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 MATERIALS FOR THE STUDY 
 OF ECONOMICS
 
 PRINCIPLES OF MONEY AND BANKING
 
 THE UNIVERSITY OF CHICAGO PRESS 
 CHICAGO. ILLINOIS 
 
 Bgents 
 THE BAKER & TAYLOR COMPANY 
 
 NEW YORK 
 
 THE CUNNINGHAM. CURTISS & WELCH COMPANY 
 
 LOS ANGELES 
 
 THE CAMBRIDGE UNIVERSITY PRESS 
 
 LONDON AND EDINBURGH 
 
 THE MARUZEN-KABUSHIKI-KAISHA 
 
 TOKYO. OSAKA, KYOTO 
 
 THE MISSION BOOK COMPANY 
 
 SHANGHAI 
 
 KARL W. HIERSEMANN 
 
 LEIPZIG
 
 PRINCIPLES OF MONEY 
 AND BANKING 
 
 A SERIES OF SELECTED MATERIALS, WITH 
 EXPLANATORY INTRODUCTIONS 
 
 BY 
 
 HAROLD G. MOULTON 
 
 THE UNIVERSITY OF CHICAGO PRESS 
 CHICAGO, ILLINOIS
 
 Copyright 1916 By 
 The University of Chicago 
 
 All Rights Reserved 
 
 Published June igi6 
 
 Composed and Printed By 
 
 The University of Chicago Press 
 
 Chicago, Illinois, U.S.A.
 
 PREFACE 
 
 This volume is the result of four years of experimentation in the 
 teaching of an introductory course in Money and Banking. It is not 
 a book of collateral readings or materials in the ordinary sense, but 
 is designed to serve the purpose of a text and at the same time to give 
 the student a breadth of view, a contact with reality, a stimulus to 
 independent thinking, and a training in judgment and discrimination 
 which are not afforded by the formal textbook. In a word, an attempt 
 has been made to combine in one volume the virtues of both the text 
 and collateral readings, and as far as possible to eliminate their defects. 
 To this end there has been selected a large number of comparatively 
 short arguments, ex-pressions of opinion, and points of view, supple- 
 mented by source materials, charts, tables, etc., which, while covering 
 the principles of money and banking as adequately as the ordinary 
 text, avoid the dogmatic tendencies inherent in the textbook method 
 and retain the suggestiveness of collateral readings without their 
 usual bulkiness and admixture of irrelevant material. These numer- 
 ous selections have, it is believed, been welded into an organic whole, 
 and unity of treatment has been secured, not only by careful arrange- 
 ment, but by means of general introductory statements prefaced to 
 each chapter or division. As a further aid to the orderly unfolding 
 and development of the subject the volume is accompanied by a series 
 of questions and problems based upon the readings and published 
 separately under the title: "Exercises and Questions in Money and 
 Banking." 
 
 During the four years of experimentation with the subject, a 
 large proportion of the selections in this volume have, in mimeo- 
 graphed form, been repeatedly tested by classroom use. The 
 exercises and questions have been developed with the readings and 
 also tried out in class, with the result that after each trial there has 
 been a very considerable revision, not only of the questions, but of 
 the arrangement and organization of the readings as well. Moreover, 
 these revisions have usually been made immediately following the 
 class sessions from day to day, while the improvements suggested by 
 the classroom discussions were fresh in mind.
 
 VIU PREFACE 
 
 The volume was originally intended to be used in a collateral 
 capacity with a formal textbook; but as the number and variety of 
 selections increased, the need for the text appeared to grow less 
 and less, until in my own teaching I now prefer to use the volume 
 independently of a textbook. Much of the material in Part 11 has 
 also been used in mimeographed form by an instructor in another 
 institution with a similar result; in the first semester it was used 
 with a text, while in the second semester the text was discarded. 
 This experience has led me to believe that the book may find its 
 greatest use in an independent rather than a collateral capacity. 
 
 The main purpose of a preface, I take it, is to reveal the point of 
 view of an author, or perhaps, more accurately speaking, to disclose 
 his hobby. My own "view" just at present is that if it comes to a 
 choice between a volume of this sort and a formal textbook as the 
 basis of a course in Money and Banking the advantage lies with the 
 book of selected materials. If the reader will bear with me I should 
 like to present the reasons for my faith. 
 
 If the purpose of education is merely to supply students with 
 predigested information, then the text is eminently satisfactory. A 
 student may, however, commit to memory the principles laid down 
 in the text, recite them in class, and write them down in examinations, 
 and still be not very much the wiser. For the usual text does not in 
 itself provoke thought and discussion to any great extent or lead 
 to careful analysis on the part of the student: these desiderata come 
 only through a challenge to the intelligence; and this challenge is 
 best made by means of the presentation, not only of conclusions, 
 but of the materials necessary to the formulation of conclusions. 
 To reach a full understanding of the principles of economics it 
 would seem to be necessary that the student should evolve, with 
 the guidance and aid of the instructor, his own conclusions and 
 principles. 
 
 This does not imply an inductive method in the sense that the 
 beginning student is to digest the vast data and raw material bearing 
 on a subject like Money and Banking and reach his conclusions after 
 a tedious process of analysis and synthesis. On the contrary, the 
 readings in this volume contain rather less of raw material and rather 
 more of conclusions and matured opinions of authorities in the field, 
 together with the conflicting views of various groups or classes in 
 society. The method may be called inductive only in so far as the 
 student's own conclusions are made to result from an analysis and
 
 PREFACE IX 
 
 weighing of conflicting views, opinions, and arguments. This must, of 
 course, be coupled with much deductive reasoning, and it is doubtless 
 best to refer to it simply as the discussion method without raising 
 the time-honored controversy over induction and deduction. 
 
 The presentation of varjdng points of view and of the philosophies 
 of different social groups, together with conflicting opinions and 
 conclusions of experts in the field., appears to me indispensable to a 
 genuine appreciation of the subject. A very serious problem in the 
 complex life of modern times lies in the specialized or group points 
 of view that prevail with reference to so many of our economic ques- 
 tions and the inability to rise above the narrowing influence of one's 
 special interest. The formal textbook seldom has a place for the 
 presentation of such conflicting points of view; and where it does, 
 they are given at second hand, usually in condensed summary- form and 
 almost wholly divorced from any manifestation of the spirit and feelings 
 of the groups or times that held such views. For example, in a chapter 
 on the silver movement in the United States the text-writer usually 
 summarizes the causes of the agitation, shows why the "Crime of 
 1873" was not a real crime, enumerates the main provisions of the 
 legislative acts passed by the silver people, shows the results of such 
 legislation in the troublous times of the early nineties, and concludes 
 that the restoration of bimetallism at the ratio of 16 to i would have 
 been unfortunate — a dull, uninteresting account of a movement 
 that roused the passions of millions of people for a generation. 
 It is impossible to give the college student of today who viewed 
 from his nursery window the torchlight processions of 1896 any 
 real conception of the nature of the silver movement or any genuine 
 appreciation of the important social and economic lessons it taught 
 without reproducing something of the spirit of the times, without 
 showing by means of their own burning language and arguments the 
 motives, impulses, and passions that influenced the men of that 
 generation. 
 
 Again, the assembling of material from a large number of authors 
 gives to a volume a richness of content that a single writer cannot 
 hope to furnish. No individual author, however matured in training 
 and thought, can possibly write on the entire field of a subject like 
 Money and Banking with the precision or authority that he can on 
 particular topics to which he has given years of special study. For a 
 book of readings, however, one may draw on the writings of a hundred 
 students of the question. Often a comparatively short selection will
 
 X PREFACE 
 
 contain the one memorable contribution of an author to the advance- 
 ment of the science. Incidentally, the collection of a large number of 
 readings from a wide range of writers over a long period of time is an 
 excellent introduction of the student to the literature of the subject. 
 It may lead to further reading and study; but even if this goal is 
 not attained, the student can hardly fail to realize that all of mone- 
 tary wisdom and experience is not contained within the covers of a 
 single book. 
 
 A collection of carefully edited readings and materials also makes 
 possible the presentation of a much larger volume of data by virtue 
 of the elimination of extraneous and repetitional matter. In order 
 to supplement a text most teachers assign to the student a list 
 of collateral readings bearing on the topic in hand and chosen 
 with the idea of showing the student what writers other than the 
 author of the text have to say on the subject, and, so far as is possible, 
 presenting to him various points of view. The teacher is usually 
 handicapped in this because in the ordinary library there is a limited 
 supply of material of the documentary and pamphlet variety, while 
 in many libraries the problem of a sufficient number of the formal 
 standard treatises is a pressing one. But even where the library 
 material is adequate, there is usually a great and needless duplication 
 of effort on the part of the student. It may probably safely be said 
 that as a rule something like one-half of such readings are practically 
 duplications, and that another 25 per cent is extraneous matter, so 
 far as the problem in hand is concerned. Someone has remarked in 
 this connection that the system is really based on the labor theory' 
 of value. A more probable explanation, however, is that it is the 
 product of necessity, being used only for want of something better. 
 In any event there appears to be little justification for such dupli- 
 cation in view of the wealth of valuable material that cannot be 
 covered under the most favorable conditions. 
 
 It is recognized that various objections may be raised in this 
 connection. It may be urged, for instance, that a certain amount of 
 repetitional reading is of value to the student. Now, while this is 
 doubtless true for a certain amount, it hardly holds for atiy amount 
 or for the usual amount. A frank talk with almost any serious-minded 
 student brings out the statement that the student is prone to 
 acquire the habit of reading one assignment and merely glancing 
 at or wholly passing by the others, with the comforting reflection that 
 it is the same " stuff " anyhow. While a good part, indeed, is usually
 
 PREFACE XI 
 
 a virtual duplication, there are generally some paragraphs or sec- 
 tions which present new material of genuine importance. These the 
 student all too frequently misses. 
 
 Again, it may be argued that "too carefully condensed and 
 edited" readings result in the student's losing a valuable training in 
 sifting chaff from the wheat. The analysis of a complete chapter 
 or article either for the purpose of evaluating the whole or for picking 
 out and making use of only such portions as bear on the topic in hand 
 unquestionably gives a training that is of much importance. It 
 seems to me, however, that the necessary training along this line may 
 be gained without following this method exclusively, or even pri- 
 marily. A considerable number of collateral readings of the ty-pe 
 under consideration should certainly be used with a book of care- 
 fully edited readings and materials as well as with a formal text- 
 book. Term papers or special reports may, of course, serve a 
 similar purpose. Where the method is followed exclusively, however, 
 the student frequently rebels or grows careless, wdth the result that 
 he does not acquire the training intended. 
 
 The most serious obstacle to the independent use of a book of 
 materials would seem to lie in a possible lack of unity in the volume. 
 There is danger that the student may not see the relations between 
 different chapters and divisions of the subject as w^ell as when they 
 are tied together by the thread of a formal treatise by a single author. 
 In the present volume an effort has been made to overcome this 
 shortcoming of the method by means of an introductory^ statement for 
 each chapter which attempts to give a setting for the readings to 
 come — to relate them to what has gone before and to indicate their 
 trend and purpose. It is probable, however, that even with this aid 
 the teacher will have more interpreting to do than with a formal 
 text. But if the idea underlying the method is sound, he will find 
 more than compensating advantages. 
 
 However, in all this pedagogical theorizing I recognize that I may 
 well be in error. And especially do I appreciate that we are not all 
 of the same pattern, and that what is a good method for one teacher 
 may prove very bad for another. If, therefore, this volume does not 
 commend itself for independent use, I hope there may be some who 
 will find in it material that will prove useful in a collateral capacity. 
 
 In adapting the ^•arious selections to the needs of this \olume 
 I have endeavored to do no violence to the views of the various 
 authors. In many cases, however, there have been substantial
 
 xii PREFACE 
 
 omissions of material regarded as extraneous so far as the purpose 
 to be served here is concerned, while in numerous others but a 
 few paragraphs of an article or chapter are given, the purpose being 
 merely to express a point of view or to present certain factual 
 material. I must, of course, disclaim responsibility for the views and 
 opinions expressed in the various selections, for many of them are 
 presented merely for pedagogical purposes. There are numerous 
 contradictory readings and many others that contain faulty analysis, 
 chosen to serve merely as the basis for classroom discussion out of 
 which principles may be developed. The unsigned readings are of 
 two kinds: those taken from documents, reports, etc., the references 
 being given in footnotes; and those written by myself. My own 
 contributions have been written because of inability to find concise 
 or satisfactory statements by others on topics regarded as essential 
 to the unity or completeness of the treatise. It has seemed un- 
 necessary to prepare a voluminous index to the volume in view of 
 the complete table of contents. 
 
 The great number of selections makes individual acknowledgments 
 out of the question here, and I can only appreciatively state that, 
 with a single exception, I have received from publishers and authors 
 the most courteous permission to use the materials desired. I am 
 under heavy obligation to my former colleague. Professor Walton H. 
 Hamilton, of Amherst College, for many suggestions growing out of 
 almost daily discussions on method and organization. Professor 
 James D. Magee, of the University of Cincinnati, has given a number 
 of valuable suggestions; and Professor Walter W. Stewart, of the 
 University of Missouri, who has read most of the manuscript in 
 Part II, has given many helpful criticisms on this portion of the work. 
 Finally, I am deeply indebted to the spirit of co-operation and team 
 play in the department with which I am associated, the numerous 
 conferences and informal discussions on the many problems involved 
 in economic instruction having been of the very greatest assistance. 
 
 H. G. M. 
 University of Chicago 
 April I, 1916
 
 INTRODUCTION: SCOPE AND ORGANIZATION 
 
 Events in the field of money and banking in recent years have 
 resulted in a substantial shifting of interest in the subject on the 
 part of both the general public and professional economist. The 
 two most conspicuous occurrences are of course the final disappear- 
 ance of the bimetallic controversy two decades ago and the recent 
 thoroughgoing revision of the national banking system. But in addi- 
 tion to these important changes, many new subjects have pressed 
 forward for attention, among which may be mentioned the devel- 
 opment of agricultural credit facilities and of the numerous t\pes 
 of co-operative loan associations and the enormous growth of invest- 
 ment banking. These important developments have seemed to me 
 to necessitate a considerable reorganization in the subject-matter of 
 a general course in the principles of Money and Banking, as well as 
 numerous changes in the relative emphasis to be placed on the various 
 aspects of the subject. 
 
 Writers of the school of Dunbar and Walker and their followers 
 were naturally primarily concerned with the financial problems that 
 were uppermost in their time. Accordingly, on the money side they 
 stressed the bimetallic and government paper-money controversies, 
 and on the banking side the operation and regulation of "commercial" 
 banking as exemplified under the national banking system. These 
 questions were all approached from the standpoint of an active present 
 interest and were consequently treated in a more or less controversial 
 manner; that is to say, it seemed of paramount importance at the 
 time to promote sound thinking to the end that "sound money" 
 might be secured. These monetary- controversies of a former genera- 
 tion are, however, not relevant to present-day practical interests; 
 they have been superseded by new issues. In the present volume, 
 therefore, the readings on money have been developed and arranged 
 so as to place these controversies in a historical setting in* their rela- 
 tionship to the whole development of monetar>^ science. While in 
 the banking field most of the problems of an earlier generation remain 
 for present-day discussion, tlie important developments that have 
 lately occurred also necessitate, as already indicated, substantial 
 modifications in the methods of analvsis.
 
 xiv INTRODUCTION 
 
 But irrespective of these changes, it has long seemed to me that 
 the field of Money and Banking has been unduly narrowed by most 
 writers on the subject. The well-known functions of money as a 
 common denominator of value, medium of exchange, etc., are not the 
 only, nor, from some points of view, the most important, functions of 
 money. The usual "scientific" analysis of money fails to indicate the 
 enormous role that it plays in the everyday world of afi'airs, and 
 furnishes a wholly inadequate basis for an understanding of the mone- 
 tary controversies of history. Similarly, the usual text on banking 
 confines the discussion to such banks as create media of exchange in 
 the form of notes and checks. The present volume attempts to treat 
 both money and banking from a much broader standpoint and to 
 bring the general subject into more vital relationship with actual 
 business affairs. 
 
 Part I is divided into eight chapters. It begins with the pecuniary 
 organization of society, covers the origin of money and the evolution of 
 the precious metals, and the history of paper money and bimetallism 
 with particular reference to American experience, and ends with a 
 descriptive analysis of the present system in the United States. It 
 is in connection with chap, i, "The Pecuniary Organization of Society," 
 that the chief departure is made from the customary treatment of 
 money. This chapter is divided into three sections, as follows: 
 (A) "The Nature and Functions of Money"; (B) "Money, Capital, 
 and Wealth," and (C) "The Role of Money in Industrial Society." 
 The first of these is typical and treats of the classic economic functions 
 performed by money in industrial society. The second portrays the 
 confusion that has always existed in the popular mind with reference 
 to money and capital and wealth, while the third is designed to show 
 the relation of the price system to the organization of industrial society 
 in general and the psychological effects of this pecuniary organization 
 on the daily activities of man. The general purpose of this first chap- 
 ter taken as a whole is to pave the way for an appreciation of the 
 monetary history which follows. 
 
 There is an economic side to all the monetary controversies 
 through which we have passed, but there is also another side — one 
 which from a practical standpoint has been of much greater impor- 
 tance. Debasements of the coinage, the demand for the retention of 
 bimetallism, and the numerous paper-money agitations of history have 
 all been vitally connected with the prevalent desire for more money, 
 in the belief that more money means more wealth. Without this
 
 INTRODUCTION xv 
 
 popular confusion on the subject of money and wealth, paper money 
 and bimetallism would never have invaded the field of politics. 
 While we might have had issues of paper money as a means of war 
 finance, such issues would probably have been promptly retired, and, 
 similarly, we should doubtless have abolished bimetallism at an 
 earlier date in the absence of any popular concern over the quantity 
 of money.' Under such circumstances, however, discussion of these 
 subjects would have been primarily academic. Most text writers 
 have in fact virtually assumed by their method of treatment that 
 these controversies were mainly academic affairs. They are analyzed 
 from the "scientific" point of view and the workings of economic 
 laws are satisfactorily disclosed, but the tremendous role that money 
 has played in society is not usually revealed. Viewed from a broader 
 outlook, the history of money becomes one of the most interesting and 
 human phases of social and economic progress. 
 
 A word should be said with reference to the treatment of paper 
 money. It has been customary to discuss the histor>' and principles 
 of regulation of paper money without differentiating between govern- 
 ment and bank paper. For instance, Jevons gives an indiscriminate 
 list of the methods that have been employed in the regulation of paper 
 money, some of them relating merely to government paper and others 
 to bank paper. Any attempt to discuss the principles of bank paper 
 money, however, appears to me futile until the student has studied 
 the principles of banking. While, historically speaking, many of the 
 government schemes involved the use of banks as agents, and while 
 the motive for an issue by banks was often not different from that by 
 a government direct, nevertheless the principles governing the regu- 
 lation of issues by banks are very different from those applying to 
 government issues. In this volume, therefore, bank paper money is 
 not taken up until after the principles of banking have been discussed. 
 
 Treatises on banking are usually devoted solely and as a matter 
 of course to what is commonly called ''commercial " banking. Indeed, 
 banking and "commercial " banking have been very generally regarded 
 as synonymous terms. Bagehot remarks, for instance, that the 
 Rothschilds are great capitalists but not bankers, while Dunbar in 
 
 ' True, the public has frequently been concerned over falling or rising price- 
 levels. Creditors have wished falling prices, or at least opposed a depreciation 
 of the standard, while debtors have frequently desired a cheaper standard of 
 deferred payments. Kut this question of changing price-levels has been very 
 closely associated in the popular mind with the volume of tlie currency.
 
 XVI INTRODUCTION 
 
 his little classic makes a similar distinction when he says: "In order 
 to be a bank at the present day, an establishment must carry on the 
 purchase of rights to demand money in the future, or securities, and 
 it must also use in some form or other its own engagements for the 
 payment of money upon demand.^' This conception of banking also 
 finds support in the definition of a bank given in the internal-revenue 
 act of 1866. According to this inteq3retation savings institutions 
 holding time deposits are not engaged in banking; nor are the great 
 investment houses which annually transfer from investors to borrowers 
 funds amounting to many hundreds of millions of dollars to be 
 regarded as banks. It is obvious, however, that the business world 
 holds no such narrow conception of the banking business. The 
 so-called "commercial" bank with its demand obligations is merely 
 one type of banking institution; and to exclude all other kinds of 
 financial operations is to narrow the field to an extent that gives but 
 a one-sided view of the problems of banking as a whole. 
 
 The study of banking has usually been approached by way of the 
 discussion of money as a medium of exchange; hence the customary 
 treatment of money and banking together. It is this method of 
 approach to the subject that is doubtless responsible for the attempt 
 to confine banking within the narrow limits indicated above, for 
 it is only the banks which issue notes and give demand deposits 
 that create media of exchange. While the "economic" function 
 of banks in furnishing society with media of exchange is of funda- 
 mental importance and should not be minimized or overlooked, it is 
 at the same time quite as important to consider the "business" func- 
 tion of banks. From the point of view of the business world the chief 
 purpose of banks is to make loans to borrowers. The business man 
 regards his bank as a place to which he may go for assistance when in 
 need — it is a sort of partner in his business venture. The fact that 
 in giving him a loan the bank is creating an inexpensive medium of 
 exchange for the transfer of commodities is from his standpoint of 
 no moment. Similarly, the banker himself views his bank merely 
 as a profit-making institution, the underlying economic function 
 being but an after-reflection at best. Now, since it is the business 
 men and bankers who use, manage, and direct institutions, the prob- 
 lems of banking cannot be fully apprehended unless we understand the 
 business point of view. Since the business view of banking, with all 
 its psychological aspects, is at bottom responsible for the whole 
 problem of credit organization and control, it is important that the
 
 INTRODUCTION xvii 
 
 analysis of banking should primarily proceed from the point of view 
 of the actual business world. The underlying "economic" aspects 
 are not overlooked or minimized by this method of approach ; on the 
 contrary, the reliability of notes and checks as media of exchange is 
 only the better understood by virtue of such an analysis. 
 
 Again, in the customary treatment of banking, legal distinctions 
 have frequently been confused with economic ones. A bank which 
 creates demand obligations in exchange for future rights is said to be 
 engaged in commercial operations; hence the designation of our 
 national and state banks as "commercial banks." Now to classify 
 a transaction as "commercial" should indicate, it would seem, the 
 economic nature of the operation; and this, indeed, is the intent when 
 one says, for instance, that national banks are commercial banks. 
 They are supposed to serve the needs of commerce, that is, to facili- 
 tate the production and marketing of consumers' goods, and are not 
 designed to promote investment or the creation of capital goods. 
 Commercial transactions are in their very nature short-time opera- 
 tions, for consumers' goods move rapidly from one class of middle- 
 men to another. Hence loans for commercial purposes may and 
 should be short-time loans. Such quickly liquidating loans are 
 obviously necessary for a bank which makes its obligations payable 
 on demand. The theory underlying the commercial bank is 
 unquestionably sound. But in practice a large percentage of the 
 loans that give rise to demand deposits are in no direct way related 
 to commercial enterprises. Overemphasis on the demand nature of 
 the deposit has too frequently been accompanied by an underemphasis, 
 if not a total ignoring, of the actual uses to which the funds borrowed 
 on short time are devoted. 
 
 In fact, short-time borrowings from "commercial" banks are prob- 
 ably more often devoted to non-commercial than to commercial pur- 
 poses. For instance, the funds from some short-time loans are used 
 for consumptive purposes. In a far greater number of cases, however, 
 they are devoted to speculation and long-time investment. The mere 
 facts that these loans are of short duration, that they give rise to 
 demand deposits, and that collateral security is usually required do 
 not make them commercial loans, even if they are granted by so-called 
 commercial banks. The very fact that collateral is required is evi- 
 dence enough that they are not of a commercial nature. Genuine 
 commercial loans require no collateral security, for the reason that 
 such loans are self-liquidating.
 
 XVlii INTRODUCTION 
 
 Finally, a great quantity of funds, how great not even the banks 
 themselves know, is annually loaned without collateral for investment 
 uses — loaned by "commercial" banks and represented on the liability 
 side of the account by demand deposits. The American practice of 
 granting loans on single-name paper, provided the borrower's character 
 is satisfactory and his financial statement shows a ratio of quick assets 
 to current liabilities of more than two to one, contains no guaranty 
 that the funds loaned will be used for commercial purposes. 
 
 Legally speaking, our national and state banks are commercial 
 banks, since they make short-time loans and create demand obliga- 
 tions. Economically speaking, they are as much investment as com- 
 mercial institutions. Practically speaking, the greatest problems of 
 banking organization and control center around this confusion of 
 investment and commercial operations, the results being manifested 
 in every period of inflation and crisis. Happily the Federal Reserve 
 Act has recognized the situation, and an attempt is now being made to 
 eliminate the more flagrant abuses that have developed in the system. 
 
 Turning now from these general considerations to the actual 
 organization of the materials on banking. Part II of the book is 
 divided into the following chapters: "Introduction"; "The Nature 
 and Functions of Credit"; "Instruments of Commercial Credit and 
 the Law of Negotiability"; "Principles of 'Commercial' Banking"; 
 "Relations between Banks"; "The Regulation of Banking"; "The 
 Federal Reserve System"; "Co-operative Banking Agencies"; 
 "Agricultural Credit"; "Investment Banking Institutions," and 
 "The Interrelations of Financial Operations." The reasons for this 
 general arrangement may be briefly indicated. 
 
 Since banking is but a particular type of credit operation, the dis- 
 cussion of the principles of banking is preceded by an analysis of credit 
 in general. The central purpose in this analysis of credit is not only 
 to show the nature and underlying basis of credit transactions, but 
 even more — to make a sharp distinction between commercial and 
 investment operations. Without a clear appreciation of the -differ- 
 ence between a commercial and an investment use of funds the student 
 cannot fully understand the principles of regulation of banking opera- 
 tions that have been developed or comprehend the problem of infla- 
 tion and commercial crises; while this twofold classification of credit 
 will also be found indispensable to an adequate discussion of savings 
 banks, agricultural credit, and the various types of co-operative 
 banking institutions.
 
 INTRODUCTION xix 
 
 In developing the principles of "commercial" banking and the 
 problems that arise in connection therewith, a departure has been 
 made from the prevalent method of treatment. Following an analysis 
 of the operations of a bank as an individual business institution, we 
 pass to a discussion of the relations that inevitably develop between 
 banks. These interrelations are discussed under two headings: 
 (A) "Within a Given City," and (B) "The System as a Whole." 
 The materials under A, together with the questions based on them, 
 are designed to indicate the inevitabiUty of the interdependence that 
 exists, and to show how competitive forces have led to the formation 
 of clearing-houses and the various regulations developed by them, 
 while under B are discussed, first, the general everyday business rela- 
 tions that exist between banks in different communities, and, secondly, 
 their relations in times of tension and ease in the money market. The 
 latter, again, is subdivided into (a) seasonal and (b) cyclical inter- 
 relations. 
 
 In the treatment of crises and panics no attempt is made to 
 include the var,ious theories that have been advanced to account for 
 the periodicity of industrial enterprise; the economic c>xle is treated, 
 in the main, only in so far as it is affected by banking operations. 
 In discussing the relation of banking to the economic cycle, however, 
 attention is confined, not merely to the exciting period just preceding 
 and during the panic, but the relation of banking to business at each 
 stage in the cycle is indicated. It has been difiicult, however, to get 
 entirely satisfactory readings for this purpose, owing to the fact that 
 the attention of writers has been so largely given to the crisis and 
 panic stages only. 
 
 The discussion of the entire problem of banking in relation to the 
 economic cycle is designed to bring out both the interdependence of 
 banking relations and the obvious impossibility, because of the opera- 
 tion of independent competitive forces, of controlling the system 
 through voluntary associations. While the banks as a whole recog- 
 nize the mutuality of their interests and the necessity of concerted 
 group action, nevertheless the persistence of individual desire to make 
 large profits, on the one hand, or to save one's self first in case of a 
 crisis, on the other, has rendered it impossible in our experience for 
 banking institutions to organize and control the credit system in the 
 interests of the larger welfare. 
 
 The readings under "The Regulation of Banking" are designed 
 to bring out the general principles underlying government control.
 
 XX INTRODUCTION 
 
 and to show the regulations that have been developed under our 
 national and state banking systems. The question of note issues is 
 reserved for separate treatment because of its great historical impor- 
 tance and because of the special problems of control in connection 
 with the issue function that remain in our day, even though the 
 bank note has now assumed a position of less importance. In 
 treating the problem of note issues general principles of regulation 
 are put forward first and then the histor>^ of bank-note systems is 
 presented in the light of these principles. 
 
 This general survey of our banking history makes it possible to 
 discuss the Federal Reserve System against a background, not only of 
 previous governmental control, but also of banking experience in the 
 matter of voluntary regulation through clearing-house associations. 
 
 The last chapter of the volume is an attempt to show the many 
 ways in which commercial and investment operations are interrelated 
 in the financial world of today, and to indicate the problems that arise 
 in connection with the control of the system of finance as a whole. 
 One phase of this problem is the general confusion of commercial and 
 investment operations by our "commercial" banks, already noted in 
 this introduction; and another phase is the enormous role that is 
 played by the investment banker, or financier, in modern business. 
 The concentration movement in industry has been paralleled in the 
 financial field; in fact, the two movements have proceeded hand in 
 hand, mutually helpful and mutually necessary — ^joint products of 
 common underlying causes. The power of the financier, however, 
 is greater than that of the mere captain of industry ; for by virtue of 
 his control of the purse the financier assumes a dominant position, not 
 only in the field of banking and finance, but in the whole realm of 
 modern industry. The proper regulation and control of this great 
 power in the interests of the pubHc as a whole presents one of the most 
 complex and delicate problems that wull confront the statesman of 
 the future. 
 
 The omission from this volume of certain topics that are cus- 
 tomarily included in treatises on money and banking remains to be 
 considered. An author always has to stop somewhere because of the 
 limitations imposed by the publishers, if for no better reason. In a 
 field so extensive as that of money and banking the problem of what 
 may best be omitted presents many difficulties and must be decided 
 in the light of niunerous considerations. The first important omission 
 to be noted here is the controversy over the relation of money and
 
 INTRODUCTION XXl 
 
 prices. The reason for this omission so far as Part I is concerned is 
 merely that price theories carmot be adequately treated until after 
 the student has been carried through an analysis of credit and bank- 
 ing. The reason for omitting the subject altogether is merely that 
 an adequate treatment would require far more space than could be 
 given it in a volume of this sort. To analyze fully the price-making 
 process in the complicated organization of modern credit society 
 requires an entire course in itself, particularly if the controverted 
 points are adequately discussed. The best exposition of the quantity 
 theory in its modern form has required, even though written with 
 unusual conciseness, a good-sized volume, while the literature of the 
 opposition is almost as voluminous. As I see it, anything less than 
 a careful analysis of the price-making process is a mere waste of time. 
 Dogmatic assertions may be made as to the way in which changes in 
 the volume of money and credit affect the price-level, but such asser- 
 tions serv'e no real purpose; on the contrary', they merely dull the 
 desire for further investigation. 
 
 It may be urged, however, that the price problem underlies all 
 the monetary questions that we have had, and that without a correct 
 theory of prices one cannot understand the problems of bimetallism, 
 fiat money, etc. It is true enough that price is fundamentally con- 
 nected with these problems, but it does not follow that the con- 
 troverted points of price theory- must be settled before one can 
 understand bimetallism, etc, I know of no writer who would hold 
 that a change in the volume of the standard might not affect prices. 
 For instance, the foremost opponent of the quantity theory admits, as 
 a matter of course, that a fall in the value of the standard results in, 
 or is tantamount to, rising prices, and vice versa, and that a change 
 from a metallic to a depreciated paper standard will mean higher 
 (paper) prices. The controversy is primarily concerned with the 
 method by which prices are affected, the one side holding that prices 
 can change only as the value of the standard metal in which prices 
 are measured rises or falls, and that such change may be independent 
 of any offering of money in exchange for goods; the other holding 
 that money and goods constitute the opposite sides of an equation of 
 exchange, and that prices are a result of offers of money (and credit) 
 directly against goods. Now all this discussion of the mechanism of 
 the price-making process is irrmiaterial in an analysis of bimetallism, 
 debasements of the currency, and fiat money schemes. We may 
 safely assume that a depreciated standard always means higher prices,
 
 xxu INTRODUCTION 
 
 other factors remaining the same; and this assumption will be found 
 throughout the readings on these topics. This relationship of money 
 to prices is brought out in the readings and questions in chap, i, and 
 therefore serves as a sufficient basis for a discussion of the monetary 
 questions which follow. 
 
 The short section on the "Control of Price Levels" does indeed 
 involve, if adequately discussed, a consideration of the price contro- 
 versy. But it seemed important at least to introduce this subject 
 because of the attention the tabular standard and "compensated 
 dollar" have attracted. Some practical aspects of the question may 
 be considered, at any rate, in the absence of a full discussion of the 
 theoretical side. 
 
 A second important omission is foreign exxhange. The justifica- 
 tion for omitting this subject is that, so far as the general principles 
 underlying exchange are concerned, they are usually presented in 
 introductory courses in economics, and are, moreover, easily available 
 in independent works like those of Escher and Withers, while to go 
 farther than the general principles and treat in full the mechanism of 
 the exchanges would require a large volume in itself. 
 
 Finally, no space is given in this volume to the banking systems 
 of foreign countries. To many this may seem unpardonable; but in 
 my view foreign banking systems may well be left for an advanced 
 course. Before the passage of the Federal Reserve Act the teacher, 
 by rapid talking, might find some time at his disposal for a brief 
 survey of foreign banking systems. The time required to expound 
 the Reserve System now affords no opportunity for anything like an 
 adequate treatment of the systems of other countries in an introduc- 
 tory course. Particularly is this true if one deems it important to 
 discuss other types of banking institutions than the commercial. 
 However, if a general survey of foreign systems is deemed essential, 
 material for the purpose may be readily obtained in numerous standard 
 treatises. Most students, indeed, have had a general survey in the 
 introductory course in economics. 
 
 It is far from my purpose to belittle the value of studying foreign 
 banking systems; on the contrary, I would hold that comparative 
 study is indispensable to a full understanding of banking organization 
 and control. But it seems to me that a student should first become 
 thoroughly acquainted with one system in the light of its historical 
 development and in its manifold aspects before undertaking such 
 comparative study. And when foreign banking is discussed something
 
 INTRODUCTION xxiii 
 
 besides the means employed by central banks in providing elasticity 
 of notes and credit in time of stress would seem to be essential. One 
 would almost think from the usual emphasis on the central banks 
 of foreign countries that they constitute, if not the only banks of 
 importance, the only ones which are of any particular interest to us. 
 There was some justification for this method before the passage of the 
 Federal Reserve Act, because it was an easy means of indicating pos- 
 sible reforms in our system of decentralized banking. The banking 
 systems of these countries cannot be really understood, however, by 
 an analysis of the methods used in escaping financial panics alone 
 any more than our American system could be understood and appre- 
 ciated by beginning and ending a course with a statement of the means 
 by which the federal reserve banks will attempt to weather the recur- 
 ring storms of finance. In a separate course one may develop the 
 relations that exist between the various tjqjes of financial institutions, 
 show the reasons for and the advantages or disadvantages of prevailing 
 methods of conducting banking and credit operations, and also indi- 
 cate through historical study the social, political, and economic forces 
 that have conditioned credit and banking development in the various 
 countries. The data and conclusions thus obtained should prove use- 
 ful in making comparative studies of banking systems that would 
 be of value in a constructive way in the further improvement of 
 our own system. 
 
 In conclusion, an attempt has been made in this volume to eluci- 
 date the principles of money and banking in the light of practical 
 experience; to give a better understanding of the problem than may 
 be gained from "scientific" analysis alone; to reveal the popular 
 and business views on the subject and the part these have played 
 in molding the history of currency and banking; to broaden the scope 
 of the study by including along with commercial banks investment 
 institutions, agricultural credit, and co-operative loan associations, 
 and to indicate the interrelations of commercial and investment 
 operations and the problems that arise in connection with financial 
 concentration and control. The book as a whole is designed to give 
 a well-rounded view of the principles of money and banking as they 
 have been developed in this country' through private and govern- 
 mental experience.
 
 TABLE OF CONTENTS 
 
 PART I. MONEY 
 I. THE PECUNIARY ORGANIZATION OF SOCIETY 
 
 PACE 
 
 Introduction 3 
 
 A. The Nature and Functions of ]\Ioney 
 
 1. Barter and Its Inconvenience. Joseph Harris .... 5 
 
 2. A Definition of Money 6 
 
 3. A Common Denominator of Value. Indianapolis Monetary 
 
 Commission 7 
 
 4. The Function of a Medium of Exchange. Fred M. Taylor 8 
 
 5. A Store of Value. Fred M. Taylor 10 
 
 6. The Relation of Money and Prices 11 
 
 7. The Standard for Deferred Payments. Indianapolis Mone- 
 
 tary Commission 12 
 
 8. Differentiation of Monetary Functions. W. Stanley Jevons 12 
 
 B. Money, Capital, and Wealth 
 (i) The Universal Love of Money: 
 
 9. Proverbs on Money. Walton II. Hamilton 13 
 
 10. Money and Human Motives. Walton II. Hamilton ... 14 
 
 11. Money Is Power. Edward Lane 16 
 
 (2) Money and the Regulation of Trade: 
 
 12. Poverty and the Export of Precious !Metals. Martin Luther 18 
 
 13. Advantage of a Favorable Trade Balance. Josiah Tucker k) 
 
 14. Mercantilism in 1870. Bonamy Price 20 
 
 ~ " ~ 21 
 
 22 
 22 
 23 
 
 15. The Practical Business View of Wealth. Henry V. Poor 
 
 16. Mercantilism Today. John Callan O'Laughlin . 
 
 17. The I'resent Gratifying Situation. Chicago Economist . 
 
 18. Patronize Home Industry. Walton H. Hamilton 
 (3) The Confusion Involved: 
 
 19. Whence the Complaint of the Want of jMoney? Joseph 
 
 Harris 24 
 
 20. Money and Wealth. John Wither spoon 25 
 
 21. A Refutation. Benjatnin Franklin 25 
 
 22. A Practical Business View Today. Moody's Magazine . . 26 
 
 23. ^loney and the Supply of Capital. Charles J. Bullock . . 27 
 
 24. Is Money a Superior Kind of Wealth? Charles Gide 28 
 
 25. The Supply of Standard Money Required. Lyman J. Gage 30
 
 XXVI TABLE OF CONTENTS 
 
 PAGE 
 
 C. The Role of Money in Industrial Society 
 
 26. The Standard of Deferred Payments and Industrial Progress. 
 
 W. Cunningham 31 
 
 27. Money and Capital Accumulation. Walton H. Hamilton . 32 
 
 28. Money and Business Organization. Thorstein Veblen . . 34 
 
 29. Money and Economic Activity. Wesley C. Mitchell . . 35 
 
 30. A Pecuniary Society. H. J. Davenport 36 
 
 31. The Role of Money in Economic Organization. Walton H. 
 
 Hamilton 39 
 
 II. THE ORIGIN AND DEVELOPMENT OF MONEY 
 
 Introduction 45 
 
 A. Origin of Primitive Money 
 
 32. The Origin and Use of Money. Adam Smith .... 46 
 2,s- Ornamentation and Money. W . W. Carlile 46 
 
 34. The Origin of Media of Exchange. Karl Menger ... 48 
 
 35. The Origin of Money through Intertribal Relations. 
 
 Carl Biicher 51 
 
 B. Forms of Primitive Money 
 
 36. Requisites of a Satisfactory Money Material. W. Stanley 
 
 Jevons 54 
 
 37. Primitive Systems of Currency. William Ridgeway . . 56 
 
 38. Cattle as Money. Homer 62 
 
 39. Early Currency of the American Colonies. Horace White 62 
 
 C. The Use of Metals as Money 
 
 40. Evolution of the Precious Metals. Karl Menger ... 66 
 
 41. Superiority of Gold and Silver. W. Stanley Jevons ... 67 
 
 42. A Monetary Chronology. Sound Currency 69 
 
 43. The Beginnings of European Monetary History. W. A. 
 
 Shaw 72 
 
 44. Production of Gold and Silver in the World Since the Dis- 
 
 covery of America. Director of the Mint 74 
 
 D. Principles of Coinage 
 
 45. Invention of Coinage. Henry V. Poor 75 
 
 46. Form, Design, and Size of Coins. W. Stanley Jevons . . 76 
 
 47. Coinage, A Government Function. W. Stanley Jevons . . 78 
 
 48. The Coinage Process at the United States Mints. Horace 
 
 White 80 
 
 49. Coinage Rules and Regulations 81 
 
 50. Seignorage. Palgrave's Dictionary of Political Economy . 85 
 
 5 1 . Social Effects of a Bad Coinage. Thomas Babington Macaulay 86
 
 TABLE OF CONTEXTS xxvii 
 
 III. EARLY EXPEDIENTS FOR INXREASIXG THE 
 CURRENCY 
 
 PACE 
 
 Introduction 89 
 
 52. Methods of Debasing the Standard. Joseph Harris ... 90 
 
 53. Roman Debasement of the Currency. /. 5. Re id ... 90 
 
 54. The Efifect of Roman Debasements. George F inlay ... 91 
 
 55. King James's Brass Money. Thomas Babington Macaiday 92 
 
 56. Coinage Debasements in England. James Maclaren . . 93 
 
 57. Reasons for Debasing the Standard. Joseph Harris 93 
 
 58. A Defense of the Practice. David Hume 94 
 
 59. Gresham's Law and the Failure of Debasements. W. Stan- 
 
 ley Jevons 95 
 
 IV. THE STANDARD QUESTION: BIMETALLISM 
 
 Introduction 96 
 
 A. General Principles 
 
 60. The Various Kinds of Standards 98 
 
 61. The Value of Standard Money loi 
 
 62. The "Popular Conception of a Dollar." Simon Newcomb 103 
 
 63. The "Scientific" Argument for Bimetallism. Francis A. 
 
 Walker 103 
 
 64. Commercial Ratio of Gold and Silver Annually Since 1687 
 
 Director of the Mint 105 
 
 65. Reasons for Variation in Relative \'alue of Gold and Silver. 
 
 Francis A. Walker 106 
 
 66. Gresham's Law and Bimetallism 108 
 
 67. Gresham's Law Qualified. Robert Gijfcn 109 
 
 68. Compensatory Action of a Bimetallic Standard. William 
 
 A. Scott Ill 
 
 B. History of Bimetallism 
 
 69. Summary Statement of Modern Monetary History. It'. A . 
 Shaw 113 
 
 70. England's Experience with Bimetallism. Sophonisba P. 
 
 Breckinridge 115 
 
 71. The Bimetallic Experience of France (Chart) 117 
 
 72. The Adoption of the Gold Standard by Leading Nations 118 
 
 C. Bimetallism in tiie United States until 1873 
 
 73. The .Adoption of a Monetary System by the United States. 
 
 A. Barton Hepburn no 
 
 74. Effects of the Changing Ratio, 1 792-1S34 i-'o 
 
 75. Coinage between 1792 and 1835. A. Barton Hepburn 122 
 
 76. The Act of 1834 1-^2
 
 XXVUl TABLE OF CONTENTS 
 
 PAGE 
 
 77. Coinage and Exports and Imports of Precious Metals, 
 
 1836-60. A. Barton Hepburn 123 
 
 78. The Act of 1853 and Subsidiary Silver 123 
 
 79. Laws of Token or Subsidiary Metallic Money. Indianapolis 
 
 Monetary Commission 124 
 
 80. The Act of 1853 and the Standard Question. August Roden 126 
 
 D. International Bimetallism 
 
 81. The Theory of International Bimetallism 129 
 
 82. The Latin Monetary Union 129 
 
 83. International Bimetallic Conferences. Maurice L.Muhleman 132 
 
 V. THE STANDARD QUESTION: GOVERNMENT 
 PAPER MONEY 
 
 Introduction 134 
 
 A. Advantages of Paper Currency 
 
 84. Types of Government Paper Money 136 
 
 85. The Origin of Representative Money. W. Stanley Jevons . 137 
 
 86. General Advantages of Paper Money. W. Stanley Jevons 137 
 
 87. Chinese Paper Money in the Thirteenth Century. Marco 
 
 Polo 139 
 
 88. Paper Money and Prosperity. Retford Ctirrency Society . 141 
 
 89. Recent Arguments for Paper Money. Century Magazine . 143 
 
 B. History of Government Paper Money 
 (i) Some Early Experiences: 
 
 90. The French Assignats and Mandats. Century Magazine . 144 
 
 91. South Carolina's First Paper Money. Sound Ciirrency . . 148 
 
 92. Summary of Colonial Issues. Horace White 153 
 
 (2) Paper Money as a Means of War Finance: 
 
 93. The Issue of Continental Bills of Credit. Charles J. Bullock 154 
 
 94. Effects of Continental Currency on Debtors and Creditors. 
 
 David Ramsay 155 
 
 95. Demoralizing Influence of the Continental Currency. Pelatiah 
 
 Webster 155 
 
 96. The Spirit of the Times 157 
 
 97. The Excuse for Continental Currency. Charles J. Bullock 157 
 
 98. Paper Currency of the Confederacy. G. C. Eggleston . . 159 
 
 99. A Sample Confederate Note. (Reproduction) . . 162 
 ICO. Reasons for the Issue of the Greenbacks. Wesley C. Mitchell 162 
 
 Id. Fluctuations in Value of Greenbacks (Chart) 168 
 
 102. Greenbacks and the Cost of the Civil War. Wesley C. 
 
 Mitchell 169
 
 TABLE OF CONTENTS xxix 
 
 PAGE 
 
 103. Effects of Greenbacks on Credit Transactions. Joseph J. 
 
 Klein 173 
 
 104. Paper Money and Subsidiary Currency. Roland P. Falkncr 174 
 
 C. The Aftermath of the Greexbacks 
 
 105. A Chronology of the Greenbacks 178 
 
 106. The Greenback Movement. Murray S.Wildman . .. ' 179 
 
 107. The Frontier Farmer and Greenbackism. Clyde O. Ruggles 186 
 
 108. Objections to Resumption of Specie Payments. Benjamin 
 
 Butler 187 
 
 109. The Resumption of Specie Payments. Alexander D. Noyes 189 
 no. Constitutionality of the Legal-Tender Notes. Davis R. 
 
 Dewey 192 
 
 111. The Greenback Party Platform of 1878 197 
 
 112. The Populist Party Platform of 1896 198 
 
 113. A Revival of "Greenbackism" . 198 
 
 114. Natural Money, The Peaceful Solution. John Raymond 
 
 Ciimmings ■ 199 
 
 D. The Regulation of Government Paper Currency 
 
 115. Methods of Regulating Government Paper 204 
 
 116. Irredeemable Paper Always Bad. John Wilhcrspoon . . 205 
 
 117. Paper IMoney Sound in Theory. David Ricardo .... 205 
 
 118. Guides for the Control of Paper Money. Charles Gide . . 206 
 
 119. Paper Money and the Foreign Exchanges. Francis A. 
 
 Walker 208 
 
 VI. THE STANDARD QUESTION: THE SILVER 
 . MOVEMENT IN THE UNITED STATES 
 
 Introduction 210 
 
 A. The Agitation for the Recoinage of Silver 
 
 120. The Crime of 1873: The Indictment. J.P.Dunn . . 212 
 
 121. The Crime of 1873: The Defense. James T. McClcary . 213 
 
 122. An Economist's View of the Act of 1873. Francis A . Walker 216 
 
 123. The Trade Dollar. A. Piatt Andrew 216 
 
 124. The Bland-Allison .^ct of 1878 218 
 
 125. The Sherman Act of 1890 219 
 
 126. The Silver Debate of 1890. Robert F. Hoxie 220 
 
 127. The Viewpoint of the Debtor ]\Iasscs. D. W. Voorhccs . 22S 
 
 128. The Viewpoint of the Creditor Classes. Francis A. Walker 228 
 
 B. The Results of the Silver Agitation 
 
 129. Difficulties under the Bland-.VUison Act. Indianapolis 
 
 Monetary Commission 229 
 
 130. Currency Receipts from Customs Duties, 1878-9S (Chart) 231
 
 XXX TABLE OF CONTENTS 
 
 PAGE 
 
 131. Greenback and Treasury Note Redemption and Gold 
 
 Exports, 1879-97 (Chart) 232 
 
 132. Net Gold Reserve in the 'l^casury, 1879-98 (Chart) . . . 233 
 
 133. The Silver Situation and the Panic of 1893. Indianapolis 
 
 Monetary Commission 233 
 
 134. Our Financial Disease. Grovcr Cleveland 235 
 
 135. The Bond Issues and the Banking Syndicate. William J. 
 
 Bryan 240 
 
 C. The Close of the Silver Controversy 
 
 136. The Issues in 1896. A. Barton Hepburn 241 
 
 137. Crucified on a Cross of Gold. William J. Bryan . . . 243 
 
 138. Distribution of Vote in 1896. Charles J. Bullock . . . 248 
 
 139. The Act of 1900 and the Greenback Currency. F. W. 
 
 Taussig 249 
 
 140. The Act of 1900 and Treasury Note Retirement. /. Lau- 
 
 rence Laughlin 252 
 
 141. Party Statements in 1896 and 191 2 254 
 
 142. The Future of Gold Production. Director of the Mint . . 255 
 
 VII. THE STANDARD QUESTION: THE CONTROL 
 
 OF PRICE LEVELS 
 
 Introduction 258 
 
 143. The Nature and Purpose of the Multiple Standard. David 
 
 Kinley 259 
 
 144. Index Numbers and Leading Price Tables. Bureau of Labor 
 
 Statistics 260 
 
 145. The Fallacy of Index Numbers. Harold Cox ....". 263 
 
 146. Criticism of Usual Index Numbers and Price Tables. Wes- 
 
 ley C. Mitchell . . ' 264 
 
 147. Criticism of the Multiple Standard. /. Laurence Laughlin 266 
 
 148. Practical Objections to the Multiple Standard. Irving Fisher 267 
 
 149. The Compensated Dollar. Irving Fisher 268 
 
 150. Criticism of the Compensated Dollar. F. W. Taussig . . 2-ji 
 
 VIII. THE EXISTING SYSTEM OF THE UNITED STATES 
 
 AND PRINCIPLES OF REGULATION 
 
 Introduction 276 
 
 151. Various Forms of Money in the United States. Treasury 
 
 Circular 276 
 
 152. Redemption of Subsidiary and Representative iSIoney . . 279 
 
 153. Legal-Tender Provisions. Treasury Circular 280 
 
 154. Monetary Stock of the United States. Treasury Report . 281 
 
 155. Paper Currency, by Denominations. Treasury Report . . 282 
 
 156. Ratio of Gold to the Total Stock of ISIoney and Per Capita 
 
 Circulation. . 283
 
 PART II. BANKING 
 I. THE VARIOUS FORMS AND SERVICES OF BANKING 
 
 PAGE 
 
 Introduction 3 
 
 1. Commercial Versus Investment Banking. William A. Scott 4 
 
 2. A Classification of Banks and Types of Banking Operations 6 
 
 3. The Various Services of Banks. James W. Gilbart ... 7 
 
 4. The Goldsmith Bankers in England. Palgravc's Dictionary 
 
 oj Political Economy 10 
 
 II. THE NATURE AND FUNCTIONS OF CREDIT 
 
 Introduction 12 
 
 5. A Definition of Credit. /. Laurence Laiighlin .... 13 
 
 6. The Basis of Credit 15 
 
 7. The Various Kinds of Credit 16 
 
 8. Commercial \'ersus Investment Credit 20 
 
 9. The Importance of Investment Credit 21 
 
 10. The Complicated System of Commercial Credit .... 22 
 
 11. Is Credit a Form of Capital ? J . R. McCiilloch .... 26 
 
 12. The Monetary Function of Commercial Credit. ./. Laurence 
 
 Langhlin 28 
 
 III. INSTRUMENTS OF COMMERCIAL CREDIT 
 
 Introduction • 31 
 
 13. Types of Commercial Credit Instruments t,2 
 
 14. Origin and Development of Mercantile Instruments. 11'//- 
 
 liam Green Hale 35 
 
 15. The Develppment of Credit Instruments in the United States. 
 
 Joseph J . Klein 36 
 
 16. The Use of Checks in the United States. David Kinky . 37 
 
 17. The Law of Negotiable Instruments. D. Curtis Gano . 40 
 
 18. Uniform Negotiable Instruments Law. William Green Hale 47 
 
 IV. PRINCIPLES OF "COMMERCIAL" BANKING 
 
 Introduction 40 
 
 A. Analysis of Banking Operations and Accounts 
 
 19. Typical Bank Statements 51 
 
 20. Analysis of a Bank Statement 53 
 
 21. Discount, Deposit, and Issue. Charles F. Dunbar ... 57 
 
 xxxi
 
 xxxu TABLE OF CONTENTS 
 
 PAGE 
 
 22. The One Underlying Function of a Bank. //. Parker Willis 60 
 
 23. Ratio of Notes to Deposits in Different Classes of Banks . 62 
 
 24. Principal Items in National Bank Statements .... 63 
 
 25. The Function of a Cash Reserve. Irving Fisher .... 64 
 
 B. Analysis of Bank Loans 
 (i) Introductory: 
 
 26. The Management of Loans 66 
 
 27. Classification of Loans in National Banks. Comptroller of the 
 
 Currency 67 
 
 28. Classification of Loans in State Banks, 1909. National 
 
 ^ Monetary Commission 69 
 
 (2) Commercial Paper: 
 
 29. Loans on Commercial Paper. Roger W. Babson and Ralph 
 
 May 69 
 
 30. Kinds of Commercial Paper. /. Laurence Laughlin ... 70 
 
 31. Duration of Commercial Paper. Roger W. Babson and Ralph 
 
 May 73 
 
 32. Confusion of Commercial and Investment Loans. William 
 
 A. Scott 75 
 
 SS- The Credit Department of a Bank 77 
 
 34. A Financial Statement 78 
 
 35. Commercial Paper Houses and Note Brokers .... 79 
 
 (3) Collateral: 
 
 36. Loans on Collateral 81 
 
 37. The Cause of the Development of Collateral Loans in the 
 
 United States. Earle P. Carman 83 
 
 38. Call Loans 84 
 
 39. Collateral Loans and Stock Exchange Speculation. Sereno 
 
 S. Pratt 8s 
 
 40. A Collateral Note and Agreement 90 
 
 41. Interest Rates in the New York Money Market. William A. 
 
 Scott 91 
 
 V. RELATIONS BETWEEN BANKS 
 
 Introduction 94 
 
 A. Within a Given City 
 (i) Loaning Relations: 
 
 42. Reserves of Clearing-House Banks and Trust Companies in 
 
 New York. Commercial and Financial Chronicle ... 96 
 
 43. National Banks and Trust Companies. 0. M. W. Sprague 98 
 
 44. Interdependence of Bank Reserves. Victor Morawetz . . 98 
 
 45. Early Settlement of Balances between Banks. James G. 
 
 Cannon 100
 
 TABLE OF CONTENTS xxxiii 
 
 PACE 
 
 46. Loans of New York Banks and Clear ing-Housc Balances loi 
 (2) Clearing-Hoiiscs: 
 
 47. The Origin of Clearing-Houses in the United States. James 
 
 G. Cannon 102 
 
 48. The Principle Involved in "Clearing." Charles F. Dunbar 103 
 
 49. Organization and Operation of Clearing-Houses. Jatnes G. 
 
 Cannon 104 
 
 50. Special Functions of Clearing-Houses. James G. Cannon 108 
 
 51. Clearings of Non-Member Banks in Chdcago. James G. 
 
 Cannon 113 
 
 The System as a Whole 
 (i) General Relations: 
 
 52. Collecting Out-of-Town Checks. James G. Cannon . . . 113 
 
 53. Lost Motion in Collecting Checks. James C. llallock . . 115 
 
 54. Correspondent Relations between Banks. Williavi A. Scott 116 
 
 55. The Concentration of Money in Great Financial Centers . iiS 
 
 56. Examples of Rapid Concentration of Funds. Fred M.Taylor 119 
 
 57. New York, the Great Financial Center. O. M. W. Spragtie 120 
 
 58. Paying Interest on Deposits and Bank Competition. George 
 
 S. Coe 120 
 
 59. Rediscbunting by National Banks. Lawrence 0. Murray 122 
 
 60. Various Means of Intersectional Borrowing. Joseph J . Klein 123 
 (2) Periodic Tension and Ease in the System: 
 
 a) Seasonal: 
 
 61. Seasonal Variations in New York Money Market. Edwin 
 
 Walter Kemmerer 125 
 
 62. Seasonal Variations in Other Centers. Edwin Walter Kem- 
 
 merer 128 
 
 63. The Theory of Domestic Exchange. William A. Scott . . 129 
 
 64. Exchange Rates and Movements of Currency to and frpm 
 
 Chicago. Edwin Walter Kemmerer 132 
 
 65. Interest on Deposits and Seasonal Disturbances. Willi<jm 
 
 A. Richardson 135 
 
 66. Seasonal Fluctuations and Commercial Failures. Edwin 
 
 Waller Kemmerer 136 
 
 67. Seasonal Variations in Supply of Currency. Edwin Walter 
 
 Kemmerer 137 
 
 68. Inelasticity of Currency for Seasonal Needs. Comptroller of 
 
 the Currency 139 
 
 69. The Treasury and the Banks: Historical Summary. David 
 
 Kinlcy 140 
 
 70. Resultsof the Isolation of Public Funds. Murray S.Wildman 142 
 
 71. Treasury Aid for Seasonal Stringency. Journal of Political 
 
 Economy 144
 
 xxxiv TABLE OK CONTENTS 
 
 PACK 
 
 b) Cyclical: 
 
 72. The Pcriodicily of Fluctuations in Trade. 5. /. Chapman 147 
 
 73. Crises and Panics in the United States 148 
 
 74. The Rhythm of Business Activity. Wesley C. Mitchell . . 150 
 
 75. Seasonal Variations and Panics. Edwin Walter Kemmerer . 157 
 
 76. The Period of Depression. Moody's Magazine . 157 
 
 77. Banking Conditions during Depressions. Walter W. Stewart 159 
 
 78. Banking Policy in Periods of Expanding Business. 0. M. 
 
 W. Spragiie 160 
 
 79. Banking Policy Immediately Preceding a Crisis. O. M. W. 
 
 Sprague 163 
 
 80. A Sample Foreboding. Elliot C.McDougal 165 
 
 81. Independent Banking the Cause of Inflation. Victor Mora- 
 
 wets 167 
 
 82. The Character of the Panic of 1893. Alexander D. Noyes 170 
 
 83. Events in the Panic of 1907. Ralph Scott Harris . . . .172 
 
 84. The Hoarding of Currency in 1893. J. DcWitt Warner . 173 
 
 85. The Strain upon New York in Time of Panic. 0. M. W. 
 
 Sprague 174 
 
 86. Suspension of Specie Payments. O. M. W. Sprague . . . 175 
 
 87 . The New York View of Interior Currency Shipments. Current 
 
 Economic Problems 177 
 
 88. Loaning Policy during a Crisis. 0. M. W. Sprague . . . 177 
 
 89. Position of Banks in Time of Panic. H. J. Davenport . . 180 
 
 90. Treasury Aid in Time of Crisis. David Kinky . . . . 181 
 
 91. The Need in Time of Crisis. J. Laurence Laughlin . . . 184 
 
 92. Bond-Secured Notes and Cyclical Elasticity. Indianapolis 
 
 Monetary Commission . . . 185 
 
 93. Interest on Deposits and Bank Note Elasticity. 0. M. W. 
 
 Sprague 187 
 
 94. Clearing-House Loan Certificates and Equalization of Re- 
 
 serves. O.M.W. Sprague 188 
 
 95. Substitutes for Cash in the Panic of 1907. A. Piatt Andrew 192 
 
 VI. THE REGULATION OF BANKING 
 
 Introduction 197 
 
 A. Governmental Sxjpervision 
 
 96. Incorporation. William A. Scott 199 
 
 97. Adoption of the System of Free Banking. Horace White 200 
 
 98. The Kirby Private Bank Failure. Chicago Banker . . 201 
 
 99. The Position of Private Bank Depositors. Chicago Banker 201 
 100. The Nature of Government Supervision of National Banks 202
 
 TABLE OF CONTENTS xxxv 
 
 PAGE 
 
 loi. The Menace in Government Control of Banking. Elmer 
 
 H. Youngman 204 
 
 102. Government Versus Private Control. The Outlook . . . 206 
 
 B. Regulation of National Bank Operations 
 
 103. Capital, Surplus, and Shareholder's Liability 207 
 
 104. Reserve Requirements 207 
 
 105. Reasons for Legal Regulation of Reserves. Charles A. 
 
 Conant 209 
 
 106. Restrictions on Loans 210 
 
 107. Objections to Loans on Real Estate. Pratt's Digest . 212 
 
 108. Argument for Loans on Real Estate. 0. M. ]V. Spragne . 212 
 
 109. Causes of National Bank Failures. Comptroller of the . 
 
 Currency 213 
 
 C. Regulation of State Banking 
 
 no. Growth and Importance of State Banks and Trust Companies 
 
 (Chart) 215 
 
 111. Summary of Legislation Affecting State Banks. John 
 
 Franklin Ebersole 217 
 
 112. The Functions of Trust Companies. Ralph W. Davis . 219 
 
 113. The Banking Functions of Trust Companies. F. B. Kirk- 
 
 bride and J. E. Sterrett 221 
 
 114. Causes of the Growth of Trust Companies. Clay Ilerrick 222 
 
 115. The Regulation of Trust Companies. John Franklin Eber- 
 
 sole 223 
 
 116. Trust Company Failures. Clay Herrick 224 
 
 D. The Regulation of Note Issues 
 
 (i) General Principles: 
 
 117. IMethods of Bank Note Regulation. Fred M.Taylor . . 225 
 1x8. The "Currency" Versus the "Banking" Principle. N. G. 
 
 Pierson 230 
 
 (2) Historical Experiences with Note Issues: 
 
 119. The Rhode Island Land Bank. Century Magazine . . . 235 
 
 120. Early State Bank Note Issues. Davis R. Dewey .... 239 
 
 121. Note Issues under the Free Banking System. John Jay 
 
 Knox 243 
 
 122. The Safety-Fund Banks. John Jay Knox 246 
 
 (3) Asset Currency: 
 
 123. The Argument for Asset Currency. Indianapolis Monetary 
 
 Commission 247 
 
 124. The Need of a System of Redemption. Indianapolis Mone- 
 
 tary Commission 248
 
 xxxvi TABLE OF CONTENTS 
 
 PACK 
 
 (4) Bank Notes under the National Banking System: 
 
 125. Reasons for Establishing the National Banking System. 
 
 Andrew McFarland Davis 253 
 
 126. Evils of Non-Uniform Issues. Andrew McFarland Davis . 253 
 
 127. The Protest against National Bank Issues. Horace Boies . 255 
 
 128. Double Profit on Bank-Note Issues. R.W.Jones . . 257 
 
 129. Analysis of Profit in Bank-Note Circulation. Comptroller 
 
 of the Currency 257 
 
 VII. THE FEDERAL RESERVE SYSTEM 
 
 Introduction 259 
 
 A. General Description of the System 
 
 130. The Creation of the Federal Reserve System. C. W. Barron 262 
 
 131. The Underlying Purpose of the Act. C.W. Barron . . . 264 
 
 132. A Bird's-eye View of the Federal Reserve System. Charles S. 
 
 Hamlin 265 
 
 133. The Federal Reserve Districts 268 
 
 134. Comparative Data on Districts. Journal of Political Economy 269 
 
 135. Superiority of District over Central Bank Plan. /. Laurence 
 
 Laughlin 270 
 
 136. Reasons for Choice of Districts. The Organization Committee 271 
 
 137. Criticism of the Districts Chosen. Journal of Political 
 
 Economy 273 
 
 138. The Federal Reserve Board. E. E. Agger . • . . . . 276 
 
 139. Functions of the Reserve Banks. Federal Reserve Board . 277 
 
 140. The Directors of the Federal Reserve Banks. Milton C. 
 
 Elliot 280 
 
 B. The Practical Working oe the System 
 
 141. Defects to be Remedied by the Act. J. Laurence Laughlin 282 
 
 142. Three Types of Bank Notes in the Future. Thomas Conway 
 
 and Ernest M. Patterson 283 
 
 143. Elasticity of Notes under the New Law. Fred M.Taylor . 287 
 
 144. Elasticity of Credit under the New Law. /. Laurence 
 
 Laughlin 295 
 
 145. Aid in the Moving of Crops under the New System. Federal 
 
 Reserve Board 298 
 
 146. Greenbacks and the Federal Reserve System. A. D. Welton 299 
 
 147. Rediscounting and Expansibility of Deposits. E. E. Agger 300 
 
 148. Discount Rates Established. Federal Reserve Board . . . 303 
 
 149. Present Discount Rates. Federal Reserve Bulletin . . . 304 
 
 150. Rediscoimts between Federal Reserve Banks. Federal Re- 
 
 serve Board 305 
 
 151. The Advantages of a Discount jNIarket to Bankers. Frank 
 
 A. Vanderlip 305
 
 TABLE OF CONTENTS xxxvii 
 
 PAOt 
 
 T52. The Nature and Advantages of Bank Acceptances. Phe 
 
 Guaranty Trust Company of New York 307 
 
 153. Provisions Governing Bankers' Acceptances. Federal Re- 
 
 serve Board 309 
 
 154. Domestic Acceptances Provided For. Federal Reserve Board 312 
 
 155. Federal Reserve Banks 'and the Foreign Exchanges. E. E. 
 
 Agger 314 
 
 156. Open-Market Operations. Federal Reserve Board . . . 316 
 
 157. Time Deposits and Savings Accounts. Federal Reserve Board 318 
 
 158. Combined Statements of Federal Reserve Banks. Federal 
 
 Reserve Bulletin 321 
 
 159. Clearings under the New System. Federal Reserve Board . 322 
 
 160. GoldClearance Fund at Washington. Federal Reserve Bulletins 322 
 
 161. Inter-District Collections. Milton C. Elliot 324 
 
 C. Rel.'^tion of the System to Other Banking Institutions 
 
 162. Membership of State Banks in the Federal Reserve System. 
 
 Journal of Political Economy 325 
 
 163. A State Banker's View of the Federal Reserve System. 
 
 Frank N. Briggs 327 
 
 164. The Attitude of the Federal Reserve Board. Charles S. 
 
 Hamlin 329 
 
 165. New York's New State Banking Law. Theo. H. Price . 330 
 
 166. The Trust Companies and the Federal Reserve Act. Journal 
 
 of Political Economy 33^, 
 
 167. Department-Store Banking. The Annalist 335 
 
 168. The Federal Reserve System Not a Harmonizing Agency. 
 
 A. D. Welton 33^ 
 
 VIII. CO-OPERATIVE BANKING AGENCIES 
 
 Introduction 338 
 
 A. The Loan Sharks 
 
 169. The Salary Loan Business in New York City. Clarence W. 
 
 Wassam 339 
 
 170. Efforts at Remediation. Arthur U. 11 am 343 
 
 171. The Loan-Shark Campaign. Malcolm W . Davis .... 345 
 
 172. The !Morris Plan of Loaning on Personal Responsibility 
 
 Literary Digest 347 
 
 B. Co-operative Institutions 
 
 173. Co-operative Credit Unions. Arthur H. Ham and Leonard 
 
 G. Robinson 348 
 
 174. The Blessings of Co-operative Banks. Henry W. WoljT . 353
 
 xxxviil TABLE OF CONTENTS 
 
 PAGE 
 
 C. Building and Loan Associations 
 
 175. The Building and Loan Movement in the United States. 
 
 James M. McKay 354 
 
 176. Local versus National Associations. Seymour Dexter . . . 360 
 
 177. A Financial Statement. Peoples^ Building and Loan Asso- 
 
 ciation 361 
 
 178. The Appeal. Swedish Home Building Association . . . 362 
 
 IX. AGRICULTURAL CREDIT 
 Introduction 363 
 
 A. Short-Time "Commercial" Credit 
 
 179. Short-Time Agricultural Loans in the United States. Edwin 
 
 Walter Kemmerer 365 
 
 180. Present Facilities for Agricultural Credit. U.S. Department 
 
 of Agriculture 369 
 
 181. Reasons for Poor Credit in the South. (Mrs.) G. H. Mathis 371 
 
 182. Plans for Improving Farm Credit with Local Banks. C. W. 
 
 Thompson 373 
 
 183. Short-Time Personal Credit among Jewish Fanners. Leonard 
 
 G. Robinson 375 
 
 184. The Argument for Direct Government Loans. E. R. Bath- 
 
 rick 376 
 
 B. Long-Time Investment Credit 
 
 185. Farm Mortgage Credit in the United States. C.W.Thompson 379 
 
 186. Rates on Farm Loans. United States Department oj Agri- 
 
 culture 382 
 
 187. Explanation of High Rates to Farmers. H. S. Van Alstine. 383 
 
 188. The Weakness of the Present Mortgage System. C. W. 
 
 Thompson . . . • 384 
 
 189. Legal Obstacles Prevent a Wide Market for Farm Mortgages. 
 
 H. M . Hanson 385 
 
 190. The Trouble with the Average Farmer. A.L.Rogers . . 385 
 
 191. The Legitimate Purposes of Mortgage Loans. Edmund F. 
 
 Adams 389 
 
 192. Agricultural Credit Institutions. R. B. Van Cortlandt . . 389 
 
 193. An Amortization Loan. Woodruff Trust Company . . 390 
 
 194. European Systems Not Needed in the United States. Henry 
 
 Wallace 392 
 
 195. A Better Leasing System Needed. Henry Wallace . . . 393 
 
 196. The Jewish Agricultural and Industrial Aid Society. George 
 
 W. Simon 395
 
 TABLE OF CONTENTS xxxix 
 
 PAGE 
 
 197. State Rural Credit Legislation. The Outlook 396 
 
 198. Wisconsin's Experiment in Rural Credit. //. /. Dreher . 397 
 
 199. Federal Legislation on Rural Credit. Journal of Political 
 
 Economy 400 
 
 X. INVESTMENT BANKING INSTITUTIONS 
 
 Introduction 402 
 
 A. Savings Banks 
 
 200. Types of Savings Institutions. William H. Knijffen, Jr. . 403 
 
 201. Mutual Savings Banks in the United States. Comptroller of 
 
 the Currency 406 
 
 202. Stock Savings Banks in the United States. Comptroller of 
 
 the Currency 407 
 
 203. Savings in National Banks. Comptroller of the Currency . 408 
 
 204. The Regulation of Savings Banks. Homer IJoyt .... 409 
 
 205. Liquidity Needed in Savings Bank Investments. George E. 
 
 Edwards 412 
 
 206. School Savings Banks. Sara Louisa Oberhollzer . . . .418 
 
 207. The Argument for Postal Savings Banks. George von L. 
 
 Meyer 419 
 
 208. Some Details of the Postal Savings System. Postmaster- 
 
 General 421 
 
 209. Success of the Postal Savings System. Postmaster-General 423 
 
 210. The Future of Savings Banks. Milton W. Harrison 425 
 
 211. Life Insurance Companies as Investment Institutions. A . S. 
 
 Johnson 426 
 
 212. Investments of Insurance Companies. Robert Lynn Cox . 427 
 
 B. Investment Banks or Bond Houses 
 
 213. The Marketing of Bonds. Theo. H. Price 429 
 
 214. The Practical Operation of Bond Houses. Lawrence Cham- 
 
 berlain 434 
 
 21$. The Basis of Bond Values. Theo. H. Price 439 
 
 XL THE INTERRELATIONS OF FINANCIAL OPERATIONS 
 
 Introduction 441 
 
 A. Investment Operations of Commercial Banks 
 
 216. The Relation of the Banks to Stock Exchange Securities. 
 
 Jacob H. Hollatuier 442 
 
 217. Investment Loans of Commercial Banks. C. W. Barron 448 
 
 218. The Misuse of Commercial Bank Funds. H. M. Geiger . 449
 
 xl TABLE OF CONTENTS 
 
 I'ACE 
 
 219. The Advanlage of the Draft over tlie Promissory Nulc 
 
 in Commercial Banking. Earle P. Carman -451 
 
 220. The Advantages of the Promissory Note or Single-Name 
 
 Borrowing. J . B. Forgan 453 
 
 221. Investment Banking and Business Inflation. Wall Street 
 
 Journal 454 
 
 222. Why "Commercial" Banks Became Investment Banks. 
 
 Louis D. Brandeis 455 
 
 223. Effects of Industrial Expansion on Demand Deposits of 
 
 Commercial Banks. Frederick A. Cleveland . . .456 
 
 224. Results of Investment Loaning by Commercial Banks. 
 
 William A. Scott 458 
 
 B. The Federal Reserve System and Investment Operations 
 
 225. Effect of the New System on Stock Exchange Speculation. 
 
 Thomas Conway and Ernest M. Patterson 460 
 
 226. The Federal Reserve System and Industrial Expansion. 
 
 C. W. Barron 461 
 
 227. Commercial Paper under the New System. Eugene E. Agger. 462 
 
 228. Regulations regarding Commercial Paper. Federal Reserve 
 
 Board 465 
 
 229. Trade Acceptances. Federal Reserve Board 469 
 
 230. The Advantages of the Trade Acceptance. Federal Reserve 
 
 Bulletin 470 
 
 C. Financial Concentration and Control 
 
 231. Our Financial Oligarchy. Louis D. Brandeis 471 
 
 232. The Satellites of the "Money Trust." Pujo Committee . . 476 
 
 233. The Defense of Financial Concentration. 7. P. Morgan bf 
 
 Company 477 
 
 234. Results of the Money Trust Investigation. American Banker 484 
 
 235. Prohibition of Interlocking Directorates by the Clayton Act. 
 
 Journal of American Bankers^ Association 485 
 
 236. The Economic Functions of the Financier in Modem Indus- 
 
 try. John A. Hobson 487
 
 PART I 
 MONEY
 
 THE PECUNIARY ORGANIZATION OF SOCIETY 
 Introduction 
 
 Within the complicated structure of modern industrial society the 
 institution of money is of supreme importance. Indeed, it is indis- 
 pensable to the system of co-operative enterprise by means of which 
 the wealth of the world is nowadays produced. Moreover, the more 
 highly specialized the productive process becomes, the more important 
 is the role assumed by money; though it should not be understood 
 from this that money was unimportant before the industrial revolu- 
 tion and among the more primitive forms of organization. Practically 
 speaking, from the very beginning of the division of labor and the 
 exchange of commodities it has been of the greatest significance — a 
 conditioning factor at every step in the evolution of industr}'. 
 
 In beginning the study of money, therefore, it is necessary to 
 consider first the various services or functions that it performs in con- 
 nection with the everyday process of procuring the means of livelihood. 
 These are set forth in the selected readings below under Section A, 
 "The Nature and Functions of Money." It is important to bear in 
 mind when studying these selections that the writers have a special 
 point of view. They are endeavoring to analyze the working of 
 economic forces, as the physicist analyzes the working of physical 
 forces; and from this standpoint it appears to them unnecessary 
 to attach any particular importance to tlie popular views on the 
 subject of money and the influence that these exert in directing the 
 daily activities of mankind. For the pur^xtse in hand they need 
 merely look upon economic society as a great and complicated struc- 
 ture or mechanism and endeavor to ascertain and describe the part 
 that money plays in such a system. Thus viewed, money is found 
 to be an agent that is performing several functions that are quite 
 as important as, though perhaps less obvious than, those performed 
 by railways or manufacturing establishments. 
 
 Section B, "Money, Capital, and Wealth," portrays the confusion 
 of mind that has always existed on the subject of money. The fact 
 
 3
 
 4 PRINCIPLES OF MONEY AND BANKING 
 
 that the values of all other commodities are stated in terms of money, 
 and that it constitutes a general fund of purchasing power — a veri- 
 table key to things desired — has always resulted in a very general 
 misunderstanding of its real importance and significance. By many 
 people money has almost been regarded as an end in itself, rather 
 than as merely the means to an end; and by still more it has been 
 deemed at least a very superioT: form of wealth, a plentiful or scanty 
 supply of which renders a nation rich or poor, powerful or impotent. 
 The results of these confused ideas on the subject are shown in follow- 
 ing chapters. It need merely be said here that the exciting, even 
 bitter, monetary controversies that have for centuries almost con- 
 tinuously commanded the attention of mankind center very largely 
 around this popular misconception of the nature and functions of 
 money. 
 
 The selections under Section C, "The Role of Money in Industrial 
 Society," are written from an angle or point of view somewhat differ- 
 ent from that taken in the selections under Section A. While not 
 denying that money performs the functions first enumerated, these 
 writers are not content to let the analysis stop at that point. Rather, 
 they use these underlying functions of money, that is, as a medium of 
 exchange, common denominator of values, etc., as a starting-point 
 for a broader analysis of tlie dominant place that money occupies 
 in directing the ordinary everyday business of the world. Since 
 money constitutes a^ fund of general purchasing power, it serves 
 as the basis of all business undertakings and, either directly or 
 indirectly, as a measure of practically all the affairs of life. By 
 it we express the relative value or worth of all commodities what- 
 soever; we use it as a convenient measure of services of every 
 kind; indeed, it is frequently charged that we measure human 
 worth and achievement in terms of dollars and cents. We reckon 
 national, as well as individual, wealth in money, and even say that 
 the wealth of the nation is one hundred twenty billions of doUars, 
 as though it actually consisted of so much coined metal or printed 
 paper money. 
 
 This universal measuring of things in terms of dollars and cents 
 has placed money in a position of unique importance in the industrial 
 system. The desire to make money appears to be the mainspring of 
 human effort and the basis of business organization. Price becomes 
 the great controlling and directing force in economic affairs, the 
 very center of the economic structure of society.
 
 THE PECUNIARY ORGANIZATION OF SOCIETY 5 
 
 A. The Nature and Functions of Money 
 
 By JOSEPH HARRIS 
 
 I. BARTER AND ITS INCONVENIENCE- 
 
 In the earliest stages of culture commerce between individuals 
 takes place exclusively by means of a direct exchange of commodities. 
 A fish is traded for a fowl and a bow fot a dozen arrows, in the same 
 way that boys in a highly complex society often make a direct 
 exchange of a top or a ball for a knife or a puzzle. It is in the incon- 
 venience of this direct exchange of commodities, or barter, that we 
 find the origin of the institution of money. 
 
 The first commerce amongst men was undoubtedly carried on by 
 barter, or the exchange of one commodity for another. But as men 
 and arts increased, a mere barter of commodities became incon- 
 venient and insufl&cient in abundance of instances. For it must needs 
 frequently happen that one man would want goods of another who 
 had no present use for those goods which he had to give in exchange; 
 and therefore to him these goods would be but of small value; and 
 it might be a tedious and intricate course, before the goods of the 
 first man could be so often bartered, till at length they became 
 exchanged into that particular commodity which the second wanted. 
 The same inconvenience would attend private bills, or promissory 
 notes; for the note could not well be discharged till the man who gave it 
 met with a customer that had goods which suited him. Added to 
 this was the difiiculty that contracts payable in goods were uncertain, 
 for goods, even of the same kind, differ in value. One horse is worth 
 more than another horse; wheat off one field is better than wheat 
 ofif another; cows, horses, swine, etc., wheat, barley, oats, etc., might 
 differ greatly in their value. A great disparity also would frequently 
 happen between artificial things of the same sort, as one workman 
 excelled another. So that in this state of barter there was no scale, 
 or measure, by which the proportion of value which goods had to 
 one another could be ascertained. 
 
 In a state of barter there can be but little trade and few artisans. 
 For want of a ready exchange for their goods people would look 
 little farther than to get food and some coarse raiment: The landed 
 men would till only so much land as sufficed their own families and 
 to procure them those few rude necessaries which the country afforded. 
 
 'Adapted from An Essay on Money and Coins (1757). Reprinted in SeUct 
 Tracts on Currency, pp. 368-69.
 
 6 PRINCIPLES OF MONEY AND BANKING 
 
 Hence, wilhoul sonic kind of money ihe arts can make no progress; 
 and witliout the arts a country cannot grow populous or flourish. 
 Ignorance and ifUeness will naturally ]>eget trespasses, incroachments, 
 wars, and contentions, ever destructive to the growth of a people. 
 Docs not this account for what we daily see, even amongst nations 
 reckoned polite? And how important is it that the rulers of the 
 eartli should be more liberally educated ? 
 
 2. A DEFINITION OF MONEY 
 
 "Money is a medium of exchange." This is the common dic- 
 tionary definition of the term, but, as we shall see, it is much too 
 limited in scope and conveys but an imperfect idea of the nature and 
 functions of money. Ask the ordinary man on the street, who knows 
 no book definition, what money is, and he will tell you readily enough 
 that money comprises coins of gold, silver, nickel, and copper; and 
 paper money. He will usually not know the distinctions between green- 
 backs, silver or gold certificates, and bank notes; so far as he is con- 
 cerned all these are merely "paper," as distinguished from "metallic" 
 money. Such instruments as checks and drafts he would probably not 
 consider money, though he would doubtless recognize that they per- 
 form a service very similar to that performed by money. He might 
 add, if questioned further, that money is something specifically devoted 
 to the work of making exchanges, and that it has been manufactured 
 for that precise purpose. Finally, he would be sure to appreciate that 
 the possession of money would give him purchasing power, regardless 
 of whether he came by the money honestly or dishonestly, whether his 
 own credit was good or bad. Bringing all this now into the semblance 
 of a definition, we might say that money includes those instruments 
 of exchange which pass freely from hand to hand, without reference to 
 the personal credit of the parties concerned. 
 
 Such a definition, while quite satisfactory^ in the ordinary world 
 of affairs, and, indeed, while perhaps as good a cut-and-dried definition 
 as could be given for any purpose, will require a number of qualifica- 
 tions and ex-planations for the purpose of economic analysis. We shall 
 need to know the differences between real and representative money, 
 and between standard and subsidiary and token money. We shall 
 need to know, further, the functions which money serves other than 
 as a means of exchanging commodities.
 
 THE PECUNIARY ORGANIZATION OF SOCIETY 7 
 
 3. A COMMON DENOMINATOR OF VALUE' 
 
 It is necessary to ask, first, Why does a country need a common 
 denominator or standard of value ? Obviously, every article possess- 
 ing value can be compared with other articles having value only by 
 reference to some given standard which itself possesses value. The 
 value of a commodity, it should be said, is the quantity of another 
 commodity, or other commodities, for which it will exchange. To be 
 obliged to go through an arduous comparison of one article with every 
 other article created would be an insuperable diflficulty. If a tailor 
 had only coats, and wanted to buy bread or a horse, it would be very 
 troublesome to ascertain how much bread he ought to oljtain for a 
 coat, or how many coats he should give for a horse. The calculation 
 must be recommenced on different data every time he barters his 
 coat for a different kind of article, and there could be no current 
 price or regular quotations of value. As it is much easier to compare 
 different lengths by expressing them in a common language of feet and 
 inches, so it is much easier to compare values by means of a common 
 language of dollars and cents. In short, a common denominator is as 
 necessary in comparing the value of commodities as is a common 
 language among many persons in any one city to enable them readily 
 to compare ideas. Before property can be conveniently traded in, 
 or exchanged, its value must be expressed in terms of a common 
 denominator of value. 
 
 There is, however, no absolute measure of value, as there is of 
 length. A common denominator of value and a unit of length, like 
 a yardstick, are wholly different in kind. A yardstick is an unvar}-ing 
 measure of length; but a metal, or any commodity, is not and never 
 can be an unvarying measure of the relations of that metal or com- 
 modity to other commodities which are constantly changing relatively 
 to each other. The very commodity chosen as a standard can be 
 changed in value by causes affecting itself; and the other commodi- 
 ties (which are compared with the standard) can be changed by 
 causes affecting them; so that the ratio of exchange with the chosen 
 standard may be modified by causes affecting either or both terms of 
 the ratio. It is inconceivable that any one article should alter 
 exactly, and in a compensating direction, with iiinunicrablc ollur 
 commodities. 
 
 ' Adiipted from Report of tlie Monetary Commission of the InJianapoUs Con- 
 vention (1898), pp. 77-80.
 
 8 PRINCIPLES OF MONEY AND BANKING 
 
 A wide difTerence is thus observable between the function of 
 money as a common denominator of value and its function as a 
 medium of exchange. A common denominator, whether it is a 
 perfect one or not, is used to measure value; a medium of exchange 
 is used to transfer value. The two processes are entirely distinct. 
 The difference will be instantly seen by the analogy with weight: the 
 machinery for weighing coal, the scales, does one duty; while that 
 for transporting coal, the horses and wagon, does another duty. 
 If, instead of coal, we think of all goods, and, instead of weight, we 
 think of value, then money is used both as a measure of the value 
 and also as a means of exchange — although these two functions are 
 quite distinct. In the case of value, an article, after being expressed 
 in terms of a standard, is ready to be exchanged. 
 
 But the one important idea to be kept firm hold of in all dis- 
 cussions of money is that when it comes to exchanging goods the 
 metal chosen as the common denominator is not necessarily used as the 
 medium of exchange. If gold, for instance, is chosen as the common 
 denominator by a country, it does not at all follow that gold is used in 
 all the transactions requiring a medium of exchange. Various forms of 
 subsidiary currency may be and indeed usually are used instead of the 
 standard money. The first historical fact which confronts us is that 
 in a society which has passed beyond the stage of barter, but which has 
 not yet developed the habits of a modem commercial nation, money 
 is usually passed from hand to hand in buying and selling. The com- 
 modity selected as a common denominator is then, also, practically 
 the sole medium of exchange. But as soon as commerce develops, 
 expedients arise for saving the expense and risk of using actual money. 
 
 THE FUNCTION OF A MEDIUM OF EXCHANGE' 
 By FRED M. TAYLOR 
 
 An illustration which shows the precise nature of this function 
 very clearly is furnished by the case of the farmer who comes to town 
 with a load of wood, sells it for five dollars, and then spends the 
 money buying groceries, dr\^ goods, etc. What, now, are the char- 
 acteristic features of this method of procedure? First, it is plain 
 that the single transaction of barter has given place to two trans- 
 actions, a sale of one commodity and a purchase of another. This, 
 however, does not quite exhaust the matter. 
 
 • Adapted from Some Chapters on Money, pp. 14-16. Published by the Uni- 
 versity of Michigan, 1906.
 
 THE PECUNIARY ORGANIZATION OF SOCIETY 9 
 
 Between the two transactions thus substituted for tlie one trans- 
 action there is necessarily an intermediate stage, an interval of 
 waiting, long or short, which gives the farmer who has sold his wood 
 for money a chance to get himself into relation with the men from 
 whom he is going to buy groceries and dry goods. Further, if money 
 exchange is going to be a really great improvement over barter, this 
 interval of waiting must be capable of indefinite extension; for the 
 farmer will not necessarily wish to spend the whole proceeds of his 
 wood for groceries and dry goods or anything else on the same day 
 that he sells that wood. It may easily be for his interest to separate 
 sale and purchase by weeks or even months. For example, he will 
 be selling wood every day during the good sleighing of midwinter; but 
 he will want to do the buying part of the operation all along till sum- 
 mer crops begin to bring in something. It is thus evident that money 
 exchange really breaks up barter into three parts; viz., (i) selling goods 
 for money, (2) keeping the money till other goods are needed, and 
 (3) using the money to buy other goods. It is further evident that in 
 these three stages, as looked at from the standpoint of the man who 
 starts out with goods to sell, money plays three difi"erent parts. In 
 the first, its role is that of a thing which can be obtained with any goods 
 whatsoever. In the third, its part is that of a thing which can obtain 
 any goods whatsoever. In the second, its business is to keep — store — 
 this power to obtain other goods. 
 
 But just here we need to be a little careful. In trying to realize 
 clearly that acting as a medium of exchange involves three stages, we 
 must not fall into the mistake of supposing that money is to be thought 
 of as a medium of exchange only when, and in so far as, it carries an 
 exchange transaction completely through its three stages. Doubtless 
 money has not entirely performed its part as a medium of exchange 
 till the farmer who has sold his wood for money has also used the 
 money to buy shoes or something else. Still, it is performing that 
 part in each stage of the operation. It is serving as a medium of 
 exchange, provided it is doing for anybody any one of the three things 
 which are essential to a complete exchange operation. That is, 
 money is serving as a medium of exchange cither (i) when a man is 
 getting it in exchange for goods, or (2) when a man is keeping it on 
 hand with the intention of using it at the proper lime in the purchase 
 of goods, or (3) when he is actually using it to purchase goods. Or, 
 to change the form of expression, money is a medium of exchange 
 so long as it is being sought after, or being kept, or being used
 
 lO PRINCIPLES OF MONEY AND BANKING 
 
 solely to buy goods, either for its owner or for someone to whom he 
 transfers it as a gift or as a means of settling an obHgation, When 
 no longer employed in one of these ways it has ceased to be a medium 
 of exchange. 
 
 S. A STORE OF VALUE' 
 By FRED M. TAYLOR 
 
 This function of money has its origin in two facts already touched 
 upon in speaking of the medium of exchange; viz.: (i) that a neces- 
 sary stage in the effecting of exchanges through money is the interval 
 of waiting between the sale of goods for money and the use of the 
 money to buy other goods, and (2) that this stage can usually be 
 indefinitely prolonged at the will of the owner of the money. As a 
 result of these facts our freedom of choice as to the time when we 
 shall utilize our wealth is indefinitely increased . The products of today 
 are sold today; but through the magic of money they satisfy the 
 wants of next week or next month or next year. It sometimes 
 happens that people sell things which will keep indefinitely and which 
 they really want and will later buy back with the very money received 
 from their sale, simply because they consider the money a safer 
 form in which to keep their wealth during the interval. This is 
 especially likely to happen in badly governed countries where property 
 is insecure. But it also happens in well-governed countries if for any 
 special cause temporary insecurity prevails. On the eve of a great war 
 bonds and stocks are likely to be treated in this way. So in the midst 
 of a disastrous war even a civilized nation may be in such desperate 
 straits that people anticipate a confiscation of certain kinds of property 
 and hasten to turn them into money as being more easily concealed. In 
 such extreme cases as these it certainly seems legitimate to say that 
 money acts as a storer of value. But even in the more ordinary cases, 
 so long as the special object in the mind of the seller of goods is to 
 get his wealth into a form which will keep, we may without serious 
 impropriety describe the operation as a storing of value. Only we 
 must not forget that money's storing value is not a work independent 
 of its serving as a medium of exchange, but is merely the artificial 
 prolongmg or emphasizing of one of the three necessary stages in its 
 mediating of exchanges. 
 
 ' Adapted from Some Chapters on Money, pp. 20-22. Published by the Uni- 
 versity of Michigan, 1906.
 
 THE PECUNIARY ORGANIZATION OF SOCIETY ii 
 
 6. THE RELATION OF MONEY AND PRICES 
 
 When we say that money serves as a common denominator or 
 standard of values we mean that it is the one commodity with which 
 or by which all others are compared. Now in comparing any given 
 commodity with money it is of course necessary to take a certain 
 definite quantity of such commodity and also a definite quantity of 
 the monetary material. The quantity of money that has been 
 chosen in the United States as the standard, or dollar, is 25 . 8 grains of 
 metal, of which 23.22 grains is gold and the remainder copper alloy. 
 To express the value of another commodity in terms of money, there- 
 fore, we always compare a certain quantity of it, as a pound, bushel, 
 or yard, with 25 . 8 grains of standard gold. If a bushel exchanges for 
 a dollar, we say its price is one dollar; while if it requires two dollars, 
 or one-tenth of a dollar only, to make an even exchange, then we 
 say the price is two dollars or ten cents. 
 
 While this universal statement of values in terms of price is of ines- 
 timable advantage, it nevertheless gives rise to problems of its own. 
 The article chosen as a standard is itself a commodity and subject 
 in consequence to fluctuations in value when compared with other 
 commodities. The forces that may influence prices in general are 
 numerous and the question of price levels is one of the most complex 
 in the entire field of economics. But without going into any of the 
 controverted questions we may nevertheless elucidate here a funda- 
 mental principle. If for any cause whatever the value of the stand- 
 ard should fall, it is obvious that the prices of all other commodities, 
 assuming no change in them, would rise. And, conversely, if the 
 value of gold should rise, the prices of other commodities would fall. 
 Indeed, it is often stated that a fall in the value of gold is a rise in 
 prices, since it is by means of rising prices that the fall in value mani- 
 fests itself. At any rate this general price relation or equation 
 is fundamental to monetary discussions. 
 
 Wherever time contracts are entered into the parties thereto 
 face the possibility that the money which constitutes the legal means 
 of payment may change in value, and at the expiration of the con- 
 tract stand for a greater or less purchasing power in terms of other 
 commodities. This uncertainty is ordinarily not of great importance 
 for oljligations of short duration; but there have been occasions when 
 a fluctuating value of the standard money has utterly demoralized 
 business — that based on short-time as well as that based on long-time 
 contracts. It is for this reason that stabiHty of value is always
 
 12 PRINCIPLES OF MONEY AND BANKING 
 
 emphasized as of the greatest importance in connection with the com- 
 modity chosen as money. 
 
 7. THE STANDARD FOR DEFERRED PAYMENTS' 
 
 We may now consider the third function of money, namely, to 
 serve as a standard of deferred payments. Whenever a contract is 
 made covering a period of time, within which serious changes in the 
 economic world may take place, then difficulties may arise as to what 
 is a just standard of payments. Various articles might serve equally 
 weU as a standard for exchanges performed on the spot, but it is not 
 so when any one article is chosen as a standard for deferred payments. 
 Without much regard to theory, the world has in fact used the same 
 standard for transactions whether settled on the spot or whether 
 extendmg over a period of time. 
 
 In order to work with perfection as a standard for deferred pay- 
 ments, the article chosen as that standard should place both debtors 
 and creditors in exactly the same absolute, and the same relative, 
 position to each other at the end of a contract that they occupied at 
 its beginning. This implies that the chosen article should maintain 
 the same exchange value in relation to goods, rents, and the wages of 
 labor at the end as at the beginning of the contract, and it implies that 
 the borrower and lender should preserve the same relative position as 
 regards their fellow producers and consumers at the later as at the 
 earUer point of time, and that they have not changed this relation, one 
 at the loss of the other. This makes demands which any article that 
 can be suggested as a standard obviously cannot satisfy. And yet 
 it is a practical necessity of society that some one article should in 
 fact be selected as the standard. The business world has thus been 
 forced to find some commodity which — while admittedly never 
 capable of perfection — provides more nearly than anything else all the 
 essentials of a desirable standard. 
 
 8. DIFFERENTIATION OF MONETARY FUNCTIONS' 
 By W. STANLEY JEVONS 
 
 It is in the highest degree important that the reader should dis- 
 crimmate carefully and constantly between the four functions which 
 money fulfils, at least in modern societies. We are so accustomed to 
 
 ' Adapted from Report of the Monetary Commission of the Indianapolis Con- 
 vention (1898), pp. 92-93. 
 
 'Adapted from Money and the Mechanism of Exchange, 1875, PP- 16-17. 
 (D. Appleton & Co.)
 
 THE PECUNIARY ORGANIZATION OF SOCIETY 13 
 
 use the one same substance in all the four different ways that they tend 
 to become confused together in thought. We come to regard as 
 ahnost necessary that union of functions which is, at the most, a 
 matter of convenience, and may not always be desirable. We 
 might certainly employ one substance as a medium of exchange, a 
 second as a measure of value, a third as a standard of value, and a 
 fourth as a store of value. In buying and selling wc might transfer 
 portions of gold; in e.xjjressing and calculating prices we might speak 
 in terms of silver; when we wanted to make long leases we might 
 define the rent in terms of wheat, and when we wished to carr}- our 
 riches away we might condense it into the form of precious stones. 
 This use of different commodities for each of the functions of money 
 has in fact been partially carried out. In Queen Elizabeth's reign 
 silver was the common measure of value ; gold was employed in large 
 payments in quantities depending upon its current value in silver, 
 while corn was required by the Act i8th Elizabeth, c. VI. (1576), to 
 be the standard of value in drawing the Idases of certain college lands. 
 There is evident convenience in selecting, if possible, one single 
 substance which can serve all the functions of money. It will save 
 trouljlc if we can pay in the same money in which the prices of things 
 are calculated. As few people have the time or patience to investigate 
 closely the history of prices, they will probably assume that the money 
 in which they make all minor and temporary bargains is also the 
 best standard in which to register debts and contracts extendmg over 
 many years. A great mass of payments too are invariably fixed by 
 law, such as tolls, fees, and tariffs or charges; many other payments 
 are fixed by custom. Accordingly, even if the medium of exchange 
 varied considerably in value, people would go on making their pay- 
 ments in terms of it as if there had been no variation, some gaining at 
 the expense of others. 
 
 B. Money, Capital, and Wealth 
 
 (i) THE UNIVERSAL LOVE OF MONEY 
 
 9. PROVERBS ON MONEY' 
 
 A man without money is a bow without an arrow. 
 A man without money is a ship without sails. 
 
 A thousand pounds and a bottle of hay 
 
 Are just the same at doomsday. 
 
 ' Compiled by Walton H. Hamilton.
 
 14 PRINCIPLES OF MONEY AND BANKING 
 
 A man without money is like a ])ird without wings; if he soars he 
 falls to the ground. 
 
 Money does not get hanged. 
 
 Money is the best bait to fish for men with. 
 
 Money is the soul of business. 
 
 Money is a universal language, speaking any tongue. 
 
 If you have money, take a seat; 
 If you have none, take to your feet. 
 
 Mention money, and the world is silent. 
 
 Money answereth all things. 
 
 Money begets money. 
 
 He that hoardeth up money takes pains for other men. 
 
 He who hath both money and bread 
 
 May choose with whom his daughter to wed. 
 
 If a man's money be white, no matter if his face be black. 
 
 If you have money, you are wise; if not, you are a fool. 
 
 If you make money your god, 'twill plague you like the devil. 
 
 Give me money, not advice. 
 
 God makes and apparel shapes, but it is money that finishes the 
 man. 
 
 God send you more wit and me more money. 
 
 Hate, religion, ambition, all have their hypocrisies, but money 
 applies the thumbscrew to them all. 
 
 But help me to money and I'll help myself to friends. 
 
 He that hath no money in his purse should have fair words on his 
 lips. 
 
 Good manners and plenty of money will make my son a gentleman. 
 
 Money makes a man for ilka that. 
 
 One handful of money is stronger than two handfuls of truth. 
 
 Put not your trust in money, but your money in trust. 
 
 WTien money speaks, truth keeps silence. 
 
 Money is a sword that can cut even the Gordian knot. 
 
 lo. :money and human motives' 
 
 Nothing in use by man, for power of ill, 
 
 Can equal money. This lays cities low, 
 
 This drives men forth from quiet dwelling-place. 
 
 This warps and changes minds of worthiest stamp 
 
 To turn to deeds of baseness. 
 
 — Sophocles 
 
 Compiled by Walton H. Hamilton.
 
 THE PECUNIARY ORGANIZATION OF SOCIETY 15 
 
 Money's the life and soul of mortal man. 
 
 Who has it not, nor has acquired it, 
 
 Is but a dead man, walking 'mongst the quick. 
 
 — TiMOCLES 
 
 How greatly everywhere 
 Prevails the power of the two oboli. 
 
 — ^Aristophanes 
 
 Cursed be he above all others 
 Who's enslaved by love of money. 
 Money takes the place of brothers. 
 Money takes the place of parents. 
 Money brings us war and slaughter. 
 
 — Anacreon 
 
 What power has law where only money rules? — Petronius 
 Arbiter. 
 
 For the love of money is the root of all evil. — Paul of Tarsus. 
 
 'Tis money makes the man; and he who 's none 
 Is counted neither good nor honorable. 
 
 — Diogenes Laertius 
 
 Money alone sets all the world in motion. — Publius Syrus. 
 
 I . , . . found him whom I left a foe, my friend. 
 What will not money do ? 
 
 — Plautus 
 
 Money, the sinews of war. — Cicero. 
 
 There is no sanctuary so holy that money cannot profane it, no 
 fortress so strong that money cannot take it by storm.- -Cicero. 
 
 Men dig the earth for gold, seed of unnumbered ills. — Ovn). 
 
 Make money, money, man; 
 Well, if so be, — if not, which way you can. 
 
 — Horace 
 
 All things, human and divine, reno^\^l, 
 Honor, and worth, at money's shrine bow down. 
 
 — Horace 
 
 None questions whence it comes, but come it must. — Juvenal. 
 
 "The beautiful eyes of my money-box!" 
 He speaks of it as a lover of his mistress. 
 
 — MOLliRE
 
 l6 PRINCIPLES OF MONEY AND BANKING 
 
 For I did dream of money-bags to-night. — Shakespeare. 
 
 If money go before, all ways do lie open. — Shakespeare. 
 
 Whilst that for which all virtue now is sold, 
 And almost every vice — almighty gold. 
 
 — Ben Jonson 
 
 Money brings honor, friends, conquest, and realms. — Milton. 
 Get money, get money still. 
 And then let virtue follow if she will. 
 
 —Pope 
 
 But the jingling of the guinea helps the hurt that honor feels. — 
 Tennyson. 
 
 II. MONEY IS POWER' 
 By EDWARD LANE 
 
 The measure under consideration affects the people I have the 
 honor to represent more than any question that has come before this 
 Congress. It is a measure cognate with the tariff. By this and 
 kindred acts the money is passed from the Government to the people. 
 Money is as old as civiUzation and its existence is necessary to society. 
 The use of money is all the advantage there is in having it, yet money 
 makes up in a measure all other wants in man. The greatest want of 
 the commercial and business Hfe of this country today is money. It is 
 needed alike by the merchants, farmers, and laborers. The demand 
 is for more money, and of course it should be of the best. 
 
 Money is power, and so acknowledged the world over. It is the 
 force that underlies our civilization and pushes it to the greatest pos- 
 sible activity. Money impels the merchant to his most venturesome 
 daring, the mechanic to exploiting his most inventive genius, the 
 farmer to endure the summer's heat and the winter's cold, and the 
 toiler in every direction to the accompUshment of the most earnest 
 effort for success. The power of money and the hope of its attain- 
 ment is the incentive to nearly all humanity's most earnest and most 
 honorable exertion. 
 
 What, then, is money and what are its uses ? It may be stated 
 in general that money is crystallized labor, labor accumulated and 
 massed, and when so accumulated and massed it has the power of 
 
 ' Adapted from a speech in tlie House of Representatives, June 6, 1890, 
 Congressional Record, XXI, Appendix A, p. 347.
 
 THE PECUNIARY ORGANIZATION OF SOCIETY 17 
 
 labor, or, in other words, money is a medium of exchange created b\- 
 law b}' which the value of all commodities produced by labor is 
 represented and exchanged. Labor creates wealth and money repre- 
 sents labor, but the value of money must be fixed by law. 
 
 I will repeat that nearly all wealth is produced by labor, and the 
 laborers would possess it if something did not exist to prevent this 
 natural result. In this country, where the reward of labor is greater 
 than in any other, some cause is operating with continued and growing 
 effect to separate production from the producer. It is admitted on 
 every hand that we are the most powerful country on earth; no 
 ancient or modern empire can compare with our Republic in resources 
 or extent. It is occupied by 65,000,000 of bright, brave, free, intelli- 
 gent, industrious, and energetic people. It is filled with the natural 
 resources of every zone: gold, and silver, and copper, and lead, and 
 iron from the mountains; cattle and sheep from the plains; cotton 
 from the South; corn and wheat from the West. 
 
 Our farmers ought to be the most happy and prosperous in the 
 world, as they under the circumstances ought to be the wealthiest. 
 But do the people share in this bounty ? Are the laborers of the land 
 satisfied with existing conditions ? Are they free from apprehension 
 of the future? Does the farmer find his brow unfurrowed by the 
 plow of care ? Are the highways free from tramps and the poor- 
 houses and prisons tenantless ? Is the tax-collector driven from the 
 door and want from the home? Alas! no; and what is the reason ? 
 Mr. Speaker, the wrong is evident, and as a plain business man I 
 wish to trace what I believe to be the cause to its proper source. 
 
 The figures show that there should be $21.75 P^^ capita in circu- 
 lation, and this may be true, averaging the whole country over, but as 
 a matter of fact there is not $10 per capita in circulation in the West, 
 and I think that amount much too small. 
 
 Why is this ? Has anyone ever observed an}- calamity resulting 
 from the circulation of too much money? Is there any locality or 
 era where there was too great activity among the producing classes ? 
 I never knew or read of any country where there were too many 
 houses in process of erection, or too plentiful raiment, or too abundant 
 food, nor where transportation of products was too cheap and rapid. 
 Does anyone recognize high prices of labor as leading to disastrous 
 results anywhere ? I presume no one would question the fact that if 
 we had more money now in circulation among the people we would 
 have much better times. Who, then, is to blame for the scarcity of
 
 l8 PRINCIPLES OF MONEY ANI> IJANKINC; 
 
 money? Clearly Congress; and, if so, ihe Repuhliam party, for the 
 Democratic party has not had full charge of the Government for 
 many years. 
 
 The market prices of land, of labor, and of commodities are 
 regulated by the amount of money in circulation. When money is 
 plentiful prices advance, and when money is scarce prices recede. 
 The leading economic thinkers of the nineteenth century agree that 
 a decrease in the quantity will always cause the wages of labor and 
 the prices of land and all commodities to sink in proportion. 
 
 The law which experience has graven upon the tablets of time 
 is that values must be measured by money and money must be 
 measured by its own quantity in relation to values. 
 
 John Stuart Mill, the greatest economic thinker of Europe, says: 
 "If the whole money in circulation was doubled, the prices would 
 double. If it was only increased one-fourth, prices would rise one- 
 fourth." 
 
 One of the greatest American writers on this subject has said: 
 "The truth is that the most enormous power ever known to man or 
 that ever can be his lies in money, in the increase or decrease of its 
 quantity." Mr. Speaker, I could furnish a hundred or more of such 
 testimonials if I had the time; but it is wholly unnecessary, as every 
 man who has been in business for the last twenty-five years is a 
 witness for himself; and if he will divest himself of prejudice he will 
 admit the truth of all I say. 
 
 (2) MONEY AND THE REGULATION OF TRADE 
 
 12. POVERTY AND THE EXPORT OF PRECIOUS METALS« 
 By martin LUTHER 
 
 Foreign merchandise which brings from Calicut and India, and the 
 like places, wares such as precious silks, and jewels, and spices, which 
 serve only love of show and no useful purpose, and drain the land and 
 people of their money, should not be permitted. But I do not pro- 
 pose now to speak of these things; for I think that these things will 
 needs be dropped of themselves finally when our money is all gone, 
 as well as the display and gluttony; indeed, no writing or teaching 
 else will do any good until need and poverty force us. 
 
 'Adapted from an essay On Trade and Usury (1524). Printed in The Open 
 Court, XI, pp, 17-18. The Open Court Publishing Company.
 
 THE PECUNIARY ORGANIZATION OF SOCIETY 19 
 
 God has brought us Germans to that pitch that we must needs 
 scatter our gold and silver into foreign lands, and make all the world 
 rich and ourselves remain beggars. England would indeed have less 
 gold if Germany left her her cloth; and the king of Portugal also 
 would have less, if we left him his spices. Reckon thou how much 
 money is taken out of German land without need or cause in one 
 Frankfort fair, then wilt thou wonder how it comes that there is 
 a penny left in Germany. Frankfort is the silver-and-gold hole 
 through which everything that sprouts and grows among us, or is 
 coined and stamped, runs out of German lands. If this hole were 
 stopped, we perchance would not hear the complaint how on all hands 
 there is nought but debts and no money, and all provinces and cities 
 are burdened and exhausted by interest-paying. 
 
 13. THE ADVANTAGE OF A FAVORABLE TRADE 
 BALANCE' 
 
 By JOSIAH TUCKER 
 
 In foreign trade, if one nation pays the other a quantity of gold 
 or silver over and above its property of other kinds, this is called a 
 balance against that nation in favour of the other. And the science 
 of gainful commerce principally consists in the bringing this single 
 point to bear. Now there can be but one general method for putting 
 it in practice ; and that is, since gold and silver are become the common 
 measure for computing the value and regulating the price of the com- 
 modities or manufactures of both countries, to export larger quantities 
 of our own, and import less of theirs, so that what is wanting in the 
 value of their merchandise, compared with ours, may be paid in gold 
 and silver. The consequence of which will be that these metals will 
 be continually increasing with us, as far as relates to that particular 
 trade and nation, and decreasing with them. And in what proportion 
 soever their money comes into our country, in that proportion it may 
 truly be affirmed that our sailors, freighters, merchants, tradesmen, 
 manufacturers, tenants, landlords, duties, taxes, excises, &c. arc paid 
 at their expense. 
 
 Or to put the matter in another light: when two countries are 
 exchanging their produce or manufactures with each other, that nation 
 which has the greatest number employed in this reciprocal trade, is 
 
 ' Adapted from .1 Brief Essay on Trade. (London, 1753.) Reprinted in Select 
 Tracts on Commerce.
 
 20 PRINCIPLES OF MONEY AND BANKING 
 
 said to receive a balance from the other; because the price of the 
 overplus labour must be paid in gold and silver. For example; if 
 there are only ten thousand persons employed in England in making 
 goods or raising some kind of produce for the market of France, 
 and forty thousand in France for the market of England, — then we 
 must pay these additional 30,000 Frenchmen in gold and silver; that 
 is, be at the charge of maintaining them. 
 
 14. MERCANTILISM IN 1870' 
 By BONAMY price 
 
 Let us take up the newspapers of today. Read the city articles of 
 every one of them. Look at the cast of thought, at the style of 
 literature, at the principles proceeded upon, at the whole spirit of the 
 language. What is thought most deserving of record ? The sums 
 of gold taken to the Bank of England, or taken away from it; the 
 amount of bullion; the vessels laden with gold on their passage to 
 England from California and Australia; the state of the exchanges. 
 The beloved phrase of the mercantile theory, "favorable exchanges," 
 is dwelt upon with satisfaction; unfavorable exchanges, and the 
 departure of gold to foreign countries, are bemoaned with anxiety 
 as a loss; prognostications are made of a languishing or flourishing 
 trade, according to the influx or reflux of bullion; and weekly returns 
 are proclaimed of ingots buried out of sight in the cellars of the Bank. 
 The doctrine that gold is wealth — the doctrine which Mr. Mill 
 paints as an absurdity so palpable that the present age regards it as 
 incredible, as a crude fancy of childhood — breathes in every line of 
 
 the city articles of all our daily newspapers What is this, I 
 
 ask, but the mercantile theory, pure and fresh, as you heard Mr. 
 Mill describe it? What is it but the resurrection of the Practical 
 Man — the reassertion of himself, of his experience, his appeal to 
 outward form, to what may be touched and handled ? The world 
 fondly imagined that he was vanquished and gone; that Adam Smith 
 had finally disposed of him; that boys and students had learned to 
 pity him, and to pride themselves on having been born after the great 
 Scotch genius; never was there a greater mistake. It takes many 
 Adam Smiths in Political Economy to kill off forever genuine mercan- 
 tile superstitions. The great authority, the man of millions, who is 
 supposed to understand the theory of business precisely because he 
 
 ' Quoted from Henrj' V. Poor, Money, Its Laws and History, p. 406.
 
 THE PECUNIARY ORGANIZATION OF SOCIETY 21 
 
 has made millions, revives in every age. The mercantile theory may 
 be consigned by philosophers to the Umbo of nursery toys; but it 
 lives on all the same, is master of the mind of the city, is supreme over 
 city articles, and regulates the barometer of commercial weather, anfl, 
 above all, is held to know the great secret of trade, and to be able to 
 show men the way to get rich. 
 
 15. THE PRACTICAL BUSINESS VIEW OF \\E.\LTH' 
 By henry V. POOR 
 
 Writings such as those of Professor Price show the incoherent 
 buffoonery taught in the name of Political Economy in one of the 
 first universities in Christendom. Where are her purists, that they 
 tolerate within her sacred precincts a fustian rhetoric to be matched 
 only by that of Pistol ? 
 
 A reader of the Economists cannot fail to be struck with the hos- 
 tility, not to say hatred, which all of them display toward merchants. 
 Adam Smith, when he called them "sneaking underlings," struck 
 the keynote for all his followers. What is the reason of this hatred, 
 with a sharper tooth even than that of the odium theologicum? — 
 the practice of treating gold as wealth, and the highest form of wealth, 
 in the very face of the teachings of the Economists that it is not 
 wealth; or that it is the lowest form of wealth. It was a reflection not 
 to be tolerated. Smith did his best to sustain his theory by sneers and 
 flings at those who grew rich by its violation. He declared them to 
 be a mean and selfish race, the abettors of the worst forms of monopoly, 
 and the disturbers of the peace of the world. Price, in his grotesque 
 way, attempts to paint them in still blacker colors. He admits 
 that if the merchant, if the universal instinct of the race, is to be 
 trusted, the teachings of Adam Smith, so far as they relate to money, 
 are shams; that one of the two must go to the wall. The only refuge 
 of the Economists is in crying that the science has been overborne by 
 the selfishness of men of affairs. They cannot deny that these grow 
 rich by pursuing methods precisely the opposite to those which they 
 lay down. The man of millions vaunts his methods; and, in reply 
 to criticism upon them, shakes his moneybags. The Economists 
 fiercely reply that truth is sacrificed to mammon; but if it be the 
 office of Political Economy to teach the method of wealth, why has 
 
 'Adapted from Money, Its Laws and History, pp. 40O-8. H. V. and H. W. 
 Poor (1877).
 
 22 PRINCIPLES OF MONEY AND BANKING 
 
 not the man of millions the true method; and what need of going 
 beyond his rules? As for the selfishness of the race, we fear that 
 Political Economists have no prescription for its cure. 
 
 i6. MERCANTILISM TODAY' 
 By JOHN CALLAN O'LAUGHLIN 
 
 The great war has not crippled American commerce as was 
 expected when it began last August. Statistics show that during the 
 expiring year the United States has had the largest balance of trade 
 in its favor that it ever has had. The balance will be about $i,ooo,- 
 000,000. Prior to the present fiscal year the largest trade balance 
 enjoyed by the United States was in 1908, when it amounted to 
 $665,000,000. While there has naturally been more falling off in 
 imports on account of the war, the great gain has come from the 
 tremendous growth of exports. Their value will be almost $300,- 
 000,000 over the figures of last year, and practically $200,000,000 
 over those of the year previous, the prize year in exports. This 
 enormous balance of trade in our favor is very gratifying to the 
 American people and the American government. 
 
 17. THE PRESENT GRATIFYING SITUATION' 
 
 The treasury statement for May i discloses a gratifying condition 
 of our circulating medium and one which promises great strength to 
 meet any possible emergency of the near future. During April the 
 national bank notes in the hands of the public, including the emer- 
 gency notes, decreased from $842,615,970 to $814,832,339, while the 
 federal reserve notes increased from $40,736,130 to $53,749,860. 
 On the first of April the gold coin in circulation — which includes gold 
 held by the banks as reserve and other gold that has been placed in 
 the hands of the public by the treasury — amounted to $614,632,850. 
 On the first of May this amount had fallen oflf to $598,931,706, 
 but of gold certificates, representing the metal, there was $951,205,229 
 April I and $987,447,729 May i. The aggregate of these totals for 
 each of the months represents the actual amount of gold in circulation 
 and shows an increase between April i and May i of $20,541,356. 
 This gain is largely due to the importations. The aggregate of these 
 two items, gold and certificates representing gold. May i, was $1,586,- 
 
 ' Adapted from the Chicago Record-Herald, June 28, 1915. 
 
 ' Adapted from an editorial in the Chicago Economist, May 15, 1915.
 
 THE PECUNIARY ORGANIZATION OF SOCIETY 23 
 
 379>435> standing for the aggregate of gold actually used as money 
 by the public. The total amount of gold used as money, including 
 bullion in the treasury of the United States at that time, was over 
 $1,889,000,000. This amount is far in e.xcess of that held by any 
 other country for the purpose, and is a tremendously strong basis 
 for future financial operations. How far we have gone in the right 
 direction since the resumption of specie payments January i, 1879, 
 is shown by a comparison of this billion and a half of gold with the 
 $117,000,000 we had then. 
 
 18. PATRONIZE HOME INDUSTRY* 
 By WALTON H. HAMILTON 
 
 "A dollar spent in Auburn gives you another chance at it; but, 
 if it is spent out of town, it's ' Good-bye Alary.' " 
 
 ''Down with the parcels post. No more diabolical device was 
 ever perfected by the big cities for stripping the small towns and 
 country districts of all their surplus cash. Yet the rich mail-order 
 houses wax fat with the dollars that are the property of local mer- 
 chants." 
 
 "If I were mayor, and had my way, I would place a fine of one 
 hundred dollars on every man who ordered goods from a mail-order 
 house." 
 
 "The individual can get rich only by selling more than he buys. 
 Likewise a community can prosper only by selling to other com- 
 munities more than it buys from them," 
 
 "The annual influx of students and other outsiders into our fruit 
 belt to engage in fruit-picking and packing is an abuse that should be 
 stopped at once. These people consume very little, saving their 
 money to take back to Ann Arbor, Madison, Champaign, and other 
 places from which they come. Thus, while making large sums off 
 us, they give little or nothing in support of our industries." 
 
 "The county commissioners should be promptly impeached and 
 removed from office for their action last Monday. We understand 
 that the contract for the building of the new courthouse was let 
 to the Knoxville firm only because their bid was Si,Soo under that of 
 our fellow-citizen, James R. Robertson. Robertson, as we are all 
 aware, is an expert at this line of work, and was well equipped to do a 
 
 ' Adapted from Current luonomic Problems, pp. 284-87. (The Uni\crsity of 
 Chicago Press, 1915.)
 
 24 PRINCIPLES OF MONEY AND BANKING 
 
 handsome job. The only excuse which ihe commissioners give is the 
 $i,8oo. But, against this must be set down the $32,000 which will 
 be paid to the Knoxville gang. Think of it! Sending $32,000 
 out of town to save a paltry $i,<Soo." 
 
 "'Now look here. Doc,' said the dollar to the dentist, 'if you'll 
 only let rae stay in this town, and won't send me to Roars, Sawbuck 
 & Co.'s in Chicago for that shaving-mug, I'll circulate around and do 
 you lots of good. You buy a big beefsteak with me, and the dry 
 goods merchant will pay his doctor's bill with me, and the doctor 
 will give me to the farmer for oats with which to feed his horse, and the 
 farmer will buy fresh beef from the butcher, and the butcher will 
 come around to you to get his tooth mended. In the long run you 
 see I will be more useful to you here at home than if j^ou send me away 
 forever.'" 
 
 "The recent cold spell, which caused a large number of water 
 pipes to burst, has been a bonanza for business. Few things in the 
 last year have caused so many people to dig down in their jeans 
 and cough up the cartwheels that spell prosperity." 
 
 (3) THE CONFUSION INVOLVED 
 
 19. WHENCE THE COMPLAINT OF THE WANT OF MONEY ?' 
 By JOSEPH HARRIS 
 
 The want of money is a common cry. All the scramble is for 
 money; few think they have enough, and many complain. This 
 probably will ever be the case, nor would setting the mint to work 
 cure the evil; and perhaps there is nowhere more want than where 
 there is most money. The beggar hath no property, nothing to 
 exchange for money; and if he will not work, none would come to his 
 share, if the common stock was ever so much increased; a greater 
 plenty of money would be so far from being advantageous to him 
 that he would run the greater risk of starving, as bread and provisions 
 of all sorts would then be so much the dearer. The farmer com- 
 plains, and thinks that if there was more money in the country his 
 corn and cattle would fetch a better price: They would fetch more 
 money, but not more of anything else that he wants; and he would 
 not be at all bettered by this higher price, unless so far as a sudden 
 
 ' Adapted from An Essay on Money and Coins (1757). Reprinted in Select 
 Tracts on Currency, pp. 413-14.
 
 THE PECUNIARY ORGANIZATION OF SOCIETY 25 
 
 increase of money might ease him in his rent, by lessening the intrinsic 
 value of the specific sum which he had agreed to pay. The same 
 may be said to the merchant, shopkeeper, &c. While all commodities 
 keep the same proportion of value in respect to one another, no one 
 reaps any advantage by the raising of the price in respect of money, 
 of his particular commodity. The complaints of particular persons 
 arise, not from a deficiency of money, of counters in circulation; but 
 from their own want of property, want of skill, address, or opportunity 
 of getting more money; or perhaps only for want of frugality, in 
 spending more than their income or proper share. 
 
 20. MONEY AND \VE.\LTH' 
 By JOHN WITHERSPOON 
 
 There are many persons who cry, "We must have more paper 
 for a circulating medium, as there is such a scarcity of gold and silver." 
 It is argued, "When I go about from day to day, and cannot collect 
 what is due me, when my creditors are calling upon me and I cannot 
 satisfy them, is not the only explanation the scarcity of money 
 everywhere ? " What shall be said to satisfy these persons ? I must 
 tell them plainly, it is their poverty, or the nation's poverty and not 
 a want of gold and silver, and if there were an hundred times as much 
 gold and silver in circulation as there is, their poverty and difficulties 
 would be just the same. If these persons read the scriptures they 
 may there learn that in Solomon's time the silver was plentiful as 
 stones in Jerusalem; probably they will think that all the people in 
 Jerusalem at that time must have lived like princes, but they must be 
 told, it was added as a necessary consequence that it was nothing 
 accounted of in the days of Solomon. 
 
 21. A REFUTATION' 
 By BENJAMIN FRANKLIN 
 
 As to plenty of money being a benefit to trade and manufactures, 
 we apprehend everyone conversant therein must know that the coin, 
 by which we generally understand money, of every respective state, 
 is by no means the mover of the intercourse or tradings of the world in 
 general. We may say that coins, in general, can no otherwise be 
 
 ' Adapted from Works, IV, 230. (Philadelphia: William W. Woodward, 1802.) 
 ' Adapted from The Principles of Trade (1774), in Franklin's Works, II, 394-95. 
 Written jointly and anonymously by Franklin and George Whatley.
 
 26 PRINCIPLES OF MONEY AND BANKING 
 
 useful than as the common measure between man and man, as serving 
 to barter against, or exchange for, all kinds of commodities. Certain 
 it is, that coins cannot be ranked amongst those which are only oj real 
 use. Let us therefore suppose pieces of coin to be counters, and, to 
 simplify the matter still more, suppose every manufacturer to have 
 of these counters any sum whatever; will it follow that any sort of 
 manufacture shall be industriously attended to, or more work done 
 than when no more counters than just enough to barter for the real 
 wants of meat, drink, and clothes, etc., can be procured by labor ? 
 Surely no. It must be the desire of supplying our wants, which 
 excites industry as above hinted; that alone sets trade going, and 
 that only can procure plenty of manufactures. 
 
 That the welfare of any state depends upon its keeping all its gold 
 and silver, either in bullion or in coin, must be founded on a very 
 narrow principle indeed. All repubhcs we know of wisely think 
 otherwise. Spain, the grand source of silver, has of late years very 
 justly allowed the free exportation of it, silver paying a duty, as in 
 Great Britain lead and tin do; nor prior to this permission could the 
 penal laws in Spain hinder its being exported; for it was a commodity 
 which that kingdom was under a necessity of giving as an equivalent 
 for what was furnished to them by other countries. 
 
 Could Spain and Portugal have succeeded in executing their foohsh 
 laws of "hedging in the cuckoo," as Locke called it, and have kept at 
 home all their gold and silver, those metals would, by this time, 
 have been of little more value than so much lead or iron. Their plenty 
 would have lessened their value. We see the folly of these edicts. 
 
 2 2. A PRACTICAL BUSINESS VIEW TODAY' 
 
 The great inflow of gold to the United States at the present time 
 is embarrassing. This country does not need gold and does not par- 
 ticularly want gold. We already have such an excess of the metal, and 
 the credit conditions and money rates generally are so easy, that we 
 are confronted with the unusual problem of not knowing just how 
 to empjoy our unexpectedly large resources in this particular field. 
 The turnabout from the conditions of last fall has been so sudden 
 and so radical that business men and bankers in this country are for 
 the moment at a loss to know just how to act under present circum- 
 stances. It is almost like an individual who, having struggled along 
 
 ' Adapted from an editorial in Moody's Magazine, March, 1915.
 
 THE PECUNIARY ORGANIZATION OF SOCIETY 27 
 
 with tremendous liabilities and having hung on the edge of bankruptcy 
 for an indefinite period, suddenly finds himself burdened with an 
 over-surplus of riches and with such a large amount of capital to set 
 actively at work that his new problems are almost as difficult to handle 
 as were those in his former condition. 
 
 23. MONEY AND THE SUPPLY OF CAPITAL' 
 By CHARLES J. BULLOCK 
 
 A review of the currency history of America reveals the following 
 facts: first, that a strong movement in favor of cheap money has 
 existed continuously in this country from the earliest period of coloni- 
 zation; and secondly, that the persistence of such an agitation has 
 been due, more than to any other single cause, to the constant spread 
 of settlements westward over large areas that have long remained 
 thinly populated. With the growth of numbers, the rise of manu- 
 facturing and commercial industries, and the increase of wealth, 
 the desire for a cheap currency has gradually diminished; but this 
 has no sooner taken place in the more populous states than the old 
 phenomena have reappeared in newly settled districts, while any 
 localities that have remained sparsely peopled and devoted chiefly 
 to agricultural pursuits have always furnished a favorable field for the 
 old propaganda. 
 
 Back of all the strivings for an inexpensive medium of exchange, 
 each generation of our people has always heard the complaint that 
 our supply of money had been insufiicient; and this cry has invariably 
 furnished an unmistakable indication of the underlying cause of the 
 agitation. "No complaint," wrote Adam Smith, in 1776, "is more 
 common than that of a scarcity of money. Money, Uke wine, must 
 always be scarce with those who have neither wherewithal to buy it, 
 nor credit to borrow it. Those who have either, will seldom be in 
 want either of the money or of the wine which they have occasion for." 
 In the United States an enterprising and resolute people has been 
 engaged for nearly three centuries in occupying and developing a 
 vast area of free land. While natural resources abounded, each 
 newly settled district has always experienced a lack of capital needed 
 to bring the soil under cultivation, to supply means of communica- 
 tion, and to develop manufacturing enterprises. This want might 
 
 ' Adapted irom Essays on the Monetary History of the United Stales, pp. 1-4. 
 (The Macmillan Co., 1900.)
 
 28 PRINCIPLES OF MONEY AND BANKING 
 
 have been little felt by a less progressive people; but with us it has 
 been a real and serious obstacle, which has been removed only by the 
 slow growth of wealth and numbers. In order to possess a sufficient 
 supply of metallic money, a nation must convert a portion of its 
 capital into a stock of gold and silver coins or bullion, a process that 
 is expensive, even under the most favorable circumstances. In the 
 United States, prior to the discovery of mines of the precious metals, 
 gold and silver could be obtained only through exchange with foreign 
 countries; and the acquirement and maintenance of an abundant 
 metallic currency was made especially difficult by the poverty of our 
 people in all sorts of capital. The difficulty was intensified still further 
 by the sparseness of settlement and the economic isolation of house- 
 holds and communities, a circumstance which made the monetary 
 circulation sluggish and increased the volume of currency required 
 for the transaction of a given number of exchanges. The accumu- 
 lated products of our industry were more often converted into other 
 things than money. Each person usually desired to employ in pro- 
 duction or exchange whatever gold or silver might come to him; 
 for he had many uses for other kinds of capital and could ill afford 
 to keep on hand a stock of money that appeared to be an idle invest- 
 ment. Therefore it happened that supplies of the precious metals 
 secured in trade tended to move out of the colonies in exchange for 
 other things that were felt to be more necessary. 
 
 24. IS MONEY A SUPERIOR KIND OF WEALTH ?• 
 By CHARLES GIDE 
 
 The popular answer to this question admits of no doubt. At all 
 epochs and in all places, except among savages, money has occupied 
 an exceptional place in the thoughts and desires of men. They regard 
 it, if not as the only wealth, at any rate by far the most important 
 wealth. Indeed, they appear to measure the value of all other wealth 
 by the quantity of money that can be contained in exchange for it. 
 To be rich is to possess either a large amount of money or the means 
 of obtaining it in exchange for other goods. 
 
 But if we ask the economists whether or not money is a superior 
 kind of wealth, the answer will be entirely different from the popular 
 opinion. In fact the first impetus to the growth of a scientific 
 political economy was the protest against the popular conception of 
 
 ' Adapted from Principles of Political Economy (\'editz' translation and 
 adaptation), pp. 219-22. (London: D. C. Heath & Co.)
 
 THE PECUNIARY ORGANIZATION OF SOCIETY 29 
 
 money, regarded by the earlier economists as a mere prejudice. 
 The science had scarcely been founded when Boisguillebert, in 1698, 
 declared, "It is quite certain that money is not a good of itself, 
 and that its quantity has nothing to do with the opulence of a country.'" 
 Since then the economists have shown Httle concern about the amount 
 of money and maintained that it is a commodity like all other com- 
 modities, and even inferior to others because it is in itself incapable 
 of satisfying any want directly, or of affording any pleasure. It is 
 consequently the only commodity of which we may say that its 
 abundance or scarcity is a matter of perfect indifference. If there 
 are few pieces of money in a country, each one will have a greater 
 purchasing power; if there are many, the purchasing power of each 
 will be smaller. So what does the quantity matter ? 
 
 These two opinions, however contradictory they seem, may easily 
 be reconciled. The public is right from the individual point of view — 
 the only one which interests it; economists are right from the general 
 or social point of view. The distinction here involved requires some 
 explanation. 
 
 Every piece of money must be regarded as a ticket or order 
 drawn on the sum total of existing wealth, gi\'ing the bearer the right 
 to claim a part of this wealth not exceeding the value indicated on the 
 coin. It is clearly our individual interest to possess as many of these 
 "orders" as possible; the more we have the richer we are. We 
 know very well that, in themselves, these "orders" can neither satisfy 
 hunger nor slake thirst. Long before economists had pointed out 
 this truth, legend taught the same principle in the tale of King 
 Midas, who died in hunger although surrounded by wealth which his 
 own folly turned into gold. Nevertheless, we regard these "orders" 
 as far more convenient than any other kind of wealth, and we are right 
 in doing so. 
 
 Given the present organization of society, the person who desires 
 to obtain an object that he has not produced (and the immense 
 majority of people are thus situated) can get it only by means of two 
 operations: first, by exchanging the product of his labor, or his labor 
 itself, for money; second, by exchanging this money for the object 
 desired. These two operations are called selling and buying. The 
 second of them, purchase, is very simple; by means of money a 
 desired object may easily be olitained. 'J1ie first process, sale, is 
 much more difficult ; an object, even of great value, cannot at all times 
 be readily exchanged for money. Hence the possessor of money 
 occupies a more favorable position than the j^ossessor of any other
 
 30 PRINCIPLES OF MONEY AND BANKING 
 
 commodity; in order to satisfy his wants he has but one operation to 
 perform, and this operation is an easy one. The possessor of any 
 other kind of goods must accompUsh two operations, one of which 
 is comparatively difficult. It has been well said that a particular 
 commodity corresponds only to a special and determinate want, while 
 money corresponds to any indeterminate and universal want. The 
 owner of a very useful commodity may not know what to do with it. 
 The possessor of money, on the other hand, is never thus embarrassed; 
 he is always able to find someone to accept it, and if by chance he is at 
 a loss how to make use of it at once, he still has the simple expedient 
 of keeping it for a more favorable opportunity. With other com- 
 modities this expedient is not always possible. 
 
 But if, instead of considering the position of an individual, we 
 regard the whole mass of individuals constituting society, the point 
 of view changes and the economists' thesis (that the amount of 
 money in a country is a matter of indifference) is more correct. Little 
 do I care for a tenfold increase in the amount of money in my posses- 
 sion if the same increase takes place for all the other members of 
 society. For in such an event I should be no richer than before; 
 since wealth is purely relative, I should not be able to obtain a larger 
 amount of goods. The sum total of wealth out of which our claims 
 or "orders" are paid would be no greater than before, and each 
 "order," i.e., each piece of money, would entitle me to a share only 
 one-tenth as large. In other words, the purchasing power of each 
 coin would be one-tenth as great, or, all prices having been multipUed 
 by ten, my position would not be changed. 
 
 25. THE SUPPLY OF STANDARD MONEY REQUIRED* 
 By LYMAN J. GAGE 
 
 The amount of standard money required by any country in my 
 opinion cannot be definitely stated. One can only reach a general 
 estimate. In order to arrive at this estimate it is necessary to inquire 
 into the various uses which gold serves. 
 
 First, it is practically out of use as a medium of exchange, and 
 the demand for it in that connection need not be considered here. 
 Second, a proper supply of gold is indispensably necessary for settle- 
 ment of balances of international trade, and our supply should be large 
 enough to permit the exportation of what may be required in such 
 
 •Adapted from "The Sufficiency of Our Present Currency System," Sound 
 Currency, X (1903), 61-63.
 
 THE PECUNIARY ORGAXIZATION OF SOCIETY 31 
 
 settlements without causing serious alarm as to the impairment of 
 our remaining stock. Third, gold ser^^es as a regulator of all other 
 forms of money, including the vast amount of credit currency. There 
 must therefore be a proper ratio of gold reserve to the various forms 
 of credit money in use. What is a proper ratio varies according to 
 time and circumstances. A ratio which at a time of budding pros- 
 perity, of reawakening enterprise and full confidence in the future, 
 would be abundant, even superfluous, might prove to be, in an unfold- 
 ing period of depression, of doubt, distrust, and business failures, 
 dangerously small. But as a general proposition the quantity of gold 
 is not a matter of great importance, for given a certain quantity, be 
 that quantity great or small, it will in the long run tend to relate 
 or establish prices of things and wages of labor. Multiplying the 
 prices of all commodities, labor, and services by ten would not make 
 anyone richer. Dividing prices would not make anyone poorer, 
 since once established the exchange ratios of commodities and the 
 power of labor to purchase goods would not therefore be relatively 
 changed. It is true that a sudden change in prices, either in one 
 direction or the other, would create incidental hardships, because 
 the change in prices could not in the nature of things be uniform or 
 simultaneous, and time contracts would be radically affected. 
 
 Were I to put in a single paragraph what I would consider the 
 ideal thing on this question of standard money, gold, it might be 
 stated after this manner: A given quantity of gold, to which the 
 floating volume of credit and the prices of commodities had, through 
 natural laws, operating over a long period of time, become normally 
 related. To this stock of gold, gradual but not sudden accretion is 
 to be desired, sufficient to bear the increasing strain of an increasing 
 volume of trade, an increase large enough to keep prices on a general 
 and continuous level. 
 
 C. The Role of Money in Industrial Society 
 
 26. THE STANDARD OF DEFERRED PAYMENTS AND 
 INDUSTRIAL PROGRESS' 
 
 By VV. CUNNINGHAM 
 
 The scarcity of the precious metals in Rome, coupled with their 
 fluctuating value, rendered it exceedingly difficult for anyone to 
 save wealth; they also made men unwilling to risk their accumulations 
 
 'Adapted from An Essay on Weslern Civil izalion and Its Economic Aspects, 
 I, 186-87. (Cambridge University Press, 1898.)
 
 32 rklNCll'LES OF MONEY AND BANKING 
 
 in business of any kinrl, and to use it as capital. The complete uncer- 
 tainty in regard to prices paralyzed trade, and capitalists were "in- 
 duced to hoard their coins of pure gold and silver for better days," 
 which never came. Industry did not offer a tempting field, as the 
 entcrjjrising man of business would often have to face the competition 
 of a manufactory organized by the State and controlled by officials 
 whom it would be imprudent to oflend. There was even greater 
 disinclination to use capital in agriculture and apply it to permanent 
 improvements. Accumulated wealth was hoarded rather than 
 invested, and general decay ensued; money and circulating capital 
 are not necessary for the maintenance of human life, but they were 
 necessary for the maintenance of a civilized society like the Roman 
 Empire. Since capital was not available, there need be no surprise 
 that labour failed to find employment and that land went out of 
 cultivation; these again are the very circumstances in which popula- 
 tion would necessarily decline, 
 
 27. MONEY AND CAPITAL ACCUMULATION 
 By WALTON H. HAMILTON 
 
 One of the most important services generally assigned to money 
 is the encouragement of capital accumulation. This function is 
 variously attributed to money as a medium of exchange, to money as 
 a store of wealth, and to money as a measure of values. Yet, since 
 in even a non-exchange society some economic thought is taken for 
 the morrow, no one of these is indispensable to capital formation. 
 
 As a medium of exchange money contributes little to capital forma- 
 tion. A farmer may live upon the provisions he has saved while 
 constructing a ditch to protect his crops. He may exchange these 
 directly for the labor of others embodied in the ditch ; for the barter sys- 
 tem does not preclude an exchange of present for future goods. Even 
 under the complex conditions of today a monetary medium of exchange 
 is unnecessary. Savings are usually deposited in banks in the form of 
 "credit instruments," each possessing a certain number of "units" 
 of value. They are exchanged for certificates of ownership of pro- 
 ductive wealth, such as deposit slips, bonds, and stocks. 
 
 The emphasis upon money as a storehouse of value is likewise 
 erroneous. True, values can be converted into money which its 
 owner can hoard until he is ready to use it. But in such case the use 
 of the value in question is merely postponed; the lack of an increment
 
 THE PECUNIARY ORGANIZATION OF SOCIETY 33 
 
 in value sufficiently attests the non-capitalistic character of the 
 operation. Today the processes of accumulating savings and pro- 
 ducing technical capital goods are closely synchronized. Through 
 savings individuals surrender their claims to wealth, and through the 
 instrumentality of "financial middlemen" these claims are trans- 
 ferred to those engaged in the technical production of capital goods. 
 Thus in general there is no time interval between saving and pro- 
 duction during which values have to be bottled up and preserved. 
 
 The contribution of money to capital formation is much less 
 direct. It inheres in the nature of a society highly organized upon 
 the basis of a "pecuniary unit" which is a common denominator of 
 values. Some of the more important aspects of this contribution 
 deserve at least passing notice. 
 
 First, calculations on the basis of the "pecuniary unit'' are 
 necessary to an appreciation of future values. In a non-calculating 
 society few future values will stand out. There is no way of measuring 
 values of varying degrees of futurity. But the pecuniary calculus 
 easily resolves these. Not only does it place definite values upon 
 future goods, but it estimates with considerable accuracy their 
 cost. Because of their association with the "roundabout" method 
 of production, the latter are varied and numerous. The determina- 
 tion of their values is further complicated by such technical facts as 
 replacement, depreciation, and obsolescence. Consequently an accu- 
 rate accounting system, based upon a precise unit, is necessary to 
 an appraisal of the costs and values of future goods. 
 
 Second, a pecuniary calculus is necessary to a rational comparison 
 of present and future values. Such an instrument enables future, 
 as well as present, needs to be translated into "prices," in which 
 form both can, in competition, make their appeals to the economic 
 motives of man. The whole aggregate of uses, present and future, to 
 which goods can be put is reduced to an intelligible scheme. Thus 
 rational thought can be taken both for today and for tomorrow. 
 
 Third, accumulation and production of capital goods are organized, 
 as aggregates, into a comprehensive system. Under a non-e.\change 
 system many, lacking means, will wish to invest; others, having 
 means, will lack opportunity for investment. But the system pro- 
 vides no instrument for bringing accumulations and opportunities 
 together. But under the pecuniary system the processes of saving 
 and technical investment arc separated. The uses to which capital 
 can be put are gathered together into a nicely arranged scheme.
 
 34 PRINCIPLES OF MONEY AND BANKING 
 
 Likewise, potential savings are aggregated into a similar scheme. 
 Through conifjetition the two aggregates are brought into harmony 
 at a "price" or a "rate of interest." 
 
 Fourth, the pecuniary calculus makes possible an intricate mech- 
 anism which brings savings and investments into a nicer adjustment. 
 There is created a complex structure of savings and investment banks, 
 trust and mortgage companies, insurance associations, investment 
 companies, and underwriting syndicates, which together bridge the 
 gulf separating the two. By splitting up investments into shares 
 of various sizes these companies are enabled to offer to each capitalist 
 an investment equal to his savings. By issuing different kinds of 
 "securities" they are able to offer risks compatible with the romance 
 in varying temperaments. In like manner, by aggregating or divid- 
 ing individual savings, they can furnish capital in amounts exact 
 enough to meet the needs of any productive venture. They can also, 
 on varying conditions, supply funds to meet any reasonable risk. 
 Thus saving and investment are alike encouraged by the nicest kind 
 of adjustment between the two processes essential to the formation 
 of capital. 
 
 In these several ways an organization of society, based upon the 
 "pecuniary unit," furnishes both the incentives and the means for 
 capital formation. 
 
 28. MONEY AND BUSINESS ORGANIZATION' 
 By THORSTEIN VEBLEN 
 
 Economists are in the habit of speaking of money as a medium 
 of exchange, a "great wheel" for the circulation of goods. It may be 
 true in some profound philosophical sense that money values are 
 not the definitive term of business endeavor, and that the business 
 man seeks through the mediation of money to satisfy his craving for 
 consimaable goods. Looking at the process of economic life as a 
 whole and taking it in its rationalized bearing as a collective endeavor 
 to purvey goods and services for the needs of collective humanity, the 
 oflSce of the money vmit is perhaps rated as something subsidiar}', serv- 
 ing to facilitate the distribution of consumable goods to the consumers, 
 the consumption of goods being the objective point of all this traffic. 
 Within the range of business transactions, however, this ulterior 
 
 ' Adapted from The Theory of Business Euter prise, pp. 83-85. (Charles 
 Scribner's Sons, 1910.)
 
 THE PECUNIARY ORGANIZATION OF SOCIETY 35 
 
 end does not necessarily come into view, at least not as a motive 
 that guides the transactions from day to day. The matter is not so 
 conceived in business transactions, it does not so appear on the face 
 of the negotiable instruments, it is not in this manner that the money 
 unit enters into the ruling habits of thought of business men. 
 
 The all-dominating issue in business is the question of gain and 
 loss. Gain and loss is a question of accounting, and the accounts are 
 kept in terms of the money unit, not in terms of livelihood, nor in 
 terms of the serviceabiUty of the goods, nor in terms of the mechanical 
 efficiency of the industrial or commercial plant. For business purposes, 
 and so far as the business man habitually looks into the matter, the 
 last term of all transactions is their outcome in money values. The 
 base line of every enterprise is a line of capitalization in money 
 values. In current business practice variations from this base line 
 are necessarily rated as variations on the part of other factors in the 
 case, not as variations of the base line. The business man judges 
 of events from the standpoint of ownership, and ownership runs in 
 terms of money. 
 
 29. ]\IONEY AND ECONOMIC ACTIVITY' 
 By WESLEY C. MITCHELL 
 
 Writers upon money usually state that it performs three functions, 
 serving as a common denominator of value, a medium of exchange, 
 and a standard of deferred payments. To enumerate the functions 
 of money in this fashion, however, is very far from suggesting the 
 importance of the role which money plays in economic life. To 
 understand this role attention must be fixed upon the complex 
 mechanism of prices, rather than upon money itself. I may give 
 here but a brief statement of the relations between prices and funda- 
 mental economic processes. 
 
 From the point of view of the men who direct it, the production of 
 wealth is nowadays a business process of selling goods for more than 
 they have cost and is conducted for the sake of getting money profits. 
 The technical processes involved in various departments of business, 
 farming, manufacturing, transportation, and commerce are, in the 
 eyes of the business men who direct them, simply subordinate parts 
 of this business process: certain of the steps necessary to make profits 
 
 ■ Adapted from Gold Prices and Wages under the Greenback Standard (iqoS), 
 pp. 279-81, University of California Publications in Economics, I.
 
 36 PRINCIPLES OF MONEY AND HANKING 
 
 by selling at prices which exceed the money cost. It is hardly too 
 much to say that from the standpoint of the business men in control 
 the production of wealth is simply an incidental feature in the business 
 process of making money. 
 
 Alongside these business enterprises incidentally concerned with 
 the production, manufacture, and distribution of material goods 
 stand the business enterprises concerned with finance: banks, trust 
 companies, stock and bond houses — in short, the whole mechanism 
 of the investment and money markets. These enterprises, like the 
 preceding class, are conducted for the sake of pecuniary profits, and 
 their profits depend on selling at prices higher than the prices paid. 
 They represent the highest development and the most complex adjust- 
 ment of the whole business organization, and all other enterprises 
 are bound to them by the various forms of pecuniary obligations. 
 
 The distribution of the wealth produced by enterprises of the 
 first sort, supported by financial aid from enterprises of the second 
 sort, is also effected by means of prices. Wages is the price paid for 
 labor, interest is the price paid for the use of loans, rent the price 
 paid for the use of material goods which must be returned without 
 substantial deterioration, and profits is the residue of the aggregate 
 prices received after the aggregate prices paid for the factors of pro- 
 duction, for materials, etc., have been deducted. To the individual, 
 indeed, economic welfare depends primarily upon the money income 
 he is able to get under the conditions presented by the price system 
 and upon the aggregate prices which he must pay for what he wishes 
 to consume. Money prices, in brief, are the formal basis on which 
 the economic relations of individuals in modern society are organized 
 and the formal mechanism by which economic processes are carried on. 
 
 30. A PECUNIARY SOCIETY' 
 By H. J. DAVENPORT 
 
 Modern society is distinctly a pecuniary society, a society of 
 business. Despite the fact that society was not always pecuniary — 
 has, indeed, been so only for the narrowest margin of years out of a long 
 human history, and may remain so only for the next short swing 
 of the pendulum in the life of man — the political economy that we 
 must study today is the political economy of today. Mainly, under 
 
 ' Adapted from The Economics of Enterprise, pp. 21-28. (The Macmillan 
 Co., 1913.)
 
 THE PECUNIARY ORGANIZATION OF SOCIETY 37 
 
 present conditions, we produce for tiie market, for exciiange, despite 
 the fact that a few generations ago the contrary was the truth. And 
 at present we produce in the larger part for a competitive, impersonal 
 world-market. This is the era of free individual initiative under 
 private property for private gain. So far, indeed, is this the truth that 
 even combination and monopoly may be regarded as merely secondary 
 aspects of competition and of individual initiative. Strike this 
 fact of competition at its very center of tone, and we discover that 
 we are in a regime of price. Money is the focusing point of modern 
 business affairs. It is the standard of values simply because in a 
 society producing for exchange it is the one established intermediate 
 commodity. Therefore, as medium of exchange, it is the standard 
 of immediate and of deferred payments. Through credit the money 
 economy lays hold upon even the distant future. Thus to object 
 that more and more, as society has advanced from a society of isolated 
 production through a barter economy to a money economy, it is now 
 moving over into a credit economy, is really to assert merely that in 
 new and marvelous ways money is taking on a still greater emphasis. 
 More and more, and more and more exclusivel}^ and over an ever- 
 widening field of human efifort, human interests and desires and 
 ambitions fall under the common denominator of money. Doubtless 
 many of the best things in life do not get bought and sold. Some of 
 them are not exchangeable; and not all things that could be trans- 
 ferred are men weak enough to sell or other men strong enough to 
 buy. Not every man has his money price. But most good things do, 
 in greater or less degree, submit to the money appraisal. Health is 
 easier for him who can take his ease and who has the wherewithal to 
 pay for good foods and medicines, to travel, to employ good nursing, 
 and to command capable physicians and efficient surgeons. And, in 
 their degree, also, love and pity and respect and place are bought and 
 sold upon the market. It takes a goodly number of dollars to get a 
 child safely born, and even more dollars to achieve for one's self a 
 respectable burial. Much money is power over many things. Money 
 is the standard of value in the sense that all values of all exchangeable 
 things are expressed in terms of it. And this holds, not only of all 
 commodities and services, but of all incomes and of all capitals. The 
 capital of a banking house, or a factory, or a railroad company, is not 
 a congeries of tangible things, but a pecuniary magnitude — so many 
 dollars. All economic comparisons are made in money terms, not in 
 terms of subsistence or of beauty or of artistic merit or of moral
 
 38 PRINCIPLES OF MONJiY AND BANKING 
 
 deserving. This same standard tends to Ijccome also the test and 
 measure of human achievement. Men engage in business, not solely 
 to earn a livelihood, but to win a fortune in a pecuniary sense. To 
 win by this money test is to certify one's self tangibly and demon- 
 straljly as having scored in the most widespread and absorbing of 
 competitions. Is one a great artist — what do his pictures sell for? 
 Or what is the income of this leading advocate? or of that famous 
 singer? How great are the author's royalties? The pecuniary 
 standard tends to be carried over into non-pecuniary fields. 
 
 It is almost past belief how far both in degree and in direction 
 money valuations pervade all our thinking. Cheapness is prone to be 
 synonymous with ugliness, richness with beauty, elegance with 
 expensiveness. No one can tell for himself where the really aesthetic 
 begins and the sheer pecuniary ends. In the field of morals, also, the 
 so-called cash-register conscience is an actual thing. And one might 
 go still further and note that almost all great political issues, and 
 almost all absorbing social problems, and almost all international 
 complications rest upon a pecuniary basis. Our national problems are 
 tariff, labor unions, strikes, money, trusts, banking, currency, rail- 
 roads, conservation of resources, shipping, taxation. Success in 
 elections, in the selection of senators, in the making of laws, and in the 
 selection of judges is prone to be desired for financial ends and to 
 be decided by pecuniary means. Diplomatic compUcations hinge 
 upon trade connections, the open door, fisheries and sealeries, colonies 
 for markets, and spheres of influence for trade. Navies are trade 
 guardians and trade auxiliaries. Eliminate from local politics the 
 influence of the public-service corporation, of the contractor, and of 
 the seekers for special pecuniary privileges, and what is left of the 
 municipal problem will be mostly the pecuniary nexus of the slum with 
 the ballot box, of the saloon with the police system, and of saloon and 
 slum and brothel with the city hall. 
 
 It is, in fact, the value problem — or more specifically and more 
 accurately for present society, the problem of market price — that is 
 the central and unifying problem of present-day economics. Price, 
 then, must attend and characterize all things that are economic; and 
 all things so attended are so far economic in character. And more 
 things than those which accurately are material must fall within the 
 scope of price. Price extends its sway to the utmost limits of what- 
 ever is property, tangible or intangible — whether material or imma- 
 terial. Property covers— and therefore price covers — debts, good
 
 THE PECUNIARY ORGANIZATION OF SOCIETY 39 
 
 will, franchises — everything that is bought or sold. Price includes 
 also many non-property facts — human services, such as the goods for 
 which payment is made to the actor, preacher, teacher, or singer. 
 And, by the way, all efforts or processes are economically productive 
 for which a price is so paid or which, directly or indirectly, enhance 
 the price. 
 
 Precisely because the present economic life is organized upon lines 
 of private property, of pursuit of individual gain, and of production 
 for exchange, it is inevitable that the center about which all economic 
 activity revolves is the medium of exchange, the price standard. It 
 is this fact which in turn fixes the problem of price as the central 
 problem and the organizing interest of current political economy as a 
 science. The proof of this is, however, mostly to be found in that 
 constant return to the price problem which we find inevitable as 
 we approach, one after another, the subordinate problems of the 
 science. And these problems, in turn, declare their subordinate 
 character by this very fact that they are only to be solved by an 
 appeal to the analysis and the laws of price. In the fact that any- 
 thing sells at all in the present economic order is implied its sale 
 in terms of price. Wages, for example, are the price of the services 
 of employed labor; profit, the price reward of the independent, self- 
 employed laborer (the entrepreneur, enterpriser, Unternchmer, or 
 imprenditor); rent, the price commanded by property lent in time 
 for hire; interest, the per cent which the time use of wealth, in 
 terms of price, bears to the total price. Each of these is a price 
 quantity or item, and each presents itself specifically as a problem of 
 price adjustment. 
 
 31. THE ROLE OF MONEY IN ECONOMIC ORGANIZATION 
 By WALTON H. HAMILTON 
 
 The institution of money is inseparably linked with the whole 
 complex of our social arrangements. Its part in facilitating market 
 operations is so direct and evident that it is generally conceived of as 
 a mere medium of established exchanges or a mere measure of pre- 
 determined values. Yet a little reflection shows that it permeates 
 every aspect of economic life, conditions all economic activity, and 
 brings to all things economic mutual comniensurability. The 
 ''pecuniary unit," which is its chief manifestation, supplies one of the
 
 40 PRINCIPLES OF MONEY AND BANKING 
 
 elements essential to the development and maintenance of a compre- 
 hensive industrial system. Let us consider somewhat specifically a 
 few of the numerous contributions which this "pecuniary unit" makes 
 to the establishment of the economic order. 
 
