29499	----	generously made available by The Internet Archive/American Libraries.) THE PAPER MONEYS OF EUROPE THEIR MORAL AND ECONOMIC SIGNIFICANCE By FRANCIS W. HIRST BOSTON AND NEW YORK HOUGHTON MIFFLIN COMPANY The Riverside Press Cambridge 1922 COPYRIGHT, 1922, BY THE REGENTS OF THE UNIVERSITY OF CALIFORNIA ALL RIGHTS RESERVED The Riverside Press CAMBRIDGE · MASSACHUSETTS PRINTED IN THE U.S.A. BARBARA WEINSTOCK LECTURES ON THE MORALS OF TRADE This series will contain essays by representative scholars and men of affairs dealing with the various phases of the moral law in its bearing on business life under the new economic order, first delivered at the University of California on the Weinstock foundation. THE PAPER MONEYS OF EUROPE THEIR MORAL AND ECONOMIC SIGNIFICANCE No more severe reflection could be passed upon the moral and political capacity of the human species than this: Five thousand years after the invention of _writing_, three thousand after the invention of _money_, and (nearly) five hundred since the invention of _printing_, governments all over the world are employing the third invention for the purpose of debasing the second; thereby robbing millions of innocent individuals of their property on a scale so extensive that previous public confiscations of private property through the adulteration of money--in ancient Rome, in Ireland under James the Second, in Prussia during the Seven Years' War, in the American colonies and the United States, in Portugal, in Greece, in various republics of Central and South America, even the assignats of the French Revolution--seem pigmy frauds in comparison with the present vast inundation of counterfeit paper money. In these times, when so much attention is given to what I may call the prehistoric history of mankind, it would ill become me, a mere adventurer in anthropology, to discuss the origin of money or to attempt an explanation of the curious fact that the art of coining money was invented and perfected a thousand years before the art of printing. The coins struck by the best cities of ancient Greece are a model and a reproach to our modern mints; and being for the most part of good silver, they fulfilled the two main functions of currency--as a measure of value and a medium of exchange. Silver was well adapted for the purposes of currency by its ductility, durability, divisibility, portability, and value. Its value depended on three things. In the first place, it was scarce; in the second, it was much in demand for the arts and manufactures; and in the third place, its intrinsic value was increased and stabilized by the needs and demands of the mints. Gold had similar qualifications, but it was too scarce and too precious until the nineteenth century, in the course of which (for reasons which I need not enter upon here), most of the great commercial nations adopted a gold standard. Copper possessed in a less degree the qualifications of gold and silver, but it was the first metal to be coined into money in ancient Rome. The Roman _as_ or _pondo_ weighed a Roman pound of _good_ copper, therefore possessed the two principal attributes of good money, a definite weight and a definite fineness. It was divided like our troy pound into twelve ounces of good copper. The English Troyes or Troy pound was first used in the English mint in the time of Henry the Eighth. Edward the First's pound sterling was a Tower pound of silver of a definite fineness. Charlemagne's livre was a Troyes[1] pound of silver of definite fineness. The old English Scotch pence or pennies contained originally a real pennyweight of silver, one twentieth of an ounce and one two hundred and fortieth of a pound. The famous pre-war English sovereign, now demonetized and misrepresented by the depreciated paper pound, was itself also a weight; but the twenty shillings and two hundred and forty pence which exchanged for it were token coins depending for their value upon the gold sovereign. [1] "The Fair of Troyes in Champaign was at that time frequented by all the nations of Europe, and the weights and measures of so famous a market were generally known and esteemed." (Adam Smith, _Wealth of Nations_, Book I, chap, IV.) From the time of Charlemagne among the French, and from that of William the Conqueror among the English [wrote Adam Smith in 1776], the proportion between the pound, the shilling and the penny, seems to have been uniformly the same as at present, though the value of each has been very different; for in every country of the world, I believe, the avarice and injustice of princes and sovereign states, abusing the confidence of their subjects, have by degrees diminished the real quantity of metal which had been originally contained in their coins. The Roman as, in the latter ages of the republic, was reduced to the twenty-fourth part of its original value, and, instead of weighing a pound, came to weigh only half an ounce. The English pound and penny contain at present about a third only; the Scots pound and penny about a thirty-sixth; and the French pound and penny about a sixty-sixth part of their original value. By means of those operations, the princes and sovereign states which performed them were enabled, in appearance, to pay their debts and fulfil their engagements with a smaller quantity of silver than would otherwise have been requisite. It was indeed in appearance only; for their creditors were really defrauded of a part of what was due to them. All other debtors in the state were allowed the same privilege, and might pay with the same nominal sum of the new and debased coin whatever they had borrowed in the old. Such operations, therefore, have always proved favourable to the debtor, and ruinous to the creditor, and have sometimes produced a greater and more universal revolution in the fortunes of private persons, than could have been occasioned by a very great public calamity.[2] [2] _Wealth of Nations_, Book I, chap. IV. John Stuart Mill follows his master in exposing and denouncing what he calls this "least covert of all forms of knavery which consists in calling a shilling a pound." But the opinions of Mill, the saint of rationalism, deserve and demand citation as they bring us directly to our subject. He writes: 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 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 recognised 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 just 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.[3] [3] Mill, _Political Economy_, Book III, chap. VII. A few illustrations from the past may help us to a critical contemplation of the present monetary conditions on the continent of Europe, which constitute fraud and robbery on the most wholesale scale ever practised by governments (with the style and title of democracies!) upon the miserable victims, called citizens, and supposed to be endowed with the blessings of self-determination. Those who believe that war, if not a divine institution, is at least an inevitable feature of human society may plead in extenuation of this species of fraud that it is usually the last desperate resource of a government which has pledged all its taxes and credit for war or armaments. I remember reading in the Roman historian Sallust of a financial crisis which was ended by debts contracted in silver being paid off in copper--_argentum ære solutum est_. A few years before Adam Smith wrote his chapter on money, Frederick the Great, during the Seven Years' War, resorted to the Jew, Ephraim, who coined tin silver: Outside noble, inside slim, Outside Frederick, inside Ephraim. But Frederick, wiser and more honest than our European belligerents, made it his first care after the peace to restore an honest silver coinage. A lively example from English, or rather Irish, history is supplied by Macaulay and belongs to the year 1689. It is one of the incidents in James the Second's brief and luckless government of Ireland: It is remarkable that while the King [James II] was losing the confidence and good will of the Irish Commons by faintly defending against them, in one quarter, the institution of property, he was himself, in another quarter, attacking that institution with a violence, if possible more reckless than theirs. He soon found that no money came into his Exchequer. The cause was sufficiently obvious. Trade was at an end. Floating capital had been withdrawn in great masses from the island. Of the fixed capital much had been destroyed, and the rest was lying idle. Thousands of those Protestants who were the most industrious and intelligent part of the population had emigrated to England. Thousands had taken refuge in the places which still held out for William and Mary. Of the Roman Catholic peasantry, who were in the vigor of life, the majority had enlisted in the army or had joined gangs of plunderers. The poverty of the treasury was the necessary effect of the poverty of the country: public prosperity could be restored only by the restoration of private prosperity; and private prosperity could be restored only by years of peace and security. James was absurd enough to imagine that there was a more speedy and efficacious remedy. He could, he conceived, at once extricate himself from his financial difficulties by the simple process of calling a farthing a shilling. The right of coining was undoubtedly a flower of the prerogative; and, in his view, the right of coining included the right of debasing the coin. Pots, pans, knockers of doors, pieces of ordnance which had long been past use, were carried to the mint. In a short time lumps of base metal, nominally worth near a million sterling, intrinsically worth about a sixtieth part of that sum, were in circulation. A royal edict declared these pieces to be legal tender in all cases whatsoever. A mortgage for a thousand pounds was cleared off by a bag of counters made out of old kettles. The creditors who complained to the Court of Chancery were told by Fitton to take their money and be gone. But of all classes, the tradesmen of Dublin, who were generally Protestants, were the greatest losers. At first, of course, they raised their demands; but the magistrates of the city took on themselves to meet this heretical inclination by putting forth a tariff regulating prices. Any man who belonged to the caste now dominant might walk into a shop, lay on the counter a bit of brass worth threepence, and carry off goods to the value of half a guinea. Legal remedies were out of the question. Indeed the sufferers thought themselves happy if, by the sacrifice of their stock in trade, they could redeem their limbs and their lives. There was not a baker's shop in the city round which twenty or thirty soldiers were not constantly prowling. Some persons who refused the base money were arrested by troopers and carried before the Provost Marshal, who cursed them, swore at them, locked them up in dark cells, and, by threatening to hang them at their own doors, soon overcame their resistance. Of all the plagues of that time none made a deeper or a more lasting impression on the minds of the Protestants of Dublin than the plague of brass money. To the recollection of the confusion and misery which had been produced by James' coin must be in part ascribed the strenuous opposition which, thirty-five years later, large classes firmly attached to the House of Hanover, offered to the government of George the First in the affair of Woods' Patent.[4] [4] Macaulay, _History of England_, I, chap. XII. "The Affair of Woods' Patent" is celebrated in Swift's Drapier letters. But paper money offers far more extensive facilities to knavery than a metallic currency. In his _Essays on the Monetary History of the United States_,[5] Mr. Charles J. Bullock has described in sufficient detail the "carnival of fraud and corruption" which attended the paper money coined or rather printed by most of the American colonies in the century preceding the American Revolution. Thus, about the middle of the eighteenth century, the paper money of Massachusetts fell to an eighth of its original value. People were driven to barter, and one writer observed that "the morals of the people depreciate with the currency." Parties were divided into debtors and creditors, and a New England writer in 1749 noted: "The Debtor side has had the ascendant ever since anno 1741 to the almost utter ruin of the country."[6] To this writer belongs the credit of discerning, at a time when even Benjamin Franklin was in error, that "the repeated large emissions of Paper Money" were responsible for its depreciation. [5] Macmillan, 1900. [6] Douglass. "Not worth a Continental" is an expression which brings us to the next chapter in American experience of inconvertible paper currencies. The so-called Continental money was the means by which the Continental Congress and the individual colonies--too timid to tax--endeavored to finance the Revolutionary War. By 1781, a paper dollar was worth less than two cents in specie, and soon afterward it became practically worthless.[7] Robbery was legalized; rogues flourished; and their frauds were encouraged and protected by a government whose policy enabled debtors to pay their debts in valueless money. We hear of creditors running away from their debtors and being paid off "without mercy." Stories were told of creditors in Rhode Island leaping out of back windows to escape the attentions of their debtors.[8] In short, the law became an engine of oppression and destroyed the fortunes of thousands who had put their confidence in it. In the words of Breck, a friendly critic, "... the old debts were paid when the paper money was more than seventy to one ... widows, orphans and others were paid for money lent in specie with depreciated paper." [7] Bullock, _Monetary History of the United States_, chap. V. [8] _Ibid._, chap. V. In 1780 Congress actually adopted a plan to redeem its paper issues at one fortieth of their pretended or nominal value. The astonishing thing is that all this knavery was devised, or winked at, not only by low class politicians but by statesmen of renown. The maxim _salus populi suprema lex_ was relied upon not for the first or last time as a sufficient excuse for a crime far more pernicious than that of a private forger. But we have not yet realized, in our minds or in our penal codes, that public vices ought to be punished at least as vigorously as private crimes. That, even as a desperate last resort for financing war, a flood of paper money defeats its own object was conclusively proved a few years later during the French Revolution. The French assignats "have taken their place in history as the classical example of paper money made worthless by over-issue. After their final collapse in 1796, French finance reverted perforce to a metallic basis." So Mr. Hawtrey, a British Treasury official, who has given us recently a lucid and sufficiently detailed account of this extraordinary incident--extraordinary but no longer singular, for the same course with the same results has been pursued during and since the war of 1914-1918 by Russia and Poland, and in a greater or less degree by most of the European belligerents. The issue of French assignats began in 1789 because the assembly would not vote adequate taxation, and Necker, the minister of finance, was unable to borrow enough to cover the deficit. In the two years from 1789 to 1791, the public revenue was 470 millions, and the public expenditures, 1719 millions, of livres. The deficit was covered by assignats, or paper livres, bearing interest, in denominations varying from 1000 to 5 livres. Thus the assignats may be regarded as a floating debt currency. In November, 1791, the assignats were worth 52 per cent of their face value. In June, 1792, after the declaration of war on Austria, they rose to 57. After the victory of Valmy, in September, they rose to 72 and remained there till December. In January, 1793, the king was guillotined, and war was declared on England. By August, after violent fluctuations, the assignat had fallen to 15 per cent of its face value. Thereafter the laws enforcing the acceptance of assignats were strengthened. It became an offence to sell coin, or to differentiate between coin and assignats in any transaction, or to refuse payment in assignats, or to negotiate assignats at a discount. By a decree of the 5th of September the death penalty itself was imposed. Here was a forced currency indeed.[9] [9] R. G. Hawtrey, _Currency and Credit_. Longmans Green & Co., London, 1919. For a few months an artificial improvement was effected in the value of the assignat by these ferocious measures; but in 1795, after the Terror, the system and the paper money collapsed. The gold and silver money, which had been hoarded, returned to circulation. In June, 1795, the quotation of the assignat oscillated violently. On one day a louis of 24 livres would buy 450 paper livres, on another, 1000.[10] Paper notes which fluctuated so violently were useless as money. They could not serve either as a medium of exchange or as a measure of value. Country people expressed their contempt for the assignats by calling them _l'argent de Paris_. A new currency of _mandats_ was tried, into which assignats were made convertible. It was a complete failure. The _assignats_ were wound up in 1796, and in February, 1797, there was "a general demonetisation of paper money."[11] The holders got practically nothing. France returned to hard cash, as Mexico has done recently. In 1918, when Mr. Hawtrey wrote, he was able to describe the decline and full of the assignats as an 'almost unique' instance of "the currency of a great nation fading away into nothing." The Russian paper rouble has performed the same feat since 1918. So has the Polish mark. And now (December, 1921) the German paper mark is also fading into nothingness.[12] In Austria and in most of the new states of Europe, the inconvertible paper legal tender currency has lost almost the whole of its value, in comparison with the pre-war coin which it pretends to represent. [10] Hawtrey, _op. cit._, chap. XV. [11] A _turn_ which even a Polish Chancellor of the Exchequer might envy. [12] In the second week of November the mark fell to 1300 to the paper pound, recovering a day or two later (Wednesday, November 9) to 980. The real difference between the present monetary conditions and the American _continentals_, or the French assignats, is a difference not of kind, but of degree and extent. The causes and the consequences, the motives of those who work the mint, the ruin and demoralization of the victims, the effects upon public and private debts and credit are the same. But a whole continent populated by four hundred millions of people is concerned. The commercial and moral fabric of European civilization is tottering. Three years have passed since the war ended; but the currencies and exchanges of Europe are in a much worse condition than when peace was being negotiated. At the end of June, 1921, I walked from my office in the Strand down to Messrs. Hands & Co., who deal in foreign money at Charing Cross. On the way I passed the shop of a tailor, who had placarded on his shop window the announcement that he would give a hundred thousand roubles to every customer who bought a suit of clothes from him. He added that at the pre-war rate of exchange the one hundred thousand roubles would be worth ten thousand pounds. He did not add that they were at that time worth only two shillings.[13] On arriving at my destination, I asked to see specimens of the most debased currencies and eventually laid out ten shillings,[14] or, to be exact, 9_s_/10_d_. Here is the bill: Ten German marks cost me one shilling A hundred Austrian crowns cost me one and sixpence A hundred Polish marks cost me sixpence Twenty-five Russian (_Czar_)[15] roubles (1909) cost me sixpence Two Italian lire cost me eightpence Two Greek drachmas cost me eightpence Two Roumanian lei cost me sixpence Five Yugoslav dinars[16] cost me one shilling Ten Czechoslovakian crowns cost me one shilling Five Bulgarian levas cost me sixpence Five Finnish marks cost me one shilling Five Esthonian marks cost me one shilling Five Latvian roubles cost me sixpence [13] A month or two later they were not worth a shilling. The Russian Soviet Government was offering two hundred thousand roubles for one pre-war silver rouble! [14] Two dollars. [15] Twenty-five Soviet roubles would have been dear at a farthing. [16] On this note is stamped 20 _Kruna_ to indicate that five dinars exchanged for twenty Austrian crowns. To show that my friend, the exchange dealer, made a decent profit out of this retail transaction, I quote some of his selling rates for the day on which he based his charges: _Rates of Exchange_ _June 29, 1921_ Austrian paper crowns 2400-2600 for £1 Finnish marks 220-240 for £1 German marks 265-275 for £1 Polish marks 6000 (selling rate) for £1 Greek drachmas 62-65 for £1 Italian lire 76-77 for £1 Roumanian lei 230-250 for £1 The last I heard from Vienna was that they had been varying from ten thousand to fifteen thousand to the paper pound! The difference in the rates depended, of course, upon whether the customer was buying or selling the foreign money. If he was buying Austrian notes, he would get twenty-four hundred paper crowns for a pound. If he was selling them, he would receive a pound in exchange for twenty-six hundred paper crowns. All these paper notes are called after, and profess to represent, silver coins, which were themselves before the war, tokens, and passed current at more than their intrinsic value because of their relation to gold. Thus the pre-war parity of marks was about twenty to the gold pound; of Austrian crowns, about twenty-four; of francs, lire, etc., about twenty-five. On the day of my purchase, therefore, the exchange value of the German mark was less than one thirteenth, of the Austrian crown less than one one hundredth, and of the Polish mark, one two hundredth, of its pre-war status. But this underestimates the depreciation; for the British pound is no longer a gold sovereign, and even gold has been depreciated.[17] The paper pound in June, 1921, was, I think, about the equivalent of twelve pre-war shillings in purchasing power. The gold dollar, which would only buy a little more than four shillings before the war, would buy five at the beginning of December, 1921. [17] To-day, November 30, 1921, the paper pound is worth about four fifths of a gold pound. The purchasing power of gold--say, the gold dollar--is perhaps about two thirds of what it was before the war. Although an inconvertible paper currency has no intrinsic value, it can (in accordance with the quantity theory of money) be maintained at a fairly stable ratio to gold or commodities by an honest government if the total issue is fixed, or kept between reasonable maximum and minimum limits. The rise of prices since the war, in each country where reliable statistics are available, has been in proportion to the expansion of the paper currency, allowance being made for the scarcity of commodities. Of course a decline in purchasing power _follows_ an expansion of circulation. The stability of the British paper pound since a limit was imposed illustrates the correctness of the quantity theory of money. Its increase in purchasing power (like that of the gold dollar) during the first half of 1921 is, of course, due to the fact that the supply of utilities had overtaken the demand. At first sight it seems difficult to understand how any government, however bad, can _deliberately_ issue flood upon flood of inconvertible paper money, seeing that its printing operations are ruinous to both public and private credit. To obtain the same amount of revenue, each new issue, each new dose, has to be much larger than the preceding. In the course of twelve months, for example, the exchange value of the Polish mark was divided by ten, that is, at the end of the period, ten times as much paper money had to be printed as at the beginning, to get the same revenue. Yet the Polish Government continued upon its course with the approval and support of the Polish Diet. The following quotation is from the Warsaw correspondent of the _London Economist_, who wrote on July 28, 1921: The effects of the last collapse of the exchanges are beginning to make themselves felt, and the Diet is already preparing fresh ground for new currency inflation. By its last vote the limit on the note circulation has been increased to 118 milliards, and on the advances of the Polish National Bank to the Government to 150 milliards. The depreciation of the Polish mark in June was followed by a rise of prices, and this led immediately to a strike movement in almost all industries. In the Lodz district 40,000 workmen have gone on strike, demanding a wage increase of 120 per cent! The manufacturers declare that they cannot raise wages by more than 20 per cent; that even under present conditions the Polish textile industry is in a most difficult position on the foreign markets, especially in Roumania, the Baltic States, etc. Posnania was menaced by an agrarian strike, but a settlement has been reached. The strike of the municipal workers in Warsaw was short-lived. Everywhere, however, wages have been increased by more than 50 per cent. This naturally will entail a new wave of rising prices, the Government will be obliged to double the salaries of its officials, and the printing press will work again under a higher pressure. This is the vicious circle round which the country has been travelling for three years. _Ex uno disce omnes._ The monetary policy of the Polish Government is merely a flagrant example of the recent monetary history of all the states of Europe northeast, southeast, east, of the Rhine and of the Alps. There is only one real remedy, the reëstablishment of complete peace, disarmament, the abolition of conscription, the drastic reduction of bloated bureaucracies, and a wholesale lowering of tariffs, which will allow the miserable and half-starved populations to renew the arts of peace and the exchange of their agricultural products and manufactures. APPENDIX THE BRUSSELS CONFERENCE[18] If all countries were included, a general and proportionate reduction of the military and naval establishments to one half of their present cost would set free a fund of probably at least $3,000,000,000 to $4,000,000,000 annually for the purchase of food and useful commodities, for the stabilization and partial restoration of debased paper currencies, for the payment of debt, the removal of public deficits, the revival of credit, and the reduction of taxes. Thus the road to recovery lies plain before us. Will it be taken by the statesmen to whose hands the peoples have intrusted their lives and fortunes? [18] Taken by permission from an article by the author in the _Saturday Evening Post_ of November 12, 1921. DEFICITS THE RULE In order to show that this view is in conformity with the conclusions of experts, and even of officials delegated for the purpose of examining world finance by the governments themselves, I turn to the conclusions unanimously arrived at by the Brussels conference a year ago, after eighty-six financial experts from thirty-nine countries had presented the accounts and balance sheets of their respective governments. In a general review of the situation they point out that "the total external debt of the European belligerents, converted into dollars at par, amounts to about 155 milliard dollars, compared with about 17 milliard dollars in 1913." They say that the government expenditures of the European belligerents amount to between 20 and 40 per cent of the total incomes of the peoples. They say emphatically that the restoration of real peace, with disarmament, is "the first condition for the world's recovery." Four commissions were appointed. The first dealt with public finance, and its resolutions were adopted unanimously by the conference. The following extract from its resolutions deserves attention: Thirty-nine nations have in turn placed before the International Financial Conference a statement of their financial position. The examination of these statements brings out the extreme gravity of the general situation of public finance throughout the world, and particularly in Europe. Their import may be summed up in the statement that three out of every four of the countries represented at this conference and eleven out of twelve of the European countries anticipate a budget deficit in the present year. Public opinion is largely responsible for this situation. The close connection between these budget deficits and the cost of living, which is causing such suffering and unrest throughout the world, is far from being grasped. Nearly every government is being pressed to incur fresh expenditure; largely on palliatives which aggravate the very evils against which they are directed. The first step is to bring public opinion in every country to realize the essential facts of the situation and particularly the need for reëstablishing public finances on a sound basis as a preliminary to the execution of those social reforms which the world demands. Public attention should be especially drawn to the fact that the reduction of prices and the restoration of prosperity is dependent on the increase of production, and that the continual excess of government expenditure over revenue represented by budget deficits is one of the most serious obstacles to such increase of production, as it must sooner or later involve the following consequences: (_a_) A further inflation of credit and currency. (_b_) A further depreciation in the purchasing power of the domestic currency, and a still greater instability of the foreign exchanges. (_c_) A further rise in prices and in the cost of living. The country which accepts the policy of budget deficits is treading the slippery path which leads to general ruin; to escape from that path no sacrifice is too great. It is therefore imperative that every government should, as the first social and financial reform, on which all others depend: (_a_) Restrict its ordinary recurrent expenditure, including the service of the debt, to such an amount as can be covered by its ordinary revenue. (_b_) Rigidly reduce all expenditure on armaments in so far as such reduction is compatible with the preservation of national security. (_c_) Abandon all unproductive extraordinary expenditure. (_d_) Restrict even productive extraordinary expenditure to the lowest possible amount. The Supreme Council of the Allied Powers in its pronouncement on the eighth of March declared that "armies should everywhere be reduced to a peace footing; that armaments should be limited to the lowest possible figure compatible with national security and that the League of Nations should be invited to consider, as soon as possible, proposals to this end." The statements presented to the conference show that, on an average, some 20 per cent of the national expenditure is still being devoted to the maintenance of armaments and the preparations for war. The conference desires to affirm with the utmost emphasis that the world cannot afford this expenditure. Only by a frank policy of mutual coöperation can the nations hope to regain their old prosperity, and in order to secure that result, the whole resources of each country must be devoted to strictly productive purposes. The conference accordingly recommends most earnestly to the Council of the League of Nations the desirability of conferring at once with the several governments concerned, with a view to securing a general and agreed reduction of the crushing burdens which on their existing scale armaments still impose on the impoverished peoples of the world, sapping their resource and imperiling their recovery from the ravages of war. The conference hopes that the Assembly of the League, which is about to meet, will take energetic action to this end. The above recommendations were ignored by the League of Nations and by practically all the governments concerned. Consequently the debts and deficits of most European countries are larger at the present time than they were a year ago, and most of the paper currencies have depreciated--some very heavily--during the last twelve months. THE DANGERS OF INFLATION I turn next to the resolutions proposed by the second commission which had to examine problems of currency and foreign exchange. From its resolutions, which also were adopted unanimously by the conference, I extract the following: The currencies of all belligerent and of many other countries, though in greatly varying degrees, have since the beginning of the war been expanded artificially, regardless of the usual restraints upon such expansion--to which we refer later--and without any corresponding increase in the real wealth upon which their purchasing power was based; indeed in most cases in spite of a serious reduction in such wealth. It should be clearly understood that this artificial and unrestrained expansion, or inflation, as it is called, of the currency or of the titles to immediate purchasing power does not and cannot add to the total real purchasing power in existence, so that its effect must be to reduce the purchasing power of each unit of the currency. It is in fact a form of debasing the currency. The effect of it has been to intensify, in terms of the inflated currencies, the general rise in prices, so that a greater amount of such currency is needed to procure the accustomed supply of goods and services. Where this additional currency was procured by further inflation--that is, by printing more paper money or creating fresh credit--there arose what has been called a vicious spiral of constantly rising prices and wages and constantly increasing inflation, with the resulting disorganization of all business, dislocation of the exchanges, a progressive increase in the cost of living, and consequent labor unrest. It is of the utmost importance that the growth of inflation should be stopped; and this, although no doubt very difficult to do immediately in some countries, could quickly be accomplished by abstaining from increasing the currency--in its broadest sense, as defined above--and by increasing the real wealth upon which such currency is based. The cessation of increase in the currency should not be achieved merely by restricting the issue of legal tender. Such a step, if unaccompanied by other measures, would be apt to aggravate the situation by causing a monetary crisis. It is necessary to attack the causes which lead to the necessity for the additional currency. The chief cause in most countries is that the governments, finding themselves unable to meet their expenditures out of revenue, have been tempted to resort to the artificial creation of fresh purchasing power, either by the direct issue of additional legal-tender money or more frequently by obtaining--especially from the banks of issue, which in some cases are unable and in others unwilling to refuse them--credits which must themselves be satisfied in legal-tender money. We say, therefore, that governments must limit their expenditure to their revenue. Here again we have excellent doctrines and good practical advice from these financial experts to the governments which appointed them. But the doctrines have remained unapplied, and the advice has been honored in the breach instead of in the observance. WISE COUNSEL IGNORED I pass next to the resolutions proposed by the commission on international trade and adopted unanimously by the conference, from which the first two paragraphs will be quoted: The International Financial Conference affirms that the first condition for the resumption of international trade is the restoration of real peace, the conclusion of the wars which are still being waged and the assured maintenance of peace for the future. The continuance of the atmosphere of war and of preparations for war is fatal to the development of that mutual trust which is essential to the resumption of normal trading relations. The security of internal conditions is scarcely less important, as foreign trade cannot prosper in a country whose internal conditions do not inspire confidence. The conference trusts that the League of Nations will lose no opportunity to secure the full restoration and continued maintenance of peace. The International Financial Conference affirms that the improvement of the financial position largely depends on the general restoration as soon as possible of good will between the various nations; and in particular it indorses the declaration of the Supreme Council of the eighth March last "that the States which have been created or enlarged as a result of the war should at once reëstablish full and friendly coöperation and arrange for the unrestricted interchange of commodities in order that the essential unity of European economic life may not be impaired by the erection of artificial economic barriers." Here again there is a full recognition of the fact that peace is necessary to the renewal of prosperity, and that the atmosphere of war preparations is fatal to the growth of trade. But neither the League of Nations nor the Supreme Council, so far as I am aware, has made any effective response to these appeals. Fourthly and lastly, I come to the commission on international credits. This commission passed a number of resolutions, all of which were adopted unanimously by the conference; but it will suffice to cite the first two: The conference recognizes in the first place that the difficulties which at present lie in the way of international credit operations arise almost exclusively out of the disturbance caused by the war, and that the normal working of financial markets cannot be completely reëstablished unless peaceful relations are restored between all peoples and the outstanding financial questions resulting from the war are made the subject of a definite settlement which is put into execution. The conference is, moreover, of opinion that the revival of credit requires as primary conditions the restoration of order in public finance, the cessation of inflation, the purging of currencies, and the freedom of commercial transactions. The resolutions of the commission on international credits are therefore based on the resolutions of the other commissions. My argument then is fully endorsed by the experts at Brussels. All the facts and figures set forth in the voluminous records of that remarkable conference indicate the urgency of peace and disarmament. A year has passed. The Brussels recommendations have been ignored, and conditions in Europe as regards its currencies, debts, trade and credit have deteriorated. The Naval limitations proposed by Mr. Hughes at Washington, even if they are ratified, will give practically no relief to Europe. 
52460	----	provided by the Internet Archive EMERSON ON SOUND MONEY SPEECH By Willis Geo. Emerson At Lockerby Hall Grand Rapids, Mich. October 29th, 1896. Publication and Printing: Perry S. Heath Chicago, Ill., October 30th, 1896 SPEECH OF HON. WILLIS GEORGE EMERSON, Lockerby Hall, Grand Rapids, Michigan. October 29, 1896. Mr. Chairman, Ladies and Gentlemen--I am indeed pleased to meet such a magnificent audience in this manufacturing city of Grand Rapids, noted from ocean to ocean for her culture, commerce and progress. Especially am I pleased to speak in your city in behalf of sound money, protection and reciprocity, under the auspices of the Young Men's Republican Club. I bring you greeting from the state of Illinois, and promise you that she will give a majority of 150,000 on next Tuesday for William McKinley. I am proud to hail from the grand old state of Illinois--a state that gave to our common country in the darkest days of our nation's history, Logan, that matchless civilian general; gave the unconquerable Grant, the tanner from Galena, and offered up as a holy sacrifice the "rail-splitter" president from the Sangamon bottoms--Abraham Lincoln. But to-night I remember that I am in the state of Michigan--magnificent commonwealth--almost illimitable in her resources, unconquerable in her courage, phenomenal in her progress, invincible in her pluck, unswerving in her patriotism, the home of the gallant Alger, and the former abode of that matchless statesman and patriot--the gifted Zach Chandler. Fellow citizens, we are in the closing days of the most momentous political campaign ever witnessed in our common country. He who would question the sincerity or honesty of a political opponent's views in this crusade must for the time being forget the school house on the hill and the high plain of intelligence of American citizenship. KNOWS "COIN" HARVEY. Hon. W. H. Harvey, author of Coin's Financial School, is a gentleman I have known for many years, and for as many years as we have known each other, we have been warm personal friends. Toward the man I entertain the greatest respect; toward his theories I regard them as idle, visionary sophistries as unstable as "the house that was built upon sand." The student who really gives thought to the financial question will early discover that Coin's Financial School rests upon a false foundation and the superstructure must surely fall when beat against by the irresistable and truth capped waves of facts and history. No better answer can be given to these misleading and false theories than a plain, truthful statement of our coinage laws and the effect of legislation relating thereto. Fellow citizens, whatever else we may be, we are all Americans, either by birth or adoption; we respect and love the same flag and the undying principles which it represents. We do not differ in a desire for good government. We may differ and differ widely, however, in our opinions and ideas as to what laws will insure the greatest blessings to the people of this nation. Fortunately for the Republican party the American people are a reading and a thinking people, and the problems of the present campaign are now on trial before a jury of 70,000,000 of honest peers, not one of whom am I willing to believe would wantonly strike down the flag of our country, or any of its cherished institutions. THE PEOPLE A JURY. This audience is a part of that great jury, who, after the evidence is all in, will decide one way or the other, with an avalanche of snowy ballots, as spotless in their purity as the honest hearts of the voters who cast the verdict into the ballot boxes. As Americans we are justly proud of our birthright--proud of the air of freedom that kisses the stars and stripes--our nation's ensign, emblematical of mighty victories in the past, a guarantee of protection in the present to all who stand beneath its folds and laden with rich promises of future prosperity. Our country is greater than the men whose election it is our pleasure to advocate. It is not men but measures which we are to consider. An earnest conscientious desire to investigate and determine the right, should absorb and thrill the heart of every patriotic American voter. The great parties in the present campaign do not differ so much in regard to the amount of money as they do in regard to its quality. "It is not the medium of exchange so much as it is an active exchange of the medium itself." On the tariff question we do not differ in schedules, but principles--principles which we, as republicans believe, involve the welfare of all our people and the prosperity of all classes. Personally I have every respect for a conscientious, earnest opponent in this crusade of education, and while honestly differing from them, yet will endeavor to wound the feelings of none. If I speak bitterly of doctrines which I believe to be pernicious in theory and ruinous in practice, do me the justice of not interpreting my remarks as in any sense personal. MORAL QUESTIONS INVOLVED. Fellow citizens, this is a campaign embracing both political and moral questions. It is a political conflict, which the people will sooner or later acknowledge, to be one of patriotism. A moral conflict, which they will acknowledge to be indeed sublime. WE MUST NOT FORGET THAT PATRIOTISM IN TIME OF PEACE IS A SCARCER ARTICLE THAN IN TIMES OF WAR. In the guise of citizens men like "Coin" Harvey are attempting ignorantly or otherwise to undermine and overthrow our nation's honor and credit, and it is these alone that can perpetuate our liberties and insure us prosperity. THE REPUBLICAN PARTY COMES BEFORE THE AMERICAN PEOPLE ADVOCATING THE MAINTENANCE OF THE GOLD STANDARD AND THE USE OF SILVER AS MONEY, IN THE LARGEST VOLUME POSSIBLE, CONSISTENT WITH SAFETY; ADVOCATING THE MAINTENANCE OF OUR NATION'S HONOR AND CREDIT; ADVOCATING A TARIFF, NOT FOR REVENUE ONLY, BUT A PROTECTIVE TARIFF THAT WILL ENCOURAGE DOMESTIC INDUSTRIES AND GIVE EMPLOYMENT TO ALL OUR PEOPLE; ADVOCATING RECIPROCITY. A DOCTRINE WHICH WILL OPEN AN UNLIMITED MARKET FOR THE AMERICAN FARM AND THE AMERICAN FACTORY A DOCTRINE BEQUEATHED TO THIS GENERATION BY THE NOW SAINTED JAMES G. BLAINE. Upon these issues the Republican party comes confidentially to the people, asking for their suffrage, appealing not to their prejudice but to their reason, not to their passions, but to their judgment. In this holy crusade we are lead by that valiant champion of the people's rights, "that advance agent of prosperity," Maj. William McKinley. On the other hand we find the Bryanized democrats, populists, and believers in Coin's Financial School arrayed in a solid phalanx against these cherished principles which we so ardently believe in. WILSON LAW CLOSED FACTORIES. The repeal of the McKinley law in 1893 closed down factories and manufactories by the hundred and deprived tens of thousands of American workmen of employment. UNDER THE OPERATIONS OF THE MCKINLEY LAW THE WAGE EARNERS OF THE UNITED STATES WERE RECEIVING EVERY SATURDAY NIGHT A LITTLE OVER $41,000,000. UNDER THE OPERATION OF THE WILSON LAW THEY ARE RECEIVING A LITTLE LESS THAN $19,000,000 AS A SATURDAY NIGHT PAY ROLL, A FALLING OFF OF OVER $22,000,000 PER WEEK TO THE WAGE EARNERS OF THIS COUNTRY. If you ask me what has been the most unfortunate and appalling result of this wonderfully shrunken pay roll, I will answer by saying that American workingmen by the thousands have lost the roof that covered their heads for themselves and families, have been turned into the highways and are beggars to-day in the most unfortunate sense of the word. The questions of free trade and protection however, have practically been relegated into the background this year, and the sixteen-headed monster of free silver pushed to the front. FELLOW CITIZENS, FREE TRADE AND FREE SILVER ARE TWIN SISTERS OF INFAMY, THE ASSERTIONS OF MR. HARVEY TO THE CONTRARY NOTWITHSTANDING. It was the province of the Republican party four years ago to send forth its protests and warnings against free trade, and to-day with equal vehemence it is sending forth its warnings against destroying the high standard of our nation's finance, and reducing this country to a second class basis of silver monometallism. BREAD AND BUTTER THE ISSUE. FELLOW CITIZENS, THE PAPER ISSUE IN THIS CAMPAIGN IS ONE OF FINANCE, BUT THE REAL ISSUE IS ONE OF BREAD AND BUTTER. FREE TRADE DURING THE LAST THREE YEARS HAS PAUPERIZED ITS TENS OF THOUSANDS, BUT THIS FREE SILVER CRAZE, IF PLACED UPON OUR STATUTE BOOKS, WILL PAUPERIZE ITS HUNDREDS OF THOUSANDS. My friends, I believe, and believe most earnestly, with every throb of my heart, that in the present campaign the Republican party is the only true friend silver has. We seek to elevate the silver dollar, our opponents seek to debase it. The Republican party has provided a redeemer for every silver dollar. Our opponents seek to destroy and alienate this redeemer. If the silver dollar was not exchangeable with gold, it would not be worth any more than a Mexican dollar, or not as much, for there is less silver in it. Coin's Financial School and free silver advocates generally, have much to say about the money of the constitution. Let me say to you, the money of the constitution was based upon the relative market value of the two metals. The history of the last 404 years, from 1492 to 1896, is replete with evidence proving beyond the question of a doubt that the relative or market value of these metals is continually changing. When Columbus discovered America in 1492, ten ounces of silver would purchase one ounce of gold; when the Pilgrim Fathers landed on the rocky and barren coast of New England in 1620, thirteen ounces of silver would purchase one ounce of gold; in 1792 fifteen ounces of silver would purchase one ounce of gold. In 1873 one ounce of gold would not purchase sixteen ounces of silver. To-day one ounce of gold will purchase almost thirty-two ounces of silver. THIS FLUCTUATION OF VALUES OF THE TWO METALS IS CONTROLLED, NOT BY LAWS WE SPREAD UPON OUR STATUTE BOOKS, BUT BY THE LAW OF SUPPLY AND DEMAND, GOVERNED BY THE COST OF PRODUCTION. JACKSON AND JEFFERSON. The patriotism and statesmanship of Andrew Jackson and Thomas Jefferson were untainted in 1792 by the dangerous influence of a coterie of silver barons. They simply ascertained as nearly as they could the relative or market value of the two metals, and determined the legal from the commercial ratio, placed them side by side and started our mints going with the unlimited coinage of gold and silver at the ratio of 15 to 1. As a matter of fact they had overvalued silver; that is to say, the gold dollar was worth 100 cents, but the silver dollar was only worth 98 cents. Now the rank and file of our forefathers cared very little about the discrepancy of the 2 cents on the dollars, but the money changers were abroad in the land in 1792, the same as they are in 1896, and whenever a gold coin came into their possession it was quietly retired from circulation. In other words, the cheaper money drove out of circulation the higher priced money, and as a result, we had silver as the only hard money currency circulating in this country from 1792 to 1834. Let me quote Thomas Jefferson's own words. In speaking of the ratio of the two metals, he says: "THE PROPORTION BETWEEN THE VALUES OF GOLD AND SILVER IS A MERCANTILE PROBLEM ALTOGETHER." What statement could be clearer and more concise than that? It being a mercantile problem, it of course was understood to be subject to fluctuation and change. Accordingly, in 1834 our forefathers concluded as their first attempt at a double standard had utterly failed in keeping the two metals circulating side by side as money, that they would change the ratio from 15 to 1 to 16 to 1, which they did. It seems this ratio undervalued silver, that is to say, the gold dollar was still worth 100 cents, but the silver dollar was worth from 102 to 103 cents. Gold at once became the hard money circulating medium in this country, silver the higher priced money, was entirely retired by the money changers, bullion dealers and silversmiths. This is another illustration where the cheaper money drove out of circulation the higher priced money. GREENBACKS WERE CHEAP MONEY. In 1861 our country was engaged in civil war, and the greenbacks were issued as money, and were at once looked upon as a cheaper money than either gold or silver and immediately drove both gold and silver out of circulation and kept them out of circulation for seventeen years, or until we resumed specie payment in 1879. The history of these seventeen years is another instance where the cheaper money was victorious and drove out of circulation the higher priced money. Mr. Harvey no less than four times in his recent speech in this city gave the following definition of bimetallism: "Bimetallism is the right to use either of the two metals for money." This condensed answer bears about the same relation to the correct definition of bimetallism as the Boy Orator of the Platte compares with those intellectual giants whom he seeks to imitate, but without success, the immortal Washington and Lincoln. (Applause). Bimetallism as is understood in the discussion of our financial question, is the use of both gold and silver as money; both legal tender money, and the legal ratio between the two metals determined from the commercial ratio. Throughout Mr. Harvey's published works and lectures we find him affirming the false principle that money is a creature of law, and that by operation of law the commercial ratio between gold and silver can be made to conform with the legal ratio of 16 to 1. Let us follow the author of "Coin's Financial School" for a few moments, and see where this false principle will carry us. TO-DAY THE COMMERCIAL RATIO BETWEEN SILVER AND GOLD IS ABOUT 32 TO 1. MR. HARVEY CLAIMS THAT IF HIS THEORIES ARE SPREAD UPON OUR STATUTE BOOKS THAT IN A VERY SHORT TIME THE COMMERCIAL RATIO WILL BE 16 TO 1. IF MR. HARVEY POSSESSES THE SUPERHUMAN POWER OF REDUCING THE VALUE OF GOLD ONE-HALF, OR DOUBLING THE PRICE OF SILVER, WHICHEVER YOU WILL, AND BRING THEM TO A COMMERCIAL PARITY AT 16 TO 1, THEN INDEED WOULD HE BE FALSE TO THE CITIZENS OF THIS REPUBLIC IF HE DID NOT ADD A LITTLE MORE POWER TO HIS "KEELEY-MOTOR" THEORY, (APPLAUSE) AND MAKE THE COMMERCIAL RATIO BETWEEN GOLD AND SILVER 15 TO 1, THE SAME AS IT WAS IN 1792, OR BETTER STILL, IF IT IS A BLESSING TO HUMANITY TO LOWER THE RATIO BETWEEN GOLD AND SILVER, THEN APPLY A LITTLE MORE OF THIS OCCULT POWER AND MAKE THE RATIO 13 TO 1, THE SAME AS IT WAS IN 1620, WHEN OUR ANCESTORS CAME OVER IN THE MAYFLOWER; OR APPLY THE SAME FORCE WITH RENEWED ENERGY AND BRING THE RATIO DOWN TO 10 TO 1, THE SAME AS IT WAS IN 1492. INDEED, IF THIS PRINCIPLE IS A BOON TO HUMANITY, AND HIS THEORIES ARE NOT FALSE, WHY NOT PUSH THE WORK ALONG AND MAKE THE RATIO BETWEEN GOLD AND SILVER 1 TO 1? (APPLAUSE.) My fellow citizens, in following my friend Harvey, you are led into a labyrinth abounding with impossibilities and as impracticable as the theory of perpetual motion. When the earth is proven to be flat instead of a globe, when water runs up-hill, when the law of gravitation ceases to be operative, when the tail wags the dog and not the dog the tail, then, and not till then, may we seriously consider these perpetual motion, "Keeley Motor" theories of Mr. Harvey and other double standard advocates. (Great Applause). If we were unable to keep both metals circulating side by side when there was a slight discrepancy of only two or three cents in their intrinsic value, does any intelligent or sane man believe for a moment whether he is a student of Coin's Financial School or not, that if we throw open our mints to the free and unlimited coinage of 52-cent dollars, that they would not at once drive out of circulation the $630,000000 of gold, now constituting more than one-third of our circulating medium? If gold, so important a factor in our medium of exchange both at home and abroad, should retire before silver--the cheaper money (and the light of experience surely proves that it would) can any one doubt that we would at once go on to a silver basis? Can any one doubt that the $625,300,000 of silver now used as money in this country would not instantly be cut in two so far as its purchasing power is concerned--that is, shrink from 100 cents, its face or nominal value, to 52 cents, its bullion value? In the light of past experience it would surely be a sad commentary on our intelligence as an enlightened nation, if we had learned nothing in 100 years. If the illustrious Hamilton and Jefferson were alive, they would, by pursuing the same policy which actuated them in determining the money of the constitution, fix the ratio to-day at about 32 to 1, simply because the relative or market value of the two metals has varied to that extent. HONESTY AND SOBER JUDGMENT NEEDED. My countrymen, the questions involved in the present campaign merit and deserve your most careful thought and study. It is the sober, honest judgment of the thinking, reading, investigating American citizen that the Republican party is relying upon for its support. Let me give you a few facts which possibly you will consider worthy of remembrance: FIRST. EVERY FREE AND UNLIMITED COINAGE COUNTRY IN THE WORLD IS ON A SILVER BASIS. SECOND. THERE IS NOT A GOLD STANDARD COUNTRY ON EARTH BUT WHAT USES BOTH GOLD AND SILVER AS MONEY. THIRD. THERE IS NOT A SILVER STANDARD COUNTRY IN THE WORLD THAT USES ANY GOLD WHATEVER AS MONEY; AND LASTLY, THERE IS NOT A SILVER STANDARD COUNTRY TO BE FOUND IN THE GREAT OCEAN OF COMMERCE THAT ROLLS ALL 'ROUND THE WORLD THAT HAS ONE-FOURTH AS MUCH MONEY PER CAPITA AS HAS THE UNITED STATES AND OTHER GOLD STANDARD COUNTRIES. China, Japan, India, Mexico and most of the South American states are on a silver basis. The United States, England, France, Germany, Belgium, Sweden and others are on a gold basis. One of the most interesting facts which the student of finance will encounter, is the vast difference of the amount of money per capita between the gold standard and the silver standard countries. PER CAPITA OF MONEY. In the countries on a silver basis we find the Central American states with a per capita of $3.78, Japan with a per capita of only $4.09, India $3.33, China $2.08, Mexico $5.47. Now note the difference between these countries and a few that I will mention that are on a gold basis: The United States has a per capita of $21.10, England $19.98, France $36.70, Germany $18.78, Belgium $27.82. In this connection, fellow citizens, let me impress upon your minds the facts that you cannot go into any country on the face of the earth where its mints are open to free and unlimited coinage of silver and find a single gold coin circulating among the people, moreover, that the silver standard country does not exist where the United States gold dollar, the United States silver dollar, or the United States paper dollar will not purchase twice as much merchandise as any dollar which you can find circulating among its people. I challenge the author of Coin's Financial School or the Demosthenes of Nebraska, William Jennings Bryan, or any one else, to successfully contradict this statement. I AM A BIMETALLIST. Personally, I am a bimetallist, and confidentially believe the republican party, guided by its wisdom and patriotism, will during the McKinley administration, devise ways and means by international agreement of autimatically adjusting the unsolved problem of true bimetallism, and keep both gold and silver on a parity at some given ratio. Silver will then be lifted from its place as one of the commodities of the earth and dignified as money, side by side with gold. To-day, I am a bimetallist, an ardent and devoted one, in the sense that I desire to see both gold and silver circulating side by side as money, and in the sense that we can have a greater per capita of money in this country by using both gold and silver as currency, than we possibly could by driving gold out of circulation, but fellow citizens, I disbelieve utterly in the possibility of a double standard. The phrase, "double standard" is a contradiction of terms. Standard means "correct measure," and you cannot have two different correct measures of value any more than you can have two different correct yard sticks, or two different correct results from a mathematical problem, or two different correct cyclometers on a bicycle. It one is right the other is wrong, and that is all there is to it. England tried the imaginary double standard for 470 years, and never succeeded in keeping the two metals circulating side by side, and finally gave it up as an utter failure. France with all the ingenuity of her inventive people, changed the ratio of gold and silver 118 times in twelve years in trying to balance on the double standard tight rope. We commenced trying it in 1792, and went on to a silver basis and remained there for 42 years, or until we changed the ratio from 15 to 1, to 16 to 1, in 1834. This change of ratio placed us on a gold basis, where we remained for a number of years. In 1861 we went on a paper basis and remained there for a number of years, and finally went back on to a gold basis in the common accepted understanding of the question, where we have since remained and the progress and prosperity of the United States during the last third of a century has been without a precedent in the history of the civilized world, and yet, I believe with my whole heart, that in the evolution of this financial question, hastened on by agitation, a plain of understanding will be reached higher and beyond that which has ever heretofore obtained in any of the civilized nations of the earth, and it will come through deliberations and councils in the republican party--the party of progress--and when it comes it will lighten the burdens and bless humanity. THE CRIME OF '73. Mr. Harvey and all silver advocates talk to us about the crime of 1873. Let me say here and now there was no crime committed in 1873, directly or indirectly. IF THERE WAS A CRIME COMMITTED, SENATORS JONES AND STEWART OF NEVADA, THE PRESENT HIGH PRIESTS IN THE SILVER MOVEMENT WERE THE CHIEF CONSPIRATORS, FOR THEN, AS NOW, THEY WERE AMONG THE LARGEST SILVER MINE OWNERS IN THE UNITED STATES, AND THEY VOTED FOR THE BILL. Prior to 1873 we had coined in this country, all told, about 8,000000 of silver dollars, since 1873 we have coined up to January 1st, 1896, $547 914,340 of silver, about $426,000,000 of which are standard dollars. Since January 1st, 1896, we have coined over $13,000,000 of standard dollars. During last August we coined 2,650,000 of silver dollars, and the profit to the government--the people--was between $800,000 and $900,000. WEBSTER SAYS: "DEMONETIZATION IS TO DEPRIVE OF VALUE, OR TO WITHDRAW FROM USE AS CURRENCY." Does it look very much as though we had withdrawn silver from use as currency? In what way have we deprived silver of value? It is a full legal tender for all debts, public and private, and without limit as to amount, and has been for the last eighteen years. These, fellow citizens, are facts which you will not find within the covers of "Coin" Harvey's books, it looks as though we had added value to it, since the silver dollar circulates side by side with the gold dollar, notwithstanding its bullion value is 48 cents less than its nominal or face value. CONSISTENT FRIEND OF SILVER. THE REPUBLICAN PARTY HAS EVER BEEN THE CONSISTENT FRIEND OF SILVER AND TO-DAY IS IRREVOCABLY COMMITTED TO THE DOCTRINE OF INTERNATIONAL BIMETALLISM, BUT IS UNALTERABLY OPPOSED TO SILVER MONOMETALLISM. For one, I am not willing to see all the gold in this country driven out of circulation and the purchasing power of silver reduced to its bullion value. In other words, I am not ready to see the per capita of money in this country reduced fully one-half and our nation doing business on a Mexicanized silver basis. Wages are the last schedule to advance, and as fully 95 per cent, of the male adults in the United States are wage, salary or fee earners, there would be almost universal want, misery and suffering bequeathed to these people, because of such a reckless, unpatriotic and unbusiness-like experiment. What party then is the real friend of silver? The party that is trying to maintain the parity of the two metals, or the party that is protesting friendship in unstinted terms and yet committed to the folly of reducing silver to its bullion value? Fellow citizens the proposition in a nutshell is this: THE REPUBLICAN PARTY BELIEVES THAT THE COINAGE OF SILVER SHOULD BE RESTRICTED BY LAW AND COINED ON GOVERNMENT ACCOUNT. MR. BYRAN AND HIS FOLLOWERS BELIEVE IN THE FREE AND UNLIMITED COINAGE OF SILVER ON PRIVATE ACCOUNT. WHEN THE GOVERNMENT COINS SILVER, UNDER EXISTING LAWS, IT GETS THE DIFFERENCE BETWEEN THE COST OF THE BULLION AND THE STAMP THAT IS PLACED UPON IT. THIS IS KNOWN AS THE GAIN OR SEIGNIORAGE AND IS PAID INTO THE TREASURY OF THE UNITED STATES THE SAME AS IS PROVIDED BY LAW REGULATING SUBSIDIARY COINS. IN THIS WAY EVERY MECHANIC, EVERY FARMER, EVERY LABORER, IN FACT EVERY CITIZEN OF THE UNITED STATES GETS HIS PROPORTIONATE SHARE OF THIS GAIN. DO NOT DEMAND BIMETALLISM. What "Coin" Harvey and the advocates of free silver demand is not bimetallism, but the unlimited coinage of the silver dollar, not at the just ratio of 32 to 1, but at the unjust ratio of 16 to 1, not on government account, but on private account. To-day the government--the people--are receiving the benefit of the 48 cents on each silver dollar coined, that being the difference between the cost of the bullion and the face value of the dollar. The government--the people-will lose these 48 cents if silver is coined on private account. The question is, my countrymen, who will get these 48 cents on each dollar, who will be benefitted by this change? We know the government will lose 48 cents on each dollar, the question is, who will receive it, or will this profit, now accruing to the government--the people--be lost as completely as the value of this building would be to the owner if it burned to ashes and there was no insurance? (Applause.) I am pretty well acquainted with the mining business, have spent many years of my life in the mining districts of the west, and am the owner to-day of mining properties in Oregon and in Colorado, and also largely interested in one of the most noted silver mining properties in Old Mexico, and I know whereof I speak, when I say to you that English capitalists and American silver kings own a majority of the stock of nearly every incorporated silver mining company in this country of any prominence. It is beginning to look to me like "there was a pretty good-sized African in the wood pile somewhere." (Laughter and applause.) FREE TRADE SHOULD BE UNDONE. Eight years ago, and again four years ago, through the influence of the Cobden Club, England attempted to subdue America. She succeeded in prostrating our industries, impoverishing our people, and increasing our public debt, but let us hope that the intelligence of American citizens will rise up in its full might and undo the free trade blunder of 1892. It now looks to me as if there was a gigantic trust of silver kings and English capitalists attempting to again subdue free America. Evidently there never was such a concert of action in the United States as has taken place during the last few months in regard to this silver question. The rapidity with which it has travelled all over this country, to say the least, has been phenomenal. There is an old saying, that "a falsehood will travel a thousand miles while truth is getting its boots on." Fellow citizens, go forth and tell the misguided advocates of free silver and believers in the false theories of "Coin's" Financial School to rejoice in their strength while it is called to-day, for, by the living God "truth has its boots on" and is marching triumphantly out among the people, tearing away the webs and veils of delusion and hypocrisy and appealing to the people, not to their passions, but to their intelligence, their reason and their honor. The people are not ready to advance by going backwards, they are not ready to be Chinaized, to be Japanized, South Americanized, Mexicanized or subsidized by a coterie of silver barons and English capitalists, who are attempting by stealth to nail the wage earners and farmers of this country to an unholy cross of depreciated silver. (Applause.) GOES AFTER BRYAN. William Jennings Bryan tells us in his Knoxville, Tennessee, speech, that there is no danger of a silver flood. "Coin" Harvey makes the same statement, notwithstanding the world's production of silver for the year 1894, at only about 63 cents an ounce, amounted to the fabulous sum of $216,000,000, a greater annual production than ever before in the history of the world, and only exceeded by the output of silver for the year of 1805, which amounted to $235,000,000, and still he claims there is no danger of a silver flood. All that Mr. Bryan asks for is, that the reins of government and the keys of the United States treasury be turned over to himself and his followers, and they will try the experiment. I hardly think the people of the United States are ready to invest in any more political experiments. The experiment of four years ago has proved quite enough. No flood of silver! The effrontery and insult to the intelligence of mankind by this degenerate democracy and silver advocates surpasses understanding. (Applause.) Fellow citizens, the so-called crime of 1873 is a myth and destitute of substance. The so-called conspiracy of that year is also a myth and without substance. You might just as well go out and from the housetop proclaim that the horse has been dehorserized, because of a huge conspiracy entered into by electricity and the bicycle. Why not ask that the noble animal be rehorserized, so that its selling price will be $150 or $200, the same as it was in "ye olden times." (Applause.) IMPROVED HARVESTING METHODS. The old-fashioned methods of reaping the yellow fields of wheat has also been ousted by the conspiracy of the late improved harvester and binder. The old fashioned cradle has been decradleized. Why not form an alliance all over this country to recradleize the cradle, and make common warfare against the up-to-date binder? Even the old McCormick reaper has been dereaperized and the succeeding invention, the header, has been deheaderized, and who shall not say in this onward march of progress, in this wonderful advancement of our civilization, in this age of discovery and invention, that sooner or later the up-to-date binder of to day will not be debinderized by the inventive genius of some American citizen? (Applause.) Now, let us see, fellow citizens, what the so-called crime of 1873 has done for prices of various commodities. One of the stock declarations of Mr. Bryan and Mr. Harvey and their cohorts is that prices should be restored and wages should be increased. One of two things is very apparent, either the framers of the Chicago platform did not consult the statistics of the United States, or else they imagined the voters would not. "Coin" Harvey and the silver advocates generally seek to establish their position by quoting statistics of average prices of certain great commodities like wheat and cotton claiming that prices commenced falling in 1873, and their decline has continued ever since. These arguments are those of the delusionists and must crumble before the evidence and the facts. Let me say to you that prices did not commence falling in 1873, but in 1864-5. WHY ARE THEY NOT HONEST? If these men are not demagogues, pure and simple, why do they not inform the "dear people" why prices fell more during the eight years precedent 1873 than they have ever fallen since? "COIN" HARVEY HAS NEVER EXPLAINED WHY, AND IF HE DID, HIS THEORY WOULD VANISH LIKE THE MIST BEFORE THE RISING SUN OF TRUTH. For example, cotton fell from $1.01 1/2 in 1864, to 17 cents a pound in 1871. Or wheat for instance. The average farm price of wheat in the United States for the year 1874 was 94 cents a bushel, paper currency, or only 84 cents a bushel in gold. The average farm price of wheat in the United States for 1891 was 83 cents a bushel, the same in 1890, while in 1888 the average farm price of wheat in this country was 92 cents a bushel, or 6 cents a bushel higher than it was in 1874. Thus it will be seen that an unfair and false impression is trying to be created among the people by both Mr. Bryan and his followers. Perhaps Mr. Bryan and the free silver advocates would like to know where I get my statistics. I answer them by saying they are taken direct from the United States Statistical Abstract, which deservedly ranks high as an authority. In looking over this work I could not help wondering if "Coin" Harvey and our opponents who are shouting so loud and lustily for the free and unlimited coinage of silver and a restoration of prices, would not like to apply their cure-all to refined sugar, which was selling in 1872 at 12 3/5 cents per pound, and only 4 3/5 cents per pound in 1892, or for instance, illuminating oil was quoted in 1872 at 23 cents a gallon, and only 5 9/10 cents per gallon in 1892. Manufacturers of bar iron in 1872 were receiving $97.63 per ton for their product, and only $29.96 a ton in 1894. A keg of nails cost $5.46 in 1872, and $1.08 in 1894. A box of window glass that cost $3.40 in 1873, sold only at $1.70 in 1891. A carpet that cost $1.14 a yard in 1873, can be purchased today for 36 cents a yard. The steamboat transportation companies hauling wheat from Chicago to New York City, by lake and canal, are receiving a compensation to-day of a little less than 4 1/2 cents a bushel, but in 1873 they were receiving 24 1/2 cents per bushel, for every bushel they carried. SHALL PRICES BE RESTORED. The question is, do the people of the United States want these prices restored? WE ARE WILLING AS AMERICANS THAT AMERICAN INDUSTRIES AND HOME COMPETITION SHALL ADJUST PRICES, BUT WE ARE NOT WILLING THAT PRICES OF LABOR SHALL BE ADJUSTED IN THIS COUNTRY BY AMERICAN WORKMEN ENTERING INTO COMPETITION WITH THE PAUPERIZED LABORERS OF EUROPE. From the same reliable statistics and undoubted authority we find that wages have materially advanced in this country during the last third of a century. The increase from the old double standard wages of 1860 to those of 1890, have been no less than 58 per cent, in money, and 72 per cent, in purchasing power. This does not look very much like a falling off. I will admit that the price of wheat has declined and declined rapidly since 1892, but you must remember that Grover Cleveland was elected president that year and is still in the White House. Give us back a protection that protects, and we will not only insure abundance of labor for all our people, but will guarantee that farm products generally will command better prices. (Applause). FELLOW CITIZENS, I EARNESTLY BELIEVE THAT "COIN" HARVEY AND ALL THOSE WHO ARE ADVOCATING THE FREE AND UNLIMITED COINAGE OF SILVER AT THE UNJUST AND UNTRUE RATIO OF 16 TO 1, AS A NOSTRUM FOR OUR ILLS, ARE ADVOCATING A THEORY AS MISLEADING AS IT IS WICKED AND UNHOLY. NO THEORY MORE FALSE WAS EVER ADVANCED OR CALCULATED TO MORE THOROUGHLY DECEIVE THE EARNEST, INDUSTRIOUS, GOD FEARING PEOPLE OF THIS NATION. Let us undo the free trade blunder of 1892 and we will hear no more about the mythical crime of 1873. (Applause.) PROTECTIVE TARIFF THE REMEDY. My friends, a tariff that protects; reciprocity that opens up a market for our surplus articles from the American farm and the American factory; a sound currency, and the business confidence which will follow, are the remedies for the unfortunate condition of bankruptcy into which the country has been submerged by political stupidity. THE QUESTION IS SIMPLY ONE OF HONESTY OR DISHONESTY. Shall thrift and economy be rewarded by robbery? Shall the widow's mite and the savings deposited in the banks of this country be cut in two by changing our money to silver monometallism? Shall the two and a half billions of school bonds from all over the country, held by English and American capitalists and payable in gold, be doubled, and a double tax fall upon the shoulders of the tax payers of this nation? Shall the toilers of this land, the wage-earners on farm and in factory, be robbed every Saturday night of one-half of their weekly wages? LABORERS SHALL BE HONESTLY REWARDED. NO. THIS BLOT OF REPUDIATION SHALL NOT SMIRCH THE UNTARNISHED ESCUTCHEON OF AMERICAN PATRIOTISM, NEITHER SHALL THE TOILING MASSES RECEIVE AS THEIR REWARD FOR HONEST LABOR A "MESS OF DEPRECIATED SILVER POTTAGE." We are now asked to desert the old ship of state that has carried this nation through many storms, through many conflicts, and invariably anchored us in the snug harbor of safety and maintained our country on the map of the world, and added many stars to the old flag. We are asked by these new and false prophets of finance to destroy this grand old ship, freighted with the hopes and ambitions of seventy millions of free American citizens; this old ship tested by time, tried by adversity, taut and trim as a May queen and invincible as a Bessemer steel iron cladder, a ship that was launched by Washington and the patriots of 100 years ago, and piloted by such noble men as Lincoln, Grant, Garfield and Hayes. We are asked to desert this ship of known safety, and embark in an untried craft and sail away on the turged waters of an unknown sea. A craft manned by a free silver captain, piloted by free tradeism, and ballasted with bombs of anarchy and repudiation; a craft whose very slimy plank is reeking with condemnation; whose mutinous crew are ready to scuttle her in mid ocean; whose worthless and shoddy sails are fanned by the angry breath of high heaven; and whose nearest port is bankruptcy and perdition. (Long continued applause.) MY FELLOW CITIZENS, THE TRUE SOLUTION OF THE PRESENT FINANCIAL DEPRESSION LIES ALONG OTHER LINES, AND THIS BRINGS US FACE TO FACE WITH THE REAL PROBLEM. Perhaps you have noticed already in this campaign that no one is quite so disgusted with remarks on the tariff as a Byranized democrat or a populist? The impoverished condition of the country, resulting from the free trade crime of 1893 is so apparent on every hand that when we lay the skeletons at their doors they frankly confess judgment, but tell us that other questions of more vital importance are now before the people. MY FRIENDS, THE ENDLESS CHAIN OF AMERICAN PROSPERITY HAS BEEN BROKEN AND NEVER WILL BE MENDED UNTIL THE DRAWN FIRES FROM OUR FURNACES ARE REKINDLED AND THE FREE TRADE SMOKE CONSUMERS ARE REMOVED FROM THE TALL CHIMNEYS IN OUR MANUFACTURING DISTRICTS. (APPLAUSE.) A PRINCIPLE UPHELD BY STATESMEN. It is not in any exulting spirit that we refer to a protective tariff, but rather because it is a great and underlying principle of national prosperity; a principle bequeated to this nation by Washington, upheld by Henry Clay, fostered by Abraham Lincoln, championed by William McKinley, and supported by the reciprocity of James J. Blaine. Prior to the free trade crime of 1892, we heard nothing about a diminished gold reserve. IN THOSE HALCYON DAYS CONFIDENCE FLEW ABROAD IN THE LAND ON THE WINGS OF PROSPERITY. Capital was freely invested and labor employed at the highest wages. The gold reserve occasioned no uneasiness and required no thought. Instead of acting as an alarmist it steadily grew, acting as a balance wheel to an ever-increasing confidence. The surplus was employed in paying off the national debt; and during President Harrison's administration our national indebtedness was reduced almost as much as it has been increased by the present administration. What has happened during the last three and a half years of grace? THE ALLURING AND MUSICAL HUM OF INDUSTRY IS NO LONGER HEARD IN THE LAND OF FREEDOM. THE PENDULUM OF TIME HAS SWUNG BACK AND REVEALED TO THE AMERICAN PEOPLE THE GHASTLY SKELETON OF WANT AND FORCED IDLENESS CONCEALED IN THE FREE TRADE CLOSET. Our great commercial institutions have fallen into a most deplorable and unhappy state, misery and want, with pinched and sorrowful countenances are walking hand in hand up and down by deserted workshops. The honest face of toil blushes as hunger drives him to eat the bread of charity. The stilled wheels of industry throughout our land, and deserted and idle farms are indeed eloquent in their silence in behalf of a protective tariff. (Applause.) Capital that was formerly employed in manufacturing enterprises has been withdrawn, while the balance of trade with other nations is frightfully against us. ENGLAND HAS BEEN SERVED. IF ENGLAND HAD HAD A POLITICAL PARTY MANUFACTURED TO ORDER BY THE MOST SKILLED ARTISANS OF THE EARTH, SHE COULD NOT HAVE HAD ONE MADE THAT WOULD MORE FAITHFULLY SERVE HER COMMERCIAL PURPOSES THAN HAS THE PRESENT ADMINISTRATION. Let us briefly inquire into the cause. Take, for instance, the sheep and wool industry, which a few years ago was a prominent one in your state. Under the stimulus of protection, we had in this country in 1884, 50,500,000 sheep. Then Grover Cleveland was elected president, and this was followed by the democratic free wool indictment of 1885, known as the Mills bill. The wool growers of America became alarmed, they fattened and sold their sheep to the butchers by the millions. This slaughter continued for four years, or until Gen. Harrison was elected to the presidency in 1888. The authentic statement shows that the number of sheep had been reduced in this country from 50,500,000 in 1884 to 41,300,000 in 1888. President Harrison's election stopped the slaughter, and under the stimulus of the McKinley law the industry gained rapidly and at the close of Mr. Harrison's administration the total number of sheep in the United States was 47,800,000. (Applause.) In 1892 Mr. Cleveland was again elected president. This was followed by the repeal of the McKinley law and the enactment of legislation hostile to the wool industry. During the last three and a half years the number of sheep in this country has been reduced from 47,800,000 to 38,500,000, or fewer sheep than there was in this country in 1873, or at any time since the so-called crime of that year. So much fellow citizens, for the democratic free wool joke on the American people. HE TALKS OF WOOL. Now let us talk for a few moments about the price of wool. For ten years preceding the repeal of the McKinley law, the average price of Ohio X.X.Washed wool in the Boston market was a little over 31 1/5 cents per pound. April 1, 1896 wool was quoted in the same market at 18 cents a pound. Such a startling contrast in prices needs no comments. As millions of our sheep were slaughtered we were compelled to import wool and woolen textiles into this country sending our money abroad, which should have been paid to the American farmer and sheep raiser. Instead of this we paid our money over to foreigners in exchange for wool and woolen textiles, which came into this country like a flood when the McKinley law was repealed and the duty removed. The result was that the woolen mills of America were practically all shut down and thousands upon thousands of American workingmen and women were thrown out of employment, and in turn, were unable to purchase the products from the American farm. No wonder the American farmer found a ready market for his potatoes in 1892, when all our people were employed, at from 50c to 60c a bushel; and to-day, when our people are unemployed, the farm price of potatoes is from 25c to 30c a bushel. Let us see what sort of a stewardship has been going on in this country for the last few years. For the twenty-five months ending November 1, 1892, our balance of trade with other nations was in our favor to the extent of $28,245,641. That is what the McKinley law and protection did for this country. That, fellow citizens, is what we call good business methods. Selling to other nations more than we purchased from them to the extent of $28,245,641, or an average of $1,129,822 per month, or $37,660 per day. (Applause.) WHAT THE RECORD IS. Now, let us look at Mr. Cleveland's record for the fifteen months ending December 1, 1895--this, you will remember, was under the Wilson bill. We find the balance of trade, instead of being in our favor, was against us to the enormous amount of $70,494,044, or an average of $4,699,603 per month, or $153,653 per day. That, fellow citizens, is a pretty good sized daily loss. That is what we call remarkably poor business methods, and so does every one within the hearing of my voice who is disposed to be fair in the consideration of this question. But why speak further of the evils of free trade, or multiply examples of the blessings of protection. The record of the last three and a half years has been an object lesson, both impressive and eloquent. It is gratifying to note that some of the ultra free traders in 1892 are the most pronounced protectionists in 1896. Many of the old time democrats who are proud of the traditions of their party, proud of the principles which they have cherished for so many years, are refusing to follow the platform adopted by the degenerate democracy of 1896. Let us mete out justice to whom justice is due. WHEN THE FLAG OF OUR COUNTRY, WAVING ABOVE FORT SUMTER WAS FIRED UPON BY THE ENEMIES OF GOOD GOVERNMENT, THOUSANDS UPON THOUSANDS OF THE DEMOCRATS OF THE NORTH FORGOT THEIR POLITICS, SHOULDERED THEIR MUSKETS AND BECAME PATRIOTS. (APPLAUSE.) THIS YEAR OF GRACE, 1896, WHEN THE GUNS OF ANARCHY AND SOCIALISM ARE DIRECTED AGAINST THE SUPREME COURT OF THE UNITED STATES AND THE NATION'S HONOR AND CREDIT, THESE SAME DEMOCRATS BY THE TENS OF THOUSANDS ARE TURNING FROM THAT PLATFORM OF REPUDIATION AND ARE THE STANCHEST OF PATRIOTS. (APPLAUSE.) SPIRIT OF REVOLUTION. It cannot be denied that a spirit of wantonness and revolution prevailed at the Chicago convention, repudiation was openly advocated on the floor of the convention hall and made a part of the platform adopted. The red hand of anarchy grappled the throats of all who dared oppose the extreme measures advocated by that seething sea of restless agitators. I wish to draw a line of demarkation, clear and distinct, between the old Simon-pure democracy of Hamilton and Jefferson, and this new degenerate democracy of Bryan, Tillman and Altgeld. It is true the framers of the Chicago platform claim the name, but the tenants and faith are strangely at variance with the traditions and principles of the old Jeffersonian doctrine. My countrymen, it is not alone the volume of money which the people want, but they demand its activity in trade and commerce. If you ask me how this can best be accomplished, I will answer by saying, protect American industries and universal confidence will surely follow. (Applause.) GREAT IS CONFIDENCE. CONFIDENCE IS THE SHIBBOLETH OF PROSPERITY. CONFIDENCE THAT GOOD DOLLARS MEAN WELL PAID LABOR. CONFIDENCE THAT WELL PAID LABOR MEANS GOOD TIMES. CONFIDENCE THAT WAGES PAID TO AMERICAN WORKINGMEN WILL POSSESS THE SAME PURCHASING POWER AS THE BEST MONEY IN THE CIVILIZED WORLD. CONFIDENCE THAT A PENSION POLICY, JUST AND GENEROUS TO OUR LIVING HEROES, WILL BE RESTORED. CONFIDENCE THAT NO OLD SOLDIER IS TO BE DEPRIVED OF HIS QUARTERLY CHECK WITHOUT TRIAL BY JUDGE OR JURY. CONFIDENCE THAT THE REPUBLICAN PARTY WILL MAINTAIN A REDEEMER FOR EVERY SILVER DOLLAR COINED. CONFIDENCE THAT A RETURN OF THE REPUBLICAN PARTY TO POWER WILL START EVERY MILL AND FACTORY IN THIS COUNTRY, WITHOUT THE AID OR CONSENT OF ANY OTHER NATION OR NATIONS ON THE FACE OF THE EARTH. CONFIDENCE THAT INTERNATIONAL BIMETALLISM, SO ABLY ADVOCATED DURING PRESIDENT HARRISON'S ADMINISTRATION, WILL BE VIGOROUSLY PROMOTED BY THE MC'KINLEY ADMINISTRATION. (GREAT APPLAUSE.) CONFIDENCE THAT A VOTE FOR MC'KINLEY AND HOBERT IS A VOTE FOR THE HOME AND THE FIRESIDE. CONFIDENCE THAT VERMONT AND MAINE HAVE PENCILED A BRIGHT PROPHECY OF HOPE IN THE EASTERN SKY. CONFIDENCE THAT THE DRAGON HEAD MONSTER OF STATE RIGHTS IS NOT TO BE RESURRECTED IN THIS COUNTRY. (APPLAUSE.) CONFIDENCE THAT SOUND MONEY AND PROTECTION ARE THE PILLARS OF JACKIN AND BOAZ IN THE TEMPLE OF AMERICAN HONOR AND PROSPERITY. CONFIDENCE THAT THE SUPREME COURT OF THE UNITED STATES IS TO REMAIN OUR BULWARK OF JUSTICE AND ALL THE GATES OF HELL SHALL NOT PREVAIL AGAINST IT. (APPLAUSE.) PROUD OF BEING A REPUBLICAN. Fellow citizens, I am a Republican and proud of my party's history. The history of the United States has been made rich and resplendent with victories and achievements of our party. We are proud of our nation's history from its earliest dawn down to the present, and for the valuable lessons it has taught. We would not expunge or obliterate a single line. We accept it as a whole, from Plymouth Rock to Bunker Hill, from Bunker Hill to Fort Sumter, from Fort Sumter to Appomattox, and from Appomattox down to the campaign of 1896. We dedicate crowns of laurel for the giants who have evolved the mighty principles and tenets of the republican party--Washington and Grant, Blaine and Logan, Sherman and Garfield, Harrison and McKinley, and most of all, that gentle soul, that man of equal poise, whose peer has never lived since the days of blessed Galilean--Abraham Lincoln! (Applause.) Our history is one of greatness and sublimity. Its pages are rich with the names of orators more eloquent than a Burke, with the names of statesmen more acute than the "Iron Chancellor" and the names of warriors greater and mightier than Napoleon. IN THE DARK AND TURBULENT DAYS OF THE REBELLION, THE REPUBLICAN PARTY, WITH THE ASSISTANCE OF DEMOCRATIC PATRIOTS, SAVED THIS NATION, WHILE NOW IN THE CLOSING DAYS OF THE NINETEENTH CENTURY, BY THE LIVING GOD, PATRIOTS WILL SAVE AND PROTECT OUR NATION'S HONOR. Ours is the greatest nation on earth, and the possibilities of the future are almost limitless; if we make no mistake in the great principles of protection, reciprocity and a sound currency, which have for their immediate object the betterment of the conditions of the wage-earners of this land. MARCHING TO GREATEST VICTORY. Following the leadership of our gallant standard bearer, that brave civilian soldier on the field of battle, that statesman without a peer, that friend of the toiling millions, that companion of every old soldier, that invincible leader of men, Major McKinley, we are advancing proudly on to the greatest political victory of modern times. In the life of Major William McKinley, we find nothing but purity and ability, bravery and compassion, and I promise you that on the fourth day of next March he will be inaugurated president of this republic; a republic whose flag, "Old Glory," the stars and stripes, floats over seas and land, peerless and without price, the emblem of power and protection to all. My friends, we must restore our protective system. Already it has accomplished wonders for the laborers of America, and its mission in behalf of prosperity and posterity has only commenced. It has enabled us to perfect a system of finance that is a marvel to all nations, and has raised our credit to a place among the first countries of the earth. It has elevated the manhood of every American citizen, dignified labor, and instilled a more universal education throughout our land than can be found in any other civilized country on the face of the globe. It has made the flag of our nation emblematical of love, liberty, protection, reciprocity, honor and all that is great and grand of human thought. Major William McKinley is our Bruce at Bannockburn in this struggle for national honor, unlimited labor and higher wages. In the golden casket of his great soul rests the immortal principles which we advocate, and in his heart burns the undying fire of love for America and American institutions. The righteousness of our cause is our strength, while he is our hope and will lead us triumphantly on to certain and splendid victory. (Applause.) But what about William Jennings Bryan? "Like a comet he rose to our vision, Like a comet he soon will depart; And 'tis certain his untimely going Will chill every popocrat's heart, In the coming cyclone of November We know his race will be run, And forever and aye, oh, let him remember, How our leader, McKinley has won." (Great Applause.) 
40429	----	ROBINSON CRUSOE'S MONEY; Or, the Remarkable Financial Fortunes and Misfortunes of a Remote Island Community. By DAVID A. WELLS, Late U. S. Special Commissioner of Revenue. "It requires a great deal of philosophy to observe once what may be seen every day." --Rousseau. New York: Harper & Brothers, Publishers, Franklin Square. 1876. PREFACE. The origin of this little book is as follows: Some months ago, the expediency was suggested to the author, by certain prominent friends of hard money in this country, of preparing for popular reading--and possibly for political campaign purposes--a little tract, or essay, in which the elementary principles underlying the important subjects of money and currency should be presented and illustrated from the simplest A B C stand-point. That such a work was desirable, and that none of the very great number of speeches and essays already published on these topics in all respects answered the existing requirement, was admitted; but how to invest subjects, so often discussed, and so commonly regarded as dry and abstract, with sufficient new interest to render them at once attractive and intelligible to those whose tastes disincline them to close reasoning and investigation, was a matter not easy to determine. At last the old idea--recognized in fables, allegories, and parables--of making a story the medium for communicating instruction, suggested itself; and, in accordance with the suggestion, a remote island community has been imagined, in which, starting from conditions but one remove from barbarism, but gradually rising to a high degree of civilization, the progress, the use, and the abuse of the instrumentalities and mechanism of exchange--through barter, money, and currency--have been traced consecutively; and the effect of the application of not a few of the most popular fiscal recommendations and theories of the day practically worked out and recorded. And, in carrying out this scheme, the reader will not fail to perceive, by reference to the marginal notes accompanying the text, that hardly an absurdity in reference to exchange, money, or currency can be imagined, which somewhere and at some time has not had its exact counterpart in actual history or experience. If any apology for the objects designed or the course pursued is needed, the author thinks he finds it in the precedent established by the illustrious Geoffrey Crayon, Gent., who, in the introduction to his "Tales of a Traveler," thus happily sets forth the special advantage which accrues from the proper employment of a story as a means of communicating information. "I am not," he says, "for those barefaced tales which carry their moral on their surface, staring one in the face; on the contrary, I have often hid my moral from sight, and disguised it as much as possible by sweets and spices; so that while the simple reader is listening with open mouth to a ghost or love story, he may have a bolus of sound morality popped down his throat, and be never the wiser for the fraud." Whether in "Robinson Crusoe's Money" the author shall succeed in inducing his fellow-countrymen--to whom the ordinary currency medicine is becoming distasteful--to swallow without wry faces the same dose sugar-coated, remains to be determined. Norwich, Conn., January, 1876. CONTENTS. Chapter I. Page The Three Great Bags of Money 11 Chapter II. A New Social Order of Things 13 Chapter III. The Period of Barter 15 Chapter IV. How They Invented Money 20 Chapter V. How the People on the Island and Elsewhere Learned Wisdom 26 Chapter VI. Gold, and How they Came to Use It 33 Chapter VII. How the Islanders Determined to be an Honest and Free People 50 Chapter VIII. How the People on the Island Came to Use Currency in the Place of Money 55 Chapter IX. War with the Cannibals, and What Came of It 60 Chapter X. After the War 72 Chapter XI. The New Millennium 83 Chapter XII. Getting Sober 108 ROBINSON CRUSOE'S MONEY. CHAPTER I. THE THREE GREAT BAGS OF MONEY. All who have read "Robinson Crusoe" (and who has not?) will remember the circumstance of his opening, some time after he had become domiciled on his desolate island, one of the chests that had come to him from the ship. In it he found pins, needles and thread, a pair of large scissors, "ten or a dozen good knives," some cloth, about a dozen and a half of white linen handkerchiefs concerning which he remarks, "They were exceedingly refreshing to wipe my face on a warm day;" and, finally, hidden away in the till of the chest, "three great bags of money--gold as well as silver." The finding of all these articles--the money excepted--it will be further remembered, greatly delighted the heart of Crusoe; inasmuch as they increased his store of useful things, and therefore increased his comfort and happiness. But in respect to the money the case was entirely different. It was a thing to him, under the circumstances, absolutely worthless, and over its presence and finding he soliloquized as follows: "I smiled at myself at the sight of all this money. 'Oh, drug!' said I, aloud, 'what art thou good for? Thou art not worth to me, no, not the taking off the ground. One of these knives is worth all this heap. Nay, I would give it all for a gross of tobacco-pipes; for sixpenny-worth of turnip and carrot seed from England; or for a handful of pease and beans, and a bottle of ink.'" In introducing this episode in the life of his hero, nothing was probably further from the thought of the author, De Foe, than the intent to give his readers a lesson in political economy. And yet it would be difficult to find an illustration which conveys in so simple a manner to him who reflects upon it so much of information in respect to the nature of that which is popularly termed "wealth;" or so good a basis for reasoning correctly in respect to the origin and function of that which we call "money." And in such reasoning, the truth of the following propositions is too evident to require demonstration: 1st. The pins and needles, the scissors, knives, and cloth were of great utility to Robinson Crusoe, because their possession satisfied a great desire on his part to have them, and greatly increased his comfort and happiness. 2d. Possessing utility, they nevertheless possessed no exchangeable value, because they could not be bought or sold, or, what is the same thing, exchanged with any body for any thing. 3d. They had, moreover, no price, for they had no purchasing power which could be expressed as money. 4th. The money, which is popularly regarded as the symbol and the concentration of all wealth, had, under the circumstances, neither utility, value, nor price. It could not be eaten, drunk, worn, used as a tool, or exchanged with any body for any thing, and fully merited the appellation which Crusoe in another place gives it, of "sorry, worthless stuff." Finally, the pins, needles, knives, cloth, and scissors were all capital to Robinson Crusoe, because they were all instrumentalities capable of being used to produce something additional, to him useful or desirable. The money was not capital, under the circumstances, because it could not be used to produce any thing. Starting, then, with a condition of things on the island in which money had clearly neither utility nor value, let us next consider under what change of domestic circumstances it could become useful, acquire value, become an object of exchange, and constitute a standard for establishing prices. CHAPTER II. A NEW SOCIAL ORDER OF THINGS. The first person that came to join Robinson Crusoe on his island was Friday, and next, Friday's father. But even with this increase of numbers there was still no use for the money, inasmuch as the three constituted but one family, the members of which labored and shared all useful things they acquired in common, and made no exchanges. But when Will Atkins and the English sailors came, and the population of the island, we may suppose, was largely and permanently increased, a new social order of things became inevitable. Incompatibility of taste and temper, and a natural desire for personal independence, soon made it impossible for all to live and share in common as one family. And self-interest also soon taught, that, in order that the quantity of useful things available for the new community as a whole might be increased, and their quality perfected, it was desirable, that, instead of each man endeavoring to supply all his own wants, and for this purpose following irregularly the business of a carpenter, baker, tailor, mason, and the like, it was best for each man to pursue but one occupation, and, making himself skilled in it, procure the things which he himself did not produce, and which he might need, by exchanging his own products or services for the products or services of some other man. They saw instinctively that Robinson Crusoe, although originally civilized, would, if he had remained alone on the island, have inevitably become a pure savage, and simply because he was alone, and could make no exchanges. For a time, the things which he obtained from the wreck raised him above this condition; for what the ship brought him--the knives, axes, guns, cloth, etc.--were capital, or the accumulated labor of other men. But if the ship had given him nothing, he would have had to make every thing for himself--"his hat, his garments, his feet-covering, his bread, his meat with bow and arrows, his house by blows of his hatchet, his hatchet by blows of his hammer, his hammer heaven knows how"--and become a barbarian in spite of himself, because all his effort would have been required, and would have only sufficed, to insure him a bare subsistence. Systematic division of labor and the exchange of products and services thus, for the first time on the island, came in, and constituted a part of the perfected machinery of production, or the means of getting a living. And it is also to be here noted, that, because commodities and services now for the first time became exchangeable, they also for the first time acquired the attribute which we call value. CHAPTER III. THE PERIOD OF BARTER. All exchanges must, however, in the first instance, have been made directly, or, as we term it, by barter; so much of one commodity or service being given for so much of some other commodity or service--corn for cloth, furs and skins for knives or tobacco, so much labor in building a house for so much skill in constructing a canoe. But in all this method of exchanging, which, while it is the most ancient, is also one which still extensively prevails in even the most civilized societies, there was no place for the use or intervention of money; and consequently, also, there was no such thing as price; for price, as before stated, is the purchasing power of any commodity or service expressed in money. But the people on Robinson Crusoe Island soon found out by experience that there was an obstacle in the way of carrying on all exchanges according to the principle of direct barter, so serious in its nature as to constitute, unless removed, a complete bar to any further considerable progress in civilization and social development. And the discovery happened somewhat in this wise: Twist, who was a tailor, and had made a coat, discovered all at once that he was out of bread; and being hungry, suspended work, and went in search of Needum, the baker, to effect an exchange. He found him without difficulty, just heating his oven, and with plenty of bread to dispose of; but as the baker had all the coats he wanted, he declined to trade. Needum, however, kindly informed Twist that if any fellow should call with any surplus grain or flour, he (Needum) would be most happy to supply him with all the bread he needed in exchange; but as the tailor was neither a farmer nor a miller, and had neither of these articles, he (Twist) set off for the other end of the island, where there was another baker, to see how the latter was situated in respect to garments. On his way, Twist was overtaken by Pecks, the mason, who had no coat, and, wanting the very garment which Twist had been making, had stopped work on a stone wall and gone in search of the tailor, to whom he proposed to exchange the coat for a new chimney. But as Twist had already two chimneys to his house, and nothing to cook, and didn't want another chimney, the mason was as unsuccessful in his effort to trade with the tailor as the tailor had been just before with the baker. At last, after much vexatious traveling about, involving great waste of time and labor, Twist found a baker who wanted to exchange bread for the coat, and Pecks a tailor who would give a coat for a chimney; Needum having, in the mean time, shut up his bakery and gone in search of Diggs, the farmer, who was willing to supply grain for bread. But when all these different persons, each desirous of exchanging his special products or services, had been found, and had come together, a new perplexity at once made its appearance, and one so embarrassing as to cause each man seriously to consider whether it were not better to return home and endeavor to produce every thing for himself, rather than attempt to exchange any thing. "For how," said they all, "is the comparative value of our different commodities and services which we propose to exchange to be ascertained?" "How can I know," said Twist, "how many loaves I ought to receive for my coat?" "Or I," said Pecks, "find out how high and broad a chimney I ought to make for my garment?" Diggs, furthermore, got up a little private dispute of his own with Needum, growing out of the circumstance that the latter wanted to make his entire payment in bread to the former at once; while Diggs, who did not relish the idea of living on stale and possibly moldy bread for an indefinite length of time, wanted pay for his grain, from the baker, at the rate of one fresh loaf per day. As for poor Twist, he had become by this time so humble through hunger that he had not the heart to object to the proposition to take a cart-load of bread at once in exchange for his coat, although his house was so small that he knew he would have to store part of his "pay" on the roof, where it would be certain to be eaten by others than his own family. There was another incident which happened about this time which made much talk among the island community. A man who had nothing to sell but his labor had been employed to load a vessel with coal--a vein of which had been discovered; and, after working faithfully all day, had received in pay for his services a ton of coal. But as it was meat, drink, and lodging, and not coal (although the latter was greatly needed for some purposes), which the laborer wanted, there was nothing left for the laborer to do but to attempt to exchange his coal, and that, too, as soon as possible, in order to satisfy his immediate necessities. Being too poor to hire a horse and cart, he therefore borrowed a wheelbarrow, and, filling it with coal, went in search of persons who had a surplus of meat, drink, and lodgings to dispose of. But all of them happened to have all the coal they wanted; and morning found the laborer still trundling through the streets his most useful commodity unexchanged, and ready to sink with hunger and exposure. A like experience befell also the journeyman butcher, blacksmith, carpenter, and dry-goods clerk, who received for their day's labor respectively a sheep-skin, a dozen horse-shoes, a piece of pine timber, and two yards of red flannel. All were in no condition, through bodily exhaustion, to resume work on the next day; and all also clearly saw that their condition would not have been much improved, if each had received an entire payment in either meat, drink, or lodging, in place of coal, skin, lumber, horseshoes, or cloth. The laborers, therefore, held a meeting, and at once resolved: "That whereas it was evident that the system of paying for labor with a portion of the commodity which each laborer produced would necessitate as much time and labor to make their wages serviceable to their wants as was required in the first instance to earn said wages; therefore, it was but right and proper that the employers should allow the laborers to use half of the whole time for which they were paid, for the purpose of rendering their wages wholly available for their immediate necessities." But to this the employers rejoined that such an agreement would be equivalent not only to doubling the proportion of wages to direct production, but also to impairing, to the extent of one-half, the effectiveness of all labor engaged in production, thereby increasing scarcity, diminishing abundance, and rendering further advance in material development exceedingly slow, if not altogether impossible. For a time, therefore, there was a prospect of a very serious difficulty between the representatives of labor and the representatives of capital; resulting, as is always the case, in immense losses, not only to those directly concerned, but to the whole community. CHAPTER IV. HOW THEY INVENTED MONEY. The people on the island--both laborers and employers--were, however, fully agreed that life was too short to waste a good part of it in a game of "blindman's-buff" on a large scale--for such this attempt to conduct exchanges on a basis of direct barter substantially was; [1] but they nevertheless also clearly perceived that the game would continue to be played, to the interruption of all material progress, unless some other method of exchanging could be devised and adopted. Under the guidance, therefore, as it were, of instinct (Robinson Crusoe encouraging), and without any enactment of law, Twist, Needum, Pecks, Diggs, Friday, Friday's father, Will Atkins, and every body else, by common consent, agreed to select and adopt some single commodity which all should agree to take in exchange for whatever of products or services they might have to dispose of; so that whenever any one had any thing to exchange, he might first exchange it for this commodity, whatever it might be, and then with such intermediate object purchase at such times and places, and in such proportions as he might desire, whatever he might need. And the moment this was done, civilization on the island took a long step forward, and the first great embarrassment growing out of the attempt to exchange exclusively by direct barter was removed. The tailor was no longer in danger of starving; the mason had no longer any anxiety about procuring clothing, and the laborer received as pay for his labor something which gave him an equivalent in meat, drink, lodging, and other necessities which he might need, without trouble; every man giving freely of his goods or services for the intermediate object, because he knew that every other person desirous of exchanging would be willing to do the same. Again: the selection of some commodity or article, and the investing it by common consent with a universal and comparatively unvarying purchasing power, also solved the second perplexity, inasmuch as it provided a measure or standard, for ascertaining the comparative value or purchasing power of every other exchangeable commodity or service; and in precisely the same manner as the length or weight of any thing is ascertained, i.e., by comparing it with some other thing which the community have universally agreed to recognize as a standard of length or weight--as, for example, the rod of wood which we call a yard-stick, or a piece of metal which is termed a pound. "My loaves are each worth ten pieces of the intermediate commodity," said Needum, the baker! "My coat," rejoined Twist, the tailor, "is worth a thousand pieces!" The terms of fair exchange between the baker and the tailor would therefore have been one hundred loaves for one coat. The general name given to the commodities or articles which the people of different countries universally accept in exchange, as the equivalent for all other commodities or services, and as the measure of values, is money. The commodities or articles which have been selected by men at various times and places to serve as this universal equivalent, intermediate agent, or medium for facilitating exchanges, have been exceedingly various. Among the North American Indians, and the early settlers who came among them, wampum and beaver-skins were used as money; among the natives of West Africa, money consists of small shells called "cowries;" in Abyssinia, the common money of to-day is salt; in Chinese Tartary, it is cubes of pressed tea; and within a comparatively recent period small cakes of soap have been used as money on the west coast of Mexico. Among pastoral people of antiquity, cattle and sheep were so extensively used for money that our common English word pecuniary has its derivation from the old word pecus, signifying a flock. And while we read in Homer that the price of the armor of Glaucus was one hundred head of cattle, we also know that the Zulus of South Africa pay their debts to-day in cattle, and reckon their wealth by the same standard. Money, therefore, existed before statutes, and exists and is used to-day among nations who have no written or acknowledged code of laws. It is also of importance to a clear understanding of this subject to recognize at this point another fundamental fact, namely, that there is no evidence that any nation or people has ever adopted, in the first instance, any article or commodity to use as money which did not possess, by reason of some inherent or intrinsic desirable qualities, a natural purchasing power or value. And a little reflection will make it obvious that this must have been so from necessity. For in the absence of all law defining what money should be, and regulating exchanges, the adoption of any article to serve as money which represented little or no effort for its production or accumulation would enable the shrewd, the idle, or unscrupulous, easily, and without fear of punishment or restraint, to take from the rest of the community products which represented the expenditure of time and labor, without giving in return any equivalent. Thus, for example, if dried leaves, or pieces of paper with such marks as any might choose to stamp or scrawl upon them, had been invested with a universal purchasing power, the primary practical result of the use of such money would have been to enable somebody to obtain something for nothing, or to permit those who would not work or save, to rob those who did. The people on the island, being uneducated, never did any such foolish thing; but when they came to study history, they found out, to their great surprise, that the people of other countries had repeatedly used things worthless in themselves as money; and many years afterward a man who aspired to be a great teacher even came to the island from the United States, and endeavored to convince the people that it was a great defect to use any thing as money which had any intrinsic value as a commodity. [2] The children of the first school he attempted to talk to soon made his position embarrassing by reading from their histories that the people of every country, especially the poor and ill-informed, who had ever attempted to facilitate their exchanges by using something as money which had no intrinsic value, had in every case been so swindled and robbed, as a consequence, that sooner or later they were always compelled, as a measure of simple self-protection, to abandon its use, and in its place adopt something as money which had a generally acknowledged and comparatively permanent inherent value or purchasing power as a commodity. The following were some of the narrations which the children found and read out of their histories: "In December, 1861, a poor soldier's widow put into the savings-bank two hundred dollars in specie, and then removed with four young children to California. In July, 1864, when gold stood at two hundred and eighty, she sent for her money. In return, she received a gold draft for eighty-three, accrued interest at six per cent, included."