great panic in the city! panic! list of banks closed!" he had heard as he changed at barnet that fourteen houses in the city had shut their doors, but he had not appreciated the fact. now he was to see with his own eyes shuttered windows and barred doors with great printed bills affixed to them, and huge crowds at gaze before them, groaning and hooting. even the shops bore singular and striking witness to the crisis, for in cheapside every other window exhibited a card stating that they would accept bank-notes to any extent and for goods to any amount--a courageous attempt to restore public confidence which deserved more success than it won; while there, and on all sides, he heard men execrating the bank of england and loudly proclaiming--though this was not the fact--that it had published a notice that it could no longer pay cash. here was panic indeed! here was an appalling state of things! and very low his heart sank, as the chaise made a few yards, stopped, and advanced again. what chance had ovington's, what hope of survival had their little venture, when the very credit of the country tottered, and here in the heart of london age-long institutions with vast deposits and forty or fifty branches toppled down on all sides? when merchant princes with tens of thousands in sound but unsaleable securities could do nothing to save themselves, and men of world-wide fame, the giants of finance, went humbly, hat in hand, to ask for time? stranded, or moving at a snail's pace, he caught scraps of the talk about him. smith's in mansion house street had closed its doors. everett and walker's had followed pole's into bankruptcy. wentworth's at york had failed for two hundred thousand pounds. telford's at plymouth had been sacked by an angry mob. the strongest bank in norwich was going or gone. the bank of england had paid out eight millions in gold within the week--and had no more. they were paying in one-pound notes now, a set found god knows where--in the cellars, it was said. the tellers were so benumbed with terror that they could not separate them or count them. for the moment he forgot arthur and arthur's business, and thought only of his father and of their own plight. "we are gone!" he reflected, his face almost as pale as the faces in the street. "we are ruined! there is no hope. when this reaches aldersbury we must close!" he could no longer bear the inaction. he could not sit still. he paid off the chaise--with difficulty, owing to the press--and pushed forward on foot. but his mind still ran on aldersbury, was still busy with the fate of their own bank. he felt an immense pity for his father, and recognized that until this moment, when panic in its most dreadful form stared him in the face, he had not realized the catastrophe, or the sadness, or the finality of it. they must close. they must begin the world again, begin it at the bottom, in competition with a multitude of beggared men, three-fourths of whom had never speculated, never touched a share, never left the safe path of industrious commerce, but were now to pay with all they possessed in the world, their daughters' portions and their sons' fortunes, for the recklessness or the extravagance of others. for a space there was vouchsafed to him the wider vision, and he saw the thing that was passing in its true light. he saw the wave of ruin spread from these crowded streets ever farther and farther, from city to town and town to country; and where it passed it wrecked homes, it made widows, it swept away the dowries of children, it separated lovers, it overwhelmed the happiness of thousands and tens of thousands. he saw the honest trader, whose father's good name was his glory, broken in heart and fortune through the failure of others, his health shattered, his house sold over his head, his pensioners and dependants flung into the workhouse. he saw deluded parsons doomed to spend the close of their lives in a hopeless wrestle with debt, their sons taken from school, their daughters sent out into a cold and unfeeling world. he saw squires, the little gods of their domain, men once wealthy, doomed to drink themselves into forgetfulness of the barred entail and the lost estate; the great house would be closed, the agent would squeeze the tenants, and they in turn the laborers, until the very village shop would feel the pinch. thousands upon thousands would lose their hoarded savings, and, too old to begin again, would sink, they and their children and their children's children, into the under-world, there to be lost amid the dregs of the population. and he and his? why should they escape? how could they escape? it would be much if they could feel, while they shared the common lot, that they had deserved to escape, that they were not of those whose wild speculations had brought this disaster on their kind. he had by this time fought his way as far as the end of cheapside, and here, where the roar was loudest and the contending currents mingled their striving masses, where the voices of the news-boys were shrillest, and the timid stood daunted, while even strong men paused, measuring the human whirlpool into which they must plunge, clement's eye was caught by a side-scene which was passing in the street hard by the mansion house. raised above the crowd on the steps of a large building, a haggard man was making an announcement--but in dumb show, for no word could be heard even by those who stood beside him, and his meaning could be deduced only from his gestures of appeal. the lower windows of the house were shuttered, and the upper exhibited many broken panes; but behind these and the cornice of the roof gleamed here and there a pale frightened face, peering down at the proceedings below. from the crowd collected before the haggard man rose a continuous roar of protest, a forest of menacing hands, shrill cries and curses, and now and again a missile, which, falling absurdly short--for in that press no man could swing his arm--still bore witness to the malice that urged it. nearer to clement on the skirts of the throng, where they could see little and were perpetually elbowed by impatient passersby, loitered a few who at a first glance seemed to be uninterested--so apathetic were their attitudes, so absent was their gaze. but a second glance disclosed the truth. they were men whom the tidings of ruin, sudden and unforeseen, had stunned. spiritless and despairing, seeing only the home they had forfeited and the dear ones they had beggared, they stood in the street, blind and deaf to what was passing about them, and only by the mute agony of their eyes betrayed the truth. the sight wrung clement's heart with pity, and he seized a news-lad by the arm. "what is that place?" he shouted in his ear. in that babel no man could make himself heard without shouting. the man looked at him suspiciously. "yar! yer kidding!" he said. "yer know as well as me!" clement shook him in his impatience. "no, i don't," he shouted. "i'm a stranger! what is it, man? a bank?" "where d'yer come from?" the lad retorted, as he twisted himself free. "it's everitt's, that's what it is! they closed an hour ago! might as well ha' never opened!" he went off hurriedly, and clement went too, plunging into the maelstrom that divided him from cornhill. but as he buffeted his way through the throng, the faces of the ruined men went with him, coming between him and the street, and with a sinking heart he fancied that he read, written on them, the fate of ovington's. chapter xxxv it was to clement's credit that, had his object been to save his father's bank, instead of to do that which might deprive it of its last hope, he could not have struggled onward through the press more stoutly than he did. but though the offices for which he was bound, situate in one of the courts north of cornhill, were no more than a third of a mile from the point at which he had dismissed his chaise, the city clocks had long struck twelve before, wresting himself from the human flood, which panic and greed were driving through the streets, he turned into this quiet backwater. he stood for a moment to take breath and adjust his dress, and even in that brief space he discovered that the calm was but comparative. many of the windows which looked on the court were raised, as if the pent-up emotions of their occupants craved air and an outlet even on that december day; and from these and from the open doors below issued a dropping fire of sounds, the din of raised voices, of doors recklessly slammed, of feet thundering on bare stairs, of harsh orders. clerks rushing into the court, hatless and demented, plunged into clerks rushing out equally demented, yet flew on their course without look or word, as if unconscious of the impact. from a lighted window--many were lit up, for the court was small and the day foggy--a hat, even as clement paused, flew out and bounded on the pavement. but no one heeded it or followed it, and it was a passing clerk who came hurrying out a little less recklessly than his fellows, whom clement, after a moment's hesitation, seized by the arm. "mr. bourdillon here?" he asked imperatively--for he saw that in no other way could he gain attention. "mr. bourdillon!" the man snapped. "oh, i don't know! here, cocky sands! attend to this gentleman! le' me go! le' me go. d' you hear?" he tore himself free, and was gone while he spoke, leaving clement to climb the stairs. on the landing he encountered another clerk, whom he supposed to be "cocky sands," and he attacked him. "mr. bourdillon? is he here?" he asked. but mr. sands eluded him, shouted over his shoulder for "tom!" and clattered down the stairs. "can't wait!" he flung behind him. "find some one!" however, clement lost nothing by this, for the next moment one of the partners appeared at a door. clement knew him, and "is mr. bourdillon here?" he cried for the third time, and he seized the broker by the button-hole. he, at any rate, should not escape him. "mr. bourdillon?" the broker stared, unable on the instant to recall his thoughts, and from the way in which he wiped his bald and steaming head with a yellow bandanna, it was plain that he had just got something of moment off his mind. "pheugh! what times!" he ejaculated, fanning himself and breathing hard. "what a morning! you've heard, i suppose? everitt's are gone. gone within the hour, d--n them! oh, bourdillon? it was bourdillon you asked for? to be sure, it's mr. ovington, isn't it? i thought so; i never forget a face, but he didn't tell me that you were here. by jove!" he raised his hands--he was a portly gentleman, wearing a satin under-vest and pins and chains innumerable, all at this moment a little awry. "by jove, what a find you have there! slap, bang, and tip to the mark, and no mistake! hard and sharp as nails! i take off my hat to him! there's not a firm," mopping his heated face anew, "within half a mile of us that wouldn't be glad to have him! i'll take my davy there are not ten men in country practice could have pushed the deal through, and squeezed eleven thousand in cash out of snell & higgins on such a day as this! he's a marvel, mr. ovington! you can tell your father i said so, and i don't care who says the contrary." "but is he here?" clement cried, dancing with impatience. "is he here, man?" "gone to the india house this--" he looked at his watch--"this half-hour, to complete. he had to drop seven per cent. for cash on the nail--that, of course! but he got six thousand odd in bank paper, and five thou. in gold, and i'm damned if any one else would have got that to-day, though the stuff he had was as good as the ready in ordinary times. my partner's gone with him to leadenhall street to complete--glad to oblige you, for god knows how many clients we shall have left after this--and they've a hackney coach waiting in bishopsgate and an officer to see them to it. you may catch him at the india house, or he may be gone. he's not one to let the grass grow under his feet. in that case----" "send a clerk with me to show me the office!" clement cried. "it's urgent, man, urgent! and i don't know my way inside the house. i must catch him." "well, with so much money--here, nicky!" the broker stepped aside to make room for a client who came up the stairs three at a time. "nicky, go with this gentleman! show him the way to the india house. transfer office--letter g! sharp's the word. don't lose time.--coming! coming!" to some one in the office. "my compliments to your father. he's one of the lucky ones, for i suppose this will see you through. it's boulogne or this--" he made as if he held a pistol to his head--"for more than i care to think of!" but clement had not waited to hear the last words. he was half-way down the stairs with his hand on the boy's collar. they plunged into cornhill, but the lad, a london-bred urchin, did not condescend to the street for more than twenty yards or so. then he dived into a court on the same side of the way, crossed it, threaded a private passage through some offices, and came out in bishopsgate street. stemming the crowd as best they could they crossed this, and by another alley and more offices the lad convoyed his charge into leadenhall street. a last rush saw them landed, panting and with their coats wellnigh torn from their backs, on the pavement on the south side of the street, in front of the pillared entrance, and beneath the colossal britannia that, far above their heads and flanked by figures of europe and asia, presided over the fortunes of the greatest trading company that the world has ever seen. through the doors of that building--now, alas, no more--had passed all the creators of an oriental empire, statesmen, soldiers, merchant princes, clive, lawrence, warren hastings, cornwallis. yet to-day, the mention of it calls up as often the humble figure of a black-coated white-cravated clerk with spindle legs and a big head, who worked within its walls and whom clement, had he called a few months earlier, might have met coming from his desk. here clement, had he been without a guide, would have wasted precious minutes. but the place had no mysteries for the boy, even on this day of confusion and alarm. skilled in every twist and turning, he knew no doubt. "this way," he snapped, hurrying down a long passage which faced the entrance, and appeared to penetrate into the bowels of the building. then, "no! not that way, stupid! what are you doing?" but clement's eyes, as he followed, had caught sight of a party of three, who, issuing from a corridor on the right at a considerable distance before them, had as quickly disappeared down another corridor on the left. the light was not good, but clement had recognized one of them, and "there he is!" he cried. "he has gone down there! where does that lead to?" "lime street entrance!" the lad replied curtly, and galloped after the party, clement at his heels. "hurry!" he threw over his shoulder, "or they'll be out, and, by gum, you'll lose him! once out and we're done, sir!" they reached the turning the others had taken and ran down it. the distance was but short, but it was long enough to enable clement to collect his wits, and to wonder, while he prepared himself for the encounter that impended, how arthur would bear himself at the moment of discovery. fortunately, the party pursued had paused for an instant in the east vestibule before committing themselves to the street, and that instant was fatal to them. "bourdillon!" clement cried, raising his voice. "hi! bourdillon!" arthur turned as if he had been struck, saw him and stared, his mouth agape. "the devil!" he ejaculated. but to clement's surprise his face betrayed neither the guilt nor the fear which he had expected to see, but only amazement that the other should be there--and some annoyance. "you?" he said. "what the devil are you doing here? what joke is this? did your father think that i could not be trusted to see things through? or that you were likely to do better?" "i want a word with you," said clement. he was in no mood to mince matters. "but why are you here?" with rising anger. "why have you come after me? what's up?" "i'll tell you, if you'll step aside." "you can tell me on the coach, then, for i have no time to lose now. i mean to catch the three o'clock coach, and----" "no!" clement said firmly. "i must speak to you here." but on that the broker interposed, his watch in his hand, "anyway, i can stop," he said. "who is this gentleman?" "mr. ovington, junior," arthur said, with something of a sneer. "i don't know what he has come up for, but----" "but, at any rate, he'll see you safe to the coach," the other rejoined. "and i must be off. i give you joy of it, mr. bourdillon. fine work! fine work, by jove! and i shall tell mr. ovington so when i see him. you're a marvel! my compliments to your father, young gentleman," addressing clement. "glad to have met you, but i can't stay now. fifty things to do, and no time to do 'em in. the world's upside down to-day. good morning! good morning!" with a wave of the hand, his watch in the other, he turned on his heel and strode back towards the main entrance. the two looked at one another and the third, who made up the party, a burly man in a red waistcoat and a curly-brimmed regency hat, surveyed them both. "well, i'm hanged," arthur exclaimed, reverting sourly to his first surprise. "is everybody mad? must you all come to town? i should have thought that you'd have had enough to do at the bank without this! but as you must----" then to the officer, who was carrying a small leather valise, the duplicate of one which arthur held in his hand--"wait a minute, will you? and keep an eye on us. we shall not be a minute. now," drawing clement into a corner of the lodge, five or six paces away, where, though a stream of people continually brushed by them, they could talk with some degree of privacy. "what is it, man? what is it? what has bought you up? and how the deuce have you come to be here--by this time?" "i posted." "posted? from aldersbury? in heaven's name, why? why, man?" clement pointed to the bag. "to take that over," he said. "this? take this over?" arthur turned a deep red. "what--what the devil do you mean, man?" "you ought to know." "i?" "yes, you," clement retorted, his temper rising. "it's stolen property, if you will have it." and he braced himself for the fray. "stolen property?" "just that. and my father has commissioned me to take charge of it, and to restore it to its owner. now you know." for one moment the handsome face, looking into his, lost some of its color. but the next, arthur recovered himself, the blood flowed back to his cheeks, he laughed aloud, laughed in defiance. "why, you--you fool!" he replied, in bitter contempt, "i don't know what you are talking about. your father--your father has sent you?" "it's no good, bourdillon," clement answered. "it's all known. i've seen the squire. he missed the certificates yesterday afternoon--almost as soon as you were gone. he sent for you, i went over, and he knows all." he thought that that would finish the matter. to his astonishment arthur only laughed afresh. "knows all, does he?" he replied. "well, what of it? and he found out through you, did he? then a pretty fool you were to put your oar in! to go to him, or see him, or talk to him! why, man," with bravado, though clement fancied that his eyes wavered and that the brag began to ring false, "what have i done? borrowed his money for a month, that's all! taken a loan of it for a month or two--and for what? why, to save your father and you and the whole lot of us. ay, and half aldersbury from ruin! i did it and i'd do it again! and he knows it, does he? through your d--d interfering folly, who could not keep your mouth shut, eh! well, if he does, what then? what can he do, simpleton?" "that's to be seen." "nothing! nothing, i tell you! he signed the transfer, signed it with his own hand, and he can't deny it. the rest is just his word against mine." "no, it's miss griffin's, too," clement said, marvelling at the other's attitude and his audacity--if audacity it could be called. but arthur, though he had been far from expecting a speedy discovery, had long ago made up his mind as to the risk he ran. and naturally he had considered the line he would take in the event of detection. he was not unprepared, therefore, even for clement's rejoinder, and, "miss griffin?" he retorted, contemptuously, "do you think that she will give evidence against me? or he--against a griffin? why, you booby, instead of talking and wasting time here, you ought to be down on your knees thanking me--you and your father! thanking me, by heaven, for saving you and your bank, and taking all the risk myself! it would have been long before you'd have done it, my lad, i'll answer for that!" "i hope so," clement replied with biting emphasis. "and you may understand at once that we don't like your way, and are not going to be saved your way. we are not going to have any part or share in robbing your uncle--see! if we are going to be ruined, we are going to be ruined with clean hands! no, it's no good looking at me like that, bourdillon. i may be a fool in the bank, and you may call me what names you like. but i am your match here, and i am going to take possession of that money." "do you think, then," furiously, "that i am going to run away with it?" "i don't know," clement rejoined. "i am not going to give you the chance. i am going to take it over and return it to the owner; it will not go near our bank. i have my father's authority for acting as i am acting, and i am going to carry out his directions." "and he's going to fail? to rob hundreds instead of borrowing from one money that you know will be returned--returned with interest in a month? you fool! you fool!" with savage scorn. "that's your virtue, is it? that's your honesty that you brag so much about? your clean hands? you'll rob aldersbury right and left, bring half the town to beggary, strip the widow and the orphan, and put on a smug face! 'all honest and above board, my lord!' when you might save all at no risk by borrowing this money for a month. why, you make me sick! sick!" arthur repeated, with an indignation that went far to prove that this really was his opinion, and that he did honestly see the thing in that light. "but you are not going to do it. you shall not do it," he continued, defiantly. "i'll see you--somewhere else first! you'll not touch a penny of this money until i choose, and that will not be until i have seen your father. if i can't persuade you i think i can persuade him!" "you'll not have the chance!" clement retorted. he was very angry by now, for some of the shafts which the other had loosed had found their mark. "you'll hand it over to me, and now!" "not a penny!" "then you'll take the consequences," was clement's reply. "for as heaven sees me, i shall give you in charge, and you will go to bow street. the officer is here. i shall tell him the facts, and you know best what the result will be. you can choose, bourdillon, but that is my last word." arthur stared. "you are mad!" he cried. "mad!" but he was taken aback at last. his voice shook, and the color had left his cheeks. "no, i am not mad. but we will not be your accomplices. that is all. that is the bed-rock of it," clement continued. "i give you two minutes to make up your mind." he took out his watch. rage and alarm do not better a man's looks, and arthur's handsome face was ugly enough now, had clement looked at it. two passions contended in him: rage at the thought that one whom he had often out-man[oe]uvred and always despised should dare to threaten and thwart him; and fear--fear of the gulf that he saw gaping suddenly at his feet. for he could not close his eyes, bold and self-confident as he was, to the danger. he saw that if clement said the word and made the thing public, his position would be perilous; and if his uncle proved obdurate, it might be desperate. his lips framed words of defiance, and he longed to utter them; but he did not utter them. had they been alone, it had been another matter! but they were not alone; the bow street man, idly inquisitive, was watching him, and a stream of people, immersed each in his own perplexities, and unconscious of the tragedy at his elbow, was continually brushing by them. to do him justice, arthur had hitherto seen the thing only by his own lights. he had looked on it as a case of all for fortune and the rest well lost, and he had even pictured himself in the guise of a hero, who took the risks and shared the benefits. if the act were ill, at least, he considered, he did it in a good cause; and where, after all, was the harm in assuming a loan of something which would never be missed, which would be certainly repaid, and which, in his hands, would save a hundred homes from ruin? the argument had sounded convincing at the time. then, for the risk, what was it, when examined? it was most unlikely that the squire would discover the trick, and if he did he could not, hard and austere as he was, prosecute his own flesh and blood. nay, arthur doubted if he could prosecute, since he had signed the transfer with his own hand--it was no forgery. at the worst, then and if discovery came, it would mean the loss of the squire's favor and banishment from the house. both of these things he had experienced before, and in his blindness he did not despair of reinstating himself a second time. he had a way with him, he had come to think that few could resist him. he was far, very far, from understanding how the squire would view the act. but now the mists of self-deception were for the moment blown aside, and he saw the gulf on the edge of which he stood, and into which a word might precipitate him. if the pig-headed fool before him did what he said he would, and preferred a charge, the india house might take it up; and, pitiless where its interests were in question, it