 1. // facilitates economic calculation. — In an isolated agrarian 
 community, composed of people possessing limited resources and 
 loving the "simple life," few commodities will be produced. Crudely 
 measuring costs against returns, and goods against goods, the people 
 will not formulate with any exactness a unit in terms of which values 
 can be gauged. Such crudeness in calculation will find its counterpart 
 in an economic order wherein the family is the economic unit, where 
 there is little division of labor, where natural resources and personal 
 talents are little developed, and where production and consumption 
 are interdependent. But if resources and talents are to be developed, 
 if goods are to be produced to satisfy a larger range of wants, if tasks 
 are to be distributed between individuals and communities, and if 
 these are to be organized into a larger and more complex whole, a 
 rather precise instrument for the calculation of values must be found. 
 And, as the economic entity becomes larger, its use of resources more 
 intensive, its products more varied, and its agencies more interde- 
 pendent, values must be calculated with more and more precision. 
 We have often been told that "money is the measure of values"; 
 yet, in point of fact, it is more exact to say that the " pecuniary unit " is 
 a common denominator of all values, for the existence of such a unit 
 makes economic calculation possible. It furnishes the indispensable 
 term for the establishment of accounting systems, which are only 
 devices for accurately analyzing schemes of values. It is evident 
 that, as the unit becomes more precise, the precision of economic 
 calculation is correspondingly increased. 
 
 2. // encourages rational economic judgment. — If one's economic 
 world contains but a handful of tasks and goods, he can, quite ration- 
 ally and without complex calculations, choose this rather than that. 
 But in a world in which his judgment is confronted at ever}' point by 
 a number of alternatives, and every activity has pecuniar}^ connec- 
 tions with a large number of others, a decision is fraught with difl5- 
 culties. To be rationally compared the alternatives must be reduced 
 to quantitative terms. Since their differences are likely to be small, 
 the determination of their values requires precision. Salvation is to 
 be found in the "magic ritual of calculation" based upon the "pecu- 
 niary unit." The presence of such a unit, further, encourages the de-
 
 THE PECUNIARY ORGANIZATION OF SOCIETY 41 
 
 veloping of the "calculating mind," which the mediaeval man would 
 have regarded as an intellectual curiosity but which the modern busi- 
 ness man esteems a priceless treasure. It also stimulates the develop- 
 ment and use of more exact accounting systems and the exclusion 
 from economic judgments of non-pecuniary considerations. It is 
 only as economic judgments approach rationality that values are 
 kept consistent in a delicately organized economic order. 
 
 3. // permits the organization of consumption. — Where an indi- 
 vidual or a group consumes its own products, it is a slave to its 
 limited resources and its technical limitations. But under an organ- 
 ized pecuniary system this thraldom is broken. Individual or group, 
 no longer compelled to satisfy all its wants, can choose the tasks 
 which resources or technical efficiency suggest as most advantageous. 
 For his labor the individual receives, not the wheat or the pig iron or 
 the shoes he has produced, but "generalized purchasing power." For 
 his consumption he chooses freely, spending his purchasing power 
 upon a large number of goods, quite oblivious to his lack of technical 
 versatility. For him consumption is thus differentiated from pro- 
 duction and organized upon the basis of a rational calculus. Since 
 other individuals are acting likewise, the consumption of wealth by 
 society is elaborated into a highly complex system. 
 
 4. It permits the organization of production. — In an economic order 
 without the division of labor', the "pecuniary unit" is unnecessary to 
 the organization of production; but where specialization appears it is 
 far otherwise. The single establishment uses divers kinds of laborers, 
 a medley of raw materials, and quite varied industrial equipment. 
 The costs of these and their proportions must be accurately gauged. 
 Likewise the "production system" is a co-ordinated collection of 
 specialized establishments that defies diagrammatic presentation. 
 The individual establishment receives its "raw materials" from 
 many sources; its finished products become the raw materials of 
 many goods. The correlation of business with business is so close 
 that "margins," which represent allowances for "friction," are 
 very small. The organization and maintenance of the single establish- 
 ment, and the integration of these into a properly co-ordinated "pro- 
 ductive system," are alike dependent upon careful calculation and 
 accurate pecuniary judgment, the basis of which is the "pecuniar\- 
 unit." 
 
 5. // articulates productive and consumptive activities into an organic 
 system. — In a self-sufficient community, possessing no division of
 
 42 PRINCIPLES OF MONEY AND BANKING 
 
 labor, consumption and production are automatically organized into 
 a system. In a world composed of such communities the organiza- 
 tion, while complete, appears crude and inexact; for there is quite 
 likely to be a surplus of certain products in some communities and a 
 dearth of them in others. Accordingly an exact adjustment of goods 
 and wants, of production and consumption, is possible only under an 
 extended economic order. But here the articulation of a myriad of 
 productive agencies and as many consumptive activities into a single 
 coherent scheme is a task of great magnitude. In the case of each 
 good, demand and supply must approximately correspond; while, 
 for the whole, resources must be used in the production of those 
 particular goods which satisfy wants pecuniarily most potent. For- 
 tunately the "pecuniary unit" enables this adjustment to be made 
 with sufficient precision. It enables each good and the satisfaction 
 of each want to have placed upon it a "price," or a quantitative 
 expression of its value in terms of the "pecuniary unit." Price is a 
 flexible medium through which demand and supply are adjusted to 
 each other. As we have learned elsewhere, an increase in demand 
 raises the price and stimulates increased production, and an increase 
 in supply lowers price and discourages production; while decreases in 
 demand and supply have antithetical efiEects. Thus the "pecuniary 
 unit," through "price," brings the demand and supply of a par- 
 ticular article into harmony. But as, impelled by its price, the 
 demand or supply of an article is changed, it becomes more or less 
 advantageous economically to produce or consume other articles. 
 Accordingly, through price-changes, the demand and supply of other 
 articles are affected. They, likewise, in the end, will harmonize, 
 though likely at new prices and in changed amounts. Thus the 
 demand for and supply of each article are intimately associated 
 through price with those of a large number of other articles. Hence 
 a larger view reveals an extremely complex and intricately organized 
 system for the "production and consumption of wealth," supported 
 by a vast and harmonious complex of pecuniary values. At the basis 
 of this intricate and gigantic, yet orderly, "price-structure" Ues the 
 "pecuniary unit." 
 
 6. It gives stability to the economic order. — If the economic order 
 were a gigantic mechanism, composed of unchangeable elements, 
 a static price-structure would preserve it. But the elements of our 
 system are quite variable: population may increase, the technical 
 system may change, industrial equipment may be augmented, the
 
 THE PECUNIAR\' ORGANIZATION OF SOCIETY 43 
 
 nature of institutions may vary, or popular caprice may affect new 
 v/ants. Confronted by one of these contingencies, a static scheme 
 of prices would introduce elements of disintegration into the system. 
 But the "pecuniary unit," stable itself, allows prices to change in 
 response to changed circumstances. Thus it induces the necessary 
 adjustments between production and consumption and leaves the 
 price-structure capable of sustaining a society as highly integrated 
 as before. Naturally, changed prices introduce inconsistencies into 
 the price-structure, but in time tJiese tend to disappear. Since 
 change is constantly occurring, the system always possesses a degree 
 of inconsistency. This is the very purpose of the "margins" allowed 
 to interlocking businesses. 
 
 Paradoxical as it may appear, money must be inconspicuous in 
 itself if it would best fill the role of economic organizer. If it be 
 heavy, or impure, or if it otherwise entail cost in making exchanges, 
 it restricts by so much the development of a highly organized society. 
 When economical substitutes are used in actual exchanges, and money 
 ceases to be a "medium of exchange," it becomes a more exact meas- 
 ure of value and a more eflScient organizer of economic activities. 
 Likewise, the more certain its value, the more effective its work in. 
 sustaining the economic order. Since it is associated with some such 
 commodity as gold, the "pecuniary unit" cannot be exact. But 
 inexactness, either actual or anticipated, has always threatened 
 chaos. There have been times when we were uncertain as to what 
 was to be the "standard for deferred payments" or "the definition of 
 the unit of value." There have been times, for instance periods of 
 great gold production, when the amount of value in "the unit" was 
 being radically changed. Both were accompanied by a partial 
 disarrangement of the price-structure and a corresponding disin- 
 tegration of the industrial system. In such periods it is particularly 
 difficult to measure present and future values m terms of each other, 
 and economic judgments which guide the system as a whole are not 
 sufficiently rational. This tendency to disintegration will remain 
 until an "inflexible unit of purchasing power" is established. When 
 that is done, questions of monetary theory will have only academic 
 interest and money will perfectly perform its organizing function. 
 
 The organizing function of the pecuniary unit is not confined to 
 the present economic order. The pecuniary unit is a fit companion 
 for such institutions as private j^roperty, free contract, pecuniary com- 
 petition, and individual initiative. But its service would be cfjually
 
 44 PRINCIPLES OF MONEY AND BANKING 
 
 indispensable in a society quite unlike ours. Under socialism, for 
 instance, even though the state took the initiative in production, to 
 guide its economic judgment it would require a means for determining 
 the quantities in which its varied goods were to be produced. This 
 would require a means for exact valuation, such as could be found 
 only in a proper accounting system, for which the "pecuniary unit" 
 must furnish the basis. Accordingly we may conclude that the 
 "pecuniary unit," the principal manifestation of money, is an agency 
 of prime importance in establishing and maintaining a complex 
 economic order.
 
 n 
 
 THE ORIGIN AND DEVELOPMENT OF MONEY 
 
 Introduction 
 
 The institution of money is of venerable age, evidence of its exist- 
 ence in one form or another going back as far as recorded history. Its 
 beginnings being thus shrouded in antiquity, the nature of its origin 
 is consequently more or less a matter of numismatical speculation. 
 The study of the use of money among primitive tribes of our own 
 time, however, has thrown considerable light on the subject, and a 
 number of different theories have been advanced for its development. 
 The chief of these are set forth in the selections below. 
 
 In connection with these readings it is important to differentiate 
 carefully the various functions of money and to ascertain in each case 
 what particular function, or combination of functions, has been per- 
 formed by the various kinds of currency enumerated. It will be 
 seen that in many cases the money in use has not performed all the 
 functions discussed under Chapter i. Indeed, the various functions 
 did not develop simultaneously, the standard of deferred payments, 
 for instance, being of relatively late origin. In regard to its functions 
 as a medium of exchange and a common denominator of value, there 
 has been much discussion over the question of priority. 
 
 At different times and among different peoples a great variety of 
 commodities has been used as money, but gradually with the evolu- 
 tion of commerical civilization the precious metals, gold and silver, 
 have come to be almost exclusively used as the bases of monetary 
 systems. The reasons for this evolution are shown in the selections 
 under Section C. It is particularly important to study the table 
 of the production of the precious metals in connection with the adop- 
 tion of gold and silver for monetary use. 
 
 It will be observed that one of the most important reasons for the 
 universal adoption of the precious metals as money is their adapta- 
 bility to coinage, thereby furnishing a uniform system of currencv. 
 The development of a good system of coinage, however, has been 
 a long and tedious process; for although money appears to have been 
 
 45
 
 46 PRINCIPLES OF MONEY AND BANKING 
 
 minted aflcr a fashion in very ancient times it was not until quite 
 recently that a really satisfactory method of coining money was 
 perfected. The consequences of a bad system of coinage have been 
 disastrous from every standpoint; and for centuries the perpetually 
 "unfortunate state of the currency", was a very serious barrier to 
 commercial progress. 
 
 A. Origin of Primitive Money 
 
 32. THE ORIGIN AND USE OF MONEY' 
 By ADAM SMITH 
 
 In order to avoid the inconvenience of barter every prudent man 
 in every period of society, after the first establishment of the division 
 of labor, must naturally have endeavored to manage his affairs in such 
 a manner as to have at all time by him, besides the peculiar produce 
 of his own industry, a certain quantity of some one commodity or 
 other, such as he imagined few people would be likely to refuse in 
 exchange for the produce of their industry. 
 
 Many different commodities, it is probable, were successively 
 thought of and employed for this purpose. In all countries, however, 
 men seem at last to have been determined by irresistible reasons 
 to give the preference, for this emplojrment, to metals above every 
 other commodity. Metals can not only be kept with as little loss 
 as any other commodity, scarcely anything being less perishable than 
 they are, but they can likewise without any loss be divided into a 
 number of parts, and by a fusion of those parts can easily be reunited 
 again, a quality which no other equally durable commodities possess, 
 and which more than any other quality renders them fit to be the 
 instruments of commerce and circulation. 
 
 33. ORNAMENTATION AND MONEY* 
 By W. W. CARLILE 
 
 Let us get rid, once for all, of the idea that a commodity owes 
 its "adoption" as money to any "convention" tacit or explicit 
 entered into with each other by the members of primitive communities. 
 The criticism at once suggests itself with reference to Adam Smith's 
 explanation of the origin of money, that if the prudent man could 
 
 ' Adapted from The Wealth of Nations, Book I, chap. iv. 
 
 'Adapted from The Evolution of Modern Money, pp. 225-70. (The Mac- 
 millan Co., 1901.)
 
 THE ORIGIN AND DEVELOPMENT OF MONEY 47 
 
 find any commodity that few would refuse in exchange for their 
 products, then money was aheady virtually established. The very 
 thing that we want to know is, how did first one commodity, then 
 another, and finally gold and silver, attain such a degree of uni- 
 versal acceptabihty as ensured their being refused by none in exchange 
 for their products ? 
 
 It may be worth while, first, to take note of those characteristics 
 which render a commodity conspicuously unfit for its choice as 
 money. The eminent German historian, Mommsen, observes: 
 ''The commodity that becomes money must over all things not be 
 one that is indispensable for the supply of the most urgent material 
 needs." The reason that prime necessities of life never become money 
 is plainly that the desire for them is dependent upon bodily appetites, 
 and is therefore liable at any moment to satiation. If a man had not 
 more than enough of wheat, for example, to satisfy present hunger, 
 he would not part with any of it. If, on the contrary, he and the 
 rest of the community had enough of it for present wants, together 
 with such provision for future needs as they regarded as adequate, 
 then any man who had a superfluity of it would not be able to barter 
 away any part of it on any terms whatsoever. No one would take it 
 off his hands. The only circumstances in which wheat could con- 
 ceivably assume a position anything like that of money would be in 
 the event of there being an export outlet for it. It was such an export 
 outlet that gave currency to tobacco in Virginia. "Since tobacco 
 was in unfailing demand for shipment abroad it was alwa}s readily 
 taken at the country store." When, however, we take the world 
 as a whole, or any self-contained section of it, hke Europe in the 
 early Middle Ages, there can evidently be no outlet constantly open 
 for any commodity, so far as the conditions of space are concerned. 
 There may, however, be an outlet in time, that is to say, the whole 
 surplus of some commodity which is not required to supply present 
 needs may be absorbed for the purposes of provision for the future; 
 and this, as a matter of fact, is what happens with regard to the 
 monetary commodity. The origin of money is thus essentially con- 
 nected with that stage in human development when men begin to 
 "look before and after," to make provision for the future. 
 
 The commodity which would best secure a man's future well- 
 being would not be so much the commodity best adapted for immedi- 
 ate use by himself or his dependents as the commodity which would 
 be most efficient in securing for him the services of his neighbors or
 
 48 PRINCIPLES OF MONEY AND BANKING 
 
 of strangers unconnected with him. We find, moreover, and not 
 without surprise, that the commodity of greatest direct utility is 
 not the most useful in procuring the services of others, or in making 
 provision for the future. On the contrary, the commodity most 
 highly prized is usually one which could easily be dispensed with. 
 
 "Wherever we come across man on the surface of the globe," says 
 M. Babelon, "we find that it is the superflous which by instinct seems 
 to him the most necessary; man has scarcely learnt the use of clothes 
 before he hangs onto his neck, his arms, his legs, his ears, necklaces, 
 bracelets, rings, and pendants of every shape, in the manufacture of 
 which the precious metals are always and everywhere preferred. 
 Ever since the beginning of the world, the pursuit of gold and silver 
 has dominated everything; ages before the invention of money and the 
 appearance of the legislator nations made war with each other for the 
 possession of the precious metals, organized for their acquisition 
 large and perilous expeditions, which have left their memory in his- 
 tory and in fable, such as the expedition of the Argonauts in search 
 of the Golden Fleece, the adventures of Hercules in the Garden of the 
 Hesperides, and the voyages of the ships of Tyre and Sidon to the 
 country of Pharsis." 
 
 These precious metals which were thus passionately sought for 
 purposes of adornment naturally became the means of making pro- 
 vision for the future, and of reckoning wealth. They served at one 
 and the same time the purposes of ornament and of money. The 
 possession of gold and silver ornaments gave distinction and social 
 prestige to the owners. Everyone prized the precious metals, there- 
 fore, and in consequence their general acceptability made them most 
 desirable commodities for monetary purposes. 
 
 34. THE ORIGIN OF MEDIA OF EXCHANGE' 
 By KARL MENGER 
 
 It has long been the subject of universal remark in centers of 
 exchange, that for certain commodities there existed a greater, more 
 constant, and more effective demand than for other commodities 
 less desirable in certain respects. The person who wishes to acquire 
 certain definite goods in exchange for his owti is in a more favourable 
 position if he brings commodities of this kind to market than if he 
 visits the market with goods which cannot display such advantages, 
 
 ' Adapted from "The Origin of Money," Economic Journal, II (1892), 247-52.
 
 THE ORIGIN AND DEVELOPMENT OF MONEY 49 
 
 or at least not in the same degree. Thus equipped he has the pros- 
 pect of acquiring such goods as he finally wishes to obtain, not only 
 with greater ease and security, but also, by reason of the steadier and 
 more prevailing demand for his own commodities, at prices corre- 
 sponding to the general economic situation — at economic prices. 
 Under these circumstances when anyone has brought goods not highlv 
 salable to market, the idea uppermost in his mind is to exchange 
 them, not only for such as he happens to be in need of, but, if this 
 cannot be effected directly, for other goods also, which, while he 
 did not want them himself, were nevertheless more salable than his 
 own. By so doing he certainly does not attain at once the final 
 object of his trafficking, to wit, the acquisition of goods needful to 
 himself. Yet he draws nearer to that object. By the devious way 
 of a mediate exchange he gains the prospect of accomplishing his pur- 
 pose more surely and economically than if he had confined himself 
 to direct exchange. Now in point of fact this seems everywhere to 
 have been the case. Men have been led, with increasing knowledge 
 of their individual interests, each by his own economic interests, with- 
 out convention, without legal compulsion, nay, even without any 
 regard to the common interest, to exchange goods destined for 
 exchange for other goods equally destined for exchange, but more 
 salable. 
 
 With the extension of traffic in space and with the expansion 
 over ever longer intervals of time of provision for satisfying material 
 needs, each individual would learn, from his own economic interests, 
 to take good heed that he bartered his less salable goods for those 
 special commodities which displayed, besides the attraction of being 
 highly salable in the particular locality, a wide range of salablcness 
 both in time and place. These wares would be qualified by their 
 costliness, easy transportability, and fitness for preservation (in 
 connection with the circumstance of their corresponding to a steady 
 and widely distributed demand) to insure to the possessor a power, 
 not only "here" and "now," but as nearly as possible unhmited in 
 space and time generally, over all other market goods at economic 
 prices. 
 
 When the relatively most salable commodities have become 
 "money," the event has in the first place the effect of substantially 
 increasing their originally high salableness. Every economic sub- 
 ject bringing less salable wares to market, to acquire goods of another 
 sort, has thenceforth a stronger interest in converting what he has
 
 50 PRINCIPLES OF MONEY AND BANKING 
 
 in Ihe first instance into wares which have become money. For such 
 persons, by the exchange of their less salable wares for those which 
 as money arc most salable, attain not merely, as heretofore, a higher 
 probal^ility, but the certainty of being able to acquire forthwith 
 equivalent quantities of every other kind of commodity to be had in 
 the market. And their control over these depends simply upon their 
 pleasure and their choice. Pecuniam habens, habet omnem rem quern 
 vult habere. 
 
 On the other hand, he who brings other wares than money to 
 market finds himself at a disadvantage more or less. To gain the 
 same command over what the market affords, he must first convert 
 his exchangeable goods into money. The nature of his economic 
 disability is shown by the fact of his being compelled to overcome a 
 difficulty before he can attain his purpose, which difficulty does not 
 exist for, i.e., has already been overcome by, the man who owns 
 a stock of money. 
 
 Thus the effect produced by such goods as are relatively most 
 salable becoming money is an increasing differentiation between 
 their degree of salableness and that of all other goods. And this 
 difference in salableness ceases to be altogether gradual and must 
 be regarded in a certain aspect as something absolute. The practice 
 of everyday life, as well as jurisprudence, which closely adheres for 
 the most part to the notions prevalent in everyday life, distinguish 
 two categories in the wherewithal of traffic — goods which have 
 become money and goods which have not. And the ground of this 
 distinction, we find, lies essentially in that difference in the sal- 
 ableness of commodities set forth above — a difference so significant 
 for practical life and which comes to be further emphasized by inter- 
 vention of the state. 
 
 It is obvious how highly significant a factor is habit in the genesis 
 of such generally serviceable means of exchange. It lies in the 
 economic interests of each trafficking individual to exchange less 
 salable for more salable commodities. But the willing acceptance 
 of the medium of exchange presupposes already a knowledge of these 
 interests on the part of those economic subjects who are expected to 
 accept in exchange for their wares a commodity which in and by 
 itself is perhaps entirely useless to them. It is certain that this 
 knowledge never arises in every part of the nation at the same time. 
 It is only in the first instance a limited number of economic subjects 
 who will recognize the advantage in such procedure, an advantage
 
 THE ORIGIN AND DEVELOPMENT OF MONEY 51 
 
 which, in and by itself, is independent of the general recognition of 
 a commodity as a medium of exchange, inasmuch as such an exchange, 
 always and under all circumstances, brings the economic unit a good 
 deal nearer to his goal, to the acquisition of useful things of which he 
 really stands in need. But it is admitted that there is no better method 
 of enlightening anyone about his economic interests than that he per- 
 ceive the economic success of those who use the right means to secure 
 their own. Hence it is also clear that nothing may have been so 
 favourable to the genesis of a medium of exchange as the acceptance, 
 on the part of the most discerning and capable economic subjects, 
 for their own economic gain, and over a considerable period of time, 
 of eminently salable goods in preference to all others. In this way 
 practice and habit have certainly contributed not a little to cause 
 goods, which were most salable at any time, to be accepted, not only 
 by many, but finally by all, economic subjects in exchange for their 
 less salable goods: and not only so, but to be accepted from the 
 first with the intention of exchanging them away again. 
 
 It is not impossible for media of exchange, serving as they do the 
 commonweal in the most emphatic sense of the word, to be instituted 
 also by way of legislation, like other social institutions. But this 
 is neither the only nor the primary mode in which money has taken 
 its origin. This is much more to be traced in the process depicted 
 above, notwithstanding the nature of that process would be but 
 very incompletely explained if we were to call it "organic," or denote 
 money as something "primordial," of "primeval growth," and so 
 forth. Putting aside assumptions which are historically unsound, 
 we can come fully to understand the origin of money only by learning 
 to view the establishment of the social procedure, with which we are 
 dealing, as the spontaneous outcome, the unpremeditated resultant, 
 of particular, individual efforts of the members of a society who have 
 little by little worked their way to a discrimination of the different 
 degrees of salableness in commodities. 
 
 35. THE ORIGIN OF MONEY THROUGH INTERTRIBAL 
 RELATIONS' 
 
 By carl BiJCHER 
 
 One fancies the genesis of exchange to have been very easy, 
 because civilized man is accustomed to find all that he needs ready 
 made at the market or store and to be able to obtain it for money. 
 
 ' Adapted from Indtislrial Evolution, pp. 60-68 (Wickett's translation). 
 (Henry Holt & Co., 1893.)
 
 52 PRINCIPLES OF MONEY AND BANKING 
 
 With primitive man, however, value and price were by no means 
 current conceptions. The first discoverers of Australia found inva- 
 riably that the aborigines had no conception of exchange. The orna- 
 ments offered them had no power whatever to arouse their interest; 
 gifts pressed upon them were found later strewn about in the woods 
 where they had been cast in neglect. Yet there was between tribes 
 a brisk trade in pots, stone hatchets, hammocks, cotton threads, 
 necklaces of mussel shells, and many other products. 
 
 This exchange between tribes arises by way of presents, or rob- 
 bery, spoils of war, fine, compensation, and winning in gaming. Within 
 the tribe goods are shared largely in common. It is looked upon as 
 theft if a herd of cattle is slaughtered and not shared with one's 
 neighbors, or if one is eating and neglects to invite a passer-by. 
 Anyone can enter a hut at will and demand food; and he is never 
 refused. Whole communities, if a poor harvest befall, visit their 
 neighbors and look to them for temporary support. For articles of 
 use and implements there exists a universal custom of loaning which 
 really assumes the character of a duty ; and there is no private owner- 
 ship of the soil. In such a community there is no occasion for direct 
 barter. Exceptions occur when purchasing a wife and making 
 presents to the medicine man, the singer, the dancer, and the min- 
 strel, who are the only persons carrying on a species of separate 
 occupation. 
 
 From tribe to tribe there prevail rules of hospitality, which recur 
 with tolerable similarity among all primitive peoples. The stranger 
 on arriving receives a present which after a certain interval he recipro- 
 cates, and at his departure another present is handed him. On both 
 sides wishes may be expressed with regard to these gifts. In this 
 way it is possible to obtain things required or desired, and success 
 is the more assured inasmuch as neither party is absolved from the 
 obligations of hospitality until the other declares himself satisfied 
 with the presents. This custom of reciprocal gifts of hospitality 
 permits rare products of a land or artistic creations of a tribe to cir- 
 culate from people to people, and to cover just as wide distance from 
 their origin as in the case of modern trade. 
 
 Once originated, exchange long retains the marks of its descent 
 in the rules that are attached to it and which are taken directly from 
 the customs connected with gifts. Among many peoples a gift pre- 
 cedes or follows a deal; the "good measure" of our village store- 
 keepers and "treating" are survivals of this custom. To decline
 
 THE ORIGIN AND DEVELOPMENT OF MONEY 53 
 
 without grounds an exchange that has been offered passes among the 
 Negroes as an insult, just as the refusal of a gift among ourselves. 
 The idea that service interchanged must be of ecjual value can hardly 
 be made intelligible to primitive man. 
 
 As time passes, exchange creates from tribe to tribe its own con- 
 trivances for facilitating matters. Most important of these are 
 markets and money. Markets are uniformly held among Negroes, 
 East Indians, and Polynesians in open places, often in the midst of 
 the primeval forests, on the tribal borders. They form neutral dis- 
 tricts within which all tribal hostiUties must cease; whoever violates 
 the market peace exposes himself to the severest punishments. 
 Each tribe brings to the market whatever is peculiar to it; one honey, 
 another palm-wine, and a third dried meat, still another earthenware 
 or mats or woven stuffs. The object of the interchange is to obtain 
 products that cannot be procured in one's own tribe at all, or at least 
 cannot be produced so well or so artistically as in neighboring tribes. 
 This must again lead each tribe to produce in greater quantities than 
 it requires those products which are valued among the tribes not 
 producing them. 
 
 Now with regard to money. How much has been written and 
 imagined about the many species of money among primitive peoples, 
 and yet how simple the explanation of their origin! The money of 
 each tribe is that trading commodity which it does not itself produce, 
 but which it regularly acquires from other tribes b}' way of exchange. 
 Such an article naturally becomes the universal medium of exchange 
 for the tribe. It is the measure of value according to which property 
 is valued. Fellow-tribesmen soon come to employ it also in trans- 
 ferring values, for because of its scarcity it is equally welcome to all. 
 Thus is explained what our travellers have frequently observed, that 
 in each tribe, often in passing from village to village, a different 
 money is current. In this way also is to be explained the further 
 fact, which has come under observation, of exchangeable commodities 
 naturally scarce, such as salt, cowry shells, and bars of copper, or 
 products of rare skill, such as European calicoes, guns, powder, 
 knives, becoming general mediums of exchange.
 
 54 PRINCIPLES OF MONEY AND BANKING 
 
 B. Forms of Primitive Money 
 
 36. REQUISITES OF A SATISFACTORY MONEY MATERIAL* 
 By W. STANLEY JEVONS 
 
 To decide upon the best material for money is a problem of great 
 complexity, because we must take into account at once the relative 
 importance of the several functions of money, the degree in which 
 money is employed for each function, and the importance of each of 
 the physical qualities of the substance with respect to each function. 
 In a simple state of industry money is chiefly required to pass about 
 between buyers and sellers. It should then be conveniently port- 
 able, divisible into pieces of various size, so that any sum may readily 
 be made up, and easily distinguishable by its appearance, or by the 
 design impressed upon it. When money, however, comes to serve, 
 as it will at some future time, almost exclusively as a measure and 
 standard of value, the system of exchange being one of perfected 
 barter, such properties become a matter of comparative indifference, 
 and stability of value, joined perhaps to portability, is the most 
 important quahty. Before venturing, however, to discuss such com- 
 plex questions, we must proceed to a preliminary discussion of the 
 properties in question, which may thus perhaps be enumerated in 
 the order of their importance: (a) utility and value; (b) portability; 
 (c) indestructibility; (d) homogeneity; (e) divisibility; (/) stability 
 of value; (g) cognizability. 
 
 a) Utility and value. — Since money has to be exchanged for 
 valuable goods, it should itself possess value, and it must therefore 
 have utility as the basis of value. 
 
 When once a substance is widely employed as money, it is con- 
 ceivable that its utility will come to depend mainly upon the serv- 
 ices which it thus confers upon the community. Gold, for instance, 
 is far more important as the material of money than in the produc- 
 tion of plate, jewelry, watches, gold-leaf, etc. A substance originally 
 used for many purposes may eventually serve only as money, and yet, 
 by the demand for currency and the force of habit, may maintain its 
 value. The cowry circulation of the Indian coasts is probably a case 
 in point. The importance of habit, personal or hereditary, is at least 
 as great in monetary science as it is in morals and sociological phe- 
 nomena generally. There is no reason to suppose that the value of 
 
 ' Adapted from Money atid the Mechanism of Exchange (1875), pp. 30-39- 
 (D. Appleton & Co.)
 
 THE ORIGIN AND DEVELOPMENT OF MONEY 55 
 
 gold and silver is at present due solely to their conventional use as 
 money. These metals are endowed with such singularly useful 
 properties that, if we could only get them in sufficient abundance, 
 they would supplant all the other metals in the manufacture of house- 
 hold utensils, ornaments, fittings of all kinds, and an infinite multitude 
 of small articles, which are now made of brass, copper, bronze, pewter, 
 German silver, or other inferior metals and alloys. ^Moreover, the 
 beautiful lustre of gold and silver must have excited admiration 
 among all peoples at all times. 
 
 b) Portability. — The material of money must not only be valu- 
 able, but the value must be so related to the weight and bulk of the 
 material that the money shall not be inconveniently hea\y on the one 
 hand, nor inconveniently minute on the other. Iron money could 
 not be used in cash payments at the present day, since a penny would 
 weigh about a pound, and instead of a five-pound note, we should 
 have to deliver a ton of iron. During the last century copper was 
 actually used as the chief medium of exchange in Sweden; and mer- 
 chants had to take a wheelbarrow with them when they went to 
 receive payments in copper dalers. 
 
 The portability of money is an important quality, not merely 
 because it enables the owner to carry small sums in the pocket without 
 trouble, but because large sums can be transferred from place to 
 place, or from continent to continent, at little cost. The cost of 
 conveying gold or silver from London to Paris, including insurance, 
 is only about four-tenths of i per cent; and between the most distant 
 parts of the world it does not exceed from 2 to 3 per cent. 
 
 c) Indestructibility. — If it is to be passed about in trade, and kept 
 in reserve, money must not be subject to easy deterioration or loss. 
 It must not evaporate like alcohol, nor putrefy like animal substances, 
 nor decay like wood, nor rust like iron. 
 
 d) Homogeneity. — All portions of specimens of the substance 
 used as money should be homogeneous, that is, of the same ciuahty, 
 so that equal weights will have exactly the same value. In order 
 that we may correctly count in terms of any unit, the units must be 
 equal and similar, so that twice two will always make four. If we 
 were to count in precious stones, it would seldom happen that four 
 stones would be just twice as valuable as two stones. 
 
 e) Divisibility. — Closely connected with the last property is that 
 of divisibility. Every material is, indeed, mechanically divisible, 
 almost without limit. The hardest gems can be broken, and steel
 
 $6 PRINCIPLES OF MONEY AND HANKING 
 
 can be cut by harder steel. But the material of money should be 
 not merely capal)lc of division, but the aggregate value of the mass 
 after division should be almost exactly the same as before division. 
 
 /) Stability of value. — It is evidently desirable that the currency 
 should not be subject to fluctuations of value. This would be a matter 
 of comparatively minor importance were money used only as a 
 measure of values at any one moment, and as a medium of exchange. 
 If all prices were altered in like proportion as soon as money varied 
 in value, no one would lose or gain, except as regards the coin which 
 he happened to have in his pocket, safe, or bank balance. But 
 practically speaking, people do employ money as a standard of value 
 for long contracts, and they often maintain payments at the same 
 variable rate, by custom or law, even when the real value of the pay- 
 ment is much altered. Hence every change in the value of money 
 does some injury to society. 
 
 g) Cognizability. — By this name we may denote the capability 
 of a substance to be easily recognized and distinguished from all other 
 substances. As a medium of exchange, money has to be continually 
 handed about, and it will occasion great trouble if every person 
 receiving currency has to scrutinize, weigh, and test it. If it requires 
 any skill to discriminate good money from bad, poor ignorant people 
 are sure to be imposed upon. 
 
 Under cognizability we may properly include what has been aptly 
 called impressibility, namely, the capability of a substance to receive 
 such an impression, seal, or design as shall establish its character 
 as current money of certain value. We might more simply say that 
 the material of money should be coinable. 
 
 37. PRIMITIVE SYSTEMS OF CURRENCY' 
 By WILLIAM RIDGEWAY 
 
 When in a certain community one particular kind of commodity 
 is of general use and generally available, this comes to form the unit 
 in terms of which all values are expressed. The nature of this barter- 
 unit will depend upon the nature of the climate and geographical 
 position, and likewise upon the stage of culture to which the people 
 have attained. 
 
 In the hunting stage, all the property of each individual consists 
 in his weapons and implements of war and the chase, and the skins of 
 
 ' Adapted from Origin of Currency and Weight Standards, pp. 1 1-30. 
 (Cambridge University Press, 1892.)
 
 THE ORIGIN AND DEVELOPMENT OF MONEY 57 
 
 wild beasts which form his clothing, and sometimes the cover of his 
 hut or wigwam. 
 
 At a later stage, when he has succeeded in taming the ox, the 
 sheep or the goat, or the horse, he is the owner of property in domestic 
 animals, whose flesh and milk sustain him and his family, and whose 
 skins and wool provide his clothing. By this time too he has found 
 out that it is better to make the captive whom he has taken in war 
 into a hewer of wood and drawer of water than merely to obtain some 
 transient pleasure from eating him after putting him to death by 
 torture, or by wearing his skull or scalp as personal decorations. This 
 is now the pastoral or nomad stage. 
 
 Next comes the more settled form of life, when the cultivation of 
 land and the production of the various kinds of cereals render a per- 
 manent dwelling-place more or less necessary. Property now consists, 
 not merely in slaves and domestic animals, but likewise in houses of 
 improved construction, and large stores of grain. Man now possesses 
 certain of the metals, gold and copper being the first to be known. 
 How does he appraise these metals when he exchanges them with his 
 neighbor ? We shall find that he estimates them in terms of cattle, 
 and that he at first barters them all by measures based on the parts 
 of the human body, a method which continues to be employed for 
 copper and iron long after the art of weighing has been invented; 
 next he estimates his gold by certain natural units of capacity such 
 as a goosequill, and finally fixes the amount of gold which is equivalent 
 to a cow by setting it in a rude balance against a certain number of 
 natural seeds of plants. 
 
 Such is the process which history tells us has taken place in the 
 temperate regions of Asia and Europe, Africa and America. The 
 development varies greatly, however, with the differing conditions of 
 life in different regions. In Arctic regions we find the skins of certain 
 animals serving as units of account, in spite of the difference in value 
 between those of different quality and rarity. In the territory of the 
 Hudson's Bay Company, even after the use of coined money had been 
 introduced among the Indians, the skin was still in common use as 
 the money of account. A gun nominally worth forty shillings brought 
 twenty "skins." (This term is the old one used by the Company.) 
 One skin (beaver) is supposed to be worth two shillings, and it repre- 
 sents two marten, and so on. "You heard a great deal about skins 
 at Fort Yukon, as the workmen were also charged for clothing, etc., 
 in this way." Similarly in the extreme north of Asia we find some
 
 58 PRINCIPLES OF MONEY AND BANKING 
 
 OsUak tribes using the skin of the Siberian squirrel as their unit of 
 account. Among the Haidas and all along the coast the blanket 
 now takes the place of the beaver-skin currency of the interior of 
 Jiritish Columbia and of the Northwest Territory. The blankets 
 used in trade are distinguished by the points or marks on the edge, 
 woven into their texture, the best being four-point, the smallest and 
 poorest one-point. The acknowledged unit of trade is a single two- 
 and-a-half-point blanket, now worth a little over $1.50. Every- 
 thing is referred to this unit, even a large four-point blanket is said 
 to be worth so many blankets. There is also the " Copper," "an article 
 of purely conventional value and serving as money. This is a piece 
 of native metal beaten out into a flat sheet and made to take a peculiar 
 shape. These are not made by the Haidas — nor, indeed, is the native 
 metal known to exist in the islands — but are imported as articles of 
 great worth from the Chilcat country north of Sitka. Much atten- 
 tion is paid to the size and make of the copper, which should be of 
 uniform but not too great thickness, and should give forth a good 
 sound when struck with the hand. At the present time spurious 
 coppers have come into circulation, and although these are easily 
 detected by an expert, the value of the copper is somewhat reduced 
 and is often more nominal than real. Formerly ten slaves were paid 
 for a good copper as a usual price, now they are valued at from forty 
 to eighty blankets." It is obvious that such costly imported articles, 
 though now used as occasional higher units of account — much as we 
 employ fifty-pound notes — must have had some definite use, owing 
 to which they were so highly prized. The attention paid to their 
 tone would lead us to conjecture that they were employed as a kind 
 of gong, and further on we shall find certain peoples of Further Asia 
 paying a large price in buffaloes for gongs. 
 
 When we turn to the torrid zone, where clothes are only an 
 incumbrance and nature lavishly supplies plenteous stores of fruits 
 and vegetables, the chief objects of desire will not be food and clothing, 
 but ornaments, implements, and weapons. Hence w^e find amongst 
 the inhabitants of such regions in especial strength that passion for 
 personal adornment, which is one of the most powerful and primitive 
 instincts of^ the human race. Shells have from very remote times 
 formed one of the most simple forms of adornment in all parts of the 
 world. Shells which once perhaps formed the necklace of some 
 beauty of the neoHthic age are found with the remains of the cave 
 men of Auvergne. Strings of cowries under their various names of
 
 THE ORIGIN AND DEVELOPMENT OF MONEY 59 
 
 changes, zimbis, bonges, or porcelain shells are both durable, uni- 
 versally esteemed, and portable, and therefore suited to form a 
 medium of exchange, and as such they are employed in the East 
 Indies, Siam, and on the whole East and West coasts of Africa, while 
 on the tropical coasts they serve the purposes of small change, being 
 collected on the shores of the maldive and Laccadive islands and 
 exported for that object. The relative value varies slightly according 
 to their abundance or scarcity. In India the usual ratio was about 
 5,000 to the rupee. Marco Polo found the cowry in use in the prov- 
 ince of Yunnam. He says, " In Carajan gold is so abundant that they 
 give one Saggio of gold for six of the same weight of silver. And for 
 small change they use the porcelain shell. These are not found in 
 the country but are brought from India." How ancient is their use 
 in Asia is shown by the fact that Layard found cowries in the ruins 
 of Nineveh. 
 
 In Queen Charlotte Islands the dentahum shell was recognized 
 as a medium of exchange by most of the coast tribes, but not so much 
 as a medium of exchange for themselves as for barter with the Indians 
 of the interior. 
 
 Passing to the islands of the Pacific we shall fmd shell money 
 playing an important part among the primitive peoples, such as those 
 who inhabit New Ireland, New Britain, the Pelew, and the Caroline 
 groups. It will suffice for our purpose to describe the form in which 
 it is employed in New Britain. Mr. Powell tells us that the native 
 money in New Britain consists of small cowry shells strung on strips 
 of cane. (In Duke of York Island it is called Dewarra.) It is 
 measured in lengths, the first length being from hand to hand across 
 the chest with arms extended, second length from the center of the 
 breast to the hand of one arm extended, the third from the shoulder 
 to the tip of the fingers along the arm, fourth from the elbow to the 
 tip of the fingers, fifth from the wrist to the tip of the fingers, sixth 
 finger lengths. Fish are generally bought by the length in Dewarra 
 unless they are too small. A large pig will cost from 30 to 40 lengths 
 of the first measure (fathom) and a small one 10 lengths. The De- 
 warra is made up for convenience in coils of 100 fathoms or first 
 lengths; sometimes as many as 600 fathoms arc coiled together, but 
 not often, as it would be too bulky to remove quickly in case of inva- 
 sion or war, when the women carry it away to hide. These coils are 
 very neatly covered with wickcrwork like the bottoms of our cane 
 chairs.
 
 6o PRINCIPLES OF MONEY AND BANKING 
 
 At Moko and Utuan they use another kind of money as well as 
 this, the other being a little bivalve shell, through which they bore 
 a hole and string it on pieces of native-made twine. It is also chipped 
 all round until it is a quarter of an inch in diameter and then smoothed 
 down into even discs with sand and pumice. Here we find strings of 
 shells, which undoubtedly in the first instance were used for personal 
 adornment, converted into a true currency. The simple savages, 
 whose possessions were exceedingly few and scanty, equated their 
 fish to strings of shells which formed their only ornament, and when 
 they got a more valuable possession in the pig, they quickly learned 
 to appraise that animal in shell worth, just as the North American 
 Indians learned to estimate the horse in Wampum. 
 
 Instead of shells the natives of Fiji are said to have employed 
 whales' teeth as currency, red teeth (which are still highly prized) 
 standing to white ones somewhat in the ratio of sovereigns to shillings 
 with us. 
 
 Passing on to the mainland of Asia we shall find that the Chinese, 
 who in the course of ages have developed a bronze coinage of their 
 own apart from the influences of the Mediterranean people, had in 
 early times an elaborate system of shell money. Cowries appear in 
 the Ya-King, the oldest Chinese book, 100,000 dead shellfishes being 
 an equivalent for riches. Tortoise of various kinds and sizes was 
 used for the greater values which would have required too many 
 cowries. Tortoise shell is still elegantly used to express coin. Several 
 kinds of Cypraea were used, including the purple shell, two or three 
 inches long; all the shells except the small ones were employed in 
 pairs. A writer of the second century B.C. speaks of the purple shell 
 as ranking next after the sea tortoise shells, measuring i foot 6 inches, 
 which could only be procured in Cochin China and Annam, where 
 they were used to make pots, basins, and other valuable objects. 
 So attached were the Chinese to these primitive corns that the usurper 
 Wangmang restored a shell currency of five kinds, tortoise shell being 
 the highest. From this time we hear no more of cowries in China 
 Proper, but they left traces of themselves in the small copper coins 
 shaped like a small Cypraea, called Dragon's eye or Ant coins. It is 
 doubtless to a similar survival that we owe those curious silver coins 
 made in the shape of shells which come from the north of Burmah and 
 of which there are several specimens in the British Museum. They 
 are about the size of a cowry, and doubtless served as a higher unit 
 in a currency of which the lower units were formed by real shells.
 
 THE ORIGIN AND DEVELOPMENT OF MONEY 6i 
 
 Powers writes of the Karoks and other tribes of CaHfornia: 
 "For money they make use of the red scalps of woodpeckers, which 
 rate at $2 . 50 to $5 . 00 a piece, and of the dentalium shell, of which 
 they grind ofif the tip, and string it on strings. The strings are usually 
 about as long as a man's arm. It is called al-li-ko-chik (in Yarok this 
 signifies literally Indian money) not only on the Klamath but from 
 Crescent City to Eel River, though the tribes using it speak several 
 different languages." Again he writes: "Some of the young bloods 
 array their Dulcineas for the dance with lavish adornments, hanging 
 on their dress 30, 40, or 50 dollars worth of dimes, quarter-dollars, 
 and half-dollars arranged in strings." 
 
 In 685 B.C. in parts of China pearls and gems, gold, knives, and 
 cloth were the money, and under the Shou dynasty (i 100 B.C.) we 
 understand from ancient commentaries that the gold circulated in 
 little cubes of a square inch, and the copper in round, tongue-like 
 plates by the tchin tchu, while the silk cloth 2 feet 2 inches wide in 
 rolls of 40 feet formed a piece. 
 
 The Chinese likewise used hoes as money, just as we shall find the 
 wild people of Annam doing at the present hour. But in the course 
 of time the hoe became a true currency, and little hoes were em- 
 ployed as coins in some parts of China. In Marco Polo's time 
 cowries were in full use, as in the province of Yunnam. 
 
 On the borders of China and Tibet we may still find a state of 
 things not far removed from that existing in the China of 2,000 years 
 ago. The Tibetans, who in recent years employ Indian rupees, for 
 purposes of small change cut up these coins into little pieces, which 
 are weighed by the careful Chinese, but the Tibetans do not seem 
 to use the scale, and roughly judge of the value of a piece of silver. 
 Tea, moreover, and beads of turquoise are largely used as a means 
 of payment instead of metal. 
 
 Among the fishermen who dwelt along the shores of tlie Indian 
 Ocean, from the Persian Gulf to the southern shores of Hindustan, 
 Ceylon, and tlie Maldive Islands, it would appear that the fishhook, 
 to them the most important of all implements, passed as currency. 
 In the course of time it became a true money, just as did the hoe in 
 China. 
 
 Advancing westward we find tlic Ossetes of the Caucasus at the 
 present moment employ the cow as their unit of value, the prices of 
 all commodities being stated as one, two, three, or four cows, or even 
 at one-tenth or one-hundredth of the value of a cow. The ox is
 
 62 PRINCIPLES OF MONEY AND BANKING 
 
 worth two cows, and the cow is worth ten sheep. This people regu- 
 late compensation for wounds thus: they measure the length of the 
 wound in barley corns, and for every barley corn which it measures 
 a cow has to be paid. We have little doubt that over all Hither Asia 
 the same method of employing the cow as the principal unit of value 
 obtained. It is that which we found among the Greeks of the Homeric 
 poems, who were in full contact with Northern Asia Minor, and was 
 almost certainly that of the Semites who dealt in the South. Just as 
 we find the buffalo, and the pots, bronze platters, arrows, lances, and 
 hoes standing side by side in well-defined mutual relation among the 
 Bahnars of Cochin China, so we find in Homer that whilst the cow is 
 the principal unit, the slave is employed as an occasional higher unit, 
 and the kettle (lebes), the pot (tripous), the ax and the half -ax, 
 hides, raw copper, and pig iron stand beside the cow as multiples or 
 sub-multiples. When Ajax and Idomeneus make a bet on the issue 
 of the chariot race, the proposed wager is a pot or a kettle, whilst 
 from another passage we learn that the usual prizes given at the 
 fimeral games of a chieftain were female slaves and pots (tripods). 
 Gold and silver were early employed by the people of Northern 
 Europe in the form of rings. 
 
 38. CATTLE AS MONEY' 
 By homer 
 
 Then Peleus' son ordained straightway the prizes for a third con- 
 test, offering them to the Danaans, for the grievous wrestling match: 
 for the winner a great tripod for standing on the fire, prized by the 
 Achaians among them at twelve oxen's worth; and for the loser he 
 brought a woman into their midst, skilled in manifold work, and they 
 prized her at four oxen. 
 
 39. EARLY CURRENCY OF THE AMERICAN COLONIES' 
 By HORACE WHITE 
 
 The first settlers of New England found wampumpeage, some- 
 times called wampum and sometimes peage, in use among the abo- 
 rigines as an article of adornment and a medium of exchange. It 
 consisted of beads made from the inner whorls of certain shells found 
 
 ' Iliad, book xxiii. 
 
 ' Adapted from Money and Banking, pp. 3-9. (Ginn & Co., 1895.)
 
 THE ORIGIN AND DEVELOPMENT OF MONEY 63 
 
 in sea water. The beads were polished and strung together in belts 
 or sashes. They were of 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 six 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 sbc were usually required in Massachusetts and sometimes 
 eight. In the latter colony wampum was at first made legally receiv- 
 able for debts for the amount of iid. only. In 164 1 the limit was 
 raised to £10, but only for two years. It was then reduced to 40<>. 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. More- 
 over 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. WTiile it was in use it fluctuated greatly in 
 value. 
 
 The first General Assembly of Virginia met at Jamestown Jul\- 
 31, 16 19, and the first law passed was one fixing the price of tobacco 
 "at three shillings the beste, and the second sorte at igd. thepounde." 
 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 35. dd. per pound 
 in Virginia. The cultivation increased so rapidly that in 163 1 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 plants per poll. Car- 
 penters and other mechanics were not allowed to plant tobacco "or 
 to do any other work in the ground." These measures were inclTective.
 
 64 PRINCIPLES OF MONEY AND BANKING 
 
 The price continued to fall. In 1639 it was only ^d. It was now 
 enacted that half of the good and all of the bad should be destroyed, 
 and that thereafter all creditors should accept 40 pounds for 100; that 
 the crop of 1640 should not be sold for less than i2d., nor that in 1641 
 for less than 2s. per pound, 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 impair- 
 ing the obligation of existing contracts. In 1645 tobacco was worth 
 only i^d. and in 1665 only id. per pound. 
 
 In the year 1666 a treaty was negotiated and ratified 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 riot, and that their aim was the subversion of the govern- 
 ment. 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 w^here 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 the real medium of exchange. 
 The tobacco notes were orders payable to bearer for the dehvery 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 ORIGIN AND DEVELOPMENT OF MONEY 65 
 
 The circulating medium of the New England colonies was quite as 
 fantastic as that of Virginia. Merchantable beaver was legally 
 receivable for debts at 105. per pound. In 163 1 the General Court 
 of Massachusetts ordered that corn should pass for the 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 los. 
 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 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 first 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 Patrons 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 6 wampum beads were equal to i stiver and 20 
 stivers to i florin, and 8 florins to i skin, the ratio of wampum to 
 beaver was 960 to i. 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. 
 
 In 1 7 19 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 lb. of rice was levied, and 
 commissioners were appointed to issue rice orders to public creditors, 
 in anticipation of collection, at the rate of 30A-. per 100 11). in tlic 
 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 receival)le for all purposes, and counterfeiting was made felony 
 without benefit of clergy.
 
 6() PRINCIPLES OF MONEY AND BANKING 
 
 In eastern Tennessee and Kentucky, early in the nineteenth 
 century, deerskins and raccoon skins were receivable for taxes and 
 served the purpose of currency. 
 
 When California was first invaded by gold-seekers there were 
 a few Mexican coins in circulation there, not nearly sufficient to an- 
 swer 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, and sometimes by guesswork. A "pinch" of 
 gold dust about as large as a pinch of snuff had a current value and 
 was common measure in places where there was no means of weigh- 
 ing. At a public meeting in San Francisco, September 9, 1848, it 
 was resolved by unanimous vote that $i6 per ounce was a fair price 
 for placer gold. This rate was at once adopted in all business trans- 
 actions. By and by private coiners of gold came into the field. 
 
 C. The Use of Metals as Money 
 
 40. EVOLUTION OF THE PRECIOUS METALS* 
 By KARL MENGER 
 
 The reason why the precious metals had become the generally 
 current medium of exchange among here and there a nation prior to 
 its appearance in history, and in the sequel among all peoples of 
 advanced economic civilization, is because their salableness is far 
 and away superior to that of all other commodities, and at the same 
 time because they are found to be specifically qualified for the con- 
 comitant and subsidiary functions of money. 
 
 There is no center of population which has not in the very 
 beginnings of civilization come keenly to desire and eagerly to covet 
 the precious metals — in primitive times for their utility and peculiar 
 beauty as in themselves ornamental, subsequently as the choicest 
 materials for plastic and architectural decoration, and especially for 
 ornaments and vessels of every kind. In spite of their natural 
 scarcity, they are well distributed geographically, and, in proportion 
 to most other metals, are easy to extract and elaborate. Further, 
 the ratio of the available quantity of the precious metals to the total 
 requirement is so small that the number of those whose need of them 
 
 • Adapted from "The Origin of Money," Economic Journal, II (1892), 252-55.
 
 THE ORIGIN AND DEVELOPMENT OF MONEY 67 
 
 is unsupplied, or at least insufficiently supplied, together with extent 
 of this unsupplied need, is always relatively large — larger more or 
 less than in the case of other more important though more abundantly 
 available commodities. In no national economy which has advanced 
 beyond the first stages of development are there any commodities 
 the salableness of which is so Httle restricted in such a number of 
 respects — personally, quantitatively, spatially, and temporally — 
 as the precious metals. It cannot be doubted that, long before they 
 had become the generally acknowledged media of exchange, they 
 were, amongst very many peoples, meeting a positive and effective 
 demand at all times and places, and practically in any quantity that 
 found its way to market. 
 
 Under such circumstances it became the leading idea in the minds 
 of the more intelligent bargainers, and then, as the situation came 
 to be more generally understood, in the minds of ever>'one, that the 
 stock of goods destined to be exchanged for other goods must in the 
 first instance be laid out in precious metals, or must be converted 
 into them, even if the agent in question did not directly need them, or 
 had already supplied his wants in that direction. But in and by this 
 function, the precious metals are already constituted generally cur- 
 rent media of exchange. In other words, they hereby function as 
 commodities for which everyone seeks to exchange his market goods. 
 
 41. SUPERIORITY OF GOLD AND SILVER' 
 By W. STANLEY JEVONS 
 
 a) Silver. — I need hardly say that silver is distinguished by its 
 exquisite white lustre, which is not rivalled by that of any other pure 
 metal. Certain alloys, indeed, such as speculum metal, or Britannia 
 metal, have been made of almost equal lustre, but they are either 
 brittle, or so soft as not to give the metallic ring of silver. When 
 much exposed to the air silver tarnishes by the formation of a black 
 film of silver sulphide; but this forms no obstacle to' its use as currency, 
 since the film is always very thin, and its peculiar black colour even 
 assists in distinguishing the pure metal from counterfeit. When 
 suitably alloyed, silver is sufficiently hard to stand much wear, and 
 next after gold it is the most malleable and impressible of all the 
 metals. 
 
 ' Adapted from Money and the Mechanism of Exchange (1875), PP- 45~47- 
 (D. Appleton & Co.)
 
 68 PRINCIPLES OF MONEY AND BANKING 
 
 A coin or other object made of silver may be known by the follow- 
 ing marks: (i) a fme pure white lustre, where newly rubbed or 
 scraped; (2) a blackish tint where the surface has long been exposed 
 to tlie air; (3) a moderate specific gravity; (4) a good metallic ring 
 when thrown down; (5) considerable hardness; (6) strong nitric 
 acid dissolves silver, and the solution turns black if exposed to light. 
 
 Silver has been coined, it need hardly be said, in all ages since 
 the first invention of the art, and its value relatively to gold and 
 copper suits it for taking the middle place in a monetary system. Its 
 value too remains very stable for periods of fifty or a hundred years, 
 because a vast stock of the metal is kept in the form of plate, watches, 
 jewellery, and ornaments of various kinds, in addition to money, so 
 that a variation in the supply for a few years cannot make any appre- 
 ciable change in the total stock. Productive silver mines exist in 
 almost all parts of the world, and wherever lead is produced a small 
 but steady yield of silver is obtained from it by the Pattinson method 
 of extraction. 
 
 b) Gold. — Silver is beautiful, yet gold is even more beautiful, and 
 presents indeed a combination of useful and striking properties quite 
 without parallel among known substances. To a rich and brilliant 
 yellow colour, which can only be adequately described as golden, it 
 joins astonishing malleability and a very high specific gravity, 
 exceeded only by that of platinum and a few of the rarest or almost 
 unknown metals. We can usually ascertain whether a coin consists 
 of gold or not by looking for three characteristic marks: (i) the 
 brilliant yellow colour; (2) the high specific gravity; (3) the metallic 
 ring of the coin when thrown down, which will prove the absence of 
 lead or platinum in the interior of the coin. 
 
 If there remain any doubt about a metal being gold, we have only 
 to appeal to its solubility. Gold is remarkable for its freedom from 
 corrosion or solution, being quite unaffected and untarnished after 
 exposure for any length of time to dry, or moist, or impure air, and 
 being also insoluble in all the simple acids. Strong nitric acid will 
 rapidly attack any coloured counterfeit metal, but will not touch 
 standard gold, or will, at the most, feebly dissolve the copper and 
 silver alloyed with it. 
 
 In abnost all respects gold is perfectly suited for coining. WTien 
 quite pure, indeed, it is almost as soft as tin, but when alloyed with 
 one-tenth or one-twelfth part of copper, becomes sufficiently hard to 
 resist wear and tear, and to give a good metallic ring; yet it remains
 
 THE ORIGIN AND DEVELOPMENT OF MONEY 69 
 
 perfectly malleable and takes a fine impression. Its melting-point 
 is moderately high, and yet there is no perceptible oxidation or vola- 
 tilization of the metal at the highest temperature which can be pro- 
 duced in a furnace. Thus, old coin and fragments of the metal can 
 be melted into bullion at a very slight loss, and at a cost of not more 
 than one halfpenny per ounce troy, or little more than one- twentieth 
 of I per cent. 
 
 42. A MONETARY CHRONOLOGY' 
 
 The main events in the history of money may be summarized as 
 follows. The legislative acts in various countries leading to the 
 adoption of a single gold standard are omitted, 
 
 B.C. 
 
 i860 Abraham's purchase of land for 400 shekels of silver, weighed out 
 as "current money with the merchant," is an early illustration of the 
 use of silver by weight as money long before the introduction of 
 coinage. 
 1 594 Cadmus mined gold in Thrace. 
 
 1400 Gold and silver used as money in Egypt, India, and Arabia. 
 HOC Money of China consisted of cubes of gold, round plates of copper, 
 
 and rolls of silk cloth. 
 800 Homeric poems show no trace of coined money. There were, 
 however, two units of value: (i) the cow; (2) the talent — supposed 
 to be a certain weight of gold. 
 500 Silver coins were current in Thrace and Macedon about this time. 
 480-206 Silver mines in Spain were worked by the Carthaginians. 
 450 Herodotus stated the ratio of silver to gold to be 13 to i in Greece. 
 400 Dionysius called tin equivalent to silver; his was probably the 
 earliest instance of debasement of coinage and of a legal-tender act 
 to force base coin into circulation. 
 60 Ratio of silver to gold in Rome, 9 to i. 
 
 A.D. 
 
 14 Amount of precious metals in the civilized world estimated by 
 Jacob to have been $1,800,000,000. The drain to the East began 
 at this period. 
 800 Total supply of precious metals estimated by Jacob to have been 
 reduced by abrasion to about $165,000,000. At this time the 
 Moors reopened the mines in Spain. iMincs discovered in Sa.xony, 
 Harz Mountains, and in Austria. Supply of precious metals 
 remained about stationary until the discovery of America. 
 
 ' Adapted from Sound Currency, VI (1899), 33-47.
 
 70 PRINCIPLES OF MONEY AND HANKING 
 
 A.D. 
 
 1252 Gold was minted in Florence, Italy — it practically having gone out 
 of use with the fall of the Roman Empire. 
 
 •1257 Gold first coined in England. The first pieces weighed as much as 
 two silver pennies, and were ordered to pass for 20 pence. 
 
 1295 Coinage of gold in France first became important, though in 1265 
 some was being coined and as far back as ii8d gold coins were 
 minted, probably for use as medals or decorations. 
 
 1328 Gold first coined in Germany about this year, the first pieces being 
 in imitation of the florin of Florence, which weighed 53 grains. 
 
 1344 The King of England proclaimed the ratio of silver to gold to be 
 12.61 to I. About this time gold coinage first became of monetary 
 importance in England. 
 
 1474 Commerical ratio of silver to gold in England was 11. 15 to i; in 
 Germany, 11. 12; in France, 11; in Italy, 10.58; in Spain, 9.82. 
 
 1492 Discovery of America by Columbus and the finding of gold in con- 
 siderable quantity among the natives of the islands he reached. 
 
 1522 The first silver sent to Europe from the mines of Mexico was obtained 
 from Tasco, discovered by the Spaniards this year. These mines, 
 together with those of Pachuca, are considered the oldest in Mexico, 
 some of them having been long worked by the Aztecs at the time 
 of the arrival of the Spaniards. 
 
 1532 Conquest of Peru by Francisco Pizarro. Its mines were soon 
 supplying a large portion of the world's sUver. 
 
 1 545 Discovery of the famous silver mines of Potosi, Bolivia. 
 
 1548 First discovery of silver at Guanajuato, Mexico. 
 
 1571 The Huancevalica quicksilver mines in Peru first began to produce 
 in noteworthy quantity. This was an important event, as an 
 abundant supply of mercury for the amalgamation of Potosi ore 
 was thus obtained. 
 
 1 596-1614 Coinage system established in Japan. Gold, silver, and copper 
 were coined. 
 
 1666 Mints of England opened to the free coinage of gold and silver in 
 unlimited quantities at the ratio of 15 to i. 
 
 1762 Discovery of the great silver bonanza of Real del Monte, Mexico. 
 
 1774 The first gold placer mines in the Ural Mountains were discovered 
 this year. 
 
 1785 France ordered a recoinage of her gold and placed the ratio at 
 I si to I. This ratio was affirmed by statute of 1803. 
 
 1792 April 2, establishment of the United States mint with free and 
 gratuitous coinage of both gold and silver at the ratio of 15 to i. 
 
 1792 The famous bonanza at Sombrerete, Zacatecas, Mexico, was dis- 
 covered this vear.
 
 THE OIUGIN AND DEVELOPMENT OF MONEY 71 
 
 A.D. 
 
 1793 Mules and horses were used in Mexico, for the first time, for mixing 
 the pulp, mercury, and chemicals in the patio process, saving 75 
 per cent in the cost of this branch of working; prior to this time, 
 the operation had been performed entirely by human labor. 
 
 1829 Discovery of gold mines in Georgia; first mining excitement in the 
 United States. 
 
 1830 Discovery of the placers of the Altai Mountains, Siberia. 
 1840 Increased production of gold in Russia. 
 
 1843 The August in process of working silver ores was introduced at the 
 Gottesbelohnung Hiittcn, near Mansfield, Germany, and later in 
 the year at the Freiberg works. 
 
 1848 On January 19, Marshall discovered gold at Coloma, California. 
 Beginning of tht; gold era. 
 
 1849 Discovery of gold in Gold Canon, Nevada; this eventually led to 
 the discovery of the Comstock lode. 
 
 185 1 Discovery of gold in Australia by Hargreaves. 
 
 1853 Maximum production of gold reached in California — $65,000,000. 
 
 1857 Discovery of gold in New Zealand. 
 
 1859 The Comstock silver lode, Nevada, was discovered. 
 
 1859 Discovery of gold in the Fraser River region, British Columbia. 
 Pike's Peak excitement; discovery of gold placers in Gilpin County, 
 Colorado, in California Gulch, and at Breckenridge. 
 
 1868 Discovery of gold in Western Australia, but it was not until 1887 
 that any diggings of importance were found. 
 
 1869 Discovery of the important silver-lead deposits of Eureka, Nevada. 
 The American practice of lead smelting has been developed chiefly 
 from the methods adopted in this district. 
 
 1869 Sutro tunnel to open the Comstock lode was commenced October 19. 
 
 1873 Discovery of the "Big Bonanza" in the Consolidated California 
 and Virginia mines on the Comstock lode. 
 
 1874 A year of great excitement on the Comstock lode, the "Big Bonanza" 
 beginning to yield largely, while another l^onanza was discovered in 
 the Ophir mine. 
 
 1878 Great excitement at Leadville, Colorado, where many new dis- 
 coveries were made. 
 
 1884 Discovery of gold in DcKaap district of the Transvaal, South .Africa. 
 
 1885-90 Numerous discoveries of gold in South .Africa. West Australia, 
 and Colorado. 
 
 1891 The perfecting of the cyanide process. This greatly reduced the 
 cost of extracting ores, making possible the continued working of 
 old mines and of many low-grade deposits. It is maiiily resjwnsiljle 
 for the enormous increa.se of gold production in the i)rtsent gen- 
 eration. 
 
 1897 Klondike gold fields discovered.
 
 72 PRINCIPLES OF MONEY AND BANKING 
 
 43. THE BEGINNINGS OF EUROPEAN MONETARY 
 HISTORY' 
 
 By W. A. SHAW 
 
 The monetary history of Europe begins in the thirteenth century, 
 and in the ItaHan peninsula. Its starting-point is the era of the 
 reintroduction of gold into the coinages of the Western nations, and 
 is definitely marked for us by the minting of the gold florin of Florence 
 in 1252. For all practical purposes gold had gone out of use since 
 the seventh century, and after the submersion of the Roman Empire; 
 and the currencies of the nations of mediaeval Europe rested on a silver 
 basis entirely. 
 
 The explanation of the reintroduction and recoinage of gold is to 
 be found in the history of the Crusades and of the commercial growth 
 of the petty independent states which sprang from the political confu- 
 sion of Italy. No sooner had they achieved each their little autono- 
 mous existence than they threw themselves with feverish activity 
 into the development of trade with the East. Florence and Venice, 
 Pisa and Genoa, led the way and reaped the fruits; and it was in her 
 most flourishing time, when she had conquered her rivals, Pisa and 
 Siena, and was enjoying a prosperous peace and active trade, that 
 Florence, at the instance of the chief of her merchants, resolved on 
 the coining of the gold florin. 
 
 The mere idea of such a gold coinage could only be derived from 
 the East, from Byzantium. But it is a curious fact that the impor- 
 tation of it should be due in the first place to the Crusades. Frederick 
 n of Italy was elected Emperor of the Holy Roman Empire in 1212. 
 Sixteen years later he headed the Fifth Crusade, and the gold coin 
 (Augustale) which he issued sometime between his return from that 
 crusade and his death probably commemorates his wish to rival the 
 appearance of opulence of the Eastern court. This Sicilian coin is 
 the direct ancestor of the florin of Florence, and to it would fitly 
 belong the honor of leading in a new era, were it not that the superior 
 beauty gave it universal currency and reputation and extinguished 
 the memory of its predecessor. 
 
 Two conditions were essential to bringing about so momentous 
 a revolution as this, however little the mind of contemporaries may 
 have known it as such. In the first place, the foreign trade of the 
 Italian republics must have become so extensive as to demand a cur- 
 rency medium of higher denomination than silver; and secondly, that 
 trade must have developed in such directions as to tap gold-using 
 
 ' Adapted from TheHislory of Currency, pp. 1-14. (G. P. Putnam'sSons, 1896.)
 
 THE ORIGIN AND DEVELOPMENT OF MONEY 73 
 
 or gold-bearing regions in order to supply the Italian mints. It is 
 a curious fact that both these conditions were realized through the 
 instrumentality of the Crusades. The quickening effect of these 
 vast movements on the trade of the Mediterranean is well known, but 
 their influence in the second direction has not hitherto been pointed 
 out. In the Fourth Crusade Venice lent the force which captured 
 Byzantium (1203), and when, by her arms, Baldwin, Count of 
 Flanders, had been seated on the Eastern throne, Venice reaped her 
 reward in three-eighths of the territories of the Eastern Empire. She 
 received Peloponnesus and a chain of islands in the Aegean, and by 
 the hold she had on Constantinople secured the virtual control of the 
 Black Sea. In its turn the control of the Black Sea brought with it 
 the monopoly of the overland trade with India. 
 
 At one and the same moment, therefore, Venice acquired pos- 
 session of a huge treasure of gold wrested from the conquered city, 
 and of the then only gold-yielding districts — the Crimea — and of an 
 intercolonial trade, demanding a more enhanced currency medium. 
 The result of such a combination of circumstances was irresistible. 
 During the continuance of the "Latin Empire" at Byzantium, Venice 
 and her sister-state were practically the only merchants of Europe. 
 
 The characteristics of this early period are perfectly well defined, 
 and repeat themselves with almost faithful and exact similarity of 
 recurrence in the several states comprising the Europe of that date. 
 In brief, such characteristics were those of (i) a period of commercial 
 expanse, necessitating an increasing currency and advancing prices; 
 (2) a period of stationary production of the precious metals, necessi- 
 tating a struggle among the various states for the possession of those 
 metals; (3) a period of endless change in the ratio between gold and 
 silver, necessitating the continual revision of the rate of exchange. 
 Broadly speaking, those characteristics fall into two classes, accord- 
 ing as they relate to (i) the natural movement of prices, i.e., having 
 regard merely to the supply of the precious metals; (2) to the unnat- 
 ural struggle for the metals themselves — for the material for currency 
 — due to international rivalry and bad or crafty legislation. 
 
 With regard to the former of these, the period was distinctly one 
 of insufficient and relatively diminishing production of the metals. 
 During these two centuries, 1300-1500, the main sources of the deri- 
 vation of gold were the Eastern trade and the finds on the eastern 
 shores and northern interior of Africa. The chief supply of silver 
 came from the mines in Germany. These latter in Hungary, Transyl- 
 vania, Saxony, and Bohemia were of such importance and activity,
 
 74 
 
 PRINCIPLES OF MONEY AND BANKING 
 
 in the fifteenth century and toward the time of the discovery of 
 America, as partially to keep pace with the general trade expanse of the 
 time, thereby helping to arrest a fall of prices that would have been 
 absolutely disastrous to the civilization of Europe. 
 
 44. PRODUCTION OF GOLD AND SILVER IN THE WORLD SINCE 
 THE DISCOVERY OF AMERICA' 
 
 
 Gold 
 
 Silver 
 
 
 Annual Average for Period 
 
 Annual Average for Period 
 
 Period 
 
 
 
 
 
 
 
 Coining Value in 
 
 
 Coining Value in 
 
 
 Fine Ounces 
 
 Standard Silver 
 Dollars 
 
 Fine Ounces 
 
 Standard Silver 
 Dollars 
 
 1493-1520 
 
 186,470 
 
 $ 3,855,000 
 
 1,511,050 
 
 $ 1,954,000 
 
 1521-1544 
 
 230,194 
 
 4,759,000 
 
 2,899,930 
 
 3,740,000 
 
 1545-1560 
 
 273,596 
 
 3,656,000 
 
 10,017,940 
 
 12,952,000 
 
 1561-1580 
 
 219,906 
 
 4,546,000 
 
 9,628,925 
 
 12,450,000 
 
 1581-1600 
 
 237,267 
 
 4,905,000 
 
 13,467,635 
 
 17,413,000 
 
 1601-1620 
 
 273,918 
 
 5,662,000 
 
 13.596,235 
 
 17,579,000 
 
 1621-1640 
 
 266,845 
 
 5,516,000 
 
 12,654,240 
 
 16,361,000 
 
 1641-1660 
 
 281,995 
 
 5,828,000 
 
 11,776,545 
 
 15,226,000 
 
 1661-1680 
 
 297,709 
 
 6,154,000 
 
 10,834,550 
 
 14,008,000 
 
 1681-1700 
 
 346,095 
 
 7,154,000 
 
 10,992,085 
 
 14,212,000 
 
 1701-1720 
 
 412,163 
 
 8,520,000 
 
 11,432,540 
 
 14,781,000 
 
 1721-1740 
 
 613,422 
 
 12,581,000 
 
 13,863,080 
 
 17,924,000 
 
 1741-1760 
 
 791,211 
 
 16,356,000 
 
 17,140,612 
 
 22,162,000 
 
 1761-1780 
 
 665,666 
 
 13,761,000 
 
 20,985,591 
 
 27,133,000 
 
 1 781-1800 
 
 571,948 
 
 11,823,000 
 
 28,261,779 
 
 36,540,000 
 
 1801-1810 
 
 571,563 
 
 11,815,000 
 
 28,746,922 
 
 37,168,000 
 
 1811-1820 
 
 367,957 
 
 7,606,000 
 
 17,385,755 
 
 22,479,000 
 
 1821-1830 
 
 457,044 
 
 9,448,000 
 
 14,807,004 
 
 19,144,000 
 
 1831-1840 
 
 652,291 
 
 13,484,000 
 
 19,175,867 
 
 24,793,000 
 
 1841-1850 
 
 1,760,502 
 
 36,393,000 
 
 25,090,842 
 
 32,440,000 
 
 1851-1855 
 
 6,410,324 
 
 132,513,000 
 
 28,488,597 
 
 36,824,000 
 
 1856-1860 
 
 6,485,262 
 
 134,083,000 
 
 29,095,428 
 
 37,618,000 
 
 1861-1865 
 
 5,949,582 
 
 122,989,000 
 
 35,401,972 
 
 45,772,000 
 
 1866-1870 
 
 6,270,086 
 
 129,614,000 
 
 43,051,583 
 
 55,663,000 
 
 1871-1875 
 
 5,591,014 
 
 115,577,000 
 
 63,317,014 
 
 81,864,000 
 
 1876-1880 
 
 5,543, no 
 
 114,586,000 
 
 78,775,602 
 
 101,851,000 
 
 1881-1885 
 
 4,794,755 
 
 99,116,000 
 
 92,003,944 
 
 118,955,000 
 
 1886-1890 
 
 5,461,282 
 
 112,895,000 
 
 108,911,431 
 
 140,815,000 
 
 1891-1895 
 
 7,882,565 
 
 162,947,000 
 
 157,581,331 
 
 203,742,000 
 
 1896-1900 
 
 12,446,939 
 
 257,301,100 
 
 165,693,304 
 
 214,229,700 
 
 1901-1905 
 
 15,606,730 
 
 322,619,800 
 
 167,995,408 
 
 217,206,200 
 
 1006 
 
 19,471,080 
 19,977,260 
 21,422,244 
 21,965,111 
 22,022,180 
 
 402,503,000 
 
 165,054,497 
 
 213,403,800 
 
 IQ07 
 
 412,966,600 
 
 184,206,984 
 
 238,166,600 
 
 IQ08 
 
 442,836,900 
 454,059,100 
 
 203,131,404 
 
 262,634,500 
 
 IQOQ 
 
 212,149,023 
 
 274,293,700 
 
 lOIO 
 
 455,239,100 
 
 221,715,673 
 
 286,662,700 
 
 TOII 
 
 22,348,313 
 22,549,335 
 
 461,939,700 
 
 226,192,923 
 
 292,451,500 
 
 IOI2 
 
 466,136,100 
 
 202,178,314 
 
 261,402,300 
 
 
 
 Total 
 
 714,747,822 
 
 $14,775,110,000 
 
 11,083,136,909 
 
 $14,329,712,400 
 
 From Annual Report of Director of the Mint, 1914, p. 268.
 
 THE ORIGIN AND DEVELOPMENT OF MONEY 75 
 
 D. Principles of Coinage 
 
 45. INVENTION OF COINAGE' 
 By henry V. POOR 
 
 Coinage is of comparatively recent origin. No traces of it have 
 been found among the remains of Assyrian or Egyptian art; and 
 Egyptian civilization, running through periods far greater than those 
 which measure the life of subsequent nations, had begun to decline 
 before coinage was used. Among all the ancient nations, including 
 the Hebrews and Phoenicians, as well as the Assyrians and Eg>T>tians, 
 the precious metals passed by weight. WTien Abraham weighed out 
 at Ephron the silver which he had named in the audience of the sons 
 of Heth — "four hundred shekels of silver, current money with the 
 merchant" — he undoubtedly used scales and denominations of weight 
 common to the whole East. The language indicates as thorough a 
 famiUarity with the use of money as does that used in financial news- 
 paper articles of the present day. So Joseph gave to Benjamin 
 "three hundred pieces of silver." These pieces were undoubtedly 
 of very nearly equal weight — consequently of equal value. The word 
 piece had a significance precisely similar to that which we attach to 
 the word dollar. 
 
 The invention of coinage has been ascribed to Pheidon, who 
 reigned about 750 B.C., in the island of Aegina, a dependency of Argos, 
 and at that time one of the greatest commercial emporiums of Greece. 
 Previous to its invention, the form in which the precious metals were 
 used was that of pins, or wires, silver being the metal chiefly employed. 
 Of these, a certain number made a conventional handful, or drachma. 
 This form was gradually exchanged for that of solid pieces, or wedges, 
 which may be considered as a step toward coinage. 
 
 Jevons says: "The mode in which the invention happened is 
 sufficiently evident. Seals were familiarly employed in very early 
 times, as we learn from the Eg\'])tian paintings or the stamped bricks 
 of Nineveh. Being employed to signify possession, or to ratify con- 
 tracts, they came to indicate authority. When a ruler first under- 
 took to certify the weights of pieces of metal, he naturally employed 
 his seal to make Uie fact known, just as, at Goldsmith's Hall, a small 
 punch was used to certify the fineness of plate. In the earliest forms 
 of coinage there were no attempts at so fashioning the metal that its 
 
 'Adapted from Money, Its Lau-s and History, p. 11. (H. \'. and H. \V. 
 Poor, 1877.)
 
 76 PRINCIPLES OF MONEY AND BANKING 
 
 weight could not be altered without destroying the stamp or design. 
 The earliest coins struck, both in Lydia and in the Peloponnesus, 
 were stamped on one side only."* 
 
 46. FORM, DESIGN, AND SIZE OF COINS' 
 By W. STANLEY JEVONS 
 
 From time to time coins have been manufactured in very many 
 forms, although circular coins vastly predominate in number. Among 
 the innumerable issues of the German states may be found octagonal 
 and hexagonal coins. A singular square coin, with a circular impress 
 in the centre, was issued from Salzburg by Rudbert in 15 13. Siege- 
 pieces have been issued in England and elsewhere in the form of 
 squares, lozenges, etc. Some of the most extraordinary specimens of 
 money ever used are the large plates of pure copper which circulated 
 in Sweden in the eighteenth century. These were about three-eighths 
 of an inch in thickness, and varied in size, the half-daler being 3^ 
 inches square, and the two-daler piece as much as 7^ inches square 
 and 3I pounds in weight. As the whole surface could not be covered 
 with a design, a circular impress was struck near to each corner, and 
 one in the centre, so as to render alteration as difficult as possible. 
 
 Among Oriental nations the shapes of coins are still more curious. 
 In Japan, the principal part of the circulation consists of silver itzibiis, 
 which are oblong, flat pieces of silver, covered on both sides with 
 designs and legends, the characters being partly in relief and partly 
 incised. The smaller silver coins have a similar form. Among the 
 minor Japanese coins are found large, oval, moulded pieces of copper 
 or mixed metal, each with a square hole in the centre. The Chinese 
 cash are well known to be round discs of a kind of brass, with a square 
 hole in the centre to allow of their being strung together. The present 
 circulation of China is composed of the so-called Sycee silver, which 
 consists of small shoe-shaped ingots, assayed and stamped, according 
 to some accounts, by the government. The coins of Formosa are 
 similar, except that they are much larger and thicker. All the copper 
 and base metal coins of China, Japan, and Formosa are distinguished 
 by a broad, flat rim, and they have characters in relief upon a sunk 
 
 ' This paragraph is taken from Money and the Mechanism of Exchange, p. 55, 
 1875. (D. Appleton & Co.) 
 
 "Adapted from Motiey and the Mechanism of Exchange (1875), pp. 55-62. 
 (D. Appleton & Co.)
 
 THE ORIGIN AND DEVELOPMENT OF MONEY 77 
 
 ground, somewhat in the manner of Boulton and Watt's copper pence. 
 They are manufactured by moulding the metal, and then filing the 
 protuberant parts smooth.. Such coins stand wear and preserve 
 their design better than European coins, but they are easily counter- 
 feited. The most singular of all coins are the scimiter-shaped pieces 
 formerly circulated in Persia. 
 
 It is a matter of considerable importance to devise the best 
 possible form for coins, and the best mode of striking them. The 
 use of money creates, as it were, an artificial crime of false coining, 
 and so great is the temptation to engage in this illicit art that no 
 penalty is sufficient to repress it, as the experience of two thousand 
 years sufl5ciently proves. Thousands of persons have suffered death, 
 and all the penalties of treason have been enforced without effect. 
 Ruding is then unquestionably right in saying that our efforts should 
 be directed, not so much to the punishment of the crime, as to its pre- 
 vention by improvements in the art of coining. We must strike our 
 coins so perfectly that successful imitation or alteration shall be out 
 of the question. 
 
 There are four principal objects at which we should aim in deciding 
 upon the exact design for a coin: 
 
 1. To prevent counterfeiting. 
 
 2. To prevent the fraudulent removal of metal from the coin. 
 
 3. To reduce the loss by legitimate wear and tear. 
 
 4. To make the coin an artistic and historical monument of the 
 state issuing it and of the people using it. 
 
 For the prevention of counterfeiting, our principal resource is to 
 render the mechanical execution of the piece as perfect as possible, 
 and to strike it in a way which can only be accomplished with the aid 
 of elaborate machinery. When all coins were made by casting, the 
 false coiner could work almost as skilfully as the moneyer. Hence, 
 in the Roman Empire, it was difficult to distinguish between true and 
 false coin. Hammered money was a great improvement on moulded 
 money and milled money on hammered money. The introduction 
 of the steam coining-press by Boulton and Watt was the next great 
 improvement, and the knee-joint press of Ulhorn and Thonnelier, 
 now used in nearly all mints, except that on Tower Hill, forms the 
 last advance in the mechanism for striking coin. 
 
 The utmost attention ought to be paid to the perfect execution 
 of the milling, legend, or other design impressed upon the edge of 
 modern coins. This serves at once to prevent clipping or tampering
 
 7S PRINCIPLES OF MONEY AND BANKING 
 
 with the coin, and to baffle the skill of the counterfeiter. The coins 
 of ancient nations were issued with rough, unstamped edges, and the 
 first coin marked with a legend on the edge was a silver coin of 
 Charles IX of France, issued in the year 1573. 
 
 All the larger coins now issued from the English, and indeed from 
 most other mints, bear a milled or serrated edge, produced by ridges 
 on the internal surface of the collar which holds the coin when being 
 struck between the two dies. These collars are difficult to make, 
 and useless when made except in the coining press, and the counter- 
 feiter cannot imitate the milling by handwork, it being almost impos- 
 sible to use a file with sufficient regularity. 
 
 The French five-franc pieces bear a legend on the edge in raised 
 letters, the words being "Dieu protege la France." Such raised 
 letters are quite beyond the art of the counterfeiter. 
 
 Some states have utilized their coins as monuments of important 
 events, such as conquests, jubUees, the accession of monarchs, etc. 
 The German states, especially Prussia, have struck a long series of 
 beautiful coins down to the Kronung's Thaler of 1861, and the Sieges 
 Thaler of 1871. Some of these coins are at once treasured up in 
 cabinets in the manner of medals. If it is possible to conceive litera- 
 ture destroyed, and modern cities and their monuments in ruins and 
 decay, such medallic coins would become the most durable memorials, 
 and the history of the kings of Prussia would be traced out by future 
 numismatists as that of the great dynasties of Bactria has lately been 
 recovered. 
 
 47. COINAGE, A GOVERNMENT FUNCTION' 
 By W. STANLEY JEVONS 
 
 Every civilized community requires a supply of well-executed 
 coins, so there arises the question, How shall this money be provided ? 
 The coins of each denomination must contain exactly equal weights 
 of fine metal, and must bear the impress proving that they do so. 
 Can we trust to the ordinary competition of manufacturers and 
 traders to keep up a sufficient supply of such coins, just as they supply 
 buttons or pins or needles? Or must we establish a permanent 
 department, under strict legislative control, to secure good coinage ? 
 
 As almost every opinion finds some advocates, there are not 
 wanting a few who believe that coinage should be left to the free 
 
 ' Adapted from Money and the Mechanism of Exchange, pp. 62-64. (D. 
 Appleton & Co., 1875.)
 
 THE ORIGIN AND DEVELOPMENT OF MONEY 79 
 
 action of competition. Mr. Herbert Spencer advanced the doctrine 
 that, as we trust the grocer to furnish us with pounds of tea, and the 
 baker to send us loaves of bread, so we might trust Heaton and Sons, 
 or some of the other enterprising firms of Birmingham, to supply us 
 with sovereigns and shillings at their own risk and profit. He held 
 that just as people go by preference to the grocer who sells good tea, 
 and to the baker whose loaves are sound and of full weight, so the 
 honest and successful coiner would gain possession of the market, and 
 his money would drive out inferior productions. 
 
 Mr. Spencer has, however, overlooked the important law of 
 Gresham, that better money cannot drive out worse. In matters of 
 currency, self-interest acts in the opposite direction to what it does in 
 other affairs, and if coining were left free, those who sold light coins 
 at reduced prices would drive the best trade. 
 
 This conclusion is amply confirmed by experience; for at many 
 times and places coins have been issued by private manufacturers, and 
 always with the result of debasing the currency. For a long time the 
 copper currency of England consisted mainly of tradesmen's tokens, 
 which were issued very light in weight and excessive in number. In 
 Mr. Smiles' Lives of Boulton and Watt the lower class of manufacturers 
 purchased copper coins to the nominal value of thirty-sbc shillings 
 for twenty shillings in silver and distributed it to their work-people 
 in wages, so as to make a considerable profit. The multitude of these 
 depreciated pieces in circulation was so great that the magistrates and 
 inhabitants of Stockport held a public meeting, and resolved to take 
 no halfpence in future but those of the Anglesey Company, which 
 were of full weight. This shows, if proof were needed, that the separate 
 action of self-interest was inoperative in keeping bad coin out of 
 circulation, and it is not to be supposed that the pubHc meeting 
 could have had any sufficient effect. 
 
 The ex-perience of the United States has also shown that the coin- 
 ing of money cannot safely be left to private enterprises. Private 
 coinage W8,s not forbidden in the United States until 1864, and between 
 1850 and this date there were numerous private gold manufactories 
 located in the gold-producing regions. As many as sixty specimens 
 of such coins have been preserved by the mint at Philadelphia. These 
 coins were guaranteed to be of the same weight and fineness as govern- 
 ment coins, though in fact the five-dollar pieces ranged in value from 
 $4.36 to $5.00. They were of course not counterfeits, and hence 
 they should have passed for their actual worth. They would have
 
 8o PRINCIPLES OF MONEY AND BANKING 
 
 done so if everyone were equipped with accurate scales and the means 
 of testing the fineness, but this was of course out of the question. 
 Traders in general could not distinguish between them, and were 
 hence likely to be cheated, while at the same time sharpers could reap 
 the advantage in handsome profits with little danger of detection. 
 Guaranteed uniformity is an absolute essential with money. 
 
 48. THE COINAGE PROCESS AT THE UNITED STATES MINTS' 
 By HORACE WHITE 
 
 The successive steps in the making of coins at the United States 
 mints are (i) assaying, (2) refining, (3) alloying, (4) coining. The 
 bullion is first melted in a crucible. While in the molten state it is 
 stirred until thoroughly mixed. It is then allowed to cool in the form 
 of a brick. Small pieces are clipped from two corners of the brick 
 most distant from each other and given to two different assayers to 
 test the fineness of the metal. If their tests do not agree within 
 a certain fraction, the brick is returned to the melting-pot and the 
 process repeated. When the test is satisfactory and the amount of 
 foreign substance is known, the whole of the impurity is removed by 
 chemical means. Then the requisite amount of alloy is added by 
 remelting and mLxing, to harden the mass. Thus, to nine pounds of 
 pure gold one pound of copper is. added, so that the coins shall be 
 nine-tenths fine. 
 
 The bullion is rolled into strips or ribbons a little wider than the 
 coin to be struck. It is then "drawn" in a machine which reduces 
 it to the thickness of the coin. The strips are then passed through 
 another machine, which cuts out of them circular pieces of the proper 
 size, called "blanks." Each blank is examined by an expert both by 
 weighing and by sounding. If one is found too light, or if it does not 
 "ring true," it is returned to the melting-pot. If it is too heavy, the 
 excess of metal is removed by filing. 
 
 The blanks are sent to a machine by which a slight rirn is raised 
 around the edge of the piece on both sides, so that its weight shall 
 rest on the rim and not on the whole surface of the coin, in order to 
 minimize the abrasion. This process is called "milling." The 
 blanks are then put in a cylindrical case and sent to the coining 
 machine. At each revolution of the machine one blank drops from 
 the bottom of the cylinder, is seized and conveyed to a sunken steel 
 
 ' Adapted from Money atid Banking, pp. 20-22. (Ginn & Co., 1895.)
 
 THE ORIGIN AND DEVELOPMENT OF MONEY 8 1 
 
 bed which contains a die that prints one surface of the coin. This 
 bed has a serrated edge or "collar." Directly above this sunken die 
 is a steel stamp containing a die which prints the other surface of the 
 coin. This stamp descends on the blank underneath with sufficient 
 force to impress upon it the letters and figures of both surfaces of the 
 coin. This pressure also squeezes the coin against the serrated 
 collar, producing an indentation on the edge of the coin, the object 
 of which, is to prevent any clandestine removal of metal. If a piece 
 were clipped from the edge, or any portion were remo\'ed by filing, 
 the fraud would be detected by the absence or irregularity of the 
 indentations. 
 
 49. COINAGE RULES AND REGULATIONS OF THE UNITED 
 
 STATES' 
 
 a) RECEIPT OF BULLION' 
 
 All bullion deposited or purchased at any of the mints or assay offices 
 of the United States shall be weighed in the presence of the depositor or 
 his agent, and the weight shall be verified by the registrar of deposits. If 
 the bullion deposited is found to be of less value than $100, it may be legally 
 refused. If, upon report of the assayer, it is found to be unsuitable for the 
 operations of the mint, it shall be refused. 
 
 b) ASSAYING 
 
 As soon as the weight of a deposit has been ascertained and recorded 
 the assayer takes at least two samples in sufficient portion for assay and 
 proceeds to test the quality of the metal. The assayer shall insert in the 
 report the fineness of the gold or silver contained in the deposit. If the 
 base is ascertained to be copper suitable for standard metal, he shall so state 
 in his report. He shall also insert in his report the charges to which the 
 deposit is subject. 
 
 c) MINT CHARGES 
 
 Section 3524, Revised Statutes of the United States, provides that the 
 charges for the various operations on bullion deposited and for the prepa- 
 ration of bars shall be fixed from time to time by the Director of the Mint, 
 with the concurrence of the Secretary of the Treasury, so as to equal, but 
 not exceed, in their judgment, the actual average cost to each mint and 
 assay office of the material, labor, wastage, and use of machinery employed. 
 
 ' From Genera! luslrucUons oitd Regulations in Relation to the Transaction 
 of Business at the Mints and Assay Offices of the United States.
 
 82 PRINCIPLES OF MONEY AND BANKING 
 
 The following are ihe principal mint charges: 
 
 1. Melting charge. — On deposit of bullion a charge of $i shall be imposed 
 for each i,ooo ounces of bullion or fraction thereof as shown by weight after 
 melting, except in the case of uncurrent United States coin and mint-fine 
 bars, for which no charge is made. 
 
 2. Parting and refining bullion. — The charges for parting and refining 
 bullion vary with the amount of impurities and base metal. Bullion con- 
 taining 800 thousandths or more of base metal is not accepted. At the 
 other extreme no charge is made for bullion containing 992 thousandths 
 of gold and upward. The charges on other buUion vary from one-half 
 cent per ounce to four cents per ounce, depending upon the amount of base 
 metals and copper alloy contained. For instance, where bullion contains 
 from 950 to 9914 thousandths, inclusive, of gold and not more than 30 
 thousandths base, the charge is 2 cents per ounce. The depositor is given 
 credit for the copper contained in the bullion. There is no charge for 
 parting and refining foreign coins unless they are below standard 
 fineness. 
 
 3. Toughening charge. — Bullion containing one or more of the following 
 substances, viz., iron, lead, antimony, bismuth, tin, arsenic, zinc, or sulphur, 
 in amounts sufficient to make it impossible to obtain a satisfactory assay, 
 shall, at the discretion of the sup>erintendent, be subject to an additional 
 charge equal to the cost to the Government for remelting and treatment 
 by the deposit melter. 
 
 4. Copper alloy. — Two cents per ounce for copper required, to be 
 determined by taking one-tenth of the standard weight of gold, except 
 where the base in the deposit is all good copper and the fineness above 
 standard, when the method of determining the number of ounces of copper 
 required shall be by taking the difference between the standard weight and 
 the gross weight of the deposit. 
 
 5. Assays of bullion and plated ware. — Samples of gold and silver 
 bullion will be assayed at the mints and assay offices at a charge of $2 per 
 sample. In case of plate, or what is known as rolled or filled plate, the 
 charge shall be $4 for each assay; or the assay may be refused, at the 
 option of the assayer. 
 
 d) ADVANCES OR PARTIAL PAYMENTS ON DEPOSITS 
 
 In case of deposits, the fineness of which may be readily determined 
 approximately by inspection, payment may, at the discretion of the super- 
 intendents of the coinage mints and the assay office at New York, be made 
 within 10 per cent of their value, or within 2 per cent when already closely 
 determined by assay and awaiting remelting or reassay for exact determi- 
 nation: Provided, No partial payment shall be made on a deposit contain- 
 ing less than $5,000 in gold, or 5,000 ounces of silver.
 
 THE ORIGIN AND DEVELOPMENT OF MONEY 83 
 
 e) DEPOSITS OF UNITED STATES COIN 
 
 United States gold coin of legal weight shall not be received from 
 depositors except in sums of not less than $5,000 in exchange for gold bars. 
 
 Mutilated or otherwise uncurrent United States gold coins, of any 
 denomination, will be received at any of the mints or assay offices of the 
 United States, and the value of the fine gold contained will be paid to the 
 depositor at the rate of $20. 67 per ounce line, or $18. 60 per ounce standard 
 (0.900 fine). 
 
 /) MODE OF PAYMENTS 
 
 Payments for deposits of gold bullion at the coinage mints and at the 
 assay office in New York will be made in fine bars, coin, or by check, as 
 may be desired by the depositor. At the minor assay offices payments 
 are made by check on an Assistant Treasurer of the United States, or 
 Government depository bank nearest at hand. 
 
 g) MANUFACTURE OF BARS 
 
 Unparted, fine, and standard bars may be manufactured at the coinage 
 mints and the assay office at New York, and unparted bars at all of the 
 institutions. Fine bars may be approved when they have a fineness of 
 o. 992 and upward, and no bar of gold or silver of less weight than 5 ounces 
 shall be issued at any of the mints or assay offices of the United States. 
 
 h) THE "tolerance OF THE MINT" AND "TRIAL OF THE PYX" 
 
 The weight of a new gold eagle, or double eagle, must not vary more 
 than half a grain from the standard weight fixed in the law. That of the 
 smaller gold coins must not vary more than a quarter of a grain. This 
 allowable variation is called the "tolerance of the mint." 
 
 The testing of this weight is determined by a "Trial of the Pyx." 
 Five pieces out of every thousand coined are taken out by the superin- 
 tendent upon receipt from the coiner and tried separately by him. If 
 successful, these pieces are sealed and deposited in a pyx which is kept 
 under the joint care of the superintendent and the assayer and secured so 
 that neither can have access to its contents without the presence of the 
 other. 
 
 If the original trial by the superintendent proves unsatisfactory, all 
 the coins shall be weighed separately, and such as are not of legal weight 
 shall be defaced and delivered to the melter and refiner. Four times a year 
 the samples from the minor mints are sent to the mint at Philadelphia. 
 The entire quantity of samples is then subjected to an annual "Trial of 
 the Pyx" by a special Assay Commission, composed of the Judges of the 
 District Court of the eastern district of Pennsylvania, the Comptroller of 
 the Currency, the Assayer of the assay office at New York, and such other 
 persons as the President may, from time to time, designate. If an error
 
 84 PRINCIPLES OF MONEY AND BANKING 
 
 is found, the officers implicated in the error are thenceforward disqualified 
 from holding their respective oflSces. 
 
 The penalty imposed upon an officer of the mint for debasing, embez- 
 zling, or in any way altering coins, or for tampering with the scales or 
 weights used at the mints, shall be a fine of not more than ten thousand 
 doUars and imprisonment for not more than ten years. 
 
 i) THE STANDARD TROY POUND 
 
 For the purpose of securing a due conformity in weight of the coins 
 of the United States to the provisions of this Title, the brass troy-pound 
 weight procured by the minister of the United States at London, in the 
 year eighteen hundred and twenty-seven, for the use of the mint, and now 
 in the custody of the mint in Philadelphia, shall be the standard troy pound 
 of the mint of the United States, conformably to which the coinage thereof 
 shall be regulated. Duplicates of this standard troy pound shall be pro- 
 cured for the other mints and assay offices. Inspection and testing of these 
 shall be made annually by the Assay Commission along with the testing 
 of coins. 
 
 j) ABRASION 
 
 Where gold is used extensively as a circulating medium there is a con- 
 siderable loss from wear and tear, or abrasion. The law in the United 
 States permits an abrasion equal to one-half of i per cent in 20 years, and 
 proportionally for each year. For instance, an eagle, at the end of 20 years, 
 would be current if it weighed only 256. 71 grains instead of 258 (or 258. 50 
 when allowance is made for the tolerance of the mint). The annual abra- 
 sion permissible is .0645. Experiments have shown that this limit of 
 abrasion is high enough to avoid frequent recoinage in the United States. 
 
 In case a gold coin is uncurrent on account of abrasion in the United 
 States the loss falls on the last holder. This appears like an injustice, since 
 the loss is due to social wear. It has thus far been held, however, that the 
 impossibility of determining whether the light weight is due to abrasion or 
 sweating makes it necessary to charge the loss entirely to the last holder. 
 
 k) COUNTERFEITING 
 
 "Whoever shall falsely make, forge, or counterfeit, or cause or procure 
 to be falsely made, forged, or counterfeited, or shall willingly aid or assist 
 in falsely making, forging, or counterfeiting any coin or bars in resemblance 
 or similitude of the gold or silver coins or bars which have been, or here- 
 after may be, coined or stamped at the mints and assay offices of 
 the United States, or in resemblance or similitude of any foreign gold or 
 silver coin which by law is, or hereafter may be, current in the United 
 States, or are in actual use and circulation as money within the United 
 States; or whoever shall pass, utter, publish, or sell, or attempt to pass,
 
 THE ORIGIN AND DEVELOPMENT OF MONEY 85 
 
 utter, publish, or sell, or bring into the United States or any place subject 
 to the jurisdiction thereof, from any foreign place, knowing the same to be 
 false, forged, or counterfeit, with intent to defraud any body politic or 
 corporate, or any person or persons whomsoever, or shall have in his pos- 
 session any such false, forged, or counterfeited coin or bars, knowing the 
 same to be false, forged, or counterfeited, with intent to defraud any body 
 politic or corporate, or any person or persons whomsoever, shall be fined 
 not more than five thousand dollars and imprisoned not more than ten 
 years." For counterfeiting minor coins the penalty is a fine of not more 
 than one thousand dollars and imprisonment for not more than three years. 
 For debasing, defacing, injuring, etc., any gold or silver coins with intent 
 to defraud, the penalty is not in excess of a fine of two thousand dollars 
 and imprisonment for five years. 
 
 SO. SEIGNORAGE' 
 
 The word seignorage, also spelt seigneurage, seigneuriage, and 
 seigniorage, is of Norman-French origin. Under the feudal system 
 the right of coinage was an exclusive privilege of the king or seigneur. 
 This personage not unnaturally took the opportunity of exacting a 
 fee when the mint was employed in the coinage of metal belonging 
 to his subjects. The money thus raised was retained by the king for 
 his use, and it was to this pK)rtion of the royal income that the title 
 seignorage was applied. 
 
 The total amount paid by merchants for the privilege of having 
 their bullion converted into coin was the sum of two charges, one of 
 which went to the king, and the other to the officers of tlie mint. 
 The first was the seignorage, the second the brassage. This latter 
 term has never been generally used in England, but it has been referred 
 to under the head of mint-charge, or charge for coinage. 
 
 These two charges were fixed at a sum per pound calculated on 
 the gross weight of coin produced from the bullion sent in, and their 
 amount was collected by a deduction from the coin delivered to the 
 merchant. Thus we find that in the reign of Edward III (1345) the 
 deduction made at the mint from gold coins delivered to the public 
 was at the rate of £1 35. 6d. per lb., of which £1 went to the king as 
 his seignorage, and 35. 6d. to the mint to defray the cost of coinage. 
 In the same year the charge for coining silver was fixed at is. ^d. per 
 lb., of which Cjd. went to the officers of the mint, and dd. to the 
 exchequer. 
 
 ' From Palgrave, Dictionary of Political Economy, III, 37^-73.
 
 86 PRINCIPLES OF MONEY AND BANKING 
 
 The revenue directly raised by the seignorage charge was at 
 various times supplemented by one or both of the following means: 
 (a) the use of the Tower pound; and (b) advantage taken of the 
 Remedy, or Shere, allowance to issue coins uniformly short of their 
 full legal weight. 
 
 The Tower pound was equal in weight to ii oz. 5 dwt. troy, so 
 that 16 lb. Tower = 15 lb. troy. Metal sent to the mint for coinage 
 was received by troy weight, but given out to the coiners by Tower 
 weight. The legal number of pieces per pound was then coined from 
 this diminished weight of metal. The king thus added to his revenue 
 a sum equal to the vklue of one-sixteenth of all the metal brought to 
 the mint for coinage, while he derived the same amount from the 
 seignorage charge as if the coin had been weighed and delivered by 
 troy weight, this charge being based upon the number of Tower 
 pounds of coin produced. The use of the Tower pound in the mint 
 was abolished in 1527 by a proclamation of Henry VIII. 
 
 SI. SOCIAL EFFECTS OF A BAD COINAGE^ 
 By THOMAS BABINGTON MACAULAY 
 
 The old crude hammered coins of Great Britain were of vajying 
 weight, slightly irregular shape, and with unmilled edges. As a result 
 they were easily clipped and mutilated. In the time of William III 
 the practice of paring down money was far too lucrative to be checked 
 even by the penalty of high treason. The severity of the punishment 
 gave encouragement to the crime. For the practice of clipping did 
 not excite in the common mind a detestation resembling that with 
 which men regard murder, arson, robbery, nay, even theft. The 
 injury done by the whole body of clippers to society as a whole was 
 indeed immense; but each particular act of clipping was a trifle. 
 To pass a half-crown after paring a penny^vorth of silver from it 
 seemed a minute and almost imperceptible fault. Even while the 
 nation was crying out most loudly under the distress which the state 
 of the currency had produced, every individual who was capitally 
 punished for contributing to bring the currency into that state had the 
 general sympathy on his side. Constables were unwilling to arrest 
 the offenders. Justices were unwilling to commit. Witnesses were 
 unwilling to tell the whole truth. Juries were unwilling to pronounce 
 the word guilty. There was a general conspiracy to prevent the law 
 
 ' Adapted from History of England, 1848, chap. xxi.
 
 THE ORIGIN AND DEVELOPMENT OF MONEY 87 
 
 from taking its course. The convictions, numerous as they might 
 seem, were few indeed when compared with the offenses, and the 
 ofifenders who were convicted looked on themselves as murdered men, 
 and were firm in the belief that their sin, if sin it were, was as venial 
 as that of a schoolboy who goes nutting in the wood of a neighbor. 
 
 In the autumn of 1695 it could hardly be said that the country 
 possessed, for practical purposes, any measure of value. It was a 
 mere chance whether what was called a shilling was really ten pence, 
 sixpence, or a groat. The results of some experiments that were tried 
 at that time deserve to be mentioned. The officers of the exchequer 
 weighed £57,200 of hammered money which had recently been paid 
 in. The weight ought to have been above 220,000 ounces. It proved 
 to be under 114,000 ounces. Three eminent London goldsmiths 
 were invited to send £100 each in current silver to be tried by the 
 balance. The £300 ought to have weighed almost 1,200 ounces. 
 The actual weight proved to be 624 ounces. The same test was 
 applied in various parts of the kingdom with practically everywhere 
 similar results. There were some northern districts, however, into 
 which the clipped money had only begun to find its way. An honest 
 Quaker who lived in one of these districts recorded the amazement 
 with which, when he travelled southward, shopkeepers and innkeepers 
 stared at the broad, heav}^ half-crowns with which he paid his way. 
 They asked whence he came and where such money was to be found. 
 The guinea which he purchased for twenty-two shillings at Lancaster 
 bore a dilTerent value at every stage of the journey. When he reached 
 London, it was worth thirty shillings and would have indeed been worth 
 more had not the government fixed that rate as the highest at which 
 gold should be received in the payment of taxes. 
 
 It may well be doubted 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 by bad crowns and bad shillings. Those events which 
 furnish the best themes for pathetic or indignant eloquence are not 
 always those which most afi'ect the happiness of the great body of the 
 people. The misgovernment of Charles and James, gross as it had 
 been, had not prevented the common l)usiness of life from going 
 steadily and prosperously on. While tlie honor and independence of 
 the state were sold to a foreign power, while chartered rights were 
 invaded, while fundamental laws were violated, hundreds of thou- 
 sands of quiet, honest, and industrious families labored and traded,
 
 88 PRINCIPLES OF MONEY AND BANKING 
 
 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-home 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 Trent, and the barrows of 
 coal rolled fast along the timbered railways of the Tyne. But when 
 the great instrument of exchange became thoroughly deranged, all 
 trade, all industry, were smitten as with a palsy. The evil was felt 
 daily and hourly in almost every place and by almost every class, in 
 the dairy and on the threshing-floor, by the anvil and by the loom, on 
 the billows of the ocean and in the depths of the mine. 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 around. 
 On a fair day or a market day the clamors, the reproaches, the curses, 
 were incessant; and it was well if no booth was overturned and no 
 head broken. No merchant could contract to deliver goods without 
 making some stipulation about the quality of the coin in which he was 
 to be paid. Even men of business were often bewildered by the 
 confusion into which all pecuniary transactions were thrown. The 
 simple and the careless were pillaged without mercy by extortioners 
 whose demands grew even more rapidly than the money shrank. 
 The price of the necessaries of life, of shoes, of ale, of oatmeal, rose 
 fast. The laborer 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 a sixpence. Where 
 artisans of more than usual intelligence were collected in great num- 
 bers, as in the dockyard at Chatham, they were able to make their 
 complaints heard and to obtain some redress. But the ignorant and 
 helpless peasant was cruelly ground between one class which would 
 give money only by tale and another which would take it only by 
 weight.
 
 Ill 
 
 EARLY EXPEDIENTS FOR INCREASING THE 
 CURRENCY 
 
 Introduction 
 
 The general confusion of mind that has ahvays existed with refer- 
 ence to the nature and functions of money, and the widespread and 
 persistent behef that money is somehow synonymous with, or at 
 least a superior form of, wealth, and that in consequence its accumula- 
 tion is one of the chief ends and aims of individuals and of society, 
 are the main underlying causes of the great monetary movements and 
 controversies of history. At bottom, the trade regulations to secure 
 importations of specie, the periodical debasing of the currency, the 
 issues of irredeemable paper money, and the use of two metals as a 
 standard were all largely caused by the belief in the virtue of much 
 money. And, conversely, the tremendous opposition to the abolition 
 of these various systems or practices, one after another, has been 
 largely due to the same underlying philosophy. It is necessary 
 to say mainly or largely due to these views, because there has been 
 at all times a scientific side to the controversies which was not con- 
 trolled by this popular confusion, and there have been, also, numerous 
 times, as will be noted later, when the popular arguments resulted 
 from other influences. Nevertheless this general confusion of money 
 with wealth must be taken as the starting-point for an understanding 
 and appreciation of monetary history. Approaching the study of 
 money from an academic standpoint alone aflfords but a meager 
 understanding or appreciation of its relation to economic development. 
 
 It is the belief of Alexander Del Mar, who has doubtless given 
 more study to the origin and development of monetary systems than 
 any other student, that the history of money is the history of civiliza- 
 tion. While this view is not accepted by most writers, all are never- 
 theless agreed that money has played a tremendous role in tlie 
 evolution of society. Similarly, there has been more discussion on 
 this subject, and more articles and books have been written on 
 monetary issues, than on any other question in the realm of politioil 
 economy. At the same time the various controversies liave doubtless
 
 QO PRINCIPLES OF MONEY AND BANKING 
 
 developed more extreme enthusiasm and greater bitterness in denun- 
 ciation than those on any other subject. In the exaggerated words of 
 Mr. Bryan, "brother has been arrayed against brother, father against 
 son. The warmest ties of love, acquaintance, and association have 
 been disregarded; old leaders have been cast aside .... and new 
 leaders have sprung up to give direction to the cause of truth." 
 
 In the present section we are cojicerned with the practice of 
 governmental debasement of the currency, once almost universal. As 
 the readings indicate, the practice was common in Roman times (it 
 was doubtless universally prevalent among the ancients) and through- 
 out mediaeval history well down to the modern period. The purposes 
 of such debasements are shown to be various, but the most common, 
 aside from the pressing requirements of the royal exchequer, were to 
 increase the volume of currency by making more coins out of the same 
 quantity of metal, and to control the international flow of currency. 
 This latter was obviously for the purpose of insuring at all times within 
 the country as large a quantity of the precious metals as possible. 
 This end was, however, continually defeated by the operation of 
 Gresham's law. 
 
 52. METHODS OF DEBASING THE STANDARD* 
 By JOSEPH HARRIS 
 
 First, by altering the denomination of the coins without making 
 any alteration at the mint, or in the coins themselves; as suppose 
 nine-pence should be called a shilling (twelve-pence). 
 
 Secondly, by continuing the same names and the same weights 
 to the coins, but making them baser, or with less silver and more alloy. 
 
 Thirdly, by preserving the same fineness of the metal, but making 
 the coins smaller or lighter. 
 
 Lastly, the two last methods, or all three methods, might be com- 
 pounded together. 
 
 S3. ROMAN DEBASEMENT OF THE CURRENCY' 
 By J. S. REID 
 
 The political importance of sound currency has never been more 
 conspicuously shown than in the century which followed the death 
 of Commodus (a.d. 180). Augustus had given a stability to the 
 
 ' Adapted from An Essay on Money and Coins (1757). Reprinted in Select 
 Currency Tracts, 450-51. 
 
 'Adapted from "The Reorganization of the Empire," in the Cambridge 
 Mediaeval History, I, 39-40. (The Macmillan Co., 1911.)
 
 EARLY EXPEDIENTS FOR INCREASING THE CURRENCY 91 
 
 Roman coinage which it had never before possessed. But he imposed 
 no uniform system on the whole of his dominions. Gold (with one 
 exception) he allowed none to mint but himself. But copper he left 
 in the hands of the Senate. Silver he coined himself, while he per- 
 mitted many local mints to strike pieces in that metal as well as in 
 copper. 
 
 Although the imperial coins underwent a certain amount of depre- 
 ciation between the time of Augustus and that of the Severi, it was 
 not such as to throw out of gear the taxation and commerce of the 
 Empire. But with C'lracalla a rapid decline set in, and by the time 
 of Aurelian the disorganization had gone so far that practically gold 
 and silver were demonetized, and copper became the standard medium 
 of exchange. The principal coin, that professed to be silver, had come 
 to contain no more than 5 per cent of that metal, and this proportion 
 sank afterwards to 2 per cent. What a government gains by making 
 its payments in corrupted coin is always more than lost in the revenue 
 which it receives. The debasement of the coinage means a lightening 
 of taxation, and it is never possible to enhance the nominal amount 
 receivable by the exchequer so as to keep pace with the depreciation. 
 The effect of this in the Roman Empire was greater than it would 
 have been at an earlier time, since there is reason to believe that much 
 of the revenue formerly payable in kind had been transmuted into 
 money. A measure of Aurelian had the effect of multiplying by eight 
 such taxes as were paid in coin. As the chief (professing) silver coin 
 had twenty years earlier contained eight times as much silver as it 
 had come to contain, he claimed that he was only exacting what was 
 justly due, but his subjects naturally cried out against his tyranny. 
 No greater proof of the disorganization of the whole financial system 
 could be given than lies in the fact that the treasury issued sack loads 
 (folles) of the Antoniani, first coined by Caracalla, which were intended 
 to be silver, but were now all but base metal only. These folles 
 passed from hand to hand unopened. 
 
 54. THE EFFECT OF ROMAN DEBASEMENTS' 
 By GEORGE FINLAY 
 
 The depreciation in the value of the circulating medium during 
 the fifty years between the reign of Caracalla and the death of Cial- 
 lienus annihilated a great part of the trading capital in the Roman 
 
 ' Adapted from A History of Greece, I, 52. (The Clarendon Press, 1877.)
 
 92 PRINCIPLES OF MONEY AND BANKING 
 
 Empire, and rendered it impossible to carry on commercial transac- 
 tions, not only with foreign countries but even with distant provinces. 
 Every payment was liable to be greatly diminished in real value, even 
 when it was nominally the same. This state of things at last induced 
 capitalists to hoard their coins of pure gold and silver for better days; 
 and as these better days did not occur, all memory of many hoards 
 was lost, and the buried treasures, consisting of select coins, have 
 often remained concealed until the present time. Thus the frauds 
 of the Roman emperors have filled the cabinets of collectors and the 
 national museums of modern Europe with wall-preserved coins. 
 
 The laws which regulate the distribution, the accumulation, and 
 the destruction of wealth, the demand for labor, and the gains of 
 industry, attest that the depreciation of the currency was one of the 
 most powerful causes of the impoverishment and depopulation of the 
 Roman Empire in the third century, and there can be no doubt that 
 Greece suffered severely from its operation. 
 
 55. KING JAMES' BRASS MONEY^ 
 By THOMAS BABINGTON MACAULAY 
 
 When James II, after abdicating and fleeing to France, had 
 returned to Dublin in 1689 and was seeking to regain his throne by 
 the aid of an Irish Parliament, he found himself hampered by an 
 empty treasury. Could he at once extricate himself from his financial 
 difficulties by the simple process of calling a farthing a shilling ? He 
 reasoned that since the right of coining money belonged to the royal 
 prerogative, the right of debasing the coinage must also belong to it. 
 
 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 metals, nominally worth near a shilling sterling, intrinsically 
 worth about one-sixteenth part of that sum, were in circulation. A 
 royal edict declared these pieces to be legal tender in all cases whatso- 
 ever. A mortgage for a thousand pounds was cleared off by a bag 
 of counters made out of old kettles. Any man who belonged to the 
 caste now dominant could walk into a shop, lay on the counter a bit 
 of brass worth three pence, and carry off goods to the value of half a 
 guinea. Legal redress was out of the question. Indeed, the sufferers 
 tliought themselves happy if by the sacrifice of their stock in trade 
 they could redeem their limbs and their lives. Of all the plagues of 
 
 ' Adapted from History of England (1848), chap. xii.
 
 EARLY EXPEDIENTS FOR INCREASING THE CURRENCY 93 
 
 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. 
 
 56. COINAGE DEBASEMENTS IN ENGLAND' 
 By JAMES MACLAREN 
 
 When the method of reckoning by pounds, shillings, and pence 
 was introduced into this country by William the Conqueror, a certain 
 amount of pure silver was allotted to each coin; the pound sterling 
 and the shilling were then, indeed, but imaginary money, the largest 
 silver coin in existence being the penny, which contained the two 
 hundred and fortieth part of a pound of silver; but a shilling if then 
 coined would have contained the twentieth part of a pound, and the 
 pound sterling would have weighed a pound. 
 
 Our kings soon began to debase the currency by diminishing the 
 quantity of pure metal contained in the coins without altering their 
 denomination; their motive, according to Lord Liverpool, being not 
 merely the gain which they themselves obtained by making more 
 money out of the same amount of bullion, but also a desire to increase 
 the wealth of their subjects, which they supposed to depend upon the 
 quantity of money in the country, so ancient is the theory which 
 attributes a power of increasing the national prosperity to an exten- 
 sion of the currency. These debasements were practiced to a great 
 extent in the later years of the reign of Henry VIII, and in the begin- 
 ning of that of his son, who, however, afterwards prepared a scheme 
 for the restoration of the coinage to its former standard, which, with, 
 some modification, was carried into effect by Elizabeth. 
 
 57. REASONS FOR DEBASING THE STANDARD' 
 By JOSEPH HARRIS 
 
 The causes of the adulteration of our coinage may be listed as 
 follows: 
 
 1. I have often heard it asserted that our standard of money is 
 too good, and should therefore be debased. 
 
 2. Debasing the standard is urged as a means of increasing the 
 currency, by giving old names to smaller pieces of money. 
 
 " Adapted from History of the Currency, pp. 1-2. (Edward Buminis, 187Q.) 
 
 'Adapted from An Essay on Money and Coins (1757). Reprinted in Select 
 
 Currency Tracts, pp. 566-67.
 
 94 PRINCIPLES OF MONEY AND BANKING 
 
 3. Debasements are necessary to keep coin from being melted 
 or exported. 
 
 4. A gradual debasement would not be perceived and would there- 
 fore do no injury to anyone. 
 
 5. Many of our coins are light from long use, and to prevent con- 
 fusion the new coins should be of the same weight as the abraded 
 ones. 
 
 58. A DEFENSE OF THE PRACTICE' 
 By DAVID HUME 
 
 While an increase in the quantity of specie will in time raise prices 
 
 and thus offset the apparent gain, it may increase to a considerable 
 pitch before it has this latter effect. In the frequent operations of the 
 French king on the money, it was always found that the augmenting 
 of the numerary value did not produce a proportional rise in prices, at 
 least for some time. In the last year of Louis XIV money was raised 
 three-sevenths, but prices augmented only one-seventh. Coin in 
 France is now sold at the same price, or for the same number of livres, 
 it was in 1683, though silver was then 30 livres the mark, and is 
 now at 50. 
 
 This seems to be one of the best reasons for a gradual and 
 universal ' augmentation of the money which can be given. Were 
 all our money, for instance, recoined, and a penny's worth of silver 
 taken from every shilling, the new shilling would probably purchase 
 everything that could have been bought by the old; the prices of 
 everything would thereby be insensibly diminished; foreign trade 
 enlivened; and domestic industry, by the circulation of a greater 
 number of pounds and shillings, would receive some increase and 
 encouragement. 
 
 In every kingdom into which money begins to flow in greater 
 abundance than formerly, everything takes on a new face; labor and 
 industry gain life; the merchant becomes more enterprising; the 
 manufacturer more diligent and skilful; and even the farmer follows 
 his plow with greater alacrity and attention.* 
 
 ' Adapted from Political Discourses (1752), pp. 46-49. 
 
 ' Hume points out, however, that in time, if the debasement is considerable, 
 the rising prices wiU prove rather a disadvantage than an advantage. — Editor.
 
 EARLY EXPEDIENTS FOR INCREASING THE CURRENCY 95 
 
 59. GRESHAM'S LAW AND THE FAILURE OF DEBASE^IENTS' 
 By W. STANLEY JEVONS 
 
 Sir Thomas Gresham, a royal agent of Elizabeth, pointed out 
 how, by debasement, two kinds of metallic money, although nominally 
 of equal value, could not be kept in concurrent circulation. In the 
 exchanges, wherein coins are valued according to weight, the inferior 
 were separated from the superior coins, and the latter were exported. 
 
 Though the public generally do not discriminate between coins 
 and coins, provided there is an apparent similarity, a small class of 
 money-changers, bullion-dealers, bankers, or goldsmiths make it 
 their business to be acquainted with such differences, and know 
 how to derive a profit from them. These are the people who fre- 
 quently uncoin monc}', either by melting it or exporting it to countries 
 where it is sooner or later melted. Hence arises the practice, exten- 
 sively carried on in the present day in England, of picking and culling, 
 or, as another technical expression is, garbling the coinage, devoting 
 the good new coins to the melting-pot, and passing the old worn coins 
 into circulation again on every suitable opportunity. 
 
 In all other matters everybody is led by self-interest to choose the 
 better and reject the worse; but in the case of money, it would seem 
 as if they paradoxically retain the worse and get rid of the better. The 
 ex-planation is very simple. The people, as a general rule, do not 
 reject the better, but pass from hand to hand indifferently the heavy 
 and the light coins, because their only use for the coin is as a medium 
 of exchange. It is those who are going to melt, export, hoard, or 
 dissolve the coins of the realm, or convert them into jewelry and 
 gold leaf, who carefully select for their purposes the new, heavy 
 coins. 
 
 ' Adapted from Money and the Mechanism of Exchange (1875), pp. 79-81. 
 (D. Appleton & Co.)
 
 IV 
 THE STANDARD QUESTION: BIMETALLISM 
 
 Introduction 
 
 Monetary controversies have centered mainly around the ques- 
 tion, What should constitute the basis of the monetary system? 
 The general problem here involved has numerous phases and its 
 adequate presentation requires several chapters. While in its broad 
 outlines it involves primarily only the question of bimetaUism and 
 of government paper money, for chronological reasons, as well as for 
 clarity of exposition, its treatment is best broken up into several 
 divisions, as is indicated by the sectional headings IV to VII inclusive. 
 
 In the present section we are concerned with bimetallism, first, 
 as to general theory, and, secondly, as to its practical success in 
 operation up to 1873. By the general theory of bimetalHsm we mean 
 the arguments in its favor that have been advanced by scientific stu- 
 dents, as distinguished from the views presented by the general public 
 in connection with monetary propagandas. In raising the problem of 
 bimetallism a frequent source of confusion must be carefully noted. 
 The "standard" question in our monetary history did not center 
 around the common denominator or measure of value. The bime- 
 taUic controversy was waged, on the one hand, over the adequacy 
 of a single metal, alone, to serve the needs of trade as a medium of 
 exchange, and, on the other, to furnish the stabiHty required for a 
 good standard of deferred payments. So far as serving merely as a 
 common denominator of value at a given moment of time is con- 
 cerned, a great quantity of the money material is not required, 
 nor is stability of value particularly important. Although it is 
 LQConceivable that any commodity should come to be used as a 
 common denominator of value that had not exhibited a relatively 
 stable value in the past — stable enough to mean something fairly 
 definite to those who would reckon by it — nevertheless, when it 
 is once adopted future changes in its value become of minor con- 
 sequence. General pricey are merely higher or lower, as the case may 
 be, and so far as comparing relative values at a given moment is 
 concerned it still serves satisfactorily enough. But not so when the 
 
 96
 
 THE STANDARD QUESTION: BIMETALLISM 97 
 
 time element enters. A change in the level of prices works havoc 
 with time contracts and seriously deranges business affairs; and a 
 first requisite for a satisfactory standard of deferred payments is 
 stability of value. The quantity of money and the stability of its 
 value are problems which are really connected only with the functions 
 as medium of exchange and standard of deferred payments. The 
 readings in this and the following chapters, therefore, are concerned 
 with money only as a medium of exchange and as a standard of 
 deferred payments. A loose use of terms in connection with the 
 various functions of money has resulted in much confusion of issues 
 and it is particularly important to keep the distinctions just made 
 constantly in mind. 
 
 Bimetallism appears to have been universally in use in Europe 
 until the nineteenth century, though without any conscious adoption 
 on the part of the various nations. Both gold and silver were money, 
 as a matter of course, after once their superiority to other commodities 
 for monetary purposes had been demonstrated. The general belief 
 that a large quantity of money is synonymous with great wealth 
 appears to have been mainly responsible for this universal acceptance 
 of bimetallism as a mere matter of course. To the mercantilist of 
 the seventeenth and eighteenth centuries the demonetization of 
 either gold or silver would have seemed nothing short of suicidal. 
 And it may fairly be said that, even with a correct analysis of 
 the real functions performed by money in mind, it might appear 
 that there was a genuine need for using both gold and silver as 
 money during this period. Reference to the table of the production 
 of the precious metals (No. 44) shows that after the opening of the 
 mines of the New World in the sixteenth century, the annual produc- 
 tion was not enormous. Doubtless it was no more than adequate to 
 the needs of the rapidly expanding commerce of the age. This table 
 of the production of the precious metals, it may be stated parentheti- 
 cally, should also be constantly studied in connection with the later 
 stages of the bimetallic controversy, for the controversies that have 
 arisen are largely attributable to changes in productivity at the 
 mines of gold and silver. 
 
 The crux of the difficulty with bimetallism is found in the varia- 
 tions in value of the metals jointly serving as the standard, and these 
 variations in turn are obviously due to the conditions governing the 
 relation of supply and demand for the precious metals. Given varia- 
 tions in the market ratio of the two metals, the operation of Grcsham's
 
 98 PRINCIPLES OF MONEY AND BANKING 
 
 law works havoc with the system. It was necessary, however, for a 
 good system of coinage to be developed before the operation of 
 Gresham's law in connection with bimetallism could well be discerned. 
 The whole problem was long obscured because of the perennial 
 debasements of the currency and the perpetual mutilation of the 
 coinage. " Bad money [mutilated or debased] drives out good 
 money." When a uniform currency was achieved it was observed 
 that Gresham's law still operated — that legally overvalued money 
 would drive out legally undervalued money; hence the retention of 
 bimetallism became a debatable question. 
 
 The argument on the compensatory action of a bimetallic standard 
 has commonly been put forward as a positive argument for bimetal- 
 lism. In fact, however, it is rather a negative argument, advanced 
 in refutation of the contention that since the relative values of gold 
 and silver can never be kept steady, owing to variations in the condi- 
 tions governing supply and demand, Gresham's law will operate to 
 defeat the maintenance of a double standard. In the readings, 
 therefore, the compensatory action is separated from the argument 
 for bimetallism and placed by itself following the discussion of the 
 operation of Gresham's law. 
 
 The history of the double standard in various countries shows 
 unmistakably that bimetaUism when practiced by one nation inde- 
 pendently of others is not a workable system; and the various nations 
 have abandoned it one by one. This abandonment, however, did 
 not come without a vigorous effort on the part of bimetalUsts to secure 
 the adoption of international bimetallism. It was believed by many 
 scientific students of the question that an international bimetaUic 
 system would be free from the objections to national bimetallism. 
 The failure to secure its adoption, however, after thirty years of effort 
 compels us to subject its merits to the test of theory rather than of 
 actual practice. The Latin Monetary Union was the nearest approach 
 to international bimetallism that we have had, but it cannot be 
 regarded as a real test of the principles involved. 
 
 A. General Principles 
 
 60. THE VARIOUS KINDS OF STANDARDS 
 
 The three primary functions of money are to serve as a medium 
 of exchange, a common denominator of value, and a standard of 
 deferred payments. While it is theoretically possible that we might
 
 THE STANDARD QUESTION: BIMETALLISM 99 
 
 sharply differentiate these functions and use a separate commodity 
 for each, it is the usual practice to employ the same commodity, or 
 commodities, for all. Indeed, it is almost, if not quite, universal that 
 the same commodity serves as both a common denominator of value 
 and a standard of deferred payments; where differentiation occurs 
 it is only with reference to the exchange function. The choice of a 
 good standard, then, has been influenced by varying considerations; 
 among these the quantity of the monetary material and its stabiUty 
 of value are of the greatest importance. Once the choice of the money 
 material had narrowed down to the precious metals, the problem 
 usually became one of a choice between gold and silver, or the con- 
 current use of both. 
 
 The single standard, or monometallism, is one in which a single 
 metal is used as the basis of the monetary system. If gold, for 
 instance, is chosen for this purpose, silver, as well as nickel and 
 copper. and the various forms of paper currency, occupies but a sub- 
 sidiary position in the system. There is restricted coinage of silver 
 and the bullion content is of less value than the coined money. 
 
 Under bimetallism, or a double standard, two metals are made the 
 basis of the system. Both are freely accepted at the mints, and they 
 are coined at a given legal ratio, adjusted as nearly as may be to the 
 current market ratio of the two metals in the form of bullion. 
 
 With the parallel standard, the two metals are freely accepted at 
 the mints, but are not coined as dollars or sovereigns at a given legal 
 ratio of weights. Under bimetallism one ounce of gold when coined 
 equals in value, say, sixteen ounces of silver; and individuals are 
 expected to exchange them at that precise ratio regardless of their 
 relative bullion values. With the parallel standard, on the other hand, 
 the pieces of money are coined merely as so many ounces or pounds 
 of metal; and no legal ratio is laid down. They pass legally only at 
 their market ratio as it is adjusted from time to time by the play of 
 economic forces. 
 
 A limping standard is not a true standard, but rather a temporary 
 j)hcnomenon found in the process of transition from bimetallism to 
 monometallism. With such a standard, only one metal enjoys free 
 coinage; but the second retains full legal-tender power and is per- 
 haps not directly redeemable in gold. It is also usually called a 
 standard from force of habit. 
 
 A kind of limping standard known as the gold-exchange standard 
 has been developed in recent years. By means of the gold exchange,
 
 100 PRINCIPLES OF MONEY AND BANKING 
 
 countries which are not on a strictly gold basis are nevertheless enabled 
 to keep their currency at suljstantial parity with gold in other coun- 
 tries. This is accomplished by means of redemption in foreign 
 exchange. The government or its agents, while not redeeming its 
 currency in gold, redeems it in orders on gold abroad. When there 
 is a demand for redemption of silver the government sells bills of 
 exchange on London or New York at a stated price in gold. The 
 silver received from the sale of exchange is withdrawn from circulation 
 until demand for redemption ceases. It will be observed that this 
 system is one of indirect redemption of silver. 
 
 Another form of standard is that of irredeemable paper. In one 
 sense this is obviously a single standard; but it differs from mono- 
 metallism in that the currency material is not a commodity having a 
 value independent of its monetary use, as in the case of the precious 
 metals. With irredeemable paper money the paper is issued by the 
 government and declared to be the standard of value. It is made 
 legal tender in payment of debts and is receivable by the government 
 in all obligations due from individuals. It is supposed to get its 
 value either from the "fiat" of the state which issues it, or by means 
 of a monopolistic limitation of the supply. 
 
 An irredeemable paper standard entirely independent of other 
 standards has seldom been tried. Paper money is usually bovmd up in 
 one way or another with other forms of money, being used merely 
 as a medium of exchange, with metals as the money of account, or 
 being only temporarily irredeemable, that is, at some future time 
 convertible into specie. 
 
 The multiple standard is a device calculated to produce an unvary- 
 ing standard of deferred payments, and has no reference to the medium 
 of exchange. The prices of a large list of representative commodities 
 are combined for a given year or period of years into a base or index 
 number, loo. This represents the purchasing power of money at 
 the given time. Each year or month or week thereafter the new prices 
 of these commodities are averaged and the variation from the base 
 number, loo, indicates the changes in the purchasing power of money 
 that have occurred. If the index number becomes no, then $iio 
 must be returned by a debtor for every Sioo that had been con- 
 tracted when the base was loo. If the index number becomes 95, 
 then similarly only $95 need be paid by a debtor. In this way the 
 inequalities resulting from a fluctuating standard would be eliminated.
 
 THE STANDARD QUESTION: BIMETALLISM loi 
 
 6i. THE VALUE OF ST.\KDAIID MONEY 
 
 When a given commodity is chosen as a common denominator 
 of value its function is to serve as a means of comparing the exchange 
 ratios of commodities in general. Thus the relative values of wheat 
 and corn are expressed by comparing each separately with the money 
 of account. If a bushel of wheat exchanges for one dollar in standard 
 gold, and a bushel of com for one-half dollar, the ratio of wheat to 
 corn is found to be two to one. The foregoing process, however, 
 obviously first involves a direct comparison of each commodity with 
 money; and since the standard itself is a commodity, this first value 
 relation, or price, as it is called, is a result of the general conditions 
 of demand and supply as affecting the standard on the one hand and 
 the commodity to be compared with it on the other. 
 
 When a commodity is chosen as a standard for deferred payments 
 we have a similar comparison of goods with the standard, but with a 
 time element introduced. It is in connection with deferred payments, 
 moreover, that the standard controversies have mainly arisen. 
 
 Since gold serves as a common denominator of value and a stand- 
 ard of deferred payments, it is important that one understand the 
 forces regulating its value. The supply of gold is obviously influenced 
 directly by the conditions of production at the mines. The discovery 
 of a bonanza mine tends to depress the value of gold as a standard 
 through increasing its supply; and the exhaustion of a rich vein of 
 ore would conversely tend to raise the value of the standard through 
 decreasing the supply. 
 
 Changes in the cost of producing gold have not in the past had 
 much effect upon the quantity produced, owing to the speculative 
 character of gold mining. It has been stated that the cost of produ- 
 cing gold has probably on the whole exceeded its value, and that the 
 losses sustained by the many who search in vain have outweighed 
 the gains of the fortunate few. In recent years, however, with the 
 rapid disappearance of placer mining and the necessity of providing 
 an ex-pensive equipment for extracting gold ore, the cost of production 
 has come to be carefully considered. There are marginal mines where 
 it barely pays to take out the gold, just as there are marginal 
 farms and marginal factories. It is doubtless true, however, that the 
 lure of the yellow metal will indefinitely continue to play its part in 
 the production of gold, and thus render a portion of the supply 
 dependent upon chance.
 
 I02 PRINCIPLES OF MONEY AN[> NANKING 
 
 Gold differs from other commodities, also, in that the supply at 
 any given time is not merely the output of a previous year's mining 
 operations; it is a stock that has been accumulated through centuries 
 of production. Gold is a highly durable commodity, and as a result 
 the world's supply becomes larger each year, even though the annual 
 production may be rapidly decreasing. The greater part of all the 
 gold mined since 1850 is still in existence and performing service 
 quite as though it were fresh from the mines of the Klondike. The 
 result of this accumulated world's supply is to render any yearly 
 change in output less and less effective in influencing the value. 
 Pouring a cup of water in a large tank has but slight effect 
 upon the level of the water in the tank. Similarly the discharging 
 of a $10,000,000 increased output of gold into a total world's supply 
 of eight or nine billions can have but little effect upon the value of the 
 whole if other factors remain unchanged. A great increase extended 
 over a number of years may, however, obviously have a substantial 
 effect upon the value of the standard metal. 
 
 The demand for gold is twofold: for use as a commodity in the 
 manufacturing and industrial arts, and for employment as a medium 
 of exchange and as a basis of monetary systems. The demand for 
 gold as a commodity is, of course, subject to the same general con- 
 ditions as the demand for any other commodity. It has utility 
 in the satisfaction of human desires, and this utility is affected 
 by degree of scarcity, change of customs, possibility of substi- 
 tuting other commodities, etc., in the same way that the utility 
 of other commodities is affected. For monetary uses, however, the 
 demand for money is sometimes said to be unlimited where free 
 coinage exists. Since all the gold produced may be taken to the 
 mints and converted into dollars or sovereigns, it would seem that 
 there is a permanent and unchanging demand. This view, however, 
 overlooks the intensity of demand. It is true that monetary systems 
 will absorb the entire quantity of gold offered; and it is true that the 
 number of grains put in a dollar may remain unchanged. But if the 
 supply is greatly increased, the purchasing power of gold may never- 
 theless be lessened. Almost any quantity of wheat would be demanded, 
 at some price, but a doubling of the total supply would substantially 
 lessen the exchange value of a given bushel. It is precisely similar 
 in the case of gold. 
 
 An increase in the monetary demand for gold would be caused 
 by the giving up of silver as a standard metal in leading countries;
 
 THE STANDARD QUESTION: BIMETALLISM 103 
 
 by an increased use of gold as a medium of exchange; by an increase 
 in the quantity of gold required as reserve for substitute forms of 
 money; by an expansion of commerce and trade; or by a less 
 effective use of gold through poor organization of credit. A decrease 
 in the monetary demand for gold would result from opposite causes. 
 
 62. THE POPULAR CONCEPTIOX OF A "DOLLAR"' 
 By SIMON NEWCOMB 
 
 So far as intellectual conceptions go, it ought to be perfectly 
 obvious that calling a piece of metal, or a piece of paper, one dollar 
 no more gives it value than calling a ruler one foot gives it length. 
 It should be just as easy to suppose two different kinds of dollars, say 
 a piece of silver and a piece of gold, both declared equal dollars by 
 act of Congress, to have different actual values, as to conceive of 
 two scales, made in different parts of the country, and both declared 
 legal yards, having different lengths. As a matter of fact, however, 
 the conception is not so easy when applied to any concrete case. 
 The quality of length is evident to the senses, and the conception of 
 this quality can be gained by simply looking at an object. The qual- 
 ity called value not only evades all examination by the senses, but its 
 very conception is so abstract and difficult that the ablest economists 
 are not yet fully agreed as to its statement. Little wonder, then, if 
 the typical man should feel much satisfaction at being worth twice 
 as many dollars this year as he was last, even if the dollars themselves 
 are worth only half as much, or feel impoverished by a great reduction 
 of his money values, though he could still command as many of the 
 utilities of life as he could before. 
 
 63. THE "SCIENTIFIC" ARGUMENT FOR BIMETALLISM' 
 By FRANCIS A. WALKER 
 
 The first advantage possessed by bimetallism is that two metals 
 constitute a better money than either metal by itself could be. The 
 mining of the precious metals has in all ages been a work of highly 
 spasmodic and often intermittent activity. Moreover, each metal 
 has its peculiar sources and conditions of supply. The bimetallist, 
 therefore, argues that it is reasonable to anticipate that the variations 
 in production of the one will, in a degree greater or less, offset those 
 
 'Adapted from "Has the Standard Gold Dollar Appreciated?" Journal of 
 Political Economy, September, 1893, PP- 503~4- 
 
 ' Adapted from Money, Trade and Industry, pp. 157-58. (Henrv Holt & Co., 
 1889.)
 
 I04 PRINCIPLES OF MONEY AND BANKING 
 
 of the other. They will not be likely to fall off in their yield at the 
 same time and to the same amount. It would be too much to expect 
 that the maximum production of one would coincide with the mini- 
 mum production of the other. But the irregularities of mining for- 
 tune could scarcely fail to secure a more equable yield of the two metals 
 taken together than of one separately. 
 
 This contention, moreover, is fully borne out by the facts of 
 production during the present century. 
 
 On this point the monometallist alleges that gold and silver, 
 having their separate sources and conditions of supply, are likely 
 to be produced irregularly as compared with each other; that now 
 gold and now silver will be yielded in excess; that, consequently, 
 their relative values must fluctuate greatly, and that a concurrent 
 circulation of the two is not possible. 
 
 The bimetallist rejoins that the considerations alleged show how 
 illy either metal alone is fitted for its office as a standard of deferred 
 payments, and establish the great utility of so uniting them in the 
 monetary function that the irregularities of the production of one may 
 be in some degree at least offset by those of the other. 
 
 The second advantage which the bimetallists claim for their sys- 
 tem is that, by the establishment of a normal price for each of the 
 two metals thus joined in the money ofl&ce, a normal price of gold 
 in terms of silver, a normal price of silver in terms of gold, a par-of- 
 exchange is created and sustained between the nations using gold 
 and the nations using silver. The natural consequence of this the 
 bimetallists claim to be of vast importance to the trade and produc- 
 tion of the world. A nearly stable monetary relation, a proper 
 par-of-exchange, is established between the portions of the world 
 using silver and the portions using gold. The merchant of a silver 
 country exporting his goods to a gold country can always compute 
 precisely or approximately what the gold he obtains by the sale of 
 his merchandise will be worth in silver. He can thus make his 
 arrangements for business, and his contracts for labor and material, 
 with confidence. In the same way the merchant in a gold country, 
 exporting his goods to a silver country, runs no risk of loss through 
 fluctuation in the comparative value of the metals, in which he buys 
 and in which he sells, respectively. The two have a nearly fixed 
 relation, and can thus, with but a small margin, if any, be rendered 
 into each other for the purpose of international exchange. The 
 gain to commerce and, through commerce, to industry, resulting 
 herefrom is asserted by the bimetallist to be very great.
 
 THE STANDARD QUESTION: BIMETALLISM 
 
 105 
 
 64. COMMERCIAL RATIO OF GOLD AND SILVER SINCE 1687' 
 
 Year 
 687 
 690 
 
 69s 
 700 
 
 710 
 712 
 
 720 
 
 725 
 730 
 735 
 740 
 
 745 
 750 
 755 
 760 
 
 765 
 770 
 
 775 
 780 
 
 785 
 790 
 
 795 
 800 
 801 
 802 
 803 
 804 
 805 
 806 
 807 
 808 
 809 
 810 
 811 
 812 
 
 813 
 814 
 
 815 
 816 
 817 
 818 
 819 
 820 
 821 
 
 Ratio Y 
 
 14.94 I 
 
 15 
 
 02 I 
 
 15 
 
 02 I 
 
 14 
 
 81 I 
 
 15 
 
 II I 
 
 15 
 
 22 I 
 
 18 
 
 31 I 
 
 15 
 
 II I 
 
 15 
 
 04 I 
 
 15 
 
 II I 
 
 14 
 
 81 I 
 
 15 
 
 41 I 
 
 14 
 
 94 I 
 
 14 
 
 98 I 
 
 14 
 
 55 I 
 
 14 
 
 68 I 
 
 14 
 
 14 I 
 
 14 
 
 83 I 
 
 14 
 
 62 I 
 
 14 
 
 72 I 
 
 14 
 
 72 I 
 
 14 
 
 92 I 
 
 15 
 
 04 I 
 
 15 
 
 55 I 
 
 15 
 
 68 I 
 
 15 
 
 46 I 
 
 15 
 
 26 I 
 
 15 
 
 41 I 
 
 15 
 
 41 I 
 
 15 
 
 79 I 
 
 15 
 
 52 1 
 
 15 
 
 43 I 
 
 16 
 
 08 I 
 
 15 
 
 96 I 
 
 15 
 
 77 I 
 
 15 
 
 53 I 
 
 16 
 
 II I 
 
 16 
 
 25 I 
 
 15 
 
 04 I 
 
 15 
 
 26 I 
 
 15 
 
 28 I 
 
 15 
 
 II I 
 
 IS 
 
 35 I 
 
 15 
 
 33 I 
 
 15 
 
 62 I 
 
 15 
 
 95 I 
 
 Year 
 
 1822 
 
 1823 
 
 1824 
 
 182s 
 
 1826 
 
 1827 
 
 1828 
 
 1829 
 
 1830 
 
 1831 
 
 1832 
 
 1833 
 
 1834 
 
 1835 
 
 1836 
 
 1837 
 1838 
 
 1839 
 1840 
 1841 
 1842 
 1843 
 1844 
 1845 
 1846 
 
 1847 
 1848 
 
 1849 
 1850 
 1851 
 1852 
 1853 
 1854 
 1855 
 1856 
 
 1857 
 1858 
 
 1859 
 1S60 
 
 1 86 1 
 1862 
 1863 
 1864 
 1865 
 1866 
 1867 
 
 Ratio '5 
 
 15.80 I 
 
 15 
 
 84 I 
 
 15 
 
 82 I 
 
 15 
 
 70 I 
 
 15 
 
 76 I 
 
 15 
 
 74 I 
 
 15 
 
 78 I 
 
 15 
 
 78 I 
 
 15 
 
 82 I 
 
 15 
 
 72 I 
 
 15 
 
 73 I 
 
 15 
 
 93 I 
 
 15 
 
 73 I 
 
 15 
 
 80 I 
 
 15 
 
 72 I 
 
 15 
 
 83 I 
 
 15 
 
 85 I 
 
 15 
 
 62 I 
 
 15 
 
 62 I 
 
 15 
 
 70 I 
 
 14 
 
 87 I 
 
 15 
 
 93 I 
 
 15 
 
 85 I 
 
 15 
 
 92 I 
 
 15 
 
 90 I 
 
 15 
 
 80 I 
 
 15 
 
 85 I 
 
 15 
 
 78 I 
 
 15 
 
 70 I 
 
 15 
 
 46 I 
 
 15 
 
 59 I 
 
 15 
 
 33 I 
 
 15 
 
 33 I 
 
 15 
 
 38 I 
 
 15 
 
 3S I 
 
 15 
 
 27 I 
 
 15 
 
 38 I 
 
 15 
 
 19 I 
 
 15 
 
 29 I 
 
 15 
 
 50 I 
 
 15 
 
 35 I 
 
 15 
 
 37 I 
 
 15 
 
 37 I 
 
 15 
 
 44 I 
 
 15 
 
 43 I 
 
 15 
 
 57 I 
 
 Year 
 
 868. 
 869. 
 870. 
 871. 
 872. 
 873. 
 874. 
 875. 
 876. 
 
 877. 
 878. 
 
 879. 
 880. 
 881. 
 882. 
 883. 
 884. 
 885. 
 886. 
 887. 
 
 Ratio 
 
 890. 
 891. 
 892. 
 
 893. 
 894. 
 
 895. 
 896. 
 897. 
 898. 
 899. 
 900. 
 
 901 . 
 
 902 . 
 
 903- 
 904. 
 
 905- 
 906 . 
 907. 
 908. 
 909. 
 910. 
 911. 
 912 . 
 913- 
 
 15 
 
 59 
 
 15 
 
 60 
 
 15 
 
 57 
 
 15 
 
 57 
 
 15 
 
 63 
 
 15 
 
 92 
 
 16 
 
 17 
 
 16 
 
 59 
 
 17 
 
 88 
 
 17 
 
 22 
 
 17 
 
 94 
 
 18 
 
 40 
 
 18 
 
 05 
 
 18 
 
 16 
 
 18 
 
 19 
 
 18 
 
 64 
 
 18 
 
 57 
 
 19 
 
 41 
 
 20 
 
 78 
 
 21 
 
 13 
 
 21 
 
 99 
 
 22 
 
 10 
 
 19 
 
 76 
 
 20 
 
 92 
 
 23 
 
 72 
 
 26 
 
 49 
 
 32 
 
 56 
 
 31 
 
 60 
 
 30 
 
 66 
 
 34 
 
 20 
 
 35 
 
 03 
 
 34 
 
 36 
 
 33 
 
 33 
 
 34 
 
 68 
 
 39 
 
 15 
 
 38 
 
 10 
 
 35 
 
 70 
 
 33 
 
 87 
 
 30 
 
 54 
 
 31 
 
 24 
 
 38 
 
 64 
 
 39 
 
 74 
 
 38 
 
 22 
 
 38 
 
 33 
 
 33 
 
 62 
 
 34 
 
 19 
 
 ' Quoted from Annual Report of Director of the Mint, 1914, p. 213.
 
 Io6 PRINCIPLES OF MONEY AND NANKING 
 
 65. REASONS FOR VARIATION IN RELATIVE VALUE OF 
 GOLD AND SILVER' 
 
 By FRANCIS A. WALKER 
 
 It is easy to find reasons for variation in the gold-value of silver 
 and the silver- value of gold. 
 
 1. The precious metals have in a great degree their separate 
 sources and conditions of supply. Silver is generally drawn from 
 deep mines. A very large part of all the gold produced in the history 
 of the world has been drawn from "placers," surface deposits, where 
 the metal lies in fine grains mingled with the sand in the beds of old 
 rivers, or has been derived by the process of hydraulic mining, where 
 the force of water is directed by engineering skill to accomplish the 
 same work in a few hours which in the case of the "placer," or "gulch- 
 gold," has been done by centuries of frost and flood. Hence the 
 production of silver is generally pursued through systematic mining 
 operations. The production of gold is more largely influenced by 
 accidental discoveries. Moreover, owing to its very low affinity 
 for other metals, gold is largely found native, while silver, from the 
 high degree of affinity it exhibits, is generally foimd in ores; so that 
 the problem of its production involves both mechanical and chemical 
 elements. 
 
 It will appear from what has been said that the comparative pro- 
 duction of gold and of silver is likely to be influenced greatly by acci- 
 dental discoveries of deposits, which are likely especially to favor 
 gold production, and to be influenced greatly, also, by the progress 
 of the arts, which is likely especially to favor silver production. 
 Europe and South America have been the great historical silver 
 continents; Asia, Africa, and Australia have chiefly, almost exclu- 
 sively, produced gold. North America is the only continent that 
 has produced the two metals in anything like equal value. First 
 through the Mexican mines it made important contributions to 
 the stock of silver; then the California discoveries constituted it 
 the greatest gold field of the world; and more recently the extensive 
 silver deposits of Nevada have turned the scale of production to the 
 side of the other metal. 
 
 2. The precious metals have, in a certain degree, their separate 
 sources of demand. The uses of gold and silver in the industrial 
 
 'Adapted from Money, Trade and Industry, ^pp. 139-44. (Henry Holt & 
 Co., 1889.)
 
 THE STANDARD QUESTION: BLMETALLISM 107 
 
 arts are widely different. In the ornamental arts the tastes of an 
 age may assign a preference now to one and now to the other. Even 
 in their function as money, gold and silver have not been wholly of 
 common or indifferent use. The habits and traditions of a people and 
 the scale of their exchange transactions may make an ounce of gold, 
 for instance, more desirable for use as money than a certain number of 
 ounces of silver, while among other people that quantity of silver 
 may have a decided preference for the uses of exchange. Practically 
 it is of great consequence that the metal or metals to be employed els 
 money, while possessing high value for a given bulk and weight, 
 should yet be found in quantity sufficient to afford pieces of such 
 purity as to remain bright and clean in circulation, of such size as to 
 be handled and carried about conveniently, in number sufhcient for 
 the needs of the community. It is evident that the number of money 
 pieces will depend upon the spending habits of the people, and that 
 these habits will vary with their social condition, the equality or 
 inequality with which wealth is distributed among the classes of the 
 community, the rapidity of circulation, etc. Copper once formed a 
 considerable part of the monetary circulation of Europe, with the 
 highest advantage to the commercial community. But copper has 
 now dropped out of use as money in all advancing nations except 
 as the smallest of small change. Within the last three hundred years 
 silver has become the ordinary money of the civilized world, and it 
 has already become quite a fashionable doctrine that even silver has 
 in large measure survived its usefulness, and has grown too heaw 
 to serve as the money of communities like those of Europe and 
 North America. However this may be, it is manifest that in the 
 United States, England, and perhaps France, the prevailing rates of 
 wages and prices are such as naturally to create a preference, from 
 considerations of convenience only, for gold, in place of silver, as 
 the money of general circulation. 
 
 We have seen that the so-called precious metals have each their 
 own sources and conditions of supply which are widely different from 
 those of the other, and that they have also, in a certain degree, 
 separate sources of demand. Evidently here is the occasion for large 
 and frequent variations of value in the gold-value of silver and in 
 the silver- value of gold. 
 
 But while this occasion for a divergence in value between tJie pre- 
 cious metals exists, there are causes which serve more or less effectively 
 to restrain that divergence. These are:
 
 Io8 PRINCIPLES OF MONEY AND BANKING 
 
 1. The durability of the metals already noted. We have seen 
 how this property tends to keep the value of gold and silver compara- 
 lively steady, since the great mass at any time in existence allows an 
 excess or deficiency of production for one year, or for a term of years, 
 to exercise but small influence. 
 
 The same cause operates to reduce the extent of the variations 
 in the gold-value of silver and the silver-value of gold. If the crop 
 of corn falls ofif in the same year in which the output of coal is excep- 
 tionally large, we look to see the power of a given quantity of corn 
 to purchase coal largely increased; but a very great increase in the 
 yield of silver coincidently with a considerable reduction in the yield 
 of gold could not seriously affect the relative value of the two metals 
 unless persisted in for a term of years. 
 
 2. The interchangeable use of the two metals in the arts of decora- 
 tion and for the purposes of ornament has a tendency to reduce 
 variations in their relative value. While some of the uses of each 
 metal are characteristic, there is also a wide field occupied by them in 
 common or indifferently. Articles of silver and articles of gold are 
 kept for sale in the same shops; they are sold to customers in the same 
 rank of life. A person entering such a shop often has no explicit 
 intention as to the article he is to purchase. He is more likely to 
 know how much he is prepared to pay for something that will answer 
 his purpose. He may buy a small article of gold, or a large one of 
 silver. A fall in the price of either metal, then, promotes its 
 consumption, and thus the fall is in a degree checked. 
 
 3. The interchangeable use of the two metals as the medium of 
 exchange has a strong tendency to check variations in their relative 
 value. Although, as we say, each has uses in exchange which give 
 it a preference within that field over the other, there is also ground 
 which they occupy in common or indifferently. For payments of a 
 certain class people can use more silver or less silver, more gold or 
 less gold, with no appreciable diminution of convenience. 
 
 66. GRESHAM'S LAW AND BIMETALLISM 
 
 The operation of Gresham's law, as in the case of debased currency, 
 has been the great barrier to a successful bimetallic system. Given 
 two metals with full legal-tender power and unrestricted coinage 
 at the mints at a given ratio, one metal will drive the other from 
 circulation, wholly or in part, whenever the market ratio varies
 
 THE STANDARD QUESTION: BIMETALLISM 109 
 
 from the mint ratio. The opportunity for profit in taking the cheaper 
 metal to the mint will result in the expulsion of the dearer metal 
 just as long as that opportunity continues. It should be carefully 
 noted in this connection that unlimited coinage of both metals is 
 essential to the operation of the law. 
 
 Another essential condition for the operation of Gresham's law 
 under bimetallism is that both metals should have equal legal-tender 
 power in the settlement of obligations. The opportunity to secure 
 the profit obtained by exchanging coins depends upon their being 
 equally acceptable by law. If the less valuable metal can be refused, 
 it is obvious that it has no power to drive out the more valuable 
 money. It is evident from this that an almost instantaneous 
 remedy for the disappearance of the dearer money is the withdrawal 
 of the legal-tender power from the cheaper. 
 