--Henry Bronson, Nature and Office of Money. "The morals of the people were corrupted (by the Continental irredeemable money) beyond any thing that could have been believed prior to the event. All ties of honor, blood, gratitude, humanity, and justice were dissolved. Old debts were paid when the paper money was worth no more than seventy for one. Brothers defrauded brothers, children parents, and parents children. Widows, orphans, and others were paid for money lent in specie with depreciated paper."--Breck, Sketch of Continental Money. "The assignats gradually dwindled down to nothing, involving the whole land in ruin--excepting a few lucky speculators--and resulted eventually in national bankruptcy. When thousands of wretches, even before the final collapse of the assignats, were committing suicide to escape starvation, war was a blessing; and Napoleon was the instrument by means of which all Europe was made to feel the results of worthless money, either directly or by inoculation, from its maddened victims."--Notes on the French Assignats, and their Influence. "He had to pay four hundred dollars for a hat; for a pair of boots the same. He wanted a good horse, but was asked a price equivalent to ten years' pay." "My six months' earnings will scarce defray the most indispensable outlay of a single day. * * * For a bed, supper, and grog for myself, my three companions, and their servants, I was charged, on going off without a breakfast next day, the sum of eight hundred and fifty dollars."--Life of General De Kalb. "In all, from first to last (1835 to 1841), the amount of notes, bills, drafts, bonds, etc., issued by the Treasury of the Republic of Texas, and serving to a greater or less extent as a 'circulating medium,' amounted to $13,318,145, or at the rate of more than two hundred and sixty dollars per head of the entire population. If paper issues serving as money could have made a people rich, the Texans ought to have been the richest people in the universe. In January, 1839, Texas treasury-notes were worth no more than forty cents on the dollar; in the spring of 1839, they were worth thirty-seven and a half cents; in 1841, from twelve to fifteen cents; and in 1842 it required, in the characteristic language of the times, 'fifteen dollars in treasury-notes to buy three glasses of brandy-and-water without sugar.' 'By this time there was little circulating medium of any kind in Texas; but this was no great calamity, as the people had but little left to circulate.' The evils the system did were immense, and such as for which, even were it so disposed, the Government could afford no compensation to the sufferers."--Gouge's Fiscal History of Texas. Again, one of the principal objects for which money was devised and brought into use was to serve as a measure, or standard, for estimating the comparative value of other things. But it seems hardly possible to conceive of a person desirous of using money for such purpose, selecting an article to measure values which in itself possesses no value, or costs no labor to produce, any more than he would select as a standard for measuring length something which had no length, or as a standard for measuring weight something which had no weight. The people of the island must have been unusually stupid if they did not from the outset, therefore, clearly see that nothing can be reliable and good money under all circumstances which does not of itself possess the full amount of the value which it professes on its face to possess. CHAPTER V. HOW THE PEOPLE ON THE ISLAND AND ELSEWHERE LEARNED WISDOM. But while any commodity possessed of acknowledged purchasing power or value may be used as money, the experience of the islanders and every other people must have soon taught them that some commodities are much better adapted to this purpose than others; or, rather, that the use of certain commodities as money, while they may answer the purpose, nevertheless entail very serious disadvantages. And the details of the manner in which this information has been acquired by experience constitute one of the most interesting chapters in the world's history. The experience of the islanders was somewhat as follows: At the outset they agreed to use cowries--a pretty shell picked up on the beach, and which the women all desired to have and use as an ornament. These shells were not, however, plentiful; and, in fact, it was found that it required about as much time and labor for a man to collect a hundred of them as it did to grow a bushel of wheat. Consequently, wheat regularly exchanged for cowries (as money) at the rate of one hundred cowries for one bushel, while the farmer with two thousand cowries could readily buy a plow, which was considered equivalent in value to twenty bushels. By-and-by, some idle fellows that were in the habit of sailing made a long excursion, and, for the first time, visited a little island on the remote horizon. When they landed, they found, to their surprise, that instead of cowries being very scarce on the beach, they were very abundant. They winked at one another, and said little; but each man proceeded to gather all the cowries he could, and, returning to the main island, kept their discovery a profound secret. The first thing of note that next happened among the Robinson Crusoe people was a great and unexpected revival in business. Money began to grow abundant. Societary circulation was never so active. Every thing that was offered for sale speedily found a purchaser, and, demand increasing, prices rapidly increased also. It was also noticed that a few persons who never did any regular work, but speculated and gambled all the morning, and took pleasant sailing excursions every afternoon, had, especially, plenty of money, which, as patriotic citizens, desirous of making trade lively, they were always most ready to part with for other commodities. The shop-keepers, the farmers, and the mechanics, all also finding that they had more money than usual, all also felt impelled to buy something, and prices took a fresh start upward, so that a bushel of wheat that could previously have been sold for one hundred cowries easily brought one hundred and fifty, and even two hundred. But, on the other hand, the farmer, instead of being able to buy, as before, a plow for two thousand cowries, now found that he had to pay double, or four thousand; or, in other words, the cowries had only about one-half the purchasing power they possessed before. But for a time every body was jubilant. Was it not evident that the value of every man's possessions, measured in cowry money, had greatly increased--and what could be more natural than that the shrewd adventurers who had been the authors of these golden days should be highly honored, invited to speak before cowry clubs in all parts of the island, and be even talked of for the chief offices, which still continued to be filled by Robinson Crusoe and his man Friday? The continually augmenting prices--measured in cowry money--of all commodities, or, what is the same thing, the continually diminishing purchasing power of the cowries, at last began to attract attention, and this in turn induced distrust; so that the price of a bushel of wheat, which had been at first one hundred cowries, and then two hundred, rose to three, four, and even five hundred cowries. Another remarkable circumstance noticed was, that, as prices increased, the wants of trade for cowry money also increased proportionably, which want the adventurers who had been the means of giving the island its increased volume of money took care to supply by bringing additional quantities of cowries as they were needed. It was also observed that, as distrust increased, there was also a remarkable increase in societary activity; for every body desired to change off his cowry money for something else. [3] Persons who were in debt made haste to pay their debts, and every body was ready to lend cowry money to start all sorts of new enterprises. A company was organized, for example, with a capital of ten million cowries, to explore the wreck of the original ship which brought Robinson Crusoe to the island; and although nobody knew exactly where the wreck was, or what was supposed to remain in it, it was advocated as affording great opportunity for labor. Another project, for which a company with fifty million cowries capital was started, was to build a system of canals across the island, although the island had a width of only about ten miles, with a remarkably safe ocean navigation all around it. Finally, the secret of the whole matter gradually leaked out. Other people besides the original three shrewd fellows found out where the supply of cowries came from, and made haste to visit the remote island, provide themselves with money, and put it in circulation. But the more money that was issued, the more was needed to supply the wants of trade, until at last it took a four-horse wagon-load of cowries to buy a bushel of wheat. Then the bubble burst. Stock-companies all failed. Trade became utterly stagnant. The man whom Robinson Crusoe had made secretary of the island treasury thought he could help matters by issuing a few more cowries, but it was no use. Some very wise persons were certain that every thing would be all right again if people would only have confidence; but as long as the people who worked and saved were uncertain what they were to receive for the products of their labor--something or nothing--confidence didn't return. Every body felt poor and swindled. Every body who thought he had money in savings-banks woke up all at once to the realization that his money was nothing but a lot of old shells. Every body had his bags, his tills, and his money-boxes filled with shells, which he had taken in exchange for commodities which had cost him valuable time and labor. Strictly speaking, however, calamity did not overtake every body. There were some exceptions, namely the shrewd and idle fellows who had first found the cheap supply of cowries, and, taking advantage of the ignorance of the community, had added them to the before-existing circulation to serve as money. All these had taken very good care to keep the substantial valuable things--houses, lots, plows, grain, etc.--which they had received in exchange. They had, in fact, grown rich by robbing the rest of the community. [4] The community, however, were too courteous to call them thieves, and in conversation they were usually referred to as shrewd financiers, and as men ahead of their time. The concluding act of this curious island experience was, that the formerly so highly prized money became depreciated to such an extent as to possess value only as a material for making lime. The people accordingly, by burning, made lime out of it, and then, in order to make things outwardly cheerful, used the lime as white-wash. But upon one point they were all unanimous, and that was, that the next commodity they might select to use as money should be something whose permanency of value did not depend on elements capable of being suddenly affected by accidental circumstances, or arbitrarily and easily changed by the devices of those who desired to get their living without working for it. But this experience of the islanders in reference to the originating and using of money, although curious, has not been exceptional; for the records of history show that men almost everywhere, in going through the process of civilization, have had a greater or less measure of the same experience. One particularly noteworthy illustration of this is recorded in the "History of New York," by Diedrich Knickerbocker, and in the manuscript records of the New York Historical Society. It was in the days of Dutch rule--1659--in New Amsterdam (afterward New York), when the common money in use was the so-called Indian money, or "wampum;" which consisted "of strings of beads wrought of clams, periwinkles, and other shell-fish. These had formed a simple currency among the savages, who were content to take them of the Dutch in exchange for peltries." William Kieft was at that time governor, and being desirous of increasing the wealth of New Amsterdam, and withal, as the historian relates, somewhat emulous of Solomon (who made gold and silver as plenty as stones in the streets of Jerusalem), he (the governor) determined to accomplish his desire, and at the same time rival Solomon by making this money of easy production the current coin of the province. "It is true, it had an intrinsic value among the Indians, who used it to ornament their robes and moccasins; but among the honest burghers it had no more intrinsic value" than bits of bone, rag, paper, or any other worthless material. "This consideration, however, had no weight with Governor Kieft. He began by paying all the servants of the company, and all the debts of the Government, in strings of wampum. He sent emissaries to sweep the shores of Long Island, which was the Ophir of this modern Solomon, and abounded in shell-fish. These were transported in loads to New Amsterdam, coined into Indian money, and launched into circulation." "And now for a time affairs went on swimmingly. Money became as plentiful as in the modern days of paper currency, and, to use a popular phrase, 'a wonderful impulse was given to public prosperity.'" Unfortunately for the success of Governor Kieft's scheme, the Yankees on Connecticut River soon found that they could make wampum in any quantity, with little labor and cost, out of oyster-shells, and accordingly made haste to supply all the wampum that the wants of trade in New Amsterdam required; buying with it every thing that was offered, and paying the worthy Dutchmen their own price. Governor Kieft's money, it is to be further noticed, had also in perfection that most essential attribute of all good money, "non-exportability." Accordingly, when the Dutchmen wanted any tin pans or wooden bowls of Yankee manufacture, they had to pay for them in substantial guilders, or other sound metallic currency; wampum being no more acceptable to the Yankees in exchange than addled eggs, rancid butter, rusty pork, rotten potatoes, or any other non-exportable Dutch commodity. [5] The result of all this was, that in a little time the Dutchmen and the Indians got all the wampum, and the Yankees all the beaver-skins, Dutch herrings, Dutch cheeses, and all the silver and gold of the province. Then, as might naturally have been expected, confidence became impaired. Trade also came to a stand-still, and, to quote from the old manuscript records, "the company is defrauded of her revenues, and the merchants disappointed in making returns with which they might wish to meet their engagements." It is safe to conclude that, after this, the commodity made use of by the Dutchmen as money was something less liable to have its value impaired than wampum. The early settlers in East Tennessee also came to a similar conclusion, after a somewhat similar experience. Raccoon-skins were in demand for various purposes, and consequently were valuable. They accordingly selected them for use as money. Opossum-skins, on the other hand, were not in demand, and therefore had little value. Those of the settlers who desired to discharge their obligations without giving a full equivalent paid their taxes in opossum-skins to which coons' tails were attached. The counterfeits having once got into the treasury, could not be exported out of the treasury to meet the payments of the State, and the use of coon-skins as currency came to an end. But to return to the island. Although the first experience of the islanders in selecting a commodity to be used as money had been particularly unfortunate, the necessity of having some agency to serve the purpose of money remained as great as before, and consequently a new commodity had to be selected. Various people proposed various things. Some proposed to use bananas, which were always desirable, and, when good and ripe, were always exchangeable at a very constant value; but their unfitness to be used as money was acknowledged as soon as it was pointed out that bananas decayed very quickly after they became most useful, and that therefore a man who had plenty of money to-day might have none tomorrow, and that through no fault of his own. [6] Wheat, cattle, and pieces of stamped iron were also proposed, but all of these were found to be unsuitable in some essential particular. Thus, for example, it was objected to wheat, that, though it was almost always in demand, and represented a very constant amount of labor for its production, it was too bulky to carry about, and rarely had the same exact value one year as another; to cattle, that it was impossible to divide up an ox, cutting off the tail at one time and the ears at another, for the purpose of making change, without destroying the value of the animal as a whole; and that if cows in general were to be used as legal tender to pay debts, the very poorest cow would very probably be selected from the money-pen for such a purpose; [7] while, if iron were adopted as money, and circulated at its current value, it might be necessary to move about a ton to pay a debt of twenty or thirty dollars. A peculiar kind of beads, made of blue glass, had come into use with the women on the island as ornaments, and being greatly in demand, small in bulk, and of most durable material, they were thought to be peculiarly well fitted to serve the purpose of money. They were accordingly adopted, and for a time fairly answered the purpose. But all at once the women declared their continued use to be unfashionable; and all use and demand for the beads at once ceasing, the merchants and others who had accumulated a large stock of them, in exchange for other commodities, at the same moment found that what they had regarded as money had no longer any purchasing power or value, and in consequence experienced great losses. Thereupon the community concluded not to use blue glass beads any longer as money. [8] How fast the people on the island, by reason of their varied experience, educated themselves up to a knowledge of what constitutes good money may be inferred from the following incident: A portion of the inhabitants on the island were heathen, and, to defray the expense of efforts to civilize and Christianize them, it was the habit of certain good men to take advantage of the assembling of the people from time to time to solicit and receive contributions for such objects. It was observed, however, on such occasions that some persons, either through ignorance of what constitutes money, or by reason of great poverty, were in the habit of depositing commodities in the hat which were not money; and the practice having been brought to the attention of Robinson Crusoe (who generally presided at such meetings), he is reported to have administered rebuke and instruction in the following impressive manner: "Before proceeding to take up our regular contribution for the heathen," he said, "I would suggest to the congregation--and more especially to those who sit in the gallery--that the practice of putting into the hat commodities which are not money, more especially buttons, shows a degree of ignorance respecting the uses of money on the part of some in this community which I had not supposed possible, after all our recent and varied experience on this subject. But if, through ignorance or impecuniosity, any should feel obliged to continue to contribute buttons in the place of money, I would request that they do not stamp down or break off the eyes; inasmuch, as while by so doing they utterly destroy the utility of these commodities as buttons, and do not increase their desirability as money, they also utterly fail to deceive the heathen; who, although ignorant of the Gospel, and not using buttons for any purpose, are nevertheless, as a general thing, good judges of currency." CHAPTER VI. GOLD, AND HOW THEY CAME TO USE IT. Finally, time and circumstances helped the islanders to a solution of their difficulties. A man, walking in a ravine one day, picked up a small bright mass of shining metal. Although it had evidently lain in the sand, been washed by the water, exposed to the atmosphere, and rubbed against the rocks, nobody knows how long, it had a remarkable brightness and color; and the more it was rubbed, the brighter and more attractive it became. This little mass of metal, which afterward came to be designated as gold, the man carried home to his wife, who in turn was so much pleased with it that she hung it by a string about her neck as an ornament. Its attractiveness of course excited the desire of every other woman to have the same, and a further search in the ravine resulted in the discovery of other nuggets. Closer examination of the new metal also showed that it possessed many other remarkable qualities besides brightness. It was found it could easily be melted and cast, and also be readily molded without heat by hammering and pressing; and that when so cast, molded, and pressed, it persistently retained the shape and impression that were given it. Further, that it could be drawn into the finest of wire, hammered into the thinnest of plates and leaves, and be bent and twisted to almost any extent without breaking; that an admixture with it of the slightest impurity or alloy so immediately changed its color, that color became to a very high degree a test of its purity; [9] that fire, water, air, and almost all the agencies destructive to other things, had comparatively little or no effect upon it; that with the exception of size and weight, every piece, no matter how small, possessed all the attributes of every other larger piece; and that when any large piece was divided into a great number of smaller pieces, these last, in turn, could be reunited without loss or difficulty again into one whole. Of course, the discovery of all these remarkable qualities united in one substance not only greatly increased its utility, but at the same time greatly increased the desire of every body to have it. In place of being worn in a rough state as an ornament, it was converted into rings, bracelets, chains, pins, etc. It was found to be almost indispensable for a great number of mechanical and chemical purposes; and, finally, the charm for its possession and desire for its use proved so overpowering that to many it actually became almost an object of worship. If a man was a Pagan, he felt that in no way could he so honor and symbolize the god he worshiped as to fashion in gold the image of that which he imagined; if he was a Christian, he chose gold for the fabrication of his symbolic vessels and ornaments, as, of all material things, the one which was most typical of purity, beauty, durability, and worth. If a great government or a people desired to commemorate the deeds of a hero or statesman, it impressed their effigies in medals of gold; if a maxim was enunciated which by general consent embodied the best rules of life, it was called golden; if a law or precept was thought worthy of being kept in ever-present remembrance before the people, it was emblazoned in letters of gold; while for speech, prophecy, or poetry, this same metal has ever been a never-failing source for the finest of comparisons and the most attractive of figurative illustrations. In short, from the time of its first discovery, among all nations, in all countries, with the ignorant and the learned, the savage and the civilized, the rich and the poor, the humble and the powerful, gold has always been, of all material things, the one which most men have desired most; the one for which, under most circumstances, they have been willing to exchange all other material possessions, and for the sake of acquiring which, even part with immaterial things of greater value--honor, creed, morality, health, and even life itself. Gold so becoming an object of universal desire to the people on the island, and made exchangeable for all other things, it soon acquired spontaneously a universal purchasing power, and from that moment became Money. This purchasing power was at first by no means fixed or constant. So long as there was but a small quantity of gold, its purchasing power was large. As the quantity extracted from the rocks or washed from the sands became greater, and the wants of the people became more and more satisfied, its purchasing power or value decreased; and if the supply had continued, and the demand had been limited to the wants of the island exclusively, its value in time would have undoubtedly been no greater than copper or iron, and possibly not so great. But, very curiously, an abundant supply did not continue. That which was obtained first and with little labor proved to be the result of the decay and washing of the rocks through long ages; and when the readily accessible or surface deposits became exhausted, as was soon the case, the conditions determining the supply of gold became altogether different. On the one hand, there was no lack of gold. Instead of being a very scarce metal, as was for a time supposed, it was found to be so widely disseminated that the chemists and metallurgists readily detected traces of gold in almost every extensive bed of clay and sand they examined. [10] But, on the other hand, experience also proved that to collect any very considerable quantity of the metal required the expenditure not only of a vast amount of most disagreeable and exhausting labor, but also of a great quantity of other commodities. So that the people who, at the outset, abandoned their various occupations of raising wheat, making coats, building boats, baking bread, and constructing stone walls and chimneys, and betook themselves to digging gold, soon learned that, as a general rule, the results of a day's labor thus employed purchased no more of useful or desirable commodities--meat, drink, clothes, etc.--than the results of a similar amount of labor exerted in the most ordinary occupations; and not a few even were ready to assert, as the result of their individual experience, that a man could do better for himself in the way of earning a living by following any and every other occupation rather than that of seeking for gold. [11] Accordingly, after trying it for a little while, the most skilled laborers left the gold regions and went back to their old occupations; and these, in turn, were followed by the unskilled laborers in such numbers, that had it not been for the encouragement growing out of the hope of suddenly enriching themselves through the chance discovery of a great nugget (as sometimes happened), the mines would have been entirely deserted. As it was, the supply of gold greatly fell off, and, the demand for it remaining about the same, the purchasing power of the stock on hand for other commodities gradually increased, until it came about that the result of an average day's labor in digging gold was found to buy more than the result of an average day's labor in other occupations. But as soon as this was observed, an additional supply of labor went back to gold-mining, and continued to follow it, until an equalization of results from effort in gold-digging and effort in other corresponding employments was again established, as before related. And this interchange of employments and equalization of results from labor went on, year by year, until at last the people, as it were by instinct, found out that a given quantity of gold represented more permanently a given amount of a certain grade or kind of human labor or effort than any other one substance. And the moment this fact became apparent, the people on the island for the first time also clearly perceived that gold, in addition to the universal exchanging quality or purchasing power which it had before naturally acquired, from the circumstance that every body from the time of its first discovery wanted it, had further acquired two other attributes, which fitted it, above all things else, to serve as money; namely, and first, that it had become a measure or standard of value, by which, as by a yard-stick, the comparative value of all other commodities might be measured or estimated; and, second, that its value or purchasing power was so constant and continuously inherent in itself, even under circumstances when the value of most other commodities would be destroyed, that the greatest security or guarantee which any person owning gold could possibly have of its remaining valuable to him for any length of time was, that the owner should simply keep possession of it. By no portion of people on the island was this last attribute regarded so much in the light of a blessing as by the poor old men and women. As a general rule, they earned but little more than sufficed to support them, and they were therefore always naturally very anxious lest what little they saved should be impaired in value or made worthless by keeping, before the time when they might especially need it to pay for doctors and medicine, or insure them a decent burial. The cowry money, which had before represented their hard toil and personal deprivation, had turned out, on keeping, to be only worthless shells; the bead money had become valueless when it became unfashionable; the cattle money had to be fed every day to keep it from experiencing a heavy discount, and penned up every night to prevent it from walking off; the wheat money was always liable to be injured by damp or devoured by vermin; while twenty pounds of pig-iron had proved too heavy for their old limbs to carry to the store every time they wanted to purchase a little cloth or tobacco. But here was something at last which completely satisfied the necessities of their situation, and enabled them to feel certain that, whether they buried it in the ground, where it was always damp and moldy; or put it in the chimney, where it was always hot and smoky; or lived at one end of the island among the heathen, or at the other end among the Christians, would always, year in and year out, buy about the same average quantity of all sorts of things; and which, when offered in payment for services or commodities, to the doctor, lawyer, merchant, druggist, undertaker, mason, or tailor; to the Yankee, Irish, Dutch, Turk, or Hindoo; to the governor of Ohio, or a senator from Indiana, did not require any of them to look in a book, examine a law, read the Bible, or hunt up the resolutions of the last Congress or political convention, to tell how much it was worth, or whether it was safe to take and keep it. There was a very wise man on the island who objected to the use of gold as money, for the reason that he felt afraid that the poor old women who wanted to feel certain of having always something of reliable value in their possession would fill their old stockings with it and hoard it. [12] But he was soon shut up by some one asking him, why, if the old women wanted to keep something by them perfectly secure against a rainy day, and slept better nights because they knew they had it, they shouldn't be allowed that privilege? and if there could be any possible reason why any one should object to the old women hoarding gold, except that he wanted to cheat and wrong the poor by compelling them to keep their hard-earned savings in something whose value was not certain, and which might have no value whatever when it came time to pay the doctor or the undertaker? When the people on the island first began to use gold as money, they carried it around with them in the form in which it was first found; the fine dust or scales inclosed in quills, and the nuggets in bags; or they melted and hammered it into large lumps and bars; [13] and, as the purchasing power of the gold was always proportioned to its weight and purity, every body carried round with him small scales and tests with which he proved the gold before making exchanges with it (the same as is customary at the present day in China). But this method involved great inconveniences; and although the statement of a person of recognized honesty that he had proved the value of the gold he offered in payment was generally accepted, it was nevertheless recognized that there was no more unfairness or discourtesy in the claim of the grocer to test the quality of the money of his customer by scales and acids, than there was in the claim of the customer to test, by tasting, the salt and sugar of the grocer. As might be inferred, therefore, it often required a good deal of time to complete the most ordinary exchanges, and people everywhere complained about it and wrote letters to the newspapers. Merchants who were very cautious and particular, irritated their customers, and got the reputation of being very exacting and distrustful; while merchants who had but little capital and wanted to get business, advertised they would take gold on the simple word of their customers. But it was observed of the last, that, owing to being constantly cheated, they all, sooner or later, failed. At last the difficulty was remedied by a series of happy circumstances. Robinson Crusoe had, some years before this, died, at a good old age, as had also Will Atkins, and all the sailors who had come with him to the island from other countries; so that there were none now on the island who had ever known any thing about or ever seen any coined money. In making some public improvements, however, a party of workmen one day broke into the old cave in which Crusoe had first lived when he escaped from the shipwreck, and there, in the dirt beneath the floor, were discovered the three great bags of money which Crusoe had found in the chest, and in his disgust had buried and utterly forgotten. Every body at once recognized the metal to be gold, and was perfectly willing to exchange other commodities for it with the finders, the same as he was willing to do for any other gold. But why it should be in the form of flat round disks, and stamped with inscriptions and images, was something that puzzled every body; and the Antiquarian and Philosophical Society called a special meeting to discuss the subject. Some, looking to only one side of the pieces, thought they were medals struck to commemorate some distinguished man, or a woman, whose name often appeared to be "Liberty." Others, who looked only at the other side, thought they were intended to signalize a great contest between the lion and the unicorn, or to make the people familiar with the peculiarities of some unnatural bird or beast, which, as it was not like any thing either in the heavens, or on the earth, or in the waters under the earth, it might not be sinful to worship. At last, after the flat disks or coins had been for some time in circulation, and the community had found out, by repeatedly weighing and testing them, that each disk represented a constant weight of gold of uniform purity, the idea came at once to every one that the only use of the fanciful images and inscriptions on the disks was to officially testify to the fact of their uniformity of weight and value; and then every body wondered that he could have been so stupid as not to have before recognized the idea and adopted it, in place of every man weighing, cutting up, and testing his gold every time he desired to part with or receive it in making an exchange. An arrangement was accordingly at once made for a public establishment--afterward called a mint--to which every person who so desired could bring his gold and receive it back again after it had been divided into suitable pieces of determinate weight and fineness; the fact that the weight and fineness of each piece had been so proved being indicated by appropriate marks upon the metal. And in this manner "coined money" first came into use on the island. And by this time, also, the money which Robinson Crusoe found in the chest, and which, when it first came into his possession, had neither utility, value, nor use as a standard, or measure of value, had gradually acquired all these several attributes: utility, when the material of which it was composed became capable of satisfying some human desire for it, as an ornament, as a symbol of worship, or for some mechanical or chemical purpose; value (the sole result of labor), when it became an object of or equivalent in exchange, or acquired a power of purchasing other things; a standard, or measure of value, when its purchasing power, by reason of various circumstances, was found to be, if not absolutely permanent, at least more permanent, on the average, than that of any other commodity. The conversion of money into coin was something purely artificial, and the result of law, or statute enactments, the sole object of which was simply to make the money (previously in use) true and in the highest degree convenient. But, as has already been pointed out, money came into use in the first instance without statute, and was the result, as it were, of men's instincts; and the subsequent choice by them of gold, in preference to any other commodities for use as money, was for reasons similar to those which induced men to choose silk, wool, flax, and cotton as materials for clothing; and stone, brick, and timber as materials for houses. It was the thing best adapted to supply the want needed. The introduction and use of coined money at once gave an impetus to business, and made the people richer, because it saved time and labor in making exchanges, and relieved every man from the trouble and expense of buying and carrying round with him scales and other tests. The only persons dissatisfied were the scale-makers, who found their business almost destroyed, and they petitioned the authorities to have their interests protected by the enactment of a law compelling all persons to weigh their coins with scales before exchanging, as formerly they did their gold. But, as every body at once saw that the effect of such a law would be equivalent to compelling all exchangers to do useless work, the petition amounted to nothing. For convenience in speaking and writing, also, each piece of gold or coin of determinate weight and fineness regularly issued by the mint received a particular name and had a particular device impressed on it. Thus, for example, the piece of lowest denomination, containing 25.8 grains of standard gold, which had on it a likeness of Crusoe's old and faithful servant, was called a "Friday;" a piece of ten times its weight and value, with a small portrait of the founder of the island community, was called a "Crusoe;" and a piece of double the weight of the last, or twenty times the weight of the first, with a large portrait on it, was called a "Robinson Crusoe" or a "double Crusoe." Some time after, when the island became generally known to the rest of the world, it was found that these coins exactly corresponded in weight, fineness, and value with those adopted in that foreign country called the United States, and there known under the names of the gold dollar, eagle, and double-eagle; and after a time, for the purpose of favoring the development of civilization and assimilating nationalities by the adoption of a common monetary standard, it was agreed to discard all local sentiments, and to substitute the latter names for the former. CHAPTER VII. HOW THE ISLANDERS DETERMINED TO BE AN HONEST AND FREE PEOPLE. Next came the consideration of the laws regulating the exchanges and the use of money. Some people wanted laws enacted that every person should be obliged to sell and part with any thing he owned, provided a nominal or real equivalent in what the State should declare money should be offered him; and, also, that when any person had bought commodities and services of another, and had promised to pay for them after a time, he might fully discharge the obligation by tendering that which the State said was money, no matter whether in the mean time the persons in charge of the mint had, for any reasons, taken out one-half the valuable gold in the coins, and substituted in its place comparatively worthless lead. But, to the honor of the islanders, these propositions met with little favor. They said, we mean to be an honest and also a free people; and, therefore, every one in buying or selling shall do exactly what he has agreed to do; unless, by reason of some unforeseen or unavoidable circumstances, he is absolutely unable to perform his agreement or contract. And they said, further, that if any one receives commodities and services, and promises to give, five years or five minutes afterward, in return, an agreed-upon quality and quantity of gold, wheat, cod-fish, or cabbages, it shall be considered, as in truth it is, dishonest to attempt to discharge the obligation by offering pig-iron in the place of gold, pease or beans in the place of wheat, soft-shell crabs in the place of cod-fish, or pumpkins in the place of cabbages; and any community which shall in any way sanction any such evasion of the letter or spirit of its obligations can have no rightful claim to call itself an honest, Christian people; and if any community enacts and maintains laws compelling any person to receive in exchange, or in pay for his services or products, something which he did not agree to and would not otherwise receive, such a community has no rightful claim to call itself a free community. The people on the island, therefore, decided that they would allow the island authorities to interfere with exchanges to this extent only: that the medium of exchange and measure of values that they had adopted and called a Friday, or a dollar, should always and under all circumstances contain 25.8 grains of standard gold; that this standard should never be departed from; and that although no one should be compelled to use it, yet whenever any one talked about or promised to pay or give money, without specifying whether the money should be wampum money, bead money, cattle money, gold money, or any other particular kind of money, the money issued by the acknowledged authorities of the island should be understood and accepted as what was meant. In short, like sensible men, the islanders concluded that as long as they maintained in common use a real, good, and true money, which carried on its face evidence (easily read and known of all men) of its value or purchasing power, there was little use of cumbering up the statute-book with any thing about legal tender. They would leave that to other people wiser than they were, who desired to use money that would not circulate, except it had some artificial power or agency back of it to make it go. After this, every thing for a time pertaining to trade and commerce went on very smoothly on the island. It is true there were bad persons who obtained commodities and services on credit for which they never intended to pay; careless and extravagant persons who bought more than they were able to pay for; and foolish and oversanguine people who, after having by labor and economy accumulated a good store of commodities, exchanged them for shares in enterprises which never could pay. And when people by one or more of such methods lost the results of their hard labor and toil, they naturally felt depressed, lost confidence in their fellow-men, and thought times and things might be improved by turning all those in office out, and putting new men in. But no one on the island ever for a moment imagined that there was any way to honestly replace the money they had lost, except by acquiring through industry and economy a new store of useful commodities with which to buy money; and no one who ever had any thing to sell which others in the community wanted, and were able to give in return a fair equivalent, ever found himself in want of money or a market; while, on the other hand, no one who had nothing to sell which the community wanted or were able to pay for ever succeeded in obtaining either money or a market. CHAPTER VIII. HOW THE PEOPLE ON THE ISLAND CAME TO USE CURRENCY IN THE PLACE OF MONEY. As time went on, changes in the method of doing business gradually occurred on the island. Instead of being an isolated and unknown community, their existence as an organized, civilized state became generally known to the rest of the world, and a brisk trade and commerce resulted from the exchange of the products of the island for the products of other countries. An excellent harbor existed at each end of the island, and about these points the population naturally aggregated, and built up two very considerable towns. The middle of the island, on the other hand, was elevated into high mountain ranges, covered with dense forests, in crossing which travelers journeying between the two cities were often robbed of all the gold they carried about them. To obviate this danger, and avoid the necessity of carrying gold, persons living at opposite ends of the island, therefore, adopted a system of giving written orders for money on each other, which each reciprocally agreed to pay to the person whose name was written in the order or draft, and then periodically settled or balanced their accounts by offsetting one order or payment against another. In this way value or purchasing power was transmitted long distances much more cheaply and conveniently than could be effected by the transmission of gold itself; and also much more safely, inasmuch as the thieves could make no use of the orders, even if they obtained them. And thus it was that the people on the island became acquainted with and first used what were afterward known as "bills of exchange." [14] This labor-saving and danger-avoiding device, moreover, proved so useful, that the idea soon suggested itself that by an extension of the principle involved in the bill of exchange the necessity of carrying gold at all in any quantity might also be avoided. A public office was therefore established, where people might deposit their gold under the guardianship of the state, and receive a ticket or receipt for the amount, payable in coin on demand; which tickets, from the fact that every body knew that they were convertible into gold at will, and that no more tickets were issued than corresponded to gold actually deposited and retained, soon came to be regarded as equally good and valid as gold itself, and vastly more convenient for the purpose of making exchanges. And thus it was that currency (from the Latin curro, to run) originated and came into use on the island as a substitute and representative of money. [15] The name originally given to these receipts was first "bank-credits," and then "bank-notes," but after a time people acquired a habit of designating them as "paper money." But this latter term was conceded to be but a mere fiction of speech and a bad use of language; for every intelligent person at once saw that a promise to deliver a commodity, or an acknowledgment of the receipt of, or a title to, a thing, could not possibly be the commodity or the thing itself, any more than a shadow could be the substance, or the picture of a horse a horse, or the smell of a good dinner the same as the dinner itself. Nevertheless, as an instrumentality for transferring commodities used for money, and avoiding the loss and waste unavoidable in handling and transporting such commodities, the currency thus devised was a great invention, and being always represented by, or, as we may express it, covered with, the commodity--gold--which, of all things, fluctuates least in value, it perfectly answered the purpose of money, without actually being so. It also furnished another striking illustration of the superiority of the commodity gold to serve either as money or as an object of value for deposit, against which receipts or certificates of deposit might be issued to serve as currency; for if other valuable commodities, like cattle, corn, cloth, or coal, had been selected for a like purpose, the bank would have been obliged to erect large pens, sheds, and warehouses for the storing of the deposits; and, let them be guarded ever so carefully, their value or purchasing power would, after a time, rapidly diminish from natural and unavoidable causes. The value of most commodities, even in a perfect condition, furthermore differs so much by reasons of mere locality, that there could be no possible uniformity in the value of the receipt for the deposit of one and the same article, issued by banks in different places, to serve as currency; the value or purchasing power of a ton of coal, or a fat ox, being one thing at the mouth of a coal-mine or on a prairie stock-farm, and quite a different thing ten, twenty, or a hundred miles distant. But in the case of gold, the space needed to store up what represents a vast value is very small, while the value or purchasing power of gold not only is, but is certain to remain, on the average, very constant all the world over. [16] CHAPTER IX. WAR WITH THE CANNIBALS, AND WHAT CAME OF IT. But more serious matters than the making and issuing of money soon claimed the attention of the people of the island. It will be remembered that Friday was first brought to the island by the cannibals, for the purpose of being cooked and eaten, and that he was rescued from this fate by the valor of Robinson Crusoe, as was subsequently also Friday's father and others of his countrymen. But the cannibals, although then repulsed, did not at the same time lose their appetites, or the remembrance of the good cheer that had escaped them; and meat becoming scarce in their own country, they projected a grand invasion of the island, with the intent of capturing and cooking Friday, if he was still there, or, in default of Friday, any body and every body they might happen to catch. The islanders all at once, therefore, found themselves precipitated into a terrible war, and were obliged to struggle not only for their homes, but for their individual existence. The Government was active and energetic, but to carry on the war a vast expenditure of commodities was necessary; and as the Government of the island--in common with all other governments--never had, or could have, any commodities or money to buy commodities with, other than what it obtained through loans and taxes, the people, one and all, were called upon to help. There was, however, some fear that if the calls for help were put in the form of taxes, the fires of patriotism might not burn as brightly as was desirable, and it was therefore deemed expedient to say little about taxes at the outset, and rely mainly on loans, to be repaid after the war was over. The people, on their side, responded most cheerfully. Some gave one thing and some another. Some gave service as soldiers, laborers, and artificers; others contributed timber for canoes, cloth for tents, iron for spear-heads and guns, corn and flour, hay, medicines, and money--in short, all sorts of useful things, the results of previous labor and economy on the part of the individual contributors. In return, the contributors received back from the Government a promise, expressed on paper, to repay the commodities borrowed, or their value in money. These promises were of two kinds. In one the promise was made definite as to the time of its fulfillment, and the amount or value of the promise carried interest. These were called bonds. In the other, the promise, although definite, specified no particular time for making it good, and its amount or value was not subject to interest. These latter, from the circumstance that they were written on blue paper, were popularly termed "bluebacks." When the people got the bonds, they put them carefully away, for the sake of the interest that would accumulate upon them; but when they got the bluebacks, they were at first at a loss to know what to do with them. They were in some respects unlike any thing they had ever seen before; and yet there was a very close resemblance between them and the certificates of deposits of gold in the public repository, which they had now been in the habit for some time of using as currency. And as the one promised, on the part of the Government, to pay money equally with the other, there seemed to the public to be no good reason why one should not be used as the representative and equivalent of money as readily as the other. The real difference was, that their former currency, composed of tickets or certificates given in exchange for a deposit of actual gold, represented an actual accumulation of an equivalent of every thing desirable which labor could produce all the world over; while, on the other hand, the promises to pay which the island authorities issued in ex- change for the commodities loaned them by the people, and subsequently used up in fighting the cannibals, represented an actual destruction of almost every thing useful and desirable in place of accumulation. The people, however, did not see this; and by reason of not seeing it they continued to accept and regard the promises to pay, which represented loss and destruction, as the same thing as money, and naturally also as wealth; and as the creation and issue of this sort of money or wealth increased as destruction increased, they finally, one and all, came to the conclusion that the more and faster they destroyed, the richer they should all be; and that, by a happy series of accidents, they had at last solved that great problem which the world had so long been anxious about--namely, "of how to eat your cake and at the same time keep it." And, as a further illustration of the extent to which this idea acquired a hold upon the public mind, it may be mentioned that some of the most popular books which were published about this time on the island had the following suggestive titles: "A National Debt a National Blessing;" "Don't Pay as you Go, a sure Way to Get Rich;" "Pulling at your Boot-straps the best Way to Rise in the World," and the like. Undoubtedly one great reason which encouraged the people of the island in their delusion was the circumstance that the Government promises to pay, although they had ceased to represent accumulation, or a definite equivalent of any thing in particular, did not thereby cease to be instrumentalities for effecting exchanges; but, on the contrary, continued to constitute great labor-saving machines, performing a work precisely similar in character to that performed by a ship or a locomotive--namely, the removal of obstacles between the producer and consumer. But, in becoming a representative of a debt to be paid in place of representing a means of paying a debt, the new currency lost at once the really most important quality of good money; inasmuch as it ceased to be a common equivalent, or in itself an object of value in exchange, and therefore became incapable of properly discharging the function of a standard, or measure, for estimating the comparative value of other things; resembling, in this deficiency, a ship without a rudder, or a locomotive without a track to run on. The removal of a rudder from a ship, or the taking up the track in front of a locomotive does not impair the capacity of the one for cargo, or the power of the other for pulling. But if it is attempted to use a ship or a locomotive under such circumstances for the purposes for which they were constructed--i.e., as agencies for effecting and facilitating exchanges--the result of their work will be so uncertain and hazardous that the owners of the things to be exchanged would require large insurance against the possible action of the exchanging agencies. And so it was with this blueback currency of the island, which, ceasing to represent or be convertible on demand into a constant quantity of any commodity, ceased to be a constant equivalent or measure of value of any thing. If the news came one day that the cannibals had been repulsed, a given number of the bluebacks would buy a bushel of wheat. If the news came the next day that the black troops, although they had fought nobly, had been driven back, and that there was some prospect that every body, sooner or later, would be cooked and eaten, then the same number of bluebacks bought only half the quantity of wheat. Consequently, every body, in selling commodities representing expenditure of time and labor, added to the price of the same, in order to insure himself against the fluctuations of the purchasing power of the currency he received; or, in other words, to make sure that what he received should remain, for a greater or less length of time, the equivalent of what he gave. But as no one could tell what the cannibals were likely to do from day to day, and therefore what were to be the fluctuations in the purchasing power of the currency, every body in selling any thing felt that he incurred a risk, in addition to the risks usually attendant upon ordinary buying and selling. And as the data for estimating these risks were just as uncertain as the data for estimating the results of dice-throwing, every body guessed at the amount of insurance needed, or, what is the same thing, bet on the purchasing power of the currency at future periods. An abnormal gambling character, therefore, necessarily became a part of every business transaction, and worked to the great detriment of all that class of people on the islands, who had only labor to sell, which loses its entire value for the time, if not bought at the moment it is offered for sale, and the selling price of which, when once established, can only be changed with difficulty. And as this was a very important matter in the financial history of the island, it is desirable to illustrate it by relating the details of what actually happened: The people on the island clothed themselves largely in cloth made in foreign countries; and as the island currency was non-exportable, the cloth was paid for by exporting gold, or commodities which could readily be exchanged in other countries for gold. The cloth thus purchased with gold was made up into clothing by the "ready-made" clothing dealers in the cities, and sold in this form for currency, to smaller or retail dealers on a credit of from three to six or nine months. Had the currency involved in this transaction throughout been gold, or certificates representing deposits of gold, the credit price of the ready-made clothing would have been the cash price, with a small amount additional to represent interest on the credit-time, and a possible risk of non-payment; and the seller would never for one moment have taken into consideration the question whether the currency, or representation of money in which he was to be paid, three, six, or nine months afterward, would have the same value or purchasing power that it had on the day the debt was contracted. He might have doubted whether his customer would pay him at all, but he never would as to the quality of that which he was entitled to receive as payment. But as the currency involved in so much of the transaction as occurred after the cloth was made into clothing was neither gold nor any thing which represented gold, nor any other valuable commodity, and therefore, like a ship without a rudder, or a locomotive without a track, was sure to be unreliable as an exchanging instrumentality, the seller knew to a certainty that what he was to receive in payment of his goods, three, six, or nine months afterward, would not have the same value or purchasing power that it had on the day the debt was contracted. It might be greater, it might be less; but the seller never bet on the former contingency, or allowed for it by deducting any thing from the time price of his goods, for to do so would be to discard in anticipation a possible incidental profit. But he always, as a matter of safety, felt obliged to bet on the latter contingency, and then cover the bet by adding correspondingly to the price of every thing he sold on credit. When, by reason of the disturbed condition of things, the purchasing power of the currency fluctuated greatly in brief intervals, the seller on all his time sales bet in favor of great risks, and bet differently every day, and added ten, fifteen, twenty, or even thirty per cent. to his prices over and above the general aggregate representing cost, profit, interest, and ordinary risk, in order to make sure of receiving currency of sufficient purchasing value to enable him to buy back as much gold as he was obliged to give for the cloth originally. When, on the other hand, the fluctuations in the purchasing power of the currency became limited, the insurance percentage added to price became also limited, and followed a somewhat general rule. Thus, when a clothing-dealer sold goods on three months' credit, for currency whose purchasing power was so much less than gold that it took one hundred and fifteen of currency to buy one hundred in gold, he added five per cent. to his sale price, or he bet that the depreciation of currency at the end of three months would be indicated by one hundred and twenty for gold; while for a credit longer than three months he bet that the risk of depreciation would be greater, and added, to cover this risk, an average of ten per cent. to his price. If now, at the end of three months, it required one hundred and twenty-five in currency to buy one hundred in gold, the dealer lost five per cent. through the payment of his debt. But if, on the other hand, the fluctuation of the purchasing power of the currency was the other way, and it required at the end of the three months only one hundred and ten of currency to buy a hundred in gold, he made ten per cent. over and above his ordinary and legitimate profit, while an equivalent burden or loss fell on the consumers. [17] As the dealers were shrewd, the result of this betting and insurance was rarely loss, and so constantly profit, that some dealers after a while came to regard the obtaining of this species of profit as the main thing for which all business was instituted; while others, more clear-headed and discerning, concluded that the wisest and easiest way to get rich was to bet directly on the varying quantity of currency which it would take from day to day to buy the same quantity of gold, or other valuable commodities, instead of attempting to do the same thing indirectly, through the agency of stores, stocks of goods, clerks, books, credits, and the like. The last, accordingly, wound up their business, and, in the language of the day, "went on to the street," and made their living by selling on time what they did not possess, and buying on time what they never expected to receive, and reckoning profit or loss according to the difference in prices growing out of the fluctuations of the currency between the day of buying or selling, and the day of receiving or delivering. In short, as with the magic fiddle in the fairy tale, which, when played upon, made every body dance, no matter whether in the brambles or on the plain, so the use on the island of a currency which continually fluctuated in purchasing power, because it was not a constant equivalent of any thing, made every body gamble that could; some because they liked to, and others because they had to, to protect themselves from losses. The masses who could not conveniently gamble tried to protect themselves by asking high prices in return for their services, or by giving less in proportion to what they received; [18] but, in the long run, they learned by hard experience that they were not as well off as they expected to be; and that if one effect of an overabundant, non-equivalent-to-any-thing currency was to stimulate production, another and greater effect of it was to unequally distribute the results of production, transferring from those who had little to those who had much, and thus making the rich richer, and the poor poorer. CHAPTER X. AFTER THE WAR. At last the war ended. The cannibals were utterly repulsed; and the islanders no longer laid awake nights for fear of being roasted and eaten. A vast amount of every thing useful had, however, been necessarily destroyed; and it would seem as if this admitted fact would have made the people of the island feel poor. But, very curiously, it did not. The promises to pay for the commodities destroyed had all been preserved. They were regarded by almost every body as money; and if money, then, of course, as every body knew, they were wealth, and wealth so great and superabundant that the one thing especially necessary to do was to devise plans for using it. Every body, therefore, devised plans; those who had no money more especially devising plans for those who had. All sorts of schemes were accordingly entered upon; railroads to carry people to the isothermals and every other place where they didn't want to go; and oil-wells on Cheat and Al(l)gon(e)quin rivers, and patented inventions for making substitutes for tea and coffee, being especially recommended as permanent investments. John Law, Lemuel Gulliver, Baron Munchausen, Sir John Mandeville, Juan Ferdinand Mendez-Pinto, and Sindbad the Sailor, all came to town, and were chronicled in the newspapers as having registered at the principal hotels. Great and commendable industry was also displayed in replacing the things destroyed by the war, so that, for a time, the societary circulation became more brisk than ever; while some who had up to this time regarded war as a misfortune and national calamity, now felt that they had made a mistake; and others who had known all the time that war was a blessing, seriously thought of proposing another war as a means of increasing national prosperity. [19] The large and constant investment of the results of labor and economy in enterprises which never could by any possibility give back any adequate return, was, as every body saw, the next best thing to war; and on the advice of the most Christian newspapers, very many of the best people made haste to make such use of their little savings; although, as agriculturists, they were perfectly well aware that to plant seed wheat or corn in soils where it would not come up, or, coming up, bear no fruit, was always very bad business, and did not encourage the sower to hire much additional labor the next year. Another idea which about this time had become very popular on the island was, that while it was a very desirable thing to sell as much as possible of the products of the island to people in other countries, it was not desirable to buy any thing from foreigners in return, and that it was wise to put all possible obstructions in the way of any ill-informed persons who desired to make such exchanges. But as no one can long continue to buy unless he proportionally sells, or sell unless he proportionally buys, the foreign commerce of the island soon came to a stand-still; and what also notably helped to this result was, that the necessity of insuring all exchanges made through the medium of the unstable currency of the island caused all the island products to cost from five to ten or fifteen per cent. more than they otherwise would, and more than they would cost the foreigners to buy elsewhere. [20] But as every industrious community (especially if it calls in the aid of the forces of nature through machinery) produces more than it consumes; and as the islanders were both industrious and ingenious, it oddly enough happened that the community became sorely troubled by an accumulation of useful things, which the manufacturers would not part with, because they were unwilling to sell at a loss, and which the foreigners would not buy because they could buy cheaper elsewhere, and pay in their own products for what they bought. Then the manufacturers stopped producing, and next the laborers, by lack of employment, being unable to buy a full share of the existing abundance, in turn diminished their consumption; so that for a time it seemed as though the island would get into the condition of those unfortunate people who die of their own fatness. In this way the times gradually "got out of joint." Gradually the people on the island came to realize that much which they had considered as wealth was not wealth, and that many influences, before little regarded, were powerfully acting to make and keep them poor. All were satisfied that the currency which they were using was one prime cause of their difficulties, but in precisely what manner the currency exerted an influence few agreed. All were of one mind, that they ought to talk about it continually; and they accordingly did so, those who knew the least talking the most. Some thought that the honest thing to do, and because honest the best, was for the Government of the island to redeem its promises to pay on demand as rapidly as possible; that where they had borrowed a canoe of one man, cloth of another, spears of a third, or money of a fourth, they should return them, and not keep promising and never doing. But even these did not agree as to the manner of thus paying. Some thought it was best to return the canoes, the iron, the cloth, and the money from day to day as the Government gradually acquired them. Others thought that a better way would be to accumulate each separate thing in a separate warehouse, and then when the warehouses had, after some years, become full, open the doors, and return every man what had been borrowed of him all at once. But, as before pointed out, the Government never had, or could have, any canoes, cloth, iron, or money, except such as it obtained from the people; and, therefore, payment on the part of the Government was really the same thing as payment on the part of the people. But payment of debts is something to which many people are constitutionally opposed; and this scheme accordingly found many opponents, who alleged that, if it were carried out, it would deprive them of money, and consequently of instrumentalities for making their exchanges; while the real trouble with many of this class of people was, that they hadn't any thing useful, the products of their own industry, to exchange, and therefore could get no money, unless they went to work, or, what was preferable, acquired it from somebody without consideration. Besides the persons referred to, who either openly or by their indecision opposed fiscal reform, there were various other classes of obstructives. There were those, for example, who, during the war, were always friends of peace, dressed in broad-brimmed hats and drab coats, and were at any time ready to compromise with the cannibals, on condition that the latter should be satisfied with roasting and eating only the old men, the babies, and an occasional mother-in-law. All such, as a part of their peace policy, opposed the original issue and circulation of the bluebacks as something arbitrary, illegal, and unnecessary. When, however, the cannibals were driven away, these "friends of peace in time of war" at once changed their Quaker garb; became "friends of war in time of peace;" declared earnestly for the enlarged issue and continued use of the bluebacks, and, as a pretext for so doing, were willing, if necessary, to have another war, or, at least, an annual scare. During the war, these friends of peace were called "copper-heads;" and after the war, their copper-headism, although disguised, was substantially the same thing. For it was apparent that opposition to the issue of the bluebacks, as manifested by the advocates of peace during the war, and opposition to their payment and withdrawal after the war, were only different manifestations of hostility to the Government and to the war itself: inasmuch as failure on the part of the Government to observe its promises, made under such circumstances of extreme peril, would manifestly put it in bad repute, and prevent it from ever resorting to similar measures in like emergencies. [21] The really intelligent and patriotic men of the island at once saw through this duplicity and repudiation, advocated under pretense of extreme solicitude for the wants of trade. They remembered the old couplet: "When the devil was sick, the devil a monk would be; When the devil got well, the devil a monk was he;" [22] and thereafter designated the opponents of paying the bluebacks, as inflated, or elongated, copper-heads, by which name they were ever after known in history. There were also many well-meaning citizens, who sincerely desired to have the balloon of inflation come down, but strenuously objected to have this result effected by any diminution of the volume of gas contained in it. All the first-cousins of the man who waited for the river to run by before crossing were certain the balloon would come down, if people would only be patient, keep a sharp lookout, and wait. But to this it was objected, that if people were obliged to consume a large part of their time in watching the balloon, to avoid having their heads smashed by its swayings and fluctuations, there would ultimately be a scarcity of victuals and drink; and that, rendered desperate with watching, and want of employment, food, and clothing, those interested would finally insist on pulling open the valves, and letting the whole volume of gas escape at once. Some proposed to imitate the example of "Peter the Headstrong" in fighting the Yankees, and bring down the balloon by proclamation; while others professed to have great faith in family prayer. Eminent patriotic constitutional lawyers maintained that the military necessity that authorized and created the bluebacks must necessarily limit their duration solely to the period of their military necessity; and that their continued re-issue and use after the repulse of the cannibals was but a prolongation of the war--not against the enemy, but against their own people. The astute elongated copper-head lawyers held, on the other hand, that an instrument of military necessity, once created, remains such an instrumentality for continued use for all time; and, therefore, that a bullet or shell, once lawfully employed for effecting destruction in time of war, could legitimately be reissued or reshot in time of peace, without matter as to whom it might hit or what property it might destroy; and that, in fact, to go on reloading and refiring these instruments, and thereby killing and destroying, were not crimes, but high acts of patriotism. This theory, however, alarmed some timid people, who said that one shell or one bullet thus re-used indefinitely might destroy all the property, or kill all the people on the island; and they rather regretted, in view of such a construction, that they did not at once succumb to the cannibals, whose appetites, in time, might have become cloyed, or whose diet might have been changed through indigestion or moral suasion. In the period of doubt and perplexity which thus came to the community, those fond of precedents carefully searched the old chronicles and records of other nations for lessons of experience; and, among various things which profited them greatly, they found, among the chronicles of the learned Spanish historian, Fray Antonio Agapida, the following account of what the veteran soldier, Don Inigo Lopez de Mendoza, Count de Tendilla, did, when, besieged by the Moors in the town of Alhama, he had also serious financial difficulties to contend with: "It happened," says Agapida, "that this Catholic cavalier, at one time, was destitute of gold and silver wherewith to pay the wages of his troops; and the soldiers murmured greatly, seeing that they had not the means of purchasing necessities from the people of the town. In this dilemma, what does this most sagacious commander? He takes me a number of little morsels of paper, on the which he inscribes various sums, large and small, according to the nature of the case, and signs me them with his own hand and name. These did he give to the soldiery, in earnest of their pay. 'How!' you will say, 'are soldiers to be paid with scraps of paper?' 'Even so,' I answer, 'and well paid, too, as I will presently make manifest; for the good count issued a proclamation ordering the inhabitants of Alhama to take these morsels of paper for the full amount thereon inscribed, promising to redeem them at a future time with silver and gold, and threatening severe punishment to all who should refuse. The people, having full confidence in his word, and trusting that he would be as willing to perform the one promise as he certainly was able to perform the other, took these curious morsels of paper without hesitation or demur. Thus, by a subtile and most miraculous kind of alchemy, did this Catholic cavalier turn worthless paper into precious gold, and make his late impoverished garrison abound in money!' "It is but just to add," continues the historian, "that the Count de Tendilla redeemed his promises, like a loyal knight; and this miracle, as it appeared in the eyes of Agapida, is the first instance on record of paper money." [23] It may be also remarked that the island antiquarians did not find any chronicle of any other soldier who imitated Count de Tendilla in issuing "little morsels of paper" to serve as money, and subsequently did not imitate him in promptly redeeming his promises, who found it easy to obtain again the confidence of the soldiers or the people when he again got into similar difficulties. [24] CHAPTER XI. THE NEW MILLENNIUM. At last there arose a sect of philosophers (calling themselves Friends of Humanity) who felt confident of settling all difficulties, and who also aspired to the government of the island. Their chief had the reputation of being an ogre. He had served in the war against the cannibals, looked exceedingly fierce, and therefore was accounted brave; he talked loud and with great assurance, and therefore he was accounted wise; he had acquired great riches without ever doing any thing useful, and therefore he was accounted skilled in business. His principal associates and counselors were two. The first was a great orator, who had spent most of his life as a missionary among an uneducated people who never had any property, and, of course, made no exchanges; and in this most excellent and practical school had learned all that could be acquired on this complicated subject. The second was a great athlete, who had performed for many years in the national circus, and had acquired great reputation by carrying weighty packages on both shoulders, labeled "domestic industry," but which in reality contained only pig-iron. About these two "every one that was in distress, every one that was in debt, and every one that was discontented gathered themselves," so that they soon had a large body of disciples. The first thing they did was to abuse poor old Robinson Crusoe, because he had advised his people, in his life-time, to make their money of gold (which can be only produced by labor, and not by hocus-pocus); and their currency of something that represented gold, and this, too, when he must have known that gold "was the machinery and relic of old despotisms;" [25] and they made no account whatever of the fact that he was the father of his country and lived in a cave. Next they declared that all the opinions heretofore accepted on this subject by the rest of mankind were fallacious; that nature had done its best to make the island an isolated community; that legislation had pretty effectually supplemented whatever in this respect nature had left deficient; and, therefore, that the wants of the island, in respect to money, currency, and every thing else, were so exceptional and peculiar that the accumulated experience of all the rest of the world could not be to them either applicable or instructive. All agreed that the pernicious theory taught by Robinson Crusoe, Friday, and other men of by-gone days and other countries--that money, to be good, ought to be a universally desirable commodity, and the equivalent of that for which it is exchanged--was the real source of all financial trouble; for was it not clear, that, if such were the case, those only could ever have money who, like the bloated wheat-holders, pig-holders, cattle-holders, house-holders, or bond-holders, had through labor previously come into possession of some desirable things, which they could give in exchange as an equivalent for money? while the true end of all financial reform, and the key to the terrible problem of poverty, was obviously to devise and bring into use that kind of money which those who had no wheat, pigs, cattle, houses, bonds, or other commodities, and were not able or disposed to acquire any through an exchange of their services, could have without difficulty, and in abundance. "We mean, therefore," said the orator-philosopher, speaking for himself and his colleague Friends of Humanity, "to have more democracy and less aristocracy in the money market; more money in every body's reach, and less for the petted few." [26] In short, the patient having become very sick and attenuated by reason of the low (fiscal) diet upon which he had been fed, the doctors now proposed to resuscitate him by administering a still thinner gruel. All also agreed that the word "money" was a bad name, and that the public would obtain a much clearer idea of the great problems at issue if more intelligible and scientific terms embodying definitions were used. One philosopher accordingly proposed that, as they intended to sprout it everywhere, they should go back to the Biblical designation, and call it the "root," at the same time remarking that "the Lord showed what he thought of money by the kind of people he gave it to." Another proposed to call it "the instrument of association" (Carey); a third, the "sign of transmission, of which the material shall be of native growth" (John Law, 1705); a fourth, "a sense of value as compared with commodities" ("British Tracts on Money," 1795-1810); a fifth, "a standard neither gold nor silver, but something set up in the imagination to be regulated by public opinion" (ibid.). As to what money, under the reform system, was, or should be, was also a question in respect to which there was not at first an entire agreement. One idea which found some favor, was, that money ought to be only a token, representative of services rendered at some indefinite time or place (possibly forgotten or disputed by its recipient), and "for which the holder has not received the equivalent to which he is inherently entitled under the system of division of labor." [27] The best money, therefore, according to the philosophers of this idea, was an evidence that some one person owed some other person; and, consequently, the more debt, the more money; and the more money, the more wealth, unless it is to be supposed (as is not reasonable) that this sort of money was not to have the first attribute of all other money--namely, purchasing power. Moreover, although the philosophers did not exactly say so, the inference was also legitimate, that in a community using merely "token" or "remembrance" money, the surest way to get rich would be to get in debt, and the best way of carrying on an enlightened system of trade and commerce, to exchange commodities, the results of time and labor, for evidences of debt without interest. It is needless to say that these teachings and inferences tended to greatly strengthen the people on the island in the opinion they before entertained, that the currency they already had--namely, evidences of destruction--was the "best currency the world ever saw." The three leaders among the philosophers were not, however, men who were going to be contented with any half-way measures. Had they not put their hands to the plow of reform? and were they, after so doing, to allow the plow to stick fast in the furrow? They accordingly appealed first to authority, and then to untutored reason. The following are some of the authorities to which great weight was given: "Commerce and population, which are the riches and power of the state, depend on the quantity and management of money."--John Law, Memoir to the Duke of Orleans, 1705. "Does, or does not, our duty to ourselves and the world at large demand that we maintain permanently a non-exportable circulation? Such is the question which now agitates the nation, and must at no distant day absorb all others. The affirmative of this question is also in perfect harmony with the practice and experience of leading nations, and in harmony with the teachings of sound economic science."--Letter of Henry C. Carey to Congressman Moses W. Field, of Detroit, September, 1875. Consult also Governor William Kieft, "On the Use of Wampum Money in New Amsterdam" (large folio, scarce and rare), 1659. "Long familiarity with the practice of giving security for loans, and of paying them back at a fixed date, has blinded us to the national advantages of loans without security and payable at any date."--Karl Marx, Secrétaire, Organisation de l'Internationale. But the thing which the philosophers relied on more than any thing else to sustain their views before the people was a judicial decision recently made in a neighboring country, by its highest court, before whom the question as to what constituted money was officially brought for determination. This decision, expressed in the very peculiar language of the country, was as follows: "What we do assert is, that Congress has power to enact that the Government promises to pay money shall be, for the time being, equivalent in value to the representative of value determined by the coinage acts, or to multiples thereof." All of which, translated into the language of the island, meant that Government has the power to make a promise to pay, containing an acknowledgment in itself that the promise has not been paid, a full satisfaction that the promise has been paid. That this decision, furthermore, covered no new points of law, was indirectly conceded by the learned judges, inasmuch as, in giving their opinions, they cited, as precedents worthy of being ever remembered, the decisions of that eminent old-time jurist, Cade (Jack), who ordained that "seven half-penny loaves should be sold for a penny;" and that "the three-hooped pot shall have ten hoops." The same court also strengthened its position by saying that "it is hardly correct to speak of a standard of value. The Constitution does not speak of it. Value is an ideal thing. The coinage acts fix its unit as a dollar; but the gold and silver thing we call a dollar is in no sense the standard of a dollar. It is a representative of it. There might never have been a piece of money of the denomination of a dollar." [28] [Note.--This last remark of the learned court embodied a great discovery; for how can there be a representative without something to represent? In the case of Peter Schlemihl, there was a man without a shadow; but here we have a shadow without any substance to make it. A gold dollar is not a specific and mechanically formed coin; but 25.8 grains of standard gold is a dollar. Did the court mean that these grains of gold may never have existed, and yet have representatives?--Author.] The moment this decision was received, all the philosophers got down their dictionaries, and searched for the meaning of the word "ideal." As was anticipated, its definition was found to be "visionary;" "existing in fancy or imagination only" (Webster); and from this time forth there was no longer any doubt in the minds of the reformers of the truth and strength of the position they occupied. For, to descend to reasoning, were not two intricate questions definitely settled by the highest of human tribunals? 1st. That the representative of a thing may be (and if those in authority say so, shall be) equivalent to the thing itself. 2d. That value is an ideal thing, and therefore imagination, which creates all ideal things, can create value. It followed, of course, that to have and enjoy any thing and every thing, it is only necessary to create and use its symbol or representative; and to pay for value received, it is only necessary to imagine a corresponding and equivalent value, and pass it over in exchange and settlement. On these conclusions of law and reason, then, it was decided by the three leaders of the philosophers and their friends, who had control of the Government, that the future money of the state should be based. The former inscription on the currency in use, "promise to pay," they were clear, was entirely unnecessary; for why promise money when the store on hand of money was to be made practically unlimited, or, at least, always equal to the wants of every body who desired to have it, whether he traded or not? Mathematical calculations were also made by a scientist, which proved that the amount of labor which would be actually saved to the community, and made available for other purposes, by using something as money which cost little or no labor to produce, in place of gold or commodities which represented much labor, would be so great as to require the immediate enactment of a law prohibiting any one from working over six hours per day, in order to guard against the evil of too great abundance. The same scientist had previously been so carried away by his demonstrations of the utility of a new stove which saved half the fuel, that he had recommended the purchase of two stoves in order to save the whole. With few exceptions, to be hereafter noted, the whole population of the island were jubilant, and proceeded as rapidly as circumstances would permit to adjust all their commercial transactions to the new basis. But joy at the prospect of the coming millennium did not extinguish feelings of gratitude in the hearts of the people, and they resolved to send ample testimonials to all, in foreign lands, to whom they had been indebted for wisdom. To each of the judges who had so intelligently defined value they accordingly voted an ideal castle and estate, possession of the same conferring nobility upon their owner, with the title of "Baron Ideality," to which, by special patent, the recipient was authorized to use (if he pleased) the prefix of "damn." To the most notable advocate, in foreign lands, of the idea of non-exportable money a gift of one million of "instruments of association," represented by ideal currency, was voted. But as this currency, both by law and the fitness of things, could not be exported from the island, it became impossible to pay this gift, and in its place a letter was written explaining the circumstances, and requesting that the resolution to pay might be accepted as a "sign of transmission." To the eminent financier who defined money, "as a sense of value in reference to currency as compared with commodities," there was sent a plaster image of the "What Is It;" while to his colleague, who had given the opinion that "the less costly the material out of which money was made, the better for the community which uses it," was sent a large box, containing contributions of the most worthless things every body could think of, with a polite note requesting the recipient to make his choice out of the collection of what seemed to him best adapted as a token, and forward a detailed report of his experience in attempting to use it as a representative of unrequited service. Pending the slow preparations of the Government of the island to provide the requisite laws for the issue and use of the new money, various enlightened individuals attempted to anticipate official legislative action by putting into practical operation, on their own account, the principles involved in the new fiscal system. The first of these who thus acted was a secretary for the interior part of the island, whose chief business was to supply the heathen--for whom, it will be remembered, Robinson Crusoe took up contributions--with beef. There had been a suspicion for some time past hanging over this official that the heathen did not get all the beef that they were entitled to; but the suspicion probably had no further foundation than the inability of the heathen to make the sense of completion harmonize with the sign of transmission. To satisfy the heathen, and at the same time effectually clear up his character, the official in question now hastened to have prepared a large number of pictures of fine, fat cattle, which he dispatched by a Quaker to the heathen, with a request that they would kill and eat, and be satisfied, adding in a postscript that they would do well to begin to learn economy by saving the skins. As the Quaker never came back, it was deemed reasonably certain that, at least, the first part of the request had been complied with. The managers of the Island Provident Society also promptly determined to develop and apply the ideal system in their sphere of usefulness to the full extent that circumstances permitted. Thus a large part of the business of this old and respected society was the distribution of clothing to the destitute; and, as is always the case when times are hard, the extent of the demands made upon it for aid tended to exceed the means of supply contributed by the charitable. The managers, however, knew that it never would answer in using the ideal system to subserve the work of charity, to put the locally needy on the same footing as the heathen, and in answer to appeals for raiment distribute to them elaborate pictures of fine clothing, cut from the fashion-plates; for there was this essential difference in the situations, that the needy were at their doors, while the heathen were a great way off. They, therefore, hit upon this happy mean: they employed a competent artist, with a full supply of paints and brushes, and when any destitute person applied for clothing, they painted upon his person every thing he desired in way of clothing of the finest and most fashionable patterns, from top-boots to collars, and from blue swallow-tailed coats to embroidered neck-ties, with jewelry and fancy buttons to match. Of course, the first man who appeared in public thus arrayed created a profound sensation. But the idea was so novel, and had obviously so many advantages over the old way of clothing one's self, that the supremacy of the ideal over the real was at once greatly strengthened. For example--and here was one of the greatest merits of the new system--it not only symbolized, but practically applied, the views of the most advanced financial philosophers; favored (as the orator-philosopher wished) "more democracy and less aristocracy in the clothes market;" and encouraged the use of the least costly material out of which the community could make clothes; while the painted cotton, silk, wool, and leather could be made to look so exactly like the real articles, that it was only when the attempt was made to exchange the representative for the real that the difference was clearly discernible. Furthermore, every garment devised in accordance with the new system was, in all cases, a perfect fit. The plague of buttons was annihilated. Every man could save time enough in dressing and undressing to enrich himself, if he only employed his economized moments usefully. Every man might, without embarrassment, sleep in his clothes; and if he desired to change his monkey-jacket three hundred and sixty-five times in a year for an overcoat, or an overcoat for a monkey-jacket, he could do it most expeditiously, without the waste of any raw material more expensive than paint; and thus the system, after a time, by a happy thought, got the name of the "three-sixty-five interchangeable." Of course, this answered very well so long as the weather continued mild and pleasant; but later in the season, when it became cool and frosty, experience soon showed that the warming qualities of different kinds of paint were not essentially different; that something more than confidence was necessary to keep out the cold; and that the temperature and circulation of the body physical remained unaffected, whether a man painted himself sky-blue one day and pea-green the next. [29] Again, two shrewd fellows, Peter von Scrapehem and Israel Double, owned each a farm worth ten thousand dollars. Peter sold his farm for its full value to Israel, and took a mortgage for the total purchase-money; and Israel, in turn, sold his to Peter, and took a mortgage also for its full value. By so doing, each of these worthy persons clearly doubled the property in his possession, inasmuch as while each had at the outset only ten thousand dollars' worth of real estate, each now had ten thousand of real estate and ten thousand of personal property; or an aggregate of forty thousand between them, in the place of twenty thousand originally. This method of multiplying property by multiplying titles was so easy, and the result so apparent, that the example was very generally followed; and when the census came to be taken, a few months afterward, all were amazed at the enormous increase of wealth that had followed the discovery and simple recognition of the true nature and value of titles. Up to this time the supply of milk on the island had been mainly controlled by a single corporation, which, under the name of the "Lacteal Fluid Association," owned all the cows, and, for the purpose of facilitating supply, had long been in the habit of issuing tickets, each good for a pint or a quart of milk, and disposing of milk to those only who had tickets. These tickets revolved perfectly in the closed circle of exchange between the milk-men and their customers, satisfying all demands, and being accepted as the same thing as milk; for the more tickets, the more milk; and no tickets, no milk. During the war the cannibals, in lack of any other meat, had eaten a large number of the cows belonging to the "Lacteal Association." Many had been also taken by the Government for the soldiers; so that after the war was over there were really no more cows than the island absolutely needed. All at once, the "foot-and-mouth disease" invaded the island, and, attacking every cow belonging to the association, rendered her unable to give milk. Then arose such a piteous cry from every household where there were babies as carried a pang to the stoutest hearts. There was no need of any concerted action, for the people assembled spontaneously and demanded action. An immense public meeting was at once organized. A highly popular and humane man, a special friend of children, familiarly known as Uncle Dick, was called to the chair. He was supported by a long list of leading citizens as vice-presidents and secretaries, none of whom, however, had had any practical acquaintance with milk since their childhood, except in the form of punch. The chairman made an eloquent speech. He did not know whether he was most agitated by pity or indignation--pity for the poor babies, whose sufferings had become intolerable; indignation at the cruelty of the chartered monopolists, who had wantonly refused to issue more tickets at the very time when the demand for milk was most imperative. The assembly was of one mind with the chairman, and unanimously resolved that the Lacteal Association should immediately increase their supply of tickets, and that, in default thereof, their charter should be altered and amended. Unable to resist the storm of popular indignation, the association at once complied, and every patriotic citizen went home to the bosom of his afflicted family, carrying an abundant supply of milk-tickets, and feeling conscious that for once at least he had risen to the level of the occasion. That night the babies were all supplied with milk-tickets in the place of milk. Milk-tickets hot, milk-tickets cold, milk-tickets sweetened, milk-tickets plain, milk-tickets with their backs printed green, and interchangeable with milk-tickets drawing cream skimmed from other milk-tickets. But, strange to say, the babies, one and all, with that same sort of instinctive perversity which induces children of a larger growth to refuse to accept shams for reality, and be grateful in addition, refused to take to milk-tickets. The uproar of the night preceding was as nothing to the disturbances of the night following, and morning dawned upon an unrefreshed and troubled population. As soon as the necessary arrangements could be made, another meeting assembled. But the meeting this time was composed of babies, backed by their mammas and nurses. There was no theory in their sentiments; and though young in years, one and all felt that they had lived long enough to know what their fathers apparently did not know--namely, the difference between milk and paper. The resolutions voted were brief, but to the point, and were, substantially, as follows: First, that the exigencies of the times demanded more milk, and not more milk-tickets; second, that the way to get more milk was to have more cows; third, that the way to get more cows was to go to work and raise them, or raise something else equally valuable, and then with this something else buy cows; fourth, that there are certain eternal verities against which it is useless for either babies or men to contend. A committee was appointed to procure a mill of the gods, to grind up those who disbelieved in the last resolution, and the meeting then adjourned. This was the first indication of any thing like popular dissent from the views of the Friends of Humanity. Others, however, soon followed. Value having been declared to be an ideal thing, and ideal measures of value having been substituted in the place of the real and tangible measures formerly in use, it had been deemed proper to substitute ideal measures of length, weight, and capacity in the place of the foot-rules, yard-sticks, pound-weights, and bushel-measures formerly employed. Shop-keepers, plumbers, charcoal-men, gas corporators, and all others who had any thing to sell accordingly provided themselves with slips of paper, upon which were printed, respectively, "This is a foot," "This is a bushel," "This is a pint," "This is a pound;" and the services of the arithmetic-man were again called for, to prove how much more cloth, beer, charcoal, gas, and all other measurable things the community would certainly have by the saving of labor and capital contingent on the avoidance of the necessity of further manufacturing, purchasing, and using the old measures. But the new system did not work smoothly. There was no harmony of sentiment between buyers and sellers; and what was one man's ideal of what he should give or receive in trade was always different from every other man's; and, before the community were well aware of what they were about, they found themselves drifting back to the adoption of the old system of barter, which had been tried and abandoned in the early days of the island's history. Instead of one price, every one who had commodities or services to sell adopted a scale of at least four prices: "pay price," "money price," "pay as money price," and a "trusting price;" and the seller, before fixing his price, invariably asked his customer how he would pay. [30] "Pay price" was barter; "money price" was payment in foreign coin; "pay as money" was in the ideal money of the island; "trusting" was an enhanced price, according to time. Thus, supposing a customer wanted a knife, its price in "pay" would be a bushel of corn; in "money price," a fifty-cent gold or silver coin; in "pay as money," sometimes as much as he could bring in a basket, at other times as much as he could bring in a wheelbarrow; and before the ultimate abandonment of the use of ideal money, a cart had to be employed to bring the money. Trade in this way became "most intricate." News also came, about this time, that the heathen, not being able to stay their stomachs with the pictures of fat cattle that had been so abundantly sent them, and considering themselves humbugged, were preparing to declare war. To meet a threatened increased expenditure on this account, the Government, therefore, levied new taxes; and as the valuation of the property of the island, under the influence of the new fiscal system, had, as before stated, enormously increased, it was anticipated that a small rate would yield a large revenue. But as soon as Scrapehem, Double, and their friends, who had been multiplying their property by multiplying titles, found out that the titles were to be valued and assessed as wealth, equally with the property which the titles represented, they hasted to swap back, and cancel their mortgages; and immediately half the reputed wealth of the island disappeared. There were some people, it will be remembered, who did not share in the general jubilation which welcomed the discovery and adoption of the new monetary system. These were the stony-hearted capitalists, meaning thereby persons who had produced by industry and frugality more than they had consumed, and had lent out this surplus in the form of ships, houses, horses and carts, wheelbarrows, coal, iron, and the like, on condition that they should be repaid the value of the several articles as expressed in money, with a portion of the profit that might have accrued to the borrower from their using. There was a popular feeling that all these lenders were "bloated," the degrees of bloat being, of course, different all the way from the man who owned and lent a ship down to the man who owned and lent a cart, or their equivalents in money; and that the best remedy for this frightful disease was tapping, and tapping by tendering in payment the ideal money, which was something very different in value from the money understood at the time the loans were effected. Natives of heathen lands, who had never enjoyed the light of the Gospel, called this robbing; but many on the island who had always been Christians regarded the matter with indifference, and treated it as a purely sanitary measure; and Christian ministers who never preached against such practices, but always did preach against the sins of that ancient people, the Jews, wondered at the low tone of morality that seemed to generally characterize society. As it appears, however, from an examination of the ancient records of the island, that strenuous exertions were made about this time to interest the Government and the people in the momentous question of the reading of the Bible in the public schools, and thus prevent public attention from being diverted to the consideration of any such unimportant and side issues as the nature and obligations of promises, it may be that the low tone of morality thus referred to was more apparent than real; no province devolving upon the historian being more difficult than that of attempting to reconcile, after a long lapse of years, what appears to be a series of contemporaneous but utterly incongruous circumstances. But, be this as it may, all who had loaned valuable commodities desired to avoid tapping, and consequently hastened to demand repayment before the ideal money could be extensively issued and put into circulation; and, having once obtained payment, were very cautious how they lent again. All this contributed, in the language of the day, to make money very tight; but this language had, to a great extent, no meaning. The only money that was tight was good money, and this had been gone so long that the younger part of the population didn't even know how it looked; while of the bad money there was a continually increasing quantity. Besides good money, all real capital, timber for building ships, factories, and houses, iron for the construction of machinery, cloth for clothes, and grain for food, were tight; not because there was any lack of all these useful things, but because the owners had all become afraid that if they once loaned or parted with them they should never receive back an equivalent. So the island, instead of being lifted up to great prosperity, was plunged into the depths of adversity. There was a general lack of confidence. Societary activity was abated; production was arrested; and men desirous of being industrious had no opportunity of following any industry. Gold had long disappeared from circulation. Although produced in large quantities on the island, none of it would stay there, but flowed off to foreign countries in a steady stream. The common explanation of this phenomenon was, that gold had become the cheapest thing the island produced, and was, therefore, the first thing exported. But a majority of those who said and heard this did not clearly see that the average purchasing power of gold the world over had not varied in any degree; but that the price of almost every other thing produced on the island had so varied and relatively increased, by reason of domestic fiscal circumstances, that it was far better for the foreigner to take pay in gold for all the commodities he sold to the island, and then, with this gold, purchase in other countries the very things which the island specially produced and wanted to sell. As already intimated, the islanders found great difficulty in understanding this little arrangement; but the foreigners understood it as by intuition, and never failed to act upon it. [31] All of this further contributed to turn upside down and inside out the industries of the island; and while the Friends of Humanity continued to loudly proclaim that the issue of more money would cure all difficulties, the people, sorely distressed, and ready to accept relief from any quarter, began to loudly murmur, in turn, at what seemed an unnecessary delay in making the issue; the fact being, that although public opinion was nearly unanimous on the subject, the regular time for the Congress of the island to meet and enact the laws had not come round. At last, the long-expected day arrived, and Congress assembled. All the special and immediate Friends of "More Money," of "Ideal Money," and of "Humanity," were members; and hardly had the presiding officer taken his seat before fifty men sprung for the floor, each with a resolution demanding immediate fiscal legislation. The first resolution adopted was, that the Government should at once supply all the money which the wants of every body, and every trade and industry, might, could, would, or should require; and that the money thus issued should be a legal tender for the payment of all debts, past, present, and prospective. The next important question was, In what manner should the new and unlimited supply of money be distributed? All saw at once that it would never do to commence on a system of giving unlimited something for unlimited nothing; and yet, if this was not done, how was it possible for the wants of those who had nothing, and who, of course, wanted money for this reason most imperatively, to be supplied? Besides, to create an unlimited supply of the new money, it would be necessary to have a good many hundreds of thousands of slips of paper with the words, "This is a dollar," "This is ten dollars," or "This is--" (some other amount), properly and artistically printed on them; all of which, in turn, would require a great expenditure, not only of ink and paper, but also of time; while the necessity of the hour was for immediate relief, especially to trade. It was therefore decided to leave the troublesome question of equal distribution for a time unsettled, and endeavor to first relieve trade by doubling the volume of the currency. And in order to do this at once, and without cost to the Government for engraving, printing, paper, and ink, it was therefore enacted that every one having legal-tender currency might cut or divide the same into two equal halves or pieces, and that each of these halves or pieces so resulting should be a legal tender to the full amount that the whole had previously been. At first thought, this proposition to exclude all those who had no money from participation in the new supply seemed most palpably unfair and unjust, but a little consideration satisfied to the contrary; for unless it was proposed to give away the new money, it was obvious that those only would get it who had money, and that the proportion which all such would obtain would be in proportion to what money they already had. It was, therefore, deemed wise to anticipate what was certain to be the ultimate result, and distribute it in the manner indicated. CHAPTER XII. GETTING SOBER. It was expected that this new and immense volume of currency, poured at once on to the wheels of trade, would immediately start the wheels. But, somehow, it didn't seem to have that effect at all. The wheels not only would not revolve, but the friction on them seemed to have become more persistent and chronic than ever. In fact, the doubling the volume of the currency, instead of increasing the before existing instrumentalities for facilitating exchanges, had really diminished them; for all who were willing to exchange commodities for the new currency either doubled the price of their commodities, or gave only half the quantity for what they regarded as half of the former money; so that with all this class the abundance of currency was relatively the same as before. But the majority who had any thing to sell would not accept the ideal money in exchange at all. They did not claim, they said, to be financiers, or philosophers, or even special friends of humanity; but they did think that they were not such fools that they could be made to believe that the half of a thing was equal to the whole, or that one bushel of grain could be converted into two by putting one bushel into two half-bushel measures. The only really positive effect of the doubling of the volume of the currency in the manner authorized by law was, therefore, to scale all debts to the extent of fifty per cent., and in such a manner that creditors were wholly unable to help themselves; for by terms of the act every one dollar of old legal tender was now made two for all new legal-tender purposes. In this way the people on the island soon learned a most important elementary lesson in finance, which was, that the only one attribute of legal tender which is imperative and unavoidable [32] is its inherent power of canceling or liquidating debts or of tapping creditors--and this, too, irrespective of the endowment of the legal tender with any real or representative value. So that a truthful designation of the act in question would have been "An act to relieve debtors from half of their obligations, and swindle creditors to a corresponding extent of what was due them by the debtor's acknowledgment." To the credit of the people of the island it must be recorded that, as a general rule, they were too honorable to take advantage of the law to do so wrong and mean a thing; [33] but the knowledge that every debtor had it in his power to so act, and the fear that some would take advantage of their unquestionable legal privileges, contributed still further to bring all business to a stand-still. There was also a curious phenomenon incident to the situation, and pertaining to the rate of interest, which excited no little comment and attention. Every body took it for granted that with an unlimited supply of money a low rate of interest would prevail, and that, however much the financiers and philosophers might disagree about other things, this one result would be certain. An eminently practical man in one of the public debating societies of the island thought he had definitely, and for all time, settled the question by authoritatively remarking that "an abundance of money does produce enterprise, prosperity, and progress;" "that when money was plenty interest would be lower," just as when horses and hogs are abundant, horses and hogs would be cheap. He, for one, "put aside all these old theories, these platitudes of finance." There was "no vitality in them." He preferred "to take the actual results, and the actual condition of the country, and let theory go to the dogs." [34] There was so much of originality and home sense in these remarks, so much of a lordly contemning of the teachings of musty old experience, that the friends of the orator thought him much more worthy than ever of the executive chair formerly filled by the wise Robinson Crusoe. But, unfortunately for the orator, he hadn't got far enough along in his financial primer to appreciate the difference between capital and currency; and in the simplicity of his heart imagined that it was all the same, whether we had pictures of horses, hogs, and money, or real horses, hogs, and money, which represent and are accumulated by labor. So the things which he thus settled in opposition to theory and experience wouldn't stay settled; and the islanders in due time came to a realizing sense of the following truths: that the more of a redundant, irredeemable paper that is issued, the more it depreciates, and the more it is depreciated, the more there is required of it to transact business; and that if any one borrows depreciated money to do any thing, he has to borrow a greater nominal amount than he would of money that was not depreciated; and that it is on the number of nominal dollars, and not on their purchasing power, that the rate of interest is always calculated. The invariable rise in prices consequent on the depreciation of money (price as already explained being the purchasing power of any commodity or service expressed in money), furthermore stimulates borrowing for the purpose of speculation; and the more borrowers, the more competition; and the more the competition to obtain an article or service, the higher the price demanded for it. Again, the currency of the island having been made artificially abundant, its exchangeable value was always uncertain; and capital, therefore, as it always does at such times, locked up its pockets, hesitated to take risks, and, if it consented to loan at all, demanded extra pay by reason of the increased risk or induced scarcity. [35] After testing all these principles experimentally for a considerable time, the people on the island came to see that the possession of money was the consequence rather than the cause of wealth; and that, except under special circumstances and conditions, the rate of interest depends on the abundance or scarcity of that part of the capital of a community which does not consist of money; and that it can not be permanently lowered by any increase in the quantity of money. [36] In this way, through the school of hard experience, the people on the island came gradually to understand that there were certain economic truths which had got to be accepted and lived up to in order to insure either individual or national prosperity. They came to understand that property is a physical actuality, the result of some form of labor; that capital is that portion of the results of production which can be reserved and made available for new and further production; that money is an instrumentality for facilitating the distribution and use of capital and the interchange of products and services; that production alone buys production; that when one buys goods with a paper representative or symbol of money, the goods are not paid for until the representative is substituted by a value of some sort in labor, or money, or some other commodity; and, finally, that a country and its inhabitants increase in wealth or abundance by increasing their products, rather than by inordinately multiplying machinery for the exchange of products. They also saw that the promises to pay which they had been using and regarding as money were debts; and that debts, as well as all other forms of title, are but shadows of the property they represent; and that, in endeavoring to all get rich by first creating debts, then calling the debts money, and the money wealth, they had been led, successively, into speculation, extravagance, idleness, and impoverishment; and, like the dog in the fable, which let go of the meat in crossing a stream for the sake of grasping its shadow, they had lost much of real wealth resulting from previous industry by trying to make the shadow of wealth supply the place of its substance. Coming to gradually realize, also, that one of the first requisites for an increase of trade was that confidence should exist between the buyer and the seller, but that such confidence never would exist so long as the representatives of value, or other intermediate agencies made use of for facilitating exchanges, were of an uncertain, fluctuating character, they also came finally to the conclusion that there was no economy in using cheap money; or, in other words, that the loss and waste inevitably resulting from the use of poor tools (money being a tool) was many times in excess of the interest accruing from any increased cost of good tools. So reasoning, gold, or undoubted promises to pay gold, gradually came once more into use as money on the island. There were some prophecies, and a good deal of apprehension, that there would be difficulty experienced in obtaining sufficient gold to serve as money or as a basis for currency, especially when it was remembered that the influence of all that had recently happened had been to encourage the export of all the gold that was owned or produced on the island. But as the goldsmiths and the jewelers never experienced any difficulty during the war with the cannibals, or afterward, in obtaining all the gold they wanted, no matter how scarce and valuable it was as compared with currency, and could have had a hundred times more than they actually used, if their customers had been willing to pay for it; so the merchants, traders, and people at large on the island, as soon as they became satisfied that it was economical to use gold, and determined to have it, experienced no difficulty in obtaining an ample supply. One circumstance which, pending this result, tended to greatly relieve the popular apprehension on this score, was the reading in foreign newspapers that the people in certain comparatively poor countries--as Oregon, Arizona, Nevada, and Washington Territory--had no more difficulty in obtaining and retaining all the gold that they found it desirable to use for the purpose of money, than they had in obtaining and retaining all the wheelbarrows and steam-engines that they desired to use in conducting their business; and laughed when any body talked of depriving them of their gold money. The first step having been thus taken in the right direction, a sequence of other proper acts occurred as naturally and with the same favorable results as in the celebrated case of the old woman and the kid; in which it will be remembered that as soon as the water began to quench the fire, the fire began to burn the stick, the stick began to beat the dog, the dog began to bite the kid, and, as a consequence of this sequence and its concluding act, the old woman got safely home with the kid, though at a period of the evening much later than was desirable or proper. And so, by a succession of events, prosperity slowly but surely came back to the island. As for the Friends of Humanity, who had been the authors of so much financial and commercial disturbance and national misfortune, they soon ceased to command attention from any one, then became objects of laughter and derision, and finally passed out of the remembrance of the people, who were now all too busy in restoring their fortunes to give a thought to bygone and mortifying experiences. Some became convinced of their errors, and made good citizens; but in the case of the majority, the belief that the calling of things of no intrinsic value by the name of money was equivalent to the creation of wealth, became chronic, and finally developed into a harmless insanity. On pleasant days they might often be seen on the corners of the streets gathering leaves and bits of sticks and straws, and telling the children that assembled about them that all that was necessary to make these worthless gatherings money was to simply have confidence that they were so. But this was asking for a simplicity of belief that was a little too much, even for the children. It only remains to add that, as memorials of this eventful history, there is still exhibited in one of the public buildings on the island an exact model of the cave in which the venerable Robinson Crusoe dwelt, and, what is even more interesting, the identical chest which he brought from the ship, and which contained the pins, needles, knives, cloth, and scissors, and the three great bags of what was then useless, but now good and true, money. Numerous specimens of the "ideal money" may also be seen in the same room, together with a picture of the barber who papered his shop with it, and of the dog which the people paraded in the streets covered with a plaster of pitch and currency. [37] NOTES [1] That the inconveniences experienced by a community attempting to conduct its exchanges exclusively by pure and direct barter as here depicted, are not only not imaginary, but have their exact counterpart in the present every-day experiences of countries of great geographical area and population, is proved by the testimony of Barth, Burton, and other recent travelers in Eastern Africa. Thus Barth, for example, says (see "Travels," vol. i., p. 568; vol. iii., p. 203) that he was repeatedly prevented from buying what he absolutely needed--corn, rice, etc.