might prove as inexorable as the bank had proved in the case of fauntleroy only the year before. in that event, what might not be the end? his uncle had signed the transfer, and at the time that had seemed enough; it had seemed to secure him from the worst. but now--now when so much hung upon it, he doubted. he had not inquired, he had not dared to inquire how the law stood, but he knew that the law's uncertainties were proverbial and its ambages beyond telling. and the india house, like the bank of england, was a terrible foe. once launched on the slope, let the cell door once close on him, he might slip with fatal ease from stage to stage, until the noose hung dark and fearful before him, and all the influence, all the help he could command, might then prove powerless to save him! it was a terrible machine--the law! the cell, the court, the gallows, with what swiftness, what inevitableness, what certainty, did they not succeed one another--dark, dismal stages on the downward progress! how swiftly, how smoothly, how helplessly had that other banker traversed them! how irresistibly had they borne him to his doom! he shuddered. the officer of the law, who a few minutes before had been his servant, fee-bound, obsequious, took on another shape. he grew stern and menacing, and was even now, it might be, observing him, and conceiving suspicion of him. arthur's color ebbed at the thought and his face betrayed him. the peril might be real or unreal--it might be only his imagination that he had to fight. but he could not face it. he moistened his dry lips, he forced himself to speak. he surrendered--sullenly, with averted eyes. "have it your own way," he said. "take it." and with a last attempt at bravado, "i shall appeal to your father!" "that is as you will," clement said. he was not comfortable, and sensible of the other's humiliation, his only wish was to bring the scene to an end as quickly as possible. he took up the bag and signed to the officer that they were ready. "it's some hundreds short. you know that?" arthur muttered. "i can't help it." "he'll be the loser." "well--it must be so." yet clement hesitated, a little taken aback. he did not like the thought, and he paused to consider whether it might not be his duty to return to the brokers' and undo the bargain. but it would be necessary to repeat all the formalities at a cost of time that he could not measure, and it was improbable that he would be able to recoup the whole of the loss. rightly or wrongly, he decided to go on, and he turned to the officer. "i take on the business now," he said, sharply. "where is the hackney-coach? in bishopsgate? then lead the way, will you?" and, the bag in his hand, he moved towards the crowded street. but with his foot on the threshold, something spoke in him, and he looked back. arthur was standing where he had left him, gloom in his face; and clement melted. he could not leave him, he could not bear to leave him thus. what might he not do, what might he not have it in his mind to do? pity awoke in him, he put himself in the other's place, and though there was nothing less to his taste at that moment than a companionship equally painful and embarrassing, he went back to him. "look here," he said, "come with me. come down with me and face it out, man, and get it over. it's the only thing to do, and every hour you remain away will tell against you. as it is, what is broken can be mended--if you're there." arthur did not thank him. instead, "what?" he cried. "come? come with you? and be dragged at your chariot wheels, you oaf! never!" "don't be a fool," clement remonstrated, pity moving him more strongly now that he had once acted on it. he laid his hand on the other's arm. "we'll work together and make the best of it. i will, i swear, bourdillon, and i'll answer for my father. but if i leave you here and go home, things will be said and there'll be trouble." "trouble the devil!" arthur retorted, and shook off his hand. "you have ruined the bank," he continued, bitterly, but with less violence, "and ruined your father and ruined me. i hope you are content. you have been thorough, if it's any satisfaction to you. and some day i shall know why you've done it. for your honesty and your clean hands, they don't weigh a curse with me. you're playing your own game, and if i come to know what it is, i'll spoil it yet, d--n you!" "i don't mind how much you curse me, if you will come," clement answered, patiently. "it's the only thing to be done, and when you think it over in cold blood, you'll see that. come, man, and put a bold face on it. it is the brave game and the only game. face it out now." arthur looked away, his handsome face sullen. he was striving with his passions, battling with the maddening sense of defeat. he saw, as plainly as clement, that the latter's advice was good, but to take it and to go with him, to bear for many hours the sense of his presence and the consciousness of his scorn, his gorge rose at the thought. yet, what other course was open to him? what was he going to do? he had little money with him, and he saw but two alternatives: to blow out his brains, or to go, hat in hand, and seek employment at the brokers' where he was known. he had no real thought of the former alternative--life ran strong in him and he was sanguine; and the latter meant the overthrow of all his plans, and a severance, final and complete, from ovington's. his lot thenceforth would, he suspected, be that of a man who had "crossed the fight," done something dubious, put himself outside the pale. whereas if he went with clement now, humiliation would indeed be his. but he would still be himself, and with his qualities he might live it down, and in the end lose nothing. so at last, "go on," he said, sulkily. "have it your own way. at any rate, i may spoil your game!" he shut his eyes to clement's generosity. if he gave a thought to it at all, he fancied that he had some purpose to serve, some axe of his own to grind. they went out into the babel of the street, and, deafened by the cries of the hawkers, elbowed by panic-stricken men who fancied that if they were somewhere else they might save their hoards, shouldered by stout countrymen, adrift in the confusion like hulks in a strange sea, they made their way into bishopsgate street. here they found the hackney-coach awaiting them, and drove by london wall to the bull and mouth. a birmingham coach was due to start at three, and after a gloomy wrangle they booked places by it, and, while the officer guarded the money, they sat down in the coffee room to a rare sirloin and a foaming tankard. they ate and drank in unfriendly silence, two empty chairs intervening; and more than once arthur repented of his decision. but already the force of circumstances was driving them together, for the thoughts of each had travelled forward to aldersbury--and to ovington's. what was happening there? what might not already have happened there? hurried feet ran by on the pavement. ominous words blew in at the windows. scared men rushed in with pallid, sweating faces, ate standing and went out again. other men sat listless, staring at the table before them, eating nothing, or here and there, apart in corners whispered curses over their meat. chapter xxxvi the news of the failures which convulsed the city on that black monday did not reach aldersbury until late on the tuesday--the tidings came in with the mails. but hours before that, and even before the opening of the bank, things in the town had come to a climax. the women, always more practical than the men and less squeamish, had taken fright and been talking. in many a back parlor in maerdol, and the foregate, and on the cop, wives had spoken their minds. they wouldn't be scared out of asking for their own, by any banker that ever lived, they said. not they! "would you, mrs. gittins?" quoth one. "not i, ma'am, if i had it to ask for, as your goodman has. i'd not sleep another night before i had it tight and right." "no more he shall! what, rob his children for fear of a stuffy old man's black looks? but i'll see him into the bank myself, and see that he brings it out, too! i'll answer for that!" "and you're in the right, ma'am, seeing it's yours. money's not that easy got we're to be robbed of it. now those notes with co. on them they're money anyways, i suppose? there's nothing can alter them, i'm thinking. i've two of them at home, that my lad----" "oh, mrs. gittins!" and superior information raised its hands in horror. "you understand nothing at all. don't you know they're the worst of all? if those shutters--go--up at that bank," dramatically, "they'll not be worth the paper they're printed on! you take my advice and go this very minute and buy something at purslow's or bowdler's, and get them changed. and you'll thank me for that word, mrs. gittins, as long as you live." upset was not the word for mrs. gittins, who had thought herself outside the fray. "well, they be thieves and liars!" she gasped. "and dean's too, ma'am? you don't mean to say----" "i wouldn't answer even for them," darkly. "if you ask me, i'd let some one else have 'em, mrs. gittins. thank the lord, i've none of them on my mind!" and on that mrs. gittins waddled away, and two minutes later stood in purslow's shop, inwardly "all of a twitter," but outwardly looking as if butter would not melt in her mouth. but, alas! purslow's was out of change that day; and so, strange to say, was bowdler's. most unlucky--great scarcity of silver--government's fault--should they book it? but mrs. gittins, although she was all of a twitter, as she explained afterwards, was not so innocent as that, and got away without making her purchase. still, that was the way talk went, up and down bride hill and in shocklatch, at front door and back door alike. and the men were not ill-content to be bidden. some had passed a sleepless night, and had already made up their minds not to pass another. others had had a nudge or a jog of the elbow from a knowing friend, and had been made as wise by a raised eyebrow as by an hour's sermon. worse still, some had got hold of a story first set afloat at the gullet--the gullet was the ancient low-browed tavern in the passage by the market place, where punch flowed of a night, and the tradesmen of the town and some of their betters were in the habit of supping, as their fathers and grandfathers had supped before them. arthur's departure, quickly followed by clement's--after dark and in a post-chaise, mark you!--had not passed without comment; and a wiseacre had been found to explain it. at first he had confined himself to nods and winks, but being cornered and at the same time uplifted by liquor--for though the curious could taste saloop at the gullet, heathcote's ale was more to the taste of the habitués, when they did not run to punch--he has whispered a word, which had speedily passed round the circle and not been slow to go beyond it. "gone! of course they're gone!" was the knowing one's verdict. "and you'll see the old man will be gone, too, before morning, and the strong-box with him! open? no, they'll not open? never again, ten o'clock or no ten o'clock. well, if you must have it, i got it from wolley not an hour back. and he ought to know. wasn't he hand in glove with them? director of the--oh, the railroad shares? waste paper! never were worth more, my lad. if you put your money into that, it's on its way to london by this time!" "and boulogne to-morrow," said another, going one better, as he knocked the ashes out of his pipe. "i'm seventy-five down by them, and that's the worst and the best for me! those that are in deeper, i'm sorry for them, but they've only themselves to thank! it's been plain this month past what was going to happen." one or two were tempted to ask why he hadn't drawn out his seventy-five pounds, if he had been so sure. but they refrained, having a wambling, a sort of sick feeling in the pit of their stomachs. he was a rude, overbearing fellow, and there was no knowing what he might not bring out by way of retort. the upshot of this and of a hundred other reports which ran about the town like wild-fire, was that a full twenty minutes before the bank opened on the tuesday, its doors were the butt of a hundred eyes. many assembled by twos and threes in the high street and on the market place, awaiting the hour; while others took up their stand in the dingy old butter cross a little above the bank, where day in and day out old crones sat knitting and the poultry women's baskets stood on market days. few thought any longer of concealment; the time for that was past, the feeling of anxiety was too deep and too widespread. men came together openly, spoke of their fears and cursed the banker, or nervously fingered their pass-books, and compared the packets of notes that they had with them. some watched the historic clock, but more watched, and more eagerly, the bank. the door, the opening of which, if it were ever opened, meant so much to so many, must have shrunk, seasoned wood as it was, under the intensity of the gaze fixed upon it; while the windows of the bank-house--ugh! the pretender, to set himself up after that fashion, while all the time he was robbing the poor!--were exposed to a fire as constant. not a curtain moved or a blind was lowered, but the action was marked and analyzed, deductions drawn from it, and arguments based upon it. that was ovington's bedroom! no, that. and there was his girl at the lower window--but he would not have been likely to take her with him in any case. as a fact, had they been on the watch a little earlier, they would have been spared one anxiety. for about nine o'clock ovington had shown himself. he had left the house, crossed with a grave face to the market place, and rung the bell at dean's. he had entered after a brief parley with an amazed man-servant, had been admitted to see one of the partners, and at a cost to his pride, which only he could measure, the banker had stooped to ask for help. between concerns doing business in the same town, relations must exist and transactions must pass even when they are in competition; and dean's and ovington's had been no exception to the rule. but the elder bank had never forgotten that they had once enjoyed a monopoly. they had neither abandoned their claims nor made any secret of their hostility, and ovington knew that it was to the last degree unlikely that they would support him, even if they had the power to do so. but he had convinced himself that it was his duty to make the attempt, however hopeless it might seem, and however painful to himself--and few things in his life had been more painful. to play the suppliant, he who had raised his head so high, and by virtue of an undoubted touch of genius had carried it so loftily, this was bad enough. but to play the suppliant to the very persons on whom he had trespassed, and whom he had defied, to open his distresses to those to whom he had pretended to teach a newer and sounder practice, to acknowledge in act, if not in word, that they had been right and he wrong, this indeed was enough to wring the proud man's heart, and bring the perspiration to his brow. yet he performed the task with the dignity, of which, as he had risen in the world, he had learned the trick, and which even at this moment did not desert him. "i am going to be frank with you, mr. dean," he said when the door had closed on the servant and the two stood eye to eye. "there is going, i fear, to be a run on me to-day, and unfortunately i have been disappointed in a sum of twelve thousand pounds, which i expected to receive. i do not need the whole, two-thirds of the sum will meet all the demands which are likely to be made upon me, and to cover that sum i can lodge undeniable security, bills with good names--i have a list here and you can examine it. i suggest, mr. dean, that in your own interests as well as in mine you help me. for if i am compelled to close--and i cannot deny that i may have to close, though i trust for a short time only--it is certain that a very serious run will be made upon you." mr. dean's eyes remained cold and unresponsive. "we are prepared to meet it," he answered frostily. "we are not afraid." he was a tall man, thin and dry, without a spark of imagination, or enterprise. a man whose view was limited to his ledger, and who, if he had not inherited a business, would never have created one. "you are aware that poles' and williams's have failed?" "yes. i believe that our information is up to date." "and that garrard's at hereford closed yesterday?" "i am sorry to hear it." "the times are very serious, mr. dean. very serious." "we have foreseen that," the other replied. they were both standing. "the truth is, we are paying for a period of reckless trading, encouraged in my humble opinion, mr. ovington"--he could not refrain from the stab--"by those who should have restrained it." ovington let that pass. he had too much at stake to retort. "possibly," he said. "possibly. but we have now to deal with the present--as it exists. it is on public rather than on private grounds that i appeal to you, mr. dean. a disaster threatens the community. i appeal to you to help me to avert it. as i have said, securities shall be placed in your hands, more than sufficient to cover the risk. approved securities to your satisfaction." but the other shook his head. he was enjoying his triumph--a triumph beyond his hopes. "what you suggest," he said, a faint note of sarcasm in his tone, "comes to this, mr. ovington--that we pool resources? that is how i understand you?" "practically." "well, i am afraid that in justice to our customers i must reply that we cannot do that. we must think of them first, and of ourselves next." ovington took up his hat. the other's tone was coldly decisive. still he made a last effort. "here is the list," he said. "perhaps if you and your brother went over it at your leisure?" but dean waved the list away. "it would be useless," he said. "quite useless. we could not entertain the idea." he was already anticipating the enjoyment with which he would tell his brother the news. with a heavy heart, ovington replaced the list in his breast pocket. "very good," he said. his face was grave. "i did not expect--to be frank--any other answer, mr. dean. but i thought it was my duty to see you. i regret your decision. good-morning." "good-morning," the other banker replied, and he rang for his man-servant. "they're gone," he reflected complacently, as the door closed behind his visitor. "smashed, begad!" and with the thought he rid himself of a sense of inferiority which had more than once troubled him in his rival's presence. he sat down to eat his breakfast with a good appetite. the day would be a trying one, but dean's, at any rate, was safe. dean's, thank god, had never put its hand out farther than it could draw it back. how pleased his brother would be! that was the worst, immeasurably the worst, of ovington's experiences, but it was not the only painful interview that was in store for him before the bank opened that morning. twice, men, applying, stealthy and importunate, at the back door, forced their way in to him. they were not of those who had claims on the bank and feared to be losers by it. they were in debt to it, but desperate and pushed for money they saw in the bank's necessity their opportunity. they--one of the two was purslow--required only small sums, and both had conceived the idea that, as the bank was about to fail, it would be all one to ovington whether he obliged them or not. it would be but a hundred or so the less for the creditors, and as the bank had sold their pledged stocks they thought that it owed them something. they had still influence, their desperate straits were not yet known; if he obliged them they would do this and that and the other--nebulous things--for him. ovington, of course, could do nothing for them, but to harden his heart against their appeals was not a good preparation for the work before him, and when he entered the bank five minutes before ten, he had to brace himself in order to show an unmoved front to the clerks. he need not have troubled himself. rodd knew all, and the two lads, on their way to the bank that morning, had been badgered out of such powers of observation as they possessed. they had been followed, cornered, snatched in this direction and that, rudely questioned, even threatened. were they going to open? where was the gaffer? was he gone? they had been wellnigh bothered out of their lives, and more than once had been roughly handled. it seemed as if all aldersbury was against them--and they did not like it. but ovington had the knack of attaching men to him, the lads were loyal, and they had returned only hard words to those who waylaid them. pay? they could pay all the dirty money in aldersbury! mr. ovington? well, they'd see. they'd see where he was, and be licking his boots in a week's time. and they'd better take their hands off them! the stouter even threatened fisticuffs. a little more and he'd give his questioners a lick over the chops. come now, give over, or he'd show them a trick of dutch sam's they wouldn't like. the two arrived at the bank, panting and indignant, their coats half off their backs; and rodd, whose impeccable respectability no one had ventured to assail, had to say a few sharp words before they settled down and the counter assumed the calm and orderly aspect that, in his eyes, the occasion required. he was himself simmering with indignation, but he let no sign of it appear. he had made all his arrangements beforehand, seen every book in its place, and the cash where it could be handled--and a decent quantity, sufficient to impose on the vulgar--laid in sight. after a few words had been exchanged between him and ovington, the latter retired to the desk behind the curtain, and the other three took their places. nothing remained but to watch--the seniors with trepidation, the juniors with a not unpleasant excitement--the minute hand of the clock. it wanted three minutes of ten. and already, though from their places behind the counter the clerks could not see it, the watching groups before the bank had grown into a crowd. it lined the opposite pavement, it hung a fringe two-deep on the steps of the butter cross, it extended into the market place, it stretched itself half-way down the hill. and it made itself heard. the voices of those who passed along the pavement, the scraps of talk half caught, the sudden exclamation, merged in a murmur not loud but continuous, and fraught with something of menace. once, on the fringe of the gathering, there was an outburst of booing, but it ceased as suddenly as it had risen, suppressed by the more sober element; and once a hand tried the doors, a voice surprisingly loud, cried, "they're fast enough!" and footsteps retreated across the pavement. the driver of a cart descending the hill called to "make way! make way!" and that, too, reached those within almost as plainly as if it had been said in the room. something, too, happened on it, for a shout of laughter followed. it wanted two--it wanted one minute of ten. rodd gave the order to open. the younger clerk stepped forward and drew the bolts. he turned the key, and opened one leaf of the door. the other was thrust open from without. the clerk slid under the counter to his place. they came in. they came in, three abreast, elbowing and pushing one another in their efforts to be first. in a moment they were at the counter, darting suspicious glances at the clerks and angry looks at one another, and with them entered an atmosphere of noise and contention, of trampling feet and peevish exclamations. the bank, so still a moment before, was filled with clamor. there were tradesmen among them, a little uncertain of themselves and thankful that ovington was not visible, and one or two bluff red-faced farmers who cared for nobody, and slapped their books down on the counter; and there were also a few, of the better sort, who looked straight before them and endeavored to see as little as possible--with a sprinkling of small fry, clerks and lodging-house keepers and a coal-hawker, each with his dirty note gripped tight in his fist. the foremost rapped on the counter and cried "here, mister, i'm first!" "no, i!" "here, you, please attend to me!" they pressed their claims rudely, while those in the rear uttered impatient remonstrances, holding their books or their notes over the heads of others in the attempt to gain attention. in a moment the bank was full--full to the doors, full of people, full of noise. rodd's cold eye travelled over them, measured them, weighed them. he was filled with an immense contempt for them, for their folly, their greed, their selfishness. he raised his hand for silence. "this is not a cock-fight," he said in a tone as withering as his eye. "this is a bank. when you gentlemen have settled who comes first. i will attend to you." and then, as the noise only broke out afresh and more loudly, "well, suppose i begin at the left hand," he said. he passed to that end of the counter. "now, mr. buffery, what can i do for you. got your book?" but mr. buffery had not got his book, as rodd had noticed. on that the cashier slowly drew from a shelf below the counter a large ledger, and, turning the leaves, began a methodical search for the account. but this was too much for the patience of the man last on the right, who saw six before him, and had left no one to take care of his shop. "but, see here," he cried imperiously. "mr. rodd, i'm in a hurry! if that young man at the desk could attend to me i shouldn't take long." rodd, keeping his place in the book with his finger, looked at him. "do you want to pay in, mr. bevan?" he asked gravely. "no. i want forty-two, seven, ten. here's my cheque." "you want cash?" "that's it." "well, i'm the cashier in this bank. no one else pays