 67. GRESHAM'S LAW QUALIFIED' 
 By ROBERT GIFFEN 
 
 There is a good deal of misunderstanding of the real law as to bad 
 money "driving out" good, and an overrated metal in a bimetallic 
 system "driving out" the underrated metal, which is commonly 
 spoken of as the Gresham law. It is assumed that the money driven 
 out must be physically driven out of the country, i.e., exported, and 
 this export is regarded as a fundamental part of the Gresham law. 
 
 The "law," however, was only an observation that it is difficult, 
 if not impossible, for good and bad coins of the same metal to circu- 
 late together, and the good coins are selected for exportation when a 
 demand for exportation arises. The export is not a necessary part 
 of the "law." 
 
 In point of fact, also, good and bad coins will circulate together 
 in a given country as if they were all good when the circulation itself 
 is not in excess of the demand for it. 
 
 In the case where bad coins drive out good coins of the same metal, 
 the good and bad coins are both doing the same work; so the good are 
 driven out of circulation when there is a surplus because they are more 
 useful for other purposes than the bad, containing more of the metal. 
 When it is a (juestion, however, between two dilTerent metals, the 
 coins of the dilTercnt metals may be performing quite different work. 
 
 ' Adapted from Economic Inquiries and Studies (G. Bell & Sons, London, 
 1904), II, 162-65.
 
 no PRINCIPLES OF MONEY AND BANKING 
 
 The "driving out" process in this last case must consequently be a 
 different one, when it takes place, from what it is in the case of bad 
 versus good coins of the same metal. 
 
 The same with inconvertible paper versus metal. The metal and 
 the paper may be required for different purposes, and so far as that is 
 the case the paper does not drive out the metal from the same cause 
 or in the same way, or proportions, as bad coins drive out good coins 
 of the same metal. Gold is actually used less or more in currency 
 in every country whether gold or silver is the standard, or whether 
 there is a bimetallic standard with silver as the overrated metal; and 
 gold, and sometimes silver, is also used in inconvertible-paper countries 
 in the same way, although the paper is the standard money. 
 
 What is true is that the overrated metal and the inconvertible 
 paper in the cases supposed drive the metal they compete with, the 
 underrated metal, out of circulation as standard money. As there 
 can be only one standard, the overrated metal or the inconvertible 
 paper, as the case may be, becomes the sole standard. But the under- 
 rated metal is not thereby physically driven out of the country' at 
 all. It depends upon circumstances whether it is exported or not 
 and how much the export is. Three things happen (besides export, 
 or the chance of it) : 
 
 1. The underrated metal may be hoarded. This is largely the 
 fact, I believe, in almost all cases of inconvertible paper. There 
 were, no doubt, hoards of gold in England in the inconvertible paper 
 period at the beginning of the century, in the United States during 
 the inconvertible paper regime which began in the Civil War, and 
 later in Italy when it had inconvertible paper; and there have been 
 hoards of gold in Austria, Russia, and the Argentine Republic. 
 
 2. The underrated metal may be used in actual circulation at a 
 market ratio different from the legal ratio. Gold was always used 
 in circulation in France as a monetary merchandise, when silver was 
 the overrated metal, without any difficulty, but at a premium, not 
 at the legal ratio. 
 
 3. Coins of the underrated metal may circulate as a species of 
 token money, either because there has been a heavy seignorage on 
 them, or because they have become worn and deteriorated, so that 
 they occupy the same place, and do the same work, as token coinage 
 of a different metal than the standard does in a monometallic system. 
 This was notably the case in England with the silver coinage before 
 1800. Silver was underrated and gold had become the standard;
 
 THE STANDARD QUESTION: BIMETALLISM in 
 
 but a silver coinage of a very bad description remained, which was 
 used exactly as the silver-token coinage is now used. 
 
 In these three ways, then, coins of an underrated metal in a 
 bimetallic system, and coins of dilTerent metals in an inconvertible 
 paper countr}', may remain physically in a country when they go 
 out of use as standard money, without being actually exported. 
 
 When export does, in fact, take place, it arises from the formation 
 of a surplus of the underrated metal, through changes of circumstances 
 as regards the use of it in the various ways specified. 
 
 68. COMPENSATORY ACTION OF A BIMETALLIC STANDARD' 
 By WILLIAM A. SCOTT 
 
 As a remedy for the variations in the market rate of gold and 
 silver and attendant evils, bimetallists rely upon what has been called 
 the compensatory action of the double standard. This may be 
 described as follows : Suppose that the ratio established between the 
 weights of gold and silver coins of the same nominal value be i6 to i, 
 and that a change in the market for bullion, due to a fall in the value 
 of silver, temporarily makes the actual ratio i8 to i. It will now be 
 profitable for all debtors to pay in silver and sell gold coins as bullion, 
 since for every ounce of gold thus sold they can purchase eighteen 
 oimces of silver, and, by carrying it to the mint for coinage, pay as 
 large a debt or make as large a purchase with sixteen ounces as they 
 could have done with the original ounce of gold, and thus make a 
 clear profit of two ounces of silver on every such transaction. It is 
 not, of course, to be supposed that every person would know enough 
 to take advantage of such a situation, or would take the trouble of 
 going into the exchange business if he did see this chance for profit; 
 but we may be sure that the people already in the business, namely, 
 the bankers, would melt down or ex-port gold coins on as large a 
 scale as possible, and buy silver bullion and take it to the mint for 
 coinage. One result of this procedure would be a large increase in 
 the coinage of silver and a decrease, perhaps a complete stoppage, of the 
 coinage of gold; and a second would be, so say the bimetallists, a large 
 increase in the use of silver for monetary purposes, and a decrease in 
 the use of gold. A change in the relative demand for the two metals 
 would thus be produced which would tend to counteract the effects 
 of the fall in the value of silver and bring the ratio between the two 
 
 ■ Adapted from Money and Banking, pp. 300-303. (Henry Holt & Co., 1910.)
 
 112 PRINCIPLES OF MONEY AND BANKING 
 
 metals on the bullion market back to that established by law for the 
 guidance of the mint; that is, the increase in the use of the one 
 metal and the decrease in the use of the other for monetary purposes 
 would raise the value of the first and lower that of the second, thus 
 tending to bring the two ratios together. A further argument is 
 needed to show that this compensatory action would be sufficient 
 to make the bullion ratio actually identical with the legal, and this 
 the bimetallists find in the enormous quantities of gold and silver 
 used for monetary purposes and in the relatively small capacity of the 
 bullion markets to absorb increased quantities of the precious metals 
 without experiencing great fluctuations in their value. 
 
 On account of this compensatory action of the double standard, 
 the bimetallists claim that, if a sufiicient number of nations could 
 be induced to adopt the bimetallic system of coinage, no variation in 
 the relative value of the precious metals could take place. The 
 general level of prices might rise and fall on account of changes in the 
 relative value of gold and silver and other commodities, but so far 
 as their relations to each other are concerned no change could take 
 place, since any tendency in that direction would be immediately 
 counteracted by a modification in the relation between the demand 
 and the supply of the two metals brought about by the process just 
 described. The above supposition of a difference between the legal 
 and market ratios, therefore, must be regarded as a hypothetical 
 case, useful as an illustration of the way the law operates, but not 
 useful in correspondence with facts as they would present themselves 
 under the bimetallic system. 
 
 The relation between the compensatory law and the alleged 
 evils of monometallism are obvious. The bimetaUic system acts 
 as a check upon fluctuations in the value of both metals, but cannot 
 entirely prevent them. As soon as some external force, such as a 
 discovery of new sources of supply or improvements in the methods 
 of production, begins to affect the value of one of the metals the 
 action of the compensatory law commences and modifies the demand 
 for it in such a way as to counteract the rise in value, if that is the 
 tendency of the movement, or the fall, if the new force is working 
 in that direction; but the maximum result of this counteraction will 
 be to prevent a change in the ratio of the two metals. It cannot go 
 so far as to make the ratio between the demand and the supply of 
 both metals precisely the same as before. For example, suppose that 
 the production of silver for monetary purposes were to increase 25 per
 
 THE STANDARD QUESTION: BIMETALLISM 113 
 
 cent under the bimetallic system; all that is claimed is that the 
 demand for silver for monetary purposes would be increased and that 
 for gold would be decreased to whatever degree might be necessary 
 to prevent a change in that ratio, but that would not mean a 25 per 
 cent change on both sides, which would be required to exactly restore 
 the former ratio of demand to supply. Very likely a i2| per cent 
 increase in the monetary demand for silver and a corresponding 
 decrease in that for gold would be sufficient, in which case both metals 
 would have experienced a considerable fall in value, but not so great 
 a fall as silver would have experienced had no counteracting agency 
 been in operation. If no change had taken place meanwhile in the 
 value of commodities prices would certainly rise, but not in the same 
 degree as in a silver monometallic country under the same circum- 
 stances, and, if both metals had previously been appreciating in their 
 relation to other commodities, this tendency would have been checked 
 and perhaps entirely counteracted. As compared with conditions 
 in a gold monometallic country SHflering from an appreciating stand- 
 ard, the situation would be much better, because the decrease in the 
 demand for gold for monetary purposes might just counterbalance 
 the increasing demand or the decreasing supply which was the cause 
 of its appreciation in the gold-standard country. 
 
 B. History of Bimetallism 
 
 69. SUMMARY STATEMENT OF MODERN MONETARY 
 HISTORY' 
 
 By W. a. SHAW 
 
 Modem monetary history may be divided into three great periods: 
 1252-1492; 1493-1660; 1661 to the present time. The first period 
 marked the rcintroduction of gold into the coinage of Europe. The 
 second period witnessed the discovery of America and the enormous 
 flow of precious metals to Europe. The third period was one of 
 remarkable steadiness of silver production with some changes in 
 gold production until the middle of the nineteenth century, and then 
 one of remarkable increase in tlie volume of both gold and silver. 
 
 The history of the first period shows with unmistakable clearness 
 two simple facts: First, it was a period in which the commercial 
 
 ' Adapted from History of Currency. Summarized from various chapters. 
 (G. P. Putnam's Sons, 1899.)
 
 114 PRINCIPLES OF MONEY AND BANKING 
 
 expanse outstripped the reinforcing supply of the precious metals, 
 with a consequent rise in the value of the precious metals. Second, 
 the evil effects of such a scarcity of the precious metals were enor- 
 mously increased by shortsighted, crafty manipulations of the 
 currency by the European rulers, and by the rough, unscientific 
 system of the prevailing coinage and exchange rates, and by the 
 inability of the age to understand, or even to perceive, the hidden 
 working of Gresham's law. 
 
 The second period was one of widely fluctuating ratios between 
 gold and silver values, and the accompaniment of feverish instability 
 and flux. The ratio averaged by periods is as follows: 
 
 1545-60 II .30 to I 1601-20 12. 25 to I 
 
 1561-80 II- 50 " " 1621-40 14.00 " " 
 
 1581-1600 11,80 " " 1641-60 14.50 " " 
 
 These fluctuations of the ratio varied in different countries and 
 there was endless movement of specie from one country to another 
 under the operation of Gresham's law. The governments of the 
 time constantly endeavored to control this flow by changing the 
 coinage ratios, altering the denomination of the coinage, and diminish- 
 ing the content and reducing the standard of fineness. During the 
 latter part of the period the mercantile theory was primarily responsi- 
 ble for the legislative attempts to control and increase the quantity 
 of money in the various countries. 
 
 The third period first witnessed the practical decline of the mer- 
 cantile theory and its elaborate legislation for the control of the 
 currency supply. By an act of 1663 England took the lead and the 
 statutes forbidding the exportation of bullion were removed at one 
 blow of astounding boldness. The fall of mercantilism and the 
 perception of a right theory of international balances opened the way 
 to highly important results. It separated the currency phenomena 
 from the larger problem of industrial and national power and thus 
 prepared the ground for a scientific conception and treatment of 
 them. This treatment resulted in the evolution of a theory and 
 practice of bimetallism in one direction, and of the theory and prac- 
 tice of monometallism in another direction. Modern currency 
 history has centered around the antagonism of these two systems. 
 Second, this period has witnessed an enormous expansion in the pro- 
 duction of the precious metals, the result of which has been the adop- 
 tion almost universally of gold monometallism.
 
 THE STANDARD QUESTION: BIMETALLISM 115 
 
 70. ENGL.^ND'S EXPERIENCE WITH BIMETALLISM' 
 By SOPHONISBA P. BRECKINRIDGE 
 
 From the time of Henry VIII the value of gold bullion changed 
 rapidly in terms of silver, and although the mint ratios were frequently 
 altered all efforts to retain both metals in circulation failed. In 1604 
 the mint ratio of gold to silver was raised 10 per cent — an increase 
 not great enough, however, to bring gold from countries where it was 
 more highly rated. In 1611-12 an alteration in the same direction, 
 going too far, drove the silver out as the gold came in, causing so 
 great a scarcity of silver that the old laws against exportation were 
 revived and re-enacted. No remedy was found until, by the simple 
 passage of time, in the development then in progress, the market 
 value of gold in terms of silver overtook and soon passed the mint 
 value of that metal. 
 
 Again in 1662-63 there was an alteration in the gold coins, caused 
 by the market value of the gold in terms of silver creeping past the 
 mint value. Finally, the whole question of coinage was taken up 
 by William in 1695, who threw upon Parliament the responsibility 
 of finding a remedy. It was proposed that the same remedy be 
 applied that had been employed by Edward I four centuries before; 
 that is, that the legal be adapted to the actual value of the coins; 
 but this proposition was rejected, and the great recoinage of the silver 
 of the realm was carried out in the years 1695-98, leaving the silver 
 coins unchanged. 
 
 The provision for the recoinage of silver caused the gold coins to 
 fall in value relatively to silver, and it was resolved by the House of 
 Commons that they should not pass at a value higher than 285., 
 which value was soon reduced to 265. On the basis of this resolution 
 an act was passed imposing a penalty on anyone who should receive 
 or pay the twenty-shilling piece at a higher rate than 265. This, by 
 another act of the same session, was reduced to 225. In 1698 their 
 price had fallen to 21s. 6d., at which rate they were taken by the 
 officers of the revenue. This rating of the gold coin was not, however, 
 such as to prevent the exportation of silver, and in 17 17 the legal 
 value of the guinea was reduced to 21s. 
 
 Even this estimate of gold in terms of silver was still too high, 
 however, to bring siKer into circulation, and during the century it 
 
 ■ Adapted from Legal Tender, pp. 43-4f>- (I'hc University of Chicago Press, 
 1903)
 
 Il6 PRINCIPLES OF MONEY AND BANKING 
 
 remained so scarce that gold became the customary medium of 
 exchange and the true standard of payments. In 1774 this state 
 of facts was recognized by legislation, and the legal-tender power of 
 silver coin was limited to £25 in any one payment, an excess of that 
 amount being paid by weight at the rate of 35. 2d. to the ounce. This 
 act, the duration of which was for two years, was in 1776 renewed for 
 another period of the same length. In 1778 it was extended to 1783, 
 when it was allowed to expire. In 1798 it was again revived, and 
 continued until 1816, when the silver coins were reduced in weight 
 and given the position of representative coins having a limited legal- 
 tender power. By this act gold was declared to be the standard coin 
 of the realm; the silver pound was to be divided into shillings weigh- 
 in^g ^lix grains, and it was decreed that silver coins should be con- 
 sidered representative coins, legal tender to the value of two guineas 
 only.
 
 THE STANDARD QUESTION: BIMETALLISM 
 
 117 
 
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 Il8 PRINCIPLES OF MONEY AND BANKING 
 
 72. THE ADOPTION OF THE GOLD STANDARD BY LEADING 
 
 NATIONS 
 
 National bimetallism has been tested by the experience of practi- 
 cally every modern commercial nation. England was the first country 
 to give up the double standard, resorting to a monometallic system in 
 1816. For an indefmite period England had suffered from the evils 
 of a fluctuating standard. During the eighteenth century the only 
 silver coins remaining in circulation were those which had been much 
 reduced in weight by fraudulent clipping; all the rest had been 
 driven out by the cheaper gold coins. 
 
 The kingdom of Portugal next adopted the single gold standard 
 in 1854. In the year 1857 the states composing the German Zollverein 
 and the empire of Austria entered into a monetary treaty by which 
 they adopted the single silver standard. The treaty provided, how- 
 ever, that any of the contracting states might mint gold coins to cir- 
 culate at their market value. It was expressly stipulated that these 
 should not be legal tender, though they might be received at the 
 public treasuries at rates to be fixed by the respective governments 
 at least once every six months. 
 
 Shortly after the establishment of the German Empire in 187 1 
 the single gold standard was adopted in Germany. Silver was 
 made a subsidiary currency, and in 1873 was completely demonetized. 
 
 The states composing the Latin Monetary Union, which had been 
 formed in 1865 in an endeavor to secure a uniform international double 
 standard, one by one practically went over to the single gold standard 
 in the decade of the seventies. In 1873 France limited the coinage 
 of silver on individual account. In the same year Belgium first 
 limited and then entirely suspended the coinage of silver. Early in 
 1874 the Union itself limited the amount of silver that might be 
 coined each year by each of the countries of the Union ; within three 
 years each state had entirely ceased to coin silver and the demone- 
 tization was practically complete. 
 
 In 1873 the United States in revising her coinage system omitted 
 the standard silver dollar from the list of coins that might be struck 
 at the mint, and thus became a single gold standard country. This 
 law was modified, however, and for many years there was a limited 
 coinage of silver. 
 
 In 1873 the Scandinavian Monetary Union was formed by 
 Norway, Sweden, and Denmark, and a single gold standard was 
 adopted. In 1874 silver was entirely demonetized.
 
 THE STANDARD QUESTION: BIMETALLISM iig 
 
 In 1873 Holland limited ihe coinage of silver and two years later 
 adopted a single gold standard. Si>ain began the restriction of silver 
 money in 1876 and completed the process in 1878. In 1876 Russia 
 suspended the coinage of silver for individuals, except as required for 
 trade with China. Finland adopted the single gold standard in 1877, 
 and in 1878 Austria-Hungary abolished the free coinage of silver. 
 
 In 1893 after long agitation the mints of India were closed to the 
 free coinage of silver. In 1898 Japan definitely adopted the single 
 gold standard. The following year Russia completed the change 
 begun in 1876 and adopted the gold standard. In 1900 the United 
 States definitely settled the standard controversy that had raged for 
 over twenty years by the enactment of a gold standard law. Prac- 
 tically all of the small states of the world have also in recent years 
 adopted either the single gold standard basis or the gold exchange 
 standard, a variation on the principle of the single gold standard. 
 
 C. Bimetallism in the United States until 1873 
 
 73. THE ADOPTION OF A MONETARY SYSTEM BY THE 
 UNITED STATES' 
 
 By a. BARTON HEPBURN 
 
 Alexander Hamilton was the first Secretary of the Treasury, and 
 soon after organizing the department set himself the task of establish- 
 ing a comprehensive federal monetary system. He first took up the 
 question of the public debt, then the establishment of a banking 
 system, and on January 21, 1791, presented to Congress his justly 
 celebrated report on the establishment of a mint and a coinage system 
 for the United States. 
 
 He examined this comprehensive subject in all its aspects and 
 ramifications, presenting the facts and arguments bearing upon both 
 sides of each question, and after careful analysis reached the following 
 conclusions: 
 
 I. That the dollar, because it had been in actual use as the measure 
 of values in practically all of the states, was the most suitable unit 
 for the proposed system; that it was of the utmost importance to 
 define as exactly as possible just what the dollar was, in order that 
 neither debtors nor creditors might be injuriously affected. The 
 
 ■ Adapted from Contest for Sound Money, pp. 20-22. (The Macmillan Co., 
 1903.)
 
 I20 PRINCIPLES OF MONEY AND BANKING 
 
 dollars in existence varied considerably, Spain having degraded or 
 changed the standard at different times. He therefore recommended 
 a dollar containing 371.25 grains of pure silver, as best expressing 
 the actual average value of the coin in use. 
 
 2. That the decimal system was of demonstrated superiority 
 over the duodecimal of Great Britain. 
 
 3. That inasmuch as the undervaluation of either metal would 
 cause its exportation, thus shifting the standard to the other, which 
 might result injuriously, and since it was very desirable to have coins 
 of both metals in actual use, the ratio should conform as nearly as 
 possible to the commercial ratio, rather than follow any specific 
 European precedent. He therefore recommended the ratio of 15 to i. 
 
 4. That the silver dollar was the equivalent of 24.75 grains of 
 gold, and therefore a gold dollar containing that quantity of metal be 
 also provided for, in order that there might be a unit coin in each metal. 
 
 5. That the fineness of the coins should be eleven-twelfths or 
 9i6f, corresponding with the British standard of fineness for gold; 
 the alloys being for gold coins, silver and copper; for silver coins, 
 copper only. 
 
 6. That no mint charge should be imposed upon the bullion 
 brought for coinage, the cost thereof being properly a general charge 
 rather than one to be imposed upon specific individuals, and to impose 
 a charge might influence prices in international relations, being in 
 effect a reduction of the standard of the coin, as compared with the 
 bullion. 
 
 7. That foreign coins should be permitted to circulate for one 
 year, that thereafter certain foreign pieces might be tolerated for 
 another year or two; anticipating that the mint would be prepared 
 to provide all the coin needed, he concluded that after three years 
 the use of foreign coins should be prohibited. 
 
 On April 2, 1792, these recommendations, with two exceptions, 
 were enacted into law. Congress refused to provide for a gold dollar, 
 and altered the fineness of the silver coins by substituting a fraction 
 resulting in .89243 fine. In all other particulars the law was prac- 
 tically an enactment of Hamilton's own language into statute. 
 
 74. EFFECTS OF THE CHANGING RATIO— 1 792-1834 
 
 The operation of Gresham's law must be comparatively slow in a 
 new and sparsely settled country possessing but a scanty supply of 
 the precious metals. It appears, however, tliat by 1810 at the latest
 
 THE STANDARD QUESTION: BIMETALLISM 121 
 
 golf' coin was being driven out of circulation; while by 18 18 there was 
 scarcely any gold to be seen. During the war from 1812 to 1815 and 
 until the resumption of specie pa}-ments in 1818 the process of gold 
 expulsion was greatly accelerated by the heavy issues of depreciated 
 bank currency. In 1818 it was officially recognized that Hamilton's 
 ratio of 15 to i differed so widely from the current market ratio 
 between gold and silver that if a double standard were in fact to be 
 maintained a new legal ratio must be established. In November of 
 that year a committee was appointed by the House, with Lowndes 
 as chairman, for the purpose of investigating the currency. 
 
 The Lowndes Report on the history of the currency and the 
 state of the coinage, made early in 18 19, was a comprehensive and 
 able study. The report recommended a new ratio of 15.6 to i. 
 The death of Lowndes in 1822 and the consequent loss of his advo- 
 cacy of a change, coupled with the conservatism of Congress, resulted 
 in a postponement of action for nearly twenty years. Indeed, it was 
 not until a combination of special interests having something to gain 
 by a change in the ratio came to the support of the advocates of a 
 new ratio that Congress could be induced to pass a law on the 
 subject. 
 
 During this period an interesting example of the operation of 
 Gresham's law was observed. There were many Spanish silver 
 dollars in circulation in the United States, which were full legal 
 tender. To quote Professor Scott, "Since they contained more silver 
 than the corresponding coins of the United States, they were hoarded 
 by bankers and money-changers or sent to the mint for recoinage, 
 and, since both coins passed at their face value among the people 
 generally, a profitable trade was carried on by sending our silver 
 dollars to the West Indies and transporting hitlier the heavier Spanish 
 coins. On this account the coinage of silver dollars was suspended 
 in 1805, but the traffic still continued to be carried on with our 
 smaller coins. The result was that only worn and clipped foreign 
 silver coins were in actual circulation, and there was a great dearth 
 of the kind of money needed for ordinary transactions." 
 
 k
 
 122 PRINCIPLES OF MONEY AND HANKING 
 
 75- COINAGE BETWEEN 1792 AND 1835' 
 
 Years 
 
 Total Gold 
 
 Silver Dollars 
 
 Fractional Silver 
 
 1792-1795 
 
 $ 71,485.00 
 942,805.00 
 
 1,533,267.50 
 1,717,475 00 
 1,345.925 00 
 1,820,585.00 
 600,315.00 
 1,302,777.50 
 8,631,700.00 
 
 $ 204,791.00 
 
 1,052,667.00 
 
 182,059.00 
 
 $ 165,892.80 
 
 17,103.95 
 
 287,889.00 
 
 3,099,217.25 
 
 2,622,316.60 
 
 3,348,494 -45 
 
 5,844,178.95 
 
 10,936,868.00 
 
 15,371,605.00 
 
 1796-1800 
 
 1801-1805 
 
 1806-1810 
 
 1811-1815 
 
 
 1816-1820 
 
 1821-1825 
 
 
 1826-1830 
 
 
 1831-1835 
 
 
 
 
 76. THE ACT OF 1834 
 
 It was not until 1834 that the legal ratio of silver and gold was 
 changed in an endeavor to bring it into accord with the market 
 ratio. It appears that private interest alone was strong enough to 
 induce a Congress to act in the matter. As Raguet says: "We 
 should possibly have for many years remained in that situation, had 
 it not been for a fresh occurrence by which fancied private interest 
 was brought to bear upon Congress. That occurrence was the dis- 
 covery of gold in North Carolina and other Southern States 
 
 This gradually increasing production of gold in the South engendered 
 precisely the same spirit as the increased production of iron had done 
 in the North. The owners of the gold mines cried out for legislative 
 protection, as the owners of the iron mines had previously done, and 
 laws were soHcited to enable the former to get more for their gold, or 
 rather for the rent of their land, than they could otherwise have 
 obtained." The market ratio at the time was 15.6 to i. These 
 people for obvious reasons preferred a ratio of 16 to i. 
 
 Politics also appears to have played its part in the passage of 
 the measure. Congressman White, who had earlier presented an 
 extensive report urging a ratio of 15.6 to i, now championed 16 to i, 
 possibly because he believed in a single standard rather than in 
 bimetallism and felt that gold would be the more desirable standard. 
 The hot political fight over the question of rechartering the Second 
 Bank of the United States necessitated a counter-monetary issue, 
 and the antibank men seized upon gold currency as an effective battle 
 cry. In the congressional debates there is ample evidence to show 
 
 ' Adapted from Hepburn, Contest for Sound Money, p. S3- (The Macmillan 
 Co., 1903.)
 
 THE STANDARD QUESTION: BIMETALLISM 
 
 123 
 
 that Congress was aware that so great a change would inevitably 
 drive silver out of circulation and give us in fact a single gold 
 standard. 
 
 77. COINAGE AND EXPORTS AND IMPORTS OF PRECIOUS 
 METAXS, 1836-60' 
 
 COINAGE 
 
 Years 
 
 Total Gold 
 
 Silver Dollars 
 
 Fractional Silver 
 
 1836-1840 
 
 $ 10,146,100.00 
 
 20,214,180.00 
 
 69,001,515.00 
 
 214,142,519.00 
 
 130,264,446.00 
 
 $ 62,305 
 
 567,218 
 
 435,450 
 
 107,650 
 
 1,527,930 
 
 $11,909,529.60 
 10,841,782.00 
 10,518,680.00 
 22,864,243.00 
 23,132,280.00 
 
 184.I-184'; 
 
 1846— 1850 
 
 i8i;i-i8';; 
 
 I856-I860 
 
 
 EXPORTS AND IMPORTS 
 
 
 Years 
 
 Exports 
 
 Imports 
 
 
 Gold 
 
 Silver 
 
 Gold 
 
 Silver 
 
 1836- 
 
 I84I- 
 1846- 
 1851- 
 1856- 
 
 -1840 
 
 -1845 
 
 -1850 
 
 -1855 
 
 -i860 
 
 $ 13,578,435 
 
 10,724,258 
 
 20,695,177 
 
 184,017,429 
 
 279,790,526 
 
 $17,423,953 
 19,705,113 
 
 13,886,373 
 13,145,180 
 18,158,678 
 
 $25,588,296 
 
 21,525,334 
 31,739,452 
 13,960,026 
 23,845,192 
 
 $30,554,104 
 19,771,321 
 13,799,885 
 11,799.057 
 28,083,659 
 
 78. THE ACT OF 1853 AND SUBSIDIARY SILVER 
 
 Until 1853 the weight of two half-dollars, four quarters, etc., 
 was exactly equal to one dollar. In consequence, when gold came 
 into circulation after 1834, not only the silver dollar, but subsidiary 
 silver coins as well, were driven from circulation. Especially after 
 the great fall in the value of gold following the discovery of the 
 California gold mines in 1849 the country was greatly embarrassed 
 for want of small change. The act of 1853, while not attempting 
 to bring the silver dollar back into circulation by changing the ratio, 
 essayed to remedy the situation so far as subsidiary silver coins 
 were concerned. The act reduced the number of grains of pure 
 silver in fractional coins from 371.25 to 345.6, or 6.91 per cent. 
 Since the silver dollar was worth about i .04 in gold, there no longer 
 remained any profit in molting fractional silver pieces, or in with- 
 drawing them from circulation. 
 
 • From Hepburn, Contest for Soutid Money, p. 50. (The Macmillan Co., 1903.)
 
 124 PRINCIPLES OF MONEY AND BANKING 
 
 This reduction in weight of the fractional silver pieces, however, 
 necessitated the adoption of a numl^er of other provisions in order 
 to prevent these subsidiary silver pieces from driving gold out of 
 circulation and otherwise disarranging the currency. The principles 
 adopted in tiiis connection have come to be known as the laws of 
 token money. 
 
 79. LAWS OF TOKEN OR SUBSIDIARY METALLIC MONEY' 
 
 As now understood and practiced, a correct system of token money 
 would conform to the following principles: 
 
 1. Such a reduction in weight and value below the standard unit 
 as would prevent exportation and yet not place a premium on counter- 
 feiting. 
 
 2. Coinage only on government account; that is, no free coinage. 
 
 3. Limited legal-tender power. 
 
 4. Protection against excessive quantity by direct redemption 
 on presentation in proper amounts, which also maintains its face value. 
 
 As a matter of course, countries have not always had clear con- 
 ceptions regarding this kind of money, so that the principles just 
 enumerated have come forth only by a process of evolution out of 
 experience. In the United States the first rule was not observed until 
 i853) when our subsidiary coins were reduced to 345.6 grains of pure 
 silver for two halves, four c^uarters, or ten dimes. This reduction 
 in weight by about 7 per cent kept the bullion value of the token 
 coins below that of both the gold and silver dollars and they circu- 
 lated freely. They were worth more as small change than as bullion. 
 
 As regards the second law, it is evident that if coins are issued at 
 a value above the cost of the bullion in them, the issuer gains this 
 profit, or seignorage. Hence the coinage should not be allowed to a 
 private person but should be restricted to the state, to which the 
 profits should accrue. This is all the more necessary if the duty is 
 laid upon the state to redeem the coins upon demand. 
 
 The reason for the third law is obvious. The standard coins being 
 ordinarily issued only in multiples of a unit, there must frequently 
 be fractional sums represented in a debt; and the same considerations 
 which demand that the kind of money to satisfy the major part of 
 the debt shall be clearly defined in law also requires that some 
 met,hod of legally satisfying the fractional portions should be indicated. 
 
 ' Adapted from Report of the Monetary Commission of the Indianapolis Con- 
 vention (1898), pp. 113-16.
 
 THE STANDARD QUESTION: BIMET.VLLIS-M 125 
 
 Consequently the token coins are made legal tender for this purpose. 
 On the other hand, a payment of a debt in large amounts of over- 
 valued coins, these being of small denominations and hence heav}^ and 
 cumbrous in large sums, would be a serious inconvenience. If, there- 
 fore, the legal-tender quality conferred on token coins were unlimited, 
 the power might be abused by a captious debtor, who might insist 
 on making some large payments in these coins for the purpose of 
 annoying the creditor. Minor and subsidiary coins have usually 
 been made a legal tender, therefore, only to limited amounts. In 
 1853 subsidiary silver coins, which hitherto had had full legal-tender 
 power, were made pa}-able for debts only in sums not exceeding five 
 dollars. In 1879 this limit was raised to ten dollars. 
 
 A person obliged to make remittances abroad might have been 
 paid here in overvalued token coins, which, not being worth in foreign 
 countries more than the bullion they contained, would be short 
 payment arid could not be used abroad. Unless he could exchange 
 token coins for full-valued standard coins which would be equally 
 good abroad as well as at home, he would find business decidedly 
 venturesome. Consequently the necessity for the fourth law becomes 
 at once apparent. Indeed, redemption is a fundamental necessity 
 for a system of token coins. Inasmuch as no government can ever 
 foretell the amount which the community will absorb, it must be 
 ready freely to provide token coins in exchange for standard coins 
 whenever needed; and to prevent an excess from clogging the tills 
 of merchants it must be equally ready to pay out standard coins in 
 exchange for token coins whenever the latter are sent in to the 
 Treasury. Thus free exchange of token coins for gold and of gold 
 for token coins is the only proper method by which an excess in 
 quantity is automatically prevented. If wanted, they are obtain- 
 able; if redundant, they are inevitably withdrawn. Without a 
 method of redemption, direct or indirect, token or debased coins would 
 certainly go to a discount if issued to excess, because, not being 
 received equally with standard coins, a discrimination against them 
 would manifest itself. Not having in themselves a value equal to 
 their face value, they must borrow the deficiency only from the process 
 by whicli they can be exchanged at par with full-valued coins. 
 
 In addition to the removal of excessive issues from the cuculation, 
 redemption of token coins performs an important function in the 
 distribution and rcdistril)ution of such coins as arc needed. Witliout 
 redemi)tion, nickels, for example, would accumulate in large amounts
 
 126 PRINCIPLES OF MONEY AND BANKING 
 
 on the hands of street-car companies; for it would be inconvenient or 
 impossible for those companies to fmd people who might want small 
 change, and it would be difficult for them to get rid of large accumula- 
 tions at full value. But the system of redemption offers the means 
 whereby those who have too much can dispose of their surplus and 
 those who have not enough can get more. The Treasury thus acts as 
 a distributor of the supply of token coins. 
 
 Lastly, the community will need only a limited amount of token 
 coins for small change. What this sum will be can be determined 
 only by experience. No one can foretell how many dimes or quarters 
 will be needed in the daily transactions in which money is necessarily 
 used. There must, therefore, be freedom in issuing all that is wanted. 
 Safety is to be found in a prompt redemption of those which the public 
 do not need. In small denominations a very large number of pieces 
 may be required, but the total value may be inconsiderable; for larger 
 denominations of no greater number of pieces the total sum may be 
 quite important. The inconvenience of not having money for large 
 and small change is so great that if the government did not provide 
 it in a form that will circulate (as before 1853 and again in July, 1862) 
 some substitutes are necessarily provided by merchants. The demand 
 for token coins is, therefore, up to a certain limit, strong and steady, 
 and if the issues are within this limit there will be no net redemptions. 
 The coins presented by one individual or class will be withdrawn 
 by others for use in the channels where they are wanted. 
 
 80. THE ACT OF 1853 AND THE STANDARD QUESTION' 
 By AUGUST RODEN 
 
 No provision was made in the act of 1853 to secure the circulation 
 of a silver dollar. There was no need of one. In 1849, when it had 
 so rapidly disappeared, its place had been supplied by the coinage of a 
 gold dollar, and by 1853 over 10,000,000 had been coined, which, 
 together with the great number of $5 and $2 . 50 gold pieces previously 
 in circulation, provided a plentiful currency for transactions in which 
 coins of this size were needed, while the use of bank notes of Si and 
 $2 was common. The 371. 25 grains of pure silver in the standard 
 silver dollar, being worth more as bullion than as money, it was appar- 
 ent that this law would take away the full legal-tender quality of all 
 silver in circulation, leaving gold as the sole standard. 
 
 'Adapted from "The Dollar of Our Daddies," Sound Currency, IV (1897), 
 No. 13, pp. 5-14.
 
 THE STANDARD QUESTION: BIMETALLISM 127 
 
 No secret was made of this fact, for Congressman C. S. Dunham, 
 of Indiana, who secured the passage of the bill in the House, relied 
 mostly on this feature for success. In speaking against an objection- 
 able feature of the Hunter Senate bill and in reference to the silver 
 coins he said: "This, however, would make them a standard in all 
 small transactions; we would thereby still continue the double stand- 
 ard of gold and silver, a thing which the committee desire to obviate. 
 They desire to have the standard currency of gold only, and that these 
 silver coins shall be entirely subservient to it and that they shall be 
 used rather as tokens than as standard currency. We intend to do 
 what the best writers on political economy have apj)roved; what 
 experience has demonstrated to be best, and what the committee 
 believe to be necessary and proper — to make but one standard and 
 to make all others subservient to it. We mean to make gold the 
 standard coin, and to make these silver coins applicable and con- 
 venient, not for large payments, but for small transactions." There 
 are other statements of a similar import. This bill with slight altera- 
 tions passed ten days later, and the nation for the first time now 
 possessed what Hamilton so earnestly strove to secure for it, and what 
 every Secretary of the Treasury and every Congress had likewise 
 striven for, viz,, the concurrent use of both gold and silver as money 
 by the American people. The results of that act were hailed with 
 satisfaction and delight by Congress and the country. 
 
 It was here that the battle of the standards in America was fought 
 and decided. The law of 1853 took away the free and unlimited 
 coining privilege of all silver that was expected to serve as money, 
 and to all intent and effect established gold as the only full money 
 of the Nation. It is true that the provisions for the continued coinage 
 of the old silver dollar were not repealed, nor was its actual coinage 
 stopped, or intended to be stopped. When coined, however, it was 
 never from 1853 to 1873 worth less than $1 . 03 and sometimes as much 
 as $1 . 07, and, such being the case, there was no danger of its threaten- 
 ing the gold standard by a displacement of the gold currency. It was 
 evident, however, that should silver cheapen in value so that the silver 
 in the silver dollar should be worth less than the gold in the gold 
 dollar (which was not considered impossible, though improbable) 
 the gold standard would be overthrown. Why, then, it will be asked, 
 if it was so clearly the intent to establish the gold standard in 1853, 
 was not this menace of a possible return to silver removed by abolish- 
 ing the provisions for the apparently useless silver dollar ?
 
 I2S PRINCIPLES OF MONEY AND BANKING 
 
 Though this may appear perplexir. ; to many at the present time, 
 the reason was very well understood in 1853. Though silver dollars 
 ceased to circulate as early as 1849, they did not cease to be coined. 
 In fact, nearly 6,000,000 of them were coined between 1853 and 1873. 
 But they were not intended to be used as money by those who brought 
 the bullion to the mint to have it stamped into dollars. They were 
 used exclusively for commerce with China, Japan, and India, where 
 it was more advantageous to use silver than gold in the purchase of 
 commodities for importation into the United States, because of the 
 relatively high valuation of silver in those countries. The nations of 
 the East, recognizing the stamp of the United States as a guarantee of 
 the weight and fineness of the silver in the dollar, accepted such silver 
 more readily than they would in the form of uncoined bullion. To 
 substantiate this assertion that this anomaly of retaining provisions 
 for the free and unlimited coinage of the silver doUar, while virtually 
 establishing the gold standard, was only to foster and protect American 
 commercial interests in the East, I will quote some of the opinions 
 and recommendations of directors of the Mint and secretaries of the 
 Treasury made previous to 1873, at which time the privilege of 
 unlimited coinage of silver dollars was stopped. 
 
 The first quotation I give is from the re]3ort of Mint Director 
 Pollock, made in 1861. At this time the excuse for the continued 
 coinage of the silver dollar for commercial purposes was beginning 
 to lose force. Director Pollock said in this report: "The silver dollar 
 was supposed to be needed for our China and East India trade, but 
 our consular advices are to the effect that our silver dollars are taken 
 very reluctantly at the ports, and not at all in the interior, of China. 
 The reasons for its retention having ceased, we should cease to coin 
 the silver dollar or it should be made to conform in weight and value 
 to our lesser silver coins." 
 
 From the Report of the Finances for 1864, page 215: "Permit me 
 again to refer to the anomalous character of the silver doUar of the 
 United States and to the observations on this subject in former reports. 
 The whole dollar should be made in weight and fineness the exact 
 multiple of our fractional currency and the gold dollar should be 
 declared the unit of value of our money." 
 
 From the Report of the Finances for 1868, page 432: "Our silver 
 dollar is not received by the Chinese except at a discount. This is 
 owing to the fact that while of equal fineness with the Spanish 
 or Mexican dollar it is about i per cent less in weight. This
 
 THE STANDARD QUESTION: BIMETALLISM 129 
 
 rejection seems to take away the past plea for continuing to coin 
 that piece." 
 
 Could better evidence be brought to show that at this time gold 
 was acknowledged as the intended and existing standard, and that 
 our currency was in a highly satisfactory condition ? The continued 
 coinage of the silver dollar, though no more to any purpose, was as 
 yet no menace to the existing national currency and of little expense 
 to the Government; so Congress from its usual conservatism or lack 
 of interest in the matter had taken no notice of the repeated recom- 
 mendations for its abolition.. 
 
 D. International Bimetallism 
 81. THE THEORY OF INTERNATIONAL BIMETALLISM 
 
 During the latter part of the nineteenth century discussion of the 
 double standard centered largely around the question of international 
 as distinguished from national bimetallism. There were many writers, 
 and these the more careful students of the theory of bimetallism, who 
 beUeved that bimetallism when adopted by a single nation would 
 always break down sooner or later, but that it would prove successful 
 if established uniformly by the leading nations of the world. 
 
 The argument was that as long as there are different coinage 
 ratios in different countries, or so long as some important nations have 
 bimetallism and some monometallism, the maintenance of national 
 bimetallism is rendered impossible on account of the flow of specie 
 from one country to another. For instance, if gold were undervalued 
 at the United States mint relatively to silver, it would be shipped 
 abroad to a country where such undervaluation was less, or non- 
 existent. Such movement abroad would take place whenever even 
 slight variations occurred in the ratios of different countries. But 
 if there were an international agreement there would be no gain 
 in sending the undervalued metal, to a foreign country for the reason 
 that its relative valuation would be the same in all markets. Under 
 international bimetallism, therefore, the compensatory action of a 
 double standard would be unimpeded. 
 
 82. THE LATIN MONETARY UNION 
 
 The nearest approach to a trial of international bimetallism is 
 found in the Latin Monetary Union. The Latin Union resulted 
 from the fall in the value of gold following the discoveries of gold in
 
 I30 PRINCIPLES OF MONEY AND BANKING 
 
 California and Australia. Under the operation of Gresham's law 
 even subsidiary silver was expelled from circulation so that there 
 was a great dearth of small change. Switzerland, like the United 
 States, resorted to the use of token coins. But as the unit of value 
 was the one-franc piece (about 19 cents), Switzerland first raised 
 the unit to five francs, and then lowered the value of the two-franc, 
 one-franc, and fifty-centime pieces, by making them only .800 fine. 
 
 This step at once caused trouble in Italy and in France, where 
 the franc system was also in use. The coins of these nations cir- 
 culated in common in the various countries, and now, owing to 
 Gresham's law, the cheaper Swiss coins began to drive out the dearer 
 French and Italian coins. Accordingly, in April, 1864, France by a 
 decree prohibited the receipt of Swiss coins for public dues of all kinds, 
 and they therefore became uncurrent. 
 
 Belgium, also using the franc system, about this time made 
 overtures to France looking to a concerted action by the four 
 countries to remedy the existing evils. A conference of delegates 
 representing Belgium, Switzerland, France, and Italy accordingly 
 met in Paris on November 20, 1865. Discussion of the state 
 of subsidiary coins led promptly to the larger question of the 
 whole metallic currency system. Belgium, Switzerland, and Italy 
 were strongly in favor of the adoption of a single gold standard, 
 retaining silver for minor coins only; but the French delegates opposed 
 this, it is said, because of the influence of the Bank of France and the 
 Rothschilds. They nevertheless came to an agreement and estab- 
 lished a uniform currency for the four countries, on the general prin- 
 ciples of token money as adopted by the United States in 1853. 
 
 They reduced the silver pieces of two francs, one franc, fifty 
 centimes, and twenty centimes from . 900 to .835 fine. They retained 
 bimetallism, however, coining gold pieces of one hundred, fifty, twenty, 
 ten, and five francs, and a five-franc silver piece. These coins were 
 all . 900 fine and were coined at the ratio of 15I to i. Although each 
 country used its own inscriptions in stamping its coins, all coins of 
 the Union were of uniform weight, fineness, diameter, and tolerance. 
 The subsidiary silver coins were legal tender to the amount of fifty 
 francs between citizens in each state, and for public dues to any 
 amount. The total quantity of coin outstanding was limited, being 
 six francs per capita. 
 
 The treaty went into effect on August i, 1866, to continue until 
 January i, 1880, and at the expiration of this time to be automatically
 
 THE STANDARD QUESTION: BIMETALLISM 13 1 
 
 renewed for another like period, and so on, unless dissolved a year 
 before the expiration of the term. In 1866 Greece, Roumania, and 
 the States of the Church entered the Union. 
 
 Within a few years, however, chanj^ed conditions of production 
 of the precious metals caused the value of silver to fall relatively to 
 gold. In 1872 the ratio reached 15.5 to i (coinciding here with the 
 mint ratio). When the ratio fell below this the situation became 
 quite the opposite of what it had been in 1S65. The problem now 
 was how to prevent silver from flooding the currency, rather than how 
 to retain it in circulation. In 1871-72 there had been presented at 
 the French mint for coinage into five-franc pieces only 5,000,000 
 francs of silver bullion. But in the single year 1873, when silver 
 became the cheaper metal, 154,000,000 francs were presented. On 
 December 16, 1873, Belgium passed an act authorizing the govern- 
 ment to discontinue the coinage of silver five-franc pieces. 
 
 On January 30, 1874, a meeting of delegates from the various 
 countries of the Union was called at Paris to discuss the new problem 
 of the silver coinage. A new treaty was agreed upon which provided 
 that during the year 1874 the power of coinage of the silver five-franc 
 piece should be restricted, each state being limited to a moderate 
 amount. This provision was adopted for only one year, since it was 
 believed that the fall in the value of silver would be but temporary, 
 having been caused by the demonetization of silver by Germany in 
 
 1873- 
 
 But the value of silver continued to fall, and the Latin Monetary 
 
 Union therefore made its policy of restricting the coinage of silver 
 
 continuous. In 1876 the total amount allowed to be coined for the 
 
 whole Union was fixed at 1 20,000,000 francs. Meanwhile the various 
 
 states did not coin their full quotas, Switzerland coining none in 
 
 either 1875 or 1876. 
 
 Each state under the terms of the agreement reserved the i)Ower 
 to suspend the coinage entirely, the convention fixing only the maxi- 
 mum that might be coined. As has been seen, Belgium exercised her 
 right to suspend the coinage of silver in 1873. France followed 
 suit on August 5, 1876. In 1877, the Union itself entirely suspended 
 the coinage of the five-franc silver piece for that year (except 
 10,000,000 francs for Italy). 
 
 Decisive final action was taken in the treaty of November 5, 
 1878, which provided that tlie "coinage of silver five-franc pieces 
 is provisionally suspended. It may be resumed when a unanimous
 
 132 PRINCIPLES OF MONEY AND BANKING 
 
 agreement to that effect shall be established between all the con- 
 tracting states." This agreement was to hold until January i, 1886. 
 This treaty abolished bimetallism when it prohibited the coinage of 
 the five-franc silver piece, for this was the only silver that bore the 
 ratio of 15.5 to i to gold. The Union itself continued, however, 
 with the old agreement still in force with reference to the coinage of 
 subsidiary silver at .835 fine. 
 
 83. INTERNATIONAL BIMETALLIC CONFERENCES' 
 By MAURICE L. MUHLEMAN 
 
 The Bland-Allison silver law of 1878 contained a provision direct- 
 ing the President of the United States to invite the nations of the 
 world to meet in a conference in Paris for the purpose of persuading 
 the nations of Europe and the commercial world in general that silver 
 continue to be necessary for monetary purposes and that an inter- 
 national bimetallism arrangement should be consmnmated. 
 
 When the conference met in May, 1878, twelve nations were 
 represented. Before its close others were added. But the delegates 
 from Great Britain and Germany, as well as those of some other 
 countries, were without power to bind their respective governments 
 by their action. 
 
 The principal object was to arrive at a ratio at which silver might 
 be satisfactorily given as great a freedom in the mints of the civilized 
 world as was given to gold. The conference found no difficulty in 
 declaring that it was necessary to mamtain in the world the monetary 
 functions of silver as well as those of gold; but the mamier in which 
 this was to be accomplished was a point upon which no agreement 
 could be reached. After full discussion and the preparation of much 
 valuable literature upon the subject of money, the conference ad- 
 journed late in August without practical results. 
 
 Hoping, rather than believing, that the opinions of the principal 
 objectors to the rehabilitation of silver (Great Britain and Germany) 
 might have undergone a change, or have become amenable to argu- 
 ment, the United States and France jointly invited the nations to a 
 second conference in 1881, also at Paris. This one was as fully 
 attended by delegates as the preceding one. But the delegates were 
 again unable to agree upon any method by which the desired object 
 
 ' Adapted from Monetary Systems of the World. (1895.) Copyright by the 
 Author.
 
 THE STANDARD QUESTION: BIMETALLISM 133 
 
 of restoring silver could be accomplished. An adjournment took 
 place in July, with the understanding that the conference would 
 reassemble in April, 1882, if called; but conditions were not regarded 
 as favorable to its reassembling, and the project was left to die of 
 compulsory neglect. 
 
 In 1892 the United States again invited the nations to send dele- 
 gates to a conference in Brussels. When it met, in November of 
 that year, twenty nations were represented. The declared object 
 of the conference was to obtain an agreement recommending inter- 
 national bimetallism upon a ratio for silver which could be main- 
 tained, but failing in this the delegates from the United States were 
 instructed to endeavor to induce European delegates to agree to an 
 enlargement of the use of silver as money. 
 
 A majority of the delegates, as in the previous conferences, sub- 
 stantially agreed upon the desirability of bimetallism under terms of 
 an international agreement, but, just as before, the representatives of 
 the gold monometallic countries of Europe, to which Austria-Hungary 
 was now added, did not manifest much sympathy with the movement, 
 and in fact some of the delegates declared that for their respective 
 countries the single gold standard was the only possible measure. 
 Many propositions were, of course, discussed, but the conference, 
 after thanking the Government of the United States for calling them 
 together, ''suspended its labors." 
 
 Finally, in 1897 in fulfilment of a pledge in the party platform of 
 1896, President McKinley appointed a commission of three persons 
 to visit Europe and make one more effort to promote international 
 bimetallism. France as usual appeared sympathetic, but in England, 
 while the government seemed willing to co-operate, the business com- 
 munity objected with such vigor to any tampering with the monetary 
 system that the entire project had to be abandoned.
 
 THE STANDARD QUESTION: GOVERNMENT 
 PAPER MONEY 
 
 Introduction 
 
 Paper money is of so many different kinds and the principles 
 advanced and used in regulating its value have varied so widely that 
 a clean-cut treatment of the subject is difficult. In the first place, 
 however, a fundamental distinction should be made between govern- 
 ment and bank paper money. The former is issued by the state 
 itself, for the purpose of meeting current obligations when the 
 treasury is empty, or to provide an inexpensive and convenient 
 medium of exchange in the interest of public welfare; the latter is 
 issued by privately managed institutions which are seeking private 
 profit from the making of loans. The principles of regulation under- 
 lying these two forms of paper currency are fundamentally different, 
 and they cannot be satisfactorily treated together. Since the regu- 
 lation of bank paper is tied up with the whole theory of credit and 
 banking, its treatment is therefore reserved until after our study 
 of the principles of banking; while the present chapter is devoted to 
 government paper money. 
 
 Government paper itself varies widely in character — from a mere 
 substitute in circulation for metallic money of equal amount held in 
 reserve, to paper which itself constitutes the common denominator 
 of values and standard of deferred payments, as well as the medium 
 of exchange. The chapter heading above therefore appears some- 
 what inappropriate; but since the main problems of government 
 paper money are connected with its use as a standard, it has seemed 
 best to treat the general subject in connection with the question of 
 standards. 
 
 The readmgs under Section A below clearly indicate that the 
 underlying causes of the advocacy of fiat money are the same as those 
 underlying the desire for bimetallism. Its history is practically 
 contemporaneous with that of the controversies discussed in preced- 
 ing chapters, and at times the adherents of a paper currency have 
 
 ^34
 
 THE STANDARD QUESTION: PAPER MONEY 135 
 
 joined forces with those in favor of a cheaper metallic money in the 
 hope of gaining the common end of a plentiful supply of currency. 
 
 There have been numerous instances in this and other countries 
 of the use of irredeemable paper money. While there have always 
 been many who believe that irredeemable paper is the ideal money 
 at all times, the actual issue of such currency has usually been the 
 result of pressing financial needs on the part of the government; and as 
 a general rule it has been regarded merely as a temporary expedient. 
 In particular the financial exigencies of war have repeatedly led to 
 the use of paper money. In our own histor>', in addition to the early 
 Colonial and Revolutionary cx-periences, both the South and the 
 North during the Civil War issued large quantities of paper with 
 which to meet the immediate requirements of government; and in 
 the present European struggle paper money issued through the me- 
 dium of central banks largely controlled by the governments is appar- 
 ently playing an important part in meeting the enormous financial 
 requirements of the various nations involved. 
 
 The striking feature of the history of paper money is that once 
 an issue is started it becomes well-nigh impossible to check an almost 
 indefinite increase. Let the first step be ever so hesitant, when once 
 it is taken other issues are likely to follow in rapid succession until 
 the entire monetary system is demoralized. It is only in rare instances 
 that issues have been controlled and kept within limits of safety. 
 
 The effects of an issue of irredeemable paper currency have prac- 
 tically always been disastrous in the long run, resulting not only in a 
 derangement c: financial relations and general disruption of business, 
 but also in unsettling the customary morality which lies at the very 
 basis of modern commercial life. Rather than serving as a real aid in 
 meeting the financial requirements of wars, in the end paper money 
 has always greatly increased the total cost, and in many cases it has 
 proved the undoing of the nation quite as much as have the cannon 
 of the enemy. However, there have always been plausible excuses 
 for such issues, short-time necessities usually proving of more impor- 
 tance than long-time considerations. But the history of such issues 
 should teach a lesson of vital importance in connection with financial 
 preparedness. 
 
 One of the most interesting aspects of war in general is its 
 effect in coloring the views of the following generation, often serving 
 to change the fundamental philosophy of national life. The "blood- 
 stained and battle-scarred" greenback currency of the Civil War
 
 136 PRINCIPLES OF MONEY AND BANKING 
 
 profoundly influenced the popular views on money in this country 
 for decades; indeed we have not fully recovered from its spell even 
 today. Moreover, the existence of $346,000,000 or more of this cur- 
 rency in our circulation continuously since the Civil War has given 
 rise to an almost perpetual problem of regulation, and at times has 
 seriously deranged the entire monetary and financial structure. It 
 appears to be a serious obstacle even now to the success of the federal 
 reserve system in giving us an elastic currency.^ 
 
 Numerous methods have been suggested for the regulation of 
 government paper money, and there has been no end of argument 
 as to the feasibility of its issue imder any circumstances. Many 
 students believe that a limited issue of irredeemable paper would be 
 distinctly economical, but most of them hold that the dangers attend- 
 ing its use are still too great to warrant the risk ; and they therefore 
 urge that Congress should not be encouraged to play with the fire at all. 
 
 A. Advantages of Paper Currency 
 84. TYPES OF GOVERNMENT PAPER MONEY 
 
 There are three kinds or types of government paper currency: 
 (i) mere representative paper, (2) convertible fiduciary paper, and 
 (3) inconvertible or fiat money. Representative money is backed 
 dollar for dollar by specie, and the paper certificates which circu- 
 late are nothing more or less than claim checks to an equivalent 
 in coin; it gives rise to no problems of regulation. Convertible 
 fiduciary paper is exchangeable for specie but is not covered by a 
 coin reserve of 100 per cent. Unlike representative paper, it involves 
 an element of trust or credit and affords a means of expanding the 
 quantity of money beyond what is possible with the use of specie 
 alone. Numerous devices have been developed by means of which 
 redeemability may be insured without a full specie reserve, and there 
 has been a long-continued discussion as to the most effective means 
 for the purpose, resulting in the development of a fairly definite body 
 of principles. Similarly there has been a prolonged controversy over 
 the advantages and practicability of an irredeemable paper currency, 
 or what may be called the "fiat" or paper standard of value. This 
 controversy has disclosed some of the most interesting fallacies in the 
 whole realm of political economy, and the ex'periences of mankind 
 with irredeemable paper money have been among the most costly 
 lessons that society has ever had to learn. 
 
 'See Reading No. 147, Part II.
 
 THE STANDARD QUESTION: PAPER MONEY 137 
 
 85. THE ORIGIN OF REPRESENTATIVE MONEY' 
 
 By W. STANLEY JEVONS 
 
 The origin of representative money is of much interest. Ancient 
 nations were unaccjuainted with the use of paper money, simply be- 
 cause they had no paper. But it would be a mistake to suppose that 
 they did not employ representative money. 
 
 One of the very earliest mediums of exchange consisted of the 
 skins of animals. The earliest form of representative money consisted 
 of small pieces of leather, usually marked with an official seal. It is a 
 very reasonable suggestion made by Storch, Bernardakis, and other 
 writers, that when skins and furs began to be found an inconveniently 
 bulky kind of money, small pieces were clipped oH, and handed over 
 as tokens of possession. By fitting into the place from which they 
 were cut they would prove ownership, something in the same way as 
 notched sticks, or tallies, were for many centuries used to record loans 
 of money to the English Exchequer. We know by experience in the 
 case of paper money that if a people had become thoroughly accus- 
 tomed to the circulation of these small leather tallies tliey would in 
 time forget their representative character, and continue to circulate 
 them, when the government or other holders of the skins themselves 
 had made away with the actual property. Such is no doubt the 
 history of the leather money which long had currency in Russia. 
 
 It is, however, in China that the use of paper money was most 
 fully developed in early times. More than a century before the Chris- 
 tian era an emperor of China raised funds to prosecute his wars in a 
 way which shows that the use of leather tokens was familiar to the 
 peo[)le. The tokens having been made of the skins of white deer, he 
 collected together into a park all deer of this color which he could find, 
 and prohibited his subjects from possessing any animals of the same 
 kind. Having thus obtained a monopoly of the material, reminding 
 one of the monopoly of the Bank of England in water-marked paper, 
 he issued pieces of white leather as money at a high rate. 
 
 86. GENERAL ADVANTAGES OF PAPER ^lONEY^ 
 
 By \V. STANLEY JEVONS 
 
 There are several purj^oses that may be detected in the use of 
 paper currency. Perhai)s the most obvious reason is that of avoiding 
 
 ' Adaiited from Money and l/ie Mechanism of Exchange (1875), PC- 'y-^Q-l- 
 (D. .\pplclon & Co.) 
 ' Ibid., pp. 195-200.
 
 138 PRINCIPLES OF MONEY AND BANKING 
 
 the trouble and risk of handling large amounts of the precious metals. 
 In order to keep large sums of metallic money in safety a person must 
 have strongholds and watchmen. At the present time in the United 
 States silver and gold certificates have come to replace the actual 
 silver and gold coins, in part for the reason just enumerated and in 
 part for the one which follows. 
 
 The weight of metallic currency is a second reason for the use of 
 representative documents in large transactions. In proportion as the 
 legal tender is more bulky and inconvenient to carry about is this 
 motive more powerful. Thus, when the state of Virginia employed 
 tobacco as the medium of exchange in the eighteenth century, the 
 tobacco was placed in stores, and receipts on paper were handed about. 
 Paper money was issued in Russia under Catherine II in 1768, on the 
 ground that copper money, then forming the legal tender, was incon- 
 venient. So much were these assignats, or notes, preferred that they 
 at first circulated at a premium of \ per cent. In the present state of 
 commerce even gold money would be far too heavy to form a 
 convenient mediiun of making payments. M. Chevaher states 
 that it would require forty men to carry the gold equal in value to the 
 Regent Diamond. The average daily transactions in the London 
 Banker's Clearing-House' amount to twenty millions of pounds sterling 
 which if paid in gold coin would weigh 157 tons, and would require 
 nearly eighty horses for conveyance. If paid in silver the weight would 
 be increased to more than 2,500 tons. I find that a Bank of England 
 note w-eighs about 2o| grains, whereas a single sovereign weighs about 
 123 grains, and a note may represent five, ten, fifty, a thousand, or 
 ten thousand such sovereigns with slight differences in the printing. 
 If we were obliged to handle a medium of exchange actually embody- 
 ing value, it would, ere now, have been necessary to employ precious 
 stones, or some metal much more rare and precious than gold. 
 
 A further and very potent motive for employing representative 
 tokens or notes consists in the saving of interest and capital, which 
 is effected by substituting a comparatively valueless material in place 
 of costly gold and silver. This may be accomplished in two ways. 
 When in straits for want of revenue a government may issue paper 
 currency as a means of paying its obligations, agreeing to receive 
 back the paper at some future date in payment of obligations to it. 
 It will be observed that this is a forced loan which enables a govern- 
 ment to procure funds without interest. A saving of interest is also 
 effected whenever a government has paper notes outstanding in excess
 
 THE STANDARD QUESTION: PAPER MONEY 139 
 
 of the gold held in readiness to redeem them. The greenback cur- 
 rency of the United States is a case in point. There are $346,000,000 
 outstanding with a specie reserve of only $150,000,000. 
 
 87. CHINESE PAPER MONEY IN THE THIRTEENTH CENTURY' 
 By MARCO POLO 
 
 Now that I have told you in detail of the splendour of this City of 
 the Emperor's, I shall proceed to tell you of the Mint he hath in the 
 same city, in which he hath his money coined and struck, as I shaU 
 relate to you. And in doing so I shall make manifest to you how it is 
 that the Great Lord may well be able to accomplish even much more 
 than I have told you, or am going to tell you, in this book. For, tell 
 it how I might you never would be satisfied that I was keeping within 
 truth and reason! 
 
 The Emperor's ]Mint then is in this same City of Cambaluc, and 
 the way it is wrought is such that you might say he hath the Secret 
 of Alchemy in perfection, and you would be right! For he makes his 
 money after this fashion. 
 
 He makes them take of the bark of a certain tree, in fact, of the 
 Mulberry Tree, the leaves of which are the food of the silkworms — 
 these trees being so numerous that whole districts are full of tliem. 
 What they take is a certain fine white bast or skin which lies between 
 the wood of the tree and the thick outer bark, and this they make into 
 something resembling sheets of paper, but black. When these sheets 
 have been prepared they are cut up into pieces of different sizes. 
 The smallest of these sizes is worth a half tornesel; the next, a little 
 larger, one tornesel; one, a little larger still, is worth half a silver 
 groat of Venice; another a whole groat; others yet two groats, five 
 groats, and ten groats. There is also a kind worth one Bezant of 
 gold, and others of tliree Bezants, and so up to ten. All these pieces 
 of paper are issued with as much solemnity and authority as if tliey 
 were of pure gold or silver; and on every piece a variety of officials, 
 whose duty it is, have to write their names and to put their seals. 
 And when all is prepared duly, the chief officer deputed by the Kaan 
 smears the Seal entrusted to him with vermilion, and impresses it on 
 the paper, so that the form of tlie Seal remains printed upon it in red; 
 the Money is then authentic. Any one forging it would be punished 
 
 ' Henry Yule's edition of Travels of Marco Polo, pp. 423-26. (J. Murray, 
 1903-)
 
 I40 PRINCIPLES OF MONEY AND BANKING 
 
 with death. And the Kaan causes every year to be made such a vast 
 ([uantity of this money, which costs him nothing, that it must equal 
 in amount all of the treasure of the world. 
 
 With these pieces of paper, made as I have described, he causes 
 all payments on his own account to be made; and he makes them to 
 pass current universally over all his kingdoms and provinces and terri- 
 tories, and whithersoever his power and sovereignty extend. And 
 nobody, however important he may think himself, dares to refuse 
 them on pain of death. And indeed everybody takes them readily, 
 for wheresoever a person may go throughout the Great Kaan's domin- 
 ions he shall find these pieces current, and shall be able to transact all 
 sales and purchases of goods by means of them just as well as if they 
 were coins of pure gold. And all the while they are so light that ten 
 Bezants' worth does not weigh one golden Bezant. 
 
 Furthermore all merchants arriving from India or other countries, 
 and bringmg with them gold or silver or gems and pearls, are pro- 
 hibited from selling to anyone but the Emperor. He has twelve 
 experts chosen for this business, men of shrewdness and experience 
 in such affairs; these appraise the articles and the Emperor then pays 
 a liberal price for them in those pieces of paper. The merchants accept 
 his price readily, for in the first place they would not get so good a 
 one from anybody else, and secondly they are paid without any delay. 
 And with this paper money they can buy what they like anywhere 
 over the Empire, whilst it is also vastly lighter to carr}'- about on their 
 journeys. And it is a truth that the merchants will several times in 
 the year bring wares to the amount of 400,000 Bezants, and the 
 Grand Sire pays for all in that paper. So he buys such a quantity of 
 those precious things every year that his treasure is endless, whilst 
 all the time the money he pays away costs him nothing at all. More- 
 over, several tunes in the year proclamation is made through the city 
 that any one who may have gold or sUver or gems or pearls, by taking 
 them to the Mint shall get a handsome price for them. And the owners 
 are glad to do this, because they would find no other purchaser give 
 so large a price. Thus the quantity they bring in is marvellous, though 
 those who may not choose to do so may let it alone. Still, in this way, 
 nearly all the valuables in the countr}^ come into the Kaan's possession. 
 
 When any of tliose pieces of paper are spoilt — not that they are so 
 very flimsy either — the owner carries them to the Mint, and by pay- 
 ing 3 per cent on the value he gets new pieces in exchange. And if
 
 THE STANDARD QUESTION: PAPER MONEY 141 
 
 any Baron, or anyone else soever, hath need of gold or silver or gems 
 or pearls, in order to make plate, or girdles, or the like, he goes to the 
 Mint and buys as much as he list, paying in this paper money. 
 
 Now you have heard the ways and means whereby the Great 
 Kaan may have, and in fact has, more treasure than all the Kings in 
 the World; and you know all about it and the reason why. 
 
 88. PAPER MONEY AND PROSPERITY' 
 
 Paper currency would increase the wealth of the nation in the 
 following ways: 
 
 I. It would replace a very expensive medium of exchange — Gold, 
 by a very cheap one — Paper. The fifty or sixty millions of gold which 
 are now supposed to be in circulation, and which are merely used as 
 counters, would be then replaced by notes. Here at once would be a 
 saving of more than two millions a year, by converting this large 
 amount of dead stock into active, productive stock (hear). Suppose a 
 farmer had been taught that it was necessary to use a golden plough- 
 share worth £1,000, and a man came and said, "I will make for you a 
 ploughshare of iron for 100 pence, which will do the work just as well " : 
 it is plain that the farmer would have the difference between £1,000 
 and 100 pence to employ as active capital (hear). He could improve 
 his land, drain, manure, and what not, when he had substituted a cheap 
 ploughshare for a dear one (hear, hear). Lord Liveqiool's wisdom led 
 him to a contrary opinion, when he advocated the introduction of the 
 present system. "The richest standard, Gold," said he, "is best 
 adapted for a rich country." The country was prospering with, and 
 by, cheap money. " Adopt an expensive money," said Lord Liverj30ol. 
 "Plough your land with a golden ploughshare." We did so, and threw 
 aside an inexpensive and tried instrument merely to adopt a fanciful 
 theory (hear, hear, and cheers). 
 
 II. But the most important advantage of a Representative Paper 
 Currency is this — that we should obtain a circulating medium capable 
 of expansion, a money in which prices would be able to rise as taxes 
 are imposed, so that taxes might be added to the cost of production, 
 and a remunerative price be obtained (hear). And further, as our 
 
 'Adapted from an "Address to the Retford Currency Society" in Currency 
 Tracts. Published by the Society for tlie Emancipation of Industry. (London, 
 1851.)
 
 142 I'RINCIPLES OF MONEY AND BANKING 
 
 population increased, and our commodities increased also — in other 
 words, as our buyers and sellers increased — money, the medium of 
 exchange between man and man, might increase in due proportion. 
 Peoj)le sometimes ask me why the law which governs — or which 
 oug/il to govern — the Currency, cannot be discovered? It is discov- 
 ered. "Supply and demand," I say, "is the law of the Currency." 
 As men increase, more food is required, and more clothes are required; 
 and if left to itself, the supply will increase with the demand. So it is 
 with Money. Make Paper Money as safe as you please — make it as 
 safe and secure as gold itself; and this we can prove can be done — 
 and then leave the trade in money free. Leave it to the general, the 
 universal law of trade, viz., Supply and Demand (hear, hear). 
 
 I say that exi:)erience fully justifies the expectations of an improved 
 state of things resulting from an alteration of the Currency Laws. I 
 say that the Paper Money System, which enabled this coimtry to 
 prosper in spite of war, would produce tenfold advantages in a time 
 of peace (hear). Observe, I do not say that Paper Money would do 
 everything. I do not say, for instance, that it would enable a farmer 
 to prosper without skill, labour, judgment, and a fair amount of 
 capital (hear). I do not say that it would supply the place of science 
 and of knowledge in the direction of a man's energies. I know that 
 under any financial system, vice, improvidence, and ignorance will 
 bear their pernicious fruits. But I do say that it would secure to labour 
 its just reward; that it would afford to every man of integrity, talent, 
 and energy', a fair opportunity of improving his condition; that it 
 would prevent the attempts which are made for raising the condition 
 of the people from being counteracted by the frequent recurrence of 
 those periods of severe distress and privation in which their moral 
 condition inevitably deteriorates (cheers). I say that the Paper 
 Money System which enabled this country to lend to Government 
 600 millions, would enable the country to pay off the debt, and thus 
 cause a reduction of nearly 30 millions of taxes. I believe that this 
 country might then advance to a greater height of happiness and 
 prosperity than ever — that instead of disunion and ill-will, we might 
 see all classes flourishing, and contributmg to each other's prosperity; 
 that the well-being of the poor would furnish the best security for the 
 possessions of the rich; that men would learn to prize the institutions 
 under which they live happily; and that England would become the 
 instrument, in the hand of Providence, of civilizing, elevating, and 
 Christianizmg tlie whole world.
 
 THE STANDARD QUESTION: PAPER MONEY 143 
 
 89. RECENT ARGUMENTS FOR PAPER MONEY' 
 
 1. I am not stuck on silver and gold as circulating mediums. A 
 piece of paper is my ideal. Geologists have things so fine that they 
 can estimate the quantities of silver and gold in the mountams, and 
 the government should issue silver certificates to an amount equivalent 
 to that estimate. It would be far safer, as it would be easy for a for- 
 eign nation to capture the coin in the treasury vaults at Washington; 
 but the mountains they could not remove, even by all the faith they 
 could muster. 
 
 2. We (speaking for the Farmers' Alliance) believe in the people 
 making their own money; we believe in the Government, which is 
 simply the agent of the people, issuing their money directly to them 
 without going around Robin Hood's barn to find them. 
 
 3. If the people had twice as much currency in their pockets as 
 now, their prosperity would be greatly increased. 
 
 4. I- am in favor of more currency. We haven't enough currency 
 per capita to do the business of the countr}^ If we cannot increase 
 the currency, I think somebody ought to issue more coUateral. There 
 is usually enough money if a man has the collateral. 
 
 5. Aly monetary system eliminates from money both the element 
 of intrinsic value and the power to limit or control the value of things 
 of use. I propose that the Government only shall issue money for the 
 public use. In order to do this, I would have it issue immediately 
 500,000,000 new treasury notes of the denomination of one dollar 
 each. So much of this amount as was necessary the Government 
 should loan to the people; 10 per cent of each loan to be paid back 
 each year; 9 per cent to be applied to the extinction of the principal, 
 I per cent covering the interest. In that way it would be possible 
 to redeem every mortgaged farm in the land within fifteen years. 
 
 6. Banks should not be allowed to issue notes. These should be 
 printed and put out by the Government. The tariff should be reduced 
 till there is a deficit in the treasury, and then greenbacks should be 
 printed and issued to pay all claimants. These should not be redeem- 
 al)le in metal money. Each bill should bear the legend, "One dollar, 
 receivable for all dues and debts." This would make it receivable for 
 all taxes and import duties, and a legal tender. This would keep it 
 peq:)etually at par. 
 
 7. Tens of thousands of our farmers have been unfortunate, and 
 can never get out of delH without special relief. I would enact a law 
 
 ' Adapted from Cculiiry Magazine, XLII (i8qi), 310-11.
 
 144 PRINCIPLES OF MONEY AND BANKING 
 
 stopping the big interest they have agreed to pay, and substituting a 
 debt at I per cent interest. It would be done in thi.. way: Suppose I 
 owe you $5,000 and accumulated interest on my farm. This new law 
 would direct you to add the interest to the principal, and go to the 
 treasury of my county and file tlie mortgage and an abstract of the 
 property, and get a check on the nearest bank for the entire debt. 
 That would satisfy you. Then the county treasurer makes a draft 
 on the United States treasurer for the money, and gets it in crisp 
 new bills. That satisfies him. The United States treasurer accepts 
 the mortgage on the farm^ — ^providing it is worth the amount of the 
 mortgage — and sends word to me when the i per cent interest is due. 
 Is not that simple ? It is the first news I have had of the transfer of 
 the debt. That ought to suit everybody. 
 
 B. History of Government Paper Money 
 
 (i) SOME EARLY EXPERIENCES 
 
 90. THE FRENCH ASSIGNATS AND MANDATS' 
 
 One of the first and most serious troubles which confronted the 
 republic established by the French Revolution of 1789 was the scarcity 
 of money. This was due to many causes, but chiefly, says Thiers, to 
 the "want of confidence occasioned by the disturbances." The same 
 authority adds the following general truth about circulation, which 
 is applicable to all countries and in all times: "Specie is apparent by 
 the circulation. When confidence prevails, the activity of exchange is 
 extreme; money moves about rapidly, is seen everywhere, and is 
 believed to be more considerable because it is more serviceable; but 
 when political commotions create alarm, capital languishes, specie 
 moves slowly; it is frequently hoarded, and complaints are unjustH 
 made of its absence." To increase the supply of circulating medium 
 it was proposed that the National Assembly issue paper money based 
 on the Church lands which had been confiscated by the Government. 
 These lands were yielding no revenue, but were a heavy burden. 
 The money, to be called assignats, was really a form of titles to the 
 confiscated lands; for it was receivable in payment for them, and was 
 designed, in addition to furnishing revenue to the Government, to 
 bring about a distribution of those lands among tlie people. The 
 
 ' Adapted from Century Magazine, XLIV(i892), 791-93.
 
 THE STANDARD QUESTION: PAPER MONEY 145 
 
 debates of the National Assembly upon the proposition showed that 
 John Law's experiment had not been entirely forgotten. There w^as 
 strong opposition, but it was overcome by the usual arguments in 
 favor of cheap money. "Paper money," said one of the advocates of 
 the assignats, "under a despotism is dangerous; it favors corruption: 
 but in a nation constitutionally governed, which takes care of its own 
 notes, which determines their number and use, that danger no longer 
 exists." 
 
 These curious arguments carried the day in the National Assembly, 
 and a first issue of assignats, to the value of 400,000,000 francs, was 
 issued in December, 1789. They bore interest, and were made payable 
 at sight, but no interest was ever paid, and subsequent issues had no 
 interest provision. The first issue represented about one-fifth of the 
 total value of the confiscated lands. 
 
 Yet with this solid basis of value upon which to rest, the assignats 
 never circulated at par. A few months after the first issue demands 
 began to be made for a second issue, as is invariably the case in ail 
 ex-j^eriments of this kind. Talleyrand opposed the second issue in a 
 speech of great ability, many of whose passages have passed into 
 economic literature as model statements of fundamental monetary 
 principles. "The assignat," he said, "considered as a title of credit, 
 has a positive and material value; this value of the assignat is pre- 
 cisely the same as that of the land which it represents, but still it must 
 be admitted, above all, that never will any national paper be upon a 
 par with the metals; never will the supi)lementary sign of tlie first 
 representative sign of wealth have the exact \^alue of its model; the 
 very title proves want, and want spreads alarm and distrust around it." 
 And again: "You can arrange it so that people shall be forced to take 
 a thousand francs in paper for a thousand francs in specie, but you 
 never can arrange it so that the people shall be obliged to gi\-e a thou- 
 sand francs in specie for a thousand francs in paper." Still again: 
 ** Assignat money, however safe, however solid it may be, is an 
 abstraction of paper money; it is consequently but the free or forced 
 sign, not of wealth, Ijut merely of credit." In answer to the arguments 
 of Talleyrand, the most effective, because most "taking," argument, 
 if argument it can be called, was the following by JMirabeau: "It is 
 in vain to compare assignats, secured on the solid basis of these do- 
 mains, to an ordinary paper currency possessing a forced circulation. 
 They rei)rcsent real property, the most secure of all possessions, the 
 land on which we tread."
 
 146 PRINCIPLIvS OF MONEY y\ND HANKING 
 
 This resounding phrase of Mirabeau carried the day in the National 
 Assemlily, and in Scptcmljer, 1790, a second issue of assignats, to 
 the value of 800,000,000 francs, bearing no interest, was ordered. 
 
 The decree for this second issue contained a pledge that in no 
 case should the amount of assignats exceed twelve hundred millions. 
 But the nation was drunk with its own stimulant, and pledges were 
 of no value. In June, 1791, a third issue of 600,000,000 was ordered. 
 This was followed soon afterward by a fourth issue of 300,000,000, 
 and by a new pledge that the total amount should never be allowed to 
 exceed sixteen hundred millions. But this pledge, like two others that 
 had been made before it, was broken as soon as a demand for more 
 issues became irresistible. Fresh issues followed one another in rapid 
 succession in 1792, and at the close of that year an official statement 
 was put forth that a total of thirty-four hundred mUHons had been 
 issued, of which six hundred millions had been destroyed, leaving 
 twenty-eight hundred millions in circulation. 
 
 Specie had disappeared from circulation soon after the second 
 issue, and the value of the assignats began to go steadily and rapidly 
 downward. Business and industry soon felt the effects, and the 
 inevitable collapse followed. Ex-President Andrew D. White, whose 
 tract. Paper Money Inflation in France, is the most admirable and 
 complete statement of this experience which has been published, says 
 of the situation at this stage: "What the bigotry of Louis XIV, and 
 the shiftlessness of Louis XV, could not do in nearly a century, was 
 accomplished by this tampering with the currency in a few months. 
 Everything that tariffs and custom-houses could do was done. Still 
 the great manufactories of Normandy were closed; those of the rest 
 of the kingdom speedily followed, and vast numbers of workmen, in 
 all parts of the country, were thrown out of employment. 
 
 "In the spring of 1791 no one knew whether a piece of paper 
 money, representing 100 francs, would, a month later, have a pur- 
 chasing power of 100 francs, or 90 francs, or 80, or 60. The result 
 was that capitalists declined to embark their means in business. 
 Enterprise received a mortal blow. Demand for labor was still further 
 diminished. The business of France dwindled into a mere living from 
 hand to mouth. This state of things, too, while it bore heavily against 
 the interests of the moneyed classes, was still more ruinous to those 
 in more moderate, and most of all to those in straitened, circumstances. 
 With the masses of the people the purchase of every article of supply 
 became a speculation — a speculation in which the professional specu-
 
 THE STANDARD QUESTION: PAPER MONEY 147 
 
 lator had an immense advantage over the buyer. Says the most 
 brilliant apologist for French Revolutionary statesmanship, 'Com- 
 merce was dead; betting took its place. ' " 
 
 In the early part of 1792 the assignat was 30 per cent below par. 
 In the following year it had fallen to 67 per cent below par. A basis 
 for further issues was secured by the confiscation of lands of emigrant 
 nobles, and a flood of assignats poured forth upon the country in 
 steadily increasing volume. Before the close of 1 794 seven thousand 
 millions had been issued, and the year 1796 opened with a total issue 
 of forty-five thousand millions, of which thirty-six thousand millions 
 were in actual circulation. By February of that year the total issue 
 had advanced to 45,500,000,000, and the value had dropped to one 
 two-hundred-and-sixty-fifth part of their nominal value. A note 
 professing to be worth about $20 of our money was worth about 
 six cents. 
 
 The Government now came forward with a new scheme, offering 
 to redeem the assignats, on the basis of 30 to i, for mandats, a new 
 form of paper money, which entitled the holder to take immediate 
 possession, at their estimated value, of any of the lands pledged by 
 the assignats. Eight hundred millions in mandats were issued, to be 
 exchanged for the assignats, and the plates for printing the latter 
 were destroyed. Six hundred millions more of mandats were issued 
 for the public service. At first the mandats circulated at as high as 
 80 per cent of their nominal value, but additional issues sent them 
 down in value even more rapidly than the assignats had fallen, and 
 in a very short time they were worth only one- thousand tli part of 
 their nominal value. It was evident that the end had come. Before 
 the assignats were withdrawn, the Government resorted to various 
 expedients to hold up their value by legislative decrees. The use of 
 coin was prohibited; a maximum price in assignats was fixed for 
 commodities by law; the purchase of specie was forbidden under 
 penalty of imprisonment in irons for six years; and the sale of assig- 
 nats below their nominal value was forbidden under penalty of im- 
 prisonment for twenty years in chains. Investment of capital in 
 foreign countries was punishable with death. All these efforts were as 
 futile as similar efforts had been m John Law's time. The value of 
 the assignats went steadily down. Bread riots broke out in Paris, 
 and the Government was compelled to supply the capital with pro- 
 visions. When tlie mandats fell, as the assignats had fallen before
 
 l4cS PRINCIPLES OF MONEY AND BANKING 
 
 Ihem, the Government was convinced that it was useless to try to 
 give value to valueless paper by simply printing more paper and call- 
 ing it by another name; and on July i, 1796, it swept away the whole 
 mass by issuing a decree authorizing everybody to transact business 
 in any money he chose. "No sooner," says Mr. McLeod, in his 
 Economical Philosophy, "was this great blow struck at the paper 
 currency, of making it pass at its current value, than specie immedi- 
 ately reappeared in circulation." In commenting upon this second 
 experience of France with paper money, which lasted for about six 
 years, Professor A. L. Perry, in his Elements of Political Economy, 
 thus graphically and truthfully sums up the consequences: "The 
 distress and consternation into which a country falls when its current 
 measure of services is disturbed and destroyed, as it was in this case, 
 is past all powers of description. The prisons and the guillotine did 
 not compare with the assignats in causing suffering during those six 
 years. This example is significant because it shows the powerlessness 
 of even the strongest and most unscrupulous governments to regulate 
 the value of anything. The assignats were depreciating during the 
 very months in which Robespierre and the Committee of Public 
 Safety were wielding the power of life and death in France with 
 terrific energy. They did their utmost to stop the sinking of the 
 Revolutionary paper. But value knows its own laws, and follows 
 them in spite of decrees and penalties." 
 
 91. SOUTH CAROLINA'S FIRST PAPER MONEY^ 
 ANONYMOUS 
 
 The first paper money issued in the Province of South Carolina 
 was by virtue of an Act of the General Assembly, May 8, 1703, en- 
 titled "An Act for Raising the Sume of four thousand pounds, on the 
 real and personal estates, and of and from the profits and revenues, of 
 the inhabitants of this Province, and establishing bills of credit, for 
 satisfying the debts due by the public on account of the late expedition 
 of St. Augustine." 
 
 By this Act £6 000 in bills of credit were stamped and issued, 
 bearmg an interest of 1 2 per cent per annum from the date of the bill 
 to the time the same was paid to the public receiver; and the said 
 bills were to be sunk and cancelled by the tax raised by this Act; 
 
 •Adapted from Sound Currency, V (1898), No. 4, pp. 34-44. Evidently written 
 in 1739 by some unknown person.
 
 THE STANDARD QUESTION: PAPER MONEY 149 
 
 £2,000 to be raised and paid on February i, 1703; £2,000 on February 
 I, 1704; and the remainder by means of duties arising by an Act 
 made on IVIay 6, 1703, entitled "an Act for laying an imposition 
 on furrs, skins, liquors, and other goods and merchandize, imported 
 into and exported out of this Province." 
 
 By an Act of December 20, 1703, the public receiver is directed 
 to cancel £3,000 of the former bills when the tax assessments shall 
 be raise.d; and £r,ooo in bills at 12 per cent is continued current, 
 any limitation in the former Act notwithstanding. 
 
 And by an Act, passed November 4, 1704, reciting "that a great 
 part of the money and bills appropriated by the before recited Acts 
 for particular uses, viz., calling in and sinking the bills of credit, had, 
 for the immediate service and necessary defence of the Province, been, 
 by order of the General Assembly, made use of for other purposes 
 than they were appointed for and appropriated to by the said Acts," 
 it was enacted that such payments should be deemed legal, and the 
 receiver was indemnified and acquitted, as fully as if he had duly 
 applied the same to the uses appointed by the Acts first recited. 
 
 On the same day, November 4, 1704, another Act was passed for 
 raising the sum of £4,000 on the real and personal estates, and of and 
 from the profits and revenues of the inhabitants of the Province, to 
 pay and cancel the bills of credit now outstanding. This Act recites 
 "that the urgent necessity for fortifying Charles Town, and other 
 occasions for the defence of the Province against the common enemy, 
 had exhausted the public treasury, and prevented the calling in and 
 sinking the bills of credit. Therefore it was enacted that the bills 
 should continue current, and a tender in law, with the interest of 12 
 per cent until March 10, 1705; and a tax of £4,000 was imposed, 
 payable on the JVIarch 9, 1705, and appropriated for calling in the 
 bills of credit which were then outstanding. A penalty was laid on 
 the public treasurer, that if he misapplied any of the sums so appro- 
 priated, he should forfeit treble the value of the sum misappHed, and 
 should be rendered incapable of holding any office in the government. 
 
 But after the passing of this Act, another Act was made, on April 
 9, 1706, entitled "an Act for the sooner and more secure payment 
 of the debts owing by the pul)lic, and for the continuing the currency 
 of the bills of credit, commonly called country bills." By this Act, 
 all taxes laid by any former Acts of Assembly, and the duties imposed 
 by the Act passed May 6, 1703, were continued and made current, 
 and three-fourths of the duties before mentioned (after the payment
 
 I50 PRINCIPLES OF MONEY AND BANKING 
 
 of the pul:)lic debts and the clergy's salaries) were appropriated 
 toward the sinking and discharging the bills of credit, and the remain- 
 ing fourth part of the said duties were to be disposed of by order of 
 the General Assembly, for the contingencies of the government. 
 
 The next Act, July 5, 1707, provides for an additional emission 
 of paper currency, "for satisfying the debts due by the public on ac- 
 count of the late invasion; for finishing the fortifications about 
 Charles Town; to revive the several Acts therein mentioned; and 
 to call in the former bills of credit." By this Act, not only £8,000 in 
 new bills were issued for payment of the public debts, but the old 
 bills which were outstanding were exchanged for new bills, and were 
 by that means continued current, and made a tender in all payments. 
 This Act was made of force for two years, but was continued for four 
 years, by an Act passed July 1 2, 1707. This date was shortly extended 
 for another year; and then "to the end of the next session of the 
 General Assembly." By another Act passed February 14, 1707, 
 entitled "an Act for the better enabling the Governour to raise a 
 force against our public enemies, and to raise money to defray the 
 charges of the same, by establishing bills of credit," a further sum 
 of £3,000 was issued in bills of credit, £2,000 of which was to exchange 
 part of the old bills, which were too large, and the other £1,000 was 
 to remain in the treasury, to answer the emergencies of the govern- 
 ment. 
 
 A very short time after passing this Act, on April 24, 1708, an 
 Act was passed for rai'sing a further sum of £5,000 in bills of credit, 
 to be ready in the public receiver's hands to answer all emergencies; 
 it provided a fund to sink them, and the duties imposed by the 
 former Acts were continued to July 12, 17 14, and from thence to 
 the end of the next session of the General Assembly. On the ist 
 day of ISIarch, 17 10, an Act was passed for raising the sum of £3,000 
 in small bills, for sinking £1,000 of the former bills; and £2,000 to 
 be applied in the payment of the debts due from the pubHc. 
 
 The next emission of paper bills of credit was said to be in con- 
 sideration of the great expense the Province had been at in building 
 fortifications, and for assisting the inhabitants of North Carolina 
 against the Tusquerora Indians, who were then at war with them, 
 with twenty white men and such Indians as could be raised. On these 
 considerations an Act passed November 10, 17 11, "for raising the 
 sum of £4,000, by laying sundry additional duties on liquors and 
 other goods and merchandises, for carrjdng on an expedition against
 
 THE STANDARD QUESTION: PAPER MONEY 151 
 
 the northern Indians, enemies to the Crown of Great Britain, and 
 for aiding and assisting the inhabitants of North Carolina, who are 
 now actually invaded by the said Indians." 
 
 The Bank Act of June 7, 1712, was "an Act for raising the sum of 
 £52,000, by stamping and establishing new Ijills of credit, and putting 
 the same out to interest, in order to call in and sink the former bills 
 of credit." From the year 1703 to the time of passing this Act, by 
 the various emissions of bills of credit at the several times herein]:)efore 
 mentioned, there had been issued £29,000, which, either by a partial 
 application of the funds appropriated for sinking them, by the exchan- 
 ging old bills for new, or by bills lost or destroyed by accident, were, 
 at the time of passing this Act, reduced to £16,000, exclusive of the 
 Tusquerora bills, amounting to £4,000. 
 
 In the preamble of the Bank Act it is declared "that the public 
 debts, occasioned by the vast charges to which the Province for 
 several years past had been subject and liable .... were become 
 at last so greatly burthensome and considerable, that there was no 
 hope or probability that the same could be discharged in any toler- 
 able time, by the public duties and incomes of this Province; and that 
 it was also impracticable (especially at that time) to discharge and 
 defray the same by the ordinary method of imposing a tax on the 
 estates, stocks, and abilities of the inhabitants of the Province, with- 
 out pressing too hard upon them"; therefore £16,000 was issued for 
 exchanging the old bills; £32,000 to be let out at interest, payable 
 in 12 years, at such a rate as would sink both principal and interest 
 at the end of that term; £4,000 was also directed to be issued for the 
 contingencies of the government. These together with the Tusque- 
 rora bills made a total of £56,000. This was 9 years from the date 
 of the first issue. 
 
 In 17 15 a new series of emissions begins. By an Act of August 27, 
 a further sum of £30,000 in bills of credit were stamped and issued; 
 and it was provided by this Act, that in order to strengthen the 
 currency of the bills newly issued, a fund should be provided for 
 sinking the same by a tax; and accordingly, on the same day there 
 was passed an "Act to raise the sum of £30,000 on the real and per- 
 sonal estates of the inhabitants of this Province, in order to sink the 
 sum of £30,000 in bills of credit." 
 
 But within a year another Act was passed, to continue the cur- 
 rency of £30,000 in bills of credit, and also to stamp the sum of
 
 152 PRINCIPLES OF MONEY AND BANKING 
 
 £i5,cx)0 in bills of credit. In the reciting part of this Act it is taken 
 notice, "that by reason of the late troubles and confusions occasioned 
 by the Indian war the tax appointed to be raised by the Act made 
 27th August, 1715, for sinking the said sum £30,000 in bills of credit 
 lately issued, is therefore repealed and declared void." £15,000 
 additional issues were sanctioned. The taxation principle again was 
 not forgotten; and an Act was promptly passed for raising £95,000, 
 a large portion of which was to be used in cancelling the outstanding 
 paper. As before, however, no bills were cancelled, and a succeeding 
 act therefore continued them. This Act of December 11, 17 17, also 
 stated that "it has been found by experience that the multiplicity of 
 bills of credit had been the cause of the ruin of our trade and commerce, 
 and had been the great evil of this Province; and that it ought, with 
 all expedition, to be remedied." It was therefore the resolution of 
 both Houses of Assembly that the above-mentioned bills of credit, 
 the bank bills excepted, amounting to £54,000, should be sunk on or 
 before the 2d Tuesday in March, 17 18. But by an Act passed 20th 
 February, 1718, entitled "an Act for raising the sum of £70,000 on 
 lands and negroes, for defraying the public debts, sinking the public 
 orders, and for calling in and cancelling the sum of £30,000 which is 
 now outstanding in bills of credit, over and besides the bank bills," 
 the last above mentioned is repealed and made void, and a new provi- 
 sion is made for sinking the bills by taxes, to be paid at three periods, 
 with liberty that such taxes might be paid in rice at certain prices, 
 varying with the date of payment. 
 
 Toward the latter end of the year 17 19, the people of South 
 Carolina threw off the government of the Lords Proprietors, and chose 
 a new Governour and Council, and during those confused times new 
 currency principles were developed. New bills were issued, payable 
 in rice at 305. per hundred. The old bills of credit were made legal 
 tender in .all payments, thus putting them all on an equaUty. It was 
 also provided, September 21, 17 21, that the sum of £4,000 of the said 
 bills of credit, then outstanding, should yearly, and ever}^ year, be 
 sunk, called in, and cancelled, by a tax to be raised on lands and 
 slaves, over and above the several sums of money to be yearly raised 
 for the support of the Government. And liberty was given by this 
 Act to all persons to pay their taxes in these paper bills of credit. 
 
 The reasons given for this new departure, as they are set down in 
 the preamble, are as follows, to wit: " that it was ver}' uncertain what 
 quantity of bills of credit were then current, many of them bemg
 
 THE STANDARD QUESTION: PAPER MONEY 153 
 
 counterfeited, and they being then so old, that it was absoluteh- 
 necessary that they should be called in and reprinted. And that bv 
 reason of the great floods, many of the inhabitants had lost their 
 crops, and most had suffered so much by the same, that they were 
 rendered incapable to pay the yearly rice tax necessary to be raised 
 for the support of the Government." At this time the total outstand- 
 ing issues had reached £120,000. The exchange rates in English 
 money were at a heavy premium, about five to one. 
 
 After his Majesty had purchased the soil of this Province, the 
 late Governour Johnson was appointed and received from his Majesty 
 several instructions relating to the paper bills of credit. It was first 
 provided that the revenues appropriated to the discharge of old bills 
 of credit should be used for seven years for the purchase and laying 
 out of townships, and for the purchasing of tools, provisions, and 
 other necessaries "for any poor Protestants that shall be desirous to 
 settle in our said Province." This was made law by an Act of August 
 20, 1 73 1, and was adhered to for several years. 
 
 The second instruction of Governour Johnson led to the act of 
 August 20, 1 73 1, for calling in, reprinting, and exchanging all paper 
 bills of credit, the amount then outstanding being £106,500. This 
 act is significant because no fund was appointed or established for 
 the gradual repaying and cancelling of the bills. At this time it took 
 approximately £6 in paper to equal £1 in English money. By 1739 
 (the date of writing this article) the rate of exchange was seven to one. 
 
 92. SUMMARY OF COLONIAL ISSUES' 
 By HORACE WHITE 
 
 There were three main causes or excuses for the issue of colonial 
 bills of credit: (i) war expenses; (2) loans to individuals; (3) ordi- 
 nary expenses of government. There were other pretexts. One of the 
 most common was the replacement of old and worn bills, which always 
 left a margin over for general expenses, and sometimes a ver>' large 
 margin. 
 
 Colonial bills of credit were of several dififerent kinds, viz., (i) 
 interest-bearing, not legal tender (these were unobjectionable); 
 (2) the same, legal tender for the principal and sometimes for the 
 interest also; (3) non-interest-bearing, legal tender for all purposes; 
 (4) the same, legal tender for future but not for past debts; (5) the 
 
 'Adapted from Money atid Banking, pp. 83-84, (Ginn & Co., 18Q5.)
 
 154 pRiN(ii'i.i;s or money and banking 
 
 same, nol legal lender between j^rivale persons, but receivable for 
 all public dues. 
 
 Interest-1)earing bills were soon abandoned and the tendency in 
 all the colonies was to make the bills legal tender for all purposes. 
 But for the restraints imposed by the mother-country probably all 
 would have been legal tender for all i)uri)oses, and the issues would 
 have been much larger in amount than they were. 
 
 The usual course of events where bills of credit were issued (but 
 with some variations) was as follows: (i) emission; (2) disappear- 
 ance 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 that had been 
 placed on loan; (7) depreciation; (8) repudiation of early issues in 
 part and the emission of others called "new tenor." 
 
 (2) PAPER MONEY AS A MEANS OF WAR FINANCE 
 
 93. THE ISSUE OF CONTINENTAL BILLS OF CREDIT' 
 
 By CHARLES J. BULLOCK 
 
 Within six weeks after the Continental Congress convened on 
 May ID, 1775, the issue of bills of credit as a means of financing the 
 Revolution was determined upon. Before the close of 1775 Congress 
 issued $6,000,000 of paper money and urged the states to redeem 
 their respective quotas of the bills by imposing taxes. But the states 
 refused to resort to taxation, except for inconsiderable sums, and con- 
 tinued to emit increasing amounts of their own paper. After unsuc- 
 cessful efforts to raise revenue by such expedients as a lottery and a 
 domestic loan, larger continental issues had to be emitted. In 1777, 
 Congress began to make requisitions upon the states for money that 
 was to be raised by taxes which only the states could impose; but 
 these requests met with such a partial compliance that further' issues 
 of paper were placed in circulation. Several years elapsed before the 
 states instituted effective systems of taxation, and little assistance 
 was secured from this source. Loans and subsidies furnished by 
 France brought considerable sums into the federal treasury; but more 
 and more paper was emitted, the amounts of the issues increasing 
 as the depreciation of the currency progressed. By the end of 1779, 
 Congress had issued $241,500,000 of the continental bills of credit; 
 while the states had gradually increased their emissions to more than 
 
 • Adapted from The Monetary History of the United States, pp. 64-65. (The 
 Macmillan Co., igoo.)
 
 THE STANDARD QUESTION: PAPER MONEY 155 
 
 $200,000,000. At the opening of 1781, a dollar in paper was worth 
 less than two cents in specie, and the currency soon afterward sank 
 in value to such an extent that it became practically worthless. 
 
 94. EFFECTS OF CONTINENTAL CURRENCY ON DEBTORS 
 AND CREDITORS' 
 
 By DAVID RAMSAY 
 
 The aged who had retired from the scenes of active business, to en- 
 joy the fruits of their industry, found their substance melting away to a 
 mere pittance, insufficient for their support. The widow who lived 
 comfortal)ly on the bequests of a deceased husband experienced a 
 frustration of all his well-meant tenderness. The laws of the country 
 interposed, and compelled her to receive a shilling where a pound 
 was her due. The blooming virgin who had grown up with an unques- 
 tionable title to a liberal patrimony was legally stripped of every- 
 thing but her personal charms and virtues. The hapless orphan, 
 instead of receiving from the hands of an executor a competency to 
 set out in business, was obliged to give a final discharge on the pay- 
 ment of M. in the pound. In many instances, the earnings of a long 
 life of care and diligence were, in the space of a few years, reduced to a 
 trifling sum. A few persons escaped these affecting calamities, by 
 secretly transferring their bonds, or by flying from the presence or 
 neighborhood of their debtors. A hog or two would pay for a slave; 
 a few cattle for a comfortable house; and a good horse for an improved 
 plantation. A small part of the productions of a farm would dis- 
 charge the long-outstanding accounts, due from its owner. The 
 dreams of the golden age were realized to the poor man and the 
 debtor, but unfortunately what these gained was just so much taken 
 from others. 
 
 95. DEMORALIZING INFLUENCE OF THE CONTINENTAL 
 
 CURRENCY^ 
 
 By PELATIAH WEBSTER 
 
 The fatal error, that the credit and currency of the Continental 
 money could be kept up and supported by acts of compulsion, entered 
 so deep into the mind of Congress and of all departments of admin- 
 istration throughout the States that no considerations of justice, 
 
 'Adapted from History of American Rcvolulion (.1789), II, 134-35. 
 'Adapted from Strict iirrs on Tender Acts (1780).
 
 156 PRINCIPLES OF MONEY AND BANKING 
 
 religion, or policy, or even experience of its utter inefficacy, could 
 eradicate it; it seemed to be a kind of obstinate delirium, totally 
 deaf to every argument drawn from justice and right, from its 
 natural tendency and mischief, from common sense, and even 
 common safety. 
 
 Congress began as early as January 11, 1776, to hold up and 
 recommend this maxim of maniasm, when Continental money was 
 but five months old. Congress then resolved, that "whoever should 
 refuse to receive in payment Continental bills, &c., should be deemed 
 and treated as an enemy of his country, and be precluded from all 
 trade and intercourse with the inhabitants," &c., i.e., should be out- 
 lawed; which is the severest penalty (except of life and limb) known 
 in our laws. 
 
 This ruinous principle was continued in practice for five suc- 
 cessive years, and appeared in all shapes and forms, i.e., in tender 
 acts, in limitations of prices, in awful and threatening declarations, 
 in penal laws with dreadful and ruinous punishments, and in every 
 other way that could be devised, and all executed with a relentless 
 severity by the highest authorities then in being, viz., by Congress, by 
 Assembhes and Conventions of the States, by Committees of Inspec- 
 tion (whose power in those days were nearly sovereign), and even by 
 military force; and tho' men of all descriptions stood trembling be- 
 fore this monster of force, without daring to lift a hand against it, 
 during all this period, yet its unrestrained energy ever proved inef- 
 fectual to its purposes, but in every instance increased the evils it 
 was designed to remedy, and destroyed the benefits it was intended 
 to promote; at best its utmost effect was like that of water sprinkled 
 on a blacksmith's forge, which indeed deadens the flame for a moment, 
 but never fails to increase the heat and force of the internal fire. 
 Many thousand families of full and easy fortune were ruined by these 
 fatal measures, and lie in ruins to this day, without the least benefit 
 to the country, or to the great and noble cause in which we were 
 then engaged. 
 
 It has polluted the equity of our laws; turned them into engines of 
 oppression and wrong; corrupted the justice of our public adminis- 
 tration; destroyed the fortunes of thousands who had most confidence 
 in it, and has gone far to destroy the morality of our people.
 
 THE STANDARD QUESTION: PAPER MONEY 157 
 
 96. THE SPIRIT OF THE TIMES' 
 Sons of Boston! Sleep No Longer! 
 
 Wednesday, June 16, 1779. 
 
 You are requested to meet on the floor of the Old Scotch Meeting 
 House to-morrow morning, at 9 o'clock, at which time the bells will 
 ring. 
 
 Rouse and catch the Philadelphia spirit; rid the community of 
 those monopolizers and extortionators, who, like canker worms, are 
 gnawing upon your vitals. They are reducing the currency to waste 
 paper, by refusing to take it for many articles; the infection is dan- 
 gerous. We have borne with such wretches, but will bear no longer. 
 PubUc example, at this time, would be public benefits! You then 
 that have articles to sell, lower your prices; you that have houses to 
 let, refuse not the currency for rent; for inspired with the spirit of 
 those heroes and patriots, who have struggled and bled for their 
 country, and moved with the cries and distress of the widow, the 
 orphan and the necessitous, Boston shall no longer be your place of 
 security! Ye inhabitants of Nantucket, who first introduced the 
 accursed crime of refusing paper money, quit the place, or destruction 
 shall attend your property, and your persons be the object of 
 
 Vengeance. 
 
 N.B. Lawyers, keep yourselves to yourselves. It is our determi- 
 nation to support the reputable merchant and fair trader. 
 
 97. THE EXCUSE FOR CONTINENTAL CURRENCY^ 
 By CHARLES J. BULLOCK 
 
 The Continental Congress has often been blamed for resorting 
 to the disastrous expedient of issuing paper money, but the financial 
 policy of the Revolution was practically settled by the j)rovincial 
 assemblies. Congress did not convene in Philadelphia until May 10, 
 and did not determine to issue bills of credit until June 22. Mean- 
 while, Connecticut had decided in April to emit paper money; and 
 Massachusetts had adopted a similar measure seven days before Con- 
 gress assembled. Before the month of May had exi)ired, Rhode 
 
 ■ Prom Phillips, Historical Skclclics of the Paptr Currency, p. 128. 
 ' .Adapted from The Monetary History of the ignited iitates, pp. 60-63. (The 
 Macmillan Co., 1900.)
 
 1S8 PRINCIPLES OF MONEY AND BANKING 
 
 Island pursued a similar course; and, in June, New Hampshire, Penn- 
 sylvania, and South Carolina followed suit. During the next few 
 months all the other colonies, without a single exception, decided to 
 provide the sinews of war by means of bills of credit. 
 
 Although the Continental Congress was a revolutionary assembly 
 which might conceivably have attempted to assume all the authority 
 of a strong national government, it is almost certain that such a 
 course would have resulted in the downfall of that body. It was in 
 reality a consultative assemblage, whose powers were limited by the 
 wishes of the several colonies. In order to exist and to maintain any 
 respect for its authority, Congress had to be governed by the temper 
 of its constituents; and, in respect to the proper financial policy, the 
 wishes of the people of America had already been indicated with suf- 
 ficient clearness by the action of the various provincial assemblies. 
 These bodies had commonly pledged the half or the whole of their 
 estates for the preservation of their sacred liberties, but they had 
 shown a uniform determination to raise money by sacrificing only 
 the estates of those people who were helpless to avoid the losses of a 
 depreciating currency. It is perfectly true that the expenses of any 
 war must, apart from help secured in foreign countries, be defrayed 
 out of the annual produce of the industry of a people; and that 
 taxation is the safest, surest, and wisest method of meeting such 
 expenditures. But the hands of Congress seem to have been bound 
 by its lack of authority and the manifest desires of the people. The 
 New York assembly, and probably some others, had conveyed to the 
 men gathered in Philadelphia explicit statements of their sentiments; 
 and the actions of various provincial congresses in actually issuing 
 paper were more significant than any words. 
 
 Thus the Continental Congress and the individual colonies of 
 states, undertook to carry on the struggle for independence by the 
 aid of bills of credit. The dangers of such a course were fully appre- 
 ciated by many men, but the temper of the great body of the people 
 could not be mistaken. Recent historians have investigated with 
 great care and entire fairness the extent and character of the opposi- 
 tion which the revolutionary movement encountered from many of 
 the most intelligent and respectable persons in America, and have 
 assured us that earlier writers have failed to do justice to the strength 
 and honesty of that party which considered separation from the 
 mother-country to be unnecessary and undesirable. With the history 
 of colonial paper currencies before us, it is reasonable to believe that
 
 THE STANDARD QUESTION: l*Al'i:k MOXKV 159 
 
 the fear of reckless issues of bills of credit was certainly one cause for 
 the hostile attitude assumed by a large portion of the conservative, 
 propertied classes. 
 
 98. PAPER CURRENCY OF THE CONFEDERACY' 
 By G. C. EGGLESTON 
 
 The history of the South during the Civil War furnishes one of 
 the best illustrations on record of the disastrous consequences of 
 relying mainly upon the issue of irredeemable paper currency as a 
 means of financing war. There were some slight ta.x levies, it is true, 
 and some borrowing through the use of bonds, but paper money was 
 looked to from the first as the chief fiscal resource of the government. 
 There was only one difficulty incident to the process of printing 
 treasury notes enough to meet all the expenses of the government, 
 namely, the impossibility of having the notes signed in the Treasury 
 Department as fast as they were needed. There happened, however, 
 to be several thousand young ladies in Richmond willing to accept 
 light and remunerative employment in their homes, and as it was 
 really a matter of small moment whose name the notes bore, they were 
 given out in sheets to these young ladies, who signed and returned 
 them for a consideration. I shall not undertake to guess how many 
 Confederate treasury notes were issued. Indeed, I am credibly in- 
 formed by a gentleman who was high in oflSce in the Treasury Depart- 
 ment, that even the secretary himself did not certainly know. The 
 acts of Congress authorizing issues of currency were the hastily formu- 
 lated thought of a not very wise body of men, and my informant tells 
 me that they were frequently susceptible of widely different construc- 
 tion by different oflficials. However that may be, it was clearly out 
 of the power of the government ever to redeem the notes, and what- 
 ever may have been the state of aiTairs within the Treasury, nobody 
 outside its precincts ever cared to muddle his head in an attempt to 
 get at exact figures. 
 
 We knew only that money was astonishingly abundant. Provi- 
 sions fell short sometimes, and the supply of clothing was not always 
 as large as we should have liked, but nobody found it difficult to get 
 money enough. It was to be had almost for the asking. 
 
 Money was so easily got, and its value was so utterly uncertain, 
 that we were never able to determine what was a fair price for any- 
 thing. We fell into the habit of paying whatever was asked, knowing 
 
 ' Adapted from A Rebel's Recollections, pp. 78-105. (Hurd & HouKiUon, 1875.)
 
 l6o PRINCIPLES OF MONEY AND BANKING 
 
 that tomorrow wc should have to pay more. Speculation became the 
 easiest and surest thing imaginable. The speculator saw no risks of 
 loss. Every article of merchandise rose in value every day, and to 
 buy anything this week and sell it next was to make an enormous 
 prolit quite as a matter of course. 
 
 Naturally enough, speculation soon fell into very bad repute, and 
 the epithet "speculator" came to be considered the most opprobrious 
 in the whole vocabulary of invective. The feeling was universal that 
 the speculators were fattening upon the necessities of the country 
 and the sufferings of the people. Nearly all mercantile business was 
 regarded with suspicion, and much of it fell into the hands of people 
 with no reputations to lose, a fact which certainly did not tend to 
 relieve the community in the matter of high prices. 
 
 The prices which obtained were almost fabulous, and singularly 
 enough there seemed to be no sort of ratio between the values of dif- 
 ferent articles. I bought cofifee at forty dollars and tea at thirty 
 dollars a pound on the same day. My dinner at a hotel cost me 
 twenty dollars, while five dollars gained me a seat in the dress circle 
 of the theater. I paid one dollar the next morning for a copy of the 
 Examiner, but I might have got the Whig, Dispatch, Enquirer, or 
 Sentinel for half that sum. For some wretched tallow candles I paid 
 ten dollars a pound. The utter absence of proportion between these 
 several prices is apparent, and I know of no way of explaining it 
 except upon the theory that the unstable character of the money 
 had superinduced a reckless disregard of all value on the part of both 
 buyers and sellers. A facetious friend used to say prices were so high 
 that nobody could see them, and that they "got mixed for want of 
 supervision." He held, however, that the difference between tlie old 
 and the new order of things was a trifling one. "Before the war," 
 he said, "I went to market with the money in my pocket, and brought 
 back my purchases in a basket; now I take the money in the basket, 
 and bring the things home in my pocket." 
 
 In the winter of 1863-64 Congress became aware of the fact that 
 prices were higher than they should be under a sound currency. If 
 Congress suspected this at any earlier date, there is nothing in the 
 proceedings of that body to indicate it. Now, however, the news- 
 papers were calling attention to an uncommonly ugly phase of the 
 matter, and reminding Congress that what the government bought 
 with a currency depreciated to less than i per cent of its face, the 
 government must some day pay for in gold at par. The lawgivers
 
 THE STANDARD QUESTION: PAPER MONEY i6l 
 
 took the alarm and sat themselves down to devise a remedy for the 
 evil condition of affairs. With that infantile simplicity which char- 
 acterized nearly all the doings and quite all the financial legislation 
 of the Richmond Congress, it was decided that the very best way to 
 enhance the value of the currency was to depreciate it still further 
 by a declaratory statute, and then to issue a good deal more of it. 
 The act set a day, after which the currency already in circulation 
 should be worth only two-thirds of its face, at which rate it was made 
 convertible into notes of the new issue, which some, at least, of the 
 members of Congress were innocent enough to believe would be 
 worth very nearly their par value. This measure was intended, of 
 course, to compel the funding of the currency, and it had that elTect 
 to some extent, without doubt. Much of the old currency remained 
 in circulation, however, even after the new notes were issued. For a 
 time people calculated the discount, in passing and receiving the old 
 paper, but as the new notes showed an undiminished tendency to still 
 further depreciation, there were people, not a few, who spared them- 
 selves the trouble of making the distinction. 
 
 The financial condition got steadily worse to the end of the war. 
 I believe the highest price, relatively, I ever saw paid, was for a pair 
 of boots. A cavalry officer, entering the little country store, found 
 there one pair of boots which fitted him. He inquired the price. 
 "Two hundred dollars," said the merchant. A five hundred dollar 
 bill was offered, but the merchant having no smaller bills, could not 
 change it. "Never mind," said the cavalier, "I'll take the boots 
 anyhow. Keep the change; I never let a little matter of three 
 hundred dollars stand in the way of a trade." 
 
 Will the reader believe that with gold at a hundred and twenty- 
 five for one, or 12,400 per cent premium; when every day made the 
 hopelessness of the struggle more apparent; when our last man was 
 in the field; when the resources of the country were visibly at an end, 
 there were financial theorists who honestly believed that by a mere 
 trick of legislation the currency could be brought back to par ? J 
 heard some of these people explain ihcir plan during a two days' stay 
 in Richmond. Gold, they said, is an inconvenient currency always, 
 and nobody wants it, excejjt as a basis. The government has some 
 gold — several millions, in fact — and if Congress will only be bold 
 enough to declare the treasury notes redeemable at i)ar in coin, we 
 shall have no further dilTicuky with our finances. So long as notes 
 are redeemable in gold at the option of the holder, nobody wants
 
 l02 
 
 I'RINCIPLKS OV MONKY AND BANKING 
 
 them redeemed. Let the government say to the people, We will 
 redeem the currency whenever you wish, and nobody except a few 
 timid and un[)atriotic peoi)le will care to change their convenient for 
 an inconvenient money. The gold which the government holds will 
 suffice to satisfy these timid ones, and there will be an end of high 
 prices and depreciated currency. The government can then issue as 
 much more currency as circumstances may make necessary, and 
 strong in our confidence in ourselves we shall be the richest people 
 on earth; we shall have created the untold wealth which our currency 
 represents. 
 
 99. 
 
 A SAMPLE CONFEDERATE NOTE 
 
 TEH 
 
 
 100. REASONS FOR THE ISSUE OF THE GREENBACKS' 
 By WESLEY C. MITCHELL 
 
 The suspension of specie payments by the New York banks on 
 December 30, 1861, was immediately followed, of necessity, by the 
 suspension of like payments by the national treasury, and on the 
 very day that the New York banks suspended specie payments, a 
 proposal was made in Congress that the United States resort to the 
 issue of an irredeemable paper currency of legal-tender notes. 
 
 The opposition to the bill called attention prominently to the 
 lessons of experience. Could it be shown that the resort to an incon- 
 vertible paper currency had always been attended in the past with 
 evil results, a strong presumption would be created against the wis- 
 
 • A'dapted from A History of the Greenbacks, pp. 44-66. (The University of 
 Chicago Press, 1903.)
 
 THE STANDARD QUESTION: PAPER MONEY 163 
 
 dom of a repetition of the experiment. Consequently rhetoric was 
 employed to picture in vivid colors the unhappy consequences that 
 had followed the issue of paper money by France during the Revolu- 
 tion, by England in the Napoleonic wars, by Austria, and Turkey, by 
 Rhode Island in colonial days, by the Continental Congress in the 
 War of Independence, and finally by the Confederate States, then 
 fairly launched upon the paper-money policy. 
 
 To break the force of these historical parallels, which told so 
 heavily against the bill, its supporters sought to show that causes, 
 which under different conditions had led to depreciation, would not 
 be operative in the case of the United States in 1862. Thus, it was 
 said, the continental notes of the American Revolution dei)rcciated 
 because of the poverty of the country, which offered no security for 
 their redemption; the vastly greater wealth of the nation in 1862 
 would prevent a repetition of the experience. The depreciation of 
 the issues of Louis XIV was explained on the ground that France 
 was then exhausted by heavy taxation to maintain a profligate court. 
 The cases of the French Revolution and the Confederate States were 
 accounted for by the fact that these governments were revolutionary. 
 Some gentlemen even denied that depreciated currencies had proved 
 evils. "It would be far from a blunder," said Senator Howe, "to say 
 that the 'golden age' of England was during that long period when 
 the only currency she knew was one of irredeemable paper"; and 
 Mr. Kellogg declared the paper issues of the Revolution had increased 
 confidence, clothed the army, and revived commerce. Another sup- 
 porter of the bill tried to evade the historical argument by maintaining 
 that the true lesson of experience was that of moderate issues. But 
 no one seems to have taken these ingenious pleas very seriously, for 
 it was easy to show that one of the striking lessons of experiments 
 with paper money is that such moderation, which the issuer at first 
 intends to observe, has almost invariably been soon forgotten. 
 
 If the argument from experience was strongly against the bill, 
 the cognate economic argument was hardly less so. The opponents of 
 paper issues assumed the offensive, declaring emphatically that Uie 
 proposed legal-tender notes were certain to depreciate in value. 
 Mr. Lovejoy said: "It is not in the power of this Congress .... 
 to accomplish an impossibility in making something out of nothing. 
 The piece of paper you stamp as five dollars is not five dollars, and 
 it never will be, unless it is convertible into a five dollar gold piece; 
 and to profess that it is, is simply a delusion and a fallacy."
 
 l64 PRINCIPLES OF MONEY AND BANKING 
 
 Various shifts were tried to meet this attack. Mr. Kellogg boldly 
 asserted that the legal-tender quality of the notes would prevent 
 fluctuation of their value; but more faith was put in the reply that 
 the total wealth of the country was security for the notes, and this 
 security being ample the value of the paper would not decline. The 
 rejoinder to this was first, that the security for the notes was not the 
 total wealth of the people, but only such part of it as the government 
 could obtain by taxation; and second, that though the security for 
 ultimate redemption might be ample, the notes would nevertheless 
 depreciate in value, if the holders were unable to secure immediate 
 payment. 
 
 A different argument to show the improbability of depreciation 
 was based by Thaddeus Stevens upon the quantity theory of money 
 as expounded by McCulloch. "The value of legal-tender notes," 
 said he, "depends on the amount issued compared with the business 
 of the country. If a less quantity were issued than the usual and 
 needed circulation, they would be more valuable than gold." The 
 opponents of the bill replied, not by attacking the quantity theory, but 
 by insisting that all experience showed that, after one issue of paper 
 money had been made, other issues were sure to follow, until the 
 currency became redundant and depreciated. "The experience of 
 mankind," said Mr. Thomas, "shows the danger of entering upon 
 this path; that boundaries are fixed only to be overrun; promises 
 made only to be broken." "The same necessity," added Mr. Pomeroy, 
 "which now requires the amount of inconvertible paper now author- 
 ized, will require sixty days hence a similar issue, and then another, 
 each one requiring a larger nominal amount to represent the same 
 intrinsic value." To such assertions, backed by the weight of his- 
 torical evidence, the supporters of the bill could respond only that 
 the case of the United States would be an exception; the American 
 government would not yield, as other governments had done, to the 
 temptation to make further issues. 
 
 Not content with showing the economic evils of a depreciated 
 paper currency, the opponents of the bill denounced it roundly as 
 immoral. To pay contractors and soldiers in depreciated money, 
 they declared, was dishonorable. "The bill says to the world," 
 asserted Mv. Horton, "that we are bankrupt, and we are not only 
 weak, but we are not honest." The injustice, however, extended not 
 only to creditors of the government, but to all persons who would 
 be compelled to accept in payment money of less value than that
 
 THE STANDARD QUESTION: PAPER MONEY 165 
 
 which they had contracted to receive. And by thus encouraging the 
 debtor to defraud his creditor, urged Senator Fessenden, the bill 
 would lower the moral standards of the people. To these charges, 
 also, the promoters of the bill had Httle to say. 
 
 Upon the fiscal aspect of the bill the case of the opposition was 
 hardly less clear. First, they declared, the resort to an irredeemable 
 paper currency was a practical confession of bankruptcy, and would 
 therefore injure the credit of the government, and make less favorable 
 the conditions on which it could borrow. "We .... go out to the 
 country," said Fessenden, "with the declaration that we are unable 
 to pay or borrow at the present time, and such a confession is not 
 likely to increase our credit." Second, it was pointed out that the 
 depreciation of the currency would cause the prices of everything 
 which the government had to buy to rise, and thus would vastly in- 
 crease the cost of the war. As Senator Cowan put it, the government 
 "might as well lose 25 per cent on the sale of her bonds, as to be obliged, 
 in avoiding it, to pay 25 per cent more for everything she buys." 
 
 This discussion of the legal-tender paper currency produced in 
 Congress the feeling that under ordinary circumstances such a pro- 
 posal would be indefensible. The vigor with which the opposition 
 had presented the case against the bill made a deep impression. On 
 the other hand, the reasoning by which the supporters of the bill had 
 sought to establish the constitutional power of Congress to make 
 treasury notes a legal tender was felt to be inconclusive. The force 
 of the telling argument from experience had not been broken; the 
 probability of depreciation had not been disproved; no adequate 
 reply had been found to the indictment of the bill on moral grounds; 
 and, finally, it had not been denied that resort to paper issues would 
 injure the credit of the government and increase the cost of the war. 
 So generally was the objectionable character of the measure realized 
 hat Senator Fessenden could say: "All the opinions that 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 
 payment of debts." 
 
 And yet an argument was found that overcame the "extreme 
 reluctance" of a majority of the members and induced tliem to vote 
 for the bill. This argument was the plea of absolute necessitv. It 
 was to necessity that Mr. Spaulding had appealed in justification of his 
 first draft of the legal-tender bill. In opening the debate in Congress
 
 l06 PRINCri'LKS OF MONEY AND IJANKINC; 
 
 he repeated the argument with emphasis. "The hill before us," 
 he said, "is a war measure, a measure of necessity and not of choice, 
 presented .... to meet the most pressing demands upon the Treas- 
 ury." The cry of necessity was taken up by the other supporters of 
 the bill, who relied upon it to meet all the objections urged by the 
 opposition. 
 
 That the assertion of necessity might carry the added force of 
 official sanction. Secretary Chase was induced to send a note to the 
 chairman of the Committee on Ways and Means to be read to the 
 House. He wrote: "I have felt, nor do I wish to conceal that I now 
 feel, a great aversion to making anything but coin a legal tender in 
 payment of debts. It has been my anxious wish to avoid the necessity 
 of such legislation. It is, however, at present impossible, in conse- 
 quence of the large expenditures entailed by the war, and the suspen- 
 sion of the banks, to procure sufiicient coin for disbursements, and it 
 has therefore become indispensably necessary that we should resort 
 to the issue of United States notes." 
 
 This letter made the bill an "administration measure," and so 
 was an important factor in its success. 
 
 In replying to the plea of necessity, the opposition candidly ad- 
 mitted it would be better to issue a forced currency than to stop 
 payment, provided there were no alternative. "If the necessity 
 exists," said Senator Fessenden, "I have no hesitation upon the 
 subject and shall have none. If there is nothing left for us to do but 
 that, and that will effect the object, I am perfectly willing to do that." 
 But that such was the case was emphatically denied. "It has been 
 asserted .... with the utmost apparent sincerity," said Mr. Horton, 
 "that this is a measure not of choice, but of necessity. But Mr. 
 Chairman, that assertion is only reiterated, not proved. Where is 
 the proof that this is a matter of necessity? There may be proofs 
 abundant, but they have not been produced." 
 
 Not only did the opposition deny the necessity, but they were 
 ready also with suggestions of other means of securing the needed 
 funds. One suggestion was adequate war taxation. "Not a dollar 
 of tax has been raised," said Mr. Thomas, "and yet w^e are talking of 
 national bankruptcy, and launching upon a paper currency. I may 
 be very dull, but I cannot see the necessity, or the wisdom, of such a 
 course." It was by this time generally acknowledged that the 
 omission to impose heavy taxes at the extra session of July, iS6i, 
 was a serious blunder which Congress should repair as soon as possible.
 
 THE STANDARD QUESTION: PAPER MONEY 167 
 
 But the supporters of the bill argued that the pending situation could 
 not be met by taxation, for the needs of the treasury were too pressing 
 to wait until new taxes could be assessed and collected. 
 
 To this the rejoinder was made: If it will take too long to wait 
 for the proceeds of taxes, let the government supply its immediate 
 wants by selling bonds at their market value, and in the meantime 
 frame a permanent system of taxation that will yield an adequate 
 revenue. This plan was the same that the delegation of bankers had 
 urged upon the secretary and the committee of Congress, and it 
 encountered the same opposition. Senator Howe was unwilling, as 
 Mr. Spaulding had been, that government bonds should be sold below 
 par. ''The experience of half a century," said he, "has demonstrated 
 that the use of money is not worth more than 6 per cent; that sum 
 the Government ought to pay." Senator Fessenden replied: " Money 
 in the market is always worth what it will sell for. It is an article of 
 merchandise like anything else, and the Government has no reason 
 to suppose, unless it can offer much better security, that it should 
 get money at a better rate than anybody else." 
 
 Of course it was not possible without offering a loan to determine 
 precisely at what rates the government could sell its bonds; but the 
 opponents of the bill beheved that Mr. Stevens and Mr. Spaulding 
 exaggerated when they predicted that the price realized would range 
 between 50 and 80. Should a plan of finance based upon taxation 
 heavy enough to inspire confidence in the management of the treasury 
 be adopted, they were convinced that the government could secure 
 loans without serious sacrifice. And further, their fiscal argument 
 showed that an increase in the cost of the war would not be avoided 
 by the rival plan of issuing an inconvertible paper currency. 
 
 Still a third alternative was proposed by the opposition — the issue 
 of treasury notes without the legal-tender quality. This suggestion 
 was embodied in the three rival plans introduced into the House as 
 substitutes for the bill. The discussion of their merits naturally 
 elicited debate upon the efficacy of the legal-tender clause. The 
 supporters of the bill were ready enough with assertions of the im- 
 portance of the clause to the success of the measure; but they found 
 it difficult to explain precisely what its value was. One said, "By 
 making these notes a legal tender we prc\cnt the money sharks from 
 rol:)])ing our soldiers of their hard earnings." Another argued that 
 unless the United States notes were made a legal tender, the banks 
 would seek to depreciate lliem in order to retain the field of circulation
 
 i68 
 
 PRINCIPLES OF MONEY AND BANKING 
 
 for their own issues. A third declared, "If we make the government 
 issues a legal tender, the demand for specie will be so limited that 
 they will maintain their value." Finally, Senator Sherman argued 
 that the banks would not receive the government notes unless com- 
 pelled to do so by the legal-tender clause. In response Senator 
 Fessenden pointed to the clause authorizing the subtreasuries to 
 receive the notes on deposit at 5 per cent interest. This clause 
 would make discrimination against the notes impracticable, he argued; 
 for should the banks refuse to receive notes as deposits they would 
 lose business, because the holders would prefer to deposit with the sub- 
 treasuries, which would pay 5 per cent interest, instead of with banks. 
 
 loi. FLUCTUATIONS IN VALUE OF GREENBACKS^ 
 I860 18S1 1862 1863 1861 1865 
 
 
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 ^From Wesley C. Mitchell, A History of the Greenbacks, p. 277. (The Uni- 
 versity of Chicago Press, 1903.)
 
 THE STANDARD QUESTION: PAPER MONEY 
 
 169 
 
 102. GREENBACKS AND THE COST OF THE CIVIL WAR' 
 
 By WESLEY C. MITCHELL 
 
 I. THE GREENBACKS AND EXPENDITURES 
 
 It is a familiar remark of writers on public finance that all things 
 required by government fall into one of two categories — commodities 
 and services. This elementary distinction regarding the objects of 
 government expenditure is of very great importance for the present 
 problem. For since prices advanced in much greater ratio than 
 wages, it is clear that the greenback issues must have increased the 
 sums paid for commodities more than the sums paid for labor. Indeed, 
 this difference between increase in cost of commodities and of labor 
 seems to have been much wider in the case of the government than 
 in the case of private persons. Clearly then the first step in any 
 estimate of the effect of the legal-tender act upon the expenditures 
 of the government during the war should be a careful separation of 
 expenditures for commodities from expenditures for services. 
 
 ESTIMATED INCREASE IN THE ORDINARY EXPENDITURES OF THE 
 
 FEDERAL GOVERNMENT CAUSED BY THE GREENBACKS 
 
 (In millions of dollars) 
 
 Fiscal Years 
 
 1862 
 
 (Six 
 Months) 
 
 1863 
 
 1864 
 
 1865 
 
 1866 
 
 (Two 
 
 Months) 
 
 Expenditures: 
 
 Class I, salaries, etc 
 
 Class II, commodities 
 
 Class III, both labor and com- 
 modities 
 
 Assumed ratio of increase: 
 
 Class II 
 
 Class III 
 
 Estimated actual increase: 
 Class I, increase in pay of sol- 
 diers 
 
 Class II 
 
 Class III. 
 
 Total estimated increase 
 each year 
 
 92 
 
 82 
 
 3% 
 3% 
 
 242 
 
 214 
 
 238 
 
 37% 
 27% 
 
 S8 
 51 
 
 109 
 
 259 
 
 258 
 
 294 
 
 56% 
 44% 
 
 6 
 93 
 90 
 
 189 
 
 408 
 
 402 
 
 405 
 
 102% 
 77% 
 
 62 
 203 
 176 
 
 441 
 
 45 
 43 
 
 44 
 
 43% 
 49% 
 
 20 
 13 
 14 
 
 47 
 
 There are many dinicuUics in the construction of an accurate 
 table showing the effect of the greenbacks upon the expenditures for 
 
 ■ Adapted from A History of the Greenbacks, pp. 406-19. (The University of 
 Chicago Press, 1903.)
 
 170 
 
 PRINCIPLES OF MONEY AND BANKING 
 
 various classes of commodities and services; but the table on p. 169 
 is the best representation of the situation that can be given. The 
 total increase for the whole period is roughly $791,000,000. 
 
 II. THE GREENBACKS AND RECEIPTS 
 
 Of the government receipts during the war some sources were 
 unaffected, while with others the depreciated currency gave rise to 
 an increase of revenue for the government. Under the provisions 
 of the first legal-tender act customs duties were paid in gold, and 
 the ad valorem duties were assessed on the foreign specie valua- 
 tion of goods. The receipts from this source therefore remained 
 on substantially the same footing as if specie payments had been 
 maintained. The receipts from direct taxes were all collected under 
 one law passed six months before suspension. This law fixed the 
 total amount of the tax at $20,000,000 and determined the precise 
 amount to be raised by each state. Accordingly the legal-tender 
 acts had no effect upon this item — except that the states were 
 
 ESTIMATED INCREASE IN THE ORDINARY RECEIPTS OF THE 
 FEDERAL GOVERNMENT CAUSED BY THE GREENBACKS 
 
 (In millions of dollars) 
 
 
 Fiscal Year 
 1862 (Six 
 Months) 
 
 Fiscal Year 
 1863 
 
 Fiscal Year 
 1864 
 
 Fiscal Year 
 i86s 
 
 Fiscal Year 
 1866 (Two 
 Months) 
 
 Current receipts: 
 
 From customs 
 
 33-5 
 
 .1 
 
 1.8 
 
 •5 
 
 69. I 
 .2 
 
 1-5 
 
 30 
 
 37-6 
 
 102.3 
 .6 
 •5 
 
 47-5 
 109.7 
 
 84.9 
 I .0 
 1.2 
 
 330 
 209.5 
 
 313 
 
 .1 
 
 ^ .0 
 
 From sales of public lands 
 From direct tax 
 
 From miscellaneous 
 sources 
 
 12.3 
 
 64.4 
 
 From internal revenue . . . 
 
 Assumed ratios of increase . 
 Estimated actual increase . . 
 
 35 9 
 3% 
 .0 
 
 III .4 
 
 37% 
 10.0 
 
 260.6 
 56% 
 390 
 
 329.6 
 102% 
 106.0 
 
 108. 1 
 
 43% 
 19.0 
 
 enabled to pay their quotas in greenbacks instead of in gold. The 
 revenue derived from miscellaneous sources includes a considerable 
 number of small items. Of these, some were doubtless increased by 
 depreciation, e.g., proceeds of sales of captured and abandoned prop- 
 erty. Other items were unaffected, e.g., receipts of fees by American 
 consuls abroad. Premiums on sales of gold coin may be set down 
 from the present point of view as clear gain.
 
 THE STANDARD QUESTION: PAPER MONEY 171 
 
 The internal-revenue system of taxation was inaugurated by an 
 elaborate law passed July i, 1862, which imposed certain duties, 
 partly ad valorem, partly specific, upon a great variety of manufac- 
 tured articles. Two years later another act raised the rates of 
 taxation and increased the number of articles made to pay duties. 
 
 At the time the first law was passed the depreciation of the cur- 
 rency was not great, and probably the rates of taxation imposed do 
 not differ much from what they would have been upon a specie basis. 
 But without any modification of the terms of the law, the progressive 
 rise of prices must have caused an increase of the revenue from ad 
 valorem duties, and from taxes on gross receipts and upon incomes. 
 Receipts from specific duties, Hcenses, etc., however, probablv did 
 not increase except as changes were made in the law or in its admin- 
 istration. 
 
 The table shows the increase of receipts to be roughly $174,000,000. 
 
 III. THE GREENBACKS AND INDIRECT COSTS 
 
 It is probable that not a little of the lavishness with which public 
 funds were appropriated by Congress during the war can be traced 
 to the paper-money policy. At least such was the opinion of a man 
 so well placed to observe the operations of the treasury as Hugh 
 McCulIoch. In his report of 1867 he said: '"As long as notes could 
 be issued and bonds could be sold at a premium or at par, for what 
 the statute made money, there was a constant temptation to liberal, 
 if not unnecessary, expenditures. Had the specie standard been 
 maintained and bonds been sold at a discount for real money, there 
 would have been an economy in all branches of the public service 
 which unfortunately was not witnessed." 
 
 If the paper currency tempted the government to reckless expen- 
 ditures, it also predisposed the people to submit more willingly to 
 heavy taxation. The advance of money wages and of money prices 
 made most people feel wealthier, and, feeling wealthier, they were 
 less inclined to grumble over the taxes. But while the feeling of 
 prosperity may have been instrumental in procuring a cheerful 
 acceptance of war taxes, it is very doubtful whether the net effect 
 of the paper-money system was favorable to revenue. 
 
 IV. THE GREENBACKS AND THE PUBLIC DEBT 
 
 The resort to a legal-tender paper currency, one may argue, is a con- 
 fession of acute financial distress and as such must depress the market
 
 172 PRINCIPLES OF MONEY AND BANKING 
 
 for bonds. Therefore, to the financial loss caused by the increase of 
 expenditures should be added a second loss from the unfavorable 
 terms to which the government had to submit in selling its securities. 
 
 Of course, it is true that the secretaries of the treasury in their 
 efforts to borrow money were obliged to agree to some very hard 
 bargains. There was little ground for exultation over the sale at 
 par of bonds bearing interest at 5 or 6 per cent in gold when the 
 currency received from purchasers was worth in specie but 50 per 
 cent of its face value. But this loss arising from the difference in 
 value between the paper dollars received by the treasury for bonds 
 and the specie dollars which the treasury contracted to pay bond- 
 holders after a term of years is not a further loss in addition to the 
 losses discussed in the preceding sections, but rather these same losses 
 looked at from another point of view. For the estimate of the in- 
 crease of expenditures above receipts, and therefore of debt contracted, 
 rests precisely upon the decline in the value of the paper dollar from 
 the specie standard. One may arrive at an estimate of the loss either 
 by computing the increase in the number of dollars that had to be 
 borrowed in paper money to be repaid in gold, or by estimating the 
 decline in the specie value of the paper money raised by the sale of 
 bonds; but to make estimates by both of these methods would be 
 to include two guesses at the same item. 
 
 It is true that, had gold bonds been sold largely at less than par 
 for paper money, a second loss would have been incurred from the 
 discount in addition to the loss from the smaller purchasing power of 
 the currency received. But, as a matter of fact, the deviation from 
 par in the subscription prices for bonds was not of great importance. 
 The prices of government securities did not fluctuate very widely 
 during the war, for the very good reason that these prices showed 
 merely the value of one set of government promises to pay — viz., 
 bonds, in terms of another set — viz., greenbacks. Most factors that 
 affected the credit of the government would affect the specie value 
 .of all its promises in much the same manner, and therefore would not 
 alter materially the ratio of one to another. 
 
 It remains only to say a word about the effect of the legal-tender 
 acts upon the interest charge borne by the government. The great 
 financial argument in favor of the greenbacks has always been that 
 they constitute a "loan without interest." But against the saving 
 of interest effected by issuing greenbacks instead of selling bonds 
 should be put down the loss of interest on the increase of debt arising
 
 THE STANDARD QUESTION: PAPER MONEY 173 
 
 from the augmentation of expenditures. If the rate of interest be 
 taken at 6 per cent, a simple calculation shows that the interest 
 saved by the greenbacks up to August 31, 1865, was but $28,000,000 
 greater than the interest loss through the excess of increase of 
 expenditures over the increase of receipts as shown by tables. By 
 the end of this period the augmentation of debt caused by the 
 greenbacks had apparently become greater than the volume of green- 
 backs in circulation, so that from this time forward the annual loss 
 of interest probably exceeded the gain. 
 
 V. CONCLUSION 
 
 The public debt reached its maximum amount August 31, 1865, 
 when it stood at $2,846,000,000. Of this immense debt the preceding 
 estimates indicate that some $589,000,000, or rather more than a 
 fifth of the whole amount, was due to the substitution of United 
 States notes for metallic money. Little as these estimates can pre- 
 tend to accuracy, it seems safe at least to accept the conclusion that 
 the greenbacks increased the debt incurred during the war by a sum 
 running into the hundreds of millions. If so, it follows that, even 
 from the narrowly financial point of view of their sponsors, the legal- 
 tender acts had singularly unfortunate consequences. 
 
 103. EFFECTS OF GREENBACKS ON CREDIT TRANSACTIONS' 
 By JOSEPH J. KLEIN 
 
 In an address on " Character and Credit," delivered shortly after 
 the close of the Civil War, Mr. Edward D. Page stated that the long 
 credits which existed before the war could not be continued because 
 of the doubts that existed in consequence of a fluctuating standard. 
 Horace Greeley, writing his Essays on Political Economy sometime 
 before 1869, confirms the statements of Mr. Page. He declared that 
 our internal credit system had broken dowTi, and rural traders, no 
 longer able to replenish their stocks on credit, bought little or nothing. 
 A gentleman who was in the dry-goods business at the time states 
 that "during the war everything was on a cash basis, on account of 
 uncertainty." An actuary recalled that the usual terms during the 
 period were cash or thirty days. 
 
 The Commercial ami Financial Chronicle, on September 9, 1865, 
 published an authoritative editorial, "The Present State of Trade 
 
 'Adapted from "The Development of Mercantile Instruments of Credit," 
 Journal of AccomUancy, XIII (1912), 45-46.
 
 174 PRINCIPLES OF MONEY AND BANKING 
 
 and Credit," wherein we find exactly the information sought as a 
 result of "careful inquiry" regarding the buyers from the South and 
 the West. Most jobbing sales were made on "short" time, from 
 sixty days to four months, but if settled within thirty days from date 
 a discount of i per cent per month was allowed, including interest for 
 the first thirty days. Inasmuch as most bills were anticipated because 
 of these favorable terms, very little credit was either "asked or given." 
 Continuing from the same source, we learn that the continued 
 rise in prices because of the volume of currency in circulation has 
 made money so plentiful that even the retail merchants can and do 
 buy for cash. "Very little paper is being made," and it is on short-time 
 periods only. Industry has not kept pace with the demand, therefore 
 buyers are more anxious to secure goods than are the sellers to dispose 
 of them, which is another reason why long credit is not in vogue. 
 "To be sure," old customers can still get the one-time fashionable 
 six months, but a few only avail themselves of this privilege. About 
 one-half of the buyers pay cash, and the rest "average less than three 
 months' credit, while only a few obtain six to eight months." 
 
 104. PAPER MONEY AND SUBSIDIARY CURRENCY' 
 By ROLAND P. FALKNER 
 
 When, through the blighting influence of a forced circulation of 
 paper money, silver, as well as gold, disappears from the monetary 
 circulation, there is left a distressing vacancy which is not immediately 
 filled. The circulation of silver, the small change of ever>'day life, 
 affects the whole people, and the inability to secure change and make 
 change causes ceaseless vexation. Sweep out of existence all denomi- 
 nations of currency between the cent and the dollar and try to imagine 
 how the affairs of everyday life would be hampered and checked at 
 every turn. Petty commerce would be at a standstill. The retail 
 dealer would have to refuse his customer or give him credit, unless 
 the latter should be willing to purchase vastly more than he would 
 need. The payment of labourers would become a serious daily or 
 weekly trial for the employer. In actual experience there has never 
 been such a complete absence of small change, but there have been 
 times of great scarcity, marked by all the phenomena described. 
 
 There are two measures of relief which have been applied in such a 
 predicament, often concurrently. One is the issue of paper substi- 
 
 ■ Adapted from " The Private Issue of Token Coins," Political Science Quarterly, 
 XVI (1901), pp. 305-27.
 
 THE STANDARD QUESTION: PAPER MONEY 175 
 
 tutes — e.g., our own fractional currency; the other, the abundant 
 issue of copper coins — e.g., so that twelve pennies may do the work 
 of a shilling. If the crisis is prolonged the government sooner or later 
 steps in to give relief in one of these ways or both. But the need brooks 
 no delay, and it frequently happens that before the slow machinery 
 of the government is set in motion private persons seek relief in the 
 unauthorized issue of both notes and coin to meet the emergency. 
 
 In the United States resort has been made to tokens at various 
 times. During the suspension of specie payments in 181 2 and in 
 1837, large quantities were issued. Few of these ''shinplasters" 
 have been preserved; but the historians tell us that they were in 
 universal use and, if we consider the circumstances of their issue, we 
 may well believe that it was so. In the })anic of 1837 some relief was 
 sought in the issue of coppers. Within certain limits, such coins in 
 sufficient quantities are capable of being a substitute for small silver. 
 Some of these private copper coins ha\-e been preserved. Numis- 
 matists enumerate some 164 varieties of such coins from the Jack- 
 sonian epoch. In diameter and thickness they correspond to the 
 large copper cent then in use. 
 
 Of the coins described by the numismatist, some ninety-three are 
 what are designated as shop cards. These were issued by merchants 
 and others, partly as advertisements, partly to supply the great need 
 of small change. Some of them bear inscriptions, " For public accom- 
 modation," and the like, which indicate their purpose. On the other 
 hand, a large number of the coins of this period were used as vehicles 
 of political satire and abuse. The victim of this abuse is generally 
 Jackson. Thus, one coin of 1834 bears the gaunt figure of the Presi- 
 dent, carrying in one hand a sword and in the other a money-bag, 
 surrounded by the words, "A plain system, void of pomp." On the 
 reverse of the coin is the emblem of a jackass in his most stubborn 
 attitude, with the letters "LL.D." on his haunches, in allusion to 
 the degree conferred on Jackson by Harvard University. Over the 
 jackass are the words "Roman Firmness" and around the edge the 
 celebrated words of Jackson, "The Constitution as I understand it." 
 Another coin of 1837 bears a representation of a turtle carrying on 
 its back an iron safe labelled "Sub-treasury," while beneath are the 
 words, "Fiscal agent" and around the coin, "Executive experiment." 
 The reverse of this coin has a jackass running, and tlie words from 
 Van Buren's inaugural, "I follow in the steps of my illustrious prede- 
 cessor." The contest over the Bank is shown in two contrasted coins
 
 176 PRINCIPLES OF MONEY AND BANKING 
 
 of tills period. One bears a ship under full sail, labelled " Constitu- 
 tion," and around it the words, "Webster, credit currency, 1840"; 
 while the other shows a ship labelled "Experiment," struck by light- 
 ning and foundering in the waves, with the inscription, "Van Buren, 
 metallic currency, 1837." A few of the coins are laudatory of Jackson 
 and his party, but the greater number contain expressions of abuse 
 and ridicule. A full list of these coins, with appropriate explanations, 
 would form a complete exposition of the political controversies of the 
 day; for among them we fmd references to the Bank, the suspension 
 of specie payments, Benton's "mint-drops," slavery and kindred 
 subjects of contemporary interest. The strong political bias of these 
 coins leads us to doubt whether their circulation as money was as 
 general as that of the neutral merchant tokens. They are none the 
 less a curious monument alike of the bitterness of political strife and 
 of the disorders of the currency. 
 
 Again during the Civil War the depreciation of the greenbacks 
 soon drove the subsidiary silver from circulation and compelled a 
 resort to cheap substitutes and tokens. To mitigate this evil a law 
 was enacted July 17, 1862, authorizing the secretary of the treasury 
 to issue stamps to be exchanged for United States notes. Private 
 issues were prohibited in the most explicit terms. 
 
 This law was commonly understood to authorize the use of postage 
 stamps, and its first effect was a run upon the post-office for stamps. 
 The postmaster-general reported that in the third quarter of 1862 
 the receipts from the sale of stamps in twenty-nine of the larger post- 
 offices exceeded by $794,340.08 the receipts in the corresponding 
 quarter of 1861. This excess was, in fact, greater than the total sales 
 in the third quarter of 1861. In New York City alone the excess 
 was $425,296. Even at this rate the post-office department did not 
 supply half the quantity demanded. Such a sudden and unusual 
 demand greatly embarrassed the postal authorities and led to orders 
 from headquarters to refuse to sell stamps wherever there was reason 
 to believe they were not to be used for postal purposes. The adhesi\'e 
 stamps of the post-office were an awkward makeshift as currency. 
 They cracked easily, and when they grew dirty could not be used for 
 their original purposes. Frequently the mucilage was washed off or 
 they were pasted upon strips of cardboard. In some cases they were 
 encased in metal, and I have seen one with the face protected by a 
 piece of mica and bearing on the back an ingenious advertisement.
 
 THE STANDARD QUESTION: PAPER MONEY 177 
 
 The unfilness of the postage stamps for currency led the secretary 
 of the treasury to substitute small notes for them. As these notes 
 bore for each denomination a representation of the postage stamp of 
 the same value, they were known as postage currency. In December, 
 1862, he reported that it had been found impossible to keep pace with 
 the public demand, though the daily issue was $100,000 and was being 
 rapidly increased to twice that amount. Yet at the time of preparing 
 his report the aggregate issue had reached only $3,884,000, and to 
 meet the imperious needs of the trading public the issue was too 
 slow. In March, 1863, fractional notes were authorized to the extent 
 of $50,000,000. They were to take the place of the postage currency, 
 but by June 30, 1863, none had been issued, though the postage notes 
 then amounted to $20,192,456. It would appear that this sum really 
 met the needs of the time, for it was only gradually increased, though 
 as time went on the fractional currency took the place of the postage 
 issues. The combined issues as late as June 30, 1866, amounted to 
 not more than $27,070,876. 
 
 If by the close of 1863 the government had succeeded in supplying 
 the need of small currency, the same was not true in the early months 
 of that year, which, despite the prohibitions of the law, showed a 
 remarkable crop of " shinplasters " and copper tokens. The issue of 
 the latter began in the fall of 1862 and reached its height in the early 
 part of 1863. The Coin Collectors^ Journal for 1876 mentions about 
 5,000 varieties. 
 
 The coins are in general nearly of the diameter and thickness of 
 the small cents then in use, though a few are larger and approximate 
 the general appearance of the older copper cents. By far the greater 
 number are of copper slightly alloyed, though a small number are of a 
 composition which in its appearance is not unlike that of the nickel 
 cent of 1857. With regard to the inscriptions, we may distinguish 
 broadly between tradesmen's tokens and general tokens, using the 
 former term to designate such coins as bore some evidence of their 
 origin. I find in a small collection ten out of a total of thirty-five 
 which contain a direct promise to redeem the coins, sometimes in bills 
 but more generally without specification of the mode of redemption. 
 On the other hand, twenty-live coins contain only the name of the 
 dealer. While one side bears the name of the dealer, the other gen- 
 erally bears some patriotic emblem or inscription. The most frequent 
 of these is the Indian's head which figured on the legal cent after 1859.
 
 178 PRINCIPLKS OF MONEY AND BANKING 
 
 Looking at this side of the coin, one would suppose that he was han- 
 dling an ordinary cent. Heads of liberty, recalling the former cents, 
 flags, shields, and the like are also seen. Sentiments, such as "Liberty 
 and Union," "Union forever," are not infrequent; while an ingenious 
 miller of Albany, N.Y., seems to mix patriotism and business by the 
 inscription "Union Flour," and the People's Line of Steamers holds 
 strictly to business by placing on the coin the time-table of the line. 
 Doubtless these tokens involved a profit to the issuer and a loss to the 
 public. Yet the fact that the issuers placed their names upon the 
 coins seems to indicate that redemption was at least contemplated. 
 
 In the large collection mentioned above are enumerated as many 
 as 848 varieties of the general tokens. Since in the absence of the 
 trader's name two sides of the coin had to be inscribed, a greater 
 scope for the exercise of ingenuity was afforded to the designer. As 
 a rule, the coin has on one side an emblem and on the reverse side an 
 inscription. Perhaps the most frequent specimen was an almost exact 
 imitation of the legal cent, differing from that coin simply by the 
 insertion in very small letters of the word "not" above the words 
 "one cent." The Indian's head, either exactly or nearly reproducing 
 that on the legal coin, is a frequent emblem. We find used also the 
 shield, the flag, the figure of liberty, the heads of Washington and 
 Jackson, groups of cannon and arms, monitors, and many others. 
 The inscriptions are either general or have some reference to the 
 emblem on the coin. 
 
 C. The Aftermath of the Greenbacks 
 105. A CHRONOLOGY OF THE GREENBACKS 
 
 1. December 18, 1865: Secretary McCuUoch and Congress 
 pledged an early retirement of the greenbacks. 
 
 2. April 12, 1866: Congress hmited the retirement to a total of 
 $10,000,000 for the next six months, and not to exceed $4,000,000 
 monthly thereafter. 
 
 3. February 4, 1868: Further retirement forbidden; $44,000,000 
 had been retired in the interim. Total outstanding then $356,000,000. 
 
 4. March 3, 1869: In Public Credit act "Congress solemnly 
 pledges its faith to make provision at the earliest practicable period 
 for the redemption of the United States notes in coin." 
 
 5.'i87i and 1872: Secretary Boutwell reissued $6,137,000 of 
 retired notes. Shay's criticism soon induced their retirement again.
 
 THE STANDARD QUESTION: PAPER MONEY 179 
 
 6. March 7, 1873 — January 15, 1874: Secretary Richardson re- 
 issued $26,000,000 by means of a purchase of bonds. 
 
 7. April, 1874: Congress passed a bill authorizing reissues until the 
 total amount outstanding should reach $400,000,000. Grant vetoed 
 the bill April 22. 
 
 8. June 20, 1874: A clause in a banking measure fixed the upper 
 limit as $382,000,000, the amount then outstanding. 
 
 9. January 14, 1875: Congress provided that after January i, 
 1879, United States notes should be redeemed in coin. In the mean- 
 while for every increase of $ioo in bank-note currency, $So of green- 
 backs should be retired. 
 
 10. May 21, 1878: Forbade any further cancellation of the green- 
 backs. When redeemed they should be reissued by the Secretary. 
 The amount then outstanding was $346,681,016. 
 
 11. January i, 1879: Greenbacks redeemable in specie on demand. 
 
 12. July 12, 1882: Congress provided that when gold reserve fell 
 below $100,000,000 further issues of gold certificates should be sus- 
 pended, thus indirectly recognizing a definite minimum reserve. 
 
 13. 1894-95: The Government sold bonds to replenish specie 
 reserve. 
 
 14. March 14, 1900: A separate reserve fund of $150,000,000 
 was authorized, and adequate powers granted for maintaining such 
 reserve. 
 
 15. December 23, 1913: Net earnings derived by the United 
 States from federal reserve banks shall, in the discretion of the Secre- 
 tary of the Treasury, be used to supplement the gold reserve held 
 against outstanding United States notes. 
 
 106. THE GREENBACK MOVEMENT* 
 By MURRAY S. VVILDMAN 
 
 The long experience of the people with paper money in the form 
 of Government notes during the Civil War and the years following 
 when the legal-tender "greenbacks" constituted the chief circulating 
 medium, wrought an important change in the popular conceptions 
 of money. 
 
 Money was said to consist of anything which "bore the stamp of 
 the Government," something that depends for its \aka' upon the 
 
 ' .\dapted from Money Inflation in the L'nitid Stoics, pp. 15O-70. (G. P. 
 Putnam's Sons, 1905.)
 
 l8o PRINCIPLES OF MONEY AND BANKING 
 
 "faith or credit of the nation." This stamp, this faith, and credit 
 became thus the essential features, whereas before they had been 
 merely incidental features of money. This was true not only of 
 greenbacks, but also of bank notes under the national banking system 
 established during the war. Bank notes now seemed to come indi- 
 rectly from the Government. Their value no longer seemed to depend 
 upon the integrity of the banker which paid them out, for if redeemed 
 they were redeemed by the Government in greenbacks. 
 
 It is difficult to realize, or to overestimate, the importance of the 
 change which had taken place. 
 
 The action of the Government in the legal-tender provision had 
 cast a veil over the economic situation and concealed its true character. 
 In this adaptation of the popular mind to the new situation we have 
 a good example of the estabhshment of an institution by implicit 
 consent, where the people are guided by superficial criteria, and 
 where few have the interest to examine and hold in mind the real 
 principles upon which the new system rests. 
 