--because he did not have, and could not get, what the people wanted in exchange; and, again (vol. ii., p. 51), he states that so great was the difficulty of getting things in some of the African towns which he visited, in consequence of the people having no general medium of exchange, that his servants would often return from their purchasing expeditions in a state of the utmost exhaustion. [2] "The precious metals have many qualities which fit them for use as coin money. Their defects are their weight, their intrinsic value as commodities."--Social Science and National Economy, by R. E. Thompson, Philadelphia, 1875. "The moment it is perceived that money is nothing but a token, it becomes evident that any token currently accepted in exchange of useful services and products of labor will perform the proper functions of money without regard to the material of which it is made; and that the less costly the material out of which money is made, the better for the community that uses it."--Money, Currency, and Banking, by Charles Moran, New York, 1875, p. 42. [3] "To my mind, the great and immediate need of the day is the issuance of more legal-tender notes, in order to impair the confidence in them to an extent as to cause the owners of them to desire to exchange them for other kinds of property, or man's wants--not simply to loan out on short or long date paper, with fire-proof security, at low or high rates of interest, which can now be done to any extent required--but absolutely part with them for other kinds of property."--Views of Enoch Ensley, of Memphis, Tennessee, on the National Finances, Memphis, September, 1875. [4] "In the midst of the public distress, one class prospered greatly--the bankers; and, among the bankers, none could, in skill or in luck, bear a comparison with Charles Duncombe. He had been, not many years before, a goldsmith of very moderate wealth. He had probably, after the fashion of his craft, plied for customers under the arcades of the Royal Exchange, had saluted merchants with profound bows, and had begged to be allowed the honor of keeping their cash. But so dexterously did he now avail himself of the opportunities of profit which the general confusion of prices gave to a money-changer, that, at the moment when the trade of the kingdom was depressed to the lowest point, he laid down near ninety thousand pounds for the estate of Helmsley, in the North Riding of Yorkshire."--Macaulay's History of England, State of the Currency in 1694-'95. [5] "Beyond the sea, in foreign lands, it (the greenback) fortunately is not money; but, sir, when have we had such a long and unbroken career of prosperity in business as since we adopted this non-exportable currency?"--Speech of Hon. William D. Kelley, House of Representatives, 1870. "I desire the dollar to be made of such material, for the purpose, that it shall never be exported or desirable to carry out of the country. Framing an American system of finance, I do not propose to adapt it to the wants of any other nation."--Speech of General B. F. Butler before the New York Board of Trade, October 14th, 1875. [6] "Some years since, Mademoiselle Zélie, a singer of the Théâtre Lyrique at Paris, made a professional tour round the world, and gave a concert in the Society Islands. In exchange for an air from 'Norma,' and a few other songs, she was to receive a third part of the receipts. When counted, her share was found to consist of three pigs, twenty-three turkeys, forty-four chickens, five thousand cocoa-nuts, besides considerable quantities of bananas, lemons, and oranges. At the Halle (market) in Paris, the prima donna remarks, in her lively letter printed by M. Walowski, this amount of live stock and vegetables might have brought four thousand francs, which would have been good remuneration for five songs. In the Society Islands, however, pieces of money were very scarce; and as mademoiselle could not consume any considerable portion of the receipts herself, it became necessary in the mean time to feed the pigs and poultry with the fruit."--Jevons's Money and Mechanism of Exchange. [7] In 1658, it was ordered by the General Court of Massachusetts that no man should pay taxes "in lank cattle."--Felt's Massachusetts Currency. [8] This incident is related by Burton, in his "Explorations of the Lake Regions of Central Africa" (1858-'59), as one within his knowledge of actual occurrence. [9] In one of the mints there is exhibited as a curiosity a case in which this fact is demonstrated in the most striking manner. It contains some fifty or more very thin ribbons, or strips, of gold, half an inch wide by three inches in length, placed in a row, parallel to, but separated from each other by a slight interval. The first ribbon is composed of gold of the highest standard of purity; the second differs from the first to the extent of one per cent. of admixture with a baser metal; while the third contains two per cent., the fourth three per cent., and so on, until in the last ribbon, or strip, the amount of gold and alloy is equal. The color of the first ribbon is, in the highest sense of the term, golden or typical. The color of the second differs from the first by a shade, which shade in every successive ribbon changes and becomes more and more marked as the proportion of alloy entering into its composition increases: and so peculiar are these differences of color that it is possible for an individual unskilled in metallurgy, but having access to the standard, to make a comparatively accurate test of the purity of any article of gold in his possession by a simple comparison of color. [10] In 1862 Mr. Eckfelt, then principal assayer at the mint in Philadelphia, communicated to the American Philosophical Society the result of some exceedingly curious examinations demonstrating the very wide distribution of gold. The city of Philadelphia, he stated, was underlaid by a bed of clay having an area of about ten square miles, with an average depth of about fifteen feet. Specimens of this clay--all natural deposits--taken from such localities as might furnish a fair assay of the whole--the cellar of the market on Market Street, near Eleventh, and from a brick-yard in the suburbs of the city--all yielded, on careful analysis, small amounts of gold; the average amount indicated being seven-tenths of a grain--or about three cents' worth--of gold for every cubit foot of clay. Assuming these data to be correct, the value of the gold, according to Mr. Eckfelt, which lies securely buried underneath the streets and houses of Philadelphia must therefore be equivalent to $128,000,000; or if we include all the clay contained in the corporate limits, the amount of gold contained in it must be equal to all that has yet been obtained from California and Australia. "It is also apparent," says Mr. Eckfelt, "that every time a cart-load of clay is hauled out of a cellar in Philadelphia, enough gold goes with it to pay for the carting; and if the bricks which front our houses could have brought to their surface, in the form of gold-leaf, the amount of gold which they contain, we should have the glittering show of two square inches on every brick." [11] On the Rhine, near Strasburg, a good able-bodied laborer can earn on an average one franc seventy-five centimes per day, washing gold from the sands of the river; but, as under most circumstances he can earn ten sous more by working in the fields on the banks of the river, and without so much risk of getting rheumatism, gold-washing on the Rhine is not often adopted as a regular employment. [12] "And when the substitution is made" (of a silver for a paper fractional currency), "what will be the consequence? The metal currency will have to be considerably debased, or else every old woman in the country will fill her stockings with it and bury it. It will be hoarded, sir; hoarded to the extent of removing millions from the currency of the country." The general paused, glared at a village wrapped in rain, by which we were rattling, chewed his cigar vigorously, and lapsed into silence.--A Newspaper Reporter's Interview with General Butler, September, 1875. [13] Gold in its crude state, and uncoined, was until recently in use as money in some parts of California, Mexico, and on the West Coast of Africa. [14] Historically, bills of exchange probably originated with the Jews of the Middle Ages, who, ever liable to persecution, adopted a system of drafts, or written orders, upon one another, which each agreed to honor and pay to the person named in the draft. [15] It was in this manner that the first bank of which we have any record originated in 1171, namely, the Bank of the Republic of Venice. Venice in that year was at war and needed money. The Council of Ten, or the Government, called upon the merchants to bring in their gold or coin into the public treasury, and gave credit on the books of the state for the amounts so deposited; which credits carried interest (always promptly paid) at the rate of four per cent. per annum. Soon after the establishment of this bank one of the depositors died; and it becoming necessary to distribute his estate among five children, his bank-credit was divided into five portions and transferred to five new owners. A system of transferring bank-credits was thus introduced, and proved so useful that in a brief time the merchants adopted it very generally as a means of paying balances in all great business transactions. The banks of Amsterdam and of Hamburg were also subsequently established on substantially the same basis, and are doing business to-day successfully. The Bank of Venice did business for five hundred years; during which period the state was prosperous, and there were few failures among the mercantile classes. [16] If to any it may seem puerile and unnecessary to enter into such explanations, it may be well to remind them that one of the schemes for a new currency, which has of late found some earnest advocates in the United States, is that of Josiah Warren, of Ohio, who proposed that currency "should be issued by those men, women, and children who perform useful service"--i. e., grow corn, mine coal, catch cod-fish, pick up chestnuts and the like--"but by nobody else;" such results of service being deposited in safe receptacles, and having receipts of deposit issued against them to serve as "equitable money." A further axiom of Mr. Warren was, "that the most disagreeable labor" (not the most useful) "is entitled to the highest compensation;" and, therefore, inferentially entitled to issue the most money. A specimen of this equitable money before the writer reads as follows: The most disagreeable labor is entitled to the highest compensation. $1.00 Cincinnati, Ohio. Due to Bearer, EIGHT HOURS' LABOR, In Shoe-making, or a Hundred Pounds of Corn. William Morton. No. --, F---- Street. Time is Wealth. Of course, to make this money equitable, and its issue, as claimed, "the satisfactory solution of the great problem of labor and capital," there must be some presupposed equitable relation between eight hours of shoe-making and a hundred pounds of corn. But one hundred pounds of corn in Illinois are the result of only a quarter as much labor as a hundred pounds in New England; and what comparison is there between eight hours' work of a skilled mechanic and that of a mere cobbler in making shoes? or of the man who performs a disagreeable, slavish piece of work, and of the genius who invents or makes a machine that makes this disagreeable work unnecessary? E. D. Linton, of Boston, one of Warren's most eminent disciples, improves on Warren's ideas, and proposes that the United States Government should prepare and issue a currency, which should read as follows: The United States will pay One Dollar to Bearer, on demand, in ---- bushels of Illinois Fall Wheat, at United States No. 1 Store-house, No. 12 River Street, Chicago, Ill. This note is receivable for all debts due the United States. And the same inferentially in respect to pigs, coal, shoes, and the services of doctors, lawyers, and cooks. So, then, if the note is not to be on its face a lie, and the promise is to be actually performed on demand, the necessity will be absolute on the part of the Government of the United States to have store-houses for wheat at Chicago, pig-pens at Peoria, coal-mines or dépôts at Pottsville, and trained professionals ready on call to plead a case, preach a sermon, cure a cold, and cook a dinner; and all of these last must take their pay in pigs if required. But as a pig has one value at Peoria, and another value at almost every other place, the dollar's worth of pig which the United States would pay might be a whole pig in one place, a half in another, and possibly only the snout in another. [17] Although, to all who have investigated the subject, the evidence is conclusive that an irredeemable fluctuating paper money is always made an agency for taxing with special severity all that class of consumers who live on fixed incomes, salaries, and wages, it has, nevertheless, always been a somewhat difficult matter to find illustrations of the fact so clear and simple as carry conviction by presentation that it does thus act to the classes most interested. With a view of obtaining such an illustration, application was made some months since to an eminent American merchant, whose large and varied experience abundantly qualified him to discuss the subject; and the result of the application may be thus stated: Q. In buying in gold and selling in currency, what addition do you make to your selling price, in the way of insurance, that the currency received will be sufficient--plus profit, interest, etc.--to replace or buy back the gold represented by the original purchase? A. We do but very little of that now; hardly enough to speak about. Q. But still you make insurance against currency fluctuations an item in your business to be regarded to some extent? A. Why, yes, certainly; it won't do to overlook it entirely. Q. Well, then, if you have no objections, please tell me what you do allow under existing circumstances? A. I have certainly no objections. We buy closely for cash; sell largely for cash, or very short credit; and, within the comparatively narrow limits that currency has fluctuated for the last two or three years, add but little to our selling prices as insurance on that account--say one to two per cent. for cash, or three months' credit; and for a longer credit--if we give it--something additional. During or immediately after the war, when the currency fluctuations were more extensive, frequent, and capricious, the case was very different. Then selling prices had to be watched very closely, and changed very frequently--sometimes daily. My present experience, therefore, is exceptional; and to get the information you want, you must look further. I think I can help you to do this. We buy regularly large quantities of a foreign product--let us suppose, for illustration, cloth, for the large manufacturers and dealers in ready-made clothing. We buy for gold, and we sell for gold, and do not allow the currency or its fluctuations to enter in any way into these transactions. But how is it with my customers? I allow them some credit; and the amount involved being often very large, I, of course, must know something of the way in which they manage their business. They transform the cloth, purchased with gold, into clothing; and then sell the clothing, in turn, to their customers--jobbers and retailers--all over the country, for currency, on a much longer average credit than they obtain from me for their raw material. As a matter of safety and necessity, these wholesale dealers and manufacturers must add to their selling prices a sufficient percentage to make sure that the currency they are to receive at the end of three, six, or nine months will be sufficient to buy them as much gold as they have paid to me, or as much as will buy them another lot of cloth to meet the further demands of their business and their customers. How much they thus add I can not definitely say. There is no regular rule. Every man doubtless adds all that competition will permit; and every circumstance likely to affect the prospective price of gold is carefully considered. Five per cent., in my opinion, on a credit of three months would be the average minimum; and for a longer time, a larger percentage. If competition does not allow any insurance percentage to be added, there is a liability to a loss of capital, which, in the long run, may be most disastrous--a circumstance that may explain the wreck of many firms, whose managers, on the old-fashioned basis of doing business, would have been successful. The jobbers and the retailers, to whom the wholesale dealers and manufacturers sell, are not so likely to take currency insurance into consideration in fixing their selling prices; but to whatever amount the cost price of their goods has been enhanced by the necessity of insurance against currency fluctuations, on that same amount they estimate and add for interest and profits; the total enhancement of prices falling ultimately on the consumer, who, of necessity, can rarely know the elements of the cost of the article he purchases. Q. So Mr. Webster, then, in his remark, which has become almost a proverb, that "of all contrivances for cheating the laboring classes, none has been more effectual than that which deludes them with paper money," must have been thoroughly cognizant of the nature of such transactions? A. Most undoubtedly; for such transactions are the inevitable consequence of using as a medium of exchange a variable, irredeemable currency. The illustration above given, therefore, in the place of being imaginary, is based on the actual condition of business at the present time--January, 1876. [18] In 1864, a ship was built in New York, at the time when labor and materials, reckoned in currency, had touched their highest prices. In 1870, another ship was built in the same place and on the same model--like the former in every particular. It was expected that, as wages and the cost of materials were less in 1870 than in 1864, the cost of the latter ship would be much less than that of the former; but the result showed that this was not the case. [19] When the Japanese embassy visited the United States, in 1872, they were seriously advised to create, by some means, a national debt as soon as they returned home, and make use of it as a basis for the creation and issue of currency. [20] Machiavelli, in his "Discourses on the First Ten Books of Livy," book ii., chap, iii., in explaining the great difference in the relative growth of the Roman and Spartan republics, relates that "Lycurgus, the founder of the Spartan republic, believing that nothing could more readily destroy his laws than the admixture of new inhabitants, did every thing possible to deter strangers from flocking thither. Besides denying them intermarriage, citizenship, and all other companionships (conversationi) that bring men together, he ordered that in his republic only leather (non-exportable) money should be used, so as to indispose all strangers to bring merchandise into Sparta, or to exercise any kind of art or industry there, so that the city never could increase in population." [21] Examination will show that the United States, for one-sixth part of their existence as a federated nation, have been in a state of war; and, for the future, there is no good reason for supposing that the country is to be any more exempt from the vicissitudes of nations than it has been in the past. With irredeemable paper, violation of plighted faith, gold demonetized and banished, in what condition is the nation for maintaining a great national struggle? [22] In a case often overlooked (Bank vs. Supervisors, 7 Wallace), the United States Supreme Court decided that "United States notes are engagements to pay dollars; and the dollars intended are coined dollars of the United States." Refusal to pay such notes in coin is clearly, therefore, repudiation. [23] Irving's "Conquest of Granada." [24] In every cabinet of rare coins in Europe there will be found specimens of what are known as "obsidional" coins, or coins struck in besieged places to supply the place of coined money. These coins appear, in all instances, to have been regarded as obligations sacred in their nature, and their repudiation a high crime against morality and patriotism. [25] Speech of General B. F. Butler, United States House of Representatives. [26] Letter of Wendell Phillips to the New York Legal-tender Club, 1875. [27] Charles Moran, New York Commercial Bulletin, October 5th; 1875. [28] Opinion of the United States Supreme Court, by Justice Strong.--Wallace, 12, p. 553. [29] The Indians on the Atrato River (Central America), when first visited by one of the recent inter-ocean-canal exploring parties, were found to be unaccustomed to the use of much, if any, clothing; but after a little intercourse with civilized man, some of the more intelligent of the natives presented themselves with their bodies painted in close imitation of clothes, which they claimed to be superior in every respect to the genuine articles worn by their visitors. [30] This was what actually happened in Connecticut in 1704 and thereabouts. See "Madame Knight's Journal," quoted in Felt and Bronson's "Histories of New England Currencies." [31] Whatever may have been the immediate effect of the gold-discoveries in California and Australia, no economist of repute now holds to the opinion that the average purchasing power of gold all the world over is any less than it was in 1849-'50; or, in other words, that any increase in the quantity of gold since 1849-'50 has resulted in any present depreciation. [32] This is the American interpretation. The English interpretation of "legal tender" was brought out in a debate in the House of Lords, in June, 1811, when it was shown to mean, in its application to Great Britain, no more than this: that in a suit between creditor and debtor, if a judgment went against the debtor, he was allowed to plead a tender of bank-notes in arrest of execution, but he could not claim that the notes should be forced upon the creditor in discharge of the debt. During the long suspension of specie payments in Great Britain, therefore, bank-notes were never made legal tender in the American sense. [33] After the Revolutionary war it was considered disgraceful to take advantage of the legal-tender character of the depreciated Continental or State paper money to liquidate debts with it; and the Society of Cincinnati expelled a member for so doing. The State of Rhode Island also, which longer than any of the other States endeavored to maintain by law the legal-tender character and use of such money, was often spoken of in consequence as "Rogue's" in place of "Rhode" Island. [34] To any who may desire to know how far imagination has been drawn upon for this picture, reference is made to the speech of Hon. O. P. Morton, United States Senate, "Congressional Record," vol. ii., part i., Forty-third Congress, First Session, p. 669. [35] The pertinacity "with which a mind befogged on the subject of money and currency holds on to the delusion that the making and issue of promises to pay, and calling the same money, is equivalent to the creation of wealth; and, vice versâ, that the cancellation or withdrawal, by payment, of such promises is the same thing as the destruction of wealth, and also tends to make money--in the sense of capital--scarce, and interest high, finds many amusing illustrations, which for educational purposes are better than arguments. For example, we have, first, the assumption of a leading Senator of the United States (already referred to, and which, if not on record, would seem incredible) that because an increased supply of horses and hogs made available to a market make horses and hogs cheap, therefore an increased supply of evidences that capital had been borrowed, used, and never paid, would tend to increase the quantity and rate of interest of loanable capital. A corresponding illustration is also to be found in the case of the member of the Continental Congress mentioned by Pelatiah Webster, who, when the subject of increased taxation for the support of the war was under consideration, indignantly asked "if he was expected to help tax the people, when they could go to the printing-office and get money by the cart-load?" The experience of the Irish mob also finds an appropriate place under this head, which made a bonfire of all the notes issued by an obnoxious private banker that they could gather, little imagining, as they shouted and capered with wild delight about the fire that consumed them, that, in place of impoverishing, they were really enriching, their enemy. The following story, also illustrative of the same popular fallacy, passes current in one of the towns of Eastern Connecticut: During the severe financial panic of 1857, an honest country farmer and deacon, who, by virtue of being a considerable stockholder in one of the local banks, had been placed as a figure-head on its board of directors, was applied to by a farmer friend to help him in procuring from the bank a small loan. Knowing that the times were hard, and money scarce, the deacon, although desirous of obliging his friend, did not at once commit himself, but promised to go to the bank, and make his action contingent upon the state of affairs which he might there find. The two friends, accordingly, went into town the next day (which happened to be the culminating day of the crisis, when every promise to pay issued by any bank was, in the general distrust, gathered up and rushed in for redemption); and, while the applicant for the loan waited outside, the director entered the bank to reconnoitre. Passing into the directors' room, and thence behind the counter, he said little, but, keeping his eyes wide open, did not fail to notice the extraordinarily large packages of bills, filling safe and drawers, which, to the annoyance and strain of the bank, had been recently sent in for payment. Seeking no further proof of the financial strength of his institution, he returned to the street, and, informing his friend that every thing was all right, the latter next entered, and confidently asked for his discount. To his great surprise, he received the usual polite answer, that "they would be too glad to oblige him, but that, really, they had no money." "Out of money!" said the deacon, when the result of the application was made known to him. "Out of money! How can they lie so, when I have just seen the safe and drawers full of it? As a Christian man, and an officer of the church, I can't conscientiously be a director and stockholder any longer in such an immoral institution." And yet, if, on returning home, the good deacon had found in his table-drawer a number of his individual promissory-notes, signed and ready to issue, but not issued, he would not have thought himself any richer by their existence, but, on the contrary, would have felt much more comfortable at such a time to know that the notes were all under double-lock security, or, better, if he saw them vanishing into ashes. And yet, in the case of the bank-notes, he couldn't understand why they were not money, to be used at all times and under all circumstances! [36] Between the years 1860 and 1870, the United States doubled the quantity of currency available for use by its citizens, and yet the rate of interest was as high in the latter year as in the former. [37] Such were some of the uses finally made of the Continental currency. See Sumner's "History of American Currency," p. 46. 
13045	----	Team from images provided by the Million Book Project WAR-TIME FINANCIAL PROBLEMS by HARTLEY WITHERS Works by Hartley Withers THE BUSINESS OF FINANCE. 6s. net. Second Impression. "He treats of the subject mainly in its relation to industry, and smooths the path for those who find the way rather thorny. Timely and instructive."--_Financial Times_. OUR MONEY AND THE STATE. 3s. 64 net. Second Impression. "It should be read at once by every taxpayer. Mr. Withers' latest book can be most heartily commended,"--_Morning Post_. STOCKS AND SHARES. 6s. net. Fifth Impression. "It is a good book, it is sure of its public."--_Morning Post_. THE MEANING OF MONEY. 6s. net. Eighteenth Impression. "Will supersede all other introductions to monetary science; a safe and indispensable guide through the mazes of the Money Market."--_Financial News_. MONEY CHANGING. 5s. net. Second Impression. "Mr. Withers makes the topic interesting in spite of its obvious and irrepressible technicality. Occasionally he renders it really amusing."--_Financial News_. POVERTY AND WASTE. 6s. net. Third Impression. "Views its subject from the advantageous position of an impartial observer, the respective cases for capital and labour, rich and poor, being brought to the reader's attention in a convincingly logical manner."--_Financial Times_. WAR AND LOMBARD STREET. 6s. net. Fourth Impression. "Nothing could be clearer or more enlightening for the general reader."--_The Times_. INTERNATIONAL FINANCE. 6s. net. Third Impression. "We heartily commend a timely work dealt with in popular and simple style, a standard financial work."--_Morning Post_. LOMBARD STREET, 6s. net. Third Impression. A Description of the Money Market, by WALTER BAGEHOT. Edited with a new Preface by HARTLEY WITHERS. "There is no city man, however ripe his experience, who could not add to his knowledge from its pages."--_Financial News_. "Blest paper credit! last and best supply! That lends Corruption lighter wings to fly: Gold imp'd by thee, can compass hardest things, Can pocket States, can fetch or carry Kings; A single leaf shall waft an Army o'er, Or ship off Senates to a distant Shore; A leaf, like Sibyl's, scatter to and fro Our fates and fortunes, as the winds shall blow; Pregnant with thousands flits the Scrap unseen, And silent sells a King, or buys a Queen." POPE, _Moral Essays_. PREFACE At a time when Finance is of greater importance than ever before, it is hoped that this small volume may be of interest and value to the public, and help the application of war's lessons to the problems that face us in peace. The contents, with the exception of the last article on "Money or Goods?" (which appeared in the Trade Supplement of the _Times_ for December, 1918), have already been published in _Sperling's Journal_, from September, 1917, to March, 1919; they have been left as they were written, except for a few verbal corrections. I desire to express my thanks to the Editors of _Sperling's Journal_ and of the _Times_ for their kind permission to reprint the articles. H. WITHERS. June, 1919. CONTENTS I THE OUTLOOK FOR CAPITAL The Creation of Capital--The Inducement--War and Capital II LONDON'S FINANCIAL POSITION London after the War--A German View--The Rocks Ahead--Our Relative Position secure--Faulty Finance--The Strength we have shown--The Nature and Limits of American Competition--No other likely Rivals III WAR FINANCE AS IT MIGHT HAVE BEEN--I Financial Conditions in August, 1914--No Scheme prepared to meet the Possibility of War--A Short Struggle expected--The Importance of Finance as a Weapon--Labour's Example--The Economic Problem of War--The Advantages of Direct Taxation--The Government follows the Path of Least Resistance--The Effect of Currency Inflation IV WAR FINANCE AS IT MIGHT HAVE BEEN--II The Changed Spirit of the Country--A Great Opportunely thrown away--What Taxation might have done--The Perils of Inflation--Drifting stupidly along the Line of Least Resistance--It is we who pay, not "Posterity" V A LEVY ON CAPITAL The Objects of the Levy--Its Origin and History--How it would work in Practice--The Attitude of the Chancellor--The Effects of the Scheme in discouraging Thrift--Its Fallacies and Injustices--The Insuperable Obstacles to its Application--Its Influence on Production--One of the Tests of a Tax--Judged by this Test the Proposed Levy is doomed VI OUR BANKING MACHINERY The Recent Amalgamations--Will the Provinces suffer?--Consolidation not a New Movement--The Figures of the Past Three Decades--Reduction of Competion not yet a Danger--The Alleged Neglect of Local Interests--Shall we ultimately have One Huge Banking Monopoly?--The Suggested Repeal of the Bank Act--Sir E. Holden's Proposal VII THE COMPANIES ACTS Another Government Committee--The Fallacy of imitating Germany--Prussianising British Commerce--The Inquiry into the Companies Acts--Will Labour Influence dominate the Report?--Increased Production the Great Need--Will it be met by tightening up the Companies Acts?--The Dangers of too much Strictness--Some Reforms necessary--Publicity, Education, Higher Ideals the only Lasting Solution--The Importance of Foreign Investments--Industry cannot take all Risks and no Profits VIII THE YEAR'S BALANCE-SHEET The Figures of the National Budget--A Large Increase in Revenue and a Larger in Expenditure--Comparison with Last Year and with the Estimates--The Proportion borne by Taxation still too Low--The Folly of our Policy of Incessant Borrowing--Its Injustice to the Fighting Men IX COMPARATIVE WAR FINANCE The New Budget--Our own and Germany's Balance-sheets--The Enemy's Difficulties--Mr Bonar Law's Optimism--Special Advantages which Peace will bring to Germany--A Comparison with American Finance--How much have we raised from Revenue?--The Value of the Pound To-day--The 1918 Budget an Improvement on its Predecessors--But Direct Taxation still too Low--Deductions from the Chancellor's Estimates X INTERNATIONAL CURRENCY An Inopportune Proposal--What is Currency?--The Primitive System of Barter--The Advantages possessed by the Precious Metals--Gold as a Standard of Value--Its Failure to remain Constant--Currency and Prices--The Complication of other Instruments of Credit--No Substitute for Gold in Sight--Its Acceptability not shaken by the War--A Fluctuating Standard not wholly Disadvantageous--An International Currency fatal to the Task of Reconstruction--Stability and Certainty the Great Needs XI BONUS SHARES A Deluge of Bonus Shares--The Effect on the Market--A Problem in Financial Psychology--The Capitalisation of Reserves--The Stock Exchange View--The Issue of Bonus-carrying Shares--The Case of the A.B.C.--A Wiser Variation from Canada--Bonus Shares on Flotation--An American Device--Midwife or Doctor?--The Good and Bad Points of both Systems XII STATE MONOPOLY IN BANKING Bank Fusions and the State--Their Effects on the Bank of England--Mr Sidney Webb's Forecast--His Views of the Benefits of a Bank Monopoly--The Contrast between German Experts and British Amateurs--Bankers' Charges as affected by Fusions--The Effects of Monopoly without the Fact--The "Disinterested Management" Fallacy--The Proposal to split Banking Functions--A Picture of the State in Control XIII FOREIGN CAPITAL The Difference between Aims and Acts--Should Foreign Capital be allowed in British Industry?--The Supremacy of London and National Trade--No need to fear German Capital--We shall need all we can get--Foreign Shares in British Companies--Can and should the Disclosure of Foreign Ownership be forced?--The Difficulties of the Problem--Aliens and British Shipping--The Position of "Key" Industries--Freedom to Import and Export Capital our Best Policy XIV NATIONAL GUILDS The Present Economic Structure--Its Weaknesses and Injustices--Were things ever better?--The Aim of State Socialism--A Rival Theory--The New Movement of Guild Socialism--Its Doctrines and Assumptions--Payment "as Human Beings"--The "Degradation" of earning Wages--Production irrespective of Demand--Is that the Real Meaning of Freedom?--The Old Evils under a New Name--A Conceivably Practical Scheme for some other World XV POST-WAR FINANCE Taxation after the War--Mr. Hoare's Scheme described and analysed--The Position of the Rentier--Estimates of the Post-War Debt--The Compulsory Loan Proposal--What Advantages has it over a Levy on Capital?--The Argument from Social Justice--Questions still to be answered--The Choice between a Levy and Stiff Taxation--Are we still a Creditor Nation?--Our Debt not a Hopeless Problem--Suggestions for solving it XVI THE CURRENCY REPORT Currency Policy during the War--Its Disastrous Medievalism--The Report of the Cunliffe Committee--A Blast of Common Sense--The Condemnation of our War Finance--Inflation and the Rise in Prices--The Figures of the Present Position--The Break in the Old Relation between Legal Tender and Gold--How to restore it--Stop Borrowing and reduce the Floating Debt--Return to the Old System--The Committee's Sane Conservatism--A Sound Currency vital to National Recovery XVII MEETING THE WAR BILL The Total War Debt--What are our Loans to the Allies worth?--Other Uncertain Items--The Prospects of making Germany pay--The Right Way to regard the Debt--Our Capital largely intact--A Reform of the Income Tax--The Debt to America--The Levy on Capital and other Schemes--The only Real Aids to Recovery XVIII THE REGULATION OF THE CURRENCY Macaulay on Depreciated Currency--Its Evils To-day--The Plight of the Rentier--Mr Goodenough's Suggestion--Sir Edward Holden's Criticisms of the Currency Committee--His Scheme of Reform--Two Departments or One in the Bank of England?--Not a Vital Question--The Ratio of Notes to Gold--Objections to a Hard-and-fast Ratio--The Limit on Note Issues--The Federal Reserve Act and American Optimism--Currency and Commercial Paper--A Central Gold Reserve with Central Control XIX TIGHTENING THE FETTERS OF FINANCE The New Meaning of Licence--The Question of Capital Issues--Text of the Treasury Regulations--Their Scope and Effect--The Position of the Stock Exchange--Wider Issues at Stake--Should Capital be set Free?--The Arguments for and against--Perils of an Excessive Caution--The New Committee and its Terms of Reference--The Absurdity of prohibiting Share-splitting--The Storm in the House of Commons--Disappearance of the Retrospective Clause--A Sample of Bureaucratic Stupidity XX MONEY OR GOODS? "Boundless Wealth"--Money and the Volume of Trade--The Quantity Theory--The Gold Standard--How is the Volume of Paper to be regulated?--Mr Kitson's Ideal INDEX WAR-TIME FINANCIAL PROBLEMS I THE OUTLOOK FOR CAPITAL _September_, 1917 The Creation of Capital--The Inducement--War and Capital One of the questions that are now most keenly agitating the minds of the investing public and of financiers who cater for its wants, and also of employers and organisers of industry who are trying to see their way into after-the-war conditions, is that of the supply of capital. On this subject there are two contradictory theories: one considers that owing to the destruction of capital during the war, capital will be for many years at a famine price; the other, that owing to the exhaustion of all the warring powers, that is, of the greater part of the civilised world, the spirit of enterprise will be almost dead, the demand for capital will be extremely limited, and consequently the supply of it on offer will go begging to find a user. It seems likely that, as usual, the truth lies somewhere between these two extreme views; but we shall best answer the question if we first get a clear idea of what we mean by capital. On the subject of the definition of capital, economists differ with all the consistency that they only show in differing. One of the earliest descriptions of capital was given by Turgot, who thought that capital meant "valeurs accumulées." In this wide sense the word covers all goods which have value, that is, can be exchanged into other goods. From this point of view, the schoolboy who invests sixpence in marbles is a capitalist, because he has bought an asset which is not immediately consumed, but can, later on, if his fancy urges him, be exchanged into white mice or any other object of his desire. On the other hand, the schoolfellow who at the same time spends sixpence on cherries and eats them has put his money into immediate consumption, his asset is digested, and he has no capital in any sense of the word. Later, the definition was narrowed by John Stuart Mill, for instance, into the sense of wealth set aside to increase production. From this point of view capital practically means the equipment and tools of industry in the widest sense of the word, including agriculture and transport. Lately economists have shown a tendency to go back to the wider application of the word, and an American economist, Dr Anderson, who has just published a book on the Value of Money, goes so far therein as to state that a "dollar is capital." The language of the City generally uses the word in the narrow sense adopted by Mill, and there is very much to be said for this view of the real meaning of capital. Marbles to play with, houses to live in, motor-cars to go joy-riding in--all these are assets which can be disposed of, and so, in a sense, may be called capital. But the businesslike meaning of the word is the tools and equipment of industry, because it is only by their possession that the wealth of mankind not only increases man's present enjoyment, but enhances his future output of the goods necessary for his existence. If we take the word in this sense it becomes at once apparent that the theory is exaggerated which maintains that war is destroying capital, so that capital will long be at a famine price. The extent to which war is actually destroying the tools and equipment of industry is quite limited. On the actual battlefield that sort of destruction proceeds apace when factories are shelled into shapeless lumps of bricks, and when the surface of the earth, that man's skill had developed into great productive fertility, is torn into craters and covered with rubbish. There is also rapid destruction of a very important part of the equipment of industry owing to the submarine campaign, which is sinking so many fine ships that were meant to carry goods from one country to another. But, apart from this actual destruction on the battlefield and on the sea, the tools and equipment of industry over the greater part of the earth remain untouched. It is true that, owing to the preoccupations of the war, not so much work as usual is being put into the upkeep and repair of our railways, factories and other industrial tools. But at the same time an enormous amount of new machinery is being created for the manufacture of munitions and other stuff needed for the war, and a large part of this new machinery ought to be available as industrial capital when the war is over. Those people who talk so glibly of the enormous destruction of capital by the war are surely making a mistake common to minds which look at economic questions through a financial telescope, mistaking money for capital. They see that an enormous amount of money is being spent on the war, and they jump to the conclusion that this money, if not spent upon the war, would have been put into capital investments and so have increased the tools and equipment of industry. In fact, a great deal of the money now spent upon the war would have been spent, if there had been no war, not upon increasing the equipment of production, but upon purely frivolous and extravagant consumption. There is no need to dwell on the effect of war in reducing many kinds of expenditure on which hundreds of millions must have gone in peace time, and this restriction of extravagant consumption has to be deducted before we even admit, not that all money spent upon the war is destroyed capital, but even that all the money spent upon the war is destroying what might otherwise have become capital. If, then, it is true that the war is not making a very terribly substantial inroad upon the mass of existing capital, how is it going to affect the supply of capital in the future? To answer this question we have to see how capital is created. The answer to this question is very simple, very obvious, and very dull. Capital can only be created by saving. Saving is such an entirely unpopular virtue that it seems at first sight a disastrous conclusion to arrive at, that if we want to increase the supply of capital it can only be done by stimulating this unattractive habit; and there is a further question to be asked--whether it will be necessary or desirable to have a great increase in the supply of capital. As was pointed out above, one theory of after-war needs maintains that the world will be so exhausted by this great struggle that it will have no enterprise and no energy left, and that capital will go begging. If this be so, we need not trouble to inquire as to whether the supply of capital can be made plentiful. But I venture to think that this view is very probably wrong, though it is very dangerous to prophesy concerning the purely psychological question of the state of mind in which the citizens of the warring Powers will end the war. It is, however, at least probable that the prices which are then likely to rule will stimulate enterprise all over the world; that every one will see that there is a great work to be done in getting industry back on to a peace basis, and a great profit to be made by those who do this work most successfully, and that the demand for capital is likely, for some years at least, to clamour for all that can be produced. To go back, then, to the statement that only by saving can capital be created. The man who saves, instead of spending money on his own enjoyment, hands it over to some company or Government to be spent on some industrial or national purpose. When it is put into industry it builds a factory or a ship or a railway or a canal, or clears a wilderness for cultivation, or does one of the innumerable other things which are necessary for the production and transport of the goods which mankind enjoys. And it is only by this process of handing over buying power, instead of using it for our own amusement and enjoyment, to others who will use it for furthering production that the tools and equipment of industry can be multiplied. Something can be done by banks and financiers in supplying credit in the form of advances and acceptances; but this method is only like oiling the wheel of industry, the real driving power of which has to be saved capital. Creating credits simply means that a certain amount of buying power is manufactured and handed over to those to whom the credit is given. It does not set free any labour or goods to be put into industry. That is only done by the man who abstains from consumption and saves money by restraining his desire to spend it on himself, and puts it at the disposal of industry. The man who saves money, who has always hitherto been rather despised by his companions and resented by a certain class of social reformer and many other uneducated people as a capitalist bloodsucker, is thus, in fact, the person who leaves the world richer than he found it, having put his money, the product of his own work, into increasing the world's output, instead of spending it on such forms of enjoyment as heavy lunches and cinema shows. The man who does this beneficent work, increasing mankind's output of goods, and providing employment as long as the factory or railway that he helps to build is running, is induced to do so, as a rule, by the purely selfish motive of providing for his old age or for those who come after him by earning the rate of interest that is paid to him for his capital. What is this rate of interest going to be, and how much effect does it have upon the creation of capital? Some people argue that a low rate of interest makes people save more because it is necessary for them to save more in order to acquire independence. Others maintain that a high rate of interest induces people to save because they can see the direct advantage of doing so. Both these arguments are probably true in some cases. But, as a rule, people who have the instinct of saving will save, within certain limits, whatever the rate of interest may be. When the rate of interest is low they will certainly not reduce their saving because each hundred pounds that they put away brings them in comparatively little, and when the rate of interest is high the attraction of the high rate will also deter them from diminishing the amount that they put aside. Moreover, we have to consider, not only the money payment involved by the rate of interest, but its buying power in goods. In 1896 trustee securities could only be bought to return a yield of 2-1/2 per cent. for the buyer; now the investor can get 5-1/4 per cent. and more from the British Government. And yet the power that this 5-1/4 gives him over the goods and services that he wants for his comfort Is probably not greater, and very likely rather less, than the power which he got in 1896 from his 2-1/2 per cent. One of the few facts which seem to stand out clearly from a study of the movement of the prices of securities, and consequently of the rate of interest to be derived from them, is that the rate of interest is high when the price of commodities is high, and vice versa. So that the answer to the question: What is the rate of interest likely to be after the war? may be given, in Quaker fashion, by another question: What will happen to the index number of the prices of commodities? It seems fairly probable that both these questions may be answered, very tentatively and diffidently, by the expression of a hope that after a time, when peace conditions have settled down and all the merchant ships of the world have been restored to their peaceful occupations, the general level of the price of commodities will be materially lower than it is now, though probably considerably higher than it was before the war. If this be so, then it is fairly safe to expect that the rate of interest, as expressed in money, will follow the movement of prices of goods. But it must be remembered that by rate of interest I mean the pure rate of interest, that is to say, the rate earned on perpetual fixed-charge securities of the highest class. It may be that, owing to the very large amount of gilt-edged securities created in the course of the war by the various warring Governments, the rate of profit to be earned by the man who takes the risks of industry from dividends on ordinary shares and stocks will have to be made relatively more attractive than it was before the war. If, then, capital can only be created by saving, how far will the war have helped towards its more plentiful production? Here, again, we are faced with a psychological question which can only be answered by those who are bold enough to forecast the state of mind in which the majority of people will find themselves when the war is over. If there is a great reaction, and everybody's one desire is to throw this nightmare of war off their chests and go back to the times as they were before it happened, then all that the war has taught us about the production of capital will have been wasted. But I rather doubt whether this will be so. Saving merely means the diversion of a certain proportion of the output of industry into the further equipment of industry. The war has taught us lessons which, if we use them aright, will help us to increase enormously the output of industry. So that if these lessons are used aright, and industry does not waste its time in squabbles over the sharing of its product, its output may be so great that a comparatively smaller amount of saving in relation to the total output may produce a larger amount of capital than was made available in days before the war. There is a further point, that the war has taught a great many people who never saved at all to save a good deal. It was estimated before the war that we in this country were saving about four hundred millions a year. This figure was necessarily a guess, and must be taken for what it is worth. There can be no doubt that the amount of real saving now in progress, voluntary, owing to the patriotic effort of people who think they ought to restrict their own consumption so that the needs of our fighters may be provided, and enforced through the action of the Government in taking taxes and inflating the currency, is very much greater than it was before the war; probably at least twice as much when all allowance has been made for depreciation of the currency. Some people think that this saving lesson will have been learned, will have become a habit, will continue and will grow. If so, if people save a larger proportion of their income than they did before, and if the total output of goods is increased, as it easily may be, it becomes at once evident that there is a possibility of a freer supply of capital for industry than has ever been seen. But in looking at this hopeful and optimistic picture, we must never forget that it can only be painted by those who are prepared to leave out of the canvas all the danger of industrial strife and dislocation, and all the danger of reaction to the old habits of luxurious spending which are so strong a possibility in the other direction. The war has shown us how we can, if we like, increase production, reduce consumption, and so have a larger margin than ever before to be put into providing capital for industry. Whether we really have learned these lessons and will apply them remains to be seen. There is also a possibility that some people may recognise that saving money and applying it to the re-equipment of the world for peace industry is a patriotically praiseworthy object not less than saving in time of war for the equipment of the Army. It may be that the benefit conferred by those who save, in increasing the output of mankind, will be more generally recognised, and that the supply of capital may, when the war is over, be increased on patriotic grounds, or on grounds even wider than mere patriotism--a desire to help a great stride forward in the material welfare of mankind. Capital is a very tender plant, and it will be very easy, if mistakes are made, to frighten those who see the benefits of accumulation for themselves and others. Labour troubles and industrial unrest are extremely likely to have the effect of destroying capital by preventing it coming into existence. If we remember that capital can only be created by being saved, it becomes evident that if those who save are threatened with too deep an inroad into their reward for so doing, on the part of labour, they will hesitate to save; and if the action of labour has this effect, labour will be sawing off the bough on which it sits. For it is new capital that sets new industry going, and it is only by a continual supply of new industry that a continual demand for fresh labour can be maintained. There is also at present much mischievous talk about a great tax on capital for the purpose of redeeming, or hastening the redemption of, war debt. It is clear at once that it is not possible to tax capital if we remember that capital consists of the tools and equipment of industry, or even, in the wider sense of the word, of accumulated assets which have not been consumed. Unless the Government is prepared to take payment in factory chimneys, railway sleepers, houses and fields, or the securities and mortgages that are claims on their product, it is not possible to tax capital. The only thing that the Government can tax is the output, that is to say, the annual income of the people. In other words, a tax on capital is simply a form of income tax assessed, not according to a man's income, but according to the assets of which he is possessed. The effect of such a tax would be that he who has spent everything that he has earned on his own enjoyment would go scot free in the matter of the capital tax, and would be rewarded for his improvidence by being asked to make no sacrifice; while his thrifty brother who, out of a smaller income, has set aside a certain proportion during the last twenty or thirty years, would have to hand over a portion of his current income assessed upon the value of the assets into which he has put his savings. Incidentally, it may be remarked that it would take years to make this necessary valuation, and that it would probably be done in a very inequitable manner by untrained and incompetent officials. But the important point is this, that if the Government shows a tendency to take the possession of assets as a basis for taxation it will be directly encouraging those who spend their whole income in riotous living and frivolous amusement, and discouraging those who help to increase mankind's output by adding to the capital available. Finally, it may be added that the shyness of the saver will be greatly diminished if he can feel that there is a trustworthy machinery of company promotion, so that he can rely on any savings that he puts into industry having at least a fair chance of yielding him a fair reward. This subject is too vast to enter into at present, but it is one to which those who are responsible for the management of our financial affairs cannot give too much attention. Every time the real investor is swindled out of his money there is more than a chance that he will look upon all forms of saving as a folly to be left to the credulous. It is easy to say that it was his own fault, that he ought to have been more careful, or consulted a better broker; but he will, with equal ease, retort that If honest financiers knew their business better, they would have long ago made things easier for the ignorant investor to know whether he was putting his money into genuine enterprise or throwing it down a sink. Like all other divagations on the subject of what may happen in the future, this attempt to forecast has necessarily consisted of "dim glimpses into the obvious," as the undergraduate said of Jowett's sermon. All that we can be sure of is this: that if the great opportunities that will lie open to mankind at the end of the war are rightly used, if we use its lessons to increase our production, restrict our frivolous consumption, and put a larger proportion of our larger production into stimulating production still further, there ought to be a great increase in the amount of capital available to supply the great increase which may be expected in the amount of capital demanded. The fact that the chief nations of the world will have enormous debts on which to pay interest is not one that need necessarily terrify us from this point of view. The arranging and imposition of the taxation necessary for meeting the interest on these debts will involve very serious political and social questions; but the payment of this interest need not necessarily diminish production, and it may probably help in checking consumption. It will not impair the total wealth of the world as a whole; it will merely affect its distribution. And since it will mean that a considerable part of the world's output will, for this reason, be handed over to the holders of the various Government debts, who, _ex hypothesi_, will be people who have saved money in the past, it is at least possible that they may devote a considerable amount of the spin so received to further saving or increasing the supply of capital available. II LONDON'S FINANCIAL POSITION _October_, 1917 London after the War--A German View--The Rocks Ahead--Our Relative Position secure--Faulty Finance--The Strength we have shown--The Nature and Limits of American Competition--No other likely Rivals. Will the prestige of the London money market be maintained when the war is over? This is a question of enormous importance, not only to every one who works in and about the City, but to all who are interested in the maintenance and increase of England's wealth. Like all other questions about what is going to happen some day, the answer to it will depend to a very great extent on what happens between the present moment and the return of peace. To arrive at an answer we have first to consider on what London's financial prestige has been based in the past, and on this subject we are able to cite in evidence the opinion of an enemy. Our own views about the reasons which gave us financial eminence may well be coloured by national and patriotic prejudice, but when we take the opinion of a German we may be pretty sure that it is not warped by any predisposition in favour of English character and achievement. A little book published this year by Messrs. Macmillan and Co., entitled "England's Financial Supremacy," contains a translation of a series of articles from the _Frankfurter Zeitung_, and from this witness we are able to get some information which may be valuable, and is certainly interesting. The basis of England's financial supremacy is recapitulated as follows by this devil's advocate:-- "The influence of history, a mighty empire, a cosmopolitan Stock Exchange, intimate business connections throughout the whole world, cheap money, a free gold market, steady exchanges, an almost unlimited market for capital and an excellent credit system, an elastic system of company legislation, a model Insurance organisation and the help of Germans, these are the factors that have created England's financial supremacy. Perhaps we have omitted one other factor, the errors and omissions of other nations." Coming closer to detail, our critic says, with regard to the international nature of the business done on the London Stock Exchange:-- "In recent years London had almost lost its place as the busiest stock market in the world. New York, as a rule, Berlin on many occasions, could show more dealings than London. But there was no denying the international character of its business. This was due to England's position of company promoter and money lender to the world; to the way in which new capital was issued there; to its Stock Exchange rules, so independent of legislative and Treasury interference; to the international character of its Stock Exchange members, and to the cosmopolitan character of its clients," On the subject of our Insurance business and the fair-mindedness and quickness of settlement with which it was conducted, we can cite the same witness as follows:-- "Insurance, again, represented by the well-known organisation of Lloyds, which in form is something between a stock exchange and a co-operative partnership, is nowhere more elastic and adaptable than in London. It must be said, to the credit of Lloyds, that anyone asking to be insured there was never hindered by bureaucratic restrictions, and always found his wishes met to the furthest possible extent. The agencies of Lloyds abroad are also so arranged that both the insured and the insurer can have their claims settled quickly and equitably." But one of the most remarkable tributes to a quality with which Englishmen are seldom credited, and one of the frankest confessions of a complete absence of this quality in our German rivals, is contained in the following passage:-- "A further bad habit, harmful to our economic development, is narrow-mindedness. This, too, is very prevalent in Germany--and elsewhere as well. And this is not surprising. Even among the generation which is active to-day, the older members grew up at a time when possibilities of development were restricted and environment was narrow. With commendable foresight many of these older men have freed themselves from this petty spirit, and are second to none in enterprise and energy. Germany can be as proud of its 'captains of industry' as America itself. But many commercial circles in Germany are still unable to free themselves from these shackles. The relations between buyer and seller are still often disturbed by petty quibbling. In those industries where cartels and syndicates have not yet been formed, too great a rôle is played by dubious practices of many kinds, by infringements of payment stipulations, by unjustifiable deductions, etc., while, on the other hand, the cartels are often too ruthless in their action. In this field we have very much to learn from the English business man. Long commercial tradition and international business experience have taught him long ago that broad-mindedness is the best business principle. Look at the English form of contract, the methods of insurance companies, the settlement of business disputes! You will find no narrow-mindedness there. Tolerance, another quality which the German lacks, has been of great practical advantage to the Englishman. Until recently the City has never resented the settlement of foreigners, who were soon able to win positions of importance there. Can one imagine that in Berlin an Italian or a South American, with very little knowledge of the German language, would be not only entrusted with the management of leading banks and companies, but would be allowed in German clubs to lay down--in their faulty German--the law as to the way in which Germany should be developed? Impossible! Yet this could be seen again and again in England, and the country gained greatly by it. If the English have now developed a hatred of the foreigner, it only means that the end of England's supremacy is all the nearer." According to our German critic the great fabric that has been built up on these characteristics and qualities is threatened with ruin by the war; and the heritage which we are supposed to be losing is to fall, by some process which is not made very clear, largely into the hands of Berlin. In order that we may not be accused of taking the laudatory plums out of this German pudding and leaving out all criticisms and accusations, let us quote in full the passage in which he dances in anticipation on London's corpse:-- "Let us sum up. England's reputation for honest business dealing and for trustworthy administration has suffered. Her insular inviolability has been put in question. The ravages of war have undermined the achievements of many generations. Her free gold market has broken down. The flow of capital towards London will fall off, for those who cannot borrow there will no longer send deposits. The surplus shown in her balance-sheet will contract. Foreign trade will also decrease. Hand in hand with this fall, free trade, that mighty agent in the development of England's supremacy, will, in all probability, give place to protection. Stock Exchange business will grow less. Rates of interest will be permanently higher." How much truth is there in all this? Has our reputation for honest dealing and for trustworthy administration suffered? Surely not in the eyes of any reasonable and unprejudiced observer. In the course of the greatest war in history, fought by Germany with weapons which have involved the violation of the most sacred laws of humanity and civilisation, England has acted with a respect for the interests of neutrals which has been severely criticised by impatient observers at home. As for our "insular inviolability" having been put in question, it certainly has not, so far, suffered any serious damage. Our Fleet has defended us from invasion with complete success, and the damage done by marine and aerial raiders to our property on shore is negligible. Our free gold market is said to have broken down. The proof of the pudding is in the eating. Germany, when the war began, immediately relieved the Reichsbank from any obligation of meeting its notes in gold, and frankly went on to a paper basis. England has already shipped well over 200 millions in gold to America to finance her purchases there and those of her Allies. It may be true that capital will not flow to London if London is not in a position to lend, but we see no reason why London should not be able to resume her position as an international money lender, not perhaps immediately on the declaration of peace, but as soon as the aftermath of war has been cleared away and the first few months of difficulty and danger have been passed. The prophecy that foreign trade will decrease may also be true for a time owing to the destruction of merchant shipping that the war is causing. This possibility, however, may be remedied between now and the end of the war if the great programmes of merchant shipbuilding which have been undertaken by the British and American Governments are duly carried out. In any case, even if foreign trade decreases, there is no reason whatever to expect that England's will decrease faster than that of other nations. In all these problems we have to look for the relative answer and to consider not whether England has suffered by the war, for it is most obvious that she has, but whether she will have been found to have suffered more than any competitor who may threaten her after-war position. "Free trade," says our German Jeremiah, "that mighty agent in the development of England's supremacy, will, in all probability, give place to protection." We venture to think that it will be recognised that the Free Trade policy of the past gave us a well-distributed wealth which was an invaluable weapon in time of war, and that any attempt to impose import duties when peace comes will be admitted, even by the most ardent Tariff Reformers, as untimely when there is likely to be a world-wide scramble for food and raw materials, and the one object of every nation will be to get them wherever they can and as cheaply as they can. If Stock Exchange business will be less, though this does not by any means follow, there is no reason why it should be relatively less here than in other centres. As to rates of interest being permanently higher, the same answer applies. It may be true, but there is no reason why they should be relatively higher in London than elsewhere; and, if they are high, it will be because there will be a great demand for capital, which will mean a great trade expansion; both in the provision of capital and in meeting the demands of trade expansion England will be doing what she has done with marked success in the past and can, if she works in the right way now and after the war, do again with equal and still greater success. There is, however, a danger that threatens our financial position after the war, on the subject of which our German critic is discreetly silent, because that danger threatens the position of Germany very much more emphatically. It consists in the way in which our Government is at present meeting the needs of war finance, not by compelling economy on the civilian population through taxation and borrowing direct from investors, but by manufacturing currency for the purposes of the war by means of the printing press and the banking machinery. The effect of this policy is seen in the enormous mass of Treasury notes with which the country has been flooded. Their total is now nearly 180 millions or perhaps 100 millions more than the gold which they were originally designed to replace. It is also to be seen in the great increase in banking deposits which has been a feature of our financial history since the war began. Some people regard this feature as a phenomenal proof of the growth of our wealth during the war. I am afraid there is little foundation for this pleasant assumption, for these new deposits have been called into being by the banks subscribing to Government securities, whether War Loan, Treasury Bills, Exchequer Bonds or Ways and Means advances or lending their customers the wherewithal to do so. By this process the balance-sheets of the banks are swollen on both sides, by the Government securities and advances to customers among the assets, against which the banks create new deposits, so giving the community as a whole the right to draw more cheques. Every time the bank makes an advance it gives the borrower a credit in its books, that is to say, the right to draw cheques to that amount; the borrower draws on the credit and hands it to any one to whom he owes money; but as long as the advance is outstanding there will be a deposit out against it in the books of some bank or another. It is an easy way for the Government to finance the war by getting the banks to manufacture money for it. Nobody feels any poorer for the process, in fact, those who have new money in their pockets or in their bank balance feel richer, but the result of thus multiplying currency without any increase in the supply of goods and services to be bought inevitably helps the rise in prices which makes the war costly, puts the burden of it on to the wrong shoulders, and likewise cheapens the value of the English pound as measured in other currencies. This is why the evils involved by this process become so relevant to the question now at issue. If the Government is allowed to go on financing the war by increasing the currency with the very reluctant help of the bankers, the difficulties of maintaining our gold standard and keeping the exchanges in favour of London will be very greatly magnified when the war is over and our gold reserves are no longer protected by the submarines and the high cost of shipping gold that they produce. It therefore follows that all who have the true interests of the City at heart should use all the influence they can to force the Government to adopt a sounder financial policy before it is too late. It is true that our war finance has hitherto been sounder than that of any other warring Power, but it has fallen very short if we apply the rough test of the proportion of the cost of war borne out of taxation and compare our performance with the results achieved by our ancestors in the Napoleonic and Crimean wars. If we have done better than France, Italy, Russia and Germany in this respect, it must also be remembered that the financial prestige which these countries had to maintain was not nearly so great and well established as ours, with the possible exception of France; and France, being exposed to the ravages of a ruthless invader, was in a position which put special obstacles in the way of the canons of sound finance. If, then, there are certain dangers that threaten our financial position when the war is over, we must remember, on the other hand, that the war has already done a great deal to maintain our financial prestige and raise it to a height at which it never stood before. When the war began we were expected to finance the Allies, to keep the seas clear and put a small Expeditionary Force to support the left flank of the French Army, and to do these things during a contest which was expected by the consensus of expert opinion to last not more than a few months. All these things we accomplished, and we were the only Power at war which did actually accomplish all that it was expected and asked to do. More than that, we also undertook a great task which was not in our programme; we created a great army on a Continental scale, and, at the same time, continued to carry out the other tasks which had been assigned to us. All these things we did, and that we should have done them was evidence of economic strength and adaptability which have astonished the world. To have financed the Allies and ourselves as long as we did would have been comparatively easy if our population could have been left at work to turn out the stuff and services, the provision of which are implied by financing; but for us to have been able to do it and at the same time to improvise an army which is now consistently and regularly beating the Germans is an achievement which will inevitably raise the world's opinion of our economic strength, on which financial prestige is ultimately based. But, as it has been said, in discussing this question we have to look at it all the time from the relative point of view. How will our prestige be when the war is over, not as compared with what it was before the war, but as compared with what any other rival in any other part of the world can show? Here we have to acknowledge at once, freely and frankly, that, as compared with New York, we shall have gone backward. America will have been enormously enriched by the war, which we shall certainly have not. America will have been opening up channels of international trade and international finance, and so New York will have been gaining at the expense of London. It is certain that when the war is over America's dependence upon London for credits against the shipments of goods to and from her shores will have been very greatly lessened, if not altogether a thing of the past. This change would have happened any way, war or no war, but it has been greatly quickened by the war. Before the war America was already making arrangements, under her new banking system, to promote the machinery for acceptance and discount, in order that goods sent to her from foreign countries should be financed by bills drawn on American banks and houses in dollars instead of on English banks and houses in sterling. Apart from this development, which would have happened in any case, it remains to be seen how far New York will be in a position to act as a rival of London as the world's financial centre. The internal resources and potentialities of America are so enormous, and there is such a vast amount of work to be done in developing them and bringing them to full fruition, that it does not at all follow that America will yet be inclined to take the position in international trade and finance which will one day surely be hers, when she has done all the work that is waiting to be done in her own back premises. America has a new banking and monetary system on trial which has met the difficult problems of the war with great success. These problems, however, are not nearly as complicated and various as those which are likely to arise in time of peace. When a nation is turning out an enormous amount of goods for which the rest of the world is prepared to pay any price, her finance is a comparatively simple business. Even now, when America has assumed the duty of financing a large number of Allies impoverished by three years of war which have been enriching her, she is still simplifying the problem by restricting her advances to the payment for goods bought in America. That New York will be greatly strengthened by the war, which has brought masses of American securities back to the country of origin and has put into the hands of American bankers and investors large blocks of European promises to pay, is as clear as noonday; but whether when the war is over New York will care to be bothered much with problems of international finance remains to be seen. In the first place, the claims of her own country upon her financial resources will be insatiable and imperative, In the second place, the business of international finance is carried out on very finely cut terms; and the Americans being accustomed to the fat rates of profit which business at home has given them may not care to devote much attention to the international market, in which the risks are big, the turnover is enormous and the profits very finely cut. It has been remarked by a shrewd observer that the Americans will never do business for a thirty-second. In the third place, it must be remembered that the geographical position of London is more favourable than that of New York as a world centre, as the world is at present constituted. England, anchored off the coast of Europe, is clearly marked as the depôt for the entrepôt trade of the Old and New Worlds. New York is clearly marked as the centre for the trade of the Western hemisphere, and it is likely enough that New York and London, acting together as the financial chiefs of the two hemispheres, may be gradually united into what is practically one market by the growing ties of mutual interest. With regard to the position of other possible rivals to London's position, it need only be said that they have certainly been weakened much more rapidly than has London during the course of the war. Paris, threatened by the near approach of an invading foe, has inevitably suffered much more severely than London, and is likely to take longer in recovering the great position as a provider of capital which was given to her by the thrift of the average French citizen. Every one expects with confidence to see, when the war is over, a miraculous recovery in France produced by the same spirit which worked miracles after the war of 1871, aided and abetted by the subsequent improvement in man's control over the forces of nature, and also by the deep and world-wide sympathy which all will feel for France as the champion of freedom who has suffered most severely in its cause during the war. But it is impossible to expect, after what France has suffered, that she will be, for some time, in a position seriously to challenge London as a financial rival. All Englishmen will hope that the day when she will be in a position to challenge us again will come quickly. As to Berlin, the only other possible rival to London in Europe, very little need be said. The German authority quoted above has already shown some of the difficulties with which Berlin has to struggle. He spoke of the narrow-mindedness of German finance, of the "petty quibbling" which often disturbs the relations between buyer and seller, of the "dubious practices of many kinds, infringements of payment stipulations, unjustifiable deductions," etc., and the "ruthless" action of the cartels. He acknowledges that though Germany had a gold standard "too much anxiety used to be shown when the gold export point was reached," and that "it was also feared that to export gold would incur the wrath of the Reichsbank." With these disadvantages to struggle against, quoted from the mouth of a German observer, Germany has also succeeded by her ruthless policy during the war in earning the deep hostility of the greater part of mankind. Sentiment probably enters into business relations a good deal more than most business men admit, and for any country to set out to gain the leadership in trade and finance by outraging the feelings of most of its possible customers is an extraordinary piece of stupidity. It seems, then, that apart from the relative weakening of London as compared with New York, there is very little need for us to fear any serious change in England's financial position after the war as long as the Government's faulty finance is not allowed too seriously to endanger the position of our gold standard. It is true that we shall not benefit, as much as we undoubtedly have in the past, from the "help of Germans" in developing our finance. But indirectly the Germans will still be helping us by the great stimulus that the war will have given us towards efficiency and hard work. What we have to do in order to secure London's position after the war is to restore as soon as we can the system that had established it in the century before the war. We have to show the world that, far from any intention to abandon Free Trade, we mean to take a long step forward along the line of international activity which has been the source of our greatness in the past. We want, as soon as possible, to get back that freedom from Government control which has given us such elasticity and adaptability to our money market, our Stock Exchange and our Insurance business. A certain amount of Government control will inevitably have to continue for a time after the war, but the sooner we rid ourselves of it the sooner we shall restore to the London money market those qualities which, after the reputation that it has for honesty, soundness and straight dealing, were most helpful in building up its eminence. Above all, we have to work hard both in finance and industry and commerce. Finance, which is the machinery for handling claims for goods and services, can only be active and effective if industry and commerce are active and effective behind it, turning out the goods and services to meet the claims that finance creates. A great industrial and commercial output, with severe restriction of unnecessary consumption so that a great margin may go into capital equipment, will soon repair the ravages of war, bring down the price of credit and of capital and make London once more the place in which these things are most cheaply and freely to be bought. Finally, if we want to restore London as a place in which all the financial transactions of the world were centred, we must remember that we cannot do so if we restrict the facilities given to foreigners to come here and settle and do business. It is not possible to be an international centre with an insular sentiment. III WAR FINANCE AS IT MIGHT HAVE BEEN--I _November_, 1917 Financial Conditions in August, 1914--No Scheme prepared to meet the Possibility of War--A Short Struggle expected--The Importance of Finance as a Weapon--Labour's Example--The Economic Problem of War--The Advantages of Direct Taxation--The Government follows the Path of Least Resistance--The Effect of Currency Inflation. A legend current in the City says that the Imperial War Committee, or whatever was the august body entrusted with the task of thinking out war problems beforehand, had done its work with regard to the Army and Navy, transport and provision, and everything else that we should want for the war, and were going on to the question of finance next week, when the war intervened. Whatever may be the truth of this story, the events of the war confirm the opinion that if it was not true it ought to have been. We are continually accused of not having been ready for the war; but, in fact, we were quite ready to do everything that we had promised to do with regard to military and naval operations. Our Navy was ready in its place in the fighting line, and the dispatch with which our Expeditionary Force was collected from all parts of the kingdom, and shipped across to France, was a miracle of efficiency and practical organisation. It is true that we had not got an Army on a Continental scale, but it was no part of our contract that we should have one. The fighting on land was in those days expected to be done by our Allies, assisted by a small British force on the left flank of the French Army. That British force was duly there, and circumstances which were quite unforeseen made it necessary for us to undertake a task which was no part of our original programme and create an Army on a Continental scale, in addition to doing everything that we had promised beforehand to a much greater extent than was in the bargain. But in finance there was no evidence that any thought-out policy had been arrived at in order to make the best possible use of the nation's economic resources for the war when it came. The acute crisis in the City which occurred in August, 1914, was a minor matter which hardly affected the subsequent history of our war finance except by giving dangerous evidence of the ease by which financial problems can be apparently surmounted by the simple method of creating banking credits. That crisis merely arose from the fact that we were so strong financially, and had so great a hold upon the finance of other countries in the world, that when we decided, owing to stress of war, to leave off lending to foreigners and to call in loans that we had made by way of accepting and bill-discounting arrangements, the whole machinery of exchange broke down because from all over the world the market in exchange went one way. Everybody wanted to buy bills on London, and there were no bills to be had. There was also the internal problem which arose because some of the public and some of the banks took to the evil practice of hoarding gold just at the wrong moment, and consequently there was no available supply of legal tender currency except in the shape of Bank of England notes, the smallest denomination of which is £5. It is known that our bankers had long before pointed out to the Treasury that if ever a banking crisis arose there would, or might be, this demand for a paper currency of smaller denominations than £5; this suggestion got into a pigeon-hole at the Treasury and was deep under the dust of Whitehall by the time experience proved how big a gap in our financial armour had been made by its neglect. If the £1 notes, with which we are now so familiar, had been ready when the war broke out, or, still better, if the Bank of England had been empowered and instructed to have an issue of its own £1 notes ready, it may at least be contended that the moratorium, which was so bad a financial beginning of the war, might have been avoided. But this opening crisis was a short-lived matter, and was promptly dealt with, thanks to the energy and courage of Mr Lloyd George, who was then Chancellor of the Exchequer, and saw that things had to be done quickly, and took the advice of the City as to what had to be done. The measures then employed erred, if at all, on the side of doing too much, which was certainly a mistake in the right direction if in any. What is much more evident is the fact that not only had there been no attempt to provide against just such a jolt to our financial machine as took place when the war began, but that, quite apart from the financial machinery of the City, no reasoned and thought-out attention had been given to the great problems of governmental finance which war on such a scale brought with it. There is, of course, the excuse that nobody expected the war to be on this scale, or to last so long. The general view was that the struggle would be over in a few months, and must certainly be so if for no other reason because the economic strain would be so great that the nations of Europe could not stand it for a long time. On the other hand, we must remember that Lord Kitchener, whom most men then regarded as representing all that was most trustworthy in military opinion, made arrangements from the beginning on the assumption that the war might last for three years. So, while some excuse may be made for our lack of financial foresight, it does seem to have been the duty of those whose business it is to manage our finances to have thought out a complete scheme to be adopted in case of war if at any time we should be involved in one on a European scale. Instead of which, not only would it appear that no such endeavour had been made by our Treasury experts before the war, but that no such endeavour has ever been made by them since the war began. All through the war's history many of the country's mistakes have been based on the encouraging conviction that the war would be over in the next six months. This conviction is still cherished to this day, and there can be no doubt that if those who cherish it hold on to it long enough they will come right some day. But if delusions of this kind may be fairly excused in the man in the street, they do not seem to be any excuse for those who are responsible for our finance for their total lack of a thought-out scheme at the beginning of the war, and their total failure to produce one as the war went on. We have financed the war by haphazard methods, limping along the line of least resistance. We are continuing to do so, and we may do so to the end, though there are now growing signs of an impatience both among the property-owning classes and others of the system by which we are financing the war by piling up debt and manufacturing banking credits. The objections to the policy on the part of the "haves" and the "have nots" are, of course, different, but as they both converge to the same point, namely, to the reform of our system of war finance, it is possible that they may in time have the effect of shaking even the confidence of our politicians and officials in the haphazard and slipshod methods which would long ago have produced financial disaster if it had not been for the great financial strength of the country. Finance is an enormously important weapon in the hands of our rulers for gliding the economic activities of the people. This is so even in peace time to a certain extent, though the revenue then collected is so small an item in the total national income that it counts for much less than in war, when the power that the Government can wield by its policy in taxation and borrowing might have been all-powerful in keeping the nation on the right lines in the matter of spending and keeping down the cost of the war, and in maintaining our financial staying power to a far greater extent than has actually been done. It is easy, as they say on the Stock Exchange, to job backwards, and it is also easy, and perhaps rather unprofitable, to hazard opinions about what would have happened if things had been otherwise. Nevertheless, when we look back on the spirit of the country as it was in those early days of the war, when the violation of Belgium had sent a chivalrous thrill through the hearts of all classes in the country, when we all recognised that we were faced with the greatest crisis in our history, that our country and the future of civilisation were about to be tested by the severest strain ever applied to them, that the life and fortune of the individual did not count, but that the war and victory were the only interests that any one had a right to consider--when one remembers all these things, and the use that a wise financial policy might have made of them, it is impossible to avoid the conclusion that the history of the war in this country and its social and political effects might have been something much finer, much cleaner and more noble if only the weapons of finance had been more boldly and wisely used. It is not a good thing to indulge in high-falutin' on this subject. It is absurd to suppose that the war suddenly turned us all into plaster saints at the beginning, and that we might have continued so to the end if the State had dealt with our money in a proper way. But without setting up any such idealistic arguments as these, looking back on those early days of the war, one can still remember the thrill of earnestness and of eagerness for self-sacrifice which has since then given way lamentably to war profiteering, war strikes, and a general struggle among many classes of the community to make as much as possible out of the war, merely because our financial leaders have never really put the country's financial problem properly before the country. We were not plaster saints, but we were either Idealistic and perhaps foolish people who attached great importance to the freedom and security of small nations and all those items in the programme of idealistic Radicalism, or else we were good, red-hot, true-blue Jingoes with a hearty hatred for Germany, and enjoyed the thought that the big fight which we had long foreseen between the two countries was at last going to be fought out. Or, again, we were just commonplace people who did not much believe in idealistic Radicalism or anti-German bitterness, but saw that the whole future of our country was at stake, and were prepared to do anything for it. A fine example was set us in those days by the Trade Union leaders. The industrial world was seething with discontent. The Suffragettes in London and the Carsonites in Ireland had shown us how much could be done by appeals to physical force in a lazy-minded community; and hints of industrial revolution, with great organised strikes, which were going to tie up the transport industry of the country were in the air. And then, when the war came, the Labour leaders said, "No strikes until the war is over. Our country comes first." This was the lead given to the country by those down at the bottom, who had the least to lose, and whose patriotism during the course of the war has frequently been questioned. At the top the financial and property-owning classes, having been saved by Mr Lloyd George's able adroitness from a bad crisis in the City, were entirely tame, and would have suffered anything in the way of taxation or financial conscription if the need for it had been properly put before them. It is almost amusing to remember now that in those early days of the war the shareholders in Home Railway companies were thought lucky. The Government were taking the railways over, and were guaranteeing that their proprietors should receive the same dividends as they had had before the war. Such was the view in financial and property-owning circles of results of war that, so far from any expectation of the huge profits which war has put into the pockets of certain classes, they were only too thankful if they could be assured that their gross incomes were not going to be reduced. Such was the spirit with which the Government of that day had to deal. A spirit in all classes earnestly patriotic, and so thoroughly frightened of the economic consequences of the war that it would have been ready to face any sacrifices that the Government had asked of it. How, then, would the Government have dealt with this spirit if it had taken the trouble really to think out the problem of war finance on a long view instead of proceeding along a haphazard line, adjusting peace methods to war without any consideration as to their adequacy? If the problem had been really thought out beforehand the Government must have seen clearly that the real economic problem in war-time is not merely a question of raising money, since that can at any time be done easily by means of a printing-press, but of diverting the industrial energy of the nation from peace to war purposes, that is to say, transferring from the enjoyment of the individual citizen the goods and services that used to contribute to his comfort and amusement, and turning them over to the provision of the things needed for the war. War's needs can only be met out of the current production of the world as it is at present. All the warring powers begin a war with certain accumulated war stores consisting of battleships, ammunition, guns and all other forms of war material. Apart from these stores with which they begin, the whole work of providing the armies with the fighting materials that they require, and the food and clothes that they consume, has to be done during the course of the war, that is to say, out of the current production of the moment. Therefore the real economic problem that any Government has to face in war-time is that of inducing its citizens to reduce their purchase of goods and services, that is to say, to spend less, so that all the things required for the Army and Navy may be obtained by the Government. It is true that some of the goods and services required for carrying on war can be obtained from foreign countries by any belligerent which is able to communicate with them freely. In that case the current production of the foreigner can be called in to help. But this can only be done if the warring country is able to ship goods to the foreigner in payment for what it buys, or if it is able to obtain a loan from the foreigner, or some other foreign country, in order to pay for its purchases abroad, or again, if, as in our case, it holds a large accumulation of securities which foreign countries are prepared to take in exchange for goods that they send for the purposes of the war. By these two last-named processes, raising money abroad, and selling securities to foreign nations, the warring country impoverishes itself for the future. When it borrows abroad it pledges itself to export goods and services in future to meet interest and sinking fund on the money so raised, so getting no goods and services in return. When it ships its accumulated wealth in the form of securities it gives up for the future any claim to goods and services from the debtor country which used to come to it to meet interest and redemption. It is only by shipping goods in return for goods imported for the war that a country can keep its financial staying-power on an even keel. Thus the problem which a statesman who had thought out the economics of war beforehand would have recognised as the keystone of his policy, would have been that of diverting the activities of the country from providing itself with comforts and amusements to turning out goods required for war, and of doing so with the least possible friction, the least possible alteration in the economic equilibrium of the country, and, above all, with the least possible cost to the national finances. We arrive at the true aspect of this problem more easily if we leave out the question of money altogether and think of it in units of energy. When a nation goes to war it means to say that it has to apply so many units of energy to the business of fighting, and to provide the fighters with all that they need. If at the beginning of the war its utmost capacity of output was, to mention merely a fanciful figure, a thousand million units of energy, and if it was clear that the fighting forces of the country would need for their proper maintenance five hundred million units of energy, then it is clear that the nation's ordinary consumption of goods and services would have to be reduced to the extent of five hundred millions of units of energy, which would have to be applied to the war, that is, assuming that its possible output remained the same. In other words, the spending power of the citizens of the country had to be reduced so that the industrial energy that used to go into meeting their wants might be made available for the purposes of fighting forces. Now what was the straightest, simplest and cleanest way of bringing about this reduction in buying power on the part of the ordinary citizen which has been shown to be necessary for the purposes of war finance? Clearly the best way of doing it is by taxation equitably imposed. When the State taxes, it says in effect to the citizens, "Your country needs certain goods and services, you therefore will have to go without those goods and services, and the simplest way to make you do this is to take away your money and so ration your buying power. Whatever is needed for the Army and Navy will be taken away from you by taxation, and the result of this will be that, instead of your indulging in comforts and luxuries, to the extent of the war's needs the Government will use your money for paying for what is needed for the Army and Navy." If such a policy had been carried out the cost of the war to the community would have been enormously cheapened. There need have been no general rise in prices because there would have been no increase in demand for goods and services. Anything that the Government spent would have been counter-balanced by decreased spending by the individual; any work that the Government needed for the war would have been counter-balanced by a reduction in demand for work on the part of individual citizens. There would have been no multiplication of currency owing to enormous credits raised by the Government; there would have been merely a transfer of buying power from individuals to the State. The process would have been gradual, there need have been no acute dislocation, but as the cost of the war increased, that is to say, as the Government needed more and more goods and services for its prosecution, the community would gradually have shed one after another the extravagances on which it spent so many hundreds of millions in days before the war. As it shed these extravagances the labour and energy needed to produce them would have been automatically transferred to the service of the war, or to the production of necessaries of life. By this simple process of monetary rationing all the frantic appeals for economy, and most of the complicated, tangled problems raised by such matters as Food Control or National Service would have been avoided. But, it may be contended, this is setting up an ideal so absurdly too high that you cannot expect any modern nation to rise up to it. Perhaps this is true, though I am not at all sure that if we had had a really bold and far-sighted Finance Minister at the beginning of the war he might not have persuaded the nation to tackle its war problem on this exalted line. At least it can be claimed that our financial rulers might have looked into the history of the matter and seen what our ancestors had done in big wars in this matter of paying for war costs out of taxation, with the determination to do at least as well as they did, and perhaps rather better, owing to the overwhelming scale of modern financial problems. If they had done so they would have found that both in the Napoleonic and the Crimean wars we paid for nearly half the cost of the war out of revenue as they went on, whereas in the present war the proportion that we are paying by taxation, instead of being 47 per cent., as it was when our sturdy ancestors fought against Napoleon, is less than 20 per cent.