cash. that's the rule of the bank. now, mr. buffery," leisurely turning back to the page in the ledger, and running his finger down it. "thirty-five, two, six. that's right, is it?" "that's right, sir." buffery knuckled his forehead gratefully. "you've brought a cheque?" but buffery had not brought a cheque. rodd shrugged his shoulders, called the senior clerk forward, and entrusted the customer, who was no great scholar, to his care. then he closed the ledger, returned it carefully to the shelf, and turned methodically to the next in the line. "now, mr. medlicott, what do you want? are you paying, or drawing?" mr. medlicott grinned, and sheepishly handed in a cheque. "i'll draw that," he mumbled, perspiring freely, while from the crowd behind him, shuffling their feet and breathing loudly, there rose a laugh. rodd brought out the ledger again, and verified the amount. "right," he said presently, and paid over the sum in dean's notes and gold. the man fingered the notes and hesitated. rodd, about to pass to the next customer, paused. "well, ain't they right?" he said. "dean's notes. anything the matter with them?" the man took them without more, and rodd paid the next and the next in the same currency, knowing that it would be remarked. "i'll give them a jog while i can," he thought. "they deserve it." and, sure enough, every note of that bank that he paid out was presented across the counter at dean's within the hour. it gave mr. dean something to think about. no one, in truth, could have done the work better than rodd. he was so cool, so precise, so certain of himself. nothing put him out. he plodded through his usual routine at his usual leisurely pace. he recked nothing of the impatient shuffling crowd on the other side of the counter, nothing of the greedy eyes that grudged every motion of his hand. they might not have existed for him. he looked through them. a plodder, he had no nerves. he was the right man in the right place. at noon, taking with him a slip of paper, he went to report to ovington, who had retired to the parlor. they had paid out seventeen hundred pounds in the two hours. at this rate they could go on for a long time. there was only one large account in the room--should he call it up and pay it? it might have a good effect. ovington agreed, and rodd returned to the counter. his eye sought out mr. meredith. "i don't know what you're doing here," he said austerely. "but i suppose your time is worth something. if you'll pass up your cheque i'll let you go." the small fry clamored, but rodd looked through them. "eight hundred and ten," said meredith with a sigh of relief, passing his cheque over the heads of those before him. he was not ashamed of his balance, but for the moment he was ashamed of himself. he began to suspect that he had let himself be carried away with a lot of silly small chaps--yet his fingers itched to hold the money. rodd confirmed the account, fluttered a packet of notes, counted them thrice and slowly, and tossed them to mr. meredith. "i make them right," he said, "but you'd better count them." then, to one or two who were muttering something about illegal preference, "bless your innocent hearts," he said, "you'll all be paid!" and he took the next in order as if nothing had happened. it had its effect, and so had a thing that half an hour later broke the dreary monotony of paying out. a man at the back who had just pressed in--for the crowd, reinforced by new arrivals, was very nearly as large as at the hour of opening--raised his voice, complaining bitterly that he could not stay there all day, and that he wanted to pay in some money and go about his business. there was a stir of surprise. a dozen turned to look at him. "good lord!" someone exclaimed. only rodd was unmoved. "get a pay slip," he said to the senior clerk, who had been pretty well employed filling in cheques for the illiterate and examining notes. "now, gentlemen, fair play. let his pass through. oh, it's mr. walker, is it? how much, mr. walker?" "two seven six, ten," said mr. walker, laying a heavy canvas bag on the counter. rodd untied the neck of the bag and upset the contents, notes and gold, before him. he counted the money with professional deftness, whilst the clerk filled in the slip. "how's your brother?" he asked. "pretty tidy." "and how are things in wolverhampton?" "so, so! but not so bad as they were." "thank you. you're the only sensible man i've seen to-day, and we shall not forget it. now, gentlemen, next please." mr. walker was closely inspected as he pushed his way out, and one or two were tempted to say a word of warning to him, but thought better of it, and held their peace. about two in the afternoon a mr. hope of bretton again broke the chain of withdrawals. he paid in two hundred. him a man did pluck by the sleeve, muttering "have a care, man! have a care what you're doing!" but mr. hope, a bluff tradesman-looking person only answered, "thank ye, but i am up to snuff. if you ask me i think you're a silly set of fools." news of him and of what he had said, and indeed of much more than he had said, ran quickly through the crowd that wondered and waited all day before the bank; that snapped up every rumor, and devoured the wildest inventions. the bank would close at one! it would close at three--the speaker had it on the best authority! it would close when so and so had been paid! ovington, the rascal, had fled. he was in the bank, white as a sheet. he had attempted suicide. there was a warrant out for him. the crowd moved hither and thither, like the colors in a kaleidoscope. on its outer edges there was horseplay. children chased one another up and down the butter cross steps, fell over the old women who knitted, were cuffed by the men, driven out by the beadle--only to return again. but under the trivialities there was tense excitement. now and again a man who had been slow to take the alarm forced his way, pale and agitated, through the crowd, to vanish within the doors; or a countryman, whom the news had only just reached in his boosey-close or his rickyard--as they call a stackyard in aldshire--rode up the hill, hot with haste and cursing those who blocked his road, flung his reins to the nearest bystander, and plunged into the bank as into water. and on the fringe, hiding themselves in doorways, or in the dark mouths of alleys, were men who stood biting their nails, heedless or unconscious of what passed about them; or who came staggering up from the gullet with stammering tongues and eyes bloodshot with drink--men who a year before had been well-to-do, sober citizens, fathers of families. all one to them now whether ovington's stood or fell! they had lost their all, and to show for it and for all that they had ever been worth had but a few pieces of printed paper, certificates, or what not, which they took out and read in corners, as if something of hope might still, at the thousandth time of reading be derived from them, or which they brandished aloft in the tavern with boasts of what they would have gained if trickery had not robbed them. so, though the crowd had its humors and was swept at times by gusts of laughter, the spectre of ruin stood, gaunt and bleak, in the background, and many a heart quailed before grim visions of bailiffs and forced sales and the workhouse--the workhouse, that in aldersbury, where they were nothing if not genteel, they called the house of industry. and ovington, as he sat over his books, or peered from time to time from a window, knew this, and felt it. he would not have been human if he had not thought with longing of that twelve thousand, the use of which had so nearly been his; ay, and with passing regret--for after all was not the greatest good for the greatest number sound morality?--of the self-denying ordinance which had robbed him of it. but harassed and heavy-hearted as he was, he remained master of himself, and his bearing was calm and dignified, when at a quarter to four, he showed himself, for the first time that day, in the bank. it was still half-full, and the approach of closing time and the certainty that they could not all be paid that day, along with the fear that the doors would not open on the morrow, mightily inflamed those who were not in the front rank. they clamored to be paid, brandishing their books or their notes. some tried prayers, addressing rodd by name, pleading their poverty or their services. others reproached him for his slowness, and swore that it was purposeful. and they would not be still, they pushed and elbowed one another, rose on tiptoe and shuffled their feet, quarrelled among themselves. their voices filled the bank, passed beyond it, were heard in the street. rodd worked on bravely, but the perspiration stood on his brow, while the clerks, flurried and nervous, looked now at the clock and now at the malcontents whose violence and restlessness seemed to treble their numbers. then it was that ovington came in, and on the instant the noise died down, and there was silence. he advanced without speaking to within a few feet of the counter. he was cold, composed, upright, dignified. and still he did not speak. he surveyed his customers, his spectacles in his hand. his eyes took in each. at length, "gentlemen," he said quietly, "there is no need for this excitement. you will all be paid. we are shorthanded to-day, but i had no reason to suppose that those who know me as well as most of you do know me--and there are some here who have known me all my life--would distrust me. however, as we are shorthanded, the bank will remain open to-day until half-past four. mr. rodd, you will see, if you please, that the requirements of those now in the room are met. i need not add that the bank will open at the usual time to-morrow. good-day, gentlemen." they raised a feeble cheer in their relief, and in the act of turning away, he paused. "mr. ricketts," he said, singling out one, "you are here about those bills? they are important. if you will bring them through to me--yes, if you please?" the man whom he had addressed, a banker's clerk, followed him thankfully into the parlor. his uneasiness had been great, for, though he had not joined in his neighbors' threats, his employers' claim exceeded those of all the rest put together. "we daren't wait, mr. ovington," he said apologetically. "our people want it. i take it, it is all right, sir?" "quite," ovington said. "you have them here? what is the total?" "eighteen hundred and twenty-eight, six, eight, sir." ovington examined the bills with a steady hand and wrote the amount on a slip of paper. he rang the bell, and the younger clerk came in. "bring me that," he said "as quickly as you can." then to his visitor, "my compliments to mr. allwood. will you tell him that his assistance has been of material use to me, and that i shall not forget it? i was sorry to hear of gibbons' failure." "yes, sir. very unfortunate. very unfortunate, indeed?" "he is no loser by them, i hope?" "well, he is, sir, i am sorry to say." "ah, i am sorry." and when the lad had brought in the money, and the account was settled, "are you returning to-night?" "no, sir. my instructions were to travel by daylight." "then you have an opportunity of stating outside, that you have been paid? i am anxious, of course, to stop this foolish run." the man said he would not fail to do so, and ovington thanked him and saw him out by the private door. then, taking with him certain books and the slips of paper that rodd had sent in to him at hourly intervals, he went into the dining-room. things were no worse than he had expected, but they were no better. or, yes, they were, a few hundreds better. betty was there, awaiting him with an anxious face. she had had no slips to inform her from hour to hour how things went, and she had been too wise to intrude on her father. but many times she had looked from the windows on the scene before the bank, on the shifting crowd, the hasty arrivals, the groups that clung unwearied to the steps of the butter cross; and though poverty--she was young--had few terrors for her, she comprehended only too well what her father was suffering--ay, and, though it was a minor evil, what a blister to his pride was this gathering of his neighbors to witness his fall! so, though she could have put on an appearance of cheerfulness, she felt that it would not accord with his mood, and instead, "well, father," she said, with loving anxiety, "is it bad or good?" and, as he sank wearily into his chair, she passed her arm about his shoulders. "well," he replied, with the sigh of a tired man, "it is pretty much as we expected. i don't know, child, that it is better or worse. but rodd will be here presently and he will tell us. he must be worn out, poor chap. he has borne the brunt of the day, and he has borne it famously. famously! i offered to take his place at the dinner-hour but he would not have it. he has not left the counter for five minutes at a time, and he has shown splendid nerve." "then you have not missed the others much?" "no. we did not wish to pay out too quickly. well--let us have some tea. rodd will be glad of it. he has not tasted food since ten o'clock." "did you go in, father?" "for a minute," smiling, "to scold them." "oh, they are horrid!" "no, they are just frightened. frightened, child! we should do the same in their place." "no," betty said stoutly. "i shouldn't! and i could never like anyone who did! never!" "did what?" "took money from you when you wanted it so much! i think they're mean! mean! and i shall never think anything else!" betty's eyes sparkled, she was red with indignation. but the heat passed, and now she was paler than usual, she looked sad. perhaps she had forgotten how things were, and now remembered; or perhaps--at any rate the glow faded and she was again the betty of late days--a tired and depressed betty. she had seen to it that the fire was clear and the lamps burned brightly; had she not visited the room a dozen times to see to it? and now the curtains had been drawn, the tea-tray had come in, the kettle sang on the hob, the silver and china, reflecting the lights, twinkled a pleasant welcome to the tired man. or they would have, if he could have believed that the comfort about him was permanent. but how long--the doubt tortured him--would it be his? how long could he ensure it for others? the waiting, anxious crowd, the scared faces, the clamorous customers, these were the things he saw, the things that blotted out the room and darkened the future. these were the only realities, the abiding, the menacing facts of life. he let his chin fall on his hand, and gazed moodily into the fire. a napoleon of-finance? ay, but a napoleon, crushed in the making, whose waterloo had met him at arcola! he straightened himself when rodd's step was heard in the passage, and he rose to take the last slip from the cashier's hand. "sit down, man, sit down," he said. "betty, give rodd a cup of tea. he must need it. well?" putting on his glasses to consult the slip. "we've paid out thirteen thousand two hundred and ten, sir." "through one pair of hands! well done! a fine feat, rodd, and i shall not forget it. umph!" thoughtfully, "that is just about what we expected. neither much better nor much worse. what we did not expect--but sit down and drink your tea, man. betty!" "yes, father." "pass the toast to him. he deserves all we can do for him. what we did not expect," reverting to the slip with a wrinkled brow, "were the payments in. four hundred and seventy odd! i don't understand that. no other sign of returning credit, rodd? was it some one we've obliged? very unlikely, for long memories are rare at such times as these. who was it?" rodd was busy with his toast. betty had passed it to him with a polite smile. "there were two, sir, i think," he said. he spoke as if he were not quite certain. the banker looked up in surprise. "think!" he said. "why, you must know." "well, there were two, sir, i am sure. but paying out all day----" "you'd remember who paid in, i should think. when there were but two. you must remember who they were." "one was from wolverhampton, i know," rodd replied, "mr. watkins--or walker." "walker or watkins? of wolverhampton? i don't remember any customer of that name. and the other? who was he?" "from somewhere bretton way. i could look him up." the banker eyed rodd closely. had the day's work been too much for him? "you could look him up?" he rejoined. "why, man, of course you could. four hundred and seventy! a bank has failed before now for lack of less. all good notes, i suppose? no gibbons' or garrards', eh?" an idea striking him. "but you'd see to that. if some one had the idea of washing his hands that way--and the two banks already closed!" but rodd shook his head. "no, sir. it was in gold and bank of england notes. i saw to that." "then i don't understand it," the banker decided. he sat pondering--the thing had taken hold of his mind. was it a trick? did they mean to draw out the amount next morning? but, no they would not risk the money, and he would stand no worse if they drew it. an enemy could not have done it, then. a friend? but such friends were rare and the sum was no trifle. the amount was more than he had received for his plate, the proceeds of which had already gone into the cash-drawer. he pondered. meanwhile, "another cup of tea?" betty said politely. and as rodd, avoiding her eyes, handed her his cup, "it's so nice to hear of strangers helping us," she continued with treacherous sweetness. "one feels so grateful to them." rodd muttered something, his mouth full of toast. "it's so fine of them to trust us, when they don't know how things are--as we do, of course. i think it is splendid of them," betty continued. "father, you must bring them to me, some day, when all these troubles are over--that i may thank them." but her father had risen to his feet. he was standing on the hearthrug, a queer look on his face. "i think that they are here now," he said. "rodd, why did you do it?" the cashier started. "i, sir? i don't think i----" "oh, you understand, man!" the banker was much moved. "you understand very well. walker of wolverhampton? you've a brother at wolverhampton, i remember, though i don't think i've ever seen him. this is your three hundred, and all you could add to it. my g--d, man----" ovington was certainly moved, for he seldom swore, "but if we go you'll lose it! you must draw it out before the bank opens to-morrow." "no," said rodd, who had turned red. "i shall do nothing of the sort, sir. it's as safe there as anywhere. i'm not afraid." "but i don't understand," betty said, looking from one to the other. it couldn't be true. it could not be that she had made such a--a dreadful mistake! "there's no mr. walker," her father explained, "and no gentleman from bretton. they are both rodd. it's his money." "do you mean----" in a very small voice. "i thought that mr. rodd took his money out!" "only to put it in again when he thought that it might help us more. but we can't have it. he mustn't lose his money, all i expect that he----" "it came out of the bank," rodd said, "and there's where it belongs, and i'm not going," stubbornly, "to take it out. i've been here ten years--very comfortable, sir. and if the bank closed where'd i be? it's my interest that it shouldn't close." the banker turned to the fire and put one foot on the fender as if to warm it. "well, let it stay," he said, but his voice was unsteady. "if we have to close you'll have done a silly thing--that's all. but if we don't, you'll not have been such a fool!" "oh, we shall not close," rodd boasted, and he gulped down his tea, his ears red. there was an embarrassing silence. ovington turned. "well, betty," he said, attempting a lighter tone. "i thought that you were going to thank--mr. walker of wolverhampton?" but betty, murmuring something about an order for the servants, had already hurried from the room. chapter xxxvii that the squire suffered was certain; whether he suffered more deeply in pocket or in pride, whether he felt more poignantly the loss of his hoarded thousands or the dishonor that arthur had done to his name, even josina could not say. his ruling passions through life had been pride of race and the desire to hoard, and it is certain that sorely wounded in both points he suffered as acutely as age with its indurated feelings can suffer. but after the first outburst, after the irrepressible cry of anguish which the discovery of his nephew's treachery had wrung from him, he buried himself in silence. he sat morose and unheeding, his hands clasping his stick, his sightless eyes staring at the fire. he gave no sign, and sought no sympathy. he was impenetrable. even josina would not guess what were his thoughts. nor did she try to learn. the misfortune was too great, the injury on one side beyond remedy, and the girl had the sense to see this. she hung over him, striving to anticipate his wishes and by mute signs of affection to give him what comfort she might. but she was too wise to trouble him with words or to attempt to administer directly to a mind which to her was a mystery, darkened by the veil of years that separated them. she was sure of one thing, however, that he would not wish anything to be said in the house; and she said nothing. but she soon found that she must set a guard also on her looks. on the tuesday mrs. bourdillon "looked in," as it was her habit to look in three or four times a week. she had usually some errand to put forward, and her pretext on this occasion was the squire's christmas list. near as he was, he thought much of old customs, and he would not for anything have omitted to brew a cask of october for his servants' christmas drinking, or to issue the doles of beef to the men and of blankets to the women which had gone forth from the great house since the reign of queen anne. mrs. bourdillon was never unwilling to gain a little reflected credit, or to pay in that way for an hour's job-work, so that there were few years in which she did not contrive to graft a name or two on the list. that was apparently her business this afternoon. but josina, whose faculties were quickened by the pity which she felt for the unconscious mother, soon perceived that this was not her only or, indeed, her real motive. the visitor was not herself. she was nervous, the current of her small talk did not run with its usual freedom, she let her eyes wander, she broke off and began again. by and by as the strain increased she let her anxiety appear, and at last, "i wish you would tell me," she said, "what is the matter with arthur. he is not open with me," raising her eyes with a piteous look to josina's face. "and--and he's something on his mind, i'm sure. i noticed it on sunday, and i am sure you know. is there"--and josina saw with compassion that her mittened hands were trembling--"is there anything--wrong?" the girl had her answer ready, for she had already decided what she would say. "i am afraid that they are anxious about the bank," she said. "there is what they call a 'run' upon it." the explanation was serious enough, but, strange to say, mrs. bourdillon looked relieved. "oh! and i suppose that they all have to be there?" "yes, i suppose so." "and that's all?" "i am afraid that that is enough." "but--but you don't mean that there may be a--a failure?" "i hope not. indeed, i hope not. but people are so silly! they think that they can all have their money out at once. and of course," josina continued, speaking from a height of late-acquired knowledge, "a bank lends its money out and cannot get it in again in a minute. but i've no doubt that it will be all right. mr. ovington is very clever." mrs. bourdillon sighed. "that's bad," she said. and she seemed to think it over. "you know that all our money is in the bank now, josina! i don't know what we should do if it were lost! i don't know what we should do!" but, all the same, josina was clear that this was not the fear that her visitor had had in her mind when she entered the room. "nor why arthur was so set upon putting it in," the good lady continued. "for goodness knows," bridling, "we were never in trade. mr. bourdillon's grandfather--but that was in the west indies and quite different. i never heard anyone say it wasn't. so where arthur got it from i am sure i don't know. and, oh dear, your father was so angry about it, he will never forgive us if it is lost." "i don't think that you need be afraid," josina said, as lightly as she could. "it's not lost yet, you know. and of course we must not say a word to anyone. if people thought that we were afraid----" "we? but i can't see"--mrs. bourdillon spoke with sudden sharpness, "what you have to do with it?" josina blushed. "of course we are all interested," she said. mrs. bourdillon saw the blush. "you haven't--you and arthur--made it up?" she ventured. josina shook her head. "but why not? now--now that he's in trouble, josina?" "i couldn't! i couldn't, indeed." the mother's face fell, and she sighed. she stared for awhile at the faded carpet. when she looked up again, the old anxiety peeped from her eyes. "and you don't think that--there's anything else?" she asked, as she prepared to rise. "i am afraid that that is enough--to make them all anxious!" but later, when the other was gone, josina wondered. what had aroused the mother's misgivings? what had brought that look of alarm to her eyes? arthur's sudden departure might have vexed her, but it could hardly have done more, unless he had dropped some hint, or she had other grounds for suspicion? but that was impossible, josina decided. and she dismissed the thought. she went slowly upstairs. after all she had troubles enough of her own. she had her father to think of--and clement. they were her world, hemispheres which, though her whole happiness depended upon it, she could hardly hope to bring together, divided as