 In the first annual report of Secretary McCulloch, after the return 
 of peace, he recommended the speedy resumption of specie payments, 
 and he proceeded to withdraw the notes from circulation as the 
 treasury revenues would permit. His proposal was fully approved 
 by Congress, and in an act passed in April of 1866, a steady process 
 of contraction was provided for. 
 
 The action of Congress in thus providing for resumption of specie 
 payments gave a new basis for confidence in the credit of the Govern- 
 ment and was reflected in a rise in the value of the notes, which was 
 equivalent to a fall in prices of goods and of gold. The people were 
 apparently unable to see that such a fall of prices was the inevitable 
 result of the appreciating credit which the notes represented, a 
 process that must take place whether the actual quantity in existence 
 was large or small. Attention was centered, not on the underlying 
 cause, but on this group of coincident facts, namely, low prices, 
 inability to borrow interpreted as scarcity of money, and contraction 
 of the currency. The shadow had almost completely replaced the 
 substance as the cause of falling prices, and Congress was subjected 
 to a rain of protests against the poUcy of contraction. 
 
 This new money, which cost the Government nothing, seemed 
 to the people as good as gold. It paid the soldier, built the railways, 
 lifted the mortgage from the farm. What more could be asked of 
 any sort of money? It was the money of the common people; it
 
 THE STANDARD QUESTION: PAPER MONEY i8l 
 
 served all their purposes when they had it, but now it was apparently 
 growing scarce. Bankers said they had none to lend, debtors had 
 none with which to pay. Buyers found money scarce and were unable 
 to pay the old prices for products. Everybody was afraid to buy for 
 fear that when he wished to sell he could not "get his money back." 
 These were the practical facts, superficial though they may have been. 
 Business was dropping; values had all gone to pieces, apparently for 
 want of that which it cost the Government nothing to supply. 
 
 The attack upon the policy of contraction reached a successful 
 issue in 1868 in the act prohibiting any furtlier retirement of the 
 greenbacks. With the steadily falling prices, however, the discontent 
 was not abated and it found expression in a movement for the aboli- 
 tion of bank notes and an increase of the greenback currency. This 
 movement did not reach its culmination until 1878, though as early 
 as 1872 it appeared as a national party issue in the platform of the 
 Labor Reform party, which resolved: "That it is the duty of the 
 Government to establish a just standard of distribution of capital 
 and labor by providing a purely national circulating medium, based 
 on the faith and resources of the nation, issued directly to the people 
 without the intervention of any system of banking corporations, 
 which money shall be legal tender in the payment of all debts, public 
 and private." 
 
 The error of theory upon which the agitation for more money 
 was based may be shown in a series of propositions appearing in the 
 debates of Congress. 
 
 a) In the first place we have an illustration of the dangerous half- 
 truth. Since the value of a commodity, as gold, was determined by 
 demand for the thing and the supply of the same, so now it was 
 assumed, and urged, that the value of promises to pay was dependent 
 on the same law of demand and supply. The terms "gold" and 
 "promises" were not used, but the ambiguous term "money" was 
 used instead of either, so that the two propositions became identical. 
 The law applicable to the material standard was asserted to applv 
 to the medium which represented the new immaterial standard. 
 
 "A currency good in the payment of all debts would fi.v the price 
 of commodities, and the value of debts would be adjusted to it. The 
 price would be high or low, depending on the volume of the currency." 
 
 b) The identification of the token with the thing for which it 
 stood may be shown most clearly in the strange belief that the with- 
 drawal and subsequent destruction of a greenback was an annihilation
 
 l82 PRINCIPLES OF MONEY AND BANKING 
 
 of just so much of ihe wealth of the nation, notwithstanding the mani- 
 fest fact that no notes could be cancelled by the debtor Treasury 
 until it had secured them by delivering equivalent wealth to the 
 creditor holder. 
 
 "When you tell me that you will repeal the legal- tender act and 
 burn up the legal-tender notes I tell you you will burn up $382,000,000 
 values in this country and you reduce to the extent of $382,000,000 
 the property of tJie people of the United States of America." 
 
 c) If the value of the notes, or their purchasing power, depended 
 on the volume issued, from the economic point of view, and if the 
 stamp of the Government gave to money whatever value it possessed, 
 the whole problem of prices passed over as by the wave of a magician's 
 wand from the realm of economic law to the realm of legislation. 
 Here was a way out of all the trouble which depressed the people. 
 Here was the time and place to make a new declaration of independ- 
 ence, an opportunity to throw off the galling yoke of natural law! 
 For what other purpose did the Constitution give to Congress the 
 power to "coin money and to regulate the value thereof" ? 
 
 "I do not consult antiquated theorists of a hundred years ago 
 to determine whether we have, or have not, enough money for the 
 
 business of the country Being a practical man, I look upon 
 
 things as I find them and will insist on a system of finance which has 
 proven beneficial to our people." 
 
 "Are we to be whistled down the wind and answered by theories 
 from John Stuart Mill or from Bastiat ? I hope not." 
 
 " I feel compelled to regard the powers of Congress over the money 
 of the Republic absolutely sovereign, complete, indivisible, and un- 
 restrained It remained for the Congress of the United States, 
 
 representing the most intelligent and the most highly civilized people 
 of the world, to coin " the credit of the nation," and it has thus wisely 
 provided a lawful money for the people, an instrument of exchange 
 more perfect than that of any other nation. In our progress and 
 development a great stride was taken in monetary science when the 
 legal- tender act of 1862 was approved by the President of the 
 United States." 
 
 d) When these propositions were accepted it was useless to look 
 further for the cause of the hard times. The suffering all came from a 
 contraction of the currency. If it was answered that there had really 
 been no contraction as yet, the reply came quickly that, with the 
 great development of trade and industry in the last few years, and
 
 THE STANDARD QUESTION: PAPER MONEY 183 
 
 the natural growth of population, the failure to increase the volume 
 of currency was virtually contraction. 
 
 "It was then for want of money and not on account of too much 
 
 of it, to meet his obligations that he [Jay Cooke] failed The 
 
 injury in every instance can be traced to the want of money and 
 not to a superabundance of it." 
 
 "The Senate and the country may see and understand how and 
 why it is that, however hard our farmers and planters may work 
 arid toil, however genial and fruitful the season may have been, 
 however plentiful and refreshing the rains may have fallen on the 
 fruitful soil of the West and of the South, prosperity for the want of 
 money was, and is today, an impossibility." 
 
 It has been said that the people were not in a position to see 
 clearly the causes of the depression. What they did see was the net 
 results of all the complex forces. These net results were falling prices 
 and an inability to renew loans as they came due. The banks refused 
 to lend, not for want of a circulating medium, but because of the 
 inability of the borrower to assure the repayment of his accommoda- 
 tion. No doubt a large portion of the people believed that the banks 
 enjoyed special advantages under the banking law, and in so far as 
 they were creditors they were favored as all creditors are by declining 
 values, granting that the loan is secure, just as debtors are favored by 
 advancing prices. The attack on the banks was not an essential 
 feature of the movement, but added much strength to it. 
 
 e) Assuming then that producers were sufTering from a dearth of 
 legal-tender notes, and that Congress had power to remedy or increase 
 this suffering, the attack of the inflationists was naturally directed 
 at three specific acts: the contraction of the currency by tlie Secretary 
 with the approval of Congress in 1865, the guaranty of payment of 
 bonds in coin by the Act to Strengthen the Public Credit, and the 
 determination to resume specie payments and redeem the legal-tender 
 notes. In this attack is seen clearly outlined the change in moral tone 
 which had come over the country in a single decade. It is safe to 
 say that no prominent man in public life would have dared, even in 
 the darkest day of the war, to advise the perpetuation of the legal 
 tenders, or the scaling down of tlie bonded debt, even when the 
 bonds were issued in exchange for notes. With this attack upon 
 Congress and the Treasury came a vociferous abuse of capitalists in 
 general, of which the following is a fair example: "We have doubled 
 the indebtedness of the tax-payers of the country by agreeing to pay
 
 l84 PRINCIPLES OF MONEY AND BANKING 
 
 the five-twenty bonds in gold, when they were contracted to be f)aid 
 in greenbacks; but that does not satisfy the insatiate greed, the 
 voracious appetite of the Shylocks and sharks, the bankers and 
 brokers, the money mongers, and gold worshii)[)crs, of the country. 
 
 "No, sir, these lineal descendants and next of kin to the sordid 
 and mercenary crew whom the Saviour of the world when on earth 
 whipped and scourged from the temple at Jerusalem, must add to the 
 intolerable burden of debt of the people by bringing the price of every- 
 thing down to the standard of gold, by contracting the currency for 
 the purpose of accomplishing that sublimest of all follies in the present 
 condition of the country — the resumption of specie payment." 
 
 /) More important than the attack upon the creditor class itself 
 was the symptom of social disease indicated by this new and distorted 
 view of the obligation of the Government's contract — the pledged 
 "faith of the nation," which by these same partisans was said to 
 make the notes as good as gold. Men would assert that the value 
 of the promises of this great nation never could depreciate and in the 
 same debate gloat over the fact that claims against the Government 
 could not be enforced. 
 
 "It is known to every gentleman that you passed an act in 1869 
 saying you would redeem this debt in gold. Suppose you did. It 
 did not form any part of the contract. It was a legislative act and 
 bound nobody. Whenever you repeal it it is at an end." 
 
 g) Finally, in order to buttress this theoretical structure, illustra- 
 tions from history were given, and alleged conditions were described 
 with an utter disregard of facts. As an instance, one writer asserts, 
 to prove the influence of the quantity of money on prices, that " the 
 United States had $1,800,000,000 paper in January, 1866, and prices 
 ranged high accordingly in thatmoney; this year (1877) the volume 
 of money is little over $800,000,000, and prices are low accordingly." 
 False assertions such as this could be cited in great number. 
 
 These theories, supported by facts which did not exist, formed 
 what may be called the erroneous intellectual basis of greenbackism. 
 But this was only the basis of the movement; in order that the skeleton 
 might be clothed with flesh and blood and quickened into life, the 
 emotions of the people must be touched, and this point was not neg- 
 lected. No flights of oratory were wanting. On this line the two 
 Senators of the great State of Illinois may be quoted: 
 
 "If our country is not good, then our currency is not good; if our 
 Government is good our currency is good, and with a Government
 
 THE STANDARD QUESTION: PAPER MONEY 185 
 
 SO endeared to the people of this hmd that they would spend billions 
 upon billions of money and rivers and rivers of the best blood to 
 preserve it, I ask you where tlie man is who will stand up here 
 and curse it and say it is not responsible for the circulation of the 
 country." 
 
 "Sir, I maintain for that legal-tender, today, that it is as good 
 as gold. The honor of this nation is pledged for its redemption in 
 gold. We will never repudiate a dollar or a dime of it. Sir, it has 
 upon it the impress of the best faith of this nation. It is the money 
 
 sealed and sanctified with the best blood of the Republic It 
 
 is a noble currency, a grand trophy of the war, and held dear in the 
 heart of every American citizen." 
 
 h) The belief in an arbitrary shifting of values by every variation 
 in the volume of notes led to another view less extensively held, no 
 doubt, but yet of serious effect, and that was that Congress and the 
 Administration were in the corrupt control of the financial interests 
 against the producing or borrowing interests. As the farmer brooded 
 over his misfortunes and was stung with the feeling of injustice in 
 addition to the realization of loss; as the conviction became more 
 and more impressed that he had not only been betrayed by his repre- 
 sentatives, but deliberately robbed of the result of his labor and the 
 patrimony of his children, he was ready to believe the demagogue 
 who could explain it all and point out the remedy. This psychological 
 stress was made the more tense and socially effective by that concen- 
 tration of dissatisfaction in agricultural and rural environment which 
 characterized the West and South. 
 
 The "Inflation Bill of 1873" is one of the most entertaming 
 debates in the Annals of Congress. Objectively speaking, it com- 
 prises seventeen hundred columns of the Congressional Record and 
 occupied almost the entire attention of both Houses during the long 
 session of the Congress beginning December i. In this voluminous 
 compendium we have gathered together what is probably the most 
 interesting body of economic theor>-, from the point of view of the 
 curio-hunter, that American public records afford. The advocates of 
 inflation were in the majority — the vote in the House was 140 to 102; 
 in the Senate, 29 to 24 — and the bill to increase the circulation of 
 greenbacks to $400,000,000 failed to become law only by the %-eto 
 of President Grant. The quotations above are taken almost entirely 
 from this discussion, as illustrating the views of the most representative
 
 l86 , PRINCIPLES OF MONEY AND BANKING 
 
 body of men available. It may be observed that the inflationist 
 advocates were not confined to either of the great parties nor to any 
 section. 
 
 As a direct party issue greenbackism proved to be a weaker 
 movement than did the non-partisan measure of 1873-74. The tem- 
 porary relief of more prosperous times and the strength of the old 
 party ties resulted in practical abandonment after a single decade of 
 struggle. The element of the discontented and aggrieved found a 
 more promising field for their powers of agitation in another move- 
 ment which was already taking form; for while the silver movement 
 offered the essential benefits which greenbackism sought, it held out 
 certain important tactical advantages, 
 
 107. THE FRONTIER FARMER AND GREENBACKISM' 
 By CLYDE O. RUGGLES 
 
 It was ultimately in the agricultural west that greenbackism found 
 its strongest support. The conclusions of a study of the greenback 
 movement in two typical states, Iowa and Wisconsin, may be sum- 
 marized as follows: 
 
 The prosperous decade of i860 to 1870 encouraged many to engage 
 in farming and to go into debt; that the falling prices of the decade 
 1870 to 1880 made it impossible for many to pay these debts, especially 
 since the subsidy policy of the Homestead Law had enticed a class 
 with but very slender means to enter agriculture; that the counties 
 which sustained a slightly higher percentage of mortgage to farm 
 value gave more votes to the Greenback party; that the land subsidy 
 policy also brought about a greater production of the principal grains 
 than could be disposed of at a profit; that the Greenback party was 
 organized and attained its greatest strength in both States during the 
 years of greatest agricultural depression and lost its hold on the voter 
 with the return of better times; that the party was strongest in that 
 State which was more dependent upon agriculture, and in the section 
 of both States that were more frontier in character; and, finally, 
 that in the "Greenback counties" there was but little stress upon 
 manufacturing, diversified farming, and the dairy, and a marked 
 concentration upon grain farming. 
 
 'Adapted from "The Economic Basis of the Greenback Movement in Iowa 
 and Wisconsin," Proceedings of Mississippi Valley Historical Association (Omaha), 
 VI (1913), 765-
 
 THE STANDARD QUESTION: PAPER MONEY 187 
 
 108. OBJECTIONS TO RESUMPTION OF SPECIE PAYMENTS' 
 By benjamin BUTLER 
 
 If resumption of specie payments could be accomplished it would 
 cause the greatest depreciation of values in every species of property 
 except debts held against the Government and individuals. Every 
 bond and note would be appreciated, say 30 per cent. All other 
 property would be depreciated the same amount as compared with 
 the present rate of valuation. Such an unsettling of values the world 
 has never seen nor any nation endured. It would be equivalent to 
 confiscation by legislative act of one-third of the value of all the 
 property in the country, excepting only that held by the creditor 
 class. 
 
 But could resumption in fact be accomplished ? The sole allevia- 
 tion yet suggested is that such confiscation might be extended over a 
 considerable period of time, say two years and a half, so that we 
 might meanwhile be preparing ourselves for it; in other words, the 
 Government ought to deprive the large majority of the middle and 
 laboring classes of its people of 12 per cent annually of their values 
 until one-third of them are absorbed for the benefit of the small 
 minority, who are owners of capital loaned at interest. 
 
 I will not insult the intelligence of the House by any argument 
 upon the feasibiUty or practicability of these schemes. The better 
 way to test them is to call attention to one or two of the methods by 
 which it is proposed to accomplish so gigantic an undertaking. One 
 says, "The way to resume specie payments is to resume." Suppose 
 the physician should say to the sick man, "The way not to be sick 
 is to be well," might not the patient ask his doctor, How am I to get 
 well ? So, a few years ago, one may remember that the way proposed 
 for the Union armies to get to Richmond was "On to Richmond ''; and 
 I trust I may not be considered mahcious in calling to mind that our 
 armies found some difficulties in carrying out that suggestion, which 
 resulted in such disaster that it was to be hoped those who blindly 
 advocated it would never again dogmatize upon any subject the dif- 
 ficulties of which they neither appreciated nor understood. 
 
 Another proposition, coming from a source we much respect in 
 some other of the branches of political science, is that we pass a law 
 that specie payments shall be resumed on the ist day of July next, 
 
 'Adapted from speech in Congress, Januar>' 12, 1869, Congressional Globe, 
 40th Congr., 3d scss., pp. 304-5.
 
 l88 PRINCIPLES OF MONEY AND BANKING 
 
 bul we are not told how the law is to be executed if passed. It was 
 jocosely said many years ago that while an act of Parliament was 
 omnipotent yet it could not make one's uncle his aunt. I fancy there 
 would be an equally insuperable difficulty in compelling by act of 
 Congress the payment at par of $700,000,000 of debts due on demand 
 when there are but $100,000,000 capable of being used for that purpose- 
 
 Another learned, able, and intelligent gentleman, for whom all 
 entertain the highest regard, in a speech of great power, supports a 
 bill embodying a plan for the relief of our financial difficulties which 
 would be perfect were it not impossible. Stripped of the halo thrown 
 around it by his logic and learning, it proposes that the Government 
 and banks shall return to specie payments by hoarding gold enough 
 with which to do it. Granted: but where is the gold to be got? 
 By borrowing simply. For although the Government may hoard 
 the gold it receives for its duties on imports, yet that gold is in fact 
 obtained by its merchants by borrowing it with Government notes 
 at 35 per cent discount. Whatever deficit of gold to carry out this 
 scheme cannot be obtained by this process is to be borrowed on the 
 Government notes for thirty years, sold at such rate of discount as 
 foreign bankers may choose to impose. Now, specie payments, if 
 they can be maintained, it will be admitted, will make all our public 
 debt with its high rates of interest equal to par, if not at a premium 
 in gold. The fault in the plan seems to be that we are not told how 
 many greenbacks we must sell at 35 per cent less than their face, and 
 how many bonds we must negotiate at a like rate of discount on 
 thirty years, to place ourselves in condition to pay both greenbacks 
 and the bonds, which we thus sell at par. Differential calculus might 
 work out the problem, but plain arithmetic is entirely inadequate to 
 the task. Besides, as upon the best authorities there are only about 
 fifteen hundred millions of specie currency in circulation in all the 
 nations where our bonds have been or will be taken as an investment, 
 or, indeed, in the civilized world, if we should succeed in locking 
 up $350,000,000 of that, or 20 per cent of the whole currency of the 
 world, should we not make what in technical phrase is known as a 
 "corner" on the rest of mankind, in comparison with which the late 
 performance in that line of the Erie Railroad and New York bankers 
 would sink into merited insignificance ? 
 
 Time will not permit me further examination of this and cognate 
 plans for the resumption of specie payments. If a return to specie 
 values is the only remedy for our financial evils, then there is but
 
 THE STANDARD QUESTION: PAPER MONEY 189 
 
 one plan, in my judgment, by which it can be accomplished: we must 
 wait and groio to it. By the industry and economy of our people; by 
 the development of our resources; by the enterprise of our business; 
 by the extension of our commerce; by the production of the precious 
 metals; by reducing importations, the only method by which we can 
 keep specie at home; by retrenchment of the expenses of government, 
 both State and national; by the relinquishment of all hazardous and 
 doubtful enterprises, we must accumulate sufficient suqilus wealth 
 to bring back the $600,000,000 of our national bonds held abroad, to 
 which may be added an equal like amount of State and railroad bonds 
 also held there, and thus stop the annual drain of more than seventy 
 millions of bullion now sent abroad year by year to meet interest 
 alone. When this is done we may with wisdom return to specie 
 values and specie payments without serious financial disaster and 
 commercial ruin. But this time will come only when gold and silver 
 from the plenitude of its production will have depreciated to our 
 values, not we appreciate them to the present value of gold and silver. 
 
 109. THE RESUMPTION OF SPECIE PAYMENTS' 
 By ALEXANDER D. NOYES 
 
 As Secretary of the Treasury, ]Mr. Sherman fixed upon 40 per cent 
 as "the smallest reserve at which resumption could be prudently 
 commenced and successfully maintained." In pursuance of this policy 
 he had accumulated by December 31, 1878, $114,193,000 in gold, 
 which was a trifle over 40 per cent of the United States notes tiien 
 outstanding. Of this gold reserve $95,500,000 had been obtained 
 through the sale of bonds, part of the coin being procured in Europe. 
 
 The accomplishment and maintenance of specie payments, how- 
 ever, was not a simple task. The danger to the Treasury's redemption 
 fund lay, as ever>'one understood, in possible gold exports. As it 
 happened, there was no gold movement in progress at the time of 
 specie resumption; but foreign exchange was only a trifle below the 
 normal gold-exporting point, and no spring season for eighteen years 
 had passed without gold shipments. In the first half of 1877, nearly 
 twenty millions of gold had been exported from New York, chiefly 
 obtained from the city banks. On January i, 1879, these New York 
 banks held in specie only $19,781,400, but they held twice as much 
 
 'Adapted from Forty Years of American Fiiuiiuc, pp. 45-57. ((i. P. Put- 
 nam's Sons, 1898.)
 
 IQO PRINCIPLES OF MONEY AND BANKING 
 
 in legal-tender notes, redeemable at the Treasury in gold. Supposing, 
 then, a further rise in exchange and a heavy export of gold, there 
 was not the least doubt about what would happen to the Treasury 
 reserve. 
 
 The general industrial situation in 1879 foreboded trouble. 
 Domestic markets were unfavorable, wage reductions were pending 
 in the cotton goods industry, and the iron trade, a traditional barom- 
 eter of industrial situations, opened the year with so little activity 
 that prices fell below the normal average cost of production. With 
 hardly an exception the country's staple industries sank, during the 
 early months of 1879, into complete stagnation. In February, the 
 most experienced international bankers, including the Rothschilds, 
 who had placed the bulk of recent American loans, predicted that 
 gold was about to move in quantity from the United States to Europe. 
 By the middle of March, the Secretary was disturbed enough to set 
 on foot an inquiry into the possibility of controlling specie exports 
 through sales of Government exchange. Such recourse, Mr. Sherman 
 plainly intimated, might become necessary "in preventing popular 
 alarm." Not even this expedient was feasible; sterling continued to 
 advance, and finally in the second week of June a million and a quar- 
 ter gold was shipped. This gold was obtained from the Treasury in 
 exchange for notes; it reduced to precisely that extent the Govern- 
 ment reserve. 
 
 The wheat harvest of 1878, in England and on the European 
 continent, had been one of the largest on record. When 1879 was 
 well advanced, wheat from English farms was still moving in quantity 
 to storage points. At the close of March, the stock of wheat at Liver- 
 pool was larger than at any time within five years; the same was 
 true of every cereal product. Frosty weather and heavy rains in 
 England had indeed advanced the price of wheat sixpence a bushel, 
 and it was admitted that the English crop of 1878 would not be dupli- 
 cated. But meantime the reserve supply was ample, demand from 
 consumers was only moderate, and early in March observers of the 
 market predicted that prices had reached their high level for the year. 
 
 Little by little the foreign situation changed. As is usual with 
 highly speculative markets, the news was contradictory, and the truth 
 developed slowly. But it was evident in May, while the outlook for 
 this country's harvest was steadily improving, that the European 
 grain markets were beginning to stir with apprehension. In France 
 snow fell heavily late in the spring; in England, after a late and
 
 THE STANDARD QUESTION: PAPER MONEY IQI 
 
 destructive frost, rain set in and continued almost incessantly through 
 the summer. It was literally a sunless season. At the opening of 
 July, people were wearing heavy overcoats in London, and in the 
 country all the crops were moulding. By this time the impending 
 harvest failure had begun to assume the dimensions of a national 
 calamity. On Sunday, July 6th, by the Archbishop of Canterbury's 
 direction, prayers for fair weather were offered in the English churches. 
 In another month the time was past when even favorable weather 
 would help, and by August it was made clear to all markets that, 
 while the United States would yield the largest harvest in its history, 
 every growing crop in the British Islands was practically ruined. No 
 such disaster had befallen English agriculture within the memory of 
 living men. The actual decrease in the wheat crop especially, as 
 compared with 1878, was 54 per cent; the total yield was smaller by 
 thirty million bushels than in the leanest recorded year since the 
 middle of the century. Nor was this Europe's only agricultural 
 catastrophe. Until midsummer, there had been favorable news from 
 the continental crops. But the blight which fell on England's harvest 
 did equal damage beyond the Channel. France, Austria, Germany, 
 and Russia yielded, in 1879, the smallest and poorest wheat crops in 
 ten years; the whole continental harvest fell off 15 per cent from the 
 average of the three preceding years. European states, which usually 
 exported wheat, had not raised enough to feed their own people. "It 
 is the American supply alone," wrote one contemporary critic, "which 
 has saved Europe from a great famine." 
 
 All circumstances seemed to conspire in favor of this country. 
 Sunny and favorable "farmer's weather," with the due proportion 
 of rains, prevailed throughout the season. The wheat fields under 
 cultivation had increased over 1878 by half a million acres. The 
 average yield per acre has never but twice been exceeded in this 
 country, and the total crop exceeded by 28,000,000 bushels the crop 
 of any previous year. The positive news of Great Britain's crop 
 failure carried the price up no less than forty cents a bushel within 
 six weeks. Along with this advance in prices, exports of wheat rose 
 to wholly unprecedented volume. The foreign buying was so urgent 
 that the country's wheat shipments, which even in 1878 did not run 
 beyond two million bushels weekly, averaged, in September, 1879, a 
 million bushels daily, a volume of grain exports equalled only twice 
 in the country's subsequent history. The crop of Indian corn was 
 the largest on record; this, too, found a ready and profitable export
 
 192 PRINCIPLES OF MONEY AND HANKING 
 
 market. Cattle raised on the interior farms were sent al^road in such 
 numbers that the foreign trade complained that British graziers were 
 bemg forced out of the British market. By a rather remarkable 
 coincidence the famous tide-water pipe-line from the Pennsylvania 
 oil-wells was completed in 1879, and the year's export of this product 
 rose nearly two million barrels over the highest previous record. By 
 another coincidence, equally independent of any events already 
 noticed, the cotton crop of India fell off 30 per cent from the autumn 
 stock of 1S7S and 50 per cent from 1877, and with the consequent 
 heavy purchases by foreign spinners, the season's export of American 
 cotton was the largest ever yet recorded. 
 
 The first result of this sudden change in the situation was a fall in 
 the foreign exchanges, and consequent dissipation of all fears that the 
 resumption fund would be impaired. With this menace removed 
 from the financial outlook, the country's torpid enterprise awoke. 
 The trade revival which ensued was without question the most 
 remarkable in this country's commercial history. 
 
 no. CONSTITUTIONALITY OF THE LEGAL-TENDER NOTES.^ 
 By DAVIS R. DEWEY 
 
 For some time after the issue of the greenbacks there was uncer- 
 tainty as to the legal-tender attribute of the treasury notes, and 
 questions quickly arose which required settlement in the State and 
 federal courts. The trend of the decisions of the Supreme Court from 
 the first was toward a limitation of the notes: In Lane County v. 
 Oregon (1868) it was held that the notes were not legal tender for 
 State taxes; in The Bank v. Supervisors (1868) that they were obli- 
 gations or securities, and consequently exempt from taxation; and 
 in Branson v. Rodes (1868) that they were not legal tender in the 
 settlement of contracts specifically calling for the payment of specie. 
 Finally the more direct question of constitutionality was passed upon 
 by the Supreme Court in 1869 in the case of Hepburn v. Griswold. 
 In i860 a Mrs. Hepburn in a promissory note agreed to pay Griswold 
 on February 20, 1862, $11,250. At each of the above dates the only 
 lawful money was gold and silver com. Mrs. Hepburn failed to pay 
 the note at maturity, and upon a suit brought in Kentucky, in March, 
 1864, tendered payment in United States notes which had been issued 
 
 ' Adapted from Financial Tlistory of the United States, pp. 362-67. (Long- 
 mans, Green, & Co., 1903.)
 
 THE STANDARD QUESTION: PAPER MONEY 193 
 
 February 25, 1862, that is, five days after the maturity of the note. 
 The tender was refused. An appeal was carried to the United States 
 Supreme Court, and a decision rendered in December, 1869. The 
 opinion by a fateful stroke of fortune was dehvered by Chief Justice 
 Chase, in whose administration as secretary of the treasury the notes 
 had been first issued. The legal-tender quahty was denied; yet the 
 whole question was not covered, because the case involved only the 
 tender of notes in settlement of contracts entered on previous to 
 the first legal- tender act; and Chase, in the declaratory portions of the 
 opinion, was careful to limit the application of the decision to such 
 contracts. Nevertheless the court clearly indicated its conviction on 
 the question of the constitutionality of notes tendered in the settle- 
 ment of current contracts, for it practically asserted that the legal- 
 tender clause was not only improper, but unnecessary. "Amid the 
 tumult of the late Civil War, the time was not favorable to consid- 
 erate reflection upon the constitutional limits of legislative or execu- 
 tive authority. If power was assumed from patriotic motives, the 
 assumption found ready justification in patriotic hearts. Many who 
 doubted yielded their doubts; many who did not doubt were silent. 
 Some who were strongly averse to making government notes a legal 
 tender felt themselves constrained to acquiesce in the views of the 
 advocates of the measure. Not a few who then insisted upon its 
 necessity, or acquiesced in that view, have, since the return of peace, 
 and under the influence of the calmer time, reconsidered their con- 
 clusions, and now concur in those which we have just announced." 
 Three justices concurred with Chase in the majority opinion, while a 
 dissenting opinion was rendered by Justice Miller in which two of 
 his associates joined, thus dividing the court, four to three. 
 
 The decision was unpopular. The close division of the court, 
 when it was not complete, was an irritating factor, to say nothing of 
 the disturbance to business if gold payments were to be enforced. A 
 second case, Knox v. Lee, subsequently came before the court, but 
 before the decision was rendered in May, 187 1, the membership of 
 the court was changed by the addition of two members, one to fill a 
 vacancy, and the other through a statute enlarging the court from 
 seven to eight. Inasmuch as on this occasion the decision of 1869 
 was reversed, there have been charges that the court was packed in 
 order to bring about the reversal. The evidence on this point has 
 been carefully examined by Professor Hart in his biography of Chase, 
 and the charges of collusion clearly shown to be unfounded. That the
 
 194 PRINCIPLES OF MONEY AND BANKING 
 
 new justices would be in general accord with the administration was 
 to be expected; there was, however, no previous understanding of 
 their views on the particular question of legal tenders, and no instruc- 
 tions to bring about a reversal of the earlier decision. Nevertheless, 
 it must be admitted that there was a strong popular expectation that 
 as soon as the court was reorganized, a reversal of the opinion would 
 be made. This is geen in the fact that the first decision did not lead 
 to a reduction in the premium on gold, and the exceptional methods 
 adopted by the court in order to bring another case quickly before 
 it for adjudgment showed unusual feeling and pressure. 
 
 In the opinion on the case of 1871 (filed in 1872), the court held 
 that a broad interpretation must be given to the Constitution, for 
 it could not be expected that this document would completely enumer- 
 ate all the powers of government with details and specifications; the 
 powers of Congress must be regarded as related to each other, and 
 means for a common end. Among the non-enumerated powers, there 
 certainly must be included the power of self-preservation, and no 
 reasonable construction of the Constitution could deny to a govern- 
 ment the right to employ freely every means not prohibited, or 
 necessary for its preservation. And in carrying out its purpose Con- 
 gress is entitled to a choice of means which are in fact conducive to 
 the exercise of a power granted by the Constitution. Marshall's words 
 in the decision on McCulloch v. Maryland are cited as convincing and 
 conclusive. "Let the end be legitimate, let it be within the scope 
 of the Constitution, and all means which are appropriate, which are 
 plainly adapted to that end, which are not prohibited, but are 
 consistent with the letter and spirit of the Constitution, are con- 
 stitutional." 
 
 There were two main questions for the court to consider: Were 
 the legal-tender acts inappropriate means for the execution of any or 
 all of the powers of the government ? And were they prohibited by the 
 Constitution? As to the first question, the emergency was great 
 when the legal- tender acts were passed; the endurance of the govern- 
 ment had been tried to the utmost. "Something revived the droop- 
 ing faith of the people; something brought immediately to the 
 government's aid the resources of the nation,' and something enabled 
 the successful prosecution of the war and the preservation of the 
 national life. What was it^ if not the legal-tender enactments ?" As 
 to whether other means might not have been effective, that was not
 
 THE STANDARD QUESTION: PAPER MONEY 195 
 
 for the courls to decide; the degree of appropriateness of given laws 
 is for the legislature and not for the judiciary to determine. 
 
 On the second point the court held that the making of the treasury 
 notes a legal tender was not forbidden either by the letter or by the 
 spirit of the Constitution. Although certain express powers are given 
 to Congress in regard to money, it cannot be inferred, as the Consti- 
 tution has been in general construed, that all other powers are by 
 implication forbidden. Since the States are expressly prohibited 
 from declaring what shall be money, or from regulating its value, 
 whatever power exists over the currency is vested in Congress. Con- 
 sidering that there is no express prohibition upon Congress in this 
 matter, and that paper money was almost exclusively in use in the 
 States as the medium of exchange, it must be presumed that the 
 framers of the Constitution did realize that emergencies might arise 
 when the precious metals would prove inadequate to the necessities 
 of the government. 
 
 Nor could it be argued that the legal-tender acts are unconstitu- 
 tional because they directly impaired the obligation of contracts, 
 that is, of contracts made previous to the passage of the act. In 
 contracts for payment of money, it did not mean money at the time 
 when the contract was made, nor gold or silver, nor money of equal 
 intrinsic value in the market; the obligation was to pay that which 
 is recognized as money when the payment is to be made. "Every 
 contract for the payment of money simply, is necessarily subject to 
 the constitutional power of the government over the currencv, what- 
 ever that power may be, and the obligation of the parties is therefore 
 assumed with reference to that power." More than this. Congress 
 does have the power to impair contracts indirectly by rendering them 
 fruitless or partly fruitless, as in bankrupt laws, declaration of war, 
 and embargoes. No obligation of a contract can extend to the defeat 
 of legitimate government authority. 
 
 In conclusion, it was observed that the legal-tender acts did not 
 attempt to make paper a standard of value; their validity does not 
 rest upon the assertion that this emission is coinage, or any regulation 
 of the value of money; or that Congress may make money out of 
 anything which has no value. "What we do assert is, that Congress 
 has power to enact that the government's promises to pay money 
 shall be, for the time being, equivalent in value to the representation 
 of value determined by the coinage acts or to multiples thereof."
 
 196 PRINCIPLES OF MONEY AND BANKING 
 
 This decision set lied the question of constitutionality of legal- 
 tender issues in times of war, but it left uncertainty as to the powers 
 of government over currency during peace. The judicial decision on 
 this point was made by the Supreme Court in 1884 in the case of 
 Juilliard v. Greenman; the question before it was the constitutionality 
 of that provision of the law of 1878 which required that all legal-tender 
 notes redeemed at the treasury be reissued, kept in circulation, and 
 continue to retain their legal-tender quality. The court decided in 
 favor of the constitutionality of such reissues, by a generous inter- 
 pretation of the doctrine of implied powers, in support of which the 
 reasoning of Marshall, in the case of McCulloch v. Maryland, is 
 again reviewed at length. As preHminary to the main conclusion, it is 
 shown that Congress has the power to pay the debts of the United 
 States; that in pursuance of this, all means which are appropriate, 
 and not prohibited, are constitutional; that not too much weight 
 should be given to the debates and votes of the Constitutional Con- 
 vention of 1787, for there is no proof of any general consensus of opin- 
 ion in the convention upon this subject; that the power to borrow 
 money includes the power to issue obhgations in any appropriate 
 form, and, if desired,. in a form adapted to circulation from hand to 
 hand in the ordinary transactions of commerce and trade; tliat the 
 issue of legal-tender notes is incident to the right of coinage; and 
 finally, that Congress has power to provide a currency for the whole 
 country. As a consequence. Congress "may issue the obligations in 
 such form and impose upon them such qualities as currency for the 
 purchase of merchandise and the paj-ment of debts as accord with 
 the usage of sovereign governments"; and it is for Congress, the 
 legislature of a sovereign nation, to declare whether, because of an 
 inadequacy of the supply of gold and silver coin, it is wise to resort 
 to legal-tender paper issues. 
 
 The decision reopened tlie controversy ; this was largely academic; 
 Bancroft, the historian, made a passionate protest in a pamphlet 
 entitled, A Plea for the Constitution of the United States of America, 
 Wounded in the House of Its Guardians; but popular judgment on 
 the whole was favorable. La\^^■ers and consitutional commentators 
 were slowly coming to the conclusion that the interpretation of the 
 Constitution must rest upon a broader basis than that of the debates 
 of 1787; and the people at large were satisfied that there was to be 
 no disturbance in the conditions to which they had been long accus- 
 tomed.
 
 THE STANDARD QUESTION: PAPER MONEY 197 
 
 III. THE GREENBACK PARTY PLATFORM OF 1878 
 
 Whereas, Throughout our entire country the value of real estate 
 is depreciated, industry paralyzed, trade depressed, business incomes 
 and wages reduced, unparalleled distress inflicted upon the poorer 
 and middle ranks of our people, the land filled with fraud, embezzle- 
 ment, bankruptcy, crime, suffering, pauperism, and starvation; and 
 
 Whereas, This state of things has been brought about bv legis- 
 lation in the interest of and dictated by money-lenders, bankers, and 
 bondholders; and 
 
 Whereas, The limiting of the legal-tender quality of greenbacks, 
 the changing of currency bonds into coin bonds, the demonetization 
 of the silver dollar, the excepting of bonds from taxation, the con- 
 traction of the circulation medium, the proposed forced resumption 
 of specie payments were crimes against the people, and, as far as 
 possible, the results of these criminal acts must be counteracted by 
 judicious legislation; 
 
 Therefore, We assemble in National Convention, and make a 
 declaration of our principles, and invite all patriotic citizens to unite 
 in an effort to secure financial reform and industrial emancipation. 
 The organization shall be known as the "National Party," and under 
 this name we will perfect, without delay, national. State, and local 
 associations to secure the election to office of such men onlv as will 
 pledge themselves to do all in their power to establish these principles: 
 
 First: It is the exclusive function of the General Government to 
 coin and create money, and regulate its value. All bank issues de- 
 signed to circulate as money should be suppressed. The circulating 
 medium, whether of metal or paper, shall be issued by the government, 
 and made a full legal tender for all debts, duties, and taxes in the 
 United States at its stamped value. 
 
 Second: There shall be no privileged class of creditors. Official 
 salaries, pensions, bonds, and all other debts and obligations, public 
 and private, shall be discharged in the legal-tender money of the 
 United States, strictly according to the stipulations of the laws under 
 which they were contracted. 
 
 Third: Resolved, That the coinage of silver be placed on the same 
 footing as that of gold. 
 
 Fourth: Congress shall provide said money adequate to the full 
 employment of laljor, the equitaljle distribution of its products, and 
 the requirements of business, fixing a minimum amount per capita 
 of the population, and otherwise regulating its value by wise and
 
 I9» PRINCII'LKS OF MONEY AND HANKING 
 
 equitable provisions of law, so that the rate of interest will secure to 
 labor its just reward. 
 
 112. THE POPULIST PARTY PLATFORM OF 1896 
 
 1. We demand a national money, safe and sound, issued by the 
 General Government only, without the intervention of banks of issue, 
 to be a full legal tender for all debts, public and private; a just, 
 equitable, and efficient means of distribution direct to the people 
 and through the lawful disbursements of the Government. 
 
 2. We demand the free and unrestricted coinage of silver and 
 gold at the present legal ratio of 16 to i, without waiting for the 
 consent of foreign nations. 
 
 3. We demand that the volume of circulating medium be speedily 
 increased to an amount sufficient to meet the demands of business 
 and population, and to restore the just level of prices of labor and 
 production. 
 
 113. A REVIVAL OF "GREENBACKISM"' 
 
 An incident of crucial significance in connection with the eflort for 
 banking reform is, however, seen in the well-authenticated attempt of 
 Mr. William J. Bryan to secure the adoption by members of the Demo- 
 cratic party in Congress of a banking plan of his own in opposition to 
 each and all of the various rival banking plans that have been thus 
 far suggested. Mr. Bryan's plan relates almost entirely to the issue 
 of notes. He desires to have the power of note issue placed exclu- 
 sively in the hands of the government, and would require that, in 
 order to get notes, banks be compelled to make a showing that they 
 possess an adequate amount of commercial paper of specified kinds. 
 When this had been demonstrated to the satisfaction of the designated 
 local officers, the government would deposit in the bank making the 
 application circulating notes to an amount equal to that for which 
 the bank had made application. These notes would be redeemable 
 at the Treasury and would constitute a single uniform government 
 currency. On the whole, the plan thus suggested, although refined 
 in various particulars as compared with the various Bryan plans that 
 have been urged in the past, is a revival, under a different name, of 
 the orginal greenback or government legal-tender-currency idea that 
 
 'Adapted from "Washington Notes" in Journal of Political Economy, Jan- 
 uary, 1913, pp. 75-76.
 
 THE STANDARD QUESTION: PAPER MONEY 199 
 
 has figured so largely in times past in connection with the proposals 
 of the radical wing of the Democratic party. 
 
 114. NATURAL MONEY, THE PEACEFUL SOLUTION' 
 By JOHN RAYMOND CUMMINGS 
 
 The adoption of a system of natural money such as is suggested 
 below will accomplish the following ends: 
 
 1. It will make panics impossible. 
 
 2. It will enable the government to take over all the land and 
 all the privately owned public utilities on terms very liberal to present 
 owners, without issuing a bond and without hardship or injustice. 
 
 3. It will enable the government to build during the same period 
 a million miles of highway at a cost of S 10,000 the mile. 
 
 4. To irrigate and drain a large proportion of the area needing 
 irrigation and drainage. ' 
 
 5. To develop tens of millions of horse-power from water and 
 distribute it throughout the country. 
 
 6. To develop internal waterways on a scale hitherto unattempted 
 and undreamed of. 
 
 7. It will raise wages and end strikes and lockouts. It will 
 establish natural wages and secure absolute equity as between em- 
 ployers and employees. 
 
 8. It will pay off the government debt and make future debt 
 impossible. 
 
 9. It will end our present industrial warfare and bring all now 
 discordant classes into harmonious co-operation, inaugurating an era of 
 progress and prosperity such as the world has not even conceived of. 
 
 For our purpose we will assume an isolated community of a 
 thousand men and their families. We will assume that our colonists 
 brought with them a limited amount of gold and silver, and that 
 they have no thought of inventing or adopting any other than the 
 coin system with which they have been faniiUar, but they do intend 
 to build a substantial community and desire to have an orderly and 
 efl&cient government, with the largest possible measure of public 
 benefits and of personal freedom. 
 
 Let us assume that they arrive in a body in the earl)- spring, and 
 that for the time being they decide that all work shall be communal. 
 
 ' Adapted from Natural Money, The Peaceful Solution (summarized from 
 various chapters). (Bankers Publishing Co., 191 2.)
 
 200 PRINCIPLES OF MONEY AND BANKING 
 
 They must have enough houses for protection before the commg 
 winter and must grow food and provender, so they decide that those 
 who are handy with the broadax, saw, and hammer shall assist the 
 few artisans in the building of houses, while the other men, with the 
 assistance of some of the women and the youths, shall grow the crops. 
 But it is understood that when there are houses for all, the work is 
 to be individualistic, except for such work as is of a public character. 
 
 When they have reached the point of individual work they hold 
 a meeting and decide that each man of voting age shall render thirty 
 days' public service yearly or pay the equivalent into the public 
 treasury, and shall be subject to call for from one to thirty days 
 additional. 
 
 Many individuals rather than perform this public service would 
 prefer to hire substitutes in order to save their own time for the 
 private employments in which they are particularly efl&cient. The 
 payment for substitutes establishes a minimum common labor wage. 
 In the beginning a man who desired a substitute made arrangements 
 with him and notified the overseer of public works, giving the name 
 of his substitute. The overseer gave the receipts accordingly to the 
 workman, who delivered them to his employer and received his pay; 
 but after a time, probably to save work in making the receipts, they 
 used printed blanks requiring only the filhng in of the worker's name 
 and the overseer's stamped signature. These each worker delivered 
 to his employers — the men whose public service he had engaged to 
 work out. The substitutes at first took the receipts in the names of 
 their various employers, one laborer doing the public work for several 
 individuals. 
 
 Still later even this was found to be unnecessary, for it involved 
 personal engagements to perform the service, and subsequent settle- 
 ments of each worker with his employers. Perhaps by the accident 
 of some workman 's failure to settle with his employers at the usual 
 time; possibly by the natural and necessary development of the 
 situation, the workmen came to be quite indifferent and careless as 
 to settlements and used the receipts with the grocer, the butcher, 
 the merchant, in fact, everywhere they had dealings. 
 
 But most of the receipts were for a week's work, only a few of 
 them being for a less amount, so after a time, on the suggestion of a 
 committee of the workmen, the receipts, or certificates, as they were 
 commonly called, were given in various denominations, from the 
 fourth part of a day to one, two, two-and-a-half, and five-day cer-
 
 THE STANDARD QUESTION: PAPER MONEY 201 
 
 tificates, and were printed on their best paper and as ornamentally 
 as their facilities allowed. 
 
 Very soon after this was done the certificates constituted the 
 larger part of the circulating medium and the people realized that 
 unwittingly they had invented a new money. Gradually as the vol- 
 ume of the certificates increased, the gold disappeared from circu- 
 lation and silver was used only as fractional currency. Coin did not 
 disappear by "emigration" nor by hoarding, but by finding its way 
 into the public treasury and remaining there because people preferred 
 the certificates. 
 
 Let it be noted that these certificates were not "promises 
 to pay," nor were they money in any legal sense; not legal tender, 
 yet they performed all the functions of money. Probably no one of 
 the colonists ever so much as thought of providing by ordinance that 
 anything should be a legal tender. 
 
 Thus this money based on service performed came naturally to 
 be the medium of e.xchange without anyone even raising a question 
 as to its soundness or safety. The certificates passed current on the 
 same basis as coin (a full-day certificate as $2.00). A purchase of 
 goods from a foreign community, however, raised the question as to 
 the safety of the certificates. It was proposed to use the coin that 
 had accumulated in the government vaults in the purchase of the 
 foreign goods, and this at once provoked discussion as to the basis of 
 the circulation power of the certificates. Some thought that ever\- 
 currency should have a coin basis, and the banker thought that the 
 coin in the community had really ser^'ed as a basis for the certificates, 
 which passed as token money upon the tacit understanding of a 
 return to coin at any time the certificates might prove unsatisfactory. 
 He was very sure a crisis would come before long if the coin were 
 sent away. He raised the question of limiting the issue of certificates, 
 and soon it was evident that this was the crux of the whole question. 
 How to limit them had never been considered, and now it was evident 
 that this was the one point to be made sure of — if it could be. 
 
 A board of experts to determine the limit was suggested, but 
 discussion indicated that a board could not tell how much money was 
 needed any better than a single expert could; that in the very nature 
 of things the amount of currency required cannot be settled abstractly, 
 but is governed only by the demands of trade. 
 
 A perfect currency is not only elastic in the sense that it will 
 expand to the fullest requirements of trade, but it is as perfect in
 
 202 PRINCIPLES OF MONEY AND BANKING 
 
 resiliency, for no matter to what extent it has been expanded by 
 temporary demand, it will contract as demand abates. 
 
 But all this change must be automatic, and not by the dictum 
 of any man or any number of men; not even by the unanimous vote 
 of all concerned. But how shall we arrange so to regulate the quan- 
 tity of our money that its value shall remain constant ? The answer 
 is simple enough. Hitherto we have been requiring from each male 
 citizen of voting age thirty to sixty days of public service each year, 
 for which receipts have been given. These receipts were not payments 
 for service but acknowledgments of service due and rendered. This 
 little government does not pay for anything. It receives what is 
 due it and gives receipts. These receipts pass current because, being 
 impersonal, anyone who is prepared to surrender them to the amount 
 of his services due is thereby discharged of his obligation; shows that 
 he has rendered the service personally or by proxy. By surrendering 
 them he designates for credit to his own account that part of public 
 service for which the certificates were issued; and the certificates 
 go back to be canceled or to be reissued in acknowledgment of further 
 service. 
 
 But hitherto we have done only such public work as estimates 
 called for without any reference to creating a circulating medium, 
 and if this has given us the proper amount to use as money it is sim- 
 ply a happy accident. There is one way and only one way to deter- 
 mine how much public work should be done, and that is to provide 
 employment for all who cannot be more profitably engaged in private 
 employment. 
 
 Naturally you will ask how this can be done. It is very simple, 
 as most great truths are. All the change we need to make in our 
 present method is an ordinance authorizing and commanding the 
 board of public works to employ all unskilled laborers who apply, at 
 two certificates per day (as we have been giving), and as many skilled 
 laborers as may be needed, at such compensation as is necessary to 
 secure the number required. While I do not think it important, it 
 may be well for technical reasons to provide in the ordinance that 
 the certificates shall be legal tender. 
 
 The way in which this plan will work to accomplish what we seek 
 is this: If at any time, for any reason whatsoever, more than the 
 natural proportion of labor had gone into public work, there would 
 then be less than the natural production of private wealth, and prices 
 of commodities would be above normal because of relative scarcity.
 
 THE STANDARD QUESTION: PAPER MONEY 20;, 
 
 Private employers would then offer somewhat more than the public 
 wage, thus drawing la])or away from the {)ublic service and restoring 
 the state of balance. On the other hand, should more than the nat- 
 ural proportion of labor be engaged in private production the prices 
 of commodities would fall because of their abundance. Some of the 
 privately employed labor would then be released and would go into 
 public work, restoring the balance. In fact, there will be no notice- 
 able shifting from private to public employment and back again, 
 except of those whose private employment is seasonal in character. 
 The state of balance will be preserved just as the water level in two 
 connected reservoirs, each having variable supply, is preserved, by 
 flow of the water from one to the other. 
 
 In a large community, one of many millions, my opinion is that 
 there would be no noticeable shifting from public to private work 
 and back again, except of those laborers who habitually do so because 
 of the irregular character of their private employment. Indeed, we 
 may find that except for those intermittent workers there will be 
 no shifting. I suspect the ultimate development will be that most 
 young men will serve an apprenticeship in public work, and the 
 currency volume will be adjusted by the slightly var}-ing average 
 time they remain. This apprenticeship work, if it all goes into the 
 public service temporarily, should be a very accurate gauge or index 
 of the currency, for if we can imagine a perfectly even standard of 
 business, that is, unvarying prosperity, the demand for money should 
 be in proportion to the number of producers, and the apprentices are 
 the enlisting force in the industrial army. 
 
 On the other hand, if there should ever be too many certificates 
 in circulation their value would fall slightly, or business would become 
 more brisk at prevailing prices and workers would be drawn from 
 public to private employment (not many but a few) and cancellation 
 by payment of taxes would bring about adjustment. 
 
 To summarize this system of natural money: The ideal money is 
 redeemable by service. It is because all the individuals of a nation 
 owe services to the government and because the surrender of the 
 currency cancels that service, that they receive it in exchange for 
 goods. The last person who gives service or goods in exchange 
 for such money, and then, instead of having it redeemed again, turns 
 it in to pay his taxes, has given it its final redemption. It is not the 
 function of government to redeem money. The money is not a 
 governmental debt, but the government's receipt for a debt paid,
 
 204 PRINCIPLES OF MONEY AND BANKING 
 
 and there is no obligation on the part of the government except to 
 acknowledge it as such receipt and receive it in lieu of service. 
 
 D. The Regulation of Government Paper Currency 
 115. METHODS OF REGULATING GOVERNMENT PAPER 
 
 The following methods have been used in regulating the issues 
 of government paper currency: 
 
 1. Full specie reserve method. — By this method the issuing govern- 
 ment retains in its coffers metallic money equal in amount to the 
 paper issued. The paper is thus a true representative currency, 
 ser\'ing merely in lieu of so much specie. 
 
 2. Percentage specie reserve method. — With this method a specie 
 reserve equal to a certain fixed percentage of the paper must be held 
 by the issuer. The amount of paper may be changed with changes 
 in the amount of reserve. 
 
 3. Minimum specie reserve method. — A certain fixed minimum 
 quantity of specie is held as reserve, and the paper outstanding 
 against this may or may not be increased or decreased. 
 
 4. The uncovered issue method. — A certain fixed amount of paper 
 may be issued, secured by bonds, etc., and beyond this amount any 
 quantity may be issued if backed by a full specie reserve. 
 
 5. The elastic uncovered issue method. — This method differs from 
 the above only in that the uncovered issue may be extended in time 
 of emergency. 
 
 6. Property reserve method. — Land or other real estate, or per- 
 sonalty such as bonds, stocks, etc., may be used as security for gov- 
 ernment paper currency. 
 
 7. Revenue payments method. — A free issue of paper money 
 which relies on its acceptability for taxes in lieu of coin to keep 
 up its value. 
 
 8. The deferred convertibility method. — Notes may be issued prom- 
 ising to pay metallic money at some future date, either definitely 
 fixed, or dependent upon political or other contingent events. 
 
 9. Fiat method. — The government may give freely issued paper 
 full legal-tender power and command its acceptance in payment of 
 all obligations. It is irredeemable. 
 
 ID. Limited issue method. — The issue may be definitely restricted 
 in amount in order that an active demand may prevent depreci- 
 ation.
 
 THE STANDARD QUESTION: PAPER MONEY 205 
 
 II. Force of habit method. — An issue once redeemable may cir- 
 culate by force of custom after the government has been absolved 
 from the obligation of redemption. 
 
 116. IRREDEEMABLE PAPER ALWAYS BAD' 
 By JOHN WITHERSPOON 
 
 Irredeemable paper money such as was issued by the Continental 
 Congress and the various state legislatures during the Revolution, 
 that is, paper bills stating that the person holding them is entitled 
 to receive a certain sum specified in them, is not, properly speaking, 
 money at all. It is barely a sign without being a pledge or standard 
 of value, and therefore is essentially defective as a medium of universal 
 commerce. To arm such bills with the authority of the state, and 
 make them a legal tender in all payments, is an absurdity so great 
 that it is not easy to speak with propriety upon it. Perhaps it would 
 give offense if I should say it is an absurdity reserved for American 
 legislatures, no such thing having even been attempted in the old 
 countries. It has been found, by the experience of ages, that money 
 must have a standard of value, and if any prince or state debase 
 the metal below the standard, it is utterly impossible to make it 
 succeed. How can it be possible to make that succeed which has no 
 value at all ? In all such instances there may be great injuries done 
 to particular persons by wiping off debts; but to give such money 
 general currency is wholly impossible. The measure carries absurdity 
 in its very face. Why will you make a law to oblige men to take 
 money when it is offered them ? Are there any who refuse it when 
 it is good ? If it is necessary to force them, does this not demonstrate 
 that it is not good? We have seen indeed this system produce a 
 most ludicrous inversion of the nature of things. For two or three 
 years we constantly saw and were informed of creditors running 
 away from their debtors and the debtors pursuing them in triumph, 
 and paying them without mercy. 
 
 1x7. PAPER MONEY SOUND IN THEORY* 
 By DAVID RICARDO 
 
 By limiting the quantity of money it can be raised to any con- 
 ceivable value. It is on this principle that paper money circulates; 
 
 'Adapted from Works, IV, 222-23. (Philadelphia: William W. Woodward, 
 1802.) 
 
 ' Adapted from Principles of Political Economy and Taxation, 1818 (Con- 
 ner's edition), pp. 341-44.
 
 2o6 PRINCIPLES OF MONEY AND BANKING 
 
 the whole charge for paper money may be considered as seignorage. 
 Though it has no intrinsic value, yet by limiting its quantity, its 
 value in exchange is as great as an equal denomination of coin, or 
 of bullion in that coin. There is no point more important in issuing 
 paper money than to be fully impressed with the effects which follow 
 from the principle of limitation of quantity. It is not necessary that 
 paper money should be payable in specie to secure its value; it is 
 only necessary that its quantity should be regulated according to the 
 value of the metal which is declared to be the standard. 
 
 Experience, however, shows that neither a State nor a Bank 
 ever has had the unrestricted power of issuing paper money, without 
 abusing that power; in all States, therefore, the issue of paper money 
 ought to be under some check and control; and none seems so proper 
 for that purpose as that of subjecting the issuers of paper money to 
 the obligation of paying their notes, either in gold coin or in bullion. 
 
 ii8. GUIDES FOR THE CONTROL OF PAPER MONEY^ 
 By CHARLES GIDE 
 
 It may be asserted that in the present state of economic science 
 there is no excuse for a government overstepping the limit and issuing 
 irredeemable paper money in excess. There are several signs, familiar 
 to the economist and the financier, which should warn us of the 
 danger, even when it is far off, and which are surer indications than 
 the pilot obtains from sounding-lead and landmarks. 
 
 1. The first of these signs is the premium for gold. As soon as 
 paper money has been issued in quantities too great for the needs 
 of a community, it begins (by virtue of the universal law of value) 
 to be depreciated; the first effect of this depreciation, the first sign 
 that that is coming, although the general public may not be aware 
 of it, is that metallic money begins to command a premium. 
 
 2. The second sign is a rise in the rate of exchange. Bills payable 
 abroad, i.e., foreign bills of exchange, are sold in all the great com- 
 mercial centers of the world. Like any other commodity, they have 
 a market price that is quoted at the stock exchange; this is called 
 the rate of exchange. These bills, or claims on foreign countries, 
 are always payable in gold or silver, generally in gold, because gold 
 is the international money. If, for example, the United States is 
 under a paper-money system and its paper begins to be depreciated, 
 
 'Adapted from Principles of Political Economy, 1888 (Veditz translation), 
 pp. 270-73. (By permission of D. C. Heath & Co., who hold the copyright.)
 
 THE STANDARD QUESTION: PAPER MONEY 207 
 
 bills on London or Paris will rise in price just like gold itself, since 
 they are in fact equivalent to gold. 
 
 3. The third sign is the flight of metallic money. However slight 
 the depreciation of paper money may be (and unless this defect is 
 immediately remedied by the withdrawal of the excessive paper), all 
 metallic money will speedily disappear from a country. This phenom- 
 enon is invariable and therefore characteristic; it occurs in all coun- 
 tries where paper money has been issued in excess. 
 
 4. The fourth sign is a rise in prices. This appears later on, and 
 shows that the evil has already become a grave one, and that the 
 permissible limit has been greatly exceeded. While the depreciation 
 is still slight, say 2 or 3 per cent, prices (except those of the precious 
 metals) are not affected. Retail dealers, and even wholesale dealers, 
 will not alter prices for so trifling a difference as this; and even if 
 they did so, the public would not worry about it. But whenever the 
 depreciation of paper money reaches 10, 15, or 20 per cent, then all 
 tradesmen and all producers raise their prices correspondingly. The 
 evil, which until then has been latent, suddenly bursts forth and is 
 revealed to all. 
 
 5. Finally, we must note that the old prices continue the same for 
 those persons who can pay in metallic money, if there is any of it 
 left. For metallic money has lost none of its former value; on the 
 contrary, compared with paper money it has gained. Hence we 
 observe the curious phenomenon of two different sets of prices for 
 commodities. Every article now has two prices, one payable in 
 metallic money, the other in paper money. The difference between 
 the two prices exactly measures the depreciation of the paper moncv. 
 
 As soon, therefore, as a government perceives the premonitory 
 signs, namely, a premium for gold and a rise in the rate of exchange, 
 its first duty is absolutely to forbid the emission of any more paper 
 money, since the extreme limit has already been reached. If this 
 limit has unfortunately been overstepped, and we discover the omi- 
 nous symptom of double prices, it must endeavor to retrace its steps 
 and destroy the paper money that returns to the public treasury 
 until there is the right amount in circulation. Such a heroic remedy 
 as this, however, involving the partial suppression of the national 
 revenue, is not within the power of all governments. They cannot 
 resort to it unless they can afford to sacrifice a part of their revenue; 
 in other words, the public revenue must be in excess of public ex- 
 penditures.
 
 2o8 PRINCIPLES OF MONEY AND BANKING 
 
 119. PAPER MONEY AND THE FOREIGN EXCHANGES' 
 
 By FRANCIS A. WALKER 
 
 One of the most important phases of the subject of paper money 
 is its relation to the International Exchanges. By the mere fact of 
 the adoption of this kind of money, a country loses all the advantages 
 of an automatic regulation of the money supply through the normal 
 movements of trade. Paper money finds no outlet in international 
 commerce. It cannot be exported and retain its value. Hence its 
 regulation becomes purely mechanical. Having no natural cost of 
 production, it will not, if in excess in any country, flow away in obedi- 
 ence to the law which governs the distribution of a money having 
 acceptance abroad equally as at home; but, if issued in excess, it 
 can only be removed by being pumped out by the same force which 
 originally issued it, at least until the stage of utter popular repudiation 
 is reached. 
 
 Even where the excess of such paper money over what would have 
 been that country's distributive share of the world's money be not 
 enough to produce grave disturbances of domestic industry, the 
 effect on foreign trade will yet be momentous. The immediate result 
 of any excess must be to establish a premium upon that metallic 
 money in which alone foreign balances can be paid. 
 
 To one who is not familiar with the largest operations of com- 
 merce this may seem a small matter; yet if we may trust those who 
 are best qualified to decide such questions, the money of a commercial 
 state cannot depart, even by the narrowest interval, from the money 
 in which international balances are discharged, without creating 
 obstructions, exciting apprehensions, and even occasioning losses, to 
 which modern trade, with its highly developed and acutely sensitive 
 organization, will not submit, or will do so only upon the payment of 
 heavy fines by the offending community. 
 
 During the German War, and for some years after, viz., from 
 187 1 to 1877, the notes of the Bank of France were inconvertible; 
 yet such was the sagacity and prudence of the directors of that 
 institution that at no time was there any considerable discount on 
 that money, the premium on gold often being but a small fraction 
 of I per cent. Yet, slight as was the disturbance of the domestic 
 circulation thereby produced, Mr. Bagehot, in his standard work, 
 
 ' Adapted from Political Economy, pp. 173-74. (Henry Holt & Co., 1883.)
 
 THE ST/VNDARD QUESTION: PAPER MONEY 209 
 
 Lombard Street, written during the period of suspension, attributes 
 to it the most momentous consequences. 
 
 "The note of the Bank of France," he says, "has not, indeed, 
 been depreciated enough to disorder ordinary transactions. But any 
 depreciation, however small, even the liability to depreciation, with- 
 out its reality, is enough to disorder exchange transactions. They 
 are calculated to such an extremity of fineness, that the change of a 
 decimal may be fatal, may turn a profit into a loss. Accordingly 
 London has become the sole great settling house of exchange trans- 
 actions in Europe, instead of being, as formerly, one of two."
 
 VI 
 
 THE STANDARD QUESTION: THE SILVER 
 MOVEMENT IN THE UNITED STATES 
 
 Introduction 
 
 The discussion of bimetallism in chapter iv ended, so far as the 
 United States was concerned, with the year 1873. The present chap- 
 ter is a continuation of our bimetallic history and treats of the acute 
 stage of the controversy that followed close upon the general demone- 
 tization of silver by the leading countries of the world. The reason 
 for having broken the continuity of the discussion by introducing 
 the chapter on paper money is that in the United States the "green- 
 backers" and the "silverites" possessed in many respects a common 
 philosophy — actually joining forces, in the main, after 1878. An 
 understanding of the greenback movement is, therefore, essential to 
 an appreciation of the last stage in the bimetallic controversy in 
 this country. 
 
 The silver movement began about 1875, when it was discovered 
 that the standard silver dollar was no longer coinable at the mints. 
 For many years prior to 1873, when the silver dollar was dropped from 
 the list of coins that might be struck, the legal ratio of silver to gold 
 had been 16 to i while the market ratio was around 15.6 to i. There 
 was consequently no incentive to coin silver, and none had in fact been 
 coined for generations, except a small quantity for use in oriental 
 trade. But when silver fell in value in 1874 and 1875 so that the 
 market ratio became 16+ to i, it was promptly presented to the 
 mints for coinage, where minting into standard silver dollars was of 
 course refused. Immediate indignation was aroused ; it appeared that 
 the "surreptitious" demonetization of silver that had occurred was 
 nothing short of a vicious crime engineered by and in the interests 
 of the gold conspirators. By a single act of Congress, unknown 
 to and unsanctioned by the general public, it seemed that the country 
 as a whole had been deprived of a large portion of its national 
 wealth. The controversy over this act of 1873 was bitterly waged 
 for more than twenty years.
 
 THE STANDARD QUESTION: THE SILVER MOVEMENT 211 
 
 The silver party, so called, was composed of numerous elements, 
 with differing points of view, but imbued with a common purpose of 
 securing the recoinage of silver. In this movement the problem of 
 deferred payments became, even on the popular side, more or less 
 differentiated from the mere question of the volume of money. It 
 appears to have been very clearly appreciated that the fall in prices 
 following the war was rendering the repayment of mortgages and 
 other long-time obligations annually more difficult; and the issue 
 between the debtor and the creditor classes, as shown in numerous 
 selections below, was bitterly contested. One cannot fail to be 
 impressed with the sincerity of conviction manifested on both sides; 
 and it is a matter of much significance, as well as interest, that prac- 
 tically every class, even the economists, became largely imbued with 
 a partisan spirit, and very generally impugned the motives of the 
 opposition; the very air seemed charged with feeling. 
 
 The result of the silver agitation was to secure a limited coinage 
 of silver and thereby to derange our monetary system for nearly 
 twenty years. It must be said in justice to the advocates of bimetal- 
 lism, however, that the system did not have a real trial during this 
 period; and their contention in the nineties that a larger rather than 
 a smaller coinage of silver was needed may easily be justified, granting 
 the premise of the bimetallic argument. The state of our currency 
 under the Bland-Allison and Sherman acts served one useful function, 
 however: it demonstrated as nothing else could have done the work- 
 ing of monetary principles and the evils of an uncertain standard of 
 deferred payments. 
 
 The issues of 1896 appear to have been settled by the geograph- 
 ical distribution of our population and the relative numerical strength 
 of the opposing interests, rather than by logic or virtue or honesty 
 or devotion to the public welfare. And, similarly, the failure of the 
 agitation to arise again since then does not denote so much an 
 increased knowledge of the principles of sound money, as it does a 
 change in the fundamental conditions governing the supply of gold. 
 The productivity of the world's mines since 1896 has given an 
 enormously increased volume of currency, enough at least to dull the 
 edge of that insistent desire for more money which characterizes the 
 true inflationist. At the same time the high prices of the present 
 era serve effectively to remove the grievance of the debtor classes. 
 In fact, it is now a horse of a different color; for it is the creditor 
 class that is feeling the ill consequences of a changing price level.
 
 212 PRINCIPLES OF MONEY AND BANKING 
 
 The quotations from the national party platforms of 1896 and 1912 
 reveal the complete reversal of opinion on the part of both parties 
 with reference to the underlying relations of money and prices; poUt- 
 ical expediency still appears to be of more practical significance than 
 analysis or truth. 
 
 By way of reviewing the whole history of monetary evolution one 
 should compare the statistics of production of the precious metals 
 at various periods with the monetary controversies that have come 
 and gone. It will be found that monetary history may be very largely 
 explained by reference to the conditions of production of gold and 
 silver at the mines. 
 
 A. The Agitation for the Recoinage of Silver 
 
 120. THE CRIME OF 1873: THE INDICTMENT' 
 By J. P. DUNN 
 
 The bill which was presented to the Senate for amendment and 
 passage contained provision for a standard silver dollar as well as for 
 a trade dollar. In the words of Mr. Sherman: "This bill proposes 
 a silver coinage exactly the same as the French, and what are called 
 the associated nations of Europe, who have adopted the international 
 standard of silver coinage; that is, the dollar provided for by this 
 bill is the precise equivalent of the five-franc piece. It contains the 
 same number of grains of silver, and we have adopted the international 
 gram instead of the grain for the standard of our silver coinage. The 
 "trade dollar" has been adopted mainly for the benefit of the people 
 of California and others engaged in trade wdth China. That is the 
 only coin measured by the grain instead of the gram. The intrinsic 
 value of each is to be stamped upon the coin." (Congressional Globe, 
 3d sess., 42d Cong., p. 672.) 
 
 Human perversity cannot misinterpret this language. It means 
 that the bill provided for two dollars. The one, measured in grams, 
 the standard of our silver coinage, and the other, measured in grains, 
 a special coin for convenience m tlie Chmese trade. The Senate 
 passed this bill and it was referred to the House, which declined to 
 concur in some of the Senate amendments, thus necessitating a Con- 
 ference Committee. This committee in reporting to the House and 
 Senate made no reference to the omission of the standard silver dollar 
 
 ' Adapted from "The Silver ' Grievance,' " Journal of Political Economy, 1892, 
 pp. 436-38.
 
 THE STANDARD QUESTION: THE SILVER MOVEMENT 213 
 
 from the list of coins that could be struck. This section of the bill 
 had not been amended by the Senate, and therefore was not a sec- 
 tion open for adjustment in the Conference Committee. Someone 
 secretly drew the pen through the silver dollar. The fact that it was 
 done in the Conference Committee, where it was not an issue, is the 
 significant point which is usually overlooked by those who hold that 
 there was no intentional deceit. 
 
 121. THE CRIME OF 1873: THE DEFENSE' 
 By JAMES T. McCLEARY 
 
 The mintage act of 1873 is a subject about which there has been 
 a great deal of misunderstanding. Aspersions galore have been cast 
 upon the methods and the motives of the men who were responsible 
 for its enactment. For twenty years "the crime of 1873" has been 
 held up as one of the most atrocious in the entire political calendar. 
 
 The original bill was prepared in the Treasury Department in the 
 winter of 1869-70 by John Knox, then Deputy Comptroller of the 
 Currency, under the direction of George S. Boutwell, then Secretary 
 of the Treasury. The laws relating to the mint had not been re^•ised 
 for more than a generation, and much confusion existed. The first 
 section of the bill was largely a codification of existing law, with such 
 improvements as experience suggested. 
 
 Then immediately following, and in the precise place where any- 
 one interested in such legislation or attempting to follow its course 
 would most naturalh' look for a statement of what was contemplated, 
 was a short paragraph headed in large capital letters: PROPOSED 
 AMENDMENTS. In this paragraph an enumeration of " the new 
 features of the bill" is made. There are twelve different amend- 
 ments specified — one of which is plainly stated to be "discontinuing 
 the coinage of the silver dollar." This is the clause that has given rise 
 to the long controversy. The bill as thus perfected was introduced 
 in the Senate April 25, 1870, accompanied by a report giving the 
 reasons for its introduction, the method of its preparation, and an 
 explanation of every section in it. (The original bill and the report 
 accompanying it arc to be found in the Senate Misc. Document No. 
 132 of the second session of the Forty-first Congress.) 
 
 Section 14 of the bill .sjK-cilied the weight and fineness of the gold 
 coins, and made the gold dollar the unit of value. 
 
 • Adapted from Sound Currency, III, 1896, No. 13, pp. 2-10.
 
 214 PRINCIPLES OF MONEY AND BANKING 
 
 Sections 15 and 18 were as follows: 
 
 Section 15. And be it further enacted, That of the silver coin, the 
 weight of the half-dollar, or piece of fifty cents, shall be 192 grains; and 
 that of the quarter-dollar and dime shall be, respectively, one half and one- 
 fifth of the weight of said half-dollar. That the silver coin issued in con- 
 formity with the above section shall be a legal tender in any one payment 
 of debts for all sums less than $1; 
 
 Section 18. And be it further enacted, That no coins, either gold, silver, 
 or minor coinage, shall hereafter be issued from the mint other than those 
 of the denominations, standard, and weights herein set forth. 
 
 Ask the first twenty free-silverites that you meet, "Did the Act 
 of 1873 ever contain the old standard silver dollar of 412^ grains?" 
 and nineteen of them, if not all, will promptly answer, "Why, cer- 
 tainly, and it was surreptitiously dropped out just before the passage 
 of the bill." Many a good man has had his righteous indignation 
 aroused by being told this tale. And very frequently it has been told 
 by men who sincerely believed that such was the case. But, as we 
 have seen, the story is not true. The 412^-grain dollar was never in 
 the bill from first to last I Its omission was carefully pointed out in the 
 report accompanying the original bill, and the reasons for the omission 
 were plainly given. The dollar for which the trade dollar was finally 
 substituted was a 384-grain dollar, of limited coinage and tender. 
 The change was made for the benefit of the silver-producers, and at 
 their request, to enable them to find a market for their silver in the 
 East. 
 
 And the bill on its final passage was voted for by every man from 
 the Pacific Coast. They had got exactly what they asked for. 
 
 That the matter was fully discussed in Congress may be seen by 
 the following extracts from the debates: 
 
 On January 9, 1872, in reporting H.R. 5, which (like the original 
 bill, S. 859) contained no silver dollar of any kind, Mr. Kelley, chair- 
 man of the committee in charge of the bill, said: "The Senate took 
 up the bill and acted upon it durmg the last Congress and sent it to 
 the House; it was referred to the Committee on Coinage, Weights, 
 and Measures, and received as careful attention as I have ever known 
 
 a committee to bestow on any measure We proceeded with 
 
 great deliberation to go over the bill, not only section by section, but 
 line by line, and word by word; the bill has not received the same 
 elaborate consideration from the Committee on Coinage of this House, 
 but the attention of each member was brought to it at the earliest
 
 THE STANDARD QUESTION: THE SHAVER MOVEMENT 215 
 
 day of this session; each member procured a copy of the bill, ami 
 there has been a thorough examination of the bill again."' 
 
 Mr. Harper on April 9, 1872, for instance, spoke as follows on 
 section 16: "Section 16 re-enacts the provisions of the existing laws 
 defining the silver coins and their weights, respectively, except in rela- 
 tion to the silver dollar, which is reduced in weight from 41 2| to 384 
 grains, thus making it a subsidiary coin in harmony with the silver 
 coins of less denomination to secure its concurrent circulation with 
 
 them This bill provides for the making of changes in the 
 
 legal-tender coin of the country and for substituting as legal-tender 
 coins of only one metal instead as heretofore of two. I think myself 
 this would be a wise provision, and that legal-tender coins, excejit 
 subsidiary coin, should be of gold alone; but why should we legislate 
 on this now when we are not using either of those metals as a 
 circulating medium?" 
 
 On May 27, 1872, the bill was once more called up in the House 
 by Mr. Hooper for the purpose of offering an amendment in the nature 
 of a substitute. 
 
 In view of certain statements which have been going the rounds 
 to the effect that the bill or its substitute was ne<^er read, it may not 
 be out of place to state somewhat more fully the events preceding 
 the passage of the act in the House, as they are recorded in the Globe: 
 
 1. A motion to suspend the rules and pass the bill without reading 
 was defeated. 
 
 2. Mr. Hooper then asked that the bill about to be passed be read. 
 
 3. The record reads, "The clerk began to read the substitute" 
 (which was the bill passed). 
 
 4. Mr. McCormick later said, "I ask that the nineteenth section 
 be read again." 
 
 5. After further discussion the bill was passed, yeas no, nays 13. 
 The bill was again printed in the Senate on May 29, 1872, and 
 
 referred to the Finance Committee, from which it was reported back 
 Decem])er 16, 1872. After debate, the bill was once more printed in 
 full, with amendments, and was considered by the Senate section by 
 section. 
 
 After passing the Senate, January 17, 1873, the l>ill was sent to 
 the House, and on January 21, 1873, it was again printed with amend- 
 ments. Subsequently conference committees were appointed, con- 
 sisting of Messrs. Hooper, Houghton, and McNecly of the House, and 
 
 ' Congressional Globe, C, 322.
 
 2i6 PRINCIPLES OF MONEY AND BANKING 
 
 Senators Sherman, Scott, and Bayard of the Senate. The reports of 
 the Conference Committee were agreed to, and the bill became a law 
 on February lo, 1873. 
 
 122. AN ECONOMIST'S VIEW OF THE ACT OF 1873' 
 By FRANCIS A. WALKER 
 
 As one who has read a good deal upon both sides of this subject, 
 I do not believe that any fraud was committed or intended by the 
 Act of 1873. Very few people knew what the monetary system of the 
 country was by law. Our public men had almost no training in eco- 
 nomics or finance. The general pubUc had not had its attention at 
 all called to the subject of the standard. Some committeeman, or 
 some few committeemen, ran the pen through the silver dollar; and 
 the thing was done. The measure passed through the usual course; 
 the bill was duly "read" the regular number of times; and without 
 debate the demonetization of silver was effected. 
 
 But while I am disposed to discredit the allegations of sinister 
 motives, it seems to me, nevertheless, that the silver men have a 
 grievance. No man in a position of trust has a right to allow a 
 measure of such importance to pass without calUng attention sharply 
 to it. Everyone knows that but few men upon the floor of Congress 
 read the text of one in twenty of the bills they have to pass upon; 
 and it is the duty of the committees deaUng with any class of subjects 
 to see to it that every proposal is fully explained to Congress and to 
 the country. They are not discharged of their obligations simply by 
 giving members an opportunity to find it out for themselves. 
 
 123. THE TRADE DOLLAR" 
 By a. PIATT ANDREW 
 
 During the sixties the United States suddenly developed silver 
 resources second only to those of Mexico; and Congress, desirous of 
 assisting American mine-owners to secure an Oriental market for their 
 product, in 1873 consented to their ha\dng their silver stamped at 
 the government mint into coin adapted for the Eastern trade. So 
 great was the foreign demand for IMexican dollars at this time that 
 they continually commanded a premium; and, as the ^lexican govern- 
 
 ' Adapted from "The Free Coinage of Silver," Journal of Political Economy,! 
 (1892), pp. 169-70. 
 
 'Adapted from Quarterly Journal of Economics, XVIII (1903-04) 329-31.
 
 THE STANDARD QUESTION: THE SU.VER MOVEMENT 217 
 
 ment levied a tax of 8 per cent upon their export, there was every 
 reason to believe that the new American coins, which could be freely 
 exported, and which would be more accurate in mintage and superior 
 in bullion value to the Mexican dollars, would meet a real demand in 
 the East, and might even supersede the Mexican coins in those parts. 
 The ordinary American dollar, containing 37 ij grains of pure silver, 
 had never been well received in China on account of its inferior con- 
 tent. So the new coins were to contain 37S grains, or | of a grain 
 more than the standard of the Mexican dollar. This would make 
 them worth, at the ratio of exchange prevailing when the act was 
 passed, a little more than Si 04 in gold, and would have the double 
 advantage, it was thought, of rendering them acceptable in the Orient 
 without danger of their invading the circulation at home. 
 
 The new trade dollars, as had been expected, found a ready market 
 in the East. At Hong Kong and the Straits Settlements, in French 
 Indo-China, and at several Chinese ports they were made a legal 
 tender along with the Mexican dollars; and the California mint soon 
 found difficulty in turning them out fast enough to meet requirements. 
 Within six years after the commencement of their coinage nearly 
 36 millions had been struck, and in January, 1877, the leading bankers 
 in China reported that there was "evidence powerful enough to con- 
 vince the most skeptical" that the United States trade dollar has 
 been a success, predicting that "ultimately it will be current all over 
 China." The American dollar was thus making rapid inroads upon 
 the territory of the Mexican dollar and threatening it with very 
 serious competition in the Far East, when unanticipated conditions 
 in America resulted in the abrupt cessation of its coinage and its 
 ultimate withdrawal from the field. 
 
 The decline in the price of silver reached such a point in 1S77 
 that the silver in a trade dollar was worth not only less than a gold 
 dollar, but also less than the depreciated paper dollars which consti- 
 tuted the circulating medium of almost the entire country. As a 
 consequence, large numbers of trade dollars began to appear in cir- 
 culation. These trade coins really had no legal standing in the 
 country, being neither an authorized tender for debts nor receivable 
 at the public treasury. In the eyes of the law they were only discs 
 of metal assayed and stamped at the government mint for foreign 
 use; but they bore on their face the words " trade dollar " and "United 
 States of America," and it was not strange, therefore, that they 
 were frequently given and taken at home at their face value. The
 
 2l8 PRINCIPLES OF MONEY AND BANKING 
 
 confusion was aggravated in the following year, when Congress ordered 
 the renewed coinage of the old standard silver dollar under the Bland- 
 Allison act (February 25, 1878); for this meant that dollar pieces of 
 even less intrinsic value were to circulate at par under governmental 
 authority. If these smaller silver coins were to be everywhere receiv- 
 able as equivalent to the gold dollar, it appeared but logical that the 
 larger coins issued from the same mint should not be worth less. 
 
 Apprehending the increasing misuse of the trade dollar, the Sec- 
 retary of the Treasury therefore ordered the discontinuance of its 
 coinage on October 15, 1877; and the ban was lifted upon only a few 
 occasions after that date, when small amounts were coined expressly 
 for exportation. The trade dollars still outstanding in the country 
 continued, however, to be a source of embarrassment, until finally, 
 in 1887, Congress decided to get rid of the anomalous pieces altogether. 
 An act was passed on March 3 of that year authorizing the redemp- 
 tion and recoinage into standard silver dollars of all trade dollars pre- 
 sented during the succeeding six months. The government had 
 coined in all 35,965,924 of them, of which 7,689,036 were withdrawn 
 under the provisions of the act, a considerable number having been 
 reimported after the passage of the act. The vast majority, however, 
 seem destined to remain in the Orient, unrepaired and unreinforced 
 until time and use have accomplished their decay or the melting-pot 
 has consumed them. 
 
 124. THE BLAND-ALLISON ACT OF 1878 
 
 As early as July, 1876, bills were introduced into Congress for the 
 recoinage of silver, but it was not until 1878 that sufficient strength 
 could be gained to enact a law. The Bland bill, providing for unre- 
 stricted coinage of silver at the ratio of 16 to i, passed the House 
 without debate November 5, 1877, by a vote of 163 to 34. In the 
 Senate there was an extended debate resulting in the Allison amend- 
 ment, which limited the purchase of silver bullion for coinage to "not 
 less than two million dollars worth per month, nor more than four 
 million dollars worth per month." 
 
 The amended bill was unsatisfactory to the silver party in the 
 House, but was finally supported by the silver people in the beUef 
 that something was better than nothing, and with the hope that it 
 would be speedily followed by complete bimetallism. On the other 
 hand, it was supported, also, by many of the opposition, who believed 
 that it would be repealed after a short trial. At the same time it 
 appeared a satisfactory solution to those legislators who were anxious
 
 THE STANDARD QUESTION: THE SILVER MOVEMENT 219 
 
 to appease all parties. The measure was thus a welcome compromise 
 all around. President Hayes, however, vetoed the bill, whereupon 
 it was promptly passed over his veto by a vote of 196 to 73 in the 
 House and 46 to 19 in the Senate. 
 
 125. THE SHERMAN ACT OF 1890' 
 By HORACE WHITE 
 
 On July 14, 1890, Congress passed an act for the issue of an indefi- 
 nite amount of legal-tender notes for the purchase of silver bullion. 
 This is commonly called the Sherman Act. The notes were to be 
 redeemed on demand in "coin," either gold or silver, at the discretion 
 of the Secretary of the Treasury, but it was declared in the words of 
 the act to be "the established policy of the United States to maintain 
 the two metals on a parity with each other upon the present legal 
 ratio or such ratio as may be established by law." This was a hint 
 rather than a command to the Secretary in favor of gold redemption. 
 The notes were declared in the act to be "legal tender in payment of 
 all debts, pubHc and private, except where otherwise expressly stipu- 
 lated in the contract." In practical effect this was a fresh issue of 
 greenbacks in time of peace, and of unlimited amount. The only 
 restriction was as to the rate of issue, which was to be the sum neces- 
 sary to pay for 4,500,000 ounces of silver bullion each month at the 
 market price. 
 
 The act of 1890 was not grounded upon financial considerations. 
 It was a part of a political trade. In the Senate, April 29, 1S96, 
 Senator Teller of Colorado gave what he called the "unvarnished 
 history" of the Sherman Act, which has never been contradicted. 
 He said that the Republicans desired to pass the McKinley tariff bill. 
 The silver men desired to pass a free-coinage bill. The latter had 
 a majority in the Senate, with power to adopt a free-coinage clause as 
 an amendment to the tariff bill and thus compel the House to adopt 
 it or lose the latter bill altogether. They did not follow that plan 
 because they knew that President Harrison would veto a free-coinage 
 bill, even if, in doing this, he should kill the tariff bill. So the silver 
 senators determined to adopt, not a free-coinage measure, which would 
 certainly be vetoed, but the nearest approach to it, and put this 
 measure on its passage ahead of the tariti bill. The Sherman silver 
 bill was then passed by the Republicans as the price for securing the 
 passage of the McKinley tariff bill. 
 
 'Adapted from Money and Banking, pp. 159-60. (Ginn & Co., 1895.)
 
 220 PRINCIPLES OF MONEY AND BANKING 
 
 126. TPIE SILVER DEBATE OF 1890' 
 By ROBERT F. HOXIE 
 
 The typical advocate of free coinage of silver logically began his 
 discussion with a resume of the present economic conditions. He 
 found a marked depression in agricultural interests, a vast accumula- 
 tion of debts and mortgages, a depression of mining interests, an era 
 of falling prices, and a widespread feeling of discontent among the 
 masses. He assumed this era of business depression accompanied by 
 falling profits, falling wages, and enforced idleness to be permanent 
 under the present conditions and to be due to certain general causes: 
 (i) a lack of confidence and business enterprise; (2) a low range of 
 prices; (3) increasing indebtedness; (4) the depression of our great 
 silver-mining industry. There were developed four trains of reason- 
 ing, more or less dependent, yet quite distinct, to prove in general 
 that the demonetization of silver did actually produce these effects 
 and that its remonetization would remedy these evils. 
 
 The first of these may be called reasoning for National Bimetal- 
 lism; the second, reasoning for Currency Inflation; the third, reason- 
 ing in the interest of the Debtor Class; the fourth, reasoning in the 
 interest of a Special Industry. These lines of reasoning will now be 
 examined in order, 
 
 A. THE REASONING IN FAVOR OF BIMETALLISM 
 
 The reasoning in favor of national bimetallism assumed that the 
 currency laws of 1873 induced the present industrial evils by cutting 
 the nation off from certain benefits and safeguards of the double 
 monetary standard, and that the establishment by law of free silver 
 coinage within the United States alone would restore and maintain 
 the double standard for the nation, with all its assumed benefits. 
 The first step in this reasoning was the proof of the virtues of bimetal- 
 lism. The arguments advanced were: (i) arguments of sentiment; 
 and (2) arguments of theory. The arguments of sentiment were those 
 most frequently advanced in this debate by all classes of silver advo- 
 cates. They may be called the universal free-coinage arguments. 
 They are easily understood and appreciated, and may be used effect- 
 ively by Congressmen to catch the popular ear, though ha\'ing no 
 economic bearing. In the line of sentimental argument, it was urged 
 that the two metals were made money by the "fiat" of the Almighty. 
 
 ' Adapted from "The Silver Debate of 1890," Journal of Political Economy, I 
 (1892-93), 545-73-
 
 THE STANDARD QUESTION: THE SHAVER MOVEMENT 221 
 
 Said Senator Teller: ":Mr. President, the question presented, not for 
 the American people alone, but for the entire world, is whether we 
 shall do business in the future as we have done business in the past, 
 pr until within the last seventeen years, by the use of the two precious 
 metals, not made money by law, not made money metals by the edict 
 of legislative minds, not by the consent of the merchants, but by the 
 fiat of the Almighty, when he created these two metals." 
 
 The age and honor of the bimetallic system were frequently brought 
 forward. A striking example is from the speech of Congressman 
 Lane: " Gold and silver should be equally valuable as money. They 
 were so used for over three thousand years and down to 1873. They 
 served together as the money of ancient and modern civilization. 
 They were good enough for Abraham in his day, and Christ himself 
 used coins, not silver certificates, to pay taxes when he was on earth. 
 Gold and silver adorned the Temple of Solomon, and for centuries they 
 have sustained commerce and navigation." 
 
 The most effective of these arguments, however, appealed to 
 patriotism. Gold and silver were the money of our fathers, for the 
 bimetallic system was adopted by our first financier, and sanctioned 
 by the framers of the Constitution, as the American currency system. 
 These appeals to sentiment, however, deser\^e only a passing notice. 
 
 Of more weight, but less frequently urged, were the theoretic 
 arguments in favor of bimetallism. It was asserted that this system 
 exerted a powerful influence in keeping steady the value of the mone- 
 tary unit: first, through the power given to both metals of entering 
 or retiring from the circulation freely; secondly, by making it less 
 possible to manipulate the currency; and thirdly, by giving free play 
 to an automatic adjustment of metallic production to the needs of 
 increasing business; a further argument, on which much stress was 
 laid, assumed that a bimetallic currency is a safeguard against panics, 
 providing adequate means of metallic liquidation in a time of failing 
 confidence, one metal at the present rate of production and growth 
 of business being inadequate as a credit basis. These arguments, 
 with perhaps a single exception in either House, were not combated 
 by the opponents of free coinage. 
 
 Another argument in this connection assumed, in direct opposi- 
 tion to the known fact as demonstrated by our failure to secure inter- 
 national co-operation, that the commercial worUl is eager for the 
 reinstatement of silver and that only the courageous etTort of one 
 nation is necessary to enlist world-wide assistance. Senator Vance
 
 222 PRINCIPLES OF MONEY AND BANKING 
 
 expressed this idea in the following words: "I believe that the world 
 is waiting for somebody to begin, and that the moment this great 
 people throw open the doors of their mints .... the success of free 
 coinage will be so well assured that the smaller nations of Europe who 
 ardently desire the free coinage of silver money will at once come to 
 the rescue, and that it is only a matter of courage that is required on 
 our part to cease to regard the interested howls of the gold speculators, 
 throw open the doors, and make a beginning." 
 
 Whether or not the United States could raise the value of silver 
 seemed an immaterial consideration to many silver advocates. 
 Leaving this question aside, it was vehemently urged that we would 
 find no difficulty in maintaining the two metals in circulation under 
 a free-coinage law. On this point was developed a remarkable con- 
 test concerning the existence and action of Gresham's law. A class 
 of silver advocates denied the possible existence of such a law, and 
 as this is a pivotal point in the discussion, liberal quotation may be 
 pardoned. Representative Lane took, perhaps, the most extreme 
 attitude. He said: "This union of the two metals, this blending of 
 them into one standard for practical use, is improperly called the 
 'double standard,' for in reality it is a single standard of two metals, 
 exactly a combination of the two as one." 
 
 This was equaled only by the following: "I beheve too that the 
 free coinage of silver will bring gold to us, not drive it away. Money 
 attracts money. Riches produce riches. Wealth has no liking for 
 anything so much as itself. Everything assimilates with its kind. 
 Money is the most social, self-assimilative, and procreative of all 
 material things." 
 
 Another and more common position was taken by Senator Daniel: 
 "How is the gold dollar likely to go to a premium over the silver 
 dollar ? What condition could exist to drive it to a premium ? What 
 use will there be for a gold dollar, making it desirable that a man shall 
 part with more than one silver dollar in order to get a gold dollar ? 
 He can pay as much tax with a silver dollar as ^^'ith a gold dollar. 
 He can discharge as much debt with his silver dollar as with his gold 
 dollar. He can buy as much of any commodity with his silver dollar 
 as with a gold dollar, and why then should he give more for a gold 
 dollar than for a silver dollar?" 
 
 A favorite mode of denial was to point to our own experience since 
 1878. Said Senator Harris: "The experiment of eleven years of a 
 coinage has effectually exploded the argument based upon the idea
 
 THE STANDARD QUESTION: THE SILVER MOVEMENT 223 
 
 that the remonetization and coinage of silver would drive gold out 
 of the country." The question was frequently asked, If 343 millions 
 of silver dollars will not drive out gold how much will ? These denials 
 and queries at once lose all force, however, when we consider that the 
 operation of Gresham's law presupposes free coinage, while under our 
 statutes the government reserves the right of coinage to itself, and 
 retains in its vaults, as profit to itself, all seignorage. 
 
 The position held by the majority of the national bimetallists was, 
 however, less extreme. They admitted the existence of Gresham's 
 law, but affirmed that its action was confined to limited conditions. 
 Gold, they asserted, could only be driven out by silver dollar for 
 dollar in legitimate trade, and then only when the balance of trade 
 is against us, or we have a surplus of money, or our securities and 
 investments become no longer desirable. These assumptions, one and 
 all, because they ignore the existence of the money broker, and the 
 fact that a metal money may disappear as well in the melting-pot and 
 by domestic hoarding as through the channels of commodity exchange, 
 must be seen to be untenable. 
 
 B. THE REASONING FOR INFLATION 
 
 We come now to a different class of arguments upheld by men 
 actuated by less worthy motives. For the origin of this class of 
 reasoning in this country we must look to the financial history of the 
 Civil War and the old greenback movement. 
 
 The advocacy of silver by the inflationist was based on the old 
 familiar assumption that the quantity of money controls prices and 
 that high pritcs mean prosperity. This view was supported by the 
 usual assertions that throughout history the prosperous eras have 
 always been periods of high prices; the conclusion of course being 
 that high prices were the cause of the prosperity. 
 
 The inflationist accepted unreservedly the idea that it is impos- 
 sible to have too much money. Said Mr. Perkins: "In my reading, 
 or otherwise, I have never learned of any people who had too much 
 good money to contribute to their happiness, to their support, and to 
 the comfort of their homes. No one ever had too much money for 
 caring for his little ones, for carrying on domestic concerns, which 
 aflcct the happiness of the fireside of every man." 
 
 The line of reasoning of the inflationist was completed by the 
 argument that the degradation of metallic currency is impossible. A 
 plain statement of this position is found in the speech of Senator Pugh:
 
 224 PRINCIPLES OF MONEY AND BANKING 
 
 "The people in no time of our history, and no country in the world's 
 history, ever suffered in trade and commerce or otherwise from having 
 too much coined money in circulation, or as the basis of circulation. 
 Who ever heard of inflation in gold or silver money, or in paper money 
 founded on it for redemption ? How can there be depreciation in the 
 unit of money value compounded of gold and silver, so long as the 
 unit is the coin of the government, declared by a law of Congress to 
 have the value of a dollar ?" 
 
 It will be seen that this assumption was based upon the belief that 
 the value of the monetary unit is independent of the bulhon value, 
 but depends solely on the stamp of the government, the legal-tender 
 function given it. Senator Jones, of Nevada, was the most ardent 
 advocate of this theory: "The logic of the situation and the reason- 
 ing of all the leading authorities on money lead irresistibly to the con- 
 clusion that its value does not reside in the material but in the stamp; 
 in other words, on the legal-tender function impressed on that metal. 
 .... The commodity value of any material on which the money 
 
 function may be stamped is too trifling to merit attention 
 
 There was never a dollar coined that did not legally and practically 
 contain loo cents." 
 
 Such being their monetary theory, the primary desire of this class 
 of silver advocates was simply for more money to raise prices. Why 
 did they resort to silver to satisfy their desire ? Simply as a matter 
 of expediency. They had no love for silver as such, but it was the 
 cheapest and most abundant substance for which they could gain 
 support, its use would result in more legal-tender currency, and iis 
 metallic character would in a measure shield the advocates from being 
 stigmatized as inflationists. Three facts exist which prove that the 
 object aimed at by this class of silver advocates was simply and only 
 more money and not especially more silver money. First, they made 
 no effort toward the remonetization of silver until after the fall in its 
 value in 1876; secondly, the members of this same class exerted them- 
 selves to force the reserves held by the government into circulation; 
 and, thirdly, they openly declared that their object could be attained 
 as well by putting fewer grains in the gold dollar. 
 
 The inflationists admitted freely that the free coinage of silver 
 would result, not in a bimetalUc currency, but in the silver standard 
 of values. In logical keeping with their monetary theories, they 
 hailed the result with pleasure. Having assumed that the value 
 resides solely in the stamp of the government, a cheaper metal is as
 
 THE STANDARD QUESTION: THE SHAVER MOVEMENT 225 
 
 stable and costs less to maintain. By resort to the silver standard 
 the United States would make money by disposing of its gold, and 
 also in the enhanced price of silver. "And further," added Senator 
 Jones, "the export of our gold will raise the price for our exported 
 goods." Such was the reasoning for inflation in the silver debate of 
 1890. 
 
 C. THE REASONING IN FAVOR OF THE DEBTOR CLASS 
 
 The train of reasoning in favor of the debtor class is closely allied 
 to that which was urged in favor of currency inflation. Both pro- 
 ceeded from a desite for more money and higher prices, but while the 
 inflationists emphasized the benefits of rising prices, this class called 
 especial attention to the evils of falling prices. The two lines of rea- 
 soning might be called complementary. The supposition at the foun- 
 dation of the reasoning for the debtor class was that the depression 
 under which the country labored had been caused by a contraction 
 of the currency (producing lower prices and so decreasing debt-paying 
 power) due to the silver legislation of 1873. The per capita circulation 
 was not sufficient for the needs of trade. 
 
 The contraction of the currency being assumed, the silver advocate 
 proceeded to emphasize the evils resulting therefrom. The following 
 from a speech of Senator Jones is a characteristic example: "It is my 
 firm conviction that the inexpressible miseries inflicted upon mankind 
 by war, pestilence, and famine have been less cruel, unpitying, and 
 unrelenting, than the persistent and remorseless exaction which this 
 inexorable enemy has made upon society. As the volume of money 
 contracts, prices decline, and with the decline of prices comes stagna- 
 tion of industry Stores, workshops, and factories, unoccupied 
 
 and unused, are found on every hand. Crime increases, bankruptcies 
 multiply, and even though the aggregate of wealth augments, it is 
 unjustly distributed, and is consequently barren of results." 
 
 A careful examination of the statements on this subject seems to 
 show that the silver advocates attributed tlie evils of contraction to 
 two causes: first, the raising of the standard of deferred payment (by 
 the fall of prices) and consequent increase of burdensome indebted- 
 ness; and, secondly, the decrease of loanable capital. 
 
 The reasoning in favor of the debtor classes was completed by an 
 attempt to prove the justice of free silver as a remedy for the evils 
 of contraction. The arguments were (i) theoretic, (2) technical, and 
 (3) moral.
 
 226 PRINCIPLES OF MONEY AND BANKING 
 
 (i) It was urged that gold had risen in value, while silver, instead 
 of falling, had maintained a remarkable steadiness as compared 
 with the value of staple commodities. The belief that gold had 
 risen followed logically from the postulate that credit must bear a 
 fixed proportion to metallic money. If this be true, and the law of 
 1873, as was claimed, had cut off one-half the metallic basis, the 
 increasing monetary work of the world was thrown upon the remain- 
 ing metal, and its rise in value followed naturally. The steadiness in 
 the value of silver was plausibly maintained by reference to tables of 
 prices dating from 1873. 
 
 (2) Technically it was maintained that there are no obligations 
 in the United States which may not be paid as well in silver as in 
 gold. The Constitution, it was urged, provided for the coinage of 
 gold and silver, and the law of 1873 was in direct violation of this. 
 The Constitution secured the absolute right of the debtor to pay in 
 the cheaper coin. Said Congressman Moore, of Texas: "Congress 
 had no more power to demonetize it than it had- to pass an ex post 
 facto law." In this connection it was denied wath great earnestness 
 that we were actually upon a gold basis. 
 
 (3) Finally it was claimed that " this cry for the best money is at 
 last beginning to be recognized for what it is : the cunning device of 
 creditors to catch the conscience of the people and play upon the 
 sense of fairness that characterizes the great mass of mankind." 
 
 To crown the argument the cry was raised that the Hmited coinage 
 of silver is an unjust discrimination against the people's money : "Silver 
 is the money of the people, the common people, not of the speculators, 
 not of the wealthy men, not of the kings and princes and potentates. 
 It is the money of the people and has been the money of the people 
 so long and so far back in the history of the race as we have any 
 record of whatever." 
 
 It seems almost incredible that this train of reasoning, its assump- 
 tions based on error in fact, its postulates on error in theory, and its 
 conclusion leading directly and inevitably to repudiation, could have 
 found supporters in the Congress of the United States, yet it was 
 maintained vigorously by the leaders of the silver party in both 
 Houses and with far more energy than it was opposed. 
 
 D. THE REASONING IN FAVOR OF A SPECIAL INDUSTRY 
 
 By the close of the last decade the persistent fall in the market 
 value of silver had convinced the mine-owners and all those dependent
 
 THE STANDARD QUESTION: THE SILVER MOVEMENT 227 
 
 on subsidiary employments that the only hope of restoring prosperity 
 to the silver-mining industry lay in immediate and decisive action of 
 Congress in the direction of greater silver coinage. Thus was added 
 a powerful wing to the free-coinage party in the Fifty-first Congress. 
 The Congressmen from the Far West were among the most insistent 
 advocates of free coinage. The arguments they brought to bear in 
 behalf of this industry resulted in a plausible chain of reasoning. At 
 the outset this reasoning assumed the postulate of the National 
 Bimetallist, that the legislation of 1873 caused the fall in the value 
 of silver. It was then argued that the prosperity of the whole countr\' 
 is so intimately connected with the silver industry that the depression 
 forced upon it by hostile legislation had spread throughout the nation. 
 This idea was vigorously expressed by Delegate, now Senator, Dubois, 
 of Idaho: "The West is pouring in upon the East $95,000,000 
 annually in gold and silver. This has been a steadily swelling stream 
 for forty years. What would your country have been without it? 
 You might have had one railroad to St. Louis or Chicago now, and 
 your business would have been swapping loopholes for tobacco and 
 
 burning corn for fuel, as of old The farmers made a profit by 
 
 their labor all through the great war; they continued to prosper for 
 eight years after the war closed. But a blight came upon them. 
 What was it ? What caused it ? The chief function of silver, that 
 of money, the perfect measure of values, was taken from it. So soon 
 as that dishonor was cast upon it as compared with gold it began to 
 
 fall in value But silver is a royal metal, and as it has gone 
 
 down it has carried every other product of industry with it in precisely 
 the same ratio." 
 
 The true animus of this whole train of reasoning, which many 
 wished to conceal, was in fact a desire for protection to a particular 
 industry. By some this was plainly confessed. The silver miners, 
 they said, had built up the industry and the country on the supposi- 
 tion that free coinage would continue. They had a right to expect 
 its continuance, for had it not the sanction of the Constitution and 
 the usages of centuries ? Its restoration would be only justice. Said 
 Senator Stewart: "There is not a silver dollar in the United States 
 that will not bring one hundred cents in gold. The United States 
 buys 412^ grains of bullion for eighty-two cents, and coins it into a 
 dollar and makes the dilTcrence. Why should not the owner of the 
 bullion, as formerly, have it coined and save the loss?"
 
 228 PRINCIPLES OF MONEY AND BANKING 
 
 Further, it was argued that there is no reason why the United 
 States should not protect the silver industry as well as other industries. 
 The mining states had aided to protect eastern industries — turn about 
 is fair play. 
 
 127. THE VIEWPOINT OF THE DEBTOR MASSES' 
 By D. W. VOORHEES 
 
 It may be stated without the shghtest fear of contradiction that 
 the attack upon silver money in this and other countries is based upon 
 no demerit or unsoundness on its part, but is simply a movement for 
 the contraction of the currency. This movement is made by the 
 moneyed classes who wish to increase the purchasing and interest- 
 gathering power of money in their own hands by making it scarce in 
 the hands of others; by people with large incomes growing out of 
 monopoHes protected by unjust legislation; by those who enjoy annui- 
 ties, interest on public securities, fixed salaries under great corpora- 
 tions, and by the creditor classes in general, including all the enormous 
 loan associations, who join in the movement of silver destruction and 
 financial contraction in order to enhance twofold, and more, the value 
 and power of the money they wring from the hands of the laboring 
 people. This will result in the practical enslavement of those who 
 are in debt and who toil for a living. The policy of contraction is 
 the poUcy of organized, unsparing, pitiless avarice. 
 
 128. THE VIEWPOINT OF THE CREDITOR CLASSES^ 
 By FRANCIS A. WALKER 
 
 The inflationists, like the poor, we have always with us. PoHtical 
 education, the growth of sound economic ideas, the establishment of 
 manufactures, trade, and banking will do much to diminish the num- 
 ber of the members of this class; but humanity will have to pass 
 through many more stages of refinement and education before that 
 element will be entirely eliminated. The instinct of spoUation and 
 confiscation, the passion for making something out of nothing and 
 much out of little, the desire to pay debts in depreciated currency, are 
 too deeply implanted in poor, fallen human nature to give way alto- 
 gether, either to ethical instruction or to demonstrating that in the 
 
 ' Adapted from "A Plea for Free Silver," North American Review, CLIII 
 (1891), 529-30- 
 
 ^ Adapted from Journal of Political Economy, I (1892-93), 166.
 
 THE STANDARD QUESTION: THE SHAVER MOVE^IENT 229 
 
 long run honesty is the best pohcy. There are tens of thousands of 
 people in Massachusetts today who, if removed west of the Mississippi, 
 or only even beyond the Alleghanies, would be rampant inflationists, 
 but are here overawed by the dominant sentiment of the community, 
 or are silent because they see no chance to act with effect in such a 
 hopeless minority. 
 
 B. The Results of the Silver Agitation 
 129. DIFFICULTIES UNDER THE BLAND-ALLISON ACT' 
 
 It was soon found that there was no demand for more than 
 30,000,000 or 35,000,000 of silver dollar pieces in circulation as coins. 
 But the provision for the issue of certificates made it possible for some 
 time to force this stream of silver into the channels of circulation with- 
 out serious difficulty, because owing to the price of bonds, the national 
 bank circulation began about this' time to contract. 
 
 The banks, however, were not partial to the new currency, and 
 objected to the use of silver or silver certificates in their clearing- 
 house transactions; and though legislation in 1S82 made it impossible 
 for the banks thereafter formally to refuse to accept the silver or cer- 
 tificates for clearing-house balances, as a matter of fact in the larger 
 clearing-houses silver has not been used. Nor have the banks cared 
 to carry any large proportion of their reserves in silver or silver 
 certificates. 
 
 As the first certificates were not issued in denominations below 
 $10, the Treasury soon found it difficult to force into the channels of 
 circulation paper representing the $2,000,000 or §2,500,000 which 
 were being coined each month. Consequently, an embarrassing 
 amount of silver and paper representing it began to accumulate in 
 the Treasury in spite of the most persistent efforts to force it out, 
 involving the payment of express charges on vast sums in the years 
 1882-86. In 1885 the Treasury inaugurated the pohcy of retiring the 
 $1 and $2 United States notes in order to make a vacuum in the cir- 
 culation to be filled by silver dollars. During the fiscal year 1SS6, the 
 amount of United States notes of $1 and $2 outstanding was reduced 
 by $14,439,000. In the same period the silver dollars in circulation 
 increased $13,998,000. Meanwhile the accumulation of silver in the 
 Treasury had grown from $39,000,000 in 1884 to $64,000,000 in 18S5, 
 
 ' Adapted from Report of the Monetary Commission of the Indianapolis Con- 
 vention (1898), pp. 141-42.
 
 230 principlj:s of money and banking 
 
 and to $93,000,000 in 1886, at which time over half of the large avail- 
 able cash reserve in the Treasury was in silver dollars. 
 
 In 1886, the Treasury, for its protection against the threatening 
 danger that it would itself have to accept and care for the entire 
 further coinage of silver dollars, secured the enactment of legislation 
 permitting the issue of silver certificates in denominations of $1, $2, 
 and $5. By the use of these certificates it has since been possible to 
 keep in actual circulation, irrespective of the bank reserves, the larger 
 part of the silver coinage.
 
 THE STANDARD QUESTION: THE SILVER MOVEMENT 23 1 
 
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 232 
 
 PRINCIPLES OF MONEY AND BANKING
 
 THE STANDARD QUESTION: THE SILVER MOVEMENT 233 
 132. NET GOLD RESERVE IN THE TREASURY 1879-98' 
 
 
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 133. THE SILVER SITUATION AND THE PANIC OF i893» 
 
 The act of 1890 had scarcely been passed when gold exports began 
 to increase. These gold exports coincided very nearly with redemp- 
 tions of the United States notes presented to the Treasury. 
 
 'Chart taken from W. M. Burke, "Bond Issues and the Clold Reserve," 
 Sound Currcury, VI (1899), 21. 
 
 * Adapted from Report of Ihe Monetary Commission of the Indianapolis Con- 
 vention (1898), jjp. 436-40.
 
 234 PRINCIPLES OF MONEY AND BANKING 
 
 There were three chief causes for these unusual withdrawals of 
 gold: (i) demands arising out of trade conditions; (2) demands due 
 to withdrawals of foreign investments; (3) interest payments on 
 foreign capital. 
 
 The demands for gold which arose from the general condition of 
 trade were the result of a long series of events. Business in the 
 United States prior to 1890-93 had been exceedingly active, profits 
 had been high, overconfidence and speculative enterprise were com- 
 mon. The result of all these had been a tendency to extravagant 
 expenditure and had resulted in large importations of goods. At the 
 same time, our abiUty to pay had been considerably diminished. A 
 considerable portion of the annual indebtedness of the United States 
 is liquidated by the shipment of agricultural products. The price 
 of these products had been steadily declining in the markets of the 
 world and, our income being decreased, our ability to pay had in this 
 way been diminished. The result could only be a transfer of capital, 
 in the form either of specie or of obligations to pay specie. 
 
 The second of the causes which have been mentioned, namely, the 
 withdrawal of investments by foreigners, was the real difficulty in the 
 whole situation. The fact that we had been spending more than we 
 earned and importing more than we could pay for would have been 
 of no permanent importance to a wealthy country hke the United 
 States had foreigners continued to be willing to loan us capital. The 
 excess of expenditures over income would easily have corrected itself 
 through the operation of the usual mechanism of trade and industry. 
 Just at the time, however, when we most needed capital, a step had 
 been taken which destroyed the confidence of foreign investors in our 
 intention to settle with them honestly. We are normally indebted 
 to foreigners to an extent which is estimated at from $100,000,000 
 to $350,000,000 annually. But during the latter part of 1892 and 
 during 1893 and the earlier portion of 1894, it is estimated that about 
 $300,000,000 of securities were returned to us by the foreigners who 
 had purchased them. The securities were placed upon the American 
 market and the remittance of the proceeds necessarily resulted in 
 gold shipments. But the worst of the situation was not in a mere 
 temporary sale of our securities, but in the fact that the willingness 
 of foreign investors to loan had received a shock. 
 
 This brings us to the third point noted above. Foreigners, being 
 no longer willing to invest their capital in the United States, demanded 
 remittances of money due them on interest account and refused to 
 reinvest this with us. It thus became necessary for us to ship gold
 
 THE STANDARD QUESTION: THE SILVER MOVEMENT 235 
 
 for all three of the reasons mentioned. All these, however, depended 
 on one single fact, the fear of payment of debts by the United States 
 in silver instead of gold. 
 
 There was another side to the withdrawals of gold from the 
 Treasury of the United States. The foreign demand has already been 
 considered and it has been shown that this was largely due to distrust 
 of our monetary policy. The same thing occurred at home. Those 
 who had maturing debts which must be liquidated in gold, and those 
 who had government promises to pay coin in their hands, fearing that 
 the word coin might be interpreted to mean silver, brought govern- 
 ment notes to the Treasury and obtained gold for the purpose of 
 hoarding it to meet future obligations. 
 
 From all sides, then, both domestic and foreign, the Treasury was 
 being drained of its gold, just as would have been the case with a 
 bank whose solvency, or ability to liquidate immediatel}', was doubted. 
 At the same time its supplies of gold were cut off. Normally this, or 
 any other, government has but one way of ob taming money, that is, 
 by taking it from the people through taxation. And of all our taxes 
 the sort from which we obtain the largest quantities of gold is the 
 customs. But, as we have seen, a decrease in importations was taking 
 place both because of our too great expenditures in the past and of the 
 curtailment of our supplies of purchasing power. The aggregate 
 revenue of the Treasury, depending as it did on our tariff duties, was 
 thus suddenly reduced. This was not the worst, A marked change 
 in the kind of money received in pa>Tnent of import duties was notice- 
 able. From the very moment of the passage of the Sherman Act, 
 gold receipts at New York in payment of tariff dues began to decrease, 
 and silver and government obligations to pay gold— principally the 
 former— took its place. The gold reserve of the Treasury was thus 
 weakened in several different ways at the same rnoment. Its obliga- 
 tions were presented for payment; its aggregate of receipts was 
 decreased; and the percentage of gold in these receipts largely fell off, 
 while the percentage of the government's own obligations and of silver 
 largely increased. 
 
 134. OUR FINANCIAL DISEASE' 
 By GROVER CLEVELAND 
 
 In July, 1S90, an act had been passed directing larger govern- 
 mental monthly purchases of silver than had been required under 
 
 • Adapted from the message of President Cleveland to Congress, December 2, 
 1895.
 
 236 PRINCIPLES OF MONEY AND BANKING 
 
 previous laws, and providing that in payment for sucii silver Treasury 
 notes of the United States should be issued payable on demand in 
 gold or silver coin, at the discretion of the Secretary of the Treasury. 
 It was, however, declared in the act to be "the established policy of 
 the United States to maintain the two metals on a parity with each 
 other upon the present legal ratio, or such ratio as may be provided 
 by law." In view of this declaration it was not deemed permissible 
 for the Secretary of the Treasury to exercise the discretion in terms 
 conferred on him, by refusing to pay gold on these notes when 
 demanded, because by such discrimination in favor of the gold dollar 
 the so-called parity of the two metals would be destroyed, and grave 
 and dangerous consequences would be precipitated by affirming or 
 accentuating the constantly widening disparity between their actual 
 values under the existing ratio. 
 
 It thus resulted that the Treasury notes issued in payment of 
 silver purchases under the law of 1890 were necessarily treated as 
 gold obligations, at the option of the holder. These notes on the 
 I St day of November, 1893, when the law compelling the monthly 
 purchase of silver was repealed, amounted to more than $155,000,000. 
 The notes of this description now outstanding, added to the United 
 States notes still undiminished by redemption or cancellation, con- 
 stitute a volume of gold obligations amounting to nearly $500,000,000. 
 These obligations are the instruments which, ever since we have had 
 a gold reserve, have been used to deplete it. 
 
 This reserve had fallen in April, 1893, to $97,011,330. It has 
 from that time to the present, with very few and unimportant move- 
 ments, steadily decreased, except as it has been temporarily replen- 
 ished by the sale of bonds. 
 
 Among the causes for this constant and uniform shrinkage in this 
 fund may be mentioned the great faUing off of exports under the 
 operation of the tariff law until recently in force, which crippled our 
 exchange of commodities with foreign nations and necessitated to some 
 extent the payment of our balances in gold; the unnatural infusion of 
 silver into our currency, and the increasing agitation for its free and 
 unlimited coinage, which have created apprehension as to our disposi- 
 tion or ability to continue gold payments; the consequent hoarding 
 of gold at home and the stoppage of investments of foreign capital, 
 as well as the return of our securities already sold abroad; and the 
 high rate of foreign exchange, which induced the shipment of our gold 
 to be drawn against as a matter of speculation.
 
 THE STANDARD QUESTION: THE SHAVER MOVEMENT 237 
 
 In consequence of these conditions the gold reserve on the ist day 
 of February, 1894, was reduced to $65,438,377, having lost more than 
 $31,000,000 during the preceding nine months, or since April, 1893. 
 Its replenishment being necessary, and no other manner of accom- 
 plishing it being possible, resort was had to the issue and sale of bonds 
 provided for by the Resumption Act of 1875. Fifty millions of these 
 bonds were sold, yielding $58,633,295.71, which was added to the 
 reserve fund of gold then on hand. As a result of this operation this 
 reserve, which had suffered constant and large withdrawals in the 
 meantime, stood on the 6th day of March, 1894, at the sum of 
 $107,446,802. Its depletion was, however, immediately thereafter 
 so accelerated that on the 30th day of June, 1894, it had fallen to 
 $64,873,025, thus losing by withdrawals more than $42,000,000 in five 
 months and dropping slightly below its situation when the sale of 
 $50,000,000 in bonds was effected for its replenishment. 
 
 This depressed condition grew worse, and on the 24th day of 
 November, 1894, our gold reserve being reduced to $57,669,701, it 
 became necessary to again strengthen it. This was done by another 
 sale of bonds amounting to $50,000,000, from which there was reaUzed 
 $58,538,500, with which the fund was increased to $111,142,021, on 
 the 4th day of December, 1894. 
 
 Again disappointment awaited the anxious hope for reUef. There 
 was not even a lull in the exasperating withdrawals of gold. On the 
 contrary, they grew larger and more persistent than ever. Between 
 the 4th day of December, 1894, and early in February, 1895, a period 
 of scarcely more than two months after the second reinforcement of 
 our gold reserve by the sale of bonds, it had lost by such withdrawals 
 more than $69,000,000 and had fallen to $41,340,181. Nearly 
 $43,000,000 had been withdrawn within the month immediately pre- 
 ceding this situation. 
 
 In anticipation of impending trouble, I had on the 28th day of 
 January, 1895, addressed a communication to the Congress, fully 
 setting forth our difficulties and dangerous position, and earnestly 
 recommending that authority be given tlie Secretary of the Treasury 
 to issue bonds bearing a low rate of interest, payable by their terms 
 in gold, for the purpose of maintaining a sufficient gold reserve, and 
 also for the redemption and cancellation of outstanding United States 
 notes and the Treasury notes issued for the purchase of silver under 
 the law of 1890. This recommendation did not, however, meet with 
 legislative approval.
 
 238 PRINCIPLES OF MONEY AND BANKING 
 
 In February, 1895, therefore, the situation was exceedingly critical. 
 With a reserve perilously low and refusal of congressional aid, every- 
 thing indicated that the end of gold payments by the Government 
 was imminent. The results of prior bond issues had been exceedingly 
 unsatisfactory, and the large withdrawals of gold immediately suc- 
 ceeding their public sale in open market gave rise to a reasonable 
 suspicion that a large part of the gold paid into the Treasury upon 
 such sales was promptly drawn out again by the presentation of the 
 United States notes or Treasury notes and found its way to the hands 
 of those who had only temporarily parted with it in the purchase of 
 bonds. 
 
 In this emergency, and in view of its surrounding perplexities, it 
 became entirely apparent to those upon whom the struggle for safety 
 was devolved not only that our gold reserve must, for the third time 
 in less than thirteen months, be restored by another issue and sale of 
 bonds bearing a high rate of interest and badly suited to the purpose, 
 but that a plan must be adopted for their disposition promising better 
 results than those realized on previous sales. An agreement was 
 therefore made with a number of financiers and bankers whereby it 
 was stipulated that bonds described in the Resumption Act of 1875, 
 payable in coin thirty years after their date, bearing interest at the 
 rate of 4 per cent per annum, and amounting to about $62,000,000, 
 should be exchanged for gold, receivable by weight amounting to a 
 little more than $65,000,000. 
 
 This gold was to be delivered in such instalments as would com- 
 plete its dehvery within about six months from the da:te of the con- 
 tract, and at least one-half of the amount was to be furnished from 
 abroad. It was also agreed by those supplying this gold that during 
 the continuance of the contract they would by every means in their 
 power protect the Government against gold withdrawals. The con- 
 tract also provided that if Congress would authorize their issuance, 
 bonds payable by their terms in gold and bearing interest at the rate 
 of 3 per cent per annum might within ten days be substituted at par 
 for the 4 per cent bonds described in the agreement. 
 
 On the day this contract was made its terms were communicated 
 to Congress by a special Executive message, in which it was stated 
 that more than $16,000,000 would be saved to the Government if 
 gold bonds bearing 3 per cent interest were authorized to be substi- 
 tuted for these mentioned in the contract.
 
 THE STANDARD QUESTION: THE SHAVER MOVEMENT 239 
 
 The Congress having declined to grant the necessary authority to 
 secure this saving, the contract, unmodified, was carried out, resulting 
 in a gold reserve amounting to $107,571,230 on the Sth day of July, 
 1895. The performance of this contract not only restored the reserve, 
 but checked for a time the withdrawals of gold and brought on a 
 period of restored confidence and such peace and quiet in business 
 circles as were of the greatest possible value to every interest that 
 affects our people. I have never had the slightest misgiving concern- 
 ing the wisdom or propriety of this arrangement, and am quite willing 
 to answer for my fuU share of responsibility for its promotion. I 
 believe it averted a disaster the imminence of which was, fortunately, 
 not at the time generally understood by our people. 
 
 Though the contract mentioned stayed for a time the tide of gold 
 withdrawal, its good results could not be permanent. Recent with- 
 drawals have reduced the reserve from $107,571,230 on the Sth day 
 of July, 1895, to $79,333,966. How long it will remain large enough 
 to render its increase unnecessary is only a matter of conjecture, 
 though quite large withdrawals for shipments in the immediate future 
 are predicted in well-informed quarters. About $16,000,000 has been 
 withdrawn during the month of November. 
 
 The foregoing statement of events and conditions develops the 
 fact that after increasing our interest-bearing bonded indebtedness 
 more than $162,000,000 to save our gold reserve we are nearly 
 where we started, having now in such reserve $79,333 >966, as 
 against $65,438,377 in February, 1894, when the first bonds were 
 issued. 
 
 Though the amount of gold drawn from the Treasury appears to 
 be very large, as gathered from the facts and figures herein presented, 
 it actually was much larger, considerable sums having been acquired 
 by the Treasury within the several periods stated without the issue 
 of bonds. On the 28th day of January, 1895, it was reported by the 
 Secretary of the Treasury that more than $172,000,000 of gold had 
 been withdrawn for hoarding or shipment during the year preceding. 
 He now reports that from January i, 1879, to July 14, 1S90, a period 
 of more than eleven years, only a little over $28,000,000 was with- 
 drawn, and that between July 14, 1890, the date of the passage of the 
 law for an increased purchase of silver, and December i, 1895, or 
 within less than five and a half years, there was withdrawn nearl\- 
 $375,000,000, making a total of more than $403,000,000 drawn from
 
 240 PRINCIPLES OF MONEY AND BANKING 
 
 the Treasury in gold since January i, 1879, the date fixed in 1875 for 
 the retirement of the United States notes. 
 
 Nearly $327,000,000 of the gold thus withdrawn has been paid 
 out on these United States notes; and yet every one of the $346,- 
 000,000 is still uncanceled and ready to do service in future gold 
 depletions. 
 
 More than $76,000,000 in gold has, since their creation in 1890, 
 been paid out from the Treasury upon the notes given on the pur- 
 chase of silver by the Government; and yet the whole, amounting 
 to $155,000,000, except a little more than $16,000,000, which has been 
 retired by exchanges for silver at the request of the holders, remains 
 outstanding and prepared to join their older and more experienced 
 aUies in future raids upon the Treasury's gold reserve. 
 
 135. THE BOND ISSUES AND THE BANKLNG S\^DICATE' 
 By WILLIAIM J. BRYAN 
 
 I do not intend to question the motives of the ofl&cials who are 
 responsible for this contract with the Banking Syndicate. We might 
 criticize the conduct of the President in excluding all other ad\asers 
 and consulting only with the magnates of Wall Street; and we might 
 even suggest that he could no more expect to escape unharmed from 
 such associations than one could expect to escape asphyxiation if he 
 locked himself up in a room and turned on the gas; but without 
 questioning the motive of the President, I say, we have a right to 
 express our judgment as to whether the discretion vested in the 
 President has been wisely exercised. We are told that this is not only 
 a business proposition but a very insignificant question, just a little 
 matter of saving half a million a year, that is all. 
 
 Will you set a price upon human life? Will you weigh in the 
 balance the misery of the people ? What is the value of civihzation 
 to the human race? — because the settlement of this "little question" 
 may enormously affect the welfare of mankind. And yet, gentlemen 
 talk about its being a matter of small consequence, a Uttle question, 
 the mere saving of half a million dollars a year. Save the people 
 $16,000,000 in thirty years, twenty-five cents a piece, by this resolu- 
 tion and $16,000,000 will not measure the damage which may result 
 to them in a third of that time. 
 
 ' Adapted from " Seigniorage, Currency, and Gold Bonds," a speech delivered 
 in Congress in 1895.
 
 THE STANDARD QUESTION: THE SILVER MOVEMENT 241 
 
 What is this contract ? I am glad that it has been made public. 
 It is a contract made by the Executive of a great nation with the 
 representatives of foreign money-loaners. It is a contract made with 
 men who are desirous of changing the financial policy of this country. 
 They recognize by their actions that the United States has the right 
 to pay coin obligation in either gold or silver and they come to us with 
 the insolent proposition, "We will give you S 16,000,000, paying a 
 proportionate amount each year, if the United States will change its 
 financial policy to suit us." They wish to have the interest on these 
 bonds payable in gold, only. Never before has such a bribe been 
 offered to our people by a foreign syndicate, and we ought to so act 
 that such a bribe will never be offered again. By this contract we 
 not only negotiate with foreigners for a change in our financial policy, 
 but we give them an option on future loans. They are to have the 
 option on all bonds which may be issued before the first of next 
 October. 
 
 I believe the President has made an inexcusable use of the dis- 
 cretion vested in him. W^e cannot afford to put ourselves in the hands 
 of the Rothschilds, who hold mortgages on most of the thrones of 
 Europe. 
 
 C. The Close of the Silver Controversy 
 
 136. THE ISSUES IN 1896- 
 By a. BARTON HEPBURN 
 
 The contentions of the silver men may be summarized as follows: 
 
 1. Demonetization of silver had deprived the people of one-half 
 the primary money made available by nature. 
 
 2. This great contraction of money, increased by the falling off 
 in the production of gold, had caused the steady downward trend in 
 prices since 1873. 
 
 3. The consequent enhancement of the purchasing power of gold 
 enormously increased the obligations of the debtors having deferred 
 payments to make. 
 
 4. These unsatisfactory conditions would be aggravated by con- 
 centrating upon one metal only the measuring of values and debt- 
 paying power; while the alternative existed of paying either metal, 
 the danger of inordinate enhancement of one was neutralized. 
 
 ' Adapted from Contest for Sound Money, pp. 3S7-SS.
 
 242 PRINCIPLES OF MONEY AND BANKING 
 
 5. The farmer was under the gold standard compelled to compete 
 with producers in other lands (India, etc.) where labor was cheap 
 and the silver basis prevailed. 
 
 6. The United States should take the lead by opening the mints 
 to free and unlimited coinage of silver, which would surely bring silver 
 to parity and compel other nations to do Ukewise. 
 
 7. The United States required a larger volume of money, and free 
 coinage was the proper way of increasing it, especially as the country 
 produced so much silver. 
 
 The international bimetallists generally agreed with the conten- 
 tions I to 4, but insisted that independent action by the United States 
 would defeat the object in view and place the country on a silver 
 basis, to the lasting detriment of all interests. 
 
 The gold advocates maintained: 
 
 1. That the volume of money had actually increased in greater 
 ratio than population, and that the growing use of credit instruments 
 had added to the media of exchange. 
 
 2. That the fall in prices was due chiefly, and probably wholly, to 
 improved methods of production, and had no relation to the demone- 
 tization of silver. 
 
 3. That producers were also consumers and hence had to pay less 
 for commodities, so that relatively they were not injured by the fall 
 in prices. 
 
 4. That the theory of having two standards was a delusion; that 
 only one thing could actually be a standard ; that in fact gold was the 
 only standard, silver being measured by it. 
 
 5. That free coinage meant depreciated money, than which no 
 device was more potent in cheating both the producer and the con- 
 sumer. It would precipitate the country upon a silver basis with 
 gold at a fluctuating premium, as in Mexico, not only contracting the 
 volume of money, but causing untold injury to all interests. 
 
 6. That Europe would be only too glad to have the United States 
 take up the silver burden alone, enhancing the value of its stock of 
 silver, but would not follow the example. 
 
 7. That the volume of money was then greater than the needs of 
 the country, and when greater needs manifested themselves the supply 
 would come from abroad in the shape of gold and from the product 
 of our own mines at home, the output of which was now rapidly 
 increasing.
 
 THE STANDARD QUESTION: THE SHAVER MOVEMENT 243 
 
 137. CRUCIFIED ON A CROSS OF GOLD' 
 By WILLIAM J. BRYAN 
 
 Mr. Chairman and Gentlemen of the Convention: I would be pre- 
 sumptuous, indeed, to present myself against the distinguished 
 gentlemen to whom you have listened if this were a mere measuring 
 of abilities; but this is not a contest between persons. The humblest 
 citizen in all the land, when clad in the armor of a righteous cause, is 
 stronger than all the hosts of error. I come to speak to you in defense 
 of a cause as holy as the cause of liberty — the cause of humanity. 
 
 When this debate is concluded, a motion vn.\\ be made to lay upon 
 the table the resolution offered in commendation of the administra- 
 tion, and also a resolution offered in condemnation of the adminis- 
 tration. We object to bringing this question down to the level of 
 persons. The individual is but an atom; he is born, he acts, he dies; 
 but principles are eternal; and this has been a contest over a principle. 
 
 Never before in the history of this country has there been wit- 
 nessed such a contest as that through which we have just passed. 
 Never before in the history of American poUtics has a great issue been 
 fought out as this issue has been, by the voters of a great party. On 
 the fourth of March, 1895, a few Democrats, most of them members 
 of Congress, issued an address to the Democrats of the nation, assert- 
 ing that the money question was the paramount issue of the hour; 
 declaring that a majority of the Democratic party had the right to 
 control the action of the party on this paramount issue; and conclud- 
 ing with the request that the believers in the free coinage of silver in 
 the Democratic party should organize, take charge of, and control 
 the policy of the Democratic party. Three months later, at Memphis, 
 an organization was perfected, and the silver Democrats went forth 
 openly and courageously proclaiming their belief, and declaring that, 
 if successful, they would crystallize into a platform the declaration 
 which they had made. Then began the conflict. With a zeal 
 approaching the zeal which inspired the crusaders who followed Peter 
 the Hermit, our silver Democrats went forth from victory unto 
 victory until they are now assembled, not to discuss, not to debate, 
 but to enter up the judgment already rendered by the plain people 
 of this country. In this contest brother has been arrayed against 
 brother, father against son. The warmest ties of love, acquaintance, 
 
 ' Adapted from The First Batik (1896), pp. 199-206.
 
 244 PRINCIPLES OF MONEY AND BANKING 
 
 and association have been disregarded; old leaders have been cast 
 aside when they have refused to give expression to the sentiments of 
 those whom they would lead, and new leaders have sprung up to 
 give direction to this cause of truth. Thus has the contest been 
 waged, and we have assembled here under as binding and solemn 
 instructions as were ever imposed upon representatives of the people. 
 
 The gentleman who preceded me [ex-Governor Russel] spoke of 
 the State of Massachusetts; let me assure him that not one present 
 in all this convention entertains the least hostility to the people of the 
 State of Massachusetts, but we stand here representing people who 
 are the equals, before the law, of the greatest citizens in the State of 
 Massachusetts. When you [turning to the gold delegates] come 
 before us and tell us that we are about to disturb your business 
 interests, we reply that you have disturbed our business interests by 
 your course. 
 
 We say to you that you have made the definition of a business man 
 too limited in its application. The man who is employed is as much 
 a business man as his employer; the attorney in a country town is as 
 much a business man as the corporation counsel in a great metropolis; 
 the merchant at the crossroads store is as much a business man as the 
 merchant of New York; the farmer who goes forth in the morning 
 and toils all day — who begins in the spring and toils all summer — 
 and who by the application of brain and muscle to the natural 
 resources of the country creates wealth, is as much a business man as 
 the man who goes upon the board of trade and bets upon the price of 
 grain; the miners who go down a thousand feet into the earth, or 
 climb two thousand feet upon the cliffs, and bring forth from their 
 hiding-places the precious metals to be poured into the channels of 
 trade, are as much business men as the few financial magnates who, 
 in a back room, corner the money of the world. We come to speak 
 for this broader class of business men. 
 
 Ah, my friends, we say not one word against those who live upon 
 the Atlantic coast, but the hardy pioneers who have braved all the 
 dangers of the wilderness, who have made the desert bloom as the 
 rose — the pioneers away out there [pointing to the west], who rear 
 their children near to Nature's heart, where they can mingle their 
 voices with the voices of the birds — out there where they have erected 
 schoolhouses for the education of their young, churches where they 
 praise their Creator, and cemeteries where rest the ashes of their
 
 THE STANDARD QUESTION: THE SmVER MOVEMENT 245 
 
 dead — these people, we say, are as deserving of the consideration of 
 our party as any people in this country'. It is for these that I speak. 
 We do not come as aggressors. Our war is not a war of conquest; 
 we are fighting in the defense of our homes, our families, and posterity. 
 We have petitioned, and our petitions have been scorned; we have 
 entreated, and our entreaties have been disregarded; we have begged, 
 and they have mocked when our calamity came. We beg no longer; 
 we entreat no more; we petition no more. We defy them. 
 
 Let me come now to the paramount issue. If our opponents ask 
 us why it is that we say more on the money question than we say 
 upon the tariff question, I reply that, if protection has slain its 
 thousands, the gold standard has slain its tens of thousands. If they 
 ask us why we do not embody in our platform all the things that we 
 believe in, we reply that when we have restored the money of the 
 Constitution all other necessary reforms will be possible; but that 
 until this is done there is no other reform that can be accomphshed. 
 
 Why is it that within three months such a change has come over 
 the country ? Three months ago, when it was confidently asserted 
 that those who believe in the gold standard would frame our platform 
 and nominate our candidates, even the advocates of the gold standard 
 did not think that we could elect a president. And they had good 
 reason for their doubt, because there is scarcely a State here today 
 asking for the gold standard which is not in the absolute control of 
 the Republican party. But note the change. Mr. McKinley was 
 nominated at St. Louis upon a platform which declared for the main- 
 tenance of the gold standard until it can be changed into bimetallism 
 by international agreement. Mr. JNIcKinley was the most popular 
 man among the Republicans, and three months ago everybody in the 
 Republican party prophesied his election. How is it today ? Why, 
 the man who was once pleased to think that he looked like Napoleon — 
 that man shudders today when he remembers that he was nominated 
 on the anniversary of Waterloo. Not only that, but as he hstens he 
 can hear with ever-increasing distinctness the sound of the waves as 
 they beat upon the lonely shores of St. Helena. 
 
 Why this change? Ah, my friends, is not the reason for the 
 change evident to anyone who will look at the matter? No private 
 character, however pure, no personal popularity, however great, can 
 protect from the avenging wrath of an indignant people a man who 
 will declare that he is in favor of fastening the gold standard upon
 
 246 PRINCIPLES OF MONEY AND BANKING 
 
 this country, or who is wilHnj^ to surrender the right of self-government 
 and place the legislative control of our affairs in the hands of foreign 
 potentates and powers. 
 
 We go forth confident that we shall win. Why ? Because upon 
 the paramount issue of this campaign there is not a spot of ground 
 on which the enemy will dare to challenge battle. If they tell us that 
 the gold standard is a good thing, we shall point to their platform 
 and tell them that their platform pledges the party to get rid of the 
 gold standard and substitute bimetallism. If the gold standard is 
 a good thing, why get rid of it ? I call your attention to the fact that 
 some of the very people who are in this convention today and who tell 
 us that we ought to declare in favor of international bimetallism — 
 thereby declaring that the gold standard is wrong, and that the 
 principle of bimetallism is better — these very people four months ago 
 were open and avowed advocates of the gold standard, and were then 
 teUing us that we could not legislate two metals together, even with 
 the aid of all the world. If the gold standard is a good thing, we 
 ought to declare in favor of its retention, and not in favor of aban- 
 doning it; and if the gold standard is a bad thing, why should we wait 
 until other nations are willing to help us to let go ? Here is the line 
 of battle, and we care not upon which issue they force the fight; we 
 are prepared to meet them on either issue or on both. If they tell 
 us that the gold standard is the standard of civilization, we reply to 
 them that this, the most enlightened of all the nations of the earth, 
 has never declared for a gold standard and that both the great parties 
 this year are declaring against it. If the gold standard is the standard 
 of civilization, why, my friends, should we not have it ? If they come 
 to meet us on that issue, we can present the history of our nation. 
 More than that ; we can tell them that they will search the pages of 
 history in vain to find a single instance where the common people of 
 any land have ever declared themselves in favor of the gold standard. 
 They can find where the holders of investments have declared for a 
 gold standard, but not where the masses have. 
 
 Mr. Carlisle said in 1878 that this was a struggle between "the 
 idle holders of idle capital" and "the struggling masses, who produce 
 the wealth and pay the taxes of the country"; and, my friends, the 
 question we are to decide is: Upon which side will the Democratic 
 party fight; upon the side of " the idle holders of idle capital" or upon 
 the side of " the struggling masses" ? That is the question which the
 
 . ■ THE STANDARD QUESTION: THE SILVER MOVEMENT 247 
 
 party must answer first, and then it must be answered by each 
 individual hereafter. The sympathies of the Democratic party, as 
 shown by the platform, are on the side of the struggling masses who 
 have ever been the foundation of the Democratic party. There are 
 two ideas of government. There are those who believe that, if you 
 will only legislate to make the well-to-do prosperous, their prosperity 
 will leak through to those below. The Democratic idea, however, 
 has been that if you legislate to make the masses prosperous, their 
 prosperity will find its way up through every class which rests upon 
 them. 
 
 You come to us and tell us that the great cities are in favor of the 
 gold standard; we reply that the great cities rest upon our broad and 
 fertile prairies. Burn down your cities and leave our farms, and your 
 cities will spring up again as if by magic; but destroy our farms, and 
 the grass will grow in the streets of every city in the country. 
 
 My friends, we declare that this nation is able to legislate for its 
 own people on every question, without waiting for the aid or consent 
 of any other nation on earth; and upon that issue we expect to carry 
 every State in the Union. I shall not slander the inhabitants of the 
 fair State of Massachusetts nor the inhabitants of the State of New 
 York by saying that, when they are confronted with the proposition, 
 they will declare that this nation is not able to attend to its own 
 business. It is the issue of 1776 over again. Our ancestors, when 
 but three millions in number, had the courage to declare their political 
 independence of every other nation; shall we, their descendants, when 
 we have grown to seventy millions, declare that we are less independ- 
 ent than our forefathers? No, my friends, that will never be the 
 verdict of our people. Therefore, we care not upon what lines the 
 battle is fought. If they say bimetaUism is good, but that we cannot 
 have it until other nations help us, we reply that, instead of having a 
 gold standard because England has, we will restore bimetallism, and 
 then let England have bimetallism because the United States has it. 
 If they dare to come out in the open field and defend the gold standard 
 as a good thing, we will fight them to the uttermost. Having behind 
 us the producing masses of this nation and the world, supported by 
 the commercial interests, the laboring interests, and the toilers every- 
 where, we will answer tlieir demand for a gold standard by saying to 
 them: You shall not press down upon the brow of labor this crown 
 of thorns, you shall not crucify mankinrl upon a cross of gold.
 
 248 
 
 PRINCIPLES OF MONEY AND BANKING 
 
 138. DISTRIBUTION OF VOTE IN 1896' 
 By CHARLES J. BULLOCK 
 
 The first group includes the eleven states of the greater average 
 density of population, and it will be seen that all of these were carried 
 by the gold party, usually by an emphatic majority: 
 
 States 
 
 Rhode Island. 
 Massachusetts 
 New Jersey . . . 
 Connecticut. . 
 New York ... 
 Pennsylvania . 
 Maryland. . . . 
 
 Ohio 
 
 Delaware. . . . 
 
 Illinois 
 
 Indiana 
 
 Average Density 
 
 318.44 
 
 278.48 
 
 193.82 
 
 15403 
 
 126.06 
 
 116.88 
 
 105.72 
 
 90. 10 
 
 85-97 
 
 68.33 
 
 61.05 
 
 Percentage of 
 Gold \'ote 
 
 The second group includes eighteen states of a medium density 
 of population, and these show a fairly even division of sentiment, 
 eight casting a majority vote in favor of the^gold standard, and ten 
 showing a majority in favor of silver or paper: 
 
 States 
 
 Kentucky 
 
 Tennessee 
 
 New Hampshire 
 
 Virginia -. . 
 
 Missouri 
 
 South Carolina. 
 
 Michigan 
 
 Vermont 
 
 Iowa 
 
 North Carolina. 
 
 Georgia 
 
 Wisconsin 
 
 West Virginia. . 
 
 Alabama 
 
 Mississippi. . . . 
 
 Louisiana 
 
 Maine 
 
 Arkansas 
 
 Average Density 
 
 47 
 34 
 81 
 27 
 98 
 16 
 46 
 39 
 47 
 30 
 IS 
 10 
 
 95 
 36 
 83 
 63 
 II 
 21 .27 
 
 Percentage of 
 Gold Vote 
 
 'Adapted from The Monetary History of the United States, pp. 117-19- 
 Macmillan Co., 1900.) 
 
 (The
 
 THE ST/VNDARD QUESTION: THE SH.VER MOVEMENT 249 
 
 The third group comprises sixteen states with the least density 
 of population, and it will be noticed that only four of these cast a 
 majority vote in favor of the gold standard: 
 
 States 
 
 Average Density 
 
 Kansas 
 
 Minnesota. . . 
 Nebraska. . . . 
 
 Texas 
 
 California . . . , 
 
 Florida 
 
 Washington. . 
 South Dakota 
 
 Colorado 
 
 Oregon 
 
 North Dakota 
 
 Utah 
 
 Idaho 
 
 Montana 
 
 Wyoming. . . , 
 Ne\'ada 
 
 54 
 83 
 52 
 78 
 22 
 34 
 54 
 99 
 36 
 72 
 56 
 05 
 98 
 64 
 43 
 
 Percentaiije of 
 Gold \ote 
 
 48.2 
 58.3 
 47 3 
 31 7 
 52.1 
 26.7 
 44.0 
 49-8 
 
 13 9 
 Si-6 
 56.0 
 
 173 
 21.4 
 19.7 
 48. S 
 18.7 
 
 139. THE ACT OF 1900 AND THE GREENBACK CURRENCY' 
 By F. W. TAUSSIG 
 
 The Act of March 13, 1900, "to define and fix the standard of 
 value, to maintain the parity of all forms of money issued or coined 
 by the United States, and for other purposes," opens a new stage in 
 the monetary history of the United States. 
 
 The first section provides that the gold dollar shall be "the 
 standard unit of value," and makes it the duty of the Secretary of 
 the Treasury to maintain all forms of money "at a parity" with this 
 standard. This, to be sure, is iio more than a declaration, whose 
 efficacy depends on the nature of the legislation provided for upholding 
 the standard. Much more important, as a legislative command 
 framed in precise terms, is the provision with which the second sec- 
 tion opens: that United States notes and Treasury notes, when pre- 
 sented for redemption, shall be redeemed in gold. Under the terms 
 of previous legislation the Secretary of the Treasury had the right to 
 redeem at his discretion, in either kind of coin. Hereafter no Secre- 
 tary will have discretion on this point. The legal-tender paper is 
 redeemable in gold and in gold only. 
 
 ' Adapted from "The Currency Act of 1900," Quarterly Journal of Economics, 
 
 XIV (1899-1900), pp. 394-410.
 
 250 I'RINCIl'LKS OF MONEY ANJJ BANKING 
 
 By section 4 there arc csta1)lishe(l in the office of the Treasurer two 
 divisions, to be known as the division of issue and the division of 
 redemption; and to these are transferred "all records and accounts 
 relating to the issue and redemption of United States notes, gold cer- 
 tificates, silver certificates, and currency certificates." So much is 
 merely a bookkeeping change, serving to set forth more clearly the 
 various resources and obligations of the Treasury. But it is further 
 provided that among these accounts shall figure the "reserve fund" 
 for the redemption of the legal-tender paper, which, like the other 
 funds represented in the several accounts, is to be "held as a trust 
 fund." That reserve fund is created and specifically defined in sec- 
 tion 2, where the declaration of trust again appears in the provision 
 that the fund "shall be used for such redemption purposes only." 
 The Secretary of the Treasury is to constitute it by setting aside 150 
 millions of gold coin and bullion, not, indeed, setting it aside physically, 
 but charging so much of the gold he has on hand to the reserve fund. 
 Here we have something Uke an issue department. We might expect 
 that thereafter the situation would be simple, the new department, 
 or account, serving to hold fast any notes redeemed, and reissuing 
 them, if at all, only against a later redeposit of gold. But this simple 
 and straightforward mechanism is not adopted. Instead, we have a 
 series of elaborate regulations, which once again interlace the new 
 account with the other Treasury operations. The further provisions 
 of this section of the act (section 2) call for constant transfers to 
 and fro between the new reserve fund and the general fund, anxiously 
 avoid any accumulation or putting aside of redeemed notes, vir- 
 tually compel their reinjection into the currency, and, finally, look to 
 real replenishment of the gold supply from the sale of bonds only as 
 a last and extreme resort. 
 
 There are two chief means of restoring the reserve whenever notes 
 are redeemed: (i) The Secretary must exchange the notes for any gold 
 coin in the "general fund." This general fund is simply the cash 
 which happens to be on hand in the course of the Treasury's ordinary 
 fiscal operations. If the cash is in excess of the current needs, and if 
 the surplus on hand exists in the form of gold coin (as at the present 
 juncture it happens to be), a resource for strengthening the reserve 
 fund is here available. But the resort to this device clearly causes 
 the surplus in the general fund to take the form of notes rather than 
 gold; and, since a permanent and continuing surplus is more than 
 improbable, we may be sure that sooner or later the transferred notes
 
 THE STANDARD QUESTION: THE SHAVER MOVEMENT 251 
 
 will be paid out. Under what we may suppose to be normal condi- 
 tions, when revenues simply balance expenditures, the operation must 
 cause the redeemed notes to be returned to circulation with but a 
 short interval of temporary housing in the general fund. (2) The 
 second use which the Secretary of the Treasury must make of redeemed 
 notes even more obviously and unfailingly returns them to circulation: 
 "by accepting deposits of gold coin at the Treasury or at any sub- 
 treasury in exchange for the notes so redeemed." Such deposits have 
 been habitually made for years, where paper is desired for convenience 
 of use by persons having gold on their hands; and a continuance of 
 this practice is looked to as a means of replenishing the reserve fund. 
 
 These devices described in the preceding paragraphs are compul- 
 sory on the Secretary of the Treasury until 50 millions of the original 
 150 millions of gold are gone from the reserve fund. So long as gold 
 can be scraped up elsewhere, by transfer from the general fund or by 
 exchange with the outside world, the redeemed notes are to be held 
 in the reserve fund only for a moment. When these devices are no 
 longer available, the notes begin to be impounded. The reserve fund 
 may never exceed 150 millions in all, and, as will be pointed out in a 
 moment, the notes in it may not exceed 50 millions; but within these 
 limits it may consist partly of gold and partly of redeemed notes. 
 
 The stage of energetic replenishment of the reserve fund is not 
 reached until the gold in it shall fall below 100 millions. The Secre- 
 tary of the Treasury must sell bonds, and thereby procure gold. But 
 the gold tlius got is not to be turned automatically into the reserve 
 fund. It " shall first be covered into the general fund of the Treasury, 
 and then exchanged for an equal amount of notes redeemed." The 
 effect of this requirement must be to cause the reserve fund, which 
 previously would have consisted of 100 millions of gold and 50 millions 
 of paper, to be suddenly made up again of 150 millions of gold, the 
 paper being transferred as suddenly to the general fund, and there 
 held again as cash. Thereafter these notes may be used in exchange 
 for gold (once more!) or to purchase bonds or "for any lawful pur- 
 pose." The only restriction is that "they shall not be used to meet 
 deficiencies in the current revenues." This proviso is expected to 
 prevent the reappearance of the "endless chain." So long as there is 
 a "deficiency in the current revenues," any notes transferred from the 
 reserve fund into the general fund in exchange for bond-bought gold 
 are to be impounded in the general fund, and there held as "cash in 
 the Treasury."
 
 252 PRINCIPLES OF MONEY AND BANKING 
 
 Surveying the new Treasury system, as a whole, we need not 
 hesitate to admit that, so long as this legislation stands, it is strong 
 enough, assuring, even though by a cumbrous machinery, the mainte- 
 nance of the gold standard. Much, indeed, is left to the discretion of 
 the Secretary of the Treasury. Contingencies may be imagined, how- 
 ever, in which the elaborate mechanism would be put to severe trial, 
 and the government and the business community involved in diffi- 
 culties calling for the highest qualities in that responsible post. 
 
 Standing conspicuously at the head of the Treasury's statement 
 of condition is the "reserve fund" of gold coin and bullion to the 
 amount of 150 millions. Such conspicuous amassing of a great hoard 
 of cash, likely to appear year after year, of no apparent utility; the 
 difficulty of establishing with the general public and among the ever- 
 shifting legislators the traditions of an. inviolable fund; the constant 
 transfers from reserve fund to general fund and vice versa, still further 
 obscuring the principle of an independent and automatic reserve; the 
 habit of looking to the government for relief, engendered by the system 
 of an independent treasury; the certainty of a perennial crop of 
 agitators and legislators who will urge a plentiful outpouring of money 
 as the one remedy in times of depression; the constant resort to com- 
 promise in settling disputed questions, inevitable under congressional 
 and parliamentary government and conspicuously illustrated by the 
 history of currency legislation for the last thirty-five years: these are 
 undeniable menaces to the permanent maintenance of the new system. 
 It lacks above all things the simphcity and single-mmdedness neces- 
 sary for the planting of a tradition, for the settlement of a principle. 
 What its future may be remains to be seen. In fair weather, it will 
 go its way easily enough; but how will it withstand the shocks of 
 storm ? 
 
 140. THE ACT OF 1900 AND TREASURY NOTE RETIREMENT* 
 By J. LAURENCE LAUGHLIN 
 
 Under the act of July 14, 1890, 168,674,682.53 ounces of fine 
 silver were bought by the issue of $155,931,002.25 of treasury notes. 
 The average price paid per ounce for the bullion was $0.9244; and 
 as the price is now about one-third less, the value behind the notes 
 has become one-third less. But if this bulhon were coined into silver 
 dollars (at the rate of 371 j grains each), the 168,674,682.53 fine 
 
 ' Adapted from "Recent Monetary Legislation," Sound Currency, VII (1900),
 
 THE STANDARD QUESTION: THE SILVER MOVEMENT 253 
 
 ounces would yield about 218 million silver dollars. Then, instead 
 of $155,931,002.25 treasury notes to look after, there would have 
 been a vastly larger bulk of silver dollars to be added to those already 
 coined under the act of 1878. The act of July 14, 1890, itself pro\-ided 
 for an eventual extinction of the treasury notes, by virtue of the fol- 
 lowing provision: "No greater or less amount of such notes shall be 
 outstanding at any time than the cost of the silver bullion and the 
 standard silver dollars coined therefrom, then held in the treasur}- 
 purchased by such notes." 
 
 Hence treasury notes, when redeemed by gold, would be reissued 
 in order to keep the amount equal to the bullion plus the silver dollars 
 held; but when redeemed by silver, the treasury notes would be can- 
 celed in order to keep the amount outstanding no greater nor less than 
 the bullion plus the diminished number of silver dollars held. The 
 released silver dollars, if returned in any way to the treasur>', could 
 then become the basis of additional silver certificates (but never of 
 treasury notes). This explains why the treasury notes were gradually 
 reduced in volume, coincident with an increase of silver dollars and 
 silver certificates. 
 
 The act of June 13, 1898 (the Spanish War Loan and Revenue 
 Act), stimulated this process by the following requirement (sec. 34): 
 "That the Secretary of the Treasury is hereby authorized and directed 
 to coin into standard silver dollars as rapidly as the pubhc interests 
 may require, to an amount, however, of not less than one and one-half 
 millions of dollars in each month, all of the silver bullion now in the 
 treasury purchased in accordance with the provision of the act 
 approved July 14, 1890 .... and said dollars, when so coined shall 
 be used and applied in the manner and for the purposes named in 
 said act." 
 
 Then the act of March 14, 1900, specified that as fast as silver 
 dollars were coined under the foregoing laws, the Secretary should 
 (sec. 5) : " Retire and cancel an equal amount of treasury notes when- 
 ever received into the treasury, either by exchange in accordance with 
 the provisions of this act or in the ordinary course of business, and 
 upon the cancellation of treasury notes silver certificates shall be 
 issued against the silver dollars so coined." 
 
 In this way the new law has brought about the cancclkition of 
 treasury notes without waiting for the former process of redemption 
 by silver, thus hastening the conversion of treasury notes into silver 
 certificates. The only advantage to be gained from tliis .u tion is the
 
 254 PRINCIPLES OF MONEY AND BANKING 
 
 final disappearance of one of the too many kinds of money which make 
 up our circulation. 
 