[1] Why has this been so? Partly, no doubt, owing to the slackness and cowardice of our politicians, and the apathy of the overworked officials, who have been too busy with the details of finance to think the problem out on a large scale. But it is chiefly, I think, because our system of taxation, though probably the best in the world, involves so many inequities that it cannot be applied on a really large scale without producing a discontent which might have had serious consequences on our conduct of the war. [Footnote 1: See _Economist_, August 4, 1917, p. 151.] It is not possible nowadays, now that the working classes are conscious of their strength, to apply taxation to ordinary articles of general consumption with anything like the ruthlessness which in former days produced such widespread misery. Indirect taxation of this kind carries with it this inherent weakness that its burden falls most heavily on those who are least able to bear it, consequently it is bound to break in the hand of those who attempt to apply it with anything like vigour to a community which is prepared to stand up for fair treatment. A tax on bread or salt obviously hits the wage-earner at 30s. a week infinitely harder than it hits the millionaire, and so the country would not tolerate taxes on bread or salt. Direct taxes, such as Income Tax and Death Duties, have this enormous advantage, that they can really be regulated so as to press with continually increasing severity upon those who are best able to bear them. Unfortunately our Income Tax is still so unjustly imposed that it was clearly impossible to make full use of it without its being first reformed. That two men, each earning £1000 a year, should pay the same Income Tax, in spite of one having a wife and five children, while the other is a careless bachelor, is such a blot upon this otherwise excellent tax that it is generally agreed that the present rate of 5s. is as high as it can be made to go unless some reform is introduced into its incidence. The need for its reform is made the excuse for a sparing use of the tax, and we have been on several occasions assured that, as soon as the war is over, this reform will be set about. In the meantime the Government falls back on funding about 80 per cent. of its requirements of the war on a system of borrowing. In so far as the money subscribed to its loans is money that is being genuinely saved by investors this process has exactly the same effect as taxation, that is to say, somebody goes without goods and services and hands over his power to buy them to the State to be used for the war. Borrowing of this kind consequently does everything that is needed for the solution of the immediate war problem, and the only objection to it is that it leaves later on the difficulties involved by raising taxes when the war is over, and economic problems are much more complicated in times of peace than in war, for meeting the interest and redemption of debt. But, in fact, it is well known that by no means all that the Government has borrowed for war purposes has been provided in this way. Much of the money that the Government has obtained for war purposes has been got not out of genuine savings of investors, but by arrangements of various kinds with the banking machinery of the country, or by the simple use of the printing-press, with the result that the Government has provided itself with an enormous mass of new currency which has not been taken out of anybody else's pocket, but has been manufactured by or for the Government. The consequence of the profligate use of this dishonest process is that general rise in prices, which is in effect an indirect tax on the necessaries of life, involving all the injustice and ill-feeling which arises from such a measure. It is inevitable that the working classes, finding themselves subjected to a rise in prices, the cause of which they do not understand, but the result of which they see to be a great decrease in the buying power of their wages, should believe that they are being exploited by profiteers, that the rich classes are growing richer at their expense out of the war, and that they and the country are being bled by a set of unpatriotic capitalist blood-suckers. It is also natural that the property-owning classes, who find themselves paying an Income Tax which they regard as extortionate, should consider that the working classes by their continuous demands for higher wages to meet higher cost of living, are trying to exploit the country in their own interests in a time of national crisis, and displaying a most unedifying spirit. The social result of this evil policy of inflation, in embittering class against class, is a matter which it is difficult to exaggerate. Some people think that it was inevitable. This is too wide a question to be entered into now, but at least it must be contended that if it is inevitable the extent to which it is being practised might have been very greatly diminished. Do we mean to go on to the end of the war with this muddling policy of bad finance? If we still insist on believing that the war cannot last another six months, and there is therefore no need to pull ourselves up short financially and put things in order, then we certainly shall do so. But we should surely recognise that there is at least a chance that the war may go on for years, that if so our present financial methods will leave us with a burden of debt which is appalling to consider, and that in any case, whether the war lasts another six months or another six years, a reform of our financial methods is long overdue, is inevitable some time, and will pay us better the sooner it is set about. IV WAR FINANCE AS IT MIGHT HAVE BEEN--II _December_, 1917 The Changed Spirit of the Country--A Great Opportunity thrown away--What Taxation might have done--The Perils of Inflation--Drifting stupidly along the Line of Least Resistance--It is we who pay, not "Posterity." In the November number of _Sperling's Journal_ I dealt with the question of how our war finance might have been improved if a longer view had been taken from the beginning concerning the length of the war and the measures that would be necessary for raising the money. The subject was too big to be fully covered in the course of one article, and I have been given this opportunity of continuing its examination. Before doing so I wish to remind my readers once more of the great difference in the spirit of the country with regard to financial self-sacrifice in the early days of the war and at the present time, after three years of high profits, public and private extravagance, and successful demands for higher wages have demoralised the public temper into a belief that war is a time for making big profits and earning big wages at the expense of the community. In the early days the spirit of the country was very different, and it might have remained so if it had been trained by the use made of public finance along the right line. In the early days the Labour leaders announced that there were to be no strikes during the war, and the property-owning classes, with their hearts full of gratitude for the promptitude with which Mr Lloyd George had met the early war crisis, were ready to do anything that the country asked from them in the matter of monetary sacrifice. Mr Asquith's grandiloquent phrase, "No price is too high when Honour is at stake," might then have been taken literally by all classes of the community as a call to them to do their financial duty. Now it has been largely translated into a belief that no price is too high to exact from the Government by those who have goods to sell to it, or work to place at its disposal. In considering what might have been in matters of finance we have to be very careful to remember this evil change which has taken place in the public spirit owing to the short-sighted financial measures which have been taken by our rulers. Thus, when we consider how our war finance might have been improved, we imply all along that the improvements suggested should have been begun when the war was in its early stages, and when public opinion was still ready to do its duty in finance. The conclusion at which we arrived a month ago was that by taxation rather than by borrowing and inflation much more satisfactory results could have been got out of the country. If, instead of manufacturing currency for the prosecution of the war, the Government had taken money from the citizens either by taxation or by loans raised exclusively out of real savings, the rise in prices which has made the war so terribly costly, and has raised so great a danger through the unrest and dissatisfaction of the working classes, might have been to a great extent avoided, and the higher the rate of taxation had been, and the less the amount provided by loans, the less would have been the seriousness of the problem that now awaits us when the war is over and we have to face the question of the redemption of the debt. In this matter of taxation we have certainly done much more than any of the countries who are fighting either with us or against us. Germany set the example at the beginning of the war of raising no money at all by taxation, puffed up with the vain belief that the cost of the war, and a good deal more, was going to be handed over to her in the shape of indemnities by her vanquished enemies. This terrible miscalculation on her part led her to set a very bad example to the warring Powers, and when protests are made in this country concerning the low proportion of the war's costs that is being met out of taxation it is easy for the official apologist to answer, "See how much more we are doing than Germany." It is easy, but it is not a good answer. Germany had no financial prestige to maintain; the money that Germany is raising for financing the war is raised almost entirely at home, and she rejoices in a population so entirely tame under a dominant caste that it would very likely be quite easy for her, when, the war is over, to cancel a large part of the debt by some process of financial jugglery, and to induce her tame and deluded creditors to believe that they have been quite handsomely treated. Here, however, in England, we have a financial prestige which is based upon financial leadership of more than a century. We have also raised a large part of the money we have used for the prosecution of the war by borrowing abroad, and so we have to be specially careful in husbanding that credit, which is so strong a weapon on the side of liberty and justice. And, further, we have a public which thinks for itself, and will be highly sceptical, and is already inclined to be sceptical, concerning the manner in which the Government may treat the national creditors. Its tendency to think for itself in matters of finance is accompanied by very gross ignorance, which very often induces it to think quite wrongly; and when we find it necessary for the Chancellor of the Exchequer to make it clear at a succession of public meetings that those who subscribe to War Loans need have no fear that their property in them will be treated worse than any other kinds of property, we see what evil results the process of too much borrowing and too little taxation can have in a community which is acutely suspicious and distrustful of its Government, and very liable to ignorant blundering on financial subjects. What, then, might have been done if, at the beginning of the war, a really courageous Government, with some power of foreseeing the needs of finance for several years ahead if the war lasted, had made a right appeal to a people which was at that time ready to do all that was asked from it for the cause of justice against the common foe? The problem by which the Government was faced was this, that it had to acquire for the war an enormous and growing amount of goods and services required by our fighting forces, some of which could only be got from abroad, and some could only be produced at home, while at the same time it had to maintain the civilian population with such a supply of the necessaries of life as would maintain them in efficiency for doing the work at home which was required to support the effort of our fighters at the Front. With regard to the goods which came from abroad, either for war purposes or for the maintenance of the civilian population, the Government obviously had no choice about the manner in which payment had to be made. It had no power to tax the suppliers in foreign countries of the goods and services that we needed during the war period. It consequently could only induce them to supply these goods and services by selling them either commodities produced by our own industry, or securities held by our capitalists, or its own promises to pay. With regard to the goods that we might have available for export, these were likely to be curtailed owing to the diversion of a large number of our industrial population into the ranks of the Army and into munition factories. This curtailment, on the other hand, might to a certain extent be made good by a reduction in consumption on the part of the civilian population, so setting free a larger proportion of our manufacturing energy for the production of goods for export. Otherwise the problem of paying for goods purchased from abroad could only be solved by the export of securities, and by borrowing from foreign countries, so that the shells and other war material that were required, for example, from America, might be paid for by American investors in consideration of receiving from us a promise to pay them back some day, and to pay them interest in the meantime. In other words, we could only pay for what we needed from abroad by shipping goods or securities. As is well known, we have financed the war by these methods to an enormous extent; the actual extent to which we have done so is not known, but it is believed that we have roughly balanced by this process the sums that we have lent to our Allies and Dominions, which now amount to well over 1300 millions. If this is so, we have, in fact, financed the whole of the real cost of the war to ourselves at home, and we have done so by taxation, by borrowing saved money, and by inflation--that is to say, by the manufacture of new currency, with the inevitable result of depreciating the buying power of our existing currency as a whole. How much better could the thing have been done? In other words, how much of the war's cost in so far as it was raised at home could have been raised by taxation? In theory the answer is very simple, for in theory the whole cost of the war, in so far as it is raised at home, could have been raised by taxation if it could have been raised at all. It is not possible to raise more by any other method than it is theoretically possible to raise by taxation. It is often said, "All this preaching about taxation is all very well, but you couldn't possibly get anything like the amount that is needed for the war by taxation, or even by borrowing of saved money. This inflation against which economic theorists are continually railing is inevitable in time of war because there isn't enough money in the country to provide all that is needed." This argument is simply the embodiment of the old delusion, so common among people who handle the machinery of finance, that you can really increase the supply of necessary goods by increasing the supply of money, which is nothing else than claims to goods expressed either in pieces of metal or pieces of paper. As we have seen, all that we have been able to raise abroad has been required for advances to our Allies and Dominions, consequently we have had to fall back upon our own home production for everything needed for our own war costs. Either we have turned out the goods at home or we have turned out goods to sell to foreigners in exchange for goods that we require from them. But since we thus had to rely on home production for the whole of the war's needs as far as we were concerned, it is clear that the Government could, if it had been gifted with ideal courage and devotion, and if it had a people behind it ready to do all that was needed for victory, have taken the whole of the home production, except what was wanted for maintaining the civilian population in efficiency, for the purposes of the war. It is a commonplace of political theory that the Government has a right to take the whole of the property and the whole of the labour of its citizens. But it would not, of course, have been possible for the Government immediately to inaugurate a policy of setting everybody to work on things required for the war and paying them all a maintenance wage. This might have been done in theory, but in practice it would have involved questions of industrial conscription, which would probably have raised a storm of difficulty. What the Government might have done would have been by commandeering the buying power of the citizen to have set free the whole industrial energy of the community for supplying the war's needs and the necessaries of life. At present the national output, which is only another way of expressing the national income, is produced from certain channels of production in response to the expectation of demand from those whose possession of claims to goods, that is to say, money, gives them the right to say what kind of goods they will consume, and consequently the industrial part of the population will produce. Had the Government laid down that the whole cost of the war was to be borne by taxation, the effect of this measure would have been that everything which was needed for the war would have been placed at the disposal of the Government by a reduction in spending on the part of those who have the spending power. In other words, the only process required would have been the readjustment of industrial output from the production of goods needed (or thought to be needed) for ordinary individuals to those required for war purposes. This readjustment would have gone on gradually as the war's cost increased. There would have been no competition between the Government and private individuals for a limited amount of goods in a restricted market, which has had such a disastrous effect on prices during the course of the war; there would have been no manufacture of new currency, which means the creation of new buying power at a time when there are less goods to buy, which has had an equally fatal effect on prices; there would have had to be a very drastic reform in our system of taxation, by which the income tax, the only really equitable engine by which the Government can get much money out of us, would have been reformed so as to have borne less hardly upon those with families to bring up. Mr Sidney Webb and the Fabians have advocated a system by which the basis of assessment for income tax should be the income divided by the number of members of a family, rather than the mere income without any consideration for the number of people that have to be provided for out of it. With some such scheme as this adopted there is no reason why the Government should not have taken, for example, the whole of all incomes above £1000 a year for each individual, due allowance being made for obligations, such as rent, which involve long contracts. For any single individual to want to spend more than £1000 a year on himself or herself at such a crisis would have been recognised, in the early days of the war, as an absurdity; any surplus above that line might readily have been handed over to the Government, half of it perhaps in taxation and the other half in the form of a forced loan. So sweeping a change would not have been necessary at first, perhaps not at all, because the war's cost would not have grown nearly so rapidly. All surplus income above a certain line would have been taken for the time being, but with the promise to repay half the amount taken, so that it should not be made a disadvantage to be rich, and no discouragement to accumulation would have been brought about. By this means the whole of the nation's buying power among the richer classes would have been concentrated upon the war, with the result that the private extravagance, which is still disgracing us in the fourth year of the war, would not have been allowed to produce its evil effects. With the rich thus drastically taxed, the working classes would have been much less restive under the application of income tax to their own wages. We should have a much more freely supplied labour market, and since the rise in prices would not have been nearly so severe, labour's claim to higher wages would have been much less equitable, and labour's power to enforce the claim would have been much less irresistible. What the Government has actually done has been to do a little bit of taxation, much more than anybody else, but still a little bit when compared with the total cost of the war; a great deal of borrowing, and a great deal of inflation. By this last-named method it produces the result required, that of diverting to itself a large part of the industrial output of the country, by the very worst possible means. It still, by its failure to tax, leaves buying power in the hands of a large number of people who see no reason why they should not live very much as usual; that is to say, why they should not demand for their own purposes a proportion of the nation's energy which they have no real right to require at such a time of crisis. But in order to check their demands, and to provide its own needs, the Government, by setting the bankers to work to provide it with book credits, gives itself an enormous amount of new buying power with which, by the process of competition, it secures for itself what is needed for the war. There is thus throughout the country this unwholesome process of competition between the Government on one hand and unpatriotic spenders on the other, who, between them, put up prices against the Government and against all those unfortunate, defenceless people who, being in possession of fixed salaries, or of fixed incomes, have no remedy against rising prices and rising taxation. All that could possibly have been spent on the war in this country was the total income of the people, less what was required for maintaining the people in health and efficiency. That total income Government might, in theory, have taken. If it had done so it could and would have paid for the whole of the war out of taxation. All this, I shall be told, is much too theoretical and idealistic; these things could not have been done in practice. Perhaps not, though it is by no means certain, when we look back on the very different temper that ruled In the country in the early months of the war. If anything of the kind could have been done it would certainly have been a practical proof of determination for the war which would have shown more clearly than anything else that "no price was too high when Honour was at stake." It would also have been an extraordinary demonstration to the working classes of the sacrifices that property owners were ready to make, the result of which might have been that the fine spirit shown at the beginning of the war might have been maintained until the end, instead of degenerating into a series of demands for higher wages, each one of which, as conceded to one set of workmen, only stimulates another to demand the same. But even if we grant that it is only theoretically possible to have performed such a feat as is outlined above, there is surely no question that much more might have been done than has been done in the matter of paying for the war by taxation. If we are reminded once more that our ancestors paid nearly half the cost of the Napoleonic war out of revenue, while we are paying about a fifth of the cost of the present war from the same source, it is easy to see that a much greater effort might have been made in view of the very much greater wealth of the country at the present time. I was going to have added, in view also of its greater economic enlightenment, but I feel that after the experience of the present war, and its financing by currency debasement, the less about economic enlightenment the better. What, then, stood in the way of measures of finance which would have obviously had results so much more desirable than those which will face us at the end of the war? As it is, the nation, with all classes embittered owing to suspicions of profiteering on the part of the employers and of unpatriotic strikes on the part of the workers, will have to face a load of debt, the service of which is already roughly equivalent to our total pre-war revenue; while there seems every prospect that the war may continue for many half-years yet, and every half-year, as it is at present financed, leaves us with a load of debt which will require the total yield of the income tax and the super-tax before the war to meet the charge upon it. Why have we allowed our present finance to go so wrong? In the first place, perhaps, we may put the bad example of Germany. Then, surely, our rulers might have known better than to have been deluded by such an example. In the second place, it was the cowardice of the politicians, who had not the sense in the early days of the war to see how eager the spirit of the country was to do all that the war required of it, and consequently were afraid to tax at a time when higher taxation would have been submitted to most cheerfully by the country. There was also the absurd weakness of our Finance Ministers and our leading financial officials, which allowed our financial machinery to be so much weakened by the demands of the War Office for enlistment that it has been said in the House of Commons by several Chancellors of the Exchequer that it is quite impossible to consider any form of new taxation because the machinery could not undertake it. There has also been great short-sightedness on the part of the business men of the country, who have failed to give the Government a lead in this important matter. Like the Government, they have taken short views, always hoping that the war might soon be over, and so have left the country with a problem that grows steadily more serious with each half-year as we drift stupidly along the line of least resistance. Such war finance as I have outlined--drastic and impracticable as it seems--would have paid us. Taxation in war-time, when industry's problem is simplified by the Government's demand for its product, hurts much less than in peace, when industry has not only to turn out the stuff, but also find a buyer--often a more difficult and expensive problem. There is a general belief that by paying for war by loans we hand the business of paying for it on to posterity. In fact, we can no more make posterity pay us back our money than we can carry on war with goods that posterity will produce. Whatever posterity produces it will consume. Whatever it pays in interest and amortisation of our war debt, it will pay to itself. We cannot get a farthing out of posterity. All we can do, by leaving it a debt charge, is to affect the distribution of its wealth among its members. Each loan that we raise makes us taxpayers collectively poorer now, to the extent of the capital value of the charge on our incomes that it involves. The less we thus charge our productive power, and the more we pay up in taxes as the war goes on, the readier we shall be to play a leading part in the great time of reconstruction. V A LEVY ON CAPITAL _January_, 1918 The Objects of the Levy--Its Origin and History--How it would work in Practice--The Attitude of the Chancellor--The Effects of the Scheme in discouraging Thrift--Its Fallacies and Injustices--The Insuperable Obstacles to its Application--Its Influence on Production--One of the Tests of a Tax--Judged by this Test the Proposed Levy is doomed. By some curious mental process the idea of a levy on capital has come into rapidly increasing prominence in the last few months, and seems to be gaining popularity in quarters where one would least expect it. On the other hand, it is naturally arousing intense opposition, both among those who would be most closely affected by its imposition, and also among those who view with grave concern the possible and probable economic effects of such a system of dealing with the national debt. I say "dealing with the national debt" because, as will be clear, as a system of raising money for the war the suggestion of the levy on capital has little or nothing to recommend it. But, as will also be made clear, the proposal has been put forward as a thing to be done immediately in order to increase the funds in the hands of the Chancellor of the Exchequer to be spent on war purposes. A levy on capital is, of course, merely a variation of the tax on property, which has long existed in the United States, and had been resorted to before now by Governments, of which the German Government is a leading example, in order to provide funds for a special emergency. This it can very easily do as long as the levy is not too high. If, for example, you tax a man to the extent of 1-1/2 per cent. to 2 per cent. of the value of his property, on which he may be earning an average of 5 to 6 per cent. in interest, then the levy on capital becomes merely a form of income tax, assessed not according to the income of the taxpayer but according to the alleged value of his property. It is thus, again, a variation of the system long adopted in this country of a special rate of income tax on what is called "unearned" income, i.e. income from invested property. But it is only when one begins to adopt the broadminded views lately fashionable of the possibilities of a levy on capital and to talk of taking, say, 20 per cent. of the value of a man's property from him in the course of a year, that it becomes evident that he cannot be expected to pay anything like this sum, in cash, unless either a market is somehow provided--which seems difficult if all property owners at once are to be mulcted of a larger amount than their incomes--or unless the Government is prepared to accept part at least of the levy in the shape of property handed over at a valuation. Before, however, we come to deal in detail with the difficulties and drawbacks of the suggestion, it may be interesting to trace the history of the movement in its favour, and to see some of the forms in which it has been put forward. It may be said that the ball was opened early last September when, in the _Daily News_ of the 8th of that month, its able and always interesting editor dealt in one of his illuminating Saturday articles with the question of "How to Pay for the War." He began with the assumption that the capital of the individuals of the nation has increased during the war from 16,000 millions to 20,000 millions. A 10 per cent. levy on this, he proceeded, would realise 2000 millions. It would extinguish debt to that amount and reduce the interest on debt by 120 millions. The levy would be graduated--say, 5 per cent. on fortunes of £1000 to £20,000; 10 per cent. on £20,000 to £50,000; up to 30 per cent. on sums over £1,000,000; and the individual taxpayer was to pay the levy "in what form was convenient, in his stocks or his shares, his houses or his fields, in personalty or realty." Just about the same time the _Round Table_, a quarterly magazine which is usually most illuminating on the subject of finance, chimed in with a more or less similar suggestion in an article on "Finance After the War." It remarked that the difficulty of applying a levy on capital is "probably not so great as appears at first sight." The total capital wealth of the community it estimated at about 24,000 millions sterling. To pay off a war debt of 3000 millions would therefore require a levy of one-eighth. Evidently this could not be raised in money, nor would it be necessary. Holders of War Loans would pay their proportion in a simple way by surrendering one-eighth of their scrip. Holders of other forms of property would be assessed for one-eighth of its value and be called on to acquire and to surrender to the State the same amount of War Loan scrip. To do this, they would be obliged to realise a part of their property or to mortgage it, "but," added the _Round Table_ cheerfully, "there is no insuperable difficulty about that." The first thing that strikes one when one examines these two schemes is the difference in their view concerning the amount of capital wealth available for taxation. Mr Gardiner made the comparatively modest estimate of 16,000 millions to 20,000 millions; the _Round Table_ plumps for 24,000 millions, and, incidentally, it may be remarked that some conservative estimates put it as low as 11,000 millions. Thus we have a possible range for the fancy of the scheme builder of from 11,000 to 24,000 millions in the property on which taxation is proposed to be levied. But it is when we come to the details of these schemes that the difficulties begin to glare. Mr Gardiner tells us that millionaires would pay up to 30 per cent. of their property, and that they would pay in what form was convenient, in houses, fields, etc., etc. But he does not explain by what principle the Government is to distribute among the holders of the debt, the repayment of whom is the object of the levy, the strange assortment of miscellaneous assets which it would thus collect from the property owners of the country. In commenting on this scheme the _Economist_ of September 15th took the case of a man with a fortune of £100,000 invested before the war in a well-assorted list of securities, the whole of which he had, for patriotic reasons, converted during the war into War Loans. He would have no difficulty about paying his capital levy, for he would obviously surrender something between 10 and 20 per cent. of his holding. But, "in exchange for nearly two-thirds of the rest, he might find himself landed with houses and bits of land all over the country, a batch of unsaleable mining shares, a collection of blue china, a pearl necklace, a Chippendale sideboard, and a doubtful Titian," The _Round Table's_ suggestion seems to be even more impracticable. According to it, holders of all other forms of property besides War Loans would be assessed for one-eighth of its value--it does not explain how the value is to be arrived at, nor how long it would take to do it--and would then be called on to acquire and to surrender to the State the same amount of War Loan scrip. To do this they would be obliged to realise a part of their property or to mortgage it, a process which would seem likely to produce a pretty state of affairs in the property market; and a very pleasant state of affairs indeed would arise for the holders of War Loan scrip, since there would be a large crowd of compulsory buyers in the market from whom the holders would apparently be able to extort any price that they liked for their stock. The next stage in the proceedings was a deputation to the Chancellor of the Exchequer, concerning which more anon, of leaders of various groups of the Labour Party, to press upon Mr Bonar Law the principle of what is called "the Conscription of Wealth," and the publication at or soon after that time, which was about the middle of November, of a pamphlet on the subject of the "Conscription of Riches," by the War Emergency Workers' National Committee, 1, Victoria Street, S.W. Among what this pamphlet describes as "the three practicable methods of conscripting wealth" No. 1 is as follows:-- A Capital Tax, on the lines of the present Death Duties, which are graduated from nothing (on estates under £300, and legacies under £20) up to about 20 per cent. (on very large estates left as legacies to strangers). If a "Death Duty" at the existing rates were now levied simultaneously on every person in the kingdom possessing over £300 wealth (every person might be legally deemed to have died, and to be his own heir), it might yield to the Chancellor of the Exchequer about £900,000,000. It would be necessary to offer a discount for payment in cash; and in order to avoid simultaneous forced sales, to accept, in lieu of cash, securities at a valuation; and to take mortgages on land. Here it will be seen that the Emergency Workers had improved on the _Round Table_, and agreed with Mr Gardiner, by providing that the Government should take securities at a valuation and mortgages on land in lieu of cash in order to avoid simultaneous forced sales. But they do not seem to have perceived that, in so far as the Government took securities or accepted mortgages on land, it would not be getting money to pay for the war, which was the object of the proposed Conscription of Wealth, but would only be obtaining property from which the Government would in due course later on receive an income, probably averaging about one-twentieth of its value. Perhaps, however, it would be more correct to say that those who put the scheme forward did not ignore this drawback to it, but rather liked it, for reasons quite irrelevant to the objects that they were apparently pursuing. A good deal of prominence was given about the same time to the question of a levy on capital in the _New Statesman_ well known to be the organ of Mr Sidney Webb and other members of the Fabian Society. These distinguished and very intellectual Socialists would, of course, be quite pleased if, in an apparent endeavour to pay for the war, they actually succeeded in securing, by the Government's acquisition of blocks of securities from property owners, that official control of industry and production which is the object of State Socialists. It will be noted, however, in this scheme that no mention is made of any forms of property to be accepted by the Government in lieu of cash except securities and mortgages on land. Items such as furniture, books, pictures and jewellery are ignored, and in one of the articles in the _New Statesman_, discussing the question of a capital levy, it was distinctly suggested that these commodities should be left out of the scheme so as to save the trouble involved by valuation. Unfortunately, if we leave out these forms of property the natural result is to stimulate the tendency, lately shown by an unfortunately large number of patriotic taxpayers, of putting money into pearl necklaces and other such gewgaws in order to avoid income tax. If by buying fur coats, old masters and diamond tiaras it will be be possible in future to avoid paying, not only income tax, but also a capital levy, it is to be feared that appeals to people to save their money and invest it in War Bonds are likely to be seriously interfered with. Unfortunately, the _Statesman_ was able to announce that the appeal for this system of taxation had been received with a good deal of sympathy by the Chancellor of the Exchequer, and the next stage in the history of the agitation was the publication on Boxing Day in several of the daily papers of what appeared to be an official summary, issued through the Central News, of what the Chancellor had said to the deputation of Labour Leaders introduced by Mr Sidney Webb, which waited on him, as already described, in the middle of November. Having pointed out that he had never seen any proposal which seemed to him to be practicable for getting money during the war by conscripting wealth, Mr Bonar Law added that, though "perhaps he had not thought enough about it to justify him in saying so," his own feeling was that it would be better, both for the wealthy classes and the country, to have this levy on capital, and reduce the burden of the national debt when the war was over. It need not be said that this statement by the Chancellor has been very far from helpful to the efforts of those who are trying to induce unthrifty citizens to save their money and put it into National War Bonds for the finance of the war. "Why," people argue, "should we go out of our way to save and take these securities if, when the war is over, a large slice of our savings is to be taken away from us by means of this levy on capital? If we had been doubting between the enjoyment of such comforts and luxuries as are possible in war-time and the austere duty of thrift, we shall naturally now choose the pleasanter path, spend our money on ourselves and on those who depend on us, instead of saving it up to be taken away again when the war is over, while those who have spent their money as they liked will be let off scot free." Certainly, it is much to be regretted that the Chancellor of the Exchequer should have let such a statement go forth, especially as he himself admits that perhaps he has not thought enough about it to justify him in saying so. If the Chancellor of the Exchequer has not time to think about what he is going to say to a Labour deputation which approaches him on an extremely important revolution in our fiscal system, it is surely high time that we should get one who has sufficient leisure to enable him to give his mind to problems of this sort when they are put before him. In the course of this review of the forms in which suggestions for a levy on capital have been put forward, some of the difficulties and injustices inherent in it have already been pointed out. Its advocates seem as a rule to base the demand for it upon an assumption which involves a complete fallacy. This is that, since the conscription of life has been applied during the war, it is necessary that conscription of wealth should also be brought to bear in order to make the war sacrifice of all classes equal. For instance, the Emergency Workers' pamphlet, quoted above, states that, "in view of the fact that the Government has not shrunk from Compulsory Conscription of Men," the Committee demands that "for all the future money required to carry on the war, the Government ought, in common fairness, to accompany the Conscription of Men by the Conscription of Wealth." This contention seems to imply that the conscription of men and the conscription of wealth apply to two different classes; in other words, that the owners of wealth have been able to avoid the conscription of men. This, of course, is absolutely untrue. The wealthiest and the poorest have to serve the country in the front line alike, if they are fit. The proportion of those who are fit is probably higher among the wealthy classes, and, consequently, the conscription of men applies to them more severely. Again, the officers are largely drawn from the comparatively wealthy classes, and it is pretty certain that the proportion of casualties among officers has been higher during the war than among the rank and file. Thus, as far as the conscription of men is concerned, the sacrifice imposed upon all classes in the community is alike, or, if anything, presses rather more heavily upon those who own wealth. Conscription of wealth as well as conscription of life thus involves a double sacrifice to the owners of property. This double sacrifice, in fact, the owners of property have, as is quite right, borne throughout the war by the much more rapid increase in direct taxation than in indirect. It is right that the owners of property should bear the heavier monetary burden of the war because they, having more to lose and therefore more to gain by a successful end of the war, should certainly pay a larger proportion of its cost. It was also inevitable that they should do so because, when money is wanted for the war or any other purpose, it can only be taken in large amounts from those who have a surplus over what is needed to provide them with the necessaries and decencies of life. But the argument which puts forward a capital levy on the ground that the rich have been escaping war sacrifice is fallacious in itself, and is a wicked misrepresentation likely to embitter still further the bad feeling between classes. Nevertheless, Mr Bonar Law thinks that, since the cost of the war must inevitably fall chiefly upon the owners of property, and since it therefore becomes a question of expediency with them whether they should pay at once in the form of a capital levy or over a long series of years in increased taxation, he is inclined to think that the former method is one which would be most convenient to them and best for the country. This contention cannot be set aside lightly, and there can be no doubt that if, by making a dead lift, the wealthy classes of the country could throw off their shoulders a large part of the burden of the war debt, such a scheme is well worth considering as long as it does not carry with it serious drawbacks. It seems to me, however, that the drawbacks are very considerable. In the first place, I have not seen any really practicable scheme of redeeming debt by means of a levy on capital In so far as the levy is paid in the form of surrendered War Loans, it is simple enough. In so far as it is paid in other securities or mortgages on land or other forms of property, it is difficult to see how the assets acquired by the State through the levy could be distributed among the debt holders whom it is proposed to pay off. Would they be forced to take securities, mortgages on land, furniture, etc., as the Government chose to distribute them, or would the Government have to nurse an enormous holding of various forms of property and gradually realise them and so pay off debt? Again, a great injustice would surely be involved by laying the whole burden of this oppressive levy upon owners of accumulated property, so penalising those who save capital for the community and letting off those who squander their incomes. A characteristic argument on this point was provided by the _New Statesman_ in a recent issue. It argued that, because ordinary income tax would still be exacted, the contrast between the successful barrister with an Income of £20,000 a year and no savings, who would consequently escape the capital levy, and the poor clergyman who had saved £1000 and would consequently be liable to it, fell to the ground. In other words, because both lawyer and parson paid income tax, it was fair that the former should escape the capital levy while the latter should have to pay it! But needs must when the devil drives, and in a crisis of this kind it is not always possible to look too closely into questions of equity in raising money. It is necessary, however, to look very closely into the probable economic effects of any suggested form of taxation, and, if we find that it is likely to diminish the future wealth production of the nation, to reject it, however attractive it may seem to be at first sight. A levy on capital which would certainly check the incentive to save, by the fear that, if such a thing were once successfully put through, it might very likely be repeated, would dry up the springs of that supply of capital which is absolutely essential to the increase of the nation's productive power. Moreover, business men who suddenly found themselves shorn of 10 to 20 per cent. of their available capital would find their ability to enter into fresh enterprise seriously diminished just at the very time when it is essential that all the organisers of production and commerce in this country should be most actively engaged in every possible form of enterprise, in order to make good the ravages of war. VI OUR BANKING MACHINERY _February_, 1918 The Recent Amalgamations--Will the Provinces suffer?--Consolidation not a New Movement--The Figures of the Past Three Decades--Reduction of Competition not yet a Danger--The Alleged Neglect of Local Interests--Shall we ultimately have One Huge Banking Monopoly?--The Suggested Repeal of the Bank Act--Sir E. Holden's Proposal. Banking problems have lately loomed large in the financial landscape. It will be remembered that about a year and a half ago a Committee was appointed to consider the creation of a new institution specially adapted for financing overseas trade and for the encouragement of industrial and other ventures through their years of infancy, and that the charter which was finally granted to the British Trade Corporation, as this institution was ultimately called, roused a great deal of opposition both on the part of banks and of traders who thought that a Government institution with a monopoly character was going to cut into their business with the help of a Government subsidy. In fact, there was no subsidy at all in question, and the fears of the trading world of competition on the part of the new chartered institution only arose owing to its unfortunate name, which was given to it in order to allay the apprehensions of the banks which had been provoked by the title originally designed for it, namely, the British Trade Bank. There seems no reason why this Company should not do good work for British trade without treading on the toes of anybody. Although naturally its activities cannot be developed on any substantial scale until the war is over, its Chairman assured the shareholders at the end of January that its preliminary spadework was being carefully attended to. After this small storm in a teacup had died down those interested in our banking efficiency were again excited by the rapid progress made by the process of amalgamation among our great banks, which began to show acute activity again in the last months of 1917. The suddenly announced amalgamation of the London and South-Western and London and Provincial Banks led to a whole host of rumours as to other amalgamations which were to follow; and though most of these proved to be untrue a fresh sensation was aroused when the union was announced of the National Provincial Bank of England and the Union of London and Smith's Bank. All the old arguments were heard again on the subject of the objections, from the point of view of industry in the provinces, to the formation of great banking institutions, with enormous figures on both sides of the balance-sheet, working from London, often, it was alleged, with no consideration for the needs of the provincial users of credit. These latest amalgamations, which have united banks which already had head offices in London, gave less cause than usual for these provincial apprehensions, which had far more solid reason behind them when purely provincial banks were amalgamated with institutions whose head office was in London. Nevertheless, the argument was heard that the great size and scale on which these amalgamated banks were bound to work would necessarily make them more monopolistic and bureaucratic in their outlook, and less elastic and adaptable in their dealings with their local customers. It seems to me that there is so far very little solid ground for any apprehension on the part of the business community that the recent development of banking evolution will tend to any damage to their interests. The banks have grown in size with the growth of industry. As industry has tended more and more to be worked by big battalions, it became necessary to have banking institutions with sufficiently large resources at their command to meet the great requirements of the huge industrial organisations that they had to serve. Nevertheless, the tendency towards fewer banks and bigger figures has grown with extraordinary celerity, as the following table shows:-- MOVEMENT OF ENGLISH JOINT-STOCK BANK DEPOSITS, ETC., SINCE 1886. December No. of Number of Capital Deposit and Total 31st Banks Branches Paid up Current Liabilities Accounts 1886 109 1,547 £38,468,000 £299,195,000 £376,808,000 1891 106 2,245 43,406,000 391,842,000 486,632,000 1896 94 3,051 45,203,000 495,233,000 599,518,000 1901 74 3,935 46,631,000 584,841,000 698,150,000 1906 55 4,840 48,122,000 647,889,000 782,353,000 1911 44 5,417 47,265,000 748,641,000 885,069,000 1916 35 5,993 48,237,000 1,154,877,000 1,316,220,000 This table is taken from the annual banking numbers of the _Economist_. It will be noticed that in 1886 there were in England 109 joint-stock banks with 1547 offices, whose accounts were tabulated in the _Economist's_ annual review. Their total paid-up capital was 38-1/2 millions, their deposit and current accounts were just under 300 millions, and their total liabilities were 377 millions. In the course of thirty years the 109 banks had shrunk by the process of amalgamation and absorption to thirty-five, that is to say, they had been divided by three; the number of their offices, however, had been multiplied by nearly four, while their deposit accounts had grown from 300 millions to 1155, and their total liabilities from 377 to 1316 millions. By the amalgamations announced at the end of 1917, and that of the County of Westminster with Parr's announced on February 1st, the number of joint stock banks will be reduced to 32. The picture would be still more striking if the figures of the private banks were included, since their number has been reduced, since 1891, from 37 to 6. These figures are eloquent of the manner in which the number of individual banks has been reduced, while the extent of the banking accommodation given to the community has enormously grown, so that the power wielded by each individual bank has increased by the force of both these processes. The consequent reduction in competition which is causing some concern among the trading community has not, as it seems to me, gone far enough yet to be a serious danger. The idea that the big banks with offices in London give scant consideration to the needs of their local customers seems to be so contrary to the interests of the banks that they would be extraordinarily bad men of business if those who were responsible for their management allowed it to be the fact. It is probably nearer the truth that banking competition in the provinces is still so keen that the London management is very careful not to allow anything like bureaucratic stiffness to get into the methods by which their business is managed. By the appointment of local committees they are careful to do all they can to see that the local interests get all the credit that is good for them. That local interests get as much credit as they want is probably very seldom the case, because it is a natural instinct on the part of an eager business man to want rather more credit than he ought to have, from a banking point of view. Business interests, as long as they exist in private hands, will always want rather more credit than there is available, and it will always be the duty of the banker to ensure that the country's industry is kept on a sound basis by checking the tendency of the eager business man to undertake rather more than is good for him. From the sentimental point of view it is certainly a pity to have seen many of the picturesque old private banks extinguished, the partners in which were in close personal touch with their customers, and entered into the lives of the local communities in a manner which their modern counterpart is perhaps unable to do. Nevertheless, it is difficult to get away from the fact that if these institutions had been as efficient and as well managed as their admirers depict them to have been they would hardly have been driven out of existence by the stress of modern developments and competition. Whatever we may think of modern competition, in certain of its aspects, we may at least be sure of this--that it does not destroy an institution which is really wanted by the business community. And if the complaint of local interests is true, that they are swamped by the cosmopolitan aspirations of the great London offices, they always have it in their power to create an institution of the kind that they want, and by giving it their business to ensure for it a prosperous career. As long as no such tendency is visible in the banking world we may be pretty sure that the views expressed concerning the neglect of local interests by the enormous banks which have grown up with London centres in the last thirty years is to a great extent a myth. It has now announced, however, that the whole problem involved by the amalgamation process is to be sifted by a committee to be appointed for this purpose. Another apprehension has arisen in the minds of those who view with critical vigilance the present tendencies of business and the present development of economic opinion among a great section of the community. If, it is urged, the banks continue to swallow one another up by the process of amalgamation, how will this tendency end except in the creation of one huge bank working a gigantic money monopoly which the Socialistic tendencies of the present day will, with some reason, insist ought to be taken over by the State for the profit of the taxpayer? This view is frankly put forward by those advocates of a Socialistic organisation of society, who say that the modern tendency of industry towards combinations, rings and trusts is rapidly bringing the Socialistic millennium within their reach without any effort on the part of Socialistic preachers. They consider that the trust movement is doing the work of Socialism, much faster than Socialism could do it for itself; that, in short, as has been argued above in regard to banking, the tendency towards centralisation and the elimination of competition can only end in the assumption by the State of the functions of industry and finance. If this should be so, the future is dark for those of us who believe that individual effort is the soul of industrial and financial progress, and that industry carried on by Government Departments, however efficient and economical it might be, would be such a deadly dull and unenterprising business that all the adaptability and tendency to variation in accordance with the needs of the moment, which are so strongly shown by individual enterprise, would be lost, to the great detriment of the material progress of mankind. As things are at present, there is little need to fear that Socialistic organisation of industry could stand up against competent individual effort. Anybody who has ever had any business dealings with a Government Department will inevitably shudder when he tries to imagine how many forms would have to be filled up, how many divisions of the Department the inevitable mass of papers would have to go through, and how much delay and tedium would be involved before the simplest business proposition could be carried out. But, of course, it is argued by Socialists that Government Departments are only slow and tied up with red tape because they have so long been encouraged to do as little as possible, and that as soon as they are really urged to do things instead of pursuing a policy of masterly inactivity, there is no reason why they should not develop a promptitude and elasticity quite as great as that hitherto shown by the business community. That such a development as this might take place in the course of generations nobody can deny; at present it must be admitted that with the great majority of men the money-making incentive is required to get the best out of them. If the process of education produces so great a change in the human spirit that men will work as well for the small salary of the Civil Service, with a K.C.B. thrown in, as they will now in order to gain the prizes of industry and finance, then perhaps, from the purely economic point of view, the Socialisation of banking may be justified. But we are a long way yet from any such achievement, and if it is the case that the rapid centralisation of banking power in comparatively few hands carries with it the danger of an attempt to nationalise a business which requires, above all, extreme adaptability and sensitiveness to the needs of the moment as they arise, this is certainly a danger which has to be carefully considered by those who are responsible for the development of these amalgamation processes. And now another great stone has been thrown into the middle of the banking pond, causing an ever-widening circle of ripples and provoking the beginning of a discussion which is likely to be with us for some time to come. Sir Edward Holden, at the meeting of the London City and Midland Bank shareholders on January 29th, made an urgent demand for the immediate repeal of the Bank Act of 1844. This Act was passed, as all men know, in order to restrict the creation of credit in the United Kingdom. In the early part of the last century the most important part of a bank's business consisted of the issue of notes, and banking had been carried on in a manner which the country considered unsatisfactory because banks had not paid sufficient attention to the proportion of cash that they ought to hold in their tills to meet notes if they were presented. Parliament in its wisdom consequently ordained that the amount of notes which the banks should be allowed to issue, except against actual metal in their vaults, should be fixed at the amount of their issue at that time. Above the limit so laid down any notes issued by the banks were to be backed by metal. In the case of the Bank of England the limit then established was £14,000,000, and it was enacted that if any note-issuing bank gave up its right to a note issue the Bank of England should be empowered to increase its power to issue notes against securities to the extent of two-thirds of the power enjoyed by the bank which was giving up its privilege. By this process the Bank of England's right to issue notes against securities, what is usually called its fiduciary issue, has risen to £18,450,000; above that limit every note issued by it has to be backed by bullion, and is actually backed by gold, though under the Act one-fifth might be in silver. It was thus anticipated by the framers of the Act that in future any credit required by industry could only be granted by an increase in the gold held by the issuing banks. If the Act had fulfilled the anticipations of the Parliament which passed it, if English trade had grown to anything like the extent which it has done since, it could only have done so by the amassing of a mountain of gold, which would have lain in the vaults of the Bank of England. Fortunately, however, the banking community had at its disposal a weapon of which it was already making considerable use, namely, the system of issuing credit by means of banking deposits operated on by cheques. Eight years before Peel's Act was passed two Joint Stock Banks had been founded in London, although the Bank of England note-issuing monopoly still made it impossible for any Joint Stock Bank to issue notes in the London district. It is thus evident that deposit banking was already well founded as a profitable business when Peel, and Parliament behind him, thought that they could sufficiently regulate the country's banking system so long as they controlled the issue of notes by the Bank of England and other note-issuing banks. It is perhaps fortunate that Parliament made this mistake, and so enabled our banking machinery to develop by means of deposit banking, and so to ignore the hard-and-fast regulations laid upon it by Peel's Act. This, at least, is what has happened; only in times of acute crisis have the strict regulations of Peel's Act caused any inconvenience, and when that inconvenience arose the Act has been suspended by the granting of a letter of indemnity from the Treasury to the Governor of the Bank. Under Peel's Act the present rather anomalous form of the Bank of England's Weekly Return was also laid down. It shows, as all men know, two separate statements; one of the Issue Department and the other of the Banking Department. The Issue Department's statement shows the notes issued as a liability, and on the assets side Government debt and other securities (which are, in fact, also Government securities), amounting to £18,450,000 as allowed by the Act, and a balance of gold. The Banking Department's statement shows capital, "Rest" or reserve fund, and deposits, public and other, among the liabilities, and on the other side of the account Government and other securities, all the notes issued by the Issue Department which are not in circulation, and a small amount of gold and silver which the Banking Department holds as till money. Sir Edward Holden's proposal is that the Act should be repealed practically in accordance with the system which has been adopted by the German Reichsbank. The principles which he enumerates, as those on which other national banks of issue work, are as follows:-- 1. One bank of issue, and not divided into departments. 2. Notes are created and issued on the security of bills of exchange and on the cash balance, so that a relation is established between the notes issued and the discounts. 3. The notes issued are controlled by a fixed ratio of gold to notes or of the cash balance to notes. 4. This fixed ratio may be lowered on payment of a tax. 5. The notes should not exceed three times the gold or cash balance. By this revolution Sir Edward would abolish all legal restriction on the issue of notes by the Bank of England. It would hold a certain amount of gold or a certain amount of cash balance against its notes, but in the "cash balance" Sir Edward apparently would include 11 millions odd of Government debt, or of Treasury notes. As long as its notes were only three times the amount of the gold or of the "cash balance," and were backed as to the other two-thirds by bills of exchange, the situation would be regarded as normal, but if, owing to abnormal circumstances, the Bank desired to increase the amount of notes issued against bills of exchange only and to reduce the ratio of its gold or its cash balance to its notes, it would, at any time, be enabled to do so by the payment of a tax, without going through the humiliating necessity for an appeal to the Treasury to allow it to exceed the legal limit. At the same time, by the abolition of Peel's Act the cumbrous methods of stating the Bank's position, as published week by week in the Bank Return, would be abolished. The two accounts would be put together, with the result that the Bank's position would be apparently stronger than it appears to be under the present system, which makes the Banking Department's Return weak at the expense of the great strength that it gives to the appearance of the Issue Department. This will be shown from the following statement given by Sir Edward Holden of the Return as issued on January 16th, and as amended according to his ideas:-- BANK STATEMENT, JANUARY 16, 1918. ISSUE DEPARTMENT Notes Issued .. £76,076,000 Gold .................. £57,626,000 Government Debt ....... 11,015,000 Other Securities ...... 7,435,000 ----------- ----------- £76,076,000 £76,076,000 Ratio of Gold to Notes Issued = 75.7 per cent. BANKING DEPARTMENT. Capital ....... £14,553,000 Government Securities ...... £56,768,000 Rest .......... 3,363,000 Other Securities ........... 92,278,000 Deposits-- Notes .......... £30,750,000 Public £41,416,000 Gold and Silver 1,143,000 Other 121,589,000 ----------- 163,005,000 ------------- 31,893,000 Other Liabilities ... 18,000 ----------- ----------- £180,939,000 £180,939,000 Ratio of Cash Balance to Liabilities = 19.6 per cent. RECONSTRUCTED BALANCE-SHEET OF THE BANK, JANUARY 16, 1918. Capital £14,553,000 Rest 3,363,000 Notes Issued (circulation) 45,325,000 Deposits 163,005,000 Other Liabilities 18,000 ___________ £226,264,000 Gold £58,768,000 Currency Notes 11,015,000 ___________ £69,783,000 Government Securities 56,768,000 Other Securities 7,435,000 _________ 64,203,000 Other Securities 92,278,000 ___________ £226,264,000 Ratio of Gold to Notes =129.7 per cent. " " Cash Balance to Liabilities = 33.5 " It need not be said that these proposals have aroused the liveliest interest. At the Bank Meetings held since then several chairmen have been asked by their shareholders to express their views on Sir Edward's proposed revolution. Sir Felix Schuster pronounced cautiously in favour of the revision of the Bank Act, and said that he had advocated it seventeen years ago. Lord Inchcape, at the National Provincial Meeting, thought that the matter required careful consideration. Most of us will agree with this view. There is certainly much to be said for a reform of the Weekly Statement of the Bank of England, giving, it may be added, a good deal more detail than Sir Edward's revised balance-sheet affords. But concerning his proposal to reconstruct our system of note issue on a foreign model, there is certain to be much difference of opinion. In the first place, owing to the development of our system of banking by deposit and cheque rather than by issue and circulation of notes, the note issue is not nearly so important a business in normal times in this country as it is in Germany and France. Moreover, the check imposed upon our banking community by the need for an appeal to the Treasury before it can extend its note issue beyond a certain point often acts with, a salutary effect, and the view has even been expressed that if that check were taken away from our system it might be difficult, if not impossible, to maintain the gold standard which has been of such enormous value in building up the prestige of London as a financial centre. I do not think there is much weight in this argument, since, under Sir Edward's plan, the note issue could only be increased against discounts, and the Bank, by the charge that it made for discounts, would still be able to control the situation. From the practical point of view of the present moment, a strong objection to the scheme is that it would open the door to fresh inflation by unrestricted credit-making just when the dangers of this process are beginning to dawn even on the minds of our rulers. VII THE COMPANIES ACTS _March_, 1918 Another Government Committee--The Fallacy of imitating Germany--Prussianising British Commerce--The Inquiry into the Companies Acts--Will Labour Influence dominate the Report?--Increased Production the Great Need--Will it be met by tightening up the Companies Acts?--The Dangers of too much Strictness--Some Reforms necessary--Publicity, Education, Higher Ideals the only Lasting Solution--The Importance of Foreign Investments--Industry cannot take all Risks and no Profits. Every week--almost every day--brings with it the announcement of some new committee considering some question that may, or may not, arise now or when the war is over. Especially in the realm of finance has the Government's output of committees been notably prolific of late. We have had a Committee on Currency, a Committee on Banking Amalgamations, and a Committee appointed, humorously enough, by the Ministry of Reconstruction to consider what measures, if any, should be taken to protect the public interest in connection with the policy of industrial combinations--a policy which the Board of Trade has been sedulously fostering. Now comes a Committee to inquire "what amendments are expedient in the Companies Acts, 1908-1917, principally having regard to the circumstances arising out of the war, and to the developments likely to arise on its conclusion, and to report to the Board of Trade and to the Ministry of Reconstruction." It is composed of the Right Hon. Lord Wrenbury (chairman), Mr A.S. Comyns Carr, Sir F. Crisp, Mr G.W. Currie, M.P., Mr F. Gaspard Farrer, Mr Frank Gore-Browne, K.C., Mr James Martin, the Hon. Algernon H. Mills, Mr R.D. Muir, Mr C.T. Needham, M.P., Mr H.A. Payne, Sir Owen Philipps, M.P., Sir William Plender, Mr O.C. Quekett, and Mr A.W. Tait. The secretary is Mr W.W. Coombs, 55, Whitehall, S.W. 1. There are some good names on the Committee. Mr. Gaspard Farrer represents a great issuing house; Sir Frank Crisp, company lawyers; Sir William Plender, the accountants; Mr O.C. Quekett, the Stock Exchange; and Sir Owen Philipps, the shipping interest. Nevertheless, one cannot help shuddering when one considers the dangers that threaten British finance and industry from ill-considered measures which might possibly be recommended by a Committee influenced by the atmosphere of the present outlook on financial and commercial affairs. One of the interesting features of the present war atmosphere is the fact that, now when we are fighting as hard as we can to defeat all that is meant by Prussianism a great many of our rulers and public men are doing their best to impose Prussianising methods upon this unfortunate country, merely because it is generally assumed that Prussian methods have been shown, during the course of the war, to carry with them a certain amount of efficiency. It is certainly true that Prussian methods do very well as applied to the Prussians and submitted to by other races of Germans. On the other hand, it is at least open to argument that the British method of freedom, individual initiative, elasticity and adaptability have produced results, during the present war, which have so far been paralleled by no other country engaged in the contest. Working on interior lines with the assistance of docile and entirely submissive allies, Germany has certainly done wonderful things in the war, but it by no means follows that the verdict of posterity will not give the palm of achievement to England, who has not only carried out everything that she promised to do before the war, but has incidentally and in the course of it created and equipped an Army on a Continental scale, and otherwise done very much more for the assistance of her Allies than was contemplated before the war began. It is untrue to say that we were unprepared for the war. We were more than prepared to do all that we promised to do. What we were unprepared for was finding ourselves required to turn ourselves into, not only the greatest naval Power in the world, but one of the greatest military Powers also. This demand was sprang upon us, and we have met it with extraordinary success. The whole idea that Germany's achievement has been such as to warrant any attempt on our part to model our institutions on her pattern seems to me to fall to pieces as soon as one looks calmly at the actual results produced by the different systems. Moreover, even if we were to admit that Germany's achievement in the war has been immeasurably greater than ours, it still would not follow that we could improve matters here by following the German system. It ought not to be necessary to observe that a system which is good for one nation or individual is not necessarily good for another. In the simple matter of diet, for instance, a most scientifically planned diet given to a child who does not happen to like it will not do that child any good. These things ought to be obvious, but unfortunately in these times, which call for eminently practical thought and effort, there is a curious doctrinaire spirit abroad, and the theorist is continually encouraged to imagine how much better things would be if everything were quite different, whereas what we want is the application of practical common sense to practical facts as they are. In the realm of finance the freedom and individual initiative and elasticity of our English system have long been the envy of the world. Our banking system, as was shown, on an earlier page, has always worked with much less restriction on the part of legislative and official interference than any other, and, with the help of this freedom from official control, English bankers and finance houses had made London the financial centre of the world before the war. The attempt of Parliament to control banking by Peel's Act of 1844 was quietly set aside by the banking machinery through the development of the use of cheques, which made the regulations imposed on the note issue a matter of quite minor importance, except in times of severe crisis, when these regulations could always be set aside by an appeal to the Chancellor of the Exchequer. There was no Government interference in the matter of new issues of securities on the London Stock Exchange or of the quotations granted to new securities by the Committee of the Stock Exchange. Now the Companies Acts are to be revised in view of what may be necessary after the war, and there is only too much reason to fear that mistakes may occur through the imposition of drastic restrictions, which look so easy to work on paper, but are more than likely to have the actual effect of doing much more harm than good. "Circumstances arising out of the war and developments likely to arise on its conclusion" give this Committee a roving commission to consider all kinds of things, which may or may not happen, in the light of wisdom which may be put before it by interested witnesses, and, worse still, in the light of semi-official pressure to produce a report which will go down well with the House of Commons. Our politicians are at present in a state of extreme servility before the enterprising gentlemen who are now at the head of what is called the Labour Party. Every one will sympathise with the aspirations of this party in so far as they aim at bettering the lot of those who do the hard and uninteresting work of the world, and giving them a larger share of the productions that they help to turn out; but that is not the same thing as giving obsequious attention to the views which their representatives may have concerning the management of financial affairs, on the subject of which their knowledge is necessarily limited and their outlook is likely to be, to a certain extent, prejudiced. A recent manifesto put forward by the leaders of the new Labour Party includes in its programme the acquisition by the nation of the means of production--in other words, the expropriation of private capitalists. The Labour people very probably think that by this simple method they will be able to save the labourer the cost of providing capital and the interest which is paid for its use; and people who are actuated by this fallacy, which implies that the rate paid to capital is thinly disguised robbery, inevitably have warped views concerning the machinery of finance and the earnings of financiers. These views, expressed in practical legislation, might have the most serious effects not only upon England's financial supremacy but also on the industrial activity which that financial supremacy does so much to maintain and foster. What, after the war, will be the most important need, from the material point of view, for the inhabitants of this country? However the war may end, and whatever may happen between now and the end of it, there can be only one answer to this question, and that answer is greatly increased production. The war has already diminished our capital resources to the extent of the whole amount that we have raised by borrowing abroad, that is to say, by pledging the production of our existing capital, and by selling to foreign countries the foreign securities in which our capitalists had invested during the previous century. No one knows the extent to which our capital resources have been impaired by these two processes, but it may be guessed at as somewhere in the neighbourhood of 1500 millions; that is to say, about 10 per cent. of a liberal estimate of the total accumulated property of the country at the beginning of the war. To this direct diminution in our capital resources we have to add the impossibility, which has existed during the war, of maintaining our factories and industrial equipment in first-class working order by expenditure on account of depreciation of plant. On the other side of the balance-sheet we can put a large amount of new machinery introduced, which may or may not be useful for industrial purposes after the war; greatly improved methods of organisation, the effect of which may or may not be spoilt when the war is over by uncomfortable relations between Capital and Labour; and our loans to Allies and Dominions, some of which may have to be written off, and most of which will return us no interest for some time to come, or will at first pay us interest if we lend our debtors the money to pay it with. What the country will need, above all, on the material side, is an abundant revenue, which can only be produced by vigorous and steady effort in industry, which, again, can only be forthcoming if the machinery of credit and finance is given the fullest possible freedom to provide every one who wants to engage in industry and increase the output of the country with the financial facilities, without which nothing can be done. Is it, then, wise at such a time to impose restrictions by a drastic tightening up of the Companies Act, upon those who wish by financial activity, to further the efforts of industries and producers? On the contrary, it would seem to be a time to give the greatest possible freedom to the financial machine so that there shall be the least possible delay and difficulty in providing enterprise with the resources that it needs. We can only make good the ravages of war by activity in production and strict economy in consumption. What we want to do is to stimulate the people of this country to work as hard as they can, to produce as much as possible, to consume as little as possible on unnecessary enjoyment and luxury, and, so, by procuring a big balance of production over consumption, to have the largest possible volume of available goods for sale to the rest of the world, in order to rebuild our position as a creditor country, which the war's demands upon us have to some extent impaired. It is a commonplace that if it had not been for the great mass of foreign securities, which this country held at the beginning of the war, we could not nearly so easily have financed the enormous amount of food and munitions which we have had to provide for our population, for our armies, and for the population and armies of our Allies. If, instead of holding a mass of easily marketable securities, we had had to rely, in order to pay for our purchases of foreign goods, on the productions of our own mines and factories, and on our power to borrow abroad, then we should have had to restrict very greatly the number of men we have put into the firing-line so as to keep them at home for productive work, or, by the enormous amount of our borrowings, we should have cheapened the value of British credit abroad to a much greater extent than has been the case. Our position as a great creditor country was an enormously valuable asset, not only during the war but also before it, both from a financial and industrial point of view. It gave us control of the foreign exchanges by enabling us, at any time, to turn the balance of trade in our favour by ceasing for a time to lend money abroad, and calling upon foreign countries to pay us the interest due from them. The financial connections which it implied were of the greatest possible assistance to us in enhancing British prestige, and so helping our industry and commerce to push the wares that they produced and handled. Reform of the Companies Acts has often before the war been a more or less burning question. Whenever the public thought that it had been swindled by the company promoting machinery, it used to write letters to the newspapers and point out that it was a scandal that the sharks of the City should be allowed to prey upon the ignorant public, and that something ought to be done by Parliament to insure that investments offered to the public should somehow or other be made absolutely watertight and safe, while by some unexplained method the public would still be somehow able to derive large benefits from fortunate speculations in enterprises which turned out right. Every one must admit there have been some black pages in the history of British company promoting, and that many swindles have been perpetrated by which the public has lost its money and dishonest and third-rate promoters have retired with the spoil. The question is, however, what is the remedy for this admitted and glaring evil? Is it to be found by making the Companies Laws so strict that no respectable citizen would venture to become a director owing to the fear of penal servitude if the company on whose board he sat did not happen to pay a dividend, and that no prospectus could be issued except in the case of a concern which had already stood so severe a test that its earning capacity was placed beyond doubt? It would certainly be possible by legislative enactment to make any security that was offered as safe as Consols, and less subject to fluctuation in value. But when this had been done the effect would be very much like the effect upon rabbits of the recent fixing of their price. No more securities would be offered. It is certainly extremely important for the future financial and industrial development of this country that the machinery of finance and company promotion should be made as clean as possible. What we want to do is to make everybody see that a great increase in output is required, that this great increase in output can only be brought about if there is a great increase in the available amount of capital, that capital can only be brought into being by being saved, and that it is therefore everybody's business, both for his own sake and that of the country, to earn as much as he can and save as much as he can so that the country's capital fund can be increased; so that industry, which will have many difficult problems to face when the war is over, shall be as far as possible relieved from any difficulty of finding all the capital that it needs. To produce these results it is highly necessary to increase the confidence of the public in the machinery of the Stock Exchange, in company promotion and all financial issues. Any one who sincerely believes that these results can be produced by tightening up the Companies Acts is not only entitled but bound to press as hard as he can for the securing of this object. But is this the right way to do it? There is much to be said at first sight for making more strict the regulations under which prospectuses have to be issued under the Companies Acts, demanding a franker statement of the profits in the past, a fuller statement concerning the prices paid to vendors, and the prices paid by vendors to sub-vendors, and so forth. Any one who sits down with a pre-war industrial prospectus in his hand can find many openings for the hand of the reformer. The accounts published by public companies might also be made fuller and more informing with advantage. But even if these obviously beneficial reforms were carried out, there would always be danger of their evasion. They might tend to the placing of securities by hole-and-corner methods without the issue of prospectuses at all, and to all the endless devices for dodging the law which are so readily provided as soon as any attempt is made by legislation to go too far ahead of public education and public feeling. This is the real solution of this problem--publicity, the education of the public, and a higher ideal among financiers. As long as the public likes to speculate and is greedy and ignorant enough to be taken in by the wiles of the fraudulent promoter, attempts by legislation to check this gentleman's enterprise will be defeated by his ingenuity and the public's eagerness to be gulled. The ignorance of the public on the subject of its investments is abysmal, as anybody knows who is brought into practical touch with it. Just as the cure for the production of rotten and fraudulent patent medicines thrust down the public's throat by assiduous advertising is the education of the public concerning the things of its stomach, so the real cure for financial swindles is the education of the public concerning money matters, and its recognition of the fact that it is impossible to make a fortune in the City without running risks which involve the possible, not to say probable, loss of all the money with which the speculator starts. When once the public has learnt to distinguish between a speculation and an investment, and has also learnt honesty enough to be able to know whether it wants to speculate or invest, it will have gone much further towards checking the activity of the fraudulent promoter than any measure that can be recommended by the most respectable and industrious of committees. At the same time, it must be recognised by those responsible for our finance, that it is their business, and their interest, to keep the City's back premises clean; because insanitary conditions in the back yard raise a stink which fouls the whole City. In the meantime, if gossip is to be believed, some of the members of the Government have the most disquieting intentions concerning the kind of regulations which they wish to impose on the activities of the City, especially in its financial branch. It is believed that some of the bright young gentlemen who now rule us are in favour of Government control over the investment of money placed at home, and the prohibition of the issue of foreign securities; and it is even whispered that a fantastic scheme for controlling the profits of all industrial companies, by which anything earned above a certain level is to be seized for the benefit of the nation, is now a fashionable project in influential Parliamentary circles. Every one must, of course, admit that a certain amount of control will be necessary for some time after the war. It may not be possible at once to throw open the London Money Market to all borrowers, leaving them and it to decide between them who is to be first favoured with a supply of the capital for which there will be so large a demand when the war is over. Certain industries, those especially on which our export trade depends, will have to be first served in the matter of the provision of capital. If it is a choice between the engineering or shipbuilding trades and a company that wants to start an aeroplane service between London and Brighton for the idle rich, it would not be reasonable, during the first few months after the war, that the unproductive project should be able, by bidding a high price for capital, to forestall the demand of the more useful producer. And with regard to the issue of foreign securities, there is this to be said, that foreign securities placed in London have the same effect upon foreign exchange as the import into England of goods shipped from any country; that is to say, for the time being they turn the exchange against us. On the other hand, it is a well-known commonplace that imports of securities have to be balanced by exports of goods or services; and as the times when our export trade is most active are those when most foreign securities are being placed in London, it follows that any restrictions placed upon the issue of foreign securities in London will hinder rather than help that recovery in our export trade which is so essential to the restoration of our position as a creditor country. Moreover, our rulers must remember this, that in War-time, when all the letters sent abroad are subject to the eye of the Censor, it is possible to control the export of British funds abroad; but that in peace time (unless the censorship is to continue), it will not be possible to check foreign investment by restricting the issuing of foreign securities in London. If people see better rates to be earned abroad and more favourable prospects offered by the price of securities on foreign Stock Exchanges, they will invest abroad, whether securities are issued in London or not. As for the curious suggestion that the profits of industrial companies are henceforward to be limited and the whole balance above a statutory rate to be taken over by the State for the public good, this would be, in effect, the continuance on stricter lines of the Excess Profits Duty. As a war measure the Excess Profits Duty has much to be said for it at a time when the Government, by its inflationary policy, is putting large windfalls of profit into the hands of most people who have to hold a stock of goods and have only to hold them to see them rise in value. The argument that the State should take back a large proportion of this artificially produced profit is sound enough; but, if it is really to be the case that industry is to be asked for the future to take all the risk of enterprise and handover all the profit above a certain level to the Government, the reply of industry to such a proposition would inevitably be short, emphatic, unprintable, and by no means productive of revenue to the State. VIII THE YEAR'S BALANCE-SHEET _April_, 1918 The Figures of the National Budget--A Large Increase in Revenue and a Larger in Expenditure--Comparisons with Last Year and with the Estimates--The Proportions borne by Taxation still too Low--The Folly of our Policy of Incessant Borrowing--Its Injustice to the Fighting Men. At first sight the figures of revenue and expenditure for the year ending March 31st are extremely satisfactory, at any rate on the revenue side. The Chancellor anticipated a year ago a revenue from taxation and State services of £638 millions, and the receipts into the Exchequer on these accounts actually amount to £707 millions. On the expenditure side, however, the increase over the Budget estimate was very much greater. The estimate was £2290 millions, and the actual amount expended was £2696 millions. Instead, therefore, of a deficit of £1652 millions having to be met by borrowing, there was an actual gap, to be filled by this method, of, roughly, £1990 millions. To take the revenue side of the matter first, this being by far the most cheering and satisfactory, we find that the details of the revenue, as compared with last year's, were as follows:-- Year ending Year ending Mar. 31, 1918. Mar. 31, 1917. Increase. Decrease. £ £ £ £ Customs 71,261,000 70,561,000 700,000 --- Excise 38,772,000 56,380,000 --- 17,608,000 Estate, etc., Duties 31,674,000 31,232,000 442,000 --- Stamps 8,300,000 7,878,000 422,000 --- Land Tax 665,000 640,000 25,000 --- House Duty 1,960,000 1,940,000 20,000 --- Income Tax and Super Tax 239,509,000 205,033,000 34,476,000 --- Excess Profits Duties, etc. 220,214,000 139,920,000 80,294,000 --- Land Value Duties 685,000 521,000 164,000 --- Postal Service 35,300,000 34,100,000 1,200,000 --- Crown Lands 690,000 650,000 40,000 --- Sundry Loans, etc. 6,056,250 8,055,817 --- 1,999,567 Miscellaneous 52,148,315 16,516,765 35,631,550 --- ----------- ----------- ----------- ----------- 707,234,565 573,427,582 153,414,550 19,607,567 | | +-----------+----------+ £133,806,983 Net Increase. A more interesting comparison perhaps is to take the actual receipts during the past financial year and compare them, not with the former year, but with the estimates of the expected yield of the various items. In this case we get the following comparisons:-- [Transcriber's Note: Corrected a typo in the table: "Sundry Loans" line should have a minus(-) instead of a plus(+) as printed.] Actual. Estimated. Difference. £ £ £ Customs 71,261,000 70,750,000 + 511,000 Excise 38,772,000 34,950,000 + 3,822,000 Estate Duties 31,674,000 29,000,000 + 2,674,000 Stamps 8,300,000 8,000,000 + 300,000 Land Tax and House Duty 2,625,000 2,600,000 + 25,000 Income Tax and Super Tax 239,509,000 224,000,000 + 15,509,000 Excess Profits Tax 220,214,000 200,000,000 + 20,214,000 Land Value Duties 685,000 400,000 + 285,000 Postal Services 35,300,000 33,700,000 + 1,600,000 Crown Lands 690,000 600,000 + 90,000 Sundry Loans, etc. 6,056,000 7,500,000 - 1,444,000 Miscellaneous 52,148,000 27,100,000 + 25,048,000 Certainly, the country is entitled to congratulate itself on this tremendous evidence of elasticity of revenue, and to a certain extent on the effort that it has made in providing this enormous sum of money from the proceeds of taxation and State services. But when this much has been admitted we have to hasten to add that the figures are not nearly so big as they look, and that there is much less "to write home about," as the schoolboy said, than there appears to be at first sight. Those champions of the Government methods of war finance who maintain that we have, during the past year, multiplied the pre-war revenue, of roughly, £200 millions by more than 3-1/2, so arriving at the present revenue of over £700 millions, are not comparing like with like. The statement is perfectly true on paper, and expressed in pounds sterling, but then the pound sterling of to-day is an entirely different article from the pre-war pound sterling. Owing to the system of finance pursued by our Government, and by every other Government now engaged in the war, of providing for a large part of the country's goods by the mere manufacture of new currency and credit, the buying power of the pound sterling has been greatly depreciated. By multiplying the amount of legal tender currency in the shape of Treasury notes, of token currency in the shape of silver and bronze coinage, and of banking currency through the bank deposits which are swollen by the banks' investments in Government securities, the Government has increased the amount of currency passing from hand to hand in the community while, at the same time, the volume of goods to be purchased has not been increased with anything like the same rapidity, and may, in fact, have been, actually decreased. The inevitable result has been a great flood of new money with a greatly depreciated value. Index numbers show a rise of over 100 per cent. in the average prices of commodities during the war. It is, however, perhaps unfair to assume that the buying power of the pound has actually been reduced by a half, but it is certainly safe to say that it has been reduced by a third. Therefore, the revenue raised by the Government during the past year has to be reduced by at least a third before we are justified in comparing our war achievements with the Government's pre-war revenue. If we take one-third off £707 millions it reduces the total raised during the past year by revenue to about £470 millions, less than two and a half times the pre-war revenue. From another point of view our satisfaction with the tremendous figures of the past year's revenue has to be to some extent qualified. The great elasticity shown by the big increase of actual achievement over the Budget estimate has been almost entirely in revenue items which cannot be expected to continue to serve us when the war is over. The total increase in the receipts over estimate amounts to £69 millions, and of this £20 millions was provided by the Excess Profits Duty, a fiscal weapon which was invented during the war, and for the purpose of the war. It has always been assumed that it would be discontinued as soon as the war was over, and if it should not be discontinued its after-war effect is likely to be very unfortunate at a time when our industrial effort requires all the encouragement that it can get. Another £25 millions was provided by miscellaneous revenue, and this windfall again must be largely due to operations connected with the war. Finally, the £15-1/2 millions by which the income tax exceeded the estimate must again be largely due to inflation and extravagance on the part of the Government, which, by manufacturing money, and then spending it recklessly, puts big profits and big incomes into the hands of those who have stocks of goods to sell or who are in a position to produce them. If, therefore, the satisfaction with which we regard the big total of the Government's revenue receipts has to be considerably modified in the cold light of close observation, the enormous increase on the expenditure side gives us very little comfort and calls for the most determined and continued criticism if our reckless Government is to be made to turn over a new leaf. In the early days of the war there was much excuse for wasting money. We had to improvise a great Army, and a great organisation for equipping it; there was no time then to look too closely into the way the money was being spent, but this excuse is long obsolete. It is not possible to waste money without also wasting the energy and working power of the nation; on this energy and working power the staying power of the country depends in its struggle to avert the greatest disaster that can be imagined for civilisation, that is, the victory of the German military power. Seeing that for many months past we have no longer been obliged to finance Russia, and to provide Russia with the mass of materials and the equipment that she required, the way in which our expenditure has mounted up during the course of the year is a very serious blot on the year's balance-sheet. We spent during the year ending March 31st, £2696 millions against £2198 millions in the previous year, an increase of close upon £500 millions; £63 millions of this increase were due to interest on war debt, the rest of it was due to increased cost of the war, and few business men will deny that very many of these extra millions might have been saved if our rulers and our bureaucratic tyrants had been imbued with any real sense of the need for conserving the energy of the nation. Much has been done by the Committee on National Expenditure to bring home to the Government opportunities for economy, and methods by which it can be secured. Can we be equally confident that much has been done by the Government to carry out the advice that has been given by this Committee? The Treasury is frequently blamed for its inability to check the rapacity and extravagance of the spending Departments. It is very likely that the Treasury might have done more if it had not been led by its own desire for a short-sighted economy into economising on its own staff, the activity and efficiency of which was so absolutely essential to the proper spending of the nation's money. But when this has been admitted, the fact remains that the Treasury cannot, or can only with great difficulty, be stronger on the side of economy than the Chancellor of the Exchequer, and that the task of the Chancellor of the Exchequer of imposing economy on a spendthrift War Cabinet is one of extreme difficulty. I hope it is not necessary to say that I do not urge economy from any sordid desire to save the nation's money if, by its spending, victory could be secured or brought a day nearer. I only urge it because I believe that the conservation of our resources is absolutely necessary to maintain our staying power, and that these resources are at present being scandalously wasted by the Government. Inter-departmental competition is still complained of in the latest report of the National Committee on Expenditure, and there seems to be still very little evidence that the Government Departments have yet possessed themselves of the simple fact that it is only out of these resources that victory can be secured, and that any waste of them is therefore a crime against the cause of liberty and progress. It is possible that before these lines are in print the Chancellor will have brought in his new Budget, and therefore any attempt to forecast the measures by which he will meet next year's revenue would be even more futile than most other endeavours at prophecy. But from the figures of last year as they are before us we see once more that the proportion of expenditure raised by revenue still leaves very much to be desired; £707 millions out of, roughly, £2700 millions is not nearly enough. It is true that on the expenditure side large sums have been put into assets which may some day or other be recoverable, and it is therefore impossible to assume with any approach to accuracy what the actual cost of the war has been for us during the past year. We have made, for instance, very large advances to our Allies and Dominions, and it need not be said that our advances to our own Dominions may be regarded as quite as good as if they were still in our own pockets; but in the case of our Allies, our loans to Russia are a somewhat questionable asset, and our loans to our other brothers-in-arms cannot be regarded as likely to be recoverable for some time to come, owing to the severity with which the war's pressure has been laid upon them. With regard to the other assets in which the Government has invested our money, such as factories, machinery, ships, supplies and food, etc., it is at least possible that considerable loss may be involved in the realisation of some of them. It is, however, possible that the actual cost of the war to us during the year that is past may turn out some day to have been in the neighbourhood of £2000 millions. If, on the other hand, we deduct from the £700 millions raised by revenue the £200 millions which represent the normal pre-war cost of Government to this country we find that the proportion of war's cost raised out of revenue is slightly over 25 per cent. This proportion must be taken with all reserve for the reasons given above, but in any case it is very far below the 47 per cent. of the war's cost raised out of revenue by our ancestors in the course of the Napoleonic wars. It seems to me that this policy of raising so large a proportion of the war's cost by borrowing is one that commends itself to short-sighted politicians, but is by no means in the interests of the country as a whole, or of the taxpayers who now and hereafter have to find the money for paying for the war. In so far as the war's needs have to be met abroad, borrowing abroad is to some extent inevitable if the borrowing nation has not the necessary resources and labour available to turn out goods for export to exchange against those which have to be purchased abroad, but in so far as the war's needs are financed at home, the policy of borrowing is one that should only be used within the narrowest possible limits. By its means the Government, instead of making the citizens pay by taxation for the war as it goes on, hires a certain number of them to pay for it by promising them a rate of interest, and their money back some day. The interest and the sinking fund for redemption have to be found by taxation, and so the borrowing process merely postpones taxation from the war period to the peace period. During the war period taxation can be raised comparatively easily owing to the patriotic stimulus and the simplification of the industrial problem which is provided by the Government's insatiable demand for commodities. When the days of peace return, however, there will be very grave disturbance and dislocation in industry, and it will have once more to face the problem of providing goods, not for a Government which will take all that it can get, but for a public, the demands of which will be uncertain, and whose buying power will be unevenly distributed, and difficult to calculate. The process, therefore, which postpones taxation during the war period to the peace period seems to be extraordinarily short-sighted from the point of view of the nation's economic progress. Recovery after the war may be astonishingly rapid if all goes well, but this can only happen if every opportunity is given to industry to get back to peace work with the least possible friction, and a heavy burden of after-war taxation, such as we shall inevitably have to face if our Chancellors of the Exchequer continue to pile up the debt charge as they have done in the past, will be anything but helpful to those whose business it will be to set the machinery of industry going under peace conditions. As things are, if we continue to add anything like £2000 millions a year to the National Debt, it will not be possible to balance the after-war Budget without taxation on a heavier scale than is now imposed, or without retaining the Excess Profit Duty, and so stifling industry at a time when it will need all the fresh air that it can get. Apart from this expedient, which would seem to be disastrous from the point of view of its effect upon fresh industry, the most widely advertised alternative is the capital levy, the objections to which are patent to all business men. It would involve an enormously costly and tedious process of valuation, its yield would be problematical, and it might easily deal a blow at the incentive to save on which the supply of capital after the war entirely depends. A much higher rate of income tax, especially on large incomes, is another solution of the problem, and it also might obviously have most unfortunate effects upon the elasticity of industry. A tax on retail purchases has much to be said in its favour, but against it is the inequity inseparable from the impossibility of graduating it according to the ability of the taxpayer to bear the burden; and a general tariff on imported goods, though it would be welcomed by the many Protectionists in our midst, can hardly be considered as a practical fiscal weapon at a time when the need for food, raw material, and all the equipment of industry will make it necessary to import as rapidly and as cheaply as possible in order to promote our after-war recovery. Apart from these purely economic arguments against the high proportion of the war's costs that we are meeting by borrowing, there is the much more important fact of its bad effect on the minds of our soldiers, and of those members of the civilian population who draw mistaken inferences from its effects. From the point of view of our soldiers, who have to go and fight for their country at a time when those who are left at home are earning high wages and making big profits, it is evidently highly unfair that the war should be financed by a method which postpones taxation. The civilian population left at home, earning high profits and high wages, should clearly pay as much as possible during the war by immediate taxation, so that the burden of taxation may be relieved for our soldiers when they return to civil life. In view of the hardships and dangers which our soldiers have to face, and the heroism with which they are facing them, this argument should be of overwhelming strength in the eyes of every citizen who has imagination enough to conceive what our fighting men are doing for us and how supreme is our duty to do everything to relieve them from any other burden except those which the war compels them to face. There is also the fact that many members of our uninstructed industrial population believe that the richer classes are growing richer owing to the war, and battening on the proceeds of the loans. I do not think that this is true; on the contrary, I believe that the war has brought a considerable shifting of buying power from the well-to-do classes to the manual workers. Nevertheless, in these times misconceptions are awkwardly active for evil. The well-to-do classes as a whole are not really benefited by having their future incomes pledged in order to meet the future debt charge, and if, at the same time, they are believed to be acquiring the right to wealth, which wealth they will have themselves to provide, the fatuity of the borrowing policy becomes more manifest. For these reasons it is sincerely to be hoped that our next fiscal year will be marked by a much higher revenue from taxation, a considerable decrease in expenditure, and a consequently great improvement in the proportion of war's cost met out of revenue, on what has been done in the past year. At our present rate of taxation we are not nearly meeting, out of permanent taxes, the sum which will be needed when the war is over for peace expenditure on the inevitably higher scale, pensions, and interest and sinking fund on war debt. IX COMPARATIVE WAR FINANCE _May_, 1918 The New Budget--Our own and Germany's Balance-sheets--The Enemy's Difficulties--Mr Bonar Law's Optimism--Special Advantages which Peace will bring to Germany--A Comparison with American Finance--How much have we raised from Revenue?