they were by an ocean of prejudice. how her father now regarded clement, whether his hatred of the name were in the slightest degree softened, whether under the blow which had stunned him, he thought of her lover at all, or remembered that it was he, and not arthur, who had saved his life, she had no notion. alas! it would be but natural if the name of ovington were more hateful to him than ever. he would attribute--she felt that he did attribute arthur's fall to them. he had said that it was the poison of trade, their trade, their cursed trade, which had entered his veins, and, contaminating the honest griffin blood, had destroyed him. it was they who had ruined him! and then, as if the stain were not enough, it was from them again that it could not be hid. they knew of it, they must know of it. there must be interviews about it, dealings about it, dealings with them. they might feign horror of it, they who in the squire's eyes were the real cause of it. they might hold up their hands at the fact and pity him! pity him! if anything, anything, she was sure, could add to her father's mortification, it was that the ovingtons were involved in the matter. with every stair, the girl's heart sank lower. once more in her father's room, she watched him. but she was careful not to let her solicitude appear, and though she was assiduous for his comfort and conduced to it by keeping miss peacock and the servants at a distance, she said almost as little to him as he to her. from time to time he sighed, but it was only when she reminded him that it was his hour for bed that he let a glimpse of his feelings appear. "ay," he muttered, "i'm better there! better there, girl!" and with one hand on his stick and the other on his chair he raised himself up by his arms as old men do. "i can hide my head there." she lent him her shoulder across the room and strove by the dumb show of her love to give him what comfort she might, what sympathy. but tears choked her, and she thought with anguish that he was conquered. the unbreakable old man was broken. shame and not the loss of his money had broken him. it would not have surprised her had he kept his bed next day. but either there was still some spring of youth in him, or old age had hardened him, for he rose as usual, though the effort was apparent. he ate his breakfast in gloomy silence, and about an hour before noon he declared it his will to go out. josina doubted if he was fit for it, but whatever the squire willed his womenfolk accepted, and she offered to go with him. he would not have her, he would have calamy--perhaps because calamy knew nothing. "take me to the stable," he said. and josina thought "he is going to see the old mare--to bid her farewell." it certainly was to his old favorite that he went, and he stood for some minutes in her box, feeling her ears and passing his hand between her forelegs to learn if she were properly cleaned; while the grey smelled delicately about his head, and nuzzled with her lips in his pockets. "ay," said calamy after a while, "she were a trig thing in her time, but it's past. and what are the legs of a horse when it's a race wi' ruin?" "what's that?" the squire let his stick fall to the ground. "what do you mean?" he asked, and straightened himself, resting his hand on the mare's withers. "they be all trotting and cantering," calamy continued with zest, as he picked up the stick, "trotting and cantering into town since morning, them as arn't galloping. they be covering all the roads wi' the splatter and sound of them. but i'm thinking they'll lose the race." "what do you mean?" the squire growled. something of his old asperity had come back to him. "mean, master? why, that ovington's got the shutters up, or as good. their notes is no better than last year's leaves, i'm told. and all the country riding and spurring in on the chance of getting change for 'em before it's too late! such-like fools i never see--as if the townsfolk will have left anything for them! watkins o' the griffin, he's three fi-pun notes of theirs, and he was away before it was light, and blick the pig-killer and the overseer with him, in his tax-cart. and parson he's gone on his nag--trust parson for ever thinking o' the moth and rust except o' sunday! they've tithe money of his. and the old maid as live genteel in the villa at the far end o' the street, she've hired farmer harris's cart--white as a sheet she was, i'm told! wouldn't even stay to have the mud wiped off, and she so particular! and there's three more of 'em started to walk it. i'm told the road is black with them--weavers from the valleys and their missuses, every sort of 'em with a note in his fist! there was two of them came here, wanted to see mr. arthur--thought he could do something for 'em." "d----n mr. arthur!" said the squire. but inwardly he was thinking, "there goes the last chance of my money! a drowning man don't think whether the branch he can reach is clean or dirty! but there never was a chance. that young chap came to bamboozle me and gain time, and that's their play." aloud, "give me my stick," he said. "who told you--this rubbish?" "why, it's known at the cross! the rooks be cawing it. ovington is over to bullon or some-such foreign place, these two days! and dean he won't be long after him! they're talking of him, too. ay, parson should ha' thought of the poor instead of laying up where thieves break through and steal. but we're all things of a day!" "take me to the house," said the squire. "shadows as pass! birds i' the smoke!" continued the irrepressible calamy, smacking his lips with enjoyment. "leaves and the wind blows! mr. arthur--but there, your honor knows best where the shoe pinches. squire acherley's gone through on his bay, and parson hoggins with him, and 'where's that d--d young banker?' he asks. thinks i, if the squire heard you, you'd get a flip o' the tongue you wouldn't like! but he's a random-tandem talker as ever was! and"--halting abruptly--"by gum, i expect here's another for mr. arthur! there's some one drove up the drive now, and gone to the front door." "take me in! take me in!" said the squire peevishly, his heart very bitter within him. for this was worse than anything that he had foreseen. his twelve thousand pounds was gone, but even that loss--monstrous, incredible, heart-breaking loss as it was--was not the worst. ruin was abroad, stalking the countryside, driving rich and poor, the widow and the orphan to one bourne, and his name--his name through his nephew--would be linked with it, and dragged through the mire by it, no man so poor that he might not have a fling at it. he had held his head high, he had refused to stoop to such things, he had condemned others of his class, woosenham and acherley, and their like, because they had lowered themselves to the traffic of the market-place. but now--now, wherever men met and bragged of their losses and cursed their deluders, the talk would be of his nephew! his nephew! they might even say that he had had a share in it himself, and canvass and discuss him, and hint that he was not above robbing his neighbors--but only above owning to the robbery! this was worse, far worse than the worst that he had foreseen when the lad had insisted on going his own way. worse, far worse! even his sense of arthur's dishonor, even his remembrance of the vile, wicked, reckless act which the young man had committed, faded beside the prospect before him; beside the certainty that wherever, in shop or tavern, men cursed the name of ovington, or spoke of those who had ruined the country-side, his name would come up and his share in the matter be debated. ay, he would be mixed up in it! he could not but be mixed up in it! his nephew! his nephew! he hung so heavily on calamy's arm, that the servant for once held his tongue in alarm. they went into the house--the house that until now dishonor had never touched, though hard times had often straitened it, and more than once in the generations poverty had menaced it. chapter xxxviii but before they crossed the threshold they were intercepted. miss peacock, her plumage ruffled, and that which the squire was wont to call her "clack" working at high pressure, met them at the door. "bless me, sir, here's a visitor," she proclaimed, "at this hour! and won't take any denial, but will see you, whether or no. though i told jane to tell him----" "who is it?" "goodness knows, but it's not my fault, sir! i told jane--but jane's that feather-headed, like all of them, she never listens, and let him in, and he's in the dining-parlor. all she could say, the silly wench, was, it was something about the bank--great goggle-eyes as she is! and of course there's no one in the way when they're wanted. calamy with you, and josina traipsing out, feeding her turkeys. and jane says the man's got a portmanteau with him as if he's come to stay. goodness knows, there's no bed aired, and i'm sure i should have been told if----" "peace, woman!" said the squire. "did he ask to see me, or----" with an effort, "my nephew?" "oh, you, sir! leastwise that's what jane said, but she's no more head than a goose! to let him in when she knows that you're hardly out of your bed, and can't see every jack harry that comes!" "i'll see him," the squire said heavily. he bade calamy take him in. "but you'll take your egg-flip, mr. griffin? before you----" "don't clack, woman, don't clack!" cried the squire, and made a blow at her with his stick, but with no intention of reaching her. "begone! begone!" "but, dear sir, the doctor! you know he said" "d--n you, i'll not take it! d'you hear? i'll not take it! get out!" and he went on through the house, the tap of his stick on the stone flags going before him and announcing his coming. half-way along the passage he paused. "did she say," he asked, lowering his voice, "that he came from the bank?" "ay, ay," calamy said. "and like enough. ill news has many feet. rides apace and needs no spurs. but if your honor will let me see him, i'll sort him! i'll sort him, i'll warrant! one'd think," grumbling, "they'd more sense than to come here about their dirty business as if we were the bank!" the man was surprised that his master took the matter with any patience, for, to him, with all the prejudices of the class he served, it seemed the height of impertinence to come to garth about such business. "let me see him, your honor, and ask what he wants," he urged. but the squire ruled otherwise. "no," he said wearily, "i'll see him." and he went in. the front door stood open. "there's a po-chay, right enough," calamy informed him. "and luggage. seems to ha' come some way, too." "umph! take me in. and tell me who it is. then go." the butler opened the door, and guided the old man into the room. a glance informed him who the visitor was, but he continued to give all his attention to his master, in this way subtly conveying to the stranger that he was of so little importance as to be invisible. nor until the squire had reached the table and set his hand on it did calamy open his mouth. then, "it's mr. ovington," he announced. "mr. ovington?" "ay, the young gentleman." "ah!" the old man stood a moment, his hand on the table. then, "put me in my chair," he said. "and go. shut the door." and when the man had done so, "well!" heavily, "what have you come to say? but you'd best sit. sit down! so you didn't go to london? thought better of it, eh, young man? ay, i know! talked to your father and saw things differently? and now you've come to give me another dose of fine words to keep me quiet till the shutters go up? and if the worst comes to the worst, your father's told you, i suppose, that i can't prosecute--family name, eh? that's what you've come for, i suppose?" "no, sir," clement answered soberly. "i've not come for that. and my father----" the squire struck his stick on the floor. "i don't want to hear from him!" he cried with violence. "i want no message from him, d'you hear? i'm not come down to that! and as for your excuses, young gentleman----" "i am not come with any excuses," clement answered, restraining himself with difficulty--but after all the old man had had provocation enough to justify many hard words, and he was blind besides. as he sat there, glaring sightlessly before him, his hands on his stick, he was a pathetic figure in his anger and helplessness. "i've been to town, as i said i would." the squire was silent for some seconds. "and come back?" he exclaimed. "well, yes, sir," with a smile. "i'm here." "umph? how did you do it?" "i posted up and came down as far as birmingham by the bull and mouth coach. i posted on this morning." "well, you've been devilish quick!" the squire admitted it reluctantly. he hardly knew whether to believe the tale or not. "you didn't wait long there, that's certain. and did as little, i suppose. bank's going, i hear?" "i hope not." "pooh!" the squire said impatiently. "you may speak out! speak out, man! there is no one here." "there's some danger, i'm afraid." "danger! i should think there was! more than danger, as i hear!" the squire drummed for a moment with his fingers on the table. he was thinking not of the bank, or even of his loss, but of his nephew and the scandal that would not pass by him. but he would not refer to arthur, and after a pause, "well," with an angry snort, "if that's all you've come to tell me, you might have spared yourself--and me. i cannot say that your company's very welcome, so if you please, we'll dispense with compliments. if that's all----" "but that's not all, sir," clement interposed. "i wish i could have brought back the securities, or even the whole of the money." the squire laughed. "no doubt," he said. "but i was too late to ensure that. the stock had already been transferred." "so he was quick, too!" "and selling for cash in the middle of such a crisis he had to accept a loss of seven per cent. on the current price. but he suggests that if you reinvest immediately, a half, at least, of this may be recovered, and the eventual loss need not be more than three or four hundred. i ought perhaps to have stayed in town to effect this, but i had to think of my father, who was alone at the bank. however, i did what i could, sir, and----" clement paused; the squire had uttered an exclamation which he did not catch. the old man turned a little in his chair so as to face the speaker. "eh?" he said. "do you mean that you've got any of the money--here?" "i've eleven thousand and a bit over," clement explained. "five thousand in gold and the rest----" "what?" "sir?" "do you mean"--the squire spoke haltingly, after a pause--he did not seem to be able to find the right words. "do you mean that you've brought back the money?" "not all. what i've told you, sir. there's six thousand and odd in notes. the gold is in two bags in the chaise." "here?" "at the door, sir. i'll bring it in." "ay," said the squire passively. "bring it in." clement went out and returned, carrying in two small leather bags. he set them down at the squire's feet "there's the gold, sir," he said. "i've not counted it, but i've no doubt that it is right. it weighs a little short of a hundred pounds." the old man felt the bags, then, standing up, he lifted them in turn a few inches from the floor. "what does a thousand pounds weigh?" he asked. "between eighteen and nineteen pounds, sir." "and the notes?" "i have them here." clement drew a thick packet from the pocket of his inner vest and put it into the squire's hands. "they're bank of england paper. they were short even at the bank, and wanted bourdillon to take it in one-pound notes, but he stood out and got these in the end." the squire handled the packet, felt its thickness, weighed it lovingly in his hand. so much money, so much money in so small a space! six thousand and odd pounds! it seemed as if he could not let it go, but in the end he placed it in the breast pocket of his high-collared old coat, the shabby blue coat with the large gilt buttons that was his common wear at home. the money secured, he sat, looking before him, while clement, a little mortified, waited for the word of acknowledgment that did not come. at last, "did you call at your father's?" the old man asked--irrelevantly, it seemed. clement colored. he had not expected the question. "well, i did, sir," he admitted. "bourdillon----" "he was with you?" "as far as the town. he was anxious that the money should be seen to arrive. he thought that it might check the run, and i agreed that it might do some good, and that we might make that advantage of it. so i took it through the bank." "pretty full, i expect, eh? pretty full?" "well," ruefully, "it was, sir." "a strong run, eh?" "i'm afraid so. it looked like it. it was full to the doors. that's why," glancing at his watch as he stood by the window, the table between him and the squire, "i must get back to my father. we took it through the bank and out by the garden, and put it in the chaise again in roushill." "umph! he came back to town with you?" "bourdillon, sir? yes--as far as the east bridge. he left me there." "where is he?" clement hesitated. "i hope that he's gone to the bank, sir," he said. he did not add, as he might have, that, after arthur and he had left the coach at birmingham and posted on, there had been a passionate scene between them. no doubt arthur had never given up hope, but from the first had determined to make another fight for it; and there was no police officer at their elbows now. he had appealed to clement by all that he loved to take the money to the bank, and there to deal with it as his father should decide. finding clement firm and his appeals useless, he had given way to passion, he had stormed and threatened and even shed tears; and at last, seizing the pistol case that lay at their feet, he had sworn that he would shoot himself before the other's eyes if he did not give way. in his rage he had seemed to be capable of anything, and there had been a struggle for the pistol, blows had been exchanged, and worse might have come of it if the noise of the fracas had not reached the postboy's ears. he had pulled up, turned in his saddle, and asked what the devil they would be at; he would have no murder in his master's carriage. that had shamed them. arthur had given way, had flung himself back, white and sullen, in his corner, and they had continued the journey on such terms as may be imagined. but even so, arthur had proved his singular power of adaptation. the environs of the town in sight, he had suggested that at least they should take the money through the bank. clement, anxious to make peace, had consented to that, and on the east bridge arthur had called on the postboy to stop, had jumped out, and, turning his back on his companion, had made off without a word. clement said nothing of this to the squire, though the scene had been painful, and though he felt that something was due to him, were it but a word of thanks, or an expression of acknowledgment. it had not been his fault or his father's, that the money had been taken; it was through him that the greater part of it had been recovered, and now reposed safe in the squire's pocket or in the bags at his feet. at the least, it seemed to him, the old man might remember that his father was alone and needing him--was facing trouble, and, it might be, ruin. he took up his hat. "well, sir, that's all," he said curtly. "i must go now." "wait!" said the squire. "and ring the bell, if you please." clement stepped to the hearth, and pulled the faded drab cord, which once had been blue, that hung near it. the bell in the passage had hardly tinkled before calamy entered. "bid your mistress come here," said the old man. "where is she? fetch her?" the blood mounted to clement's face, and his pulses began to throb, his ideas to tumble over one another. the old man, who sat before him, his hands on his stick, stubbornly confronting the darkness, the old man, whom he had thought insensible, took on another hue, became instead inscrutable, puzzling, perplexing. why had he sent for his daughter? what was in his mind? what was he going to say? what had he--but even while clement wondered, his thoughts in a whirl, strange hopes jostling one another in his brain, the door opened, and josina came in. she came in with a timid step, but as soon as her eyes met clement's, the color rose vividly to her cheeks, then left her pale. her lip trembled. but her look--fleeting as it was and immediately diverted to her father--how he blessed her for that look! for it bade him take confidence, it bade him have no fear, it bade him trust her. silently and incredibly, it took him under her protection, it pledged her faith to him. and how it changed all for him! how it quelled, in a moment, the disappointment and anger he was feeling, ay, and even the vague hopes which the squire's action in summoning her had roused in him! how it gave calmness and assurance where his aspirations had been at best to the extravagant and the impossible. but, whatever his feelings, to whatever lover's heaven that look raised him, he was speedily brought to earth again. the old man had proved himself thankless; now, as if he were determined to show himself in the worst light, he proceeded to prove himself suspicious. "come here, girl," he said, "and count these notes." fumbling, he took the parcel from his pocket and handed it to her. "ha' you got them? then count them! d'you hear, wench? count them! and have a care to make no mistake! lay 'em in piles o' ten. they are hundreds, are they? hundreds, eh?" she untied the parcel, and brought all her faculties to bear on the task, though her fingers trembled, and the color, rising and ebbing in her cheeks, betrayed her consciousness that her lover's eyes were upon her. "yes, sir, they are hundred-pound notes," she said. "all?" "yes, all, i think, sir." "bank of england?" he poked at her skirts with his stick. "bank of england, eh? are you sure?" "yes, sir, so far as i can see." "ay, ay. well, count 'em! and mind what you are doing, girl!" clement did not know whether to smile or to be angry, but a moment later he felt no bent towards either. for with a certain dignity, "i ha' been deceived once," the squire continued. "i ha' signed once and paid for it. i'm in the dark. but i don't act i' the dark again. if i can't trust my own flesh and blood, i'll not trust strangers. no, no! i don't know as there's any one i can trust." "i quite understand, sir," clement said--though it was the last thing he had had it in his mind to say a moment earlier. "i don't mind whether you understand or not," the squire retorted. "ha' you done, girl?" after an interval of silence. "not quite, sir. i have five heaps of ten." "well, well, get on. we are keeping the young man." he spoke as he would have spoken of any young man in a shop, and clement winced, and josina knew that he winced and she reddened. but she went on with her work. "there are sixty-one, sir," she said. "that makes----" "six thousand one hundred pounds. ay, it's right so far. right so far. and the gold"--he paused and seemed to be at a nonplus--"i'm afraid 'twould take too long to count it. well, let it be. get some paper and write a receipt as i tell you." "there is no need, sir," clement ventured. "there's every need, young man. i'm doing business. ha' you got the pen, girl? then write as i tell you. 'i, george griffin of garth, in the county of aldshire, acknowledge that i have this th day of december received from messrs. ovington of aldersbury, six thousand one hundred pounds in bank of england notes, and'--ha' you got that? ha' you got that?