 When the new law came into force there were only $66,776,000 
 treasury notes outstanding, supported by bullion costing $77,402,692, 
 plus 9,373,308 silver dollars. The number of ounces of fine silver 
 uncoined at that date was about 85,550,000. Consequently, instead 
 of 155 million dollars in treasury notes, we shall have about 200 
 millions in silver dollars when conversion has been completed, or an 
 increase of not less than 45 million dollars. This increased volume 
 of silver dollars will raise the total issue (including the 378 million 
 dollars coined under the act of 1S78) to about 578 million dollars. 
 For the maintenance of this vast sum at parity with gold, when each 
 silver dollar is actually worth only about 47 cents, there is absolutely 
 no method of direct redemption in gold. And the act of March 14, 
 1900, gives no new provisions whatever to accomphsh this end, or to 
 support its windy and virtuous order to the Secretary to maintain the 
 parity. Congress might as well have ordered the Secretary to see that 
 every citizen of the United States should have blue eyes, so far as any 
 new power was given him to carry out the purpose. 
 
 141. PARTY STATEMENTS IN 1896 AND 1912 
 
 DEMOCRATIC PLATPORM, 1896 
 
 "We declare that the Act of 1873, demonetizing silver without the 
 knowledge or approval of the American people, has resulted in the 
 appreciation of gold and a corresponding fall in the prices of com- 
 modities produced by the people." 
 
 DEMOCRATIC PLATFORM, 1912 
 
 "The high cost of living is a serious problem in every American 
 home. We charge that excessive prices result in a large measure from 
 the high tariff laws enacted and maintained by the Republican party 
 and from trusts and commercial conspiracies fostered and encouraged 
 by such laws, and we assert that no substantial relief can be secured 
 for the people until import duties on the necessaries of life are 
 materially reduced and these criminal conspiracies broken up." 
 
 It was denied in the campaign that the rising prices could be due 
 to any other cause, such as the fall in the value of gold. 
 
 REPUBLICAN PLATFORM, 1896 
 
 "The full and unrestricted Democratic control of the government 
 .... has been a record of unparalleled incapacity, dishonor, and
 
 THE STANDARD QUESTION: THE SILVER MOVEMENT 255 
 
 disaster. In administrative management, it has ruthlessly sacrificed 
 indispensable revenue, entailed an increasing deficit .... piled up 
 the public debt by $262,000,000 in time of peace. In the broad effect 
 of its policy it has precipitated panic, blighted industry and trade 
 with prolonged depression, closed factories, reduced work and wages, 
 halted enterprise, and crippled American production." 
 
 The assertion was repeatedly made in the campaign that there was 
 an adequate quantity of money and that low prices were not the 
 result of gold appreciation; that, in fact, there is little relation 
 between money and prices. 
 
 REPUBLICAN PLATFORM, I912 
 
 "The steadily increasing cost of living has become a matter not 
 only of national but world-wide concern. The fact that it is not due 
 to the protective tariff system is evidenced by the similar conditions in 
 countries which have a tariff policy different from our own, as well as 
 by the fact that the cost of living has increased while ratesq^ duty have 
 remained stationary. The RepubHcan party will support a prompt 
 scientific inquiry into the causes which are operative both in the 
 United States and elsewhere to increase the cost of living." 
 
 It was repeatedly stated during the campaign that this world-wide 
 phenomenon of rising prices was undoubtedly due to the fall in the 
 value of gold in consequence of the great increase in gold production. 
 
 142. THE FUTURE OF GOLD PRODUCTION' 
 
 The great increase in the output of gold since 1890 has been due 
 in the main to two contributing discoveries that were directly related 
 to each other, namely, the discovery of the Transvaal field and the 
 discovery of the cyanide process. 
 
 The discovery of the c}-anide process must be regarded as one of 
 the greatest achievements of modern times. And there can be no 
 doubt that cyaniding will be hailed by coming generations for its im- 
 portance, not so much to the mineral industries directly, as for its bear- 
 ing upon world-economies in rendering possible a greatly increased 
 output of gold and silver year after year. In the comparatively brief 
 twenty-year interval since 1891, when Messrs. McArthur and Forrest 
 brought the modern perfected cyanide process prominently before tlie 
 mining world, the output of gold has amounted to 284,081,289 fine 
 
 'Adapted from the Annual Report of Director of the Mint, igii, pp. 46, 
 66-67; 1914. PP- 261-62.
 
 256 PRINCIPLES OF MONEY AND BANKING 
 
 ounces. This is a most astonishing showing, especially when com- 
 pared with a total output of 401,311,148 fine ounces for the entire 
 397 years previous — from 1493 to 1890. Nor, if we except the Klon- 
 dike, 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 fields that the cyanide process has achieved a record pro- 
 duction of the yellow metal. And among those leavings we must 
 not forget the innumerable lower-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. 
 
 Of course, it is possible that at any time new deposits equally rich 
 with those of the Transvaal and the Klondike may be laid bare; and 
 it is conceivable that the cyanide process may be superseded by a 
 method which would again revolutionize production. But until such 
 new discoveries are made there can be no leap in production compar- 
 able to that of the past twenty years. 
 
 Since 1906 the rate of production in the United States, including 
 Alaska, has been practically at a standstill. There is nothing to indi- 
 cate a considerable change in either direction. Australasia has been 
 on a declining scale since 1903, the annual yield being now about 
 $28,000,000 below the high year. Russia, Canada, and Mexico have 
 shown an increase of late about sufl&cient to offset Australasia. 
 
 Investigation has recently been made into the question of the life 
 of the Rand as a gold field. That there is an immense amount of 
 payable ore in sight, and that very low-grade and at present unpay- 
 able ore exists by hundreds of millions of tons, is beyond dispute. 
 But as a paying proposition in the aggregate how long the Rand will 
 last is the subject that has been engaging attention. The Engineers' 
 Committee of the Transvaal Chamber of Mines has recently arrived 
 at conclusions which are regarded as rather unpalatable. The ore- 
 bearing formations show considerable fluctuations, and working costs 
 appear to be increasing as the mines deepen. But it is impossible to 
 make a definite forecast, especially as in the eastern section of the 
 Rand recent developments lead to an increase of tlie estimates of ore 
 reserves. Beyond the proved claims, which are yielding fair to good
 
 THE STANDARD QUESTION: THE SILVER MOVEMENT 257 
 
 results, it is estimated that there are 1,720,000,000 tons of ore in that 
 section. The whole matter resolves itself into a question of working 
 costs, but under any circumstances the Transvaal production will 
 continue to be on an enormous scale for many years to come. 
 
 The South African Mining Journal in a recent issue refers to the 
 great varieties of estimates as to the life of the Rand which have been 
 made in recent years. In conclusion, the article observes: "To sum- 
 marize all these prophecies, and witliout quoting a number of other 
 forecasts, we arrive at the following: 1901 — Mr. Hammond says the 
 Rand will last until 1926. 1902— Dr. Hatch and Mr. Leggett say 
 until 1944. 1904 — The Loan estimates that authorities say until 1934. 
 1911 — Dr. Hatch indicates a life until 1950, and in the same year Mr. 
 Hull prolongs the period by about 15 years. Mr. Boustred then put 
 the date of exhaustion at a.d. two thousand and something. Next 
 the Chamber of Mines gives evidence, which is interpreted in some 
 quarters as meaning that the Rand will be of a very minor importance 
 after 1940, and Mr. Mathers informs the world that the Rand will be 
 productive until 2008. We do not propose to analyze these various 
 prophecies — such action would be as futile as the prophecies them- 
 selves. It is now admitted that Mr. Hammond's 1901 estimate was 
 based on false premises. The former chief consulting engineer of the 
 gold fields did not reckon on working costs being reduced to the 
 extent they have been. We firmly believe that long before the date 
 of exhaustion determined by other authorities has been reached it 
 will be generally admitted that these other authorities also did not 
 base their estimates on correct assumptions. Who at this date will 
 make so bold as to say what changes in the economic aspects of the 
 industry may not be effected before the end of the present decade ? 
 And since every little improvement, every little reduction in working 
 costs, must have a hugely important influence on millions of tons of 
 ore, who can limit or determine the productive era of the Witwatcrs- 
 rand ? In any case, the death of the Rand is not going to be a sudden 
 affair. The decline will be very gradual and protracted."
 
 VII 
 
 THE STANDARD QUESTION: THE CONTROL OF 
 PRICE LEVELS 
 
 Introduction 
 
 In this chapter we are concerned only with tlie standard of de- 
 ferred payments. It has been noted that this function of money was 
 of later origin than the others, being necessarily delayed until the 
 development of contractual relations and the institution of credit 
 had given rise to time obligations. Consequently, in the early periods 
 of monetary history the question of deferred payments was of minor 
 importance. Today, however, it is the paramount issue in monetary 
 discussion. The standard, gold, no longer serves extensively as a 
 medium of exchange, and as a common denominator of value for a 
 given moment of time it gives rise to no real problems. It is, prac- 
 tically speaking, only as a standard of deferred payments that we 
 have at the present time a monetary problem at all, so far as gold is 
 concerned. 
 
 It has been noted in chapter i that an ideal standard of deferred 
 payments should be absolutely invariable, like a yardstick, and that 
 in practice we should choose for such standard a commodity as nearly 
 stable in value as possible. The evils of a fluctuating standard of 
 deferred pa}Tnents manifest themselves through changing price levels. 
 Obligations payable in money that are entered into at one price level 
 may be payable at a future date when the level of prices may be 
 substantially lower or substantially higher. If lower, the borrower 
 finds that he has to repay a greater purchasing power than he received, 
 or, what is more to the point, he finds it more difficult in consequence 
 of lower prices (and wages) to repay his loan than would have been 
 the case at the former level of prices. If prices have risen, the lender 
 does not receive back a purchasing power equivalent to that given 
 at the time of the loan. 
 
 While the greenback and silver movements in the United States 
 found their popular support partly, perhaps mainly, in the desire for a 
 larger supply of money, they also involved, as has been noted, the 
 injustice to debtors caused by an appreciating standard of deferred 
 
 258
 
 THE STANDARD QUESTION: PRICE LEVELS 259 
 
 payments. At the present time the situation is reversed, the agita- 
 tion over the high cost of Uving being a result of the losses suffered 
 by creditors — owners of bonds and other long-time investments — in 
 consequence of rising prices; though accompanying this, of course, 
 is the inequity that results from the failure of salaries and wages to 
 advance with like rapidity. Former eras of high prices have also 
 given rise to discussion of the question of deferred payments though 
 perhaps in a less definite way so far as the general public has been 
 concerned. The public attitude toward the control of prices, how- 
 ever, is shown in the various historical attempts in almost ever>' 
 country to fix the prices of staple products and to punish violations 
 of the law by fines, imprisonment, and even death. 
 
 Students of money have long given the control of price levels 
 their close attention, and numerous devices have been suggested for 
 procuring a stable standard of deferred payments. The first phase 
 of the discussion centered around the choice of such a standard — 
 whether it should be the precious metals or some other commodity, 
 such as wheat (corn), or whether labor might not serve as the measure 
 of future payments. In the second place, the argument for bimetal- 
 lism, at least on the "scientific," as distinguished from the popular, 
 side, was mainly that it would give us a less variable standard for 
 deferred payments. A third device was that of the tabular standard, 
 first proposed by Mr. Jevons in the seventies' after a long period of 
 rising prices, and discussed by economists more or less continuously 
 ever since. Finally, we have a variation of the tabular method 
 of control known as the compensated dollar. First suggested by 
 Williams in 1S92, it has again been independently advanced with 
 much refinement and elaboration of detail by Professor Irving Fisher. 
 The plan has been the subject of much discussion and has had a wide 
 though not universal indorsement by economists. 
 
 143. THE NATURE AND PURrOSE OF THE ISIULTIPLE 
 STANDARD' 
 
 By DAVID KINLEY 
 
 The unit of measure under the talnilar standard is the aggregate 
 price at a given time of a long list of articles, a dclinitc quantity and 
 quality of each being chosen, just as is done in making a table of inde.x 
 
 • Jevons gives credit for suggestions along this line to some English writers as 
 early as 1830. 
 
 » Adapted from Money, pp. 276-77. (The Macmillan Co., 1904.)
 
 26o PRINCIPLES OF MONEY AND HANKING 
 
 numbers. A table of the prices of these articles is made when the 
 debt is created, and again when it is to be paid. If we call the sum 
 of the prices of the articles at the creation of the debt loo, then the 
 amount of money to be paid is to the amount borrowed as the sum of 
 the prices at the time of payment is to loo. That is, the debt is 
 really regarded as consisting of as many units of the tabular standard 
 as the money loaned would buy at the time the debt was incurred. 
 The amount of money which will buy these units when the debt is 
 due is what the debtor pays. For example : If, on the first of January, 
 A borrows $i,ooo payable in one year, he finds the number of units 
 of the tabular standard which $i,ooo will buy on January first. Sup- 
 pose this number is ten. He then gives his creditor a note for ten 
 units of the tabular standard, and on the first of the following January 
 reference is made to the price list then existing, to determine how 
 much money the units of the tabular standard will then command. 
 He may find that $990 will buy the same quantity of the goods used 
 in making up the table as $1,000 would buy the year before. In that 
 case the debt is settled by the payment of $990. 
 
 Of course it would be necessary to have some means of msuring 
 the accuracy of the prices quoted in making up the tabular standard. 
 This would be done by creating an oflacial commission, whose duty 
 it would be to publish at stated periods, say weekly or monthly, 
 changes which have taken place in the prices of commodities entering 
 into the table. With these prices in hand, it would be an easy matter 
 for an individual to find out what his debt was worth in money at 
 any date. If the tables included all articles sold at the time, in the 
 proportion in which they are offered for sale, and if the amount of 
 each article in the table were scaled down so that the price of the 
 whole should become that of a unit of money, the tabular unit would 
 become what we have called the composite conomodity unit. The 
 aim of the tabular standard of deferred payments is, therefore, to 
 return at the time of payment as many such composite commodity 
 units as the money borrowed enabled the borrower to secure at the 
 time the loan was made. The debtor, by this method, would return 
 the same income in goods as he received. 
 
 144. INDEX NUMBERS AND LEADING PRICE TABLES' 
 
 An index number or relative price of any given article at any 
 
 given date is the percentage which the price of that article at that 
 
 date is of the price of the same article at a date or period which has 
 
 ^Bulletin of the United States Bureau of Labor Statistics, VII (1902), 195-214.
 
 THE STANDARD QUESTION: PRICE LEVELS 26 1 
 
 been selected as a base or standard. This base or standard varies 
 in the different series of index numbers which have been presented to 
 the public. In the London Economist^ s index numbers the average 
 price for the years 1845 to 1850, inclusive, is taken as the base; in 
 those calculated by Mr. Sauerbeck the average for the eleven years, 
 1867 to 1877, is taken; in Soetbeer's index numbers the average for 
 the four years, 1847 to 1850, is used, while in the United States Senate 
 Finance Committee's statement of relative prices the price for the 
 year i860 is taken as the base or standard. In order to secure the 
 index number or relative price for any article at any date in the period 
 covered, the price of the article for that date is divided by the price 
 at the date, or by the average price for the period selected as the base. 
 The quotient obtained shows what percentage the price at the given 
 date is of the base or standard price and is called the index number 
 or relative price. For example, the percentage for flour in 1885 in 
 Mr. Sauerbeck's series of index numbers is 63, meaning that the 
 average price of flour in 1885 was 63 per cent of the average price of 
 the same article during the base period (1867-77). This base being 
 always 100, a fall of 37 per cent is indicated. 
 
 These percentages having been made in the case of each separate 
 article included in the particular scheme under consideration, and 
 for each year of the period covered, a series of total index num- 
 bers or relative prices for each of the years covered is usually con- 
 structed by adding together the index numbers of all the articles 
 for each year and dividing the result by the number of articles con- 
 sidered, thus securing an average of the same. 
 
 One of tlie best known price tables is that of the London Econo- 
 mist, which has been published annually since 1863. It is based on 
 the price quotations of twenty-two commodities, as follows: coffee, 
 sugar, tea, tobacco, wheat, butcher's meat, raw cotton, raw silk, flax 
 and hemp, sheep's wool, indigo, oils, timber, tallow, leather, copper, 
 iron, lead, tin, cotton wool, cotton yarn, cotton cloth. The prices 
 used are wholesale quotations, mainly from firms engaged in trade in 
 the London and Manchester markets. 
 
 The most widely known series of European index numbers, aside 
 from those of the London Economist and Mr. Sauerbeck, is that of 
 Dr. Adolph Soetbeer. These index numbers were first published in 
 1886 and were based on the prices of the Bureau of Commercial 
 Statistics of Hamburg. To the prices secured from this source Dr. 
 Soetbeer added those of several articles, such as potatoes, meat, etc.,
 
 262 PRINCIPLKS OF MONEY AND HANKING 
 
 which were obtained from the records of hospitals and other institu- 
 tions in Hamburg. There were also considered the prices of 14 manu- 
 factured articles of British export. In all, 114 articles are included 
 in these index numbers. The table runs from 1851 to 1885, with a 
 continuation to include 1891 by Mr. Heinz. 
 
 Perhaps the largest collection of prices which has ever been made 
 under a uniform system, with the exception of the Bureau of Labor's 
 table, is that of the United States Senate Finance Committee, com- 
 monly known as the Aldrich Table. It covers the years from 1840 
 to 1 89 1. The prices used were wholesale prices, and in most instances 
 were taken directly from the books of merchants and manufacturers. 
 The exceptions were those obtained from trade journals, large buyers, 
 etc. The base or standard was the price for the year i860. 
 
 The index number of the United States Department of Labor 
 represents the course of wholesale prices since 1890. Two hundred 
 and sixty-one series of quotations serve as the basis of the index 
 number, the commodities covered being classified under nine general 
 groups, as follows: 
 
 Farm products, 16 series of quotations. 
 
 Food, etc., 54 series of quotations. 
 
 Cloths and clothing, 76 series of quotations. 
 
 Fuel and lighting, 13 series of quotations. 
 
 Metals and implements, 39 series of quotations. 
 
 Lumber and building materials, 27 series of quotations. 
 
 Drugs and chemicals, 9 series of quotations. 
 
 House-furnishing goods, 14 series of quotations. 
 
 Miscellaneous, 13 series of quotations. 
 
 The prices quoted in every instance are wholesale prices. Whole- 
 sale prices have invariably been used in compilations which ha\-e 
 been made for the purpose of showing changes in the general price 
 level. They are more sensitive than retail prices and more quickly 
 reflect changes in conditions. Retail prices must usually follow the 
 wholesale, but not generally in the same proportion. The margin 
 between them in the case of some commodities is so great that slight 
 changes in the wholesale price do not affect the retail. Changes in 
 the wholesale price, also, which last for a short time only do not 
 usually result in corresponding changes in the retail price. 
 
 These prices are collected from the best available sources, such 
 as standard trade journals, produce exchanges, and leading manu-
 
 THE STANDARD QUESTION: PRICE LEVELS 263 
 
 facturers, or their selling agents, reports of boards of trade and 
 chambers of commerce. The prices quoted are usually the prices in 
 the New York market, except for such articles as have their primary 
 market in some other locality. 
 
 145. THE FALLACY OF INDEX NUMBERS' 
 By HAROLD COX 
 
 What does the evidence as to price changes that is alleged to be 
 furnished by index numbers amount to? Here, for example, are 
 two pairs of figures taken from a table given by Mr. Lay ton in his 
 little book on the Study of Prices. Between 1891 and 1910 the Sauer- 
 beck index number for food prices /c// from 77 to 74; between the 
 same two years the index number for raw material rqsc from 68 to 81. 
 Do the advocates of the quantity theory expect the world to believe 
 that the increased output of gold simultaneously sent do\\Ti food 
 prices and sent up the prices of raw materials ? 
 
 Let us look at the matter a little more closely. Mr. Sauerbeck's 
 numbers, and also those published by the Economist, are obtained 
 by averaging a number of separate prices of different commodities. 
 But such an average is nothing more than an arithmetic expression. 
 For example, the weekly price lists published in the Economist show 
 that between August 26, 191 1, and September 7, 1912, copper rose 
 from £59 iQS. to £'S>T,\ linseed oil fell from £42 55. to £33 155.; beef 
 rose from 45. to 45. lod.; butter fell from 1395. to 1265.; bacon was 
 stationary. Is it seriously contended that by averaging these vari- 
 ations we can determine whether gold has appreciated or depreciated ? 
 To show the absurdity of such a proposition it is sufficient to point 
 out that the average would be altered if the price of one article in 
 the list changed considerably through causes admittedly peculiar to 
 that article. With all respect to the erninent statisticians who work 
 out these index numbers, it is no more possible to deduce any prac- 
 tical inference from such averages than it is to infer the actual depth 
 of a river at any given point from the statement that the average depth 
 is three feet. The fallacy of averages is one that seems ever to haunt 
 the human mind. 
 
 'Adapted from "Politics and Prices," Edinburgh Review, October, 191 2, 
 pp. 482-83.
 
 264 PRINCIPLES OF MONEY AND BANKING 
 
 146. A CRITICISM OF USUAL INDEX NUMBERS AND 
 PRICE TABLES' 
 
 By WESLEY C. MITCHELL 
 
 Making an index number involves several distinct operations: 
 (i) defining the purpose for which the final results are to be used; (2) 
 deciding the numbers and kinds of commodities to be included; 
 (3) determining whether these commodities shall all be treated aUke 
 or whether they shall be weighted according to their relative impor- 
 tance; (4) collecting the actual prices of the commodities chosen 
 and, in case a weighted series is to be made, collecting also data 
 regarding their relative importance; (5) deciding whether to measure 
 the average variations of prices or a variation of a sum of actual 
 prices; (6) in case average variations are to be measured, choosing 
 the base upon which relative prices shall be computed; and (7) 
 settling upon the form of average to be struck. 
 
 The first step, framing a clear idea of the ultimate use to which 
 the index number is to be devoted, is most important, since it affords 
 the clue to guide the compiler through the labyrinth of subsequent 
 choices. It is, however, the step most frequently omitted. Most 
 of the widely used index numbers are "general purpose" series, 
 designed with no aim more definite than that of measurmg changes 
 in the price level. Once pubUshed they are used for many ends — to 
 show the depreciation of gold, the rise in the cost of hving, the alter- 
 nations of business prosperity and depression, and the allowance to 
 be made for changed prices in comparing estimates of national wealth 
 or private income at different times. They are cited to prove that 
 wages ought to be advanced or kept stable; that railway rates ought 
 to be raised or lowered; that "trusts" have manipulated the prices 
 of their products to the benefit or the injury of the pubUc; that 
 tariff changes have helped or harmed producers or consumers; that 
 immigration ought to be encouraged or restricted; that the monetary 
 system ought to be reformed; that natural resources are being de- 
 pleted or that the national dividend is growing. They are called in 
 to explain why bonds have fallen in price and why interest rates have 
 risen, why public expenditures have increased, why social unrest 
 prevails in certain years, why farmers are prosperous or the reverse, 
 
 ' Adapted from Bulletin of the United States Bureau of Labor Statistics, 1915, 
 Whole Number 173, pp. 25-26.
 
 THE STANDARD QUESTION: PRICE LEVELS 265 
 
 why unemployment fluctuates, why gold is being imported or ex- 
 ported, and why political "landslides" come when they do. 
 
 The compiler of a general-purpose index number, then, cannot 
 foresee to what uses and misuses his figures will be put. For each of 
 the legitimate uses he might conceivably devise an appropriate series. 
 But he cannot conceivably devise a single series that will serve all 
 uses equally well. The very qualities that make an index number 
 good for one purpose may make it equally bad for other purposes. 
 
 II 
 
 The price tables in use at the present time are also defective in 
 other ways.' Out of the thousands of commodities bought and sold, 
 the most extensive tables quote less than three hundred. The selec- 
 tion depends less on the information which is desired than on the 
 information which happens to be available. Goods which change 
 substantially in quality from year to year must be rejected, and 
 for goods which are usually the subject of private bargains it is 
 difficult to secure quotations. For the most part, only those com- 
 modities are included which are dealt in on public exchanges and 
 those for which dealers post their buying and seUing prices. Hence 
 it happens that the various parts of the system of prices are 
 most unevenly covered. Relatively abundant quotations can be 
 had for the staple raw materials, while the data concerning manu- 
 factured goods, whether used by producers or consumers, are rela- 
 tively scanty. Moreover, the market reports and list prices given 
 to the public cannot always be trusted, because many transactions 
 are made on the basis of concessions from or additions to the standard 
 rates. Particularly in times of crises, when the markets become 
 "demoralized," and in times of intense activity, when premiums are 
 paid for quick deliveries, the published table probably understates 
 the real fall and rise of prices. Finally a consitierable part of the 
 business transacted at any given time is done on a basis of prices 
 fixed by earlier contracts, and these contract prices often differ from 
 the current quotations. With all its defects, however, the available 
 material can be made to yield much information under systematic 
 examination. 
 
 The best known American, English, French, and German scries 
 differ widely in the number and character of the commodities included 
 and in the basis of computation, and hence in the results shown. 
 
 ■ Adapted from Business Cycles, pp. 93-113. (University of California, 1Q13.)
 
 266 PRINCIPLES OF MONEY AND BANKING 
 
 There is always a grave question as to how far they may be regarded 
 as trustworthy representatives of the average price variations in the 
 several countries; and for comparative purposes they leave the gate 
 open for quite erroneous conclusions. 
 
 147. CRITICISM OF THE MULTIPLE STANDARD' 
 By J. LAURENCE LAUGHLIN 
 
 When prices fall because of changes in the arts and in the pro- 
 ductive efficiency of society, the multiple standard does not subserve 
 perfect justice. The practical question is, Who is entitled to the gains 
 of industrial society ? If the capital of $ 1,000 which A owned in 1880 
 purchased x goods, and gave forth a certain industrial result in the 
 then state of the arts; and if that capital while in the hands of B, the 
 borrower, due solely to the general progress of the arts for which 
 neither A nor B is directly the cause, gave forth in 1900 a greater 
 industrial result (such as more tons of coal or more yards of cotton 
 cloth), does that additional product, n goods, belong of right to A or 
 to B ? Should the result of the efficiency of society go to the creditor 
 or to the debtor ? The question is similar to that of deciding to whom 
 should go the increased value of land arising from the growing num- 
 bers of the community — to the landowner or to the tenant. The 
 triumphs of chemistry and physics, the marvels of invention and 
 machinery, become the general property of the industrial world, and 
 any one debtor or any one creditor can claim no general property 
 in these results. Therefore neither A nor B has any moral right to 
 the additional n goods which have issued from the greater efficiency 
 of labor and capital under the improved conditions of 1900. 
 
 The multiple standard, however, by its very nature assumes that 
 perfect justice is rendered through the return by the debtor to the 
 creditor of only x goods; that is, the multiple standard works to give 
 the n goods (due to the progress of the arts) to the debtor and to take 
 them away from the creditor. And yet it has been seen that the 
 debtor has no moral right to this excess of goods. The conclusion, if 
 the above reasoning be accepted, is inevitable, that the multiple 
 standard in a case of falling prices due to the progress of society does 
 not subserve perfect justice; if it is to be rejected, it must be on this 
 ground, and not on that of impracticabihty. 
 
 ' Adapted from Principles of Money, pp. 54-55. (Charles Scribner's Sons, 
 1903-)
 
 THE STANDARD QUESTION': TRICE LEVELS 267 
 
 148. PRACTICAL OBJECTIONS TO THE TABULAR 
 STANDARD" 
 
 By IRVING EISIIER 
 
 On the whole, the "tabular standard" seems to have real merit. 
 Certainly there could be no material harm in trying a "permissive" 
 law, that is, one that enables anyone who chooses to make a time 
 contract in terms of a tabular standard. But on practical grounds 
 the tabular standard is subject to serious if not fatal objections. 
 One is the fact that it would involve the trouble of translating money 
 into the tabular standard and would therefore fail to attract the 
 public sufficiently to warrant its complete adoption by any govern- 
 ment. Another objection is that its half-way adoption would really 
 aggravate many of the evils it sought to correct, and therefore dis- 
 courage, rather than encourage, its further e.xtension. Even were 
 the system adopted in its complete form for any one country, it would 
 have the disadvantage of isolating that country commercially, and 
 thus reintroduce the inconveniences of an uncertain rate of inter- 
 national exchange. An analogous inconvenience would arise by its 
 partial adoption in any one country. Business men naturally and 
 properly prefer a uniform system of accounts to two systems warring 
 with each other. They would complain of such a double system of 
 accounts in e.xactly the same way and on exactly the same grounds 
 as they have always complained of the double system of accounts 
 involved in international trade between gold and silver countries. A 
 business man's profits constitute a narrow margin between receipts 
 and expenses. If receipts and expenses could both be reckoned in 
 the tabular standard, his profits would be more stable than if both 
 were reckoned in money. But if he should pay some of his expenses, 
 such as interest and wages, on a tabular basis, his profits would fluctu- 
 ate far more than if both sides, or all items of the accounts, were in 
 gold. In fact, his expected profits would often turn into losses by a 
 slight deviation between the two standards, in precisely the same 
 way as the importer or exporter of goods between China and the 
 United States may have his profits wiped out by a slight variation 
 in the exchange. In either case, he would prefer to have the same 
 standard on both sides of the account, even if this standard fluctuated, 
 rather than have two standards, only one of which fluctuated; for 
 
 ' Adapted from the Piirchiising Power of Money, pp. 335-37- (Tlic Macmillan 
 Co., 191 1.)
 
 268 PRINCIPLES OF MONEY AND BANKING 
 
 his profits depend more on the paralleHsm between the two sides of 
 his account than on the stabihty of either. 
 
 149. THE COMPENSATED DOLLAR* 
 By IRVING FISHER 
 
 The following plan, which may be called "the adjustable seign- 
 iorage plan," is an attempt to make the purchasing power of the dollar 
 constant. We have at present a gold dollar of constant weight, but 
 of varying purchasing power. We need a dollar of constant purchas- 
 ing power and varying weight. 
 
 The present proposal is to increase and vary, from time to time, 
 the weight of the bullion dollar, without necessarily disturbing the 
 weight of the coined dollar. Suppose, for instance, that the buUion 
 dollar had been gradually increased since 1896 until today it were 
 50 per cent heavier, or 38.7 grains, while the coined dollar were still 
 25.8 grains. This means that the government would redeem on 
 demand each coined dollar in 38.7 grains of gold bullion. Gold 
 dollars would then be mere tokens, like brass checks, entitling the 
 holder to gold bullion just as our gold certificates now entitle the holder 
 to so much gold (coin or bullion) in the United States Treasury. As 
 to convertibility in the other direction, the government mint would 
 stand ready to give back a coined dollar for each 38.7 grains of bullion 
 plus a slight coinage fee or "brassage" of, say, i per cent. This 
 brassage charge would serve, as afterward explained, to prevent loss 
 to the government by speculation. If i per cent, it would be 0.387 
 grains, to be added to the 38.7, making 39.087 grains in all as the 
 bullion required at the mint to secure a "coined dollar." 
 
 The difference between the bullion required by the mint (39.087 
 grains) and the coin dollar (25.8 grains) is 13.287 grains and would 
 be retained by the government to strengthen its bullion reserve for 
 redeeming gold coin. Of this 13.287 only 0.387 is brassage; the 
 remainder, 12.9 grains, may for distinction of terms be called seign- 
 orage. Thus in weight the bullion dollar is the coin dollar plus 
 seignorage, and the bullion dollar required by the mint is the amount 
 of this bullion dollar plus "brassage." 
 
 An obvious proviso in the proposed plan would be that the bulHon 
 dollar must never be lighter than the coin dollar. The present indi- 
 
 ' From various writings of Irving Fisher as adapted by Marshall, Wright, 
 and Field in Materials for the Study of Elementary Economics. The University of 
 Chicago Press.
 
 THE STANDARD QUESTION: PRICE LEVELS 269 
 
 cations are that the dollar, in order to maintain the same purchasing 
 power, will need in general to increase, for further depreciation of 
 gold seems probable. If, however, it should even happen that the 
 proposed bullion dollar should shrink in weight again to 25.8 grains, 
 then the proviso that it should never shrink lower would come into 
 operation. It would then have to remain 25.8 until the weight re- 
 quired for the bullion dollar should again rise above 25.8 grains. So 
 long as it remained 25.8 grains it would cease to be adjustable and to 
 maintain a constant purchasing power. We should during this period 
 simply be in the same condition that we are in at present. 
 
 With a coin dollar weighing 25.8 grains and with the bullion 
 dollar never lighter than 25.8 grains, the price of gold bullion can 
 never be higher than $18.60. But this limit or barrier can at any 
 time be made to recede simply by reducing the weight of the coin 
 dollar through recoinage. It might even be advisable, in order to 
 secure a wide margin between the coin and the bullion dollar, to 
 begin the new system by recoining at the outset all present gold coin 
 into coins of less weight, the government keeping the difference as a 
 reserve to help create its bullion reserve needed for operating the 
 proposed system. This would, incidentally, have the fiscal advantage 
 of saving the expense of creating such a reserve by taxation or loans. 
 
 We now come to another important restriction on changes in the 
 weight of the bullion dollar which should be imposed in order to 
 prevent speculation embarrassing to the government. This restric- 
 tion is that no single shift in the bullion dollar may exceed the extent 
 of the brassage. That is, if the brassage is i per cent, no one shift 
 shall exceed i per cent. 
 
 If this were not provided but the bullion dollar should at any time 
 be raised more than i per cent, if, e.g., the shift was from a bullion 
 dollar of 38.7 grains to 40 grains (and from a quantum of bullion 
 required by the mint of 39.087 grains to 40.40 grains), the government 
 might be embarrassed by speculation. The new pair of figures (40 
 and 40.40) would both be above the range of the old pair (38. 7 and 
 39.087); that is, the lower (40) of the new pair would be higher than 
 the higher (39.087) of the old pair. When it was known or expected 
 that these changes were to be made on a certain date, speculators 
 would hurry bullion to the mint in advance of that date and for each 
 39.0S7 grains receive a coin dollar. With this dollar they could, as 
 soon as the set date arrived, return and demand redemption in 40 
 grains. Thus they would win overnight 40—39.087, or 0.913 grains
 
 27© PRINCIPLES OF MONEY AND BANKING 
 
 on each 39.087 grains originally held. Again, if ihe bullion dollar 
 were changed too much at any time in the opposite direction, as, say, 
 from 39.7 grains to 37 grains, owners of gold coin could get it redeemed 
 in bullion at the old rate today and mint this bullion at the new rate 
 tomorrow. Each coin dollar they could redeem today in 38.7 grains 
 gold bullion and tomorrow under the new arrangement they could 
 get a dollar from the mint for only 37 grains plus i per cent brassage, 
 or 37.37 grains, still leaving 38.7 — 37.37, or 0.33 grains of bullion for 
 overnight profit on each original dollar invested in the speculation. 
 
 But if the permissible shift in weight of the bullion dollar were 
 not over i per cent in either direction, no such profit would be possible. 
 The restriction in the shift to i per cent at a time is ample to permit 
 of all the movement ordinarily required, provided the shift is made 
 often enough. It might be monthly, or 12 per cent per annum; it 
 might be bimonthly, or 6 per cent per annum; it might be quarterly, 
 or 4 per cent per annum. Moreover, the margin for each shift might 
 be narrowed or widened by making the brassage three-fourths of i 
 per cent or less, or i| per cent or more. 
 
 One important question remains: How can we know what changes 
 to make from time to time in the weight of the bullion dollar ? The 
 answer is: By index numbers of prices, such as those of the United 
 States Bureau of Labor, Bradstreet, Gibson, Sauerbeck, the Econo- 
 mist, or the British Board of Trade. Any of these would afford a 
 good guide and they all agree fairly well. 
 
 When once a system of index numbers is fixed upon, their numeri- 
 cal calculation becomes a mere matter of clerical arithmetic. If the 
 oflScial index number should show the price level to be, say, one-half 
 of I per cent above the base level from which the system started, it 
 would become mandatory to increase the gold bullion dollar by one- 
 half of I per cent (i.e., to decrease the bullion prices by one-half of 
 I per cent), and so on for any increase or decrease — subject, of course, 
 to the restrictions above imposed. Thus if the price level were i per 
 cent below normal, the bullion dollar could be reduced by only i 
 per cent in any one quarter of the year; but the full correction could 
 be reached in three quarters unless the deviation were aggravated 
 in the meantime; and in that case the correction would follow steadily 
 on the heels of the deviation. Except in paper-money times there 
 never was, I think, a historical case of a persistent rise of prices over 
 any large part of the world as great as i per cent a quarter or 4 per 
 cent a year for more than two or three years, while the falls of prices
 
 THE STANDARD QUESTION: PRICE LEVELS 271 
 
 have been less violent, excepting after crises. Under the system here 
 proposed there would be little opportunity for crises to incubate. 
 
 ISO. CRITICISM OF THE COMPENSATED DOLLAR* 
 By F. W. TAUSSIG 
 
 It must be admitted at the outset that the plan, if carried out with 
 iron consistency for a considerable stretch of time, would achieve 
 the result mainly had in view — the prevention of a long-continued 
 and considerable rise in prices. No one who holds to the doctrine 
 that the general range of prices is determined by the relation between 
 the quantity of commodities and the volume of the circulating me- 
 dium, and that the volume of the circulating medium in the end 
 depends, ceteris paribus, on the amount of coined money, can do 
 otherwise than admit the logical soundness of the scheme. 
 
 More stress should be laid, however, than Professor Fisher lays, 
 on the fact that the plan can work out its results only through its 
 effects on the quantity of coined gold. The connection between the 
 quantity of coined money and general prices is by no means a close 
 one. It is not only loose and uncertain, but we are much in the dark 
 concerning the degree of looseness and uncertainty. Economists 
 should be very chary of prediction in such matters, and Professor 
 Fisher makes prediction which the event might greatly falsify. It 
 seems highly improbable that fluctuations in prices would cease, or 
 that a smooth course would be followed as is indicated on Professor 
 Fisher's chart. So long as the modem mechanism of credit continues 
 to be used fluctuations in prices seem to me inevitable. A long- 
 continued considerable advance would alone be prevented. Com- 
 mercial crises would not be prevented, nor, in my judgment, ap- 
 preciably abated. Professor Fisher's predictions on this subject rest 
 upon the particular theory of commercial crises which he has devel- 
 oped elsewhere. That theory does not seem to me established, 
 and I have little faith in predictions that are based upon it. Xor 
 do I believe that labor discontent is as closely connected with changes 
 in general prices as Professor Fisher intimates. 
 
 ' Adapted from "The Plan for a Compensated Dollar," Quarterly Journal of 
 Econoni!Cs,XX\ll (1913), 402-16. As adapted by Marshall, Wright, and Eicld in 
 Materials for the Study of Elementary Eeotiomies. The University of Chicago Press.
 
 272 PRLNCIl'LES OF MONEY AND BANKING 
 
 II 
 
 What is to be said now of the possibility of securing the adoption 
 of such a plan ? 
 
 An international agreement for its adoption seems to me in the 
 highest degree unlikely. Let it be recalled how repeated were the 
 endeavors, under stress greater than felt in recent years, to bring 
 about an agreement for international bimetallism. A fall in general 
 prices and in money incomes is a phenomenon much more unwelcome 
 than a rise. The earlier fall in prices, moreover, was bitterly felt, 
 not only by the debtor classes, but by all the protectionists. The 
 movement for international bimetallism had powerful support in 
 political circles as well as among the economists. Yet it never had a 
 ghost of a chance. So great is the rivalry between nations, so intent 
 is each upon its own advantage, so jealous are they of each other, so 
 strong above all is the spirit of selfishness and mercantilism in their 
 economic policies, that it seems to me hopeless to expect them to 
 come to an understanding on a matter of this sort. 
 
 Even if, by some unexpected stroke, an international agreement 
 were to be secured, it would rest upon the frailest basis. Any war 
 would put an end to it. Any stage of depression in an important 
 country would render it in the highest degree irksome, would lead to 
 its revocation by some one country, and then would cause the whole 
 structure to topple over. Not least, there would be differences con- 
 cerning the index number of prices to be used in fixing the seignorage. 
 Prices do not move parallel in different countries. It is inevitable 
 that they should sometimes rise in one coimtry while faUing in 
 another; or rise in one more than in another, or fall more. Which 
 coimtry's index number should govern ? If indeed all countries were 
 convinced that a disastrous depreciation of money were impending, 
 and if they were resolutely determined to sink all differences and all 
 selfish interests in order to prevent it, they might act on the basis of a 
 compromise index number settled by an international commission. 
 But the mere mention of these conditions precedent suffices to show 
 how far they are from being present. 
 
 The question arises whether it would be feasible for one country 
 to adopt the plan. It would be feasible in the same sense that it 
 would be feasible for all countries together to adopt it. One country 
 alone, carrying it out with unflinching consistency, might secure the 
 desired result, subject to the qualifications which have already been
 
 THE STANDARD QUESTION: PRICE LEVELS 273 
 
 indicated. But that any one country would, in fact, adopt it alone 
 seems to me in the highest degree improbable. 
 
 Consider for a moment the mode in which the scheme would 
 work in detail if adopted by a single country. The immediate eflect 
 of a seignorage would be, as Professor Fisher points out, a readjust- 
 ment of the par of foreign exchange. The exporter would find the par 
 of exchange lessened, and in terms of domestic money (compensated 
 dollars) he would receive less than he got before. All commodities of 
 export would fall in price at once or fail to rise to the extent of the 
 seignorage. The exporters would be as hotly indignant with the 
 plan as if an excise tax had been imposed on their commodities 
 without any possibility of their raising the price of their products. 
 Consider for a moment what would be the state of mind of our cotton- 
 exporting South. Is it to be supposed that any set of legislators could 
 resist the political pressure from the various exporting sections and 
 carry out the scheme unflinchingly ? Can we imagine a congressman 
 telling his constituents that they need only wait a while, until all 
 money incomes and all prices had adjusted themselves to the new 
 conditions ? that then nobody would be worse off or better off than 
 before ? To ask this sort of question is to answer it. 
 
 Ill 
 
 In view of all these complications, uncertainties, and political 
 and sectional obstacles, the question presents itself whether the 
 emergency is so serious, the evil so great, the gain to be secured so 
 unmistakable, that it is worth while to press so far-reaching a change. 
 
 Professor Fisher has predicted that prices will rise further. He 
 is disposed to believe that there will be, not only a rise, but that there 
 will be a considerable rise. I hesitate to enter the domain of predic- 
 tion. I am inclined to believe that the rise in prices will not cease 
 for the next decade; but whether it will be considerable or moderate 
 or negligible in extent I should not venture to say. Predictions con- 
 cerning the output from the mines are to be taken with the greatest 
 caution. We all recall the predictions which Suess made in 1892. 
 The distinguished geologist believed that the prospects of an increased 
 production of gold were of the slightest, and that the world must fall 
 back on the use of both metals. How diflcrent the course has been 
 from that which he jircclicted! There are tliose who Ijclicvc that the 
 output of gold, so far from continuing to increase, has reached, or is
 
 274 PRINCIPLES OF MONEY AND BANKING 
 
 approaching, its maximum. For myself, I should not be surprised 
 if there were a cessation in growth, and should certainly be surprised if 
 there were not a relaxation in the rate of growth. 
 
 Further: it deserves to be borne in mind that the total supply 
 of the precious metals is now so much greater than it was twenty 
 years ago that the same annual increment will have much less effect 
 on prices. This is the familiar consequence of the durability of the 
 precious metals. 
 
 Finally, a circumstance should be borne in mind which bears, not 
 only upon the intrinsic desirability of a regulative plan, but also upon 
 the attitude of the general public and the consequent pohtical and 
 industrial possibilities. The economist is thinking and reasoning 
 about the change which has been of special interest for him, the 
 general rise in prices. The man on the street is thinking about the 
 exceptional rise in prices of one important set of commodities. Any- 
 one who will examine with care the index numbers of our Bureau of 
 Labor will see what a marked rise, much beyond that of the general 
 index number, has appeared in the prices of farm products, and espe- 
 cially in the prices of meat. That special advance has taken place 
 within the last three or four years. It is precisely within this period 
 that general attention has been turned to rising prices. What the 
 public has had chiefly in mind has not been the general change, 
 but the particular change in the commodities of wide consumption. 
 This, I believe, is the main cause of labor unrest. 
 
 Whatever be the particular causes that have led to the high 
 prices of food, economists agree that these causes wiU operate irre- 
 spective of any compensated-dollar plan. This would simply serve, 
 at its best, to keep general prices where they are, leaving each par- 
 ticular group of commodities to its own particular causes. If the 
 compensated-dollar plan were to be adopted, and if the prices of food 
 should continue to mount, there would be disappointment for the gen- 
 eral public, but nothing to surprise the economist. And, conversely, 
 it is entirely possible that the rise in the cost of living, that is, the 
 special rise in the prices of foodstuffs, will reach its end irrespective 
 of any monetary change whatever. The general rise in prices and 
 money incomes, to repeat what has already been said, is not unwel- 
 come to the great majority of people. Its incidental consequences 
 are perceived and debated chiefly by the economists, such as the 
 effects on the creditor class and the slowness of so-called fixed incomes 
 to rise accordingly. The general public is concerned chiefly with the
 
 THE STANDARD QUESTION: PRICE LEVELS 275 
 
 conspicuous rise in the prices of foodstuffs, which is ascribable to causes 
 very different from those that bring the general rise, and can be 
 reached only by remedies very different. 
 
 In sum, I am not convinced that the evils of the present s\stem 
 are so great as to call for the extraordinary remedy proposed. If, 
 indeed, consequences of the most serious sort were imminent from an 
 overwhelming increase in the gold supply, we might feel disposed to 
 move heaven and earth to prevent them. Obstacles from international 
 jealousy, or from widespread misconceptions and fallacies, could then 
 only spur us to greater exertions. But if the evils are as yet not 
 unbearable; if those against which the public most rebels are due 
 chiefly to other causes than the mere increase in gold supply; if the 
 remedy proposed is one whose operation is far from certain, hkeh' to 
 lead to complications of its own, and in danger of being discarded on 
 its first failure to work a cure, let us bear tlie ills we have.
 
 VIII 
 
 THE EXISTING SYSTEM OF THE UNITED STATES 
 AND PRINCIPLES OF REGULATION 
 
 Introduction 
 
 The present monetary system of the United States and the vari- 
 ous provisions with reference to legal tender, redemption, etc., show 
 at every hand the marks of our checkered monetary history. Many 
 of the provisions that exist are mere survivals and are under- 
 standable only by reference to our earlier history. On the other 
 hand, there are numerous important principles in use today that have 
 been developed out of our varied experience — principles which give 
 to the present system as a whole a reasonable degree of safety and 
 economy. The greenbacks, however, appear to remain a source of 
 more or less apprehension, particularly since the passage of the 
 Federal Reserve Act. But while the system is on the whole safe 
 enough, it appears to be unnecessarily comphcated and clumsy. The 
 elimination of certain of the forms of currency in use and a thorough 
 overhauhng of the laws with a view to simpHfying and unifjdng them 
 would prove a very useful service. 
 
 All this, however, relates only to monjey that is issued or controlled 
 by the government directly. Paper money issued by banks and 
 checks, or deposit currency, remain to be treated as separate problems 
 in themselves. It is these forms of currency that are designed to 
 give the necessary flexibility, or elasticity, to the monetary system 
 as a whole ; and as such they give rise to problems of pecuHar difficulty. 
 The treatment of these forms of currency, however, must be reserved 
 until the general principles of banking and credit have been 
 discussed. 
 
 151. VARIOUS FORMS OF MONEY IN THE UNITED STATES' 
 
 A. GOLD COINS 
 
 While the gold dollar is the unit and standard of value, the actual 
 coinage of tlie $1 piece was discontinued under authority of the act 
 of September 26, 1890. Gold is now coined in denominations of 
 
 'Adapted from Circular No. 52 of the United States Treasury Department, 
 1910. 
 
 276
 
 UNITED STATES SYSTEM AND REGLLATIOX 277 
 
 $2.50, $5, $10, and $20, called, respectively, quarter-eagle, half-eagle, 
 eagle, and double eagle. 
 
 The total coinage of gold by the mints in the United States from 
 1792 to June 30, 1910, is $3,149,207,670.50, of which it is estimated 
 that $1,531,074,997 is now in existence as coin in the United States, 
 while the remainder, $1,618,132,673.50 represents the excess of exports 
 over imports and the amount consumed in the arts. The gold bullion 
 now in the United States is about $105,000,000. 
 
 B. SILVER COINS 
 
 The standard silver dollar was first authorized by the act of 
 April 12, 1792. Its weight was 416 grains .8924 fine. It contained 
 the same quantity of fine silver as the present dollar, whose weight 
 and fineness were established by the act of January 18, 1837. The 
 coinage of the standard silver dollar was discontinued by the act of 
 February 10, 1873, and it was restored by the act of February 28, 
 1878. The total amount coined from 1792 to 1873 was $8,031,238, 
 and the amount coined from 1878 to December 31, 1904, when the 
 coinage was discontinued, was $570,272,610. 
 
 The subsidiary silver coins authorized by the act of April 2, 1792, 
 are the half-dollar, quarter-dollar, dime, and half-dime. The half- 
 dime, has, however, been discontinued as being inconveniently small. 
 The subsidiary silver was originally of proportional weight with the 
 dollar, but since 1853 has been coined about 7 per cent lighter. 
 
 The amount of full-weight fractional silver coined prior to Febru- 
 ary 21, 1853, was $71,734,964.50, and the amount of subsidiary silver 
 coined since that year is $272,331,351.45. 
 
 "In order to procure bullion for the subsidiary silver coinage, 
 the superintendents with the approval of the Director of the Mint, 
 as to prices, terms, and quantity, shall purchase such bullion with 
 the bullion fund. The seignorage thereon shall be credited to a 
 special fund denominated the silver profit fund." (Revised Statutes, 
 sec. 3526). 
 
 C. MINOR COINS 
 
 The minor coins of the United States shall be a five-cent piece and 
 a one-cent piece. The alloy for the five-cent piece shall be of copper 
 and nickel, to be composed of three-fourths copper and one-fourth 
 nickel. The alloy of the one-cent piece shall be 95 per cent of copper 
 and 5 per cent of tin and zinc. For the purchase of metal for the minor
 
 278 PRINCIPLES OF MONEY AND BANKING 
 
 coinage a sum of not exceeding $250,000 shall be transferred by the 
 Secretary of the Treasury to the credit of the superintendent of the 
 mint at Philadelphia. The seignorage arising from the coinage of 
 the minor coins shall be credited to a special fund known as the minor- 
 coinage profit fund, the balance of which shall be from time to time, 
 at least twice a year, covered into the Treasury (Revised Statutes, 
 sees. 3515 and 352S). 
 
 D. UNITED STATES NOTES 
 
 The United States notes or "greenbacks" were first issued during 
 the Civil War to meet the expenses of the government. Since 1879 
 there have been outstanding $346,681,016. They are backed by a 
 cash reserve of $150,000,000 as a special fund in the Treasury. The 
 amount never increases or decreases, for the law provides that if 
 redeemed in cash at the Treasury they shall be promptly reissued. 
 They are mainly in five- and ten-dollar denominations and fill a sort 
 of middle place in our currency. 
 
 E. TREASURY NOTES OF 1890 
 
 These government notes were issued in the purchase of silver 
 bullion under the terms of the Sherman Silver Purchase Act of 1890. 
 There were in 1893 some $155,000,000 outstanding; but they are now 
 canceled as fast as received at the Treasury, so that they are con- 
 stantly disappearing from circulation. Originally amounting to 
 $155,931,002, there were left outstanding in 1913 only $2,709,000. 
 They are in various denominations. When retired, their place is 
 taken directly by silver dollars coined from the bullion originally 
 purchased with the notes; indirectly their place is filled by silver 
 certificates issued as representative of silver coin. 
 
 F. GOLD CERTIFICATES 
 
 These certificates date back to the Civil War. The inconven- 
 ience of gold for everyday exchange transactions led to an author- 
 ization of the Secretary of the Treasury to receive gold in sums of not 
 less than $20 and to issue certificates in their place. None may be 
 issued in a denomination of less than $10. It is provided that at least 
 one-fourth of the certificates shall be in denominations of $50 or 
 less. They are designed to meet the needs of our large monetary 
 transactions. The total amount of gold certificates now outside the 
 Treasury is $802,754,199.
 
 UNITED STATES SYSTEM AND REGULATION 279 
 
 G. SILVER CERTIFICATES 
 
 The use of silver certificates dates back to 1S7S, being authorized 
 by the Bland-Allison Act. The Secretary of the Treasury is required 
 to accept all silver in sums of not less than Sio, and to issue certificates 
 therefor in denominations of $10 and less. They form tJie bulk of 
 our small bills and have largely superseded the use of the silver they 
 represent. The amount outside the Treasury on July i, 19 10, was 
 $478,597,238, while the amount of silver dollars outstanding was only 
 $72,432,514.' 
 
 152. REDEMPTION OF SUBSIDIARY AND REPRESENTATIVE' 
 
 MONEY' 
 
 Gold coins and standard silver dollars, being standard coins of the 
 United States, are not "redeemable." 
 
 The position of the silver dollar in our system is anomalous in that 
 it is regarded in law as a standard coin and hence is not redeemable, 
 while in essence it is no more standard than fractional silver or paper 
 currency. The reason for this is historical. We have not yet got 
 entirely over to the single gold standard; we have what has been 
 aptly called a limping standard — the silver is still carried along as a 
 full legal-tender coin, but it is coined only on government account. 
 There is, however, a system of indirect redemption which in practice 
 has thus far proved quite as efifective as would a specific redemption 
 in gold. In all payments to itself the Treasury receives silver on an 
 equality with gold, and in all payment from itself to others it pro- 
 vides gold if that metal is desired; but in no case does it force silver 
 upon an unwilling person. By the Currency Act of 1900 it is provided 
 that silver shall be maintained at a parity with gold, and that it shall 
 be the duty of the Secretary of the Treasury to maintain such parity. 
 In case the above method of indirect redemption should not prove 
 efficacious, the Secretary would be obliged to resort to more direct 
 means. 
 
 Subsidiary coins and minor coins may be presented, in sums or 
 multiples of $20, to the Treasurer of the United States or to an assist- 
 ant treasurer for redemption or exchange into lawful money. 
 
 • Bank notes are discussed in Part II, selections Nos. 125-^9. 
 
 'Adapted from Circular No. 52 of the United States Treasury Department, 
 1910.
 
 28o PRINCIPLES OF MONEY AND BANKING 
 
 United States notes are redeemable in United States gold coin in 
 any amount by the Treasurer and all the assistant treasurers of the 
 United States. 
 
 Treasury notes of i8go are redeemable in United States gold coin 
 in any amount by the Treasurer and all the assistant treasurers of the 
 United States. 
 
 Gold certificates, being receipts for gold coin, are redeemable in 
 such coin by the Treasurer and all assistant treasurers of the United 
 States. 
 
 Silver certificates are receipts for standard silver dollars deposited, 
 and are redeemable in such dollars only. 
 
 "Coin^' obligations of the Government are redeemed in gold coin 
 when gold is demanded and in silver when silver is demanded. 
 
 153. LEGAL-TENDER PROVISIONS* 
 
 Gold coin is legal tender at its nominal or face value for all debts, 
 pubhc and private, when not below the standard weight and Hmit of 
 tolerance prescribed by law; and when below such standard weight 
 and limit of tolerance it is legal tender in proportion to its weight. 
 
 Standard silver dollars are legal tender at their nominal or face 
 value in payment of all debts, public and private, without regard to 
 the amount, except where otherwise expressly stipulated in the 
 contract. 
 
 Subsidiary silver is legal tender for amounts not exceeding $10 in 
 any one payment. 
 
 Treasury notes of the act of July 14, i8go, are legal tender for all 
 debts, public and private, except where otherwise expressly stipulated 
 in the contract. 
 
 United States notes or "greenbacks" are legal tender for all debts, 
 pubUc and private, except duties on imports and interest on the 
 pubHcdebt. Upon resumption of specie payments, January i, 1S79, 
 they were made acceptable in payment of duties on imports by 
 treasury order and have been freely received on that account since 
 that date, though the law has not been changed. 
 
 Gold certificates, silver certificates, and national bank notes are not 
 legal tender, but both classes of certificates are receivable for all 
 public dues, while national bank notes are receivable for all public 
 
 I Adapted from Circular No. 52 of the United States Treasuty Department, 
 1910.
 
 UNITED STATES SYSTEM AXD REGULATION 
 
 281 
 
 clues except duties on imports, and may be paid out by the Govern- 
 ment for all salaries and other debts and demands owing bv the 
 United States to individuals, corporations, and associations within 
 the United States, except interest on the public debt and in redemp- 
 tion of the national currency. All national banks are required by 
 law to receive the notes of other national banks at par. 
 
 The minor coins of nickel and copper are legal tender to the extent 
 of 25 cents. 
 
 Foreign coins are not legal tender. Section 3584 of the Re\-ised 
 Statutes of the United States provides that no foreign coins shall be 
 legal tender in the United States. They were legal tender, however, 
 until 1854. 
 
 154. MONETARY STOCK OF THE UNITED STATES* 
 
 Kinds 
 
 In Treasury and 
 Mints 
 
 In Circulation 
 
 Total Stock 
 
 (iold coin and bullion 
 
 Silver dollars 
 
 $1,279,112,110 
 
 495,532,993 
 22,040,989 
 
 $611,544,681 
 
 70,300,485 
 
 159,965,698 
 
 $1,890,656,791 
 565-833,478 
 182,006,687 
 
 Subsidiary silver 
 
 
 Total metallic 
 
 1,796,686,092 
 
 841,810,864 
 
 2,638,496,956 
 
 
 United States notes 
 
 Treasury notes of 1890 
 
 National bank notes 
 
 8,835,369 
 
 11,237 
 
 35,491,862 
 
 337,845,647 
 
 2,427,763 
 
 715,180,037 
 
 346,681,016 
 
 2,439,000 
 
 750,671,899 
 
 Total notes 
 
 44,338,468 
 
 1.055,453,447 
 
 1,099,791.915 
 
 
 Aggregate metallic and notes 
 
 1,841,024,560 
 
 1,897,264,311 
 
 3,738,288,871 
 
 Gold certificates 
 
 54,825,730 
 12,248,023 
 
 1,026,149,139 
 478,601,977 
 
 
 Silver certificates 
 
 
 
 
 Total certificates 
 
 67,073,753 
 
 1,504,751,116 
 
 
 
 
 Aggregate 
 
 
 $3,402,015,427 
 
 $3,738,288,871 
 
 
 
 ' Annual Report of the Secretary of the Treasury, June 30, 1914, pp. 308-9.
 
 282 
 
 PRINCIPLKS OK MONEY AND RANKING 
 
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 UNITED STATES SYSTExM AND REGULATION 
 
 283 
 
 156. RATIO OF GOLD TO THE TOTAL STOCK OF MONEY 
 AND PER CAPITA CIRCULATION 
 
 Dates 
 
 Total Stock of 
 Money 
 
 Gold 
 
 Percentage 
 Gold 
 
 Circulation 
 per Capita 
 
 July I 
 July I 
 July I 
 July I 
 July I 
 July I 
 July I 
 July I 
 July I 
 
 1906 
 
 1907 
 
 1908 
 
 1909 
 
 1910 
 
 1911 
 
 1912 
 
 1913 
 
 1914 
 
 $3,069,976,591 
 3,115,728,887 
 3,378,764,020 
 3,406,328,354 
 3,419.591,483 
 3.555.958.977 
 3,648,870,650 
 3,720,070,016 
 3,738,288,871 
 
 $1,475,706,765 
 1,466,389,101 
 1,618,133,492 
 1,642,041,999 
 1,636,043,478 
 1,753,196,722 
 1,818,188,417 
 1,870,761,835 
 1,890,656,791 
 
 48 
 47 
 47 
 48 
 47 
 49 
 49 
 50 
 50 
 
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 06 
 89 
 20 
 
 85 
 30 
 82 
 28 
 57 
 
 S32 
 32 
 34 
 34 
 34 
 34 
 34 
 34 
 34 
 
 32 
 22 
 72 
 93 
 33 
 20 
 
 34 
 56 
 35
 
 PART II 
 BANKING
 
 THE VARIOUS FORMS AND SERVICES 
 OF BANKING 
 
 Introductory 
 
 It is impossible to give a precise definition of banking, for the 
 reason that at one time or another the most widely differing economic 
 functions or services have been designated by the term. Even now 
 it includes various forms of financial operations based on substantially 
 different principles. Numerous writers, however, ignoring the popu- 
 lar or business connotations of the word, have attempted to limit the 
 discussion of banking to a particular t^-pe of operation, namely, the 
 creation of notes or checks, which are payable on demand, and which 
 thereby furnish media of exchange to supplement the work of money 
 proper in the economic process. While this type of operation is un- 
 questionably of great importance, it is nevertheless only one form of 
 banking, and to treat of it exclusively is to narrow the field to an 
 extent that affords an entirely inadequate understanding of the 
 subject. 
 
 It is the purpose of the readings in this chapter, first, to set 
 forth in a very general way the two fundamental types of banking 
 operations — the commercial and the investment; second, to enumer- 
 ate the various forms of banking institutions that have been developed 
 in the carrying out of these fundamental operations; and third, to 
 indicate the great variety of services that are in fact performed by the 
 typical commercial banking institution. All of this is but introduc- 
 tory, however — designed to afford a sort of bird's-eye view of the 
 problem of banking as a whole, and to serve as a point of departure 
 for the detailed study to follow. 
 
 It should perhaps be added here that banking (using the term 
 loosely) is one of the oldest of institutions, dating back to a remote 
 antiquity. Archaeologists have discovered, for instance, that 
 Assyria, as early as eight centuries before the Christian era, appears 
 to have had a well-developed system of bills of exchange, promissory 
 notes, and transfer checks, very similar to those of our own day. 
 
 3
 
 4 I'RINCIPLKS or MONEY AND BANKING 
 
 Among the Greeks and Romans, also, most of the operations typical 
 of modern bankhig were common. Tlje Middle Ages, however, was 
 a period of stagnation in banking affairs, as in practically every- 
 thing else, and it was not until the twelfth century that modern bank- 
 ing history began. In the great commercial cities of Italy and Spain 
 banking developed rapidly between the twelfth and the sixteenth 
 centuries and appears to have been characterized by many of the 
 problems that confront us today. A little later the famous bank of 
 Amsterdam, though of a simple type, was largely responsible for the 
 commercial pre-eminence enjoyed by Holland in the sixteenth and 
 seventeenth centuries. The way in which modern banking originated 
 in England and the general character of the services performed are 
 indicated by the selection on "Goldsmith Bankers in England." 
 
 A noteworthy feature of banking in mediaeval Europe was the 
 rise, along with commercial institutions, of numerous great invest- 
 ment bankers or financiers who, through their control of enormous 
 capital resources, were at times almost able to sway the destinies of 
 nations. The Money Trust appears to have been quite as menacing 
 then as now! 
 
 I. COMMERCIAL VERSUS INVESTMENT BANKING' 
 By WILLIAM A. SCOTT 
 
 In order to draw the line between commercial and investment 
 banks, attention must be riveted upon the functions which each per- 
 forms in the economy of the nation. Commercial banks are essential 
 parts of the machinery by which goods and services are exchanged in 
 the everyday conduct of business. Investment banks are essential 
 parts of the machinery by which the savings of the people are collected 
 and applied to the production and transportation of goods and to the 
 service of such public bodies as the federal, state, county, township, 
 and municipal governments. 
 
 In order to comprehend the precise role which commercial banks 
 play in the daily exchange of goods and services, we must note certain 
 features of our credit system. To sell and to buy on time are very 
 common practices in modern business. The manufacturer frequently 
 buys raw materials and agrees to pay for them after their transforma- 
 
 ' Adapted from "Investment vs. Commercial Banking," Proceedings of the 
 Second Annual Convention of the Investment Bankers Association of America, 1913, 
 pp. 76-80.
 
 VARIOUS FORMS AND SERVICES OF BANKING 5 
 
 tion into completed products. The jobber frequently buys goods to 
 be paid for after he has sold them. The farmer frequently buys seed, 
 fertilizer, cattle for fattening, etc., to be paid for when the crop has 
 been harvested or the animals sold to the butcher. 
 
 The explanation of these practices is to be found in the growing 
 separation of producers and consumers and in the lengthening of the 
 period of production caused by the constant extension of the areas 
 within which goods are marketed and of the use of machinery in 
 manufacturing. Before paying for them consumers like to receive 
 the goods purchased, and middlemen not only to receive them but to 
 sell them again. Manufacturers find advantage in being able to pay 
 for labor and raw products after they have been transformed into com- 
 pleted goods and sold to middlemen or consumers. Hence an interval 
 must elapse between purchase and payment measured by the length 
 of time required for the transportation, selling, and manufacturing 
 processes. 
 
 The practice of buying and selling on time results in making 
 practically every business man both a debtor and a creditor, and 
 renders it necessary for each one to meet his debts as they mature 
 by means of the amounts paid by others in settlement of their obliga- 
 tions to him. 
 
 It is rarely possible, however, for a business man to make the 
 maturities of the debts due him and the debts due by himto others 
 exactly correspond, and he therefore finds himself under the necessity 
 of transforming into means of payment the obligations of other people 
 due in the future. This service the commercial bank performs for 
 him, and in this consists its unique function in the national economy. 
 
 The means by which this service is performed is the discount of 
 the evidences of indebtedness of others to him, or of his own personal 
 notes, and this in the vast majority of cases is accomplished in this 
 country by exchanging these credit documents for balances on a 
 checking account, which balances can be transferred at will to other 
 people at home, in other cities, or in other countries or transformed 
 into hand-to-hand money. 
 
 The service rendered by the investment bank dilTers greatly from 
 that of the commercial. It acts as an intermediary between the per- 
 son who has accumulated capital and those who are in a position to 
 invest it in fixed forms. Two processes arc here involved: the accu- 
 mulation of the savings of the community on the one hand, the devel- 
 opment of natural resources and the construction and management of
 
 6 PRINCIPLES OF MONEY AND BANKING 
 
 manufacturing and transportation agencies on the other. The trans- 
 fer of capital to pubHc bodies, such as central governments, states, 
 municipalities, and other political divisions, for unproductive con- 
 sumption is a process also carried on by investment banks similar 
 to the other in its nature, but having peculiarities which place it in 
 a class by itself. 
 
 It is the business of the investment banking institutions of a 
 country to see that this work of directing the savings of the country 
 into its various enterprises is economically and efficiently done. It 
 is their business to stimulate saving and to provide facilities by which 
 every person who saves can readily put his accumulated funds to 
 productive use. It is their business to search out opportunities for 
 investment, to see to it that the natural and human resources of the 
 nation are used to the best possible advantage in the promotion of 
 its economic interests. This is a great work, as important and essen- 
 tial to the well-being of the nation as that which commercial banks 
 or institutions of any other kind perform. 
 
 2. A CLASSIFICATION OF BANKS AND TYPES OF BANKING 
 
 OPERATIONS 
 
 Banks are commonly classified either according to the type of 
 business in which they speciahze, or according to the legal authority 
 under which they conduct their business. Under the first classifica- 
 tion we find the following: commercial banks, investment banks or 
 bond houses, savings institutions, and trust companies. However, 
 there is often a far from complete specialization in the work per- 
 formed by these various institutions; indeed, "commercial" banks 
 and trust companies as a general rule now perform nearly every kind 
 of banking operation. 
 
 Under the second classification we have: national and state banks 
 and private banks — the classification indicating the source of, or the 
 absence of, specific authority to conduct a banking business. The 
 term "state bank," however, has numerous connotations. Most 
 commonly the term is used in connection with state institutions which 
 engage in commercial operations. From this standpoint — the char- 
 acter of business carried on — savings banks and trust companies can- 
 not be called state banks, even though incorporated under state law. 
 Again, private unincorporated banks have also been classified as state 
 banks where they are subject to regulation by the state. For our 
 present purpose, however, the distinguishing feature is the chartering
 
 VARIOUS FORMS AND SERVICES OF BANKING 7 
 
 by state governments. Trust companies, savings banks, bond houses 
 where incorporated, and commercial institutions are all state banks 
 in this classification. 
 
 Private banks are of various kinds: (i) small concerns which 
 engage in a general banking business (largely savings), without any 
 specific grant of authority; they may or may not be under the super- 
 vision of the state banking department; (2) various co-operative 
 creditor loaning associations; (3) unincorporated investment banks, 
 or bond houses. 
 
 But while banks may be classified into several different kinds of 
 institutions, and while, from the standpoint of services performed, 
 they offer a wide variety of advantages in the way of affording a 
 place for the safe-keeping of money, transferring funds at small 
 expense for the benefit of customers, providing a convenient and 
 uniform system of currency, etc., there are nevertheless but two 
 fundamental types of banking operations. In the last analysis all 
 banking may be classified as either commercial or investment 
 business. 
 
 3. THE VARIOUS SERVICES OF BANKS' 
 By JAMES W. GILBART 
 
 Banks are useful as places of security for the deposit of money. 
 The circumstance which gave rise to the business of banking in this 
 country was a desire on the part of the merchants in London to 
 obtain a place where they might lodge their money in security. 
 Everyone who has had the care of large sums of money knows the 
 anxiety which attends their custody. A person in this case must 
 either take care of his money himself or trust it to his servants. If 
 he takes care of it himself he will often be put to inconvenience, and 
 will have to deny himself holidays and comforts, of which a man who 
 is possessed of much money would not like to be deprived. If he 
 entrusts it to others, he must depend upon their honesty and ability. 
 Besides, in both these cases the money is lodged under the owner's 
 own roof and is subject to thieves, to fire, and to other contingencies, 
 against which it is not always easy to guard. .All these evils are 
 obviated by means of banking. 
 
 The bankers allow interest for money placed in lliL-ir hands on 
 deposit. By means of banking the various small sums of money 
 
 ■ Adapted from The History, Principles, and Practice of Banking, i.Sj;. 
 Michie's revision (1882), pp. 213-22. (G. Bell & Sons.)
 
 8 PRINCII'IJ;.S OK MONEY AND HANKINO 
 
 which would have remained unproductive in the hands of individuals 
 are collected into large amounts in the hands of the bankers, who 
 employ it in granting facilities to trade and commerce. Thus banking 
 increases the productive capital of the nation. 
 
 Another advantage conferred upon society by bankers is that 
 they make advances to persons who want to borrow money. These 
 advances are made by discounting bills, upon personal security, upon 
 the joint security of the borrower and two or three of his friends, and 
 sometimes upon mortgage. Persons engaged in trade and commerce 
 arc thus enabled to augment their capital, and consequently their 
 wealth. The increase of money in circulation stimulates production. 
 
 Another benefit derived from bankers is that they transmit money 
 from one part of the country to another. There is scarcely a person 
 in business who has not occasion sometimes to send money to a dis- 
 tant town. This can be most conveniently done by paying the money 
 into a bank, which in turn arranges with a correspondent bank in or 
 near the distant town to pay the designated party the amount speci- 
 fied. Periodical settlements between the two banks make such trans- 
 actions comparatively inexpensive. At the same time there is not 
 the least risk of loss. 
 
 Wherever a bank is established, the public is able to obtain that 
 denomination of currency which is best adapted for carrying on the 
 commercial operations of the place. In a town which has no bank 
 a person may have occasion to use small notes, and have none but 
 large ones; and at other times he may have need of large notes and 
 not be able to obtain them. The banks issue that description of notes 
 which the receivers may require, and are always ready to exchange 
 them for others of a different denomination. Banks, too, usually 
 supply their customers and the neighborhood with silver; and if, on 
 the other hand, silver should be too abundant; the banks will receive 
 it, either as a deposit or in exchange for their notes. Hence, where 
 banks are established, it is easy to obtain change. This is very con- 
 venient to those who have to pay large sums in wages or who pur- 
 chase in small amounts the commodities in which they trade. 
 
 By means of banking there is a great saving of time in making 
 money transactions. How much longer time does it take to count 
 out a sum of money in pounds, shillings, and pence than it does to 
 write a draft ? And how much less trouble is it to receive a draft in 
 payment of a debt, and then to pay it into the banker's, than it is to 
 receive a sum of money in currency ? What inconveniences would
 
 VARIOUS FORMS AND SERVICES OF BANKING 9 
 
 arise from the necessity of weighing sovereigns, what a loss of time 
 from disputes as to the goodness or badness of particular pieces of 
 money I 
 
 A merchant or tradesman who keeps a banker saves the trouble 
 and expense of presenting promissory notes which he holds or drafts 
 which he may draw against customers. He may turn these over to 
 his banker for safe-keeping and collection at maturity. He pays these 
 into the hands of his banker, and has no further trouble. He has now 
 no care al^out the custody of his bills, no anxiety about their being 
 stolen, no danger of forgetting them until they are overdue, and thus 
 exonerating the endorsers, no trouble of sending to a distance in order 
 to demand payment. He has nothing more to do than to see the 
 amount entered to his credit in his banker's books. If a bill be not 
 paid it is brought back to him on the day after it falls due, properly 
 noted. The banker's clerk and the notary's clerk are witnesses ready 
 to come forward to prove that the bill has been duly presented, and 
 the notary's ticket attached to the bUl assigns the reasons why it is 
 not paid. 
 
 Another advantage of keeping a banker is that by this means you 
 have a continual reference as to your respectability. If a mercantile 
 house in the country writes to its agent to ascertain tlie respectability 
 of a firm in London, the first inquiry is, " Who is the banker ? " And 
 when this is ascertained, the banker is applied to through the proper 
 channel, and he gives his testimony as to the respectability of his 
 customer. When a trader gives his bill, it circulates through the 
 hands of many individuals to whom he is personally unknown; but 
 if the bill is made payaljlc at a banking-house, it bears on its face a 
 reference to a party to whom the accepter is known, and who must 
 have some knowledge of his character as a tradesman. This may be 
 an immense advantage to a man in business as a means of increasing 
 his credit; and credit. Dr. Franklin says, is money. 
 
 By means of banking, people are able to preserve an authentic 
 record of their annual expenditures. If a person pays in to his banker 
 all the money he receives in the course of a year, and makes all his 
 payments by chccques, then by looking over his bank-book at the 
 end of the year he will readily see the total amount of his receipts and 
 the various items of his ex]-)enditure. This is very useful to jiersons 
 who have not habits of business, and who may therefore be in danger 
 of living beyond their means. A bank account is useful also in case 
 of disputed payments. People do not always take receipts for money
 
 lO PRINCIPLES OF MONEY AND BANKING 
 
 ihey pay to their tradesmen, and when they do the receipts may be 
 lost or mislaid. In case of death, or omission to enter the amount 
 in the creditor's books, the money may be demanded again. Should 
 the payment have been made in bank notes or sovereigns, the payer 
 can offer no legal proof of having settled the account; but if the 
 account was discharged by a checque on a banker, the checque can 
 be produced and the payment proved by the officers of the bank, 
 who can be subpoenaed for that purpose. 
 
 By keeping a banker people have a ready channel of obtaining 
 much information that will be useful to them in the way of their 
 business. They will know the way in which bankers keep their 
 accounts; they will learn many of the laws and customs relating to 
 bills of exchange. By asking the banker, or any of the clerks, they 
 may know which is the readiest way of remitting any money they 
 have to send to the country or to the Continent. If they have to 
 buy or sell stock in the public funds, the banker can give them the 
 name of a respectable broker who can manage the business; or should 
 they be about to travel, and wish to know the best way of receiving 
 money abroad, or be appointed executors to a will, and have to settle 
 some money matters, the banker will in these, and many other cases, 
 be able to give them the necessary information. 
 
 Banking also exercises a powerful influence upon the morals of 
 society. It tends to produce honesty and punctuality in pecuniary 
 engagements. Bankers, for their own interest, always have a rigid 
 regard to the moral character of the party with whom they deal; they 
 inquire whether he be honest or tricky, industrious or idle, prudent 
 or speculative, thrifty or prodigal, and they will more readily make 
 advances to a man of moderate property and good morals than to 
 a man of large property but of inferior reputation. Thus the estab- 
 lishment of a bank in any place inmiediately advances the pecuniary 
 value of good moral character. 
 
 4. THE GOLDSMITH BANKERS IN ENGLAND' 
 
 The development of banking in England was a mere outgrowth of 
 the business of the goldsmith, and was entirely unaccompanied by 
 legislation of any sort. The date at which the English goldsmiths 
 extended their operations from mere trading in money and the precious 
 metals to a regular system of private banking can be approximately 
 
 ' Adapted from Palgrave, Dictionary of Political Economy, II, 227. (London: 
 Macmillan & Co., 1910.)
 
 VARIOUS FORMS AND SERVICES OF BANKING ii 
 
 set at 1645. A pamphlet written in 1676 entitled The Mystery of the 
 Newfas/iioned Goldsmiths or Bankers Discovered informs us that the 
 goldsmiths had extended their previous business to lending money 
 and to most of the operations of modern banking, their largest 
 advances being made to the king upon the security of the taxes. The 
 goldsmiths allowed interest to those who placed money with them, 
 and the receipts which they gave for these deposits passed from hand 
 to hand as currency in much the same manner as Bank of England 
 notes do now. That this business soon grew considerably is evident 
 from the testimony of Sir Dudley North in 1680, who, on returning 
 from abroad after many years, was greatly astonished at the new 
 practice of merchants and others making payments by drawing bills 
 on bankers, i.e., goldsmiths. Hence it will be seen that the gold- 
 smiths, from the middle of the seventeenth century onward, assisted 
 greatly to accustom people to the use of a paper currency. 
 
 The English goldsmiths of the seventeenth century in issuing 
 their notes acted on quite a different principle from the continental 
 banks of that date. Most of the continental banks professed to be 
 merely banks of deposit of coin or bullion, and to hold in this form 
 the full value of the bills issued against these deposits. Our gold- 
 smiths and the Bank of England, following them, purported to give 
 in their bills the equivalent of what they had received, but never 
 pretended to take the deposit for any other purpose than that of 
 trading with it. They did not make their issues square exactly with 
 the deposits of coin and bullion entrusted to them, '"but coined their 
 own credit into money." In other words, they kept a compara- 
 tively small reserve as a basis for extensive deposit accounts in pre- 
 cisely the same manner as do modern commercial banks. This 
 resulted occasionally in difficulties. The first recorded run on the 
 private banks, or goldsmiths, was in 1667 after the disastrous defeat 
 suffered by the English fleet at the hands of the Dutch at Chatham. 
 Then the stoppage of the exchequer in 1672 seriously affected their 
 credit; even their honesty was impugned; and in course of lime 
 it was found that paper money issued on the security of a small 
 numljcr of individuals could not circulate profitably in competition 
 with that of a powerful joint-stock corporation, such as the Bank of 
 England became in spite of tlic goldsmiths' opposition.
 
 II 
 
 THE NATURE AND FUNCTIONS OF CREDIT 
 
 Introduction 
 
 An analysis of the principles underlying the institution of credit 
 is fundamental to an understanding of banking. Indeed, it is often 
 stated that banks are credit institutions, that banks deal in credit, or, 
 in a word, that credit and banking are virtually synonymous. Again, 
 it is often stated that modern industrial society is a credit society, 
 the implication being that credit is the most significant factor in the 
 present-day organization of industry and commerce. "Credit is the 
 life-blood of commerce, " " Credit is the heart and core of the modern 
 business structure," are other common statements emphasizing the 
 tremendous importance of this phenomenon that is called credit. 
 
 While credit may be readily enough defined, an understanding of 
 its real nature and significance is not so easUy gained. It is a concept 
 rather than a visible something; or perhaps one might better say that 
 it is incorporeal rather than tangible. It is therefore an elusive phe- 
 nomenon: "Now you see it and now you don't see it." At any rate, 
 the student usually has at first no little difficulty in grasping its essen- 
 tial nature. In particular, credit is very often confused with the 
 instruments of credit. One can see a check or a promissory note, and 
 such instruments are therefore likely to appear as the very essence 
 of credit. They are, however, merely evidences of the antecedent 
 credit process or transaction and as such are quite irrelevant to credit 
 itself. It should be observed in this connection that in the treat- 
 ment below the "Instruments of Commercial Credit" are discussed 
 in a separate division following the general anahsis of credit itself. 
 
 The subject may best be understood through a study of the reasons 
 for giving and receiving credit and an analysis of the many ways in 
 which it manifests itself in our everyday business activities. It will 
 be found that, whatever the particular classification, all credit opera- 
 tions involve at bottom a common principle; though there has been 
 much discussion as to just what this basis of credit is — a discussion, 
 however, which appears to have been largely due to a loose or differ- 
 ing use of words. The selection below on "The Basis of Credit"
 
 THE NATURE AND FUNCTIONS OF CREDIT 13 
 
 seeks to set forth the essential requirements for credit without 
 attempting to reduce the matter to a definite word or statement. 
 All credit operations will be found to involve an analysis more or less 
 similar to the one there given. 
 
 But while the granting of credit always involves a similar sort 
 of analysis, there emerges, in the use of the funds or goods borrowed 
 on credit, a sharp differentiation, one that is fundamental to the entire 
 study of banking; namely, the distinction between commercial and 
 investment credit. The one is related to the process of manufactur- 
 ing and marketing consumers' goods, converting raw materials into 
 finished products in the hands of their final consumers; the other, to 
 the creation of capital goods, machinery, tools and equipment, stores, 
 factories, railroads, etc. The former usually gives rise, because of 
 the very nature of the operations, to short-time credit instruments, 
 notes, drafts, checks, etc.; the latter as a rule to long-time credit 
 instruments, stocks, bonds, mortgages, etc. 
 
 In practice, however, this fundamental difference between com- 
 mercial and investment credit has not always been clearly perceived, 
 and some of the most serious problems of finance throughout our 
 history have arisen from the frequent failure to differentiate in 
 practice between investment and commercial operations. The read- 
 ings in the present chapter are designed to set forth these fundamental 
 differences, while the remainder of the book is devoted to an appli- 
 cation of the principles here outlined. Indeed, banking in all its 
 forms, so far as principles, as distinguished from the details of bank- 
 ing practice, are concerned, centers primarily around the use of either 
 commercial or investment credit. 
 
 5. A DEFINITION OF CREDIT* 
 By J. LAURENCE LAUGHLIN 
 
 With the division of laljor, the marvelous inventions of machinery, 
 the prolongation of industrial processes (so that a unit of product can 
 be more cheaply sold in the end), the growth and prodigious increase 
 of all forms of capital have naturally led, as a help to this movement, 
 to the evolution by society of the practical means by winch men of 
 affairs, when preparing for tlic future, are enabled willi llu- least 
 waste of efficiency to obtain control of property and capital in pro- 
 ductive efforts. As apart of this evolution, as a practical means to an 
 
 ■ Adapted from Principles of Money, pp. 72-76. (Charles Scribner's, Sons, 1903.)
 
 14 PRINCIPLES OF MONEY AND BANKING 
 
 end involving futurity, credit has come into existence. In its simplest 
 terms it is a transfer of commodities involving the return of an 
 equivalent at a future time. 
 
 Whenever the time element is eliminated from a transaction, it 
 will be seen at once that credit does not enter into it. A transfer of 
 goods for which an equivalent is rendered on the spot would never 
 be thought of as a credit operation. In fact, buying and selling for 
 an immediate consideration (or "cash") is generally understood to 
 be the very opposite of credit. By general agreement usage would 
 never allow an obligation entered into for the future delivery of per- 
 sonal service to be spoken of as credit; and rightly. A contract to 
 work ten hours a day for the coming three months should not be 
 regarded as a credit obligation. We may, therefore, agree to confine 
 credit operations to goods or property of a transferable kind. And, 
 in the conception of credit, with the transfer goes the right to make 
 any ordinary use of the goods; not merely to keep possession, but to 
 destroy entirely — and commonly with the purpose of reproduction — 
 if that is the best means of increasing product and getting back goods 
 for repayment. The specific goods borrowed need not always be 
 returned in kind; an equivalent will sufl&ce; not the same wheat, or 
 wool, or gold which was borrowed, but the equivalent of them. 
 
 Many contracts appear as results of credit transactions. For 
 instance, A borrows the means to finish the building of his house; 
 he obtains certain goods which he inserts into his structure, and gives 
 a promissory note to B for its repayment, secured by a pledge of his 
 property in the form known to the law as a mortgage. The note and 
 the mortgage are merely the legal methods adopted to make repay- 
 ment more certain; they are not essential in the credit itself. The 
 real importance should be put on the transfer to A of means return- 
 able to B in the future. Legal and customary forms intended to 
 secure repayment have created different devices in the same com- 
 munity, while the prevailing habits of different countries have given 
 rise to varying methods of obtaining the same result. In one situa- 
 tion, for instance, a book entry, in another a bill of exchange, in 
 another a promissory note is found most suitable. In short, the 
 circumstances of the loan, the opinions and convenience of the 
 parties to the contract, and the like, may bring into use a great 
 variety of legal forms, all resulting from the primary transfer of goods. 
 The undue insistence upon legal forms arising out of credit draws 
 attention away from the economic processes essential and intrinsic in
 
 THE NATURE AND FUNCTIONS OF CREDIT 15 
 
 it to the nonessential and external forms outside of it. The familiar 
 case of a bank loan illustrates this truth: there is the essential element 
 in the transfer of capital to the borrower on an obligation to return an 
 equivalent value at a fixed future time; but the evidences of the trans- 
 action, whether in the form of a book entry as a deposit, or the passing 
 of the bank's own notes, or the giving of a cashier's draft for the sum, 
 are secondary matters, or consequences, arising out of the original 
 credit operation. As said before, the latter merely form the machinery 
 for obtaining greater or less security with a view to repayment. 
 
 6. THE BASIS OF CREDIT 
 
 There has been a long-continued discussion over the basis of credit 
 operations, that is, the reasons why credit is extended by one person 
 to another. One party to the controversy has stoutly insisted that 
 confidence h the basis of all grants of credit; that if one did not have 
 confidence that a borrower would repay a loan he would never think 
 of making the loan, unless perchance for personal or philanthropic 
 reasons. Others have held that property, rather than confidence, is 
 the basis of all genuine credit transactions. Without attempting to 
 analyze the causes for this apparent difference of view, a tabular 
 exhibit of the points usually investigated before credit is extended by 
 up-to-date business concerns will show that while confidence must exist 
 before a loan will be granted, such confidence is based in part on the 
 borrower's property and in part on his personal characteristics. 
 
 The customary matters investigated may be grouped in two 
 general classes as follows: 
 
 Pertaining to Character of Borrower Pertaining to Character of th; Business 
 
 a) Record for honest dealing a) Ratio of quick assets to current 
 
 b) Personal habits liabilities 
 
 1. Church aftiliations b) Amount of capital invested and 
 
 2. Gambling and drinking proportion owned 
 tendencies c) Character of .slock of goods 
 
 3. Political ambitions d) Rate of turnover of stock 
 
 4. Styleof living; wife's social e) Location of business, and character 
 ambitions of competition 
 
 c) Reputation for ability f) Insurance carried 
 
 1. Common-sense and 
 shrewdness 
 
 2. Age and general experience 
 
 3. Success in this line of busi- 
 ness 
 
 4. Success in other lines of 
 business
 
 l6 PRINCIPLES OF MONEY AND BANKING 
 
 It will be apparent that these points are not entirely unrelated. 
 A man of excellent lousiness al)ility, for instance, would have his busi- 
 ness properly organized, and on the other hand, if it were found that 
 a business was Doorly equipped and managed, it would be certain 
 that the man's t)usiness experience or business capacity was strictly 
 limited. Investigation of these two kinds, however, usually serves to 
 furnish a more adequate basis for a sound judgment of the risks in- 
 volved. Perhaps one may conclude from this analysis that before 
 deciding to extend credit one should at any rate have confidence in 
 two points: (i) in the abihty of the borrower to pay as promised; 
 and (2) in his wilUngness or intention to pay. One is a matter of 
 property and business ability; the other a question of honesty and 
 business reliability. 
 
 7. THE VARIOUS KINDS OF CREDIT 
 
 The modern world has been called a credit society. The Germans, 
 for instance, classify the stages in the evolution of industry as fol- 
 lows: barter economy; money economy; credit economy. The 
 mechanism of credit would therefore appear to be the center and 
 core of modern industrialism. While this characterization may well 
 be pushed too far, it is certainly true that credit today is found in 
 practically every variety of business transaction and is in fact the 
 basis for the great mass of commercial exchanges. The divisions of 
 credit have been classified as follows: Public Credit; Capital Credit; 
 Mercantile Credit; Individual or Personal Credit; and Banking 
 Credit. 
 
 By Public Credit is meant chiefly the borrowing operations of 
 governments, whether national, state, or local, through the issue of 
 interest-bearing securities. The government promises to pay interest 
 on a bond from year to year and to repay the principal at some stated 
 future date. The purchaser of the bond accepts the government's 
 promise of intention to pay and has faith in its ability to keep that 
 promise. The government by means of its credit is therefore able 
 to secure funds for present needs. An issue of paper money by the 
 government is another example of a credit operation. Even without 
 any fund for redemption purposes an issue of paper money will not 
 for a time depreciate to worthlessness ; a promise of ultimate redemp- 
 tion will give it some value so long as faith in the word of the govern- 
 ment is not entirely shattered. At any rate, a partial reserve in coin.
 
 THE NATURE AND FUNCTIONS OF CREDIT 17 
 
 as in Ihe case of our greenbacks at present, will maintain the value of 
 paper currency. To the extent of the uncovered issue we have a 
 pure credit currency. 
 
 By Capital Credit, or Industrial Credit, to employ another term, 
 is meant the credit used by corporations in procuring the necessary 
 capital required in their business operations. The corporation agrees 
 to return to the purchasers of its bonds at some future date the 
 equivalent of the funds borrowed, with interest. The bondholder 
 thus extends funds to the corporation because he believes the credit 
 of the corporation is good. The purchaser of stock, also, trusts his 
 funds to the managers of a corporation, and it is understood that he 
 is to receive dividends in the future (if earned) and ultimately, if the 
 business is liquidated, a return of his share of the capital. There 
 is the obvious difference between a holder of stock and of bonds that 
 one is an owner and the other a creditor, that the returns to the one 
 are wholly contingent, and to the other defmite, in so far as the mort- 
 gage is adequate. But credit, through the entrusting of one's funds 
 to a third party, is an essential element in both. 
 
 It is the usual practice to exclude from Capital Cre<lit investments 
 made by individuals in a business partly or largely their own, such as 
 a partnership. The difference between this sort of investor and 
 the purchaser of securities, says Prendergast, is this: "Where a few 
 men invest their funds in a business, those funds invariably represent 
 their entire available means of wealth. They are working for them- 
 selves alone, and the profits of the business, whatever the\' may be, 
 go to the owners alone. These owners .... have placed all they 
 
 possess at the risk of the business On the other hand, the 
 
 general investor, who is seeking merely a nominal or reasonable inter- 
 est upon the funds invested, is careful to so place those funds that 
 his investments will be very well distributed," with a consequent 
 lessening of the total risk. To use the economic terminology, the one 
 is primarily a risk-taker and after profits, while the other is, as far as 
 possible, a risk-avoider and is satisfied with interest alone. A better 
 distinction between the two types of investment, however, is that 
 credit, so far as fixed capital is concerned, is almost negligible in the 
 case of the general investor, while with the purchaser of securities 
 credit is the very basis of the transaction. 
 
 Mercantile Credit is the credit used by producers, wholesalers, 
 commission merchants, retailers, etc., in connection with the manu- 
 facture and sale of commodities, that is, with the movement of goods
 
 i8 PkiN('irij;s OF money and ranking 
 
 from first producer to ultimate consumer. For instance, a manu- 
 facturer who buys raw materials to be made into finished com- 
 modities may agree to pay the producer of the raw materials only after 
 he has sold his product. He has thus been " trusted " by the producer ; 
 there has arisen a " time obligation," a future payment. Or the manu- 
 facturer may at once pay the producer with cash, procuring the cash 
 by a loan from the bank, which he promises to repay after the goods 
 are manufactured and sold. In this case he has used his credit with 
 the bank instead of with the producer of the raw materials; but it is 
 obvious that the nature of the operation is the same. A wholesaler 
 or retailer may likewise purchase the goods he wishes to sell, on time, 
 or on funds borrowed from a bank, as the case may be, agreeing to 
 repay the loan after the goods are sold. 
 
 Mercantile Credit is to be distinguished from Capital or In- 
 dustrial Credit by the character of the business which employs it 
 and the nature of the use to which the funds are put. A character- 
 istic feature of Mercantile Credit is that it usually runs for a short 
 time, whereas Industrial Credit is usually extended for long periods. 
 Mercantile Credit is represented by promissory notes and bills of 
 exchange rather than by bonds or stock certificates. 
 
 Personal or Individual Credit obviously takes its name from the 
 fact that it is connected with individuals rather than with public or 
 private corporations. It is the means by which an individual may 
 secure goods for consumption purposes without an immediate payment 
 of cash. The laborer who settles his bills on the weekly pay day, the 
 salaried man who pays by check at the end of the month, and the 
 farmer who settles his account at the village store when he sells his 
 crops are cases in point. Personal Credit is distinguished from other 
 credit in part by the character of the security furnished by the bor- 
 rower, and in part by the use that is made of the things borrowed. 
 The basis of the security is an indirect one, consisting primarily, not of 
 actual property in hand, but of a recognized earning power from per- 
 sonal or professional services. The things borrowed are generally 
 used for immediate consumption rather than for further production. 
 Such credit is therefore often called "Consumption Credit." It is 
 also sometimes spoken of as "Retail Credit," because it is used 
 primarily in retail transactions. This, however, is confusing, because 
 such a term might mean the credit of the "retailer" himself. 
 
 Personal Credit is usually extended without requiring a deposit 
 of collateral as security and even without a written promise to pay in
 
 THE NATURE AND FUNCIIONS OF CREDIT 19 
 
 the future. A promise is, however, implied,. and the entry on the 
 books of a retail store is the evidence of the credit transaction. "Book 
 Credit" is a name commonly used in this connection; but this name 
 describes not so much the character of the credit operation as the 
 manner of "evidencing" the credit transaction. The credit on the 
 books is an evidence that a personal credit has been granted. 
 
 The fifth form of credit has been called Banking Credit. As is 
 well known, banks furnish funds to borrowers of every description; 
 it is to the banks that one in need of credit naturally turns. But by 
 Banking Credit is not meant the credit extended to individuals, cor- 
 porations, merchants, and governments. Such forms of credit fall 
 within the classifications given above. The essence of Banking Credit 
 may be discovered only in the answer to the question. Where do the 
 banks procure the funds which they loan to the business world? 
 These funds are procured in part from the banks' own capital, and 
 in part from the funds that have been left with them by individual 
 depositors; but in the main it is through the use of their own 
 credit. 
 
 A bank uses its own credit in much the same way as does an indi- 
 vidual. A man who is responsible morally, who has a reputation for 
 business honesty and ability, and who has security in the form of 
 commodities that enter into trade, is able to borrow on his credit. 
 He uses his good name and his property as means of securing funds 
 for immediate use. A bank, likewise, if it possesses the confidence 
 of the community, is able to extend its business by means of its credit. 
 The simplest use of its credit is found in the entrusting of funds by 
 depositors with the bank — for safe-keeping or use, as the case may be. 
 There is a more important way, however, in which our large commer- 
 cial banks use their credit. A bank with Sioo,ooo cash on hand is 
 able by means of its credit to do a business ecjual to five or six times 
 this amount. This is accomplished through borrowing on its credit. 
 Just as a government borrows when it issues paper currency, so a 
 bank borrows when it creates obligations, either in the form of bank 
 notes or deposit accounts against which checks may be drawn. The 
 ordinary commercial bank usually owes on demand several times the 
 amount of its cash. A bank is safe in thus extending its obligations 
 so long as the management is efllcient and the resources other than 
 cash are ample. There are some special problems involved in tlu' 
 use and control of Bank Credit, but in essence it does not differ from 
 the other forms of credit that have been enumerated.
 
 20 PRINCIPLES OF MONEY AND BANKING 
 
 8. COMMERCIAL VERSUS INVESTMENT CREDIT 
 
 Viewing credit apart from particular groups of persons or organi- 
 zations, such as governments, corporations, wholesalers and retailers, 
 banks, and private individuals, two distinct types of credit may be 
 distinguished, namely, commercial and investment credit. This clas- 
 sification is of the foremost importance from the standpoint of eco- 
 nomic analysis and a clear understanding of the principles underlying 
 the various forms of banking operations. 
 
 Investment credit is that which is used in the financing and 
 development of business enterprises such as railroads, factories, work- 
 shops, stores, farms, and mines. The funds borrowed are invested 
 in fixed or durable forms of capital goods, as distinguished from con- 
 sumptive goods. In consequence, the borrower does not expect to 
 be able to repay the loan within a few weeks or months; rather, he 
 plans to pay the principal of the loan out of the accumulated earn- 
 ings of the business in the course of several years. The lender, 
 similarly, regards such a disposal of his funds as permanent; hence 
 the term investment. 
 
 Commercial credit, on the other hand, is used in financing the 
 manufacture and marketing of goods, and it has to do only with con- 
 sumptive goods. It is only another name for the mercantile credit 
 described in the previous selection, viewed from another angle — that 
 of the use to which the funds borrowed are put. Unlike the borrower 
 of investment funds, the borrower here wishes to use his funds only 
 temporarily. A concrete case will serve to illustrate the difference: 
 A borrows, let us say, $10,000 and purchases a stock of goods with the 
 money. Two months later he sells these goods for $11,000, or at a 
 profit of 10 per cent. The goods purchased thus furnish the direct 
 means of Hquidating the loan. The borrower for investment purposes, 
 on the other hand, invests the $10,000 in alactory. He does not con- 
 template selUng the factory within a few weeks or months. On the 
 contrary, he expects to use the factory for many years in the manufac- 
 ture of commodities. It may take ten years or more before the 
 accumulated profits will permit the repayment of the principal of the 
 loan. The latter is a long-time process, requiring years for fruition; 
 the former a short- time operation, carried to completion in a few weeks 
 or months. It is by means of the former that industries are developed 
 and continued; it is by the latter that the manufacture and marketing 
 of goods are accomplished, that commodities are transferred through
 
 THE NATURE AND FUNCTIONS OF CREDIT 21 
 
 purchase and sale from the original producer to the hands of the 
 ultimate consumer. 
 
 9. THE IMPORTANCE OF INVESTMENT CREDIT 
 
 The importance of investment credit has often been underesti- 
 mated by writers on the subject of credit. Nevertheless it plays quite 
 as important a role in the world of business as does commercial credit. 
 By means of government credit the individuals who purchase bonds 
 receive interest on funds that might otherwise be either unemployed 
 or less safely or remuneratively invested, while the government, on 
 its part, is enabled to build a Panama Canal, wage wars of self-defense 
 or conquest, construct public roads and buildings, street railways, 
 electric lighting plants, etc. In so far as a government 'can perform 
 certain services for society more effectively than can private business, 
 there is clearly a direct social gain arising from the uses of this form 
 of credit. 
 
 By means of capital or industrial credit the surplus funds of 
 individuals are turned back into the channels of productive industry; 
 they are transferred from non-productive to productive employments, 
 thereby increasing the wealth and productive power of society. 
 These private funds are converted into railroads, factories, shops, and 
 farms which would not yet have come into existence without the use 
 of investment credit. 
 
 An idea of the enormous extent of investment credit may be 
 gained from the statistics of the bonds and stocks listed on the New 
 York Stock Exchange, The principal of the bonds listed on the 
 exchange amounts to a total of Si4,3 10,553,000, classified in groups 
 as follows: 
 
 Government and municipal, including foreign $3,357,379,849 
 
 Railroad 8,213,374,750 
 
 Public utility and street railway 1.475. 567. 59° 
 
 Manufacturing, industrial, and miscellaneous 1,264,232.950 
 
 The face value of the listed stocks amounts to $13,084,073,923. 
 
 It is estimated that for the country as a whole the bond houses 
 every year market in the neighborhood of $2,000,000,000 of bonds. 
 The significance of these enormous figures may be realized when one 
 considers that the total wealth of the entire nation is estimated at 
 about $120,000,000,000.
 
 22 I'RIXCIPLKS OF iMONKY AND liA\KI.\(; 
 
 lo. 11 IK COMPLICATED SYSTEM OF COMMERCIAL CREDIT 
 
 It has become almost a trite saying that credit is the very hfe- 
 blood of commerce and that without its wonderful assistance the 
 enormous business of the modern world would be quite impossible. 
 It is a commonplace, also, that the credit structure is a very uncertain 
 mechanism, one that periodically breaks down, involving hundreds 
 of businesses in financial ruin and indirectly demoralizing the com- 
 merce of an entire country. The precise manner, however, in which 
 this credit structure is built up, with its intricate and complicated 
 interrelations, is often not clearly understood. It is the purpose of 
 the following analysis to trace these intricate relations and show the 
 complicated interdependencies in the fabric of commercial credit. 
 
 Commerce relates to the movement of goods from the hands of 
 those who perform the first operation in production to their final 
 resting-place with the ultimate consumers. Commercial credit con- 
 nects itself, therefore, with the various purchases and sales that are 
 made in the extended process of marketing commodities. The nature 
 and place of credit in this marketing process may perhaps best be made 
 clear by assuming first a society that does business on a cash basis 
 only. 
 
 To illustrate the process, let us begin with some raw materials in 
 the form of iron ore and coal which are to be manufactured into farm 
 machinery for sale to farmers. These raw materials normally pass 
 through the hands of the following classes of business men: (i) the 
 manufacturer of machinery; (2) the wholesale dealer; (3) the retail 
 merchant, from whom they are purchased by the farmer. In the 
 absence of credit the producer of raw materials would have to possess 
 enough capital to defray the cost of producing these materials. Let 
 us assume he sells them for cash to the manufacturer, who pays for 
 them with ready money. In turn, the manufacturer, after converting 
 the materials into finished machines, sells them in a new form to the 
 wholesale dealer, who pays for them out of funds accumulated for the 
 purpose. The wholesaler next passes them on to the retailer for cash, 
 and the retailer disposes of them to the farmer for cash. In each case 
 cash accumulated and in hand ready for payment is the significant 
 feature. We have thus far, however, but half completed the com- 
 mercial circle. 
 
 The farmer does not purchase the machinery as an end in itself. 
 With it he produces crops for sale. He sells his annual produce to a
 
 THE NATURE AND FUNCTIONS OF CREDIT 23 
 
 local dealer for cash ; the local dealer sells these products to the com- 
 mission merchant for cash; the commission merchant passes them on 
 for cash to a retail store; and the storekeeper sells them for cash to 
 his customers, who happen to be, let us assume, the laborers in the 
 mines of iron and coal who were the original producers of the raw 
 materials that went to the making of farm machinery. Thus we have 
 the complete round of production. 
 
 In the foregoing analysis we have assumed each sale to be for 
 cash; no one waits for his payments, and all keep the slate clear as 
 they go. With such a method there is little danger of a general 
 breakdown. If a purchaser has not the cash with which to pay for 
 goods, he is refused the sale. Hence the seller is never dependent upon 
 the future solvency of his purchaser. Sales may be restricted by a 
 slackening of the industrial process; but there are never maturing 
 obligations to meet and there is never a chain of failures, each due to 
 the previous one. Let us now introduce credit into the system as 
 outlined above. 
 
 It is evident that the farmer who buys the farm machinery is the 
 ultimate demander of the raw materials purchased by the manufac- 
 turer. In the final analysis the farmer's cash pays for the labor of the 
 workers in the mines of iron and coal. Or, travehng around the cir- 
 cuit in the opposite direction, it is the laborer's cash that really pays 
 for the crops that have been produced by the farm machinery. 
 Without credit, however, it is impossible for the precise cash paid b}- 
 the farmer to the retailer to be used by the latter in paying the 
 wholesaler, and so on up to the producer of the raw materials. 
 In introducing credit into this system it will be necessary to assume 
 for the moment a situation that does not represent the actual stale 
 of affairs. The corrective will be given in the paragraph following. 
 
 Let us assume that the producer of raw materials possesses enough 
 cash to produce $10,000 worth of raw materials, paying his laborers 
 in advance. Now let us assume that he sells these materials to the 
 manufacturer on twelve months' time; that is, he agrees to wait twelve 
 months for his pay. The manufacturer in the course of three months 
 converts these raw materials into finished machinery and sells the 
 machines on nine months' time to the wholesaler. In a month the 
 wholesaler disposes of the machinery, letting the retailer have eight 
 months in which to pay. In another month the retailer sells the 
 machines to a farmer, agreeing to wait seven months Four months 
 later ihc farmer sells his crops on three months' time to a local dealer,
 
 24 I'RINCIPLES OF MONEY AND BANKING 
 
 who sells them in a month to a commission merchant on two months' 
 time, the commission merchant in turn selling on one month's time 
 to a retail store, and the retailer disposes of them within a month 
 to the laborers who work in the mines, for cash received by them for 
 producing raw materials. Cash would thus be paid to the retailer 
 of farm produce just twelve months from the date of the first sale of 
 the raw materials; and if this cash should be passed on promptly 
 through the hands of the commission merchant, local dealer, farmer, 
 retailer, wholesaler, and manufacturer to the original producer it 
 could liquidate all the obligations as per schedule. 
 
 In actual practice, however, twelve months would be a long time 
 for the producer to wait for his payment. Similarly, the periods of 
 nine, eight, and seven months would be too long for the others to 
 wait, for further production would be more or less halted meanwhile. 
 In practice, therefore, credit extension is for much shorter periods, 
 usually from one to four months, whether it be to the producer of 
 raw materials, the manufacturer, or the middleman. How is this 
 made possible ? 
 
 The manufacturer, for instance, may give his note to the producer 
 for three months and pay as soon as he sells to the wholesaler. The 
 question now is. Where does the wholesaler get the funds with which 
 to pay ? Does he not have to wait until the retailer has disposed of the 
 goods ? This is where the banks come to the assistance of commerce. 
 The wholesaler sells to the retailer on time, but instead of delaying 
 his payment to the manufacturer, he procures a loan from his bank, 
 giving as security therefor either his own note or the notes received 
 from the retailer.' With this loan the wholesaler may pay the manu- 
 facturer at once. The loan from the bank is repaid when the retailer 
 settles with the wholesaler. Therefore the bank instead of the dealer 
 undertakes the waiting. 
 
 In the foregoing illustration it was the wholesaler who procured the 
 loan from the bank. It may, m fact, be any one or several in the 
 chain of buyers and sellers. The manufacturer, for instance, instead 
 of asking the wholesaler to pay cash could accept a promissory note 
 instead, and then sell this note to a bank for cash, that is, have 
 
 ' The practice in this country has commonly been for the wholesaler to sell 
 on open account, requiring no note, the retailer paying shortly in cash obtained 
 by borrowing on his own note. Both wholesalers and retailers, however, have 
 occasion to borrow from the banks.
 
 THE NATURE AND FUNCTIONS OF CREDIT 25 
 
 it discounted. Or the retailer might borrow from a bank and pay 
 cash to the wholesaler. Similarly, on the other side of the circle, the 
 commission merchant may pay cash to the local dealer, borrowing 
 from a bank for the purpose; and the retailer of the foodstulTs may 
 sell to his customers on credit and borrow from a bank while waiting 
 for his returns. It is quite immaterial which party procures the 
 assistance of the banks, though in practice it usually becomes the 
 custom for only certain ones in the chain to do so regularly. 
 
 The commercial structure which we have thus outlined is seen to 
 be very closely interrelated; and it is because of this interdependence 
 of factors that a "credit breakdown" has such far-reaching conse- 
 quences. The credit circle cannot be broken at any point without 
 more or less seriously disrupting the entire system. Supix)se, for 
 instance, that a long drouth or heavy rains ruin the agricultural pro- 
 duce and render it impossible for the farmer to pay the retailer as 
 promised. This afifects the retailer's ability to pay the wholesaler, 
 and in turn the wholesaler's ability to pay the manufacturer, or his 
 bank, and so on around the entire circle. Or suppose a strike in the 
 manufacturing establishment should prevent the manufacturer from 
 filling his selling orders. It becomes impossible for him to pay the 
 producer on time; and the latter in turn is unable to meet his obliga- 
 tions as they fall due. The halting of the manufacturing process 
 may compel the producer to restrict his output of raw materials, and 
 hence discharge laborers. This affects the sales of the retailer of the 
 farm produce, and hence his ability to pay the commission mer- 
 chant, and so on around the circle. Obviously numerous other 
 examples of this sort might be enumerated. 
 
 Whenever there is a break in the delicate structure at any point, 
 there is always an attempt to stop the gap by calling upon the banks 
 for assistance. Whoever finds himself unable to pay on time rushes 
 to his banker for a loan. Indeed, if there is but a well-grounded fear 
 that difficulties are likely to come, dealers often go at once to the 
 banks for loans in anticipation of trouble to come. Without here 
 going into an analysis of the responsiljility thus placed ujxjn tlie 
 banking institutions, it should be emphasized that the success 
 with which a community may pass through a period of disrupted 
 credit operations depends upon the ability of tlie banks to expand 
 their own credit sufficiently to tide the commercial world over tlie 
 emergency.
 
 26 PRINCIPLES OF MONEY AND BANKING 
 
 II. IS CREDIT A FORM OF CAPITAL?' 
 
 By J. R. Mcculloch 
 
 It is in the effects resulting from the transference of capital from 
 those who are willing to lend to those who are desirous to borrow 
 that we must seek for the advantages derivable from credit. All the 
 operations supposed to be carried on by its agency, how extensive and 
 complicated soever they may seem, originate, in fact, in a change in 
 the actual holders or employers of capital. Nothing, indeed, is more 
 common than to hear it stated that commodities are produced, and 
 the most extensive operations carried on, by means of credit or con- 
 fidence; but this is an obvious mistake. Wealth cannot be produced, 
 nor can any sort of industrious undertaking be entered upon or com- 
 pleted, without the aid of labor and capital; and all that credit does, 
 or can do, is, by facilitating the transfer of capital from one indi- 
 vidual to another, to bring it into the hands of those who, it is most 
 probable, will employ it to the greatest advantage. A few remarks 
 will render this apparent. 
 
 It is plain that, to whatever extent the power of the borrower of 
 a quantity of produce, or a sum of money, to extend this business, 
 may be increased, that of the lender must be equally diminished. The 
 same proportion of capital cannot be employed by two individuals 
 at the same time. If A transfers his capital to B, he necessarily, by 
 so doing, deprives himself of a power or capacity of production which 
 B acquires. It is most probable, indeed, that this capital will be more 
 productively employed by B than by A; for the fact of A having lent 
 it shows that he either had no means of employing it advantageously 
 or was disinclined to take the trouble; while the fact of B having 
 borrowed it shows that he conceives he can advantageously employ 
 it or that he can invest it so as to make it yield an interest to the 
 lender and a profit for himself. It is obvious, however, that except 
 in so far as credit may thus bring capital into the possession of those 
 who, it may be fairly presumed, will employ it most beneficially, it 
 can contribute nothing to the increase of wealth. 
 
 The most common method of making a loan is by selling com- 
 modities on credit, or on condition that they shall be paid at some 
 future period. The price is increased proportionally to the length of 
 credit given; and if any doubt be entertained with respect to the 
 punctuahty or solvency of the buyer, a further sum is added to the 
 
 •Adapted from Principles of Political Economy (1843), PP- 121-25.
 
 THE NATURE AND FUNCTIONS OF CREDIT 27 
 
 price in order to cover the risk that the seller or lender runs of not 
 recovering the price, or of not recovering it at the stipulated period. 
 This is the usual method of transacting business where capital is 
 abundant and confidence general. 
 
 When produce is sold in the way now described, it is usual for the 
 buyers to give bills to the sellers for the price, payable at the expira- 
 tion of the credit; and it is in the effects growing out of the negotiation 
 of these bills that much of that magical influence that has sometimes 
 been ascribed to credit is believed to consist. Suppose, to illustrate 
 this, that a paper-maker. A, sells to a printer, B, a quantity of paper, 
 and that he gets his bill for the sum, payable at twelve months after 
 date: B could not have entered into the transaction had he been 
 obliged to pay ready money; but A, notwithstanding he has occasion 
 for the money, is enabled, by the facility of negotiating or discounting 
 bills, to give the requisite credit without disabling himself from prose- 
 cuting his business. In a case like this bolh parties are said to be 
 supported by credit; and as cases of this sort are exceedingly common, 
 it is contended that half the business of the country is really carried 
 on by its means. All, however, that such statements really amount 
 to is that a large proportion of those engaged in industrial under- 
 takings do not employ their own capital, but that of others. In the 
 case in question, the printer employs the capital of the paper-maker, 
 and the latter employs that of the banker or broker who discounted 
 the bill. This person had, most likely, the amount in spare cash lying 
 beside him, which he might not well know what use to make of; but 
 the individual into whose hands it has now come will immediately 
 apply it to useful purposes, or to the purchase of the materials, or the 
 payment of the wages of the workmen employed in his establishment. 
 It is next to certain, therefore, that the transaction will be advan- 
 tageous. But still it is essential to bear in mind that it will be so, not 
 because credit is of itself a means of production, or because it can 
 give birth to capital not already in existence, but because, through 
 its agency, capital finds its way into those channels in which it has the 
 best chance of being profitably employed. 
 
 The following extract from the evidence of Mr. Ricardo before 
 the committee appointed by the House of Lords in 18 19, to inciuire 
 into the expediency of the resumption of cash payments by the Bank 
 of England, sets the principle we have been endeavoring to establish 
 in a very clear point of view:
 
 28 PRINCIPLES OF M0NI:Y AND BANKING 
 
 "Do you not know," Mr. Ricardo was asked, "tlmt when there 
 is a great demand for manufactures, the very credit which that cir- 
 cumstance creates enables the manufacturer to make a more extended 
 use of his capital in the production of manufactures?" To this Mr. 
 Ricardo answered, "I have no notion of credit being at all effectual 
 in the production of commodities; commodities can only be pro- 
 duced by labor, machinery, and raw materials; and if these are to 
 be employed in one place, they must necessarily be withdrawn from 
 another. Credit is the means, which is alternately transferred from 
 one to another, to make use of capital actually existing; it does not 
 create capital; it determines only by whom that capital shall be 
 employed; the removal of capital from one employment to another 
 may often be very advantageous, and it may also be very injurious." 
 
 Mr. Ricardo was then asked, "May not a man get credit from a 
 bank on the securit)^ of his capital which is profitably employed, 
 whether invested in stock or land; and may he not, by means of that 
 credit, purchase or create an additional quantity of machinery and 
 raw materials, and pay an additional number of labourers, without 
 dislodging capital from any existing employment in the country?" 
 To this Mr. Ricardo answered, "Impossible! an individual can pur- 
 chase machinery, etc., with credit; he can never create them. If he 
 purchase, it is always of someone else; and, consequently, he dis- 
 places some other from the employment of capital." 
 
 12. THE MONETARY FUNCTION OF COMMERCIAL CREDIT' 
 By J. LAURENCE LAUGHLIN 
 
 Credit being in its simplest form a transfer of goods involving an 
 obligation to return an equivalent in the future, we find in practice, 
 however, that credit has in modern society developed instruments that 
 are akin to money. Clearly enough, it does not act as a standard 
 or common denominator. Its relation to the subject of money is 
 to be found in the fact that society has in the forms of credit created 
 a medium of exchange. Credit is the natural result of the premium 
 always existing in business transactions to evolve a means of avoid- 
 ing the risk and loss attending the actual transfer of the valuable 
 standard; and it remains in use because transactions involving futu- 
 
 ^ Adapted from Principles oj Money, pp. 82-85. (Charles Scribner's Sons, 
 1903)
 
 THE NATURE AND FXJNCTIONS OF CREDIT 29 
 
 rity arc thereby rendered possible and legitimate, to the immense 
 advantage of commerce and industry. It is the evolution of a 
 refined system of barter, rendered necessary by division of labor, 
 the interdependence of industries, and the introduction of the 
 time element. 
 
 The reason for the common belief that credit is based upon, and 
 limited by, money is evidently to be found in the fact that all the 
 evidences of credit transactions (such as notes, bills, checks, book 
 credits) are drawn in terms of money; and that every business man 
 assumes that his checks, or deposits account, or bills payable can be 
 liquidated in money. If this were not so, he reasons, what would be 
 their value to him in preparing to meet his own obligations ? Para- 
 doxical as it may seem, it is absolutely true that the mass of obliga- 
 tions could not possibly be, and were never really intended to be, 
 liquidated in actual money. The fundamental truth is that the 
 quantity (and value) of goods vastly overpasses the quantity (and 
 value) of money; only a portion of the wealth of any community is, 
 or ought to be, invested in its machinery of exchange. Provided that 
 exchanges go on efficiently, the less of the country's wealth invested 
 in this unproductive form the better. To speak as if a country were 
 better off the greater the amount invested in its money machinery is 
 to glorify the fact of its backward commercial growth; such an 
 attitude would imply that a farmer could turn the soil better with a 
 plow decorated with costly precious stones when one worth one one- 
 thousandth as much would do the work quite as well. Inasmuch 
 as all the population of a walled city do not wish to pass through 
 its gates at once, a few gates suflSce at any one time; so likewise 
 not all of the mass of goods are seeking exchange at the same 
 moment. As a consequence, the amount of money needed for 
 exchange is, of course, far less than the total amount of goods. 
 This is an economic commonplace. 
 
 All transactions cannot be liquidated at once in actual money; 
 and, if it were possible, that is not a process which would most eco- 
 nomically satisfy our daily wants. The best machinery of exchange 
 is that which enables our own product to be most easily exchanged 
 for the various goods which we desire; and money is but one of the 
 means to the end. Credit is, also, an important instrument, or 
 medium, of exchange. Certain reserves of money are necessary parts 
 of tlie system, to provide against lack of confidence, general distrust.
 
 30 PRINCII'LIOS OF MONEY AND BANKING 
 
 and unreasoning human nature. As McLeod says: "Though in every 
 system of credit there must be an ultimate reserve of specie, yet that 
 ultimate reserve does not bear a constant, fixed ratio to the quantity 
 of credit: but it mainly depends on the organization of credit: the 
 more highly organized the system of credit is, the less is the requisite 
 amount of the ultimate reserve of specie. Any amount of credit 
 may be created and extinguished without any relation to the quantity 
 of money."
 
 m 
 
 INSTRUMENTS OF COMMERCIAL CREDIT 
 
 Introduction 
 
 Credit instruments probal)ly originated soon after, if not simul- 
 taneously with, the development of credit itself, for an obligation 
 entered into upon a credit basis would appear to require almost as 
 a matter of necessity some evidence of the transaction involved. 
 It is of course possible that credit operations may have at one time 
 been extensively conducted without the use of written proof thereof; 
 but there appears to be no historical evidence that such informal 
 credit extension was ever the rule rather than the exception. With- 
 out doubt there were always many "character" loans, however, 
 where one's word was as good as his bond, even as now there are 
 between friends informal loans where no note is required. But in all 
 probability some form of note or bill of exchange was generally used 
 almost from the very beginning. There is abundant proof that these 
 instruments were well developed among the Greeks and Romans and 
 even among the Assyrians and Babylonians. 
 
 At the present time a great part of credit is e\adenced merely 
 by entries in account books, and is known as book credit. Such 
 informal credit extension is quite as significant as any from one 
 standpoint, but from another point of \iew it is much less imj>ortant 
 than formal credit. Where a note or 1)111 of exchange arises from a 
 credit operation, we have at hand tangible legal instruments that may 
 be used in a modified way as media of exchange, while in the bank 
 check we have an instrument that in the modern business world has 
 largely superseded the use of money itself in the making of exchanges. 
 Bonds and stocks arising from investment transactions also serve to 
 some extent in lieu of money; but it is only in the instruments of com- 
 mercial credit tliat we have a generally acceptable substitute for 
 money. 
 
 The adaptability of these instruments to serve as media of 
 exchange has long been recognized, and there has been graduall>- 
 developed a definite body of law governing their use. The funda- 
 mental principle which has given them the wide circulation they now
 
 32 PRINCIPLKS or MONEY AND BANKING 
 
 possess is known as negotiability, whereby one of these instruments 
 may come to have a good title even though there was originally a 
 flaw in it; that is to say, when it gets into the hands of a third party 
 it may, under certain conditions, be a better instrument than when 
 in the possession of the original holder. This principle, so far as our 
 own legal history is concerned, was developed in the English courts 
 to meet the needs of mediaeval trade. In due time it was extended 
 to America, where, in the various states, it developed along similar 
 lines, though with so many local variations that the bar association 
 eventually undertook the securing of identical legislation on the 
 subject in all the states. A uniform negotiable instruments law, how- 
 ever, has only recently been secured. 
 
 13. TYPES OF COMMERCIAL CREDIT INSTRUMENTS 
 
 A promissory note is an unconditional written promise by X 
 (the maker) agreeing to pay, either on demand or at a definite future 
 date, a sum of money to Y (the payee) or to Y's order or to bearer. 
 It may or may not designate the place at which payment is to be made. 
 Promissory notes may be issued by institutions and governments 
 as well as by individuals. Bank notes. United States notes, certifi- 
 cates of deposit, etc., are forms of the promissory note. 
 
 Due- 
 
 (■Y^ -jdi'^^ '^-"^--^y^. - ofter date for value received the undersigned promise to pay to the order of 
 
 ^ "mE National City Bank of Chicago 
 
 C?v<rVr.<^ A^K.-vx-'i^ve^ <a-.-f ^/ ^ ,'<^0< ~' DOLLARS 
 
 at Its Banking House In Chicago Illinois, with interest AFTER MATURITY at the rate of seven per cent per 
 annum until paid and with costs of collection and a reasonable attorney fee if not paid at maturity. Presentment' 
 and demand for payment, notice of non-payment, protest and notice of protest are each and all hereby waived by 
 the makers, endorsers and guarantors Jointly and severally. Any indebtedness owing from said bank or legal 
 holder hereof to the undersigned or to any endorser or guarantor may be appropriated and applied by said bank 
 or legal holder on this note at any time either before or after maturity of this note and wlUmit demand upon or 
 notice to any one. 
 
 Ah iC^_c.'lf'''y'i^^^^*^ C{^t/Z- 
 
 -^ 
 
 To indorse a note the payee writes his name across the back of 
 the instrimient. This act makes the payee, like the maker, responsi- 
 ble for the payment of the note. Notes may also be indorsed by third 
 parties, thereby adding to the number of those responsible for the 
 payment of the note. Notes which show only one person responsible 
 for the payment are called single-name paper. Those which have two 
 or more signers are called double-name or three-name paper.
 
 INSTRUMENTS OF COMMERCIAL CREDIT ^;^ 
 
 A bill of exchange is an unconditional written order, signed by X 
 (the person giving the order — the drawer), ordering Z (the drawee) 
 to pay, either on demand or at a definite future date, a sum of money 
 to Y (the payee) or to Y's order or to bearer. The drawee ma>' 
 indicate his willingness to honor it by signing his name to the word 
 "accepted" written across the face of the bill. 
 
 Bills of exchange are of two kinds, foreign and domestic, or inland. 
 A foreign bill is legally defined as one the drawer and drawee of which 
 live in different countries or different states, while a domestic bill 
 is one both parties to which live within the same state. Business 
 custom, however, warrants our using the term domestic bill for all 
 bills when both parties live in the United States, regardless of state 
 lines. 
 
 There is likely to be some confusion as to when to use the term 
 draft. Draft and bill of exchange are often used interchangeably. 
 For instance, we speak of drafts on London and bills of exchange on 
 London, and we say New York exchange and drafts on New York. 
 In the business world, however, there is a growing custom of using 
 the term draft when speaking of domestic transactions, while one 
 more frequently hears the term bill of exchange in connection with 
 foreign transactions. 
 
 Bills of exchange may be classified according to whether or not 
 the parties to the order are bankers. A banker's draft is an order 
 drawn by one bank and payable by another. It is not necessary, 
 however, that the party to whom it is payable be a bank. In the 
 case of individual or trade bills of exchange the payee may be the 
 drawer himself as well as a third party. The payee may also be a 
 bank. The second party, the drawee, may likewise be "a bank, in 
 which case the bill of exchange is in the form of the familiar check 
 drawn by a person against his deposit account in a bank. 
 
 Bills may be classified according to whether or not they arise 
 out of actual commercial transactions. Hence we have bankers' 
 or finance bills, trade or commercial bills, and accommodation bills. 
 Bankers' bills are used merely as a means of making payments and 
 transferring balances and arc secured by the reputation of the bank 
 that draws them. A commercial bill arises out of an actual .sale of 
 goods and, is secured, not only by the general responsibility of the 
 drawer, but also by the goods which have been exchanged for the 
 purpose of sale. Accommodation bills are bills which do not arise 
 out of any business transaction already concluded, though there 
 may be an intention to purchase goods with the funds procured.
 
 34 
 
 PRINCII'LKS OF MONEY ANI; BANKING 
 
 K l MiiMaaaiUaanma ssa^ 
 
 AN ACCEPTED TRADE DRAFT 
 
 ■■ "n i m au uu wmuu i'uwwWMMOfiMiini juuui»A«miiMBiM8u<M»iiui«p«jijuii«ii«i r n i nn i,ii)niiii M iB j i 
 
 //^ v-/ OQO- 
 
 ^ <sLc--x.-fcr<A^^ ^ acXXz^ A^/k^.^ 
 
 (' A'fr/','y^r} />' (SA^c.v>^-e-£.o-g^ 
 
 ^rxjo-JL .:ti s^-<^^-y<LaL-^.^^ r-^'i_ 
 
 
 A FOREIGN BILL OF EXCHANGE 
 
 0^ 
 
 EXCHANGE FOR 
 
 M- 
 
 
 (p^.. fTi. 
 
 ^xi^^t^k^^.^:^^ FI RST OF EXCHANGE 
 
 .5 17- 
 
 
 zf- 
 
 ■.^. .^jgft. 
 
 SNatiomal BamkSNorth America.Chicaso 
 
 i^^^t.^-^ 
 
 Ti» 
 
 <r^-«-c^ ocriye. — 
 
 CASHIER S CHECK 
 
 -<lf Pit, ijg-.lwi Wii-yn. T-g:^!!! < .a^TTTTT 
 
 =§i 
 
 i^^l TiiE]S;vnoj{.viiCmB.\NiiOFCniCAGO 
 
 
 
 Q^ ^^f-^^Xfl^l^^ \ 
 
 _^t3?*i3^^^r^^^ii^2i_ 
 
 ~ Doi.F^MiK 
 
 I -rf^ 
 
 .^ 
 
 :.ig
 
 INSTRUMENTS 01- COMMERCIAL CREDIT .^S 
 
 111 order to illuslrale the use of these instruments, suppose that 
 X has bought a bill of goods from Y. X may pay in one of several 
 ways: (i) He may "pay casH," and this may be in bank notes, 
 United States notes, gold certificates, etc. (2) He may give Y a 
 check on his (X's) bank. (3) He may draw and deliver a bill of ex- 
 change on Z payable to Y or Y's order. In such a case Z is presum- 
 ably a debtor to X. (4) He may give Y a promissory note. This 
 
 PERSONAL BANK CHECK 
 
 
 Chicago.Ill-^ I9l/ No*^^/ 
 
 Pay TO THE ORDER OF 
 
 TkFirslNational Bank of En^lcwood Mo^ 
 
 ?t^ 
 
 /«g-y Dollars 
 
 LADIES DEPARTMENT. 
 
 will merely defer actual payment. (5) He may "accept" a bill of 
 exchange which Y has drawn upon him. This also merely defers 
 actual payment. (6) He may transfer to Y some check or promis- 
 sory note or bill of exchange which some other person (say V) has 
 drawn to X's order or to bearer. (7) He may buy from his banker a 
 banker's draft drawn (on some other banker) in favor of Y. (8) 
 He may buy from his banker a cashier's check. 
 
 14. ORIGIN AND DEVELOPMENT OF MERCANTILE 
 INSTRUMENTS* 
 
 By WILLIAM GREEN H.\LE 
 
 The law governing negotiable instruments had its inception in the 
 customs of the mercantile world — indeed, these instruments were 
 born of the necessities and needs of merchants. Bills, notes, and 
 checks are thus freciuently referred to as commercial jxiper, or mer- 
 cantile sjiecialties, and the law pertaining to such instruments as the 
 Law Merchant. 
 
 'Adapted from Laxc of Negotiable lustnimnils, jip. 1-2. (lUackstone Insti- 
 tute, iQts)
 
 36 I'RINCII'J.KS OF MONEY AND BANKIX(; 
 
 There is much douljt as to the exact time and place of the origin 
 of commercial j)ai)cr. This much seems quite certain: that bills of 
 exchange were used to some extent by the merchants of Italy as early 
 as the thirteenth century and, not a great while thereafter, found 
 their way into England, where they were first used by the English 
 merchants in their dealings with the merchants on the continent of 
 Europe. Thus the foreign bill of exchange was the first mercantile 
 specialty to become known to the English law. 
 
 The inland bill of exchange and promissory note followed rapidly 
 in the wake of the foreign bill of exchange. And by the first of the 
 seventeenth century all three of these instruments were well known 
 to the merchants of England, and were coming to be made the sub- 
 jects of litigation. It was about this time also, it is said, that the 
 custom of making such instruments payable to order or bearer, and 
 thus negotiable in form, took its rise. Down to the time of Lord 
 Mansfield, in 1756, however, the rules that governed in the contro- 
 versies which arose over bills and notes were in a more or less chaotic 
 condition. He it was — since termed the "father of the Law jVIer- 
 chant" — ^who voiced and molded into the form of definite rules of 
 law the numerous customs of the merchants with reference to such 
 paper and made the Law Merchant a real part and parcel of the great 
 body of the English Law. 
 
 15. THE DEVELOPMENT OF CREDIT INSTRUMENTS IN 
 THE UNITED STATES' 
 
 By JOSEPH J. KLEIN 
 
 The use of commercial drafts played a very important role in 
 the history of the American colonies. The draft was used when the 
 drawer had a balance to his credit with some merchant, residing either 
 in England or the colonies. There is no evidence, however, to show 
 that the promissory note was used during the colonial period. Bank 
 checks appear to have been unknown in colonial times, and there is 
 no evidence to show that the few banks of the time did any discounting 
 of bills of exchange. Checks were unknown to the colonists until the 
 time of the Revolution. 
 
 In the period between 1789 and the Civil War we find the develop- 
 ment of an extensive use of both drafts and promissor}' notes in mer- 
 
 ' Adapted from an unpublished thesis on The Development of Mercantile 
 Inslrumcnls of Credit in the United States.
 
 INSTRUMENTS OF COMMERCIAL CREDIT 37 
 
 cantile transactions. During this period also banking became well 
 developed and differentiated into banks of discount and banks of 
 circulation. The use of the check became quite generally known in 
 the cities, although it was not until after the Civil War that deposit 
 currency came to be the most important instrument of exchange 
 that we possess. 
 
 16. THE USE OF CHECKS IN THE UNITED STATES' 
 By DAVID KINLEY 
 
 I. The volume of business that can be done by credit paper 
 depends on several circumstances. Obviously, in the first place, it 
 depends upon the banking facilities of the country. If the banks 
 are widely distributed, if they are willing to deal in transactions small 
 enough to be within the reach of large numbers of people, many more 
 transactions will be settled through them than would otherwise be 
 the case. This fact undoubtedly explains in large measure the 
 development of what may be called the "banking habit" among the 
 people of the United States. Undoubtedly our people pay by check 
 much more commonly and much more largely than people of any other 
 country. 
 
 In the next place, the density of population is, of course, an 
 important factor in the growth of credit exchanges. A larger volume 
 of business is settled by bank paper in a commercial center than in 
 an agricultural community, even though the proportion of total 
 business thus settled may not be larger. 
 
 Finally, the general education and intelligence of the mass of the 
 people is an important factor. Men do not use banks unless they have 
 confidence in them, and they have come to be regarded as a settled 
 part of the ordinary commercial mechanism of the community. 
 
 2. It is very clear that a large proportion of the business of the 
 country, even in the retail trade, is done by means of credit instru- 
 ments. We are justified in concluding that 50 or 60 per cent of the 
 retail trade of the country is settled in this way. Over 90 per cent 
 of the wholesale trade of the country is done with checks and oilier 
 credit documents. We may therefore safely accept an average of 
 80 to 85 per cent as the probable percentage of business of thi's country 
 transacted by check. 
 
 ' Adapted from The Use of Credit Instruments in the United Stales. 
 (National Monetary Commission, 1910.)
 
 3^ 
 
 PRINCn'L]':S Ol" MONJOY AND BANKING 
 
 3. Such evidence as there is seems to indicate that payment by 
 check has shown an increase during the i)ast few years: 
 
 a) In the first j)lace, the returns of our reports show a larger per- 
 centage in retail trade. 
 
 
 DIAOKA 
 
 A OF THE PEBOENTAOE OF ODECKS IH EETAIL DEPOSITS BT CLASSEH OF BKitZ::. 
 
 M no M M ^0 fl9 QO n 
 
 „ . 1^^ 
 
 
 
 
 
 
 
 
 
 
 
 Ua«»wltruTt 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 _ ^ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 U 1 d»*ln»b«Bk* 
 
 
 
 
 
 
 
 
 
 
 '■■" 
 
 TOI. ... 
 
 
 
 
 
 
 
 
 
 
 
 
 DIAGRAM or THT PESCENTAOE OF C 
 ^0 20 ?0 ^3 i- 
 
 HtCKS IN RETAIL DEPOSITS 1 
 p ^^ 70 iO 9P 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 S C«Qlt 1 Di» 
 
 
 
 
 
 
 
 
 
 W tern D v 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 National banks 
 
 DUORAM or THE PIEOENTAOE OF CHICKS IN WHOLESALE 
 ij If I] 'J) fC Hi 
 
 DEPOSITS 
 
 
 
 
 
 
 
 
 
 
 _ 
 
 
 
 
 
 
 
 
 
 
 
 
 L„.= «„d .r„,, com- 
 
 
 
 
 
 
 
 
 
 S,ock„v,„<.b.„W..... 
 
 
 
 
 
 
 
 
 
 
 _ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
 
 
 
 
 
 HtttuI nrlDc* taoki 
 
 ft) The prosperity of the farmers in the Central West has enabled 
 many to carry bank accounts who fifteen years ago could not carry 
 balances. 
 
 c) The third evidence is found in the growth of the number of 
 small banks, especially in the country districts. Since national 
 banks have been permitted to establish themselves with a capital 
 of $25,000 their number has increased from 3,617 to 6,926. 
 
 d) The appearance of a considerable portion of checks in the 
 deposits of mutual savings banks is also, to some degree, significant.
 
 INSTRUMENTS OF COMMERCIAL CREDIT 39 
 
 Of course the credit documents rtx:ei\'e(l in the deposits of these banks 
 may be to a considerable extent money orders. Nevertheless their 
 deposits show a certain use of credit paper by the patrons of the 
 banks. 
 
 We cannot e.xpect any social movement to continue steadih- 
 in one direction for an indefinite time. Such evidence as inquiries 
 of this character furnish seems to show that there is a certain ebb and 
 flow in the proportion of checks used in business payments. 
 
 The volume of credit transactions very likely tends to increase as 
 population and business grow. It does not increase uniformly, how- 
 ever, but by periodic movements. That is to say, the rate of increase 
 of credit transactions, as compared with the whole volume of business, 
 grows, as it were, by jerks and at a decreasing rate. 
 
 One point needs to be carefully borne in mind: However great 
 the volume of credit exchanges, however extensive the use of credit 
 may become in a community, they can never fully displace sales for 
 direct money payment. 
 
 4. The amount of money released by our credit transactions is 
 not equal in amount to the volume of credit instruments, for there 
 must always be enough to settle the uncanceled balances called for 
 in money from day to day. The amount of money displaced is the 
 difference between the amount that would be needed in a purely 
 money regime and the amount needed to pay the uncanceled balances 
 of the credit transactions. It is important to note that an increase 
 in the volume of credit transactions does not necessarily mean that 
 we must get a proportionate increase in our reserve of money. Every 
 refinement of the credit mechanism makes it possible to do a larger 
 volume of business on the same reserve. 
 
 No one can say, therefore, with definiteness what is the amount of 
 money released if 75 or 80 per cent of our business transactions arc 
 settled by means of credit paper. This is a matter in which the long 
 experience of practical bankers is the only safe guide, because the 
 amount in question is changing from day to day as the conditions 
 change. No simple rule about it can be laid down. Certainly, 
 however, it is not 75 per cent of the money which would be necessary 
 if all transactions were settled with money. It is an amount varying 
 from one-third to one-fifth of uncanceled credit balances, according 
 to the perfection of the banking machinery, the state of credit, 
 prosperity, and public confidence.
 
 40 PRINCIPLES OF MONEY AND BANKING 
 
 17. THE LAW OF NEGOTIABLE INSTRUMENTS' 
 By D. CURTIS GANO 
 
 Definition. — A negotiable instrument may be defined as a written 
 instrument or evidence of the debt which may be transferred from 
 one person to another by indorsement or deHvery so that the legal 
 title becomes vested in the transferee. 
 
 Principal characteristic. — ^The principal characteristic of a nego- 
 tiable instrument, and that which makes it pass freely as a substitute 
 for money, is that in the hands of a third party who purchases it 
 in good faith and for value before it is due, it is enforceable, while 
 the original holder, perhaps, could not enforce it for the reason that 
 the party who made the instrument has a good defense or counter- 
 claim. As soon, however, as an innocent purchaser comes into 
 possession of it for value, he cannot be prevented from collecting 
 because of any defenses existing between the original parties. In 
 other contracts the purchaser acquires only the right of the party 
 from whom he buys, but in the case of negotiable paper he may acquire 
 a better title than the original holder. 
 
 Essential conditions. — The question arises as to what conditions 
 are essential to constitute a contract a negotiable instrument. In 
 general we find that no exact form need be followed, although custom 
 has prescribed forms that are very generally used, but it is required 
 that a negotiable instrument must be: (i) in writing, (2) properly 
 signed, (3) negotiable in form, (4) payable in money only, (5) the 
 amount must be certain, (6) must be payable absolutely, (7) to a 
 designated payee, (8) at a time that is certain. A few words of 
 elaboration on each of these points is necessary. 
 
 1. No oral contract could be negotiable. By a written contract 
 we mean one in either writing or printing, and the writing may be 
 executed with any substance, as ink or pencil. The whole instru- 
 ment must be written. No essential part, as the names of the parties, 
 the amount, or the date, can be omitted from the writing. 
 
 2. It is usual that the signature be made by writing the name of 
 the signer, but it is not necessar}', as he may affix his mark or any 
 other character intended to be a signature. It is usual to place the 
 signature at the close of the instrument, but if it is shown that it is 
 meant for a signature, it may be placed on any other part. 
 
 'Adapted from Gano's Commercial Law, pp. 116-53. (Copyright 1904, 
 1913. By permission of American Book Co., publishers.)
 
 INSTRUMENTS OF COMMERCIAL CREDIT 41 
 
 3. The instrument must be payable to "Order"' or "Bearer." 
 If made payable to a particular person or persons only, it is not a 
 negotiable instrument, and falls under the rules governing a simple 
 contract. In other words, the intent of the party making the instru- 
 ment to execute a negotiable paper must appear by some express words 
 showing such a purpose. 
 
 4. The very reason it must be payable in money is that if it were 
 payable in any other commodity the amount could not be defmite 
 and certain. If payable in a given number of bushels of wheat, the 
 person taking it would be obliged to determine the value of wheat 
 at that place; the value at another place might be materially different. 
 By the term "money" is meant the legal tender of the country; that 
 is, a note payable in Spanish money is not a negotiable instrument 
 in the United States. 
 
 5. The sum payable is considered fijced and certain if it is a given 
 amount with interest, or payable by stated installments or with 
 exchange (the bank's charges), or with the costs of collection in case 
 payment is not made at maturity. 
 
 6. There must be no uncertainty as to the person to whom the 
 money is to be paid. The instrument must be made payable to a 
 certain person, or his order, or to the bearer. It need not name the 
 payee, but it must be payable to a person or persons who can be defi- 
 nitely ascertained at the time of payment. If payable to A or B, 
 it is not a negotiable instrument under the law merchant, but it has 
 been so rendered by statute in some states. 
 
 7. If the instrument is so drawn that any condition may arise 
 which would render it of no effect, it is not a negotiable paper. Con- 
 sequently, a promise to pay a certain sum out of a designated fund 
 is not negotiable, and this is the case even though the fund exists at 
 the time or the condition that would nullify the contract never arises. 
 
 8. But the promise is not made conditional by designating a 
 place of payment in the instrument. Not only must the amount 
 be payable absolutely, but the time of payment must be definite and 
 fLxed. That is, the date of payment must be definitely stated, or it 
 must be on or before a certain definite date, or at a certain time after 
 the happening of an event that is sure to occur. A note payal)le a 
 certain number of days after the death of a person is negotiable, 
 the date being certain because the time is sure to arrive. But the 
 contingent event must be certain to occur or the promise will not be 
 absolute.
 
 42 PRINCIPLFOS OF MONEY AND BANKING 
 
 Negotiation. — By negotiation wc mean the transfer of a ncj^otiable 
 instrument from one person to another in such a way that the trans- 
 feree is the legal holder thereof and vested with all of the rights of 
 the original holder. 
 
 Indorsement. — Negotiable paper is transferred by indorsement, 
 that is, by the payee signing his name on the back with directions as 
 to the party to whom payment shall be made. When an instrument 
 is made payable to a certain person or bearer, an indorsement is not 
 necessary to give a good title to the transferee, delivery being sufficient, 
 but if it is payable to a certain person or order, the indorsement is 
 necessary to give title. 
 
 Blank and full indorsement. — For the purpose of transfer, the 
 indorsement must be made by the party to whom the instrument is 
 payable. 
 
 Indorsement may be made in full or in blank. In the former case 
 the payee writes " Pay to the order of X " and signs his name. This is 
 also called a special indorsement. To indorse in blank all that is 
 necessary is for the payee to write his name. This is equivalent to 
 writing "Pay to bearer." The instrument is payable to anyone 
 who holds it. 
 
 Obligation of indorser and drawer. — The obligation of an indorser 
 to a transferee, like that of the drawer of a bill, is that the indorser 
 will pay the instrument provided the maker does not, and also pro- 
 vided it is duly presented for payment and upon refusal is duly 
 protested and notice of protest given the indorser. In domestic 
 bills and notes the protest may be omitted and instead notice of non- 
 payment may be given the indorser. It will be seen that the contract 
 of the maker of a note or the acceptor of a bill is absolute. Each is 
 liable in any event, but the contract of the indorser and of the drawee 
 of a bill is conditional upon the failure of the maker or acceptor to 
 pay upon proper protest and notic6 to him. 
 
 Indorsement without recourse. — If the indorser of a note wishes 
 to avoid any personal Habihty, he may indorse "without recourse" 
 and sign his name. By the indorsement "without recourse" the 
 indorser expressly stipulates that he will not be liable if the maker 
 does not pay, but he is held to impliedly warrant that the signatures 
 of the maker and all prior indorsers are genuine, that is, that they 
 are not forgeries. The intent and purpose of such indorsement is 
 to pass title to the instrument.
 
 INSTRUMENTS OF COMMERCIAL CREDIT 43 
 
 Indorsement: how made. — The indorsement must be on the instru- 
 ment itself or on a paper attached to it. The indorsement must relate 
 to the entire instrument; a part cannot be transferred by indorse- 
 ment, or a part to one party and the remainder to another. Any 
 writing intended to transfer the title to the instrument will be con- 
 strued as an indorsement. 
 
 Presentment and demand. — As has been said, to fix the liabiHty 
 of the drawer or indorscr, the first step is presentment to the drawee 
 or maker and demand. Bills of exchange payable a certain time 
 after sight are presented for acceptance; notes, checks, and bills 
 payable on demand or sight are presented for payment. Present- 
 ment consists in exhibiting the instrument to the payer or handing 
 it to him, while demand is a request to either accept or pay it as the 
 case may be. If the paper is payable at a bank the mere fact that 
 at the time of maturity the paper is at the bank at which it is payable 
 is sufficient presentment and demand, provided the bank has knowl- 
 edge of the fact. Presentment and demand must always be made at 
 the place designated in the instrument. 
 
 In case there is no designated place of payment it is said that the 
 paper is payable generally. This means that it is payable at the 
 place of business or residence of the maker of the note or acceptor 
 of the draft, and when he has a known place of business that should 
 have preference over his residence. If the maker or acceptor has 
 neither a known residence nor a place of business, the holder need 
 only be present with the paper and ready to receive payment at the 
 place where the contract was made. 
 
 Time. — Presentment for payment must be made on the day on 
 which the instrument falls due, unless some "inevitable accident'' 
 or other legal obstacle prevents such presentment. The fact that 
 both the holder and indorser know that the note will not be paid when 
 due and that the maker is dead and the estate insolvent docs not 
 relieve the holder from his obligation to make presentment and give 
 notice of dishonor. 
 
 Days of grace. — Drafts, bills of exchange, and promissory notes 
 formerly had days of grace, that is, three days were added to the time 
 stated in which the instrument should become due. The purpose 
 of this v/as to give the payer in the early days of slow transportation 
 an opportunity to arrange for payment. A note at thirty days drawn 
 June 10 would not be payable until July 13; but days of grace have
 
 44 PRI.XCirLKS OF MONEY AND HANKIXG 
 
 been abolished by statute in most of the states and an instrument 
 matures on the date fixed. If given a number of days after date, 
 the day on which the instrument is drawn is excluded; thus, a note 
 dated January lo, payable thirty days after date, is due February 9. 
 If the date of maturity is Sunday or a legal holiday, the instrument 
 is payable on the next succeeding business day. In the states in 
 which days of grace are yet allowed, if the last day of grace is a holiday 
 or Sunday, the instrument is payable on the preceding day. But 
 when the time is reckoned by the month, as it is when the instrument 
 is made payable one or more months after date, the note falls due on 
 the corresponding date of the month in which it is due. Thus a 
 note dated January 31, 1903, due one month after date, would mature 
 February 28, 1903, where no grace is allowed, and if dated February 
 28, it would be due March 28. Not only must the presentment 
 for payment be made on the right day, but it must be made at a 
 reasonable time on that day. If presented at a bank, it must be 
 during banking hours. In other cases the time must be at a reasonable 
 hour. The presentment must be made by the holder or his duly 
 authorized agent, upon the proper person, who is the maker or the 
 acceptor, or, if he is dead, his personal representative. 
 
 Notice of dishonor. — After the payment has been refused and the 
 instrument dishonored, notice of such dishonor must be given to the 
 drawer of a bill of exchange and to each indorser if a bill or note, and 
 any drawer or indorser to whom such notice is not given is discharged. 
 This notice under the law merchant must be given within a reasonable 
 time, but by the negotiable-instrument law adopted in many of the 
 states it is expressly stipulated when the notice is to be given. If the 
 parties reside in the same place, it must be given the following day. 
 If they reside in different places, and notice is sent by mail, it must be 
 deposited in the post-office so as to go the day following the dishonor; 
 if given otherwise than through the mail, it must be done in time to be 
 received as soon as the mailed notice would have been. The notice 
 may be given by the holder or his agent or by any party who may have 
 to pay the debt and who is entitled to be reimbursed. 
 
 Notice to indorsers. — When there are several indorsers the last 
 indorser can look to the previous one, or in fact to anyone who has 
 indorsed before him, as well as to the maker or acceptor. There- 
 fore it often happens that the holder upon dishonor of the instrument 
 gives notice to the last indorser, to whom he will look to be reim- 
 bursed in case he is obliged to pay the instrument. The notice of
 
 INSTRUMENTS OF COMMERCIAL CREDIT 45 
 
 dishonor may be either oral or written, and can be either delivered 
 personally or sent through the mail. Some cases hold that the postal 
 service cannot be used when the parties reside in the same town, but 
 by statute in New York State the post-office can be used even in 
 that case. 
 
 Waiver. — Notice may be waived, and frequently the indorser 
 adds "protest waived," the effect of this being to waive presentment 
 and notice of dishonor as well as formal protest. 
 
 Protest. — Protest is a formal declaration in writing and under seal, 
 of an officer called a notary public, certifying to the demand and 
 dishonor. Protest of foreign bills of exchange is necessar\-, but it is 
 not required in the case of notes, checks, and inland bills, although it 
 is often employed in giving notice of their dishonor. The notary 
 makes the presentment and demand, and upon refusal issues a cer- 
 tificate, stating that presentment and demand has been made and 
 judgment refused, and further that notice has been sent to the maker 
 and all indorscrs of the note. 
 
 Irregular indorser. — Frequently there appears on the back of a 
 bill or note the name of a person who is not a party to it and to whom 
 it was never indorsed. Such a person is known as an irregular or 
 anomalous indorser. The object of such an indorsement is to give 
 additional security to the payee. Different states hold differently 
 as to the liability of such a party, but the rule commonly followed 
 seems to be that he is liable as an ordinary indorser. Such indorse- 
 ments are frequently used when the pa}ee of a note wishes to get 
 it discounted at a bank, that is, to get the money on it. The bank 
 requires an indorser, and the payee gets a friend to indorse the note. 
 The irregular indorser is liable to the bank the same as any other 
 indorser. 
 
 The holder or payee. — We have yet to consider the position and 
 rights of the holder or payee of the instrument. Whether he be the 
 original payee or an indorser, he is the party in whose hands the instru- 
 ment rests and who has the right to the money which it represents. 
 We have already learned that negotiable instruments have a distin- 
 guishing characteristic not possessed by any other contract, which is 
 that when they have passed into certain parties' hands under particu- 
 lar conditions they are valid and enforceable, although not valid 
 between the original parlies to them. The rule is generally said to 
 be that a negotiable instrument in the hands of an innocent i)urchaser 
 for value and before maturity is not subject to any of the defenses
 
 46 TRiNCirLJis oi< monj:y and banking 
 
 that might be interposed to it between the original parties, but this 
 is not true of certain absolute defenses which affect the very existence 
 of the contract, and which we will consider later. To bring the instru- 
 ment under the rule, the holder must be an innocent purchaser for 
 value, or, as it is often expressed, a "bona fide holder for value" or 
 a "holder in due course." The term "bona fide holder" means a 
 holder who has acquired the instrument in good faith, without 
 knowledge or notice of any defenses or defects that could be set up 
 against any prior holder. To constitute notice, the holder must have 
 had actual knowledge of the defect, or his carelessness must have been 
 so great as to amount to "bad faith." 
 
 Defenses: general statement. — It can be stated as a general propo- 
 sition that a bona fide purchaser before maturity and for value takes 
 title free from all defects and defenses, or, as is often stated, "free 
 from equities," except such as affect the very existence of the instru- 
 ment and which are said to constitute absolute defenses. The 
 absolute defenses are either cases in which no valid contract ever 
 existed or where the contract is declared illegal and void by statute. 
 
 No delivery. — The instrument may never have been dehvered. 
 It is considered by the law merchant to be a sufficient delivery to 
 hold the maker or acceptor if it is handed over by the party himself 
 or his agent either with or without authority, or if it gets into circula- 
 tion through the negligence of the maker. The question is. Did the 
 maker deliver the instrument or was his actor representation respon- 
 sible for its coming into the hands of bona fide holders ? If this be true, 
 he must suffer, although it was not his intention to deliver the instru- 
 ment. On the other hand, if he has been deprived of the possession 
 of the paper by fraud or theft, he cannot be compelled to pay the 
 amount named to anyone, as in this case the instrument was never 
 delivered and no contract existed. If in the making of the instru- 
 ment there was such fraud as would vitiate a contract, then no contract 
 exists, and the maker or acceptor cannot be held. 
 
 Alteration or forgery. — Another failure of contract arises when 
 there has been a material alteration or forgery, for in these instances 
 the minds of the parties have not met in the contract. To alter the 
 terms of a negotiable instrument without authority after it has been 
 signed destroys its validity even in the hands of a bona fide holder. 
 Any alteration of a negotiable instrument which changes its legal 
 effect is a material alteration. There must be an intent to make the 
 alteration, and it must be made, of course, without the consent of
 
 INSTRUMENTS OF COMMERCIAL CREDIT 47 
 
 the maker or acceptor of Ihc instrument. The alteration must also 
 be made by a party to the instrument or one in lawful possession of 
 it. The holfler cannot be prejufliccd or injured Ijy the act of a stranger 
 without his consent. It will be seen from the foregoing paragraphs 
 that when a signature to a negotiable instrument is forged the party 
 whose name is so used cannot be held. 
 
 Want of capacity to contract.— The contract represented by the 
 instrument may not be binding, for the reason that the party or parties 
 did not have the capacity to contract; as, the note or bill of an infant 
 or lunatic. Still, if a valid negotiable instrument comes into the hands 
 of an infant, he may, if of full mental capacity, transfer it to another. 
 The mere fact that a contract is illegal is not an absolute defense to a 
 negotiable instrument in the hands of a bona fide holder; but if the 
 contract is expressly made illegal and void by statute an absolute 
 defense is created. 
 
 Equities. — Other defenses than those described as absolute are 
 termed "equities," and are valid defenses between the original parties 
 to the instruments, but, as we have learned, cannot be set up against 
 bona fide holders. Lack of consideration is a good defense as between 
 the original parties, but not as against a bona fide holder for value. 
 It is an equity and not an absolute defense. The fact that there is 
 an absolute defense to an instrument does not discharge all of the 
 parties to it or through whose hands it has passed. As we have seen, 
 such defense exonerates the maker or acceptor of a negotiable instru- 
 ment, but it does not relieve the liability of the indorser, because every 
 person who negotiates such an instrument warrants that it is genuine, 
 that he has a good title to it, and that all prior parties have capacity 
 to contract. 
 