--The Value of the Pound To-day--The 1918 Budget an Improvement on its Predecessors--But Direct Taxation still too Low--Deductions from the Chancellor's Estimates. One of the most interesting passages in a Budget speech of unusual interest was that in which the Chancellor of the Exchequer compared the financial methods of Germany and of this country, as shown by their systems of war finance. He began by admitting that it is difficult to make any accurate calculation on this subject, owing to the very thick mist of obscurity which envelops Germany's actual performance in the matter of finance since the war began. As the Chancellor says, our figures throughout have been presented with the object of showing quite clearly what is our financial position. Most of the people who are obliged to study the figures of Government finance would feel inclined to reply that, if this is really so, the Chancellor and the Treasury seem to have curiously narrow limitations in their capacity for clearness. Very few accountants, I imagine, consider the official figures, as periodically published, as models of lucidity. Nevertheless, we can at least claim that in this respect the figures furnished to us by the Government during the war have been quite as lucid as those which used to be presented in time of peace, and it is greatly to the credit of the Treasury that, in spite of the enormous figures now involved by Government expenditure, the financial statements have been published week by week, quarter by quarter, and year by year, with the same promptitude and punctuality that marked their appearance in peace-time. In Germany, the Chancellor says, it has not been the object of German financial statements to show the financial position quite clearly. It is, therefore, difficult to make an exact statement, but he was able to provide the House with a series of very interesting figures, taken from the statements of the German Finance Ministers themselves. His first point is with regard to the increase of expenditure. The alarming rate with which our expenditure has so steadily grown appears to be paralleled also in Germany. Up to June, 1916, Germany's monthly expenditure was £100 millions. It has now risen to over £187 millions. That means to say that their expenditure per diem is £6-1/4 millions, almost the same as ours, although our expenditure includes items such as separation allowances and other matters of that kind, borne by the States and municipalities in Germany, and so not appearing in the German imperial figures. As to the precise extent of the German war debt, there is no certainty, but the Chancellor was able to tell the House that the last German Vote of Credit, which was estimated to carry them on to June or July, brings the total amount of all their Votes of Credit to £6200 millions, and that it is at least certain that that amount has been added to their War Debt, because their taxation during the war has not covered peace expenditure plus debt charge. Up to 1916 they imposed no new taxation. In 1916 they imposed a war increment tax, something in the nature of a capital levy, which is stated to have brought in £275 millions. They added also that year £25 millions nominally to their permanent revenue. In 1917 they added in addition £40 millions to their permanent revenue, "Assuming, therefore, that their estimates were realised, the total amount of new taxation levied by them since the beginning of the war comes to £365 millions, as against our £1044 millions. This £365 millions is not enough to pay the interest upon the War Debt which had been accumulated up to the end of the year." Mr Bonar Law then proceeded to give an estimate of what the German balance-sheet will be a year hence on the same basis on which he had calculated ours. With regard to our position, he had calculated that on the present basis of taxation we shall have a margin of four millions at the end of the present year if peace should then break out. As will be shown later, this estimate of his is somewhat optimistic, but at any rate our position, compared with that of Germany, may be described as on velvet. A year hence the German War Debt will be not less than £8000 millions. The interest on that will be at least £400 millions, a sinking fund at 1/2 per cent. will be £40 millions. Their pension engagements, which will be much higher than ours owing to their far heavier casualties, have been estimated at amounts ranging as high as £200 millions. The Chancellor was sure that he was within the mark in saying that it will be at least £150 millions. Their normal pre-war expenditure was £130 millions, so that they will have to face a total expenditure at the end of the war of £720 millions. On the other side of the account their pre-war revenue was £150 millions. They have announced their intention of this year raising additional permanent Imperial revenue amounting to £120 millions. From the nature of the taxes the Chancellor considers it very difficult to believe that this amount will be realised, but, assuming that it is, it will make their total additional revenue £185 millions. That, added to the pre-war revenue, gives a total of £335 millions, showing "a deficit at the end of this year, comparing the revenue with the expenditure, of £385 millions at least." The Chancellor added that if that were our position he would certainly think that bankruptcy was not far from the British Government. Another point that the Chancellor was able to make effectively, in comparing our war revenue with Germany's, was the fact that, with the exception of the war increment tax, scarcely any of the additional revenue has been obtained from the wealthier classes in Germany. Taxation has been indirect and on commodities which are paid for by the masses of the people. "The lesson to be drawn from these facts is not difficult to see. The rulers of Germany, in spite of their hopes of indemnity, must realise that financial stability is one of the elements of national strength. They have not added to their financial stability." The reason for this failure the Chancellor considers to be largely psychological. It is, in the first place, because they do not care to add to discontent by increased taxation all over the country, but "it is still more due to this, that in Germany the classes which have any influence on or control of the Government are the wealthier classes, and the Government have been absolutely afraid to force taxation upon them." It is certainly very pleasant to be able to contemplate the financial blunders by which Germany is so greatly increasing the difficulties that it will have to face before the war is over. On the other hand, we have to recognise that the Chancellor, with that incorrigible optimism of his, has committed the common but serious error of over-stating his case by leaving out factors which are in Germany's favour, as, for instance, that Germany's debt is to a larger extent than ours held at home. Since the war began we have raised over £1000 millions by borrowing abroad. Our public accounts show that the item of "Other Debt," which is generally believed to refer to debt raised abroad, now amounts to £958 millions, while one of our loans in America, which is separately stated in the account because it was raised under a special Act, amounted to £51-1/2 millions. It is also quite possible that fair amounts of our Treasury bills, perhaps also of our Temporary Advances and of our other war securities, have been taken up by foreigners; but quite apart from that the two items already referred to now amount to more than £1000 millions, though at the end of March last their amount was only £988 millions. It is also well known that we have during the course of the war realised abroad the cream of our foreign investments, American Railroad Bonds, Municipal and Government holdings in Scandinavia, Argentina, and elsewhere, to an amount concerning which no accurate estimate can be made, except by those who have access to the Arcana of the Treasury. It may, however, be taken as roughly true that so far the extent of our total borrowings and realisation of securities abroad has been balanced by our loans to our Allies and Dominions, which amounted at the end of March last to £1526 millions. We have thus entered into an enormous liability on foreign debts and sold a batch of very excellent securities on which we used to receive interest from abroad in the shape of goods and services, against which we now hold claims upon our Allies and Dominions, in respect to the greater part of which it would be absurd to pretend that we can rely on receiving interest for some years after the war, in view of the much greater economic strain imposed by the war upon our Allies. Germany, of course, has been doing these things also. Germany has parted with her foreign securities. She was selling them in blocks for some weeks before the war, and Germany, of course, has done everything that she could in order to induce neutrals, during the course of the war, to buy securities from her and to subscribe to her War Loans. Nevertheless, it cannot have been possible for Germany to carry out these operations to anything like the extent that we have, partly because her credit has not been nearly so good, partly because her ruthless and brutal conduct of the war has turned the sentiment of the world against her, and partly because the measures that we have taken to check remittances and transfers of money have not been altogether ineffective. On this side of the problem Germany has therefore an advantage over us, that her war finance, pitiful a$ it has been, has, not owing to any virtue of hers, but owing to force of circumstances, raised her a problem which is to a great extent internal, and will not have altered her relation to the finance of other countries so much as has been the case with regard to ourselves. We also have to remember that the process of demobilisation will be far simpler, quicker, and cheaper for Germany than for us. Even if the war ended to-morrow the German Army would not have far to go in order to get home, and we hope that by the time the war ends the German Army will all have been driven back into its own country and so will be on its own soil, only requiring to be redistributed to its peace occupations. Our Army will have to be fetched home, firstly, over Continental railways, probably battered into a condition of much inefficiency, and then in ships, of which the supply will be very short. The process will be very slow and very costly. Our Overseas Army will have to be sent back to distant Dominions, and the Army of our American Allies will have to be ferried back over the Atlantic. Consequently if Germany is able to obtain anything like the supply of raw material that she requires she will be able to get back to peace business much more quickly than any of her Anglo-Saxon enemies, and this is an advantage on her side which it would be unwise to ignore in considering the bad effects on her after-war activities of the very questionable methods by which she has financed and is financing the war. Since we are indulging in these comparisons, it may be interesting to consider how our American Allies are showing in this matter of war finance. The _Times_, in its "City Notes" of April 15th, observed, in connection with the unexpectedly small amount of the third Liberty Loan, that the reason why the smaller figure was adopted for the issue was that it seems quite certain now that the original estimate for the expenditure in the fiscal year ending June 30th next was much too high. This estimate was 18,775 million dollars. The _Times_ stated that the realised amount is likely to be hardly more than 12,000 million dollars, of which about 4500 million dollars will represent loans to Allies, and that the estimate for the year's largely increased tax revenue was 3886 million dollars, which now seems likely to be exceeded by the receipts. If this be so, out of a total expenditure of £2400 millions, of which £900 millions will be lent to the Allies, the Americans are apparently raising nearly £800 millions out of revenue. Therefore if we deduct from both sides of the account the pre-war expenditure of about £215 millions and deduct also the loans to Allies from the expenditure, it leaves the cost of the war to America £1285 millions for this year and the war revenue £562 millions. If these figures are correct it would thus appear that America is raising nearly half its actual war cost out of revenue as the war goes on. On the other hand, in the New York _Commercial Chronicle_ of April 6th the total estimated disbursements for the year are still stated at over 16,000 million dollars, that is to say, £3200 millions roughly, so that there seems to be considerable uncertainty as to what the actual amount of the expenditure of the United States will be during the year ending on June 30th. In any case, there can be no question that if the very high proportion of war cost paid out of revenue shown by the _Times_ figures proves to be correct, it will be largely owing to accident or misfortune; if America's war expenditure has not proceeded nearly as fast as was expected, it will be, no doubt, owing not to economies but to shortcomings in the matter of delivery of war goods which the Government had expected to pay for in the course of the fiscal year. It certainly would have been expected that the Americans would in this matter of war finance be in a position to set a very much higher standard than any of the European belligerents owing to the enormous wealth that the country has acquired during the two and a half years in which it, in the position of a neutral, was able to sell its produce at highly satisfactory prices to the warring Powers without itself having to incur any of the expenses of war. On the other hand, its great distance from the actual seat of operations will naturally make it difficult for the American Government to impose taxation as freely as might have been done in the case of peoples which are actually on the scene of warfare; so that it is hardly safe to count on American example to improve the standard of war finance which has been so lamentably low in Europe in the course of the present war. According to their original estimates the proportion of war cost borne out of taxation seems to have been on very much the same level as ours, and this has all through the war been very much lower than the results achieved by our ancestors at the time of the Napoleonic and Crimean wars. On this point the proportion of our expenditure, which has been borne out of revenue, the Chancellor stated that up to the end of last financial year, March 31, 1918, the proportion of total expenditure borne out of revenue was 26.3 per cent. On the estimates which he submitted to the House in his Budget speech on April 22nd, the proportion of total expenditure met out of revenue during the current financial year will be 28.3 per cent., and the proportion calculated over the whole period to the end of the current year will be 26.9 per cent. These proportions, however, are between total revenue and total expenditure during the war period. The proportion, of course, is not so high when we try to calculate actual war revenue and war expenditure by deducting on each side at a rate of £200 millions a year as representing normal expenditure and revenue and leaving out advances to Allies and Dominions. On this basis the proportion of war expenditure met out of war revenue up to March 31, 1918, was, the Chancellor stated, 21.7 per cent. For the year 1917-18 it was 25.3 per cent., for the current year it will be 26.5 per cent., and for the whole period up to the end of the current year 23.3 per cent. The corresponding figures for the Napoleonic and Crimean wars are given by Sir Bernard Mallet in his book on British Budgets as 47 per cent. and 47.4 per cent. So that it will be seen that, judged by this test, our war finance, though very much better than Germany's, is not on so high a standard as that set by previous wars. It is true, of course, that the rate of expenditure during the present war has been on a scale which altogether dwarfs the outgoing in any previous struggle. The Napoleonic War is calculated to have cost some £800 millions, having lasted some twenty-three years. Last year we spent £2696 millions, of which near £2000 millions may be taken as war cost, after deducting normal expenditure and loans to Allies. Nevertheless, this argument of the enormous cost of the present war does not seem to me to be a good reason why the war should be financed badly, but rather a reason for making every possible effort to finance it well Are we doing so? At first sight it is a great achievement to have increased our total revenue from £200 millions before the war to £842 millions, the amount which we are expected to receive during the current year on the basis of the proposed additions to taxation, without taking into account any revenue from the suggested luxury tax. But, as I have already pointed out, the comparison of war pounds with pre-war pounds is in itself deceptive. The pounds that we are paying to-day in taxation are by no means the pounds that we paid before the war; their value in effective buying power has been diminished by something like one half. So that even with the proposed additions to taxation we shall not have much more than doubled the revenue of the country from taxation and State services as calculated in effective buying power. When we consider how much is at stake, that the very existence, not only of the country but of civilisation, is endangered by German aggression, it cannot be said that in the matter of taxation the country is doing anything like what it ought to have done or anything like what it would have done, willingly and readily, if a proper example had been set by the leading men among us, and if the right kind of financial lead had been given to the country by its rulers. When we look at the details of the Budget, it will be seen that the Chancellor has made a considerable advance upon his achievement of a year ago, when he imposed fresh taxation amounting to £26 millions, twenty of which came from excess profits duty, and could therefore not be counted upon as permanent, in his Budget for a year which was expected to add over £1600 millions to the country's debt, and actually added nearly £2000 millions. For the present year he anticipates an expenditure of £2972 millions, and he is imposing fresh taxation which will realise £68 millions in the current year and £114-1/2 millions in a full year. On the basis of taxation at which it stood last year he estimates for an increase of £67 millions, income tax and super-tax on the old basis being expected to bring in £28 millions more, and excess profits duty £80 millions more, against which decreases were estimated at £3-1/2 millions in Excise and £37 millions in miscellaneous. He thus expects to get a total increase on the last year's figures of £135 millions, making for the current year a total revenue of £842 millions, and leaving a total deficit of £2130 millions to be provided by borrowing. Increases in taxation on spirits, beer, tobacco, and sugar bring in a total of nearly £41 millions. An increase of a penny in the stamp duty on cheques is estimated to bring in £750,000 this year and a million in a full year, and the increases in the income tax and the super-tax will bring in £23 millions in the present year and £61 millions in a full year. Increases in postal charges will bring in £3-1/2 millions this year and £4 millions in a full year. There has been little serious criticism of these changes in taxation except that many people, who seem to regard the penny post as a kind of fetish, have expressed regret that the postal rate of the letter should be raised to 1-1/2 d. This addition seems to me to be merely an inadequate recognition of the depreciation of the buying power of the penny and to be fully warranted by the country's circumstances. Either it will bring in revenue or it will save the Post Office labour, and whichever of these objects is achieved will increase the country's power to continue the war. The extra penny stamp on cheques has been rather absurdly objected to as being likely to increase inflation. Since the effect of it is likely to be that people will draw a smaller number of small cheques, and will make a larger number of their purchases by means of Treasury notes, the tax will merely result in the substitution of one form of currency for another, and it is difficult to see how this process will in any way increase inflation. Other arguments might be adduced, which make it undesirable to increase the outstanding amounts of Treasury notes, but in the matter of inflation through addition to paper currency, it seems to me that the proposed tax is entirely blameless. The increase of a shilling in income tax and super-tax produced a feeling of relief in the City, being considerably lower than had been anticipated. It is hardly the business of the Chancellor of the Exchequer in this most serious crisis to produce feelings of relief among the taxpayers, and it seems to me a great pity that he did not make much freer use of these most equitable forms of taxation, having first made arrangements (which could easily have been done) by which their very severe pressure would have been relieved upon those who have families to bring up. Death duties, again, he altogether omitted as a source of extra revenue. His proposed luxury tax he has left to be evolved by the wisdom of a House of Commons Committee, and has thereby given plenty of time to extravagantly minded people to lay in a store of stuff before the tax is brought into being. Space will not allow me to deal fully with the Chancellor's very interesting analysis of our position as he expects it to be at the end of the financial year on the supposition that the war was then over. He expects a revenue then of £540 millions on the present basis, making, with the yield of the new taxes in a full year, £654 millions in all, without including the excess profits duty, and he expects an after-war expenditure of £650 millions, including £50 millions for pensions and £380 millions for debt charge. It seems to me that his expectation of after-war revenue is too high, and of after-war expenditure is too low. He says that the estimates have been carefully made, but that they include "a recovery from the absence of war conditions," but surely the absence of war conditions is much more likely to produce a diminution than a recovery in taxation. Under the present circumstances, with prices continually rising, the profits of those who grow or hold stocks of goods of any kind automatically swell The rise in prices has only to cease, to say nothing of its being turned into a fall, to produce at once a big check in those profits, and when we consider the enormous dislocation likely to be produced by the beginning of the peace period expectations of an elastic revenue when the war is over seem to be almost criminally optimistic. The Chancellor arrived at his after-war debt charge of £380 millions by estimating for a gross debt on March 31, 1919, of £7980 millions, which he reduces to a net debt of £6856 millions by deducting half the expected face value of loans to Allies, £816 millions, and £308 millions for loans to Dominions and India's obligation. But is he, in fact, entitled to count on receiving any interest at all from our Allies for some years to come after the war? If not, then on that portion of our debt which is represented by loans to Allies we shall have to meet interest for ourselves. He also gave an imposing list of assets in the shape of balances in hand, foodstuffs, land, securities, building ships, stores in munitions department, and arrears of taxation, amounting in all to nearly £1200 millions. It is certainly very pleasant to consider that we shall have all these valuable assets in hand; but against them we have to allow, which the Chancellor altogether omitted to do, for the big arrears of expenditure and the huge cost of demobilisation, which is at least likely to absorb the whole of them. On the whole, therefore, although we can claim that our war finance is very much better than that of our enemies, it is difficult to avoid the conclusion that it might have been very much better than it is, and that it is not nearly as good as it is represented to be by the optimistic fancy of the Chancellor of the Exchequer. X INTERNATIONAL CURRENCY _June_, 1918 An Inopportune Proposal--What is Currency?--The Primitive System of Barter--The Advantages possessed by the Precious Metals--Gold as a Standard of Value--Its Failure to remain Constant--Currency and Prices--The Complication of other Instruments of Credit--No Substitute for Gold in Sight--Its Acceptability not shaken by the War--A Fluctuating Standard not wholly Disadvantageous--An International Currency fatal to the Task of Reconstruction--Stability and Certainty the Great Needs. As if mankind had not enough on its hands at the present moment, a number of well-meaning people seem to think that this is an opportune time for raising obscure questions of currency, and trying to make the public take an interest in schemes for bettering man's lot by improving the arrangements under which international payments are carried out. Nobody can deny that some improvement is possible in this respect, but it may very well be doubted whether, at the present moment, when very serious problems of rebuilding have inevitably to be faced and solved, it is advisable to complicate them by introducing this difficult question which, whenever it is raised, will require the most careful and earnest consideration. Since, however, the question is in the air, it may be as well to consider what is wrong with our present methods, and what sort of improvements are suggested by the reformers. At present, as every one knows, international payments are in normal times ultimately settled by shipments from one country to another of gold. Gold has achieved this position for reasons which have been described in all the currency text-books. Mankind proceeded from a state of barter to a condition in which one particular commodity was used as the chief means of payment simply because this process was found to be much more convenient. Under a system of barter an exchange could only be effected between two people who happened to be possessed each of them of the thing which the other one wanted, and also at the same time to want the thing which the other one possessed, and the extent of their mutual wants had to lit so exactly that they were able to carry out the desired exchange. It must obviously have been rare that things happened so fortunately that mutually advantageous exchanges were possible, and the text-books invariably call attention to the difficulties of the baker who wanted a hat, but was unable to supply his need because the hatter did not want bread but fish or some other commodity. It thus happened that we find in primitive communities one particular commodity of general use being selected for the purpose of what is now called currency. It is very likely that this process arose quite unconsciously; the hatter who did not want bread may very likely have observed that the baker had something, such as a hit of leather, which was more durable than bread, and which the hatter could be quite certain that either he himself would want at some time, or that somebody else would want, and he would therefore always be able to exchange it for something that he wanted. All that is needed for currency in a primitive or any other kind of people is that it should be, in the first place, durable, in the second place in universal demand, and, in the third place, more or less portable. If it also possessed the quality of being easily able to be sub-divided without impairing its value, and was such that the various pieces into which it was sub-divided could be relied on not to vary in desirability, then it came near to perfection from the point of view of currency. All these qualities were possessed in an eminent degree by the precious metals. It is an amusing commentary on the commonly assumed material outlook of the average man that the article which has won its way to supremacy as currency by its universal desirability, should be the precious metals which are practically useless except for purposes of ornamentation. For inlaying armour and so adorning the person of a semi-barbarous chief, for making into ornaments for his wives, and for the embellishment of the temples of his gods, the precious metals had eminent advantages, so eminent that the practical common sense of mankind discovered that they could always be relied upon as being acceptable on the part of anybody who had anything to sell. In the matter of durability, their power to resist wear and tear was obviously much greater than that of the hides and tobacco and other commodities then fulfilling the functions of currency in primitive communities. They could also be carried about much more conveniently than the cattle which have been believed to have fulfilled the functions of currency in certain places, and they were capable of sub-division without any impairing of their value, that is to say, of their acceptability. Merely as currency, precious metals thus have advantages over any other commodity that can be thought of for this purpose. So far, however, we have only considered the needs of man for currency; that is to say, for a medium of exchange for the time being. It is obvious, however, that any commodity which fulfils this function, that is to say, is normally taken in payment in the exchange of commodities and services, also necessarily acquires a still more important duty, that is, it becomes a standard of value, and it is on the alleged failure of gold to meet the requirements of the standard of value that the present attack upon it is based. On this point the defenders of the gold standard will find a good deal of difficulty in discovering anything but a negative defence. The ideal standard of value is one which does not vary, and it cannot be contended that gold from this point of view has shown any approach to perfection in fulfilling this function. It could only do so if the supply of it available as currency could by some miracle be kept in constant relation with, the supply of all other commodities and services that are being produced by mankind. That it should be constant with each one of them is, of course, obviously impossible, since the rate at which, for example, wheat and pig-iron are being produced necessarily varies from time to time as compared with one another. Variations in the price of wheat and pig-iron are thus inevitable, but it can at least be claimed by idealists in currency matters that some form of currency might possibly be devised, the amount of which might always be in agreement with the amount of the total output of saleable goods, in the widest sense of the word, that is being created for man's use. It need not be said that this desirability of a constant agreement between the volume of currency and the volume of goods coming forward for exchange is based on what is called the quantitative theory of money. This theory is still occasionally called in question, but is on the whole accepted by most economists of to-day, and seems to me to be a mere arithmetical truism if we only make the meaning of the word "currency" wide enough; that is to say, if we define it as including all kinds of commodities, including pieces of paper and credit instruments, which are normally accepted in payment for goods and services. This addition of credit instruments, however, is a complication which has considerably confused the problem of gold as the best means of ultimate payment. Taken simply by itself the quantitative theory of money merely says that if money of all kinds is increased more rapidly than goods, then the buying power of money will decline, and the prices of goods will go up and vice versa. This seems to be an obvious truism if we make due allowance for what is called the velocity of circulation. If more money is being produced, but the larger amount is not turned over as rapidly as the currency which was in existence before, then the effect of the increase will inevitably be diminished, and perhaps altogether nullified. But other things being equal, more money will mean higher prices, and less money will mean lower prices. But, as has been said, the question is very greatly complicated by the addition of credit instruments to the volume of money, and this complication has been made still more complicated by the fact that many economists have refused to regard as money anything except actual metal, or at least such credit instruments as are legal tender, that is to say, have to be taken in payment for commodities, whether the seller wishes to do so or not. For example, many people who are interested in currency questions would regard at the present moment in this country gold, Bank of England notes, Treasury notes, and silver and copper up to their legal limits as money, but would deny this title to cheques. It seems to me, however, that the fact that the cheque is not and cannot be legal tender does not in practice affect or in any way impair the effectiveness of its use as money. As a matter of fact cheques drawn by a good customer of a good bank are received all over the country day by day in payment for an enormous volume of goods. In so far as they are so received, their effect upon prices is exactly the same as that of legal tender currency. This fact is now so generally recognised that the Committee on National Expenditure has called attention to the financing of the war by bank credits as one of the reasons for the inflation of prices which has done so much to raise the cost of the war. It is, in fact, being generally recognised that the power of the bankers to give their customers credits enabling them to draw cheques amounts in fact to an increase in the currency just as much as the power of the Bank of England to print legal tender notes, and the power of the Government to print Treasury notes. Thus it has happened that by the evolution of the banking system the use of the precious metals as currency has been reinforced and expanded by the printing of an enormous mass of pieces of paper, whether in the form of notes, or in the form of cheques, which economise the use of gold, but have hitherto always been based on the fact that they are convertible into gold on demand, and in fact have only been accepted because of this important proviso. Gold as currency was so convenient and perfect that its perfection has been improved upon by this ingenious device, which prevented its actually passing from hand to hand as currency, and substituted for it an enormous mass of pieces of paper which were promises to pay it, if ever the holders of the paper chose to exercise their power to demand it. By this method gold has been enabled to circulate in the form of paper substitutes to an extent which its actual amount would have made altogether impossible if it had had to do its circulation, so to speak, in its own person. From the application of this great economy to gold two consequences have followed; the first is that the effectiveness of gold as a standard of value has been weakened because this power that banks have given to it of circulating by substitute has obviously depreciated its value by enormously multiplying the effective supply of it. Depreciation in the buying power of money, and a consequent rise in prices, has consequently been a factor which has been almost constantly at work for centuries with occasional reactions, during which the process went the other way. Another consequence has been that people, seeing the ease with which pieces of paper can be multiplied, representing a right to gold which is only in exceptional cases exercised, have proceeded to ask whether there is really any necessity to have gold behind the paper at all, and whether it would not be possible to evolve some ideal form of super-paper which could take the place of gold as the basis of the ordinary paper which is created by the machinery of credit, which would be made exchangeable into it on demand instead of into gold. It is difficult to say how far the events of the war have contributed to the agitation for the substitution for gold of some other form of international currency. It would seem at first sight that the position of gold at the centre of the credit system has been shaken owing to the fact that in Sweden and some other neutral countries the obligation to receive gold in payment for goods has been for the time being abrogated. The critics of the gold standard are thus enabled to say, "See what has happened to your theory of the universal acceptability of gold. Here are countries which refuse to accept any more gold in payment for goods. They say, 'We do not want your gold any more. We want something that we can eat or make into clothes to put on our backs.'" This is certainly an extremely curious development that is one of the by-products of war's economic lessons. But I do not feel quite sure that it has really taught us anything new. All that has ever been claimed for gold is that it is universally acceptable when men are buying and selling together under more or less normal circumstances. It has always been recognised that a shipwrecked crew on a desert island would be unlikely to exchange the coco-nuts or fish or any other commodities likely to sustain life which they could find, for any gold which happened to be in the possession of any of them, except with a view to their being possibly picked up by a passing ship, and returning to conditions under which gold would reassume its old privilege of acceptability. During the war the shipping conditions have been such that many countries have been hard put to it, especially if they were contiguous to nations with which the Entente is at present at war, to get the commodities which they needed for their subsistence. The Entente, with its command of the sea, has found it necessary to ration them so that they should have no available surplus to hand on to the enemy. They have very naturally endeavoured to resist these measures, and in order to do so have made use of the power that they exercise by their being in possession of commodities which the Entente desires. They have shown a tendency to say that they would not part with these commodities unless the Entente allowed them to have a larger proportion of things needed for subsistence than the Entente thought necessary for them, and it was as part of this battle for larger imports of necessaries that gold has been to some extent looked upon askance as means of payment, the preference being given to things to eat and wear rather than to the metal. These wholly abnormal circumstances, however, do not seem to me to be any proof that gold will after the war be any less acceptable as a means of payment than before. The Germans are usually credited with considerable sagacity in money matters, with rather more, in fact, I am inclined to think, than they actually possess; they, at any rate, show a very eager desire to collect together and hold on to the largest possible store of gold, obviously with a view to making use of it when the war is over in payment for raw materials, and other commodities of which they are likely to find themselves extremely short. America also has shown a strong tendency to maintain as far as possible within its borders the enormous amount of gold which the early years of the war poured into its hands. While such is the conduct of the chief foreign nations, it is also interesting to note that one comes across a good many people who, in spite of all the admonitions of the Government to all good citizens to pay their gold into the banks, still hold on to a small store of sovereigns in the fear of some chain of circumstances arising in which only gold would be taken in payment for commodities. On the whole, I am inclined to think that the power of gold as a desirable commodity merely because it is believed to be always acceptable has not been appreciably shaken by the events of the war. This does not alter the fact that, as has been shown above, gold, complicated by the paper which has been based upon it, cannot claim to have risen to full perfection as a standard of value. In primitive times the question of the standard of value hardly arises. Transactions are for the most part carried out and concluded at once, and any seller who takes a piece of metal in payment for his goods does so with the rough knowledge of what that piece of metal will buy for him at the moment, and that is the only point which concerns him. The standard of value only becomes important when under settled conditions of society long-term contracts bulk large in economic transactions. A man who makes an investment which entitles him to 5 per cent. interest, and repayment in 30 years' time, begins to be very seriously interested in the question of what command over commodities his annual income of 5 per cent. will give him, and whether the repayment of his money at the end of 30 years will represent the repayment of anything like the same amount of buying power as his money now possesses. It is here, of course, that gold has failed because, as we have seen, the process has been a fairly steady one of depreciation in the buying power of the alleged standard and a rise in the prices of other commodities. This means to say that the investor who has accepted repayment at the end of 30 years of the amount that he lent, be it £100 or £10,000, has found that the money repaid to him had by no means the same buying power as the money which he originally invested. Within limits this tendency of the standard of value towards depreciation has possessed considerable advantages, probably much greater advantages than would have followed from the contrary process if it had been the other way round. If we can imagine that the currency history of the world had been such that a constantly diminished quantity of currency in relation to the output of other commodities had caused a steady fall in prices, it is obvious that there might have been a very considerable check to the enthusiasm of industry. It has indeed been contended that the scarcity of precious metals which, with the absence of an organised credit system, produced this result during the later Roman Empire was a very important cause of the decay into which that Empire fell. I do not feel at all convinced that this effect would necessarily have followed the cause. It seems to me that the ingenuity of enterprising man is such that the producer might, and probably would, have found means for facing the probability of depreciation in price. But it is always an empty pastime to try to imagine what would have happened "if things had been otherwise." What we do know is that a period of rising prices, especially if the rise does not go too fast, stimulates the enterprise of producers, and sets business going actively, and consequently it may at least be claimed that the failure of the gold standard to maintain that steadiness of value which is an obvious attribute of the ideal standard has at least been a failure on the right side, by tending to depreciation of the value of currency, and so to a rise of the prices of other commodities. Obviously, people will tuck up their sleeves more readily to the business of production and manufacture if the course of the market in the product which they hope to sell some day is likely to be in their favour rather than against them. And when all is admitted concerning the failure of the existing standard of value, the question is, what substitute can we find which will carry with it all the advantages that gold has been shown to possess, and at the same time maintain that steadiness of value which gold has certainly lacked? We hear airy talk of an international currency based on the credit of the nations leagued together to promote economic peace. It is certainly very obvious that the diplomatic relations of the world require complete reform, and the system by which the nations at present settle disputes between themselves has been found by the experience of the last four years to be so disgusting, so barbarous and so ridiculous that all the most civilised nations of the world are determined to go on with it until it is stopped for ever. Nevertheless, obvious as it is that some kind of a League of Nations is essential as a form of international police if civilisation is to be rescued from destruction, it is very doubtful whether such an organisation could, at least during the first half-century or so of its existence, be called upon to tackle so difficult a question as that of the creation of an international currency based on international credit. In the first place, what will be required more than anything else after the war in economic matters will be the elimination of all possible reasons for uncertainty; so much uncertainty and difficulty will be inevitable that it seems to me to be almost criminal to add to those uncertainties by an outburst of eloquence on the part of currency reformers if there were any danger of their recommendations being accepted. It will be difficult enough to know where the producers of the world are to get raw material, find efficient labour, and then find a market for their products, without at the same time upsetting their minds with doubts concerning some kind of new-fangled currency that is to be created, and in which they are to be made to accept payment, with the possibilities of changes in the system which may have to be effected owing to some quite unforeseen results happening from its adoption. The gold standard, with all its failures, we do know; we also know that something may be done some day to remedy them if mankind can produce a set of rulers capable of approaching the question with all the knowledge and experience required; but to substitute this system at a time of great uncertainty for one which might or might not work would seem to be tempting Providence in an entirely unnecessary manner at a time when it is above all necessary to get the economic ship as far as possible on an even keel. If the proposed substitute is to succeed it will have to be at least as acceptable as gold, and at the same time its quantity must be so regulated as to be at all times constant in relation to the output of commodities. Can we pretend that the economic enlightenment of mankind has yet reached a point at which such a currency could be produced and regulated by the Governments of the world and be accepted by their citizens? XI BONUS SHARES _July_, 1918 A Deluge of Bonus Shares--The Effect on the Market--A Problem in Financial Psychology--The Capitalisation of Reserves--The Stock Exchange View--The Issue of Bonus-carrying Shares--The Case of the A.B.C.--A Wiser Variation from Canada--Bonus Shares on Flotation--An American Device--Midwife or Doctor?--The Good and Bad Points of Both Systems. Of the many kinds of Bonus shares, the one which has lately been most prominent in the public eye is that which is produced by the capitalisation of a reserve fund. There has lately been a perfect epidemic of this kind of Bonus share, which is almost as plentiful as the caterpillars in the oak trees and the green fly on the allotments. The reason for this outburst is apparently the anxiety which the directors of many prosperous industrial companies feel lest the high dividends which good management and sound finance in the past have enabled them to pay should lay them open to misunderstanding and attack by well-meaning people who think that it is a crime for a company to earn more than a certain percentage on its capital. This explanation was very frankly given by the directors of Brunner, Mond and Company, when they lately capitalised part of their reserves. The company, they stated, has for many years paid a dividend on its Ordinary shares of 27-1/2 per cent., and "the directors feel that there is a widespread impression that this is the rate of profit earned on the total of the capital invested, and consequently that the company is making an unfair profit out of its customers and the labour it employs. This is by no means the case." It is a lamentable proof of the backward state of the economic education of this country that it should be necessary for well-financed and prosperous concerns to take steps to make it quite clear to the public that they are not earning more than they appear to be. In a well-educated community it would be perceived at once that it is the well-financed and prosperous companies which improve production in the interests of their shareholders, their workmen, and the public; that the price which the public pays for a commodity is ultimately the price at which the worst financed and worst managed companies can just manage to keep alive; that the higher profits earned by the better companies are not wrung out of the pockets of the community, or their workmen, but are the result of good management and good finance; and that the more the good companies are encouraged to go ahead and drive the bad ones out of existence, the better will the community be served, and the better will be the chance of the workmen to get good wages. These platitudes are of course, only true in a state of free competition. If there is anything like monopoly the public and the workers are fully justified in being suspicious and examining the source from which high dividends are produced. Such being the reason why this outburst of capitalisation of reserves first began--since in these days all capitalists and those who have to manage capital feel that they are working under criticism, which is not only jealous and suspicious (as it should be), but is also too often both ignorant and prejudiced--it is interesting to note that the movement which was so started has been stimulated by its very exhilarating effect on the market in the shares of the companies concerned. Why this should be so it is difficult at first sight to say. What happens is merely this--that a company, let us suppose, for the sake of simplicity, with a capital consisting wholly of 3,000,000 Ordinary shares, has accumulated out of past profits, or out of premiums on new issues of shares, a reserve fund of £1,000,000. Its net profit has lately averaged £400,000, and it has, year by year, distributed £300,000 in the shape of a 10 per cent. dividend to its shareholders, and put £100,000 into its reserve fund, which is represented on the other side of the balance-sheet by buildings and plant and a certain amount of first-class investments. If the directors now decide to capitalise that £1,000,000 of reserve fund, the only effect is that each shareholder will be given one new share for every three which he holds in the existing capital, the reserve fund will be wiped out, and the ordinary capital will be increased from £3,000,000 to £4,000,000. None of the shareholders will be in actual fact better off to the extent of one halfpenny, because all will be in the same position with regard to one another; their relative shares in the enterprise will not have been altered. If we imagine, by way of simplifying the problem, that all the Ordinary shares were in one hand, that one holder would have had in his Ordinary shares a claim to the total assets of the company, that is to say, to its earning power as long as it is a going concern, and to whatever its assets realise if it went into liquidation; the fact that £1,000,000 worth of the assets had been bought out of past profits or premiums paid on new issues of shares would have already added to the value of the claim that he had on the property of the company, and no addition would be made to that value by turning the reserve fund into shares. In other words, the reserve fund is already the property of the shareholders, and to convert it from reserve fund into capital, making them a present of new shares, which merely represent their claim to the assets held against the reserve fund, is as empty a gift as presenting a man with a piece of paper informing him that he is the owner of his own hat. All this remains equally true if, besides the ordinary capital, there is a considerable amount outstanding of Preference shares and Debenture debt. In any case, the Ordinary shareholders possess a claim to the earning power of the company when prior charges have been satisfied, and to whatever surplus may remain on liquidation after first charges have been paid off in full. Whether that interest of theirs is represented by a larger or smaller number of shares, or by shares of a larger or smaller denomination, or by a reserve fund upon which they have a claim when all other claims have been settled makes no difference whatever as a matter of academic fact. Apart from the sentiment of the matter, there is no reason why ordinary capital should have any nominal value. As to the earning power of the company, that, of course, is not affected one whit by the process. The earning power of the company is all in the assets--the plant, machinery and other property--plus the elusive qualities which are bound up in the word "goodwill," representing the selling power, organisation, and the expectation of future profits. The capitalisation of the reserve simply affects the manner in which the liabilities of the company are arranged, and the existence of a reserve fund merely means that the Ordinary shareholders have a claim to a larger amount than their nominal holding in case of liquidation. It does not matter in the least whether this larger claim is handed to them in the shape of a certificate, since the nominal amount of their claim has nothing whatever to do with the amount that their claim realises to them annually in the shape of dividends, or in the event of liquidation, from the realisation of the company's assets. In fact, the capitalisation of reserves is sometimes criticised by economic purists as a retrograde step because it seems likely to encourage the directors to be extravagant in the matter of dividends. In the example which we supposed above of the company with a capital of three millions and reserve fund of one million, if the reserve fund is turned into Ordinary shares and the earning power of the company remains the same there may obviously be a temptation to the directors to modify the prudent policy under which they had hitherto placed one hundred thousand a year to reserve, because if they continued it the shareholders would discover they were really no better off and that they simply got a lower rate of dividend on the larger amount of shares, and that their actual receipts from the company were exactly the same as before. And if the earning power of the company remained the same and the directors left off placing the one hundred thousand a year to reserve, and paid away the whole of the net profit in dividend, it is clear that the progressive expansion of the company's business would be to that extent checked. On the other hand, there is a contrary argument that as long as the company has a large reserve fund there is a possibility that dissatisfied shareholders may agitate for a realisation of sufficient assets to enable that reserve fund to be distributed, especially if it has been wholly acquired out of past profits. In this case the capitalisation of the reserve fund puts this temptation out of their reach since, when once the reserve fund has been capitalised, it can only be got at by greedy shareholders through the process of liquidation. Since, however, the shareholder in these times is not quite so short-sighted as he used to be, there is not perhaps really very much advantage in this point. But since, as has been shown, capitalisation of reserves has no effect upon the earning power and assets of the company, it is interesting to try and discover why the rumour and announcement of such an intention on the part of the board of directors is nearly always accompanied by a rise in the shares of the company affected. If the shareholder is merely to be given a larger nominal claim, which does not in the least affect the value of the assets which that claim concerns, and if the relative amount of his claim is exactly the same with regard to the other shareholders, it is clear that the rise in the value of the shares is based entirely either on a psychological mistake on the part of the public and its financial advisers, or on the fact that the transaction called attention to the value of the shares which have hitherto been undervalued in the market. Probably the movement arises from both these causes. A large number of people think they are better off if they have a larger nominal share, without considering that all the other shareholders are at the same time having their claim increased, that the assets to which they all have a claim are not being increased, and that, consequently, if a sharing-out process were to take place they would all be exactly as they would have been if no such capitalisation of reserves had been carried out. And if a sufficient number of people think that a share or any other commodity is more valuable, it thereby becomes more valuable, because value is nothing else than the amount, whether in money or other commodities, at which a commodity can be disposed of. But it is also true that there are, at all times, a very large number of securities, especially in the industrial market, which would stand higher if their earning power and position were more closely scrutinised. This is very clearly seen to be the case from the apparently extravagant prices at which insurance companies, for example, sometimes buy the businesses of one another. They give a price which is considerably above the market value of the concern as represented by the price of its shares. Critics say that the terms are extravagant, and yet the deal is found to be highly profitable to the buying company. The profit of the deal, of course, may be increased by the advantages of amalgamation, but quite apart from that it is clear that the market price of securities very often undervalues, as it also, perhaps, still oftener overvalues, the real position of the companies on whose earning powers they represent claims. In any case, there is the fact that these capitalisations of reserve funds, which make no real difference to the actual position of the company, are universally regarded, in the language of the Stock Exchange, as "bull points." It is assumed, of course, that the directors would not carry out such an operation unless they saw their way to a higher earning power in the future as a justification for the larger capital. In this expectation the directors might be right or wrong, and, even if they are right, that prospect of higher earning power, if market prices could be relied upon to express the true position of a company, would have been "in the price." There is another kind of Bonus share, which is not exactly a Bonus share, but carries a bonus with it. This comes into being when the directors of a company sell new shares to existing shareholders at a price below the terms which they might have obtained if they made a new issue to the general public. The classical example of this system is the Aerated Bread Company, that concern to which City clerks and journalists and others owe so much as pioneers of cheap and simple catering. It will be remembered that in the palmy days of this company, before it had been severely cut into by competition, its £1 shares used to stand in the neighbourhood of £15. The directors used then to make issues of new shares to existing shareholders at their face value, that is to say, at £1 per share, although it was obvious that if they had made a public issue inviting all and sundry to subscribe they could have sold their new issues at or above £14 per share. This system put an enormous bonus in the pockets of the existing shareholders at the expense of the company and its future prospects. The directors practically gave to the existing shareholders a present of £130,000 if they sold them 10,000 new shares for £10,000, which they and the public would have readily subscribed for at £140,000. There was nothing wicked about the process, but it was extremely short-sighted. If the company had retained the monopoly which its pioneer work as a cheap caterer for a long time secured it, it might have kept its prosperity unimpaired even by this short-sighted finance. As it was, attracted several competitors, some of which were extremely well managed and financed, and although it still does a most useful work for the community, its earning power has suffered considerably. But this is only an extreme example of a system which is reasonable enough if it is not carried too far. The Canadian Pacific Railway, for instance, has for many years adopted a very moderate use of this system, making new issues to its shareholders on terms rather cheaper than it could have obtained by a public issue, but not giving away enough to impair its future seriously in order to make presents to the existing stockholders by this means. By the continued making of small presents to their constituents the directors of the company have obtained the support of a very loyal body of stockholders, who feel that they are being well treated but not pampered. This system of granting a small bonus to existing shareholders on occasions when the company has to issue new capital is one which is quite unobjectionable as long as it is not abused. If, owing to the use of it, the directors are encouraged to finance themselves badly, that is to say, to pay out of new capital for improvements and extensions which a more prudent policy would have financed out of earnings, just because they find that these issues carrying a small bonus makes them popular with the stockholders, then the system is being abused. Otherwise there seems no reason to object to a measure which keeps the shareholders happy and does not do any harm to the concern so long as it is worked in moderation. Finally, there is a Bonus share or stock which does not represent accumulation out of vast profits or issues of new shares at a premium, and does not involve a bonus by the sale to existing shareholders at a price below the terms which could be got in the market, but is at first sight pure water, representing merely possibilities, perhapses, and potentialities. This kind of Bonus share is chiefly known on the other side of the Atlantic, and is usually damned with bell, book and candle by purists among English financial critics. We say on this side of the water that every pound of an English well-financed company represents a pound which has actually been spent and put into tangible assets which help the company to earn profits. This boast is by no means true, since nearly all industrial companies come into being with something paid for in the shape of goodwill, which is of enormous importance, but can hardly be called a tangible asset; and even in the case of our railway companies, many millions of original capital went into Parliamentary and legal expenses, which have been, in one sense, dead capital ever since, though without this expenditure the railways could never have got to work. The American system of Common shares, representing what appears to be water, is only a modification of what every company has to do, in one form or another, on this side or anywhere in the world. Wherever an existing business is bought out something has to be given over and above the old iron value of the concern for the value of the connection and other intangible assets. Wherever an entirely new industry is started it has to meet certain initial expenses. It has to placate, to use the unpleasant American word, various interests in order to get to work, or it has to lay out money, in building up a concern by advertising or otherwise. It is impossible that every penny which is put into it will go into actual buildings, plant, machinery, and stock-in-trade. In America the system has been preferred by which the actual tangible assets of a new concern are financed wholly or largely by issues of bonds or Preferred stock, and the Common stock is given away to those interested in the promotion, for them either to hold or to use in order to secure the co-operation of those who may be useful, or modify the opposition of those who may be dangerous. The net result of it is that the Common stock is represented in fact by goodwill or the power to get to work. If the company prospers, then it is the business of those who hold these Common shares to see that assets are accumulated out of profits, to be held against their Common stock, so squeezing the water out of it and making it good. The system thus possesses this very considerable advantage, that those who promote a company are interested in its future welfare, and watch over it and guide it through its subsequent existence, putting energy and good management at its disposal in order that the paper which they hold may be represented, not by water, but by real assets, and so may bring them a tangible reward. It has thus in some ways a great advantage over the English system, by which the company promoter is too often concerned merely in the immediate success of the promotion. He is, as one of the greatest of them described himself, a mere midwife, who brings the interesting infant into the world, pats its little head, says good-bye to it, and leaves it to take care of itself throughout its troubled existence. By the American system the promoter is not a midwife but a doctor who assists at the birth of the infant, and also watches over its youth and makes every effort to guide its toddling footsteps in such a way that it may grow into lusty manhood. It is not until he has done so that he is enabled, by the sale of the shares which were given to him at the beginning, to realise the full profit which he expected. The profits realised by this method are in many cases enormous. On the other hand, the amount of work that is put in to secure them is infinitely greater than happens in the case of the English midwife promoter; and if the enterprise is a failure, then the promoter goes without his profits. The system, like everything else, is liable to abuse, if a rascally board of directors, in a hurry to unload their holding of Common stock on an unsuspecting public, makes the position and prospects of the company look better than they are by unscrupulous bookkeeping and extravagant distribution of profits, earned or unearned. These things happen in a world in which the ignorance of the public about money matters is a constant invitation to those who are skilled in them to relieve the public of money which it would probably mis-spend; but, if well and honestly worked, the system is by no means inherently unsound, as some English critics too often assume, and it has been shown that it carries with it a very great and substantial advantage in the hands of honest people who wish to conduct the business of company promotion on progressive lines. XII STATE MONOPOLY IN BANKING _August_, 1918 Bank Fusions and the State--Their Effects on the Bank of England--Mr Sidney Webb's Forecast--His Views of the Benefits of a Bank Monopoly--The Contrast between German Experts and British Amateurs--Bankers' Charges as affected by Fusions--The Effects of Monopoly without the Fact--The "Disinterested Management" Fallacy--The Proposal to split Banking Functions--A Picture of the State in Control. A few months ago, writing in this Journal on the subject of banking amalgamations, I referred to one of the objections against them, that they tended towards the creation of monopoly, and so encouraged hope on the part of those who would like to see all forms of industry managed by the State, that the banking business might sooner or later be taken over and worked as a State monopoly. At that time this danger of monopoly seemed to be still fairly remote, but since then the progress of amalgamations has brought it appreciably nearer, and so has vigorously stimulated both the hopes and fears of those who consider that it tends to bring nearer the seizure of banking business by the State. The fear is expressed by Sir Charles Addis, manager of the Hongkong Bank and director of the Bank of England, in the July number of the _Edinburgh Review_ in a very interesting article on the "Problems of British Banking." Sir Charles observes that: "It may even be questioned whether the gigantic size they have already attained does not constitute a menace to the predominant position which the Bank of England has hitherto enjoyed as the bankers' bank. How will the Bank of England be able to maintain its supremacy and control the money market, surrounded by banks individually greater and more powerful than itself, especially when the object in view is by raising the rate of interest to prevent an internal or external drain upon our gold reserve? It is even conceivable that the finance of the State may be threatened, and it is probably for this reason that in Germany the Prussian Minister is said to be considering a State monopoly of banking. Nor can the psychological effect of these great aggrandisements of capital in the hands of a few banks be ignored. They are virtually Government-guaranteed institutions. The insolvency of one of the great banks would involve such widespread disaster that no Government could stand aside. They would be compelled to make use of the national resources in order to guarantee the solvency of private banks. From Government guarantee to Government control is but a step, and but one step more to nationalisation. We are playing into the hands of Mr Sidney Webb and the Socialists." As it happens, in the July number of the _Contemporary Review_, Mr Sidney Webb was developing the same theme, namely, the inevitability of banking monopoly and the necessity, as he conceives it, of defeating private monopoly for the sake of profit, by State monopoly to be worked, as he hopes, in the public interest. His article is headed by the rather misleading title, "How to Prevent Banking Monopoly," for, as has been said, Mr Webb very much wants monopoly, says that it cannot be helped, and sees the fulfilment of some of his pet Socialistic dreams in the direction of it by the bureaucrat whom he regards as the heaven-sent saviour of society. His very interesting argument is most easily followed by means of a series of quotations. "We are, it is said, within a measurable distance of there being--save for unimportant exceptions--only one bank, under one general manager, probably a Scotsman, whose power over the nation's industry would be incalculable. Even in the crisis of the war the matter is receiving the attention of the Government. "In the opinion of the present writer, the amalgamation of banks in this country, which has been going on continuously for a century, though at varying rates, and is being paralleled in other countries, notably in Germany, and latterly in the Canadian Dominion, is an economically inevitable development at a certain stage of capitalist enterprise, and one which cannot effectively be prevented." Mr Webb considers that there is no economic limit to this policy of amalgamation, and that the gains it carries with it are obvious. He dilates upon these as follows:-- "It may be worth pointing out: "(a) That apart from the obvious economies in the cost of administration, common to all business on a large scale, there is, in British banking practice, a special advantage in a bank being as extensive and all-pervasive as possible. Where distinct banks co-exist, there can be no assurance that the periodical shifting of business, the perpetual transformations in industrial organisation, the rise and fall of industries, localities or firms, the changes of fashion and the ebb and flow of demand, and even a relative diminution of reputation may not lead to a shrinking of the deposits and current account balances of any one bank, or even of each bank in turn. Accordingly, every bank has to maintain an uninvested, or, at least, a specially liquid, reserve to meet such a possible withdrawal. The smaller, the more numerous, the more specialised by locality or industry are the competing banks, the larger must be this reserve. On the other hand, if all the deposit and current accounts of the nation were kept at one bank, even if it has innumerable branches, as the experience of the Post Office Savings Bank shows, no such shifting of business would affect it; no mere transfers from firm to firm or from trade to trade would involve any shrinking of its aggregate balances; and it would need only to have in hand, somewhere, sufficient currency to replenish temporarily a local drain on its 'till money.' The nearer the banks can approach to this condition of monopoly, not only the lower will be their percentage of working expenses, but also the greater will be the financial stability, and the smaller the amount that they will need to keep uninvested in order to meet possible withdrawals. "(b) That the process of amalgamation has involved an ever-increasing elimination, from the British banking business, of the typical profit-maker, first as partner in a private bank, then as a director in a Joint Stock bank, representing a large personal holding of shares; and the gradual transfer of practically the whole conduct of the business to what may be called 'disinterested management'--that is to say, management by trained, professional officers serving for salaries, whose remuneration bears no relation to the profit made on each piece of business transacted. The part played in the business by the directors themselves seems to be, with every increase in the magnitude and scope of the concern, steadily diminishing; and these directors, moreover, come to be chosen, more and more, not because of their large holdings of shares, or because of their ancestral or personal connection with banking, but because of their reputation or influence, commercial, social or political. The result is that, along with the process of amalgamation, there has been going on a transfer of the whole management of banking to the hierarchy of salaried officials; whilst the supreme decisions on financial policy are in the hands, in practice, of a very small group of salaried general managers, only partially in consultation with an equally small group of chairmen of boards of directors, themselves usually drawing not inconsiderable salaries." It seems to me that Mr Webb exaggerates in rather a dangerous degree the reduction, through amalgamation, of the necessity which obliges a bank to keep a considerable reserve of cash. It is quite true that under normal circumstances cash withdrawn from one bank finds its way in due course to another, and that with regard to these mere "till money" transfers there might be a considerable reduction in the amount of cash required if all the banking of the country were in the hands of one business, so that what was withdrawn from one branch would be paid into another. But this fact would not alter the need which compels a bank to keep considerable reserves in cash in order to provide against the possibility of a run. A State bank, if the public takes it into its head that it prefers to have a larger proportion of currency in its own pocket rather than in its bank, may find itself pulled at for cash just as vigorously as a bank managed by private enterprise. This was shown in August, 1914, when very large sums were withdrawn from the Post Office Savings Bank during the crisis which then impelled many members of the public to hoard money, or compelled them to take it out of their banks because they did not find that the ordinary system of payment by cheques was working with its usual ease. Moreover, Mr Webb's point about what he calls disinterested management--that is to say, the management of banks by officers whose remuneration bears no relation to the profit made on each piece of business transacted--is one of the matters in which English banking seems likely at least to be modified. Sir Charles Addis, in the article already referred to, calls attention in a very striking passage to the efficiency of the administration of German and English banks, and makes a comparison between the remuneration given to the banking boards of the two countries. The passage is as follows:-- "Scarcely second in importance to the financial strength of a bank is the efficiency of its administration. The German board of direction is composed, to an extent unknown in England, of men possessed of professional and technical knowledge. No one who has been present at a meeting of German bank directors in Berlin, when some foreign enterprise has been under consideration, can have failed to be impressed by the animation with which it was discussed, and by the expert and comparative knowledge displayed by individual directors of the enterprise itself and of the conditions prevailing in the foreign country in which it was proposed to undertake it. He may have been led to reflect ruefully upon the different reception his project met with in his own country. He will recall the meeting of the London board; the difficulty of withdrawing its members even temporarily from their country pursuits and their obvious anxiety to lose no time in returning to them; most of them old men, many of them long retired from business; some of them ex-Government officials and the like, who have never been in business; a few ornamental titled persons; only one or two here and there who have no train to catch and are willing to discuss the matter in hand with attention, and, it may be, with understanding. "It would be idle to pretend that a board of this kind constitutes anything like the nexus between industry and finance which obtains in Germany, and which is very much to be desired in this country. It may be that we do not pay our men enough. A London director has to be content with an honorific position, a fee of a few hundred pounds a year, and, it must be added, a very exiguous degree of responsibility. That is not enough to attract men in the prime of life with expert or technical knowledge of industry and finance, who would have to submit to a reduction in the large incomes they are earning by the exercise of their special abilities if they were to accept a seat on the board of a bank. There are two things which a good man, in the business sense of the term, will not do without--pay and responsibility. Give him sufficient of the former, and you may saddle him with as much of the latter as you like. You may not always get good men by offering them good pay, but you will certainly not get them without doing so. Apparently shareholders are content so long as their profits are not reduced by more than nominal directors' fees. At a recent meeting of a bank with deposits of over £200,000,000 the proposal to increase the directors' fees to £1000 a year was met by the rejoinder from one of the shareholders present that he did not know what the directors would do with such a sum. "They manage these things differently in Germany. In the three banks to which we have already referred, after payment by the Deutsche Bank of 5 per cent. of the net profits to reserve, and of the ordinary dividend of 6 per cent., and by the Disconto-Gesellschaft and the Dresdner Bank of 4 per cent., the directors receive respectively 7 per cent., 7-1/2 per cent., and 4 per cent. (the Disconto's personally liable partners receive 16 per cent.) out of the remainder. The directors are bound by law to supervise all the details of the bank's business, and to keep themselves well informed as to its general policy and methods of management. They are bound by law to exercise the caution of a careful business man, and are liable to be sued for damages arising out of the crime or negligence of their employees. If cases of this kind are seldom brought to public notice, it is not because they do not occur, but because the directors, as a rule, prefer to pay up for the laches of their employees, as they can well afford to do out of their profits, rather than be haled before the Court." When Mr Webb comes to the question of the dangers resulting from monopoly, he finds that they lie chiefly in a restriction of facilities, and in raising the price exacted for them, and that in both respects the danger appears to be great. There is, he says, every reason to expect that the banker, as the nearest approach to the "economic man," will take the opportunity of raising his charges either by increasing the frequency and the rate of the commission exacted for the keeping of a small account, or by reducing the rate of interest allowed on balances, or adopting the common London practice of refusing it altogether. "The banker, who is not in business for his health, may be expected, on this side of his enterprise, to pursue the policy of 'charging all that the traffic will bear.' It would probably pay the banker actually to refuse small accounts, and to penalise the employment of cheques for small sums. This would be a social loss." With regard to the other side of his business, lending to the borrowers, Mr Webb thinks it need not be assumed that the monopolist banker will actually lend less, because he will seek at all times to employ all the capital or credit that he can safely dispose of, but Mr Webb thinks that he is likely, as the result of being relieved of the fear of competition; to feel free to be more arbitrary in his choice of borrowers, and therefore able to indulge in discrimination against persons or kinds of business that he may dislike; that he will raise his charges generally for all accommodation, again, theoretically to "all that the traffic will bear"; and, finally, that in times of stress with regard to all applicants, and at all times with regard to any applicant who was "in a tight place," that he will extort as the price of indispensable help a theoretically unlimited ransom. Such are the effects which Mr Webb fears from the process which has already put the control of the greater part of the banking facilities of England into the hands of five huge banks. He thinks that these things may happen long before it is a question of an absolute monopoly in one hand. A monopoly, he says, may be more or less complete, and the economic effects of monopoly may be produced to a greater or less degree at a point far below a complete monopolisation in a single hand. There is much truth in this contention of his. Amalgamation has now come to such a point that every new one not only brings absolute monopoly more closely in sight, but increases the ease with which agreements among the huge banks might suffice to produce the effects of monopoly without further amalgamations. Mr Webb goes on to argue that it is impossible to stop by legislative prohibition or restriction the progress towards economic monopoly where such progress is financially advantageous to those concerned, and that the only remedy ultimately by which the community can be protected from the dangers which he sees threatening it is for the community to take the monopoly into its own hands, and so to get rid, not of the monopoly, which, from the standpoint of national organisation, he thinks is advantageous, but of the motives leading to extortion. If, he says, "no shareholders are in control with their perpetual and insatiable desire for profit, there is no inducement to take advantage of the needs or helplessness of the customers by restricting service or raising prices." In this sentence, of course, he begs the whole question between the advantage of private enterprise and of Socialistic organisation. Private enterprise works for profit, and therefore makes as much profit as it can out of its customers. It is, therefore, according to Mr Webb's argument, probable that if private enterprise in banking is able to establish monopoly it will squeeze the public to the point of restricting banking facilities and making them dearer. No one can deny that there is some truth in this contention, but, on the other hand, it may very fairly be argued that modern business has perceived the great advantages of a big turnover and small profits on each transaction. The experience of the great insurance companies, and of great catering companies, and of enormous private organisations such as the Imperial Tobacco Company, has shown the enormous advantage of providing cheap facilities to the largest possible number of customers; so that fears of natural restriction of banking facilities, through monopoly, if they cannot be set altogether aside, are not by any means a certain consequence even of the establishment of monopoly in private enterprise. Still weaker is Mr Webb's assumption that if the interests of the shareholders with "their perpetual and insatiable desire for profit" were eliminated, cheap and plentiful banking facilities would inevitably result from bureaucratic management. The contrary has been shown to be the case in the examples of the Post Office, of the Telephone Service, and the London Water Supply. In the case of the telegraph and the telephones, the Government took over prosperous businesses, and has managed them at a loss. In the matter of the Post Office it is not possible to compare the Government with individual enterprise, but it will generally be admitted that the Telephone Service has by no means been improved since the Government took it over. Mr Webb points out that nationalisation, whether of banks or of other forms of enterprise, does not necessarily mean government under a Minister by a branch of the Civil Service. But it is impossible to ignore the fact that as soon as nationalisation takes place those who are responsible for the management of the enterprise are practically certain to develop the qualities and idiosyncrasies of civil servants, which are so unlikely to tend to elasticity, rapidity and efficiency in business management. In fact, Mr Webb practically grants this point by the very interesting development he suggests by which the two chief functions of banking should be differentiated, and one of them should be nationalised and the other should remain in the hands of private enterprise. He develops this truly ingenious suggestion as follows:-- "Just as we have (except for some obsolescent survivals) separated the function of issuing paper money from that of keeping current accounts, so we shall separate the function of keeping current accounts from that of money-lending. The habit of the British banker of combining in one and the same concern (_a_) the essentially routine business of keeping current accounts or receiving deposits; and (_b_) the much more difficult and hazardous business of lending capital to private traders, is not a necessary characteristic of banking organisation; and, whilst possibly the most profitable to the profit-seeking banker, this combination may not be the most advantageous from the standpoint of the community. "It may accordingly be suggested that the business of banking, as understood in this country, is destined to be further divided into two parts, one of which is ripe for immediate nationalisation, and need no longer be carried on for private profit, whilst the other should be the sphere of a number of separate and diversely specialised organisations catering for particular needs. The whole of the deposit and current account side of banking--with its services in the way of keeping securities, collecting dividends, meeting calls, making regular payments, and carrying through the purchase and sale of securities--ought to be united with the Post Office and Trustee Savings Banks and the money order and other postal remittance business, and run as a national service for the receipt and custody of cash, for the utmost possible development of the cheque system, and for the cheapest possible organisation of remittances. There is no longer any reason why this important branch of social organisation should be abandoned to the profit-maker, should be made the instrument of levying an unnecessarily heavy toll on the customers for the benefit of shareholders, and should now be exposed to the imminent danger of monopoly. "If the receipt and custody of deposits and the keeping of current accounts were made a public service the Government might invest the funds thus placed at its disposal in a variety of ways. A certain proportion, perhaps corresponding to what is now held as savings, would be invested, as at present, in Government securities--not Consols, but such as are repayable at par at fixed dates, including Treasury Bills and Terminable Annuities; and any increase in this amount would, in effect, release so much capital for other uses, by paying off part of the National Debt. But the bulk of the amount, corresponding with the proportion of their resources that the bankers now lend for business purposes, might be advanced, for terms of varying duration, partly to Government Departments and local authorities for all their great and rapidly extending enterprises, formerly abandoned to the profit-maker; and partly to a series of financial concerns, whose business it should be to discount the bills and satisfy the requests for loans of those profit-makers who now appeal to the bankers. But these financial concerns should be organised, it is suggested, very largely by trades and industries, specialising in particular lines, and devoted, so far as possible, to meeting the business needs of the different occupations. Whether they should be financial concerns, owned and directed by shareholders, and ran for their profit; or whether they might not, in some cases, be owned and directed by the great industrial associations and combinations that the Government is now promoting in the various industries, and be run for the advantage of the industries as wholes, may be a matter for consideration and possible experiment. In either case, the concerns to which the Government would lend its capital would, of course, have to be of undoubted financial stability to be secured, it may be, by large uncalled capital, or by the joint and several guarantees of a numerous membership; coupled, possibly, with a charge on the assets." At first sight this proposal to differentiate the functions of banking is somewhat startling, and one wonders whether it could possibly work. On consideration, however, there seems to be nothing actually impracticable about the scheme. The Government would presumably take over all the offices and branches of the banks of the country, and would therein accept money on deposit and current account, making itself liable to pay the money out on demand or at notice, as the case may be, just as is done by the existing banks; it would hold the necessary cash reserve, and it would apparently itself invest a certain proportion of the money in Government securities, as the banks do at present. The more difficult part of the banking business, the advancing of money to borrowing customers, it would hand over to financial institutions, created for this purpose presumably out of the ashes of the nationalised banking business. These institutions would make themselves responsible for the lending side of banking, and would obviously, and naturally, be allowed to make a profit on this side of the business. In this differentiation Mr Webb's ingenuity is seen at its very best. He reserves for the State that part of banking which is purely a matter of routine, and he leaves to private enterprise that part of it which requiries the elasticity and judgment and quickness in which the average bureaucrat is most likely to fail. A certain amount of friction may easily arise from this differentiation. The interest that the State would be enabled to allow to depositors would clearly depend to a great extent on the interest which it would be able to receive from the financial institutions engaged in lending the money. These institutions could naturally pay the State interest according to the rate which they were able to charge their borrowing customers, leaving themselves a margin for profit and for protection against the risk that their business would involve. It is obvious that there might at times be considerable difficulty in adjusting these two different points of view, and anybody who knows anything about the length of time and argument involved in inducing officials to make up their minds can only fear that occasional jarring in this connecting link between the two sides of banking might sometimes produce effects which would be awkward for the industry of the country. But apart from this obvious difficulty, can we contemplate with equanimity the prospect of the State monopoly of the ordinary banking facilities as they present themselves to the man in the street, namely, the provision of bank branches, the use of the cheque book, the custody of securities and any other articles that the customer wishes to leave with his bank? At present the ease and quickness with which these routine matters of banking are carried out in England are developed to a point which is the envy of foreign visitors. How would it be if every cashier of every bank were converted by the process of nationalisation from the kindly, businesslike human being as we know him into the kind of person who ministers to our wants behind the counters of the Post Office? As it is, we go into our bank, to present a cheque in order to provide ourselves with cash for the daily purposes of life; the cashier looks at the signature, recognises the customer, hands him over the money. If that cashier became a Government official how long would it take him to verify the signature, to see whether the customer really had a balance to his credit, and finally furnish him with what he wanted? It is obvious that the change suggested by Mr Webb, though it might work, could only work to the detriment of the convenience of the public, and his hopeful view that the elimination of the profits of the shareholders would mean that these profits would go into the pockets of the community in the form of cheapened facilities for banking customers is an ideal largely based on the assumption, that has so often been proved to be incorrect, that the State can do business as well and as cheaply as private enterprise. It is much more likely that after a few years' time the public would find the business of paying in and getting out its money a very much more tedious and irritating process than it is at present, and that the expenses of the matter would have grown to such an extent that the taxpayer might be called upon annually to make good a considerable loss. XIII FOREIGN CAPITAL _September_, 1918 The Difference between Aims and Acts--Should Foreign Capital be allowed in British Industry?--The Supremacy of London and National Trade--No Need to fear German Capital--We shall need all we can get--Foreign Shares in British Companies--Can and should the Disclosure of Foreign Ownership be forced?