--'two bags stated by them to contain five thousand pounds in gold.' ha' you got that down? then show me the place, and----" but as she put the pen in his hand he let it drop. he sat back in his chair. "ay, he showed me the place before," he muttered, his chin on his breast. "it was he gave me the pen, then, girl. and how be i to know? how be i to know?" it came home to them--to them both. in his voice, his act, his attitude was the pathos of blindness, its helplessness, its dependence, its reliance on others--on the eyes, the hand, the honesty of others. the girl leant over him. "father," she said, tears in her voice, "i wouldn't deceive you! you know i wouldn't. i would never deceive you!" "ha' you never deceived me? wi' that young man?" sternly. "but----" "ay, you have! you have deceived me--with him." she could not defend herself, and, suppressing her sobs, "i will call calamy," she said. "he can read. he shall count the notes." but he put out his hand and grasped her skirts. "no," he said. "what'll i be the better? give me the pen. if you deceive me in this, wench--what matter if the notes be short or not, or what comes of it?" "i would cut off my hand first!" she cried. "and clement----" "eh?" he sat up sharply. she was frightened, and she did not continue. "this is the place, sir," she said meekly. "here?" "yes, sir, where you are now." he wrote his name. "dry it," he said. "and ring the bell. and there, give it to him. he wants to be off. odds are the shutters'll be up afore he gets there. calamy!" to the man who had appeared at the door, "see this gentleman off, and be quick about it. he's no time to lose. and, hark you, come back to me when he's gone. no, girl," sternly, "you stay here. i want you." chapter xxxix in ordinary times, news is slow to make its way to the ears of the great. protected from the vulgar by his deer park, looking out from the stillness of his tall-windowed library on his plantations and his ornamental water, sir charles woosenham was removed by six miles of fine champaign country from the common fret and fume of aldersbury. he no longer maintained, as his forefathers had maintained, a house in the town, and in all likelihood he would not have heard the talk about the bank, or caught the alarm in time, if one of his neighbors had not made it his business to arouse him. acherley, baffled in his attempt at blackmail, and thirsting for revenge, had bethought him of the chairman of the valleys railroad. he had been quick to see that he could use him, and perhaps he had even fancied that it was his duty to use him. at any rate, one fine morning, some days before this eventful wednesday, he had mounted his old hunter, nimrod, and had cantered across country by gaps and gates from acherley to woosenham park. he had entered by a hunting wicket, and leaping the ha-ha, he had presented himself to sir charles ten minutes after the latter had left the breakfast table, and withdrawn himself after his fashion of a morning, into a dignified seclusion. alas, two minutes of acherley's conversation proved enough to destroy the baronet's complacency for the day. acherley blurted out his news, neither sparing oaths nor mincing matters. "ovington's going!" he declared. "he's bust-up--smashed, man!" and striking the table with a violence that made his host wince, "he's bust-up, i tell you," he repeated, "and i think you ought to know it! there's ten thousand of the company's money in his hands, and if there's nothing done, it will be lost to a penny!" sir charles stared, stared aghast. "you don't say so?" he exclaimed. "i can't believe it!" "well, it's true! true, man, true, as you'll soon find out!" "but this is terrible! terrible!" acherley shrugged his shoulders. "it'll be terrible for him," he sneered. "but--but what can we do?" the other asked, recovering from his surprise. "if it is as bad as you say----" "bad? and do, man? why, get the money out! get it out before it is too late--if it isn't too late already. you must draw it out, woosenham! at once! this morning! without the delay of a minute!" "i!" sir charles could not conceal the unhappiness which the proposal caused him. no proposal, indeed, could have been less to his taste. he would have to make up his mind, he would have to act, he would have to set himself against others, he would have to engage in a vulgar struggle. a long vista of misery and discomfort opened before him. "i? oh, but--" and with the ingenuity of a weak man he snatched at the first formal difficulty that occurred to him--"but i can't draw it out! it needs another signature besides mine." "the secretary's? bourdillon's? of course it does! but you must get his signature. d--n it, man, you must get it. if i were you i should go into town this minute. i wouldn't lose an hour!" sir charles winced afresh at the idea of taking action so strong. he had not only a great distaste for any violent step, but he had also the feelings of a gentleman. to take on himself such a responsibility as was now suggested was bad; but to confront ovington, who had gained considerable influence over him, and to tell the banker to his face that he distrusted his stability--good heavens, was it possible that such horrors could be asked of him? flustered and dismayed, he went back to his original standpoint. "but--but there may be nothing in this," he objected weakly. "possibly nothing at all. mere gossip, my dear sir," with dignity. "in that case we might be putting ourselves in the wrong--very much in the wrong." acherley did not take the trouble to hide his contempt. "nothing in it?" he replied, and he tossed off a second glass of the famous woosenham cherry-brandy which the butler, unbidden, had placed beside him. "nothing in it, man? you'll find there's the devil in it unless you act! enough in it to ease us of ten thousand pounds! if the bank fails, and i'll go bail it will, not a penny of that money will you see again! and i tell you fair, the shareholders will look to you, woosenham, to make it good. i'm not responsible. i've no authority to sign, and the others are just tools of that man ovington, and afraid to call their souls their own! you're chairman--you're chairman, and, by g--d, they'll look to you if the money is left in the bank and lost!" sir charles quailed. this was worse and worse! worse and worse! he dropped the air of carelessness which he had affected to assume, and no more flustered man than he looked out on the world that day over a white lawn stock or wore a dark blue coat with gilt buttons, and drab kerseymeres with hessians. but, again, true to his instincts, he grasped at a matter of form, hoping desperately that it might save him from the precipice towards which his friend was so vigorously pushing him. "but--my good man," he argued, "i can't draw out the money--the whole of the capital of the concern, so far as it is subscribed--on my own responsibility! of course i can't!" wiping the perspiration from his brow. "of course i can't!" peevishly. "i must have the authority of the board first. we must call a meeting of the board. that's the proper procedure." acherley rose to his feet, openly contemptuous. "oh, hang your meeting!" he said. "and give a seven days' notice, eh? if you are going to stand on those p's and q's i've said my say. the money's lost already! however, that's not my business, and i've warned you. i've warned you. you'll not forget that, woosenham? you'll exonerate me, at any rate." "but i can't--god bless my soul, acherley," the poor man remonstrated, "i can't act like that in a moment!" and sir charles stared aghast at his too violent associate, who had brought into the calm of his life so rude a blast of the outer air. "i can't override all the formalities! i can't, indeed, even if it is as serious as you say it is--and i can hardly believe that--with such a man as ovington at the helm!" "you'll soon see how serious it is!" the other retorted. and satisfied that he had laid the train, he shrugged his shoulders, tossed off a third glass of the famous cherry-brandy, and took himself off without much ceremony. he left a flustered, nervous, unhappy man behind him. "good g--d!" the baronet muttered, as he rose and paced his library, all the peace and pleasantness of his life shattered. "what's to be done? and why--why in the world did i ever put my hand to this matter!" one by one and plainly all the difficulties of the position rose before him, the awkwardness and the risk. he must open the thing to bourdillon--in itself a delicate matter--and obtain his signature. if he got that, he doubted if he had even then power to draw the whole amount in this way, and doubted, too, whether ovington would surrender it, no meeting of the board having been held? and if he obtained the money, what was he to do with it? pay it into dean's? but if things were as bad as acherley said, was even dean's safe? for, of a certainty, if he removed the money to dean's and it were lost, he would be responsible for every penny--every penny of it! there was no doubt about that. yet if he left it at ovington's and it were lost, what then? it was not his custom to drink of a morning, but his perturbation was so great that he took a glass of the cherry-brandy. he really needed it. he could not tell what to do. in every direction he saw some doubt or some difficulty arise to harass him. he was no man of business. in all matters connected with the company he had leant on ovington, and deprived of his stay, he wavered, turning like a weathercock in the wind, making no progress. for two days, though terribly uneasy in his mind, he halted between two opinions. he did nothing. then tidings began to come to his ears, low murmurs of the storm which was raging afar off; and he wrote to bourdillon asking him to come out and see him--he thought that he could broach the matter more easily on his own ground. but two days elapsed, during which he received no answer, and in the meantime the warnings that reached him grew louder and more disquieting. his valet let drop a discreet word while shaving him. a neighbor hoped that he had nothing in ovington's--things were in a bad way, he heard. his butler asked leave to go to town to cash a note. gradually he was wrought up to such a pitch of uneasiness that he could not sleep for thinking of the ten thousand pounds, and the things that would be said of him, and the figure that he would cut if, after acherley's warning, the money were lost. when wednesday morning came, he made up his mind to take advice, and he could think of no one on whose wisdom he could depend more surely than on the old squire's at garth; though, to be sure, to apply to him was, considering his attitude towards the railroad, to eat humble pie. still, he made up his mind to that course, and at eleven he took my lady's landau and postillions, and started on his sixteen-mile drive to garth. he avoided the town, though it lay only a little out of his way, but he saw enough of the unusual concourse on the road to add to his alarm. once, nervous and fidgety, he was on the point of giving the order to turn the horses' heads for aldersbury--he would go direct to the bank and see ovington! but before he spoke he changed his mind again, and half-past twelve saw him wheeling off the main road and cantering, with some pomp and much cracking of whips, up the rough ascent that led to garth. he was so far in luck that he found the squire not only at home, but standing before the door, a gaunt, stooping figure, leaning on his stick, with calamy at his elbow. "who is it?" the old man asked, as he caught the sound of galloping hoofs and the roll of the wheels. he turned his sightless eyes in the direction of the approaching carriage. "i think it's sir charles, sir," calamy answered. "it's his jackets." "ay! well, i won't go in, unless need be. go you to the stables and bid 'em wait." sir charles alighted, and bidding the postillions draw off, greeted his host. "i want your advice, squire," he said, putting his arm through the old man's, and, after a few ceremonial words he drew him a few paces from the door. it was a clear, mild day, and the sun was shining pleasantly. "i'm in a position of difficulty, griffin," he said. "you'll tell me, i know, that i've only myself to thank for it, and perhaps that is so. but that does not mend matters. the position, you see, is this." and with many apologies and some shamefacedness he explained the situation. the squire listened with gloomy looks, and, beyond grunting from time to time in a manner far from cheering, he did not interrupt his visitor. "of course, i ought not to have touched the matter," the baronet confessed, when he had finished his story. "i know what you think about that, griffin." "of course you ought not!" the squire struck his stick on the gravel. "i warned you, man, and you wouldn't take the warning. you wouldn't listen to me. why, damme, woosenham, if _we_ do these things, if we once begin to go on 'change' and sell and buy, where'll you draw the line? where'll you draw the line? how are you going to shut out the tinkers and tailors and brummagem and manchester men when you make yourselves no better than them! how? by jove, you may as well give 'em all votes at once, and in ten years' time we shall have bagmen on the bench and jews in the house! aldshire--we've kept up the fence pretty well in aldshire, and kept our hands pretty clean, too, and it's been my pride and my father's to belong to this county. we're pure blood here. we've kept ourselves to ourselves, begad! but once begin this kind of thing----" "i know, griffin, i know," woosenham admitted meekly. "you were right and i was wrong, squire. but the thing is done, and what am i to do now? if i stand by and this money is lost----" "ay, ay! you'll have dropped us all into a pretty scalding pot, then!" "just so, just so." the baronet had pleaded guilty, but he was growing restive under the other's scolding, and he plucked up spirit. "granted. but, after all, your nephew's in the concern, griffin. he's in it, too, you know, and----" he stopped, shocked by the effect of his words. for the old man had withdrawn his arm and had stepped back, trembling in all his limbs. "not with my good will!" he cried, and he struck his stick with violence on the ground. "never! never!" he repeated, passionately. "but you are right," bitterly, "you are right, woosenham. the taint is in the air, the taint of the city and the 'change, and we cannot escape it even here--even here in this house! in the concern? ay, he is! and i tell you i wish to heaven that he had been in his grave first!" the other, a kindly man, was seriously concerned. "oh. come, squire," he said; and he took the old man affectionately by the arm again. "it's no such matter as all that. you make too much of it. he's young, and the younger generation look at these things differently. after all, there's more to be said for him than for me." the squire groaned. "and, anyway, my old friend," woosenham continued gently, "advise me. time presses." he looked at his watch. "what shall i do? what had i better do? i know i am safe in your hands." the squire sighed, but the other's confidence was soothing, and with the sigh he put off his own trouble. he reflected, his face turned to the ground at his feet. "do you think him honest?" he asked, after a pause. "who? ovington?" "ay," gloomily. "ovington? the banker there." "well, i do think he is. yes, i do think so. i've no reason to think otherwise." "he's a director, ain't he?" "of the railroad? yes." "responsible as you are?" "yes, i suppose he is!" "a kind of trustee, then, ain't he--for the shareholders." sir charles had not seen it in that light before. he looked at his adviser with growing respect. "well, i take it he is--now you mention it, griffin," he said. "then"--this, it was plain, was the verdict, and the other listened with all his ears--"if he is honest, he'll not have mixed the money with his own. he'll not have put it to an ordinary account, but to a trust account--so that it will remain the property of the company, and not be liable to calls on him. that's what he should have done, anyway. whether he has done it or not is another matter. he's pressed, hard pressed, i hear, and i don't know that we can expect the last spit of honesty from such as him. it's not what i've been brought up to expect. but," with a return of his former bitterness, "we may be changing places with 'em even in that! god knows! and i do know something that gives me to believe that he may behave as he should." "you do?" sir charles exclaimed, his spirits rising. "you do think so?" "well, i do," reluctantly. "i'll speak as i know. but if i were you i should go to him now and tell him, as one man to another, that that's what you expect; and if he hangs back, tell him plain that if that money's not put aside he'll have to answer to the law for it. whether that will frighten him or not," the squire concluded, "i'm not lawyer enough to say. but you'll learn his mind." "i'll go in at once," sir charles replied, thankfully. "i'm going in myself. if you'll take me in--you've four horses--it will save time, and my people shall fetch me out in an hour or so." sir charles assented with gratitude, thankful for his support; and calamy was summoned. two minutes later they got away from the door in a splutter of flying gravel and dead beech leaves. they clattered down the stony avenue, over the bridge, and into the high road. probably of all those--and they were many--who travelled that day with their faces set towards the bank, they were the last to start. if tuesday had been the town's day, this was certainly the country's day. for one thing, there was a market; for another, the news of something amiss, of something that threatened the little hoard of each--the slowly-garnered deposit or the hardly-won note--had journeyed by this time far and wide. it had reached alike the remote flannel-mill lapped in the folds of the border-hills, and the secluded hamlet buried amid orchards, and traceable on the landscape only by the grey tower of its church. on foot and on horse-back, riding and tying, in gigs and ass-carts, in market vans and carriers' carts, the countryside came in--all who had anything to lose, and many who had nothing at stake, but were moved by a vague alarm. even before daybreak the roads had begun to echo the sound of their marching. they came by the east bridge, laboring up the steep, winding cop; by the west bridge and under the gabled fronts of maerdol, along the river bank, before the house of the old sea-dog whose name was a household word, and whose portrait hung behind the mayor's chair, and so up the foregate--from every quarter they came. before ten the streets were teeming with country-folk, whose fears were not allayed by the news that all through the previous day the townsfolk had been drawing their money. sullen tradesmen, victims of the general depression, eyed the march from their shop doors, and some, fearing trouble, put up half their shutters. more took a malicious amusement in telling the rustics that they were too late, and that the bank would not open. the alarm was heightened by a chance word which had fallen from frederick welsh. the lawyer's last thought had been to do harm, for his interest in common with all substantial men lay the other way. but that morning, before he had dressed, or so much as shaved, his office and even his dining-room had been invaded. scared clients had overwhelmed him with questions--some that he could answer and more that he could not. he could tell them the law as to their securities, whether they were lodged for safety, or pawned for loans, or mortgaged on general account. but he could not tell them whether ovington was solvent, or whether the bank would open, or whether dean's was affected; and it was for answers to these questions that they clamored. in the end, badgered out of all patience, he had delivered a curt lecture on banking. "look here, gentlemen," he had said, imposing silence from his hearth-rug and pressing his points with wagging forefinger, "do you know what happens when you pay a thousand pounds into a bank? no, you don't? well, i'll tell you. they put a hundred pounds into the till, and they lend out four thousand pounds on the strength of the other nine hundred. if they lend more than that, or lend that without security, they go beyond legitimate banking. now you know as much as i do. a banker's money is out on bills payable in two months or four, it's out on the security of shares and farms and shop-stock, it's lent on securities that cannot be realized in five minutes. but it's all there, mark me, somewhere, in something, gentlemen; and i tell you candidly that it's my opinion that if you would all go home and wait for your money till you need it, you'd all get it in full, twenty shillings in the pound." he meant no harm, but unfortunately the men who heard the lecture paid no heed to the latter part, but went out, impressed with the former, and spread it broad-cast. on which some cried, "that's banking, is it! shameful, i call it!" while others said, "well, i call it robbery! the old tea-pot for me after this!" a few were for moving off at once and breaking ovington's windows, and going on to dean's and serving them the same. but they were restrained, things had not quite come to that; and it was an orderly if excited throng that once more waited on bride hill and in the market place for the opening of the doors. not all who gathered there had anything to lose. many were mere onlookers. but here and there were to be seen compressed lips, pale faces, anxious eyes. here and there women gripped books in feverish fingers or squeezed handkerchiefs into tight balls; and now and again a man broke into bad words and muttered what he would do if they robbed him. there were country shopkeepers who had lodged the money to meet the traveller's account, and trembled for its safety. there were girls who saw their hard-earned portions at stake, and parsons whose hearts ached as they thought of the invalid wife or the boy's school-bill; and there were at least a score who knew that if the blow fell the bailiff, never far from the threshold, would be in the house. before the eyes of not a few rose the spectres of the poorhouse and a pauper funeral. standing in groups or dotted amid the crowd were bigger men--wool-brokers and cattle-dealers--men loud in bar-parlors and great among their fellows, whose rubicund faces showed flabby and mottled, and whose fleshy lips moved in endless calculations. how was this bill to be met, and who would renew that one? too often the end of their calculations spelled ruin--if the bank failed. ruin--and many were they who depended on these big men: wage-earners, clerks, creditors, poor relations! one man walking up and down under the arcade of the market house was the centre for many eyes. he was an auctioneer from a neighboring town, a man of wide dealings, who, it was whispered, had lodged with ovington's the proceeds of his last great sale--a sum running into thousands and due every penny to the vendor. his case and other hard cases were whispered by one to another, and, bruited about, they roused the passions even of those who were not involved. yet when the bank at length opened on the stroke of ten an odd thing happened. a sigh, swelling to a murmur, rose from the dense crowd, but no one moved. the expected came as the unexpected, there was a moment of suspense, of waiting. no one advanced. then some one raised a shout and there was a rush for the entrance; men struggled and women were thrust aside, smaller men were borne in on the arms of their fellows. a wail rose from the unsuccessful, but no man heeded it, or waited for his neighbor, or looked aside to see who it was who strove and thrust and struggled at his elbow. they pushed in tumultuously, their country boots drumming on the boards. their entrance was like the inrush of an invading army. the clerks, the cashier, ovington himself, stood at the counter waiting motionless to receive them, confronting them with what courage they might. but the strain of the preceding day had told. the clerks could not conceal their misgivings, and even rodd failed to bear himself with the chilling air which had yesterday abashed the modest. he shot vindictive glances across the counter, his will was still good to wither, but the crowd was to-day made up of rougher material, was more brusque and less subservient. they cared nothing for him, and he looked, in spite of his efforts, weary and dispirited. there was no longer any pretence that things were normal or that the bank was not face to face with a crisis. the gloves were off. they were no longer banker and customers. they were enemies. it was ovington himself who this morning stood forward, and in a few cold words informed his friends that they would all be paid, requesting them at the same time to be good enough to keep order and await their turns, otherwise it would be impossible to proceed with the business. he added a single sentence, in which he expressed his regret that those who had known him so long should doubt, as he could only suppose that they did doubt, his ability to meet his engagements. it was well done, with calmness and dignity, but as he ceased to speak--his appearance had for the moment imposed silence--a disturbance broke out near the door. a man thrust himself in. ovington, already in the act of turning, recognized the newcomer, and a keen observer might have noted that his face, grave before, turned a shade paler. but he met the blow. "is that mr. yapp?" he asked. it was the auctioneer from iron ferry. "ay, mr. ovington, it is," he said, the perspiration on his face, "and you know my position." ovington nodded. yapp was one of five depositors--big men--whose claims had been, for the last twenty-four hours, a nightmare to him. but he let nothing be seen, and "kindly let mr. yapp pass," he said; "i will deal with him myself." then, as one or two murmured and protested, "gentlemen," he said sternly, "you must let me conduct my business in my own way, or i close my doors. let mr. yapp pass, if you please." they let him through then, some grumbling, others patting him on the back--"good luck to you, jimmy!" cried one well-wisher. the counter was raised, and resettling his clothes about him, the auctioneer followed mr. ovington into the parlor. the banker closed the door upon them. "how much is it, mr. yapp?" he asked. the man's hand shook as he drew out the receipt. "two thousand, seven hundred and forty," he said. "i hope to god it's all right, sir?" his voice shook. "it's not my money, and to lose it would three parts ruin me." "you need not fear," the banker assured him. "the money is here." but for a moment he did not continue. he stood, his eyes on the man's face, lost in thought. then, "the money is here, and you can have it, yapp," he said. "but i am going to be plain with you. you will do me the greatest possible favor if you will leave it for a few days. the bank is solvent--i give you my honor it is. no one will lose a penny by it in the end. but if this and other large sums are drawn to-day i may have to close for a time, and the injury to me will be very great. if you wish to make a friend who may be able to return the favor ten-fold----" but yapp shook his head. "i daren't do it!" he declared, the sweat springing out anew on his face. "it isn't my money and i can't leave it! i daren't do it, sir!" ovington saw that it was of no use to plead farther, and he changed his tone. "very good," he said, and he forced himself to speak equably. "i quite understand. you shall have the money." sitting down at the table he wrote the amount on a slip, and struck the bell that stood beside his desk. the younger clerk came in. he handed him the slip. yapp did not waver, but he remembered that good turns had been done to him in that room, and he was troubled. "if it was my money," he said awkwardly, "or if there was anything else i could do, mr. ovington?" "you can," ovington replied. he had got himself in hand, and he spoke cheerfully. "well----" "you can hold your tongue, yapp," smiling. "it's done, sir. i won't