 18. UNIFORM NEGOTIABLE INSTRUMENTS LAW- 
 By WILLIAM GREEN HALE 
 
 As early as 1890 a movement was started in the United States 
 to bring about a codification of the law merchant in the several slates 
 with a special view to securing uniformity in the dilTerent jurisdictions. 
 Following the lead of New York, commissioners were appointed in 
 other states, and in 1S95 at a meeting of these commissioners a Com- 
 mittee on Commercial Law was instructed to have prepared a codi- 
 fication of the law relating to bills and notes. The draft was forthwith 
 
 ' Adapted from Law of Negotiable Inslrinncnts, pp. 9-1 1. (IJIackstonc Insti- 
 tute, 1915-)
 
 48 PRiNCiPLi:s or money and ijankino 
 
 prepared and submitted to the conference which met at Saratoga in 
 August, 1896, and, with some amendments, was adopted, and is 
 known as "The Negotiable Instruments Law." 
 
 Following this, steps were at once taken to secure the adoption of 
 the bill, thus approved, in every state in the Union. Again the state 
 of New York took the lead by passing the law in 1897. Since then 
 this bill has become a law in forty-three states, Alaska, the District 
 of Columbia, Hawaii, and the Philippine Islands; in a few instances, 
 however, with more or less important modifications.
 
 IV 
 
 PRINCIPLES OF "COMMERCIAL" BANKING 
 
 Introduction 
 
 As has been indicated in chapter ii above, credit in its various 
 forms has come to play so important a role in the modern business 
 world that present-day economy is often called a credit economy. 
 Within this great and complicated credit structure banking institu- 
 tions occupy a position of unique importance. In fact, banks are 
 often called credit institutions, or manufactories of credit, because 
 they create credit instruments that are used as currency quite as 
 are the ordinary media of exchange. While, as we shall presently 
 find, this is a more or less narrow view of the relations of banking 
 to business in general, it is none the less true that banking is vitally 
 related to the entire system of credit that has been developed. 
 
 In our study of banking we are to consider first the so-called com- 
 mercial bank. It is necessary to say so-called commercial bank, or 
 to place the word commercial in quotation marks, for the reason that 
 much of the business performed by the banks thus designated is 
 really of an investment nature. A commercial bank is generally 
 defined as an institution which exchanges present for future rights, 
 that is, which gives an individual the right to receive funds now, or 
 on demand, in exchange for the right of the bank to receive funds from 
 the individual at some future date. Under this definition come all 
 our national banks and a large proportion of the banks chartered 
 under the laws of various states. When viewed from the standpoint 
 of the uses to which the funds borrowed are put, however, these banks 
 which thus create demand obligations are by no means strictly 
 engaged in furthering commercial as distinguished from investment 
 business. It was originally intended that the banks which created 
 these demand obligations in exchange for short-lime promises to pay 
 would as a matter of course, and virtually of necessity, make loans for 
 strictly commercial purposes, for unless they made commercial loans 
 the obligations could not be liriuidaled within a short time. In 
 practice, however, a large proportion of the loans made by "commer- 
 cial" banks are for investment purposes, and out of this practice 
 
 49
 
 50 PRlNCll'LKS Ol" MONEY AND BANKING 
 
 have grown some of our most serious banking problems. It is highly 
 important, therefore, at the very beginning of the study of banking 
 to bear in mind that "commercial" banking is only partly commercial. 
 The full significance of this fact, however, will not be apparent until 
 the last chapter of the volume is reached. Our present purpose is 
 merely to discuss the working of the "commercial" bank as a type 
 of business institution. 
 
 An understanding of the practical operations and the functions 
 of a bank may best be gained by approaching the subject through 
 the medium of a bank's accounts or financial statement. The prac- 
 tical problems based on the statements given below serve to elucidate 
 the everyday business transactions of a bank in dealing with its 
 customers. 
 
 In connection with the economic functions that are performed 
 by banks while conducting their daily operations, selections Nos. 
 21 and 2 2 discuss the subject from different points of view; together 
 they serve to bring out clearly the essential nature of the commercial 
 banking business as the economist sees it. However, from the point 
 of \new of the business man who is interested in banks from the 
 standpoint of the use he may make of them, as distinguished from 
 that of the economist who is interested in banking from the stand- 
 point of its relation to the entire economic system, "commercial" 
 banks are primarily loanifig institutions to ^hich he may look for 
 assistance in carrying on his business. Similarly, from the stand- 
 point of the banker himself, a bank is an institution out of which 
 profits may be made, and its practical operations are conducted with 
 this single end in mind. It is important to an understanding of the 
 entire problem of banking that all these points of view be kept in 
 mind; to consider the subject from any one angle alone is to get but 
 a very inadequate grasp of its manifold nature. 
 
 From every point of view, however, the granting of loans is the 
 most important part of banking. It is from this source that the 
 banker derives his chief profits; it is in this way that the commercial 
 bank chiefly serves the business world and justifies its right to exist 
 from a business point of view, and it depends upon the character of 
 the loans made whether the bank will be sound and safe and whether 
 it properly fulfils its functions in relation to the economic system as 
 a whole. It is in connection with the analysis of the loan items, 
 moreover, that one may expect to find the investment operations, 
 already noted, that are so commonly conducted in the name of
 
 PRINCIPLES OF "COMMERCIAL" BANKENG 51 
 
 "commercial" banking. From the standpoint of the bank there are 
 two classes of loans: those that are based on unsecurcfl promissory 
 notes or bills of exchange and those that are secured by the deposit 
 of collateral. This classifieation, it should be observed, is from a 
 purely banking viewpoint; collateral is or is not required, depending 
 upon whether the banker believes that the borrower can reasonably 
 be expected to pay the loan at maturity. It docs not necessarily 
 touch the question in which we are interested from the economic 
 point of view; namely, the uses to which the borrowed funds are put 
 and the consequent relation of banking to commercial and investment 
 development. 
 
 A. Analysis of Banking Operations and Accounts 
 
 19. TYPICAL BANK STATEMENTS' 
 
 The National City Bank of New York 
 resources 
 
 Loans and discounts SiQi.425,216.92 
 
 U.S. bonds to secure circulation 2,562,750.00 
 
 U.S. bonds to secure circulation purchased with agree- 
 ment to resell 1,000,000. 00 
 
 U.S. and other bonds loaned 2,985,500. 00 
 
 U.S. bonds on hand 173,318.94 
 
 Premium on U.S. bonds 4,615 • 00 
 
 Bonds, securities, etc 41,879,191.09 
 
 Capital set aside for South American branch 1,000.000. 00 
 
 Stock of Federal Reserve Bank 1,000,000. 00 
 
 Securities purchased with agreement to resell 75,000.00 
 
 Banking house, furniture, and fixtures 5,000,000. 00 
 
 Due from banks and bankers 22,880,392 67 
 
 Country checks, other cash items, and fractional currency 1 14,73° 52 
 
 Exchanges for Clearing-House 19,962,842.81 
 
 Checks on other banks in this city 1,252,563.50 
 
 Notes of other national banks 69,045 . 00 
 
 Federal Reserve notes 736,500. 00 
 
 Lawful Reserve, viz.: 
 
 Specie in vault $69,914,025.86 
 
 Legal-tender notes in vault 23,020,000.00 
 
 Deposit in Federal Reserve Bank. . . 27,670.346.07 
 
 120.604,371.93 
 
 Gold bullion 2,317,760.60 
 
 Redemption fund with U.S. Treasurer (5 per cent of circu- 
 lation) i7'*^,'37-50 
 
 Due from U.S. Treasurer 42,000.00 
 
 Total ?4 1 5, 263.936 48 
 
 'Report of condition at dose of business, Manh 4, 101 ^.
 
 52 PRINCII'LKS OF MONEY AND BANKING 
 
 LIABILITIES 
 
 Capital stock paid in $ 25,000,000, oo 
 
 Surplus fund 25,000,000. 00 
 
 Undivided profits, less expenses and taxes paid 10,818,895.39 
 
 National bank notes outstanding 3,562,750.00 
 
 Due to banks and bankers $163,766,269 . 56 
 
 Dividends unpaid 890. 00 
 
 Individual deposits subject to check 155,948,413. 70 
 
 Demand certificates of deposit 1,683,864. 63 
 
 Certified checks ■ 4,328,361 . 75 
 
 Cashier's checks outstanding 2,399,974. 57 
 
 Time certificates of deposit 338,119. 13 
 
 328,465,893.34 
 
 U.S. and other bonds borrowed 5,592,950. 00 
 
 Bills payable, including obligations representing money 
 
 borrowed 3,211,811.22 
 
 Acceptances based on imports and exports 7,226,858. 59 
 
 Letters of credit 5,690,528. 54 
 
 Other liabihties 694,249.40 
 
 Total $415,263,936.48 
 
 Taylor Discount and Deposit Bank' 
 resources 
 Reserve fund : 
 
 Cash, specie and notes $13,605. 70 
 
 Due from approved reserve agents 56,217 . 04 
 
 $ 69,822.74 
 
 Nickels and cents 204 . 74 
 
 Assets held free, viz.: 
 Bills discounted: 
 
 Upon pne name $ 35,000. 00 
 
 Upon two or more names 245,744. 20 
 
 280,744. 20 
 
 Time loans with collateral 49,900. 00 
 
 Loans on call with collateral 35,445. 00 
 
 Loans on call upon two or more names 2,370. 00 
 
 Loans secured by bonds and mortgages 90,831 . 00 
 
 Bonds, stocks, etc 166,308 00 
 
 Office building and lot 17,000. 00 
 
 Furniture and fixtures 2,250. 00 
 
 Overdrafts 31 • 7o 
 
 Total $714,900. 18 
 
 ' A state bank at Taylor, Lackawanna County, Pennsylvania, at close of 
 business November 2, 19 14.
 
 PRINCIPLES OF "COMMERCIAL" BANKING 53 
 
 LIABILITIES 
 
 Capital stock paid in $ 50,000 00 
 
 Surplus fund 50,000. 00 
 
 Undivided profits, less expenses and taxes paid 22,491 . 84 
 
 Individual deposits subject to check S 93,318. 28 
 
 Individual deposits, time 497,443.96 
 
 Deposits, U.S. postal savings 132. 21 
 
 Certified checks 20. 00 
 
 Cashier's checks outstanding 954. 70 
 
 591,869.15 
 
 Due to banks and trust companies, etc., not in reserve 539. 19 
 
 Total $7 14,900. 18 
 
 20. ANALYSIS OF A BANK STATEIMENT 
 
 As in any other business, the statement of a bank aims to show 
 at a glance the financial condition of the institution. All of the debts 
 or obligations owed by the bank are arrayed under the heading of 
 Liabihties, and all the property of the bank together with the debts 
 or obligations owing to the bank are grouped under Assets or Re- 
 sources. In the typical statement published for the examination of 
 the general public the form is usually condensed to ten or a dozen 
 items, though in the fuller account submitted periodically to the 
 Comptroller of the Currency these are subdivided into more than a 
 score of items on either side. 
 
 The habilities of a bank are of two classes: those to the stock- 
 holders of the corporation, and those to the creditors or customers of 
 the bank. Under stockholders' liabilities may be classified three 
 items: Capital, surplus, and undivided profits. To understand 
 clearly why capital should be set down as a liability of the bank, 
 it is necessary to conceive of the banking corporation as in itself a 
 business entity to which the stockholders have intrusted their funds. 
 The capital is not owned by the banking institution, but by the indi- 
 viduals who have bought its certificates of stock. These stockholders 
 have the shares as evidence of the obligation of the bank to them; 
 and in turn the bank must enter on its books a statement of the amount 
 of capital thus owed to stockholders. 
 
 Capital is to be carefully distinguished from specie or cash. The 
 difference can best be made clear by reference to the first entries that 
 would have to be made on the books of a newly organized bank.
 
 54 PRINCIPLKS OF MONEY AND BANKING 
 
 If $100,000 is raised from the sale of 1,000 shares of stock at Si 00 per 
 share, the following entry would be made on the bank's books: 
 
 Resources Liabilities 
 
 Cash |ioo,ooo Capital $100,000 
 
 As already indicated, the entry of Capital is the recording of the 
 bank's obligations to its owners. The entry of a like amount under 
 Cash means that there is in the vaults of the bank specie to the amount 
 of $100,000 available for the use of the bank. The Capital item will 
 remain unchanged so long as no new stock is issued or existing stock 
 diminished, but the Cash entry changes constantly as the bank 
 engages in its daily operations. Instead of using the term Cash, 
 however, the term Reserve is ordinarily employed. 
 
 The item Undivided Profits states the amount of earnings that 
 have been accumulated since the last di\ddend date. It is a liability, 
 because the dividends are, Hke the Capital, owed to the stockholders. 
 Like Capital, also, it is represented on the resources side of the account 
 by Cash. WTien dividends are declared and paid the Undivided Profits 
 account is lessened by the amount of the dividend payment, and the 
 Cash item is reduced by the same amount, provided the dividends are 
 paid in the form of cash. 
 
 Surplus is closely akin to Capital. It may arise in at least two 
 ways. When stock of the par value of $100,000 is sold above par, 
 say for $110,000, the accoimt would appear as follows: 
 
 Resources Liabilities 
 
 Cash $110,000 Capital $100,000 
 
 Surplus 10,000 
 
 This Surplus may be increased from year to year through a policy 
 of not paying all the earnings of a bank to the stockholders in the form 
 of dividends. Suppose a bank has Undivided Profits to the amount of 
 $20,000. If the Capital is $100,000 the bank could pay a 10 per cent 
 dividend to the stockholders and keep $10,000 in the business to 
 supplement the existing capital. When this is done it is carried to 
 Surplus. The Capital account, however, and in consequence the 
 number of shares of stock outstanding, are kept the same as before. 
 And dividends are computed on the Capital only— never on Surplus. 
 
 The other liabiUties of a bank take two main forms, that of 
 Deposits and that of Circulation or Notes. The latter item is a 
 statement of the total amount of obligations the bank has outstand- 
 'm<r in the form of its own notes or promises to pay. Anyone who
 
 PRINCIPLES OF "COMMERCIAL" BANKING 55 
 
 holds a bank note has a claim for cash against the bank that issued it 
 for the amount stated on the face of the note. Bank notes are 
 always payable on demand. 
 
 Deposits are of three classes: Individual, Bank, and Government 
 deposits. The first is a statement of the amount owed by the bank 
 to persons holding, not notes of the bank, but a right to draw upon the 
 bank for funds, as evidenced by a certificate of deposit, balanced 
 passbook, or monthly statement of account. Such deposits may be 
 payable either upon demand or upon notice given a certain number 
 of days in advance. Bank deposits is a statement of the obligations 
 of the bank to other banks, and is often entered merely as "Due other 
 banks." In a more detailed statement this item is divided into: 
 Due national banks, Due state banks. Due trust companies and savings 
 banks. Government deposits do not differ from the others in prin- 
 ciple; they are merely funds owing to the government. 
 
 Other items found among liabihties in the typical statement are 
 Certified checks and Cashiers' checks. The former arises as follows : 
 Depositor X writes a check against his account for, say, $100 and 
 asks the cashier of the bank to certify that the account is good for 
 the amount, and hence that the check will be paid at maturity, by 
 writing "Certified" across the face of the check and signing his name 
 thereto. When the cashier does this the bank becomes directly 
 Uable for the payment of the check, and consequently immediately 
 deducts the amount from Individual deposits (X's account) and 
 adds it to Certified checks. A Cashier's check is an order on the 
 bank to pay a certain sum drawn by the cashier rather than by an 
 individual depositor. 
 
 Acceptances based on imports and exports represent obligations 
 resulting from the bank's accepting drafts drawn against it by persons 
 engaged in international trade. Accepting a draft is ccjuivalent 
 to a promise to pay. Letters of credit also arise in international 
 transactions. The bank agrees to guarantee the credit of a merchant 
 who wishes to buy goods abroad. The bank in this case docs not 
 accept drafts drawn against it, but asks a London correspondent to 
 accept the drafts, the bank agreeing to collect from the merchant 
 and forward the funds to its correspondent before the date of maturity 
 of the drafts. Such business is done on a commission l)asis. 
 
 On the resources side of a bank statement we find first the item 
 of Loans, or Loans and discounts. This item indicates that the bank 
 has claims against individuals who have borrowed funds to the amount
 
 56 I'RINCIPLKS or MONEY AND BANKING 
 
 named. As an evidence of these claims the bank has in its port- 
 folio bills of exchange and promissory notes of individuals which 
 cover the amount of the loans. These loans may be either on time 
 or demand. 
 
 There is a slight difference between a loan and a discount. In the 
 case of a loan the interest is payable at the expiration of the loan, 
 or, if it be a long-time obligation, at stated intervals annually or 
 semiannually. In the case of a discount, on the other hand, the 
 interest is deducted in advance and the borrower is given, not $i,ooo, 
 but $i,ooo less the interest for the time the loan is to run. Then at 
 the date of maturity he repays to the bank only the face of the loan, 
 $i,ooo. A discount, then, is merely a loan in which the interest is 
 payable in advance rather than at maturity. In practice nowadays 
 discounting is almost universal, except for call or demand loans. 
 
 The item of Bonds, securities, etc., shows that the bank has in its 
 possession various stocks and bonds which it has purchased from time 
 to time. United States bonds to secure circulation indicates the 
 ownership of bonds that are devoted to a specific purpose, that of 
 serving as security for the issue of circulating notes. These bonds 
 are not held in the bank's own vaults, for the law requires that they 
 shall be deposited in the United States Treasury at Washington.' 
 They are nevertheless an asset and the bank receives interest from 
 the government just as it would if the bonds were in its own possession. 
 
 The entry Req,l estate is a statement of the cost value of the bank 
 buiMing, furniture, and fixtures and the ground upon which the bank 
 is located, together with such other real estate as may be necessary 
 to the conduct of the banking business. 
 
 Reserve is the statement of the amount of money that the bank has 
 in its till and vaults. It is made up of all the various forms of our 
 currency, except bank notes and minor coins. If a national bank 
 holds in its possession notes of other banks, a separate entry is made 
 "Notes of other banks" or "Bills of other banks." This is because 
 the law specifies that no national bank shall count bank notes as a 
 part of its specie reserve. A state bank, however, not subject to this 
 provision would not need to make a separate entry for bank notes. 
 
 Items closely connected with cash are "Due from other banks" 
 and "Exchanges for clearing-house," or "Checks for clearing," to 
 use another expression. The former indicates that this bank has 
 
 * Under the federal reserve system this item will probably eventually 
 disappear.
 
 PRINCIPLES OF "COMMERCIAL" BANKING 57 
 
 deposits with other banks against which it can draw on demand. 
 "Exchanges for clearing-house" means that this bank has checks 
 on other banks to the amount named, which it has cashed or credited 
 to the accounts of its depositors, and in exchange for which it may 
 receive cash from the banks against which the checks were respec- 
 tively drawn. In practice, however, when presented to the clearing- 
 house these checks are largely counterbalanced by similar claims 
 against this bank, and only a small net balance, one way or the other, 
 need be paid in cash. 
 
 Federal reserve notes are notes issued by the regional (central) 
 institutions. They are to nearly all intents and purposes as good 
 as cash, though they may not be counted as part of the lawful 
 reserve. 
 
 21. DISCOUNT, DEPOSIT, AND ISSUE' 
 By CHARLES F. DUNBAR 
 
 The business of a commercial bank is said to be to lend or discount 
 and to hold deposits. With these two functions may be combined a 
 third, that of issuing bank-notes, or the bank's own promises to pay, 
 for use in general circulation as a substitute for money. 
 
 The borrower who procures a loan from a bank does so in order 
 to provide himself with the means either of making some purchase 
 or of paying some debt. He seeks, therefore, to obtain, not neces- 
 sarily money, but a certain amount of purchasing power in available 
 form, or of whatever may be the usual medium of pa>Tnent, measured 
 in terms of money. If we suppose him to be a merchant, buying and 
 selling goods upon credit in the regular course of his business, he is 
 likely at any given time to have in his hands a greater or less number 
 of notes, not yet due, signed by the persons to whom he has heretofore 
 made sales; and it is in the form of a loan, made upon the security 
 of one or more of these notes and giving him immediate command 
 of the amount which will become due upon them in the future, that 
 he is likely to procure what he needs from the bank. Tins loan 
 may be supposed to take the form of what is termed a discount; in 
 which case, in exchange for the note "discounted," the borrower is 
 entitled to receive from the bank the amount promised in the note, 
 less the interest on that amount computed at an agreed rate for the 
 time which the note has still to run. The discounted note becomes 
 
 ' Adapted from Theory and History of Banking, pp. 9-15. (G. P. Putnam's 
 Sons, 1891.)
 
 58 PRINCIPLES OF MONEY AND BANKING 
 
 the property of the bank, to which the promisor is henceforward 
 bound to make payment at maturity; and this payment when made 
 obviously restores to the bank the amount advanced by it in exchange 
 for the note, together with the interest which was the inducement for 
 making the exchange. 
 
 It is now clear, however, that the operation which we have 
 described, although spoken of as a loan by the bank to a borrower, 
 is in fact something more than a loan. The note when given was 
 evidence that its holder owned the right to receive at a fixed date 
 a certain sum of money, and this right the so-called borrower has 
 ceded to the bank. Passing over for the present all question as to 
 what he has received in exchange, his cession of property by sale is 
 as distinct and complete as if he had sold a bale of cotton to another 
 merchant instead of selling to a bank his right to receive money 
 in the future. The note has ceased to be his, and now takes its place 
 among the investments or securities of the bank, although custom 
 may lead to its classification as a "loan or discount." 
 
 We have now to consider what it is that the bank gives in exchange 
 for the right to demand and receive money at a future time, acquired 
 by it under these circumstances. The proceeds of the discounted 
 note, or its nominal amount less the interest for the time for which 
 it is to run, are in the first instance placed to the credit of the mer- 
 chant, to be drawn out by him at once or at different times, as con- 
 venience or necessity may dictate. In thus crediting him with the 
 proceeds, the bank plainly gives to him simply the right to call upon 
 it at pleasure for that sum of money. Whether this right is exercised 
 at once by demanding and receiving the money, or whether the exer- 
 cise of it is postponed as regards the whole or a part of the amount, 
 in either case the right to demand, or to "draw," is the equivalent 
 received by the merchant in exchange for the right, sold by him to 
 the bank, of which the note discounted was the evidence. The sum 
 which he is thus entitled to call for is said, so long as it stands to his 
 credit, to be deposited in the bank, or to be a deposit standing in his 
 name, so that the transaction is seen to be, both in form and in sub- 
 stance, an exchange of rights. 
 
 But a deposit may owe its origin to a different operation from that 
 which has just been examined. It happens every day that the mer- 
 chant, having cash in hand, prefers not to hold it in his possession 
 until it is required for use, but to "deposit" it with the bank where 
 he usually transacts his business until he needs to use it. In this
 
 PRINCIPLES OF "COMMERCIAL" BANKING 59 
 
 case, when he makes his deposit, the property in the money or sub- 
 stitutes for money actually handed in by him passes to the bank, 
 and he receives in exchange the right to demand and receive at 
 pleasure, not that which he paid in, but an equivalent amount. Here, 
 then, as in the former case, the transaction is in effect a sale, although 
 the use of the word "deposit" seems at first to suggest an entirely 
 different idea of its character. 
 
 The other leading operations of banks, when analyzed, can also 
 be resolved into cases of the exchange of rights against rights, or 
 of rights against money; as, for example, when the bank, for the 
 convenience of its customer or depositor, undertakes to collect a note 
 due to him by some third party, in which case the amount paid to the 
 bank in money by the promisor is passed to the credit of the promisee 
 as a deposit. Here the bank has received money for the account of 
 the depositor, and has given to him in exchange a right to draw at 
 pleasure for the amount or any part thereof, the property in the money 
 actually paid having passed absolutely to the bank in exchange for 
 the right to draw. And again, when the bank buys from a merchant 
 a bill of exchange, or when it sells a bill of exchange drawn by itself 
 on some correspondent, it effects an exchange of money against a 
 right, or of a right against money, strongly resembling those already 
 considered. 
 
 A little consideration of the manner in which notes are issued 
 by banks will show that in the bank note we have only another form 
 of liability, differing in appearance, but not in substance, from the 
 liability for deposits. The bank note is the duly certified promise 
 of the bank to pay on demand, adapted for circulation as a convenient 
 substitute for the money which it promises. It is issued by the bank, 
 and can be issued only to such persons as are willing to receive the 
 engagement of the bank in this form instead of recei\ing money, 
 or instead of being credited with a deposit. Thus the so-called bor- 
 rower, who in the first instance has been credited with a deposit and 
 to whom the bank is therefore to this extent liable, may prefer to 
 draw the amount in notes of the bank and to use tliem in making his 
 payments. But, in this case, it is plain that the liability of the bank 
 is changed only in form; it is still a liability to pay a certain sum of 
 money on demand. And so if the depositor pays in money and 
 receives notes, or receives notes in satisfaction of a demand of an\- 
 kind against the bank, he, in fact, foregoes the use of the money 
 itself and consents to receive in its stead a promise to pay upt)n
 
 6o PRINCIPLES OF MONEY AND BANKING 
 
 (Icniand and to receive the evidence of that promise in the form of 
 notes. The question in which form he shall hold his right of demand 
 against the bank is one to be dcciflcd by the nature of his business 
 or by his present convenience, but plainly the decision of this question 
 in no way alters the relation between himself or any transferee of his 
 right, on the one hand, and the bank on the other. The notes issued 
 by a bank are thus a UabiUty distinguishable in form only from its 
 liability for deposits, and the fimctions of deposit and issue, instead of 
 being distinct, as is often assumed, are one in substance. 
 
 22. THE ONE UNDERLYING FUNCTION OF A BANK* 
 By H. PARKER WILLIS 
 
 What is banking ? Many writers define a bank as an institution 
 which exercises the functions of discount, deposit, and issue, a classi- 
 fication which yields very Httle insight because of the fact that such 
 a grouping of functions is merely a v»^ay of describing banking as an 
 operation from different points of view. WTiat the bank does is the 
 same under each of these heads; there is no difference in its essential 
 performance. Reduced to its lowest terms, this essential function 
 is that of guaranteeing the credit of individuals. The basic banking 
 transaction may be described as follows:. 
 
 A has purchased goods from B and has given B a document or 
 "note," in which he promises to pay B the sum of $1,000 with interest 
 at the end of ninety days. We may assume that this pajonent is 
 absolutely certain, and that there is no risk of loss. B, however, 
 wishes to get means of payment immediately in order to meet his 
 own obUgations. In order to do this, he resorts to someone who has 
 immediate funds and asks him to extend "accommodation." The 
 banker takes the note from B, and B gets in exchange the right to 
 draw upon the bank at sight up to an amoimt agreed upon. This 
 process is called discount, and the difference between the amount 
 that B can draw at sight and the face of the note is the discount for 
 this transaction. The banker seldom, if ever, enters into such a 
 transaction without having B's endorsement or guarantee on the note, 
 but it is plain that what has been done is to substitute the credit of 
 the bank for the credit of A and B. The banker counts upon not 
 being asked to pay money for the drafts drawn on him by B. That 
 is to say, he expects that not everyone to whom B gives a draft or 
 
 ' Adapted from The Federal Reserve, pp. 5-9. (Doubleday, Page & Co., 1915.)
 
 PRINCIPLES OF "CO:\LMERCI/\L" BANKING Ol 
 
 check on him will want to cash it, or, if such cashing should be de- 
 manded, that other checks and drafts will come into his possession 
 sufficient to offset those which he is thus asked to make good. 
 
 This hope is founded upon the fact that the banker accepts the 
 funds on deposit. He allows persons who want to have their money 
 safely kept to leave it with him, and this affords them a convenience 
 because they can now pay by means of checks. When he makes a 
 discount he may, and usually does, in the United States, make it 
 merely by crediting the person to whom it is granted with a fixed 
 sum, allowing that person to draw on it to the amount indicated. It 
 is clear that this "deposit" function is the same as the discount func- 
 tion, except in so far as the deposits with the banker consist of money. 
 Where they are created simply through crediting a customer with a 
 specified amount, the deposit function is merely another aspect of 
 the discount function. Neither function could be carried on without 
 the other. 
 
 It may be that the customer of the bank would rather not receive 
 the credit on the books of the institution because the persons with 
 whom he deals do not understand the check system or have no facili- 
 ties for cashing checks. Should that be true, the customer wiD 
 probably ask to receive his discount in currency. If the banker is 
 allowed to exercise the issue function, he will then merely hand the 
 person to whom he has granted the discount a quantity of "bank 
 notes." They are notes which he agrees to pay at sight if presented. 
 In this phase of the operation the banker has merely taken the note 
 from B and given in exchange a quantity of his (the banker's own) 
 notes in small denominations. The banker now has A's note endorsed 
 by B for Si,ooo for ninety days, while B, having paid, say, Sio for the 
 service, has, say, ninety-nine of the banker's notes of ten-dollar 
 denomination payable to bearer. The question may be asked why 
 B did not simply issue his own notes, numbering one hundred, of 
 denominations of Sio, and pay them to anyone who desired him to 
 settle his obligation. There is no reason why he might not have done 
 so except that the banker's credit is better known than his, and that 
 the banker specifically undertakes to pay his own notes in money 
 when they are presented. It is quite true that in most cases the holder 
 of such a note will not present it for payment; but one principal 
 reason why he does not do so is that he knows he can, if he chooses, 
 licjuidate in that way at any time. Performance of the operation 
 just referred to over and over again, and proju-r protection of the
 
 62 
 
 PRINCIPLES OF MONEY AND BANKING 
 
 bank's notes and deposits issued or granted so that the holder may 
 get cash at sight, is commercial banking. The banker may modify 
 the plan of his business by entering into an agreement with his cus- 
 tomers to pay them, not at sight, but on time; and in that case he is 
 able to use such funds as come to him for long-time investments. 
 The basic idea is the same in the one case as in the other, but the 
 method of procedure is different. 
 
 23. RATIO OF NOTES TO DEPOSITS IN DIFFERENT CLASSES 
 
 OF BANKS ^ 
 
 (In millions of dollars) 
 
 
 
 
 Other Central 
 
 
 
 
 New York City 
 
 Reserve and 
 
 Country Banks 
 
 Totals 
 
 Year 
 
 
 
 Reserve Cities 
 
 
 
 
 Notes 
 
 Deposits 
 
 Notes 
 
 Deposits 
 
 Notes 
 
 Deposits 
 
 Notes 
 
 Deposits 
 
 1870. . 
 
 • 32.9 
 
 167.0 
 
 68.4 
 
 134-7 
 
 190-5 
 
 199.7 
 
 291.8 
 
 501.4 
 
 1875.. 
 
 . 18 
 
 3 
 
 173-5 
 
 69 
 
 4 
 
 197 
 
 9 
 
 230.7 
 
 293 
 
 2 
 
 318.4 
 
 664.6 
 
 1880. . 
 
 . 18 
 
 6 
 
 242.0 
 
 72 
 
 4 
 
 234 
 
 3 
 
 226.4 
 
 397 
 
 2 
 
 317-4 
 
 873-5 
 
 1885.. 
 
 9 
 
 9 
 
 250 -5 
 
 55 
 
 3 
 
 302 
 
 I 
 
 203.7 
 
 549 
 
 8 
 
 268.9 
 
 1,102.4 
 
 1890. . 
 
 3 
 
 6 
 
 251-4 
 
 15 
 
 I 
 
 469 
 
 6 
 
 104.2 
 
 «43 
 
 8 
 
 122.9 
 
 1,564.8 
 
 1895- •• 
 
 • 14 
 
 3 
 
 299.7 
 
 32 
 
 7 
 
 509 
 
 3 
 
 135-4 
 
 892 
 
 7 
 
 182. s 
 
 1,701.7 
 
 1900. . . 
 
 • 29 
 
 3 
 
 420.7 
 
 03 
 
 7 
 
 775 
 
 2 
 
 190.9 
 
 1,312 
 
 3 
 
 283.9 
 
 2,508.2 
 
 1905 . . . 
 
 • 53 
 
 7 
 
 657-7 
 
 120 
 
 4 
 
 1,086 
 
 5 
 
 294.9 
 
 2,076 
 
 5 
 
 459-0 
 
 3,820.7 
 
 1909... 
 
 ■ 52 
 
 8 
 
 780.0 
 
 181 
 
 8 
 
 1,477 
 
 2 
 
 423-5 
 
 2,754 
 
 9 
 
 658.1 
 
 5,012.1 
 
 • 'From Statistics of Banks and Banking in the United States, i86j-igoQ. 
 (National Monetary Commission, 1910.)
 
 PRINCIPLES OF "COMMERCIAL" BAXKIXG 
 
 
 
 
 
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 64 PRINCIPLES OF MONEY AND BANKING 
 
 25. THE FUNCTION OF A CASH RESERVE* 
 By IRVING FISHER 
 
 It cannot be too strongly emphasized that, in any balance sheet, 
 the value of the liabilities rests on that of the assets. The deposits 
 of a bank are no exception. We must not be misled by the fact that 
 the cash assets may be less than the deposits. When the uninitiated 
 first learn that the number of dollars which note-holders and depositors 
 have the right to draw out of a bank exceeds the number of dollars 
 in the bank, they are apt to jump to the conclusion that there is 
 nothing behind the notes or deposit liabilities. Yet behind all these 
 obligations there is always, in the case of a solvent bank, full value; 
 if not actual dollars, at any rate dollars' worth of property. By no 
 jugglery can the liabilities exceed the assets except in insolvency, 
 and even in that case only nominally, for the true value of the liabiUties 
 ("bad debts") will only equal the true value of the assets behind 
 them. 
 
 These assets are largely the notes of merchants, although, so 
 far as the theory of banking is concerned, they might be any property 
 whatever. If they consisted in the ownership of real estate or other 
 wealth in "fee simple," so that the tangible wealth which property 
 always represents were clearly evident, all mystery would disappear. 
 But the effect would not be different. Instead of taking grain, 
 machines, or steel ingots on deposit, in exchange for the sums lent, 
 banks prefer to take interest-bearing notes of corporations and indi- 
 viduals who own, directly or indirectly, grain, machines, and steel 
 ingots; and by the banking laws the banks are even compelled to take 
 the notes instead of the ingots. The bank finds itself with liabilities 
 which exceed its cash assets; but in either case the excess of liabilities 
 is balanced by the possession of other assets than cash. These other 
 assets of the bank are usually liabilities of business men. These 
 liabilities are in turn supported by the assets of the business men. If 
 we continue to follow up the ultimate basis of the bank's liabilities 
 we shall find it in the visible tangible wealth of the world. 
 
 We have seen that the assets must be adequate to meet the 
 liabilities. We now wish to point out that the form of the assets 
 must be such as will insure meeting the liabilities promptly. Since 
 the business of a bank is to furnish quickly available property (cash 
 
 ' Adapted from The Purchasing Power of Money, pp. 40-46. (The Mac- 
 millan Co., 1913.)
 
 PRINCIPLES OF "COMMERCIAL" BANKING 65 
 
 or credit) in place of the "slower" property of its depositors, it fails 
 of its purpose when it is caught with insufficient cash. Yet it "makes 
 money" partly by tying up its quick property, i.e., lending it out 
 where it is less accessible. Its problem in policy is to tie up enough 
 to increase its property, but not to tie up so much as to get tied up 
 itself. So far as anything has yet been said to the contrar\-, a bank 
 might increase indefinitely its loans in relation to its cash or in rela- 
 tion to its capital. If this were so, deposit currency could be indefi- 
 nitely inflated. 
 
 There are limits, however, imposed by prudence and sound 
 economic policy on both these processes. Insolvency and insufficiency 
 of cash must both be avoided. Insolvency is that condition which 
 threatens when loans are extended with insufficient capital. In- 
 sufl5ciency of cash is that condition which threatens when loans arc 
 extended unduly relatively to cash. Insolvency is reached when 
 assets no longer cover liabilities (to others than stockholders), so that 
 the bank is unable to pay its debts. Insufficiency of cash is reached 
 when, although the bank's total assets are fully equal to its liabilities, 
 the actual cash on hand is insufficient to meet the needs of the instant 
 and the bank is unable to pay its debts on demand. 
 
 The less the ratio of the value of the stockholders' interests to the 
 value of liabiHties to others the greater is the risk of insolvency; the 
 risk of insufficiency of cash is the greater the less the ratio of the cash 
 to the demand liabilities. In other words, the leading safeguard 
 against insolvency lies in a large capital and surplus, but the leading 
 safeguard against insufficiency of cash lies in a large cash reser\-e. 
 Insolvency proper may befall any business enterprise; insufficiency 
 of cash relates especially to banks in their function of redeeming notes 
 and deposits. 
 
 Since, then, insufficiency of cash is so troublesome a condition — 
 so difficult to escape when it has arrived, and so difficult to forestall 
 when it begins to approach — a bank must so regulate its loans and 
 note issues as to keep on hand a sufficient cash reserve, and thus pre- 
 vent insufficiency of cash from even threatening. It can regulate 
 the reserve by alternately selling securities for cash and loaning cash 
 on securities. The more the loans in proportion to the cash on hand 
 the greater the profits, but the greater the danger also. In the long 
 run a bank maintains its necessary reserve by means of adjusting the 
 interest rate charged for loans. If it has few loans and a rcscr\c 
 large enough to support loans of much greater volume, it will endeavor
 
 66 PRINCIPLES OF MONEY AND BANKING 
 
 to extend its loans by lowering the rate of interest. If its loans are 
 large and it fears too great demands on the reserve, it will restrict 
 the loans by a high interest charge. Thus, by alternately raising and 
 lowering interest, a bank keeps its loans within the sum which the 
 reserve can support, but endeavors to keep them (for the sake of 
 profit) as high as the reserve will support. 
 
 If the sums owed to individual depositors are large relatively 
 to the total liabilities, the reserve should be proportionately large, 
 since the action of a small number of depositors can deplete it rapidly. 
 Similarly, the reserves should be larger against fluctuating deposits 
 (as of stockbrokers) or those known to be temporary. The reserve 
 in a large city of great bank activity needs to be greater in proportion 
 to its demand liabilities than in a small town with infrequent banking 
 transactions. 
 
 Experience dictates differently the average size of deposit accounts 
 for different banks according to the general character and amount 
 of their business. For every bank there is a normal ratio, and hence 
 for a whole community there is also a normal ratio — an average 
 of the ratios for the different banks. No absolute numerical rule 
 can be given. 
 
 B. Analysis of Bank Loans 
 
 (i) INTRODUCTORY 
 
 26. THE MANAGEMENT OF LOANS 
 
 In any business the extent and character of the assets owned in 
 relation to the liabilities is the test of good management. If the 
 accounts and bills receivable are certain to be paid when due, and if 
 they are ample to cover all current liabilities, the business is regarded 
 as fundamentally sound. Commercial banking differs from other 
 businesses in this connection only in the greater need imposed upon 
 it of keeping its assets in a liquid form. If a merchant finds himself 
 unable to meet current obligations from maturing assets, he may 
 seek an extension of time, but a bank when called upon to discharge 
 its obligations must pay at once. If it has insufficient funds for the 
 purpose there are but two alternatives open: to secure a loan from 
 another bank or to announce insolvency. The procuring of the 
 necessary funds from other bankers is often impossible, and it is 
 therefore of the greatest importance that a bank manage its loans and 
 discounts in such a way that they may be absolutely relied upon.
 
 PRINCIPLES OF "COMMERCIAL" B/VNKING 67 
 
 The greatest care should be observed in the granting of loans. 
 The security offered should be such that the bank has virtually 
 no doubt of the safety of the loan and of its prompt payment. The 
 maturities of the loans should be so arranged that they will insure, 
 as nearly as may be, a constant flow of funds to the bank, a flow 
 ordinarily sufficient to meet the constant drain of funds from the 
 bank. A correct policy in this connection would endeavor to provide 
 for as many maturities as possible on days or weeks that are known 
 to be periods of heavy withdrawals, and to arrange for fewer paj-ments 
 when the withdrawals are known to be light. It is obviously impos- 
 sible to make the flow of funds to the bank exactly coincide with the 
 withdrawals — so that no reserve at all would be required — but it 
 is evident that the bank management should strive for this goal. 
 The sounder and more licjuid the loans that are made and the more 
 scientific the arrangement of maturities, the less is the reserve required 
 in the handling of a given quantity of business, and in consequence 
 the greater margin of profit to the bank. 
 
 27. CLASSIFICATION OF LOANS IN NATIONAL BANKS' 
 
 The ordinary commercial bank has the option of making the fol- 
 lowing types of loans: first, on notes secured by mere personal 
 responsibiUty ; secondly, on notes secured by real estate; thirdly, on 
 commercial paper of the following kinds: (a) the single-name promis- 
 sory note, (b) indorsed notes and accepted drafts, (c) notes and drafts 
 accompanied by documentary evidence; fourthly, on notes secured 
 by collateral. 
 
 These loans may be further classified according to whether they 
 are time loans — thirty, sixty, or ninety days, or more — or demand 
 loans, subject to immediate liquidation. 
 
 The following table shows the classification of loans, first, in all 
 national banks, and, secondly, in all national banks in New York 
 City: 
 
 ' Comi)iled from reports of the Comptroller of the Currency.
 
 68 
 
 PRINCIPLES OF MONEY AND BANKING 
 
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 c< On t^OO 
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 6o. 2 
 
 76.1 
 
 116.0 
 
 170.7 
 
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 00 On On On 
 M M M M
 
 PRINCIPLES OF "COMMERCIAL" BANKING 
 
 69 
 
 28. CLASSIFICATION OF LOANS IN STATE BANKS, 1909' 
 (In millions of dollars) 
 
 Regions 
 
 'A 
 
 O 
 
 rt S *< 
 O 
 
 V ^ C 
 
 C"5 «J.2 
 
 Is" 
 
 — c-o_ 
 t« a «; g 
 
 
 32 
 
 
 g 
 
 C-SS 
 
 o 3 
 f c 
 
 New York City 
 Minneapolis. . . 
 
 Wisconsin 
 
 Southern states 
 United States. . 
 
 44 
 10 
 
 445 
 
 3,312 
 
 11,292 
 
 2.2 
 
 1.2 
 
 6.6 
 
 14. 1 
 
 134 9 
 
 70.3 
 0.2 
 
 3 3 
 
 26.3 
 
 226.8 
 
 71.8 
 
 24 
 
 21 .9 
 
 116. o 
 
 542. o 
 
 431 
 0.6 
 
 13 9 
 
 25-4 
 2530 
 
 45-8 
 
 I.I 
 
 II. 4 
 
 74.8 
 
 326.2 
 
 7.2 
 
 OS 
 20.8 
 
 56.7 
 334 9 
 
 (2) COMMERCIAL PAPER 
 
 29. LOANS ON COMMERCIAL PAPER' 
 By ROGER W. BABSON and RALPH MAY 
 
 Mercantile businesses are in almost constant need of borrowing 
 money for short periods of time. They find a call for merchandise 
 and a chance to buy it for less than they can sell it. To fill all orders 
 they can get they need more money than they have with which to 
 buy this merchandise. Such borrowing as this, to buy merchandise 
 or something similar, which is to be turned into cash, presumably 
 at a profit, and within a short time, is called borrowing through 
 commercial paper. Commercial paper is the name given the medium 
 for such borrowing and is not properly applied to any other form of 
 borrowing. It fills a lield of its own and requires separate analysis 
 and study. It is different from the borrowing of railroads and public 
 service corporations, even for an equivalent time. It is ditTcrcnl 
 from the borrowing of an individual on the most salable of security 
 and with ample margin. It is a method of finance all its own, just 
 as mortgage Ijonds arc in their particular field. It is a very important 
 factor in the financial system of any country, for as business is the 
 attempt to turn available wealth into capital, and as most business 
 
 ' From Special Report from the Banks of the United States. (National Monctar>' 
 Commission, 1909.) 
 
 'Commercial Paper, pp. 29-37. (Roger W. Babson, 1912.)
 
 70 PRINCIPLES OF MONEY AND BANKING 
 
 must have to do with the purchase and sale of merchandise, so com- 
 mercial paper must play a most important part, if not the most im- 
 portant part, in financing the business needs of a community or nation. 
 Commercial paper is one of the biggest aids that we can make use of 
 in economic progress, that is, in the acquisition of true wealth. Com- 
 mercial paper is entirely as proper an economic medium for borrowing 
 and lending in its own particular field as are other forms of security 
 in theirs, and when properly used to do the work for which it is 
 intended, and no more, it is exactly as safe. Loans to packing-houses 
 on short time, or to some large dry-goods house, or to a mill (if properly 
 issued) are examples of commercial paper. These loans are made to 
 firms conducting a well-known business and for well-known needs. 
 They distinctly belong with loans, the interest on which is pure 
 interest, as there is no exceptional risk involved in the loan. 
 
 The use of commercial paper as a medium of finance is by its 
 nature confined to the raising of money with which to buy stock in 
 some regular business or to avoid selling that stock temporarily. 
 In this country much commercial paper is sold in order to raise 
 money to buy machinery or other fixed assets. These are no less 
 valuable, perhaps, than the merchandise is, but there is absolutely 
 no hope of converting them into cash within the life of the notes, and notes 
 issued for this purpose are 7iot properly commercial paper. 
 
 Inasmuch as the proceeds of commercial paper are to go to the 
 purchase of merchandise, it follows that from the nature of merchan- 
 dise it cannot well be given as collateral. Commercial paper is, there- 
 fore, usually an ordinary promissory note without collateral. As 
 merchandise must be sold within the life of the note and as stock in 
 trade must usually be exhibited and be in shape for immediate 
 deHvery to be sold to the best advantage, it would be injurious not only 
 to the borrower but to the lender to require it as collateral. 
 
 30. KINDS OF com:mercial papers 
 
 By J. LAURENCE LAUGHLIN 
 
 I. The single-name promissory note. — Suppose that A, who is 
 doing a large business, has sold goods on credit (open account) to 
 many customers. A may find himself short of current funds in 
 consequence of the absorption of his capital in carrying these cus- 
 
 ' Adapted from Banking Reform, pp. 77-81. (National Citizens' League, 
 1912.)
 
 PRINCIPLES OF "COMMERCIAL" BANKING 71 
 
 tomers. If he goes to the bank for accommodation, he may request 
 a loan simply on the strength of his own personal, unsecured note. 
 In this case the wisdom of the bank in granting the loan will depend 
 entirely upon what it knows of the customer. If the total amount 
 which he desires is moderate as compared with his total assets, and 
 particularly as compared with his current cash receipts over a specified 
 period, the loan is "safe." If it complies wholly with these require- 
 ments, it is, perhaps, the safest purchase the bank can make, since 
 the individual has total assets largely in excess of the loan, while 
 he has current incomes that supply the means for prompt payment. 
 Paper thus obtained is termed single-name paper. 
 
 2. Two-name paper. — Suppose, however, that A, mstead of selling 
 his goods on credit (open account), has required his customers to 
 give him their notes payable at thirty days. -He may take these notes 
 to his bank and ask for a discount, in which case the bank will desire 
 to know substantially the same things as before. It may or may not 
 make a close inquiry into the condition of the persons who gave the 
 notes to the merchant that originally sold the goods. It assumes, of 
 course, that A has investigated them with care. But its real security 
 is found in the fact that it knows the man who presents the notes for 
 discount, is familiar with his business, and requires him to indorse 
 the notes before getting accommodation based on them. This is 
 called two-name paper, and while collection at maturity will first 
 be sought from the person who made the notes— that is, the person 
 who bought the goods from the original merchant and gave the latter 
 the notes in e.xchange — the bank will, if payment is not promptly made, 
 require the person who secured the discount to make good the sum. 
 
 The value of two-name paper as compared with single-name 
 paper is entirely relative and dependent upon circumstances. If the 
 individual who presents the notes for discount is stronger and belter 
 known linancially than the makers of the notes, it is probable that 
 his own unsecured note would be quite as satisfactory as tlie two- 
 name paper. If the maker of the notes and the man who presents 
 them for discount are both persons of small resources ami questionable 
 credit, the combination of liability furnished by the two-name 
 paper is not important and does not of itself make the paper good. 
 The ultimate test is invariably found in the responsibility of those 
 whose names appear, and if one of these names represents unques- 
 tioned commercial solvency, it is far better as a protection to the bank 
 than several names whose credit is doubtful or limited.
 
 72 PRINCIPLES OF MONEY AND BANKING 
 
 The kind of two-name paper which has jusL been described is not 
 the only one. In many parts of the country it is not even the most 
 important. A, who sold the goods to B, may, instead of requiring 
 B to give him a "note" payable after thirty days, stipulate, at the 
 time when his sale is made, that he will simply "draw" on B "at 
 thirty days' sight." That is to say, simultaneously with his shipment 
 of goods to B he hands to his bank a draft on B which is payable 
 thirty days after being presented to the latter. The bank then 
 sends this draft to a bank in the place where B is situated, and this 
 bank presents it to B, who, if the transaction is carried out, "accepts" 
 the draft by writing his name, with the date, upon it under the 
 word "accepted." This makes the draft an obligation on the part 
 of B to pay a specified sum at the end of a specified time. It is pri- 
 marily an obligation of B's, but in case he should not pay it, any person 
 who had acquired A's claim on B in the meantime would look to A 
 for payment. 
 
 Now, if A merely passed the draft to his bank for collection, he 
 must wait thirty days in order to get his payment, which is then 
 reported to him and placed to his credit by the bank that originally 
 took the draft. Probably, however, A wants funds at once. If 
 so, he has told his bank at the outset that he wishes to have the draft 
 discounted. In that case the bank has allowed him an immediate 
 credit on its books equal to the face of the draft less discount. It 
 then looks to B for payment, thereby standing in the place of A. 
 But in the event that B defaults and does not liquidate at the specified 
 time, A's bank will look to A, the merchant, for reimbursement of 
 the amount which it originally advanced him on the strength of his 
 application for a discount accompanied by the draft on B. It is, 
 in short, protected by two names. Paper of this kind is regarded 
 with peculiar favor by banks, because it grows out of a live commercial 
 transaction; and, where the operation is legitimate, there is every 
 reason to suppose that B will liquidate at maturity, while in case he 
 does not, the bank can fall back upon an individual in its own city 
 about whom it has full information. It may make the discount with 
 confidence if it is absolutely assured of the solvency and honesty 
 of either A or B, the transaction itself being good evidence that there 
 is real value in existence to back up the transaction. 
 
 3. Paper accompanied by documentary evidence. — If the bank 
 wishes to be exceedingly well protected, it may demand that A, who 
 discounts the draft with it, shall turn over to it, along with the draft
 
 PRINCIPLES OF "COMMERCIAL" HAXKIXG 75 
 
 itself, the documents which give control of the property which has 
 been sold, so long as the same is in transit. These documents may be 
 of several kinds and more or less numerous. 'J'he commonest is the 
 ordinary "bill of lading," issued by the common carrier who has 
 accepted the goods. It indicates that the ultimate power of demand- 
 ing the goods from the carrier has been surrendered by the shipper 
 and is now in the hands of the bank which has discounted the draft. 
 The bank may send this bill of lading, along with the draft, to its 
 correspondent bank in the place where B lives, and may decline to 
 give up the title to the property until such time as B liquidates the 
 draft. Or it may assent to the surrender of the property under 
 conditions which are satisfactory to itself. In this case the use of 
 the documents serves to locate the responsibility for releasing the 
 ultimate property on which the transaction is based — the goods that 
 passed from A to B in the original transaction. 
 
 Besides the bill of lading thus referred to there may be certificates 
 of insurance, and, in the case of foreign shipments, master's receipts, 
 the proper consular invoices, health certificates in the case of food- 
 stuffs, etc. The aim in transferring these documents is to show that 
 all the requirements of a bona fide sale have been complied with, and 
 that the way has been completely cleared for putting the goods 
 en route to the consumer via the ultimate dealer, while all risks in 
 connection with the process have been transferred to others who are 
 prepared to assume such risks. This is a way of giving the bank 
 additional assurance that everything is right, and that it has nothing 
 to apprehend from legal or other obstacles. It then assumes only 
 the legitimate risks which it was organized to incur — those connccteii 
 with the transfer of property from man to man, and the collection of 
 the proceeds of sales, either at sight or after the lapse of a specified 
 period. 
 
 31. DURATION OF COMMERCIAL PAPER* 
 By ROGER VV. BABSON and RALPH MAY 
 
 From a study of general business we may take a year as the long- 
 est time that commercial paper may be allowed to run. Only the 
 very strongest borrowers, however — those who by the nature of their 
 business and a past history of successful operation show especial 
 strength — should be allowed by lenders to make their commercial 
 
 ' Cotnmercial Paper, pp. 40-43. (Roger W. liubson, 191 2.)
 
 74 PRINCIPLES OF MONEY AND BANKING 
 
 paper for as long a term as a year. The best mills, such as successful 
 cotton mills, whose paper is endorsed by selling houses in the best 
 of repute, are examples of such business. Occasionally, because of 
 attractive rates, bankers who see by their study of fundamental 
 business conditions that rates will probably decline lend strong 
 mercantile companies or firms for so long a period as a year, and do 
 so with authority, not because it will take so long a period as a year 
 to sell the goods bought, but because the lender is sure that when the 
 first lot of merchandise is sold the proceeds will be used to buy more 
 merchandise, the result being the same as if the lender had renewed 
 once or more an original borrowing. Conversely, borrowers who 
 study fundamental conditions are justified in borrowing year money 
 when statistics show clearly that rates will advance. The practice 
 of allowing credit through commercial paper on merchandise which 
 will undoubtedly be sold long before the paper matures is, however, a 
 dangerous practice, especially for those who are not fully familiar 
 with fundamental business conditions and all changes which occur 
 from week to week. For such it is better for both the lender and the 
 borrower to start anew with each individual transaction. 
 
 Most commercial paper should mature within six months, much 
 within four months, much within ninety days. With any proper 
 operation of commercial paper as a medium of finance, the time the 
 paper has to run will decrease with sixty to ninety days as its limit. 
 Foreign countries, older communities than this, rarely have commer- 
 cial bills for sLx months' time. Six months should be taken in general 
 as the maximum time commercial paper shall be allowed to run, 
 the varying maturities allowed being governed by the convertibility 
 of the merchandise back of them and the foresight of the principals 
 involved. Packing -house paper, which is presumably secured by 
 merchandise which has as ready a sale as almost anything, is especially 
 safe and may be taken with safety for the full time if the makers 
 desire a sLx months' maturity. Commission merchants, such as 
 those dealing in cotton cloth and seUing for mills, or houses selling 
 groceries and like goods, for which there is a constant demand, should 
 also, if they wish, be allowed six months' time. 
 
 Paper of manufacturers, say of a special form of shoe, the value 
 of which is quick to change with fashion and the sale of which ought 
 to be arranged for practically before the paper to cover the merchan- 
 dise is put out, should not be made for over five months. Care should 
 be taken, too, that a firm manufacturing a specialty does not renew
 
 PRINCIPLES OF "COMMERCIAL" BANKING 75 
 
 its paper except under exceptional circumstances. Such renewals, 
 if in any quantity, should be taken as a danger sign at once. Makers 
 of heavy machinery may or may not be given credit for so long as 
 six months with safety. Usually, in the case of such borrowers, most 
 of the machinery made is contracted for. If a customer is not ready 
 to fill his contract immediately and yet is good, it is perfectly proper 
 that the manufacturer should be given credit to carry his merchandise; 
 but care should be taken that such credit is based on a firm basis. 
 The trade accounts of the manufacturers of heavy machinery and the 
 like, who make their paper regularly for the. longest possible period, 
 should be examined with especial care. 
 
 32. CONFUSION OF COMiMERCIAL AND INVESTMENT 
 
 LO.\KS' 
 
 By WILLIAM A. SCOTT 
 
 It is possible, indeed very easy, for a bank to confuse commercial 
 and investment loans. This confusion is most readily accomplished 
 by the exchange of investment securities for checking accounts. Thus 
 a commercial bank may treat bonds, mortgages, or the personal notes 
 of its customers indefinitely renewed and discounted for investment 
 purposes in the same manner that it treats genuine commercial paper. 
 The bank creates for itself a demand obligation, just as in the case 
 of a loan on commercial paper, but without any assurance that the 
 funds loaned will be devoted to uses which will provide for an early 
 liquidation of the loans. 
 
 There are several reasons which account for the prevalence of 
 this confusion in commercial banks. The fact that circulating notes 
 supposed to be adequately protected by government bonds are put 
 into the hands of national bankers and are regarded both by them 
 and by the general pubUc as money which, under ordinary circum- 
 stances, will not need to be redeemed, tempts the banks to exchange 
 them for investment securities, or at least obscures the harm of such 
 a procedure. 
 
 The laws pertaining to our state banks also encourage the confu- 
 sion of these two departments of banking. Some of these laws place 
 no limit whatever upon the amount of investment such banks may 
 
 'Adapted from "Investment vs. Commercial Banking," Proceedings of the 
 Second Annual Convention of the Investment Bankers' Association of America, 1913, 
 pp. 81-84.
 
 70 PRINCIPLES OF MONEY AND BANKING 
 
 make in real estate and mortgage securities, and in other cases the 
 limits prescribed for such investments do not depend in any respect 
 upon the capital, surplus, and savings funds which they possess. 
 Indeed, in country towns these banks are encouraged to loan their 
 funds to farmers on mortgage security and for the purpose of assisting 
 them, not in the transfer of their crops to consumers, or in the trans- 
 formation of seed into crops, but for the purchase of their lands, the 
 construction of their buildings, the equipment of their farms with 
 drainage, irrigation works, cattle, machinery, etc. Thus they are 
 tempted, and in some cases almost forced, to transform investment 
 securities into checking accounts. 
 
 Our reserve system contributes to the same end. It compels 
 our banks to keep locked up in their vaults in cash a certain percent- 
 age of their deposit liabilities. A larger percentage is usually kept 
 on deposit with banks in reserve cities, and since they must be held 
 subject to call, these funds flow to New York City, where they are 
 invested on call loans on the New York Stock Exchange. The fact 
 that under ordinary circumstances the loans of a broker when called 
 can be transferred from one bank to another, and that the securities 
 deposited as collateral can be readily sold upon the stock exchange, 
 has created the impression that these loans are really liquid. As a 
 matter of fact they are not liquid in any proper sense of the term. 
 The sale of a bond or of a certificate of stock on the New York Stock 
 Exchange is not Hquidation. It is merely a transfer of obligations 
 from one person to another, and if the pressure for realization upon 
 call loans is great, these transfers cannot be made in the ordinary 
 manner, and crisis ensues. 
 
 The third part of our reserves takes the form of high-class bonds 
 listed upon the exchanges. Banks call these their secondary reserves 
 and ordinarily feel quite safe when they have large quantities of them 
 in their vaults. In this case also they are deceived by the fact that 
 ordinarily, when everything is running smoothly, such bonds can be 
 turned into cash, and they are accustomed to call these securities 
 liquid on that account, but they are no more liquid than are the call 
 loans based upon them, and pressure to realize on this portion of our 
 reserves, if it be great, is forced liquidation, and in extreme cases also 
 results in crises. 
 
 So far as the danger of confusing commercial and investment loans 
 is concerned, in many respects the worst of our banking practices still 
 remains for discussion. I refer to the basis on which lines of credit
 
 PRINCIPLES OF "COMMERCIAL" BANKING 77 
 
 for ordinary bank customers are established and administered. It 
 is customary for a business man to arrange with his banker for such 
 a line, and too often in determining how much it shall be the bank 
 takes into consideration the man's total possessions rather than the 
 volume of commerce which he transacts. The Une once determined, 
 the customer expects that the bank will carry him for that amount 
 and usually resents too close inquiry into the way in which he employs 
 borrowed funds. Though the banker usually insists that his cus- 
 tomer's paper shall be drawn for short periods of lime, both expect 
 that this paper will be renewed at maturity. Indeed both the cus- 
 tomer and the banker are apt to regard the amount fixed in the line 
 of credit as a part of the former's permanent working capital. The 
 practice of demanding carefully drawn statements of a customer's 
 business is fortunately growing, but it is still very far from common. 
 The correct interpretation of these statements when they are drawn 
 is even less common. 
 
 On account of this practice a banker rarely knows to what extent 
 the paper in his portfolios represents commercial and to what extent 
 investment processes. Until the test of forced liquidation actually 
 comes, he does not know how large a percentage of his resources are 
 really liquid. Under these circumstances it is not surprising that the 
 line between investment and commercial loans is frequently crossed.' 
 
 33. THE CREDIT DEPARTMENT OF A BANK 
 
 The credit department of a bank is a development of the past 
 twenty-five years. Today practically all of our large city banks ha\c 
 such a department, though in the country as a rule the work is not 
 yet differentiated. The functions of a credit department consist 
 of a systematic and judicious collection of data respecting the financial 
 responsibility, character, antecedents, and business qualifications and 
 abilities of the bank's customers, the classification of the data on each 
 customer in chronological order, and their systematic preservation 
 for future reference and comparison. A well-arranged file will dis- 
 close at a glance the entire career and present business standing of 
 any customer. 
 
 The principal sources of credit information are as follows: (i) 
 signed property statement from the borrower; (2) reports from com- 
 petitors of the ])orrower; (3) reports from the trade, that is, from his 
 
 'Compare cliap. xi, sec. i. — Editor.
 
 78 PRINCIPLES OF MONEY AND BANKING 
 
 mercantile creditors; (4) reports from banks with whom he has 
 dealt; (5) reports from commercial agencies; (6) reports from other 
 departments of the bank that may have come in contact with him; 
 (7) general "gossip" of the community. 
 
 The most important of these sources of information is by all odds 
 the financial statement. It is an itemized exhibit of the resources and 
 liabilities of the customer, usually at date of last inventory. A care- 
 ful analysis of a statement will show the amount of cash that could 
 be realized from the business if it were suddenly Uquidated and its 
 assets thrown on the market. Some of the largest banks now sup- 
 plement this statement by an investigation of the factory or store 
 conducted by the borrower. Expert appraisers and engineers are 
 sometimes employed for the purpose. 
 
 Dun's and Bradstreet's reports furnish a great amount of valuable 
 historical data as well as collateral evidence bearing on the present 
 status of the borrower. They collect information with reference to 
 business houses and give them a "rating" in their reports. They 
 aim to cover the entire field and include every individual business 
 man, but with new enterprises and even new cities springing up daily 
 it is impossible in practice for them to furnish recent information on 
 all mercantile concerns. A serious handicap to reliable information 
 lies in the fact that the agency reporters are not always treated with 
 the greatest freedom and confidence. Moreover, the reporters are 
 poorly paid, and hence many of them are poorly qualified for the work 
 in hand. There is also, in many instances, an evident desire on the 
 part of the firms concerned to strengthen their "rating" by deliberate 
 deception. Nevertheless, the service performed by the agency reports 
 is an invaluable aid. 
 
 The remaining information is obtained by correspondence and 
 interviews, and it usually furnishes much collateral evidence on the 
 financial and moral responsibihty of the borrower. 
 
 It is not a function of the credit department of a bank, how- 
 ever, to analyze the information collected and pass judgment upon 
 the loan. It merely supplies the information to the loan officers 
 of the bank, who render the decision and assume all responsibility 
 for the loan. 
 
 34. A FINANCIAL STATEMENT 
 
 The following is a form of financial statement recommended 
 by the American Bankers' Association. The statement proper is
 
 PRINCIPLES OF "COMMERCL\L" BANKING 79 
 
 followed by a long list of questions as to the character of the 
 individual items. 
 
 Assets Liabilities 
 
 Cash Notes payable 
 
 Bills receivable (net) Accounts payable 
 
 Accounts receivable (net) Deposits 
 
 Merchandise Bonded debt 
 
 Land ^lortgages 
 
 Buildings Accrued Uabihties 
 
 Machinery — ^fixtures Total 
 
 Capital 
 
 Surplus — profits 
 
 Reserves 
 Total Total 
 
 35. COMMERCIAL PAPER HOUSES AND NOTE BROKERS 
 
 The business of note brokerage arose in response to a very definite 
 economic need. Banks in a given community frequently find that 
 they cannot fully utilize their resources there, and wish in consequence 
 to make loans in a wider market. Similarly, it frequentlv happens 
 that borrowers in a given community are unable to procure adequate 
 accommodations for the reason that the banks there have already 
 made loans to their full capacity; in consequence borrowers often 
 wish to procure funds in a wider market. The opportunitv thus 
 afforded in bringing together the banks and borrowers of different 
 localities has given rise to a distinct type of financial middleman. 
 A remunerative business was early developed by individuals in taking 
 notes of merchants in one town and selling them on a commission 
 basis to banks in another town. This business has become so impor- 
 tant today, however, that in place of the individual note broker we 
 now usually find the commercial-paper house, an institution quite 
 as important in the financial world as the banks themselves. Some 
 of these houses purchase and sell commercial paper amounting to 
 hundreds of millions of dollars annually. Their operations are nation- 
 wide in extent; they sell the paper of New England dealers to 
 banks in California, and that of merchants in Portland and Seattle 
 to the bankers of Chicago and New York. The commercial-paper 
 broker thus serves the important economic function of adjusting or 
 equilibrating the demand and supply of loanaJjle funds. 
 
 The commercial-paper house may cither buy the paper outright 
 and then sell it to the bank, or it may merely offer the paper for s;ile
 
 8o PRINCIPLES OF MONEY AND BANKING 
 
 with the knowledge that it can be obtained on request. The former 
 method is usual nowadays among the larger houses. In either case, 
 however, the brokerage house is a mere middleman, for it is not a 
 part of its business to loan funds; it always buys to sell on a commis- 
 sion basis. It may be added that the house guarantees the genuine- 
 ness of the signatures to the paper, though it does not indorse the 
 paper and thereby assume a secondary liability. 
 
 Where the commercial-paper house buys the paper outright there 
 is much more likelihood that the broker will investigate the financial 
 standing and general character of the borrower than if he merely 
 secures the paper upon request, for he may find himself unable to 
 sell the paper. This is regarded by many as an important considera- 
 tion, for the banker is at a disadvantage in investigating business 
 firms at long range. With a local customer the bank as a rule deals 
 with persons who have been known to it for many years and whose 
 business standing is a matter of record in the files of the credit depart- 
 ment. But in the case of paper bought in the open market, unless 
 the name of the borrower is particularly well known, the bank has 
 to deal in the main with an abstract proposition in the form of the 
 borrower's statement. The commercial-paper house, through its 
 investigation, may therefore serve as an additional check on credit 
 on the principle that two investigations are better than one. There 
 is a possible danger here, however, in that each investigation may be 
 less rigid than would be the case if the responsibility were not divided. 
 
 Where the paper is of an unknown name, it is the usual custom 
 for the bank to buy the paper on an option of seven or ten days, 
 during which time it may make an adequate investigation of the firm 
 or corporation offering the paper. Such an investigation must be 
 conducted chiefly by means of letters of inquiry to the banks and busi- 
 ness men in the town where the borrower is located, to those in the 
 trade who have sold goods to the party in question, and to bankers 
 in great commercial and industrial centers where the paper is likely 
 to be placed on the market. If the paper is not acceptable after investi- 
 gation, it is returned to the commercial-paper broker, the bank of 
 course keeping the interest earned while the paper was in its possession. 
 
 The term "commercial paper" as used in the financial world 
 often refers, not to all paper arising out of commercial transactions, 
 but only to paper that is handled by the commercial-paper houses. 
 Such paper has its own special quoted rate, which often varies materi- 
 ally from the rate on direct loans of banks to their customers.
 
 PRINCIPLES OF "COMMERCIAL" BANKING 8 1 
 
 (3) COLLATERAL 
 36. LOANS ON COLLATERAL 
 
 Loans that are contracted for the purpose of investing in fixed 
 capital, or in any way that does not give rise to funds for the payment 
 of the loan at an early maturity, must be classed as investment 
 rather than commercial loans. Such short-time loans may be per- 
 fectly safe if the bank is not required to pay on demand, but it is 
 clear that a bank cannot meet demand liabilities with assets whose 
 maturities depend upon the more or less remote incomes to be derived 
 from investments in fixed capital. In a similar way loans granted to 
 individuals for personal consumption or non-commerce, or to be used 
 in speculative enterprises, are unsafe for a commercial bank whose 
 liabilities are demand liabilities. Unless borrowed funds are used in 
 the manufacture or marketing of goods, there is not a reasonable 
 assurance that the loans will be paid at maturity. Accordingly, non- 
 commercial loans are usually made on collateral; that is, the borrower 
 pledges with the bank as security some valuable claim to wealUi, 
 such as bonds, stocks, or warehouse receipts. In case, then, that 
 the loan is not paid at maturity, the bank can sell the security thus 
 pledged and thereby keep itself in funds. In the event that the loan 
 is paid, the collateral is returned to the borrower. This sort of loan, 
 when properly safeguarded, is in normal times quite as liquid as 
 commercial-paper loans. The nature and types of collateral may be 
 indicated by reference to a few typical cases. 
 
 A bond or brokerage house is a concern which deals in invest- 
 ments or securities, and has nothing to do with tlie marketing of goods. 
 It would be dangerous for a bank to loan to such a concern without 
 collateral security. But such a house owns blocks of securities, 
 stocks and bonds, which have a definite market value and which can 
 be hypothecated with the bank as security for a loan. 
 
 A brewer has his capital invested in the manufacture of products 
 which will be consumed only after an interval of several years, often 
 from four to eight years after they are manufactured. These goods 
 are stored in government bonded warehouses and negotiable receipts 
 are issued by tlie warehouses to the owners of the goods. These 
 receipts can be used as security for a loan at a bank in the same manner 
 as stocks and bonds. 
 
 Spring eggs are placed in cold storage and negotiable receipts 
 are issued by the warehouse. The eggs are covered by fire insurance
 
 82 . PRINCIPLES OF MONEY AND BANKING 
 
 and arc safeguarded by such means as the cold storage affords. The 
 possibility of wide fluctuations in value render them undesirable 
 security for commercial loans, but the warehouse receipts, with a 
 proper margin, can be safely used as collateral for a loan. 
 
 Grain is stored in grain elevators under the supervision of the 
 government. In Illinois, for instance, there is a State Warehouse 
 Commission under whose supervision warehouse receipts are issued 
 certifying that the wheat, corn, or oats is all of a certain grade. These 
 receipts are insured against theft or loss by fire, and they pass current 
 almost as money does. They are, therefore", well adapted to serve 
 as security for loans at a bank, and are among the most conmion forms 
 of collateral security. 
 
 It is not safe for banks to make loans to the full present market 
 value of such securities. They may fluctuate widely in value during 
 the life of the loan and prove inadequate in case of forced sale to cover 
 the amount of the loan. It is necessary, therefore, to require a margin, 
 an excess of valuable securities over the amount of the loan. This 
 excess is, of course, returned to the borrower after the loan has been 
 paid. 
 
 The amount of margin required will vary in proportion to the 
 chance of sudden shrinkage in the salable value of the collateral. 
 In the case of the best bonds ten per cent is usually regarded as a 
 safe margin. Twenty per cent is usually required in the case of the 
 best active listed stocks. On less active or more speculative stocks, 
 and in common stock, a much larger margin is necessary for safety. 
 Mixed collateral is obviously better than that of a single class of 
 bonds or stocks. In the case of collateral, marketabiUty is even 
 more important than steadiness of value or ultimate safety. Collat- 
 eral is not regarded as an investment. It is merely a protection for 
 the investments in the form of loans, hence ready salabiUty is of first 
 importance. It is for this reason that collateral that is regularly 
 quoted and dealt in on the exchanges is much more acceptable 
 than non-listed securities. "The fact that a security is hsted on 
 a stock exchange, however, even the New York Stock Exchange, 
 is not in itself evidence to warrant its being accepted as the best 
 of collateral, any more than the fact that a security is not listed 
 should preclude it from acceptance as collateral." Investigation 
 of the conditions surrounding the given security is necessary in either 
 case.
 
 PRINCIPLES OF "COMMERCIAL" BANKING 83 
 
 37- THE CAUSE OF THE DEVELOPMENT OF COLLATER.\L 
 LOANS m THE UNITED STATES' 
 
 By EARLE p. carman 
 
 National banks are fundamentally commercial banks. Their 
 operations are restricted by law almost entirely to transactions 
 involving short-term credits, which Congress assumed would consist 
 mainly of commercial credits. The National Bank Act attempted 
 to make such credits feasible by requiring the banks to keep a mini- 
 mum cash reserve equal to a certain percentage of their deposit 
 liabilities. It was assumed that this cash reserve would enable the 
 banks to meet the unusual and extraordinary demands of depositors, 
 and that their remaining funds could be employed in commercial 
 credits by arranging their loans in such manner that they would 
 mature in rotation, and thus maintain at an average level the funds 
 required to meet the usual and ordinary demands of depositors. 
 
 In all countries commercial credits have always been preferred 
 by banks of discount and deposit because of the fact that they auto- 
 matically provide the means for their own liquidation under ordinary 
 circumstances. In other words, the mere granting of the loan places 
 the borrower in possession of property through the sale of which he 
 will be able to pay the loan at maturity. And banking experience 
 for more than a century has demonstrated that pure commercial 
 loans are the safest of all temporary investments. Commercial loans, 
 however, are usually made for periods of thirty, sixty, or ninety 
 days, while the larger part of commercial bank deposits are pavable 
 on demand. Now it is obvious that a bank cannot safely loan for 
 fixed periods of time any large percentage of funds which it may be 
 called upon to pay out instantly unless it has some means of convert- 
 ing such loans into cash before maturity, if necessary. 
 
 For a century or more commercial loans in the leading countries 
 of Europe have been instantly convertible into cash by reason of the 
 fact that they could be rediscounted at the central banks of the 
 countries where they originated. This instant convertibility of com- 
 mercial credits, added to their inherent safety, caused them to be 
 favored with a lower rate of interest than any other short-term credit. 
 Thus in European countries commercial loans, or "discounts," as 
 
 'Adapted from "The Change in Credit Methods Made Necessary by the 
 Federal Reserve Act," Commercial and Financial Chronicle, 1915, |)p. 1396-97.
 
 84 PRINCIPLES OF MONEY AND BANKING 
 
 they are called, are made at a rate of interest usually i per cent lower 
 than collateral loans, however choice the collateral pledged as security. 
 In America, however, prior to the passage of the Federal Reserve 
 Act, no means existed for rediscounting commercial paper, and it 
 could only be converted into cash when it matured. The necessity 
 of loaning a large percentage of demand deposits in such manner that 
 they could be instantly converted into cash was no less imperative 
 here than in Europe, and it compelled American bankers to relegate 
 commercial credits to a secondary position and devise a means of 
 making loans which could be converted into cash whenever desired. 
 Consequently, demand loans secured by collateral which could be 
 sold in the open market became the favorite method of investing 
 demand deposits, and clearly the most logical method under the 
 circumstances. This preference for collateral loans encouraged the 
 creation of collateral which could be pledged to secure such loans. 
 This collateral, however, consisting of stocks and bonds, is the product 
 of investment banking and represents fixed or permanent property. 
 The loans made against it, therefore, are in no sense commercial. 
 The stock exchanges furnished constant market quotations for such 
 collateral and provided a means of selling it instantly should the 
 banks desire to do so. Naturally, under such circumstances, collat- 
 eral loans could be secured with the greatest ease, and this encouraged 
 speculation on the stock exchanges. Whenever this speculation 
 expanded sufficiently to absorb the demand money readily avail- 
 able, the interest rate for such money advanced, and whenever 
 this interest rate rose above the legal rate for commercial paper it 
 naturally drew into the demand, or "call," money market funds which 
 otherwise would have been available for commercial credits.^ 
 
 38. CALL LOANS 
 
 Call loans are loans that are terminable at the demand of either 
 the borrower or the bank. If the borrower washes to repay the loan 
 he has the privilege of doing so without waiting for a maturity date. 
 If the bank wishes to enlarge its cash reserve it may demand immediate 
 payment of its call loans. In practice, "on demand" means sub- 
 ject to call the next day, and call loans always run at least one day. 
 There is a rule, also, that loans cannot be called or paid after 
 1:00 P.M., unless notice has been given before that hour. 
 
 'Compare chap, xi, sec. i. — Editor.
 
 PRI^XIPLES OF "COMMERCIAL" BANKING ^ r 
 
 The rates on call loans are subject to very wide fluctuations. 
 Ordinaril)- they are lower than any other rates, ranging from i to 
 2 or 2^ per cent, but on a few occasions they have gone beyond 
 IOC per cent. The call rate rose to 127 per cent on October 29, 1S96; 
 to 96 per cent on November 2, 1S96; to 186 per cent on December iS, 
 1899; to 75 per cent on May 9, 1901 ; to 125 per cent on December 28, 
 1905; in 1906 to 60 per cent on January 2; to 30 per cent on April 
 5 and 6; to 40 per cent on September 5, and to 45 per cent on Decem- 
 ber 31. 
 
 These high rates occur at times when a dearth of loanable funds 
 in New York coincides with both a heavy commercial demand and a 
 great financial demand for credit. A flurry on the stock exchange 
 will often give rise to the most insistent demand for funds for a short 
 time. 
 
 High call-loan rates are often pointed to as evidence of a monopo- 
 listic control of credit; but as a matter of fact there is a greater profit 
 accruing to the banks when the call rate is only 3 or 4 per cent than 
 when it is 25 or 50 per cent. When money rates reach these high 
 figures many corporations and large individual depositors are tempted 
 to withdraw their funds from the banks in order to make loans to 
 borrowers directly. This depletion of the banks' reserves at a time 
 when money is generally tight more than counterbalances the high 
 returns on the loans they may make on call. Because of this some 
 banks in New York have made it a rule never to loan money on call 
 at more than 6 per cent. 
 
 39. COLLATERAL LO.ANS AND STOCK EXCHANGE 
 SPECULATION' 
 
 By SERENO S. PRATT 
 
 The stock-broker e.xecutes orders for his customers on usually 10 
 per cent margin, but he is obliged to pay for the securities in full upon 
 delivery. It would be manifestly impossible for any broker to do this 
 without borrowing money from the banks. He has extended credit 
 to his customer; he must himself get credit from the banks. For 
 instance, a broker buys 5,000 shares of New York Central at no, 
 amounting to 8550,000. But he executes the order for his customer 
 on a margin of $55,000, so that he must pay the dilTerence of $495,000, 
 
 • .Adapted from The Work of Wail Street, pp. 267-74, 287, 275-78. 
 (D. Applcton & Co., 1903.)
 
 86 PRINCIPLES OF MONEY AND BANKING 
 
 either out of his own capital or else borrow of the banks. Necessity 
 compels him to go to the banks. lie takes the 5,000 shares of the 
 New York Central to the banks and offers them as collateral for a 
 loan. If he is wise, he already has an agreement with his customers 
 enabling him to do this. The banks lend him $440,000 on the col- 
 lateral at the prevailing rate of interest. With the $55,000 from his 
 customer and $440,000 from the banks the broker has $495,000, or 
 $55,000 less than he must pay for the stock. This he would have to 
 supply out of his own capital. 
 
 What is the net result? The customer is nominally the owner 
 of 5,000 shares of stock, which he has, however, never seen, and which 
 is actually in the possession of banks whose very names he may not 
 know. The interest of the banks in the stock represents 80 per cent 
 of its value; the broker's, 10 percent; and the customer's, 10 per cent. 
 It does not follow that every transaction is exactly of these proportions 
 of risk. The broker, in fact, may be able to obtain from the banks 
 loans large enough to enable him, in connection with his customer's 
 margin, to carry a transaction without the employment of much, 
 if any, of his own capital. This example has been based upon the 
 general rule that the margin demanded by the broker of his customer 
 is usually 10 per cent, and the margin demanded by the banks of 
 the broker is usually 20 per cent, the percentages in both cases varying 
 in accordance with the character of the securities. The example 
 serves to illustrate clearly the close intimacy existing between the 
 money-market and the stock-market. The money-lenders are, in 
 fact, the actual holders of the securities dealt in, and they have the 
 largest interest at stake in the maintenance of values. 
 
 But this is not the only connection between the banks and the 
 stock-brokers. Let us return to the example already given. The 
 broker has bought stock for which, on delivery, he must pay $550,000. 
 Now, before he can get any loans from the banks on this stock he 
 must have the stock in his possession, so as to be able to use it as 
 collateral for the loans. Before he can get it in his possession he must 
 pay for it. His balance in the bank may not be more than $50,000. 
 What is he to do ? 
 
 Right here enters the new aUiance between the banks and the 
 brokers. It goes by the name of certification. The broker, in the 
 case instanced, draws a check for $550,000 in payment for the stock. 
 The check is sent to the bank where the broker keeps his account for 
 certification. The cashier or paying teller indorses the check across
 
 PRINCIPLES OF "COMMERCIAL" BANKING 87 
 
 its face, thus certifying, not only that the signature is correct, but that 
 the bank will pay the amount of the check, on presentation and identi- 
 fication, or when it comes to it through the operations of the clearing- 
 house. But it has been said that the broker has a balance of only 
 $50,000, and here the bank is certifying to his check for $550,000. 
 That is what is called "overcertification," and it is another form of a 
 great system of credits on which the transactions of Wall Street stand. 
 
 Overcertificalion is in effect a temporary loan, and as employed 
 in stock exchange transactions involves Httle risk. There are a num- 
 ber of Wall Street banks— not all — that do a regular business of cerlf- 
 fying brokers' checks, but a large proportion of this business is done 
 by the trust companies. A broker enters into a definite arrangement 
 with one of the institutions on a basis something like this: The broker 
 agrees to keep a daily cash balance at the bank of, say, $50,000; in 
 return the bank agrees to certify his checks to an amount, say, of 
 $1,000,000. WTiaile this seems starthng, the practice is in reality not 
 dangerous. 
 
 The banking institutions are very conservative in transactions of 
 this kind. They must know all about the broker, his character, good 
 judgment, and business methods and standing. In other words, 
 personal character is a valuable asset in Wall Street. A man's credit 
 in the Exchange and in the banks depends largely upon it. Then the 
 bank stipulates, in entering upon an agreement of this kind with the 
 broker, that, while it will certify, say, to an amount of Si, 000,000 
 on a net daily balance of $50,000, the broker must not frequently 
 reach that limit. Moreover, he must make his deposits at the bank 
 as frequently as he receives checks for payment for securities delivered. 
 He cannot wait until nearly 3:00 o'clock and then make one deposit 
 for the day, but must deposit, it may be, six or seven times a day. 
 The result is that while the broker is receiving the benefit of large 
 certifications in excess of his balance, at the same time he is at fre- 
 quent intervals depositing other certified checks. Deposits and certi- 
 fications thus go on simultaneously. 
 
 In making these loans the banks scrutinize the collateral closely. 
 The securities must be strictly good. delivery according to the rules 
 of the Exchange. Stocks and bonds for which there is not a constant 
 market are generally not acceptable. The bank's protection consists 
 in its actual holding of the collateral, and either in a note signed by 
 the borrower in each transaction or in a continuing agreement, which 
 its customer signs, enabling the bank to sell the securities, without
 
 88 PRINCIPLES OF MONEY AND BANKING 
 
 notice, in case the borrower neglects to respond to the call for payment 
 of the loan. This agreement obviates the necessity of a new note each 
 time a new loan is made. 
 
 The violation of the national bank law against overcertification 
 is in most cases more technical than actual; for as soon as the broker 
 gets his stock and arranges his loan he is able to make every check 
 good, and by his arrangement with the bank he is bound to maintain 
 his average daily balance of $50,000, or whatever other amount 
 may be agreed upon. The larger the average balance the larger the 
 certification. 
 
 But even the appearance of violation of law may be open to 
 criticism, and therefore the national banks are gradually withdrawing 
 from this business and other institutions are taking their place. 
 The institutions also are beginning to adopt other systems, which 
 have the merit of simplicity and freedom from possible illegaUty. 
 Many of them are making morning loans to brokers of an amount that 
 will cover their probable certification for the day. These loans are 
 based on the "single-name paper" of the broker — that is to say, his 
 individual, unindorsed note. With such a loan the broker has to his 
 credit a deposit at the bank sufficient for the day's probable business, 
 and technical overcertification is avoided. The practical result is 
 the same under either system. The latter has the merit of avoiding 
 the appearance of evil. 
 
 The amount of certification required in the operations of the stock- 
 market is stupendous. On the deliveries made in the Stock Clearing- 
 House transactions the certification actually required in 1901 was 
 nearly $11,000,000,000. The Stock Clearing-House clears about 
 85 per cent of all the sales of stocks. The remaining 15 per cent, as 
 well as transactions in bonds, must therefore be taken into account 
 in any estimate of total certification required. The bonds alone added 
 at least another billion, and it is safe to say that the business of the 
 New York Stock Exchange exclusively, in 1901, required a certifica- 
 tion of $14,000,000,000, or an average of about $45,000,000 daily. 
 This was over one-fifth the average daily clearances of the Bank 
 Clearing-House. 
 
 It may be asked. What does a bank make by certifying brokers' 
 checks? In the example given the bank gains the use of $50,000, 
 the required daily balance of the broker. But as the national bank 
 is, by law, required to keep a reserve of 25 per cent, its net gain by this 
 operation is the use of $37,500. Its profit is the mterest it earns
 
 PRINCIPLES OF "COMMERCIAL" BANKING Sg 
 
 by the loaning of that amount. If it were not profitable the bank 
 would not engage in the business. 
 
 While the great mass of these stock exchange loans are on rail, 
 most brokers seek to secure a certain proportion of their required 
 line of credit on time. Formerly time loans were made by months, 
 but now by days. Thus there are thirty-day, sixty-day, and ninety- 
 day loans. The rates for time loans are generally higher than for 
 call, except in times of severe stringency in the money-market, and 
 banks are commonly very conservative in making such loans for long 
 periods. The bank's deposits being subject to withdrawal on demand, 
 it follows that it can lock up only a comparatively small part of its 
 resources in the form of time loans. The stock-broker, though pay- 
 ing more for his credit than he would on his call-loan basis, escapes 
 the liability of having all his loans called at one time.
 
 90 
 
 PRINCIPLES OF MONEY AND BANKING 
 
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 PRI^XIPLES OF "COMMERCLVL" BANKING qi 
 
 41. INTEREST RATES IN THE NEW YORK MONT^Y MARKET' 
 By WILLIAM A. SCOTT 
 
 The published rates on money loaned on the New York market 
 include two sets of quotations under the head "Call Loans," namely, 
 call loans at the stock exchange and at banks and trust companies; 
 seven under the head "Time Loans," namely, 30-, 60-, and 90-day, 
 and 4-, 5-, 6-, and 7-month; and three under the head "Commercial 
 Paper," namely, double-name, choice 60- to 90-days, and two varieties 
 of single-name, prime 4- to 6-months, and good 4- to 6-months. In 
 the weekly summaries contained in the Commercial and Financial 
 Chronicle the minimum and maximum quotations for each class of 
 loans are given. A comparison of these quotations reveals some 
 interesting facts. 
 
 The five varieties of time loans quoted regularly often dilTcr from 
 each other in magnitude and range. A comparison of the minimum 
 quotations for the last eleven years reveals the general rule that the 
 rate tends to rise as the length of the loan increases, but to this rule 
 there are many exceptions. For example, in 126 weeks of the period 
 the minimum rates were identical for all classes of time loans. The 
 90-day and 60-day minimum rates were identical in 30S weeks, the 
 4-months and 90-day in 320 weeks, the 5-months and 4-months in 
 374 weeks, the 6-months and 5-months in 501 weeks. 
 
 The difference between these quotations rarely exceeds one-half 
 of I per cent, and the general rule seems to be that the influence of 
 time in raising the rate grows less as the length of the loan increases. 
 For example, there is apt to be a greater difTercnce between the quota- 
 tions of 60- and 90-day paper than between 90-day and 4-months. 
 Likewise, there is a greater dilTerence between 90-day and 4-months 
 than between 4-months and 5-months paper. 
 
 The range of time loans is much less than that of call loans, being 
 rarely above one-half of i per cent in a given week, and on all classes 
 being zero during the great majority of the 572 weeks investigated. 
 The tendency for the rate to vary during the week grows stronger 
 as the period of the loan increases. In the case of 6o-days loans, 
 for example, there were variations in only 162 of the 572 weeks, 
 while in that of 90-day loans there were variations in 190 weeks, 
 and in that of 4-months loans, in 23S weeks. 
 
 ' Adapted from " Rates on the New York Money Market, 1896--1906," Journal 
 of Political Economy, XVI (May, 1908), 273-98.
 
 92 
 
 PRINCIPLES OF MONEY AND BANKING 
 
 During the greater part of the last eleven years the rates on all 
 classes of time loans have averaged higher than those on call loans. 
 This was true of the annual averages of these rates for seven of the 
 eleven years and of the monthly averages for 86 of the 132 months 
 of the period. The exceptions to this rule, however, are important. 
 
 A comparison of the quotations on commercial paper reveals 
 the same kind of differences that are noted in the case of call and time 
 loans. The minimum rate on double-name paper is usually below 
 
 % 
 
 mm 
 
 B^:^V. /_/ 
 
 c/ ^^ 7 
 
 A= Commercial paper, double name 6o-day. 
 
 B= 60-day time. 
 
 C=CaUloan. 
 
 that on single-name, but during 254 of the 572 weeks of the period 
 it was identical with that on prime single-name paper. The differ- 
 ence, when one exists, is usually one fourth of i per cent. The range 
 for single-name paper is usually greater than for double-name and 
 the fluctuations are more frequent. As compared with the rates on 
 time loans running for the same period, that on commercial paper, 
 as a rule, averages higher. The exceptions to this rule correspond 
 in time to those mentioned above, in which the call-loan rate averaged 
 above that on 60-day time. 
 
 The chart above indicates the fluctuations in the following rates: 
 the minimum rate on 60-day time loans, the minimum rate on 60- 
 to 90-day commercial paper, and the average call-loan rate at the
 
 PRINCIPLES OF "COMMERCIAL" BANKING 93 
 
 Stock exchange. The fluctuations of these particular rates are 
 typical of the others in each class. 
 
 It will be observed that in all their principal and in most of their 
 minor fluctuations these three rates move together. In degree of 
 change the call-loan rate was decidedly the champion, the 60-day time 
 rate, as a rule, occupying second, and the commercial-paper rate 
 third place. The cases in which these statements do not hold true 
 are decidedly exceptional. These facts point clearly to influences 
 common to all the rates as the chief causes of their fluctuations. 
 These causes are to be found in the influences which afifect the rela- 
 tions between the supply of and demand for loanable funds in the 
 New York market.
 
 V 
 
 RELATIONS BETWEEN BANKS 
 
 Introduction 
 
 In the foregoing chapter the bank has been studied as a type of 
 business institution, and as such treated by itself alone, that is, inde- 
 pendently of other banks. In actual practice, however, a bank is never 
 isolated in this way. In the ordinary conduct of its business every 
 bank is in many ways brought into contact with other banks — with 
 those in the same city or community, with those in other cities, and 
 even with the institutions of other countries. The development of 
 the present interrelations of banking institutions has been partly due 
 to a desire to effect certain economies in the conduct of the banking 
 business; but it has also been due to a very considerable degree — 
 much more than has been generally realized — to the driving force of 
 competition under conditions that were proving mutually disadvan- 
 tageous, if not disastrous, just as the combination movement in 
 industry was originally due in no small degree to the disastrous 
 results of various practices inherent in competition. 
 
 Within a given city, for instance, the banks are constantly brought 
 into relations through the daily granting of loans. The extent to 
 which any bank may loan is dependent in part upon the extent to 
 which other banks are loaning. And when the reserves of any par- 
 ticular bank are low there are numerous means by which it may increase 
 its loaning power at the expense of, or through permission of, its com- 
 petitors. One of the most important reasons for the establishment of 
 clearing-houses appears to have been the common practice among 
 banks of making use of each other's funds between settlement days. 
 The clearing-house, once organized, has, moreover, come to serve 
 the banks of a given community in a great variety of ways. Among 
 these the clearing of checks has attracted the most attention; in fact, 
 the clearing-house in this regard is one of the wonders of the modern 
 world. There is something about this daily settlement of many 
 millions of obligations in the space of a few minutes that makes a 
 tremendous appeal to the imagination. Yet, after all, the "clearing" 
 is merely an interesting, and relatively simple, labor-savmg device, 
 
 94
 
 RELATIONS BETWEEN BANKS 95 
 
 and at the present time cannot be regarded as the most important 
 function performed by the clearing-house. 
 
 By the " system as a whole " is meant not only the banks of a given 
 community but those of the entire country, for though independently 
 organized they are all inextricably bound together by mutual interests. 
 These interrelations are discussed under two headings: first, the 
 general relations that exist in the conduct of daily business, and, 
 secondly, the peculiar relations that develop periodically with the 
 ebb and flow of business activity. This periodical tension and 
 ease in the system as a whole is, moreover, of two sorts, seasonal and 
 cyclical, each of which has its own peculiar problems. It is in con- 
 nection with these seasonal and cyclical variations, in fact, that the 
 hardest problems of banking organization and control arise. 
 
 The banks through their clearing-house associations have endeav- 
 ored to control certain competitive practices that work havoc in the 
 system as a whole in every period of stress in the money market. To 
 some extent they have been successful in this voluntary regulation of 
 the machinery of banking; but in certain respects the immediate self- 
 interest of the independent members of the system has always proved 
 too powerful to be controlled by voluntary association. Even 
 though many, or even the great majority, of the banks of the system 
 be willing and anxious to sacrifice immediate gains for the sake of 
 saving the entire structure from crumbling, they are powerless 
 to resist the minority. When some strike out to save themseh'es, 
 leaving the system as a whole to its fate, the rest must follow suit, 
 for the system is then already crumbling, and self-preservation 
 becomes the first law of banking. 
 
 When the strain on the system is great at one point, some relief 
 has often been gained by calling upon banks in some other part of the 
 country; but there are limits to this in consequence of the independ- 
 ent basis of organization of our banks, and for the reasons suggested 
 above. When the strain on the entire system becomes severe, 
 relief has frequently been sought from the federal treasur\^; but this, 
 too, is a Jimited source of aid. Finally, gold may be imported from 
 other countries when the supply of loanable funds is inadequate to 
 meet the requirements of business. At times some assistance has 
 been procured from this source, but one of the striking weaknesses of 
 our independent banking system has been the lack of elTective 
 machinery for controlling the international flow of specie; gold has 
 often flowed out of the country at the very time when it was needed 
 as a l:)asis for domestic loans.
 
 96 
 
 PRINCIPLES OF MONEY AND BANKING 
 
 When all means of procuring elsewhere the additional funds 
 needed in time of monetary stringency have failed or been exhausted, 
 there still remains the alternative of manufacturing more currency 
 that can serve as the basis of credit expansion. But under our 
 national banking system our currency always proved inelastic; it 
 could not readily be increased in quantity to meet the requirements of 
 the situation in time of stringency, nor could the quantity be easily 
 reduced during periods of monetary ease. This inelasticity, however, 
 was due not so much to the system of independent banking as to the 
 nature of the security required by law for the notes issued by the 
 national banks. Through the use of clearing-house loan certificates 
 and the equalization of reserves the banks have at times been able 
 to save the financial system from breaking under the strain, but gen- 
 erally the inability of a voluntary association to control the policy 
 of all its members has resulted in disaster for all. Government regu- 
 lation and government provision for an elastic currency appear, 
 therefore, to be a necessity. 
 
 42. 
 
 A. Within a Given City 
 
 (i) LOANING RELATIONS 
 
 RESERVES OF CLEARING-HOUSE BANKS AND TRUST 
 COMPANIES IN NEW YORK^ 
 
 
 Capiial 
 
 (igo7) 
 Week ENDiNot Sept. 14 
 
 (1913) 
 Week Ending f August 30 
 
 Name of Bank 
 
 Surplus 
 Reserve 
 
 Percentage 
 Reserve 
 
 Surplus 
 Reserve 
 
 Percentage 
 Reserve 
 
 Bank of New York National 
 
 Banking Association 
 
 Bank of the Manhattan 
 
 $ 2,000,000 
 
 2,050,000 
 2,000,000 
 
 6,000,000 
 
 1,500,000 
 
 25,000,000 
 
 3,000,000 
 
 600.000 
 1,000,000 
 
 300,000 
 500,000 
 
 5,000,000 
 
 25,000,000 
 
 3,000,000 
 
 500,000 
 
 2,250,000 
 200,000 
 
 $ 337.800 
 
 740,000 
 219,900 
 
 89,500 
 
 76,500 
 
 3,924,100 
 
 677,800 
 
 337.000* 
 21,400 
 
 47,500* 
 52,800* 
 
 761,000* 
 1,825,000 
 326,000* 
 446,700* 
 
 13,100 
 39.300 
 
 27.1 
 
 27.6 
 26.0 
 
 25. 4 
 25. 3 
 27 
 27 .6 
 
 19.5 
 25.4 
 
 22.5 
 
 24.1 
 
 21 .0 
 26.6 
 22.4 
 23.6 
 
 25.1 
 26.6 
 
 $ 166,750 
 
 710,500 
 
 101,000* 
 
 40,000* 
 66.250 
 2,463,000 
 247,000 
 
 14,500* 
 
 25 9 
 27.0 
 
 Merchants National Bank. . 
 Mechanics and Metals Na- 
 
 24.4 
 25.0 
 
 
 25.2 
 
 National City Bank 
 
 Chemical National Bank. . . 
 Merchants Exchange Na- 
 
 26.2 
 26.0 
 
 24 7 
 
 Gallatin National Bank. . . . 
 National Butchers' and 
 
 
 30,800 
 26,300 
 
 156,300 
 2,115,300 
 
 26.8 
 
 
 25.2 
 
 American Exchange Nation- 
 
 25.3 
 
 National Bank of Commerce 
 Mercantile National Bank.. 
 
 26.7 
 
 2,500 
 
 40,500 
 25.000 
 
 25.0 
 
 Chatham and Phenix Na- 
 
 25.2 
 
 
 26.0 
 
 
 
 * Deficit. t Average for the week. 
 
 ' Data taken from the Commercial and Financial Chronicle.
 
 RELATIONS BETWEEN BANKS 
 
 97 
 
 
 Capital 
 
 (1Q07) 
 Week E>fDiNG Seft. 14 
 
 (1913) 
 Week Ending Augost 30 
 
 Naue of Bank 
 
 Surplus 
 Reserve 
 
 Percentage 
 Reserve 
 
 Surplus 
 Reserve 
 
 Percentage 
 Reserve 
 
 Hanover National Bank . . . 
 
 Citizens' Central National 
 
 Bank 
 
 3,000,000 
 
 2,550,000 
 1,000,000 
 
 1,000,000 
 2,000,000 
 3,000,000 
 
 1,500,000 
 5,000,000 
 250,000 
 5,000,000 
 1,000,000 
 10,000,000 
 
 4,000,000 
 250,000 
 
 500,000 
 
 750,000 
 
 5,000,000 
 
 100,000 
 
 200,000 
 
 200,000 
 
 1,000,000 
 
 1,000,000 
 
 250,000 
 
 1,000,000 
 
 200,000 
 
 1,000,000 
 
 1,000,000 
 
 1,000,000 
 1,000,000 
 1,000,000 
 
 1,000,000 
 
 1,000,000 
 
 1,000,000 
 
 1,131,000 
 
 254,800 
 311,900* 
 
 43.200 
 256,400* 
 234,500 
 
 168,000* 
 841,300 
 
 48,900* 
 252,000 
 
 17,500* 
 542,100 
 
 276,500 
 132,200* 
 
 222,900* 
 
 37,000* 
 540,400 
 158,600 
 
 52,800* 
 197,600 
 
 82,600* 
 3,loo* 
 
 14,700* 
 510,200* 
 
 46,500 
 157.300 
 
 72,700* 
 
 !i'^°°* 
 1,060,000* 
 
 t 
 
 a6.7 
 
 36.3 
 17.0 
 
 25.6 
 22.7 
 25 5 
 
 24.2 
 26.0 
 20.8 
 36.3 
 34.8 
 25-7 
 
 26.9 
 21.3 
 
 31.3 
 23-9 
 25-9 
 26. s 
 23.6 
 28.3 
 24.4 
 25.0 
 24.4 
 19.0 
 26.0 
 25.8 
 243 
 
 26.1 
 18.1 
 
 174,000* 
 
 235,300 
 34,200* 
 
 353.800 
 
 56,200* 
 
 303,500 
 
 23.000 
 169,800 
 
 67,300 
 251,000 
 
 26,800 
 848,800 
 
 228,800 
 15,200* 
 
 98,000* 
 76,800 
 5,170,000 
 
 197,500 
 14,000* 
 33.800 
 
 62,500 
 
 316,300 
 
 14,000 
 
 5 5. 800 
 
 5.300 
 
 617,000 
 63,800 
 
 57,300 
 8,800 
 9,200* 
 
 59,000 
 
 16,500 
 
 24,000 
 
 24 7 
 26.1 
 
 National Nassau Bank 
 
 Market and Fulton National 
 Bank 
 
 24 7 
 28.8 
 
 Metropolitan Bank 
 
 Corn Exchange Bank 
 
 Importers and Traders Na- 
 
 24.6 
 25 4 
 
 25.0 
 
 National Park Bank 
 
 East River National Bank. . 
 
 Fourth National Bank 
 
 Second National Bank 
 
 First National Bank 
 
 Irving National Exchange 
 Bank 
 
 25.1 
 29.6 
 25.8 
 254 
 25.8 
 
 255 
 
 
 245 
 
 New York County National 
 Bank 
 
 23 8 
 
 German-American Bank . . . 
 
 Chase National Bank 
 
 Fifth Avenue Bank 
 
 German Exchange Bank. . . 
 
 27.0 
 29.6 
 26.4 
 24-5 
 25.5 
 
 Lincoln National Bank. . . . 
 
 Garfield National Bank 
 
 Fifth National Bank 
 
 Bank of the Metropolis. . . . 
 
 25-4 
 27-4 
 25-3 
 25s 
 25. 1 
 
 Seaboard National Bank. . . 
 Liberty National Bank. . . . 
 New York Produce Ex- 
 
 27.3 
 25 2 
 
 25 5 
 
 State Bank 
 
 25 
 
 
 25 
 
 Coal and Iron National 
 Bank 
 
 X 
 
 
 36.0 
 
 Union Exchange National 
 Bank 
 
 X 
 
 
 25-4 
 
 Nassau National Bank, 
 
 X 
 
 
 35.1 
 
 
 
 
 
 Total 
 
 $133,650,000 
 
 $6,918,700 
 
 25.6 
 
 $1,385,746 
 
 26.0 
 
 
 
 Brooklyn Trust Company. . 
 Bankers Trust Company. . . 
 U.S. Mortgage and Trust 
 
 Company 
 
 Astor Trust Company 
 
 Title Guarantee ancf Trust 
 
 $ 1,500,000 
 10,000,000 
 
 2,000,000 
 1,250,000 
 
 5,000,000 
 
 10,000,000 
 
 1 ,000,000 
 
 4,000,000 
 
 2,000,000 
 1,000,000 
 3,000,000 
 1 ,000,000 
 1,000,000 
 
 2,000,000 
 1,500,000 
 
 § 
 
 
 $ 279,750 
 1,364,500 
 
 3,830,000 
 660,000 
 
 3,046,500 
 
 15,022,000 
 
 218,750 
 
 244,750 
 
 819,500 
 423.500 
 1,251,250 
 363,000 
 124,500 
 
 1,065.500 
 777.SOO 
 
 lS.0-t-10.2ll 
 
 
 
 iS.o-|-io. 1 
 
 
 
 iS.o-t-13.6 
 
 
 
 15.0-1-12. 6 
 
 
 
 lS.o-l-16.7 
 
 Guaranty Trust Company.. 
 Fidelity Trust Company. . . 
 Lawyers' Title Insurance 
 
 and Trust Comp.-iny 
 
 Columbia- Knickerbocker 
 
 Trust Company 
 
 People's Trust Company. . . 
 New York Trust Company. 
 Franklin Trust Company.. . 
 Lincoln Trust Company.. . . 
 Metropolitan Trust Com- 
 
 
 
 14.3-1-20.5 
 
 
 
 15.6-I-10.6 
 
 
 
 IS.4 + IS* 
 
 
 
 15.0-I-I0.8 
 
 
 
 14. 7-Hii .4 
 
 
 
 15.0-1-12.5 
 
 
 
 i6.o-t-ii .3 
 
 
 
 15. i-l-io.i 
 
 
 
 iSO-l-16.1 
 
 Broadway Trust Company . 
 
 
 
 15.0-1-14.5 
 
 
 
 
 Total 
 
 $46,250,000 
 
 
 
 $24,187,750 
 
 14.8-1-14.1 
 
 
 
 
 
 ♦Deficit. 
 
 t Not organized in 1907. 
 
 11 These include deposits in clearing-house bonks. 
 % Trust company figures not obtainable for 1907-
 
 g8 PRINCIPLES OF MONEY AND BANKING 
 
 43. NATIONAL BANKS AND TRUST COMPANIES' 
 By O. M. W. SPRAGUE 
 
 In times of moderate strain the clearing-house banks of New York 
 were often enabled by means of the trust companies to make a better 
 showing in the weekly bank statements than would otherwise have 
 been the case. As the business of the trust companies was chiefly local 
 they were not subject to seasonal withdrawals of cash, and their lend- 
 ing power was, therefore, more nearly the same throughout the year. 
 An increase in rates for loans in New York was usually followed by a 
 shifting of loans from banks to trust companies. By this means the 
 deposit liabilities of the clearing-house banks were reduced, thus 
 enabling them to preserve the cherished 25 per cent reserve ratio. 
 The resort to this device was, of course, greatly simplified through the 
 close affiliations between some of the large banks and trust companies, 
 and it was so much in evidence during the years before the crisis of 
 1907 that the surplus reserve became quite as much an object of 
 mirth as of confidence. 
 
 44. INTERDEPENDENCE OF BANK RESERVES' 
 By victor MORAWETZ 
 
 The character and sufficiency of bank reserves must be con- 
 sidered with regard to the banking situation as a whole as well as with 
 regard to the affairs of each separate bank. 
 
 Thus a deposit claim of one bank against another bank — that is 
 to say, its right to call upon such other bank for the payment on 
 demand of a sum of money — may be treated as a reserve, if we leave 
 out of consideration the position of the banks collectiv^ely and the 
 general banking situation. But obviously the liability of a bank 
 to pay money to another bank would not increase the collective ability 
 of all the banks to pay all their depositors and would not in the least 
 strengthen the general financial situation. When a particular bank 
 strengthens its own reserve by drawing upon its deposit with another 
 bank, it weakens to the same extent the reserve of the bank upon which 
 it draws. 
 
 ' Adapted from Crises under the National Banking System, pp. 227-28. (Na- 
 tional Monetary Commission, 19 10.) 
 
 ' Adapted from The Banking and Currency Problem in the United States, 
 pp. 16-19. (North American Review Publishing Co., 1909.)
 
 RELATIONS BETWEEN BANKS 99 
 
 Similarly, bank-notes may be treated as a reserve if the position 
 of the bank holding such notes be considered without regard to the 
 general banking situation; but, having regard to the situation of all 
 the banks, it is clear that such notes are not good as a reserve. A 
 bank note is merely a promissory note payable in money on demand. 
 Bank "A" holding notes of bank "B" may consider such notes as 
 good as money so long as bank "B " is solvent and pays its obligations 
 on demand; but it is obvious that when bank "A" obtains money 
 from bank "B" by requiring it to redeem its notes, the reserves of 
 bank "B " will be diminished exactly as much as the reserves of bank 
 "A" are increased. That, having regard to the entire banking situa- 
 tion, bank notes are not a good reserve becomes apparent upon consid- 
 ering the case of several banks exchanging their notes, and each bank 
 calling upon the others to pay their notes in lawful money. 
 
 As long as financial conditions are normal, call loans may be 
 regarded as a good reserve, because a bank can obtain cash promptly 
 by calling such loans; but call loans do not strengthen the general 
 banking situation, and, therefore, when there is a severe money 
 stringency, they are not good as a reserve. When a bank calls a loan, 
 the borrower either must borrow the same sum from some other bank, 
 although required to pay a very high rate of interest, or he must 
 obtain the recjuired sum by selling property, and in that event the 
 purchaser usually must draw the money from the banks. Therefore 
 when a bank strengthens its reserve by calling a loan, the practical 
 elTect is to draw the money from other banks and pro tanto to weaken 
 their reserves. 
 
 For similar reasons, as long as financial conditions generally are 
 not strained, bonds or other securities that have a ready market may 
 serve as a reserve, because by selling such bonds or securities a 
 bank can obtain money; but reserves of that character do not 
 strengthen the general credit situation and are not available when 
 most needed by the banks that hold them. When a bank sells 
 securities in order to obtain lawful money to pay its depositors, the 
 purchaser usually must draw the i)urchase price from the banks. The 
 selling bank thus would obtain lawful money by drawing indirectly 
 from the reserves of other banks. Therefore when there is a general 
 money stringency, bonds or other salable securities are not good 
 reserves. During the recent panic many of the banks and trust 
 companies, including some of those which failed, owned large amounts
 
 lOO PRINCIPLKS OF MONKY ASl) BANKING 
 
 of high-class securities, but this did not help them or relieve the 
 general situation, as the combined lawful money reserves of the 
 banks and trust companies were inadequate. 
 
 Deposits by banks in other banks, bank notes, call loans, and 
 bonds or other securities are not, properly speaking, bank reserves 
 at all. They are only the means of obtaining reserve money for 
 particular banks by drawing this money from the reserves of other 
 banks. In considering the general financial situation, deposits of 
 banks, bank notes, call loans, and securities held by the banks should 
 be disregarded. For the ultimate payment of bank-deposit liabilities 
 the only true reserve is legal-tender money. 
 
 45. EARLY SETTLEMENT OF BALANCES BETWEEN BANKS^ 
 By JAMES G. CANNON 
 
 Prior to the establishment of the New York Clearing-House in 
 1853 the method of settling balances between banks was a very costly 
 and cumbersome process. In the daily course of business each bank 
 received checks and other items on each of the other banks, which 
 had to be presented for collection. All such items on hand were 
 assorted and listed on separate slips at the close of the day, and items 
 coming in through the mail on the following morning were added at 
 that time. To make the daily exchanges each bank sent a porter 
 with a book of entry, or passbook, together with the items to be 
 exchanged. 
 
 The receiving teller of the first bank visited entered the exchanges 
 brought by the porter on the credit side of his book and the return 
 exchanges on the debit side, who then hurried away to deliver and 
 receive in like manner at the other banks. It often happened that five 
 or six porters would meet at the same bank, thereby retarding one 
 another's progress and causing much delay. Considerable time was 
 consumed in making the circuit. Hence, the entry of the return items 
 in the books of the several banks was delayed until the afternoon, 
 at an hour when the other work of the bank was becoming 
 urgent. 
 
 A daily settlement of the balances was not attempted by tlie banks, 
 owing to the time it would have required, but they informally agreed 
 upon a weekly adjustment, the same to take place after the exchanges 
 
 'Adapted from Clearing-Houses, pp. 127-31. (National Monetary Com- 
 mission, 1910.)
 
 RELATIONS BETWEEN BANKS loi 
 
 on Friday morning. At that time the cashier of each bank drew a 
 check for each of the several balances due it and sent a porter out to 
 collect them. At the same time the porter carried coin with which to 
 pay balances due by his bank. After the settlement had been made, 
 there was a meeting to adjust dilTerences and bring order out of chaos. 
 
 An old bank officer, in describing the inconveniences and defects 
 of this system, says that some of the more speculative banks took 
 advantage of the weekly method of settlements by carrying a line of 
 discounts to an amount greater than their legitimate resources would 
 allow. Thus a bank would manage to carry a small debit balance 
 of $2,000 or $3,000 with thirty or more institutions, making a total 
 debit balance of, say, $100,000 on which it discounted paper. It 
 was the practice to borrow enough on Thursday to make the settle- 
 ments on Friday, and the return of the loan on Saturday threw it again 
 into the debtor column. Virtually, therefore, the weekly settlements 
 were nominal only, and to show tliat there was no attempt at economy 
 of time and labor in making them, it is only necessary to say that the 
 cashier drew a check for every balance due him, whereas a draft on 
 one bank in favor of another might have settled two accounts at once. 
 
 The banks were at liberty to draw on each other for their credit 
 balances without waiting for the settlements on Friday, and hence, 
 when specie was needed, this was not infrequently done. But so far 
 did many of the banks extend their loans and discounts that a single 
 small draft by one bank on another would induce a general drawing 
 and involve them all in confusion and virtual war on each other. 
 Three o'clock would arrive, with the line of drafts incomplete, thus 
 enabling the debtor banks ofttimes to add $50,000 to their specie, 
 whereas creditor banks would find themselves at the close of the day 
 depleted in perhaps twice that sum. 
 
 46. LOANS OF NEW YORK BANKS AND CLEARING-HOUSE 
 
 BALANCES 
 
 Each bank in New York attempts to keep at all times a close 
 adjustment of loans and reserves, that is, to prevent a decided fluctua- 
 tion in the ratio. This is accomplished through an expansion or 
 contraction of call loans, and the banks of the metropolis even go 
 so far as to anticipate the balances resulting from the daily settle- 
 ments at the clearing-house. Call loans are made in two ways: at 
 each bank as a lending institution, and at the "money post" on tlie 
 floor of the Stock Exchange, where the representatives of the banks
 
 I02 PRINCIl'LES OF MONEY AND BANKING 
 
 meet with the stock-exchange brokers each business day at ii o'clock. 
 By that time each Ixank has heard the returns from the clearing-house 
 settlement and knows whether its reserve for the day has increased or 
 decreased. It can, therefore, calculate whether it can expand its loans 
 or whether it must "call" some of its demand loans in order to replen- 
 ish its reserve. Each broker also usually knows at that hour whether 
 he has a surplus or needs to borrow. For about an hour, therefore, 
 banking operations are active on the stock exchange. 
 
 About two o'clock there is usually another bustle of activity 
 in consequence of unexpected inflows and outflows of bank funds. 
 Thus an almost constant adjustment is effected, in so far as the con- 
 ditions of the market as a whole permit. 
 
 (2) CLEARING-HOUSES 
 
 47. THE ORIGIN OF CLEARING-HOUSES IN THE UNITED 
 
 STATES ' 
 
 By JAMES G. CANNON 
 
 On August 23, 1853, 16 presidents, i vice-president, and 21 
 cashiers, representing 38 banks, assembled in the directors' room of 
 the Merchants' Bank, New York, and appointed a committee with 
 instructions to prepare a plan "to simplify the system of making 
 exchanges and settling the daily balances." On September 13 the 
 plan proposed was adopted, to become effective on October 11. 
 Accordingly, on the appointed day, the representatives of the banks, 
 members of the association, met in a room which had been procured 
 in the basement at No. 14 Wall Street, and made the first exchanges. 
 The total clearings on that day were $22,648,109.87, and the balances 
 were $1,290,572.38. These clearings have since been ecHpsed by 
 over $30,000,000 in the totals of a single bank. 
 
 The clearing system in America was thus fairly launched, and 
 from that time forth its success exceeded the expectations of even its 
 most ardent projectors. The association consisted at that time of 
 52 banks, banded together for their common good, which, as they 
 then conceived, consisted solely in the exchange of items and settle- 
 ment of balances at a uniform time and place. For nearly a year 
 the operations were conducted without a constitution. The adoption 
 of such an instrument was opposed, on the ground that it was not 
 
 'Adapted from Clearing-Houses, pp. 133-35; 263-65. (National Monetary 
 Commission, 1910.)
 
 RELATIONS BETWEEN BANKS 
 
 103 
 
 needed and might lead to a dangerous concentration of power in the 
 hands of a few managers, who might use it for personal aggrandize- 
 ment or for the exercise of an arbitrary supervision. But the need 
 of fixed rules of some sort for their guidance became more and more 
 urgent, and on August i, 1S54, a constilulion was adopted. 
 
 This instrument, with the changes that have been made from time 
 to time by the adoption of amendments and resolutions, is in force at 
 the present day. 
 
 'Following the lead of New York all the principal cities of the 
 country have organized clearing-houses until at the present time there 
 are considerably more than a hundred. 
 
 48. THE PRINCIPLE INVOLVED IN " CLEARING "» 
 By CHARLES F. DUNBAR 
 
 To illustrate the working of the Clearing-House system, we will 
 suppose the case of sLx banks carrying on business in the same town. 
 On a given morning we will suppose the messengers of these banks to 
 meet at the Clearing-House, each bringing the checks received by his 
 bank in deposit on the previous day, as follows: 
 
 No. I, 
 
 checks 
 
 on No. 
 
 2. . 
 
 . . $ 6,500 
 
 No 
 
 • 4, 
 
 checks 
 
 on No 
 
 I. . 
 
 . . $ 8,750 
 
 u 
 
 « 
 
 u u 
 
 3- 
 
 9,200 
 
 
 a 
 
 a 
 
 u u 
 
 2. . 
 
 . . 4,700 
 
 u 
 
 u 
 
 u u 
 
 4.. 
 
 7,100 
 
 
 u 
 
 « 
 
 u u 
 
 3-- 
 
 6,740 
 
 u 
 
 u 
 
 u a 
 
 S-- 
 
 6,250 
 
 
 u 
 
 u 
 
 u u 
 
 5-- 
 
 .. 5,820 
 
 u 
 
 u 
 
 u u 
 
 6.. 
 
 ■ . 4,500 
 
 
 u 
 
 u 
 
 u u 
 
 6.. 
 
 5,UO 
 
 
 $33,550 
 
 $31,150 
 
 No. 2, 
 
 checks 
 
 on No. 
 
 I. . 
 
 . . $ 7,800 
 
 No 
 
 • 5, 
 
 checks 
 
 on No 
 
 I. . 
 
 . . $ 8,740 
 
 u 
 
 u 
 
 u u 
 
 3- 
 
 4,100 
 
 
 u 
 
 u 
 
 u u 
 
 2. . 
 
 4,620 
 
 u 
 
 u 
 
 a (( 
 
 4-- 
 
 • . 5,760 
 
 
 u 
 
 u 
 
 a u 
 
 3- 
 
 .. 9,250 
 
 u 
 
 a 
 
 u u 
 
 5-- 
 
 6,340 
 
 
 u 
 
 u 
 
 a u 
 
 4- 
 
 7,680 
 
 u 
 
 a 
 
 u u 
 
 6.. 
 
 . . 5,870 
 $29,870 
 
 
 u 
 
 u 
 
 u u 
 
 6.. 
 
 • • 5.940 
 
 
 $36,230 
 
 No. 3 
 
 checks 
 
 on No 
 
 I. . 
 
 .. $ 6,750 
 
 No 
 
 .6, 
 
 checks 
 
 on No 
 
 I. . 
 
 .. $ 3-700 
 
 u 
 
 « 
 
 u u 
 
 2. . 
 
 4,270 
 
 
 a 
 
 u 
 
 u « 
 
 2. . 
 
 4,100 
 
 u 
 
 u 
 
 u u 
 
 4.. 
 
 5,900 
 
 
 « 
 
 u 
 
 u u 
 
 3-- 
 
 6,740 
 
 u 
 
 u 
 
 u u 
 
 5-- 
 
 6,400 
 
 
 a 
 
 u 
 
 u u 
 
 4-- 
 
 .. 9.250 
 
 u 
 
 a 
 
 u u 
 
 6.. 
 
 • • 5,940 
 
 
 u 
 
 u 
 
 u a 
 
 5-- 
 
 . . 7.850 
 
 
 $29,260 
 
 $31,640 
 
 u 
 
 \.dapted 
 
 from T 
 
 he Ti 
 
 leory a ltd History 
 
 of B 
 
 anking, 
 
 PP- 52- 
 
 53- 
 
 (G. P. Put-
 
 I04 
 
 PRINCIPLES OF MONEY AND BANKING 
 
 The sum of all the checks brought in is $191,700. If, now, we 
 credit each bank with the checks which it presents against the others 
 and charge it with the checks presented by them against it, we shall 
 find that No. i is charged with $35,740 and credited with $33,550, 
 that No. 2 is charged with $24,190 and credited with $29,870, and so 
 for the others, and, therefore, that 
 
 No. I owes a 
 
 balance of . . 
 
 . . $ 2,190 
 
 
 No. 2 is owed 
 
 u 
 
 u 
 
 
 $ S,68o 
 
 No. 3 owes 
 
 u 
 
 u 
 
 • . 6,770 
 
 
 No. 4 owes 
 
 u 
 
 u 
 
 4,540 
 
 
 No. 5 is owed 
 
 u 
 
 u 
 
 
 3,570 
 
 No. 6 is owed 
 
 u 
 
 u 
 
 
 4,250 
 
 $13,500 $13,500 
 
 If, then, the debtor banks, Nos. 1,3, and 4, pay into the Clearing- 
 House the sums due from them, amounting to $ 1 3 , 500, and the Clearing- 
 House pays out to the creditor banks, Nos. 2, 5, and 6, the sums due 
 them, of like amount, the result will be that every bank will, in effect, 
 have collected payment of all the checks which it had received and 
 will have made payment of all the checks drawn against it. This 
 settlement of checks, amounting in all to $191,700, will have been made 
 by the payment of $13,500, and transactions apparently involving 
 thirty separate demands, each bank being the creditor of five others, 
 will have been settled by a series of additions made at a central 
 office, followed by three payments to and three payments from a com- 
 mon fund. 
 
 49. ORGANIZATION AND OPERATION OF CLEARING-HOUSES' 
 By JAMES G. CANNON 
 
 The government of a clearing-house association in the United 
 States is, theoretically, vested in a president, vice-president, secretary, 
 treasurer, manager, and a clearing-house committee, sometimes 
 termed "committee of management" or "executive committee." 
 Not every association, however, is as completely officered as this; 
 in fact, there are many associations that do not have the full list of 
 officials named. A president, a manager, and an executive committee, 
 
 ' Adapted from Clearing-Houses, pp. 28-46. (National Monetary Commis- 
 
 sion, 1910.)
 
 RELATIONS BETWEEN BANKS 105 
 
 however, are found in the organization of nearly every clearing-house 
 association, for these functionaries are practically indispensable. 
 
 The clearing-house association holds an annual meeting for the 
 purpose of electing officers and committees and for the transaction of 
 other business. The quorum is usually fixed at a majority of all 
 the associated banks. In some instances, however, it is fixed at 
 two-thirds, and in a few cases even as low as one-third, of all the 
 members. Sometimes a specified number is designated as constitut- 
 ing a quorum. Each bank is expected to be represented at the 
 annual meeting by one or more of the officers, but is usually allowed 
 only one vote. 
 
 The rules regulating the kinds of matter to be cleared are by no 
 means uniform. A number of organizations specify in their articles 
 of association what shall be considered proper clearing matter. With 
 but two exceptions the exchanges passing through the clearing-house 
 are confined to items drawn upon members or upon non-members 
 clearing through members. That is to say, checks and drafts received 
 by a bank member of a clearing-house in any city drawn upon another 
 member of the same clearing-house, from whatever source the checks 
 may have been received, are liquidated through the clearing-house; 
 but checks and drafts received by a member of a clearing-house drawn 
 upon some bank located at a distance, and not a member, nor clearing 
 through a member, are regarded as improper matter for clearing. 
 
 The number of messengers required to transport the exchanges 
 to and from the clearing-house varies widely in difi^crent cities. When 
 the business is light, as in some of the smaller cities, one person acts 
 as both messenger anti settling clerk, while in some of the larger cities 
 the exchanges of some of the banks are so heavy that four or five 
 messengers are necessary to transport them. 
 
 Checks are taken to the clearing-house bound together with rubber 
 bands or inclosed in large envelopes, the items that go to each of the 
 members being kept separate. If the bulk is not too great, they are 
 often carried in the hand, but it is customary in the large cities to 
 transport them in leather bags or cases. The usual rule is that 
 immediately upon his arrival at the clearing-house the settling clerk 
 delivers to the manager, or the assistant manager, a ticket containing 
 the amount of the items brought from his bank. 
 
 Two methods of delivering items in the exchange room are in 
 vogue. In the one case they are delivered by all the clerks simul- 
 taneously; in the other by each clerk as soon as he arrives at th(;
 
 I06 I'RIXCII'I.KS OF MONKY AND BANKING 
 
 clearing- room; but the exchanges must all be made before a specified 
 time. 
 
 When the clerks begin the exchanges at the same time, they all 
 start upon the signal from the manager with their items on their 
 arms or in bags or cases strapped over the back, and proceed in the 
 same direction, passing along the desks until they have deposited all 
 their paper. In the large cities, where the clerks are numerous, order 
 and method are necessary in delivery to prevent confusion and to save 
 time. But in small cities, where the clerks usually deliver their items 
 as soon as they arrive, more liberty is allowed in personal conduct; also 
 by this method an opportunity is afforded to the less proficient clerks 
 to arrive early and list their items as fast as they are delivered to 
 them from the other banks. 
 
 When the clearings have been made, the next step is for each 
 settling clerk to determine the amount of the balance of his own bank, 
 which is found by taking the difference between the amount brought 
 to the clearing-house and the amount taken away. A certain amount 
 of time is allowed for the proof. In some cases the setthng clerks do 
 not remain until the proof is made, but leave for their respective 
 banks as soon as they make out their tickets for the amounts brought, 
 amounts received, and balances. If the manager of the clearing- 
 house, or his assistant in charge of the proofsheet, finds, after he has 
 made all the entries and additions, that his work does not prove, he 
 first determines whether the error was made by one of the settling 
 clerks or by himself. If by one of the clerks, it is usually discovered 
 in a short time at the bank, whereupon the latter reports the error to 
 the manager at the clearing-house either by messenger or by tele- 
 phone. If the bank fails to report the error in due time, the manager 
 takes the debit and credit slips and finds it. 
 
 The speed with which the business of a clearing-house is trans- 
 acted seems almost incredible. The actual time required to make the 
 exchanges varies from one and one-half minutes to ten minutes. 
 When the exchanges are made simultaneously, the time varies, as 
 a rule, in proportion to the number of members. In view of the 
 shortness of time required to make its exchanges, the New York 
 Clearing-House affords, perhaps, the best example in existence of the 
 success of modern business methods as compared with the old way of 
 doing things. The clearances exceed on the average $300,000,000, and 
 yet this enormous amount of paper is exchanged between the banks 
 in ten minutes, and often in less time.
 
 RELATIONS BETWEEN BANKS 107 
 
 Clearing-houses may be divided into two classes with reference 
 to the funds used in the settlement of balances: first, those clearing- 
 houses which make their settlements on a cash basis, and, second, 
 those clearing-houses which make their settlements on some other 
 basis. 
 
 About 17 per cent of the clearing-houses in the United States 
 settle their balances entirely on a cash basis. Among the clearing- 
 houses that do not settle with cash no less than five different methods 
 of settling are in vogue. They are (i) by manager's check on debtor 
 banks given to creditor banks; (2) by borrowing and loaning balances 
 without interest; (3) by borrowing and loaning balances with interest; 
 (4) by the use of one or more of four forms of certificates, viz., gold 
 and currency depository certificates, United States assistant treasurer 
 certificates, and clearing-house loan certificates; and (5) by draft 
 on another city. These methods, however, are often found in com- 
 bination. 
 
 Where manager's checks are used the creditor banks send clerks 
 to the clearing-house to receive the manager's checks. These may 
 be taken to the debtor banks and cashed, exchanged for cashier's 
 checks or drafts on other cities, or sent through the clearings on 
 another day. 
 
 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." 
 
 Generally speaking, about 40 per cent of the clearing-houses of 
 the United States use drafts on other cities in paying their balances. 
 About 30 per cent settle by manager's check and about 25 per cent 
 settle by cash alone, the remaining 5 per cent settling by a com- 
 bination of two or more of the foregoing methods.
 
 loS PRINCIPLES OF MONEY AND BANKING 
 
 50. SPECIAL FUNCTIONS OF CLEARING-HOUSES' 
 By JAMES G. CANNON 
 
 The tendency has been marked, especially in recent years, to 
 include within the legitimate field of clearing-houses all questions 
 affecting the mutual welfare of the banks and the community as a 
 whole. The most important of the special functions of a clearing- 
 house are (a) the extending of loans to the Government, (b) mutual 
 assistance of members, (c) fixing uniform rates of interest on deposits, 
 
 (d) fixing uniform rates of exchange and of charges on collections, 
 
 (e) the issue of clearing-house loan certificates, and (/) examining 
 individual banks, 
 
 a) Less than a decade after the inauguration of the clearing- 
 house system in America the Civil War broke out and threw the 
 Government into a condition of acute financial embarrassment. The 
 ordinary sources of income were insufficient to meet the demands of 
 the approaching crisis. Thereupon the banks, members of the 
 clearing-houses in New York and Boston, responded with practical 
 unanimity to the call of the Government for loans, by which the latter 
 was enabled to put armies into the field and maintain the struggle 
 for national unity. 
 
 b) In times of panic it is not infrequently the case that a bank 
 in good standing becomes temporarily embarrassed. Unfortunate 
 report may cause a run on it, and, being unable to call in a sufficient 
 amount of its outstanding loans to meet the demands of its frightened 
 depositors, it must either secure a loan or fail. In such an emergency 
 the other members of the clearing-house are usually willing to render 
 assistance until the strain is relaxed. To secure such aid, however, 
 a bank must be sound in its management and of good repute in every 
 respect. Otherwise the members of the clearing-house are likely to 
 decline assistance, being quite willing to get rid of a weak and ill- 
 managed member. 
 
 c) Another of the special functions of a clearing-house is the fixing 
 of uniform rates of interest on deposits, and in a few instances on 
 loans. In some associations the legality of such action is still regarded 
 as a moot question, and hence they are reluctant to enforce such a rule. 
 Other associations, however, have not hesitated to regulate the mem- 
 bers on these points. As early as iSSi rates of interest were agreed 
 
 'Adapted from Clcaring-Houses, pp. 11-22, 139-49. (National ]\Ionetary 
 Commission, 1910.)'
 
 RELATIONS BETWEEN BANKS 1 09 
 
 upon in Buffalo, and were observed practically without friction or 
 violation for some nine years thereafter. They were broken at last 
 only because of their non-observance by new banks, which at the 
 outset refused to become members of the clearing-house organization. 
 
 The Sioux City Clearing-House Association has fixed a maximum 
 rate of interest of 2 per cent per annum, to be paid by the members 
 upon bank accounts or balances, and on time certificates of deposit 
 3 per cent. Without any special clearing-house regulation on the 
 subject, it is generally understood by the banks that 6 per cent is 
 the minimum rate that shall be charged on first-class loans, and 
 that the rate shall range from that to 8 per cent, according to the 
 character of the risk. 
 
 At St. Joseph, Missouri, the clearing-house rules provide that 
 interest (not naming the rate) may be paid on balances to banks, bank- 
 ers, trust companies, the St. Joseph Cattle Loan Company, deposits 
 of the Government, State, county, city, etc., or to individuals, firms, 
 corporations, not located or doing business in St. Joseph or Buchanan 
 County, but that no interest may be paid to individuals, firms, or 
 corporations located or doing business in St. Joseph or Buchanan 
 County, except by unanimous consent. Trust companies may pay 
 interest on checking accounts at the rate of 2 per cent per annum, 
 while savings banks, trust companies, and savings departments of 
 commercial banks may pay interest on savings accounts, at a rate not 
 to exceed 3 per cent. Interest is not allowed on demand or time 
 certificates for a less period than six months, and then at the rate of 
 three per cent per annum. No interest is allowed for any fractional 
 part of a six months' period. 
 
 The banks of Savannah, Georgia, under clearing-house regulation, 
 may pay interest not to exceed 3 per cent on individual accounts, 
 and then only when the balances in such accounts exceed §25,000. 
 On bank balances without limitation as to amount they may pay 
 not to exceed 3 per cent. 
 
 The question of clearing-house regulation of the rates to be 
 charged on local loans has been considered by many associations in 
 different parts of the country, but, generally speaking, has not met 
 with much favor. It is quite evident that on this one point the 
 individual banks are jealous of their prerogative to loan their money 
 at whatever rate they choose. The nearest approach to clearing- 
 house rate regulation of loans seems to be in the arrangement in vogue 
 at Chattanooga, Ti-nntssce, by which the minimum rate to be charged
 
 no I'RIXCirLKS OF MONEY AND BANKING 
 
 by the banks in making their loans is determined from time to 
 time by a committee appointed by the associated banks for that 
 purpose. 
 
 d) Still another of the special functions of a clearing-house is the 
 fixing of uniform rates of exchange and of charges on the collection 
 of items. In 1881, the year in which the clearing-house in Bufifalo 
 was organized, a prominent banker in that city succeeded in uniting 
 the banks on rates. The promoter of the enterprise, though well 
 known for rate cutting, was a successful banker and had always been 
 able to meet competition successfully. Hence, when he proposed a 
 uniform-rate system the other banks were only too glad to consider 
 his propositions. Meetings were accordingly held, schedules of 
 charges were drawn up, and rules were formulated for the guidance 
 of the banks. In a short time a schedule was adopted and put into 
 successful operation. The rates were not high, but were arranged 
 so as to do justice, as far as possible, to the banks on the one hand and 
 the depositors on the other, and so satisfactory was the new regime 
 that it remained in harmonious operation for nearly nine years. It 
 is said that the increase in profits or collections, to the twelve banks 
 interested, over the former method of doing business free of charge, 
 paid the dividends of all the banks each year, and whatever profit 
 was made on loans and discounts was used to build up the surplus. 
 But the formation of new banks finally played havoc with the uniform- 
 rate system. While it lasted it was made obligatory upon every 
 bank, but in 1891 the newly organized banks began to cut on rates. 
 The clearing-house members endeavored to induce the new banks to 
 join the association, but did not at first succeed. It was regarded 
 as unjust to the member banks to hold them to the existing agreement 
 when their competitors were free, and accordingly, in June, 1891, the 
 schedule of rates was made no longer obligatory. 
 
 In 1895 the Rochester (New York) Clearing-House Association 
 put into operation a schedule of collection charges, and the results 
 have been most satisfactory. All of the banks were in favor of it, 
 though there was at first some complaint on the part of customers. 
 
 Up to a comparatively short time ago no other association in the 
 country had approached that of St. Joseph in the detail with which 
 it worked out a system of regulations governing the conduct of its 
 members in regard to making collections. In the past few years, 
 however, considerable attention has been given to the subject by the
 
 RELATIONS BETWEEN BANKS ill 
 
 several associations, with the result that between 50 and 60 per cent 
 of all the clearing-houses in the United States are now working under 
 comprehensive rules and regulations covering the collection of items 
 which come under this head. 
 
 e) One of the most important of the special functions of the 
 clearing-houses, to which attention may be briefly called, is the issue of 
 clearing-house loan certificates in times of panic. By this means, in 
 some cases, the specie reserves of the clearing-house members have been 
 combined in a way to become a common fund, so that any bank that 
 experienced an unusual demand for specie was supported by the 
 combined reserves of all the banks. The bank thus assisted secures 
 the other members against loss by depositing with a committee 
 appointed for the purpose of receiving them its securities in the 
 shape of stocks, bonds, and bills receivable.' 
 
 /) A recently developed function of clearing-houses is the examina- 
 tion of banks in the association in an effort to supplement the work 
 of federal and state bank examiners in their efforts to reduce bank 
 failures to a minimum. Chicago was the pioneer in the field, its 
 system of clearing-house examinations being inaugurated on June i, 
 1906, as a direct result of the failure of the Walsh banks the preceding 
 autumn. 
 
 The examinations extend to all the associated banks of Chicago 
 and to all non-member institutions. The examinations include, be- 
 sides a verification of the assets and liabilities of each bank, so far as 
 is possible, an investigation into the workings of every department, 
 and are made as thorough as is practicable. After each examination 
 the examiner prepares a detailed report in duplicate, describing the 
 bank's loans, bonds, investments, and other assets, mentioning spe- 
 cially all loans, either direct or indirect, to oflicers, directors, or 
 employees, or to corporations in which they may be interested. The 
 report also contains a description of conditions found in every depart- 
 ment. One of these reports is filed in the vaults of the clearing-house, 
 in the custody of the examiner, and the other is handed to the examined 
 bank's president for the use of its directors. This system has spread 
 rapidly and is now in vogue in more than a score of the larger cities 
 of the country. Everywhere it appears to have been eminently 
 successful. 
 
 ' See Selection No. 94. — Editor.
 
 Hi I'RIXCII'LKS OF ,MO.\i:V A\l> ll.\.\K].\(; 
 
 Various clearing-houses in diflerent parts of Ihc country have 
 incorporated into their rules and regulations certain special features, 
 some of which are worthy of mention. For instance, at Altoona, 
 Pennsylvania, it is the duty of the associated members to report to 
 the secretary of the association any flagrant violation of commercial 
 or financial integrity on the part of anyone having business relations 
 with them. Furthermore, the solicitation of accounts of other 
 members is prohibited, and any members having accounts of the 
 same depositors shall have the right of ascertaining, each from the 
 other, the extent and character of the loans made to such depositor. 
 It is also provided that when a depositor of any member bank applies 
 to another member for a loan the member so applied to shall have 
 the right to ascertain from the applicant's bank whether the loan 
 had been previously offered there and, if refused, the reason for 
 refusal. 
 
 At Philadelphia, Pennsylvania, Chester, Pennsylvania, and Wil- 
 mington, Delaware, it is provided that the associated banks shall 
 report at once to each other the names of individuals, firms, or cor- 
 porations whose accounts have been closed on account of overdrawing, 
 depositing worthless checks, or otherwise defrauding them. 
 
 The associated banks of MinneapoUs, by special agreement, but 
 not by constitutional provision, have appointed an advertising 
 committee, of which the manager of the clearing-house is the chair- 
 man, to which is submitted all general schemes of advertising. The 
 schemes are submitted in writing to the committee by the soUcitor and 
 action taken thereon. Many of these propositions are rejected, and 
 what is known as clearing-house advertising appears only in the best 
 mediums. The claim is made that this concerted action serves to 
 secure much better rates and does not preclude any bank from placing 
 advertisements in any other direction it desires. Chattanooga, 
 Tennessee, and Fort Wayne, Indiana, also have made provision 
 regulating the placing of advertisements by their member banks. 
 The regulations of the Portland (Maine) Association state that no 
 member shall, by advertisement, circular letter, or publication, reflect 
 unfavorably upon the responsibility of another member. 
 
 The constitution of the Rochester Clearing-House Association 
 provides that members are prohibited from offering a higher rate 
 of interest to induce a customer to change his account from one bank 
 to another or as an offset against collection charges.
 
 RELATIONS BETWEEN BANKS 113 
 
 51. CLEARINGS OF NON-MEMBER BANKS IN CHICAGO 
 By JAMES G. CANNON 
 
 Besides the regular members there are about forty non-member 
 banks clearing through the Chicago Clearing-House. In other 
 words, there is an average of two to each member. Most of those 
 clearing in this way are private banks and trust companies. 
 
 Up to January, 1907, the Chicago Clearing-House exacted no 
 compensation for permitting outside institutions to clear through 
 its members. About that time an amendment was added to the 
 constitution making it imperative for a member bank to first obtain 
 the consent of the clearing-house committee before it could clear for 
 an outside institution, and further obhgated such a member to pay 
 as follows : For each bank having a capital of — 
 
 More than $ 25,000 and less than $ 50,000 $150 
 
 More than 50,000 and less than- 200,000 250 
 
 More than 200,000 and less than 400,000 350 
 
 More than 400,000 and less than 600,000 450 
 
 More than 600,000 and less than 1,000,000 600 
 
 Exceeding i ,000,000 700 
 
 The amendment further provided that such banks and bankers 
 should, under proper authority, consent to the same examinations 
 and render the same statements of their condition as are required of 
 the members of the association, and be subject to all such rules and 
 regulations in matters of common interest arising from or affecting 
 relations with banks in other localities, and the fostering of sound 
 and conservative methods of banking, as have been or may from 
 time to time be adopted by the association, and sign an agreement 
 so to do in such form as the clearing-house committee may require. 
 
 B. The System as a Whole 
 
 (i) GENERAL RELATIONS 
 
 52. COLLECTING OUT-OF-TOW^N CHECKS* 
 
 By JAMES G. CANNON 
 
 It is evident that a bank receives from its customers in the daily 
 course of business checks drawn on banks in distant towns and cities, 
 but before a bank can realize any return from such checks it must 
 
 ' Adapted from Clearing-Hotiscs, pp. 288-89. (National Monetary Commis- 
 sion, 19 10.) 
 
 ^ Ibid., pp. 59-78.
 
 114 I'RINCII'LKS OF MONKY AND BANKING 
 
 colled them. That is, it must send them to the banks upon which 
 they are drawn, or to some near-by bank which will act as its agent, 
 for [)ayment. For the purpose of collecting or clearing these foreign 
 checks the clearing-house is not available. Checks and drafts 
 received by a member of a clearing-house drawn upon some bank 
 located at a distance, and not a member, nor clearing through a 
 member, are regarded as improper matter for clearing. 
 
 The charges made by banks for exchange are usually extremely 
 vexing to customers, and to the layman appear indeed quite unreason- 
 able. It is obvious, however, that the banks are asked to perform 
 an important service for their customers. When A, who lives at a 
 distance from a financial center, buys a bill of goods from B, living in 
 the city, and sends a check drawn on his local bank for payment of 
 the amount, he subjects someone to the expense of collecting the 
 check, and, further, someone is out the use of the money until the 
 collection has been made. 
 
 For instance, a check on a bank in Massillon, Ohio, presented for 
 payment in New York City might be sent to a bank in Cleveland, 
 which in turn would send the check to the Massillon bank for 
 collection. In an actual case like this two checks had to be drawn, 
 four letters had to be written, 8 cents in postage stamps were used, 
 and seventy-five or more handlings of the check were involved by 
 a score or so of clerks, in five different banks, located in three 
 different cities. 
 
 It would seem that the banks could not be expected to advance 
 funds pending collection; but the competition among the financial 
 institutions in the larger cities is so keen that the bank does not stand 
 upon its rights and insist that the check shall be held for collection and 
 credited to B's account only when collected, but passes it to his credit 
 at once through fear that he will withdraw his account and deposit 
 with some other bank that will extend that accommodation to him. 
 This practice is quite general. 
 
 During the past few years great strides have been made by the 
 clearing-houses throughout the country in the matter of establishing 
 uniform rates for the collection of country checks, and at the present 
 time there are few associations in the United States that have not 
 some sort of a schedule for this purpose, however crude it may be.
 
 RELATIONS BETWEEN BANKS 
 
 115 
 
 53. LOST MOTION IN COLLECTING CHECKS' 
 By JAMES C. HALLOCK 
 
 I. A check for less than $50 on Stonington, Conn., started at 
 Westerly, R.I., six miles from Stonington, which it reached only 
 after many days and a thousand miles of travel by the following 
 route: Westerly to Providence, Providence to Boston, Boston to 
 New York, New York to Boston again, but to another bank; Boston 
 to New York again, but to another bank; New York to New Haven, 
 New Haven to Saybrook, Saybrook to New London, and New 
 London to Stonington. It passed through Boston twice. New York 
 twice, and New Haven four times. It was put through nine banks, 
 two of them in Boston and two in New York. 
 
 The following diagram pictures the circuitous journey: 
 
 BOSTON 
 
 WEW have: 
 
 PROVIDINCE 
 
 ♦WESTERLY 
 STOWINCTOIV 
 
 NEW VORK 
 
 ^Clearing Oul-of-Town Checks, pp. 12 and 21. (Copyright by the author, 1903.)
 
 ii6 
 
 TRINCIPLES OF MONEY AND BANKING 
 
 2. A check drawn in Hoboken and payaljle to a Sag Harbor firm, 
 visited New York, Boston, Tonawanda, Albany, Port Jefferson, Far 
 Rockaway, New York again, Riverhead, and Long Island City. 
 
 The journey was as shown in the diagram below : 
 
 k ALBA NY 5 
 
 BOSTON.a 
 
 FAR ROCK AW AY7 
 
 IVET^HEAD.g. 
 
 SAG HARBOR, n. 
 
 54. CORRESPONDENT RELATIONS BETWEEN BANKS^ 
 By WILLIAM A. SCOTT 
 
 Banks are the chief agencies for the conduct of exchanges between 
 persons who do not reside in the same place. If a person buys goods 
 beyond the limits of his home town he often pays for them by sending 
 a draft purchased from a local bank and drawm either upon a bank in 
 the place in which the goods were purchased or upon a bank in some 
 other place which has frequent business relations with this one. In 
 order to render this service to their customers banks are obliged 
 to keep funds on deposit in other cities, not necessarily in every city in 
 which the customers may desire to do business, but in certain com- 
 mercial centers through the banks of which arrangements may be 
 made for the conduct of exchanges with any place desired. The 
 banks selected for this purpose in this country are usually called 
 correspondents. In countries in which branch banking is practiced 
 
 ' Adapted from Money and Banking, pp. 11 7-21. (Henry Holt & Co., 1910.)
 
 RELATIONS BETWEEN BANKS I17 
 
 a great deal of business of this kind is conducted between the central 
 institution and its various branches. 
 
 By way of illustration let us consider the way in which a small 
 city in Wisconsin conducts its exchanges with the outside world. We 
 may assume that its banks have correspondents in Milwaukee, 
 Chicago, and New York. Its out-of-town business results from the 
 purchase and sale of goods and the adjustment of credit relations 
 between its inhabitants and outsiders. Purchasers of outside goods 
 will pay for them by sending checks on a local banker, by buying 
 drafts on Milwaukee, Chicago, or New York, provided exchange on 
 these places is acceptable to their customers, or, if not acceptable, on 
 other places, such drafts being furnished by the correspondents of the 
 local bank. These payments do not necessarily correspond in time 
 with the purchases. Some are deferred. On a particular date the 
 demand for exchange due to purchases comes from those made on 
 time in the past, the payment for which falls due on that date and 
 includes those made on a cash basis. To this demand must be added 
 that arising from the adjustment of credit relations with outsiders. 
 Under this head belong loans made to outsiders and investments in 
 outside enteqjrises. Gifts to outsiders or transfers of property from 
 any cause would also add to this demand. 
 
 To meet these drafts the banks have the checks, drafts, bills of 
 exchange, etc., drawn on outside institutions and sent to the city in 
 payment for goods sold, on account of loans, gifts, and other transfers 
 of property to citizens and on account of investments of outsiders in 
 local enterprises. These credit instruments are deposited with the 
 local banks and sent by them to their correspondents for collection. 
 Whether or not they will be sent to Milwaukee, Chicago, or New York, 
 or distributed between the three places, will depend in part upon the 
 location of the banks on which these instruments are drawn or at 
 which they are payable and in part upon the condition of the local 
 banks' accounts with their correspondents. Instruments drawn on 
 Milwaukee or on banks in towns which do their banking business 
 chiefly through Milwaukee will usually be sent to correspondents in 
 that city, and the others, on the same principle, to Chicago and 
 New York correspondents. Certain checks and drafts may be indilTer- 
 ently sent to either place, in which case the condition of the banks' 
 balances in these three centers will determine the distribution. 
 
 It is obvious that on a given date the bala'nce between the drafts 
 made by the banks of a town on their correspondents and the credits
 
 llS I'RINCIIM.KS OF MONKY AND BANKING 
 
 made in their favor through collections and deposits of checks and 
 drafts may be in their favor or against them. In the former case their 
 balances with their correspondents will increase and in the latter 
 case decrease. A succession of favorable balances might result in 
 large accumulations and a succession of unfavorable balances in the 
 overdrawing of their accounts. The existence of such balances 
 renders possible the movement of money from one place to another, 
 since the creditor banks may demand from the debtor banks payment 
 in cash. Whether or not they will do so depends upon their ability 
 profitably to use at home more cash than they already have, and this 
 depends upon the relative local and outside demand for loans and 
 hand-to-hand money. When banks are loaning heavily to local 
 customers, their deposits increase and more cash is needed in the 
 reserves, and when there is an increased demand for hand-to-hand 
 money, a relatively larger number of checks are presented for encash- 
 ment, and they are obliged to increase the percentage of reserves to 
 deposits unless .they are able to meet this demand by increased issues 
 of notes, a resource not open to the banks of the United States under 
 existing conditions. If the home demand for loans and for hand-to- 
 hand money does not justify the banks in calling for shipments of 
 currency from their correspondents, they may loan surplus funds in 
 the cities in which their correspondents are located, or in other cities, 
 or leave them on deposit with correspondents at such a rate of interest 
 as may be agreed upon. In this case these funds will be loaned by 
 the correspondents instead of by the local banks, and the rate of 
 interest paid by them will be sufficiently below the local rate to 
 guarantee a fair profit on the transaction. In case the home demand 
 for loans, or cash, or both, exceeds the funds banks have at hand or 
 on deposit with their correspondents, they may arrange with the 
 latter for overdrawing their accounts, either by drawing drafts 
 upon them without sending exchange or cash sufficient to pay them, 
 or by ordering shipments of currency to them in case the need is for 
 hand-to-hand money rather than credit. Correspondents will grant 
 such accommodations only on condition of the payment of a rate of 
 interest on adverse balances equal to or in excess of the local rate 
 plus the expenses of the transaction. 
 
 55. THE CONCENTRATION OF MONEY IN GREAT 
 FINANCIAL CENTERS 
 
 It has been the theory of our national, banking system to permit 
 a depositing of reserves by the banks of smaller cities in the banks of
 
 RELATIONS BETWEEN BANKS IIQ 
 
 larger cities. For instance, country banks have been allowed to keep 
 three-fifths of tJieir required reserve in correspondent banks in the 
 financial centers. The practice is quite general for these banks to loan 
 this reserve at a small rate of interest (2 per cent) to the larger city 
 banks, particularly in New York, where they are used in the making of 
 call loans to stock-exchange speculators. 
 
 In addition to loaning their legal reserves the outlying banks also 
 loan additional funds to New York and other city banks during periods 
 of slack business in the country. Otherwise idle funds are thereby 
 given temporary employment while remaining subject to call for 
 more remunerative investment as soon as occasion offers. Sometimes 
 instead of redepositing these funds in banks in the money centers 
 they are simply sent to brokers, who offer them as loans at the best 
 rates obtainable. 
 
 56. EXAJVIPLES OF RAPID CONCENTRATION OF FUNDS' 
 By FRED M. TAYLOR 
 
 The experience of the country as a whole with reference to cur- 
 rency movements is duplicated on a small scale between every trad- 
 ing center and the territory immediately dependent upon it. For 
 example, some years ago in a certain Michigan village which had a 
 factory with a pay roll of $2,000 per week, it proved necessary for 
 the local bank to bring out the $2,000 in cash from Detroit practically 
 every week in the year. That is, the $2,000, having been paid to the 
 workmen, instead of remaining in the village ready for use the next 
 week, before the time was up found its way into Detroit, from which 
 it had to be taken back by the banker. 
 
 Another rather striking illustration of this principle comes from 
 the copper country of Michigan. There the banks are every month 
 called upon by a great mining company to furnish many thousands of 
 dollars in fifty-dollar bills, and these bills have to be shipped in from 
 Chicago or New York, not once, but every time. This seems very 
 strange. One would suppose that those bills which were shipped in 
 and used in January would drift back to the banks and be ready for a 
 second job in February. But not so; when February comes around 
 the bills have all disappeared, and the operation of shipping in has to 
 be repeated. And this goes on indefinitely 
 
 ' Adapted from Some Chapters on Money, pp. 139-40. (Copyright by the 
 author, 1906.)
 
 I20 PRINCIPLES OF MONEY AND BANKING 
 
 57. NEW YORK, THE GREAT FINANCIAL CENTER' 
 By O. M. W. SPRAGUE 
 
 The significance of the New York money market in our banking 
 system is not fully recognized. It is indeed generally understood 
 that the practice of depositing reserves with agents in the money 
 centers places a severe strain upon them in emergencies, and it is well 
 known that the New York banks have acquired a large share of such 
 deposits. The enormous responsibilities resting upon the New York 
 banks on this account may be seen from the following statistics: On 
 September i, 1909, the New York banks held more than 43 per cent 
 of the net bankers' deposits of the country. Compared with the 
 banks of Chicago and St. Louis their obligations to bankers were 
 almost three times as great. 
 
 Large New York balances are necessary because New York is the 
 clearing-house of the country. In this connection certain statistics 
 gathered by the Comptroller of the Currency nearly twenty years ago 
 have great significance. From information provided by 3,329 of 
 the 3,438 national banks it was found that in 1890 all but three 
 drew drafts upon New York, and that the total amount of such drafts 
 was 61 .31 per cent of all the drafts drawn upon all the banks of the 
 country. In the case of the Chicago banks the amount drawn was 
 but 9.82 per cent of the total. The Chicago banks drew upon New 
 York for $222,000,000 and were drawn upon in return for but $82,000. 
 These figures show very clearly how indispensable is the maintenance 
 of payments by the New York banks if the dislocation of the domestic 
 exchanges is to be avoided. 
 