--The Difficulties of the Problem--Aliens and British Shipping--The Position of "Key" Industries--Freedom to Import and Export Capital our Best Policy. Many things that are now happening must be tickling the sardonic humour of the Muse of History. The majority of the civilised Powers are banded together to overthrow a menace to civilisation, carrying on a war which, it is hoped, is to produce a state of things in which mankind, purged of the evil spirits of militarism and aggression, is to start on a new order of co-operation. At the same time, while we are engaged in fighting under banners with these noble ideals inscribed on them, a large number of citizens of this country are airing proposals aimed at restrictions upon our intercourse with other nations, especially in the economic sphere. In last month's issue of this Journal a very interesting article, signed "Veritas," discussed the question as to how far it was in the power of the Allies to make use of the economic weapon against their enemies after the war. That such a question should even be mooted as an end to a war undertaken with these objects, shows what a number of queer cross-currents are at work in the minds of many of us to-day. But some people go much further than that, and are advocating policies by which we should even restrict our commercial and economic intercourse with our brothers-in-arms. If the clamour for Imperial preference is to have any practical result, it can only tend to cultivate trade within the British Empire, protected by an economic ring-fence at the expense of the trade which, before the war, we carried on with our present Allies. And a large number of people who, under the cover of Imperial preference, are agitating also for Protection for this country, would endeavour to make the British Isles as far as possible self-sufficient at the expense of their trade, not only with all their present Allies, but even with their brethren overseas. It is fortunately probable that the very muddle-headed reasoning which is producing such curious results as these, at a time when the world is preparing to enter on a period of closer co-operation and improved and extended relations between one country and another, is confined, in fact, to a few noisy people who possess in a high degree the faculty of successful self-advertisement. I do not believe that the country as a whole is prepared to relinquish the economic policy which gave it such an enormous increase in material resources during the past century, and has enabled it to stand forward as the industrial and financial champion of the Allied cause during the difficult early years of the war. Our rulers seem to be sitting very carefully on the top of the fence, waiting to see which way the cat is going to jump. They have made brave statements about abrogating all treaties involving the most-favoured nation clause and about adopting the principle of Imperial preference; but when their eager followers press them to do something besides talking about what they are going to do, they then have a tendency to return to the domain of common-sense and to point out that it is above all desirable that our economic policy should be in unison with that of the United States. Whatever may happen in the realm of trade and commercial policy, it would seem to be self-evident that with regard to capital it would be still more difficult and undesirable to impose restrictions than with regard to the entry of goods; and above all, it seems to be obvious that at any rate the free entry of capital into this country is a matter which should be specially encouraged when the war is over. At that difficult period we have to secure, if possible, that British industry shall be entirely unhampered in its endeavours to carry out the very puzzling operations involved by transferring its energies from war activities to peace production. However well the thing may be managed, it will be an exceedingly difficult and complicated operation. In certain industries, especially in shipbuilding and engineering, the building trade and all the allied enterprises, those who are responsible for their efficient management ought to be able to count upon a keen and widely-spread demand for their products. But in many industries there will necessarily be a good deal of doubt as to the kind of article which the consuming public at home and abroad is likely to want. There will be the great difficulty of sorting out the right kind of labour, of obtaining the necessary raw materials, and of getting the necessary credit and capital. That this huge problem can be solved, and solved so well that the country can go ahead to a great period of increased productivity and prosperity, I fully believe; but this can only be done if it is able to command the most efficient co-operation of all the various factors in production--if employers put their best brains and if workers put their best energy into the business, and if everything is done to make the whole machinery work with the utmost possible smoothness. One element in the machinery, and a highly important one, is the question of capital. During the war the citizens of this country have been trained to save and to put their money at the disposal of the Government with a success which could hardly have been expected when the war began. Whether they will continue to exercise the same self-denial when the war is over Is a very open question. At any rate, there can be no doubt that there will be a tendency among a very large number of people who have answered the appeal to save money for the war to listen with considerable indifference to any appeals that may be made to them to save money in order to provide industry with capital. All the capital that industry can get, it will certainly want. If, besides what it can get at home, it can also get a considerable amount from foreign countries, then its ability to resume work on a prosperous and profitable basis when the war is over will be very greatly helped. This would seem to be so obvious that one might have thought that even a Government which is believed to be flirting with what is called Tariff Reform would think twice before it imposed any restrictions on the free flow of foreign capital into British industry. In so far as foreigners lend to us we shall be able to import raw materials, to be worked up to the profit of British industry, in return for promises to pay--very timely convenience at a critical moment. Nevertheless, it would appear that obviousness of the desirability of foreign capital, from whatever source it comes, is by no means evident to those who are now in charge of the nation's destinies. At any rate, the Company Law Amendment Committee, which was appointed last February "to inquire what amendments are expedient in the Companies Acts, 1908 to 1917, particularly having regard to circumstances arising out of the war and of the developments likely to arise on its conclusion," seems to have thought it necessary to provide the Government with schemes by which alien capital could, if the Government thought necessary, be kept out of the country. It was a powerful and representative Committee, and it is very satisfactory to note that its own view concerning the policy to be pursued was strongly in favour of freedom. It points out in its Report that the question which lay in the forefront of its investigations was that of the employment of foreign capital in British industries. On the preliminary question of whether it was desirable that foreign capital should be freely attracted to this country, there was little, if any, difference of opinion. For this very sensible conclusion the Committee gives rather a curious reason. It states that the maintenance of London as the financial centre of the world is of the first importance for the well-being of the Empire, and that anything which could impede or restrict the free flow of capital to the United Kingdom would, in itself, be prejudicial to Imperial interests. Now, of course, if is entirely true that the maintenance of London as a financial centre is very important, but I venture to think that those who are most jealous concerning the prestige of London and the importance of its financial operations would say that it ranks only second to the industrial efficiency of the country as a whole and cannot, in fact, be long maintained unless there is that industrial efficiency behind it, providing a surplus out of which London may be able to finance the world and so, incidentally, and as a side issue, be to a great extent helped by foreign capital to do so. It is surely evident that a financial supremacy which was based merely on a jobbing business, gathering in capital from one nation and lending it to another, would be an extremely precarious and artificial structure, the continuance of which could not be relied on for many decades. Finance can only flourish healthily and wholesomely in a country which produces a considerable surplus of goods and services which it is prepared to place at the disposal of the world. Owing to the possession of this surplus it becomes a market in capital, and so gets a considerable jobbing business, but the backbone and foundation of its position must be, in the end, industrial activity in the widest sense of the word. It therefore seems that the Committee's argument that the free flow of capital is essential to the maintenance of London's finance might have been reinforced by the very much stronger one that it is essential to the recuperative power of British industry, which will need every assistance it can get in order to re-establish itself after the war. The Committee points out that "any legislation which would tend to impede or restrict the free flow of capital here by imposing restrictions or creating impediments ought to be jealously watched, lest in the endeavour to prevent what has come to be called 'peaceful penetration' the normal course of commercial development should be arrested," and it goes on to observe that at the end of the war, "if it should be concluded upon such terms as we hope and anticipate," it is not likely that our present enemies will be in possession of capital looking for employment abroad. This is certainly very true. By the time the Germans have made the reparations, which will involve so much rebuilding in Belgium and in the parts of France that they have overrun and swept clean of industrial plant, and have in other respects made good the damage which their ruthless and uncivilised methods of warfare have inflicted, not only on their enemies, but on neutrals, it does not seem likely that they will have much to spare for capital expansion in foreign countries, especially when we consider how many problems of reconstruction they will themselves have to face at home. "To impose restrictions upon the influx of capital," the Report continues, "aimed at our present enemies, with the result of deterring the flow of capital from (say) America, would be a policy highly injurious to the economic recovery and renewed prosperity of this country after the war. For these reasons we are of opinion that in all amendments of the law falling within the scope of our reference, the expediency of the attraction of foreign capital should be steadily borne in mind." The Committee thus seems to have thought it necessary to administer comfort to anybody who might fear that the unrestricted flow of capital from abroad might involve this country in the terrible danger of being assisted in its industrial recovery by capital from Germany. If there were, in fact, any possibility of this assistance being given, it would seem to be extremely short-sighted not to allow British industry to make use of it. In the matter of "peaceful penetration," we have ourselves in the past done perhaps as much as all the rest of the countries of the world put together, with the result that we have greatly stimulated the development of economic prosperity all over the world; in fact, it may be argued that the great progress made in the last century in man's power over the forces of Nature has been to a great extent due to the freedom with which we invested capital abroad and opened a free market to the products of all other countries. At a time when, owing to exceptional circumstances, we ourselves happen to be in need of capital, it would appear to be an extremely short-sighted policy to refuse to admit it, wherever it came from. We have excellent reason to known that, when capital is once invested in a foreign country, it is largely in the power of the inhabitants and Government of that country to control its working. Any foreigner, even an enemy, who set up a factory in England after the war would be doing just the very thing which we most of all want to be done, namely, setting the wheels of industry going, relieving the labour market from a possible glut after demobilisation, and helping that difficult stage of transition from war work to peace work. The Committee, however, considers that "at the root of the whole matter lies a question which is not one of Company Law amendment at all, but one of high political and economic policy." It does not fall within its province "to inquire whether the traditional policy of this country to admit and welcome all who seek our shores and submit themselves loyally to our laws ought, in the case of some and what aliens, to be revised"; or whether discrimination ought to be made between an alien of one nationality and an alien of another. "As regards aliens who are now our enemies, it may be that the British Empire may adopt the policy that a special stigma ought to be attached to the German, and that neither as an individual nor as a firm, nor as a corporation, ought he, for a time at any rate, to be admitted to commercial fellowship or to any fellowship with the civilised nations of the world." It need not be said that any attempt to apply this stigma in practice would be extremely difficult to carry out, would involve all kinds of difficulties and complications in trade and in finance, and that the threat of it is more likely than anything else to stiffen the resistance of the Germans and to force them to rely on their militarist leaders as their only hope of salvation. However, the Committee points out that recent legislation shows a desire to ascertain and record the extent to which aliens are active in commerce here, and thinks it necessary to make provision to meet the requirements of the Government in case our rulers should decide to impose the restrictions which its own common-sense shows it are so undesirable. If, it says, foreign capital is to be attracted here, it must be represented either by shares or by debentures. "The question, therefore, is whether restrictions ought to be imposed upon the extent to which the control of the company shall be allowed to reside in aliens, either by reason of their holding a majority of the shares, or of the debentures, or by reason of their obtaining a majority upon the Board of Directors; and, if so, how disclosure of their alien character is to be enforced." It goes on to point out the great difficulties which present themselves in the way of securing disclosure of nationality and ensuring that aliens shall not command the control. "The law of trusts," it says, "is firmly established in this country. If A, be the registered holder of a share, he is not necessarily the beneficial owner. He may be a trustee for B. To enact that the registered holder must be a British subject effects nothing, for B. may be an alien and an enemy. Suppose, however, that you enact that A., when his share is allotted or transferred to him, shall make a declaration that he holds in his own right, or that he holds in trust for B., and that both A. and B. are British subjects. There is nothing to prevent the creation of a new trust the next day, under which C., an alien enemy, will be the person beneficially entitled. Further, at the earlier date (the date of allotment or transfer) the facts may be that A. (a British subject) is trustee for B. (a British subject), but that B. (unknown to A.) is a trustee for C., an alien enemy. The fact that B. is trustee for C. would be purposely withheld from A., and A.'s declaration that he was simply trustee for B. would be perfectly true. To require that A. should make a declaration at short intervals (say once a month), or that A., B., C., and so on, should all make declarations would be, of course, so harassing and so detrimental as to be, as a matter of business, impossible. The only effectual way of dealing with the matter would be by a provision that the share might be forfeited, or might be sold and the proceeds paid to the owner, if an alien should be, or become beneficially entitled to or interested in the share. Such a provision does not in the general case commend itself to us as practical or desirable." Any endeavour to control the nationality of the Board of Directors produces similar difficulties. It is easy to ensure that they shall be all, or a majority of them, British subjects, but there is no means of ensuring that their actions shall not be controlled by aliens whose nationality is not disclosed. Having pointed out these difficulties, which seem in effect to reduce the whole question to the domain of farce, the Committee goes on to inquire whether it is desirable to legislate in the direction of forbidding the employment of foreign capital here in Joint Stock Companies, unless:-- (1) There is disclosure of the alien character of the foreign owner; (2) Not more than a certain proportion of the Company's shares are held by aliens; (3) The Board, or a certain proportion of the Board, shall not be alien; and, further, whether it is desirable to discriminate between one alien and another, and to legislate in that direction in the case of certain aliens and not of others. In answering these questions, the Committee decided that it was necessary to discriminate between certain classes of companies--Class A being companies in general, Class B being companies owning British shipping, and Class C companies engaged in "key" industries. With regard to companies in Class A, they recommend that no restrictions at all be imposed, but, nevertheless, they elaborate a scheme of enforcing disclosure of alien ownership if that policy seems to the legislature to be right. This scheme, the Committee admits, is necessarily detailed and laborious; it puts difficulties in the way of investment in English securities, whether by British subject or alien. It would supply, no doubt, to the Board of Trade useful information as to the extent of foreign investment in English industries, but the price paid for this advantage would, in the Committee's opinion, be too great. If adopted, the scheme could be evaded. And, with regard to companies in general, the Committee's recommendations go the length of allowing complete freedom as to the nationality both of the corporators and of the Board. They would allow, for instance, American capitalists to come here and establish themselves as a British corporation in which all the corporators and all the directors were American, and so with every other nationality. They would make no discrimination between aliens of different nationality, for, if there is to be such discrimination, there must be the machinery of disclosure, involving a deterrent effect and acting prejudicially in the case of all investors. But, if any such discrimination were adopted, the Committee thinks that at any rate it should be limited to some short period, say, three or five years after the end of the war. If, however, the legislature should decide upon the necessity of disclosure of alien ownership, the Committee draws up the following scheme for securing it in Paragraph 15 of its Report: 15. For reasons already given, it is not possible efficiently to ensure full disclosure, but the following suggestions would, in the absence of deliberate and intentional evasion (which would be quite possible), meet the point and in the large majority of cases would disclose the extent of alien interests and control:-- (a) Every allottee of shares upon allotment and every transferee upon transfer should be required to make a declaration disclosing his nationality and whether he is the beneficial owner of the shares, and, if not, for whom he is trustee, and what is the nationality of the beneficial owner, and should undertake within a limited time, after any change in the beneficial ownership, to communicate the new facts to the company. In default of compliance with the above, the shares should, at the option of the company, either (1) be liable to sale by the company and the holder be entitled only to the proceeds; or (2) be liable to forfeiture and the holder be entitled to receive payment from the company of 10 per cent. less than the market value of the share, or if there be no market value, then 10 per cent. less than the value at which the share would be taken for _ad valorem_ stamp duty if it were the subject of transfer. In case the company made default in exercising its power, the Board of Trade should be authorised to require the above sale to be made. (b) Every director, upon coming into office, should be required to make a declaration disclosing his nationality and stating whether in his office he is wholly free from the control or influence of any alien, and if he is not so free, stating by whose directions or under whose control or influence he is to act and what is the nationality of that person, and should undertake within a limited time after any change in that state of things to communicate the facts to the Board and procure a statement of the facts to be entered in the Board minutes. Any breach of these obligations to be visited with a penalty which should be severe. (c) The company should be required to enter in the register of members, against the name of every registered member, his nationality as disclosed by the declaration. In the case where the registered member is not the beneficial owner, the company should be required to record, not in the register, but in another book, the nationality of the beneficial owner as disclosed by the declaration, and, as regards the latter book, to record the nationality of any new beneficial owner when and as disclosed by the registered member. These particulars should be required to be included in the annual list under Section 26 of the Act of 1908. That list would thus become not a list of members only, but a list of members with the addition of beneficial owners. The company should, further, be required to add to the annual list a summary of the result as regards nationality showing (1) as regards registered members, how many are British subjects and how many shares they hold, and how many are aliens and how many shares they hold, subdividing the number of the aliens and their holdings under their respective nationalities; and (2) as regards the registered members who are British subjects; (a) how many of them are the beneficial owners and how many shares they hold, and (b) as regards the rest, what are the nationalities and holdings of the beneficial owners. With regard to companies owning British shipping, the Committee is satisfied that the total exclusion of aliens from ownership of British ships is not essential for national safety and is not expedient. It therefore considers that in these companies it will be sufficient to ensure that not more than 20 per cent. of the power of control should be in alien hands. It thinks that there should be this, limit of 20 per cent., that not more than 20 per cent. of the share capital should be held by aliens, and that those shares should carry no more than 20 per cent. of the voting power. Alternatively, it considers that the alien holdings should carry no vote at all, but that is a point of detail deserving further consideration. It follows that in this class there must, in the opinion of the Committee, be disclosure of nationality, which should be enforced in the manner detailed above, which, on its own admission, is not proof against deliberate evasion. With regard to companies carrying on "key" industries, a very complicated system is recommended. In the first place, the question whether a company is one to carry on a "key" industry would seldom or never arise at the time of its registration. The modern Memorandum of Association includes so many things that a "key" industry might be within the powers of almost any company. The question would thus arise when the company has got to work. And so the Committee thinks that the Board of Trade should be empowered at any time to make an inquiry whether any company is carrying on a "key" industry and, if it finds that it is, then the company shall, at the direction of the Board of Trade, require every registered member to make a declaration such as, under the disclosure procedure already described, he would have had to make if he were at the date of the notice about to receive an allotment or become a transferee. Further, the holders of share warrants to bearer would be required to surrender their warrants for cancellation and have their names entered in the register, and all subsequent allottees and transferees would be subject to the obligation of disclosure, as already described, and the limits of 20 per cent. recommended in the case of merchant shipping would then be made applicable. Under the system of disclosure it follows that bearer shares are impossible, but, if disclosure be negatived, the opinion of the Committee is in favour of the maintenance of the bearer share. It should be mentioned that one member of the Committee produced a reservation strongly combating even the very moderate views expressed by the Committee on the subject of British shipping and "key" industries. It should be noted, however, that he attended very few meetings of the Committee. He points out that, with regard to the registration of ships as British when they are owned by a company which has alien shareholders, "it is not usually a question of permitting a ship which would in any case be British to be under the control of aliens; the question is whether, if a number of persons, some or all of whom are aliens, own a ship, they should be permitted to register it as a British ship by forming themselves into a British company and establishing an office in the British Dominions. If," he observes, "they were not allowed to do so they would still own the ship, but register it as a foreign ship in some other country. It appears that a number of ships were registered here before the war by companies with alien shareholders (some even with enemy shareholders). They were managed in this country; the profits earned by them were subject to our taxation; they were obliged to conform to the regulations of our Merchant Shipping Acts; they carried officers and men who were members of the Royal Naval Reserve; on the outbreak of war our Government was able to requisition the ships owing to their British registration and without regard to the nationality of the shareholders in the companies owning them." It appears to this recalcitrant member--and there is much to be said for his view--that all these consequences have been highly advantageous to this country. On the subject of "key" industries he is equally unconvinced. It appears to him that "the important thing is to get the industries established in this country, and that the question of their ownership is of secondary consequence." It is very satisfactory to note, in view of wild talk that has lately been current with regard to restrictions on our power to export capital, that the Committee has not a word to say for any continuance, after the war, of the supervision now exercised over new issues. The restrictions which it did recommend, while admitting their futility, on imports of capital into our shipping and "key" industries were evidently based on fears of possible war in future. The moral is that this war has to be brought to such an end that war and its barbarisms shall be "spurlos versenkt," and that humanity shall be able to go about its business unimpeded by all the stupid bothers and complications that arise from its possibility. XIV NATIONAL GUILDS _October_, 1918 The Present Economic Structure--Its Weaknesses and Injustices--Were things ever better?--The Aim of State Socialism--A Rival Theory--The New Movement of Guild Socialism--Its Doctrines and Assumptions--Payment "as Human Beings"--The "Degradation" of earning Wages--Production irrespective of Demand--Is that the Real Meaning of Freedom?--The Old Evils under a New Name--A Conceivably Practical Scheme for some other World. Most people will admit that there are many glaring faults in the present economic structure of society. Wealth has been increased at an exhilarating pace during the last century, and yet the war has shown us that we had not nearly realised how great is the productive power of a nation when it is in earnest, and that the pace at which wealth has been multiplied may, if we make the right use of our plant and experience, be very greatly quickened in the next. The great increase in wealth that has taken place has been certainly accompanied by some improvement in its distribution; but it must be admitted that in this respect we are very far from satisfactory results, and that a system which produces bloated luxury plus extreme boredom at one end of the scale and destitution and despair at the other, can hardly be called the last word, or even the first, in civilisation. The career has been opened, more or less, to talent. But the handicap is so uneven and capricious that only exceptional talent or exceptional luck can fight its way from the bottom to the top, the process by which it does so is not always altogether edifying, and the result, when the thing has been done, is not always entirely satisfactory either to the victorious individual or to the community at whose expense he has won his spoils. The prize of victory is wealth and buying power, and the means to victory is, in the main, providing an ignorant and gullible public with some article or service that it wants or can be persuaded to believe that it wants. The kind of person that is most successful in winning this kind of victory is not always one who is likely to make the best possible use of the enormous power that wealth now puts into the hands of its owner. Those who are fond of amusing themselves by looking back, through rose-coloured spectacles, at more or less imaginary pictures of the good old mediaeval times, can make out a fair case for the argument that in those days the spoils were won by a better kind of conqueror, who was likely to make a better use of his victory. In times when man was chiefly a predatory animal and the way to success in life was by military prowess, readiness in attack and a downright stroke in defence, it is easy to fancy that the folk who came to the top of the world, or maintained a position there, were necessarily possessed of courage and bodily vigour and of all the rough virtues associated with the ideal of chivalry. Perhaps it was so in some cases, and there is certainly something more romantic about the career of a man who fought his way to success than about that of the fortunate speculator in production or trade, to say nothing of the lucky gambler who can in these times found a fortune on market tips in the Kaffir circus or the industrial "penny bazaar," Nevertheless, it is likely enough that even in the best of the mediaeval days success was not only to the strong and brave, but also went often to the cunning, fawning schemer who pulled the brawny leg of the burly fighting-man. However that may be, there can be no doubt that now the prizes of fortune often go to those who cannot be trusted to make good use of them or even to enjoy them, that Mr Wells's great satire on our financial upstarts--"Tono-Bungay"--has plenty of truth in it, and that our present system, by its shocking waste of millions of good brains that never get a chance of development, is an economic blunder as well as an injustice that calls for remedy. This being so, it is the business of all who want to see things made better to examine with most respectful attention any schemes that are put forward for the reconstruction of society, however strongly we may feel that real improvement is only to be got, not by reconstructing society but by improving the bodily and mental health and efficiency of its members. The advocates of Socialism have had a patient and interested hearing for many decades, except among those to whom anything new is necessarily anathema. There was something attractive in the notion that if all men worked for the good of the community and not for their own individual profit, the work of the world might be done much better, because all the waste of competition and advertisement would be cut out, machinery would be given its full chance because it would be making work easier instead of causing unemployment, and a greater output, more evenly distributed, would enable the nation to breed a race, each generation of which would come nearer to perfection. So splendid if true; but one always felt misgivings as to whether the general standard of work might not deteriorate instead of improve if the stimulus of individual gain were withdrawn; and that the net result might probably be a diminished output consumed by a discontented people, less happy under a possibly stupid and short-sighted bureaucracy, than it is now when the chances of life at least give it the glorious uncertainty of cricket. Since the war our experiences of official control, even when working on a nation trained in individual initiative, have increased those misgivings manifold; and hundreds of people who were Socialistically inclined in 1914 will now say that any system which handed over the regulation of production and distribution to the State could end only in disaster, unless we could first build up a new machinery of State and a new people for it to work on. Partly, perhaps, owing to this discredit into which the doctrines of State Socialism have lately fallen, increasing attention has been given to a body of theory that was already active before the war and advocates a system of what it calls Guild Socialism, under which industry is to be worked by National Guilds, embracing all the workers, both by brain and by hand, in the various kinds of production. Its advocates are, as far as I have been able to study their pronouncements, decidedly hostile to State Socialism and needlessly rode to some of its most prominent preachers, such as Mr and Mrs Webb, who at least merit the respect due to those who have given lives of work to supporting a cause which they believe to be sound and in the best interests of mankind. But in spite of their chronic and sometimes ill-mannered facetiousness at the expense of State Socialism and its advocates, the Guild Socialists, as we shall see, have to rely on State control for very important wheels in their machinery and leave gaps in it which, as far as disinterested observers can see, can only be filled by still further help from the discredited State. It is no disparagement of the efforts of these writers and thinkers to say that their sketch of the system that they hope to see built up is somewhat hazy. That is inevitable. They are groping towards a new social and economic order which, in their hope and belief, would be an improvement. To expect them to work it out in every detail would be to ask them to commit an absurdity. The thing would have to grow as it developed, and we can only ask them to show us a main outline. This has been done in many publications, among which I have studied, with as much care as these distracting times allow, "Self-Government in Industry," by G.D.H. Cole, "National Guilds," by A.R. Orage (so described on the back of the book, but the title-page says that it is by S.G. Hobson, edited by A.R. Orage), and "The Meaning of National Guilds," by C.E. Bechhofer and M.B. Reckitt. These authorities seem to agree in thinking (1) that the capitalist is a thief, (2) that the manual worker is a wage slave, (3) that freedom (in the sense of being able to work as he likes) is every man's rightful birthright, and (4) that this freedom is to be achieved through the establishment of National Guilds. As to (1) Messrs Bechhofer and Reckitt speak on page 99 of their book of the "felony of Capitalism" as a matter that need not be argued about. Mr Cole makes the same assumption by observing on page 235 of the work already mentioned that "to do good work for a capitalist employer is merely, if we view the situation rationally, to help a thief to steal more successfully." Well, this view of capital and the capitalist may be true. Mr Cole is a highly educated and gifted gentleman, and a Fellow of Magdalen. He may have expounded and proved this point in some work that I have not been fortunate enough to read. But as the abolition of the capitalist is one of the chief aims put forward by these writers it seems a pity that they should thus first assert that he is a thief to be stamped out, instead of explaining the matter to old-fashioned folk who believe that capitalists are, in the main, the people (or representatives of the people) who have equipped industry, and enormously multiplied its efficiency and output, and so have enabled the greater part of the existing population of this country (and most others) to come into being. But to the Guild Socialists the identity of robbery with capitalism seems to be so self-evident that it needs no proof. Next, as to the wage system. They seem to think that to earn a wage is slavery and degradation, but to receive pay is freedom. With the best will in the world I have tried to see where this immense difference between the use of two words, which seem to me to mean much the same thing, comes in in their view, but I have not succeeded. Perhaps you will be able to if I give you Mr Cole's own words. On page 154 of the book cited, he says that the wage system is "the root of the whole tyranny of capitalism," and then continues: "There are four distinguishing marks of the wage system upon which National Guildsmen are accustomed to fix their attention. Let me set them out clearly in the simplest terms, "1. The wage system abstracts 'labour' from the labourer, so that the one can be bought and sold apart from the other. "2. Consequently, wages are paid to the wage worker only when it is profitable to the capitalist to employ his labour. "3. The wage worker, in return for his wage, surrenders all control over the organisation of production. "4. The wage worker, in return for his wage, surrenders all claim upon the product of his labour. "If the wage system is to be abolished, all these four marks of degraded status must be removed. National Guilds, then, must assure to the worker, at least, the following things:-- "1. Recognition and payment as a human being, and not merely as a mortal tenement of so much labour power for which an efficient demand exists. "2. Consequently, payment in employment and in unemployment, in sickness and in health alike. "3. Control of the organisation of production in co-operation with his fellows. "4. A claim upon the product of his work, also exercised in co-operation with his fellows." Now, looking with a most dispassionate eye and an eager desire to find out what it is that Labour and its spokesmen are grouping after, can one find in these "marks of degraded status" any serious evil, or anything that is capable of remedy under any conceivable economic system? In all of them the wage-earner is on exactly the same footing as the salary-earner or the professional piece-worker. The labour of the manager of the works can also be abstracted from the manager, and can be bought and sold apart from him. One would have thought that this fact is rather in favour of the manager and of the wage-earner--or would Mr. Cole prefer that the latter should be bought and sold himself? The salary-earner and the professional are only employed when somebody wants them. The manager's term of employment is longer, but the professional pieceworker, such as I am when I write this article, has usually no contracted term, and is only paid for actual work done. I also have no control over the organisation of the production of _Sperling's Journal_ or any other paper for which I do piecework. I am very glad that it is so, for organising production is a very difficult and complicated and risky business, and from all the risks of it the wage-earner is saved. The salary-earner or the professional, when once his product is turned out and paid for, also surrenders all claim upon the product. What else could any reasonable wage-earner or professional expect or desire? The brickmaker or the doctor cannot, after being paid for making bricks or mending a broken leg, expect still to have the bricks or the leg for his very own. And how much use would they be to him if he could? Unless he were to be allowed to sell them again to somebody else, which, after being once paid for them, would merely be absurd. But when we come to the remedies that Mr. Cole suggests for these "marks of degraded status," we find in the forefront of them that the worker must be secured "payment as a human being, and not merely as a mortal tenement of so much labour power for which an efficient demand exists." This, especially to an incurably lazy person like myself, is an extremely attractive programme. To be paid, and paid well, merely in return for having "taken the trouble to be born," is an ideal towards which my happiest dreams have ever struggled in vain. But would it work as a practical scheme? Speaking for myself, I can guarantee that under such circumstances I should potter about with many activities that would amuse my delicious leisure, but I doubt whether any of them would be regarded by society as a fit return for the pleasant livelihood that it gave me. And human society can only be supplied with the things that it needs if its members turn out, not what it amuses them to make or produce, but what other people want. And It is here that the National Guildsmen's idea of freedom seems, in my humble judgment, to be entirely unsocial As things are, nobody can make money unless he produces what somebody wants and will pay for. Even the capitalist, if he puts his capital into producing an article for which there is no demand, will get no return on it. In other words, we can only earn economic freedom by doing something that our fellows want us to do, and so co-operating in the work of supplying man's need. (That many of man's needs are stupid and vulgar is most true, but the only way to cure that is to teach him to want something better.) The Guildsmen seem to think that this necessity to make or do something that is wanted implies slavery, and ought to be abolished. They are fond of quoting Rousseau's remark that "man is born free and is everywhere in chains." But is man born free to work as and on what he likes? In a state of Nature man is born--in most climates--under the sternest necessity to work hard to catch or grow his food, to make himself clothes and build himself shelter. And If he ignores this necessity the penalty is death. The notion that man is born with a "right to live" is totally belied by the facts of natural existence. It is encouraged by humanitarian sentiment which, rightly makes society responsible for the subsistence of all those born under its wing; but it is not part of the scheme of the universe. Such are a few of the weaknesses involved by the theoretical basis on which Guild Socialism is built. When we come to its practical application we find the creed still more unsatisfactory. Even if we grant--an enormous and quite unjustified assumption--that the Guildsman, if he is to be paid merely for being alive, will work hard enough to pay the community for paying him, we have then to ask how and whether he will achieve greater freedom under the Guilds than he has now. Now, freedom is only to be got by work of a kind that somebody wants, and wants enough to pay for it. And so the consumer ultimately decides what work shall be done. The Guildsman says that the producer ought to decide what he shall produce and what is to be done with it when he has produced it. "Under Guild Socialism," says Mr Cole,[1] "as under Syndicalism, the State stands apart from production, and the worker is placed in control." Very well, but what one wants to know is what will happen if the Guilds choose to produce things that nobody wants. Will they and their members be paid all the same? Presumably, since they are to be paid "as human beings" and not because there is a demand for their work. But if so, what will happen to the Guildsman as consumer? There will be no freedom about his choice of things that he would like to enjoy. And what about admission to membership of a Guild, the price at which the Guilds will exchange products one with another, and the provision of capital? The nearest approach to an answer to these questions is given by Messrs Bechhofer and Reckitt in Chapter VIII, of the "Meaning of National Guilds." This chapter describes "National Guilds in Being." It tells us that "each man will be free to choose his Guild," which sounds very pleasant, but is completely spoilt by the end of the sentence, which says "and actual entrance will depend on the demand for labour." It sounds just like a capitalistic factory. And then--"Labour in dirty industries, sewaging, etc.--will probably be in the main of a temporary character, and will be undertaken by those who are for the time unable to obtain an entry elsewhere." Most sensible, but where is the freedom? The Guildsman will not be able to do the work that he wants to do unless there is a demand for that kind of labour, and in the meantime, just like the unemployed in the days of darkness, he will be set to cleaning the streets and flushing the drains. Messrs. Bechhofer and Reckitt are, in fact, so sensible and practical that they abandon altogether the freedom of the producer to produce what he likes. "Indeed," they write, "a query often brought to confound National Guildsmen is this: What would happen to a National Guild that began to work wholly according to its own pleasure without regard to the other Guilds and the rest of the community? We may reply, first, that this spirit would be as unnatural among the Guilds as it is natural nowadays with the present anti-communal, capitalist system of industry" (but under the present system any one who worked without regard to the rest of the community would very soon be in the hands of a Receiver); "secondly, if it did arise in any Guild, this contempt for the rest of the community would be met by the concerted action of the other Guilds. The dependence of any individual Guild upon the others would be necessarily so great that a recalcitrant Guild would find itself at once in a most difficult position, and a Guild that pressed forward demands that were generally felt by the rest of the community to be impossible or unreasonable would soon be brought back into line again." [Footnote 1: "The Meaning of Industrial Freedom," page 39.] Of course; but if so, where is the Guildsman's alleged freedom? Every Guild and every Guildsman would have to adapt himself to the wants of the community, just as all of us who work for our living have to do now. He would be no more free than I am, and I am no more free than the person who is sometimes described as a "wage slave." The Guildsman might be happier in the feeling that he worked for a Guild rather than a capitalist employer, but this is by no means certain. The writers just quoted show with much frankness and good sense that there would be plenty of opening for friction, suspicion, discontent and strikes. "A Guild," they say, "that thought itself ill-used by its fellows would be able to signify its displeasure by the threat of a strike." The officials of the Guild are to be chosen by the "men best qualified to judge" of their ability, whoever they may be, and every such choice would be ratified by the workers who are to be affected by it. "The Guild would build up in this way a pyramid of officers, each chosen by the grade immediately below that which he is to occupy," Did not the Bolsheviks try something like this system, with results that were not conducive to efficient production? And to meet the danger that the officials as a whole might combine "in a huge conspiracy against the rank and file," Messrs Bechhofer and Reckitt can only suggest vigilance committees within the Guilds. In a word, Guild Socialism seems to be a system that might possibly be worked by a set of ideally perfect beings; but as folk are in this workaday world one can only doubt whether it would be conducive either to freedom, efficiency or a pleasant life for those who lived under it. XV POST-WAR FINANCE _November_, 1918 Taxation after the War--Mr. Hoare's Scheme described and analysed--The Position of the Rentier--Estimates of the Post-War Debt--The Compulsory Loan Proposal--What Advantages has it over a Levy on Capital?--The Argument from Social Justice--Questions still to be answered--The Choice between a Levy and Stiff Taxation--Are we still a Creditor Nation?--Our Debt not a Hopeless Problem--Suggestions for solving it. Under this heading two very interesting articles were contributed to the October issue of _Sperling's Journal_ by Mr Alfred Hoare and an "Ex-M.P.," and the subject is clearly one to which, now that the end of the war has been brought appreciably nearer by the feats of the Allied armies, too much thought and discussion can hardly be given. How are we going to face the problem that has been built up for us by the bad finance of the war, the low proportion of its cost that has been paid for out of taxation, and the consequent huge debt with which--it is already over £7000 millions gross--the State will be saddled? Mr. Hoare answered the question by proposing a scheme of taxation of what he called Rente, by which he meant all forms of "unearned income"--"rentals from freehold and leasehold property, interest upon loans whether public or private, and dividends on joint stock companies or sleeping partnerships." He added that in his opinion earned income above a certain figure might reasonably be added to this category on the ground that it has, in some instances, very much the same characteristics as unearned; the income of a "successful professional man or clown or jockey or opera star" being due to peculiar qualities; "and it would be no great hardship if earned income above, say, a thousand a year for a married couple, with an additional three hundred for every child under twenty-five years of age were regarded as unearned, and taxed accordingly." Income was thus the basis of Mr Hoare's scheme. Rente he regards as an agency regulating distribution, and requiring to be constantly checked. "It is," he says, "an elementary principle of social health, and economic prosperity that the share of the national wealth enjoyed by the Rentier, by the owner, that is, of unearned income, should not be excessive," Most people who can follow his admirable example and take a detached and unbiassed view of questions which affect their pocket so closely, will agree with him In this opinion. The Rentier lives on the proceeds of work done in the past by him or by some other person; and it is not good for our economic health that he should grow too fat at the expense of those who are working now, lest the latter be discouraged and work with less spirit. At the same time we have to remember that the work done in the past by the Rentier or those whom he represents, has given us the plant and equipment (in the widest sense of the phrase) with which we are now working. If, therefore, we penalise the Rentier too severely we shall discourage his future creation; the present race of earners, if they see that those who are living on past savings are shorn too close will be deterred from saving, will put their surplus earnings into extravagant spending instead of into plant and equipment, and the economic future of the nation, and of the world, will be _pro tanto_ less hopeful. If once our fiscal system is going to propagate the view--already so rampant among the happy-go-lucky citizens of this unthrifty people--that the worst thing to do with money is to save it there will be bad times ahead for our industry and commerce, which can only get the capital that it needs if somebody saves it. Mr Hoare's elaborate calculations led him to conclusions involving a tax of 11s. 6d. in the pound on unearned income. This figure is, I hope, needlessly high. To arrive at it he assumed that peace might be concluded towards the end of 1919, and that when peace conditions are fully re-established--which will take, he thinks, three years, the National Debt will amount to £10,000 millions, involving annual interest of £500 millions, which, added to the total Rente of the country in 1913 (which he made out to be £520 millions), will make a total Rente in 1923 of £1020 millions. His view is that the burden of the National Debt should be thrown by means of the income tax upon the national Rente, not taxing it out of existence, but by such a scale of taxation as would reduce the net Rente of the country to approximately the level at which it stood before the war. There is good reason to hope that Mr Hoare's figures will not be reached. He took £10,000 millions merely as a round sum. Mr Bonar Law, it will be remembered, worked out our net debt on March 31st next at £6856 millions, taking credit for half the estimated amount of loans to Allies as a good asset. If we prefer as sounder bookkeeping to write off the whole of our loans to Allies for the time being and to apply anything that we may hereafter receive on that account to Sinking Fund, the debt, on the Chancellor's figures, will amount on March 31st (if the war goes on till that date) to £7672 millions. Even if the war went on for six months more it ought not to bring the debt up to more than £9000 millions at the outside. It is quite true, as Mr Hoare says, that the return to peace conditions will be a gradual process, and that expenditure will not come back to a peace basis all at once. Demobilisation and other matters which were left, by our cheery Chancellor, out of the airy after-war balance-sheet that he so light-heartedly constructed, may cost £1000 millions or more before we have done with them. But against them we can set a string of recoverable assets which, in the Chancellor's hands, footed up a total of £1172 millions--balances in agents' hands, due debts (apart from loans to Allies), land, securities, ships, buildings, stores In Munitions Department, arrears of taxation, and so on. With his 11s. 6d. in the pound on unearned and 6s. in the pound on earned incomes, Mr Hoare expects a revenue of £620 millions, "or enough to provide for the interest of the debt with a 1 per cent. Sinking Fund, and leave £20 millions towards the Supply Services." But Mr Bonar Law anticipated a total peace Budget (if the war ended by March 31st next) of £650 millions. This was probably too low, but we may at least hope that Mr Hoare has gone rather further than was necessary to be on the safe side. In the other article on the subject of post-war debt contributed to the last number of this Journal, an "Ex-M.P." plumped for a somewhat novel variety of the Levy on Capital, in the shape of a Compulsory Loan, bearing no interest and repayable in 100 years. Each individual citizen to be made to subscribe to the extent of 20 per cent. of his possessions. Ten per cent. of the amount due to be paid on application, 10 per cent. six months after allotment, and 80 per cent. on January 1st of the following year. When desired, the Government to advance at 5 per cent. the money necessary for the payment subsequent to allotment, full repayment of such advances to be made within eight years. A Sinking Fund to be established to redeem the loan at maturity. But is there any real advantage in this scheme over the Levy on Capital, from which it only differs by the receipt by the payer of a promise to repay in 100 years' time? The approximate value of £1000 nominal of the Compulsory Loan stock would be, according to "Ex-M.P.'s" calculation, in the year of issue £7 12s., money being worth 5 per cent. and assuming that rate to be current during the remainder of the term. The claim that there is no confiscation, because "a perfectly good security is given for the money received," would seem rather futile to those who paid £1000 and received a security, the present value of which might be below £10. They might very likely think that outright confiscation (since confiscation originally means nothing but "putting into the Treasury") is really a simpler way of dealing with the problem. "Ex-M.P.," however, estimates that the immediate redemption of £2800 millions of debt (which he, rather modestly, expects to be the result of his 20 per cent. levy) would enable the balance of the War Debt to be converted into 3-1/2 per cent. stock. This may be true, but if so it is equally true if a similar or larger amount of debt is cancelled by means of an outright Levy on Capital. The merits and demerits of a Levy on Capital have already been dealt with in the pages of this Journal "Ex-M.P.," however, brought forward a slightly novel form of argument in its favour. He pointed out that the money constituting the great increase in debt that has taken place during the war will have been, in the main, contributed by people who have worked at home under the protection of the Army and Navy, while the soldiers and sailors have been prevented by the duty which sent them out to risk their lives from subscribing a proportionate share to the National Debt. Hence "a class that deserves most of the State will find itself indebted to a class which--if it does not deserve least of the State--has, at any rate, turned a national emergency to personal profit." This is a strong argument, which, has been used frequently in the course of the war in the pages of the _Economist_, against borrowing for war purposes to the large extent to which our timid rulers have adopted the policy. "To be really just," the writer continued, "the process of taxation ... must be applied with greatest force to those who have accumulated their money since the outbreak of war, and only to a less degree to those whose fortunes have not been built upon their country's necessity. The difficulty of separating these two classes of wealth is great, and must, in the writer's opinion, be effected by separate legislation--legislation which might justly be based upon the increase in post-1913 incomes, a record of which should now be in preparation at Somerset House." Everyone will agree that everything possible should be done to take the burden of the war debt off the shoulders of those who have fought for us; but it is equally clear that now that the mischief of this huge debt has been done, it will be exceedingly difficult to repair it by any ingenuities of this kind. For instance, if the kind of taxation--in the shape of a Compulsory Loan--proposed by "Ex-M.P." were enforced, how can we be sure that it would not take a large slice off capital, the next heir to which is a soldier or a sailor? Bad finance is so much easier to perpetrate than to remedy that one is almost certain to come across such objections as this to any scheme for making the war profiteers "cough up" some of their gains. Moreover, we have to remember that by no means the whole of the war debt represents the gains of those who "have turned a national emergency to personal profit." Some people whose incomes have been actually decreased by the war, especially when currency depreciation is taken into account, have, in response to the appeals of the War Savings Committee, saved more than they ever saved before by patriotically stinting themselves. And even the savers who have saved out of war profits were so far more patriotic than the war profiteers who did not save but squandered. In all the discussion concerning the Levy on Capital I have not seen any answer (even in Mr Pethick Lawrence's very persuasive little book in its favour) to the three great objections to it (1) that it lets off the squanderer and penalises the saver; (2) that the difficulty, trouble and expense involved by the necessary valuation, and the iniquities and frauds that are almost certain to arise out of it, will be enormous; and (3) that its economic effect may be very serious in discouraging accumulation. "Why should any one save," the unthrifty soul will most naturally ask, "if his savings are liable to have a slice cut out of them by a levy at any time?" The advocates of the Levy, and "Ex-M.P." in his advocacy of a Compulsory Loan for repayment of debt; assume that it can be done once and for all and never again. "Take one-fifth of a man's savings away as an emergency measure not to be repeated, and he will at once endeavour to save it back again." But how will you persuade him that it is an emergency measure not to be repeated? How can you be sure that it is so? I have heard a very distinguished Socialist, discussing in private the beauties of the Levy on Capital, point out that it is the sort of thing which, when once the ice has been broken, can be done again so easily. From the Socialist point of view the Levy on Capital is, of course, a simple means of getting, by repetitions of it at regular intervals, all the means of production into the hands of the State; but would the State make a good use of them? Another assumption about the Levy on Capital that seems to me to be the merest will o' the wisp is the delusion that the whole saving that it would entail by reducing the debt charge would necessarily and certainly go to the relief of income tax. On this assumption Mr Pethick Lawrence bases his most persuasive appeal to the smaller income-tax payer, by showing that he would be better off after a Levy on Capital than before it, thanks to the reduction in income tax, which is assumed as axiomatically arising in its train. But is this certain or even likely? Is it not much more probable that our Government, finding its post-war Budget greatly lightened by a Levy on Capital or a Compulsory Loan to redeem debt, will think itself free to indulge in extravagance, maintaining a considerable part of the war income tax and wasting it on rash experiments? All these weaknesses, which appear to be inherent alike in the Levy on Capital or in the scheme which gilds the pill by calling it a Compulsory Loan, seem to be ignored or neglected (perhaps because they are unanswerable) by their advocates. On the other hand, there are certain psychological arguments on the other side. If the well-to-do, who would have to pay the Levy or subscribe to the Compulsory Loan, would prefer that system to a high income tax, there is no more to be said. A tax that is popular with the payer, as compared with other modes of shearing his fleece, needs no further recommendation. But, in view of the probability of the experiment, once tried, being shortly and frequently repeated, I Very much doubt whether this is so; as far as I have been able by personal inquiry to test opinion on the point I have found it almost unanimously adverse among those whom the Levy would most seriously affect. If, as is much more likely, the imposition of a Levy created better feeling among the working classes and the returning soldiers and tended to more harmonious co-operation in after-war tasks of reconstruction, it might be worth while to face its evils and its dangers. But here again it is quite probable that if the burden of war debt were clearly and palpably put on the shoulders best able to bear it, that is, on those who are lifted by the gifts of fortune--either in inherited money or unusual brainpower or faculties--by an equitably graded income tax, the effect might be just as good on the minds of those who suspect that the rich have battened throughout the war on exploitation of the poor. This much at least seems to be agreed by most reasonable people about the debt charge--that it will have to be raised, either by a Levy on Capital or by income tax or some other form of direct taxation, from those who are blessed with a margin. We are not likely to repeat our ancestors' mistake, after the Napoleonic War, of throwing the whole burden on to the general consumer by indirect taxation of necessaries and of articles of general consumption. Even Tariff "Reformers" say little about the revenue that their fiscal schemes would bring in. And with good reason. For in so far as they secured Protection they would bring in no revenue; we cannot at once keep out foreign goods and tax them; and any revenue that they brought in would be most expensively raised, because a large part of the extra price paid by the consumer would go not to the State but into the pockets of the home producer. Nor is it likely that any of the many schemes--of which Mr Stilwell's "Great Plan, How to Pay for the War," is a particularly bold example--for paying off debt by a huge issue of inconvertible currency, will achieve any practical result. Not only would they defraud the debt-holder by paying him off in currency enormously depreciated by the multiplication of it that would be involved; but they would also, by that depreciation, throw the burden of the debt on the shoulders of the general consumer through a further disastrous rise in prices, and so would accentuate the bitterness and discontent already rife owing to the war-time dearness and all the suspicions of profiteering and exploitation that it has engendered. After all, this problem of the war debt, in so far as it is held at home, is not one that ought to terrify us if we look at it steadily. People talk and write as if when the war is over the business of paying for it will begin. That is not really so. The war has been paid for as it went on, and, except in so far as it has been financed by borrowing abroad, it has been paid for by us as a nation. Whatever we have used for the war we have paid for as it went on, partly with the help of loans from America and from other countries--Argentina, Holland, Switzerland, etc.--that have lent us money. These loans amount, as far as they can be traced from the official figures, to about £1300 millions. Against them we can set our loans to our Dominions, over £200 millions (a perfectly good asset), and our loans to our Allies, perhaps £1500 millions, which the Chancellor proposes to write down by 50 per cent., and might perhaps treat still more drastically. To meet this foreign debt we shall have to turn out so much stuff--goods and services of all kinds--for sale abroad to meet the interest and repayment. We have further impoverished ourselves by selling our foreign securities abroad No figure has been published giving any clue to the amount of these sales, and we may perhaps guess them at £1000 millions. If the pre-war estimates of our overseas investments at £4000 millions were anywhere near the mark. It thus appears that we shall end the war still a great creditor nation. In so far as the debt was raised at home, the war was paid for by those who bought the securities offered, and we have now to pay them interest and set about repaying them the capital. This process will not diminish the national wealth, but will only affect its distribution. It will not diminish the amount of available capital, but may even rather increase it by gathering into the hands of the debt-holders--who are ex-hypothesi folk with an inclination for saving--money that might, if left in the hands of those from whom it is collected, have been squandered. The payment of the debt charge merely means that those who came forward with their money when they were asked to subscribe to war loans, have, according to the extent of the effort that they then made, a set-off against the subsequent taxation involved by the war debt. It would have been a much simpler and more businesslike proceeding to have taken, instead of borrowing, a much larger proportion of the war's cost during the war; but it is too late now to rub in this platitude which is now pretty generally admitted. Mr Hoare showed in last month's Journal that the creation of the War Debt has caused a huge addition to what he has called Rente--the gross income of the propertied classes; and there is much logic in his contention that this income is the source from which the debt charge should be met. At the same time both justice and economic expediency seem to demand that his wider interpretation of Rente, to make it include the earnings of those whose special qualifications (or, we may add, special luck) put them in a position to earn more easily than the struggling majority, should be applied to taxation involved by the debt charge. How, then, shall we deal with the debt? In the first place we want a good Sinking Fund--1 per cent. at least--and all realisations of assets in the shape of loans repaid, ships, etc., sold, should be used for reduction of our foreign debt. For the home charge we want a special form of income tax that will fall as lightly and indirectly as possible on industry; that is, that it should be imposed on the individual taxpayer direct. So that what we want is an extended, reformed and better graduated form of the super-tax brought down so low that every one who is not merely rich but comfortable should pay his share, For example, any single man or woman with any excess over £500 a year of unearned income, or over £800 a year of earned income might well pay super-tax on that excess. The exemption limit might well be raised by 50 per cent. for married couples (if their joint incomes are still to be counted as one), and by £100 a year for each child between the age of five and twenty-five. But all these figures are mere suggestions, and the details of the scheme would have to be worked out by Inland Revenue officials, whose experience and knowledge of the practical working of such matters qualifies them for the task. The broad principle is a special tax for the debt charge to be raised direct from individual incomes with skilful differentiation, according to the circumstances of the taxpayer, in the matter of the number of his dependants, and also according to the source of the income, whether it is being earned by exertions which illness might terminate or received from invested funds, and therefore beyond the reach of the "slings and arrows of outrageous fortune." That portion of the tax that is required for Sinking Fund might be made payable, at the option of the taxpayer, in Government securities at prices giving some advantage to the holder. This form of special debt-charge super-tax would enable the ordinary income tax to be reduced considerably at once. Mr Edward Lees, secretary to the Manchester and County Bank, has put forward a scheme by which taxpayers can buy in advance immunity for so many years from so much annual income tax. If this suggestion could be worked it might provide a means of quickening the debt's repayment, though it looks rather like exchanging one form of debt for another. But, in any case, it is urgent that the long promised reform of income tax should be set in hand at once, so that it may be purged of its present inequities and anomalies and set to work in peace to redeem debt on a new and more scientific basis. XVI THE CURRENCY REPORT _December_, 1918 Currency Policy during the War--Its Disastrous Mediaevalism--The Report of the Cunliffe Committee--A Blast of Common Sense--The Condemnation of our War Finance--Inflation and the Rise in Prices--The Figures of the Present Position--The Break in the Old Relation between Legal Tender and Gold--How to restore it--Stop Borrowing and reduce the Floating Debt--Return to the Old System--The Committee's Sane Conservatism--A Sound Currency vital to National Recovery. Among the many features of the late war (how comfortable it is to talk about the "late war"!) that seem likely to astonish the historian of the future, perhaps the thing that will surprise him most is the behaviour of the warring Governments in currency matters. It is surely, a most extraordinary thing after all that has been thought, said and written about monetary policy since money was invented that as soon as a great economic effort was necessary on the part of the leading civilised Powers, they should all have fallen back on the old mediaeval dodge of depreciating the currency, varied to suit modern needs, in order to pay part of their war bill, and should have continued this policy throughout the course of the war, in spite of the obvious results that it was producing in the shape of unrest, suspicion and bitterness on the part of the working classes, who very naturally thought that the consequent rise in prices was due to the machinations of unscrupulous capitalists who were exploiting them. It is even possible that the historian of a century hence may ascribe to this cause the beginning of the end of our present economic system, based on the private ownership of capital, for it is very evident that we have not yet seen the end of the harvest that this bitterness and discontent are producing. A less important but still very objectionable consequence of the flood of currency and credit that the Government has poured out to fill a gap in its war finance is the encouragement that it has given to a host of monetary quacks who believe that all the financial ills of the world can be saved if only you give it enough money to handle, oblivious of the effect on prices of mere multiplication of claims to goods without a corresponding increase in the volume of goods. These enthusiasts have seen that during war a Government can produce money as fast as it likes, and since they think that producing money makes every one happy they propose to adopt this simple method for paying off war debt, restarting trade and generally creating a monetary millennium. How far their nostrums are likely to be adopted, no one can yet say, but some of the utterances of our rulers make one shudder. Into this atmosphere of quackery and delusion the report of the Committee on Currency and Foreign Exchanges breathes a refreshing blast of sound common sense. Everybody ought to read it. It costs but twopence; it is only a dozen pages long, and it is described (if you want to order it) as Cd. 9182. In view of the many attacks that have been made on our banking system--especially the Bank Act of 1844--by Chambers of Commerce and others before the war, it is rather surprising that so little criticism should have been heard of this Report, which practically advocates a return, as rapidly as possible, to the practice and principles imposed by that Act. It may be that peace, and all the preoccupations that have followed it, have absorbed men's minds so entirely that questions of currency seem to be an untimely irrelevance; or possibly the very heavy weight of the Committee's authority may have silenced the opposition to its recommendations. Presided over by Lord Cunliffe, the late Governor of the Bank, and including Sir John Bradbury and Professor Pigou and an imposing list of notable bankers, it was a body whose opinion could only be challenged by critics gifted with the most serene self-confidence. One of the most interesting--especially to advocates of sound finance--points in its Report is the implied condemnation that it pronounces on the methods by which the war has been financed by our rulers. It points out that "the need of the Government for funds wherewith to finance the war in excess of the amounts raised by taxation or by loans from the public has made necessary the creation of credits in their favour with the Bank of England.... The balances created by these operations passing by means of payments to contractors and others to the Joint Stock banks have formed the foundation of a great growth in their deposits, which have also been swelled by the creation of credits in connection with the subscriptions to the various War Loans.... The greatly increased volume of bank deposits, representing a corresponding increase of purchasing power and, therefore, tending in conjunction with other causes to a great rise of prices, has brought about a corresponding demand for legal tender currency which could not have been satisfied under the stringent provisions of the Act of 1844." Here we have the story of bad war finance put as clearly as it can be. Because the Government was not able to raise all the money needed for the war on sound lines--that is, by taxation and loans to it of money saved by investors--it had recourse to credits raised for it by the Bank of England and the other banks against Treasury Bills, Ways and Means Advances, War Loans, War Bonds, and loans to customers who were taking up War Loans, etc. Thereby as these credits created fresh deposits there was a huge increase in the community's purchasing power; and since the supply of goods to be purchased was stationary or reduced, the only result was a great increase in prices which made the war, perhaps, nearly twice as costly as it need have been and produced all the suspicion and unrest that has already been referred to. Considering that the Committee included an ex-Governor of the Bank and the Permanent Secretary to the Treasury it could hardly have been expected to use much plainer language concerning the failure of our rulers to get money out of us in the right way for the war and the vigour with which they made use of the demoralising weapon of inflation. It followed as a necessary consequence that the volume of legal tender currency had to be greatly increased. As prices rose wages rose with them, and so much more "cash" was needed in order to pay for a turnover of goods which, fairly constant in volume, demanded more currency because of their inflated prices. As the Committee says in its Report (page 5): "Given the necessity for the creation of bank credits in favour of the Government for the purpose of financing war expenditure, these issues could not be avoided. If they had not been made, the banks would have been unable to obtain legal tender with which to meet cheques drawn for cash on their customers' accounts. The unlimited issue of currency notes in exchange for credits at the Bank of England is at once a consequence and an essential condition of the methods which the Government have found necessary to adopt in order to meet their war expenditure." The effect of these causes upon the amount of legal tender currency (other than subsidiary coin) in the banks and in circulation is summarised by the Committee in the following table:-- "The amounts on June 30, 1914, may be estimated as follows:-- "Fiduciary Issue of the Bank of England £18,450,000 "Bank of England Notes issued against gold coin or bullion 38,476,000 "Estimated amount of gold coin held by Banks (excluding gold coin held in the Issue Department of the Bank of England) and in public circulation 123,000,000 ___________ "Grand total £179,926,000 ___________ "The corresponding figures on July 10, 1918, as nearly as they can be estimated, were:-- "Fiduciary Issue of the Bank of England 18,450,000 Currency Notes not covered by gold 230,412,000 ___________ "Total Fiduciary Issues [1] £248,862,000 Bank of England Notes issued against coin and bullion 65,368,000 Currency Notes covered by gold 28,500,000 Estimated amount of gold coin held by Banks (excluding gold coin held by Issue Department of Bank of England), say 40,000,000 ___________ "Grand total £382,730,000 "[Footnote 1: The notes issued by Scottish and Irish banks which have been made legal tender during the war have not been included in the foregoing figures. Strictly the amount (about £5,000,000) by which these issues exceed the amount of gold and currency notes held by those banks should be added to the figures of the present fiduciary issues given above.] "There is also a certain amount of gold coin still in the hands of the public which ought to be added to the last-mentioned figure, but the amount is unknown." It will be noted that the gold held by the banks (other than the Bank of England) and by the public has declined from £123 to £40 millions, according to the Committee's estimate, while, on the other hand, the circulation of bank notes has risen by £27 millions and the issue of currency notes has taken place to the tune of £259 millions (at the date of the Report; it is now nearly £300 millions), making a net addition to legal tender currency of over £200 millions. When we also remember that there has been a very heavy coinage of silver and copper, that the Bank of England's deposits have risen by over £100 millions and the deposits of the other banks by nearly £700 millions, and all this at a time when most of the industrial activity of the country was going into the production of destructive weapons and the support of those who were using them, the behaviour of commodities of ordinary use in rising by nearly 100 per cent. seems to be an example of remarkable moderation. With all this new buying power in the hands of the community there is little wonder that some people should think that we have enormously increased our wealth during this most destructive and costly war, and should then feel hurt and disappointed when they find that this new buying power is robbed of all its beauty by the fact that its efficiency as buying power is seriously diminished by its mere quantity. Such being the state of affairs--a great mass of new credit and currency based on securities--it is clear that our currency has been deprived for the time being of that direct relation with its gold basis that used in former time to regulate its volume according to world prices and our international trade position. As the Committee says, "It is not possible to judge to what extent legal tender currency may in fact be depreciated in terms of bullion. But it is practically certain that there has been some depreciation, and to this extent therefore the gold standard has ceased to be effective." Very well, then, what has to be done to get back to the old state of things under which there was a more or less automatic check on the creation of credit and the issue of currency? This check worked by a system which was elastic and simple. It was not entirely automatic, because its working had to be controlled by the Bank of England, which, by the action of its discount rate, could, more or less, quicken or check the working of the machine. Legal tender currency could only be increased by imports of gold; and exports of gold reduced the available amount of legal tender currency; and since a stock of legal tender currency was essential to meet the demands upon them that bankers made possible by creating credits, there was thus an Indirect and variable connection between the country's gold stock and the extent to which bankers would think it prudent to multiply credits. If credits were multiplied too fast, our currency was depreciated in value as compared with those of other countries and the exchanges went against us and gold either was exported or began to look as if it might be exported. If it was exported the legal tender basis of credit was reduced and the creation of credit was checked. If the Directors of the Bank of England thought it inadvisable that gold should be exported they could, by raising the rate of discount and taking artificial measures to control the supply of credit, produce, without the actual loss of gold, the effects which that loss would have brought about. The keystone of the system was the rigid link between legal tender currency and gold. This was secured by the provisions of the Bank Act of 1844, which laid down that above a certain line--which was before the war roughly £18-1/2 millions--every Bank of England note issued should have gold behind it, pound for pound. In other words, the Bank of England note was, for practical purposes, a bullion certificate. The legal limit on the fiduciary issue (that is, the issue of £18-1/2 millions against securities, not gold) could only be exceeded by a breach of the law. The many critics of our banking system seized on this hard-and-fast restriction and accused it of making our system inelastic as compared with the German arrangement, under which the legal limit could at any time be exceeded on payment of a tax or fine on any excess perpetrated. These critics might have been right if legal tender currency had been the only, or even the predominant, means of payment in England. But, as every office boy knows, it was not. Legal tender--gold and Bank of England notes--was hardly ever seen in commercial and financial transactions on a serious scale. We paid, sometimes, our retail purchases of goods and services in gold; and Bank notes were a popular mode of payment on racecourses and in other places where transactions took place between people who were not very certain of one another's standing or good faith. But the great bulk of payments was made in the cheque currency which our bankers had developed outside of the law and could create as fast as prudence--and an eye to the supply of legal tender which every holder of a cheque had a right to demand--allowed them to do so. While cheques provided the currency of commerce, another form of "money" was produced, again without any restriction by the Act, by the pleasant convention which caused a credit in the Bank of England's books to be regarded as "cash" for balance-sheet purposes by the banks. These advantages gave the English system a freedom and elasticity, in spite of the strictness of the law that regulated the issue of paper currency, that enabled it to work in a manner that, judged by the test of practical results, had one great advantage over that of any of the rival centres. It alone in days before the war fulfilled the functions of an international banker by being ready at all times and without question to pay out the gold that was, in the last resort, the final means of settling international balances. It is the object of Lord Cunliffe's Committee to restore as quickly as possible the system which, has thus been tried by the test of experience, "After the war," they say in their Report, "our gold holdings will no longer be protected by the submarine danger, and it will not be possible indefinitely to continue to support the exchanges with foreign countries by borrowing abroad. Unless the machinery which long experience has shown to be the only effective remedy for an adverse balance of trade and an undue growth of credit is once more brought into play there will be very grave danger of a credit expansion in this country and a foreign drain of gold which might jeopardise the convertibility of our note issues and the international trade position of the country.... We are glad to find that there was no difference of opinion among the witnesses who appeared before us as to the vital importance of these matters." The first measure that they put forward as essential to this end is the cessation at the earliest possible moment of Government borrowings. "A large part of the credit expansion arises, as we have shown, from the fact that the expenditure of the Government during the war has exceeded the amounts which they have been able to raise by taxation or by loans from the actual savings of the people. They have been obliged therefore to obtain money through the creation of credits by the Bank of England and the Joint Stock banks, with the result that the growth of purchasing power has exceeded that of purchasable goods and services." It is therefore essential that as soon as possible the State should not only live within its income but should begin to reduce indebtedness, especially the floating debt, which, being largely held by the banks, has been a cause of credit creation on a great scale. "The shortage of real capital must be made good by genuine savings. It cannot be met by the creation of fresh purchasing power in the form of bank advances to the Government or to manufacturers under Government guarantee or otherwise, and any resort to such expedients can only aggravate the evil and retard, possibly for generations, the recovery of the country from the losses sustained during the war." With these weighty words the Committee brushes aside a host of schemes that have been urged for putting everything right by devising new machinery for the manufacture of new credit. That new credits will be needed for industry after war is obvious, but what else are our banks for, if not to provide it? They can only be set free to provide it on the scale required if, by the necessary reduction of the floating debt, they are relieved of the locking up of their funds in Government securities, which has been one of the bad results of our bad war finance. It goes without saying that the Committee does not recommend the continuance in peace of the differential rates for home and foreign money that were introduced as a war measure with a view to lowering a rate at which the Government borrowed at home for war purposes. It would evidently be too severe a strain on human nature to attempt to work such a system, except in war-time, when the artificial conditions by which the market was surrounded made it both feasible and desirable to do so. With regard to the note issue, the Committee proposes a return to the old system and a strictly drawn line for the amount of the fiduciary note issue, the whole note issue (with the exception of the few surviving private note issues) being put into the hands of the Bank of England, all notes being payable in gold in London only and being made legal tender throughout the United Kingdom. These suggestions are subject to any special arrangements that may be made with regard to Scotland and Ireland. An early resumption of the circulation of gold for internal purposes is not contemplated. The public has become used to paper money, which is in some ways more convenient and cheaper; and the luxury of a gold circulation is one that we can hardly afford at present. Gold will be kept by the Bank of England in a central reserve, and all the other banks should, it is suggested, transfer to it the whole of their present holdings of the metal. In order to give the Bank of England a closer control of the bullion market the Committee thinks it desirable that the export of gold coin or bullion should, in future, be subject to the condition that such coin or bullion had been obtained from the Bank for the purpose. This measure would give the Bank of England a very close control of the bullion market, so close that there is a danger that if this control were too rigorously exercised, gold that now comes to this country might be diverted, with a view to more advantageous sale, to other centres. The amount of the fiduciary issue is a matter that the Committee leaves open to be determined after experience of post-war conditions. They "think that the stringent principles of the Act (of 1844) have often had the effect of preventing dangerous developments, and the fact that they have had to be temporarily suspended on certain rare and exceptional occasions (and those limited to the earlier years of the Act's operation, when experience of working the system was still immature) does not," in their opinion, invalidate this conclusion. So they propose that the separation of the Issue or Banking Departments should be maintained, but that in future if an emergency arose requiring an increase in the amount of fiduciary currency, this should not involve a breach of the law, but should be made legal (as it is now under the Currency and Bank Notes Act of 1914), subject to the consent of the Treasury. It is not proposed at present to secure the circulation of paper instead of gold by legislation. The Committee considers that "informal action on the part of the banks may be expected to accomplish all that is required." If necessary, however, it points out that the circulation of gold could be prevented by making the notes convertible, at the discretion of the Bank of England, into coin or bar gold. The amount which, in the opinion of the Committee, should be aimed at for the central gold reserve is £150 millions (a sum which is already almost in sight on its figures quoted above); and "until this amount has been reached and maintained concurrently with a satisfactory foreign exchange position for a period of at least a year," it thinks that the policy of reducing the uncovered note issue "as and when opportunity offers" should be consistently followed. How this opportunity is going to "offer" is not made clear; but presumably a reflow of notes from circulation can only happen through a fall in prices or a reduction in bank deposits by the liquidation of advances made to the Government, directly or indirectly, by the banks. Concerning the difficult problem of replacing the Bradbury notes by Bank of England notes of £1 and 10s., an ingenious suggestion is made by the Committee. It observes that there would be some awkwardness in transferring the issue to the Bank of England before the future dimensions of the fiduciary issue have been arrived at; and it suggests that during the transitional period any expansion in Treasury notes that may take place should be covered, not as now, by Government securities, but by Bank of England notes taken from the Bank. By this means any demands for new currency would operate in the normal way to reduce the reserve of the Banking Department, "which would have to be restored by raising money rates and encouraging gold imports," and so a step would have been taken to getting back to a business basis in the currency system and away from the profligate printing-press policy of the war period. Such are the suggestions made by this distinguished body for the restoration of our currency. Little has been said against them in the way of serious criticism, but their conservative tendency and the fact that they practically recommend a return to the _status quo_ has caused some impatience among the financial Hotspurs who proposed to begin to build a new world by turning everything upside down. In matters of finance this process is questionable, interesting as the result would undoubtedly be. To get to work on tried lines and then, when once industry and finance have recovered their old activity, to amend the machine whenever it is creaking seems to be a more sensible plan than to delay our start until we have fashioned a new heaven and earth, and then very probably find that they do not work. If the machine is to be set moving, it can only be done by close co-operation between the Bank of England and the other banks which have grown by amalgamation into institutions the size of which seem likely to make the task of central control more difficult than ever. On this important point the Committee is curiously silent. But it recommends the adoption of a suggestion made by a Committee of Bankers, who proposed that banks should in future be required "to publish a monthly statement showing the average of their weekly balance-sheets during the month." (Will this requisition apply to the Bank of England?) This is a welcome suggestion as far as it goes, but unless something is done by co-operative action to make the Bank rate more automatic in its influence on the actions of the other banks, the difficulty of making it effective seems likely to be considerable. Getting the currency right is a most important matter for the future of our financial position. Another is the question of our debt to foreigners. Most of this debt we owe to America, and we only owe it because we had to finance our Allies. We surely ought to be able to arrange with America that anything that we have to do in giving our Allies time before asking for repayment they also should do for us--within limits, say, up to thirty years. In view of all that they have made and we have lost by this war waged for the cause of all mankind, this would seem to be reasonable concession on America's part. XVII MEETING THE WAR BILL _January_, 1919 The Total War Debt--What are our Loans to the Allies worth?--Other Uncertain Items--The Prospects of making Germany pay--The Right Way to regard the Debt--Our Capital largely intact--A Reform of the Income Tax--The Debt to America--The Levy on Capital and other Schemes--The only Real Aids to Recovery. A table published week by week by the _Economist_ shows that from August 1, 1914, to November 9, 1918, the Government paid out £8612 millions sterling. From this we have to deduct an estimate of the amount that the Government would have spent if there had not been a war, so that we are at once landed in the realm of conjecture. The last pre-war financial year saw an expenditure of £198 millions, and it is safe to assume that this figure would have swollen by a few millions a year if peace had continued, so that we may take at least £860 millions from the above total as normal peace expenditure for the 4-1/2 years. This gives us £7752 millions as the gross cost of the war, as far as the period of actual fighting is concerned. From this figure, however, we are able to make some big deductions. There are loans to Allies and Dominions, and some other much more readily realisable assets than these. We do not know the actual figure of the loans to Allies and Dominions during the war period, because they are not included in the weekly financial statements. The amount that we borrow abroad is set out week by week--at least, that is believed to be the meaning of the cryptic item "Other Debt"--but the amount that we lend to Allies and Dominions is hidden away in the Supply Services or somewhere, and we only get occasional information about it from the Chancellor in the course of his speeches on the Budget or on Votes of Credit. In his last Vote of Credit speech, on November 12, 1918, Mr Bonar Law gave the chief items of the loans to Allies, and a very interesting list it was. The totals up to October 19, 1918, were £1465 millions to Allies and £218-1/2 millions to Dominions. The Allies were indebted to us as follows:--Russia, £568 millions; France, £425 millions; Italy, £345 millions; smaller States, £127 millions.[1] [Footnote 1: Parliamentary Debates, Vol. 110, No. 114, p. 2560.] Some of these debts may be written off at once, and that cheerfully, seeing that they have been lent brothers-in-arms who have been hit much harder than we have by the war, and had nothing like our financial strength. The question is, what figure ought we to put on this asset in deducting it from gross war expenditure in order to arrive at a guess at the real cost? We take our loans to Dominions, of course, as good to the last penny. Mr Bonar Law, in his Budget speech last April, took our loans to Allies at half their face value. Strict bookkeeping would probably demand a lower figure than 50 per cent.; but let us follow the ex-Chancellor's example and take loans to Allies, which we will estimate at £1480 millions up to November 9th, as good for £740 millions, and loans to Dominions at £220 millions up to the same date, a total of £960 millions, to be deducted from gross war cost. Concerning £740 millions of this sum, however, there is a certain amount of doubt. No one questions for a moment the solvency of France and Italy, but in view of the pressure that the war has exercised on their producing power, and, in the case of France, the complication added by the uncertainties of the position in Russia, in which French investors are so deeply interested, one cannot feel sure that they will be able at once to make interest payments. Much will depend on the sums that they are able to recover from Germany against their bill of damages, on which more anon. But in any case it seems likely that a general scheme of interest funding, as between the Allies, may have to be adopted for some years to come. As to the other assets that we have to set against our gross expenditure during the fighting period, they were enumerated by the Chancellor in his Budget speech last April in the following terms;-- Balances in agents' hands, debts due, foodstuffs, etc £375 millions. Land, securities, buildings and ships 97 " Stores in Munitions Department (cost price 325 millions) taken at 100 " Additions this financial year 100 " Arrears of taxation 500 " --- Total[1] £1172 [Footnote 1: Parliamentary Debates, Vol. 105, No. 33, pp. 698-699.] It will be remembered that in his Budget speech the Chancellor was proceeding on the assumption that the war would last till March 31st next--the date at which our financial year ends--and would then be convenient enough to stop. Happily for us, the valour of our soldiers and those of our Allies, the splendid success of our Fleet and our merchantmen In bringing over American troops and their food and equipment with astonishing speed, and the straightforward diplomacy of President Wilson, combined to achieve victory nearly five months earlier than the most sanguine had dared to expect. With the very pleasant result--though it is a small matter when compared with the end of the killing of the best of our manhood--that the financial position is very greatly improved. With regard to the figures given above, it should be observed that the "debts" are advances to Dominions, but on quite a different basis from our loans to them, being money owed by them against goods and services supplied.[1] They and the balances in the hands of agents are both as good as gold. Concerning the others, one is entitled at first sight to feel a good deal of scepticism, since such articles as land, buildings, ships and stores, bought or built by Government during a war, are likely to find an extremely sluggish demand when the war is over. However, Mr Bonar Law assured the House that his valuation of these amounts had been arrived at on a conservative basis, and, what is better still, in his Vote of Credit speech on November 12th, he was able to state that revised estimates had shown that their value would be "far greater" than he had previously expected. So perhaps we are entitled to take them at £1300 millions. [Footnote 1: Parliamentary Debates, Vol. 105, No. 33, p. 698.] If so, we get the following results for the cost of the fighting period:-- Total Government expenditure, August 1, 1914, to November 9, 1918 £8612 millions. Less estimate of normal peace expenditure 860 " ----- 7752 " Less Loans to Dominions 220 millions. Less Loans to Allies (half face value) 740 " Realisable assets 1300 " ---- 2260 " ---- Net cost of period £5492 " If war cost would be good enough to cease with the fighting we should thus now be able to see, more or less, how we stand. During the fighting period the Government raised by taxation the sum of £2120 millions,[1] from which we have again to deduct £860 millions as an estimate for normal peace taxation, if the war had not happened, leaving £1350 millions as the net war taxation, and £4142 millions as the net addition to debt from the war. [Footnote 1: _Economist_, Nov. 16, 1918.] But, of course, there are still some large and uncertain sums to come in to both sides of the account. There is the cost of maintaining our Army and Navy during the armistice period, the cost of demobilisation, and the cost of putting an end to war munitions contracts running for many months ahead, holders of which will have to be compensated. Who has enough assurance to venture on an estimate of the cost of these items? Shall we guess them at something between £1000 and £1500 millions? And when we have made this guess are we at the end of the war's cost? Ought we not to include pensions to be paid, and if so, at what figure? Fifty millions a year for thirty years? If so, there is another £1500 millions. And interest on war debt, and for how long? On the other side of the balance-sheet, the only asset that has not yet been included in the calculation is the sum that we are going to receive from Germany, Some cheery optimists think that it is possible for us and for the Allies to make Germany pay the whole of our war cost. If so, we have halcyon days ahead, for not only shall we be able to repay the whole war debt but also to pay back to the taxpayer all the £1350 millions that he produced during the war, unless, as seems more likely, the Government finds other uses, or abuses, for the money, and sets its motley horde of wasters to work again. But this problem, of course, is not going to arise. It would not be physically possible for Germany to pay the whole of the Allies' war cost, except in the course of many generations, and, moreover, the Allies have bound themselves not to make any such demand by the rider that they added to President Wilson's peace terms, in giving their assent to them as the basis on which they were prepared to make peace. Early in November they stated that President Wilson's reference to "restoration" of invaded countries should, in their view, be expanded into a claim for compensation "for all damage done to the civilian population of the Allies and to their property by the aggression of Germany by land, by sea, and from the air."[1] This is letting Germany off lightly; but, after stating their readiness to make peace on the basis of the fourteen points, if amended as above (and also with regard to the Freedom of the Seas question) it is not possible for the European Allies, as the Prime Minister's late manifesto says they propose to do[2] to expand this claim for civilian damage into a demand for the whole of their war cost up to the limit of the capacity of the Central Powers to pay, without a serious breach of faith. So that the question of how much we can get out of Germany is complicated by the further uncertainty of the size of the bill for damages that we can present. It will be big enough. We know that the Germans have sunk 8-1/2 million tons of British ships during the war. As to the price at which, for "restoration" purposes, we shall value those ships and their cargoes, and all the civilian property damaged by aircraft and bombardment, this is a matter which it would be obviously improper to discuss; but we may be sure that the bill will mount up to many hundreds of millions, and it remains to be seen whether, after Belgium and France have presented their account, it will be possible for us to secure payment even for all the civilian damage that we have suffered. [Footnote 1: _Times_, November 7, 1918.] [Footnote 2: _Times_, December 6, 1918.] It thus appears that the net cost of the fighting period has been somewhere in the neighbourhood of £5500 millions, taking our loans to Allies at half their face value; and that the armistice and demobilisation period is likely to cost another £1000 to £1500 millions more, to say nothing of pensions and debt charge that will go on for years (unless the supporters of Levy on Capital have their way and wipe the debt out), and that against this further expenditure we can set whatever sum is recovered from Germany. Seeing that our total pre-war debt was £710-1/2 millions, or, omitting what the Government returns call the Other Capital Liabilities, £653-1/2 millions, these figures of war debt and war cost are at first sight somewhat appalling. But there is no reason why they should terrify us, and there are several reasons why they are, when looked at with a discriminating eye, much less frightening than when we first set them out. In the first place, we have always to remember that these figures are in after-war pounds, and that the after-war pound is, thanks to the profligate use by our war Governments of the printing-press and the banking machine, just about half the size, when measured in actual buying power, of the pre-war pound. Any one who pays £100 in taxes to-day thereby surrenders claims to about the same amount of goods and service as he did if he paid £50 in taxes before the war. So that in making any comparison between the position now and the position then we have to divide the figures of to-day by two. In the second, we need not be misled by the Jeremiahs who tell us that now that we have won the war we have before us the task of paying for it. This is not true, or true only to a small extent--to the extent, that is to say, to which we shall, when all these assets and liabilities have been settled up and balanced, be afflicted with a foreign debt. Let us leave this question on one side for the time being, and consider what the position really is with regard to that part of the war's cost that has been raised at home. In so far as that has been done, the war cost has been raised by us while the war went on. In fact, all the war cost has to be raised by somebody while the war goes on, because the war is fought with stuff and services produced at the time and paid for at the time. But when Americans lend us money to pay for some of the stuff that they send us, they pay at the time and we, or our posterity, have to pay them back later on; this is the only way in which we can make posterity pay for the war, and then it only means that our posterity pays America's. It is not possible to carry on war with wealth that is going to be produced some day. The effort of self-sacrifice that war demands has to be made by somebody during its progress--otherwise the war could not be fought. That effort of self-sacrifice we have already made in so far as we have paid for our war cost out of money raised at home. That money has been raised in three ways--by taxation, by borrowing saved money, and by inflation. When it is raised by taxation the sacrifice is obvious, and, in nearly all cases, inevitable: we pay our larger war taxes and so we have less to spend on ourselves, and so we go without things. A few people raise money to pay taxes during war by borrowing or drafts on capital, but they are probably so exceptional that their case need not be considered. We transfer our buying power to the Government to be used for the fighters, and so we set free the labour and material that used to go in providing us with comforts and pleasures; our competition for goods is reduced, and so the Government is able to get what it needs out of the nation's production, which is _pro tanto_ relieved of our demand. The same thing happens when the Government gets money for the war by borrowing money that we save. We reduce expenditure, and transfer buying power to the State and diminish our demand on the nation's production, or that of its foreign supplies. If the whole war cost had been met by these two methods there need have been little or no increase in prices here, and the cost of the war would have been about half what it has been. Of the two methods, taxation is obviously the cleaner, simpler and more honest. By borrowing, the State hires those who have a margin to put part of it at the disposal of the State at a time of national crisis, instead of taking it from them outright. As most of the taxation involved by the subsequent debt charge falls on those who have a margin (as it obviously should) the result is that the people who subscribed to the loans are afterwards taxed to pay themselves interest and to repay themselves their debt. This subsequent taxation falls on them all alike in proportion to their ability to pay, or would if the income tax was more equitably imposed; those who have subscribed their fair share to the loans have an offset, in the interest that they receive, against the taxation; those who subscribed less are properly penalised, those who subscribed more are properly benefited. If only the income tax did not make the position of fathers of families so unjust, the whole arrangement would look, at first sight, quite fair, though rather absurd and clumsy, involving all this subscribing and taxing and paying back instead of an outright tax and having done with it. But in fact a very grave inequity is involved by this business of borrowing for war, and laid upon just the people whom we ought, above all, to treat most fairly, namely, those who fight for us. The soldiers and sailors risk their lives for a pittance during the war, while their brothers and sisters and cousins and uncles and aunts, left at home in security and comfort, earn bloated profits and wages, and put them, or part of them, into War Loans; then when the fighters come back, very likely with their business and connection ruined or lost, they are expected to contribute to the taxation that goes into the pockets of debt-holders. Inflation, the third method of paying for war, again produces the same effect of a reduction of consumption by the civilian population, but in a roundabout manner, which works at first without being noticed, and so is particularly dear to the adroit politician. By it nobody transfers buying power to the Government, but the Government and the bankers, who are generally most reluctant accessories to the transaction, between them create new buying power, which, coming into a restricted market for goods in addition to all the existing buying power, simply forces everybody to consume less because the money in their pockets fetches less goods owing to the rise in prices. The evil attached to this system is obvious enough. It amounts to a tax on the general consumer in proportion to his consumption, and so it lays the sacrifice on the shoulders of those least able to bear it. No Government would have the courage to impose such a tax openly and frankly. All the warring Governments in varying degrees have used this roundabout device of imposing it, very likely being quite unaware of the fraud on the consumer that they were perpetrating. Our own Government, in fact, having first added by this process to a rise in the price of bread, then reduced it by a special subsidy--a pleasant touch of Alice in Wonderland finance. This mode of taxing by raising prices hits, of course, all those who live on fixed incomes and salaries and wages. Those who can strike, or take more out of the consumer, can evade it, and so it falls on the weakest shoulders and incidentally produces friction, discontent and dangerous suspicion. But even it works at the time when it happens. Each creation of new buying power gives the Government, for the moment, control of so much in goods and services at the expense of the consumer; but when once the new buying power has been distributed by the State's payments it is in the hands of the nation as a whole. If the process ceased, the nation would still have control of the whole of its output, which is its income, though the injustice involved, to those who are not strong enough to resist the effects of higher prices, would continue. Thus, whatever means--straightforward or devious--are used for financing war, it is paid for while it goes on by the warring country if the financing is done at home, or by its foreign creditors if the financing is done abroad. And it is, necessarily, almost entirely paid for out of income, that is, out of current production. It is curious to find that many people still seem to think that the whole cost of the war has come out of capital. Luckily for us it could not be done, or only to a very small extent. Our capital mostly consisted of railways, factories, ships, roads, agricultural land, machinery, houses and other things that could not be taken and shot out of a gun. These things we have still got, and though many of them are not in such good shape as they were, some of them are much better equipped and organised. We have drawn on our stocks of materials and goods--how far it is impossible to say; we have lost 8-1/2 million tons of shipping by war losses; in the meantime we have built, bought and captured 5-1/2 millions of new tonnage, and we have a claim against the Germans for such tonnage. On capital account we have suffered by wear and tear in so far as our upkeep has been neglected owing to lack of labour during the war, and by depletion of materials and stocks, and also, of course, by the fact that if the war had not happened, we should, if pre-war calculations were correct, have put some £1700 millions into new investments at home and abroad during the 4-1/4 years of fighting and some more hundreds of millions during the after-war period of Government borrowing and restriction on private investment. But a very large part of the money that went into victory would otherwise have gone not to capital account but into the pleasant frivolities, embellishments and vulgarities that made life an amusing absurdity in days before the war. If, then, the war sacrifice was made during the war, in so far as its cost was raised at home, how far is it true that we are now faced with the business of paying for it? If taxation were equitable it would only be to the extent that those who ought to have made the sacrifice and did not, will in future have to pay interest to those who did, or their representatives. So that the first thing we have to do is to make taxation equitable, that is, lay it on the taxpayer in proportion to his ability to pay. There will still remain the injustice to those who have fought for us, which might be cured, or amended, by special exemptions. With taxation on a really sound basis no further sacrifice would be involved by the debt charge, and no diminution of the nation's wealth or consuming power, which will depend, as always, on its output of goods and services; but only a transfer of consuming power from taxpayers to debt-holders in accordance with the sacrifice made by the latter during the war. What we produce as a nation we shall consume as a nation, subject to the extent that we financed the war during its course by operations abroad. These operations were twofold. We sold to foreigners part of our holdings of foreign securities, thereby and to this extent paying for war cost out of capital--out of the investments made by ourselves and our forbears in America and elsewhere. Mr Bonar Law, in a recent interview in the _Observer_, stated that we had sent back to the United States practically the whole of our holdings of American securities to be sold or pledged as collateral for loans, and that the value of them was three billion dollars--£600 millions sterling. Any of them that have only been pledged can presumably be used to meet the loans raised as they fall due, and so will lighten our burden in the matter of repayment. These loans raised abroad are the second mode of foreign financing. By it we had raised up to November 9th nearly £1300 millions, as shown by the _Economist's_ table, and to that extent we have pledged our future production and that of our posterity, to meet the annual service for interest and repayment. On the other hand, all this sum and more we have (as shown above) lent to our Allies and Dominions, so that the ex-Chancellor was well justified in his boast that we had only borrowed to finance our Allies, and that we had been self-sufficient for our own war cost.[1] [Footnote 1: Budget Speech, Parliamentary Debates, vol. 105, No. 33.] In other words, all that we needed for the war we were able to produce ourselves, or to obtain in exchange for our produce and assets. On paper, therefore, our position as a creditor country is only impaired by our sales of securities. But that is only so on paper. In fact, the loans that we have raised abroad are good debts that have to be met to the last penny, and are a first charge on our future output, but the advances that we have made to our Allies, much harder hit than we are by the war, are assets on which we cannot depend. They were taken in our balance-sheet above at half their face value, but there is much to be said for writing them off altogether and tearing up the I.O.U.'s of our foreign brothers-in-arms. Their need is greater than ours, it would be little satisfaction to receive interest and repayment from them, and the payment due from them, involving difficult problems of taxation for them, would not help the good relations with them which, we hope, may be a lasting effect of the war. And such an act of renunciation on our part would do something towards a restoration of the spirit with which we entered on war, a spirit which has been seriously demoralised during its course, largely owing to the results of our faulty finance, which encouraged profiteering in all classes. In any case, there is our position. We have a big debt to meet at home and abroad, and we are weakened on capital account by foreign indebtedness, wear and tear of plant and dimunition of stocks and materials. Wear and tear and depletion we can soon make good if we set to work and work hard, if our bureaucracy takes away the fetters of its restrictions and controls (instead of making further additions to the "Black List" even after the armistice!), and if our ruling wiseacres will refrain from trying to stimulate industry by taxing raw and half-raw materials. For the debt charge many pleasant and simple fancy strokes are suggested. The Levy on Capital is popular, especially with those who do not own any, but its advocacy is by no means confined to them. Mr Pethick Lawrence has published a persuasive little book about it, but I cannot see that he meets the objections to it. These are, the difficulty of valuation, the fact that in many cases it would have to be paid by instalments, and so would be merely another form of income tax, its sparing of the waster and penalising of the saver, and, consequently, the grave danger that it would check accumulation and so dry up the springs of capital. Mr Stilwell has produced a "Great Plan to Pay for the War," by which all the belligerents and neutrals who have been involved in expense by the war would receive World Bonds from an International Congress for what they have spent owing to the war, and would then pay one another any international debts by exchanging these World Bonds, and deal with the home debt by paying it off in new currency raised on the World Bonds. But, surely, to pay off war debt with a huge addition to currency, making war's inflation many times worse, would be a disastrous beginning to that new era which is alleged to be dawning. By hard work, sparing consumption of luxuries, and a big industrial output, we can soon make the debt charge look smaller and smaller as compared with our aggregate income. Our foreign debt we can only meet by shipping goods and rendering services. But since it was all raised to be lent to our Allies and our lending of it was essential to a victory which has rid mankind of a terrible menace, it is surely reasonable that our creditors should not press for repayment in the first few difficult years, but should fund our short-dated debts into loans with twenty-five or thirty years to run. As to the home debt, we can only lighten its burden on the taxpayer by making taxation equitable. To this end reform of the income tax is an urgent need. We have to lighten its pressure much more effectively on those who are bringing up families, and by collecting it through employers make it an effective and just tax on those of the working class whose earnings and family liabilities make them fairly subject to it. XVIII THE REGULATION OF THE CURRENCY _February_, 1919 Macaulay on Depreciated Currency--Its Evils To-day--The Plight of the Rentier--Mr Goodenough's Suggestion--Sir Edward Holden's Criticisms of the Currency Committee--His Scheme of Reform--Two Departments or One in the Bank of England?