have a tongue except to say that the money's paid. you may depend upon me." "thank you. i shall not forget it." the clerk brought in the money, and stayed until the sum was counted and checked and the receipt given. then, "that's right, mr. yapp," the banker said, and sat back in his chair. "show mr. yapp out, williams." yapp followed the clerk. his appearance in the bank was greeted by half a dozen voices. "ha' you got it?" they cried. he was a man of his word, and he slapped his pocket briskly. "every penny!" he said, and something like a cheer went up. "i'd not have worried, but it wasn't my money." ovington's appeal to him had been a forlorn hope, and much, now it had failed, did the banker regret it. but he had calculated that that twenty-seven hundred pounds might just make the difference, and he had been tempted. left to himself he sat, turning it over, and wondering if the auctioneer would be silent; and his face, now that the mask was off, was haggard and careworn. he had slept little the night before, and things were working out as he had feared that they would. presently he heard a disturbance in the bank. something had occurred to break the orderly course of paying out. he rose and went out, a frown on his face. he was prepared for trouble, but he found to his relief that the interruption was caused by nothing worse than his son's return. having given his word to arthur to carry the money through the bank, clement had sunk whatever scruples he felt, and had made up his mind to do it handsomely. he had driven up to the door with a flourish, had taken the gold from the chaise under the public eye, and now, with all the parade he could, he was bringing it into the bank. his brisk entrance and cheery presence, and the careless words he flung on this side and that as he pushed through the crowd, seemed in a trice to clear the air and lift the depression. not even arthur could have carried the thing through more easily or more flamboyantly. and that was saying much. "make way! make way, if you please, gentlemen!" he cried, his face ruddy with the sharp, wintry air. "let me in, please! now, if you want to be paid, you must let the money come through! plenty of money! plenty for all of you, gentlemen, and more where this comes from! but you must let me get by! hallo, rawlins, is that you? you're good at dead weights. here, lift it! what do you make of it?" and he thrust the bag he carried into a stout farmer's hands. "well, it be pretty near fifty pund, i'd say," rawlins replied. "though, by gum, it don't look within a third of it, mr. clement." clement laughed. "well done!" he said. "you're just about right. and you can say after this, rawlins, that you've lifted fifty pound weight of gold! now, make way, gentlemen, make way, if you please. there's more to come in! plenty more." he bustled through with the bag, greeted his father gaily, and placed his burden on the floor beside him. then he went back for the other bag. he made a second countryman weigh this, grinned at his face of astonishment, then taking up the two bags he went through with his father to the parlor. his arrival did good. the clerks perked up, smiled at one another, went to and fro more briskly. rodd braced himself and, though he knew the truth, began to put on airs, bandied words with a client, and called contemptuously for order. and the customers looked sheepish. gold! gold coming in like that in bags as if 'twere common stuff. it made them think twice. a few, balancing in their minds a small possible loss against the banker's certain favor, hesitated and hung back. two or three even went out without cashing their notes and shrugged their shoulders in the street, declaring that the whole thing was nonsense. they had been bamboozled. they had been hoaxed. the bank was sound enough. but behind the parlor door things wore a different aspect. chapter xl the banker looked at the money lying at his feet. clement looked at his father. he noted the elder man's despondent attitude, he read the lines which anxiety had deepened on his brow, and his assumed gaiety fell from him. he longed to say something that might comfort the other, but _mauvaise honte_ and the reserve of years were too much for him, and instead he rapidly and succinctly told his tale, running over what had happened in london and on the road. he accounted for what he had brought, and explained why he had brought it and at whose request. then, as the banker, lost in troubled thought, his eyes on the money, did not speak, "it goes badly then, sir, does it?" he said. "i see that the place is full." ovington's eyes were still on the bags, and though he forced himself to speak, his tone was dull and mechanical. "yes," he said. "we paid out fifteen thousand and odd yesterday. about six thousand in odd sums to-day. i have just settled with yapp--two thousand seven hundred. mills and blakeway have drawn at the counter--three thousand and fifty between them. a packet of notes from birmingham, eleven hundred. jenkins sent his cheque for twelve hundred by his son, but he omitted to fill in the date." "and you didn't pay it?" "no, i didn't pay it. why should i? but he will be in himself by the two o'clock coach. the only other account--large account outstanding--is owen's for eighteen hundred. probably he will come in by the same coach. in the meantime--" he took a slip of paper from the table--"we have notes for rather more than two thousand still out; half of these may not, for one reason or another, be presented. and payable on demand we still owe something like two or three thousand." "you may be called upon for another six thousand, then, sir?" "six at best, seven thousand or a little more at worst. and we had in the till to meet it, a quarter of an hour ago, about three thousand. we should not have had as much if rodd had not paid in four hundred and fifty." "rodd?" clement eyes sparkled. "god bless him! he's a trojan, and i shan't forget it! bravo, rodd!" the banker nodded, but in a perfunctory way. "that's the position," he said. "if owen and jenkins hold off--but there's no hope of that--we may go on till four o'clock. but if either comes in we must close. close," bitterly, "for the lack of three thousand or four thousand pounds!" clement sighed. young as he was he was beginning to feel the effect of his exertions, of his double journey, and his two sleepless nights. at last, "no one will lose, sir?" he said. "no, no one, ultimately and directly, by us. and if we were an old bank, if we were dean's even--" there was venom in the tone in which he uttered his rival's name "--we might resume in a week or a fortnight. we might reopen and go on. but," shrugging his shoulders, "we are not dean's, and no one would trust us after this. it would be useless to resume. and, of course, the sacrifices that we have made have been very costly. we have had to rediscount bills at fifteen per cent., and sell a long line of securities at a loss, and what is left on our hands may be worth money some day, but it is worthless at present." "wolley's mill?" "ay, and other things. other things." clement looked at the floor, and again the longing to say something or do something that might comfort his father pressed upon him. to himself the catastrophe, save so far as it separated him from josina, was a small thing. he had had no experience of poverty, he was young, and to begin the world at the bottom had no terrors for him. but with his father it was different, and he knew that it was different. his father had built up from nothing the edifice that now cracked and crumbled about them. he had planned it, he had seen it rise and grow, he had rejoiced in it and been proud of it. on it he had spent the force and the energy of the best twenty years of his life, and he had not now, he had no longer, the vigor or the strength to set about rebuilding. it was a tragedy, and clement saw that it was a tragedy. and all for the lack--pity rose strong within him--all for the lack of--four thousand pounds. to him, conversant with the bank's transactions, it seemed a small sum. it was a small sum. "ay, four thousand!" his father repeated. his eyes returned mechanically to the money at his feet, returned and fixed themselves upon it. "though in a month we may be able to raise twice as much again! and here--here"--touching it with his foot--"is the money! all, and more than all that we need, clement." then at last clement perceived the direction of his father's gaze, and he took the alarm. he put aside his reserve, he laid his hand gently on the elder man's shoulder, and by the pressure of his silent caress he strove to recall him to himself, he strove to prove to him that whatever happened, whatever befell, they were one--father and son, united inseparably by fortune. but aloud, "no!" he said firmly. "not that, sir! i have given my word. and besides----" "he would be no loser." "no, we should be the losers." "but--but it was not we, it was bourdillon, lad!" "ay, it was bourdillon. and we are not bourdillon! not yet! nor ever, sir!" ovington turned away. his hand shook, the papers that he affected to put together on his desk rustled in his grasp. he knew--knew well that his son was right. but how great was the temptation! there lay the money at his feet, and he was sure that he could not be called to account for it. there lay the money that would gain the necessary time, that would meet all claims, that would save the bank! true, it was not his, but how great was the temptation. it was so great that what might have happened had clement not been there, had he stood there alone and unfettered, it is impossible to say--though the man was honest. for it was easy, nothing was more easy, than to argue that the bank would be saved and no man, not even the squire, would lose. it was so great a temptation, and the lower course appeared so plausible that four men out of five, men of average honesty and good faith, might have fallen. fortunately the habit of business integrity came to the rescue, and reinforced and supported the son's argument--and the battle was won. "you are right," the banker said huskily, his face still averted, his hands trembling among the papers. "but take it away! for god's sake, boy, take it away! take it out of my sight, or i do not know what i may do!" "you'll do the right thing, sir, never fear!" the son answered confidently. and with an effort he lifted the two heavy bags and moved towards the door. but on the threshold and as the door closed behind him, "thank god!" he whispered to himself, "thank god!" and to betty, who met him in the hall and flung her arms about his neck--the girl was in tears, for the shadow of anxiety hung over the whole house, and even the panic-stricken maids were listening on the stairs or peering from the windows--"take care of him, betty," he said, his eyes shining. "take care of him, girl. i shall be back by one o'clock. if i could stay with him now i would, but i cannot. i cannot! and don't fret. it will come right yet!" "oh, poor father!" she cried. "is there no hope, clement?" "very little. but worse things have happened. and we may be proud of him, betty. we've good cause to be proud of him. i say it that know! cheer up!" she watched him go with his heavy burden and his blunt common-sense down the garden walk; and when he had disappeared behind the pear-tree espaliers she went back to listen outside the parlor door. she had been her father's pet. he had treated her with an indulgence and a familiarity rare in those days of parental strictness, and she understood him well, better than others, better even than clement. she knew what failure would mean to him. it was not the loss of wealth which would wound him most sorely, though he would feel that; but the loss of the position which success had gained for him in the little world in which he lived, and lived somewhat aloof. he had been thought, and he had thought himself, cleverer than his neighbors. he had borne himself as one belonging to, and destined for, a wider sphere. he had met the pride of the better-born and the older-established with a greater pride; and believing in his star, he had allowed his contempt for others and his superiority to be a little too clearly seen. for all this he would now pay, and his pride would suffer. betty, lingering in the darker part of the hall, where the servants could not spy on her, listened and longed to go in to him and comfort him. but all the rules forbade this, she might not distract him at such a time. yet, had she known how deep was his depression as he sat sunk in his chair, had she known how the past mocked him, and the long chain of his successes rose and derided him, how the mirage of long-cherished hopes melted and left all cold before him--had she guessed the full bitterness of his spirit, she had broken through every rule and gone in to him. the self-made man! proudly, disdainfully he had flung the taunt back in men's faces. could they make, could they have made themselves, as he had? and now the self-ruined man! he sat thinking of it, and the minutes went by. twice one of the clerks came in and silently placed a slip beside him and went softly out. he looked at the slip, but without taking in its meaning. what did it matter whether a few more or a few less pounds had been drawn out, whether the drain had waxed or waned in the last quarter of an hour? the end was certain, and it would come when the two men arrived on the chester coach. then he would have to bestir himself. then he would have to resume the lead and play the man, give back hardness for hardness and scorn for scorn, and bear himself so in defeat that no man should pity him. and he knew that he could do it. he knew that when the time came his voice would be firm and his face would be granite, and that he would pronounce his own sentence and declare the bank closed with a high head. he knew that even in defeat he could so clothe himself with power that no man should browbeat him. but in the meantime he paid his debt to weakness, and sat brooding on the past, rather than preparing for the future; and time passed, the relentless hand moved round the clock. twice the clerk came in with his doom-bearing slips, and presently rodd appeared. but the cashier had nothing to say that the banker did not know. ovington took the paper and looked at the figures and at the total, but all he said was, "let me know when owen and jenkins come." "very good, sir." rodd lingered a moment as if he would gladly have added something, would have ventured, perhaps, some word of sympathy. but his courage failed him and he went out. nor when clement, half an hour afterwards, returned from his mission to garth did he give any sign. clement laid his hand on his shoulder and said a cheery word, but, getting no answer, or as good as none, he went through to his desk. a moment later his voice could be heard rallying a too conscious customer, greeting another with contemptuous good humor, bringing into the close, heated atmosphere of the bank, where men breathed heavily, snapped at one another, and shuffled their feet, a gust of freer brisker air. another half-hour passed. a clerk brought in a slip. the banker looked at it. no more than seven hundred pounds remained in the till. "very good," he said. "let me know when mr. owen and mr. jenkins come." and as the door closed behind the lad he fell back into his old posture of depression. there was nothing to be done. but five minutes later clement looked in, his face concerned. "sir charles woosenham is here," he said in a low voice. "he is asking for you." the banker roused himself. the call was not unexpected nor quite unwelcome. "show him in," he said; and he took up a pen and drew a sheet of paper towards him that he might appear to be employing himself. sir charles came in, tall, stooping a little, his curly-brimmed hat in his hand; the dignified bearing with which he was wont to fence himself against the roughness of the outer world a little less noticeable than usual. he was a gentleman, and he did not like his errand. ovington rose. "good morning, sir charles," he said, "you wanted to see me? i am unfortunately busy this morning, but i can give you ten minutes. what is it, may i ask?" he pushed a chair toward his visitor. but woosenham would not sit down. if the man was down he hated to--but, there, he had come to do it. "i am sure it is all right, mr. ovington," he said awkwardly, "but i am concerned about the--about the railway money, in fact. the sum is large, and--and--" stammering a little--"but i think you will understand my position?" the banker smiled. "you wish to know if it's safe?" he said. "well, yes--precisely," with relief. "you'll forgive me, i am sure. but people are talking." "they are doing more," ovington answered austerely--he no longer smiled. "they are doing their best to ruin me, sir charles, and to plunge themselves into loss. but i need not go into that. you are anxious about the railroad money? very good." he rang the bell and the clerk came in. "go to the strong-room," the banker said, taking some keys from the table, "with mr. clement, and bring me the box with the railway trust." "i am sorry," sir charles said, when they were alone, "to trouble you at this time, but----" ovington stopped him. "you are perfectly in order," he said. "indeed, i am glad you have come. the box will be here in a minute." clement brought it in, and ovington took another key and unlocked it. "it is all here," he explained, "except the small sum already expended in preliminary costs--the sum passed, as you will remember, at the last meeting of the board. here it is." he took a paper which lay on the top of the contents of the box. "except four hundred and ten pounds, ten shillings. the rest is invested in treasury bills until required. the bills are here, and clement will check them with you, sir charles, while i finish this letter. we have, of course, treated this as a trust fund, and i think that the better course will be for you to affix your seal to the box when you have verified the contents." he turned to his letter, though it may be doubted whether he knew what he was writing, while sir charles and clement went through the box, verified the securities, and finally sealed the box. that done, woosenham would have offered fresh apologies, but the banker waved them aside and bowed him out, directing clement to see him to the door. that done, left alone once more, he sat thinking. the incident had roused him and he felt the better for it. he had been able to assert himself and he had confirmed in good will a man who might yet be of use to him. but he was not left alone very long. sir charles had not been gone five minutes before rodd thrust a pale face in at the door, and in an agitated whisper informed him that owen and jenkins were coming down the high street. a scout whom the cashier had sent out had seen them and run ahead with the news. "they'll be here in two minutes, sir," rodd added in a tone which betrayed his dismay. "what am i to do? will you see them, sir?" "certainly," ovington answered. "show them in as soon as they arrive." he spoke firmly, and made a brave show in rodd's eyes. but he knew that up to this moment he had retained a grain of hope, a feeling, vague and baseless, that something might yet happen, something might yet occur at the last moment to save the bank. well, it had not, and he must steel himself to face the worst. the crisis had come and he must meet it like a man. he rose from his chair and stood waiting, a little paler than usual, but composed and master of himself. he heard the disturbance that the arrival of the two men caused in the bank. some one spoke in a harsh and peremptory tone, and something like an altercation followed. raised voices reached him, and rodd's answer, civil and propitiatory, came, imperfectly, to his ear. the peremptory voice rose anew, louder than before, and the banker's face grew hard as he listened. did they think to browbeat him? did they think to bully him? if so, he would soon--but they were coming. he caught the sound of the counter as rodd raised it for the visitors to pass, and the advance of feet, slowly moving across the floor. he fixed his eyes on the door, all the manhood in him called up to meet the occasion. the door was thrown open, widely open, but for a moment the banker could not see who stood in the shadow of the doorway. two men, certainly, and rodd at their elbow, hovering behind them; and they must be owen and jenkins, though rodd, to be sure, should have had the sense to send in one at a time. then it broke upon the banker that they were not owen and jenkins. they were bigger men, differently dressed, of another class; and he stared. for the taller of the two, advancing slowly on the other's arm, and feeling his way with his stick, was squire griffin, and his companion was no other than sir charles, mysteriously come back again. prepared for that which he had foreseen, ovington was unprepared for this, and the old man, still feeling on his unguarded side with his stick, was the first to speak. "give me a chair," he grunted. "is he here, woosenham?" "yes," woosenham said, "mr. ovington is here." "then let me sit down." and as sir charles let him down with care into the chair which the astonished banker hastened to push forward, "umph!" he muttered, as he settled himself and uncovered his head. "tell my man"--this to rodd--"to bring in that stuff when i send for it. do you hear? you there? tell him to bring it in when i bid him." then he turned himself to the banker, who all this time had not found a word to say, and indeed had not a notion what was coming. he could only suppose that the squire had somehow revived woosenham's fears, in which case he should certainly, squire or no squire, hear some home truths. "you're surprised to see me?" the old man said. "well, i am, mr. griffin. yes." "ay," drily. "well, i am surprised myself, if it comes to that. i didn't think to be ever in this room again. but here i am, none the less. and come on business." the banker's eyes grew hard. "if it is about the railroad moneys," he said, "and sir charles is not satisfied----" "it's none of his business. naught to do with the railroad," the squire answered. then sharply, "where's my nephew? is he here?" "no, he is not at the bank to-day." "no? well, he never should ha' been! and so i told him and told you. but you would both have your own way, and you know what's come of it. hallo!" breaking off suddenly, and turning his head, for his hearing was still good. "what's that? ain't we alone?" "one moment," ovington said. rodd had tapped at the door and put in his head. the cashier looked at the banker, over the visitors' heads. "mr. owen and mr. jenkins are here," he said in a low tone. "they wish to see you. i said you were engaged, sir, but----" his face made the rest of the sentence clear. ovington reddened, but retained his presence of mind. "they can see me in ten minutes," he said, coldly. "tell them so." but rodd only came a little farther into the room. "i am afraid," he said, dropping his voice, "they won't wait, sir. they are----" "wait?" the word came from the squire. he shot it out so suddenly that the cashier started. "wait? why, hang their infernal impudence," wrathfully, "do they think their business must come before everybody's? jenkins? is that little jenkins--tom jenkins of the hollies?" "yes, sir." "then d--n his impudence!" the old man burst forth again in a voice that must have wellnigh reached the street. "little tom jenkins, whose grandfather was my foot-boy, coming and interrupting my business! god bless my soul and body, the world is turned upside-down nowadays. fine times we live in! little--but, hark you, sirrah, d'you go and tell him to go to the devil! and shut the door, man! shut the door!" "tell them i will see them in ten minutes," said the banker. but the old man was still unappeased. "that's what we're coming to, is it?" he fumed. "confound their impudence," wiping his brow, "and they've put me out, too! i dunno where i was. is the door closed? oh, 'bout my nephew! i didn't wish it, i've said that, and i've said it often, but he's in. he's in with you, banker, and he's lugged me in! for, loth as i am to see him in it, i'm still lother that any one o' my name or my blood should be pointed at as the man that's lost the countryside their money! trade's bad, out of its place. but trade that fails at other folks' cost and ruins a sight of people who, true or false, will say they've been swindled----" "stop!" the banker could bear it no longer, and he stepped forward, his face pale. "no one has swindled here! no one has been robbed of his money. no one--if it will relieve your feelings to know it, mr. griffin will lose by the bank in the end. i shall pay all demands within a few weeks at most." "can you pay 'em all to-day?" asked the squire, at his driest. "it may be that i cannot. but every man to whom the bank owes a penny will receive twenty shillings in the pound and interest, within a few weeks--or months." "and who will be the loser, then, if the bank closes? who'll lose, man?" "the bank. no one else." "but you can't pay 'em to-day, banker?" "that may be." "how much will clear you? to pay 'em all down on the nail," truculently, "and tell 'em all to go and be hanged? eh? how much do you need for that?" ovington opened his mouth, but for a moment, overpowered by the emotions that set his temples throbbing, he could not speak. he stared at the gaunt, stooping figure in the chair--the stooping figure in the shabby old riding-coat with the huge plated buttons that had weathered a dozen winters--and though hope sprang up in him, he doubted. the man might be playing with him. or, he might not mean what he seemed to mean. there might be some mistake. at last, "five thousand pounds would pull us through," he said in a voice