 58. PAYING INTEREST ON DEPOSITS AND BANK 
 COMPETITION^' 
 
 By GEORGE S. COE 
 
 The payment of interest on deposits of money payable on demand 
 is open to the gravest objections. This subject has upon several 
 occasions in years past been under consideration, and its total abolition 
 has been almost unanimously agreed to among our banks by written 
 contract. Yet by the refusal of one or more members it has failed 
 to become a binding obligation. Like some other great reforms, this 
 
 ' Adapted from "Proposals for Strengthening the National Banking System," 
 Quarterly Journal of Economics, XXIV (1909-10), 219-20. 
 
 ' Adapted from an address before the New York Clearing-House Association, 
 June 4, 1884 {Bankers' Magazine, New York, LVI [1884], pp. 44-50-
 
 RELATIONS BETWEEN BANKS 121 
 
 one does not admit of partial application or of compromise. Any 
 attempt to make exceptions to the prohibition among partners 
 mutually dependent can only result in entirely releasing them all 
 from any obligation respecting it. Yet every banker will freely 
 admit that the purchase of deposits payable on demand operates, 
 in some degree, as an absolution of the obligation to be always in 
 condition to meet the contract. Both the giver and receiver of inter- 
 est on such deposits, by the nature of the business, substantially, 
 though not expressly, agree to such use of the money as may prevent 
 its immediate return. 
 
 What is the nature of bank deposits ? Every responsible person 
 in regulating his own affairs must withhold from permanent invest- 
 ment and keep in hand enough ready money for his current wants. 
 This is his reserve. When such sums, for greater safety, are placed 
 in charge of another person, they do not lose their essential character; 
 and when they become further aggregated and pass into the possession 
 of a bank or banker, they are still subject to the same immediate 
 wants of every original owner for the very purpose for which he set 
 them aside. And when these rivulets of capital become streams, and 
 streams gather into rivers and flow toward the ocean until they reach 
 this city, where they come into financial relations with other men in 
 other continents, the parties who here take them in charge assume 
 new and accumulated responsibilities. They are subject not only 
 to the necessities of the people at home but also to the world-wide 
 influences of commerce. 
 
 Is it not evident that when these reserves are attracted by banks 
 and bankers who pay interest for them they immediately lose their 
 peculiar character and become, so far, at once changed from reserves 
 into investments, and that their original purpose is greatly reversed ? 
 The people's ready cash, by the very condition of receiving interest for 
 it, necessarily passes through the banker into flxcd forms never 
 intended. Reserve and investment! Idleness and work! They 
 are adverse and irreconcilable conditions. It is true that in the 
 hands of sound commercial banks some of these deposit funds may 
 be legitimately used for the best interests of society, in the negotiation 
 of business notes representing articles of human want and subsistence, 
 passing from production into consumption. This is using the fund by 
 promoting the very object for which each person originally provided 
 it. But such, we all know, is not the tendency nor the operation of 
 the practice now in question. Money payable on demand with inter- 
 est is chiefly loaned licre upon fixed property intendal for permanent
 
 122 PRINCIPLES OF MONEY AND BANKING 
 
 investment and upon bonds, stocks, and other obligations made for the 
 construction of public enterprises and works of established purpose, 
 whose large expenditures are not again resolvable into money. They 
 are in their nature fixed, and they demand, not their ready cash 
 reserve, but the permanent savings of the people to construct them. 
 So that temporary loans of reserved capital upon such securities 
 are certain to be called in when they are hardest to pay, because the 
 ready-money reserves so injudiciously absorbed by them are called 
 back by their owners in apprehension or for the supply of their own 
 needs. 
 
 Deposits so unnaturally attracted are necessarily capricious and 
 transitory. They fly away at the first whisper of danger, to the 
 detriment of the many who have touched them. Those banks which 
 so purchase them are objects of special dread to their colleagues in 
 business, while at the same time they are continually held up as 
 patterns of enterprise and as models for imitation. Differing so 
 widely from their associates in principle and in practice, the two 
 cannot work harmoniously together, nor equally and honorably 
 share the burdens of a national financial system whose stability 
 requires the New York banks voluntarily to stand firmly and com- 
 pactly together as one united body. 
 
 Experience among ourselves has again and again proved that the 
 interest-paying banks are the first to become embarrassed by any 
 kind of financial disturbance, even if they themselves are not the 
 means of producing it, and that they are then almost alone in being 
 compelled to seek protection from the loan committee by a pledge of 
 their securities. 
 
 Will a few members of this association, on the one hand, longer 
 continue a practice that subjects them to this humiliation ? And is it 
 just, on the other, for a large majority to tacitly submit to having their 
 business thus drawn away and the community periodically dis- 
 turbed by associates whom, in the hour of peril, they are compelled 
 for their own protection to support? 
 
 59. REDISCOUNTING BY NATIONAL BANKS* 
 By LAWRENCE O. MURRAY 
 
 While the banks are assumed to have sufficient capital, surplus, 
 profits, and deposits to take care of the business of the community in 
 
 ' Adapted from a letter quoted in an unpublished thesis by Joseph J. Klein, 
 entitled The Development of Mercantile Instruments of Credit in the United States 
 (igii).
 
 RELATIONS BETWEEN BANKS 1 23 
 
 which they are located, they often rediscount notes, as is shown by 
 their pubUshed statements, and their right to do so has been recog- 
 nized by the courts. This may be necessary because of an unusual 
 withdrawal of deposits, an unusual demand for loans by their cus- 
 tomers, and possibly, in rare instances, to make good their reserve. 
 Rediscounting when practical shows a rather strong seasonal swing 
 with the larger amounts during the fall and early winter during the 
 strain of the crop-moving period. 
 
 60. VARIOUS MEANS OF INTERSECTIONAL BORROWING^ 
 
 The rediscounting by country banks in New York is not of large 
 volume and at the present time comes principally from the southern 
 correspondents. There is a great difference of opinion in reference 
 to this matter, and in some quarters rediscounting is looked upon as 
 a sign of weakness, but as far as I am concerned I do not feel that 
 way. Of course any bank in New York which attempts to redis- 
 count its paper and publish the same in its statement is more or 
 less criticized. One large institution in this city showed bills dis- 
 counted, or rediscounted, for some $2,000,000 in their September call 
 to the Comptroller, which created considerable comment. But for 
 out-of-town banks, whose customers need considerable sums of money 
 at certain seasons, especially in the crop-moving period, and whose 
 capital is not large enough, or would be too large during the rest of the 
 year, I see no reason why such institutions should hesitate to redis- 
 count with their reserve city correspondents. Where there are rival 
 institutions in the smaller places throughout the country they do not 
 hesitate to point out to the customers of the other institutions the fact 
 that they rediscount, as if it was something out of the way. From 
 this fact has grown up a practice with a large number of banks to secure 
 money in other ways which will not show on their statement if called 
 for by the Comptroller. For instance, if they have a large amount 
 of bonds which are well known to their correspondents, they will 
 pass a resolution of their board authorizing the officers to sell these 
 bonds and their correspondent would buy them with an agreement on 
 behalf of the bank to repurchase the bonds at the same price plus a 
 fixed rate of interest. Another method of rediscounting is for the 
 directors of the bank to give their own note jointly and severally to 
 their reserve city correspondent for a considerable sum of money 
 
 ' Adapted from a letter of a prominent New York banker, quoted in an un- 
 published thesis by Joseph J. Klein, op. cil.
 
 124 rRINClIM>i:S OF MONEY AND BANKING 
 
 without {guarantee or endorsement of their bank in any way. The 
 money thus borrowed by the directors is placed at their credit on the 
 books of their own institution, but they do not draw against it, and it 
 gives them just as much more money to use and increases their 
 deposits at a time when naturally the deposits are withdrawn by their 
 regular customers. Another method employed for this borrowing 
 is for the bank to sell some of its notes without recourse to its corre- 
 spondent, with instructions to charge these notes to their account 
 ten days before maturity and forward the same to them for collection. 
 
 These are all irregular methods of borrowing and do not show in 
 the call to the Comptroller; consequently that is the reason why when 
 you come to examine the statements of national banks you do not 
 find under the head of "Rediscounts" any considerable amount. 
 
 The Comptroller is endeavoring to take steps to stop these 
 methods and make the banks show all their borrowings as redis- 
 counts. There is one perfectly legitimate method, however, which 
 the Comptroller cannot stop and which I am pleased to say is growing 
 out of the practice of large purchases of commercial paper which the 
 banks throughout the country are making in the open market. You 
 know this is my "fad, " and hence I feel very well pleased at the way 
 this part of the business of the country is being handled. Where 
 banks over the country buy commercial paper upon the open market 
 from reputable note-brokers, and buy paper which is known to their 
 correspondents in reserve cities as being first-class in every way, there 
 is no reason, when they need funds to take care of their customers 
 or meet receding deposit lines, why they should not take this com- 
 mercial paper which is bought on the open market and sell it to their 
 correspondents without any endorsement and without recourse. This 
 makes a very flexible secondary reserve for every institution which 
 carries commercial paper of this character, and the Comptroller can 
 find no fault with this; and the banks that are doing it not only have 
 the advantage over other institutions of being able to take care of 
 their customers as the paper matures, but are also in a position to 
 quickly and promptly turn into cash through their reserve agents a 
 large amount of their bills discounted.
 
 RELATIONS BETWEEN BANKS 125 
 
 (2) PERIODIC TENSION AND EASE IN THE SYSTEM 
 
 (a) Seasonal 
 
 61. SEASONAL VARIATIONS IN NEW YORK MONEY MARKET* 
 By EDWnsr WALTER KEMMERER 
 
 With regard to seasonal movements in the relative demand for 
 moneyed capital the New York money market exhibits five important 
 seasonal swings. Throughout January and during the early part of 
 February there is normally a pronounced "easing up" of the money 
 market. By the fore part of January the crop-moving demand for 
 money in the West and South is over and the return flow of cash is at 
 its height. There is a natural reaction — in part psychological — 
 which results from the relaxing of the heav}' strain on the money 
 market incident to January i settlements and to the passing of the 
 holiday season. At this time freight traffic, both on the railroads 
 and on the inland waterways, is relatively small. 
 
 The second seasonal movement is the spring revival, beginning 
 about the middle of February and extending to the latter part of 
 March or the fore part of April (in some years a week or so later). 
 This recovery is stimulated by the cheap money prevailing during the 
 preceding period, railroad traffic is released from the incubus of cold 
 weather and snow, the inland waterways are opened up; on April i 
 comes the demand for large interest and dividend settlements, and in 
 this period comes the spring demand of agriculturists for the planting 
 of crops. 
 
 The third important seasonal movement is the weakening money 
 market of the late spring, followed by the summer depression. This 
 period extends from the middle or latter part of April to the fore 
 part of August. It is interrupted by a temporary reaction about 
 July I, the time of semiannual settlements. This third seasonal 
 period shows the natural reaction from the high rates of the preceding 
 period, the anticipation and later the realization of the hot months 
 of summer comprising the vacation period, the lessened demand 
 for funds in the Middle West after the planting of the crops, and the 
 resulting return of cash to New York for deposit, investment, and 
 speculation. The decUning and cheap money market at this time, 
 
 ' Adapted from Seasonal Variations in the Relative Demand for Money and 
 Capital in the United States, pp. 24-25, 223-24. (National Monetar>' Commission, 
 1910.)
 
 126 
 
 l'RIN(IIM.i;S Ol- MONEY AND BANKING 
 
 wliicli linds expression in such phenomena as large bank reserves, low- 
 interest rates, gold cxportations, and high security prices, naturally 
 brings its own corrective to some extent. 
 
 Deposits and Bank-Note Circulatton of the New York City Cleareng- 
 HousE Banks, 1890- 1908 
 
 Loans and 
 Deposits 
 (000,000) 
 
 81S 
 80s 
 
 78s 
 
 76s 
 
 70s 
 
 69s 
 
 Weeb 
 Months 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 rage Loans 
 
 rage Deposits 
 
 rage Bank Note Circulation 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 .' 
 
 
 
 
 
 
 
 
 
 
 / 
 
 
 
 
 
 
 
 » 
 
 
 
 / 
 
 
 
 
 
 
 
 
 
 
 '*••••'** 
 
 
 
 
 
 
 **** '• 
 
 
 *••' 
 
 
 
 
 
 
 
 
 V 
 
 
 
 
 
 
 
 
 
 A^ 
 
 f^ 
 
 \ 
 
 \J' 
 
 ^/^ 
 
 
 
 j^\ 
 
 
 n 
 
 J 
 
 
 
 
 
 ^ 
 
 t 
 
 
 r 
 
 \^ 
 
 ^ 
 
 
 
 
 
 / 
 
 V / 
 
 f 
 
 
 
 
 
 
 / 
 
 f 
 
 
 
 1 
 
 7 
 
 V 
 
 
 
 
 
 J 
 
 f 
 
 
 
 
 
 7 
 
 ^ 
 
 ^^ 
 
 
 
 ■"^ 
 
 /^ 
 
 
 
 
 
 
 5 10 15 20 25 30 35 tO 4i 50 1 
 
 Jan^ 1 Feb. | Mai. | Api. | May | June | July | Aug. | Sept. | Oct | Nov. | Dec. | Jan. 
 
 Hank-Note 
 Circulation 
 (000,000) 
 
 $.370 
 
 360 
 
 2S0 
 
 260 
 
 240 
 Weeks 
 
 Months 
 
 The crop-moving period is the fourth period. This period, the 
 discounted beginnings of which are evidenced by the upward turn of 
 interest rates on sixty- to ninety-day commercial paper and four 
 months' time paper as early as the first week in July, may perhaps
 
 RELATIONS BETWEEN BANKS 
 
 127 
 
 best be dated from the first week in August, when call rates begin their 
 upward movement and when bank reserves begin their decline. 
 Under the pressure of the crop-moving demand for cash in the West 
 and South bank reserves are depleted and the money market tightens 
 rapidly until about October i. 
 
 Reserves and Ratios of Reserves to Deposits of the New York City 
 Clearing-House Banks, 1890-190S 
 
 Ratio of 
 
 Reserves to 
 
 Deposits 
 
 (Per cent) 
 
 2g.6o 
 
 28.80 
 
 28 .40 
 
 28.00 
 
 27 .60 
 
 26.80 
 Weeits 
 
 Months 
 
 A 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 A 
 
 verage Rescr^'cs 
 
 vcragc Ratios of Reserves to Deposits 
 
 
 / 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 \ 
 
 
 
 K 
 
 
 
 
 
 
 
 / 
 
 \ 
 
 
 /\i 
 
 f ^ 
 
 \f 
 
 
 
 
 
 
 
 \ 
 
 
 r 
 
 
 V. 
 
 
 
 
 
 
 /■ 
 
 ..^ \ 
 
 A 
 
 f 
 
 .•....♦' 
 
 v 
 
 *«»\ 
 
 
 
 K 
 
 i 
 
 / 
 
 \ 
 
 '»••••*•* 
 
 / 
 
 
 
 
 u 
 
 A 
 
 A 
 
 / 
 
 / 
 
 
 
 
 
 
 
 V 
 
 > 
 
 '.•'\. 
 
 -\ 
 
 5 10 15 20 25 30 35 40 45 50 1 
 
 Jan. 1 Feb. | Mar. | Apr. | May | June | July | Aug | Sept. | Oct | Nov. | Dec. |j«n. 
 
 Reserves 
 (ooo.ooo) 
 
 $278 
 
 268 
 
 H 253 
 248 
 238 
 228 
 318 
 208 
 
 Weeks 
 Months 
 
 The fifth and last seasonal period in the New York money market 
 extends from about the first week in October to the opening of the new 
 year. It is a period of considerable uncertainty and of many minor 
 fluctuations, but the demand for moneyed capital continues large 
 until after the holiday season and January settlements. The west- 
 ward movement of cash falls off rapidly in November and December, 
 and by the latter month the return flow has set in. The southward 
 movement declines in Novemljcr, but shows some signs of increasing 
 temporarily in December. Gold imjwrts reach a low point in Decem- 
 ber. Throughout Octol^er, November, and December the Federal 
 Treasury Department normally continues to increase its deix)sits in 
 national banks, of which New York City gets its share.
 
 1 28 PRINCIPLES OF MONEY AND BANKING 
 
 62. SEASONAL VARIATIONS IN OTHER CENTERS' 
 By EDWIN WALTER KEMMERER 
 
 Chicago, as might be expected, shows a striking similarity to 
 New York. There are the same five principal seasonal movements 
 taking place at approximately the same times of the year and in- 
 fluenced largely by the same causes. 
 
 The St. Louis seasonal swing differs from those of New York and 
 Chicago principally in the fact that it exhibits a sharp decline in 
 November, followed by a reaction extending until the latter part of 
 December. There are considerable differences, moreover, in the times 
 at which the different seasonal movements begin and end. Being in 
 the midst of the great agricultural section which creates the "crop- 
 moving demand for money," St. Louis naturally relaxes from the 
 crop-moving strain earlier than do the cities farther east. 
 
 The movements in New Orleans differ from those of New York and 
 Chicago even more than do those of St. Louis. The January decline 
 is of such short duration as to be almost negligible. Bank reserves 
 decline rapidly from early in January until the beginning of May, but 
 this is apparently not due so much to a demand for funds at home 
 as to the transfer of money for deposit and investment to other markets 
 during the slack season in the region contributory to New Orleans. 
 The New Orleans market, like those of other cities studied, is weak 
 during the hot summer months of June and July, but begins to grow 
 stronger by August and reaches its strongest point of the year during 
 the crop-moving months of September, October, and early November. 
 The last period of the year in the New Orleans money market is one 
 of readjustment and liquidation, following the heavy demands of the 
 crop-moving period. It extends from the fore part of November 
 to the end of the year, and is a period of comparatively strong though 
 gradually weakening market, and seems to resemble more closely the 
 markets of New York and Chicago for this period than that of St. 
 Louis. 
 
 The San Francisco market is probably more largely influenced 
 by purely local conditions than any of the other money markets 
 studied. It exhibits seven fairly pronounced seasonal movements, 
 as follows : (i) The usual January decline. (2) A progressive ''harden- 
 ing" from about the first of February until nearly the middle of 
 
 ' Adapted from Seasonal Variations in the Relative Demand for Money and 
 Capital in the United States, pp. 224-25. (National Monetary Commission, 1910.)
 
 RELATIONS BETWEEN BANKS 129 
 
 March. In addition to the forces bringing about this spring revival in 
 other cities, such as the natural reaction and readjustment after the 
 January decline and the spring demands of agriculturists, the local 
 tax situation in California is an important factor. (3) The third 
 period is one of an easier money market. It begins about the middle 
 of March, and continues until the last of April, being temporarily 
 interrupted at the time of quarterly disbursements, about the first 
 week in April. This movement, like the former, is largely the 
 result of the local tax system. (4) From the last of April until the 
 latter part of June the San Francisco market is comparatively strong, 
 under the influence of the demands for the annual fruit-packing 
 business and of fishing companies preparing for long fishing trips. 
 (5) The fifth period extends from the last of June to about the last of 
 September. Like the summer months in the other cities studied, it is a 
 period of comparatively small demand for loanable capital. (6) The 
 sixth seasonal period is the crop-moving period, extending from about 
 the last of September until the latter part of November. It is a 
 period of rapidly increasing or large relative demand for mone}-ed 
 capital. The demand comes largely from the need of funds for 
 moving dried fruits and canned fruits and for financing the hay and 
 grain crops. An important factor in the market at this time is the 
 local tax situation. (7) The seventh and last seasonal movement 
 in the San Francisco market covers the last few weeks in the year 
 and begins anywhere from the latter part of November to the middle 
 of December, according to the lateness of the season. It is a period 
 of reaction and decline after the strong market of the preceding period. 
 
 63. THE THEORY OF DOMESTIC EXCHANGE' 
 By WILLIAM A. SCOTT 
 
 Commercial relations between communities are revealed most 
 clearly by what is called the balance of trade, by which is meant tlic 
 difference between the totals of the sales to and the purchases from 
 outsiders. When Llie total of sales exceeds the total of j^urchascs, 
 the balance of trade is said to be favorable, and in tlie opposite case 
 unfavorable. Credit relations are revealed by balancing mutual 
 loans and investments, and gift relations by balancing gifts and other 
 transfers of property for which no return is expected. A combina- 
 
 ' Adapted from Money and Banking, pp. 121-25. (Henry Holt & Co., 1910.)
 
 I30 PRINCIPLES OF MONEY AND BANKING 
 
 tion of these balances results in making a given community either 
 a debtor of or a creditor to other communities. It is for the adjust- 
 ment of these debit and credit balances that shipments of money from 
 place to place are made. 
 
 At this point the queries naturally arise whether the money funds 
 of a community may not be completely exhausted by the payment 
 of adverse balances and how much is required for this purpose. An 
 examination of the various elements which determine the balance of 
 indebtedness will show that there is no danger either of the exhaustion 
 of money funds or of their reduction below minimum requirements. 
 The balance of trade, the balance of loans, and the balance of invest- 
 ments are all three adjustable. Long before a community could be 
 deprived of the minimum amount of cash needed for bank reserves 
 and hand-to-hand money, prices, interest rates, and opportunities 
 for profitable investments would have so changed as to annihilate 
 the unfavorable balance. The first effect of shipments of currency 
 to other centers is the decline in the reserves of banks, which, if con- 
 tinued, will result in a rise of interest rates and a contraction of bank 
 loans. The withdrawal from business men of the loan accommoda- 
 tions to which they have been accustomed will force them to diminish 
 their purchases and will stimulate their efforts to sell. If this is not 
 sufl&cient to redress the unfavorable balance, loans from outsiders may 
 be increased or the fall in local values due to the increased anxiety 
 to sell property may induce outsiders to increase their investments 
 in the town. The proper adjustment will ultimately be brought about 
 by a change of prices. If those of the place at which the balance of 
 indebtedness is adverse are sufficiently reduced, increased sales to and 
 increased investments by outsiders will remedy the diflSculty, and such 
 a reduction will result from the pressure to meet obligations caused 
 by the currency drain. 
 
 The influence of currency movements on relative prices must not 
 be confused with the fundamental causes of price changes. We are 
 here concerned with the adjustment of the relations between the 
 demand and the supply of the same goods in different places. 
 Movements of currency from place to place are but one phase of 
 the operation of the general principle that people sell in the dearest 
 and buy in the cheapest market, the result of which is a tendency 
 toward the equalization of the prices of the same commodity in 
 different markets.
 
 RELATIONS BETWEEN BANKS 131 
 
 Shipments of currency from place to place involve expenditures for 
 express charges and insurance and the loss of interest during the period 
 of transit. This latter item is explained by the fact that banks are 
 unable to count as part of their reserve, and hence to use as a basis 
 for loans, money in the possession of an express company. On 
 account of these expenses, a bank which is asked to sell exchange on 
 a place in which it has no balance, or to which it cannot without 
 expense transfer a portion of its balance in some other place, must 
 charge a premium for such drafts, unless it can buy in the home town 
 exchange on that place at par. Under the opposite circumstances 
 a bank may be willing to sell drafts at a discount, since this may be 
 the most profitable way of using a surplus balance with its correspond- 
 ent. This would be the case, for example, if its reserve were low and 
 its surplus with the correspondent large. Rather than pay the expense 
 of a currency shipment it could afford to sell drafts at any discount 
 less than that expense. The maximum premium it could charge in 
 the opposite case would be the expense of sending money to cover its 
 draft, since rather than pay a higher premium customers would ship 
 cash for themselves. The rate of exchange on a place, as the price 
 of drafts is technically called, may, therefore, fluctuate between a 
 point above par, determined by adding the expenses of shipment to 
 the face value of the draft, and a point below par, determined by sub- 
 tracting that amount. The actual premium or discount is fixed by 
 competition between the buying and selHng banks of a place, those in 
 a position to sell exchange competing with each otlier for the custom 
 of those buying, in case exchange is at a discount, and, in case it is at 
 a premium, the buying banks bidding against each other for the 
 drafts the selling banks are willing to dispose of. 
 
 The cost per $1,000 of currency shipments between New York 
 and Chicago is usually about 50 cents; between New York and 
 St. Louis, 60 cents; between New York and New Orleans, 75 cents, 
 and between New York and San Francisco, $1 . 50. In this country 
 the expense of currency shipments is sometimes saved by the opera- 
 tion of our independent treasury system. The central government 
 has subtreasuries in which its funds are kept in Philadelphia, New 
 York, Boston, Baltimore, Cincinnati, St. Louis, New Orleans, Chicago, 
 and San Francisco, and when it has occasion to make transfers for its 
 own purposes it may sell drafts on certain subtreasuries at par, tlius 
 saving banks the expense of shipping currency on their own account.
 
 132 PRINCIPLES OF MONEY AND BANKING 
 
 64. EXCHANGE RATES AND MOVEMENTS OF CURRENCY 
 TO AND FROM CHICAGO' 
 
 By EDWm WALTER KEMMERER 
 
 Throughout January money in Chicago relative to that in New 
 York City is cheap. Exchange rates on New York are high and there 
 is a considerable movement of cash from Chicago to the Eastern 
 states — ^particularly to New York City. The average rate of exchange 
 for each of the first four weeks (1899-1908) varied from 2.5 cents 
 premium in the first week to 10 cents premium in the fourth week. 
 Of the forty weekly rates appearing during the first four weeks of the 
 ten years twenty-four were not less than 10 cents premium. Com- 
 paratively high exchange rates were accordingly fairly regular in their 
 occurrence during this period. 
 
 Just prior to January i there is normally a large demand in 
 Chicago for New York exchange with which to meet dividend and 
 interest payments due in New York, and the high rates thus created 
 continue somewhat into the new year. The crop-moving and hoHday 
 demand, however, being over, money becomes relatively cheap in 
 Chicago and flows to New York City, where it can at least earn the 
 2 per cent paid by banks on bankers' balances, and where it is absorbed 
 somewhat in speculative activity and in the higher security prices, 
 which normally rule the latter part of January and the fore part 
 of February. 
 
 From the last of February to the fore part of March the demand 
 for money in Chicago relative to that in New York rapidly rises. 
 Exchange rates on New York fall to a low point. 
 
 Reported currency shipments between Chicago and Eastern 
 states substantiate the evidence of domestic exchange rates. The 
 total shipments of cash from Chicago to the Eastern states in January 
 amounted in four years to $8,088,000, while February shipments 
 amounted to only $1,934,000. The total receipts by Chicago from 
 the East in January for the four years was $1,751,000. There is no 
 evidence of a movement of cash from the East to Chicago in February, 
 although there is something of a westward movement in IMarch. 
 
 During the period from late January to early March the relative 
 demand for money in Chicago is increased by the anticipated opem'ng 
 of navigation on the Great Lakes, for the opening of navigation gives 
 rise to a large amount of New York exchange received in pajonent of 
 
 ' Adapted from Seasonal Variations in the Relative Demand for Money and 
 Capital in the United States, pp. 96-100. (National Monetary Commission, 1910.)
 
 RELATIONS BETWEEN BANKS 133 
 
 grain bills. There is also a demand on the part of western bankers 
 for currency to meet the spring needs of the western farmers. The 
 first of March in many sections of the Middle West is the commonest 
 time for making settlements of interest and principal on farm mort- 
 gages. It is also a common date for paying farm rents. 
 
 This spring advance in the value of money in Chicago as compared 
 with New York reaches its maximum early in March. The demand 
 then falls off rapidly and with only temporary interruptions (the 
 most noteworthy being about May i) until it reaches the low level of 
 the early summer, the latter part of May. It continues at a low 
 level until early in July, when the crop-moving advance begins. 
 
 The average domestic exchange rate rose from 29 . 5 cents discount 
 in the ninth week to 16 cents premium in the twenty-first week. In 
 nine of the ten years the rate for the twenty-first week was higher 
 than that for the ninth. The average rate then fell to 4 cents premium 
 in the twenty-fourth week. These two latter movements, however, 
 were minor ones and not regular in their occurrence, the former taking 
 place in six and the latter in five of the ten years. 
 
 Chicago reported relatively small receipts of cash from the East 
 during these months. The shipments east, however, were high, the 
 totals for four years being as follows: March, $6,287,000; April, 
 $10,936,000; May, $12,212,000; June, $12,628,000. 
 
 Money, having served its purpose in meeting the spring needs of 
 agriculturists, flows into the reserves of the Chicago banks, and 
 Chicago bankers, not having a great demand for it at this time, move 
 a portion of it to New York for the purpose of obtaining the 2 per cent 
 which New York banks pay upon bankers' balances. 
 
 About July I the relative demand for money in Chicago begins 
 to increase, advancing rapidly, with minor interruptions, imtil early in 
 September and then maintaining a high level until the fore part of 
 November. During this period exchange rates rule low and money 
 moves in large quantities from the Eastern states to Chicago. The 
 average exchange rate fell abruptly from 1 1 . 5 cents premium in the 
 twenty-sbcth week to 16.5 cents discount in the twenty-seventh 
 week, a decUne taking place in every one of the ten years. After a 
 minor reaction to the twenty-ninth week, which took place in seven 
 years, there was a continuous decline until the thirty-lillh week, when 
 the lowest point of the year was reached. The average rate fell 
 from II . 5 cents premium in the twenty-sixth week to 37 . 5 cents dis- 
 count in the thirty-fifth, a very substantial decline taking place in
 
 134 I'RINCII'I.KS OF MONi:y AND BANKING 
 
 every year. Exchange then continued at a low level until about the 
 forty-fourth week (fore part of November), the average rate for this 
 week being 29 cents discount. 
 
 The primary cause for this is of course the anticipated and actual 
 crop-moving demand. For the twenty-seventh week (about July 1) 
 the striking fall in exchange may be due in part to the efforts of west- 
 ern banks to maintain their reserves (or strengthen them) in prepara- 
 tion for their half-yearly statements, which are generally published. 
 
 The receipts of cash by Chicago banks from eastern banks from 
 June to October were as follows: June, $2,500,000; July, $2,704,000; 
 August, $17,910,000; September, $11,789,000; October, $21,843,000. 
 Shipments by Chicago to the East were very low in all these months. 
 
 During the last six to eight months of the year, the demand for 
 money being stronger in New York than in Chicago, the average 
 exchange rate rose from 29 cents discount to 13 cents premium in the 
 forty-seventh week; it then declined to 11. 5 cents discount in the 
 forty-ninth week. The rate for the forty-seventh week was higher 
 than that for the forty-fourth in every one of the ten years, that for the 
 forty-ninth week was lower than that for the forty-seventh in eight 
 years and the same as the forty-seventh in the other two years, while 
 that for the fifty-second week was higher than that for the forty- 
 ninth in six years and the same as that for the forty-ninth in two years. 
 The general upward tendency in rates at this time, as well as the 
 two lesser movements noted, appear, therefore, to be fairly regular 
 in their occurrence. 
 
 Reported receipts of cash by Chicago from the Eastern states 
 fell off in November and December from their maximum figure 
 for the year in October. On the other hand, shipments to the Eastern 
 states reported by Chicago rose from $2,134,000 for October to 
 $3,213,000 for November, then fell to $3,021,000 for December. 
 
 Money becomes relatively cheap in Chicago and vicinity during 
 these last six weeks of the year, principally because of the return flow 
 of currency previously shipped to the country districts for crop- 
 moving purposes. There is also considerable demand at this time for 
 New York exchange to meet payments in certain lines of goods, such 
 as hardware and dry goods, that are due New York and New England 
 houses by western establishments, and to make purchases for the 
 holiday trade. 
 
 The decline in exchange rate from the forty-seventh to the forty- 
 ninth week may perhaps be attributed to the fact tliat by this time
 
 RELATIONS BETWEEN BANKS 135 
 
 foreign exchange made by coUon and grain shipments to Europe 
 has been sold in New York in considerable quantities. The advance 
 from the forty-ninth to the fiftieth week and the comparatively high 
 exchange rates until the end of the year are largely due to preparations 
 for the January disbursements, which western concerns are called upon 
 to make in New York City. 
 
 65. INTEREST ON DEPOSITS AND SEASONAL DISTURBANCES" 
 By WILLIAM A. RICHARDSON 
 
 The practice of paying interest on deposits is pernicious and 
 fraught with danger and embarrassment to borrower and lender as 
 well as to the general business interests. If deposit accounts are 
 employed as temporary investments, the interest attracts a large 
 amount of money to those cities where such interest is paid, and where 
 speculation is most active, at seasons when as much profit thereon can- 
 not be secured in legitimate business, these temporary investments are 
 called in and jeopardize in their sudden withdrawal the whole business 
 of the banks, both affecting the legitimate depositors on the one hand 
 by excitement and distrust, and on the other creating a condition of 
 things in which the borrowers on call are also unable to respond. The 
 banks have borrowed their money of depositors on call. They have 
 loaned it on call to speculators, who by its use have contributed to 
 inflate prices of the stocks or merchandise which have been the subject 
 of their speculations. The speculator wants it till he can dispose of 
 them without a loss. This he is unable to do in a stringent money 
 market. The banks, their depositors, and the borrowers all want 
 it at the same time, and of course a stringency is developed which 
 spreads distress throughout the country. 
 
 The system creates an immense amount of debts payable on 
 demand, all of which thus suddenly and unexpectedly mature at 
 the first shock of financial or commercial embarrassment in the 
 country and at the very time when most needed by debtors and when 
 they are least able to respond. 
 
 Without attributing the stringency in the money market which is 
 experienced every autumn and occasionally at other seasons of the 
 year solely to this practice of paying interest upon deposits in the 
 large cities, it is evident that when money is less needed in legitimate 
 ])usiness the practice encourages overtrading and speculation, always 
 
 ' Adapted from Finance Report, 1873, pp. xv-xvi.
 
 i,:;^ PRINCIPLES OF M0NP:Y AND BANKING 
 
 detrimental to tlic best interests of the country, and the bad effects 
 of which upon those interests become more apparent and the disaster 
 more widespread when the necessary contraction begins to be felt. 
 
 66. SEASONAL FLUCTUATIONS AND COMMERCLVL FAILURES' 
 By EDWIN WALTER KEMMERER 
 
 The figures for commercial failures for the years 1890-1908 pub- 
 lished by Dun's and Bradstreet's show a striking seasonal movement. 
 First to attract attention is the very large number of failures during 
 the fore part of January. The first three weeks of the year are clearly 
 the highest three. After the fore part of January there is a rapid 
 decline in the number of commercial failures until the fore part of 
 April. With the exception of a minor upward movement during July, 
 followed by a decline throughout August, the curves of commercial 
 failures tend to be low from early April until the fore part of Septem- 
 ber, when they begin a strong upward movement which does not cul- 
 minate until after the opening of the new year. 
 
 What is the explanation of this marked seasonal swing in the 
 number (and also the liabilities) of commercial failures ? Obviously 
 one of the chief causes for the large number of failures in December 
 and January consists in the custom among business concerns of taking 
 account of stock in December and of closing accounts for the year's 
 business. Many small concerns really do not know where they stand 
 until about this time of the year. Many financial obligations, more- 
 over, become due January i, and it is customary in many places for 
 banks to require statements of customers at about this time. In 
 early January business concerns are commonly facing a period of 
 inactive business. Similar conditions in general exist, although on 
 a much smaller scale, during the few weeks before and after July i, 
 and probably account for the movements in commercial failures 
 noted as occurring at that time. Concerns which survive the 
 December- January strain are hkely to be able to continue during 
 the spring and the slack summer months. As the fall approaches and 
 the money market hardens in response to crop-moving demands, as 
 interest rates rise, bank reserves decline, and loans are curtailed, as 
 securities tend to decline and increased margins are called for, the 
 
 ' Adapted from Scason<il Variations in the Relative Demand for Money and 
 Capital in the United States, pp. 231-32, 221-22. (National Monetary Commis- 
 sion, 1910.)
 
 RELATIONS BETWEEN BANKS 137 
 
 strain on the weaker business concerns is liable to become more tense. 
 While, of course, it would be rash to say that the tightened money 
 market in the fall is the cause of the large number of failures at this 
 period, it seems reasonable to expect that the strained money market 
 at this time would tend to push over many concerns which were 
 already near the verge of failure. I know of no other explanation for 
 the large number of failures during October and November. The 
 period of the spring trade revival is so brief and such a short time after 
 the "cleaning-up" period of December and January that it normally 
 occasions few failures. In March, however, there is a slight decrease 
 in the number of commercial failures. 
 
 67. SEASONAL VARIATIONS IN SUPPLY OF CURRENCY' 
 By EDWIN WALTER KEMMERER 
 
 By "money in circulation" is meant all money outside of the 
 Federal Treasury vaults. The forces influencing the amount of gold 
 and gold certificates in circulation are (i) the bullion deposits at the 
 United States mints and assay ofl5ces; (2) the net imports and 
 exports of gold in settlement of foreign balances; and (3) subtreasury 
 payments and receipts. The rapidly increasing gold production in 
 1 890- 1 90S would of course show a steady increase in gold circulation 
 from January to December. 
 
 The substantial increase in gold circulation from July to December 
 is due to the large deposits of gold at the mints and assay offices in 
 these months, by net importations of gold from abroad in consequence 
 of heavy exports at this season, and to a decrease in the treasury 
 balances. The deposit of large amounts of bullion at the mints at 
 this season is due merely to the conditions surrounding the production 
 of gold. It is not brought about to any extent by the great demand 
 for moneyed capital at this time of the year. It has been the policy 
 of the Treasury Department during the latter months of the year to 
 aid the banks in meeting the crop-moving demand by decreasing 
 subtreasury holdings and increasing government deposits in national 
 banks. 
 
 The national bank note circulation curves do not exhibit any 
 considerable seasonal elasticity. There is a general increase from 
 
 ' Adapted from Seasonal Variations in the Relative Demand for Money and 
 Capital in the United Slates, pp. 146-53, 173. (National Monelar>' Commission, 
 1910.)
 
 i3« 
 
 I'RINCIPLES OF MONEY AXD BANKING 
 
 Seasonal Variations of Vakious Kinds of Money and of Deposits in tue 
 
 United States, 1890-1908' 
 
 Gold Coin 
 
 ami (lold 
 
 Certilkati's 
 
 (000,000) 
 
 $860.0 
 
 852 5 
 84s. o 
 
 837. S 
 
 830.0 
 822. S 
 815.0 
 
 807.5 
 800.0 
 
 Total 
 
 Money 
 
 (000,000) 
 
 $2,130 
 
 2,080 
 
 2,060 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ^^^^ Average Amounts o( National Bank Notes 
 
 
 
 _^ 
 
 
 
 
 
 
 
 
 
 
 
 y 
 
 •/ 
 
 
 
 
 
 
 
 
 
 y 
 
 '/ 
 
 / 
 
 \ 
 
 
 
 
 
 
 
 ^^ 
 
 ^ 
 
 ^ 
 
 / 
 
 
 \\ 
 
 
 
 ^ 
 
 ^ 
 
 
 
 
 
 / 
 
 
 
 w 
 
 
 y^ 
 
 ^ 
 
 > 
 
 
 
 / 
 
 
 
 
 
 \ 
 
 / 
 
 N 
 
 ^ 
 
 / 
 
 
 
 / 
 
 
 
 
 
 \ 
 
 /^ 
 
 \ 
 
 <y 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 j\ 
 
 1 
 
 
 ■■■■■ Average Amounts of Total Money 
 
 
 
 
 i 
 
 / 
 
 
 
 
 
 
 
 
 
 
 
 / 
 
 
 \ 
 
 \ 
 
 
 
 
 
 
 
 
 i 
 
 i^ 
 
 \ 
 
 \ 
 
 \ 
 
 
 
 / 
 
 \ 
 
 
 
 
 
 
 
 \ 
 
 \ 
 
 / 
 
 
 
 \ 
 
 
 
 
 1 
 
 
 
 \ 
 
 
 
 
 
 \ 
 
 
 \ 
 
 / 
 
 1 
 
 
 
 1 
 
 
 
 ' 
 
 
 > 
 
 
 \ 
 
 V 
 
 
 
 
 
 
 
 / 
 
 ^ 
 
 
 ^ 
 
 / 
 
 
 
 
 
 
 
 
 / 
 
 
 
 
 
 
 
 
 
 
 
 
 National 
 Bank Notes 
 
 $340 
 335 
 
 30s 
 
 Amounts c 
 
 dealings 
 
 (000,000) 
 
 §4,075 
 
 1,62s 
 
 Months ^ cS 
 
 1400 
 Months 
 
 ' Chart made from Kcmmcrer's chart, p. 146, and table, p. i6t.
 
 RELATIONS BETWEEN BANKS 139 
 
 year to year, as would be expected because of generally expanding 
 business, but there is virtually no rise and fall according to the seasonal 
 variations in the demands of trade. It is noteworthy, however, that 
 the increase in circulation each year takes place largely in the fall and 
 early winter. Apparently banks intending to increase their circu- 
 lation postpone doing so until the crop-moving season approaches. 
 There is no evidence of contraction, however, when the crop-moving 
 demands are over, the national bank note elasticity being (to use 
 a rather inelegant expression) of the chewing-gum variety. 
 
 Deposit currency exhibits a high degree of seasonal elasticity, 
 expanding and contracting in accordance with variations in trade 
 demands. It is the only truly elastic element among our media of 
 exchange. In some cities, like New York and Chicago, the general 
 movement of the curves for the circulation of deposit currency follows 
 fairly closely those for the relative demand for loanable capital. In 
 other cities, like St. Louis and San Francisco, while the parallelism 
 is not so close, there is, however, a tendency for the general seasonal 
 swing of the deposit currency circulation and of the relative demand 
 for moneyed capital to be similar. 
 
 68. INELASTICITY OF CURRENCY FOR SEASONAL NEEDS' 
 
 The autumn of each year makes more apparent the urgent 
 necessity of some additional facility or means by which the demand 
 for crop-moving funds can be supplied to the people without derange- 
 ment of all the business and financial affairs of the country. 
 
 As has been so often said, there is no flexibility or elasticity in our 
 currency. The necessity for this is always most acutely felt in the 
 late summer and early autumn, or at the crop-moving time. The 
 two ways in which the demand for funds then manifests itself are in 
 a demand for an increase of deposits requiring more reserve money 
 and for cash or currency to make cash payments. This latter demand 
 has to be largely met by money which would otherwise be available 
 for reserve. The withdrawal of this reserve money reduces the 
 reserves when they should increase, and after it is no longer needed 
 for cash payments the money returns to reserves and tends to inflate 
 loan credits and induce speculation. 
 
 The real solution of the problem is to enable the banks to supplv 
 for the cash transactions bank notes not available for reserves, and 
 
 ■ Report of Comptroller of the Currency, 1906, p. 67.
 
 I40 PRINCIPLES OF MONEY AND BANKING 
 
 which therefore do not contract loans when paid out and do not inflate 
 them when they return. 
 
 Consider for the moment the supply of crop-moving funds, which 
 is the really critical point in this question. When the harvests first 
 begin in the South and Southwest, the banks at oijce feel two demands: 
 first, for loans to the people who must provide funds to buy the prod- 
 ucts of the farm and plantation; second, for currency to pay the 
 wages of labor and to pay for such products as must be paid for in 
 actual cash, and not by a transfer of credits by check. This demand 
 for loans to be kept on deposit makes more reserve money necessary 
 for the banks to hold, and at the same time they must supply more 
 currency for cash transactions. It would seem, therefore, perfectly 
 axiomatic to anyone that the best way to meet the situation 
 would be to keep in the banks all the money which can properly be 
 used for reserve and to supply for cash transactions currency which 
 will answer all necessary requirements, be just as safe, just as con- 
 venient, and just as good in every way, but which is not available 
 as bank reserves. This can be done simply, easily, and automatically 
 by the proper use of the right kind of bank notes, and in no other way. 
 
 69. THE TREASURY AND THE BANKS: HISTORICAL 
 SUMMARY* 
 
 By DAVID KINLEY 
 
 1. The policy of the government with reference to the safe- 
 keeping of its funds has been variable. For the first few years after 
 the adoption of the Constitution, before the subject attracted serious 
 public attention, there was no specific place for the custody of the 
 public money, and it was left largely in the hands of collecting and 
 disbursing ofl&cers. 
 
 2. During the existence of the first and second United States 
 banks, that is, from 1796 to 181 1, and from 1816 to 1833, the date of 
 the "removal of the deposits," the public money was kept mainly in 
 these institutions and their branches. Nevertheless, even during 
 these periods some state banks were employed. 
 
 3. In the interim between 181 1 and 1816 the pubUc money was 
 kept mainly in the state-chartered banks. These banks were also 
 used between 1833 and 1846, the date of the establishment of the 
 independent treasury. 
 
 • Adapted from The Independent Treasury of the United States and Its Relation 
 to the Banks of the Country, pp. 323-30. (National ilonetary Commission, 1910.)
 
 RELATIONS BETWEEN BANKS 141 
 
 4. Beginning with 1847, immediately after the establishment of 
 the independent treasury, the public money was kept in the Treasury 
 and subtreasuries, and no banks were used until after the establish- 
 ment of the present national banking system in 1863. Since that 
 time the depositary banks have supplemented the use of the sub- 
 treasuries as places for the keeping of the public money. 
 
 5. In the past one hundred and twenty years, therefore, there were 
 only seventeen, 1847-1864, in which the government did not use 
 depositary banks for keeping the public money. 
 
 6. The evidence therefore shows that there has been, uniformly, 
 a strong tendency for the government, throughout its history, to use 
 banks. 
 
 7. The causes of this tendency are shown to have been the greater 
 convenience in the management of the public money, the desire of 
 the Secretary and the public that government fiscal operations should 
 interfere as little as possible with the monetary circulation and with 
 business conditions, the necessities of the government, and pressure 
 from banking and other interests. 
 
 8. Under the influence and pressure described, first the Secretary 
 of the Treasury, and later Congress, have given way, and virtually 
 abandoned the policy of independence in the keeping and manage- 
 ment of public money which was established by the act of August, 
 1846. Congress authorized the use of national banks in which to 
 deposit receipts from internal revenue. With some vacillations the 
 extent of the use of the banks as depositaries for these receipts has 
 steadily increased. By recent legislation receipts from customs may 
 also be deposited in the banks. Under the first interpretation of the 
 law permitting these deposits they could accrue only as the collecting 
 officers placed the money received by them in the banks and not from 
 the transfer of government receipts once deposited in the treasuries. 
 By later practice the latter method of deposit has also been adopted 
 and is claimed by some to be legal. Under present practice and 
 legislation, therefore, the Secretary of the Treasur>' has a free hand to 
 put any and all receipts of public money in the depositary banks. 
 The independence of the Treasury depends entirely upon the will 
 of the Secretary. 
 
 g. A further departure from the policy of independence is shown 
 by the course of opinion and legislation concerning security for 
 deposits. Under the law as passed public deposits were to be secured 
 by United States bonds and otherwise. This was understood to mean
 
 142 PRINCIPLES OV MONEY AND BANKING 
 
 United States bonds in addition to a personal bond. Eight years 
 ago the phrase was differently interpreted, and banks were permitted 
 to secure deposits on the basis of other than United States bonds as 
 security. The practice thus estabUshed was legaHzed between two 
 and three years ago. 
 
 10. At first the banks which obtained public money on deposit 
 were expected to keep a reserve against it, as provided by the law of 
 their being. Some seven or eight years ago this practice was broken 
 and the banks allowed to hold public deposits without protecting 
 them by a reserve. The practice thus initiated was also later made 
 legal. 
 
 11. Finally, with all these changes, the amount of public money 
 deposited with banks has steadily increased, until at one time in 
 recent years only a comparatively small working balance was kept 
 in hand by the Treasury itself. 
 
 70. RESULTS OF THE ISOLATION OF PUBLIC FUNDS' 
 By MURRAY S. WILDMAN 
 
 Since our federal revenue is so largely derived from indirect 
 taxation, the streams rise and fall with the course of certain lines of 
 trade and rarely coincide with disbursements over any considerable 
 period. Owing to this uncertainty in the rate of income, there is 
 nearly always a surplus and, normally, the excess of income over 
 outgo determines the magnitude of the treasury hoard and the amount 
 of the circulating medium of the country condemned to idleness. 
 
 These sums are significant from the point of view of their absolute 
 magnitude and also from that of their variability. In all cases they 
 consist of money capable of use as bank reserves. It is true that 
 national banks may not count bank notes as part of their reserves, 
 but since such notes are used as reserve by state and private banks 
 the distinction may be ignored. It may be said also that the cash 
 reserve of banks is made up of the surplus circulation of the country. 
 So long as there is a deficiency of money for the needs of trade it will 
 not be deposited, or if deposited will not remain in the hands of the 
 bank. It follows that this entire sum, if not held by the Treasury, 
 would be added to the bank reserves, eliminating exports of gold, and 
 would increase the cash holdings of all institutions doing a banking 
 
 'Adapted from "The Independent Treasury and the Banks," Annals of the 
 American Academy of Political and Social Science, XXXVI (1910), 576-81.
 
 RELATIONS BETWEEN BANKS 143 
 
 business. The effect of such an increase in cash reserves would 
 depend on various circumstances. In the case of some banks it 
 would further establish the convertibility of their demand liabilities 
 without affecting the magnitude of these liabiUties. In the case of 
 others, by increasing the lending power it would tend to decrease the 
 the rate of discount and so the cost of conducting business in general. 
 This diminution in the costs of competitive business, other factors 
 remaining constant, would tend to lower prices of consumers' goods. 
 
 The first and most obvious objection to our practice is found in 
 the social loss involved in the idleness of pecuniary capital. 
 
 The waste involved in the idleness of pubUc funds is less objection- 
 able than the successive expansion and contraction of reserves which 
 result from the receipt and disbursement of revenue. One phase of 
 this movement may be illustrated by the simple case of a pension 
 disbursement. On August 4 the Treasury drew pension checks 
 amounting to $14,970,000 and distributed them throughout the 
 country. About half of this sum was drawn upon the assistant 
 treasurer at New York. Coming into the hands of country banks, 
 cashed or deposited, these checks are mailed to New York correspond- 
 ent banks for credit. In a few days this mass of checks is presented to 
 the New York subtreasury through the clearing-house and an equiva- 
 lent amount of money is transferred from the subtreasury to the 
 banks, whose combined reserves, in the absence of countervailing 
 debits, are increased $7,000,000. Without any alteration in the 
 aggregate wealth of the country or even of New York City the lending 
 power of New York banks is raised about $28,000,000. In order that 
 this new source of profit may be utilized, since nothing in the situation 
 operates immediately to stimulate the demand from commercial 
 sources, the competition of banks in an effort to place their funds 
 lowers the call-loan rate. This reduces the cost of carrying stocks 
 and stimulates speculation for the rise in Wall Street. 
 
 To reverse the illustration, let us suppose tliat the collection of 
 duties at the port of New York in a given week reaches the not uncom- 
 mon sum of $10,000,000. This amount of money is drawn from local 
 banks and trust companies and locked up in the sub treasury- . In as 
 far as the effect on reserves and lending power is concerned, it might 
 quite as well have been sunk in New York harbor. The I'ate for call 
 loans rises, stocks fall, or commercial paper which other%vise would 
 have found a ready market remains unsold and the production and 
 exchange of goods may be curtailed
 
 144 TKINCIPLES OF MONEY AND BANKING 
 
 Unable to foresee these fluctuations in reserves and the conse- 
 quent fluctuations in the lending power of his banker, the merchant is 
 constrained to carry a much larger cash reserve (bank deposit) than 
 would be carried otherwise, and the interest on this is the price he 
 pays for this particular form of insurance, a charge that is ultimately 
 shifted to the consumers of the goods he offers for sale or to the pro- 
 ducer from whom he buys. By the same token each banker in a 
 system which presupposes independence and the absence of any joint 
 responsibility carries a large fund of capital devoted to no more 
 productive purpose than as an insurance fund. This fund of ready 
 money tends to be largest in times of stress when the needs of com- 
 merce are greatest. This added cost to the banker's business is paid 
 in higher discount rates and tends to shift to the price of commodities. 
 
 The largest source of revenue is in the import duties, amounting 
 in the fiscal year ending in 1910 to $333,683,445.03. About two- 
 thirds of these duties are paid into the subtreasury at New York, 
 mainly from the banks of that city, and a corresponding large part of 
 the disbursements are made from the sub treasury and pass to the 
 local bank reserves. It happens that gold drawn for export is taken 
 from the same group of banks. New York bank reserves stand in a 
 peculiar relation therefore to our foreign trade. When imports of 
 commodities are heavy the payment of duties tends to coincide with 
 a rise in foreign exchange and with threatened or actual gold exports, 
 causing a double drain of bank reserves. In this situation it would 
 be suicidal for New York bankers to purchase time paper with the 
 same liberality as can be practiced by the bankers of Chicago or 
 St. Louis. In order to protect themselves against this double drain 
 of funds they must lend a large portion of their funds on call for use 
 in stock exchange speculation, or else adopt the alternative policy of 
 excessive reserves. Our fiscal system therefore is one of the instru- 
 ments that promotes excessive stock exchange speculation in this 
 country. 
 
 71. TREASURY AID FOR SEASONAL STRLNGENCY^ 
 
 A. THE AUTUMN OF 1912 
 
 An interesting economic condition due to the heav>^ business 
 demands upon the banks is again seen in the reduction of reserves 
 and the renewed appeal to the national treasury for help. Practically 
 
 ■ From "Washington Notes" in Journal of Political Economy, XX (1912), 957.
 
 RELATIONS BETWEEN BANKS I45 
 
 since the end of August there has been very strong interest among 
 bankers and the more forcsighted business pubHc with reference to 
 bank conditions. It was early admitted that the large crop movement 
 would necessitate the granting of extensive accommodation by the 
 banks with corrresponding pressure on reserves. During the latter 
 half of September the decline of reserves in the clearing-house cities 
 had been very severe, and in several places the banks were forced 
 close to the danger line. The consequence was a loud call for govern- 
 ment aid. In deference to these demands, Secretary MacVeagh, 
 who has had about $90,000,000 that might at a pinch have been 
 deposited, had ordered an inquiry into the situation by officers of the 
 Treasury Department. The outcome of this inquiry was an unofficial 
 announcement at the opening of October that no Treasury deposits 
 would be made, followed shortly thereafter by an equally unofficial 
 statement of a plan for the limited relief of the national banks. This 
 plan consisted in the placing with the banks of gold or gold funds 
 equal to any amounts importation of which might be arranged for, 
 such funds to be available as soon as provision should be made for 
 the importations desired. This was practically a revival of the plan 
 followed by Leslie M. Shaw when Secretary of the Treasury, whereby 
 tlie banks were permitted to count as part of their reserves any 
 importation of gold they might engage from abroad so soon as such 
 arrangements had been entered into. The only difference between 
 the original Shaw plan and the present undertaking of the Treasury 
 is that the latter takes the government gold from the vaults and places 
 it in the hands of the banks as soon as officials are assured that they 
 arc protected by a bona fide arrangement made by the bank in 
 question with a foreign shipper. 
 
 B. THE AUTUMN OF 1913^ 
 
 Toward the latter part of July symptoms of uneasiness began to 
 reappear. There was much talk about the difficulty of moving the 
 fall crops, and the annual apprehension on this score began to stalk 
 aliout the country with more than usual vigor. It is a characteristic 
 of our imperfect and unsatisfactory banking system that the very 
 prosperity of the country becomes, at times, a menace, because of the 
 apprehended inaliility of the banks to meet the seasonal demand for 
 the large amounts of money required to move a bounteous harvest. 
 Conditions were again becoming acute when the Secretary determined 
 
 ' From Annual Report of Secretary of the Treasury, Finance, 1913, pp. 2-4.
 
 146 PRINCII'LKS OI' MONEY AND BANKING 
 
 to deposit from twcnty-fivc millions lo fifty millions of dollars of 
 government funds in the national banks in those parts of the country 
 where the necessity for funds to move crops existed. The Secretary 
 announced that, as security for such deposits, high-class commercial 
 paper would be accepted at 65 per cent of its face value, bearing the 
 indorsement of the depository bank. This was an unprecedented 
 step, because commercial paper had never before been accepted as 
 security for government deposits. It was, however, a necessary and 
 highly beneficial step, because it enabled the banks to obtain the 
 required funds upon the pledge of available paper already in their 
 vaults. If the banks had been obliged to secure these deposits with 
 government bonds or other fixed investments, the relief would not 
 have been effective, because many of the banks would have been 
 compelled to use the deposits for the purchase of the bonds required 
 by the Government as security. 
 
 In order to distribute intelligently the crop-moving^ deposits, 
 three conventions of bankers were held at the Treasury Department 
 in Washington during August, 1913, the first composed of bankers 
 from the Southern and Southwestern states; the second composed 
 of bankers from the Middle Western and Northwestern states; the 
 third composed of bankers from the Pacific Coast and Rocky 
 Mountain states. It was not necessary to extend aid to the Eastern 
 states, although the Department was ready to do so if it had been 
 required. 
 
 It was essential that the action of the Department should be 
 non-partisan and non-political; the crops of Republicans, Democrats, 
 Progressives, and all other classes of the people had to be moved, and 
 the earnest desire of the Department was to have the benefits of this 
 action diffused as widely and impartially as possible. The clearing- 
 house associations in each of the cities invited to participate in the 
 conferences were asked, therefore, to name the delegates. A most 
 interesting and intelligent body of men assembled in Washington and 
 discussed with the Secretary and Assistant Secretary Williams (in 
 charge of the fiscal bureaus) the needs of their several communities 
 and sections. As a result, allotment of these funds was made upon 
 the basis of the testimony of their several representatives, as follows: 
 
 Middle and Southwest $22,550,000 
 
 Middle and Northwest 19,000,000 
 
 Pacific Coast and Rocky Mountain 4,950,000 
 
 Total $46,500,000
 
 RELATIONS BETWEEN BANKS 147 
 
 The Department, having no machinery for the investigation of 
 local credits, was obliged to rely upon the banks in the larger cities 
 as instrumentalities for the distribution of government funds to the 
 banks in the smaller communities. In the discussions at Washington, 
 the representatives of the banks were urged to pass the government 
 funds on to their country correspondents upon reasonable terms. 
 The Secretary is gratified to be able to say that in most instances this 
 was done on a basis that seemed fair to all concerned. 
 
 The effect of this action was highly beneficial. Confidence was 
 restored. The readiness of the Government to meet every reasonable 
 need of the banks for the legitimate purposes of crop-moving had 
 the effect, so the Department is informed, of causing much hoarded 
 money to be deposited in the banks. This increased their ability 
 to take care of their customers, and caused a decided relaxation in 
 the demands of country correspondents for accommodation, which, 
 prior to the announcement of the Secretary, had been much greater 
 than usual, because the small banks were attempting, very naturally, 
 to impound all the funds they could get to make them safe against 
 the anticipated stringency. The moment it became known that the 
 Government stood ready to assist, the tension was relieved, business 
 resumed a normal aspect, and the fall movement of crops, trade, and 
 commerce proceeded upon an easier and safer basis than for many 
 years past. 
 
 It is interesting to note that of the fifty million dollars which the 
 Department offered to place in the banks for crop-moving purposes 
 only $34,661,000 had been called for up to November 25, 1913. 
 These funds will be gradually repaid to the Treasury beginning in 
 January, 19 14. 
 
 (b) Cyclical 
 
 72. THE PERIODICITY OF FLUCTUATIONS IN TRADE' 
 By S. J. CHAPMAN 
 
 Everybody knows that production does not flow along uninter- 
 ruptedly. It has its ups and downs. Periods of brisk business are 
 followed by periods of stagnation. Some unsteadiness in trade we 
 should naturally be prepared to find, for there are vicissitudes in all 
 human affairs; but certain peculiarities characterize the broad 
 
 • Adapted from Outlines of Political Economy, pp. 254-55- By [Jermission of 
 Longmans, Green, & Co., 1913.
 
 148 PRINCIPLES OF MONEY AND BANKING 
 
 fluctuations of trade which one would not expect and which call for 
 explanation. These peculiarities we may designate "synchronism" 
 and "periodicity." 
 
 Good times in the different industries tend to synchronize or 
 come more or less simultaneously. And so do bad times. There 
 are numerous exceptions, but the rule seems to be that most indus- 
 tries arc every now and then depressed together, and every now and 
 then flourish together. Moreover, synchronism appears to hold inter- 
 nationally. When commerce is sluggish in one country it tends to be 
 sluggish also in other countries. "^ 
 
 The periodicity of fluctuations in trade means that the intervals 
 between the fluctuations are not of quite uncertain duration. Regu- 
 larity is far from being perfect, but it is suf&cient to warrant the 
 assertion that trade fluctuations exhibit a degree — a comparatively 
 high degree — of periodicity. They are like the disturbed oscillations 
 of a pendulum when a kitten is playing with it. It used to be claimed 
 that the time normally occupied by a trade cycle was ten or eleven 
 years. But departures from this duration are not uncommon; and 
 it has recently been suggested that the wave-length of a trade cycle 
 inclines to be about twice or three times a period of approximately 
 three and a half years. Thus the cycle, it is said, may be expected 
 to cover seven years at least and, should it exceed this length, to 
 extend to about ten and a half years. But, unfortunately, the evi- 
 dence which has been collected and sifted so far is too scanty to 
 justify an unhesitating generalization. Of commercial fluctuations 
 prior to the nineteenth century we are comparatively ignorant, and 
 it is not known how far the cyclical movement reaches back. 
 
 73. CRISES AND PANICS IN THE UNITED STATES 
 
 While there were some earlier disturbances of importance, it is 
 generally agreed that the first panic in the United States occurred in 
 August, 1814. It was a direct result of the capture of Washington 
 by the British on August 24, though the disruption of trade and the 
 exigencies of war financing were contributing factors. 
 
 The first genuine economic crisis in the United States, however, 
 occurred in 18 19. It was an outgrowth of the abnormal expansion of 
 manufacturing industries occasioned by the embargo and the War 
 of 1S12 and by the necessary readjustments that follow a period of 
 inflated paper currency. Not until late in 182 1 did commerce and 
 industry begin to revive.
 
 RELATIONS BETWEEN BANKS 149 
 
 Both of these early crises were distinctively local and dependent 
 upon national rather than international causes. 
 
 There followed a period of j^reat prosperity and rapid territorial 
 and business expansion, which continued with but slight interruptions 
 until 1837. In 1824 there was an industrial boom, and in 1826 there 
 was a reaction, due, in part, to the European crisis of December, 1S25; 
 but these were merely temporary deviations from an othervuse 
 steady expansion. 
 
 The crisis culminating in the disastrous panic of May, 1837, is 
 associated with an undue extension of banking and credit, an over- 
 provision of public roads, canals, and railways, and excessive specu- 
 lation in western lands. Recovery from the panic was very slow; 
 indeed, it was more than a year before the banks resumed specie pay- 
 ments. A period of depression followed until the summer of 1S43, 
 a premature revival in 1838 and 1839 resulting in a multitude of 
 failures. 
 
 A general revival of trade began in the autumn of 1843 and con- 
 tinued without much interruption until 1857. The European crisis 
 of 1S47 exercised little influence here, owing to good crops and heavy 
 e.xportations. There was, however, a minor crisis in 1848, occasioned 
 in the main by the Mexican War. The period of rapid expansion 
 came to a head in the very sudden and sharp crisis of August, 1S57. 
 While the financial disturbance appears to have been more acute than 
 in 1837, industry and commerce were much less seriously affected, 
 and in consequence the succeeding period of depression was less uni- 
 versal in its effects. The depression reached its worst in 1859. 
 Conditions were rapidly on the mend in i860, but the outbreak of war 
 in 1 86 1 so disarranged the financial and industrial affairs of the nation 
 that the return of prosperity was postponed for a half-dozen years. 
 There was a great crisis in England in 1866 which the war, no doubt, 
 enabled us to escape. 
 
 Following the Civil War we entered upon a new era of industrial 
 e.xpansion. Wide areas of agricultural lands were opened up, immi- 
 gration was heavy, railroads were built on a scale hitherto undreamed 
 of — built far ahead of settlements and the demands of trade. It was 
 a period also of wild speculation, dishonesty, and extravagance. 
 The great crisis of 1873 affected practically every operation of com- 
 merce and finance and shook the credit fabric to its very foundations. 
 The succeeding depression was unprecedented in its severity and 
 duration, continuing in most branches of industry until the end of
 
 I50 i'RiN(;ii"Li;s OF monky and banking 
 
 187S, and in some lines until 1879. Tlie largest number of failures 
 occurred in the year 1878. 
 
 Prosperity returned with bountiful harvests and the resumption 
 of specie payments in 1879. A period of world-wide prosperity was 
 marked in the United States by another era of enormous railroad 
 building, industrial expansion, and extravagant living, which ended 
 in the minor crisis of May, 1884. The downward movement con- 
 tinued until 1886; after the recovery there was a season of moderate 
 activity until 1890. The great crisis in Europe, attending the failure 
 of the famous English banking house of Baring Brothers, near the 
 end of the year 1890, was felt acutely in the United States, though 
 we escaped a complete breakdown, the enormous crops and hea\^ 
 exports of 1891 tiding us over the threatening situation for another 
 year or two. But in May, 1893, we again went to the wall with a 
 panic which in many respects was even more severe than that of 
 1873. This crisis, however, was complicated by the unstable mone- 
 tary standard of the time; by many it has been called a monetary 
 rather than a financial crisis. It was doubtless a result of combined 
 influences. The depression continued until 1896. 
 
 Along with the whole commercial world, in 1897 we entered upon 
 another great period of expansion, which was accelerated after the 
 Spanish War and continued with but minor reactions until the autumn 
 of 1907. The crisis which ended in the panic of October, 1907, was 
 marked by all the usual manifestations of such periods, and the 
 depression which followed continued for more than a year. The 
 succeeding years have been marked by great business and banking 
 uncertainty, consequent upon extensive legislative experiments, 
 Mexican troubles, and the European war. The outbreak of war 
 in Europe occasioned a severe financial crisis and near panic in 
 the United States, fortunately tided over successfully by the use of 
 emergency currency. 
 
 74. THE RHYTHM OF BUSINESS ACTIVITY' 
 By WESLEY C. MITCHELL 
 
 With whatever phase of the business cycle analysis begins, it 
 must take for granted the conditions brought about by the preceding 
 phase, postponing explanation of these assumptions until it has worked 
 around the cycle and come again to its starting-point. 
 
 ' Adapted from Business Cycles, pp. 571-79. (Copyright by the author, 1913. 
 Published by the University of Cahfornia Press.)
 
 RELATIONS BETWEEN BANKS 151 
 
 A revival of activity, then, starts with a legacy from depression: 
 a level of prices low in comparison with the prices of prosperity, 
 drastic reductions in the costs of doing business, narrow margins of 
 profit, liberal bank reserves, a conservative policy in capitalizing 
 business enterprises and in granting credits, moderate stocks of goods, 
 and cautious buying. 
 
 Such conditions are accompanined by an expansion in the physical 
 volume of trade. Though slow at first, this expansion is cumulative. 
 In time an increase in the amount of business which grows more 
 rapid as it proceeds will turn dullness into activity. Left to itself this 
 transformation is effected by slow degrees; but it is often hastened 
 by some propitious event, such as exceptionally profitable harvests 
 or hea\y purchases of supplies by the government. 
 
 A partial revival of industry soon spreads to all parts of the 
 business field. For the active enterprises must buy materials and 
 current supplies from other enterprises, the latter from still others, 
 etc. Meanwhile all enterprises which become busier employ more 
 labor, use more borrowed money, and make higher profits. There 
 results an increase in family incomes and an expansion of consumers' 
 demands, which likewise spreads out in ever-widening circles. Shop- 
 keepers pass on larger orders to wholesale merchants, manufacturers, 
 importers, and producers of raw materials. All these enterprises 
 increase the sums they pay to employees, lenders, and proprietors. 
 In time the expansion of orders reaches back to the enterprises from 
 which the initial impetus was received, and then the whole comj^li- 
 cated series of reactions begins afresh at a higher pitch of intensity. 
 All this while the revival of activity is instilling a feeling of optimism 
 among business men. 
 
 The cumulative expansion of the physical volume of trade stops 
 the fall in prices and starts a rise. For when enteq^rises have in 
 sight as much business as they can handle with existing facilities, they 
 stand out for higher prices on additional orders. This policy pre- 
 vails because additional orders can be executed only by breaking in 
 new hands, starting new machinery, or buying new equipment. 
 The expectation of its coming hastens the advance. Buyers are 
 anxious to secure large supplies while the quotations continue low, 
 and the first signs of an upward trend bring out a rush of orders. 
 
 The rise of ])rices spreads rapidly, for every advance puts pressure 
 on someone to recoup himself Ijy advancing the prices of what he has 
 to sell. The resulting changes in price are far from even: retail
 
 152 PRINCIPLES OF MONEY AND BANKING 
 
 prices lag behind wholesale and the price of finished products behind 
 the price of raw materials. Among the last-mentioned the prices 
 of mineral products reflect changed business conditions more regu- 
 larly than do the prices of forest and farm products. Wages rise 
 more promptly but in less degree than wholesale prices; interest 
 rates on long loans always move sluggishly in the earlier stages of 
 revival, while the prices of stocks both precede and exceed commodity 
 prices on the rise. 
 
 In a great majority of enterprises larger profits result from these 
 divergent fluctuations, coupled with the greater physical volume of 
 sales. For while the prices of raw materials and of bank loans often 
 rise faster than selhng prices, the prices of labor lag behind, and the 
 prices making up supplementary costs are mainly stereotyped by old 
 agreements. 
 
 The increase of profits, under the spell of optimism, leads to a 
 marked expansion of investments. The heavy orders for machinery, 
 the large contracts for new construction, etc., which result, swell still 
 further the physical volume of business and render yet stronger the 
 forces which are driving prices upward. 
 
 Indeed, the salient characteristic of this phase of the business cycle 
 is the cumulative working of the various processes which are con- 
 verting a revival of trade into intense prosperity. Not only does 
 every increase in the volume of trade cause other increases, every 
 convert to optimism make new converts, and every advance in price 
 furnish an incentive for new advances; but the growth of trade also 
 helps to spread optimism and to raise prices, while optimism and 
 rising prices support each other. Finally, the changes going forward 
 swell profits and encourage investments, while high profits and heavy 
 investments react by augmenting trade, justifying optimism, and 
 raising prices. 
 
 While the processes just sketched work cumulatively for a time 
 to enhance prosperity, they also cause a slow accumulation of stresses 
 within the balanced system of business — stresses which ultimately 
 undermine the conditions upon which prosperity rests. 
 
 Among these is the gradual increase in the cost of doing business. 
 The decUne in supplementary costs per vuiit ceases when enterprises 
 have secured all the business they can handle with their standard 
 equipment, and a slow increase in these costs begins when the expira- 
 tion of old contracts makes necessary renewals at liigher rates. Mean- 
 while prime costs rise at a relatively rapid rate. The price of labor 
 rises, both because of an advance in nominal wages and because of
 
 RELATIONS BETWEEN BANKS 153 
 
 higher rates for overtime. More serious is a decline in the efl&ciency 
 of labor, because of the employment of undesirables and because 
 crews cannot be driven at top speed when jobs are more numerous 
 than men. The prices of raw material rise faster on the average than 
 the selling prices of products. Finally, numerous small wastes creep 
 up when managers are hurried by press of orders. 
 
 A second stress is the accumulating tension of investment and 
 money markets. The supply of funds available at the old rates 
 fails to keep pace with the sweUing demand. It becomes difl&cult to 
 negotiate new issues of securities except on onerous terms, and men 
 of affairs complain of the "scarcity of capital." Nor does the supply 
 of bank loans, limited by reserves, grow fast enough to keep up with 
 the demand. Active trade keeps such an amount of money in circu- 
 lation that the cash left in the banks increases rather slowly. On the 
 other hand, the demand for loans grows, not only with the physical 
 volume of trade, but also with the rise of prices, and with the desire 
 of men of affairs to use their own funds for controlUng as many 
 businesses as possible. 
 
 Tension in the bond and money markets is unfavorable to the 
 continuance of prosperity, not only because high rates of interest 
 reduce the prospective margins of profit, but also because they check 
 the expansion of the volume of trade out of which prosperity develops. 
 Many projected ventures are relinquished because borrowers con- 
 clude that interest would absorb too much of their profits. 
 
 The group producing industrial equipment suffers especially. 
 In the earlier stages of prosperity this group enjoys exceptional 
 activity. But when the market for bonds becomes stringent and 
 the cost of construction high, business enterprises defer the execution 
 of plans for extending old or erecting new plants. As a result, con- 
 tracts for this kind of work become less numerous as the climax 
 of prosperity approaches. Then the steel mills, foundries, machine 
 factories, lumber mills, construction companies, etc., find their 
 orders for future delivery falling olT. 
 
 The larger the structure of prosperity the more severe become these 
 internal stresses. The only elective means of preventing disaster 
 while continuing to build is to raise selling prices time after time high 
 enough to offset the encroachment of costs upon profits and to keep 
 investors willing to contract for frcsli industrial ec[uipment. 
 
 But it is impossible to keep selling prices rising for an indefinite 
 time. In default of other checks, the inadequacy of cash reserves
 
 154 PRINCIPLES or MONEY AND BANKING 
 
 would ultimately compel the banks to refuse a further expansion of 
 loans on any terms. But before this stage has been reached the rise 
 of prices is stopped by the consequences of its own inevitable inequali- 
 ties. These become more glaring the higher the general level is 
 forced; after a time they threaten serious reductions of profits to 
 certain business enterprises, and the troubles of these victims dissolve 
 that confidence in the security of credits with which the whole tower- 
 ing structure of prosperity has been cemented. 
 
 In certain lines in which selling prices are stereotyped by law, by 
 contracts for long terms, by custom, or by business policy, selling 
 prices cannot be raised to prevent a reduction of profits. In other 
 lines prices are always subject to the incalculable chances of the har- 
 vests. In some lines the recent construction of new equipment has 
 increased the capacity for production faster than the demand for 
 wares has expanded under the repressing influence of high prices. 
 The unwillingness of investors to let fresh contracts threatens loss 
 not only to the contracting firms but to the enterprises from which 
 they buy materials. Finally, the success of some enterprises in raising 
 prices fast enough to defend their profits aggravates the difficulties 
 of the men who are in trouble. 
 
 As prosperity approaches its height, then, a sharp contrast 
 develops between the business prospects of different enterprises. 
 Many are making more money than at any previous stage in the 
 business cycle. But an important minority faces the prospect of 
 declining profits. The more intense prosperity becomes the larger 
 grows this threatened group. In time these conditions bred by 
 prosperity will force radical readjustment. 
 
 Such a decline of profits threatens consequences worse than the 
 failure to reahze expected dividends. For it arouses doubt about 
 the future of outstanding credits. Business credit is based pri- 
 marily upon the capitalized value of present and prospective profits, 
 and the volume of credits outstanding at the zenith of prosperity is 
 adjusted to the great expectations which prevail when affairs are 
 optimistic. The rise of interest rates has already narrowed the 
 margins of security behind credits by reducing the capitalized value 
 of given profits. When profits begin to waver, creditors begin to 
 fear lest the shrinkage in the market rating of business enterprises 
 which owe them money vnW leave no adequate security for repayment. 
 Hence they refuse renewals of old loans to enterprises which cannot 
 stave off a decUne in profits and press for settlement of outstanding 
 accounts.
 
 RELATIONS BETWEEN BANKS 155 
 
 Thus prosperity ultimately brings on conditions which start 
 a liquidation of the huge credits which it has piled up. And in the 
 course of this liquidation prosperity merges into crisis. Once begun, 
 the process of liquidation extends rapidly, partly because most enter- 
 prises called upon to settle put similar pressure on their own debtors, 
 and partly because news presently leaks out and other creditors take 
 alarm. 
 
 While this financial readjustment is under way the problem of 
 making profits is subordinated to the more vital problem of main- 
 taining solvency. Business managers nurse their financial resources 
 rather than push their sales. In consequence the volume of new 
 orders falls off rapidly. The prospect of profits is dimmed. Expan- 
 sion gives place to contraction. Discount rates rise higher than 
 usual, securities and commodities fall in price, and working forces are 
 reduced. But there is no epidemic of bankruptcy, no run upon 
 banks, and no spasmodic interruption of ordinary business processes. 
 
 Crises, however, may degenerate into panics. When the process 
 of liquidation reaches a weak link in the chain of interlocking credits 
 and the bankruptcy of some conspicuous enterprise spreads unreason- 
 ing alarm, the banks are suddenly forced to meet a doubled strain — 
 a sharp increase in the demand for loans and the demand for 
 repayment of deposits. If the banks meet both demands, the alarm 
 quickly subsides. But if many solvent business men are refused 
 accommodation at any price and depositors are refused payment 
 in full, the alarm turns into a panic. A restriction of payments by 
 banks gives rise to a premium on currency, to hoarding of cash, and 
 to the use of various unlawful substitutes for money. Interest rates 
 may go to three or four times their usual figures, causing forced sus- 
 pensions and bankruptcies. There follow appeals to the government 
 for extraordinary aid, frantic efforts to import gold, the issue of 
 clearing-house loan certificates, and an increase in bank-note cir- 
 culation as rapidly as the existing system permits. Collections fall 
 into arrears, workmen are discharged, stocks fall to extremely low 
 levels, commodity prices are disorganized by sacrifice sales, and the 
 volume of business is violently contracted. 
 
 There follows a period during which depression spreads over the 
 whole field of business and grows more severe. Consumer's demand 
 declines in conscriuence of wholesale discharge of wage-earners. With 
 it falls the business demand for raw materials, current sui)plics, and 
 equipment. Still more severe is the shrinkage in the investor's
 
 1 56 PRINCIPLKS OF MONEY AND BANKING 
 
 (k'liiand for construction work of all kinds. The contraction in the 
 physical volume of business which results from these shrinkages in 
 demand is cumulative, since every reduction of employment causes 
 a reduction in consumer's demand, thereby starting again the whole 
 series of reactions at a higher pitch of intensity. 
 
 With this contraction goes a fall in prices. For when current 
 orders are insufficient to employ the existing equipment competition 
 for business becomes keener. This decUne spreads through the 
 regular commercial channels which connect one enterprise with 
 another, and is cumulative, since every reduction in price facilitates 
 reductions in other prices, and the latter reductions react to cause 
 fresh reductions at the starting-point. 
 
 The fall in prices is characterized by certain regularly recurring 
 differences in degree. Wholesale prices fall faster than retail and the 
 prices of raw materials faster than those of manufactured products. 
 The prices of raw mineral products follow a more regular course than 
 those of forest or farm products. Wages and interest on long-time 
 loans decline in less degree than commodity prices. The only impor- 
 tant group of prices to rise is high-grade bonds. 
 
 The contraction in the volume of trade and the fall in prices 
 reduce the margin of present and prospective profits, spread dis- 
 couragement, and check enterprise. But they also set in motion 
 certain processes of readjustment by which the depression is overcome. 
 The prime costs of doing business are reduced by the fall in the 
 prices of raw material and of bank loans, by the marked increases 
 in the efl&ciency of labor which comes when employment is scarce, 
 and by closer economy by managers. Supplementary costs are 
 reduced by reduction of rentals and refunding of loans, by unriting 
 down depreciated properties, and by admitting that a recapitalization 
 has been effected on the basis of lower profits. 
 
 While costs are being reduced, the demand for goods begins 
 slowly to expand. Accumulated stocks left over from prosperity are 
 exhausted, and current consumption requires current production. 
 Clothing, furniture, and machinery are discarded and replaced. New 
 tastes appear among consumers and new methods among producers, 
 giving rise to demand for novel products. Most important of all, 
 the investment demand for industrial equipment revives. Capital- 
 ists become less timid as the crisis recedes into the past, the low rates 
 of interest on long-time bonds encourage borrowing, and contracts 
 can be let on most favorable conditions.
 
 RELATIONS BETWEEN BANKS 157 
 
 Once these forces have set the physical volume of trade to expand- 
 ing the increase proves cumulative. Business prospects become 
 gradually brighter. Everything awaits a revival of activity which 
 will begin when some fortunate circumstance gives a fillip to demand, 
 or, in the absence of such an event, when the slow growth of the volume 
 of business has filled order books and paved the way for a new rise 
 in prices. Such is the stage of the business cycle with which the 
 analysis begins, and, having accounted for its own beginning, the 
 analysis ends. 
 
 75. SEASONAL VARIATIONS AND PANICS* 
 By EDWIN WALTER KEMMERER 
 
 It has been found that the two periods of the year in which the 
 money market is most likely to be strained are the periods of the 
 "spring revival," about !March, April, and early May, and that of 
 the crop-moving demand in the fall; and that the two periods of 
 easiest money market are the "readjustment" period, extending from 
 aljout the middle of January to nearly the ist of March, and the period 
 of the summer depression, extending through the three summer 
 months. Of the eight panics, four occurred in the fall or early 
 winter (i.e., those of 1873, 1890, 1899, and 1907), and these four 
 included two of the three really severe panics of the period (i.e., 
 those of 1873 and 1907); three occurred in May (i.e., those of 1884, 
 1893, and 1901); and one (i.e., that of 1903), probably the least im- 
 portant one from the standpoint of the country as a whole, extended 
 from March until well along in November. 
 
 The evidence accordingly points to a tendency for panics to 
 occur during the seasons normally characterized by stringent money 
 markets. This does not mean that the seasonal stringencies are the 
 causes of the panics; it does mean that the months in which they 
 occur are the weakest links in the seasonal chain, and that in periods 
 of extraordinary tension the chain breaks at these links. 
 
 76. THE PERIOD OF DEPRESSION* 
 
 A few facts and figures will indicate the extent of tlie present 
 industrial depression. Bank exchanges at all tlie leading cities of 
 the United States were $2,073,910,424 for the week ending January' 
 
 ' .\daptcd from Seasonal Variations in the Relative Demand for Money and 
 Capital in the United States, p. 222. (National Monctar>' Commission, 1910.) 
 -Adapted from an editorial in }foo(l\'s .U(;i,'i;;/';;c. \' fiooS), 151-54
 
 I5,S PRINCIPLES OF MONEY AND BANKING 
 
 30, 1908, a decrease of 23 . 3 per cent compared with the corresponding 
 week of 1907 and 37.2 per cent compared with the corresponding 
 week of 1906. The decrease in New York and Philadelphia exceeded 
 28 per cent, compared with 1906, and was greater than in any other 
 cities. 
 
 For the first two weeks of January, 1908, gross earnings of rail- 
 roads were about 13 per cent less than in 1907, For the last week in 
 December they were 15.52 per cent below those of 1906. For the 
 entire month of December gross earnings were i . 13 per cent, while 
 net earnings were 17.46 per cent less than were those for December, 
 1906. 
 
 Transactions of the New York Stock Exchange amounted to 
 16,634,817 shares, compared with 22,712,420 in January, 1907. 
 
 The sharp falling oflf in the net earnings of the United States 
 Steel Corporation in the last quarter of 1907 shows the remarkable 
 decline in industr3^ The net earnings fell from $17,052,211 in 
 October to $10,467,253 in November, and to $5,034,531 in Decem- 
 ber. This is a decline of over 70 per cent. 
 
 The unparalleled number of idle cars affords a barometer of our 
 industrial condition. Today there are approximately 320,000 freight 
 cars and 8,000 locomotives standing idle, representing an investment 
 of more than $460,000,000, and there are more than 30,000 unem- 
 ployed trainmen. And yet three months ago there were not enough 
 railroad cars to move the traffic of the count^}^ 
 
 The general state of industry and trade is summarized by Brad- 
 street's as follows: "It is safe to say that estimates of shrinkages 
 of 30 to 50 per cent in sales and general turnover are not unreasonable. 
 Iron output will probably be 50 per cent below a year ago. Shoe 
 shipments are about 30 per cent below January, 1907. Lumber and 
 all kinds of building material are very quiet the country over. Coke 
 production, though larger than in December, is easily 50 per cent 
 below the fullest capacity. Coal has been helped by cold weather, 
 but is dull; stocks have accumulated because of past mild weather 
 or of reduced industrial consumption, and there is talk of miners of 
 bituminous coal being asked to take lower wages as an alternative 
 to reducing production. There are widespread reports of large num- 
 bers of unemployed in all sections of the country, and some southern 
 reports point to a return of idle city labor to the farms." 
 
 The returns for the prices of commodities show a probable decline 
 of about 10 per cent in the cost of living.
 
 RELATIONS BETWEEN BANKS 159 
 
 The money market affords one of the best barometers of the 
 great change that has come over the industrial situation. From a 
 deficit of $54,103,600 on November 23, in the surplus reserves of 
 the New York Associated Banks, there was a surplus of $40,626,725 
 on February i. From rates of 25 per cent or more last fall for call 
 money we now have rates of less than 2 per cent. From rates of from 
 7 to 12 per cent for time money last fall we now have rates of from 
 4 to 4^ per cent on Stock Exchange collateral and from 5 to 6 per 
 cent on commercial paper. The return of hoarded money and the 
 slackening demand for money in industrial and commercial operations 
 are mainly responsible for this sudden transformation of the money 
 market. 
 
 Already gold exports have begun from this country. They may 
 reach a considerable volume before next July. Money rates, however, 
 may be expected to remain about as at present. Money rates are 
 being followed by rising prices for bonds and other secure securities. 
 During January the price of bonds rose about twice as much as the 
 price of common stock. Under existing conditions investors find 
 bonds very attractive in view of the uncertainty of the situation. 
 Many interior banks have put their idle funds in bonds on account of 
 the comparatively high interest return they can secure by such 
 a course. 
 
 77. BANKING CONDITIONS DURING DEPRESSIONS' 
 By WALTER W. STEWART 
 
 The business conditions prevailing during periods of depression 
 bring about certain changes in the loans, the deposits, and the reserves 
 of banks. Those concerns which are borrowers at the banks find 
 that their declining volume of business can be financed with smaller 
 banking accommodations. Consequently, as accoimts are collected 
 and goods are sold, the funds are first deposited and then used to pay 
 their loans at the banks. This method of payment, by which the 
 borrower gives back to the bank the desposit account and receives 
 in return his canceled note, results in the reduction of deposits as 
 well as the cancellation of loans. Both the loans and the deposits, 
 therefore, are lower during the depression than during the prosperity. 
 In case the banks have pursued a policy of loan contraction during 
 the crisis preceding the depression, then early in the depression the 
 
 ' From an unpublished article.
 
 i6o PRINCIPLES OF MONEY AND BANKING 
 
 loans will increase. But it is an increase only as compared to the low 
 point of the crisis, and not as compared to the period of prosperity. 
 
 The business conditions of depression are also reflected in the 
 movement of bank reserves during the period, for the decrease in 
 sales reduces cash requirements as well as credit requirements. The 
 diminished volume of business causes merchants to keep less till- 
 money; the increased unemployment causes wage-earners to carry 
 less pocket-money; and the depositors who withdrew money during 
 the crisis now redeposit it. This new distribution of money between 
 the banks and the public results in an accumulation of reserve-money 
 during the depression. 
 
 Thus it comes about that the cash held by the banks is actually 
 increasing at the very time that the deposits are decreasing. The 
 result is a favorable ratio between reserves and deposits, which in 
 part explains the easy money market and the low interest rates 
 characteristic of the depression. 
 
 78. BANKING POLICY IN PERIODS OF EXPANDING BUSINESS* 
 By O. M. W. SPRAGUE 
 
 At the beginning of the ten years of business activity which cul- 
 minated in 1907 the banks were in an exceedingly strong condition, 
 as is usually the case at the end of a long period of depression. Dur- 
 ing the four years following the crisis of 1S93 the loans, deposits, and 
 cash reserves for the banks fluctuated within narrow Umits, reflecting 
 the stagnant condition of trade. On October 5, 1897, against net 
 deposits of $2,195,000,000, the national banks held a cash reserve of 
 $388,900,000, giving them the tolerably high ratio of 17.7 per cent to 
 deposit liabilities. Their loans also must have been of high average 
 quality after four years of thoroughgoing Uquidation and recuperation 
 in the business world. 
 
 Beginning with the autumn of 1897, the cash reserves of the banks 
 increased rapidly. At first the gain was due to gold imports secured 
 through abnormally large grain exports to Europe, and afterward 
 on account of increasing gold production, of which the United States 
 acquired a considerable share. A further gain was secured indirectly 
 as a result of the currency act of 1900. As a result of these various 
 influences, the cash holdings of the national banks increased from 
 $388,900,000 on October 5, 1897, to $701,600,000 on October 22, 1907. 
 
 ' Adapted from Crises under National Banking System, pp. 216-26. (National 
 Monetary Commission, 19 10.)
 
 RELATIONS BETWEEN BANKS 
 
 l6l 
 
 With this increase of nearly $313,000,000 in their cash reserves 
 it would have been possible for the banks to have nearly doubled their 
 productive investments without diminishing the ratio of cash to 
 deposit liabilities. As a matter of fact, these investments were 
 increased far more than this. 
 
 The following table shows the changes in loans, net deposits 
 (not including government deposits), cash reserves, and reserve ratio 
 at the time of the early autumn return of the condition of the national 
 banks from 1S97 to 1907: 
 
 (Amounts expressed in millions) 
 
 Loans 
 
 Net Deposits 
 
 Cash Reserve 
 
 Ratio to Net 
 Deposits 
 
 Oct. 5, 1897 
 Sept. 20, 1898 
 Sept. 7, 1899 
 Sept. 5, 1900 
 Sept. 30, 1901 
 Sept. 15, 1902 
 Sept. 9, 1903 
 Sept. 6, 1904 
 Aug. 25, 1905 
 Sept. 4, 1Q06, 
 Aug. 22, 1907 
 
 $2,066 
 2,172 
 2,496 
 2,686 
 3,018 
 3,280 
 3,481 
 3,726 
 3,998 
 4,298 
 4,678 
 
 f2,i79 
 2,404 
 
 2,952 
 3,187 
 3,554 
 3,720 
 3,863 
 4,400 
 
 4,735 
 4,927 
 5,256 
 
 $388 
 420 
 466 
 S18 
 539 
 508.0 
 
 554-3 
 
 661. 5 
 665.6 
 626.0 
 
 701 .6 
 
 Per Cent 
 17.9 
 
 17 5 
 15-8 
 16. 2 
 152 
 13-7 
 14 3 
 150 
 14 3 
 12.7 
 
 13-3, 
 
 Every year witnessed an increase in loans (that for the last jear 
 of the series being the most considerable) and also in deposit liabilities. 
 Cash reserves showed a gain, except in 1902 and 1906, but the reserve 
 ratio was subject to greater fluctuations. Between 1897 and 1902 
 the decline was continuous, with the exception of 1900, when the 
 banks enjoyed the benefit of the change in the requirement as to note 
 issue from 90 per cent to the full par value of the bonds deposited as 
 security. By 1902 the banks had evidently approached as near to 
 legal-reserve requirements as they felt was consistent with safety, 
 and thereafter loans and deposit liabilities were kept roughly within 
 limits determined by the amount of cash holdings. It will be noted 
 that in 1902 the banks were a little above and in 1906 somewhat below 
 the ratio of reserve on August 22, 1907, the date of the last return 
 before the crisis. That the banks were slightly stronger in cash in 
 1907 than in 1906 may be in part due to the earlier date of the return 
 of 1907, nearly two weeks earlier than that for the corresponding 
 period in 1906. It is evident, however, that the banks were at least
 
 l62 PRINCIPLES OF MONEY AND BANKING 
 
 in, what was for them, a quite normal condition of strength just 
 before the beginning of the crisis. But this was not on account of 
 any exercise of restraint in making loans, since the increase during 
 the previous twelve months was greater than for any other year of the 
 period under review. Finally, it may be noted that the proportion 
 of reserve to deposit Habilities which had become customary was 
 distinctly less than it was during the years before either the crisis of 
 1873 or that of 1893. 
 
 Analysis of the condition of the banks by groups does not give 
 different results in the case of the country banks and those of reserve 
 cities. The net deposits of the country banks increased without 
 interruption from $963,000,000 on October 3, 1897, to $2,527,000,000 
 on August 22, 1907. The reserve ratio, which was 11. 6 per cent 
 at the outset, declined rapidly and was constantly in the neighborhood 
 of 7.5 per cent from 1902 onward; in 1906 it was 7.5 per cent; in 
 1907, 7.6 per cent. In the reserve cities also deposits increased 
 with the exception of a single year, 1903, rising from $586,000,000 to 
 $1,423,000,000. The reserve ratio was 17.8 per cent at the outset, 
 but was in the neighborhood of 125 per cent from 1901 onward. In 
 1906 it was 12. 1 per cent; in 1907 it was 13.4 per cent. 
 
 The condition of the banks in the central reserve cities presents 
 greater individual differences. In St. Louis deposits increased regu- 
 larly with the exception of 1900. The reserve ratio of the St. Louis 
 banks was below 25 per cent even in 1897 and was above that point 
 in only one year, 1905. In 1906 it was 24 per cent and in 1907, 23 . 5 
 per cent. In Chicago deposits fell off somewhat in two years, 1900 
 and 1906, but increased from $105,700,000 in 1897 to $262,900,000 
 in 1907. Beginning with a high reserve ratio of 36 per cent in 1897 
 the Chicago banks soon broke away from the traditionally ample 
 reserve which had characterized the banks of the city. In 1S99 the 
 reserve was 25.4 per cent, in 1902 only 21.9 per cent, and thereafter 
 every autumn return showed a deficiency until 1907, when the banks 
 held a cash reserve equal to 25.3 per cent of their deposit habilities. 
 
 The upward tendency of loans was not so marked in New York 
 as in the case of the banks in general. The $408,000,000 of Xew York 
 bank loans in 1897 was nearly 20 per cent of all the loans of the national 
 banks, while the $712,000,000 of loans in 1907 was just above 15 
 per cent of the total. Even at the beginning of the period the New 
 York banks were able to find borrowers for all they were prepared to 
 lend, and throughout the period they were evidently handling their
 
 RELATIONS BETWEEN BANKS 163 
 
 loan account so as to keep just above the 25 per cent requirement 
 against deposits. They did no more than maintain the reserve 
 position which previous experience had clearly shown to be inadequate, 
 although the burden resting upon them through the relati\ely greater 
 expansion elsewhere tended to increase. New York still maintained 
 its commanding position as a debtor of national banks. There had 
 been no marked change in the proportion of deposits due to national 
 banks compared with the total deposits of the New York banks. 
 They were 30 per cent of the total in 1897, nearly as much in 1906, 
 and 27 per cent in 1907. The New York banks were comparatively 
 as strong as in the past and under no greater relative obligations to 
 other national banks. They might, however, reasonably have 
 expected somewhat greater withdrawals in an emergency, because of 
 the smaller cash reserve ratio of all the other banks in the s>'stem, 
 though the probable difference on this account was not remarkably 
 great. 
 
 During this period there was a startling increase in the number of 
 state banks and trust companies, in consequence of which the bank- 
 ing situation as a whole is greatly complicated. On October 2, 1897, 
 the net amount due from national banks to state banks of all kinds 
 was only $185,600,000; on August 22, 1907, it was $646,000,000. In 
 particular, the increase in the deposits of state banks and trust com- 
 panies held by the New York banks was most striking, and might 
 well have been considered alarming. 
 
 From a little more than one-third the aggregate of bankers' 
 deposits in 1897 the deposits due state institutions had become in 
 1907 almost equal to those due the national banks. The aggregate 
 of bankers' deposits had also become a slightly larger part of the total 
 deposits of the New York banks, but the real importance of this 
 growth is due to the fact that the cash reserves of the state banks and 
 trust companies were notoriously inadequate. 
 
 79. BANKING POLICY ESIMEDIATELY PRECEDING A CRISIS* 
 
 By O. M. W. SPRAGUE 
 
 After the San Francisco earthquake on April 18, 1906, eighteen 
 months before the crisis, there were Indications in plenty that the pace 
 was too rapid and that the equilibrium of economic forces was becom- 
 ing increasingly unstable. That catastrophe destroyed an immense 
 
 ' Adapted from Crises under the National Banking System, pp. 237-45. (Na- 
 tional Monetary Coinniission, 1910.)
 
 i64 i'ki\(:ii'Li;s of monkv and ijankinc; 
 
 amount of capital, a loss whicli, through insurance, was widely dis- 
 tributed; but even if it had not occurred it is certain that demand for 
 additional capital was outstripping current savings seeking invest- 
 ment. Increasing difficulty was experienced in marketing securities 
 of the very highest class. The strain upon capital was world-wide, 
 and in the United States municipal bonds whose sale would have 
 been stimulated by distrust of business corjwrations could only be 
 marketed when offered at lower prices or a higher rate of interest. 
 
 The inability to secure capital by the sale of securities in a period 
 of active business should have been enough in itself to inspire unusual 
 caution in the management of banking institutions. When corpo- 
 rations of the highest standing are obliged to resort to short-term 
 notes it may be assumed without question that other corporations are 
 expanding upon an insufficient foundation of working capital, that 
 current obligations are increasing, and that bank credits are being 
 used to their utmost extent. This probability might well have been 
 recognized as a certainty when it appeared that during the latter half 
 of 1906 and the first eight months of 1907 the loans of the national 
 banks had increased more rapidly than at any time in the history 
 of the system. 
 
 Increasing tension in New York, whenever comparatively slight 
 contraction in loans took place, was another indication pointing to the 
 same condition of affairs. It suggested that there were few persons 
 in the community with idle funds available to take over either the 
 loans or the collateral of borrowers, and that, consequently, any 
 considerable liquidation of loans would be difficult, and, if carried 
 through rapidly, disastrous. 
 
 Another indication of the approach of a period of declining activity 
 in trade was the increasing ratio of costs reported in many industries. 
 This is probably one of the most fundamental causes of industrial 
 reaction and the necessity for an occasional period of recuperation. 
 During the ten years before 1907 production in many branches had 
 more than doubled; as, for example, coal, iron, and also railroad 
 traffic. A far more rapid increase in the number employed in such 
 occupations was made than was compatible with the maintenance 
 of industrial efficiency. The incompetent could hold places because 
 there were none to fill their positions, and there was no time to ac- 
 quire skill by those capable of acquiring it. 
 
 As a result of these and other causes which might be mentioned 
 there could be no doubt that the United States, like other countries, 
 was about to pass through a period of reaction, though the exact
 
 RELATIONS BETWEEN BANKS 
 
 165 
 
 moment of its beginning could not be foreseen and might largely be 
 determined by fortuitous circumstances. It was so probable that 
 with each month of 1906 and 1907 the exercise of increasing caution 
 might well have been expected in all responsible circles. 
 
 Little heed seems to have been given to these warning signs, but 
 much was made of every straw which suggested a possililc further 
 advance. On July 31, 1906, dividends were resumed on the common 
 stock of the United States Steel Corporation, and on August 18 the 
 Union Pacific dividend was advanced from 6 to 10 per cent, and 
 dividends were begun at the rate of 5 per cent on the shares of the 
 Southern Pacific Railroad. Events seem to have proved conclusively 
 the ability of these companies to earn the dividends which were 
 then declared, but nevertheless, coming when it did, this action 
 exercised an unfortunate general influence. It gave encouragement 
 to the unbridled optimism which was already too much in evidence. 
 It was preceded and followed by a speculative movement on the 
 stock exchange, which was made possible through credits granted 
 by the banks upon the foundation of the usual summer inflow of 
 funds from the interior. 
 
 Despite the numerous evidences of danger during the earl}- 
 autumn of 1906 and the "rich men's panic" of March, 1907, when the 
 severest declines occurred that have been known to the New York 
 Stock Exchange, the banks of New York made no real preparation 
 for the crisis that was obviously due. They were in slightly better 
 shape in August, however, than they were a year earlier. The 
 following table shows the situation: 
 
 (Expressed in millions) 
 
 
 1907 
 
 igo6 
 
 
 August 24 
 
 October 19 
 
 August 33 
 
 October 10 
 
 Loans 
 
 $i,oSS.o 
 
 1,048.0 
 
 272.0 
 
 9 9 
 
 $1,076.0 
 
 1,025.0 
 
 267.0 
 
 II. 2 
 
 $1,071 .0 
 
 1.053 
 
 267.0 
 
 4-2 
 
 $1,082.0 
 
 Deposits 
 
 1,062.0 
 
 Reserve 
 
 271 .0 
 
 Surplus reserve 
 
 6.2 
 
 
 
 80. A SAMPLE FOREBODING' 
 By ELLIOT C. McDOUGAL 
 
 Until very recently no one admitted lluit his judgment dictated 
 any policy of retrenchment. Gentlemen, we cannot hold the 
 
 ' Adapted from an address before the New York State Bankers' Association, 
 June 27, 1907. Quoted in Bankers' Magazine, LXXV, No. I (1907), 1-3.
 
 l66 PRINCIPLES OF MONEY AND BANKING 
 
 present pace. We should not hold it, even if we could. Though our 
 depositors do not realize this, our unpleasant but perfectly plain 
 duty is to curtail their accommodation lines and force retrenchment. 
 We are in an era of extravagance, both corporate and individual, of 
 extravagance in enterprise and of extravagance in expenditure; 
 extravagance as much beyond precedent as is our feverish business 
 activity. No matter what this country's book-profits are, it cannot 
 accumulate capital without thrift, and today thrift appears to be 
 forgotten. At least a moderate amount of what is popularly known 
 as "hard times" is the only cure. 
 
 Expansion is not confined to the industrial and commercial world. 
 For years banking facilities have been expanding out of all proportion 
 to the growth of cash reserves. For several years there has not been 
 a week in which all the New York Clearing-House banks have held 
 full reserves, and frequently half, or nearly half, have been short. 
 The same tendency prevails throughout the country. Is it not time 
 for bankers to check this undue expansion, to prune, this tree too 
 luxuriant for its roots, this fabric of credit built on an inadequate 
 foundation of reserve? Consider that our reserves consist largely 
 of balances due from other banks. The system of reserve agents, 
 both in our state and national banking systems, with which you are 
 all familiar, the abolition of which would be opposed by most if not 
 by all the bankers in this room, contains possibilities of serious trouble; 
 nay more, invites serious trouble. 
 
 For instance, a state bank near Buffalo receives a deposit of 
 $10,000, which it redeposits with a trust company in Buffalo. The 
 latter redeposits the amount with its reserve agent, a state bank in 
 Buffalo; the state bank redeposits the amount with its reserve agent, 
 a correspondent in Albany, and the Albany bank redeposits the 
 amount with its reserve agent, a correspondent in New York City. 
 Here is one $10,000 deposit, multiplied by five swelling discounts in 
 this state by $50,000, and swelling so-called reserve by $42,500, 
 against which the only cash reserve held is that of the New York 
 bank, amounting to $2,500. 
 
 Is not tliis inflation? This is no imaginary case. Of course, 
 each bank is supposed to keep a very small part of each deposit in 
 reserve, in cash, but it frequently happens that each bank in the 
 chain has a little surplus cash reserve, and that the operation is 
 exactly as stated. 
 
 Now, what happens ? The country depositor draws on his bank 
 for $10,000, the country bank on the trust company, the trust com-
 
 RELATIONS BETWEEN BANKS 167 
 
 pany on the Buffalo bank, the Buffalo bank on the Albany bank, and 
 the Albany bank on the New York bank. Deposits shrink $50,000; 
 $42,500 of reserve vanishes. 
 
 Thousands of such operations occur daily, the countless rami- 
 fications of which are so interlaced that their effects are widely felt. 
 In ordinary times these operations pass witliout notice. When our 
 next financial disaster comes they will cause widespread disturbance 
 and promote panic. We should remember that most of the reserve 
 cities in the national system have sprung up in recent years, and 
 were not in existence during the panic of 1893. The system has not 
 stood the test of a financial crisis. I know that country bankers 
 desire interest on their reserve accounts, and that banks in reserve 
 cities desire such accounts. Nevertheless, I advocate that whatever 
 reserve may be required by law, that reserve shall be in cash in each 
 bank's own vaults, and that the present system of reserve deposi- 
 taries, both state and national, be abolished as most unsound and 
 dangerous. 
 
 81. INDEPENDENT BANKING THE CAUSE OF INFLATION 
 By victor MORAWETZ 
 
 The managers of each bank have the power to regulate the amount 
 of its loans and discounts and the expansion of its deposit liabilities 
 in relation to reserves, having regard to the condition of the particular 
 bank which they control; but in the United States bank managers 
 have no power to regulate the ex-pansion of credits of all the banks 
 with a view to the security of the general credit situation, and have 
 no power, through the issue and redemption of bank notes, to pre- 
 vent sudden and wide fluctuations in the credit power of the banks 
 resulting from the fluctuations of the volume of currency used as 
 a circulating medium. Though the managers of fifty, or of a hundred, 
 out of the seven thousand national banks may be of the opinion that, 
 having regard to existing or prospective conditions, the exi")ansion of 
 credits has gone too far, they have no power to accomplish any sub- 
 stantial result. They could restrict the grant of credits by their own 
 banks, and so lose profitable business that would go to other banks, but 
 they could not materiatt>' improve the general situation. This was the 
 case prior to the recent panic. For months before the panic many 
 intelligent managers of banks and trust companies knew that the 
 
 ' Adapted from The Banking and Currency Problem in the United States, 
 pp. 36-42. (North American Review Publishing Co.. 1909.)
 
 l68 PRINCIPLES OF MONEY AND BANKING 
 
 credit situation throughout the country had become strained, and 
 accordingly, by restricting credits and by making call loans instead 
 of time loans, many of them endeavored to strengthen their own 
 institutions, but they could do little for the protection of the general 
 credit situation. 
 
 The point to which bank credits throughout the country may be 
 expanded with safety depends upon many circumstances and varies 
 from time to time. A ratio of reserves to liabilities may be perfectly 
 safe under certain conditions and quite unsafe under other conditions. 
 It is a fatal mistake to assume that bank credits always can be 
 expanded with safety to the maximum allowed by the reserve require- 
 ments of the National Bank Act. Recent experience has shown that 
 though the minimum reserves required under the National Bank Act 
 are sufficient in ordinary times, they are not sufficient at all times, 
 and that credits may be expanded beyond the limit of safety although 
 the legal ratio of reserves to Habilities be maintained. It is 
 not sufficient to consider merely the rate of interest in Wall Street. 
 It is not sufficient to consider the rate of interest and financial condi- 
 tions throughout the United States. It is necessary to consider the 
 whole world. The financial and commercial relations between the 
 leading countries of the world are so close that any shock affecting 
 financial conditions in one country would be felt by them all. A 
 great war, or a financial crash in any country, would affect fioiancial 
 conditions throughout the whole civilized world. 
 
 It is necessary to consider, also, the prospective expansion of 
 business and the prospective demand for credits and currency through- 
 out the world. Furtliermore, allowance must be made for events 
 that cannot be foreseen. There are times when exceptional condi- 
 tions render necessary an exceptional expansion of bank credits or of 
 the currency as a temporary measure of relief, as, for example, when 
 a panic is threatened by reason of the sudden withdrawal of currency 
 in unusual amounts to be hoarded by depositors who have lost confi- 
 dence in the banks. In such case, however, safety requires that, 
 as soon as the immediate need of the extraordinary expansion shall 
 have been removed, bank credits and the currency shall again be 
 contracted to a normal limit. 
 
 There are in the United States approximately seven thousand 
 national banks, besides more than twice as many state banks and 
 trust companies. Each of these institutions acts for its individual 
 interest alone, independently of the others, and the prevailing tend-
 
 RELATIONS BETWEEN BANKS 169 
 
 ency of each at all times is to expand its credits to the limit permitted 
 by law. The country banks lend their surplus resources in the form 
 of deposits at mterest to the banks in the larger cities, and the banks 
 in the principal money centers commonly expand their credits as 
 much as practicable by lending on call such sums as they deem it 
 unsafe to lend on time or by discount of commercial paper. Each 
 bank with a deposit in another bank assumes that, in case of need, it 
 can strengthen its reserve by drawing upon this deposit; but it fails 
 to consider that, when thus it strengthens its own reserve, it must to 
 the same extent weaken the reserve of the other bank, and that the 
 deposits of banks with other banks add no strength to the general 
 credit situation. Each bank that has loaned money on call assumes 
 that, in case of need, it can strengthen its reserve by calling such loans; 
 but it fails to consider that, generally, when a loan is called the 
 borrower is obliged to borrow the same sum from some other bank, 
 although a high rate of interest may be exacted, and, therefore, that 
 call loans affect the security of the entire bank situation practically 
 to the same extent as time loans. 
 
 In the United States there is no way of regulating the supply of 
 bank credits and of holding part of the potential supply in reserve 
 for periods of financial stringency. Consequently, nearly always 
 there is either an overabundance of money (meaning credit which the 
 banks are ready to lend) or a money famine. It has been argued 
 that the volume of credits granted by the banks depends upon busi- 
 ness activity and upon the consequent demand for credit and not 
 upon the power of the banks to grant credits, and, therefore, that the 
 willingness of the banks to make loans at very low interest rates has 
 little effect in causing an expansion of bank credits. Experience 
 shows, however, that the contrary is the case, at least in the United 
 States. .It is true that when there is loss of confidence and wiien 
 business is depressed interest rates are low, because there is less 
 currency in circulation and more in the bank reserves, while at the 
 same time the demand for bank credits is diminished. It is true, 
 also, that the willingness of the banks to make loans at low interest 
 rates will not stimulate speculation and enterprise unless people have 
 confidence and are ready to speculate and embark in new enteri)riscs. 
 But we know by experience that when people are in a mood for 
 speculation and for business expansion low interest rates operate as 
 a powerful stimulus to speculation and business expansion. .A leading 
 banker has said: "In the long run commerce suffers more from the
 
 I70 PRINCIPLES OF MONEY AND BANKING 
 
 periods of overalnnidaiicc [of money] than from those of scarcity. 
 The origin of each recurring period of tight money can be traced 
 to preceding periods of easy money. Whenever money becomes so 
 overabundant that bankers, in order to keep it earning something, 
 have to force it out at a])normally low rates of interest, the founda- 
 tions are laid for a period of stringency in the not far distant future, 
 for then speculation is encouraged, prices are inflated, and all sorts 
 of securities are floated until the money market is glutted with 
 them." 
 
 82. THE CHARACTER OF THE PANIC OF 1893' 
 By ALEXANDER D. NOYES 
 
 The panic of 1893, in its outbreak and in its culmination, followed 
 the several successive steps familiar to all such episodes. One or 
 two powerful corporations, which had been leading in the general 
 plunge into debt, gave the first signals of distress. On February 20 
 the Philadelphia and Reading Railway Company, with a capital of 
 $40,000,000 and a debt of more than $125,000,000, went into bank- 
 ruptcy; on the 5th of May the National Cordage Company, with 
 twenty millions capital and ten millions liabilities, followed suit. 
 The management of both these enterprises had been marked by the 
 rashest sort of speculation; both had been favorites on the specu- 
 lative markets. The Cordage Company in particular had kept in the 
 race for debt up to the moment of its ruin. In every month of the 
 company's insolvency its directors declared a heavy cash dividend, 
 paid, as may be supposed, out of its capital. In January, National 
 Cordage stock had advanced 12 per cent on the New York market, 
 selling at 147. Sixteen weeks later it fell below ten dollars per 
 share, and with it, during the opening week of May, the whole stock 
 market collapsed. The bubble of inflated credit being punctured, 
 a general movement of liquidation started. This movement immedi- 
 ately developed very serious symptoms. 
 
 Panic is in its nature unreasoning; therefore, although the 
 financial fright of 1893 arose from fear of depreciation of the legal 
 tenders, the first act of frightened bank depositors was to withdraw 
 these very legal tenders from their banks. Experience has taught 
 depositors that in a general collapse of credit the banks would prob- 
 ably be the first marks of disaster. Instinct led them to get their 
 
 ' Adapted from Forty Years of American Finance, pp. 188-93. (G. P. Put- 
 nam's Sons, 1909.)
 
 RELATIONS BETWEEN BANKS 171 
 
 money out of the banks and into their own possession with the least 
 possible delay; therefore when the depositors of interior banks 
 demanded cash, and such banks had as immediate reserve a cash 
 fund amounting to only 6 per cent of their deposits, it followed that 
 the eastern "reserve agents" were drawn upon in enormous sums. 
 
 On the New York banks the strain was particularly violent. 
 During the month of June the cash reserves of banks in that city 
 decreased nearly twenty millions; during July they fell off twent>-- 
 one millions more. The deposits entrusted to them by interior insti- 
 tutions had been loaned, according to the banking practice, in the 
 eastern market; their sudden recall in quantity forced the eastern 
 banks to contract their loans immediately. But in a market already 
 struggling to sustain itself from wreck, such wholesale impairment of 
 resources was a disastrous blow. In the closing days of June the 
 New York money rate on call advanced to 74 per cent, time loans 
 being wholly unobtainable. The early withdrawals by depositors in 
 the country banks were only a slight indication of what was to follow. 
 In July this western panic had reached a stage which seemed to 
 foreshadow general bankruptcy. Two classes of interior institutions 
 went down immediately — the weaker savings banks and private 
 banks, distributed in various provincial towns, which had fostered 
 speculation through the use of their combined deposits by the men 
 who controlled them all. 
 
 In not a few instances country banks were forced to suspend at 
 a moment when their own cash reserves were on their way to them 
 from depository centers. Out of the total of 158 national bank fail- 
 ures of the year, 153 were in the West and South. How widespread 
 the destruction was among other interior banking institutions may 
 be judged from the fact that the season's record of suspension com- 
 prised 172 state banks, 177 private banks, 47 savings banks, 13 loan 
 and trust companies, and 16 mortgage companies. 
 
 During the month of July, in the face of their own distress, the 
 New York banks were shipping every week as much as $11,000,000 
 cash to these western institutions. Ordinarily, such an enormous 
 drain would have found comjjensation in import of foreign gold, and, 
 in fact, sterling exchange declined far below the normal gold import 
 point. But the blockade of credit was so complete that oj)erations 
 in exchange, even for the import of foreign specie, were impracticable. 
 Banks with impaired reserves would not lend even on tlie collateral 
 of drafts on London.
 
 172 PRINCII'LKS OF MONKY 7\NIJ IJANKINC; 
 
 83. EVENTS IN THE PANIC OF 1907' 
 By RALPH SCOTT HARRIS 
 
 In July, 1907, it was felt in every circle that business trembled 
 on the edge of an abyss. A continued money stringency forced 
 Secretary Cortelyou in August to make deposits in banks and accej)t 
 as security state, municipal, and railway bonds. Beginning in 
 September there was a tone of ill-concealed fright among the most 
 hopeful. Only the financial papers attempted to coax themselves 
 back into the old confidence. During the second week in October 
 call loans in New York ranged from 2^ to 6 per cent; time loans from 
 6 to 7 per cent; commercial paper from 7 to 7^ per cent. In these 
 two weeks there were twice as many failures as in the same period of 
 1906. There were five times as many manufacturing failures in 
 September, 1907, as in September, 1906. 
 
 A series of bank failures precipitated the spectacular part of the 
 crisis. The first intimation of upheaval was the failure of the Stock 
 Exchange firm of which Otto C. Heinze was the head. The suspen- 
 sion was due to a failure to corner the copper market. There was 
 a well-defined suspicion that F. Augustus Heinze, president of the 
 Mercantile National Bank, was interested in his brother's ventures 
 and that the bank was being "used" in this connection. He and his 
 supposed allies fell into public distrust. Seven banks and a trust 
 company, with capital of $21,000,000 and deposits of $71,000,000, were 
 dominated by these interests. Believing them able to weather the 
 storm, the Clearing-House Association agreed to help them out if 
 Heinze and his associates were eliminated. This was done. A few 
 days later, however, the National Bank of Commerce refused to clear 
 any longer for the Knickerbocker Trust Company, whose president 
 was thought to be allied with the suspected interests. The result 
 was a run on the Knickerbocker Trust Company, which, after paying 
 out $8,000,000 in three hours, closed its doors. Runs followed on the 
 Lincoln Trust Company and on the Trust Company of North America. 
 Following several conspicuous commercial failures other banks in 
 New York closed for safety's sake. 
 
 Meanwhile the money scramble began. Banks were forced 
 to try to call loans to be prepared for the demand of banks and 
 individual depositors. The Secretary of the Treasury deposited 
 $35,000,000 in national banks in New York in four days. 
 
 'Adapted horn Practical Banking, pp. 250-57. (Copyright bj' the author. 
 Published by Houghton Mifflin Co., 1915.)
 
 RELATIONS BETWEEN BANKS 
 
 173 
 
 Stock Exchange prices collapsed. A syndicate, headed by the 
 late J. P. Morgan, stated that it would stand under the market, and 
 placed $25,000,000 on call at 10 per cent; later $10,000,000 was made 
 available at 50 per cent, the high price being iLxed to discourage 
 speculation. Soon the banks began to restrict cash payments; 
 clearing-house loan certificates were issued. The demand for cash 
 started a premium on currency the next week which continued the 
 rest of the year. It offered an incentive for withdrawal of deposits. 
 Large failures occurred as the result of the money stringency. On 
 November 9 arrived the first large shipment of more than $100,000,000 
 in gold, imported to relieve the money stringency. The banks had 
 already increased their circulating notes at this time. 
 
 But in the meantime the panic had seized the interior. Banks in 
 most of the cities over 25,000 suspended cash payments. The 
 clearing-houses stood guaranty on certificates. It is estimated that 
 over $500,000,000 of substitute paper was issued. The country 
 banks, having no clearing-house affiliations, suffered most. ]Many 
 failures occurred among them. 
 
 Shipments of money to the West were made from New York. 
 These varied from $4,400,000 for the week ending October 19 to 
 $22,600,000 for the week ending November 16. In the week ending 
 January 4 the tide turned and $5,500,000 was shipped to New York. 
 The New York banks supplied the country- with $125,000,000 between 
 the beginning of the panic and the first of 1908. Still the reserves of 
 the clearing-house banks were not seriously depleted, the importation 
 of gold and the federal deposits having almost offset the loss of cash. 
 
 Perhaps the panic could have been localized had New York bank- 
 ers been able to meet all demands without restriction. But restriction 
 inspired country banks with a zeal to provide for any disaster. 
 Hoarding followed. In December most country banks had higher 
 reserves than at the beginning of the panic. The question which 
 each country' banker asked himself was, Can I afford to be less cautious 
 than other bankers when I know the psychology of ''panics" and 
 "runs"? 
 
 84. THE HOARDING OF CURRENCY IN 1893' 
 By J. DkWI TT WARNKR 
 
 Then developed the feature that will forever characterize the 
 stringency of 1893: instructive to those who have not already 
 learned how immaterial is an}- ordinary supply of legal currency when 
 
 'Adapted from Sound Currency, III (1896), p. 240.
 
 174 PRINCIPLES OF MONEY AND BANKING 
 
 compared with credit in its various forms — the real currency of the 
 country. Almost between morning and night the scramble for 
 currency had begun and culminated all over the country, and the 
 preposterous bulk of our circulating medium had been swallowed up 
 as effectually as, in a scarcely less brief period, gold and silver had 
 disappeared before the premium on specie a generation before. 
 Currency was hoarded until it became so scarce that it had to be 
 bought as merchandise at a premium of i to 3 per cent in checks 
 payable through the clearing-house; and to enable their families 
 to meet petty bills at the summer resorts the merchants and pro- 
 fessional men of the cities were forced to purchase and send express 
 packages of bills or coin, while savings banks hawked their govern- 
 ment bond investments about the money centers in a vain attempt to 
 secure currency. 
 
 85. THE STRAIN UPON NEW YORK IN TIME OF PANIC^ 
 By O. M. W. SPRAGUE 
 
 The strain upon New York banks in emergencies is not limited to 
 the withdrawals of balances by outside banks. Like the central 
 money markets of other countries, New York is the cheapest market 
 for loans in the United States, and is consequently resorted to by 
 large borrowers from all sections. For this reason and on account of 
 stock exchange and other financial deaUngs the demand for loans 
 there is indefinitely large and attracts the surplus funds of the banks 
 of the entire country. Loans of outside banks in New York are apt 
 to be particularly large during those periods of months or even years 
 when conditions are ripening for a crisis, because at such times the 
 rates for loans in money centers always reach abnormally high levels. 
 When a crisis does come, calls from the outside banks for the liqui- 
 dation of their loans and the shipment of the currency received in 
 payment are invariably even more in evidence than the drawing 
 down of balances. The effects are far more disturbing, because of the 
 shifting of loans which is involved. 
 
 There has been no crisis since the estabhshment of the national 
 banking system in which the New York banks would have been at 
 all likely to have resorted to suspension had their difficulties been 
 confined to those of purely local origin. In 1873 the situation in 
 
 ' Adapted from "Proposals for Strengthening the National Banking System," 
 Quarterly Journal of Economics, XXIV, 1909-10, pp. 221-22.
 
 RELATIONS BETWEEN BANKS 175 
 
 New York was so far improved at the time the banks restricted pay- 
 ments that the necessity for it was generally questioned. It was 
 subsequently explained in a clearing-house committee report that 
 the measure was taken on account of the threatened exhaustion of the 
 cash reserves of the banks in response to the demands of the interior 
 banks for the return of their deposits. In 1893 there was nothing 
 in the nature of a panic in New York itself when this discreditable 
 step was again taken. The banks succumbed to the prolonged drain 
 of money to the West and Southwest, where numerous bank failures 
 had generally weakened public confidence. Again, in the crisis of 
 1907, at the end of the week in which the troubles of the New 
 York trust companies became known, the local situation was showing 
 such decided evidence of improvement that but for the increased 
 demands of the outside banks it is certain that cash payments would 
 have been maintained. 
 
 86. SUSPENSION OF SPECIE PAYMENTS* 
 By O. M. W. SPRAGUE 
 
 If the banks of the money centers refuse or even delay the ship- 
 ment of funds deposited with them, the thousands of country banks 
 will inevitably discontinue remittances upon items sent to them for 
 collection. But is the reverse equally inevitable? If the initiative 
 is taken by the country banks, is that sufficient reason for the dis- 
 continuance or restriction of the shipments of money to tlie interior by 
 the banks of the money centers ? No, because the banks in the money 
 centers reap great advantages from their position as clearing centers 
 and as reserve agents. They incur a responsibility for maintaining 
 the credit situation which does not rest upon the other banks. 
 
 Finally, what has been said of money centers generally in re- 
 lation to the country banks applies with even less qualification to 
 the responsibilities of the New York banks, to the banks of other 
 money centers, and, indeed, to the banks of the entire country ? 
 There is always a chance that the New York banks, by meeting ever>' 
 demand upon them for cash, may be able to re-establish the ordinar>' 
 course of payments between banks in different parts of the country, 
 while nothing tliat the country banks and those of the secondary 
 money centers may do can possibly bring this about. It follows, 
 therefore, that even though in 1873, or on later occasions, some of 
 
 'Adapted from History of Crises under the Nalional Banking System, pp. 61- 
 69. (National Monetary Commission, 19 10.)
 
 176 I'RINCII'LKS OF MONEY AND BANKING 
 
 the banks outside New York may have restricted payments before 
 the suspension in New York, the general dislocation of the domestic 
 exchanges is i)roperly to be attril)uted to the banks of that city. 
 A danger, therefore, which had been merely threatening became 
 a reality at the moment the action of the clearing-house banks on 
 Wednesday, September 24, became generally known. Similar steps 
 were immediately taken in most of the secondary centers. In 
 Boston, Philadelphia, Baltimore, Washington, New Orleans, Cin- 
 cinnati, and St. Louis the issue of clearing-house loan certificates, 
 and at the same time the use of certified checks, payable through the 
 clearing-house, were sanctioned. While the use of loan certificates 
 does not necessarily involve suspension, the fact that both measures 
 were taken together in many places not unnaturally gave rise to the 
 erroneous impression that suspension is an inevitable consequence 
 of the issue of loan certificates. Moreover, in many cities, Chicago 
 being the most important, as well as by the country banks generally, 
 suspension of cash payments was quite as complete, even though they 
 did not resort to the loan certificate. 
 
 When once the banks had resorted to suspension, various causes 
 of disturbance, till then of minor importance, became serious. The 
 amount of actual money required for a given volume of transactions 
 was greatly increased. Uncertain whether the banks would provide 
 the money which they might shortly need, many persons began to 
 discontinue paying into the banks cash received in the course of their 
 daily business. On September 30, for example, one of the Boston 
 banks reported that many of their customers were depositing their 
 currency in their own safes. The currency premium also tended to 
 keep money from finding its way into banks. The premium on 
 currency in terms of certified checks began in 1907 on October 31 
 at 2 (low) and 3 (high) per cent, and continued almost without inter- 
 ruption until December 31. The highest premium recorded was 4 
 per cent, on December 6, 12, and 13. Many retail shops in New 
 York, it was said, sold to brokers their receipts in currency. Positive 
 hoarding also seems to be increased by suspension, even though some 
 money is brought into use by the possibility of realizing a profit from 
 its sale at a premium. In 1873 at any rate the amount of money thus 
 brought to light was unquestionably more than offset by the amounts 
 which were locked up in savings banks. In New York alone the 
 savings banks were estimated to have held from $13,000,000 to 
 $20,000,000, and they were severely criticized for withholding this
 
 RELATIONS BETWEEN BANKS 177 
 
 money from the channels of trade. Such criticisms would have been 
 well founded if the commercial banks had not resorted to suspension. 
 The savings banks, having reciuired thirty days' notice from dejjosi- 
 tors, were properly justified in holding themselves ready to meet the 
 demands of those depositors who had already given notice. 
 
 87. THE NEW YORK VIEW OF INTERIOR CURRENCY 
 SHIPMENTS' 
 
 The clearing-house committee knew by experience that the dissi- 
 pation of the New York banking reserve, upon which practically the 
 credit volume of the nation rests, would alarm the nation, intensify 
 the panic, and greatly prolong the period of recuperation. New 
 York bankers have been severely criticized because they did not more 
 fully respond to the demands of country correspondents by shipping 
 currency against balances. To have fully honored the demands that 
 were pouring in from all sections of the country would have dissipated 
 our banking reserve in a fortnight. How could it be replenished ? 
 Were the interior bankers sending currency to New York ? What 
 would have been the effect upon the country if the New York banking 
 reserve had been entirely depleted ? It would have so intensified 
 the panicky feeling that widespread commercial disaster would have 
 resulted. The $53,000,000 deficit in our banking reserve occurred 
 in less than ten days after the failure of the Knickerbocker Trust 
 Company, and was caused by the shipment to interior institutions 
 of the larger portion of that amount in that short time. We kept the 
 door of our treasure house wide open until for the good of the country- 
 it became necessary everywhere to close it. It never was fully closed; 
 currency shipments continued in a restricted way througliout the 
 panic, and a larger number of our banks kept up their counter pay- 
 ments as usual. 
 
 88. LOANING POLICY DURING A CRISIS* 
 By O. M. W. SPRAGUE 
 
 The "banking stage " of a crisis and the efforts made by the banks 
 to weather the storm may best be studied in connection with the crisis 
 of 1873, since the statistical data for this panic are far more e.xtensivc 
 than those which we have for the later crises of 1893 and 1907. 
 
 ' From Hamilton, Current Economic Problems, p. 237. 
 
 ' Adapted from History of Crises under the National Banking System, pp. 82-84, 
 303-5. (National Monetary Commission, 1910.)
 
 178 
 
 PRINCIPLES OF MONEY AND BANKING 
 
 Abstracts of the regular report of September 12 and of the two 
 special returns for October 13 and November i are presented in 
 the accompanying table. (The crisis came to a head on September 
 20.) The report of November i was after the panic, and is of impor- 
 tance only in showing the rapid recovery of the banks. Attention 
 should be given chiefly to the changes which occurred between vSep- 
 tember 12 and October 13. The following table shows the changes 
 in loans for the banks as a whole for the three groups of banks: 
 
 (Expressed in millions) 
 
 
 Country Banks 
 
 Reserve City 
 Banks 
 
 Banks in 
 New York 
 
 Total 
 
 Sept. 12, 1873 
 
 $478.5 
 455-8 
 442.0 
 
 $262.5 
 
 247-5 
 242.2 
 
 $199.2 
 179. 1 
 169. 1 
 
 $940 . 2 
 882.4 
 853-4 
 
 Oct. 13, 187? 
 
 Nov. I, 1873 
 
 
 The contraction of loans to October 13 may be taken as repre- 
 senting the extent of contraction which was due to and which in turn 
 contributed to the severe financial strain of the crisis. The further 
 contraction to November i represented the diminishing requirements 
 of business owing to trade depression. By the banks as a whole 
 loans were reduced by $58,000,000 before October 13, or slightly more 
 than 5 per cent. This contraction was general, both the country 
 banks and those in reserve cities showing a contraction of about 
 5 per cent and those in New York a more considerable contraction of 
 10 per cent. The most severe contraction among city banks was 
 in Chicago, where, doubtless owing to the decision of the banks not 
 to issue clearing-house loan certificates, loans were reduced from 
 $25,300,000 on September 12 to $19,000,000 on October 13. 
 
 In this, as in other American crises, a somewhat exaggerated 
 opinion became current as to the extent to which the banks required 
 borrowers to liquidate their loans. Difficulty experienced in dis- 
 posing of commercial paper through note brokers and the high 
 rates for call loans seem to have been grounds for this erroneous 
 impression. Under our banking system borrowers imable to dispose 
 of their paper through note brokers in times of crisis resort more 
 largely to the particular banks which hold their accounts than is usual 
 at other times. This shifting of loan relationships gives rise to an 
 impression of wholesale contraction which the statistics of the total 
 loans of the banks show to be unfoimded.
 
 RELATIONS BETWEEN BANKS 
 
 179 
 
 The statistical data for the crisis of 1907 are far from satisfactory. 
 The first of the two returns made was on August 22, about two months 
 before the crisis, and the second, on December 3, came after the 
 worst of the panic was passed. For 1907 it is neccssar}^ to assume 
 that no great change had taken place in the condition of the banks 
 between the end of August and the middle of October, an assumption 
 which, judging from the weekly bank statement in New York, Boston, 
 and Philadelphia, is not far from the facts of the actual situation. 
 It would, however, be somewhat hazardous to draw conclusions if 
 it were not that the same tendencies are disclosed which were so 
 clearly manifest both in 1873 ^-nd in 1893. 
 
 As in former periods of crisis, the reserves of the banks, taken as 
 a whole, were not made use of to any considerable extent. On 
 August 22 the banks held $701,600,000, and on December 3, $660,- 
 800,000 — a loss of only $40,800,000. If the holding of the notes of 
 other banks are included, this loss is reduced to only $31,400,000. 
 This cash loss can be more than matched on many occasions when 
 conditions were entirely normal, e.g., between August 25 and Novem- 
 ber 9, 1905, when the reserves of the banks fell off more than $43,- 
 000,000. By means of loan contraction, the loss in cash, and the 
 diminution in indebtedness between the banks, net deposits were 
 reduced from $5,256,000,000 to $4,629,000,000, and there was a slight 
 increase in the proportion of cash held, which advanced from 13.35 
 per cent to 13.45 per cent. This slight increase in the reserve ratio 
 was entirely in accord with the precedent, and its ex-planation is to 
 be found in changes in the condition of the country banks, which are 
 shown in the following table: 
 
 (Expressed in millions) 
 
 August 22 
 
 December 3 
 
 Decrease 
 
 Loans 
 
 Net deix)sits 
 
 Cash reserve 
 
 Percentage of reserve 
 
 Net de|x>sits With reser\e agents. 
 
 $2,401 o 
 
 2,627.0 
 
 199.6 
 
 7.6 
 
 410.0 
 
 $2,324 o 
 
 2,485 o 
 
 24O . o 
 
 9 9 
 356 o 
 
 $ 77 o 
 
 142.0 
 47 6' 
 
 54 o 
 
 * Increase. 
 
 The increase of $47,600,000 in reserves of this group of banks 
 exceeded by $6,800,000 the total loss in reserves of the banks taken 
 as a whole. There is no reason to believe that countr}' banks were 
 endeavoring to hoard the money which they withdrew from their
 
 i8o PRINCIl'LKS OF MONEY AND BANKING 
 
 reserve agents at the beginning of the crisis. They needed additional 
 supplies of cash if they were to meet the demands of their own deposi- 
 tors. But after the New York banks suspended and suspension 
 became general they naturally held with a tight grip all the money 
 which they had in their possession at the moment and also very 
 naturally endeavored to extract more from their reserve agents. 
 The withdrawal of money was entirely in accord with what the 
 teachings of past experience ought to have led reserve agents to 
 expect and to be in readiness to meet. 
 
 89. POSITION OF BANKS IN TIME OF PANIO 
 By H. J. DAVENPORT 
 
 The panic cannot be controlled, once it has started, by any policy 
 of restriction of credit, but only by generous extension. The credi- 
 tors are hurrying their debtors mostly because of the danger of being 
 themselves hurried, or because of the danger that delay may mean 
 that some other creditor may by his promptitude make himself the 
 sole creditor paid or the sole creditor obtaining adequate security. 
 Were really solvent debtors sure of obtaining credit in case of serious 
 pressure, there would be few creditors to press them. 
 
 In fact, also, if the creditors were sure of credit for themselves 
 in case of need, there would be less occasion for pushing the debtors. 
 And if these creditors, in turn, were not in danger of being pushed 
 by other creditors, themselves straitened in credit and themselves 
 fearful of the possible failure of the debtor to obtain credit under 
 se""ous need, this last occasion of credit pressure would be mostly 
 removed. The banks stimulate a call upon themselves for credit by 
 X, Y, and Z. And if the creditors of X, Y, and Z make demands upon 
 them, and the banks refuse to give credit to X, Y, and Z, these men 
 are driven, in their turn, to place pressure upon still other debtors. 
 The hurry grows with the restriction of credit, and the further restric- 
 tion of credit adds to the hurry. The process is a geometrical pro- 
 gression. And immediately that no one can get credit to pay with 
 there is a frightened scramble to enforce payment in money, to get 
 money to pay with, to hoard money against possible necessities. 
 The attempt of the banks to hold fast to their reserves is the very 
 force which is prompting the taking them away; depositors under 
 
 ' Adapted from Economics of Enterprise, pp. 285-88. (The Macmillan Co., 
 1913)
 
 RELATIONS BETWKEX HANKS I Si 
 
 pressure are withdrawing funds to meet claims in other centers, or, 
 suspicious of the continued aliility of the bank to pay upon demand, 
 or suspicious of the ultimate solvency of the bank, are calling for 
 cash to be hoarded. The fact is that it is not necessary that a 
 stringency have already arisen in order to bring about the panic 
 stringency; merely the menace of stringency is necessary. 
 
 The difficulty is not precisely in the fact that some banks purport 
 to hold in large part, but actually do not hold, the reserves of other 
 banks; that under our system of redepositing reserves more than 
 three-fourths of the reserves, computed as somewhere else, are really 
 not where they are supposed to be, but instead are still somewhere 
 else, where, in turn, they really are not, and that, therefore, in times 
 of stress the banks themselves are the most serious sources of pressure 
 upon one another; that the banks are not only themselves among the 
 very depositors whose calls are so disastrous, but are, of all the depos- 
 itors, the ones likely to be first in their calls. Although all tliis is 
 serious enough, the ultimate difficulty is that the very process by 
 which all the banks at once are tr^dng to strengthen their reserves 
 is an altogether impossible process, a paradox, a deathblow at the 
 very fundamental principle of banking. Any general attempt to 
 convert banking paper or deposit credit into gold must promptly 
 issue in a lamentable collapse of the whole credit machinery'. The last 
 people to make this attempt should be the bankers themselves. If 
 other interests attempt it, the banker's duty is to intervene to save 
 the situation. The attempt must in any case fail, but all sorts of 
 calamity must attend this eflort at the imiwssi])le. When the banks 
 themselves join in the scramble, the last hope of supporting tlie credit 
 fabric has vanished. 
 
 90. TREASURY AID IN TIME OF CRISIS" 
 
 BY DAVID KINLEY 
 
 I. BY DEPOSIT OF FUNDS 
 
 During the ten days from October 21 to 31, 1907, the Trcasurv- 
 transferred to the national banks of New York city $37,507,000, which 
 the banks immediately advanced to tlie trust companies to meet the 
 
 ' Adapted from The IndependetU Treasury of the United States and Its ReJation 
 to the Banks of the Country, pp. 257-60. (National Monetary Commission, 1910.)
 
 1 82 PRINCIPLES OF MONEY AND BANKING 
 
 run on them. In order to aid the banks in meeting the demand of the 
 interior for currency, the Treasury Department in three days furnished 
 the New York banks about $36,000,000 in small bills. "As the 
 stringency progressed the Treasurer gave relief in every important 
 locality where assistance seemed to be required. By the middle of 
 November the Treasury had deposited in the banks all the money 
 it could spare; indeed, it had reduced its working surplus to about 
 $5,000,000." 
 
 An analysis of the entire problem of treasury aid in time of crisis 
 shows that the independent treasury exercises a beneficial influence 
 only in the earlier stages of a crisis caused by a speculative advance 
 of prices; that in the later stages of such an occurrence its influence is 
 evil to a greater or less degree, according as its receipts happen to 
 exceed or to be less than its disbursements; that in a stringency 
 caused by a rapid but healthy increase of business its absorptive 
 influence is wholly bad, but that in the later stage of such a crisis its 
 disbursements are promotive of good, unless mismanaged or too long 
 delayed. 
 
 Hence we see that the coincidence of a particular phase or stage 
 of the progress of a crisis is necessary in order that the influence of 
 the subtreasury may be beneficial. But such a coincidence is purely 
 fortuitous, and this fact deprives the system of all value as a scientific 
 mode of relief in crises. 
 
 n. INDIRECT AID 
 
 Further to relieve the situation Secretary Cortelyou notified the 
 national banks that they might substitute "bonds suitable for 
 savings banks investments for government bonds which were held 
 as securities against public deposits." The Secretary's purpose in 
 doing this was the same as that of Secretary Shaw in resorting to the 
 same device four years previously. He wished to increase the volume 
 of United States bonds available for circulation. Under this stimulus 
 the circulation of the national banks increased by December 21, 1907, 
 to $83,012,153. Still the difficulty of obtaining bonds and the 
 awkward machinery of administration in issuing national-bank notes 
 had the usual result of making the increase of circulation virtually 
 ineffective until after the need for it had passed away. The volume 
 of national-bank currency increased by $24,000,000 between October 
 15 and November 15, but at the close of the year, it had risen much
 
 RELATIONS BETWEEN BANKS 183 
 
 more. The circulation continued to increase, however, although the 
 demand for it no longer existed, until, about the middle of January, 
 it became $695,927,806. 
 
 Of course the usual effect on the price of bonds followed. The 
 increased demand drove up the 2 per cent bonds as high as no, and 
 even at that price the amount available was regarded as too small. 
 Accordingly the Secretary thought it necessary to adopt additional 
 means to relieve the situation, and on November 1 7 he offered a loan 
 of $50,000,000 in Panama Canal bonds under authority of the act of 
 June 28, 1902, and $100,000,000 of 3 per cent certificates of indebted- 
 ness under the act of June 30, 1898. Of the bonds only $24,631,980 
 were taken by the public and $15,436,500 of the loan certificates. 
 Tt is a Httle difficult to understand the reason for this action unless 
 the Secretary- hoped to sell the bonds and securities to people who 
 were hoarding money. Of course the purchase of these securities 
 by the banks, or by people who were not hoarding, simply reduced the 
 circulation and would have made the situation worse. In order to 
 avoid this, however, the Secretary transferred part of the purchase 
 money to the banks. Therefore with one hand he was withdrawing 
 money from circulation in payment of his bonds and with the other 
 was restoring it by depositing it in the banks. The banks which 
 purchased these securities were allowed to retain 90 per cent of the 
 purchase price of the Panama bonds as a deposit and 75 per cent of 
 that of the certificates. 
 
 In addition to these positive means of assistance undertaken by 
 the Secretary of the Treasury, the Comptroller of the Currency, 
 fearing that a revelation of their condition would add to tlie panic 
 in a measure, decided to postpone the call on the national banks for 
 a report in November. This action operated favorably, because the 
 banks were putting themselves in shape to meet the call. The delay 
 made them more cautious in making discounts and lowering their 
 reserves. Evidence that this was the case is found in a statement of 
 the Secretary himself that "the fact that a call had been made and 
 a report submitted contributed another favoraljle factor to the 
 situation immediately afterwards by enabling the banks to release 
 a part of this accumulated cash to meet the pressing needs of their 
 clients, with the knowledge that they would probably be able to 
 fully reinstate their reserves before another call was made by the 
 ComptroUer."
 
 l84 PRINCIPLES OF MONEY AND BANKING 
 
 91. THE NEED IN TIME OF CRISIS' 
 By J. LAURENCE LAUGHLIN 
 
 It will probably appear to many that the demand of the public 
 for expanding issues of currency is of vital importance in a time of 
 financial distress, such as that in the autumn of 1907. It is supposed 
 that in a time of stringency the public will demand more circulation; 
 and to support this view the events of the panic of 1907 have been 
 drawn upon as proof. It is true, of course, that government or bank 
 notes could not be had in most cities during the height of the panic of 
 1907, even in small sums; and as a consequence the clearing-house 
 associations issued clearing-house notes (as distinct from clearing- 
 house loan certificates) for circulation among the public. Without 
 doubt this inability to get cash for a small check on a bank or at 
 a paying office made a deeper impression on the minds of the people 
 than any other event during the panic. It was, as everyone must 
 admit, a striking commentary on the inadequacy of our banking and 
 monetary system that it was impossible for the banks to supply to 
 employers of labor and for the small needs of every day a relatively 
 small amount of currency having a general circulation. Yet, on the 
 other hand, it is a fact that the total amounts of the clearing-house 
 notes for the use of the public were not large, nor were they long 
 outstanding. Moreover, as affecting the ability of the producing 
 and trading firms to weather the stress of the panic, they had practi- 
 cally no influence whatever. 
 
 The power to expand their note issues (which are liabilities) could 
 not have added to the cash reserves of the banks and thus have 
 enlarged their power to aid needy borrowers. It is true, however, 
 that an expansion of note issues would have aided the banks indirectly; 
 it would have allowed them to satisfy the urgent demand of the public 
 for a medium of exchange by passing out their notes, and thus would 
 have enabled them to retain lawful money which could be used as 
 reserves to support their loans and deposits. 
 
 The reserve city bank which can quickly increase its own notes 
 can also supply the demands made upon it by country national 
 banks and correspondents — provided the country bank wishes only 
 currency for circulation in the neighborhood and not for its own 
 reserves. Here, again, the new bank issues do not give the pivotal 
 
 ' Adapted from "Banknotes and Lending Power," Journal of Political Economy, 
 XVIII (1910), pp. 779-83-
 
 RELATIONS BETWEEN BANKS 185 
 
 aid which some suppose always comes from additional circulation. 
 Not being lawful money they could not be used in reserves, and there- 
 fore would not — and could not — improve the lending power of the 
 local country bank. They would, however, supply currency to the 
 country bank which could be paid out, if urgently demanded, and 
 thus indirectly protect reserves. 
 
 Another advantage in emergency bank notes, of course, is the 
 opportunity they present to national banks having relations with 
 state banks and trust companies. By issuing their own notes they 
 may exchange them for lawful money held by banks outside the 
 national system. In this way they can indirectly increase their 
 lawful money, and consequently their power to lend. 
 
 But, primarily, the issue of bank notes is for circulation in the 
 hands of the public and not for any serious advantage which they 
 render in increasing the power of the banks to lend and stave off 
 a panic. The real difficulty resides, not with the general public and 
 the media of exchange — for checks are as good as ever as a medium 
 of exchange if there are deposit accounts on which they can be drawn — 
 but with the banks, with the power of the banks to expand their loans 
 in a time of stress. This is the pivotal thing in any plan to relieve 
 the distress of a financial panic. 
 
 92. BOND-SECURED NOTES AND CYCLICAL ELASTICITY' 
 
 Bank notes secured by bonds are open to several serious objec- 
 tions from the standpoint of elasticity. In the first place the bonds 
 sell above par and bear a low rate of interest; and yet, in limes of 
 financial stringency, the rate of discount is sure to be high, and bor- 
 rowers are in great need of loans. As against buying bonds bearing 
 a low rate of interest in order to issue notes, there is the opportunity 
 for the banks to loan such funds directly at the high market rate of 
 discount. The situation, therefore, puts a premium upon the direct 
 use of banking capital, as against the method of investment which 
 leads to increasing the bank-note circulation. In those communities 
 where bank notes are essential to making discounts this is a serious 
 obstacle. In short, at the time or place of jircssing demand under 
 the existing system the sui)ply of notes is not forthcomiTig. 
 
 On the other hand, if the country is suffering from business 
 depression, if funds are accumulating in the banks, and if the market 
 
 ' Adapted from Report of the Convention of Indiancpolis Monetary Commission 
 (1898), pp. 228-30.
 
 1 86 PRINCIPLES OF MONEY AND BANKING 
 
 rate of interest is low because there are few opportunities of profitably 
 employing capital, then it would not be impossible to expect the 
 banks to use superabundant funds in buying bonds of a low rate of 
 interest. Therefore, at a time when the demand for loans is slight 
 and the rate of discount low, it would be easy for the banks to invest 
 in bonds and thereby obtain notes. In short, when there is no 
 demand the supply is easily obtained. It needs no further comment, 
 consequently, to see that such a system of note issues works at cross- 
 purposes with the needs of the public. With a deposit of bonds for 
 security of notes, there is no supply of notes at a time when most 
 needed and an abundant supply of notes when least needed. 
 
 To give concrete examples, the financial panic of 1890 caused 
 a fall in the prices of government bonds, and thereby increased the 
 chances of profit on the circulation of national bank notes. As a 
 result there was a net increase of $13,000,000 in their circulation in 
 1891 and of $8,000,000 in 1892. Now, in these two years, there was 
 absolutely no demand for an increase in the circulating medium of 
 this country; on the contrary, the Treasury Department in these years 
 was injecting arbitrarily between $25,000,000 and $50,000,000 of silver 
 paper money into the currency of the country, as a result of the 
 Silver Purchase Act of 1890, and gold, in consequence, was being 
 exported at a rate which alarmed business men and finally precipi- 
 tated the panic of 1893. 
 
 "During 1893 the 4's of 1907 sold down to 113, and the banks 
 added to their circulation $37,000,000. During the months of June, 
 July, and August of that year there was a most urgent need for an 
 expansion of the currency; but during these months the new national 
 bank notes did not appear. Not until after the panic was over and 
 money was piling up in all the financial centers — a drug on the 
 market — did the increase in the national bank note circulation take 
 place. As a result of the panic, business being depressed, the interest 
 rate on prime commercial paper during 1894, 1895, and 1896 was 
 between 3 per cent and 4 per cent. The money supply of the country 
 was in excess of its needs and gold was exported in large amounts. 
 The Treasury, embarrassed by the withdrawals of gold, was forced 
 to issue bonds in order to maintain the gold reserve. These bond 
 issues forced down the prices of bonds, and thus increased the profit 
 which banks could make upon new circulation. Therefore, consider- 
 able idle banking capital, which could be loaned barely at 3 per cent 
 in business, was exchanged for government bonds and made the
 
 RELATIONS BETWEEN BANKS 187 
 
 basis for liank notes, so tliat in 1895 '^'^^ 1896 there was a net addi- 
 tion to the bank note circulation of $32,000,000. Thus, the national 
 bank note helped to embarrass the government by inflating the 
 currency at a time when the government was doing its utmost to 
 hinder inflation and prevent the exportation of gold to Europe." 
 
 Secondly, it should be noted that when the necessities of business 
 urgently demand additional notes, even if the price of bonds should 
 be such as to make the issue profitable, the delays incident to the 
 purchase of bonds, the taking out of circulation upon them, etc., 
 would make it impossible to obtain the currency until all need for it 
 was practically past. Under such a system, therefore, banks must 
 refuse to customers additional supphes of notes upon sudden demand 
 even though the community in such circumstances has enlarged its 
 currency need and an additional supply may, therefore, without 
 additional strain on the bank, be kept in circulation. Under such 
 circumstances, if notes are an essential to the borrower, rates for loans 
 rise abnormally and crisis conditions are vastly intensified. Prob- 
 ably the best illustration of this delay in responding to demand was 
 seen in the difiiculty of obtaining currency during the summer of 1893, 
 when it was practically impossible to secure a sufficient supply of 
 a circulating medium of any sort. The New York banks held on 
 June I, 1893, a surplus of $21,000,000 in excess of their legal reserve. 
 At that time the volume of national bank notes outstanding was 
 about $177,000,000. By the first of August extraordinary demands 
 for currency had drawn down the reserves $14,000,000 below the 
 legal minimum and yet the outstanding notes were only about 
 $5,000,000 more than on June i. By September i, however, when 
 the reserves were but $1,500,000 below the minimum, and the urgency 
 was past and currency once more comparatively abundant, the notes 
 had begun to expand and had already reached $199,800,000, sub- 
 sequently rising to $209,300,000 on November i, notwithstanding 
 the continued decrease in the demand for them. 
 
 93. INTEREST ON DEPOSITS AND BANK-NOTE INELASTICITY* 
 By O. M. W. SPRAGUE 
 
 During periods of inactive trade the amount of bank notes sent 
 to Washington for redemption invariably reaches large proportions. 
 The city banks are chiefly responsible for this movement. Some- 
 thing like half the notes are sent in by the New York banks alone, 
 
 ' Adapted from "Proposals for Strengthening the National Banking System," 
 Qiiarlcrly Journal of Economics, XXIV (1909-10), pp. 639-40.
 
 l88 PRINCIPLES OF MONEY AND UANKINC] 
 
 which, when rates for call loans are persistently below 2 per cent, arc 
 naturally desirous of reducing bankers' lialances swollen by the 
 receipt of idle funds from all quarters. But the redemption of the 
 notes does not secure contraction. All the banks, more particularly 
 the country banks and those of the smaller cities, make haste to 
 reissue notes, thus setting free an equivalent amount of money, 
 which in the absence of local demand is shipped to the money centres 
 for the sake of the interest to be had from the city banks. There is 
 a sort of endless chain, the working of which can be interrupted 
 only by the discontinuance of the present practice of paying interest 
 on bankers' deposits. Were that inducement removed, our bond- 
 secured notes would prove to be susceptible of a considerable measure 
 of contraction. Even if the banks continued to reissue their notes 
 as regularly as at present, contraction would still take place. An 
 equivalent amount of money would be locked up in the banks, since 
 they would reap no advantage from sending it to the money centres. 
 Moreover, even if it were sent thither the pressure on city banks to 
 force a demand for loans by the offer of low rates would be removed 
 and they would doubtless maintain a higher reserve level. 
 
 94. CLEARING-HOUSE LOAN CERTIFICATES AND EQUALI- 
 ZATION OF RESERVES^ 
 
 By O. M. W. SPRAGUE 
 
 In 1893 and in 1907 the clearing-house loan certificate was the 
 only device resorted to in order to secure the adoption of a common 
 policy by the banks. In 1873, as on earlier occasions when its use 
 was authorized, provision was also made for the equalization of the 
 reserves of the banks. Thus in 1873 the Clearing-House Association, 
 in addition to the customary arrangements for the issue of loan 
 certificates, adopted the following resolution: 
 
 That in order to accomplish the purposes set forth in this agreement 
 the legal tenders belonging to the associated banks shall be considered and 
 treated as a common fund, held for mutual aid and protection, and the 
 committee appointed shall have power to equalize the same by assessment 
 or otherwise at their discretion. For this purpose a statement shall be 
 made to the committee of the condition of such bank on the morning of 
 every day, before the opening of business, which shall be sent with the 
 exchanges to the manager of the Clearing-House, specifying the following 
 
 ' Adapted from "Proposals for Strengthening the National Banking Sj^stem," 
 Quarterly Journal of Economics, XXIV (1909-10), pp. 232-39.
 
 RELATIONS BETWEEN BANKS 189 
 
 items: (i) Loans and discounts. (2) Amount of loan certificates. 
 
 (3) Amount of United States certificates of deposit and legal-tender notes. 
 
 (4) Amount of deposits, deducting therefrom the amount of special gold 
 deposits. 
 
 Two fairly distinct powers were given the clearing-house com- 
 mittee: the right to issue clearing-house certificates, and control 
 over the currency portion of the reserves of the banks. This machin- 
 ery was devised (according to tradition) after the crisis of 1857 by 
 George S. Coe, who for more than thirty years was president of the 
 American Exchange National Bank. The purpose of the certificate 
 was to remove certain serious difhculties which had become generally 
 recognized during that crisis. The banks had pursued a }X)licy of 
 loan contraction which ultimately led to general suspension, because 
 it had proved impossible to secure an agreement among them. The 
 banks which were prepared to assist the business communit\- with 
 loans could not do so because they would be certain to be found with 
 unfavorable clearing-house balances in favor of the banks which 
 followed a more selfish course. The loan certificate provided a means 
 of payment other than cash. What was more important, it took 
 away the temptation from any single bank to seek to strengthen itself 
 at the expense of its fellows and rendered each bank more wilUng 
 to assist the community with loans to the extent of its power. 
 