--Not a Vital Question--The Ratio of Notes to Gold--Objections to a Hard-and-fast Ratio--The Limit on Note Issues--The Federal Reserve Act and American Optimism--Currency and Commercial Paper--A Central Gold Reserve with Central Control. Everyone has read, and most of us have forgotten, the great passage in Macaulay's history which describes the evils of a disordered currency. "It may well be doubted," he says, "whether all the misery which had been inflicted on the English nation in a quarter of a century by bad Kings, bad Ministers, bad Parliaments and bad judges was equal to the misery caused in a single year by bad crowns and bad shillings.... While the honour and independence of the State were sold to a foreign Power, while chartered rights were invaded, while fundamental laws were violated, hundreds of thousands of quiet, honest and industrious families laboured and traded, ate their meals and lay down to rest in comfort and security. Whether Whigs or Tories, Protestants or Jesuits were uppermost, the grazier drove his beasts to market, the grocer weighed out his currants, the draper measured out his broadcloth, the hum of buyers and sellers was as loud as ever in the towns, the harvest-time was celebrated as joyously as ever in the hamlets, the cream overflowed the pails of Cheshire, the apple juice foamed in the presses of Herefordshire, the piles of crockery glowed in the furnaces of the Trent, and the barrows of coal rolled fast along the timber railways of the Tyne. But when the great instrument of exchange became thoroughly deranged, all trade, all industry, were smitten as with a palsy.... Nothing could be purchased without a dispute. Over every counter there was wrangling from morning to night. The workman and his employer had a quarrel as regularly as the Saturday came round. On a fair-day or a market-day the clamours, the reproaches, the taunts, the curses, were incessant; and it was well if no booth was overturned, and no head broken.... The price of the necessaries of life, of shoes, of ale, of oatmeal, rose fast. The labourer found that the bit of metal which, when he received it was called a shilling, would hardly, when he wanted to purchase a pot of beer or a loaf of rye bread, go as far as sixpence." From some of the evils thus dazzlingly described we are happily free in these times. We are not cursed with a currency composed of coins which are good, bad and indifferent, with the result that the public gets the bad and indifferent while the nimble bullion dealers absorb and export the good. There is nothing to choose between one piece of paper and another, and all that is wrong with them is that there are too many of them. But the general result as it affects the labourer who wants to purchase a pot of beer or anyone else who wants to buy anything is very much the same. A bit of metal that is called a shilling has about the value of a pre-war sixpence and a bit of paper that is called a Bradbury fetches half as much as the pound of five years ago. Compared with what other peoples are suffering from the same disease arising from the same surfeit of money in one form or another, this nuisance that we are enduring is not too terribly severe. It has entailed great hardship on a class that is small in number, namely, those who have to live on fixed incomes. The salary-earner and the rentier have borne the brunt, while the wage-earner and the profit-maker have been able to expand their earnings, in paper, at least to a point at which the depreciation of currency have left them no worse off. Seeing that the wage-earners are those who do the dreariest and dirtiest jobs, and that the profit-makers are those who take the risks of industry and the enormous responsibility of organising enterprise, they are the classes whom it is clearly most desirable to encourage. The rentier in these days gets less than no sympathy, but we make a great mistake if we think that we can with impunity crush him between the upper and nether millstone of fixed income and rising prices. With his help we have equipped industry at home and abroad. We can, if we choose, by depreciating the currency still further, lessen still more the reward that we pay him for that benefit. He may kick, but he cannot abolish the equipment with which he has already provided industry. But if we make his life too hard he can strike like the rest of us, and by refusing to provide for any further expansion in industrial equipment, he can hold up production until we have devised some new method of laying up capital. Currency depreciation is good for the debtor and bad for the creditor; if it goes too far it kills the creditor and reduces business to chaos. We are a very long way from the chaos to which many of our Continental neighbours have already reduced their monetary systems; but there is fortunately a very general feeling that we are a country with a reputation and a prestige on this point; and the business world is growing restive concerning the delay on the part of those responsible in putting an end to a state of things which may have been justified by the war's exigencies (though there is much to be said for the view that in fact it only added to the war's difficulties) but is now clearly as out of date as the censorship, which, like it, nevertheless, continues to flourish. This state of things arises from the arrangement tinder which an unlimited supply of legal tender currency can be manufactured by the Government, which encouraged to continue the system by the fact that each note issued is in effect a loan to itself without interest. At the meeting of Barclays Bank on January 27th, Mr. Goodenough demanded that the issue of currency notes by the Government should be stopped forthwith, and that if it were necessary to provide more currency it would be better for the banks to be allowed to issue notes themselves. This suggestion involves, of course, a complete reversal of the principles on which our monetary system has grown up, since it has long been based on a note-issuing monopoly in the hands of the Bank of England. But these are topsy-turvy days, in which greyheaded precedent is very justly at a heavy discount; and Mr Goodenough's suggestion very practically gets over a big difficulty that stands in the way of stopping the stream of Bradburys. This difficulty lies in the fact that if the banks were pulled at by their customers for currency and could not supply them with Bradbury notes, they would be forced to take notes from the Bank of England, with a bad effect on the appearance of its reserve. If the business of issuing notes were put into the hands of the clearing banks, their power to do so would be limited by the extent of their assets, or of such of their assets as were thought fit to rank as backing for their notes. In other words, the note-issuing business would once more have to be regulated on banking principles and controlled by the price asked, for advances, instead of expressing the helplessness and improvidence of an impecunious and invertebrate Government. In this manner the new departure might be a convenient halfway-house on the way from chaos back to sanity. But probably it is too revolutionary and goes too straight in the teeth of the Bank of England's privilege to receive much practical consideration; and there is the question whether the public would take the new paper readily and whether it could be made legal tender. Sir Edward Holden, in one of those masterly surveys of world finance with which he now instructs the shareholders of the London Joint City and Midland Bank, assembled at their annual meeting, gave much of his attention to an attack on the report of Lord Cunliffe's Committee on Currency. This was only to be expected, since the Committee had made recommendations on lines which were largely conservative and did not embody any of the reforms or changes which had been previously advocated by Sir Edward. Being on this occasion chiefly critical, he did not make very clear in his latest speech the precise proposals that he favours. For them we have to go back to his speech of a year ago, as reported in the _Economist_ of February 2, 1918, p. 171, where he stated that "if the Bank (of England) had been working on the same principles as other national banks of issue, there would have been little ground for anxiety," and that these principles are:-- 1. One bank of issue and not divided into departments. 2. Notes are created and issued on the security of bills of exchange and on the cash balance, so that a relation is established between the notes issued and the discounts. 3. The notes issued are controlled by a fixed ratio of gold to notes or of the cash balance to notes. 4. This fixed ratio may be lowered by the payment of a tax. 5. The notes should not exceed three times the gold or the cash balance. As will be remembered, the Cunliffe Committee recommended that the division of the Bank of England into an Issue Department and a Banking Department, should be retained; that the old principle by which above a certain fixed limit all notes should be backed by gold, should also be retained, but that if at any time a breach of this rule should be found necessary it should be possible, with the consent of the Treasury, and that Bank rate "should be raised to a rate sufficiently high to secure the earliest possible retirement of the excess issue." Since it was formerly only possible to exceed the limit on the fiduciary issue by a breach of the law, under the Chancellor of the Exchequer's promise to get an indemnity for it from Parliament, and since Treasury tradition insisted on a 10 per cent. Bank rate whenever such a breach was permitted or contemplated, it will be seen that the Cunliffe Committee proposed some considerable modifications in our system and hardly justified Sir Edward's assertion that it "proposed that the Bank should continue to work under the Act of 1844 as heretofore." At first sight there seems to be a good deal of difference between Sir Edward's ideal and Lord Cunliffe's, but is not the difference to a great extent superficial? Whether the Bank be divided into two departments, each presenting a separate account, or its whole business be regarded as one and stated in one account, seems to be rather a trifling question. And the arguments put forward for their several views by the two champions are not strikingly convincing. Sir Edward wants only one account, because he thinks the consequence would be a stronger reserve and fewer changes in bank rate. But a mere change of bookkeeping such as the amalgamation of the two accounts would not make a half-pennyworth of difference to the extent of the Bank's responsibilities and its ability to meet them, and it is on variations in these factors that movements in bank rate are in most cases decided. On the other hand, Lord Cunliffe and his colleagues argue that the main effect of putting the two departments into one would be to place deposits with the Bank of England in the same position as regards convertibility into gold as is now held by the note. On this point Sir Edward's answer is telling: "In reply to this statement, I say that the depositors at the present time can always get gold by drawing out notes from the reserve and taking gold from the Issue Department. There seems to be little difference between the depositors attacking gold direct and attacking the gold through the notes in the reserve. If the Bank cannot pay the notes when demanded the whole machinery stops." Quite so. The notion that the holder of a Bank of England note has now a stronger hold over the Bank's gold than the depositor seems to be baseless. He can exercise his hold more quickly perhaps, though even this is doubtful. Since banknotes are not legal tender at the Bank of England, it is not quite clear that the depositor would even have to take the trouble to go first to the Banking Department for notes and then to the Issue Department for gold. He might be able to insist on gold in immediate payment of his deposit. Still less convincing is the Committee's argument that "the amalgamation of the two departments would inevitably lead in the end to State control of the creation of banking credit generally." Their report might have explained why this should be so, for to the ordinary mind the chain of consequence is not apparent. On the whole it is hard to see much good or harm to be achieved by changing the form of the Bank return. It might make the Bank's position look stronger, but it could not make it really stronger. Nor would it really impair the strength of the note-holder's position as against the depositor, because even now there is no essential difference. It would substitute a more businesslike and simple statement for a form of accounts which is cumbrous and stupid and Early Victorian--a relic of an age which produced the crinoline, the Crystal Palace and the Albert Memorial. On the other hand, to alter a statistical record merely for the sake of simplicity and symmetry is questionable. Unless we are getting more and truer information, it is a pity to make comparisons between one year and another difficult by changing the form in which figures are given. A more essential difference between the two policies lies in Sir Edward's advocacy of a ratio--three to one--between notes and gold, and the Committee's support of the old fixed line system. By the latter, if gold comes in, notes to the same extent can be created, and if gold goes out notes to the amount of the export have to be cancelled. Under Sir Edward's policy the influx and efflux of gold would have an effect on the note issue which would be three times the amount of the gold that came in or went out. This at least is the logical effect of his statement that "the notes should not exceed three times the gold or the cash balance." This law does not seem to be quite consistent with his view that the fixed ratio of gold to notes may be lowered by the payment of a tax; but presumably the tax would come into operation before the three to one part was reached, and at three to one there would be a firm line drawn. On this assumption the Committee's argument is a very strong one. "If," says its report (Cd. 9182, p. 8), "the actual note issue is really controlled by the proportion, the arrangement is liable to bring about very violent disturbances. Suppose, for example, that the proportion of gold to notes is actually fixed at one-third and is operative. Then, if the withdrawal of gold for export reduces the proportion below the prescribed limit, it is necessary to withdraw notes in the ratio of three to one. Any approach to the conditions under which the restriction would become actually operative would then be likely to cause even greater apprehension than the limitation of the Act of 1844." Certainly if, during a foreign drain, for every million of gold that went out, another two millions of credit, over and above, had to be cancelled, it is easy to imagine a very jumpy state of mind in Lombard Street and on the Stock Exchange. Sir Edward and the Committee seem to be agreed as to a limit on the note issue, but of the two limiting systems the old one advocated by the Committee, though apparently more severe, would seem to have much less alarming possibilities behind it. A point on which the commercial world does not seem to have made up its mind, however, is whether there should be a limit at all. Under the old Act there was a limit which could only be passed by a breach of the law. Under the Cunliffe proposal the limit could be passed with the consent of the Treasury. Sir Edward has not told us of what machinery he proposes for the passing of the limit which he lays down; but in view of the great apprehension that an approach to the limit point would, as shown by the Committee, produce, it is clear that there would have to be a way round. In Germany there is no limit; you pay a tax on the excess issue and go on merrily. In America it would seem that the German system has been taken for a model. In his speech on January 29th Sir Edward quoted Senator Robert Owen, who was the principal pioneer of the Federal Reserve Bill through the Senate, as follows:--"The central idea of the system is elastic currency issued against commercial paper and gold, expanding and contracting according to the needs of commerce.... It is of great importance that the volume of these notes should contract when the commerce of the country does not require the notes to be circulation, and the reserve board can require them to be returned by imposing a tax upon the issue.... Under the reserve system a financial panic is impossible. People will not hoard currency nor hoard gold when they know that they can get currency or get gold when required.... America no longer believes a financial panic possible, and therefore the business men, being perfectly assured as to the stability of credits, do not hesitate to enter manufacturing and commercial enterprises from which they would be deterred under old conditions of unstable credit." Well, let us hope the Senator is right and that America is right in believing that a financial panic is no longer possible there. But one cannot help feeling that such a belief may be rather dangerous in the minds of people so ready to take rose-coloured views as our American cousins. The Federal Reserve system has worked beautifully in a period in which American finance has had nothing to do but rake in the enormous profits of American production at the expense of warring Europe and lend part of them, to be spent in America, to the Allied belligerents. It may work equally well if and when the problem to be faced is different, but it will be interesting to see--for those of us who live to see--what sort of a tax will be needed to "require" America, in one of its holiday moods, to return currency that it thinks it needs and the Federal Reserve Board regards as redundant. Another point on which Sir Edward lays great stress, in his attack on the Bank Act of 1844 and the Committee which supports its main principles, is the beauty of the bill of exchange as backing for a note issue, as opposed to Government securities. "There is," he says, "no automatic system for the redemption of currency notes as would be the case if they were issued against bills of exchange, which in due course would have to be paid off." Again, "it seems to me that notes should not be issued against Government securities which may or may not be paid off, but against bills of exchange which must be met at due date." This advantage about a bill of exchange is a very real one to the individual holder who can always put himself in funds by letting the contents of his portfolio "run off"; but is there much in it as a safeguard against excessive issue of currency in times of exuberance? In such times bills that fall due are pretty sure to be replaced by new ones drawn against fresh production--since over-production is a common symptom of commercial exuberance--or against a resale of the goods on which the original bills were based. As long as anyone who can show produce can be certain to get credit and currency, the notion that the maturing of bills of exchange can be relied to restrict currency expansion within safe limits is surely a dangerous assumption. The principle of a fixed limit, to be broken in case of real need, but only after some ceremony has been gone through giving notice of the fact that a crisis has been reached, seems rather to be required by the psychology of speculative mankind. But even if Sir Edward's preference for bills of exchange as backing for notes has all the merits that he claims that is no reason for urging the repeal of the Bank Act to secure their use. Because the Bank Act does not forbid it: it merely says, "there shall be transferred, appropriated and set apart by the said governor and company to the Issue Department of the Bank of England securities to the value of," etc. It is the practice of the Bank to put Government securities into the Issue Department, but the terms of the Act do not compel them to do so, and if an excess issue were needed they would seem to be empowered to put any bills that they discounted into the assets held against the note issue. On the whole the terms of the Act leaving them freedom in the matter, except with regard to the "Government debt" of £11 millions, which is specially mentioned as to be transferred to the Issue Department, seem to be preferable to a special stipulation in favour of bills of exchange. But the most important difference between Sir Edward Holden and the Cunliffe Committee seems to be in their attitude towards the gold reserve and the relation between the Bank of England and the rest of the items that compose the London money market. The Committee, working to restore the conditions which made our market the centre of the world's finance, endeavoured to give back the control of the central gold reserve to the Bank of England by suggesting, among other things, that the other banks should hand over their gold to it. They omitted to discuss the serious question of the greater difficulty that the Bank is likely to find in future in controlling the price of money in the market, owing to the huge size that the chief clearing banks have now reached. But a central gold reserve under central control was evidently the object at which they aimed. Sir Edward will have none of this. He says that if this were done the position of the Joint Stock banks would be weakened, though he does not explain why, since they would obviously hold notes in place of their gold and so would be able to meet their customers' demands, now that the latter are accustomed to the use of notes for pocket money. He points out that "the gold which was held by the Joint Stock banks before the war proved most useful.... At the beginning of the war the banks paid out gold, satisfied the demands of their customers for small currency, and thus eased the situation until currency notes became available." He seems to have forgotten that the banks, or most of them, refused to part with their gold, paid their customers in Bank of England notes which, being for £5 at the smallest, were of little use for pocket money, and so drove them to the Bank to get gold; and we had to have a prolonged bank holiday and a moratorium. Sir Edward is in favour of three gold reserves, one to be held by the Government, one by the clearing banks, and one by the Bank of England. If there were differences between the three controllers of the reserve at a time of crisis the consequence might be disastrous. In view of the admiration expressed by Sir Edward for the new American system which is so clearly based on central control it is rather illogical that he should be so strongly in favour of independence on this side of the water. His opinion is that "the policy of the Joint Stock banks ought to be to make themselves independent of the Bank of England by maintaining large reserves in their vaults." Independence and individualism are a great source of strength in most fields of financial activity, but in view of the great problems that our money market has to face there seems to be much to be said for co-operation and central control, at least until we have got back to a normal state of affairs with regard to the foreign exchanges. XIX TIGHTENING THE FETTERS OF FINANCE _March_, 1919 The New Meaning of Licence--The Question of Capital Issues--Text of the Treasury Regulations--Their Scope and Effect--The Position of the Stock Exchange--Wider Issues at Stake--Should Capital be set Free?--The Arguments for and against--Perils of an Excessive Caution--The New Committee and its Terms of Reference--The Absurdity of prohibiting Share-splitting--The Storm in the House of Commons--Disappearance of the Retrospective Clause--A Sample of Bureaucratic Stupidity. A contrast between liberty and licence is a pleasant alliterative commonplace beloved by political writers, especially those with a reactionary bias. In the light of recent events it seems to be going to take a new meaning. Licence will soon be understood, not as the abuse of liberty, to which democracies are prone, but as a new weapon by which our bureaucracy will do away with liberty by tightening the shackles on our economic and other activities. For imports and exports the licence system is already familiar; if the mines and railways are to be nationalised we may have to be licensed before we can burn coal or go away for a week-end; if the Eugenists have their way a licence will be necessary before we can propagate the species; and before we can get a licence to do anything we shall have to go through an exasperating process of filling in forms innumerable, inconsistent, overlapping and incomprehensible. Finance is the latest victim of this melancholy tendency. Under the guise of an attempt to give greater freedom to it a system has been introduced which makes a Treasury licence necessary, with penalties under the Defence of the Realm Act, for doing many things which have hitherto been possible for those who were prepared to forgo the privilege of a Stock Exchange quotation. Let the story be told in official language, as uttered through the Press Bureau, on February 24th, in "Serial No. C. 10917." "In view of the changed conditions resulting from the conclusion of the armistice, the Treasury has had under consideration the arrangements which have been in force during the war for the control of New Issues of Capital. "The work of scrutinising proposals for new Capital Issues has been performed during the war by the Capital Issues Committee, the object being to refuse sanction for all projects not immediately connected with the successful prosecution of the war. The decisions of the Treasury, taken upon the advice of this Committee, have, however, not had any binding force, beyond what is derived from the emergency regulations of the Stock Exchange, which forbids dealings in any new Issues which have not received Treasury consent. "While it is not possible under existing financial conditions to dispense altogether with the control of Capital Issues, it has clearly become necessary to reconsider the principles upon which sanction has been given or refused in order that no avoidable obstacles may be placed in the way of providing the Capital necessary for the speedy restoration of Commerce and Industry, and the development of public utility services. "In view of the numbers of the proposals for fresh Issues of Capital which are to be expected, it is necessary to provide further machinery for dealing with them and for making the decisions upon them effective. "A regulation under the Defence of the Realm Act has accordingly been made prohibiting all Capital Issues except under licence from the Treasury, and the Capital Issues Committee has been reconstituted with new Terms of Reference, which are as follows:-- "'To consider and advise upon applications received by the Treasury for licences under Defence of the Regulation (30 F) for fresh Issues of Capital, with a view to preserving Capital during the reconstruction period for essential undertakings in the United Kingdom, and to preventing any avoidable drain upon Foreign Exchanges by the export of Capital, except where it is shown to the satisfaction of the Treasury that special circumstances exist.' "It will be an instruction to the Committee that, in order that applications may be dealt with expeditiously and to enable oral evidence to be given in support of them when desired by the applicant, that the Committee should sit by Panels consisting of three members, the decision of the Panels to be subject to confirmation by the full Committee. "All applications for licences most be made, in the first instance, in writing on a Form which can be obtained from the Secretary of the Capital Issues Committee, Treasury, S.W. 1. "Before any application is refused the Committee will give the applicant an opportunity of giving oral evidence in support of his case." The notice then proceeded to recite the terms of D.O.R.A. 30 F, of which more anon. Next day came a supplementary announcement, "Serial No. C 10938," as follows:-- "With reference to the recent announcement in the Press that all applications for Treasury licences must be made in writing on a form obtainable from the Secretary of the Capital Issues Committee, Treasury, S.W. 1, delay will be avoided if intending applicants will state which of the following forms they require:-- "Form No. 1. Issue by a proposed New Company to start a fresh business. "Form No. 2. Issue by an Existing Company (other than for the purpose of capitalising profits). "Form No. 3. Issue by an Existing Company for the purpose of capitalising profits. "Form No. 4. Conversion of a Firm into a Limited Company which does Not involve the introduction of fresh capital. "Form No. 5. Conversion of a Firm into a Limited Company which Does involve the introduction of fresh capital. "If none of the above Forms appears to be applicable (as, e.g., in amalgamations, sub-divisions of shares, etc.), a statement of the facts should be submitted in writing." Before we go on to consider the new regulation, 30 F, let us try to see what is the real effect of the document above quoted. It was evidently intended to be a relaxation of the control of finance. This is shown by the sentence which says that the matter was to be reconsidered "in order that no avoidable obstacle may be placed in the way of providing the capital necessary for the speedy restoration of commerce and industry, and the development of public utility services." And yet it was thought necessary to give legal force and attach penalties to regulations that have worked during the war quite sufficiently well to secure a much stricter control than is now required. The explanation of this apparent inconsistency is probably to be found in the desire of the Government to meet a grievance of the Stock Exchange. Hitherto the only penalty that befell those who made a new issue without getting Treasury sanction was that the securities issued could not be dealt in on the Stock Exchange. The practical effect of this was that those who acted without Treasury sanction could only issue securities subject to this serious drawback, and so an effective but not altogether prohibitive bar was put on the process. If this bar was not strong enough in war-time it ought clearly to have been strengthened long ago; if it was strong enough, then why should it be strengthened now? From the Stock Exchange point of view it is easy to make out a good case for working through licence and penalty rather than through the banning, of the securities effected, from sanction for dealings. By thus being used as an official weapon the Stock Exchange penalised itself and its members. By saying "no security not sanctioned by the Treasury shall be dealt in here," its Committee restricted business in the House and drove it outside. This grievance was obvious and was plentifully commented on during the war. If the Committee had pressed the point vigorously it could probably have forced the Government long ago to abolish the grievance by making all dealings in new issues that appeared without Treasury sanction illegal and liable to penalty. A patriotic readiness to fall in with the Government's desires was probably the reason why the Stock Exchange refrained from embarrassing it, during the war, by too active protests against a grievance that was then more or less real; though it should be noted that even if the grievance had been amended, the Stock Exchange would not necessarily have got any more business, but would only have succeeded in stopping a very moderate amount of business that was being done by outsiders. But when all is said that can be said for the justice of the case that can be made by the Stock Exchange, the question still arises whether it was advisable, at a time when relaxation of restrictions was desirable in the interests of the revival of industry, to draw tighter bonds which had been found tight enough to do their work. That the Stock Exchange should suffer from limitations from which outside dealers were exempt was certainly a hardship. On the other hand, since the armistice there has been a considerable expansion in Stock Exchange business. Oil shares, Mexican securities, industrial shares, insurance shares, and others in which capitalisation of reserves and bonus issues have been used as an effective lever for speculation, have enjoyed spells of considerable activity. With this revival in progress, in spite of many obvious bear points, such as industrial unrest at home, Bolshevism abroad, the continuance of heavy expenditure by the Government, and the hardly slackened growth of the national debt, it seems to have been scarcely necessary in the interests of the House to have made regulations which, though perhaps demanded by abstract justice, imposed new ties on enterprise at a time when complete freedom, as far as it was consistent with the best interests of the country, was most of all desirable. How far, we have next to ask, is it necessary for the best interests of the country to restrict the freedom of capital issues? If we look back at the terms of reference under which the reconstituted Committee is to work, we see that the officially expressed objects are (1) preserving capital for essential undertakings in the United Kingdom, and (2) preventing any avoidable drain upon Foreign Exchanges by the export of capital. There is certainly much to be said for both these objects. When we lend money to foreigners we give them the right to draw on us now in return for their promises to pay some day; in other words, we make an invisible import of foreign securities, and in the present state of our trade balance all imports, whether visible or invisible, need careful watching. It is also very evident that at a time when capital is scarce there is much to be said for keeping it for essential industries, especially those which produce necessaries and goods for export, and not allowing it to be swept up by borrowers who are going to devote it to making expensive fripperies on which big profits are probable. There remains a very big other side to both these questions. All over the world there is a demand for goods which have not been produced, or only in greatly reduced quantities, during the war. This demand is only effective in so far as willing buyers can pay; some of them have the needful cash in hand or waiting in London or elsewhere to be drawn on, but a great number of would-be buyers want to be financed, and will have to be financed by somebody if the needs that they feel are to be translated into actual purchases. In other words, in order that the wheels of industry are to be set turning as fast as they might, if they had a full chance, somebody has to lend freely. Now, it is surely most of all important in the national interest that those wheels should begin spinning as fast as possible, and the question is whether we are more likely to serve that interest best by keeping a meticulous eye on the course of exchange and buttoning up our pockets to foreign borrowers or by leaving capital free to seek its market, knowing that every time we give the foreigner the right to draw on us we stimulate our export trade, because his drawing must finally mean a demand on us for something--goods, securities or gold--and goods are what people are in these times most anxious to take. If we are going to leave all the financing to be done by America and fear to import promises to pay lest they should be followed by demands on our gold, shall we not be rather in the position of Barry Lyndon, who was given a gold piece by his mother when he went out into the world, with strict injunctions always to keep it in his pocket and never to change it? Regard for our gold standard is most necessary, but the gold standard is not an end in itself, but merely an important part of a machine which only exists to serve our industry. If we are so careful of the machine, which is a mere subsidiary, that we check the industry which it is there to serve, we shall be like the dandy who got wet through because he had not the heart to unfurl his beautifully rolled-tip umbrella. Again, it looks very sound and sensible to keep capital for purposes that are essential, but, on the other hand, it is so enormously important to set industry going as fast as possible that almost any one who will do anything in that direction is entitled to be given a chance. In war-time, when labour and materials were so scarce that they could not turn out all the munitions that were necessary, such a restriction was clearly inevitable. Now, when labour and materials are becoming more plentiful, and the scarce commodity is the pluck and enterprise that will take the risks involved by getting to work on a peace basis, it may be argued that any one who will take those risks, whatever be the stuff or services that he proposes to produce, should be encouraged rather than checked. It is again a question of the balance of advantage. If we are going to be so careful in seeing that capital is not put to a wrong use that we take all the heart out of those who want to make use of it, we shall do more harm than good. If by leaving capital free to go into any enterprise that it fancies we can give a start to industry and promote a spirit of courage and enterprise among its captains, it will be well worth while to do so at the expense of seeing a certain amount of capital going into the production of articles that the community might, if it made a more reasonable use of its purchasing power, very well do without. The same question arises when we consider the desire of the Government, not expressed in the above statement, but very freely admitted by Mr Bonar Law, in discussing it in the House of Commons, to keep capital to be lent to it rather than expended in, perhaps unnecessary, industry. Here, again, it is clearly in the interest of the taxpayer that Government loans should be raised on the most favourable terms possible. But if, in order to do so, we starve industry of capital that it needs, and so check the production on which all of us, Government and citizens alike, ultimately have to live, we shall be scoring an immediate advantage at the expense of future progress--spoiling a possibly brilliant break by putting down the white ball for a couple of points. There is thus a good deal to be said for setting capital free, before we have even arrived at the most serious objection to regulating it under Treasury licence. This objection is the exasperation, delay and uncertainty involved by this control. Even if we had an ideally wise and expeditious body to decide about capital issues it might not be the best thing to set it to work. But when we remember that in order to see that the wrong sort of issue is not made, all issues will have to pass through the terribly slow-working process of official selection before the necessary licence is finally granted, it begins to look still more likely that we should do well to run the risk of letting a few goats through the gate, rather than keep all the sheep waiting outside for months, with the probable result that many of them may lose altogether their chance of final salvation. It will be noted from the official statement that the arbitrary methods of the old Committee are to be modified. It has long been a by-word among those who had dealings with it; they abused it in quite sulphurous language and were wont to quote it as an example of all that bureaucratic tyranny is and should not be, thereby doing some injustice to our bureaucrats, seeing that the Committee was manned not by officials but by business men, clothed _pro hac vice_ in the thunder of Whitehall. The new Committee is to sit by panels of three, so as to expedite matters, and so as to allow applicants the privilege of giving oral evidence. This is an innovation that will save some exasperation, but it will hardly accelerate matters, especially as the decision of the panels will be subject to confirmation by the full Committee, so that all the work will have to be done twice over. There is thus much reason to fear that delay, so fatal in business matters, will be an inevitable offspring of the efforts of the new Committee, and the list of different forms on which applications are to be made, given above, shows that all the paraphernalia of red tape will dominate the proceedings. Now for the terms of the new Regulation under the Defence of the Realm Act. "1. The following regulation shall be inserted after Regulation 30 EE:-- "30 F. The following provisions shall have effect in respect of new capital issues and to dealings in securities issued for the purpose of raising capital: "(1) No person shall, except under and in pursuance of a licence granted by the Treasury-- "(a) issue, whether for cash or otherwise, any stock, shares or securities; or "(b) pay or receive any money on loan on the terms express or implied that the money is to be or may be applied at some future date in payment of any stock, shares or securities to be issued at whatever date to the person making the loan; or "(c) sub-divide any shares or Debentures into shares or Debentures of a smaller denomination, or consolidate any shares or Debentures of a larger denomination; or "(d) renew or extend the period of maturity of any securities; or "(e) purchase, sell or otherwise transfer any stock, shares or securities or any interest therein, or the benefit of any agreement conferring a right to receive any stock, shares or securities, if the stock, shares or securities were issued, sub-divided or consolidated, or renewed or the period of maturity thereof extended, or the agreement was made, as the case may be, at any time between the 18th day of January, 1915, and the 24th day of February, 1919, and the permission of the Treasury was not obtained to the issue, sub-division, consolidation, renewal or extension or the making of the agreement, as the case may be. "(2) No person shall except under and in pursuance of a licence granted by the Treasury-- "(a) buy or sell any stock, shares or other securities except for cash or when the purchase or sale takes place in any recognised Stock Exchange, subject to the rules or regulations of such exchange. "(b) buy or sell any stock, shares or other securities which have not remained in physical possession in the United Kingdom since the 30th September, 1914. "(3) A licence granted under this regulation may be granted subject to any terms and conditions specified therein. "(4) If any person acts in contravention of this regulation, or if any person to whom a licence has been granted under this regulation subject to any terms or conditions fails to comply with these terms or conditions, he shall be guilty of a summary offence against these regulations. "(5) In this regulation the expression 'securities' includes Bonds, Debentures, Debenture stock, and marketable securities." It will be seen at once that the terms of this document, on any interpretation of them, go far beyond the intentions expressed in what may be called the official preamble and in the new Committee's terms of reference. One of the clauses seems, with all deference to its august composers, to be merely silly. This is (1)(c) forbidding sub-division of securities. If a £10 share is split into ten _£1_ shares this operation cannot make the smallest difference to the supply of capital for essential industries or cause any drain on the Foreign Exchanges. I am assured by those who have delved into the official intention that the reason for the objection of the old Committee to splitting schemes, on which this new prohibition is based, was that splitting made shares more marketable and popular and so more likely to compete with War Bonds. But a mere sale of shares, split small and so popularised, does not absorb any capital. That only happens when, money is put into some new form of industry. If A, who holds ten £20 shares, is enabled to dispose of them to B because they are split into 200 £1 shares, then, A instead of B has got the money and has to invest it in something. The amount of capital available for investment is not diminished by a halfpenny. This regulation is just a piece of short-sighted tyranny which exasperates without doing the smallest good to anybody. More serious, however, was clause (1)(e) under which any securities that have been issued, split, consolidated or renewed without Treasury sanction since January, 1915, were not to be dealt in, in future, without a licence. The result of this clause, if it had stood, would have been that all loans under which such securities had been pledged would have had to be called in because the collateral became unsaleable, except after all the ceremonies had been gone through and a licence had been got. It was also possible to argue that the prohibition to renew or extend the maturity of any security meant that no loans of any kind could be renewed, and that no commercial bills could be renewed, without a licence. It is true that No. 5 paragraph says what the expression "securities" includes, but it does not state definitely that bonds, Debentures, Debenture stock and marketable securities are the only things included. It was a pretty piece of drafting, and raised a pretty storm in the House of Commons on February 27th, when a somewhat lurid picture of its effects was drawn by Sir H. Dalziel and Mr Macquisten. Mr Chamberlain not being then legally a member of the House, it fell to the lot of Mr Bonar Law to explain that the Government had really meant to give greater freedom, in making new issues, that the evils anticipated had not been intended, that he hoped the House would not judge the Government too harshly for not making unsanctioned issues illegal from the beginning, and that a new Order would be issued removing the retrospective effect of the new regulation. And so amendment was promised of a measure which would have had very awkward and unjust effects. It may be argued that it would only have affected people who had done, during the war, what they were asked not to do, namely, make issues without Treasury sanction. If the old Committee had been a reasonable and expeditious body this argument would have had great weight. But, in view of its caprices and dilatoriness, there was a good deal of excuse for those who decided to do without Treasury sanction and take the consequence of being unable to market their securities on the Stock Exchange. To propose to add a new penalty and cause the cancelling of all the financial arrangements made in connexion with such issues during four years was simply piling blunder on blunder. Luckily, the protests of the Government's own supporters sufficed to undo the worst of the mischief; but the whole affair is only another argument in favour of the earliest possible ridding of finance and industry from control that is so clumsily exercised. XX MONEY OR GOODS?[1] _December_, 1918 [Footnote 1: This was the latter of two articles contributed to the _Times Trade Supplement_ in answer to a series in which Mr Arthur Kitson had attacked our banking and currency system suggested an inconvertible paper currency.] "Boundless Wealth"--Money and the Volume of Trade--The Quantity Theory--The Gold Standard--How is the Volume of Paper to be regulated?--Mr Kitson's Ideal. In the November _Trade Supplement_ an endeavour was made to answer Mr Kitson's rather vague and general insinuations and charges against our bankers concerning the manner in which they do their business. Now let us examine the larger and more interesting problem raised by his criticism of our currency system. In his article in the June _Supplement_ he told us that "if the British public had any grasp of the fundamental truths of economic science they would know that a future of boundless wealth and prosperity is theirs." This is a cheery and encouraging view and, let us hope, a true one. But, that boundless wealth can only be got if we work for it in the right way. Can Mr Kitson show it to us, and what are these "fundamental truths of economic science"? It is easier to talk about them than to find any two economists who would give an exactly--or even nearly--similar list of them. Mr Kitson glances "at a few elementary truths." "Wealth," he says, "is the product of two prime factors, man and Nature, generally termed labour and land. With an unlimited, or practically unlimited, supply of these two factors, how is it that wealth is and has been hitherto so comparatively scarce?" But is the supply of "man" unlimited in the sense of man able, willing, and properly trained to work? And is the supply of "Nature" unlimited in the sense of land, mines, and factories fully equipped with the right machinery and served and supplied by adequate means of transport? Surely the failure In production on which Mr Kitson so rightly lays stress is due, at least partly, to lack of good workers, good organisers, good machinery, and good transport facilities. Workers who restrict output, employers who despise science and cling to antiquated methods, the opposition of both classes to new and efficient equipment, and large tracts, even of our own land, still without reasonable transport facilities, have something to do with it. And lack of capital--this answer to the question Mr Kitson flouts because, he says, "since capital is wealth," to say that "wealth is scarce because capital is scarce is the same as saying that wealth is scarce because it is scarce." But is it not a "fundamental truth of economic science" that capital is wealth applied to production? Wealth and capital are by no means identical. When a well-known shipbuilding magnate laid waste several Surrey farms to make himself a deer-park, the ground that he thus abused was still wealth, but it is no longer capital because it has ceased to produce good food and is merely a pleasant lounging-place for his lordship. May not the failure of production be partly due to the fact that, owing to the extravagant and stupid expenditure of so many of the rich, too much work is put into providing luxuries--of which the above-mentioned deer-park is an example--and too little into the equipment of industry with the plant that it needs for its due expansion? Mr Kitson's answer is much easier. According to him, instead of working better, organising better, and putting more of our output into plant and equipment and less into self-indulgence and vulgarity all that we have to do to work the necessary reform is to provide more money and credit. Since, he says, under the industrial era-- "All goods were made primarily for exchange or rather for sale ... it followed, therefore, that production could only continue so long as sales could be effected; and since sales were limited by the amount of money or credit offered, it followed that production was necessarily limited by the quantity of money or credit available for commercial purposes." But is this so? If goods are produced more rapidly than money, it does not follow that they could not be sold, but only that they would have been sold for less money. The producer would have made a smaller profit, but on the other hand the cheapening of the product would have improved the position of the consumer, the cheapening of materials would have benefited the manufacturer, and it is just possible that production, instead of being limited, might have been stimulated by cheapness due to scarcity of currency and credit, or, at least, might have gone on just as well on a lower all-round level of prices. On the whole, it is perhaps more probable that a steady rise in prices caused by a gradual increase in the volume of currency and credit would have the more beneficial effect in stimulating the energies of producers. But Mr Kitson's argument that the volume of currency and credit imposes an absolute limit on the volume of production is surely much too clean-cut an assumption. This absolute limit may be true, if currency cannot be increased, with regard to the aggregate value in money of the goods produced. But money value and volume are two quite different things. If our credit system had not been developed as it has, and we had had to rely on actual gold and silver for carrying on all production and trade, it does not by any means follow that trade and production might not have been on something like their present scale in the matter of volume and turnover; but the money value would have been much smaller because prices would have been all round at a much, lower level. This contention is based on what is called the "Quantity Theory of Money." This theory Mr Kitson wholeheartedly believes, so that this is not a point that has to be argued with him. "The value of money," he says, "as every student of economics knows, is determined by the quantity of money in use and its velocity of circulation." Quite so. If you increase the amount of money faster than that of goods, more money has to be given for less goods; the value, or buying power, of money is depreciated and prices go up. The present war has given an excellent example of this process at work. All the warring Governments have printed acres of paper money, and have worked the credit system with profligate energy; and so we have a huge increase in currency and credit, along with little or no increase (probably a decrease) in consumable goods, and prices have soared like rockets all over the world. In neutral countries the rise has been as bad as anywhere, because the neutrals have been choked with the gold that the warring Powers exported, putting paper in its place. So we see that the volume of money, on the theory so emphatically expounded by Mr Kitson and endorsed by common-sense--as long as we are careful to include all forms of money that are taken in exchange for goods in the definition--reflects itself at once in prices. If money does not increase in quantity and goods do, then prices go down, and after the necessary adjustments are made in rates of wages and salaries, a larger trade can be done with the same amount of money at a lower level of values. The volume of money thus limits the aggregate value of trade, but not its aggregate volume. Periods of falling prices are not encouraging to producers, and they put too much advantage into the hands of the _rentier_--the man who lives on fixed interest; on the other hand, they are generally believed to be in favour of the working classes, since reductions in wages generally lag behind the fall in prices, which means increased buying power to the wage-earner. Mr Kitson's view that the volume of trade is limited by the quantity of currency and credit is thus based on confusion between volume and value. Moreover, it follows also from the "Quantity Theory of Money," which he holds, that if he applies his remedy and multiplies currency and credit as fast as he appears to want to, the result will be a still further depreciation in the buying power of money, and a further rise in prices and an increase in all the bitterness, discontent, suspicion, and strikes that the rise in prices has already caused during the war. Is this a prospect to pray for? Surely if we want to enjoy "boundless wealth and prosperity" the way to do so is to turn out goods--things to eat and wear and enjoy--and not to multiply money, thereby merely depreciating its value, on Mr Kitson's own admission. He thinks that "nothing but an abundant supply of currency in the shape of legal tender notes and bank credit, could have enabled us to undertake successfully such unprecedented burdens" as we have borne during the war. But it may equally well be argued that we have borne these burdens because we worked harder than ever before to turn out the needed stuff, organised better, used our machinery to its full power, and spent less of our product on luxuries; and that the abundant currency, by forcing up prices, immensely increased the cost of the war and produced industrial friction which several times brought us unpleasantly close to disaster. Mr Kitson, however, uses the "Quantity Theory of Money"--the doctrine that the value or buying power of money varies according to its quantity in relation to that of the goods that it buys--chiefly as a stick wherewith to beat the Gold Standard. He shows, very easily and truly, that it is absurd to suppose that the value of the monetary gold standard is invariable. Thereby he is only beating a dead horse, for no such argument is nowadays put forward. The variability of the gold standard of value is acknowledged, whenever a fluctuation in the general level of commodity prices is recorded. But gold is the basis of our credit system, and of those of all the economically civilised countries of the world, not because its value is believed to be invariable, but because it is the commodity which is universally accepted, in such countries and in normal times, in payment of debts. This quality of acceptability it has got largely by custom and convention. Mr Kitson speaks of the "selection of gold by the world's bankers as the basis for money and credit." But it was selected as currency by common custom long before bankers were heard of. And it was selected because of its permanence, ductility and other qualities, especially its beauty as ornament, which made man, eager to adorn himself, his women-kind, and the temples of his gods, always ready to accept it in payment, knowing also that, because of this acceptability, he would always be able to exchange it into any goods that he wanted. Any other commodity that earned this quality of universal acceptability could do the work of gold just as well. But until one has been found, gold, as long as it keeps that quality, holds the field. And bankers use it as the basis for money and credit, not because, as Mr Kitson says, they selected it owing to its scarcity, but because this quality of universal acceptability made it the thing in which all debts, both at home and abroad, could be paid. "Given," says Mr Kitson, "a self-contained trading community with a certain quantity of legal tender, just sufficient for its commercial needs, and it makes no difference either to the value or efficiency of the money or to the trade affected whether it be made of metal or paper." Quite so, but trading communities are not self-contained. Their currency has to be convertible into something acceptable abroad, and that something is, at present, gold. It is possible that the world may some day evolve an international paper currency that will be everywhere acceptable. But such an ideal requires a growth of honesty and mutual confidence among the nations that puts it a long way off. And how is its volume to be regulated? This question is all-important, whether the currency be national or international. Mr Kitson speaks of a currency "just sufficient" for the community's commercial needs. Who is to decide when the currency is just sufficient? The Government? A sweet world we should live in, if among other party questions, Parliament had to consider multiplying or contracting the currency every year or every month, with all the interests that would be affected by the consequent rise or fall in prices, lobbying, speech-making, and pulling strings to work the oracle to suit their pockets. And, according to Mr Kitson's view, that the volume of trade is limited by the supply of currency, this volume would then depend on the whims of the House of Commons, half the members of which would probably be innocent of a glimmering of understanding of the enormously important question that they were deciding. The gold standard, which makes the course of prices depend, more or less, on the chances of digging up a capricious metal from the bowels of the earth, has its obvious drawbacks; but it is a clean and sensible business compared with making them depend on the caprices of Parliament, complicated by the political corruption that would be only too likely to follow the putting of such a question into the hands of our elected and hereditary representatives and rulers. Such, however, seems to be the Promised Land to which Mr Kitson wants to lead us. Thus he propounds his remedy. "The remedy is surely obvious. Divorce our legal tender from its alliance with gold entirely, so that the supply of money and credit for our home trade is no longer dependent upon our foreign trade rivals. Base our currency upon the national credit ... treat gold as a commodity only, for the settlement of foreign trade balances." This passage in his article in the September _Supplement_ tells us what to do. Keep gold, out of deference for foreign prejudice, for the settlement of foreign trade balances, but make as much paper money as you like for home use. As our legal tender money is to be "divorced entirely from its alliance with gold" it clearly cannot be convertible into gold. So that apparently we shall have a paper pound and a gold pound (the latter for foreign use) with no connection between them. This stage of economic barbarism has been left behind now even by some of the South American republics. The paper pound, based on the national credit, can be multiplied as fast as our legislators think fit. If they do not multiply it fast enough, Mr Kitson will tell them that they are strangling trade, because the volume of production is limited by the amount of money available. At the same time bank credits will be multiplied indefinitely because, as was shown in the November _Supplement_, Mr Kitson supports a view that the average business man holds (according to him) that he ought to have a legal right to as much credit as he wants. With the Government printing paper to please its supporters, with the banks obliged by law to give credit to every one who asks for it, and with prices soaring on every addition to currency and credit, what a country this will be to live in, and what a life will be led by those who have to compile and work out the index numbers of the prices of commodities! Some of us, perhaps, will prefer the jog-trot conservatism of Lord Cunliffe's Currency Committee, who in their recently issued report[1] (which every one ought to read) recommend that gold should not be used for circulation at present, but that endeavours should be made towards the cautious reduction of our swollen paper currency, and that its convertibility into gold should be maintained. [Footnote 1: Cd. 9182, _2d_.] INDEX Addis, Sir Charles, on banking, Aërated Bread Co., and bonus issues, Allies, loans to, America, effect of war on, War finance of, Bank Act: its purpose, Its suggested repeal, Its working, Bank Amalgamations, progress of, Bechhofer, Mr, on Guild Socialism, Bills of Exchange, as basis of issue, Bonar Law, Mr, on after-war position, On capital levy, On sale of securities, British Trade Corporation, formation of, Brunner, Mond, and bonus shares, Budget, in 1918, Canadian Pacific, and bonus issues, Capital, foreign, Levy on, Meaning of, Supply of, War's destruction of, Capital Issues, Committee on, Licence required for, Need to restrict, Stock Exchange and, Cole, Mr, on Guild Socialism, Cunliffe Committee, report of Currency: inflation of, International, Metals as, Origin of, Quantity theory of, Report on, _Daily News_, on capital levy, Expenditure, Committee on, France, after-war position of, Free Trade and British supremacy, Germany, after-war position of, Our claims against, War finance of, Gold standard: affected by war, Faults of, Reasons for, Goodenough, Mr, on note issue, Hoare, Mr Alfred, on taxation, Holden, Sir Edward, and the Bank Act, Inflation, working of, Interest, rate of, Kitson, Mr, on currency, Labour, example set by, Lawrence, Mr Pethick, on capital levy, Lees, Mr Edward, on debt redemption, Lloyds, elasticity of, London, prestige of, Macaulay, Lord, on bad money, _New Statesman_, on capital levy, Owen, Senator, on American system, "Quantity Theory," of currency, Reserves, capitalising, _Round Table_, on capital levy, Socialism, and bank amalgamations, In light of war, Guild, Stilwell, Mr, on paying for war, Taxation, as war weapon, Increase of, in war, "War Emergency Workers," on capital levy, Webb, Mr, on State banking, 
60029	----	[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, 1913, 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 7 SECOND NIGHT. What Is Money? 26 THIRD NIGHT. What Is Currency? 46 FOURTH NIGHT. Bank Credit Currency 62 FIFTH NIGHT. What Is Exchange? 84 SIXTH NIGHT. Value, Price, Wealth, Property, Credit 101 SEVENTH NIGHT. Commercial Credit, Land Credit, Government Credit 118 EIGHTH NIGHT. Colonial Credit Money 144 NINTH NIGHT. United States Notes or Greenbacks 173 TENTH NIGHT. Reserves 195 ELEVENTH NIGHT. The Bank 224 TWELFTH NIGHT. Land Credit Bank 248 THIRTEENTH NIGHT. The Clearing House 289 FOURTEENTH NIGHT. Banking in 1860 340 FIFTEENTH NIGHT. Outline of Bill 368 SIXTEENTH NIGHT. Draft of Bill 405 SEVENTEENTH NIGHT. Aldrich Plan and Plot Exposed 459 [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 6,000 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 360 white beads worth sixty pence the fathom. In 1648 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 12d. only. In 1641 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 31, 1619, and the first law passed was one fixing the price of tobacco 'at three shillings the beste, and the second sorte at 18d. the pounde.' Tobacco was already the local currency. In 1642 an act was passed forbidding the making of contracts payable in money, thus virtually making tobacco the sole currency. "The Act of 1642 was repealed in 1656, but nearly all the trading in the Province continued to be done with tobacco as the medium of exchange. "In 1628 the price of tobacco in silver had been 3s. 6d. per pound in Virginia. The cultivation increased so rapidly that in 1631 the price had fallen to 6d. 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 1,500 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 1639 it was only 3d. It was now enacted that half of the good and all of the bad should be destroyed, and that thereafter all creditors should accept 40 lbs. for 100; that the crop of 1640 should not be sold for less than 12d., nor that in 1641 for less than 2s. 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 1645 tobacco was worth only 1-1/2d. and in 1665 only 1d. 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 1666 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 1683 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, 1684, 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 1727 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 1734 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 10s. per pound. In 1631 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 10s. 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 1635 musket balls were made receivable to the extent of 12d. in one payment. "In 1640 Indian corn was made current at 4s. per bushel, wheat at 6s., rye and barley at 5s., and peas at 6s. 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 1654 it was ordered that no coin should be exported, except 20s. 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 10 per cent of the collections. A constable once collected 130 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 1670 it was ordered for the first time that contracts made in silver should be paid in silver. "In 1675, during King Philip's war, the need of metallic money for public use was so great that a deduction of 50 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, 1634, 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 8 florins per skin. As 5 wampum beads were equal to 1 stiver and 20 stivers to 1 florin, and 8 florins to 1 skin, the ratio of wampum to beaver was 960 to 1. 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 1656, Director Stuyvesant wrote to the company urging that beaver be rated at 6 florins instead of 8, and wampum at 8 for a stiver instead of 6, as these rates were nearer the commercial values. "In 1719 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 1,200,000 pounds of rice was levied, and commissioners were appointed to issue rice orders to public creditors, in anticipation of collection, at the rate of 30s. per 100 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, 1723.' "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 9, 1848, it was resolved by unanimous vote that $16 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 $50, called 'slugs,' and afterwards those of $20 each. This was done in 1851; the San Francisco mint was not ready till 1854. The Moffat coins continued to circulate after the mint had gone into operation, since everybody had confidence in their goodness. It is estimated that $50,000,000 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 $3,300,000 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 1774, but not until 1816 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 1853, 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 1853, and not until February 12, 1873, 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 '73, about which the men now wearing gray hair, or no hair, heard so much in the '80's and early '90's. Yes, we were hearing this as late as 1896, 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 1873. 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 1890 that the amount of gold accumulated was approximately $4,000,000,000 (four thousand million dollars). The amount of gold produced during the last twenty-two years, or since 1890, by all the countries of the world approximates $6,500,000,000 (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 $1,500,000,000 (one thousand five hundred million dollars). A deduction should also be made for what has been absorbed by India, about $700,000,000 (seven hundred million dollars), and also by Egypt, about $200,000,000 (two hundred million dollars), or nearly $1,000,000,000 (one thousand million dollars), by these two countries. The Director of the Mint in his report, Page 53, 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 1910 to $47,026,698. "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 14, 1911, reported the net imports of gold by India since 1840 at about $1,200,000,000, 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 1900. For the ten-year period, 1890-1899, the net imports plus the country's own production were $135,800,000; for the eleven years, 1900-1910, they aggregated $433,800,000. For the British fiscal years ended March 31, 1911, they amounted to $90,487,000, 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 31, 1911, 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 $58,670,000, and in the second period, $146,660,000. For the year 1910 they were $30,000,000. "Some light is shed upon the situation by the following statement in an address by Lord Cromer, made in London, in 1907: "'A little while ago I heard of an Egyptian gentleman who died leaving a fortune of £80,000 [$400,000], the whole of which was in gold coin in his cellars. Then, again, I heard of a substantial yeoman who bought property for £25,000 ($125,000). 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 £5,000 ($25,000) 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 $4,000,000,000 (four thousand million dollars), in addition to what we had in 1890, making a total of $8,000,000,000 (eight thousand million dollars). Of this total amount the United States has $1,800,000,000 (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 $3,000,000,000 (three thousand million dollars). MR. BANKER: How do you make that out? MR. LAWYER: The banking resources of the entire world are now about $55,000,000,000, while those of the United States are about $25,000,000,000, 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 $3,200,000,000. While, as I have just said, it is true that there have been no discoveries of new fields since 1890, 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 1890, when Messrs. McArthur and Forrest brought the modern perfected Cyanide process prominently before the mining world, the output of gold has amounted to 284,081,289 fine ounces. This is a most astonishing showing, especially when compared with a total output of 401,311,148 fine ounces for the entire 397 years previous from 1493 to 1890, 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 1890 the banking resources of the world were estimated at $16,000,000,000, less than one-third of what they are today. That is, the banking resources have trebled since 1890, 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 $450,000,000 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 1896, 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 1890. 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: 1. The Trusts, 2. The Middleman, 3. Advertising, 4. Unscientific Management, 5. Overcapitalization, 6. Monopoly! Monopoly! 7. Extravagance, 8. Militarism, 9. Exhaustion of Soil, 10. High Rates of Interest on Agricultural Loans, 11. Unnecessary Disease, 12. Concentration of Population in Cities, 13. Shorter Hours by one-quarter, 14. Increased Wages by one-quarter at least; in some instances, 150%, 15. Shorter Hours for Women, 16. Child Labor Laws, 17. Minimum Wage Laws, 18. Workmen's Compensation Acts, 19. Insurance Against Unemployment, 20. 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. 21. During the past ten years, 10,000,000 of our people have shifted, or gone, from the country to the cities. Food producers have decreased, and food consumers have increased by 10,000,000. Our population has increased 47% and our food products only 30% since 1890. 22. 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. 23. 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 $40,000,000, although her business has expanded enormously. England took only $30,000,000, while France took $300,000,000, Russia $200,000,000, and we absorbed $1,100,000,000. During the same time India took $433,000,000. 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 $16,000,000,000 to over $55,000,000,000, or increased three and one-half times, the gold for monetary purposes has only doubled, or increased from $4,000,000,000 to $8,000,000,000. 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 1862, 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 $5.00._" 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 $5.00 United States Note, by which you agree to pay me $5.00 cash, can't be the $5.00 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 1862 until 1879, for about seventeen years, and he came within an ace of flunking again in 1894. 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 $5.00 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: $346,000,000. 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 $346,000,000, then that $5.00 United States Note would not pass for $5.00. MR. BANKER: Precisely so; that very note passed for only $1.75 at one time in 1864, or only 35 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 $5.00._" 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 $5.00. 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 412-1/2 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 1 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 .0011890. 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 .0026743. Here is a 10 cent piece, worth about 4 cents, or .04456, and here is a 25 cent piece, worth about 11 cents, or .11141. Here is a 50 cent piece, worth about 22 cents, or .22283. Here is the sacred dollar of our daddies, worth about 47 cents, or .47651. 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 47 cents. In 1902 it was worth 40 cents. In other words, our silver dollar is not its own redeemer at 100 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 50, 25, 10 and 1 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 5 cents. MR. LABORINGMAN: And it would take a telescope to find a piece of gold worth only 1 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 1691 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 1693, 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 1805." 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 100 cents, they would circulate at their metal or bullion value, or at about 47 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 100 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 1, 1879, the date Uncle Sam redeemed his promise to pay gold for them, was simply a quotation of the government credit. This credit ranged from $1.00 to 35 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 1864 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 1,659,000,000 meal tickets out, and only 150,000,000 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 1,659,000,000 and that I had on hand only 150,000,000 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 $346,000,000 of United States Notes to pay. You have also $563,000,000 Silver Dollars to redeem, and there are $750,000,000 National Bank Notes, making a total of $1,659,000,000, all resting on your $150,000,000 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 5% 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 $563,000,000 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 $2.00 bills; that is, the $2.00 bill, the $1.00 bill, 50, 25, 10 and 5 cent pieces? MR. BANKER: There are in circulation today about $400,000,000 of these various forms of subsidiary or token coins, or about $4.00 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, $563,000,000 of silver dollars and $147,000,000 of silver pieces less than one dollar, or a total of $710,000,000. 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 200,000,000 of people; for you say we have all told $710,000,000 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 $1,850,000,000 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 $20 gold coin, if as pure, is worth just as much as a $20 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 25,000. 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 $1,000, and the bank upon receiving your check for $1,000 could convert that book account, or book debt, into a note account, or note debt, by giving you its bank notes for $1,000, 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 15 per cent reserve, if a National Bank, or $150 in cash against that deposit of $1,000. The interest on that $150 for one year at 6 per cent would be $9. Now, if that deposit were convertible into notes, and you kept the same reserve of 15 per cent against them, the thousand dollars in notes would cost only $9 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 $346,000,000 United States Notes and $750,000,000 of bond-secured Bank Notes, or about $1,100,000,000 in all. Now, since any bank must pay par, or 100 cents on the dollar, to get possession of either of these forms of currency, the cost of carrying either of them will be 6 per cent on the total of $1,100,000,000, or $66,000,000 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 $66,000,000 a year, or $55,000,000 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 20 per cent, not 15 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 $53,000,000, 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 $1,000 more currency than it has on hand to accommodate a customer. You would have to go out and buy it, and pay $1,000 for it, or obligate your bank to do so. With interest at 6 per cent it would average $60 per year to carry it, but if you could exchange your bank's notes, amounting to $1,000, for your customer's note of $1,000, and carry a reserve against your bank notes outstanding of say 20 per cent or $200, and interest is at 6 per cent, it would cost you only 6 per cent on $200, instead of 6 per cent on $1,000; or you would make a saving of $48 on the $1,000 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 $48 a thousand on $1,100,000,000, we are wasting annually on that one item alone $52,800,000. 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 1907, 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 1907. Gentlemen, instead of the panic of 1907 costing us $53,000,000 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 $346,000,000, 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 35 cents on the dollar during the war, and again they came within an ace of wrecking your credit in 1894 when the gold in the treasury went down, down and down, until there was only $41,000,000 left, between you and national dishonor. Don't you remember that you then sold $262,000,000 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 1879 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 $100,000,000 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 $100,000,000 to the other $262,000,000 you have issued since to protect your credit against these United States Notes, you will find that you have issued altogether $362,000,000 of your bonds, or $16,000,000 more than the total amount of the greenbacks, $346,000,000, and that you have also obligated yourself to pay interest on these bonds from first to last amounting to $362,000,000 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 1879, 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 29, 1908, Page 5638, that showed that, if the greenbacks had been funded on the 1st day of January, 1879, into 4 per cent 30 year bonds, and canceled and destroyed, the total cost to the Government for principal and interest to July 1, 1907, would have been $741,897,340, whereas the total cost and liability actually incurred on account of them has been $1,081,881,562; the difference in favor of converting into bonds being $339,984,222. 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 1879, you would not only have saved $340,000,000 by so doing, but that today there would be in the United States in our banks, and in circulation among the people, $346,000,000 more gold than we now have. In other words, instead of our gold amounting to $1,850,000,000, it would now amount to $2,196,000,000. 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 $340,000,000 on account of the greenbacks and I have lost the great advantage of having $346,000,000 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 $10,000 in currency a week, our average expense for the year will undoubtedly be $10,000 invested for that purpose. And if money is worth 6 per cent interest, it will cost us $600 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 $600 per annum. Now, our bank, being a country bank, we carry 15 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 $10,000 of United States Notes every week, and so keep $10,000 invested all the year around at a cost to us of $600, the interest on $10,000, we could convert $10,000 of our deposit debts into $10,000 note debts of the bank it would only cost us 6 per cent on $1,500, the amount we are carrying as reserve against our deposits of $10,000, or only $90. In other words, we would save $510 on the transaction. Of course, if we have to pay out $510 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 $98,896,488 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 1880 the notes outstanding amounted to $352,000,000, and in 1891, eleven years afterwards, they amounted to only $162,000,000, or about $100,000,000 less, although the country was growing and business expanding all the while. We ought always to expand our currency during the fall months about $300,000,000, 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 $750,000,000 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 $750,000,000. 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 $750,000,000 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 $100,000, and has loaned the same out to the people of the community. He now owes $100,000 subject to check, and he has $100,000 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 $100,000 of his notes for $100,000 of the notes of the same people who have borrowed the $100,000 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 10 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 $100,000 payable to bearer on demand are outstanding, while the deposits at A's bank amounting to $100,000 and payable to order are outstanding. Those notes of B's amounting to $100,000 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 $100,000 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 $100,000, each man paying in $50,000 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 15 per cent reserve, or $15,000 cash, to protect the deposit of $100,000 subject to check, and also a 15 per cent reserve, or $15,000 cash, to protect the $100,000 of demand notes outstanding. The actual cost to the bank in each case is 6 per cent on the reserve of $15,000 or $900 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 $50,000 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 $50,000 to a note debt of $50,000, so that instead of owing $100,000 in deposits, it owed only $50,000 in deposits, and instead of owing only $100,000 in notes, it owed $150,000, 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 $150,000, and the notes outstanding, or note debts, are only $50,000; the total debt of the bank being precisely the same all the time, $200,000. 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 $150,000 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 6 per cent per annum on $150,000, or $9,000; whereas, it has only cost the bank 6 per cent on the reserves carried to protect the $150,000, at the rate of $15,000 for each $100,000, or six per cent on $22,500. The cost to the bank you will see would be only $1,550, as against $9,000, if compelled to buy the currency, or would result in an actual saving to the bank of $7,450, 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 1,000 men walking about the streets of a town, each having a $10 bank note of the local bank in their pockets, or a thousand men walking about with check books from which they can issue 1,000 checks for $10 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 1860 about the effect of Credit Currency in Scotland, where it has now been in use 217 years. "All these marvelous results which have raised Scotland from the lowest state of barbarism up to her proud position in the space of 170 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: 1. It has provided Scotland with an elastic currency adapted to the condition of her industries and adequate in volume to their changing needs. 2. 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. 3. 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. 4. It has brought into active use the available savings and capital of the country. 5. 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. 6. 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 $100,000 is all invested in this bank building which we occupy. Our deposits were $500,000. We took $100,000 of our deposits and purchased $100,000 of Government Bonds, which we deposited with the United States Government, and received in return $100,000 bank notes which we have put out, or, as we say, put into circulation. Now, since we actually took $100,000 of our deposits to buy the bonds with, and then placed the bonds up as collateral, to guarantee the payment of $100,000 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 $100,000 of the United States Government Bonds should not sell for $100,000? Say they sold for only $75,000, would the noteholders lose the other $25,000, and he replied as follows: "No, if the bonds should sell for only $75,000, the remaining $25,000 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 217 years, and that they did not start the deposit and checking system until they had been in operation for 140 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 $5,900,000, and deposits were $5,000,000. The highest note issue of the second United States Bank was $23,000,000, and the deposits were $2,600,000. In 1800, 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 $1,000,000,000, while the deposits are only about $100,000,000. In a single week there has been a conversion of $75,000,000 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 1834, which continued its almost matchless career until 1866. 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 $3,300,000; its maximum of note issue was $5,700,000, always currently redeemed in coin. In 1857, 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 1842. 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 1860 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 500 banks in the system, with capital varying all the way from $25,000 to $700,000 each. Two other facts must be kept constantly in mind in this connection; they are these: 1st, the combined authorized note issue of these 500 banks was $131,000,000, absolutely unlimited to all intents and purposes; 2d, 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 10 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 500 banks in the Suffolk System. MR. MANUFACTURER: I ought to say right here, before you go on, that the 10 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: 1. It covered six different states. 2. It covered a large territory. 3. The facilities for communication were bad. Some parts of New England were as far from Boston then as San Francisco is now. 4. There were 500 individual, independent banks. 5. There was no branch banking. 6. The permissive note issue to all intents and purposes was unlimited. The possible amount of issue was $131,000,000, but the maximum amount of notes out at any time did not reach 50 per cent of this total, while the average amount did not exceed 33 per cent of it. 7. The Bank Notes of the Suffolk System were universally accepted at par throughout New England. 8. They were redeemed every day at Boston, in coin by the Suffolk Bank. 9. They were accepted in all commercial centers of the West, Buffalo, Cincinnati, Chicago, Milwaukee and St. Louis at a premium of from 1 to 5 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 1824 two clerks could do all the work. In 1855 seventy were required, and the redemptions reached $400,000,000 per year. As the circulation of the New England banks at that time was about $40,000,000, 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 60 or 90 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 1857 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 $50,000,000, and the deposits were $32,000,000. As a result of the panic, there was an exigent demand for currency, and the note issue rose from $50,000,000 to $56,000,000, and the deposits fell at the same time from $32,000,000 to $25,000,000, showing a conversion of about $6,000,000 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 $56,000,000 to $35,000,000, and the deposits increased from $35,000,000 to $46,000,000. In other words, $21,000,000 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 500 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, 27 in all, with about 2,000 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 $3.80 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 1912 to Nov. 30th._ January $88,065,521 February 88,920,598 March 95,918,404 April 95,145,371 May 93,819,333 June 102,011,848 July 95,827,534 August 101,501,270 September 104,334,287 October 110,696,877 November 115,473,098 Maximum issue 115,473,098 Minimum issue 88,065,521 ----------- Amount of Expansion $27,407,577 Population of Canada 7,204,838 Per Capita Expansion $3.80 Same expansion in the United States would amount to $380,000,000 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 $300,000,000. I have heard the amount variously estimated from $200,000,000 to $300,000,000. 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 $10,000 currency I bundle up $12,000 or $15,000 of my commercial paper, and take it to my correspondent, and get the currency by giving my bank's note, and leaving the $12,000 or $15,000 of paper as collateral. Now, if you should ask my correspondent upon what he had loaned me $10,000 he would say, "my bank's credit and the commercial paper I left with him." But, gentlemen, why could I not issue $10,000 of my bank notes against my bank credit, and keep the $12,000 or $15,000 of commercial paper? Certainly if my bank's credit and the commercial paper were good enough for my correspondent bank to let me have $10,000 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 27 banks." Well, I said, it works just as well in France with one bank. It has been working in Scotland just as well with 12 banks for 217 years. It worked in Indiana with one bank and 17 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 500 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 90 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 $20 for a load of potatoes; if I draw a check upon Mr. Banker for $20 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: 1. What is a promissory note? 2. What is a check? 3. What is a draft? 4. What is an acceptance? 5. 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 $1,000, 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 $1,000, he can then cancel the debt by delivering him the note for $1,000. 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 $1,000 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 $1,000. 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 $1,000 and C is owing A $1,000, 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 $1,000, 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 $1,000. 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, $1,000, and C, who lives in San Francisco, owes D, who lives in Boston, $1,000. 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 $1,000 and C could pay his debt of $1,000 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 $1,000 in money from Boston to San Francisco, and also of sending $1,000 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, $1,000, and if C, who lives in London, owes D, who lives in New York, $1,000, 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 $1,000 in gold from New York to London, and also the expense of sending $1,000 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 $1,000,000,000 a year, and the sales of Great Britain to us of woolens, silks, cotton and cloth and other manufacturies should amount to $1,000,000,000, 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 $2,000,000,000 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 $50,000, to some one in Great Britain; the purchaser in Great Britain arranges with his bank to accept a 60 or 90 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 1893 and 1907 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 $16,000,000,000 in 1890, while today they are upwards of $50,000,000,000, possibly as much as $55,000,000,000. 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 500 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 75 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 60 per cent of its business with currency, while the medium sized cities, or towns, do possibly as much as 60 per cent of the business with checks. In the largest cities as much as 90 per cent of the business is done with checks, while the clearing houses settle their differences or balances with about 5 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 90 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 1896; 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 1896. 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 $50,000 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 $50,000 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 150 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 $200,000 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 150 houses, but he has a good deal less wealth. For when the mill located there, Mr. Adams' wealth exceeded $100,000, 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 150 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 100,000 acres of land worth only 25 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: (1) Of material things, such as houses, land, etc.; (2) Of productive power, called labor, etc.; (3) 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: "1. 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. "2. 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 1907--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 1837. 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 1837, 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 90 and 95 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 1873, 1893 and 1907 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 $4,000 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 $5,000. First, he pays me the $4,000 and interest, and has about $1,000 profit on the transaction. You will all perceive and understand, that as I gave Mr. Farmer this credit of $4,000 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 $4,000 and he incurred the duty or obligation to pay $4,000. 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 $1,000 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 $3,000, pleuro-pneumonia might strike his cattle, and cholera might seize his hogs and the transaction might result in a loss of $1,000 instead of a profit of $1,000; or even a greater loss than $1,000. 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 $4,000 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, $10,000 worth of goods on three months' time. The wholesale merchant sold the goods for $12,000 to an English exporter on three months' time. The English exporter sold the goods to an American importer for $20,000, duty paid; the importer sold them to an American jobber for $22,000; the jobber sold them to me for $24,000. 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 $10,000 went through five different hands and became the basis upon which credits were granted for $88,000, and debts were created for $88,000. 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 $88,000 would have been paid and credit amounting to $88,000 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 15 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 25,000 or 30,000 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 $50. 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, $100 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 $50 worth of boots and shoes. Mr. Merchant indorsed and gave the check to Mr. Manufacturer for $50 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 $10,000 in Lancashire, England, was sold five times, and that credits amounting to $88,000 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 $50; paid my neighbor for a Jersey cow $50; paid the country grocery store for groceries $50; paid Mr. Merchant for boots and shoes $50; paid Mr. Manufacturer for clothing $50; paid the bank on account of Mr. Manufacturer's debt $50; or six separate debts in all, amounting to $300. 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 115 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 $5,000 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 $5,000, each due in 90 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 $75,000, and he had $25,000 cash in the bank. The dam and water ditch was to cost $100,000. My friend sold off a part of his goods, realizing $25,000 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 $100,000 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 $100,000 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 $200,000 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 $200,000 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 $200,000 worth of food and clothing represented by two years' work of 100 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 $200,000 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 $200,000 of food and clothing back, for they are in the dam and ditch. The $200,000 he gets for his bonds, if he sold them for that price, is an entirely different $200,000, as you must admit after a moment's thought. Your friend had groceries and clothing which he could sell for $200,000 in money. Now, suppose that you had had at the same time, $200,000 in your business. Your $200,000 with the $200,000 your friend had put into the dam, when finished would amount to $400,000. 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 $200,000 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 $200,000 of cash capital into $200,000 of passive or fixed capital. Before he built the ditch he had $200,000 and before I sold out my grocery business I had $200,000, making $400,000 of cash capital. Now he has $200,000 of cash capital and I have $200,000 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 $100,000 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 $100,000 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 $100,000 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 3 per cent or 4 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 $160 for every man, woman and child in the United States. The average value per acre is $15.57. 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 100 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 1717, 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 1789 to 1796, 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 1789 to 1796. Assignats were so termed because land was assigned to the holders of them. The financial strait of the French Government in 1789 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. 2, 1789, and the Crown lands which had been taken over by the nation on Oct. 7th. Subsequently the lands of the Emigres, the princes and royal followers, 30,000 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 400,000,000 francs or ($80,000,000) worth of Assignats, each note being 100 francs or $20 value and bearing interest daily, at 5 per cent. They were to be redeemed by the product of the sales, and from certain other sources, at the rate of 120,000,000 francs ($24,000,000) in 1791; 100,000,000 francs ($20,000,000) in 1792; 80,000,000 francs ($16,000,000) in 1793 and 1794, and the balance in 1795. 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 1790 the interest was reduced to 3 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 800,000,000 francs ($160,000,000) 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 (1,200,000,000) ($240,000,000). This pledge, however, was soon broken, and further issues brought the total up to three billion seven hundred and fifty million francs (3,750,000,000) ($750,000,000). The consequence of these further issues was instant depreciation, and the note of 100 francs ($20) sank to less than 20 francs ($4) 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 1, 1793). For this the death penalty was ultimately substituted (May 10, 1794). 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 3, 1793, 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, 1794, the total number of issued Assignats aggregated nearly eight billion francs ($1,600,000,000), 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 8 per cent to 15 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 1796 the issue had reached the enormous figure of forty-five billion francs ($9,000,000,000), 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, 1795, had produced no effect; and, though by various payments into the Treasury, the total number had been reduced to about twenty-four billion francs ($4,800,000,000), their face value was about thirty to one of coin. At this value they were converted into eight hundred million francs ($160,000,000) 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 82 per cent. They had an existence of six months, and were finally received back by the State at about the 70th 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 1690, 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 "£7,000 ($35,000) of printed bills of equal value with money." And the balance of the cost which was £40,000 or $200,000 was issued the following day. In July, 1692, 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 5 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 1697 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, 1702, for £10,000 in value "equal to money," but to be accepted in all public payments at the advance of 5 per cent. The passion for borrowing spread like flame on the dry prairie. In November, 1714, Massachusetts ordered £50,000 to be let out by trustees to the inhabitants of the province for five years on real security, at 5 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, 1715, 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 30th of October, 1705, and the 30th of October, 1722. The loan of Bills of Credit by Massachusetts in 1714 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 £100,000 were in 1716 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, 1721, £50,000 were distributed among borrowers in each of the several towns according to its proportion in the last province tax. Again in 1728, £60,000 in Bills of Credit were proportionately loaned among the several towns, even on personal security, at the rate of 6 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, 1737, less than forty-seven years after the first emission of Bills of Credit by Massachusetts, that colony issued £9,000 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 9th of January, 1739, 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 1742 new style." But that year went by and relief had not been found. In 1744, 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 1745, 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, 1748, 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 £2,200,000 of their Bills of Credit would be outstanding in the year 1749, that is, $11,000,000. In January of that year an act was passed redeeming the bills of the old issue or tenor at the rate of 45 shillings, those of the new issue or tenor at the rate of 11s. and 3d. 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, 1709, Connecticut put forth £8,000 of bills, or $40,000; then soon followed that by £11,000 more, which were "to be in value equal to money, and to be accordingly accepted in all public payments." In October, 1718, Connecticut, to prevent oppression by the rigorous exaction of money, declared its Bills of Credit legal tender for debt contracted between the 12th day of July, 1709, and the 12th day of July, 1727. The time for the operation of the law was afterwards extended to 1735. In the year 1733 Connecticut loaned interest-bearing bills for nearly £50,000. In May, 1740, it issued £30,000 of a new issue of which £22,000 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 1752, 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, 1756, 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 1717 the Council of New Hampshire was zealous to follow the fashion of issuing paper money by loan and issued £15,000. Rhode Island, also, in July, 1710, 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, 1711, Rhode Island discharged a claim by a loan of its Bills of Credit to the amount of £300 for four years free of interest. New Jersey, too, tried its hand at the same scheme, following the lead of Pennsylvania. In December, 1783, it issued £31,250, and in 1786, 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, 1723, 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 30 shillings to £50." Again, on March 21, 1783, 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 $300,000 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 £150,000, the lowest note of 3 pence. But in the decisive hour Pennsylvania, too, proved the implacable foe of paper money. In 1733, £90,000 in its bills of credit were brought into circulation by loans of 4 per cent by the legislature of Maryland. Virginia was involved from May, 1755, 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, 1757, it was further ordered that any seller who should demand more for his goods in notes than in gold or silver coin, should "forfeit 20 per cent of their value." ... In 1781, in the month of March, Virginia directed the emission of £10,000,000 and authorized £5,000,000 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 1780 North Carolina directed the emission of more than £1,000,000, and such further sums as the exigencies of the state might require; in the next year gave authority at one dash to issue $26,250,000 of paper dollars bearing 6 per cent interest. Again in 1783, North Carolina emitted £100,000, declaring each pound of the emission equal to two and one-half Spanish milled dollars, and a tender in all payments whatever. In 1785, the state emitted £100,000 more. South Carolina, too, as late as 1785, permitted itself to be persuaded to lend among the constituents of its legislature £100,000 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, 1712, had ordered £52,000 in new bills of credit to be stamped and put out at interest in loans. In December, 1717, 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, 1709, for the first time involved itself in the use of Bills of Credit. In 1770, the legislature of New York passed an Act for emitting £120,000 in Bills of Credit to be put out on loan. Again in April, 1786, the opening year of the final great movement for a closer union of the state, it placed an emission of £200,000 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 1780, 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 1743, 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 £100,000 sterling in value is at present reduced to a nominal 32 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: (1) emission; (2) disappearance of specie; (3) counterfeiting; (4) wearing out of bills; (5) calling in and replacing worn and counterfeited issues with new ones; (6) extending the time for old ones to run, especially those which had been placed on loan; (7) depreciation; (8) 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 11 for 1 (the standard being "proclamation money"). In Connecticut it was 8 for 1. In 1763, the value of the New Hampshire shilling was a little less than a half penny; in 1771, it vanished altogether. Rhode Island owed tenor bills in 1770 that were worth 26 to 1. Those of North Carolina were 10 for 1; of South Carolina 7 for 1. 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, 1775, 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, 1775, to issue due bills for 2,000,000 Spanish milled dollars, to be sunk by taxes in four successive years, beginning November 30, 1779, 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, 1777, 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 $240,000,000 in the year 1779. In 1781 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, 1777, 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 1774, 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, 1779, 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 $7.00 per month to 33 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, 1780, Congress tried the colonial experiment of "new tenor" in a very awkward and roundabout way, and declared that "old tenor" to be worth 40 to 1; the actual depreciation being 60 for 1. As it was supposed that $200,000,000 of Continental money was out, this was a repudiation of all but $5,000,000 of it. The depreciation then went on more rapidly than before. The "new tenor" bills started at a depreciation of 2 for 1, which became 3 for 1, even before they reached the army, and dropped to 6 to 1 in a few months. Old tenor went at a galloping pace at 500 for 1 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 1,000 to 1. 