that sounded strange to himself, "as it turns out." "you'd better take ten," the squire answered. "there," fumbling in his inner pocket and extracting with effort a thick packet, "count five out of that. and there's five in gold that my man will bring in. d'you give me a note for ten thousand at six months--five per cent." "mr. griffin----" "there, no words!" testily. "it ain't for you i'm doing it, man. understand that! it ain't for you. it's for my name and my nephew, little as he deserves it! count it out, count it out, and give me back the balance, and let's be done with it." ovington hesitated, his heart full, his hands trembling. he was not himself. he looked at woosenham. "perhaps, sir charles," he said unsteadily, "will be good enough to check the amount with me!" "pshaw, man, if i didn't think you honest i shouldn't be here, whether or no. no such fool! i satisfied myself of that, you may be sure, before i came in. count it, yourself. and there! bid 'em bring in the gold." the banker rang the bell and gave the order. he counted the notes, and by the time he had finished, the bags had been brought in. "you'll ha' to take that uncounted," the squire said, as he heard them set down on the floor, "as i took it myself." "my son will have seen to that," ovington replied. he was a little more like himself now. he sat down and wrote out the note, though his hand shook. "ay," the squire agreed, "i'm thinking he will have." and turning his head towards woosenham, "he's a rum chap, that," he continued, with a chuckle and speaking as if the banker were not present. "he gave me a talking-to--me! d'you know that he got to london in sixteen hours, in the night-time?" "did he, by jove! our friend at halston could hardly have beaten that." "and nothing staged either! railroads!" scornfully. "d'you think there's any need o' railroads when a man can do that? or that any railroad that's ever made will beat that? sixteen hours, by george, a hundred and fifty-one miles in the night-time!" sir charles, who had been an astonished spectator of the scene, gave a qualified assent, and by that time ovington was ready with his note. the squire pouched it with care, but cut short his thanks. "i've told you why i do it," he said gruffly. "and now i'm tired and i'll be getting home. give me your arm, woosenham. but as we pass i've a word to say to that little joker in the bank." he had his word, and a strange scene it was. the two great men stood within the counter, the old man bending his hawk-like face and sightless eyes on the quailing group beyond it, while the clerks looked on, half in awe and half in amusement. "fools!" said the squire in his harshest tone. "fools, all of ye! cutting your own throats and tearing the bottom out of your own money-bags! that's what ye be doing! and you, tom jenkins, and you, owen, that should know better, first among 'em! you haven't the sense to see a yard before you, but elbow one another into the ditch like a pair of blind horses! you deserve to be ruined, every man of you, and it's no fault o' yourn that you're not! business men? you call yourselves business men, and run on a bank as if all the money was kept in a box under the counter ready to pay you! go home! go home!" poking at them with his stick. "and thank god the banker has more sense than you, and a sight more money than your tuppenny ha'penny accounts run to! damme, if i were master here, if one single one o' you should cross my door again! but there, take me out, woosenham; take me out! pack o' fools! pack o' dumb fools, they are!" the two marched out with that, but the squire's words ran up and down the town like wild-fire. what he had said and how he had said it, and the figure little tom jenkins of the hollies had cut, was known as far as the castle foregate before the old man had well set his foot on the step of his carriage. the crowd standing about sir charles's four bays in the market place and respectfully gazing on the postillions' yellow jackets had it within two minutes. within four it was known at the gullet that the old squire was supporting the bank, and had given welsh owen such a talking-to as never was. within ten, the news was being bandied up and down the long yard at the lion, where they stabled a hundred horses, and was known even to the charwomen who, on their knees, were scrubbing the floors of the assembly rooms that looked down on the yard. dean's, at which a persistent and provoking run had been prosecuted since morning, got it among the first; and mr. dean, testy and snappish enough before, became for the rest of the day a terror and a thunder-cloud to the junior clerks. nay, the news soon passed beyond aldersbury, for the three o'clock up-coach swept it away and dropped it with various parcels and hampers at every stage between the falcon at heygate and wolverhampton. not a turn-pike man but heard it and spread it, and at the cock at wellington they gave it to the down-coach, which carried it back to aldersbury. owen, it was known, had drawn his money. but jenkins had thought better of it. he had gone out of the bank with his cheque in his hand, and had torn it up _coram public_ in the roadway; and from that moment the run, its force already exhausted, had ceased. half an hour later he would have been held a fool who looked twice at an ovington note, or distrusted a bank into which, rumor had it, gold had been carried by the sackful. had not the bank of england sent down a special messenger bearing unstinted credit? and had not the old squire of garth, the closest, stingiest, shrewdest man in the county, paid in thirty, forty, fifty thousand pounds and declared that he would sell every acre before the bank should fail? before night a dozen men were considering ruefully the thing that they had done or pondering how they might, with the least loss of dignity, undo it. before morning twice as many wives had told their husbands what they thought of them, and reminded them that they had always said how it would be--only they were never listened to! at the gullet in the shut off the market place, where the tap never ceased running that evening, and half of the trade of the town pressed in to eat liver and bacon, there was no longer any talk of boulogne. all the talk ran the other way. the drawers of the day were the butts of the evening, and were bantered and teased unmercifully. their friends would not be in their shoes for a trifle--not they! they had cooked their goose with a vengeance--no more golden eggs for them! and very noticeable was it that whenever the banker's name came up, voices dropped and heads came together. his luck, his power, his resources were discussed with awe and in whispers. there were not a few thoughtful faces at the board, and here and there were appetites that failed, though the suppers served in the dingy low-ceiled room at the gullet, dark even at noon-day, were famous for their savoriness. * * * * * very different was the scene inside the bank. at the counter, indeed, discipline failed the moment the door fell to behind the last customer. the clerks sprang to their feet, cheered, danced a dance of triumph, struck a hundred attitudes of scorn and defiance. they cracked silly jokes, and flung paper darts at the public side; they repaid by every kind of monkey trick the alarms and exertions from which they had suffered during three days. they roared, "oh, dear, what can the matter be!" in tones of derision that reached the street. they challenged the public to come on--to come on and be hanged! they ceased to make a noise only when breath failed them. but in the parlor, whither clement, followed after a moment's hesitation by rodd, had hastened to join and to congratulate his father, there was nothing of this. the danger had been too pressing, the margin of safety too narrow to admit of loud rejoicing. the three met like ship-wrecked mariners drawn more closely together by the ordeal through which they had passed, like men still shaken by the buffeting of the waves. they were quiet, as men amazed to find themselves alive. the banker, in particular, sat sunk in his chair, overcome as much by the scene through which he had passed as by a relief too deep for words. for he knew that it was by no art of his own, and through no resources of his own that he survived, and his usual self-confidence, and with it his aplomb, had deserted him. in a room vibrating with emotion they gazed at one another in thankful silence, and it was only after a long interval that the older man let his thoughts appear. then "thank god!" he said unsteadily, "and you, clement! god bless you! if we owe this to any one we owe it to you, my boy! if you had not been beside me, god knows what i might not have done!" "pooh, pooh, sir," clement said; yet he did but disguise deep feeling under a mask of lightness. "you don't do yourself justice. and for the matter of that, if we have to thank any one it is rodd, here." he clapped the cashier on the shoulder with an intimacy that brought a spark to rodd's eyes. "he's not only stuck to it like a man, but if he had not paid in his four hundred and fifty----" "no, no, sir, we weren't drawn down to that--quite." "we were mighty near it, my lad. and easily might have been." "yes," said the banker; "we shall not forget it, rodd. but, after all," with a faint smile, "it's bourdillon we have to thank." and he explained the motives which, on the surface at least, had moved the squire to intervene. "if i had not taken bourdillon in when i did----" "just so," clement assented drily. "and if bourdillon had not----" "umph! yes. but--where is he? do you know?" "i don't. he may be at his rooms, or he may have ridden out to his mother's. i'll look round presently, and if he is not in town i'll go out and tell him the news." "you didn't quarrel?" clement shrugged his shoulders. "not more than we can make up," he said lightly, "if it is to his interest." the banker moved uneasily in his chair. "what is to be done about him?" he asked. "i think, sir, that that's for the squire. let us leave it to him. it's his business. and now--come! has any one told betty!" the banker rose, conscience-stricken. "no, poor girl, and she must be anxious. i quite forgot," he said. "unless rodd has," clement replied, with a queer look at his father. for rodd had vanished while they were talking of arthur, whom it was noteworthy that neither of them now called by his christian name. "well go and tell her," said ovington, reverting to his everyday tone. and he turned briskly to the door which led into the house. he opened it, and was crossing the hall, followed by clement, who was anxious to relieve his sister's mind, when both came to a sudden stand. the banker uttered an exclamation of astonishment--and so did betty. for rodd, he melted with extraordinary rapidity through a convenient door, while clement, the only one of the four who was not taken completely by surprise, laughed softly. "betty!" her father cried sternly. "what is the meaning of this?" "well, i thought--you would know," said betty, blushing furiously. "i think it's pretty plain." then, throwing her arms round her father's neck, "oh, father, i'm so glad, i'm so glad, i'm so glad!" "but that's an odd way of showing it, my dear." "oh, he quite understands. in fact"--still hiding her face--"we've come to an understanding, father. and we want you"--half laughing and half crying--"to witness it." "i'm afraid i did witness it," gravely. "but you're not going to be angry? not to-day? not to-day, father." and in a small voice, "he stood by you. you know how he stood by you. and you said you'd never forget it." "but i didn't say that i should give him my daughter." "no, father; she gave herself." "well, there!" he freed himself from her. "that's enough now, girl. we'll talk about it another time. but i'm not pleased, betty." "no?" said betty, gaily, but dabbing her eyes at the same time. "he said that. he said that you would not be pleased. he was dreadfully afraid of you. and i said you wouldn't be pleased, too. but----" "eh?" "i said you'd come to it, father, by and by. in good time." "well, i'm----" but what the banker was, was lost in the peal of laughter that clement could no longer restrain. chapter xli arthur, after he had dropped from the post-chaise that morning, did not at once move away. he stood on the crown of the east bridge, looking down the river, and the turmoil of his feelings was such as for a time to render thought of the future impossible, and even to hold despair at bay. the certainty that his plan would have succeeded if it had not been thwarted by the very persons who would have profited by it, and the knowledge that but for their scruples all that he had at stake in the bank would have been saved--this certainty and this knowledge, with the fact that while they left him to bear the obloquy they had denied him the prize, so maddened him that for a full minute he stood, grasping the stone balustrade of the bridge, and whispering curses at the current that flowed smoothly below. the sunshine and the fair scene did but mock him. the green meadows, and the winding river, and the crescent of stately buildings, spire-crowned, that, curving with the stream, looked down upon it from the site of the ancient walls, did but deride his misery. for, how many a time had he stood on that spot and looked on that scene in days when he had been happy and carefree, his future as sunny as the landscape before him! and now--oh, the cowards! the cowards, who had not had the courage even to pick up the fruit which his daring had shaken from the bough. ay, his daring and his enterprise! for what else was it? what had he done, after all, at which they need made mouths? it had been but a loan he had taken, the use for a few weeks of money which was useless where it lay, and of which not a penny would be lost! and again he cursed the weakness of those who had rendered futile all that he, the bolder spirit, had done, who had consigned themselves and him to failure and to beggary. he had bought their safety at his own cost, and they had declined to be saved. he shook with rage, with impotent rage, as he thought of it. presently a man, passing over the bridge, looked curiously at him, paused and went on again, and the incident recalled him to himself. he remembered that he was in a place where all knew him, where his movements and his looks would be observed, where every second person who saw him would wonder why he was not at the bank. he must be going. he composed his face and walked on. but whither? the question smote him with a strange and chilly sense of loneliness. whither? to the bank certainly, if he had courage, where the battle was even now joined. he might fling himself into the fray, play his part as if nothing had happened, smile with the best, ignore what he had done and, if challenged, face it down. and there had been a time when he could have done this. there had been a time, when clement had first alighted on him in town, when he had decided with himself to play that rôle, and had believed that he could carry it off with a smiling face. and now, now, as then, he maintained that he had done nothing that the end did not justify, since the means could harm no one. but at that time he had believed that he could count on the complicity of others, he had believed that they would at least accept the thing that he had done and throw in their lot with his, and the failure of that belief, brag as he might, affected him. it had sapped his faith in his own standards. the view clement had taken had slowly but surely eclipsed his view, until now, when he must face the bank with a smile, he could not muster up the smile. he began to see that he had committed not a crime, but a blunder. he had been found out! he walked more and more slowly, and when he came, some eighty yards from the bridge and at the foot of the cop, to a lane on his left which led by an obscure shortcut to his rooms, he turned into it. he did not tell himself that he was not going to the bank. he told himself that he must change his clothes, and wash, and eat something before he could face people. that was all. he reached his lodgings, beneath the shadow of an old tower that looked over the meadows to the river, without encountering any one. he even stole upstairs, unseen by his landlady, and found the fire alight in his sitting-room, and some part of a meal laid ready on the table. he washed his hands and ate and drank, but instinctively, as he did so, he hushed his movements and trod softly. when he had finished his meal he stood for a moment, his eyes on the door, hesitating. should he or should he not go to the bank? he knew that he ought to go. but the wear and tear of three days of labor and excitement, during which he had hardly slept as many hours, had lowered his vitality and sapped his will, and the effort required was now too much for him. with a sigh of relief he threw up the sponge, he owned himself beaten. he sank into a chair and, moody and inert, he sat gazing at the fire. he was very weary, and presently his eyes closed, and he slept. two hours later his landlady discovered him, and the cry which she uttered in her astonishment awoke him. "mercy on us!" she exclaimed. "you here, sir! and i never heard a sound, and no notion you were come! but i was expecting you, mr. bourdillon. 'he won't be long,' i says to myself, 'now that that plaguy bank's gone and closed--worse luck to it!" "closed, has it?" he said, dully. "ay, to be sure, this hour past." which of course was not true, but many things that were not true were being said in aldersbury that day. "and nothing else to be expected, i am told, though there's nobody blames you, sir. you can't put old heads on young shoulders, asking your pardon, sir, as i said to mrs. brown no more than an hour ago. it was her johnny told me--he came that way from school and stopped to look. such a sight of people on bride hill, he said, as he never saw in his life, 'cept on show day, and the shutters going up just as he came away." he did not doubt the story--he knew that there was no other end to be expected. "i am only just from london," he said, feeling that some explanation of his ignorance was necessary. "i had no sleep last night, mrs. bowles, and i sat down for a moment, and i suppose i fell asleep in my chair." "indeed, and no wonder. from london, to be sure! can i bring you anything up, sir?" "no, thank you, mrs. bowles. i shall have to go out presently, and until i go out, don't let me be disturbed. i'm not at home if any one calls. you understand?" "i understand, sir." and on the stairs, as she descended, a pile of plates and dishes in her arms, "poor young gentleman," she murmured, "it's done him no good. and some in my place would be thinking of their bill. but his people will see me paid. that's where the gentry come in--they're never the losers, whoever fails." for a few minutes after she had retired he dawdled about the room, staring through the window without seeing anything, revolving the news, and telling himself, but no longer with passion, that the game was played out. and gradually the idea of flight grew upon him, and the longing to be in some place where he could hide his head, where he might let himself go and pity himself unwatched. had his pockets been full he would have returned to london and lost himself in its crowds, and presently, he thought--for he still believed in himself--he would have shown the world what he could do. but he had spent his loose cash on the journey, he was almost without money, and instinct as well as necessity turned his thoughts towards his mother. the notion once accepted grew upon him, and he longed to be at the cottage. he felt that there he might be quiet, that there no one would watch him, and stealthily--on fire to be gone now that he had made up his mind--he sought for his hat and coat and let himself out of the house. there was no one in sight, and descending from the town wall by some steps, he crossed the meadows to the river. he passed the water by a ferry, and skirting the foot of the rising ground on the other side, he presently struck into the garthmyle road a little beyond the west bridge. he trudged along the road, his hat drawn down to his eyes, his shoulders humped, his gaze fixed doggedly on the road before him. he marched as men march who have had the worst of the battle, yet whom it would be unwise to pursue too closely. at first he walked rapidly, taking where he could a by-path, or a short-cut, and though the hills, rising from the plain before him, were fair to see on this fine winter day, as the sun began to decline and redden their slopes, he had no eye for them or for the few whom he met, the road-man, or the carter, who, plodding beside his load of turnips or manure, looked up and saluted him. but when he had left the town two or three miles behind he breathed more freely. he lessened his pace. presently he heard on the road behind him the clip-clop of a trotting horse, and not wishing to be recognized, he slipped into the mouth of a lane, and by and by he saw clement ovington ride by. he flung a vicious curse after him and, returning to the road, he went on more slowly, chewing the sour cud of reflection, until he came to the low sedgy tract where the squire had met with his misadventure, and where in earlier days the old man had many a time heard the bittern's note. he was in no hurry now, for he did not mean to reach the cottage until clement had left it, and he stood leaning against the old thorn tree, viewing the place and thinking bitterly of the then and the now. and presently a spark of hope was kindled in him. surely all was not lost--even now! the squire was angry--angry for the moment, and with reason. but could he maintain his anger against one who had saved his life at the risk of his own? could he refuse to pardon one, but for whom he would be already lying in his grave? with a quick uplifting of the spirit arthur conceived that the squire could not. no man could be so thankless, so unmindful of a benefit, so ungrateful. strange, that he had not thought of that before! strange--that under the pressure of difficulties he had let that claim slip from his mind. it had restored him to his uncle's favor once. why should it not restore him a second time? properly handled--and he thought that he could trust himself to handle it properly--it should avail him. let him once get speech of his uncle, and surely he could depend on his own dexterity for the rest. hope awoke in him, and confidence. he squared his shoulders, he threw back his head, he strode on, he became once more the jaunty, gallant, handsome young fellow, whom women's eyes were wont to follow as he passed through the streets. but, steady, not so fast. there was still room for management. he had no mind to meet clement, whom he hated for his interference, and he went a little out of the way, until he had seen him pass by on his return journey. then he went on. but it was now late, and the murmur of the river came up from shadowy depths, the squat tower of the church was beginning to blend with the dark sky, lights shone from the cottage doors, when he passed over the bridge. he hastened on through the dusk, opened the garden-gate, and saw his mother standing in the lighted doorway. she had missed clement, but had gathered from the servant who had seen him that arthur might be expected at any moment, and she had come to the door with a shawl about her head, that she might be on the look-out for him. poor mrs. bourdillon! she had passed a miserable day. she had her own--her private grounds for anxiety on arthur's account, and that anxiety had been strengthened by her last talk with josina. she was sure that something was wrong with him, and this had so weighed on her spirits and engrossed her thoughts, that the danger that menaced the bank and her little fortune had not at first disturbed her. but as the tale of village gossip grew, and the rumors of disaster became more insistent, she had been forced to listen, and her fears once aroused, she had not been slow to awake to her position. gradually arthur's absence and her misgivings on his account had taken the second place. the prospect of ruin, of losing her all and becoming dependent on the squire's niggard bounty, had closed her mind to other terrors. so at noon on this day, unable to bear her thoughts alone, she had walked across the fields and seen josina. but josina had not been able to reassure her. the girl had said as little as might be about arthur, and on the subject of the bank was herself so despondent that she had no comfort for another. the squire had gone to town--for the first time since he had been laid up--in company with sir charles, and josina fancied that it might be upon the bank business. but she hardly dared to hope that good could come of it, and mrs. bourdillon, who flattered herself that she knew the squire, had no hope. she had returned from garth more wretched than she had gone, and had she been a much wiser woman than she was, she would have found it hard to meet her son with tact. when she heard his footsteps on the road, "is it you?" she cried. and as he came forward into the light, "oh, arthur!" she wailed, "what have you brought us to? what have you done? and the times and times i've warned you! didn't i tell you that those ovingtons----" "well, come in now, mother," he said. he stooped and kissed her on the forehead. he was very patient with her--let it be said to his credit. "but, oh dear, dear!" she had lost control of herself and could not stay her complaints if she would. "you would have your way! and you see what has come of it! you would do it! and now--what am i to say to your uncle?" "you can leave him to me," arthur replied doggedly. "and for goodness' sake, mother, come in and shut the door. you don't want to talk to the village, i