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 4, 1790, authority was granted for funding the bills in 6 per cent bonds "at the rate of $100 in the said bill for $1.00 in specie." Only $7,000,000 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 100 years, from 1690 to 1790, 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, 1783, 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 1786, 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 1785 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 1787, on the 9th 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 1785, 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, 1786, Washington wrote to Jefferson: "Other states are falling into the very foolish and wicked plans of emitting paper money." In May, 1788, 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 1807, 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 1786: "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 85 against 17 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 1752, 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 16th 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--9. Nays: New Jersey, Maryland--2." 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 16th 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 1752 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 28th 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 1690 to 1790, 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: (1) Emission of paper money; (2) depreciation of the issue; (3) disappearance of coin; (4) emission of more paper money to make up for the depreciation of that already issued; (5) defrauding of creditors; (6) repudiation; (7) cancelation; (8) reappearance of gold and silver; (9) resumption of species or coin payment; (10) 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 9 to 4, 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 1862 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 1812, the Government of the United States issued Treasury notes to the amount of $36,680,794. All except $3,392,994 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 $100 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, 1814. On November 12, 1814, 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 42 to 95, and without debate, refused to consider this bill. No other attempt was made to pass a legal tender bill until 1862. "In the panic and crisis of 1837-43, during a portion of which time specie payments were suspended, the Government issued Treasury notes to the amount of $47,000,000 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 1842, bearing only a nominal rate of interest (one mill per $100 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 1847, during the war with Mexico, Treasury notes to the amount of $26,122,100 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 1814, and again in 1837, 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 $1.00, 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 1837 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 1789 to 1862, a fundamentally different view was taken in 1862. 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 $5,000,000 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 1861, and a threatened war with Great Britain, growing out of the Trent affair, so shocked public confidence that by January 1, 1862, 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 ($1,000,000,000), the total cost of the war being three billion two hundred million ($3,200,000,000). 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 ($150,000,000), 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, 1861, arranged to furnish the first $150,000,000, the banks of New York, Philadelphia and Boston held gold amounting to $63,200,000, and on December 7th, they held practically the same amount, or $58,100,000, although they had already furnished $100,000,000 of the $150,000,000 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 $150,000,000 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 $300,000,000 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 100 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 10 per cent, if not of 50 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 $150,000,000 of United States Notes was passed and signed by the President February 25, 1862. The second issue of $150,000,000 came very soon, on July 11, 1862. The third issue of $150,000,000 followed on March 3, 1863, making a total issue in about a year of $450,000,000. 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 1868 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, 1862, to January 1, 1879, when we resumed specie payment, and began their current redemption in gold coin. It shows that they were worth 97 cents on the dollar in February, 1862, when the President signed the bill; in one year, or February 15, 1863, they were worth 60 cents on the dollar; and in a little more than a year afterwards, in July, 1864, they were worth only 35 cents on the dollar. That is, if you had bought a horse for $100 in January, 1862, and given a note due in July, 1864, you could have paid for the horse with $35. You will perceive that every creditor was defrauded going down hill until you struck the bottom on that July day in 1864, when it took $2.85 of United States Notes to buy $1.00 of gold coin, and you defrauded every debtor climbing up that long hill from that July day in 1864, when the United States Notes were worth 35 cents, until January 1, 1879, when they became worth 100 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 $339,984,222, if at the close of the war we had issued bonds, bearing 4 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 $850,000,000. And Mr. Wesley Hill, in the "Journal of Political Economy," March, 1897, computes the net cost of the war, due to this cause at $528,000,000. Now to be fair and take the average of these two estimates or $689,000,000, and add the cost of meeting greenback redemption since the war, or $339,984,222, we have $1,028,984,222, 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, 1869, 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 1862 and 1863, 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, 1870, 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, 1884. 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 1788. 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 ($25,000,000,000). The individual deposits of the United States today exceed seventeen billion dollars ($17,000,000,000). 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 1893 and 1907 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 $42,000,000 every year; for our deposits you say are now seventeen billion ($17,000,000,000). 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 1864, 518 national banks have failed, with liabilities reaching $244,000,000. The direct losses of the failed banks amount to $38,000,000. Two thousand and fourteen state and private banks have failed since 1864, with liabilities amounting to $825,000,000, and probable losses of $200,000,000. The total liability of all banks, national, state and private, failing since 1864 is $1,069,000,000. Their aggregate is 2,532 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 1890, with liabilities aggregating $174,000,000. One thousand four hundred and six state and private banks have failed since 1890, with liabilities aggregating $694,000,000. The total liabilities of all banks failing since 1890 aggregate $898,000,000. The total number of all banks failing since 1890 is 1,757. 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; 1st, from the standpoint of the single bank; 2d, from a standpoint of the community or a single city; 3d, from a standpoint of the whole country; 4th, 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 5 per cent cash would be ample reserve for a high-class mutual savings bank, a commercial bank, in equally good standing, may require from 10 per cent reserve up to 50 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 1857 and 1866, 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; $3,000 silver certificates; $3,500 of United States notes, or greenbacks; $4,500 National bank notes; $2,500 gold certificates; $1,500 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 $3,000,000 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 $3,500,000 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 1 per cent or 1-1/4 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 $500,000,000 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 $4,000 out of the total of $14,250, 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 1844, permission was given to count silver as one-quarter or 25 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 $50,000,000 of silver and $150,000,000 of gold, the gold would not only have to carry the $50,000,000 of silver, which is nothing but another form of credit money, because actually worth only 50 cents on the dollar in bullion, but the gold would also have to carry $150,000,000 additional; that is, all the credit based upon this $50,000,000 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 $346,000,000 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 5 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 17 per cent reserve, the average of all the National Banks, or only 7 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 7 per cent reserve, and that the National Banks carry an average of two and a half times as much or 17 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 5 per cent, including the Mutual Savings Banks, but excluding them, only an average of 7 per cent, and that the average reserves of all the National Banks is 17 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 7 per cent cash reserves of their individual deposits, or demand liabilities, they have 24 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 17 per cent in cash of their individual deposits, have invested only 17 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 $996,000,000, with $5,825,000,000 individual deposits, while the other banks, excluding the Mutual Savings Banks, have only $577,000,000 cash reserves, with individual deposits amounting to $7,589,000,000. The average cash reserves of the United States therefore are only a trifle over 11 per cent, when they should not be less than 16 per cent under any circumstances at the low level, reaching nearer 20 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 6 per cent cash, which amounts to about $120,000. There are times of the year when I could carry $180,000 or even $200,000 a good deal easier than I could carry $60,000, or even $50,000 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 6 per cent cash. In addition to this, I ought to carry at least 10 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 5 per cent to 25 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 7,312 National banks amounting to $1,033,000,000 is just about equal to the capital of the other 17,804 banks, outside the National System reporting, and the estimated capital of $70,000,000 of the non-reporting banks, $1,047,000,000. The surplus of the National banks is 92 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 92 per cent of their capital. That is, the National banks have $1,983,000,000 capital and surplus to insure $5,825,000,000 individual deposits and $2,178,000,000 due to the other banks, or a capital and surplus to all deposits of nearly 25 per cent, while all the other banks have $2,010,000,000 capital and surplus to insure individual deposits $5,089,000,000 and $454,000,000 due to banks, or a little over 24 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 10 or 20 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 10 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 ($6,480,000,000) are savings deposits. Again Article I, Section 8 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 1907? 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 20 per cent reserves of which 17 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 15 per cent reserves; that is $15,000 cash against every $100,000 of deposits; that they may send 9 per cent or $9,000 for every $100,000 of deposits away to what we call reserve cities. Now, there are 320 banks in 48 of these reserve cities. These reserve cities are required by law to carry a reserve of 25 per cent, or $25,000, for every $100,000 deposits; but they may send away 12-1/2 per cent, or $12,500, for every $100,000 of deposits to a central reserve city, of which there are three: New York, Chicago and St. Louis. These central reserve cities must carry 25 per cent cash reserves or $25,000 in cash for each $100,000 of deposits. Experience shows that these 320 banks in the 48 reserve cities and these 55 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 1 per cent to 10 per cent, to 20 per cent, to 100 per cent, or even 1,000 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 35 or 40 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 $100,000 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 $200,000; but again there are times when you want to use a part of the $100,000, possibly as much as $75,000 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, 9 per cent of your deposits, or $175,000, 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 10 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 $879,000,000, although there is in the country $1,850,000,000 of gold, practically one billion of gold, or $10 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 $70,000 came into your National system and had to increase its present reserve, which is only 7 per cent, by as much as 10 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 $100,000, but it would also increase its reserves by $100,000. That is certainly a perfectly sound proposition. Before the bank came into the system, its reserves were only 7 per cent, or $70,000, since its deposits were $1,000,000. After it goes into the National system, it has changed $100,000 of its notes for $100,000 of gold, or gold certificates, as they came in over the counter; it now owes $1,100,000, of which $100,000 is of notes, but it now has $187,000 of reserves of all of its demand liabilities, or 17 per cent, instead of $70,000, or 7 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 10 per cent, as you suggested a while ago, of their demand or individual deposits, and 5 per cent of their savings deposits, what would your central gold reserve amount to? MR. BANKER: On June 14, 1912, the Comptroller of the Currency reported that the individual deposits amounted to ten billion five hundred million ($10,500,000,000), and that the savings deposits, outside of the mutual savings bank, amounted to two billion eight hundred and seventy-two million ($2,872,000,000). 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 $468,000,000 of their notes for that much gold, the result would be as follows: Individual Deposits $10,500,000,000 @10% $1,050,000,000 Savings Deposits 2,872,000,000 @ 5% 143,600,000 Bank Notes 1,219,000,000 @10% 121,900,000 -------------- Making a total central gold reserve of $1,315,500,000 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 45 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 $100,000,000 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 4 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 6 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 $10,000,000, $50,000,000 or $100,000,000 or $200,000,000 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. 25, 1863, 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 650 of these Mutual Savings Banks, with deposits amounting to $3,608,000,000. 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 1,292 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 1,410 of such Trust Companies, so called, with capital amounting to $419,000,000 owing individual deposits amounting to $3,674,000,000 with $450,000,000 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 7,397 National Banks, nearly half of them, 3,039, are now doing a regular savings bank business, without any express authority of law, and 2,340,226 depositors have deposited with our National banks $659,500,000. 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. 1, 1863, 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 1890, or during the past twenty-two years. Our banking resources have increased fourfold. In 1890 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 1890 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 1890 were only seventeen billion. The productions of the United States in 1912 will exceed thirty-five billion dollars. The wealth of the United States in 1890 was only sixty-five billion dollars. The wealth of the United States in 1912 is estimated at about one hundred and twenty-five billion dollars. The imports in 1890 were seven hundred and eighty-nine million; the imports the present year will be one billion eight hundred million; the exports in 1890 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 $100,000,000 cash, they must at once reduce their liabilities by $400,000,000. 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 $25,000,000 to $50,000,000. The coin, bullion, and paper money held as assets in the United States Treasury during the present Administration has varied from $300,000,000 to $350,000,000. 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 20 per cent. "The receipts and disbursements of the Treasury are most irregular. The Treasury receipts in 1907 exceeded the disbursements by $91,000,000. Two years later the disbursements exceeded the receipts by $118,000,000. For the past two years receipts have again exceeded disbursements. The general fund in the Treasury was $272,000,000 in 1907; three years later it had fallen to $106,000,000. 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, 1907, following the money panic, the special deposits in the banks by the Treasury had reached $256,000,000. Three years later they were reduced to $4,000,000. In the fiscal year 1908-1909, the Treasury withdrew $100,000,000 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 1907 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 1846, when the sub-treasuries were established, it is unbelievable. The Act of Aug. 5, 1846, 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. 25, 1863, establishing National Banks, authorized their use as depositaries of the public money except "receipts from Customs." Forty-four years later the Act of March 4, 1907, struck out the words "except receipts from customs." By the Act of March 2, 1911, 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, (1) we must give to the National banks the power to do a Savings bank business, as well as a Commercial business; (2) we must give our National banks the power to do a Trust Company business; (3) 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 12,000,000 farmers of the United States are adding over $8,400,000,000 to the national wealth each year. They are doing this on a borrowed capital of $6,040,000,000, on which $510,000,000 of interest is annually paid. Counting commissions and renewal charges, the rate averages at 8-1/2 per cent for this country as against 3-1/2 or 4-1/2 per cent for Germany. If the American farmers had a thoroughly organized system of coöperative associations they would not only save this difference of $200,000,000 or $250,000,000 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 $385,000,000 of foodstuffs exported last year barely equaled 76 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 $60,000,000 of mortgage loans, were in existence in 1848, 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 1769, 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 $500,000,000, and the interest rate runs as low as 4 per cent and 3.5 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 1890 and 1894 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 4.3 per cent. But by adding a little over 3.2 per cent to this, and paying 7.5 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 $10,000. He pays $750 annually twenty times for the interest, sinking fund and expenses. This makes a total of $15,000, 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 1 per cent, or even one-tenth of 1 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 $25. 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 4 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 1 per cent), with a contribution to the reserve or guaranty fund, and another for the expenses of administration. The annuities have totaled 6 per cent, but they now average around 4 per cent or lower; e.g., interest being 3 per cent, sinking fund one-half of 1 per cent, guaranty fund one-fourth of 1 per cent, and expenses one-fourth of 1 per cent. Some of the banks also require a lump payment on the grant of the loan of 1 or 2 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 1850 or 1860 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 1899. 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 $2,618,000,000 loaned out on mortgage, or over five times more than the Landschaften. The capital is $170,563,000, the smallest being $238,000 and the largest $14,000,000. The bonds in circulation amount to $2,548,009,000, with interest at 3-1/2 or 4 per cent per annum, while the average returns on mortgage loans are 4.22 to 4.33 per cent per annum. As 6 per cent and even 14 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 1852 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 0.6 per cent over the rate at which it obtains money on its debentures issued at the time of the loans. An excess of only 0.45 per cent is allowed on loans to municipalities. The outstanding loans and debentures issued must exactly correspond in amounts. After paying a 5 per cent dividend the Crédit Foncier must set aside between 5 and 20 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 $40,000,000, divided into 400,000 shares of $100 each; but authority has been obtained to increase the same to $50,000,000, represented by 500,000 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 $8,000. The subgovernors must hold one hundred shares each. Their salaries are $4,000. 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 $20,000,000, 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 4.3 per cent per annum, for public establishments 4.1 per cent, and 3.85 per cent for municipalities. The total annuity, including both interest and amortization sum, for a twenty-five year mortgage loan is a little over 6.5 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 $870,000,000. Here is an amortization table of the Crédit Foncier: _Annuity of a capital of $100, interest at 4.3 per cent, payable semiannually._ Duration. Annuities. 5 years $22.440405 10 years 12.409111 15 years 9.115217 20 years 7.504843 25 years 6.566976 30 years 5.964436 35 years 5.552593 40 years 5.259040 45 years 5.043495 50 years 4.881753 55 years 4.758395 60 years 4.663140 65 years 4.588881 70 years 4.530558 75 years 4.484483 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 $40,000. 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 $20. 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 1912 for $100,000,000 at 3 per cent, payable within seventy years, was oversubscribed eighteen times. The total land mortgages and municipal indebtedness in France is figured at $2,800,000,000. 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 $25,000, and that the shares should be $100 each. No person should own more than two hundred and fifty shares, or 10 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 $25,000,000; that is, until the national organization shall have a cash capital of its own of $12,500,000 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 1851, into Italy in 1860, into Belgium in 1864, into France in 1883, into Scotland in 1889, and into Ireland in 1894. 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 1849 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 1909 in Belgium 458 banks, with a membership of 25,762, had outstanding (roughly calculated) $4,000,000 of loans; in France ninety-six regional banks did upward of $25,000,000 of business on a capital of $2,983,646, while the 2,983 local banks, with a membership of 133,382 farmers, had $2,622,241 of capital and a record of over $20,500,000 of operations. There were nearly 6,000 banks in Austria. The membership was over 725,666, and the loans ran over $86,500,000. In Italy 690 banks that furnished reports had a working capital of over $170,091,946. In Germany there is one bank for every 1,600 of the population, and the total business done was over $4,888,000,000. In one Province there is a bank for every 3,000 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 5 per cent and 7 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 1909 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 $3,000 and $10,000 of outstanding loans. Interest rates have been low, yet it paid over 6 per cent dividends on its capital. Thirteen new unions were formed in 1911 and have $25,000 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 $5), 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 $1 is made to do the work of $50, 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 1844 the Rochdale pioneers put all their little savings into the pot, and they amounted to only $140. With this they started a store. By 1845 they had seventy-four members and $900 of capital, and did $3,500 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 55 per cent and the trade 75 per cent. The productive and distributive business alone amounts to $640,000,000. The retail societies have $200,000,000 of capital. "Last year the sales of these retail societies totaled more than $352,000,000, or about $142.50 per member." It is most significant that the societies, in their own mills and factories, produced nearly 50 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 15 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 $230,000 to charity, $450,000 to education, i.e., libraries, lectures, and concerts, and $50,000 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 1862 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 $25 share for every five of its membership; the Scotch society one $5 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 $25 shares, or two hundred $5 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 1907 they had a membership of more than 2,615,000, a capital of more than $169,000,000, a surplus of $85,000,000. Their annual sales amount to more than $600,000,000, and their profits more than $60,000,000. 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 20,000 men are employed by this society. Some of its factories are large, e, g., the Leicester Shoe Works employ 1,446 men; the Irlam Soap Works, 702 men; Long Sight Printing Works, 941 men; the Middleton Pickle Works, 564, 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 $17,000,000. 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 $1,750,000. 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 (12-1/2c.) admission, and forty marks ($10) 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 2,311 retail societies, more than two million members, and more than $5,000,000 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 $12,000,000 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 1908 there were 4,105,594 persons actively interested in one form or another of German coöperation. In 1911 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 1873 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 $17 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 $1,000,000 worth of business a year; it makes 110,000 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 $375,000 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 1907-8 the "Maison" made a profit of $134,000; 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 119,581 members; sixteen productive societies with 1,583 members. The Productive Societies include weaving, printing, cabinetmaking, tobacco and cigars, hardware and bakery. The total coöperative business is $6,800,000 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 20 per cent to 40 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 $5,000,000,000 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 1775, 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 1833, they were for a long time refused admittance to the Clearing House; but in June, 1854, 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 1875.) 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 1872, which was just five years short of a century later. As early as 1831 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 1853, 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. 11, 1853; 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 26 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 96-1/2 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 98 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 2,652 accounts. It substituted one account for each bank with the Clearing House--an economy of 98 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 1853. The first clearing was effected on Oct. 11, 1853, and amounted to $22,648,109.87. The balances amounted to $1,290,522.28. Boston followed in the footsteps of New York, and established a Clearing House in 1856, and Philadelphia in 1858. 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 1840, 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 1858 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 1858 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. 29th 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. 12th, 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. 16th submitted it to their country correspondents. The plan for an independent country Clearing House was abandoned by the country Bankers' Committee on Nov. 19th, and the clearing of country checks commenced in London on Nov. 23, 1858. In less than eight weeks, after the idea was broached in London, it was put in practice there." This system covers 60,000 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 1899 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 1899. The system includes checks on all points in New England, and maintains a free zone of nearly equal extent. "Proposed in 1877 and 1883, 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 ($8,000,000,000). "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, 90 per cent of the banks in New England remit at par. We collect 95 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 1853. 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 1775, and kept a Clearing House in a blind alley. Nothing more was done in England by way of advance until 1858, when the country banks of England and Wales, covering a territory of 60,000 square miles, by threatening to start their own Clearing House in London, compelled the London banks to clear their checks. Not till 1872, 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 1831. Hallock established it in 1853. Boston and Philadelphia followed in three and five years, respectively. In 1899, 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 15,231 people in 1900. _Third_: The examination of all banks clearing through the Clearing House, of which Chicago was the pioneer, starting June 1, 1906--and probably the best type, although there are today about twenty cities following in her footsteps, including the following: Minneapolis, Feb. 1, 1907; St. Paul, May 1, 1908; St. Louis, Oct. 11, 1907; Los Angeles and San Francisco following upon the heels of St. Louis; Kansas City, March 1, 1908; St. Joseph, the early part of 1909; Philadelphia, April 5, 1909; New York, 1912, 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. 11, 1853. Mr. Cannon says that not until August, 1854, 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 $1,130,000 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 $10,000.... 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, 1912, 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 $5,000,000, must pay $5,000; a bank, the capital of which exceeds $5,000,000, must pay $7,500. Any member increasing its capital is required to pay in accordance with those rates." In 1899, 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 15 per cent cash in their vaults. It was tacitly understood that all banks clearing, should have 25 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. 11, 1903, the association passed a resolution requiring that every institution (not a bank required to maintain specified reserves) "shall after June 1, 1903, keep in its vaults a cash reserve, equal to 5 per cent; after Feb. 1, 1904, 7-1/2 per cent; after June 1, 1904, not less than 10 per cent, nor more than 15 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 1907, the New York legislature passed a law requiring them to carry 15 per cent cash reserves. On June 13, 1908, the association passed a resolution compelling all trust companies, who were members, to carry a cash reserve of 25 per cent, and on Jan. 16, 1908, the association for the first time in its history made a rule compelling all its members to keep a cash reserve of 25 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 3, 1899, this rule became obligatory, and if any member violated it, the penalty was $5,000 for the first offense; for the second offense it might be expelled from the association.[1] MR. LABORINGMAN: That is precisely the same rule we have in our Union, only our limit is not so high. We fine a member $5.00 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 $1,000, $2,000, $3,000, $4,000, $5,000, $10,000, $20,000, $50,000 and $100,000 each. All notes of a smaller denomination than $5.00 should, according to practice, be put up in packages of not more than $5,000. 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, $5,000 and $10,000 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 $200,000,000. 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 1899. 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 1877, 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 1883, 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 1898, 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 14, 1899, 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. 21st, Maine was added to the list, followed by Rhode Island and Connecticut on Nov. 9th, and New Hampshire and Vermont in January, 1900. [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 $541,000,000 at a cost of ten cents per thousand dollars; the second year $565,000,000 at a cost of eight cents; the third year $607,000,000 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 1906. You will also remember that Walsh had control of three different banks with approximately $30,000,000 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 $3,000,000. 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 1, 1906, 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 9th, will say that Clearing House examinations were begun in Los Angeles on May 1, 1908. 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 1906 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 $3,500,000, and 44 per cent of their aggregate deposits of $27,000,000, 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 $90,000 each represented by so-called memorandum notes. Each memorandum note purported to be secured by $100,000 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, $952,000 of which (being almost the entire issue) were also among the assets of the banks, were finally disposed of at about 23 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. "1. 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. "2. 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.' "3. 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 [$6,000,000 of $8,000,000 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 1907, collateral security amounting to $453,000,000 passed through the hands of the New York Clearing House Committee, of which $330,000,000, or 72.92 per cent, was commercial paper and $123,000,000, or 27.08 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 25 cents to $100,000 in the different associations and in proportions varying from $50 to $100 of certificates to $100 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 $500,000, which in ordinary times would be paid in money or gold certificates. In a time of panic a part of this sum--say $300,000--is paid in Clearing House loan certificates and the remaining $200,000 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 1860. 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. 23, 1860, 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 20 per cent, was now freely marketed at 7 per cent and 8 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. 19, 1861, the first issue was made. In 1863 the association issued certificates for the third time. The first bore the date of November 6th, and the largest amount outstanding at any one time was $9,608,000. Owing to the prolongation of the war, with the consequent unrest in business circles, the issue of certificates for the fourth time began March 7, 1864, and reached its maximum, $16,418,000, on April 20th of the same year. No more loan certificates were issued until the year 1873, 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 1860, 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 20th 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 22d the first issue was made. The amount was fixed at the outset at $10,000,000, 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 $26,565,000 were issued. New Orleans alone issued certificates in 1879, the amount being $54,000. New York alone issued certificates in 1884, the amount being $24,915,000. The next certificates were issued Nov. 12, 1890, and the issue ceased December 22d, amounting in the aggregate to $16,645,000; the largest amount outstanding at any one time was $15,205,000, on December 12th; and the last certificates were retired February 7, 1891, less than three months from the date of the first issue. Boston and Philadelphia followed. Then came one of the memorable panics, 1893. The issue was commenced June 21, 1893, and ceased September 6th of the same year, the total issue having been $41,490,000. The largest amount outstanding at one time ($38,280,000) was attained August 20th, which amount remained unaltered until September 6th. 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 $1, $2, $5, $10, and all the larger amounts. Besides the loan certificates issued in 1893, 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., $10, $5, and $1; Chester, S.C., $10, $5, and $1; Columbia, S.C., $50, $20, $10, $5, $2 and $1; Danville, Va., $100, $50, $20, $10, $5, $2, and $1; Newman, Ga., $10, $5 and $1; and Rock Hill, S.C., $5, $2 and $1. 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 1907. Of this a prominent banker and economist has said: "The truth is that responsibilities for the panic of 1907 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. 26, 1907, New York issued Clearing House loan certificates. On Oct. 26, 1907, Chicago also issued Clearing House loan certificates. On Nov. 6th, Chicago issued Clearing House checks for $1, $2, $5, $10, amounting to $7,500,000. These checks were secured by Clearing House loan certificates. On November 16th, 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 $1, $2, $5 and $10, amounting to $200,000, which had no security back of them. In November pay checks in denominations of $2, $5, $10, $20 were issued to the fourteen banks of the Clearing House of Cincinnati. Cleveland followed Chicago in denominations of $1, $2, $5, $10. Fargo, Dakota, issued $5, $10, $20, $100 and $500. Los Angeles issued October 30th "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. 2 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 1857; 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 10 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 $1, $2, $5, $10, $20, $50 and $100 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 1899, 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 1907, was stated by the Comptroller of the Currency to be $248,279,700. 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 $250,000,000 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 1907 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 1907 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 1803, 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 1818, thirty-five years before New York got to going. It only took two clerks to do the business for the first six years. By 1855, 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 $1,000,000,000 (one billion) in notes, and only one-tenth as much, or only $100,000,000 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 1840 to 1860 the note issue of the 510 banks in New England ranged from $30,000,000 to $57,000,000, and averaged $43,000,000, while the deposits ranged from $15,000,000 to $47,000,000, and averaged only $31,000,000, or the note issue was nearly 50 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 1775. The second Clearing House started in Boston in 1818 under the Suffolk Bank. The third started in New York in 1853. _Third_: Clearing country checks was established in London in 1857. New England became a free zone for country checks in 1899. _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 $1, $2, $5, $10, $20, $50, $100, 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 1: 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 1860 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. 23, 1863, 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 14, 1900. Then Congress adopted word for word a provision contained in Congressman Fowler's first general Financial and Banking bill of March, 1897. This provision provided: That the new bonds should be payable in gold coin and bear interest at the rate of 2 per cent per annum and that the banks could issue circulation up to par of the bonds, and that the tax of 1 per cent should be reduced to one-half of 1 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 1844, 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 1803 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 1860, 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 1860, 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 1860, 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 1818, 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 1860 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 1860 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 33-1/3 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 1857, 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 1860 amounted to $24,496,000, the $12,115,000, the circulation $11,579,000 and the deposits $19,777,000. On Feb. 24, 1845, 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 10 per cent of the amount of its circulation to create a safety fund to redeem the notes of any branch that might fail. In 1846 there were seventeen branches; in 1848 twenty-five branches; in 1849 thirty-eight branches and in 1850 thirty-nine branches. The note issues were of a purely credit character, and were proportioned to the capital as follows: For the first $100,000 of capital, there might be $200,000 of notes; for the second $100,000 of capital, $150,000 of notes; for the third $100,000 of capital, $125,000 of notes; for the fourth $100,000 of capital, $100,000 of notes, and for each additional $100,000 of capital, $75,000 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 30 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 1845 and 1851 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 1863 was $5,674,000, specie $3,033,000, circulation $9,057,000 and deposits $11,697,000. 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 1834 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 $800,000 of stock amounted to three and a half millions of dollars. The Bank of Indiana, which became a model, was chartered in 1834, with a capital of $1,600,000, 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 12-1/2 per cent was imposed upon all notes not redeemed in coin. The institution was hardly under way when the panic of 1837 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 1855 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 1857 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 1837 came two years after the organization of the State Bank; and in 1857, 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 1860 the capital was $3,323,000, specie $1,917,000, circulation $5,753,000, deposits $1,186,000. 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 1833-4 granted a charter to the Bank of Kentucky with $5,000,000 of capital and the privilege of six branches. Charters were also granted to the Northern Bank of Kentucky, with a capital of $3,000,000, and the Bank of Louisville, with a capital of $5,000,000, 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 1898 and the Bank of Louisville was merged into the Southern Bank in 1899, the Bank of Kentucky had in the latter year a capital of $1,645,000 and a surplus of $1,103,000, 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, 1837, the blighting wave of suspension swept from New York across the country, these three banks of Kentucky held $1,900,000 in specie against $3,300,000 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 1857, 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 1860 the capital of these banks was $12,660,000 and the circulation was $13,520,000. 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 1857, 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 12-1/2 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 25 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, 1862, 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 10, 1864, 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 1865, and the 10 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 $1,439,000 outstanding on Jan. 2, 1865, was redeemed without the loss of a single cent to the holders. The capital was $1,048,000; specie, $389,800; circulation, $1,439,000; deposits, $2,851,000. MR. LAWYER: In 1898 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 1800 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. 13, 1804, with a capital stock of $1,500,000 in shares of $100 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 $3,500,000, including the capital stock. The cashier was required to give bond for $50,000; the total amount of notes to be put into circulation by the banks, together with the debts, were restricted to $4,500,000, 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 1 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 8 to 1. The banks at such times kept their coin reserve up by keeping the discounts down. The banks of Virginia from 1827 to 1860 had a prosperous period, keeping on an average $10,000,000 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 1861, and they were at a discount of only one-quarter of one per cent in New York. On Jan. 31, 1860, the capital was $16,000,000, specie was $2,943,000, circulation was $9,812,000, deposits $7,729,000. The Bank of the State of Missouri was started in 1837, 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 $3,450,000. In 1856, 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 $2,200,000, although its stock of $1,400,000 specie warranted notes to the amount of $4,200,000, 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 5 to 25 per cent. So valuable were the notes of the banks of the State of Missouri in California in the '50'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 1857, chartered seven banks of issue, with branches conveniently located for the accommodation of business. These banks were promptly organized in the spring of 1857, 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 1857 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 $5.00, 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 $3.00 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 1857. The capital in 1863 was $11,247,000; specie, $3,666,000; circulation, $4,037,000; deposits, $3,434,000. 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 1848, 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 $100,000; nor was the average capital outside of Boston more than $160,000, and including that city, it was not more than $206,000. By 1860 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 1840 to 1860 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 1840 was only 23 per cent of that permitted. The circulation of 1850 was only 40 per cent of that permitted; and the circulation in 1860 was only 36 per cent of that permitted. During every year from 1840 to 1860, 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 $8,150,000 in 1850, and notes outstanding amounting to $7,300,000, while Boston with $33,200,000 of capital had only $7,500,000 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 1857. The authorized note issue of the five hundred and ten banks constituting the Suffolk System with capital ranging all the way from $25,000 to $500,000 each was $131,000,000. In 1856, the year before the panic, the note issue amounted to $50,000,000, and the deposits amounted to $32,000,000. In 1857, as the result of the panic, the note issue rose to $55,000,000 and the deposits dropped to $25,000,000; in 1858, one year after the panic, the note issue had fallen to $36,000,000, and the deposits had risen to $47,000,000, or there had been a conversion of $20,000,000 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 $131,000,000, they never exceeded $57,000,000, which was the highest point of circulation, and that was reached as the result of the panic of 1857, and that they averaged $43,000,000 from 1840 to 1860. _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 1856, the year before the panic, was four hundred and ninety-five, and in the year 1858, 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 1 to 5 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 1840 to 1860 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 1 per cent of all the notes in circulation would have paid all the notes of the banks that failed under the Suffolk System from 1840 to 1860, it would have taken a tax of one-fifth of 1 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, 1841.) "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, 1852.) "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. 31, 1857.) "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, 1848.) "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, 1851.) "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_, 1854.) "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, 1865.) "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, 1865.) 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 20 to 33 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 $500,000,000 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 $500,000,000. 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 $500,000,000, they would have to call loans and shift conditions until they could scrape up $500,000,000 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 $11,579,000 No limit except $12,115,000 $19,777,000 33% Coin Reserve Ohio $9,057,000 $10,000,000 About $9,057,000 $11,697,000 Par Indiana $5,753,000 No limit but a $1,917,000 $1,186,000 12-1/2% penalty for failure to redeem in coin Iowa $1,439,000 $2,096,000 70% $389,800 $2,851,000 Virginia $9,821,000 $14,725,000 70% $2,943,000 $7,729,000 Missouri $4,037,000 $10,998,000 38% $3,666,000 $3,434,000 Suffolk System $44,000,000 $131,000,000 30% $10,058,995 $41,208,000 _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 10 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 27 banks in Canada, with 2,000 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 5 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 5 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 1860. 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 1804, 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 1857, 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 1837. 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 10 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 1875 and the silver hallucination of 1896. 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 50 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 $170,000,000,000 (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 1863. 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 1896. 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 1860, 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 1860 approximately $300,000,000 of gold, and that our banking resources were approximately three billion dollars ($3,000,000,000); in other words, that the gold represented about 10 per cent of our banking resources. Today we have banking resources in excess of twenty-five billion dollars ($25,000,000,000) and our gold is only one billion eight hundred and fifty million dollars ($1,850,000,000), or our gold represents only about 7 per cent of our banking resources. In other words, our gold reserves today are not as strong as they were in 1860 by at least 33 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 1860, 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. 23, 1863, 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 ($6,500,000,000). The trust feature of the banking business, as followed today, had not even been heard of. Then by a tax of 10 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 14, 1912, reached the surprising and startling figures of five billion four hundred and three million dollars ($5,403,000,000). 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 1890 were estimated at only five billion four hundred and fifty million dollars ($5,450,000,000) or only $47,000,000 more. In other words, the increase in our banking resources in four years ending with June 14, 1912, were almost equal to the entire accumulation of our banking resources from the first settlement at Jamestown in 1607, two hundred and eighty-three years ago. Mulhall, the English statistician, stated that the banking resources of the entire world in 1890, including the United States, were a little less than seventeen billion dollars ($17,000,000,000), and estimated that our banking resources at that time were a little less than seven billion dollars ($7,000,000,000), or about two-fifths of the total banking power of the world. Today our banking power exceeds twenty-five billion dollars ($25,000,000,000), while that of the entire world is estimated at about fifty-five billion dollars ($55,000,000,000). In other words, we now have more than 45 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 1890 to 1912. We now have more than twenty-five million toilers. Our productions in 1912 will exceed thirty-five billion dollars ($35,000,000,000). Our foreign trade will reach four billion dollars ($4,000,000,000). Our bank clearings will probably pass the one hundred and seventy billion dollar ($170,000,000,000) mark. Our total transactions (of all kinds) will approximate five hundred billion dollars ($500,000,000,000). 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 1907, 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 1863, 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 $76,000,000 of capital, owing individual deposits of $842,000,000. There are thirteen thousand three hundred and eighty-one state banks, with $459,000,000 of capital, owing individual deposits of $2,912,000,000, with $250,000,000 additional liabilities. There are one thousand four hundred and ten loan and trust companies, with $419,000,000 capital, owing individual deposits of $3,674,000,000, with $450,000,000 additional liabilities. Here are sixteen thousand eighty-three stock savings banks, state banks and trust companies, with $904,000,000 capital, owing individual deposits of $7,428,000,000. 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 $11,198,000,000. The capital of the national banks is $1,033,570,000; their individual deposits are $5,825,000,000 and the amount due to banks is $2,178,000,000. 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 2 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 6 per cent interest; it is clear that outside of other expenses, my profits will be 4 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, $85.00, and will then have to pay the Government in addition for the transmission of the notes about twenty cents per $1,000. Now if I should receive deposits amounting to one hundred thousand dollars and should pay interest on them at the rate of 2 per cent per annum, and should loan them out at the rate of 6 per cent to some of my customers, my profits would be 4 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--15 per cent; that is, I am carrying fifteen thousand dollars ($15,000) against the deposits and also fifteen thousand dollars ($15,000) 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 1893 and 1907. 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 17 per cent. The reserves of all the other banks amount to only 5 per cent; and, excluding the mutual savings banks, the reserves of all the remaining banks amount to only 7 per cent. The cash reserves of the banks of the United States should under no circumstances fall below 15 per cent, and under some circumstances they should amount to at least 30 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 50 or 60 per cent of our cash reserves, or say 10 per cent of our individual deposits, and 5 per cent of our time deposits or savings accounts. In this way, we shall centralize and mobilize about $1,250,000,000 of our gold, which now exceeds $1,850,000,000. 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 $200,000,000. This practice is the result of experience, not only in the times of panic, such as 1893 and 1907, 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 $1 certificates, $2 certificates, $5 certificates, $10 certificates, $20 certificates, $50 certificates and in denominations of $100, $1,000, $10,000, 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 10 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 10 per cent upon bank note issues can also put a tax of 10 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 $17,000,000,000 individual deposits of which $6,480,000,000 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. 1 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, 7 per cent of their deposits and 7 per cent of their note issues will be deposited with the board of control. Later this should be increased to 10 per cent. Let us assume that this 7 per cent of their deposits and 7 per cent of the notes issued amount to $100,000,000, 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 $1,250,000,000 (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 5 to 20 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 10 per cent ultimately of all individual deposits and 5 per cent of savings deposits. This would give us at the present time about one billion dollars ($1,000,000,000) of cash reserve, and about one billion two hundred and fifty million dollars ($1,250,000,000) 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 1906, 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 1863 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 35/1000 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 3/100 of one per cent. MR. LABORINGMAN: 3/100 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 3-1/2 cents on every $100; only one-third of one cent on $10, and one-third of one mill on $1. 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 25, 1913. Mr. Joshua Farmer, Loraine, New York. DEAR SIR: Your letter of January 22d 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 $2,555,700,000. The losses sustained by creditors of failed National banks (actual for closed receivership and estimated for those not closed) will approximate $44,100,000, or an annual average loss of $900,000. The average annual loss is, therefore, 0.0352 per cent of the annual average deposits in active banks. Of the 525 National banks placed in the charge of receivers, the affairs of 478 have been finally closed and the losses to creditors definitely determined. The liabilities of 478 insolvent National banks the affairs of which have been finally closed amounted to $219,357,100 Creditors received in dividends, offsets, etc. 181,215,826 ------------ Loss to creditors $38,141,274 Creditors, therefore, received an average of 82.50 per cent, the loss averaging 17.41 per cent. There are now (September 30, 1912) 47 insolvent banks in process of liquidation by receivers, with liabilities of $34,314,633 Creditors have received (September 30, 1912) 26,750,925 ----------- Balance due creditors $7,563,708 Creditors of these 47 insolvent banks have, therefore, received an average of 77.9 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, 17.4 per cent. During the past ten years 119 National banks have been placed in the charge of receivers. The affairs of 78 of these banks have been finally closed and 41 are yet in the charge of receivers. The liabilities of these 119 banks, as shown by the enclosed statement, aggregate $66,804,214. Creditors have received $56,252,544, or 84.20 per cent. If creditors were, therefore, paid no further dividends, the loss during the ten years mentioned would average only about 15.80 per cent. It cannot at this time be determined what the ultimate loss will be to creditors of the 41 insolvent banks which failed since 1902. 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 20,000,000 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 1865 Congress passed a law imposing a tax of 10 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 10 per cent, or even 20 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 $100,000,000 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 $500,000,000 to $1,000,000,000, or more, according to the percentage of reserves the banks holding them may be carrying. MR. BANKER: I would impose a tax of 10 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 2 per cent upon the average. I would impose a tax of 2 per cent upon our bank note issues, because banking is carried on upon about that basis. If a bank pays 2 per cent upon deposits, and 2 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 2 per cent tax upon the bank notes, which would amount to approximately $25,000,000, 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 1 per cent per annum upon the $730,000,000 2 per cent United States bonds; so that the Government could convert these 2 per cent bonds into 3 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 2 per cent upon the bank notes would produce about $25,000,000 a year. How do you make that out, when we have only $750,000,000 of bank notes out? That would give us only $15,000,000. 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 10 per cent upon their individual or commercial accounts, and 5 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 $500,000,000, 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 $17,000,000,000, would be increased to only seventeen billion five hundred million dollars ($17,500,000,000), an increase of only 3 per cent, while our reserves, which now amount to about $1,600,000,000, would be increased by $500,000,000, or nearly 33 per cent. MR. LAWYER: I see, then, that you propose to increase the note issue about $500,000,000. This would give us a note issue of $1,250,000,000, and 2 per cent of this would be $25,000,000. 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 $3.80/100 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 15th 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 $350,000,000 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 200 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 ($1,250,000,000). 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 ($1,250,000,000) 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 $2 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 1803, when the Bank of France was established, the financial resources of France were without official record, but comparatively nominal. In 1844, 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 $500,000,000. The total note issue of England, Scotland, and Ireland was less than $200,000,000; the public and private deposits in the Bank of England were less than $75,000,000; and the gold in the Bank of England was less than $75,000,000. In 1873, when the Imperial Bank of Germany took its present form, industrial Germany was still slumbering; and the bank resources probably did not exceed $1,000,000,000. The capital of the incorporated banks was about $425,000,000, the notes were about $325,000,000, and the reserves held about $30,000,000. The banking resources of the United States are today more than ($25,000,000,000) twenty-five thousand million dollars and our foreign trade more than ($4,000,000,000) 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 1. _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 2. 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 3. 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 120,000 square miles of territory. France has 204,000 and Germany 208,000 square miles. All Europe, outside of Russia, is only about half the size of the United States. It has 1,600,000 square miles, while we have 3,026,000 square miles. Including Russia, all Europe has only 3,600,000 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 $35,000,000,000 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 1803 and the German Empire of 1873 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 4. 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 5. 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 6. 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 7. 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 8. 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 9. 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 10. 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 11. 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 12. That the president of the bankers' council shall be chairman of the board of control. SECTION 13. That the president of the bankers' council shall be a deputy United States comptroller. SECTION 14. 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 15. 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 16. 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 17. 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 18. 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 19. 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 20. 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 21. 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 22. 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 23. That the place of business of the American Reserve Bank shall be Washington, District of Columbia. SECTION 24. 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 25. 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 26. 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 27. 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 28. That the Comptroller of the Currency shall ex officio be a member of the board of directors of the American Reserve Bank. SECTION 29. 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 30. 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 31. 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 32. 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 33. 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 34. 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 35. 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 1899, 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 1818 to 1865, 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 36. 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 37. 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 38. 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 20 per cent. The average per cent of gain to the banks would be about 5 per cent upon the amount of notes outstanding (approximately $1,250,000,000) or $60,000,000. 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 39. 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 7 per centum of its average deposits during the preceding calendar six months, and in addition thereto an amount equal to 7 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 25 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 40. 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 7 per centum of its average deposits during the preceding calendar six months and 7 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 1 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 10 per centum of its average deposits during the preceding calendar six months and 10 per centum of its national bank notes taken out for issue and circulation. SECTION 41. That every national bank shall carry a cash reserve of 6 per centum of all of its individual deposits subject to check up to six million dollars and one-half of 1 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 10 per centum in cash. SECTION 42. That every national bank shall carry a cash reserve of 20 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 33 per cent up to 50 per cent. SECTION 43. That any national bank may at any time fall 75 per centum below its required cash reserve: _Provided, however_, That its average cash reserve from January 1st to December 31st shall be equal to its required cash reserve. SECTION 44. 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 45. 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 46. 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, 10 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 10 per centum penalty that may result from a demand for gold during a panic, crop-moving period, or any unusual or extraordinary condition. SECTION 47. 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 100 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 48. 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 30. COMMENT:--You will observe, gentlemen, that by Section 43 a bank is allowed to fall 75 per cent below its average cash reserve; that by Section 45 it can buy gold from the Board of Control with its commercial paper and build up the reserve; also that by Section 47 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 49. 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 50. 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 51. 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 52. 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 53. 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 54. 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 55. 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 56. 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 57. 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 58. 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 1 per centum upon the average amount of notes in actual circulation during the preceding six months. COMMENT:--The tax is placed at 2 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 59. That the tax so paid by the banks upon the national bank notes, as provided in Section 58 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 1 per centum per annum upon all the United States 2 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 5 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 60. That to any national bank which has complied with section thirty-nine of this Act the United States Government shall return the 5 per centum fund deposited with it for the purpose of redeeming its bond-secured bank notes. SECTION 61. 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 62. 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 63. 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 10 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 10 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 64. 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 65. 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 66. 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 1 per centum for each additional five hundred thousand dollars up to ten million dollars, and upon this amount and all additional amounts, 10 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 67. 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 68. 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 69. 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 70. 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 71. 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 5 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 5 per centum against such savings account. SECTION 72. That the said 5 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 $350,000,000 of the present bonds held by the national banks for circulation, as the total savings now approximate seven billion dollars ($7,000,000,000). SECTION 73. 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--50 per centum thereof in three months, 50 per centum in six months. SECTION 74. 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 10 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 75. 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 10 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, 74 and 75, 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 76. 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 2 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: 1 per centum on the tenth days of January and July of each year on the average balance during the preceding six months. SECTION 77. 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 2 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 2 per centum shall be paid into the reserve fund of the United States Treasury in gold coin. SECTION 78. 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 59, provision was made for a 5 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 78 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 79. That the American Reserve Bank shall, on the first days of January and July of each year during the life of the 2 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 1 per centum per annum of all the United States 2 per centum bonds or consols now aggregating about seven hundred and thirty million dollars. SECTION 80. That when the American Reserve Bank shall have paid into the United States Treasury the first half of 1 per centum in accordance with the preceding section, the United States Government shall thereupon refund all of the 2 per centum bonds or consols into 3 per centum bonds or agree to pay 3 per centum thereon; and thereafter the Government shall pay 3 per centum interest upon all of said 2 per centum consols. COMMENT:--By this section all the 2 per cent bonds will be converted into 3 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 $730,000,000. 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 81. That when the United States Government shall have made provision for refunding the 2 per centum bonds or consols into 3 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 82. 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, 81 and 82, 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 83. 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 1 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 1 per cent upon the amount of deposits held. SECTION 84. 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 1 per cent of its deposits. SECTION 85. The fund so created by the payment of the said three-fifths of 1 per cent to the American Reserve Bank shall constitute and be known as "The Depositors' Insurance Fund." SECTION 86. 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 87. 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 88. 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 6 per cent per annum, payable annually. SECTION 89. 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 90. 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 91. 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 92. 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 1 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 93. 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 94. 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 1 per cent to carry this act into effect, they are hereby authorized and empowered to do so. SECTION 95. 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 83 to 95 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 $35,000,000 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 $38,000,000, and the estimated loss where the failed banks have not been closed out is only $6,000,000, or a total loss for the whole time of only $44,000,000. 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 96. That whenever the accumulations from the tax upon the national bank notes shall reach an amount equal to 5 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 1 per centum per annum upon all the 2 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 97. 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 77 and 96, also in Section 97, 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 $346,681,016. The present amount of the Reserve Fund is $150,000,000. Now after we have paid into this fund $196,681,016, 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 98. 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 ($1,250,000,000). 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 $900,000,000 now in the banks and $978,000,000 in the channels of trade, or $1,878,000,000 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 $350,000,000 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 1890. 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 1844 provide that only the Bank of England should issue bank notes, and why did Germany follow in her footsteps in 1874, 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 1797 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 1810, 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 1800 to 1844 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 1821, when the Bank of England resumed specie payments. In 1824 gold began to leave England again, and continued to go throughout 1825, when the crisis came. In 1827 the Bank seemed to be convinced that the principles of the Bullion Report were correct, and it tried to apply them in part. In 1836 and 1837 there was more financial trouble, and again at the end of 1838 another serious period arrived. By the end of 1839 the specie had dropped from $50,000,000 to $14,000,000. 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 1844. 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 $72,000,000 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 1846. The new scheme was to be put to the test within two years after the English Bank Act was passed. On Aug. 29, 1846, the amount of bullion in the bank was $81,000,000. The bank notes outstanding were $102,000,000. By Jan. 9, 1847, the bullion was down to $71,000,000. The bank notes outstanding were $104,000,000. By April 10, 1847, the bullion was down to $48,000,000. The bank notes outstanding were $101,000,000. _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 $30,000,000 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 1844 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 1856, 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 1847, 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 3-1/2 per cent, then to 4 per cent, and finally to 5 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 1844 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 33 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 65 per cent of its note issue. The Bank of England usually carries about $150,000,000 in gold, and has outstanding about $250,000,000 bank notes; the difference between the gold and this amount being covered by Government securities. Her deposits are $250,000,000. The Imperial Bank of Germany carries about $200,000,000 of gold, and has outstanding about $700,000,000 bank notes. Her deposits are about $250,000,000. The Bank of France holds about $650,000,000 of gold, and has outstanding about one billion dollars of notes ($1,000,000,000). Her deposits are usually about $100,000,000. 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 $200,000,000; 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 14 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 $16 per capita and the variation averages now about $4 per capita. The same ratio would give us an expansion and contraction every fall of about $400,000,000 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 99. 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 100. 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 101. 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 102. 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 103. 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 104. That the term of service of the members of the committee shall be one year. SECTION 105. 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 106. 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 107. 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 50 per centum of a fair valuation thereof. SECTION 108. 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 109. 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 110. 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 111. 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 112. 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 113. 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 114. 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 115. 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 116. 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 117. 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 118. 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 119. 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 120. 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 121. 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 122. 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 123. 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 124. 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 125. 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 126. 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 127. That the officers of the National Land Credit Bank shall consist of a president, vice-president, secretary, treasurer, and auditor. SECTION 128. 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 129. 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 130. 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 131. 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 50 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 25 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 132. 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 133. 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 134. 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 135. 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 10 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 10 per centum per annum. SECTION 136. 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 137. 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 138. 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 139. 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 140. 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 141. 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 142. That when the surplus account of the National Land Credit Bank shall be equal to 50 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 50 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 143. 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 144. 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 145. 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 146. 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 147. 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 3 per centum per annum until paid: _Provided, however_, That this loan shall not extend beyond the period of ten years. SECTION 148. 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 149. 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 150. 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 29, 1910, 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 $125,000,000. 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 1907. "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 $100,000 of notes so called in the loans might be reduced to an average of $500,000, 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 20, 1912. 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 16 to 1. "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 1907. 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; 1907 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 500 banks all told, what can you expect it to do here with more than 25,000 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 $500,000,000, 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 5 per cent, 6 per cent, 7 per cent, 8 per cent, 9 per cent, 10 per cent? No. The New York _Evening Post_, in its annual review, says it was from 12 per cent to 20 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 7-1/2 per cent and 1-1/2 per cent for three months, or upwards of 13 per cent. "I was told of one loan to one of the largest banks in Berlin, running for a whole year at 7 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 15 to 20 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 25,000 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 25,000 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 33 per cent of gold and 66 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 1900 to 1910 the gold accumulated by Russia amounted to upward of $200,000,000; that accumulated by France, upward of $300,000,000; that accumulated by England, where nothing but gold is treated as reserves and where there has been comparatively little growth in business, $32,000,000. The United States accumulated $1,100,000,000, while Germany, with all her development of trade during the last ten years, accumulated only $40,000,000 of gold when it ought to have been ten times as much, all things considered, or $400,000,000. 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 15 per cent and 20 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 15 per cent reserve. To this they protested, saying that it meant the accumulation of at least $250,000,000 in gold; but Havenstein persisted and insisted upon his demand. Now, gentlemen, if you add the $40,000,000 they had accumulated, to what Havenstein insisted that they should accumulate, or $250,000,000, you have $300,000,000 as a minimum. It is altogether probable that $400,000,000 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 $346,000,000 United States notes or greenbacks, the $650,000,000 of legal tender silver and a part of the $750,000,000 national bank notes in the reserves of our banks, we would now have in the United States $2,500,000,000 of gold instead of only $1,850,000,000. 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 1792, a differential of only one-half to one per cent drove all the gold out of the country by 1832, and that from 1834 to 1860 the changed ratio drove every dollar of silver out of circulation. Who does not know that from 1861 to 1865 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 1879? "Has any banker over fifty years of age forgotten the silver struggle from 1879 to 1894, when, because of the silver purchase act by which we only added $50,000,000 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 $3,000,000,000, possibly $3,500,000,000, 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 $1,250,000,000, allowing for a differential of $250,000,000 either way as a possibility. In other words, we would have as a result not more than 40 per cent and possibly not more than 30 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 20 per cent, let us assume, first, that a national bank called 'X' has $5,000,000 of deposits and holds a 20 per cent reserve, or $1,000,000 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 $1,000,000 of commercial paper for $1,000,000 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 $1,000,000 which stood guard over $5,000,000 of debts now is called upon to protect $12,000,000 of debts, or only about an 8 per cent reserve as against 20. "The X National Bank owes $5,000,000 of deposits against $1,000,000 deposited with the association. The association owes the X National Bank the $1,000,000 deposited with it and $1,000,000 of notes outstanding which it issued to the Y National Bank. The Y National Bank has liabilities outstanding of $5,000,000 with the notes as reserves, or a net expansion and inflation of $7,000,000. "It has been assumed or claimed by some advocates of the scheme that probably $1,000,000,000 of gold would be deposited with the association, in which event there would be an expansion and inflation of $7,000,000,000, or a total liability of $12,000,000,000 where now there are only $5,000,000,000. "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 50 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 1913-4-5-6-7 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 1907. "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 1907, 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 1913 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 1907 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 $100,000, the amount of my capital, and by going to my Board of Control, $100,000 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 1893 and 1907, 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 $60,000,000 in the treasury of the American Reserve Bank, to redeem them if my bank failed. _Third_: That the American Reserve Bank with $1,250,000,000 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 $100,000 down to $25,000, 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 $100,000 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 20 per cent of my capital, and I had paid up 10 per cent, or one-half of it, or $10,000. Then, I must have a deposit or balance with his institution, possibly as much as $20,000, if I wanted to borrow as much as $100,000. 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 $100,000 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 6 per cent upon $100,000, or $6,000 per annum. Mark this, put it in your pipes and smoke it, that under our plan, allowing for the cost of my reserve of 15 per cent on $100,000 of notes, or 6 per cent on $15,000, or $900, and allowing my tax of 2 per cent on $100,000 of notes, or $2,000, it would make a total cost of only $2,900. My bank would, as you can see, be the loser of $3,100 by using the Aldrich scheme as against our plan. Do not fail to remember that the largest part of the 2 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 $3,100 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 $5,000,000 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 800 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 $50,000,000; 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 $50,000,000 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 $1,250,000,000 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 1781. The confederation was too weak to be an efficient government, and so we formed a "Stronger Union," the present Federal Government in 1789. 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 $400,000,000 $36,500,000 $72,000,000 $45,000,000 Deposit 1,500,000,000 100,000,000 250,000,000 200,000,000 Note Issue 2,400,000,000 1,000,000,000 (See Note.) 400,000,000 Possible Note Issue 4,500,000,000 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 $90,000,000._ 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 $2,000,000,000, and the subscription to the National Reserve Association must be 20 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 $1,500,000,000 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 51, that the National Reserve Association can issue $900,000,000 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 $1,500,000,000, as contemplated by the author of the National Reserve Association, it could issue $2,400,000,000 before beginning to pay any tax on circulation. By paying a tax of 1-1/2 per cent per annum, it could put out $300,000,000 more notes, not covered by lawful money, or $2,700,000,000; then, by paying a tax of 5 per cent, it could go any limit until its lawful money reserve was reduced to 33 per cent. This makes a possible issue of $4,500,000,000, 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 23 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 34.--The National Reserve Association shall have power both at home and _abroad_ to deal in certain things." SECTION 36.--"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 $10,000,000 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 45 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 26 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 29, 1908, 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_ _(1) A commercial banking business._ _(2) A Savings bank business._ _(3) A Trust company business._ _(4) 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 7 per cent at the outset, and be gradually increased to 10 per cent, which would amount, at the present time, to a central gold reserve of upwards of $1,250,000,000. 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:_ _(1) 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._ _(2) 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:_ _(1) Bank supervision and control over all members._ _(2) 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._ _(3) Such a free check system over every commercial zone, precisely as New England has had since 1899, 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:_ _(1) To make each individual bank absolutely independent, because it has an unlimited resource in the coöperative gold reserve._ _(2) To make every commercial zone as free and independent of every other commercial zone, as England is of France, or France is of Germany._ _(3) 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._ _(4) To insure all depositors in National banks against loss._ _(5) To liquefy and therefore develop a general market for commercial paper._ _(6) To save the business interests of this country more than $200,000,000 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 1897 or for more than fifteen years, and had incorporated in his bill of 1908. 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 25,000 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 1908 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 1908, 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 1911. 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 2, 1913. =======================+================+=================+============= |General Stock |Held in Treasury,| Money in |of Money in the |as Assets of the |Circulation. |United States. | Government. | +----------------+-----------------+--------------- |January 2, 1913.|January 2, 1913. |January 2,1913. -----------------------+----------------+-----------------+--------------- Gold coin (including | | | bullion in Treasury) | $1,878,57,122| $170,983,732 | $623,159,221 Gold Certificates[2] | | 128,747,19 | 955,686,972 Standard Silver Dollars| 565,481,020| 165,022 | 74,528,998 Silver Certificates[2] | | 12,814,458 | 477,972,542 Subsidiary Silver | 174,538,163| 17,814,855 | 156,723,308 Treasury Notes of 1890 | 2,797,000| 10,115 | 2,786,885 United States Notes | 346,681,016| 6,995,837 | 339,685,179 National Bank Notes | 750,972,246| 30,787,771 | 720,184,475 +----------------+-----------------+-------------- Total | $3,719,046,567| $368,318,987 |$3,350,727,580 -----------------------+----------------+-----------------+-------------- Population of continental United States January 2, 1913, estimated at 96,496,000; circulation per capita, $34.72. FOOTNOTES: [Footnote 2: 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 14, 1912. ===========================+=================+============+============= Classification. |National Banks. |All Other |All Reporting | | Banks. | Banks. ---------------------------+-----------------+------------+-------------- Gold Coin | $149,294,417 | 88,210,552 | 237,504,970 Gold Certificates | 437,081,380 |204,494,410 | 641,575,790 Silver Dollars | 12,637,221 | 10,230,733 | 22,867,954 Silver Certificates | 138,569,628 | 55,248,220 | 193,817,848 Subsidiary and Minor Coins| 22,555,692 | 15,026,738 | 37,582,430 Legal-tender Notes | 188,440,207 | 63,576,675 | 252,016,882 National Bank Notes | { 47,564,277 }| 58,037,130 | 105,601,407 Cash not Classified | {of other banks}| 82,302,986 | 82,302,986 ---------------------------+-----------------+------------+-------------- Total | $996,142,823 |$577,127,445|$1,573,270,268 ---------------------------+-----------------+------------+-------------- Amount of money held by United States Treasury, $368,318,987. Amount of money held by all banks, $1,573,270,268. Amount of money held by the people, $1,777,457,312. Total amount of money in the United States, $3,719,046,567. APPENDIX C Assuming that the plan should be adopted within the year 1913, and taking round but approximate figures, the amount of reserves required to put the plan into operation would be as follows: Individual deposits, commercial $11,000,000,000 Due to banks 1,000,000,000 Band credit currency, notes 1,250,000,000 --------------- _Total demand liabilities_ $13,250,000,000 Central reserves against this amount at 10% $1,325,000,000 Cash reserves on this amount at an average of 8% 1,060,000,000 Cash reserves against savings held amounting to $3,000,000,000 at 5% 150,000,000 -------------- _Total reserves required under our plan_ $2,535,000,000 _Amount of circulation in the United States that may be used as reserves_: Gold coin in the United States $1,900,000,000 Standard silver dollars 565,000,000 Subsidiary coin 175,000,000 Treasury notes, 1890 2,797,000 United States notes 346,681,000 -------------- $2,989,478,000 Less gold held in the U.S. Treasury as a Reserve Fund 150,000,000 -------------- _Total possible reserves_ $2,839,478,000 Amount of reserves required by our plan $2,535,000,000 -------------- Leaving a net amount of lawful reserves for circulation among the people of $304,478,000 Amount of subsidiary coin $175,000,000 Amount of silver dollars out 75,000,000 Amount of $1 and $2 bills out 225,000,000 ------------ $475,000,000 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 $1,780,000,000 If we deduct the amount of lawful reserves left for circulation among the people $304,478,000 -------------- _We have the total amount of bank note circulation_ $1,475,522,000 Amount of circulation provided for 1,250,000,000 -------------- Additional amount of bank credit currency to be provided $225,522,000 _But this increased amount of bank notes, amounting to $225,522,000, 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, 501 Appendix B, amount of money held by banks, 502 Appendix C, reserves required under proposed plan, 503 Acceptance, what is an, 87 desirability of, 90 liability of, same as deposit, 93, 390 reserves against, should be same as against deposits, 96 Acceptance should be allowed only on goods in transit, 96 would develop a general market for commercial paper, 91 Acceptances, 428 Agriculture produced its money, 9 Aldrich, Nelson W, 60, 369 Aldrich, Wilbur, 30 American Reserve Bank, formation of, 389 duties of board of, 415 fund of, 433 how reserve is created, 422 government balance carried with, 434, 435 shall maintain parity of silver and gold, 439 Aldrich Plan and Plot, exposed, 459, 484 cost of currency of, 476 branches and foreign agencies, 487 economic objections to, 462 expansion and inflation of, 469 inconvenience and uselessness of, 475 loss of gold by, 469 800 associations possible, 478 was central bank, 484 possible capital and issue, 485 why public favored at first, 494, 499 would not effect reforms demanded, 498 reasons for its rejection, 500 Aristotle, 29 Bagehot, 202, 226 Bank, what is a, 225 credits of equivalent to gold, 234 failures of, 198 deposit, system of, 228 holding companies in, 237 at Hamburg, 226 number of, in United States, 235, 236 number and resources of, 374 independence of individual, 474 penalty for not carrying reserves, 431 repression in development of, 238 Bank, description of, by MacLeod, 226 by Bagehot, 226 United States, 71 at Venice, 226 Banks, no change in National, 239 increase in business of, 239 various kinds and business of, 375 Banker, is what, 224 Banking is Interstate Commerce, 216 is kind of insurance, 230 bank deposits and bank notes identical in, 231 necessary reforms in, 245 resources of, in 1860, 370 amount of, in 1890, 372 amount of, in 1912, 372 amount of, in world in 1890, 373 Bancroft, George, 165, 166 Bank credit currency, definition of, 67 first lien on assets, 69 additional amount permitted, 424 cost of transmission, how paid, 425 facility of supplying currency, 360 identical with check, 376 increase of, 400 how described and issued, 421 less profitable than deposits, 376 not understood, 378 tax on, how used, 427 strength of, 473 Bankers' Council, formation of, 412 Bank notes, bond-secured, 36 are a first lien, 69 are Government credit, in circulation, 58 bear no relation to business, 58 cost of, as currency, 50 not money, 36 origin of, 57 objections to, as currency, 59 penalty for carrying, as reserves, 428 promise of, to pay money, 36 Bayard, James A., 179 Bill, draft of, 407 Board of Control, compensation of, 413 Boston, country clearing at, 300, 310 Bullion report, 441 California, first use of gold, 14 Canada, bank system of, 79 chart showing movement of currency in, 80 Canada, circulation in 1912, 81 free from panics, 444 Cannon, James G., 291 Capital, what is, 108, 109 active, passive and fixed, 109, 110 active, essential to commerce, 110 conversion of commercial, into fixed, 131, 132 real estate mortgages tie up, 134 Central bank, tax on notes of, 486 Chase, Salmon P., 57, 176 Check, what is a, 86 City bank, National, bank stock holdings of, 488 Boss system established by, 493 Chicago Clearing House examinations, 316, 318 Clearing House, 289 approved practices of, 379, 383 clearings prior to establishment of, 295, 296 country Clearing, established in England, 299 centralizing reserves of, 308 definition of, 290, 291 established in London, 291 first clearing in New York, 298 free zones, 309 functions adopted, 339 for each commercial zone, 419 Clearing House Certificates, issues of, 329, 330 Coins, amount of subsidiary, 43 description of subsidiary, 38 parity of value of, 37 total amount of silver, 43 token, 37 value of, 37 Colonial credit money, 144 depreciation of issues of, 156 effect of issues of, 155 issues by Continental Congress, 157 issue of, in Connecticut, 149 in Massachusetts, 146 in New Hampshire, 151 in New Jersey, 151 in North Carolina, 153 in New York, 153 in Pennsylvania, 152 in Rhode Island, 151 in South Carolina, 153 in Virginia, 152 price of issues fixed, 158 succession of events following issue of, 173 Colwell, Stephen, 290 Congress, will legislate only after discussion, 369 Connecticut, bank commissioners report 1841, 357 Conklin, Roscoe, 180 Coöperative societies, conditions in Germany, 281 conditions in Belgium, 283 extent of business, 279 in United States, not a subject of banking legislation, 285 profits of, 279 main offices described, 281 started in Rochdale, 279 success assured in United States, 286 wholesale houses of, 280 Conant, Charles A. (Scotch currency), 68 Credit, definition of, 114, 124, 125 ample reserves essential to sound, 123 comparative value of, 124 contraction of, by an instrument of, 125 dangers of, 115 expansion as a result of, 121 Germany's abuse of, 124 importance of, 113 our banks should be ready to prove their, 124 per cent, of business done by, 112 production by use of, 119 proper functions of different forms of, 141, 142 use of, in Lancashire, 126 various forms of, 117 Webster on, 111 Crédit Foncier, amortization of mortgages, 266 capital of, 263 can take deposits, 265 formed when, 261 how governed, 262 Currency, definition of, 46, 441 cost of bank credit, 49 definition of bank credit, 67 deposits identical with bank credit, 64, 65 economy of bank credit, 51, 66 consists of, 47 proper system of, 48 right kind of, 55 what it is not, 47 redemption of, 67 Deposits, guarantee of, 393 no difference between currency and, 66 interchangeability of currency into, 64, 65 Depositors, insurance of, 395, 435, 437 cost of insurance of, 395 Depositors, insurance fund, how created, 435 losses of, how paid, 436 Deutsche Bank, 465 Diagrams, zone, subdivisions, 387 Canadian currency chart, 80 Clearing House, 295, 297 course of check, 311-313 Egypt, absorption of gold by, 20 Electricity, importance of, 113 Ellsworth, Oliver, 168 England, Bank of, 206 dissimilarity of, with banks of France and Germany, 443 failure of bank act, 441 resources, when established, 407 not bank of issue, 485 Exchange, what is, 84 Bill of, 87 broad definition of, 96 difference between draft and bill of, 87 is equal to gold in all transactions, 98 Origin, ancient, 94 Farmers, number of, 249 Fessenden, William Pitt, 181 Forgan, James B., 318, 319 Fowler, Charles N., 336, 340, 460 Fowler, W.J., Deputy Comptroller, 395 France, Bank of, founded by Napoleon, 71 land used as basis of money in, 137 Government credit of France used as basis of money, 138 resources of bank, when established, 407 note issue of, 484 Gallatin, Albert, 292 Garfield, James A., 58 Germany, resources of bank, when established, 407 financial situation of bank, weak, 467 failure of bank act, 443 Gold, adopted as standard by United States, 18 by England, 18 amount of, 19 amount in United States in 1860 and 1912, 370 certificate, 28 changing value of, 31 monetary use of, 22 outlook for supply of, 24 production of, 23 United States share of, 22 universal standard of value, 19 Gold, total amount used as reserves, 32 what influences the movement of, 440 Gold reserves, how created, 222 Government, demand liability of, 42 Government issues preceding greenbacks, 174 Hamilton, Alexander, 161, 171 Herrick, Myron T., 249 Hallock, James C., 293, 300 India, absorption of gold by, 20 Indiana, Bank of the State of, 346 State Bank of, 73, 345 statement of bank of, 361 Interest, rate in United States, 249 France, 254 Germany, 249 Iowa, State Bank of, 73, 348 statement of Bank of, 361 Japan, Tried Bond-secured Currency, 59 Jefferson, Thomas, 170 Jevons, Stanley, 203, 291 Kentucky, Bank of, 73, 347 Land Credit Bank, Directors of, 450 dividends of, 454 losses, how borne, 455 put into operation, how, 456 outline of provisions, 268, 269, 270 Landschaften, business of modern, 261 modern, 260 origin of, 252 old, 255 spread of, 258 Law, John, 137 Lee, Richard Henry, 162 Legal tender, what is, 41 Liverpool, Lord, coins of the realm, 39 Loan Certificates, clearing house, 328 amount of, issued, 336 are bank credit currency, 336 denominations of, 329-333 lessons of, 333 London, clearing started in, 291, 302 Los Angeles, Clearing House, 316 Louisiana, bank act of, 343 statement of banks of, 361 Lubbock, Sir John, 299 MacVeagh, Franklin, 240, 405 Madison, James, 164, 165 Maine, Report of Bank Commissioner 1857, 357 and 1865, 358 Marshall, John, 58, 164 Mason, George, 163 Massachusetts, Report of Bank Commissioner, 358 Missouri, Bank of the State of, 73, 351 statement of Bank of, 361 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, 44 credit must not be called money, 33 description of, 29 functions of, 30 gold is our, 26 how made, 26 what are the pieces of, 27 "wild cat," "red dog," etc., 348 Morrill, Justin S., 17 Mortgages, amount of, 249 rate of interest on, 249 Mutual Credit Societies, number of, 274 in Massachusetts, 275 resources for short loans, 277 Ohio, Bank of the state of, 73 bank act of, 344 statement of bank of, 361 Paper, accommodation, 128, 131 commercial, 120 difference between commercial and accommodation, 129 Paine, Thomas, 162 Panic of 1907, 471 Pinckney, Charles, 163 Population, shifting of, 32 Price, what is, 104 Prices, causes of higher, 31 Printing, importance of, 112 Promissory note, what is a, 86 note and draft identical, 87 Property, what is, 104 difference between property and wealth, 104 Postal Savings Banks, 384 Raiffeisen, Friedrich Wilhelm, 272 Real estate, unfit as basis for currency, 136 Redemption, in coin essential, 50 Reforms demanded, 494, 495, 496, 497 Reserves, amount of, 200 amount held by national and other banks, Appendix B, 381 amount of central, 222, 381 additional, where obtained, 409 Bagehot, 202 bank notes as, 204 circumstances should control amount of, 200 character of, 201 average, in United States, 208 elasticity of, 208, 219 from what points considered, 199 how increased, 220, 221 Jevons on, 202 legal tender quality unnecessary to, 188 national banks, 207 promises to pay as, 204 present, inefficient, 218 penalty for not maintaining, 423, 431, 432 present method of, useless, 218 are measure of value, therefore must be coin, 205 state or city debts as, 204 silver, not used in Bank of England, 206 should be national, 211 superimposed, 218 State bank, 207 taxation to compel equal, 212 unfair to permit unequal, 209 United States notes not actual, 206 what constitutes proper, 203 Ricardo, 441 Root, L. Carroll, 334 Ruggles, Charles A., 301, 310 Scotland, description of, currency by Conant, 68 currency by White, 68 effect of bank credit in, 67 Schulze, Francis Frederick, 272 Shaw, Leslie M., 487 Shaw, William A., 17 Sherman, John, 183 Sherman, Roger, 150, 166 Silver certificate, a warehouse receipt, 40 Silver dollars, amount of, Appendix A, 36, 43 a government debt, 40 a subsidiary coin, 39 a demand for gold, 38 not money, 38, 40 weight of, 36 Spaulding, E.G., 183 Stevens, Thaddeus, 183 Steam, importance of, 113 Standard of value, 9 changes in ratio of gold and silver as, 17 gold, the natural selection of, as the, 24 qualities of gold as, 17 Sub-Treasury, deposits in, 243 Suffolk Bank system, 73, 353, 354, 355, 361 achievements of, 334, 335 Bank was first clearing house in United States, 337, 338 commissioner's reports on, 357, 358 description of, 75 destroyed by 10 per cent tax, 74 Sumner, Charles, 179 Talbot, Joseph T., 205, 231 Uap, money of, 15 United States, bank clearings of, 373 financial center of world, 404 foreign trade of, 373 important interests of, 409 production of 1912, 373 size of, compared with Europe, 409 total business transactions of, 373 United States Government, nature of, 410 taxing power, only resource, 189, 191 time obligations only should be incurred, 192, 410 unfit to meet demand debts, 189 United States notes or greenbacks, additional cost of war due to, 185 agreement to pay gold, 34 amount of, Appendix A and 35 bonds issued for, 52 constitutionality of, 185-187 cost of, as currency, 50, 56 cost of, since 1879, 53 depreciation of, 184 drive gold out, 206 how converted into gold certificates, 427, 438 issues of, 183 lowest value of, 35 not money, 35 price of, a quotation of government credit, 41 resumption of payment of, 53 suspended payment of, 34 unfit for currency, 55 Walsh, John R., failure of, 314 War, Civil, first loan for, 177 Washington, George, 162, 165 Wealth, what is, 104 difference between property and, 107 Webster, Daniel, 111, 170 White, Horace, 30, 155 Wilson, John W., clearing house examiner, Los Angeles, 316 Zone, credit bureau of, 323 organization of, 338, 411 organization, repetition of National Government, 483 places of, discount limited to, 479 publicity of organization, 476 should not stand alone, 480 state lines do not conform to economic, 419