suppose? come in." he shepherded her into the parlor and closed the door on them. he was cold, and he went to the fire and stooped over it, warming his hands at the blaze. "but the bank?" "oh, the bank's gone," he said. she began to cry. "then, i don't know what's to become of us!" she sobbed. "it's everything we have to live upon! and you know it wasn't i signed the order to--to your uncle! i never did--it was you--wrote my name. and now--it has ruined us! ruined us!" his face grew darker. "if you wish to ruin us," he said, "at any rate if you wish to ruin me, you'll talk like that! as it is, you'll not lose your money, or only a part of it. the bank can pay everyone, and there'll be something over. a good deal, i fancy," putting the best face on it. "you'll get back the greater part of it." then, changing the subject abruptly, "what did clement ovington want?" "i don't--know," she sobbed. but already his influence was mastering her; already she was a little comforted. "he asked for you. i didn't see him--i could not bear it. i suppose he came to--to tell me about the bank." "well," ungraciously, "he might have spared himself the trouble." and under his breath he added a curse. "now let me have some tea, mother. i'm tired--dog tired. i had no sleep last night. and i want to see pugh before he goes. he must take a note for me--to garth." "i'm afraid the squire----" "oh, hang the squire! it's not to him," impatiently. "it's to josina, if you must know." she perked up a little at that--she had always some hope of josina; and the return to everyday life, the clatter of the tray as it was brought in, the act of giving him his tea and seeing that he had what he liked, the mere bustling about him, did more to restore her. the lighted room, the blazing fire, the cheerful board--in face of these things it was hard to believe in ruin, or to fancy that life would not be always as it had been. she began again to have faith in him. and he, whose natural bent it was to be sanguine, whose spirits had already rebounded from the worst, shared the feeling which he imparted. that she knew the worst was something; that, at any rate, was over, and confidently, he began to build his house again. "you won't lose," he said, casting back the locks from his forehead with the gesture peculiar to him. "or not more than a few hundreds at worst, mother. that will be all right. i'll see to that. and my uncle--you may leave him to me. he's been vexed with me before, and i've brought him round. oh, i know him. i've no doubt that i can manage him." "but josina?" timidly. "d'you know, she was terribly low, arthur--about something yesterday. she wouldn't tell me, but there was something. she didn't seem to want to talk about you." he winced, and for a moment his face fell. but he recovered himself, and, "oh, i'll soon put that right," he answered confidently. "i shall see her in the morning. she's a good soul, is josina. i can count on her. don't you fret, mother. you'll see it will all come right--with a little management." "well, i know you're very clever, arthur. but jos----" "jos is afraid of him, that's all." and laughing, "oh, i've an arrow in my quiver, yet, mother. we shall see. but i must see jos in the morning. is pugh there? i'll write to her now and ask her to meet me at the stile at ten o'clock. nothing like striking while the iron is hot." on the morrow he did not feel quite so confident. the sunshine and open weather of the day before had given place to rain and fog, and when, after crossing the plank-bridge at the foot of the garden, he took the field path which led to garth, mist hid the more distant hills, and even the limestone ridge which rose to her knees. the vale had ceased to be a vale, and he walked in a plain, sad and circumscribed, bounded by ghostly hedges, which in their turn melted into grey space. that the day should affect his spirits was natural, and that his position should appear less hopeful was natural, too, and he told himself so, and strove to rally his courage. he strode along, swinging his stick and swaggering, though there was no one to see him. and from time to time he whistled to prove that he was free from care. after all, the fact that it rained did not alter matters. wet or dry he had saved the squire's life, and a man's life was his first and last and greatest possession, and not least valued when near its end. he who saved it had a claim, and much--much must be forgiven him. then, too, he reminded himself that the old man was no longer the hard, immovable block that he had been. the loss of sight had weakened him; he had broken a good deal in the last few months. he could be cajoled, persuaded, made to see things, and surely, with josina's help, it would not be impossible to put such a color on the--the loan of the securities as might make it appear a trifle. courage! a little courage and all would be well yet. he was still hopeful when he saw josina's figure, muffled in a cloak and poke-bonnet, grow out of the mist before him. the girl was waiting for him on the farther side of the half-way stile, which had been their trysting place from childhood; and what slight doubt he had felt as to her willingness to help him died away. he whistled a little louder, and swung his stick more carelessly, and he spoke before he came up to her. "hallo, jos!" he cried cheerfully. "you're before me. but i knew that i could count on you, if i could count on any one. i only came from london last night, and"--his stick over his shoulder, and his head thrown back--"i knew the best thing i could do was to see you and get your help. why?" in spite of himself his voice fell a tone. "what's the matter?" "oh, arthur!" she said. that was all, but the two words completed what her look had begun. his eyes dropped. "how could you? how would you do it?" "why--why, surely you're not going to turn against me?" he exclaimed. "and he was blind! blind! and he trusted you. he trusted you, arthur." "the devil!" roughly--for how could he meet this save by bluster? "if we're going to talk like that--but you don't understand, jos. it was business, and you don't understand, i tell you. business, jos." "he does." two words only, but they rang a knell in his ears. they gripped him in the moment of his swagger, left him bare before her, a culprit, dumb. "he has felt it terribly! terribly," she continued. "he was blind, and you deceived him. whom can he trust now, arthur?" he strove to rally his confidence. he could not meet her gaze, but he tapped a rail of the stile with his stick. "oh, but that's nonsense!" he said. "nonsense! but, of course, if you are against me, if you are not going to help me----" "how can i help you? he will not hear your name." "i can tell you how--quite easily, if you will let me explain?" she shook her head. "but you can. if you are willing, that is. of course, if you are not----" "what can i do? he knows all." "you can remind him of what i did for him," he answered eagerly. "i saved his life. he would not be alive now but for me. you can tell him that. remind him of that, jos. tell him that sometime after dinner, when he is in a good humor. he owes his life to me, and that's not a small thing--is it? even he must see that he owes me something. what's a paltry thousand or two thousand? and i only borrowed them; he won't lose a penny by it--not a penny!" earnestly. "what's that in return for a man's life? he must know----" "he does know!" she cried; and the honest indignation in her eyes, the indignation that she could no longer restrain, scorched him. for this was too much, this was more than even she, gentle as she was, could bear. "he does know all--all, arthur!" she repeated severely. "that it was not you--not you, but clement, mr. ovington, who saved him! and fought for him--that night! oh, arthur, for shame! for shame! i did not think so meanly of you as this! i did not think that you would rob another----" "what do you mean?" he tried to bluster afresh, but the stick shook in his hand. "confound it, what do you mean?" "what i say," she answered firmly. "and it is no use to deny it, for my father knows it. he knows all. he has seen clement----" "clement, eh?" bitterly. "oh, it's clement now, is it?" he was white with rage and chagrin, furious at the failure of his last hope. "it's that way, is it? you have gone over to that prig, have you? and he's told you this?" "yes." "and you believe him?" "i do." "you believe him against me?" "yes," she said, "for it is the truth, arthur. i know that he would not tell me anything else." "and i? do you mean to say that i would?" she was silent. it was check and mate, the loss of his last piece, the close of the game--and he knew it. with all in his favor he had made one false move, then another and a graver one, and this was the end. he could not face it out. there was no more to be said, nothing more to be done, only shame and humiliation if he stayed. he flung a word of passionate incoherent abuse at her, and before she could reply he turned his back on her and strode away. sorrowfully jos watched him as he hurried along the path, cutting at the hedge with his stick, cursing his luck, cursing the trickery of others, cursing at last, perhaps, his own folly. she watched him until the ghostly hedges and the misty distances veiled him from sight. ten minutes later he burst in upon his mother at the cottage and demanded twenty pounds. "give it me, and let me go!" he cried. "do you hear? i must have it! if you don't give it me, i shall cut my throat!" scared by his manner, his haggard eyes, his look of misery, the poor woman did not even protest. she went upstairs and fetched the sum he asked for. he took it, kissed her with lips still damp with rain, and bidding her send his clothes as he should direct--he would write to her--he hurried out. chapter xlii "i wun't do it! i wun't do it!" the squire muttered stubbornly. "mud and blood'll never mix. shape the chip as you will, 'tis part of the block! girls' whimsies are women's aches, and they that's older must judge for them. she'd only repent of it when 'twas too late, and i've paid my debt and there's an end of it." from the hour of that scene at ovington's he had begun to recover. from that moment he began to wear a stiff upper lip and to give his orders in hard, sharp tones, as he had been wont to give them in days when he could see; as if, in truth, his irruption into the life of the town and his action at the bank had re-established him in his own eyes. those about him were quick to see the change--he had taken, said they, a new lease of life. "maybe, 'tis just a flicker," calamy observed cautiously; but even he had to admit that the flame burned higher for a time, and privately he advised the new man who filled thomas's place "to hop it when the master spoke," or he'd hop it to some purpose. the result was that there was a general quickening up in the old house. the master's hand was felt, and things moved to a livelier time. to some extent pride had to do with this, for the rumor of the squire's doings in aldersbury had flown far and wide and made him the talk of the county. he had saved the bank. he had averted ruin from hundreds. he had saved the country-side. he had paid in thirty, forty, fifty thousand pounds. naturally his people were proud of him. and doubtless the bold part he had played had given the old man a fillip; others had stood by, while he, blind as he was, had asserted himself, and acted, and rescued his neighbors from a great misfortune. but the stiffness he showed was not due to this only. it was assumed to protect himself. "i wun't do it! i wun't do it! it's not i' reason," he told himself over and over again; and in his own mind he fought a perpetual battle. on the one side contended the opinions of a lifetime and the prejudices of a caste, the beliefs in which he had been brought up, and a pride of birth that had come down from an earlier day; on the other, the girl's tremulous gratitude, her silence, the touch of her hand on his sleeve, the sound of her voice, the unceasing appeal of her presence. ay, and there were times when he was so hard put to it that he groaned aloud. no man was more of a law to himself, but at these times he fell back on the views of others. what would woosenham say of it? how would he hold up his hands? and chirbury--whose peerage he respected, since it was as old as his own family, if he thought little of the man? and uvedale and cludde? ay, and acherley, who, rotten fellow as he was, was still acherley of acherley? they had held the fort so stoutly in aldshire, they had repelled the moneyed upstarts so proudly, they had turned so cold a shoulder on manchester and birmingham! they had found in their peninsular hero, and in that little country churchyard where the maker of an empire lay resting after life's fever, so complete a justification for their own claims to leadership and to power! and no one had been more steadfast, more dogged, more hide-bound in their pride and exclusiveness than he. now, if he gave way, what would they say? what laughter would there not be from one end of the county to the other, what sneers, what talk of an old man's folly and an old man's weakness! for it was not even as if the man's father had been a peel or the like, a baring or a smith! a small country banker, a man just risen from the mud--not even a stranger from a distance, or a merchant prince from god knows where! oh, it was impossible. impossible! garth, that had been in the hands of gentlefolk, of armigeri from harry the eighth, to pass into the hands, into the blood of--no, it was impossible! all the world of aldshire would jeer at it, or be scandalized by it. "i wun't do it!" said the squire for the hundredth time. it was more particularly at the thought of acherley that he squirmed. he despised acherley, and to be despised by acherley--that was too much! "of course," said a small voice within him, "he would take the name of griffin, and in time----" "mud's mud," replied the squire silently. "you can't change it." "but he's honest," quoth the small voice. "so's calamy!" "he saved----" "and i ha' paid him! damme, i ha' paid him! ha' done!" and then, "it's that blow on the head has moithered me!" things went on in this way for a month, the squire renewing his vigor and beginning to tramp his fields again, or with the new man at his bridle-hand to ride the old grey from point to point, learning what the men were doing, inquiring after gaps, and following the manure to the clover-ley, where the oats and barley would presently go in. snow lay on the upper hills, grizzling the brown sheets of bracken, and dappling the green velvet of the sloping ling; the valley below was frost-bound. but the squire had a fire within him, a fire of warring elements, that kept his blood running. he was very sharp with the men and scolded old fewtrell. as for thomas's successor, the lad learned to go warily and kept his tongue between his teeth. the girl had never complained; it seemed as if that which he had done for her had silenced her, as if, she, too, had taken it for payment. but one day she was not at table, and miss peacock cut up his meat. she did not do it to his mind--no hand but jos's could do it to his mind--and he was querulous and dissatisfied. "i'm sure it's small enough, sir," miss peacock answered, feebly defending herself. "you said you liked it small, mr. griffin." "i never said i liked mince-meat! where is the girl? what ails her?" "it's nothing, sir. she's been looking a little peaky the last week or two. that's all. and to-day----" "why didn't you tell me?" "it's only a headache, sir. she'll be well enough when the spring comes. josina was always nesh--like her mother." the squire huddled his spoon and fork together, and pushed his plate away, muttering something about d--d sausage meat. her mother? how old had her mother been when she--he could not remember, but certainly a mere child beside him. twenty-five or so, he thought. and she was nesh, was she? he sat, shaving his chin with unsteady fingers, eating nothing; and when calamy, hovering over his plate, hinted that he had not finished, he blew the butler out of the room with a blast of language that made miss peacock, hardened as she was, hold up her hands. and though jos was at breakfast next morning, and answered his grumpy questions as if nothing were amiss, a little seed of fear had been sown in the squire's mind that grew as fast as jonah's gourd, and before noon threatened to shut out the sun. a silk purse could not be made out of a sow's ear. but a good leather purse, that might pass in time--the lad was stout and honest. and his father, mud, certainly, and mud of the pretentious kind that the squire hated: mud that affected by the aid of gilding to pass for fine clay. but honest? well, in his own way, perhaps: it remained to be seen. and times were changing, changing for the worse; but he could not deny that they were changing. so gradually, slowly, unwelcome at the best, there grew up in the old man's mind the idea of surrender. if the money were paid back, say in three months, say in six months--well, he would think of it. he would begin to think of it. he would begin to think of it as a thing possible some day, at some very distant date--if there were more peakiness. the girl did not whine, did not torment him, did not complain; and he thought the more of her for that. but if she ailed, then, failing her, there was no one to come after him at garth, no one of his blood to follow him--except that bourdillon whelp, and by g--d he should not have an acre or a rood of it, or a pound of it. never! never! failing her? the squire felt the air turn cold, and he hung, shivering, over the fire. what if, while he sought to preserve the purity of the old blood, the old traditions, he cut the thread, and the name of griffin passed out of remembrance, as in his long life he had known so many, many old names pass away--pass into limbo? ay, into limbo. he saw his own funeral procession crawl--a long black snake--down the winding drive, here half-hidden by the sunken banks, there creeping forth again into the light. he saw the bleak sunshine fall on the pall that draped the farm-wagon, and heard the slow heavy note of the garthmyle bell, and the scuffling of innumerable feet that alone broke the solemn silence. if she were not there at window or door to see it go, or in the old curtained pew to await its coming--if the church vault closed on him, the last of his race and blood! he sat long, thinking of this. and one day, nearly two months after his visit to the bank--in the meantime he had been twice into town at the bench--he was riding on the land with fewtrell at his stirrup, when the bailiff told him that there was a stranger in the field. "which field?" he asked. "where they ha' just lifted the turnips," the man said. "oh!" said the squire. "who is it? what's he doing there?" "well, i'm thinking," said fewtrell, "as it's the young gent i've seen here more 'n once. same as asked me one day why we didn't drill 'em in wider." "the devil, he did!" the squire exclaimed, kicking up the old mare, who was leaning over sleepily. "called 'em radicals," said fewtrell, grinning. "them there radical swedes," says he. "dunno what he meant. 'if you plant radicals, best plant 'em radical fashion,' says he." "devil he did!" repeated the squire. "said that, did he?" "ay, to be sure. he used to come across with a gun field-way from acherley; oh, as much as once a week i'd see him. and he'd know every crop as we put in, a'most same as i did. very spry he was about it, i'll say that." "is it the banker's son?" asked the squire on a sudden suspicion. "well, i think he be," fewtrell answered, shading his eyes. "he be going up to the house now." "well, you can take me in," to the groom. "i'll go by the gap." the groom demurred timidly; the grey might leap at the gap. but the squire was obstinate, and the old mare, who knew he was blind as well as any man upon the place, and knew, too, when she could indulge in a frolic and when not, bore, him out delicately, stepping over the thorn-stubs as if she walked on eggs. he was at the door in the act of dismounting when clement appeared. "d'you want me?" the old man asked bluntly.' "if you please, sir," clement answered. he had walked all the way from aldersbury, having much to think of and one question which lay heavy on his mind. that was--how would it be with him when he walked back? "then come in." and feeling for the door-post with his hand, the squire entered the house and turned with the certainty of long practice into the dining-room. he walked to the table as firmly as if he could see, and touching it with one hand he drew up with the other his chair. he sat down. "you'd best sit," he said grudgingly. "i can't see, but you can. find a chair." "my father has sent me with the money," clement explained. "i have a cheque here and the necessary papers. he would have come himself, sir, to renew his thanks for aid as timely as it was generous and--and necessary. but"--clement boggled a little over the considered phrase, he was nervous and his voice betrayed it--"he thought--i was to say----" "it's all there?" "yes, sir, principal and interest." "have you drawn a receipt?" "yes, sir, i've brought one with me. but if you would prefer that it should be paid to mr. welsh--my father thought that that might be so?" "umph! all there, is it?" "yes, sir." the old man did not speak for awhile. he seemed to be at a loss, and clement, who had other and more serious business on his mind, and had his own reasons for feeling ill at ease, waited anxiously. he was desperately afraid of making a false step. suddenly, "who was your grandfather?" the squire asked. clement started and colored. "he had the same name as my father," he said. "he was a clothier in aldersbury." "ay, i mind him. i mind him now. and his father, young man?" "his name was clement," and foreseeing the next question, "he was a yeoman at easthope." "and his father?" clement reddened painfully. he saw only too well to what these questions were tending. "i don't know, sir," he said. "and you set up--you set up," said the squire, leaning forward and speaking very slowly, "to marry my heiress?" "no, sir, your daughter!" clement said, his face burning. "if she'd not a penny----" "pho! don't tell me!" the old man growled, and to clement's surprise--whose ears were tingling--he relapsed into silence again. it was a silence very ominous. it seemed to clement that no silence had ever been so oppressive, that no clock had ever ticked so loudly as the tall clock that stood between the windows behind him. "you know," said the old man at last, "you're a d--d impudent fellow. you've no birth, you're nobody, and i don't know that you've much money. you've gone behind my back and you've stole my girl. you've stole her! my father'd ha' shot you, and good reason, before he'd ha' let it come to this. but it's part my fault," with a sigh. "she've seen naught of the world and don't know the difference between silk and homespun or what's fitting for her. you're nobody, and you've naught to offer--i'm plain, young gentleman, and it's better--but i believe you're a man, and i believe you're honest." "and i love her!" clement said softly, his eyes shining. "ay," drily, "and maybe it would be better for her if her father didn't! but there it is. there it is. that's all that's to be said for you." he sat silent, looking straight before him with his sightless eyes, his hands on the knob of his stick. "and i dunno as i make much of that--'tis easy for a man to love a maid--but the misfortune is that she thinks she loves you. well, i'm burying things as have been much to me all my life, things i never thought to lose or part from while i lived. i'm burying them deep, and god knows i may regret it sorely. but you may go to her. she's somewhere about the place. but"--arresting clement's exclamation as he rose to his feet--"you'll ha' to wait. you'll ha' to wait till i say the word, and maybe 'tis all moonshine, and she'll see it is. maybe 'tis all a girl's whimsy, and when she knows more of you she'll find it out." "god bless you, sir!" clement cried. "i'll wait. i'm not afraid. i've no fear of that. and if i can make myself worthy of her----" "you'll never do that," said the old man sternly, as he bent lower over his stick. he heard the door close and he knew that clement had gone--gone on wings, gone on feet lighter than thistle-down, gone, young and strong, his pulses leaping, to his love. the squire was too old for tears, but his lip trembled. it was not alone the sacrifice that he had made that moved him--the sacrifice of his pride, his prejudices, his traditions. it was not only the immolation of his own will, his hopes and plans--his cherished plans for her. but he was giving her up. he was resigning that of which he had only just learned the worth, that on which in his blindness he depended every hour, that which made up all of youth and brightness and cheerfulness that was left to him between this and the end. he had sent the man to her, and they would think no more of him. and in doing this he had belied every belief in which he had been brought up and the faith which he had inherited from an earlier day--and maybe he had been a fool! but by and by it appeared that they had not forgotten him, or one, at any rate, had not. he had not been alone five minutes before the door opened behind him, and closed again, and he felt josina's arms round his neck, her head on his breast. "oh, father, i know, i know," she cried. "i know what you have done for me! and i shall never forget it--never! and he is good. oh, father, indeed, indeed, he is good!" "there, there," he said, stroking her head. "go back to him. but, mind you," hurriedly, "i don't promise anything yet. in a year, maybe, i'll talk about it." the end. none