 But in addition to the arrangement for the use of loan certificates 
 provision was also made for what was called the equalization of 
 reserves. The individual banks were not, of course, equally strong in 
 reserves at the times when loan certificates were authorized. From 
 that moment they would be unable to strengthen themselves, aside 
 from the receipt of money from depositors, except in so far as tlie 
 other banks should choose to meet unfavorable balances in cash. 
 Moreover, withdrawals of cash by depositors would not fall cvenlv 
 upon the banks. Some would find their reserves falling away rapidly 
 with no adequate means of replenishing them. The enforced sus- 
 pension of individual banks would pretty certainly involve the other 
 banks in its train. Finally, it would not be impossible for a bank 
 to induce friendly depositors to present checks on other banks directly 
 for cash payment, instead of deix)siting them for collection and 
 probable payment in loan certificates, through the clearing-house. 
 The arrangement for equalizing reserves therefore diminished the 
 likelihood of the Imnks working at cross-]niri)oses — a danger which the 
 use of clearing-house certificates alone cannot entirely remove.
 
 IQO PKINCri'LKS OF MONKY AND BANKING 
 
 These arrangements had enabled the banks to pass through 
 periods of severe strain in i860 and in 1861 without suspension. In 
 both instances the use of the loan certificate was followed immedi- 
 ately by an increase in the loans of the banks, and in a short time 
 by an increase in their reserves. The stipulation in 1873 was more 
 serious, and, as events proved, the reserve strength of the banks, while 
 sufBcient to carry them through the worst of the storm, was not 
 enough to enable them to avoid the resort to suspension. 
 
 In 1884, the next occasion when clearing-house loan certificates 
 were issued, the opposition to the provision for the equalization of 
 reserves was so widespread that it does not appear that it was even 
 formally considered. The ground for this opposition can be readily 
 understood. In 1873 the practice of paying interest upon bankers' 
 deposits was generally regarded with disfavor. Only twelve of the 
 clearing-house banks offered this inducement to attract deposits; 
 but by this means they had secured the bulk of the balances of out- 
 side banks. It was in meeting the requirements of these banks that 
 the reserves of all the banks were exhausted at that time. The non- 
 interest-paying banks entered into the arrangement by the equali- 
 zation of reserves in expectation of securing a clearing-house rule 
 against the practice of paying interest on deposits. But their efforts 
 had resulted in failure. Some of them had employed their reserves 
 for the common good most reluctantly in 1873, and the feeling 
 against a similar arrangement in 1884 was naturally far stronger and 
 more general. Moreover, the working of the pooling agreement in 
 1873 had occasioned heartburnings which had not entirely dis- 
 appeared with the lapse of time. It was believed, and doubtless 
 with reason, that some of the banks had evaded the obligations of the 
 pooling agreement. It was said that some of the banks had encour- 
 aged special currency deposits so as not to be obliged to turn money 
 into the common fund. Further, as the arrangement had not included 
 bank notes, banks exchanged greenbacks for notes in order either to 
 increase their holdings of cash or to secure money for payment over 
 the counter. Here we come upon an objection to the pooling arrange- 
 ment which doubtless had much weight with the specially strong 
 banks, although it is more apparent than real. In order to supply 
 the pressing requirements of some banks, others who believed that 
 they would have been able to meet all the demands of their depositors 
 were obliged to restrict payments. That such an expectation would 
 have proved illusory later experience affords ample proof. When
 
 RELATIONS BETWEEN BANKS 
 
 191 
 
 a large number of the banks in any locality suspend, the others cannot 
 escape adopting the same course. But in 1884 the erroneousness 
 of the belief had not been made clear by recent experience. 
 
 The New York, banks weathered the moderate storms of 1884 and 
 1890 without suspension by means of the clearing-house loan certifi- 
 cate alone, and in the course of time all recollection of the arrange- 
 ment for the equalization of reserves seems to have faded from the 
 memory of the banking community. 
 
 In 1893 only a small part of the balances between the banks was 
 settled in certificates at first; but by the end of July practically all 
 balances were settled in that way and suspension followed at once. 
 In 1907 all the banks having unfavorable balances, with but one 
 important exception, took out certificates on the first day that their 
 issue was authorized, and suspension was then for the first time 
 simultaneous with their issue. 
 
 The connection between suspension and the use of clearing-house 
 loan certificates as the sole medium of pa\Tnent between the banks is 
 simple and direct. The bank which receives a relatively large amount 
 of drafts and checks on other banks from its customers cannot pay 
 out cash indefinitely if it is unable to secure any money from the 
 banks on which they are drawn. So long as only a few banks are 
 taking out certificates and the bulk of payments are made in money 
 no difficulty is experienced; but as soon as all the banks make use 
 of that medium tlie suspension of the banks which have large num- 
 bers of correspondents soon becomes inevitable. The clearing-house 
 loan certificate was a device which the banks themselves had adopted, 
 and they had failed to provide any means for preventing partial 
 suspension as the result of its use. That the arrangement for equal- 
 izing the reserves, adopted in 1873, would have availed to prevent 
 suspension on subsequent occasions is highly probable, indeed a 
 practical certainty. 
 
 The reserve situation in 1893 and 1907 was by no means desper- 
 ate at the time of suspension. In 1893 the New York banks were in 
 what was for them an unusually strong condition at the beginning of 
 the disturbance, having early in June a cash reserve exceeding 30 
 per cent of their net deposits. A succession of banking failures in the 
 West and South led to heavy withdrawals from New York during 
 the latter part of June and the beginning of July. Then followed 
 a lull and money began to be returned to New York. During the 
 third week of July banking failures were renewed in the West and
 
 192 PRINCIPLES OF MONEY AND BANKING 
 
 South and the drain was resumed. The positively unfavorable aspects 
 of the situation were altogether similar to those of the previous month, 
 with the one further circumstance of a reduced cash reserve in New 
 York. On the other hand, additional means with which to meet the 
 situation were becoming available. At the end of July gold imports 
 in large amounts had been arranged. Foreign purchases of our 
 securities were heavy, reflecting increasing confidence in the repeal 
 of the silver-purchase law. Arrangements had also been made which 
 would certainly lead to a considerable increase in the issues of bank 
 notes during August and September. Notwithstanding all these 
 favorable circumstances the New York banks suspended, during the 
 first week of August, when they still held a cash reserve of $79,000,000, 
 more than 20 per cent of their deposit liabilities. 
 
 In 1907 the New York banks restricted payments when they still 
 held a cash reserve of more than $220,000,000 and when the reserve 
 ratio was also above 20 per cent. Both in 1893 and in 1907 suspen- 
 sion was not a measure of last resort taken after the banks had entirely 
 exhausted their reserves and when there were no means of securing 
 additional cash resources. Moreover, after cash payments were 
 restricted the policy of the banks was unlike that adopted in 1873 
 in that the banks did not make further use of their reserves; they 
 hoarded them and added to their amount, thus unduly prolonging 
 the period of suspension. 
 
 95. SUBSTITUTES FOR CASH IN THE PANIC OF 1907' 
 By a. PIATT ANDREW 
 
 Reports from the 145 largest "independent" cities show that during 
 the disturbance of 1907 in at least 71, or nearly half, resort was made 
 by the banks to clearing-house loan certificates, clearing-house checks, 
 cashiers' checks payable only through the clearing-house, or other 
 substitutes for legal money; in 20 others the larger customers of the 
 banks were asked to mark their checks "payable only through the 
 clearing-house"; and in at least one other, where these practices 
 were not pursued, the size of checks that would be cashed was 
 restricted. Roughly speaking, in two-tliirds of the cities of more than 
 25,000 inhabitants the banks suspended cash payments to a greater 
 or less degree. 
 
 ' Adapted from "Substitutes for Cash in the Panic of 1907," Quarterly Journal 
 of Economics, XXII (1907-8), 501-16.
 
 RELATIONS BETWEEN BANKS 
 
 193 
 
 Seven dillerent types of substitutes for cash have been distin- 
 guished, though some of them closely resemble each other. There 
 were also many variations in the various individual types. 
 
 A. The familiar expedient of issuing clearing-house loan certifi- 
 cates in denominations ranging from $500 to $20,000 for use in settling 
 interbank balances has never been resorted to upon such a scale as in 
 1907. During the panic of 1893 eight cities were re])orted to have 
 employed them; but during the disturbances of 1907 they were used 
 by no less than 42. The aggregate issue of regular clearing-house 
 certificates in the entire country during the panic of 1907 was 238 
 millions, or nearly three and a half times the total of 1893. 
 
 B. During the panic of 1893, for the first time clearing-house 
 associations issued certificates in currency denominations to be used 
 by the banks in paying their customers. Their issue, however, was 
 practically confined to the southeastern states. In the panic of 1907 
 Georgia was again, as in 1893, the center for emergency circulation 
 of this sort, what were called "clearing-house certificates" being 
 issued in at least 21 Georgia towns; but devices of that name were 
 also put in circulation in many other parts of the country, and not 
 infrequently even by banks of small towns, where no clearing-house 
 had ever existed. In such cases they were issued under the auspices 
 of temporary committees of the local banks, which accei)ted and held 
 the collateral olTered to guarantee their redemption. 
 
 These small certificates, like the large ones, were secured by 
 collateral deposited with the clearing-house committee, and were 
 practically guaranteed by all the associated banks, in that these 
 banks agreed to accept them at par for the sum named. The descrip- 
 tion of collateral in most cases was a general aflirmation that "this 
 certificate is secured by the de]>osit of approved securities." But 
 sometimes there was more detail, as in Portland, Oregon, where it 
 was asserted that the banks have deposited " notes, bills of exchange, 
 and other negotiable instruments secured by wheat, grain, canned 
 fish, lumber actually sold, and other marketable products, and bonds 
 approved by the committee," etc.; or in the case of Charleston, South 
 Carolina, where there were said to be deposited "securities of double 
 the value of this certificate, or bonds of the United States or of the 
 State of South Carolina, or of the city of Charleston, or of the city of 
 Columl)ia, 10 per cent in excess thereof." 
 
 Many of the certificates were elaljorately engraved and were 
 shaped and colored so as to rescmljle ordinary bank or government
 
 194 PRINCIPLES OF MONEY AND BANKING 
 
 notes. In denomination they usually ranged from $i to $20, but in 
 some cases, as in Montgomery, Alabama, they were issued for con- 
 venient sums all the way from 25 cents to $50. 
 
 The compilation here presented, though very incomplete, records 
 an issue of $23,831,813 of such devices in the course of the panic of 1907. 
 
 C. Identical with these certificates in character and function, 
 though differing in form, were the clearing-house checks issued in a 
 number of cities. Like the certificates, they were issued by the 
 associations to member banks upon the deposit of approved securities. 
 Like them, they were accepted for deposit in any of the banks, but 
 were payable only through the clearing-house. They were also in 
 currency denominations, and were often quite as elaborately engraved, 
 so as to resemble currency. The one peculiarity which distinguished 
 them from certificates was that instead of merely certifying indebted- 
 ness on the part of the clearing-house association, they took the form 
 of checks drawn on particular banks, and signed by the manager of 
 the clearing-house. In Chicago a bank desiring such checks deposited 
 with the clearing-house a corresponding amount of the ordinary loan 
 certificates of large denominations and received the checks in cur- 
 rency denominations in exchange. They were also issued in Cleve- 
 land, Milwaukee, Youngstown, South Bend, and some smaller cities. 
 Our record includes $12,060,248 of such issues. 
 
 D. In spite of the provisions of the National Bank Act, that no 
 national banking association shall issue "any other notes to circulate 
 as money than such as are authorized by the provisions of this title," 
 a large number of national banks issued what were practically cir- 
 culating notes in the form of cashier's checks in convenient denomi- 
 nations. In spite also of the 10 per cent tax upon any notes issued 
 by state banks, similar devices were issued freely and without hin- 
 drance by some of those institutions as well (e.g., in Superior, Wis- 
 consin). These checks usually purported to be "payable to bearer," 
 but they were "payable only through the clearing-house," or "in 
 exchange," or, as the phrase sometimes went, "in clearing-house 
 funds." While in the southeastern states it was common for the 
 banks in the small towns to issue conjointly what they called "clearing- 
 house certificates," in smaU towns of the Middle West the "cashier's 
 checks" of the individual banks were much more common. Some- 
 times these cashier's checks, like clearing-house certificates and 
 clearing-house checks, were secured by the deposit of approved 
 collateral with a committee of the clearing-house.
 
 RELATIONS BETWEEN BANKS 
 
 195 
 
 E. Another variety of currency issued during the panic were the 
 New York drafts in denominations of $i and upward, issued by the 
 banks of Birmingham, Alabama, and which were used for pay-rolls 
 and general circulation in that locality. They were really cashier's 
 checks drawn on New York, but were drawn against actual balances 
 held by particular New York correspondents. They were payable 
 through the New York clearing-house, and were not otherwise secured, 
 yet they appear to have circulated in and about Birmingham to the 
 extent of millions of dollars without difficulty. 
 
 F. In a few instances the currency issued by tlie banks took the 
 form of negotiable certificates of deposit in convenient denommations. 
 Sometimes these certificates asserted that a particular person or 
 company made the deposit, as in the case of the Bank of Winston- 
 Salem, North Carolina. Sometimes the assertion was altogether 
 general, as in the example from Berkeley, California. In some cases 
 they bore interest, and were payable after the e.xjDiration of a certain 
 period; in others they were immediately acceptable by the issuing 
 bank through tlie clearing-house, and in such cases they bore no 
 interest. 
 
 G. Last of all among the emergency devices were the pay checks 
 payable to bearer drawn by bank customers upon their banks in 
 currency denominations and used in all parts of the country- in pay- 
 ment of wages and in settlement of other commercial obligations. 
 These checks were generally "payable only through the clearing- 
 house," but they dilTcred from those which have as yet been con- 
 sidered, in that they were not a liability of the clearing-house 
 association or of the bank on which they were drawn, but of the 
 firm or coqDoration for whose benefit tliey were issued. 
 
 The pay-check system reached its largest development in Pitts- 
 burgh, where during the panic some §47,000,000 were issued, much 
 of which was in denominations of Si and $2. Their issue involved 
 much more labor to the clearing-house, to the banks, and to the corjx>- 
 rations using tliem tlian the issue of clearing-house checks would have 
 caused, for most of them were rushed back to the bank witJiin a week 
 or ten days, and new checks had to be issued in their stead. 
 
 Pay checks were also issued by railroads, mining companies, 
 manufacturers, and storekeepers in a largo number of cities. Shops 
 and stores and places of amusement in the neighborhood of their 
 issue generally accepted them, and it is indeed suqirising, consitloring 
 their variety, their liability to counterfeit, and their general lack of
 
 196 
 
 PRINCIl'LKS ()¥ MONKY AND H.WKIXd 
 
 security, how liLlle rtvil diflicully was experienced in j^elling them to 
 circulate in Heu of cash, 
 
 SAMPLES OF CLEARING-HOUSE CURRENCY 
 
 
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 Sav n?ANOsc;o njKARrxG llorsi 
 
 
 
 
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 VI 
 
 THE REGULATION OF BANKING 
 
 Introduction 
 
 Banking was one of the first forms of business to be subjected to 
 government regulation. Because of the almost universal demand for 
 the accomodations which banking affords and because of the tremen- 
 dous power that is inherent in the control of loanable funds, the 
 business has long been regarded as quasi-public in its nature. Indeed, 
 there are many who hold that all banking should actually be con- 
 ducted by the government itself; that to permit private interests to 
 control the supply of bank currency and credit is to foster one of the 
 most vicious of monopolies. But while it has long been recognized 
 that banking is a public-service calling, we have not yet completely 
 abolished private banking; for in many states it is still possible for 
 individuals to engage in a general banking business subject to no 
 regulation whatever. The numerous disastrous failures of such insti- 
 tutions in recent years, however, have fortunately developed an 
 agitation against them which promises to result in their complete 
 elimination from our banking system. Many of the large investment 
 banking institutions are also unchartered and largely unregulated; 
 but since they are for the most part controlled by men of large finan- 
 cial experience, and since they deal chiefly with other large financial 
 interests, these private institutions do not present the same problems 
 as do those which are designed to serve the public by means of a 
 general banking business. The problems that arise in connection 
 with the private investment banks are related to the possible misuse 
 of the great power they wield through the control of the resources 
 of capital. 
 
 A second reason for government supervision of banking is that it 
 is necessary for the control of the system as a whole in its relation to 
 the entire economic structure of society. As has been indicated in the 
 preceding chapter, individual banks cannot escape relations with other 
 banks, their own prosperity and safety being fundamentally linked 
 with that of the system as a whole; and as a consequence the banks 
 themselves have been forced, in the absence of adequate government 
 
 197
 
 lyb I'RlNCll'LKS OF MONEY AND BANKING 
 
 regulation, to develop machinery for controlling themselves as a sys- 
 tem. At certain points, however, and at certain times, as has been 
 noted, these voluntary associations have proved inadequate to 
 the requirements of the situation. The government has therefore 
 been looked to for the direction and control of banking — in the inter- 
 ests of the banks themselves and through them of the entire economic 
 system. 
 
 Governmental supervision of banks has assumed various forms. 
 In addition to requiring banks to incorporate, and thereby to con- 
 form with certain general provisions with reference to organization, 
 the government has laid down numerous regulations pertaining to the 
 character and extent of loans and the amount and nature of the 
 reserve that must be held against deposits. Both national and state 
 governments have developed regulations along these lines, and in the 
 main they have based them on principles that have been developed 
 out of many years of actual banking experience. 
 
 The most important feature of government regulation of banking, 
 however, has been in connection with the issue function. While 
 deposits have gone largely unregulated, bank notes have from the 
 very beginning of our banking history been subject to numerous 
 regulations. This special attention to the issue function is due in 
 part to the fact that it was long the primary form in which bank 
 obligations were manifested, in part to the fact that bank notes pass 
 from hand to hand without regard to the character of those who 
 hold them and thereby form a part of the money supply of the country 
 quite as much as do gold and silver or government paper, and in 
 part to the fact that we must look to the notes to give flexibility to 
 the currency system as a whole. 
 
 The regulation of note issues has taken many forms, and the 
 discussions of the principles underlying bank currency have been as 
 vigorous and prolonged as the controversy over bimetallism. There 
 are two fundamental problems in connection with the regulation of 
 bank notes: that of making them safe and that of making them elas- 
 tic, that is, responsive to the varying requirements of trade. Until 
 the Civil War we had no national system of banking, and as a whole 
 our bank currency was in a chaotic condition, lacking safety, uni- 
 formity, and elasticity. Here and there sound banking principles 
 were being developed: in numerous instances bank notes were 
 reasonably secure; in some sections of the country there was devel- 
 oped more or less uniformity; and now and then a measure of
 
 THE REGULATION OF BANKING 199 
 
 elasticity was found. But on the whole the situation could hardly 
 have been worse. 
 
 The national banking system made a great step in advance when 
 it eliminated all state bank issues and gave us a safe and uniform 
 national currency based on the deposit of government bonds in the 
 federal Treasury. But this system of bond-secured notes did not 
 provide for an elastic medium of exchange; and since we depend upon 
 bank notes to furnish us virtually all the elasticity we have in our 
 monetary system (aside from deposit currency), one of our most 
 serious banking problems has remained for solution until the present 
 day. It is believed, however, that the federal reserve system has 
 solved the problem of an elastic currency. 
 
 A. Governmental Supervision 
 
 96. INCORPORATION' 
 By WILLIAM A. SCOTT 
 
 It is generally admitted nowadays that no one ought to be per- 
 mitted to engage in the banking business without special authority 
 from the state. The reason for this is the need, in the interests of 
 safety, of the public regulation and supervision of this business. 
 Experience has shown that this can best be secured by the require- 
 ment of incorporation through special charter or in accordance with 
 general laws, such charters or laws prescribing the conditions under 
 which the business must be carried on. Without incorporation it is 
 difficult, if not impossible, to separate banking from other lines, and 
 consequently to know precisely who are engaged in it and how it is 
 being conducted. Under such conditions certain persons are sure to 
 escape the regulations prescribed by law and designed for tli£ safe- 
 guarding of the public. 
 
 As between incorporation by special charter or under general 
 laws, practice in the past has varied widely, but general banking laws 
 are fast becoming the rule the world over. They prevent favoritism 
 and secure uniformity. Only in the cases of highly specialized insti- 
 tutions of peculiar character, like the great central banks of Europe, 
 is the special-charter method of incorporation likely to survive. The 
 diilerentiation of the banking from the general incorporation laws 
 of a state, that is, those applicable to other kinds of industrial 
 
 ' Adapted from Money and Banking, pp. 131-32- (Henry Holt & Co., 1910.)
 
 200 PRINCII'LKS OF MONEY ANI> HANKING 
 
 corporations, is also desirable on account of the peculiarities and 
 public importance of this business. Such diflerentiation is rapidly 
 becoming the rule in this country. 
 
 The need of incorporation applies to savings banks and trust 
 companies quite as much as to commercial banks. Incorporation 
 may be either under state or national law. 
 
 97. ADOPTION OF THE SYSTEM OF FREE BANKING^ 
 By HORACE WHITE 
 
 The system of free banking, or incorporation under the provisions 
 of a general law, had its origin in the State of New York in 1838, 
 although the State of Michigan had something resembling it a year 
 earlier. Prior to that time bank charters in New York were a part of 
 the spoils system of politics. Accustomed as we are to the spoils 
 system of today, it nevertheless sounds oddly to read that bank 
 charters were granted by Whig and Democratic legislatures only to 
 their own partisans. Not only was this the common practice, but 
 the shares in banks, or the rights to subscribe to them, were parceled 
 out by political "bosses" in the several counties. Of course, cor- 
 ruption flourished in such soil. The people became exasperated by 
 the indecencies witnessed at Albany. A reaction in favor of equal 
 rights was the natural consequence, and out of this came the Free- 
 Banking Law of 1838. Under this law the Comptroller was authorized 
 to issue circulating notes to any association organizing itself as a 
 bank and depositing stocks of the United States, or any State, or 
 bonds secured by mortgage on real estate of a certain specified grade. 
 The system had a bad start. Within five years after the law was 
 passed twenty-nine banks that had organized under it failed, and the 
 deposited securities realized only seventy-four cents on the dollar of 
 the outstanding notes. This led to changes in the law by which all 
 State bonds were ruled out except those of New York, and the mort- 
 gage securities were keyed up to a high pitch, but still not high enough. 
 
 The free-banking system made Uttle headway in other eastern 
 states, but it was quite generally adopted in the West during the 
 decade just preceding the Civil War. While the early experience 
 under free banking was generally disastrous, the fault lay, not in 
 the general incorporation law, but in the inadequate regulation of 
 the conditions under which banks thus organized were operated.* 
 
 ' Adapted from "National and State Banks," Sound Currency (1894-95), H, 7-8. 
 ^Eor other features of the free-banking system, see selection No. 121. — Editor.
 
 THE REGULATION OF BANKING 20l 
 
 98. THE KIRBY PRUATE BANK FAILURE* 
 
 The Kirby Savings Bank, at 5019 South Ashland Ave., was closed 
 when its proprietor, Dr. William P. Kirby, was adjudged insane by 
 the county court. The assets discovered amounted to SS56, of which 
 $206 is cash; liabiUties totaled $150,000. Possession of the defunct 
 bank was effected by the receiver only with the assistance of the police, 
 a woman reported to be the owner of the building endeavoring to 
 prevent its seizure by means of a double-barreled shotgun. The 
 cashier of that bank, who is a relative of Dr. Kirby, is but seventeen 
 years old. He was arrested on a charge of passing a worthless check 
 for $1,000, as agent for Dr. Kirby. 
 
 The Kirby Savings Bank was a private institution. It was 
 conducted by a physician, who may or may not have had some knowl- 
 edge of banking methods. Regardless of his fitness or unfitness to 
 run a bank, he was free to put up a sign and in\'ite deposits, no super- 
 vision or inspection of any kind being apphed to the concern by the 
 pubUc authorities. 
 
 99. THE POSITION OF PRIVATE BANK DEPOSITORS' 
 
 A private banker never having become incorporated or subjected 
 to supervision or control of either the national, state, or municipal 
 government occupies exactly the same position in the eyes of the 
 law as does a private citizen. The assets and liabilities of his busi- 
 ness are a part of his personal estate and are included with those of 
 his private ventures. Consequently when he dies the debts of not 
 only his banking business, but of all of his private enterprises as well, 
 are liens against his estate, which, like that of any other individual, 
 must go through the probate court for settlement. The depositors 
 of the bank share pro rata with the other creditors of the estate, for 
 it has been held by the courts that the relation existing between a 
 bank and a depositor is simply that of debtor and creditor, which does 
 not entitle the latter to a preference in the distribution of the assets. 
 
 While the banking business conducted by a private indivi:iual 
 may be perfectly solvent, the liabilities of his other private ventures 
 may be of such magnitude as to render his estate as a whole insolvent. 
 In other words, the depositors in his bank are obliged to stand the 
 losses suffered by him in businesses absolutely foreign to that of bank- 
 ing. Onl}- the other day we read of a saloonkeeper who died while 
 
 'Quoted from the Chicago Banker, November 9, 1912, p. 15- 
 
 ' From an editorial in the Chicago Banker, December 2r. 1Q12, pp. 16-17.
 
 202 PRINCIPLES OF MONEY AND BANKING 
 
 running a private bank as a side line; he also conflucted a barber 
 shop and a steamship agency. If any of these prove to be a failure, 
 it is more than probable that the depositors will be very much dis- 
 appointed when the estate is wound up. The same situation would 
 prevail should the insolvent decide to avail himself of the emergency 
 defense of insanity. 
 
 One does not have much sympathy for educated people so careless 
 as to place their funds in unstable banking institutions; he cannot, 
 however, help but feel for the ignorant foreigners who have come to 
 this "land of promise" with the hope and expectation of accumulating 
 a little something as a provision for the proverbial "rainy day." To 
 them the word "bank" has a certain trust-inspiring significance, 
 creating a feeling of the utmost faith and confidence. They do not 
 know that there is any distinction between state, national, or private 
 banks; they place all banks in one class — as a place where they can 
 deposit their savings and withdraw them any time they so desire. 
 They do not know anything about the probate court nor of other 
 creditors. Is it any wonder, then, that they sometimes resort to 
 attempted acts of violence when the savings gleaned as a result of 
 years of toil are denied them ? 
 
 The argument has been advanced on behalf of the private bankers 
 opposing supervision in Illinois that because conditions are "rotten" 
 in Chicago it does not necessarily follow that they are in the rest of 
 the state — all of which will be conceded; but why should a private 
 banker on a perfectly solvent basis and who is conducting his business 
 honestly oppose an opportunity to show to his cUents the exact status 
 of his bank and the manner in which the money of its depositors 
 is being used, thereby taking them into his confidence ? The answer is 
 that he doesn't. It is the crafty, hard-hearted, dishonest man who is 
 willing to allow a lot of simple, uneducated people to contribute to 
 his support with money earned by the sweat of their brows, while 
 he in return gives them nothing but the "honor and prestige" of 
 being depositors of his "bank." There is a vast difference, too, 
 between "personal" and bank taxes. 
 
 loo. THE NATURE OF GOVERNMENT SUPERVISION OF 
 NATIONAL BANKS 
 
 "There shall be established in the Treasury Department a separate 
 Bureau, which shall be charged with the execution of all laws passed by 
 Congress relating to the issue and regulation of national currency secured
 
 THE REGULATION OF BANKING 203 
 
 by United States bonds and, under the general supervision of the Federal 
 Reserve Board, of all Federal Reserve notes, the chief ofTicer of which 
 Bureau shall be called the Comptroller of the Currency and shall perform 
 his duties under the general directions of the Secretary of the Treasur)-." 
 (National Bank Act of June 3, 1864, as amended by the P^ederal Reserve 
 Act of December 23, 1915.) 
 
 "The Comptroller of the Currency, with the approval of the Secretary 
 of the Treasury, shall appoint examiners who shall examine every member 
 bank at least twice each calendar year and oftener if considered necessary. 
 The examiner making the examination of any national bank, or of any 
 other member bank, shall have power to make a thorough examination of 
 all the affairs of the bank and in doing so he shall have power to administer 
 oaths and to examine any of the officers and agents thereof under oath." 
 (Federal Reserve Act, December 23, 1913.) 
 
 "It is the duty of the Comptroller to make an annual ref)ort to Congress, 
 giving a summary of the condition of every national bank together with 
 such special information as may be regarded of imp)ortance, whether in 
 connection with national or state banks." (National Bank Act of June 3, 
 1864.) 
 
 "Every association shall make to the Comptroller of the Currency not 
 less than five reports during each and every year, .... which reports shall 
 exhibit, in detail and under appropriate heads, the resources and liabilities 
 of the association at the close of business on any past day to be by him 
 specified, and shall transmit such reports to the Comptroller within five 
 days after the receipt of a request or requisition therefor from him. And 
 the Comptroller shall have power to call for special reports from any par- 
 ticular association whenever in his judgment the same shall be necessary. 
 Any association failing to make and transmit any such report shall be 
 subject to a penalty of one hundred dollars for each day after five days 
 that such bank shall delay to make and transmit any report." (National 
 Bank Act, as amended March 3, 1869.) 
 
 "A Federal Reserve Board is hereby created which shall consist of seven 
 members, including the Secretary of the Treasury and the Comptroller of 
 the Currency, who shall be members ex officio, and five members appointed 
 by the President of the United States by and with the advice and consent 
 of the Senate." (Federal Reserve Act, December 23, 1913.) 
 
 The Federal Reserve Board has very broad powers, the chief of 
 which are as follows: 
 
 a) To examine at its discretion the accounts, books, and affairs of each 
 Federal reserve bank and of each member bank and to require such state- 
 ments and reports as it may deem necessary. The said board shall publish 
 once each week a statement showing the condition of each Federal reserve 
 bank and a consolidated statement for all Federal reserve banks.
 
 204 PRINCIPLKS OF MONEY AND BANKING 
 
 b) To permit, or, on the affirmative vote of at least five members of the 
 Reserve Board, to require Federal reserve banks to rediscount the dis- 
 counted paper of other Federal reserve banks at rates of interest to be 
 determined by the Federal Reserve Board. 
 
 c) To suspend for a certain limited period any reserve requirements 
 specified in this Act: Provided, That it shall establish a graduated tax 
 upon the amounts by which the reserve requirements of the Act may be 
 permitted to fall below the level specified. 
 
 d) To regulate through the Bureau under the charge of the Comp- 
 troller of the Currency the issue and retirement of Federal reserve notes. 
 
 e) To exercise general supervision over said Federal reserve banks. 
 (Adapted from Federal Reserve Act, December 23, 1913.)' 
 
 loi. THE MENACE IN GOVERNMENT CONTROL OF BANKING^ 
 By ELMER H. YOUNGMAN 
 
 The banking bill introduced in the Senate on June 26, 1913, is 
 in my judgment one of the most dangerous and unsound measures 
 ever introduced in the American Congress. 
 
 It virtually proposes to concentrate fifteen or twenty billions of 
 banking credit under the control of a Federal Reserve Board, thus 
 making possible what is now impossible under our system of numerous 
 small banks with their system of ownership and management widely 
 scattered, namely, the complete domination of credit by pohtical 
 bosses or by the financial powers to whom such bosses are subservient. 
 
 What a rich prize that would be as a bone of contention between 
 rival political bosses and rival financial interests — the power to con- 
 trol credit and fix the rate of discount in every corner of the country. 
 Outside the Russian Empire, where the Imperial Bank is a department 
 of the State Treasury, no such politico-financial despotism exists. 
 
 This country does not need and will not tolerate a central bank 
 (even if called a National Reserve Association) dominated by big 
 bankers and those whom they control. 
 
 Nor does it need nor will it tolerate a political bank (even if called 
 a Federal Reserve Board) controlled by the ruUng poUtical party. 
 
 The founders of this Government sought to avoid placing the 
 purse and the sword in the same hands. The Secretary of the Treas- 
 ury and the Comptroller of the Treasury make their reports to the 
 Speaker of the House of Representatives, not to the President. But 
 
 ' For full treatment of Federal Reserve System see chapter vii. 
 ' Adapted from an editorial in the Bankers' Magazine, (New York, LXXXVII, 
 1915), 138-40.
 
 THE REGULATION OF B.\NKING 205 
 
 here is a proposal to place in the hands of the President the power to 
 give or to withhold credit, w^hich has been aptly defined as the life- 
 blood of commerce. 
 
 Such a power is too great to be placed in the hands of any man, 
 and its exercise by him, even through his appointees, might become a 
 source of grave danger. 
 
 Neither should this power be entrusted to a central bank (or 
 National Reserve Association, so-called) nor to any other board of 
 any kind whatsoever and howsoever composed; for no board — who- 
 ever its members may be- can sit at Washington or any other place 
 and determine justly or accurately the amount of credit, the kind of 
 credit, or the rate that should be paid for such credit. 
 
 Nor can these matters possibly be determined by Congress, nor 
 by any department of the Government. 
 
 The only one who has sure knowledge of the needs of currency 
 and credit is the man or the community that w-ants it. 
 
 The only sure means of testing the demand for currency and 
 credit is the bank, which has its finger on the business pulse of 
 individuals and the community. Banks are the scales that weigh the 
 credit of communities and individuals, and are therefore the onl\- 
 instruments that can properly gauge and supply the demand for 
 credit and currency. 
 
 When I take my note to a bank, and lay it down, I buy credit 
 from the bank, just as when I go to the fish-dealer and lay down my 
 money I buy fish. For the bank to dictate to me (and whether this 
 is done by the Government, a board, or any other agency whatever, 
 it comes to the same thing) what I should get in exchange for my 
 note — that is, the kind of credit or money I should have, whether 
 bank notes, coin, paper certificates, or checks-^would be just as imper- 
 tinent as for the fish-dealer to try to give me codfish when I asked for 
 mackerel. 
 
 Whether I shall obtain credit at all is a matter between me and 
 my banker, because he is the only man in the community wh<> has 
 the machinery for testing my ability to pay. 
 
 What kind of credit (or currency) I shall swap my own credit 
 for, that is my affair purely. 
 
 All that the Government ought to do is to see that the notes are 
 properly engraved so as to render counterfeiting dilVicult, and to see 
 that the banks provide the coin and tin- ni.u liiiurv for promptly 
 paying their notes.
 
 2o6 PRINCIPLES or MONEY AND BANKING 
 
 The power to determine the amount and kind and rate of credit 
 is one which no community should yield up to outside domination. 
 President Wilson's proposal to set credit free is really a proposal to 
 enslave it — to take it away from twenty-five thousand banks, with 
 their many thousand shareholders, their millions of depositors, and 
 their thousands of officers, each in touch with local conditions, vitally 
 interested in local prosperity, and in close personal touch and sym- 
 pathy with those who deal with the banks, and to place this power 
 in the hands of a poHtical board at Washington. 
 
 I02. GOVERNMENT VERSUS PRIVATE CONTROL^ 
 
 The opposition of the bankers to the Administration Currency 
 Bill is the old cry against government regulation which the railways 
 made ten years ago, when the Hepburn Rate Bill was passed. 
 
 The bill provides that general control of the entire national bank 
 system shall be in the hands of seven men, three of the seven being 
 the Secretary of the Treasury, the Comptroller of the Currency, and 
 the Secretary of Agriculture. The other four members are to be 
 chosen by the President of the United States, with the advice and 
 consent of the Senate. It is mandatory upon the President that at 
 least one of his four appointees shall be an experienced banker. 
 
 Here, then, is the whole trouble. The case is that of private 
 control versus Government control. To ask that the bankers shall 
 select the Federal Reserve Board is like asking that the railways 
 shall choose the Interstate Commerce Commission. It is perhaps 
 not unnatural that the bankers should be reluctant to let the control 
 pass out of their hands; but is it quite fair for them to claim that 
 what is proposed is to substitute "political control" for business 
 control ? 
 
 If the Federal Reserve Board, appointed by the President, with 
 the advice and consent of the Senate, is "pohtical," then the Inter- 
 state Commerce Commission is "pohtical" and the Supreme Court is 
 "poUtical." 
 
 If the American people can trust the President to choose their 
 Supreme Court for them, the bankers can certainly trust him to 
 choose the Federal Reserve Board. A President who would prosti- 
 tute the Federal Reserve Board to his own base political and partisan 
 advantage would endeavor to so prostitute the Supreme Court and 
 would deserve to be impeached. 
 
 'Adapted from an editorial in the Outlook, CIV (1913), 794-95-
 
 THE REGULATION OF BANKING 207 
 
 No political, social, financial, or industrial system was ever devised 
 without its most important element being confidence in human honor. 
 If the American system ever reaches a point where the President 
 cannot be trusted, in the full light of publicity and with the super- 
 vision of the United States Senate, to appoint our Federal judges, our 
 interstate commerce commissioners, and our bank supervisors, it will 
 be time to abandon that system and to adopt some form of benevolent 
 despotism. 
 
 B. Regulation of National Bank Operations 
 103. CAPITAL, SURPLUS, .VXD SILVREHOLDKRS' LLVBILITY 
 
 No association shall be organized within a city the population of which 
 exceeds fifty thousand persons with a capital of less than $200,000. In 
 cities having less than fifty thousand and more than sue thousand inhabit- 
 ants the capital must be at least $100,000. In any place with a population 
 of not more than six thousand the capital may be only $50,000. In any 
 place the population of which does not exceed three thousand, banks may 
 be organized with a capital of only $25,000. (Adapted from National 
 Bank Act as amended March 14, 1900.) 
 
 "Each association shall, before the declaration of a [semiannual] 
 dividend carry one-tenth part of its net profits of the preceding half-year 
 to its surplus fund until the same shall amount to twenty per centum of 
 its capital stock." (National Bank Act, June 3, 1864.) 
 
 "The stockholders of every national banking association shall be held 
 individually responsible for all contracts, debts, and engagements of such 
 association each to the amount of his stock therein, at the par value thereof 
 in addition to the amount invested in such stock." 
 
 "No Federal Reserve Bank shall commence business with a capital 
 stock of less than $4,000,000. . The stockholders [the member banks] 
 shall be entitled to receive an annual dividend of six per cenluni on the 
 paid-in capital stock, which dividend shall be cumulative. After the afore- 
 said dividend claims have been fully met, all the net earnings shall be paid 
 to the United States as a franchise tax, except that one-half of such net 
 earnings shall be paid into a surplus fund until it shall amount to forty 
 per centum of the paid-in capital stock of such bank." (Federal Reserve 
 Act, December 23, 1913.) 
 
 104. RKSERVE REQUIREMENTS 
 
 For the purpose of the regulation of reserves the national banks 
 are divided into the following classes: (i) Banks in Central Reserve 
 Cities — New York, Chicago, and St. Louis; (2) Banks in Reserve
 
 2o8 PRINCIPLES OF MONKY AND BANKING 
 
 Cities — aljout fifty of the larger cities of the country; (3) Country 
 Banks — that is, in the remaining cities and towns. Each class has 
 separate reserve requirements as follows: 
 
 1. "A bank in a central reserve city shall hold and maintain a reserve 
 equal to eighteen per centum of the aggregate amount of its demand 
 deposits, that is, deposits payable on less than 30 days' notice, and five 
 per centum of its time deposits, in its vaults 6/18 thereof, in the Federal 
 reserve bank 7/18, the balance of said reserve shall be held in its own vaults 
 or in the Federal reserve bank, at its option." 
 
 2. "A bank in a reserve city shall hold and maintain reserves equal 
 to fifteen per centum of the aggregate amount of its demand deposits and 
 five per centum of its time deposits." Five-fifteenths of the reserve must 
 be in each bank's own vaults, 6/15 in the vaults of the Federal reserve 
 bank. The other 4/15 may be held in either place or in both. 
 
 3. "A bank not in a reserve or central reserve city shall hold and 
 maintain reserves equal to twelve per centum of the aggregate amount of 
 its demand deposits, and five per centum of its time deposits." Four- 
 twelfths of the reserve must be in each bank's own vaults, 5/12 in the vault 
 of the Federal reserve bank. The other 3/12 may be held in either place 
 or in both. 
 
 The former reserve requirements for national banks were: (a) for 
 banks in central reserve cities 25 per cent; (b) for banks in reserve cities 
 25 per cent, of which 1/2 might be deposited in central reserve city national 
 banks; (c) for country banks 15 per cent, of which 3/5 might be deposited 
 in reserve city and central reserve city national banks. 
 
 "In estimating the reserves required by the Federal Reserve Act, the 
 net balance of amounts due to and from other banks shall be taken as the 
 basis for computation. To this amount should be added the individual 
 demand deposits. Balances in reserve banks due to member banks shall 
 be counted as reserves." 
 
 "Whenever any bank has less than the minimum reserve required by 
 law, it shall not increase its liabilities by making any new loans or discounts 
 otherwise than by discounting or purchasing bills of exchange payable at 
 sight, nor make any dividend of its profits until the required reserve has 
 been restored. If in thirty days the bank does not make good its reserve 
 in lawful money the Comptroller may, with the concurrence of the Secretary 
 of the Treasury, appoint a receiver to wind up the business of the associa- 
 tion." 
 
 The Federal Reserve Board is empowered " to suspend, for a period 
 not exceeding thirty days, and from time to time to renew such suspension 
 for periods not exceeding fifteen days, any reserve requirements specified 
 in this Act: Provided, That it shall estabhsh a graduated tax upon the 
 amount by which the reserve requirements of this Act may be permitted 
 to fall below the level specified."
 
 THE REGULATION OF BANKING 209 
 
 105. REASONS FOR LKGAL REGULATION OF RESERVES' 
 By CPLVRLES A. CONANT 
 
 The requirement that a bank shall keep in standard money a 
 certain fixed proportion of its note issues is one of the regulations 
 of banking which has been sanctioned by practical experience. It 
 is a requirement capable of justification upon grounds of public policy. 
 The natural tendency of banking, even where there is no intentional 
 violation of sound principles, is toward the reduction of cash reserves 
 to the lowest limit. This is a natural result of the law of marginal 
 utility and of unrestricted competition. The law of marginal utility 
 leads the community as well as the banker to employ paper as largely 
 as possible as a medium of exchange in preference to coin, because of 
 the economy in the amount of capital required and in transportation 
 and handling. The practical determination of how much coin shall 
 be retained within the country as a basis of security for notes lies 
 with the banker, where there is no restriction upon denominations of 
 notes, because the public will continuously accept notes and rely 
 upon the banker to keep a sufficient metallic reserve. The necessity 
 for regulation is less obvious where the entire volume of notes is 
 issued by a single great bank than in the case of competing banks, 
 because such a bank is not, as a note issuer at least, subject to com- 
 petition, and its accounts attract more attention. 
 
 Where competition enters into the problem between banks other- 
 wise upon equal footing, the bank which runs closest to the danger 
 line in respect to the size of its metallic reserve, without actually 
 impairing public confidence, will make the largest profits. The tend- 
 ency, therefore, among competing banks will be to reduce their 
 metallic reserves within narrower and narrower limits, until thev may 
 fall below the limits of safety. This is the natural result of the effort to 
 render services to patrons for the lowest charges and earn profits for 
 the bank by keeping at the minimum the amount of idle capital 
 invested in reserves. The rectitude of any one banker, or even a 
 combination of bankers, will not guard against the improper reduc- 
 tion of reserves under the stress of competition, unless such a com- 
 bination is strong enough to discredit the more reckless bankers 
 among depositors and other patrons. The chances will favor the less 
 prudently managed banks, because of their facilities for reducing 
 charges for their services and attracting patrons until the bankers 
 
 ■Adapted from Principles of Money and Banking, IT, 71-73- (Copyright 
 by Harper & Brothers, 1905.)
 
 2IO PRINCIPLES OF MONEY ANiJ BANKING 
 
 of greater prudence are driven from business by the fall of their rate of 
 profit below the normal return upon capital. 
 
 This process is almost certain to go on in a state of economic free- 
 dom, even though there is no conscious abandonment of sound banking 
 principles. The more daring banks, especially if they are younger 
 and smaller than the conservative ones, will keep only the reserve 
 required for meeting ordinary demands, and will rely on the older 
 and more prudent banks to aid them with their stronger reserves in 
 case of unexpected demands. This will be still more the case if the 
 larger banks are in the commercial centers and constitute the natural 
 support of the smaller banks. Where no regulation existed, however, 
 and pre-eminently where no one bank was large enough to feel the 
 responsibiUty of sustaining the credit of the entire banking system, 
 the tendency would be toward reducing the reserves of even the 
 central banks to the minimum of safety under ordinary conditions. 
 Reserves in such banks would be larger than in country banks, but 
 not adequate to meet unusual demands. This reduction of the reserve 
 to the danger line would, moreover, while there was no marked 
 adverse movement of the precious metals, pass unobserved except 
 by a few students, whose warnings would attract little attention 
 until a serious emergency arose. 
 
 The danger of such gradual impairment of the reserves would be 
 much greater when there was no minimum limit prescribed by law or 
 custom than if such limit existed. The awakening to the fact that 
 metallic reserves were inadequate to sustain business and credit 
 would finally come at a time when country banks had reduced their 
 reserves to the form of deposits in commercial centers and the banks 
 in the commercial centers had reduced their reserves to a point which 
 permitted the extension of little aid to their country' correspondents. 
 At such a moment the failure of a few country banks might carry 
 with it the collapse of the whole banking structure, as one institution 
 after another discovered that it was leaning upon a broken reed in 
 relying upon other banks, and the banking and business community 
 suddenly had revealed to them in a flash the slender foundation upon 
 which credit rested. 
 
 io6. RESTRICTIONS ON LOANS 
 
 o) It shall be lawful for any such [banking] association to purchase, 
 hold, and convey real estate as follows: 
 
 First. Such as shall be necessary for its immediate accommodation 
 in the transaction of its business.
 
 THE REGULATION OF BANKING 211 
 
 Second. Such as shall be mortgaged to it in good faith by way of 
 security for debts previously contracted. 
 
 Third. Such as shall be conveyed to it in satisfaction of debts previously 
 contracted in the course of its dealings. 
 
 Fourth. Such as it shall purchase at sales under judgments, decrees, 
 or mortgages held by such association, or shall purchase to secure debts 
 due to said association. (National Bank Act, June 3, 1864.) 
 
 Such associations shall not hold the possession of any real estate 
 under mortgage, or hold the title and possession of any real estate purchased 
 to secure any debts due to it for a longer period than five years. (National 
 Bank Act, June 3, 1864.) 
 
 "Any national banking association not situated in a central reserve 
 city may make loans secured by improved and unencumbered farm land, 
 situated within its Federal reserve district, but no such loan shall be made 
 for a longer time than five years, nor for an amount exceeding fifty per 
 centum of the actual value of the property offered as security. Any such 
 association may make such loans in an aggregate sum equal to twenty-five 
 per centum of its capital and surplus or to one-third of its time deposits, 
 and such banks may continue hereafter as heretofore to receive time 
 deposits and to pay interest on the same." (Federal Reserve Act, Decem- 
 ber 23, 1913.) 
 
 The Federal Reserve Board shall have power from time to time to add 
 to the list of cities in which national banks shall not be permitted to make 
 loans secured upon real estate in the manner described in this section. 
 (Federal Reserve Act, December 23, 1913.) 
 
 b) To one person or corporation: The total liabilities to any association, 
 of any person, or of any company, corporation, or firm for money borrowed, 
 including, in the liabilities of a company or firm, the liabilities of the several 
 members thereof, shall at no time exceed one-tenth part of the amount of 
 the capital stock of such association actually paid in and unimpaired and 
 one-tenth part of the unimpaired surplus fund, provided that the total of 
 such liabilities shall in no event exceed thirty per centum of the capital 
 stock of the association. But the discount of bills of exchange drawn in 
 good faith against actually existing values, and the discount of commercial 
 or business paper actually owned by the person negotiating the same, shall 
 not be considered as money borrowed. (National Bank Act, as amended 
 June 22, 1906.) 
 
 c) On security of own stock: No association shall make any loan or 
 discount on the security of the shares of its own capital stock, nor be the 
 purchaser or holder of any such shares, unless such security or purchase 
 shall be necessary to prevent loss upon a debt previously contracted in 
 good faith; and stock so purchased or acquired shall, within six months 
 from the time of its purchase, be sold or disposed of at public or private 
 sale; or, in default thereof, a receiver may be appointed to close up the 
 business. (National Bank Act, June 3, 1864.)
 
 212 PRINCIPLES OF MONEY AND BANKING 
 
 107. OBJECTIONS TO LOANS ON REAL ESTATE' 
 
 The prohibition against loans on real estate is a feature of the 
 National Banking Law which has been much criticized in some quar- 
 ters; and as evidence that this restriction upon the powers of the 
 national banks is unreasonable and unnecessary, it is urged that 
 real estate is the best kind of security; that savings banks, trust 
 companies, and insurance companies are authorized to make such 
 loans; and why, therefore, should not the national banks be permitted 
 to do the same ? But, by the great majority of bankers, the restriction 
 is deemed wise and salutary. The objection to real estate security is 
 not to its sufficiency, but to the kind. As the obUgations of the banks 
 are largely payable on demand, it is necessary that the securities 
 it holds should be readily convertible into money; and while a mort- 
 gage upon real estate may be good security, it cannot be made imme- 
 diately available, in case of an emergency. Personal securities of 
 the kind usually taken by banks can be quickly assigned and promptly 
 realized upon; but the transfer of any interest in real estate is always 
 attended with more or less delay. It has not infrequently been the 
 case that banks have been compelled to suspend when their assets 
 were more than sufficient to pay their debts simply because a large 
 portion of the assets were real estate securities, upon which it was 
 impossible to realize at the proper time. In the case of insurance 
 companies, trust companies, savings banks, and similar corporations 
 there is not the same necessity for having the assets in a convertible 
 form, but it is rather desirable that a large portion of the investments 
 shall be of a more or less permanent character; and, therefore, real 
 estate loans are well adapted to their purpose. 
 
 108. ARGUMENT FOR LOANS ON REAL ESTATE* 
 By O. M. W. SPRAGUE 
 
 For banks all of whose obligations are payable upon demand the 
 real estate loan, quite regardless of its safety, is wisely considered 
 unsuitable. Such loans are commonly wanted by borrowers for a 
 considerable period of time, and therefore they cannot readily be 
 
 ' Adapted from Digest of National Banking Lazvs, p. 28. (A. S. Pratt & Sons, 
 1908). 
 
 = Adapted from "Proposals for Strengthening the National Banking System," 
 Quarterly Journal of Economics, XXIV (1909-10), 204-5.
 
 THE REGXJLATION OV HAN KIM. 213 
 
 reduced in amount even by an individual bank. In other words, they 
 are not liquid. But the importance of this quality in all its assets 
 disappears when a bank begins to acquire time or savings deposits 
 as well as those payable on demand. 
 
 Some of the advantages which the banks would derive if they 
 were able to lend on real estate are so evident that they require 
 little more than mere mention. It would give them more of the most 
 profitable kind of business, that which has its origin in the neighbor- 
 hood of the bank. The immediate return is generally greater than can 
 be secured from the employment of funds in the money centers or in 
 the purchase of paper from note brokers. Moreover, in fostering the 
 growth of wealth and population in its locality a bank is laying a 
 soUd foundation for the future expansion of its own business. Finally, 
 the ability to lend on real estate will often enable a bank to secure 
 valuable customers who would otherwise go elsewhere. It has been 
 the unpleasant experience of many a national banker to be obliged 
 to refuse a loan to a would-be borrower who has nothing but real 
 estate to offer as security and see him enter a neighboring state bank 
 or trust company where there was no legal obstacle to the transaction. 
 Relations once established are pretty certain to continue even after 
 the borrower has security which falls within the provisions of the 
 national law. 
 
 In order that such loans may be made with safety, however, it 
 is necessary to establish time savings departments, segregating the 
 deposits, 
 
 109. CAUSES OF NATIONAL BANK FAILURES' 
 
 Sixty per cent of the failures of national banks were caused 
 by violations of the national banking laws; 23 per cent were caused 
 by injudicious banking; 13 per cent by shrinkage in values and gen- 
 eral stringency in the money market, while 4 per cent resulted from 
 the failure of large debtors and other minor causes. 
 
 Criminal violations of law caused about 37 per cent of the failures, 
 23 per cent being caused by fraudulent management, 7 per cent by 
 defalcations, and 7 per cent were wTecked by tlie cashier or other 
 employee. Excessive loans caused 20 per cent of the failures and 
 heavy investments in real estate or mortgages about 3 per cent. 
 
 ' Adapted from Report of Comptroller of the Currency, 191 1, p. 27-
 
 214 
 
 PRINCin.KS OK MONKY AND HANKING 
 
 The followini^ Uiblc shows tlic number and percentage of insolvent 
 national banks classified according to causes of failure from 1865 to 
 October 31, 191 1: 
 
 Causes of Failure 
 
 Criminal violations of law: 
 
 Defalcations 
 
 Fraudulent management 
 
 Wrecked by cashier or other employee 
 
 Other violations of law: 
 
 Excessive loans 
 
 Investments in real estate and mortgages 
 
 Other causes: 
 
 Injudicious banking 
 
 Shrinkage in values 
 
 Depreciation of securities 
 
 Failure of debtors 
 
 Closed by or in anticipation of run 
 
 Receiver appointed after voluntary liquidation 
 
 Cause not indicated 
 
 Total 
 
 Number 
 
 Per Cent 
 
 36 
 
 6.96 
 
 117 
 
 22.63 
 
 35 
 
 6.77 
 
 107 
 
 20.70 
 
 14 
 
 2.71 
 
 119 
 
 23.01 
 
 50 
 
 9.67 
 
 17 
 
 3 29 
 
 12 
 
 2.32 
 
 4 
 
 .78 
 
 3 
 
 ■58 
 
 13 
 
 •58 
 
 S17 
 
 100.00
 
 THE REGULATION OF B.\NKING 
 
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 THE REGULATION OF BANKING 217 
 
 III. SUMMARY OF LEGISLATION AFFECTmC STATE BANKS* 
 By JOHN FRANKLIN EBERSOLE 
 
 The prevailing requirements for state banks may be sketched in 
 their main outlines. The minimum capital required for state banks 
 varies from nothing to $50,000 in the different states. In the South 
 and West the requirement is less than the $25,000 required for na- 
 tional banks. Some twenty states require but $10,000 or less. In 
 twenty-nine of the thirty-seven states and territories which reciuire a 
 minimum under a general law, the amount is graded according to 
 population. In most of these states $25,000 is the maximum, though 
 several require $100,000. As compared with the national-bank mini- 
 mum of $25,000 for towns of less than 3,000 population, three states 
 have higher, seven states have the same, and seventeen have lower 
 requirements. As compared with the national-bank requirement of 
 $50,000 for places of 3,000 to 25,000 population, over three-fourths 
 of the states which prescribe a fixed capital have lower requirements. 
 None of the states require more; in several they require much less. 
 For cities of 25,000 to 150,000 three-fourths of all the states have 
 lower requirements than the national-bank requirement of $100,000. 
 
 This difference in the amount of capital required is one of the 
 noteworthy contrasts between national and state legislation, and 
 this difference exists not in legislation only. Sbcty-two per cent of 
 the 11,319 state banks in operation on April 2S, 1909, had less than 
 $25,000, and 27 per cent had capital ranging between $10,000 and 
 $15,000. A few states show some lack of banking ideals in permitting 
 an authorized capital larger than the paid-in requirements, undue 
 prolongation of the paying in of capital, and the payment of subscrip- 
 tions to capital in things other than "cash" or "money of the United 
 States." 
 
 The national-bank act requires one-tenth of net earnings to be 
 set aside annually toward a surplus fund until it amounts to one-fifth 
 of the capital. Nineteen states have this rule; seven states have 
 more stringent provisions; Virginia has a lower requirement, and 
 seventeen states do not require, by general law, such a surplus accumu- 
 lation. In addition to this surplus fund added to capital, most stales 
 follow the national-bank act in providing for the double liability of 
 shareholders. In nineteen states the sliareholdcrs are responsible 
 
 'Adapted from "The Relation of State to National Banks," Proccfdings of 
 Ihe American Academy of Political and Social Science, I (191 1), 286-90.
 
 2l8 PRINCIPLES OF MONEY AND BANKING 
 
 "equally and ratably and not for another." In fourteen states the 
 shareholders are liable "jointly and for each other." Sixteen other 
 states are more lenient, imposing no statutory liability whatever. 
 
 With reference to the regulation of loans the state banking laws 
 are in general more liberal than the federal law. The national-bank 
 act limits the amount of any single liabihty due a national bank to 
 one-tenth of its capital and surplus and to 30 per cent of its capital 
 stock. With the exception of two states the state banking laws are 
 far more liberal. Some twenty- two states allow from 15 per cent to 
 30 per cent of capital and surplus as the limit to each individual 
 liability to a bank, and ten states have no limitations whatever. 
 
 The national-bank act permits an excess if it consists of advances 
 on bona fide bills of exchange and commercial paper actually owned 
 by the negotiator. The state laws, in addition to these, make excep- 
 tions in favor of loans on real estate mortgages (six states) ; loans on 
 bills of lading and warehouse receipts (eight states) ; loans on collat- 
 eral security (fifteen states), and loans approved by a vote of the 
 directors (four states). This greater liberality may be accounted for 
 by the smaller size of most of the state banks and the difl&culty of 
 enforcing restrictions. Even in the national system enforcement is 
 not easily accomplished, for as late as September, 1909, over one 
 thousand banks (or 15 per cent of the total) voluntarily reported 
 excessive loans. Several of the eastern states have recently set Umi- 
 tations as to the amount of any one loan irrespective of the individual's 
 liability. 
 
 Another important contrast between national and state banks is 
 the power conferred upon the latter and denied the former to loan 
 upon real estate. A few states limit the amount to be put into real- 
 estate loans. The prevaiHng practice is to limit these loans to 50 
 per cent of the capital or capital and surplus. A few place the limit 
 at from 15 per cent to 40 per cent of the assets, and some at 20 per 
 cent of the loans. State laws define the character of these loans 
 as to the location of the property, the character of the lien, or the 
 proportion which the value of the real estate must bear to the amount 
 of the loan. Holdings of real estate are limited to a five-year duration 
 following a foreclosure sale. 
 
 These real-estate loans are a larger proportion of the total loans 
 in the smaller towns and cities. And "notwithstanding the disad- 
 vantages of real estate as a convertible asset, the power to loan on 
 the security of real estate is a valuable one to many of the state
 
 THE REGULATION OF BANKING 219 
 
 banks." On April 28, 1909, 20.6 per cent of the total loans and dis- 
 counts of state banks were based upon security of this character. 
 In so far as the deposits of state banks are time deposits, this form of 
 lending cannot be troublesome, though it is not suitable for active 
 commercial banks in large centers of population. 
 
 The third great difference between national and state banks is 
 found in the reserve requirements. Here, also, the state banks and 
 territorial laws are the more lenient. At present (1910) in ten states 
 no reserve whatever is required for incorporated banks. In fourteen 
 states a reserve is required only against demand deposits. The 
 amount ranges from 10 per cent to 25 per cent, although 15 per cent 
 is commonly required. In six other states a lower reserve is required 
 against time deposits than against demand deposits. This ranges 
 from 4 per cent to 15 per cent for time deposits as against 15 per 
 cent to 25 per cent for demand deposits. In sharp contrast the na- 
 tional-bank act requires from 15 per cent to 25 per cent of all deposits. 
 This example has been followed in but thirteen states. 
 
 Not only in regard to the amount of reserve, but also as to its form, 
 do state and national laws differ. All states permit balances in other 
 banks to be counted as a part of the reserve. The amount of redeposit 
 so authorized varies from one-half to three-fourths. 
 
 A few states distinguish between the amount to be redeposited 
 of the reserve against demand and time deposits. As high as eleven- 
 fifteenths of the latter are so redeposited. 
 
 In seven states "the banks determine for themselves what part 
 of their reserves shall be cash in bank and what part shall be in the 
 form of bank balances." In four states bonds may be counted in 
 the reserve. In the choice of depositaries the state banks are practi- 
 cally unrestricted. In but five states are distinctions made between 
 the reserves required of ordinary banks and reserve agents. 
 
 112. THE FUNCTIONS OF TRUST CO.MP/\NIES' 
 By RALPH W. DAVIS 
 
 The functions of a trust company may be divided into two 
 classes: general and special. The general functions are: (i) the 
 execution of corporate trusts, (2) the execution of individual trusts, 
 (3) the care of securities and valuables, and (4) banking. 
 
 ' A(lai)tc(l from an unpublished article.
 
 220 I'RINCIPLKS OF MONEY AND BANKING 
 
 The company often acts as "trustee under corporate mortgages 
 and trust deeds, looking out for the interests of the bondholders. As 
 fiscal agent the company flispenses coupons and makes interest pay- 
 ments on bond issues and dividends of stocks. It receives funds set 
 aside as sinking funds, or when the bonds are subject to redemption 
 draws a specified amount by lot, and pays the principal. As regis- 
 trar the company authenticates certificates of stock in order to 
 prevent overissues and to reduce the chance of loss or theft. As 
 transfer agent it attends to the perfecting of transfers of ownership 
 for stock and bond issues or parts of them. As manager of under- 
 writing syndicates it issues a prospectus and markets the securities 
 of corporations which are being launched, or, if established, are issuing 
 new securities. In railroad and other reorganizations the company 
 takes a prominent part, acting both as a depository for, and as a 
 representative of, the committees which formulate and execute the 
 plans. As assignee and receiver the company acts in the same capa- 
 city for corporations as for individuals and partnerships, assisting in 
 winding up insolvent business and in conducting embarrassed ones. 
 
 The original function was the work of the present individual 
 trust department. All other functions have been added. As executor 
 appointed by will the company sees to the carrying out of the terms 
 of the will. As administrator it performs similar duties. As trustee 
 under a will it carries out the provisions of the will, investing or 
 managing the estate or particular funds in accordance with the direc- 
 tions. In this case it may hold real or personal property. As trustee 
 under deed a contract is entered into, and the title of the prop- 
 erty is vested in the company. Marria,ge settlements are often made 
 in this way. 
 
 The trust company often acts as guardian, curator, or committee 
 of estates, and in some states of persons of minor age, insane, spend- 
 thrifts, drunkards, and others not legally fit to conduct their own 
 affairs. As agent the company takes charge of property for its o\\Tier, 
 but does not have the power to sell it. As assignee the company takes 
 possession of the property assigned, for the purpose of carrying out 
 the terms of the deed of assignment, in the interest of both the assignor 
 and his creditors. As receiver appointed by court the company has 
 much the same to do as in the case of assignee. It must preserve the 
 property for the creditors. As custodian the company holds property 
 the title of which is in dispute, deUvering the same when the dispute 
 is legally settled.
 
 THE REGULATION OF BANKING 221 
 
 The company acts as representative for living or dead in practi- 
 cally every legal relation in which an individual can act. It must not 
 only keep intact the estate of which it has charge, but must safeguard 
 the interest of every beneficiary. 
 
 The special functions are life insurance, title insurance, and 
 fideUty insurance. Life insurance was formerly a part of a trust 
 company's business, but has now been delegated in large degree to 
 special life insurance companies. Title insurance is often found to 
 be one of the functions. The company insures the purchaser of 
 property because of illegal titles and guarantees the sale to be legal. 
 Fidelity insurance, which insures an individual or corporation against 
 loss by reason of dishonesty and non-performance of obligations or 
 contracts, is gradually passing into the hands of special companies. 
 
 113. THE BANKING FUNCTIONS OF TRUST COMPANIES' 
 By F. B. KIRKBRIDE ant) J. E. STERRETT 
 
 The banking functions of trust companies may include any or 
 all of the following: 
 
 The receipt of money deposits payable on demand and subject 
 to check, or payable at a fixed date, or according to special agreement. 
 Interest is usually allowed on all deposits above a fixed minimum 
 amount or on the total sum. 
 
 ^loney advances secured by the hj'pothecation of stocks, bonds, 
 Ufe insurance policies, bonds and mortgages, or other personal 
 property. 
 
 Real estate loans, secured by bond and mortgage. It is customary 
 to loan not over two-thirds of the value of improved property ; when 
 the property is unimproved, not more than half. 
 
 Discounting paper is engaged in principally by companies trans- 
 acting a commercial banking business. The purchase of unsecured 
 paper is permitted in some states where discounting is not allowed. 
 
 The purchase and sale of securities. 
 
 Trust companies sometimes guarantee issues of bonds, or at least 
 set their stamp of approval upon them. 
 
 The issue or guarantee of letters of credit antl the transaction 
 of a foreign e.xchange business. 
 
 ■ Adapted from The Modern Trust Company, p. 6. (The Macmillan Co., 1913)
 
 222 PRINCIPLES OF MONEY AND BANKING 
 
 The care of savings deposits. For this purpose a separate depart- 
 ment is usually maintained. 
 
 114. CAUSES OF THE GROWTH OF TRUST COMPANIES' 
 By clay HERRICK 
 
 Regarding the causes of the growth of trust companies, the easiest 
 thing to say is also probably the truest — that they are found in the 
 tendencies of our age and nation. The trust company marks, not a 
 revolution, but an evolution in our methods of handling financial 
 matters, and we cannot understand its development without taking 
 into account the great changes which our civilization is undergoing. 
 There is, to begin with, the accumulation of individual wealth — the 
 increase in the number of persons and families having large interests 
 to care for. A still more important influence has been the tremendous 
 increase in corporate wealth, both in number of corporations and in 
 the amounts under their control. Here are phenomena that are 
 peculiar to the United States and peculiar to this age. Nothing 
 like the huge corporations formed in recent years in the United 
 States has ever been known before since history began. To care for 
 these institutions some special agency was needed. The trust com- 
 pany proved equal to the emergency. Says one writer: "Without 
 their [the trust companies'] agency some of the transactions in mod- 
 ern corporate business would be both cumbersome and difficult. For 
 the success of schemes of reorganization of railroad interests and the 
 financing of vast industrial consolidations their intervention has 
 grown to be at least an invaluable convenience, if not altogether a 
 necessity." 
 
 Coincident with this tendency to great consolidations, the grow- 
 ing recognition among all classes of people of the value of associated 
 effort has had a marked influence in favor of trust companies. Here 
 again the trust company finds itself in harmony with the times. It is 
 an intermediary between great enterprises and the group of individuals 
 who constitute its customers. It takes the amounts, large or small, 
 contributed by the latter, in trust; and the result is a large amount 
 which it can invest in any corporate undertaking to the mutual ad- 
 vantage of all concerned. Surplus funds, useless in small amounts, are 
 
 ' Adapted from Trust Companies, Their Organization, Growth and Manage- 
 ment, pp. 31-32. (Bankers' Publishing Co., 1909.)
 
 THE REGULATION OF BANKING 223 
 
 gathered together and made to do service in enterprises that benefit 
 the whole people. 
 
 115. THE REGULATION OF TRUST COMPANIES' 
 By JOILN franklin EBERSOLE 
 
 The trust companies present some different features from the 
 state banks. While it is true that the laws concerning state banks 
 and trust companies are tending to become assimilated, certain im- 
 portant differences remain. 
 
 The trust companies are distinctly authorized to accept trusts 
 and to do a safe-deposit business in addition to general banking. 
 The majority of the states which provide for a specified capital 
 require a minimum of $100,000 or over. There is a tendency in recent 
 legislation to lower this amount. "In every state except one the 
 smallest permissible capital is as large for trust companies as for 
 state banks, if not larger; in six states it is the same; in all the others 
 it is larger." 
 
 Subscribed but unpaid capitals are permitted in fourteen states, 
 but the majority require full payment. Of the latter over half require 
 full payment as a condition for beginning business. The payment is 
 required by all but nineteen states to be " in cash " or " lawful money." 
 The accumulation of a surplus is not required in so many states for 
 trust companies as for banks. 
 
 With respect to loans, trust companies are less restricted than 
 state banks. Nine states which limit state banks do not limit trust 
 companies. 
 
 The reserve requirements for trust companies are much less than 
 for state banks. Six states and territories require no reserve what- 
 ever. Two states require reserves of trust companies but not of banks. 
 In the remaining states, trust companies are favored by being allowed 
 to count bonds as a part of the reserve, or to hold lower reserves 
 against time deposits. Recent legislation shows a tendency to increase 
 these reserves or to diminish the proportion of bonds held in them. 
 This leniency has probably been due to the different character of the 
 trust company deposits. They are largely inactive and contain i)ut a 
 small percentage of bank deposits which are subject to sudden or 
 large withdrawals. 
 
 'Adapted from "The Relation of State to National Banks," Proceedings of 
 the American Academy of Political and Social Science, I (1911), 291-92.
 
 224 PRINCIPLES OF MONEY AND BANKING 
 
 ii6. TRUST COMPANY FAILURES' 
 By clay HERRICK 
 
 Statistics regarding failures and suspensions of trust companies 
 are not obtainable prior to the year 1893. From 1893 to 1907 the 
 percentage of failures (or the ratio of the number of companies failing 
 to the number of companies in business) was about as follows for the 
 different types of banking institutions: 
 
 National banks 5 of i per cent 
 
 State banks iVo of i per cent 
 
 Savings banks iVo of i per cent 
 
 Loan and trust companies iVo of i per cent 
 
 From these figures it appears that the proportionate number of 
 trust company suspensions was less than that of any class of financial 
 institutions except the National banks. 
 
 Regarding the losses involved in the failures, the showing of the 
 trust companies is, on the face of the figures, not so good, the losses 
 assigned to them exceeding those of the other institutions, except 
 the private banks. The figures represent, however, not the ultimate 
 losses, but the best estimates of the probable results obtainable at 
 the time. An examination of the figures for the year 1907, which 
 account for 62 per centum of the entire estimated liabilities for the 
 fifteen years, shows that they give a greatly exaggerated idea of the 
 actual losses involved. Of the 17 trust companies reported suspended 
 in 1907, at this date (November, 1908) about one-half have reopened 
 for business, while several others are being liquidated without loss to 
 depositors. 
 
 Especial interest attaches to the record of trust companies during 
 and since the panic of 1907, because it was the first severe strain that 
 has been undergone by these institutions since their great development 
 began. On the whole the record must be pronounced very satisfac- 
 tory. Although subjected to a strain that was unprecedented, their 
 record compares favorably with that of other classes of financial 
 institutions. The failures which occurred were in no sense ascribable 
 to any inherent weakness in the trust company as an institution, 
 but are accounted for in some cases by the dishonesty of ofl&cials and 
 by undue laxity of the state laws under which they operated, and in 
 others by pressure of circumstances which could not be overcome 
 
 ' Adapted from Trust Compa)ues, Their Organization, Growth and Management, 
 pp. 23-24. (Bankers' Publishing Co., 1909.)
 
 THE REGULATION OF BANKING 225 
 
 by any kind of banking institution. The same causes brought about 
 the downfall of other financial institutions, including National banks 
 and State banks in states having the best laws for their regulation 
 and control. The panic of 1907 did, however, emphasize the necessity 
 of careful and intelligent state regulation and control of trust com- 
 panies as well as of the other banking institutions. 
 
 D. The Regulation of Note Issues 
 
 (i) GENERAL PRINCIPLES 
 
 117. METHODS OF BANK NOTE REGULATION* 
 
 By FRED M. TAYLOR 
 
 The chief problems offered to the student by the bank note cir- 
 culation are these three: (i) How shall this kind of money be kept 
 at par with standard money? (2) How shall the holders of such 
 money be secured against loss should the issuing bank default on 
 payment? (3) How shall this money be given that elasticity which 
 will enable it to play well its part as that constituent in the system 
 which is depended on to adjust the stock of money to the need for 
 money ? Parity, ultimate security, and elasticity, these are the three 
 principal characteristics which wise regulation seeks to secure for the 
 note circulation. 
 
 I. THE PARITY OF BANK NOTES 
 
 In general all methods of insuring parity may be described as 
 devices whereby a guarantee is given to the note-holder that, in case 
 he cannot use the bank note in the ordinary course of trade he can 
 easily make some other disposition of it which will not involve loss. 
 Under that condition everyone is willing to become a note-holder, 
 and so is willing to accept the note at par. 
 
 The principal devices coming under this description are two: (i) 
 making the note a valid tender in some important relation, and 
 (2) providing for its easy, instant, and constant convertibility. It 
 is doubtful whether the former could ever, by itself, maintain parity. 
 Probably, however, it contributes greatly to the result when the 
 conditions for securing convertibility are inadcf|uate, as is commonly 
 the case. 
 
 But while it is a valid tender in some important relation contrib- 
 uting to maintaining the parity of notes, the only sure method of 
 
 ' Adapted from Sovic Chapters on Money, p|). 276-94. (Coi)yriKlit by the 
 author, 1906.)
 
 2 26 PRINCIPLES OF MONEY AND BANKING 
 
 securing this characteristic is to keep them easily and constantly 
 convertible. The holder of such notes must be able at all times, and 
 in practically all places, to exchange them, without material trouble 
 or expense, for standard money. As a first step toward this end the 
 issuing bank must, of course, redeem the notes over its own counter. 
 But this is not enough. Maintaining this condition is sufficient to 
 keep the notes at par in the immediate vicinity of the issuing bank; 
 but it has often proved unable to hinder those notes from circulating 
 at a discount in distant places. The ideal plan would involve a great 
 number of local redemption agencies scattered over the country, with 
 one or more central agencies for redeeming the notes taken in by the 
 local agencies. In practice, however, it is probably sufficient to pro- 
 vide for redemption at one or more important banking centers. For 
 the existence in the trade centers of an opportunity to get the notes 
 redeemed makes the banks of those centers ready to receive them at 
 par, while this fact, combined with the additional one that banks in 
 lesser places have frequent occasion to send money to the centers, 
 makes this latter class of banks quite ready to receive the notes at 
 par. Thus the maintenance of central redemption secures what is, in 
 effect, local redemption throughout the country. 
 
 In the preceding discussion of parity I have had in mind the case 
 of notes issued by a bank still solvent. But the problem of keeping 
 notes at par may also arise when the issuing bank has gone into 
 liquidation. If we suppose that, in such a case, there is no doubt as 
 to the ultimate security of the note, nevertheless that note may not 
 be generally accepted at par, may pass at more or less discount, 
 pending the completion of arrangement for making it good out of 
 the assets of the bank. 
 
 This particular case of parity, which one might designate as 
 "liquidation" parity, may be more or less adequately provided for 
 in several ways. One device, which probably contributes, at least, to 
 the desired result, is to provide that the notes of failed banks shall 
 bear interest until paid. This makes them a banking investment, 
 hence makes banks ready to accept them. Another and far more 
 effective device is requiring all banks in the system to maintain a fund, 
 known as a safety fund, from which the notes of any bank in liquida- 
 tion shall be redeemed. 
 
 A third method of securing "liquidation" parity is immediate 
 redemption by a guarantor of the notes. This is the system at present 
 in vogue in the United States. The Federal Treasury agrees to redeem
 
 THE REGULATION OF BANKING 227 
 
 out of its own funds the notes of any failed bank, recouping itself 
 by the sale of bonds or other property belonging to the bank; and 
 this redemption it undertakes just as soon as the issuing bank shuts 
 its doors. Naturally, under this condition, the notes can never go 
 below par. 
 
 II. THE SECURITY OF BANK NOTES 
 
 Considered from the standpoint of the methods employed to make 
 the notes secure, systems may be grouped into four classes: (i) Pure 
 Credit or Free Issues, (2) Regulated Credit Issues, (3) Secured 
 Issues, and (4) Guaranteed Issues. The first two of these might be 
 classed together as Asset Issues, in contrast with Secured or Guaran- 
 teed Issues. That is, no special property is set aside to secure them 
 as in the Secured Issues, nor does any institution guarantee them, so 
 that the note-holder must depend on the ordinary assets of the issuing 
 bank to insure him against loss. 
 
 A. Pure Credit Issues. — The nature of Pure Credit Issues is sug- 
 gested by the name. They rest on credit solely, the same sort of 
 credit that supports any personal note. They are free, that is, unregu- 
 lated, save as all contracts are regulated. The banker is allowed to 
 borrow other people's money by issuing his circulating notes, just as 
 he would borrow other people's money by giving an ordinary note 
 payable in ninety days, or in two years, or at the end of any definite 
 period. The whole transaction is looked on as being the business of 
 nobody except the banker and the person who accepts the note and, 
 thereby, becomes the credi4:or of the banker. If such person choose 
 to trust the banker, that is his own affair, calling for no interference 
 on the part of the state or of anyone else. 
 
 In a system like that just described security manifestly depends 
 on the promptness and thoroughness with which the rights of the 
 note-holder, under the ordinary law of contracts, are enforced. The 
 note of the banker is payable on demand. If the banker does not keep 
 the engagement, he can be forced into bankruptcy. An.xiety to avoid 
 this result would seem to insure that bankers would be at least as 
 certain as other debtors to keep their engagements, and tliat there- 
 fore the security of these notes might be left to the banker's 
 self-interest and to the legal processes ordinarily used in enforcing con- 
 tracts. Yet experience and theory alike have fairly establishctl a 
 contrary doctrine, have convinced almost all authorities that no 
 proper guarantee of the security of circulating notes is furnished by 
 the laws regulating ordinary promissory notes.
 
 22S PRINCIi*LES Ol- MONEY AND BANKING 
 
 B. Regulated Credit Issues. — Under this head arc included all 
 those systems of note issue which, while undertaking to do something 
 for the security of the notes, do not attempt to accomplish the object 
 directly, as, for example, by requiring the pledging of bonds to cover 
 them. Instead, these systems content themselves with defining in 
 one way or another the circumstances and conditions of issue, with 
 the intention of thereby increasing the probability that the notes will 
 be secure. Schemes of this sort are very numerous, and some group- 
 ing of them is almost necessary. Perhaps as convenient a classification 
 as any is one which makes five groups: viz., (a) those which try to 
 gain security by a proper placing of the power of issue, (b) those 
 which seek the end by restricting the amount of issue, (c) those which 
 restrict the circulation of the notes, (d) those which dictate with respect 
 to the assets kept by the bank, and (e) those which impose some degree 
 of government supervision. Obviously, these different methods of 
 regulation may be combined, one with another, as also with Secured 
 Issue systems, or Guaranteed Issue systems. 
 
 The method of procedure which aims to furnish security by a 
 proper placing of the right of issue gives us two cases: (i) restricting 
 the right of issue to some particular bank or class of banks, and 
 (2) restricting the right to a special department within the bank. 
 Restricting the right of issue to special banks has taken a variety of 
 forms. Sometimes the exercise of this function has been permitted 
 only to banks having special charters from the legislature. Further, 
 the legislature has granted such charters very sparingly, in France 
 to one bank only, in England and Germany to one principal one, 
 together with a few others which are permitted to play a subordinate 
 role. In other cases the right of issue has been limited to companies 
 incorporated in a certain way and acting under certain well-defined 
 conditions. In the United States the right is by indirection restricted 
 to banks organized under Federal Law. 
 
 That this plan of exercising great care in placing the right of issue 
 tends to increase the security of the notes cannot be doubted. Mani- 
 festly it diminishes the chances that this important function shall 
 pass into the hands of banks which are too loosely organized, too 
 weak, too badly managed, or too dishonest to furnish a really safe 
 note. 
 
 Restricting the right of issue to a special department is illustrated 
 by the Bank of England. It contributes to the ultimate security of 
 the notes in at least two ways. First, it in some measure frees the
 
 THE REGULATION OF BANKING 229 
 
 note from control of those persons in the bank management who are 
 under most temptation to be imprudent in extending unduly the 
 issue, since these persons will belong to the loan, rather than to the 
 the issue, department. In the second place any evasion of legal 
 restrictions with respect to the amount or conditions of issue is more 
 difficult when the issuing of notes is under the control of a separate 
 department, since such evasion would in this case require guilty 
 collusion between the responsible managers of the two departments. 
 
 The efficiency of the plan for promoting security which limits the 
 amount of issue is manifestly derived from the fact that restricting 
 the quantity diminishes the danger that an imprudent management 
 will extend its issues until bankruptcy is inevitable, or that, in case 
 of bankruptcy, the bank will find the amount of its outstanding notes 
 too great to be paid. In our day substantially every banking system 
 of importance puts limits of one or more kinds on the amount of 
 notes issued. Such limits may be direct or indirect; that is, a maxi- 
 mum may be definitely specified, or conditions of issue may be imposed 
 which by indirection limit issues. 
 
 The direct hmitations are: (a) absolute, in terms of dollars, 
 pounds, or francs; (b) relative, or proportional, to capital or other 
 factor; (c) fixed, where maximum may never be exceeded; (d) elastic, 
 where maximum may be passed under penalty of a tax. 
 
 The indirect limitations are: (a) to notes of high denominations; 
 (b) frequent redemption; (c) restricting territory in which notes may 
 circulate. 
 
 C. Secured Issue Systems. — Here are included all which attempt 
 to safeguard the note-holder by giving him a special claim on all, or 
 some, of the property owned by the issuing bank. Of such systems 
 the simplest is that which gives the note-holder a first lien on the 
 general assets of the bank. That is, should the bank fail, the note- 
 holder must be paid in full before other creditors. get anything. The 
 fitness of this device to contribute to the security of the notes is 
 plain. 
 
 Different forms of property are used for security. The general 
 choice lies between (i) special securities, such as bonds and mortgages, 
 and (2) ordinary banking assets, such as notes and bills of merchants 
 and manufacturers. If the former are decided upon, choice has again 
 to be made among bonds, stocks, and mortgages. 
 
 D. Guaranteed Issue Systems. —The essence of this sysli-ni is to 
 be found in the fact that some institution, or group of institutions,
 
 230 J'R1.\CJ1'LJ:.S or money AXJJ JiAXKIXG 
 
 outside the issuing banks becomes sponsor for that bank, guaranteeing 
 that its notes shall be paid in any and all cases. 
 
 One of the most notable examples of the Guaranteed Issue system 
 is to be found in the National Bank system of the United vStates. 
 Here the guarantor is the Federal Treasury. That is, the Federal 
 Treasury promises to redeem on sight all notes of insolvent national 
 banks, thus giving to those notes all the security which the credit 
 of a great and rich government can furnish. At the same time the 
 Treasury is fully secured against loss by several simple provisions. 
 First, it has in its possession, in lawful money, a fund belonging to the 
 bank equal to 5 per cent of the bank's circulation. Secondly, it is 
 custodian for Federal bonds belonging to the bank equal in value 
 to the total circulation. Thirdly, it has a first lien on all the other 
 assets of the bank. 
 
 III. THE ELASTICITY OF BANK NOTE CURRENCIES 
 
 In considering what are the best means for securing that the 
 notes shall possess this property of elasticity it is convenient to 
 distinguish ordinary elasticity and emergency elasticity. By the former 
 is meant the capacity to expand or contract, according to the changes 
 in need which characterize an ordinary year. By emergency elasticity 
 is meant the power to expand or contract according to the changes in 
 need which characterize a commercial crisis and the depression which 
 follows it. Each sort of elasticity needs to be studied in the two 
 phases essential to both, viz., expansibility and contractiUty. 
 
 118. THE " CURRENCY " VERSUS THE "BANKING " PRINCIPLE* 
 By N. G. PIERSON 
 
 "If," asks Lord Overstone — who was the first to proclaim the 
 currency theory — "there be no bank notes in a country, can there 
 ever be scarcity of metallic money in that country?" Would it be 
 possible, for instance, for the balance of payments of such a country 
 to become so unfavorable as to cause all the metallic money and 
 bullion to be exported. The answer is, that it would not be possible, 
 for when money is scarce its value rises and prices fall. And when 
 prices fall exports increase and imports diminish until there is suffi- 
 cient money and bullion in the country once more. A nation which 
 
 ' Adapted from The English Banking System, pp. 243-52. (National Monetary 
 Commission, 191 1.)
 
 THE REGULATION OF BANKING 23 1 
 
 does not use bank notes can never, in the long run, have too little 
 metallic money in relation to other things. It may be a poor nation, 
 certainly, but its capital will always include such a proportion of 
 coined money as shall be needful. 
 
 It is different with a country which uses bank notes as well as 
 coined money, for in such a country exportation .of the latter does 
 not necessarily cause a scarcity of money. The balance of payments 
 becomes unfavorable; considerable exports of gold take place; but 
 at the same time, by granting credit, the banks greatly increase their 
 uncovered circulation. Will prices fall in this case too?-* Will the 
 balance of payments change and cause the exported gold to return 
 to the country ? There is no reason to expect that it will, because no 
 deficiency will have arisen in the monetary circulation. In the first 
 of the two cases described the evil cures itself; in the second it 
 grows more acute. With a mixed circulation, that is, with a circula- 
 tion consisting partly of paper, the whole of the metal may disappear 
 without causing any reduction in prices. 
 
 What, then, are the means which a country using bank notes should 
 adopt in order to prevent the whole of its gold from being exported ? 
 The law should prevent the banks from substituting paper for the 
 exported metal; or, better still, it should compel them to reduce 
 their uncovered circulation in proportion to the exports of the metal. 
 Suppose the stock of money required in a country to be represented 
 by the figure loo and to consist entirely of gold; if a quantity of this 
 money corresponding to the figure 10 were to leave the country, 
 there would remain 90, consequently not enough to meet the demand, 
 and this of itself would cause prices to fall. But suppose the needful 
 stock of 100 to consist of 50 parts gold and 50 parts paper. In this 
 case, if, while 10 parts of the metallic money left the country, the paper 
 circulation were increased to 60, the total stock of money would still 
 remain at 100, and therefore suffice to meet the demand. And if a 
 second 10 parts of the metallic money were to leave the country and 
 to be followed by a third and fourth 10 parts, while the paper circu- 
 lation was increased, at first from 60 to 70, then from 70 to 80, and 
 then from 80 to 90, there would always be a sufficient stock of money 
 in the country, and the exported gold would not return. This must 
 be prevented. A deficiency in the monetary circulation must not be 
 met with paper. Measures must be adopted to prevent the possil)ility 
 of the whole of the specie and bullion being drained from a country 
 and the bank notes of that country thus becoming inconvertible.
 
 232 PRINCIPLES OF MONEY AND BANKING 
 
 Such is the currency theory; now let us examine its defects. 
 First of all it is not true that a bank invariably does wrong when it 
 supplies a deficiency in the monetary supply by issuing notes. We 
 forfeit one of the greatest advantages of a well-regulated banking 
 system when we conform strictly to the currency theory. Suppose, 
 for instance, that a crisis has occurred, and that the demand for 
 money has greatly increased in consequence. Will it not have a salu- 
 tary effect if the bank of issue is able to meet this demand, and would 
 it not be the height of folly to interfere with such action on the part 
 of the bank? Or suppose that the corn crop has failed, so that it 
 has become necessary to import large quantities of grain for home 
 consumption. Is it not an advantage in such a case not to have to 
 part at a given moment with large quantities of interest-bearing 
 bonds, or cattle, or machinery, or other necessaries, in order to pay 
 for the imports of grain and to be able to pay for them in the mean- 
 time by exporting precious metals, for which paper can be temporarily 
 substituted ? Steps must be taken to ensure the return of the exported 
 metal; but this need not be done immediately. A well-managed bank 
 always has a larger metallic reserve than it needs in ordinary times, 
 and of which it will therefore be able to spare a part in times of 
 emergency. When the time of stress has passed, the bank will gradu- 
 ally restrict its credits, thus enabling its metallic reserve to accumulate 
 once more. In the meantime it will have rendered a great service to 
 the community, for it will have mitigated the adverse effects of the 
 crop failure by enabling them to be spread over a more extended 
 period of time. 
 
 There is a second mistake in the currency theory. It is not true 
 that in a country where no bank notes are in circulation exportation 
 of specie results in an immediate fall in prices, and consequently in an 
 alteration in the balance of payments. It would be so if the bank ?totes 
 were the only possible substitutes for specie, but bank deposits also 
 serve as substitutes for specie. Bank notes and bank deposits differ 
 only in form, since both take the place of specie when they are not 
 covered by a metallic reserve. Let the needful stock of media of pay- 
 ment be represented by the figure loo, and suppose it to be made up 
 of specie and bank deposits each to the extent of 50. If specie be now 
 exported to the value of 10, but the banks at the same time grant credits 
 to their depositors to the same amount, how is the fall in prices to take 
 place which the supporters of the currency theory declare to be the 
 inevitable result of the exportation of precious metal from a country
 
 THE REGULATION OF BANKING 233 
 
 where no bank notes are in circulalion ? A circulation bank issues 
 notes payable to bearer with which people pay each other. A deposit 
 bank credits it to depositors' accounts, and the balances produced in 
 this way also constitute a medium of payment. Wherein does the 
 difference lie ? The difference, we repeat, is one of form only. 
 
 The exponents of the currency theory never discerned this. Bank 
 notes are money, they said, and bank deposits are book entries. But 
 we are not concerned here with calling notes and bank deposits by 
 their right names: the question is, what functions they perform; 
 whether both do not supply the place of specie; whether both are not 
 capable of supplying a deficiency in the specie circulation of a country 
 where the cheque is a very common medium of payment. The chief 
 error of Lord Overstone and his followers certainly lay in their not 
 having understood this clearly. Their doctrine was not founded on a 
 true conception of the bank deposit. Between the latter and the 
 bank note they sought to establish a fundamental distinction which 
 does not exist. 
 
 To the credit of their opponents, the "Banking Principle" men, 
 it must be recorded that they did not fall into this error. To them the 
 closeness of the relationship between the bank notes and the bank 
 deposit was perfectly clear, and they may be regarded as having 
 rendered a service in making it more widely known. If the contro- 
 versy between the two schools had been waged round this point alone, 
 we should not have a moment's hesitation in siding absolutely with 
 the latter. But the adherents of the "Banking Principle" have erred 
 so egregiously on another point in the controversy that we ffnd it 
 difficult to determine toward which of the two sides we feel most 
 attracted. 
 
 The point to which we allude relates to the question as to how 
 far a bank can bring itself and the community into danger by an 
 excessive issue of notes. The adherents of the "Banking Principle" 
 hold that no danger can be incurred by either so long as the notes 
 remain convertible. 
 
 Should they cease to be so, then, indeed, too large a quantity of 
 them may get into circulation, just as may happen in the case of notes 
 issued by the Government and declared legal tender by enactment. 
 Hut if the bank paper be convertible, how can it ever become redun- 
 dant ? What the public has no use for it returns to the bank, whose 
 offices are always ready to accept the paper in exchange for specie. 
 A bank can only put a definite quantity of notes into circulation;
 
 234 PRINCIPLES OF MONEY AND BANKING 
 
 any nolcs which it issues in excess of that quantity get returned to 
 it under an iroii law, as it were. This is proved by statistics. When we 
 consult them we are surprised to find how little variation there usually 
 is in the amount of notes in circulation. It was through Tooke more 
 especially that a clear light was brought to bear upon this, and his 
 conclusions have been fully verified by later investigations. There is 
 indeed a remarkable degree of regularity in the demand for bank notes. 
 We do not dispute the contention of the adherents of the "Banking 
 Principle" that so long as bank paper is convertible any quantity 
 of it issued in excess of a certain sum gets returned to the bank at once. 
 
 It is strange, however, that people should ever have imagined 
 that this constituted a safeguard against the consequences of impru- 
 dent bank management. It is precisely in the return of the notes to 
 the bank Uiat the danger lies. If the notes did not return, the bank 
 that issued them could never get into difficulties. The fact is, however, 
 that these institutions give rise to a very serious condition of things 
 if they issue notes to excess. 
 
 For how do the notes return ? By repayment of advances ? Do 
 we learn from the statistics, which Tooke and others have compiled 
 with so much care, that when a bank, by granting credit too freely, 
 issues paper in excess of the requirements of trade, the public repays 
 its outstanding loans, maturing bills are met and so fresh ones are 
 discounted, so that in this way the circulation is once more reduced ? 
 Quite the contrary: the statistics show that the redundant notes are 
 ofifered in exchange for specie or used in purchasing bullion from the 
 bank, the specie or bullion being then exported. In this way the 
 amount of the circulation continues the same, it is true, but its com- 
 ponents are no longer the same; "uncovered" is substituted for 
 "covered" circulation, and the ratio between metallic reserve and 
 note circulation becomes less favorable. 
 
 Tooke's statistics plead against him instead of for him. It is 
 just because of there being a limit to the amount of notes which a 
 bank can keep in circulation that an excessive paper issue becomes 
 possible. For the paper issue becomes excessive from the moment that 
 a disproportion exists between the amount of notes in circulation 
 and the amount of metal in reserve against them. 
 
 "The question of banks of issue will always be misunderstood, and 
 all discussion on the subject mere fencing with big words, so long as 
 people fail to realize that a bank, when issuing paper, is simply an 
 instrument in the hands of the pubhc." Thus wrote a Dutch adherent
 
 THE REGULATION 01- BANKING 235 
 
 of the "'Banking Principle'' several years ago. So far as concerns 
 the ajnninl of its circulation, a bank is undoubtedly an instrument in 
 the hands of the public; but it is not the instrument of the public 
 in the matter of the items which go to make up that amount, and it is 
 these, more especially, that one has to consider when judging whether 
 a note issue is excessive or not. 
 
 (2) HISTORICAL EXPERIENCES WITH NOTE ISSUES 
 119. THE RHODE ISLAND LAND B.VNK' 
 
 At the close of the Revolutionary War the people of Rhode Island 
 found themselves in extreme poverty and heavily burdened with 
 their share of the national debt. The war had seriously crippled their 
 trade, upon which they were mainly dependent, and in their distress 
 the people, instead of patiently waiting for relief to come by the slow 
 process of rebuilding their trade, turned to paper money for relief. 
 They began to clamor for a paper bank in 1785, and when petitions 
 for such a bank were rejected by the General Assembly, a new party 
 was organized with paper money as its chief principle. They went 
 before the Assembly again in 1786, and their petitions for a paper 
 bank were met with counter-petitions against it, signed by the mer- 
 chants of Providence, and the project was defeated again by a vote 
 of two to one. They then carried the question into the elections and 
 won a surprising victory, gaining control of the General Assembly by 
 a large majority. This body assembled in May, 17S6, and one of its 
 first acts was the passing of a law establishing a paper-money bank 
 of one hundred thousand pounds. 
 
 Every farmer or merchant who came to borrow money must 
 pledge real estate for double the amount desired. The money was 
 to be loaned to the people upon this pledge according to the appor- 
 tionment of the last tax, and must be paid into the treasury at the 
 end of the fourteen years. Great expectations were entertained by 
 the farmers of the beneficent results which were to follow upon this 
 new influx of wealth. " Many from all parts of the State made haste 
 to avail themselves of their good fortune, and mortgaged fields strewn 
 thick with stones and covered with cedars and stunted pines for 
 sums such as could not have been obtained for the richest pastures. 
 They had, however, no sooner obtained the money and sought to 
 make the first payment at the butcher's or baker's, than they found 
 that a heavy discount was taken from the face value." 
 
 ' .Vdapted from the Century Magazine, XL 1 1 (1S91), 151-5J.
 
 236 PRINCIPLES OF MONEY AND BANKING 
 
 The depreciation of the new money began lilcrally with its issue. 
 Every merchant and tradesman in the State refused to receive it for 
 its face value, and the holders of it refused to make any discount. 
 The General Assembly came to the aid of the bank and sought to 
 give its paper money full value by statutory enactment. A forcing 
 act was passed subjecting any person who should refuse to take the 
 bills in payment for goods on the same terms as specie, or should in 
 any way discourage their circulation on such terms, to a fine of one 
 hundred pounds and to the loss of his rights as a freeman. This made 
 matters worse than ever. Merchants and traders refused to make 
 any sales whatever, many of them closing their shops, disposing of 
 their stock by barter, and going out of business. In fact, money 
 almost ceased to circulate at all. ' Nearly all kinds of business was 
 transacted by barter, rents were paid in grain and other commodities, 
 and the only people who used the paper money were those who had 
 borrowed it on their land. The chief cities of the State, Providence 
 and Newport, presented a very remarkable spectacle. Half their 
 shops were closed, their inhabitants idle, and their streets animated 
 only by groups of angry and contentious men blaming one another 
 for the blight which had fallen upon their business and industries. In 
 order to retaliate upon the merchants and traders for refusing to take 
 their money, the farmers refused to bring their produce to market. 
 A famine was so imminent in Providence because of this withholding 
 of supplies that a town meeting was called to devise means for obtain- 
 ing the necessaries of life. To provide immediate relief for persons 
 in want of bread five hundred dollars was authorized to be borrowed 
 by the town council. In Newport a mob brought on a riot by attempt- 
 ing to force grain dealers to sell corn for paper money. 
 
 In August, about two months after the estabUshment of the bank, 
 affairs became so desperate that a State convention controlled by 
 the country towns adopted a report recommending the General 
 Assembly to enforce and amend the penal laws in favor of paper 
 money and advising farmers to withhold their produce from the 
 opponents of the bank. The General Assembly, convened in special 
 session for the purpose, passed an additional forcing act, which sus- 
 pended the usual forms of justice in regard to offenders against the 
 bank, by requiring an immediate trial, within three days after the 
 complaint was entered, without a jury and before a court of which 
 three judges should constitute a quorum, whose decision should be 
 final, and whose judgment should be instantly compUed with on
 
 THE REGULATION OF BANKING 237 
 
 penalty of imprisonment. The fine for the first offense was fixed at 
 from six to thirty pounds and for the second at from ten to fifty 
 pounds. "This monstrous act of injustice," says' Arnold, "was car- 
 ried through the legislature by a large majority, and the solemn 
 protest against it as a violation of every particle of moral and civil 
 right, of the charter, of the articles of confederation, of treaty obliga- 
 tions, and of every idea of honor or honesty entertained among men," 
 which a minority of the members presented, was not allowed to 
 appear on the record. 
 
 This second forcing act brought matters to a crisis. A butcher 
 in Newport was brought into the Superior Court on a charge of 
 refusing to receive paper money at par in payment for meat. A 
 great concourse of spectators attended the trial, which was before a 
 full bench of five judges. Leading lawyers appeared for both sides, 
 and their arguments occupied a whole day. Two of the judges spoke 
 against the forcing acts, and the other three were of the same mind. 
 On the following morning the formal decision of the court was 
 announced, declaring the acts unconstitutional and void, and dis- 
 missing the complaint. The wrath of the General Assembly at this 
 decision was great. A special session was at once convened, and 
 the judges were summoned, in language of incredible arrogance, to 
 appear before the Assembly to assign the "reasons and grounds" for 
 their decision. Three of the judges obeyed the summons, but as the 
 other two were detained by sickness the hearing was postponed till 
 the next session. At the next session four of the offending judges 
 were removed. Before adjourning the General Assembly prepared a 
 new act to "stimulate and give efficacy to the paper bills." This 
 was called the Test Act, and it contained one of the most remarkable 
 oaths ever prescribed to a free people. Everyone taking the oath 
 bound himself in the most solemn manner to do his utmost to support 
 the paper bank and to take its money at par. Ail persons refusing 
 to take the oath were disfranchised. Ship captains were forbidden 
 to enter or to go out of ports of the State, lawyers were not to be 
 allowed to practice, men were not to be allowed to vote, politicians 
 were not to be allowed to run for office, and members of the legislature 
 were not to be allowed to take their seats until the oath had been 
 taken. This was so stringent a measure that the General Assembly 
 was afraid to take the responsibiHty of enacting it, and after consid- 
 ering it referred it to the people of the towns for approval. Only 
 three towns in the State voted in its favor, all the others rejecting it.
 
 238 PRINCIPLES OF MONEY AND BANKING 
 
 This ended all efforts to force the people to take the money at 
 par in ordinary business transactions. The General Assembly, in 
 January, 1787, formally repealed the forcing acts, and then took the 
 first step toward the repudiation of the State debt by ordering the 
 treasurer to pay off one-fourth of it in the I)ills received for taxes, 
 that is, in the depreciated paper money, which, at that time, was 
 circulating on the basis of six to one. By successive steps of this and 
 similar kinds the entire State debt was extinguished, public creditors 
 being forced to take it on terms prescribed by the State or to forfeit 
 their claims. The last instalment of the debt was got rid of in 1789, 
 in a forced settlement, when the paper money which the helpless 
 creditors received was worth only one-twelfth as much as coin. 
 "Had a general act of insolvency," says Arnold, "relieving all debtors 
 from their liabilities and the State from its legal obligations been 
 passed in the first instance, the same end would have been more 
 speedily accomplished, and the means would not have differed very 
 
 widely from those that were actually employed It fell but 
 
 little short of repudiation." 
 
 During 1787, when the value of the paper money ranged from one- 
 sixth to one-tenth that of coin, bills in equity for the redemption of 
 mortgaged estates were filed in large numbers in the courts. The 
 Superior Court of Newport declined to try any case in which a large 
 sum was involved. Suitors came to court with paper money in hand- 
 kerchiefs, bags, and pillowcases, asking to have the holders of their 
 mortgages forced to take this at par in redemption of their lands. 
 One bag, containing fourteen thousand dollars, was brought for the 
 redemption of a single farm. But the court refused to try all cases 
 of the kind. The value of the paper money dropped steadily till 
 fifteen paper dollars were worth only one coin dollar. In August, 1789, 
 the General Assembly showed its first sign of returning reason by 
 suspending the operation of the tender law. It followed this by 
 repealing the statute of limitations, because of the depreciation in 
 the value of paper money, and by extending the time allowed for 
 the redemption of mortgages from five to twelve years. Finally, in 
 October it repealed as much of the Paper Bank act as made the bills 
 a tender at par, and debtors were authorized to substitute property 
 at an appraised value for money in discharge of debts. The act 
 which effected the repeal fixed the value of the paper bills at fifteen 
 to one. This was the end.
 
 THE REGULATION OF BANKING 239 
 
 1 20. EARLY STATE BANK NOTE ISSUES' 
 
 By DAVIS R. DEWEY 
 
 I. VOLUME 
 
 The restrictions laid down in the charters of state banks in the 
 period before the Civil War were exceedingly vague and lax, and 
 little protection was given to the currency. Many of the acts of 
 incorportation did not make specific requirements with reference to 
 the volume of notes that might be issued, but covered the point indi- 
 rectly through limitations in the amount of indebtedness, including 
 deposits. 
 
 The states were generous in their grants of indebtedness. At 
 the outset this Umitation was generally set at two or three times 
 the capital. This amounted to practically no limitation at all, at 
 least upon banks with a large capital, and admitted an issue of notes 
 out of all proportion to the specie fund. Naturally it afforded an 
 opportunity for a wide range and violent fluctuations in the amount 
 of outstanding currency, depending upon applications for discounts. 
 
 In many cases, however, particularly in the northern states, the 
 banks did not issue the legal maximum. There was a marked varia- 
 tion, also, in the amounts issued by banks in the country and those 
 in the city, the latter doing more of a discount and deposit business. 
 
 II. REDEMPTION 
 
 In the earliest charters there was no express provision made for the 
 redemption of notes, nor was there any penalty for non-redemption. 
 The issuing of notes was generally regarded as the principal object 
 of a bank's existence instead of an incidental function. The Umita- 
 tion of note issues to a certain proportion of the capital which was 
 often represented by stock notes of shareholders rather than solid 
 funds was of Uttle consequence. Practically the only security for 
 convertibility lay in the liability imposed upon stockholders, and 
 particularly upon directors, in case of failure or mismanagement. 
 Indeed, many in the earlier part of the nineteenth century considered 
 that it was improper and injurious to call upon a bank for specie in 
 payment of its bills. "Brokers who sent home the bills of country 
 banks were denounced as speculators and bloodsuckers, whose extir- 
 pation would be a public benefit." Respectable men defended the 
 
 ■Adapted from State Banking before the Civil War, pp. 53-224. (National 
 Monetary Commission, 1910.)
 
 240 PRINCIPLES OF MONICY AND BANKING 
 
 conduct of banks in interposing obstacles to the payment of their 
 notes to brokers who had bought them up to discount. A Boston 
 broker was brought before the grand jury of Vermont for demanding 
 payment in specie for the bills of one of its banks, on the complaint 
 of the attorney general that he was guilty of an indictable offense. 
 
 As a result of disastrous experience various methods were tried 
 to enforce redemption. On the one hand the public, through its 
 legislatures, gradually imposed penalties upon banks for failure to 
 honor their note obligations, and on the other hand prudent and 
 well-managed banks found it necessary, in self-defense and for their 
 mutual benefit, to establish voluntary arrangements whereby notes 
 could be promptly redeemed. Until about 1830, however, the situa- 
 tion was on the whole deplorable, particularly so in the South and 
 West; and with few exceptions the situation continued bad prac- 
 tically down to i860. During the first half of the century various 
 devices were employed by speculative banks to increase their circu- 
 lation and avoid redemption. In 18 18 a legislative committee of 
 New York enumerated some of the schemes which were thus adopted, 
 such as placing a fund in a distant bank to redeem notes, and, after 
 it became generally known that the notes were at par in that quarter, 
 issuing a new emission signed in ink of a different shade, at the same 
 time giving secret orders to the correspondent bank not to pay the 
 notes thus signed. Others issued a species of paper called "faciUty" 
 notes, not payable in money, but receivable by banks issuing them 
 in payment of debts due. Again, large accommodations were given to 
 individuals on agreement that- the borrowers should keep in circu- 
 lation a certain sum for a specified time, the notes being designated 
 by a private mark, and in case the notes were returned before the 
 date set the borrowers were to be charged with the discount on such 
 sum for the remainder of the period. To others loans were made on 
 condition that the borrowers pay their notes when due in what was 
 called current money; that is, notes of banks which were current 
 throughout the State, but not including the bank's own notes. The 
 borrower, therefore, was often obliged to pay, as the time drew near, a 
 premium in order to secure acceptable notes. 
 
 Most of these schemes bordered so closely upon fraud that they 
 had to be abandoned. Other methods, however, were employed, some 
 of which may be enumerated, as follows: 
 
 I. About 1835 it became common for banks in the North to 
 employ agents to exchange bills of one bank for notes of other banks.
 
 THE REGULATION OF BANKING 24 1 
 
 This practice was continued in Massachusetts and complained of by 
 the commissioners in a report of 1S40. The bank inspector of Ver- 
 mont, 1837, criticized the practice and characterized it as a icind of 
 piracy of one bank on another; a bank situated within reach of other 
 banks sometimes had to decide against discounting an application for 
 a loan because of the .belief that the bills would be promptly taken 
 up and sent back for redemption. This consequently forced banks to 
 seek for discounts at distant places. 
 
 2. In some States banks made their notes payable at some other 
 place than where the office was located; for example, in 18 16 the 
 Dedham Bank of Massachusetts issued three-fourths of its circulation 
 drawn on the cashier of the bank at Middletown, Connecticut. The 
 legislature promptly passed an act prohibiting the issue of notes 
 payable at other banks unless payable also at the bank of issue. 
 This act, however, did not extend to checks or drafts for sums exceed- 
 ing Sioo, and it was subsequently learned that the Dedham Bank 
 issued bills for $101 in order to avoid the penalty. In the Southwest 
 this practice became an established custom. 
 
 3. Notes were loaned on an agreement that they would not be 
 presented for redemption within a certain time. In 1839 the bank 
 commissioners of Massachusetts complained that some banks in that 
 State loaned bills at a lower rate of interest on condition that they 
 should be kept in circulation. In Connecticut the legislature in 1837 
 found it necessary to pass a law prohibiting banks from making 
 loans which involved an express agreement that the notes would not 
 be returned to the bank for redemption within a Hmited time. 
 
 4. A most common method was putting notes in circulation at 
 distant points. Its extreme form is to be found in the "Saddlebag 
 Bank" described by Niles in 1820: "A bank whose notes were carried 
 about the country in saddlebags to be exchanged with landowners 
 for their notes." In the middle of the century the practice was 
 illustrated in the development of "Wildcat banks" in the West. 
 But banks in the East were also guilty. Ill-managed banks supplied 
 brokers, shopkeepers, tavern-keepers, drivers, and workmen with 
 quantities of paper and paid them liberally for getting it off. Agents 
 carried these notes to every corner of the country, even to the British 
 provinces, and beset travelers for an exchange of bills. One broker 
 in Rhode Island put oil in one year more than $200,000 of the notes 
 of a speculative bank, mostly in one-dollar bills. In 1840 the com- 
 missioners of Connecticut complained that several of the banks made
 
 242 PRINCIPIJiS OF M(JNi:V AND IJANKING 
 
 discounts upon an understanding thai the notes were to be put in 
 circulation at a distance. Branch banks in the South employed this 
 method to a considerable degree. 
 
 After 1837 the question of having an adequate specie basis to 
 support circulation became a matter of common discussion. Prac- 
 tically the only provisions relating to the holding of specie were those 
 requiring original payments in gold and silver of a certain portion of 
 the capital stock before the bank began business, but as a rule 
 banks did not retain this coin after operations were once begun. 
 Another indirect requirement was that which prescribed a penalty 
 in case a bank refused or delayed redemption of bills. In these 
 provisions it will be observed, however, that there was no specification 
 of keeping on hand a fixed amount. 
 
 The experience of Massachusetts may be taken as fairly typical 
 of the Northern states. The joint committee on banks and banking 
 reported that it would be unconstitutional to impose upon banks the 
 requirement that they should keep on hand 10 per cent in specie, as 
 this would be a new burden not contemplated in the original charters. 
 In 1850 the subject was again investigated by the legislature, but a 
 committee thought that application of a definite rule was too difficult 
 to determine; there was a great variation in the amount of specie 
 kept by individual banks; in Plymouth County it varied from 16 to 
 24, and in Norfolk from 6 to 30 per cent. In 1855 the bank commis- 
 sioners reported that the banks kept too little specie; coimtr}' banks 
 with a capital of more than $26,000,000 had but about $1,000,000 in 
 specie, and the city banks with a capital of $33,000,000 had an aver- 
 age of only about $3,000,000. In the next year the commissioners 
 again referred to the subject and noted that the banks had not 
 improved their position: " We continue to feel surprised that judicious 
 men connected with banks still continue to speak with indifference 
 of the item of specie." In 1858 an act was passed requiring the banks 
 to keep on hand in specie 15 per cent of their aggregate liabiUty for 
 circulation and deposits. Banks outside of Boston, however, could 
 count as specie their balances in other banks, not bearing interest, 
 which could be applied to the redemption of bills. Under this proviso 
 a country bank was not obHged to keep a dollar in its own vaults. 
 
 In 1 86 1 the average holding for both notes and deposits was 7.5 
 per cent for the country banks and 21 per cent for the banks of Boston. 
 
 Although there was little legislation in States south of New York 
 on this subject, the need of a better protection to the circulation
 
 THE REGULATION OI- BANKING 243 
 
 through the holding of coin was frequently referred to by the bank 
 commissioners and legislative committees. Not, however, until 1S60 
 was there any specific requirement as to specie holdings by banks 
 in Pennsylvania, and in the law then passed only 8 per cent in specie 
 or its equivalent was demanded. Virginia passed an act in 1837 pro- 
 viding that banks should have one-fifth of their notes in specie and 
 forbade a bank to make any loan when the reserve fell below this 
 limit. This ratio was observed in subsequent legislation. 
 
 In 1838 the bank commissioners of Mississippi advised that the 
 banks should have $1 in specie for every S3 in circulation and deposits. 
 Louisiana had the credit of taking the most advanced position of all 
 the States in her reserve requirements for banks; for many years the 
 Louisiana State Bank maintained a specie holding of one-third its 
 total responsibilities. In 1838 the associated banks of New Orleans 
 agreed to carry, in 1S39, specie holdings of one-third their aggregate 
 circulations and deposits in specie, while a sum equal to the remaining 
 two-thirds must be invested in short-time paper payable absolutely at 
 maturity. Discounting by a bank which had been ten days below 
 the specie line was made an act of insolvency, requiring liquidation, 
 and directors or managers who assented to the violation of the law 
 on this point were made individually liable for all debts. This legis- 
 lation was approved by its results; banks of New Orleans passed 
 successfully through the crisis of 1837, and in March, 1S61, at the 
 beginning of the Civil War, they held sixteen millions of specie to a 
 capital of twenty millions. 
 
 Ohio, in 1839, enacted that the volume of bills issued should not 
 exceed three times the amount of specie on hand, exclusive of deposits. 
 By the free banking act of 185 1 banks were required to have on 
 hand in gold or silver, or their equivalent, 30 per cent of their out- 
 standing notes. The State Bank of Iowa, 185S, required a reserve 
 of coin of one-fourth the circulation and a similar reserve in current 
 notes for the deposits. 
 
 121. NOTE ISSUES UNDER THE FREE-BANKING SYSTEM' 
 By JOHN JAY KNOX 
 
 The free-banking system of New York was authorized on April 
 i3j I'^.V^- Under its provisions any number of persons were authorized 
 to form banking associations upon tlie terms and conditions and 
 
 ' Adapted from Report of Comptroller of the Currency, wSyO, pp. xxiii-x.xxvi.
 
 244 PRINCIPLES OF MONEY AND liANKINO 
 
 subject to the liabilities of the act. The law originally provided that 
 such associations, on depositing stocks of the State of New York or 
 of the United States, or any State stock which should be, or be made, 
 equal to a 5 per cent stock, or bonds and mortgages on improved and 
 productive real estate worth, exclusive of the buildings thereon, 
 double the amount secured by the mortgage, and bearing interest 
 at not less than 6 per cent per annum, should receive from the Comp- 
 troller of the State an equal amount of circulating notes. Previous 
 to the year 1843 twenty-nine of these banks, with an aggregate cir- 
 culation of $1,233,374, had failed; and their securities, consisting of 
 stocks and bonds and mortgages amounting to $1,555,338, were sold 
 for $953,371, entailing a loss of $601,966. The avails of the securities 
 were sufl&cient to pay but 74 per cent of the circulation alone. The 
 losses to the bill-holders occurred only in the case of those banks which 
 had deposited State stocks other than those of New York. The law 
 was thereupon so amended as to exclude all stocks except those issued 
 by the State of New York, and to require these to be made equal to a 
 5 per cent stock. An amendment in 1848 required that the stocks 
 deposited should bear 6 per cent interest instead of 5, and that the 
 bonds and mortgages should bear interest at 7 per cent, and should 
 be on productive property and for an amount not exceeding two-fifths 
 of the value of the land covered by them. Subsequently, on April 10, 
 1849, the law was again so amended as to require that at least one- 
 half of the securities so deposited should consist of New York State 
 stocks, and that not more than one-half should be in the stocks of 
 the United States, the securities in all cases to be, or to be made, equal 
 to a stock producing an interest of 6 per cent per annum, and to be 
 taken at a rate not above their par value and at not more than their 
 market value. In 1840 a law was passed requiring the banks of 
 New York to redeem their notes at an agency of the bank, either 
 in New York City, Albany, or Troy, at one-half of i per cent discount. 
 
 The constitution of 1846 also provided that, after the year 1850, 
 stockholders of banks issuing circulating notes should be individually 
 responsible to the amount of their shares for all debts and Uabihties 
 of every kind, and that, in case of the insolvency of any bank or bank- 
 ing association, the bill-holders should be entitled to preference in 
 payment over all other creditors; and the constitution, as amended 
 in 1874, still contains substantially the same provisions. 
 
 After the New York free-banking law had been perfected by 
 various amendments, and subseciuent to 1850, a number of the States,
 
 THE REGULATION OF BANKING 245 
 
 among which were Massachusetts, Vermont, Connecticut, New Jersey, 
 Ohio, Indiana, Illinois, Wisconsin, Tennessee, Virginia, and Louisiana, 
 adopted the system which had proved so satisfactory in New York. 
 The Massachusetts and Louisiana acts, in addition to the many 
 excellent features of the New York act, required an ample reserve 
 to be kept on hand, and also contained other restrictions, which were 
 subsequently embodied in the national bank act. In nearly all the 
 States which adopted the free-banking system charters for banks 
 were still granted which authorized the issue of circulating notes 
 without security and in excess of capital. These were more profitable, 
 and therefore in most of the States but few banks were organized 
 under general laws. In other States the best features of the New 
 York law were omitted. The shareholders were not made personally 
 liable; the security required was not sufficient ; the notes were issued 
 in proportion to the stock and bonds deposited and not in proportion 
 to the cash capital; no provision wp-s made for the prompt redemption 
 of the notes at any commercial center, and a majority of the directors 
 and shareholders were frequently non-residents. Many of the organ- 
 izations were not banks, in any true sense of the word, but were 
 associations without capital, located at places not easily accessible, 
 and owned by non-residents, who availed themselves of ill-considered 
 legislation to convert their bonds into currency at rates higher than 
 the market value — drawing the interest on their bonds, but trans- 
 acting little or no business at the place of issue. When the bonds 
 depreciated in value, and any considerable amount of notes were 
 presented at their counters for redemption, the banks failed, the 
 securities were sold by the authority of the States, and the avails 
 were distributed among the note-holders. 
 
 The governor of Indiana, referring to such banks, says in his 
 message for 1853: "The sj)cculator comes to Indianapolis with a 
 bundle of bank notes in one hand and the stock in the other; in 
 twenty-four hours he is on the way to some distant point of the 
 Union to circulate what he denominates a legal currency authorized by 
 the legislature of Indiana. He has nominally located his bank in 
 some remote jxirt of the State, difficult of access, where he knows 
 no banking facilities are required, and intends that his notes shall go 
 into the hands of persons who will have no means of demanding their 
 redemption." 
 
 The New York Journal of Commerce in June, 1853, referring to 
 the same subject, says: "The operators in these schemes have turned
 
 246 PRINCIPLES OF MONEY AND BANKING 
 
 lo the West, and, under the free-banking laws of Indiana, lUinois, 
 and Wisconsin, are prepared to flood the channels of circulation with 
 their notes. It is not western capital that is seeking profitable em- 
 ployment, nor is it eastern capital invested at the West. Not a 
 dollar of the new currency will be issued where it is likely to be pre- 
 sented for redemption." 
 
 122. THE SAFETY-FUND BANKS^ 
 By JOHN JAY KNOX 
 
 The safety-fund system was recommendeed by Mr. Van Buren 
 in his message as governor of New York in 1829, and the act estab- 
 lishing it passed the legislature and became a law on April 2 of that 
 year. Forty banks were then in operation, and their charters were 
 about to expire. It is said to have been suggested by a system which 
 originated with the Hong merchants in China, by which each member 
 contributed to uphold and cherish the weak members of the Hong. 
 The act authorized the issue of circulating notes not exceeding twice 
 the amount of capital paid in and limited the loans to twice and one- 
 half the amount of the capital. The feature of most importance in 
 the act was the establishment of a common fund, by a provision 
 requiring every banking corporation thereafter organized, or whose 
 charter should be renewed or extended, to pay annually to the treas- 
 urer of the State a sum equal to one-half of i per cent of its capital 
 stock paid in, the payments to be continued until every such corpora- 
 tion had paid into the treasury 3 per cent upon its capital stock. 
 The fund thus created was made applicable to the payment of the 
 circulation and other debts of any insolvent bank contributing to 
 the same. If the fund became at any time diminished by payments 
 from it, each bank was required to renew its annual contribution 
 until the deficiency was restored. 
 
 Contributiorts to the fund were first made in 1831. In 1841-42 
 eleven of the safety-fund banks failed, with an aggregate capital of 
 $3,150,000. The sum which had been paid into the fund by these 
 banks was but $86,274, while the amount required for the redemption 
 of their circulation was $1,548,588, and for the payment of claims 
 of their other creditors $1,010,375, makmg a total of $2,558,933. 
 According to the report of the State Comptroller, made in 1849, the 
 whole amount contributed to the fund down to September 30, 1848, 
 
 ' Adapted from Report of the Comptroller of the Curreiwy, 1876, pp. xxi-x.xii.
 
 THE REGULATION OF BANKING 247 
 
 was but $1,876,063; and even if full payments, as required by law, 
 had been made by all the banks organized under the system, the fund 
 would still have been insufficient to pay the deficiency occasioned by 
 the insolvency of these eleven banks. This deficienc>' was subse- 
 quently provided for by the issue of a 6 per cent stock by the State, 
 to be reimbursed largely by new contributions from the banks. 
 During the year 1842 the act was so amended that the safety-fund 
 became a security only for the notes in circulation and not for the 
 other debts of the banks. 
 
 (3) ASSET CURRENCY 
 123. THE ARGUMENT FOR ASSET CURRENCY' 
 
 While a bond-secured circulation cannot furnish an elastic medium, 
 expanding and contracting automatically, it is quite otherwise with a 
 currency that is based upon the general assets of the issuing banks. 
 The volume of notes put forth under such circumstances will, like 
 deposits, automatically expand in volume by being issued upon 
 demand from legitimate borrowers and automatically contract by 
 being returned to the bank when the need for the currency is past. 
 Under such a system any increase in the demand for money, and 
 consequent higher rate of interest, adds to the inducement to issue 
 notes instead of making it less profitable, as in the case of bond-secured 
 currency. 
 
 There is, moreover, no delay or inconvenience such as exists 
 where bonds must be purchased and deposited with the Treasurer 
 before the notes can be issued. The assets on which the notes are 
 based are the ordinary commercial paper acquired by tiie l^ank in 
 the course of its regular business. The bank is thus always ready to 
 increase its circulation if the public will use more notes, and all 
 considerations of profit lead it to do so, as its power to loan will be 
 increased in proportion as it is able to keep more notes in circulation. 
 The same motives acting on all the l)anks lead to active comi)etition, 
 which results in the prompt redemption of all notes (lc]Misite(l or paid. 
 into any bank. 
 
 Another result of a system of bank currency l)asc(l on general 
 assets — indeed a corollary- of what lias just bci-n stated — is that each 
 community is thereby enabled to furnish lov itself most easily and 
 
 ' Adapted from Report of the Monetary Commission of the I ndiauapolis Con- 
 vention, 1898, pp. 231-34.
 
 248 PRINCIPLES OF MONEY AND BANKING 
 
 economically just such currency as it requires for the convenient 
 transaction of its business. The rural districts are not forced to go 
 to more expense in creating their currency — notes — than are the 
 commercial centers in creating that which they use — deposits. 
 
 The only arguments which have been seriously opposed to this 
 plan have been based on the fear that the security provided by 
 general commercial assets would not be equal to that afforded by 
 bonds. The validity of the objection depends entirely upon the 
 character of the assets. Of what, then, do the ordinary assets of 
 banks consist, and what is their amount and character ? These assets 
 are the result of loans made by the banks to those carrying on the 
 business of the country; they represent in the main marketable 
 products or commodities in the process of exchange or distribution. 
 They are made by bankers whose interest it is to see that they are 
 sound, inasmuch as the first loss, if any, must fall on the bank and its 
 stockholders. These assets, therefore, are based' on and secured by 
 the best business of the country; their character rests on that which 
 is a condition precedent to all solvency — individual, corporate, and 
 governmental. It is conceivable that a government may become 
 bankrupt while the great portion of the private business of the country 
 remains solvent; indeed, this has occurred. But it is not conceivable 
 that the bulk of the private business of a country can become worth- 
 less and the government of that country remain solvent; and this 
 has never occurred. These considerations make it clear that, taken 
 in the aggregate, there can be no safer security for bank notes than 
 that afforded by the combined commercial assets of the issuing bank. 
 No revulsion which has ever taken place in this or any other country 
 of similar commercial development has been so serious that it would 
 have impaired the value of notes secured by such assets. 
 
 124. THE NEED OF A SYSTEM OF REDEMPTION^ 
 
 To secure real elasticity it is not enough that the circulation 
 should expand when the necessities of commerce require more cur- 
 rency; it is just as essential that it should promptly contract when 
 those necessities have gone by. Under the head of redemption it is 
 proposed to consider the mechanism by which this withdrawal of any 
 excessive currency is enforced and by which the supply of currency is 
 adjusted to meet the lessened demands. 
 
 ' Adapted from Report of the Monetary Commission of the Indianapolis Con- 
 vention, 1898, pp. 324-34.
 
 THE REGULATION OF BANKING 249 
 
 The whole process is merely an application by each bank of a very 
 simple principle, the key to which is self-interest. Ever>' banker who 
 is free to issue additional notes without inconvenience or cost has 
 a decided interest in withdrawing from circulation the notes of another 
 banker in order to make room for his own. This is the force back of 
 redemption. Under a system where every bank was free to issue 
 notes up to, say, 80 per cent of its capital — as free as it would be to 
 receive deposits — is it conceivable that a bank whose issues were only 
 50 per cent of its capital, upon receiving on deposit the notes of 
 another bank, would pay them out again ? Why should it ? For any 
 purpose for which a bank note will serve — such as the cashing of a 
 check, or the discount of a note, or the grant of a loan — its own notes 
 can be used without cost to itself. So it naturally pays out its own 
 notes and presents the others for redemption, thus adding to its cash 
 reserve. 
 
 Under such a system a banker whose issues had not approached 
 the 80 per cent limit would no more think of allowing the notes of 
 another bank to remain idle on his hands or to be paid out again 
 where his own notes could be used than he would today of holding 
 checks on that bank just because he considers them good, or of 
 voluntarily or gratuitously transferring to such bank a portion of 
 his customers' deposits. Such an act would in fact be a loan 
 without interest to that other bank for the length of time the note 
 was held, or (being put into circulation) for the time it might 
 be expected to remain outstanding, and, under a system of com- 
 parative freedom of note-issue, would be the grossest disregard of 
 business principles. 
 
 It is in this way that, under any banking system sufficiently 
 liberal in terms to permit adequate expansion, there is sure to be 
 sufficient incentive to retirement to keep the outstanding volume of 
 note issues down to the needs of business. In other words, there is a 
 very close connection between the ease or difficulty of issuing notes 
 and the activity and efficiency of the redemption system. The devel- 
 opment of the latter is dependent almost entirely upon the existence 
 of a system of issues sufficiently liberal to permit ex])ansit)n even 
 beyond the needs of business, for it is only then that the c«)miK'lilion 
 of the banks for a legitimate profit will furnish the incentive which 
 lies behind a system certain to withdraw redundant currency. When 
 the notes arc no longer wanted by the jniblic for the convenient trans- 
 action of its business, they will be dciK)sited in some bank, and ai=
 
 250 PRINCIPLES OF MONEY AND BANKING 
 
 soon as they are thus deposited they will be put on the road to redemp- 
 tion and retirement through the operation of the principles described 
 above. 
 
 The function of a system of active note redemption as a regulator 
 of the character of the currency as well as of its volume also demands 
 consideration. It is only when the value of a promise to pay money 
 is being constantly put to test that there exists the danger of its 
 depreciation. And it is through redemption, in the case of a bank 
 currency, that this test is made. Where no real redemption exists, 
 there may be danger of expansion, since the most powerful agency 
 in keeping down the supply of currency to the amount demanded and 
 keeping its character up to the standard is absent; but where the 
 notes are being constantly tested by their presentation for redemption, 
 none can be kept in circulation which are not up to the standard, and 
 no more can be issued than the public wishes to use. And to place 
 impediments in the way of quick redemption is practically to affect 
 the value of the currency — to lower it, to some extent, from the 
 standard to which it should conform. 
 
 In Canada the banks are left perfectly free to issue notes as they 
 may think best up to the limit imposed by law — the par of their capi- 
 tal. Each banker, as the only means by which the field can be kept 
 clear for his own circulation, regularly sends in for settlement the notes 
 of his neighbors precisely as he does their checks. If the notes are 
 those of a bank having a branch in the same town, he sends them to 
 that branch for settlement; if not, he sends them to the most conven- 
 ient town containing both a branch of his bank and a branch of the 
 bank whose notes he wishes to present for redemption. Except in 
 those occasional instances where the legal limit of circulation has been 
 reached, the paying out by one bank of the note of another is regarded 
 in Canada as an instance of grossest disregard of business principles. 
 The result of this universal attitude of the Canadian banks in con- 
 stantly insisting upon daily redemption of notes is that any issue 
 beyond the current needs of business soon reaches the tills of some 
 bank, by which it is promptly presented for redemption. 
 
 It should be noted in this connection that the redemption involved 
 is of the nature of a clearing-house transaction. It is very rare that 
 the notes of a bank are presented to it for redemption in actual coin. 
 For as the notes are thoroughly secure, the public has no reason to 
 prefer gold or a Dominion note to the note of a Canadian bank. So 
 that the only redemption is that forced by the banks themselves;
 
 THE REGULATION OF BANKING 251 
 
 and this, where there are clearmg-houses, takes place through them, 
 and elsewhere by exchanges between individual banks — in which 
 latter case balances are settled sometimes by Dominion notes, but 
 ordinarily by draft upon the head oflace. It appears from the best 
 evidence obtainable that, on the average, the life of the notes of a 
 Canadian bank is not far from thirty days. In other words, the 
 entire circulation is, on an average, redeemed twelve times over in 
 the course of a year. 
 
 The most interesting feature of the banking experience of New 
 England was the system of bank-note redemption which was there 
 developed — the SulTolk Bank system — taking its name from the Imnk 
 which acted as the redeeming agent. 
 
 Prior to the inauguration of the system, in 1824, the notes of 
 banks situated at some distance from Boston were received only at a 
 discount by the Boston banks. This was usually only sufficient to 
 cover the expense involved in sending the notes home for redemption, 
 and in later years it rarely exceeded one-half of i per cent for the bills 
 of Massachusetts banks. This discount, however, although slight, 
 allowed the bills of the country banks to circulate in Boston to the 
 exclusion of those of the Boston banks, which, being redeemable on 
 the spot, remained at \)av. So long as the issuing countr>' banks were 
 known to be solvent, their notes passed readily from hand to hand in 
 ordinary business transactions, although at the banks they were not 
 accepted at par. Persons having payment to make at a Boston bank, 
 therefore, found it advisable to lay aside for that puq^ose any notes of 
 Boston banks which might come into their hands, as such notes and 
 specie were the only forms of currency accepted at par by the banks. 
 The outside notes, however, which were readily accepted in business, 
 were paid out again by the merchants, and thus kept in circulation. 
 The consequence was that the field of circulation, even in Boston, 
 was monopolized by the notes of outside banks, on the principle that 
 the cheaper money drives out the dearer. 
 
 It was to remedy this state of affairs, by insisting upon the main- 
 tenance of all the currency at par, that the SulTolk Bank system was 
 inaugurated. The general arrangement made between the Suffolk 
 Bank and the other banks of New England, which were soon drawn 
 into the system, was as follows: 
 
 Each bank placed with the SulTolk a permanent dc]x)sit of $2,000 
 and upward without interest — the amount dcj^cnding upon the 
 capital and business of the bank. In consideration of this deix)sit,
 
 252 1'ki\('Iimj:s of monky and banking 
 
 the Suffolk Jiank redeemed all the IjIUs of Ihal bank which might 
 come to it from any source, charging the redeemed bills to the issuing 
 bank once a week, or whenever they amounted to a certain fixed sum, 
 provided that the bank kept a sufficient amount of funds to its credit, 
 independent of the permanent deposit, to redeem all of its bills which 
 should come into the possession of the Suffolk Bank. It was further 
 agreed that the Suffolk Bank should receive from any of the New 
 England banks which kept an account with it the bills of any other 
 New England bank in good standing, placing them to the credit of 
 the bank sending them on the day following their receipt. When any 
 bank refused to join the Suffolk Bank system, the Suffolk Bank 
 merely presented its notes for payment in specie at its counter. In 
 such cases notes of other banks would not be accepted in redemption. 
 
 This practice united practically all the banks of New England, 
 and in a large measure insured the prompt redemption of their notes 
 at par at all times in Boston. Inasmuch as this city was the center 
 of the commercial interests of New England and because Boston funds 
 were at par elsewhere, a note which could be used at par in remittances 
 to Boston was never depreciated in any part of New England. 
 
 At first there was much hostility to the system on the part of some 
 of the banks. They objected strenuously to the necessity imposed 
 on them of making arrangements for the redemption of their notes at 
 Boston, and occasionally a bank seceded from the system in the hope 
 of getting an increased circulation. In such cases, however, it at 
 once appeared that its circulation was then limited to the immediate 
 vicinity of the place of issue, and the inconvenience and loss of 
 confidence resulting led to a renewal of the agreement. In general, 
 it was the practice of each bank to gather together the bills of all the 
 other banks paid over its counter and include them in its weekly 
 remittance of its own bills. In this way there was very little necessity 
 for redemption in specie, the Suffolk Bank merely acting as a clearing- 
 house where the notes of one bank were offset against those of the 
 others.
 
 THE REGULATION OF BANKING 253 
 
 (4) BANK NOTES UNDER THE NATIONAL 'BANKING 
 
 SYSTEM 
 
 125. REASONS FOR ESTABLISHING THE NATIONAL 
 BANKING SYSTEM' 
 
 By ANDREW McFARLAND DAVIS 
 
 IMr. Sherman advocated the bill because it would furnish a uni- 
 form currency; because it would create a market for bonds; because 
 through the sale of bonds thus elTected the nation would be consoli- 
 dated; because it would furnish depositories for public funds, and 
 because the bills could be used in payment of taxes. Greenbacks he 
 considered not suitable for the desired uniform currency, because 
 they were liable to inflation. The more of them that were put out 
 the greater had been the emissions of state banks. "The consequence 
 has been," he said, "that while the Government has been issuing 
 its paper money, some of the banks have also been inflating the 
 currency by issuing paper money on the basis of United States money. 
 There is no way to check this except by one uniform currency system." 
 What benefit, he asked, does the United States obtain from this 
 system? "The first benefit is, there is a market furnished for the 
 bonds of the United States. Then banks must furnish 10 per cent 
 more of the bonds of the United States than they receive in paper 
 money. This at once, if the full amount is issued, which I do not 
 anticipate within. a year, will furnish a market for $330,000,000 of 
 bonds, and we know very well by the laws of supply and demand that 
 where -a demand is made for a given article the demand extends far 
 beyond the particular want." He thought the passage of the bill 
 would "promote a sentiment of nationality," the want of which was 
 one of the evils of the times. 
 
 126. EVILS OF NON-UNIFORJSI ISSUES* 
 By ANDREW McFARLAND DAVIS 
 
 The Chicago Tribune on Februar}' 13, 1863, states that "Every 
 one of the 1,395 banks in the loyal states has its separately engraved 
 and printed notes, differing more or less in form or design pictorially, 
 
 » Adapted from The Origin of the National Banking System, pp. 79-80. (Na- 
 tional Monctar>' Commission, 19 10.) 
 'Ibid., pp. 25-26.
 
 254 PRINCII'LKS OF MONF.Y AND HANKIXC 
 
 and each bank issues the various denominations which by usage seem 
 to have become the rule. 
 
 "Taken together, each bank issues bills of at least six different 
 denominations. The 1,395 banks therefore issue 8,370 varieties of 
 notes, which people are expected to distinguish from counterfeits. 
 Moreover, the varied issues of the fraudulent, broken, and worthless 
 banks should not be overlooked. Of this class of 'retired' banks, as 
 they were styled, 854 are enumerated in the published list furnished 
 by the 'descriptive list' for January, 1863. Such as these have there- 
 fore contributed their quota to this promiscuous catalogue. 
 
 "One phase of our paper currency engendered by this multiform 
 system calls for special notice and consideration. We refer to counter- 
 feiting. It may be safely stated that the art, as pursued in the United 
 States, is without parallel, and that, without vaunt or hyperbole, we 
 can 'beat the world' on this, our national specialty — counterfeiting. 
 A species of literature, even unknown to the rest of the world, has been 
 initiated among us, and no merchant or mechanic deems himself 
 safe unless he consults the Counterfeit Detector. The absolute facts, as 
 detailed by those interested in keeping the record of counterfeits, 
 appear monstrous and fabulous even beyond credence. Of the various 
 kinds it is estimated that there are about six thousand. Of the vari- 
 ous species of 'counterfeits,' as they are called, it is ascertained that 
 but a small part of those in circulation is composed of bona fide 
 imitations of the genuine notes. Those known as alterations number 
 highest. One cause of this multiplicity of altered notes is attributable 
 to the similarity of titles among banks in different sections of the 
 country. As, for instance, we find 27 Union banks, of which 7 are in 
 the State of New York. A yet further aid to 'alterations' is in the 
 frequent use of the same devices on notes of different banks, and often 
 of different banks of the same name." 
 
 Although the picture is drawn at a later date than that which we 
 are at present considering, nevertheless it is equally true for the year 
 1 86 1, and must be accepted as such. 
 
 A writer in the Bankers^ Magazine, in November, 1862, stated 
 that experienced New York bankers and a former bank-note engraver 
 were unable to detect certain fraudulent notes. His conclusion was: 
 "If experts such as bank tellers and bank-note engravers are so 
 readily deceived by well-executed fraudulent bills, it cannot be 
 expected that merchants, traders, and others will be prepared to 
 detect such frausis."
 
 THE REGULATION OF BANKING 255 
 
 127. THE PROTEST AGAINST NATIONAL BAKK ISSUES' 
 By HORACE BOIES 
 
 "Whom the gods would destroy they first make mad." 
 
 The currency of a country is the Ufeblood of its business interests. 
 
 Taint it in a single artery or a lesser vein and the whole system 
 is diseased. 
 
 Our national banking system was the offspring of a naked treasury 
 and overwhelming debt. 
 
 Through all the years of its existence it has been nursed and 
 fondled by indulgent representatives of a great republic. 
 
 It was conceived in one of the darkest hours of the nation's 
 financial history, the child of an overpowering necessity that could 
 stop at nothing but some form of national relief. 
 
 In its swaddling clothes it was a meek and pleading thing, grateful 
 for any crumbs that fell from its master's table. Today it is the auto- 
 crat of all the states. It no longer stands at the doors of Congress 
 asking alms at its hands. 
 
 It comes as a victor now, with all its plans matured, its measures 
 formulated by a little coterie of men within its folds, dictates such 
 changes in the nation's laws as its own selfish interests require, and a 
 fawning majority of a committee in Congress, to which its measures 
 are referred, hasten to obey its will. 
 
 By the original act authorizing the incorporation of national 
 banks each of these institutions was required to purchase and deposit 
 with the Secretary of the Treasury, to be held by the go\-ernment as 
 security for the payment of its outstanding notes, United States 
 bonds. These bonds were interest-bearing obligations of the govern- 
 ment, the interest on which was paid to the banks the same as it was 
 paid to other holders of like securities. 
 
 Upon such deposit the bank was authorized to issue and put in 
 circulation as money its own notes up to 90 per cent of the face value 
 of the bonds deposited. 
 
 To secure the prompt redemption of its notes on demand each bank 
 was also required to keep on hand a reserve /;/ laujul money of the 
 United States equal to 25 per cent of its own outstanding notes. 
 
 The effect of these provisions was to enable a private corporation 
 to coin the credit of the nation into something that, for every practical 
 
 ' Adapted from "Why Not Government Currency?" Moody's Maf^azine, HI 
 (1906-7), 299-300.
 
 256 PRINCIPLES OF MONEY AND BANKING 
 
 use of its own, was money at the ratio of $4 for every $1 of its own 
 money it was required to lock up in its own vaults. 
 
 The same provisions authorized the bank to receive the money of 
 others, invest it as its oflScers saw fit, subject only to the requirement 
 that it should keep on hand in its own vaults 25 per cent of these 
 deposits, in lawful money, with which to meet demands of depositors 
 for their money as the same were made. 
 
 They accomplished this further end. They withdrew from cir- 
 culation the legal tender money of the country equal to 2 5. per cent of 
 the outstanding bills of all the national banks of the country there- 
 after to be organized, and 25 per cent also of all deposits in all of these 
 banks, and left the enormous vacuum occasioned by such withdrawals 
 to be filled by the notes of these banks, and in no other possible way. 
 On the 24th of September last, as shown by the report of the Comp- 
 troller of the Currency, the aggregate of these deposits was almost 
 five billions of dollars, requiring a withdrawal from circulation of the 
 legal tender money of the country of nearly $1,250,000,000. 
 
 But, liberal as these provisions were, they did not satisfy these 
 corporations. They first asked and obtained from Congress leave to 
 invest their own notes up to the face value of the bonds they had 
 deposited, and they then asked and obtained leave to withdraw their 
 reserve of 25 per cent of their outstanding notes that they might 
 utilize the same to the best advantage possible, instead of having it 
 tied up in their own vaults. 
 
 When they had accomplished this they had not a dollar invested 
 in their business that was not interest-bearing, payable to themselves, 
 and they had appropriated sufl&cient of the nation's credit to enable 
 them to issue and put in circulation, as money, a sum of their own 
 notes equal to the entire face value of the bonds they had deposited, 
 upon which bonds they were annually collecting interest from the 
 government. 
 
 They had also made the national bank note credit money only, as 
 pure and simple as ever the old discarded greenback was such money, 
 for all they had added as security to the greenback of old was the 
 individual credit of the private corporation that issued the notes. 
 
 How little this amounted to in a practical way is evidenced by 
 the well-known fact that no man, wherever located, stops for an 
 instant to inquire by what corporation a national bank note offered 
 him is issued. It is sufficient for all to know that behind each of these 
 notes, wherever or by whomsoever issued, stands the credit of this
 
 THE REGULATION OF BANKING 257 
 
 great nation, pledged for its redemption if the bank issuing it fails to 
 redeem it. 
 
 128. DOUBLE PROFIT ON BANK-NOTE ISSUES' 
 By R. W. JONES 
 
 The government bonds upon which the bank notes are issued 
 are safely deposited in the United States Treasury. The bankers 
 draw coin interest on these bonds from the Government and pav no 
 taxes upon them. The Government allows them to issue about 90 
 per cent of the amount of their bonds in notes, thus without any cost 
 to the banks except the tax on their issues increasing their interest- 
 bearing capital 90 per cent. In other words, upon a capital of Sioo,- 
 000,000 they can reap profits from $190,000,000. They lend at from 
 8 to 12 per cent interest. The people pay them on their bonds from 
 5 to 6 per cent interest. Thus the people pay from 13 to 18 per cent 
 interest to the national banks on every dollar of "Blackbacks" in 
 circulation. Besides this the Government coins and issues to the 
 banks their notes free of charge. The Government must also settle 
 up the business of every broken bank. This is a useless and extrava- 
 gant system, calculated to concentrate wealth and rapidly enrich the 
 money power of the country at the expense and by the oppression of 
 the people. 
 
 129. ANALYSIS OF PROFIT ON BANK-NOTE CIRCULATION* 
 
 It has been assumed by those not fully informed on the subject 
 that the issue of national bank circulation is attended by a large 
 profit; that is, that the banks receive the fijced interest on the bonds 
 deposited as security for circulation and current rates of interest on 
 the total amount of notes received, making their net prolit the sum 
 of these two returns. The fact, however, that the volume of circula- 
 tion outstanding is approximately only 70 per cent of the maximum 
 issuable — that is, an amount equal to the paid-in capital stock of 
 the banks — is evidence that the circulation franchise is not as profit- 
 able as would appear. 
 
 Below is given a compulation made by the Actuary of the Treasury 
 Department of the profit on circulation, based upon the deposit of 
 $100,000 of the various classes of bonds available at the average net 
 
 ■ Adapted from .\foney is Power, pp. 44-45- (Davis & FrccRard, 1878.) 
 'Adapted from Report of Comptroller of the Currency, 191 1, p. la.
 
 258 PRINCIPLES OF M(JNI-:Y AND BANKING 
 
 price. By reference to this table it will be noted that money is 
 assumed to be worth 6 per cent. From the gross receipts, that is, 
 interest on the bonds, and the interest on $100,000 circulation loaned, 
 at 6 per cent, deductions are made for the tax on circulation, expenses 
 incident to redemptions, shipments of currency, etc., and the sinking 
 fund, to show the net receipts. The actuary then computes the 
 interest on the cost of the bonds at 6 per cent, the difference between 
 this amount and the net receipts being the net profit to the bank. 
 
 Two per cent consols of 1930 were at the highest average net price 
 in March last, and as a result the profit on circulation was at the 
 lowest point, namely, 1.296 per cent. These bonds were at the lowest 
 point in July, namely, 100.250, when the profit on circulation is 
 shown to have been 1.412. The highest-priced Government issues 
 are the 4 per cent bonds of 1925, and were held at 116.86 in January 
 last, when the profit on circulation was 0.986 per cent. At the market 
 price of 114. 134, in August last, the profit on circulation was at its 
 maximum, namely, 1.226 per cent. The Panama Canal bonds of 
 19 16 sold, on an average, in August last, at 100.303, when the profit 
 on circulation was 1.410 per cent. The highest average price during 
 the year for these bonds was 101.250, in April last, and the percentage 
 of profit on circulation 1.325. 
 
 Consols of 1930. January, 191 i 
 
 Cost of bonds $101,125.00 
 
 Circulation obtainable 100,000.00 
 
 Receipts 
 
 Interest on bonds $2,000 
 
 Interest on circulating notes 6,000 
 
 Gross receipts $8,000.00 
 
 Deductions 
 
 Tax $ 500.00 
 
 Expenses 62.50 
 
 Sinking fund 32.00 
 
 Total $594. 50 
 
 Net receipts 7,540.50 
 
 Interest on cost of bonds at 6 per cent 6,067.50 
 
 Profit on circulation in excess of 6 per cent $1,338.00 
 
 Percentage excess profit 1.388
 
 VII 
 THE FEDERAL RESERVE SYSTEM 
 
 Introduction 
 
 The Federal Reserve System in which our national banks are 
 now organized was inaugurated by the Federal Reserve Act of Decem- 
 ber 23, 1913. For fifty years our banks had been operating under the 
 national banking law that had been passed during the Civil War. 
 This act gave us a safe and uniform bank-note currency, and in 
 other ways it constituted so substantial an improvement over the con- 
 ditions that had existed prior to the war that we were long loath to 
 tamper with it seriously. While defects were early revealed, they ap- 
 peared in the main to be of such a nature as required amendment 
 merely, rather than thoroughgoing revision. 
 
 But the panic of 1893 revealed serious shortcomings in the 
 national banking system. It was found that the great dearth of 
 money that developed could not be relieved by an increase in that 
 element of our currency system to which we must look for elasticity, 
 namely, the bank notes, and it became necessary for the clearing- 
 house associations, and even private businesses, to issue a wide 
 variety of substitutes for cash. The same phenomenon had of course 
 been manifested in 1873, but the nature of the difTiculty was not so 
 generally understood at that time. It also became apparent in 1893 
 that in consequence of inadequate and rapidly dissipating reserves 
 our banks were unable to expand their loans to meet the needs of a 
 crisis. 
 
 The result of the experience of 1893 was the advancement of ilic 
 Baltimore plan of currency reform, which was modeled after the 
 Canadian system of issuing currency protected by a joint guaranty 
 fund to which all the banks contribute. Nothing came of the plan, 
 however, the silver issue of the time forcing all otlicr financial matters 
 into the background. Again, in 1898 tlic Indianapolis Monetary 
 Commission, after a thorough survey of the banking and currency 
 prol}lem, suggested some substantial amendments to existing cur- 
 rency legislation, among which was the issue of bank notes inured 
 
 259
 
 26o PRINCIPLES OF MONEY AND BANKING 
 
 upon commercial paper, or asset currency. However, the Spanish- 
 American War diverted our attention to problems of international 
 policy, while the long period of prosperity which followed caused us 
 in the main to forget the question of banking reform. However, the 
 act of 1900, in providing that national banks might thereafter issue 
 notes up to the par value' of bonds deposited as security, gave us a 
 rapid exj^ansion of bank-note currency; but it did nothing to provide 
 the necessary elasticity. 
 
 The disastrous panic of 1907 thoroughly aroused the country 
 to the imperative need of banking reform. It was observed that 
 whereas other countries were equally subject to periodic fluctua- 
 tions of commerce and trade the United States appeared to be the only 
 nation in which the banking machinery was incapable of alleviating 
 the conditions that developed in time of crisis. Strong pressure, 
 partly political, was brought on Congress to pass some emergency 
 legislation. After a very brief study of the problem Congress passed 
 the Aldrich-Vreeland Act of 1908, which provided for the issue of 
 emergency notes in time of stress through groups of banks in various 
 communities organized into national currency associations. This 
 currency could be based in part on commercial paper, and thus for 
 the first time we secured legal permission for an asset currency. 
 Moreover,. good service was rendered by this act at the outbreak of 
 the European war, just prior to the inauguration of the Federal 
 Reserve System. The Aldrich-Vreeland law, however, was confess- 
 edly a temporary measure, its final clause authorizing the appointment 
 of the National Monetary Commission and making appropriation 
 for a thoroughgoing study of the entire banking problem. 
 
 The movement for banking reform then rapidly developed. The 
 National Monetary Commission in its investigation drew upon the 
 experience of the entire world, and a vast Hterature on the subject 
 was collected and published — nearly fifty volumes in all. Meanwhile 
 numerous independent students were analyzing the problem, with the 
 result that the various weaknesses of the national banking system, 
 as indicated in our previous chapter, were clearly revealed. A large 
 number of comprehensive plans of reform were also put forward, many 
 of them as bills in Congress, and others in the form of monographs 
 by commercial associations and independent students of the question. 
 
 ' To market value, only, when market value is less than par.
 
 THE FEDERAL RESERVE SYSTEM 261 
 
 It remained, however, for the Aldrich bill, growing out of the work of, 
 and indorsed by, the National Monetary Commission, to bring us to 
 close quarters with the problem. The Aldrich plan, which was pre- 
 sented to Congress early in 191 1, was discussed the country over per- 
 haps more thoroughly than any other measure ever before Congress. 
 The bill is generally conceded to have had many excellent provisions; 
 many of them, indeed, subsequently became embodied in the Federal 
 Reserve Act. But the prevalent distrust of !Mr. Aldrich in conse- 
 quence of his unsavory reputation on tariff matters, together with the 
 fact that his proposal was undoubtedly a ver>' strongly centralizing 
 measure, made its enactment into law a political impossibility, espe- 
 cially after the coming of the Democrats to power in 191 2. 
 
 The Federal Reserve Act is an outgrowth of the Aldrich plan, 
 though modified in numerous details and in some very important 
 respects. Passed with unusual expedition by a newly organized and 
 inexperienced Congress, the measure was ver>' generally distrusted by 
 the financial interests of the country while it was pending. It was 
 held by many, indeed, that it would wreck the national banking sys- 
 tem, if not the country itself. After the passage of the act, however, 
 as soon as time had permitted a study of the provisions of the law, it 
 became apparent that an extraordinary piece of legislation had been 
 enacted; and practically all parties promptly rallied to its support. 
 The act now appears to be one' of the wonders of American legisla- 
 tion; it seems almost inconceivable that a measure containing so much 
 of solid achievement and so little of weakness could have come out 
 of Washington. It is important to reflect, however, that the funda- 
 mental principles underlying the new system were developed out of 
 the innumerable discussions of the subject that had been taking place 
 for years. It nevertheless remains a remarkable coincidence that 
 the principles thus scientifically developed should have been in so 
 admirable a manner incorporated into law. 
 
 The new system has now been in operation for nearly two years, 
 and it appears to have justified the confidence that has been reposed 
 in it. It will of course require many years to test the measure fully; 
 but already the business of the country' is being adjusted to the 
 changed conditions. Whether tlie act permanently accomplishes all 
 that its supporters hojie, it is already clear that we shall never g<i back 
 to the old order, and that the inauguration of the Federal Reserve 
 System marked tlie beginning of a new era in .American banking.
 
 :62 PRINCIPLES OF MONEY AND BANKING 
 
 A. General Description of the System 
 
 130. THE CREATION OF THE FEDERAL RESERVE SYSTEM- 
 By C. W. BARRON 
 
 Next to the Declaration of Independence and the Constitution of 
 the United States the Federal Reserve Act, signed by President 
 Wilson December 23, 1913, may be the most important measure ever 
 placed before the people of these United States. Upon its wise 
 administration depends the good or ill of a hundred million people, 
 and as a nation we shall probably live under it, not only for the twenty 
 years named in the act, but, with amendments found necessary from 
 time to time, for possibly many generations. 
 
 The miraculous thing about its creation is that it sprang forth in 
 a few hours before the Christmas holidays from a new Congress that 
 understood little of currency and less of banking and an Executive 
 and a Cabinet that never made any pretense to a clear understanding 
 of financial principles. Yet a Congress of financial experts, with an 
 Administration and a Cabinet composed of the leading bankers of the 
 country, probably could not have produced so good a bill. Bankers 
 are not generally progressive or even open-minded. The line of safety 
 must be their rule of procedure, and all changes they naturally regard 
 with suspicion. 
 
 Congress, having no fixed principles, was subject to no prejudices, 
 and the bankers, who could never be induced to formulate a bill, 
 unconsciously made one by their negations. 
 
 This bill is the re-formation of an absolutely unworkable and 
 chaotic measure passed by the House. It was forced into shape by 
 pressure from the Administration to do something promptly, as the 
 nether millstone, and the determination of the banking interests to 
 quit the national banking system, should the act give evidence of 
 being for them dangerous as the upper miUstone. 
 
 Yet the bill in its broad principles is the result of expert currency 
 and banking agitation that has been going on for well-nigh a genera- 
 tion, even before the necessity for currency legislation was emphasized 
 by the 1907 panic. 
 
 The bill as it passed the House was so highly dangerous as to be 
 undesirable. Had not the financial papers refrained from criticism 
 a panic might easily have ensued. Had the House bill passed the 
 
 ' Adapted from The Federal Reserve Act, pp. 7-9. (Boston News Bureau Co., 
 1914.)
 
 THE FEDERAL RESERVE SYSTEM 267, 
 
 Senate and been signed by the President, it might have disrupted the 
 national banking system and caused the sudden retirement of 
 $700,000,000 of national bank currency. 
 
 The country has never been informed of the quiet currents of 
 expression that went on last autumn between leading banking inter- 
 ests. The sentiment of the national bankers cr>-stallized in a quiet 
 but unaccorded determination to make no acceptance of the House 
 bill and to avoid the creation of any panic by simply sitting still and 
 leaving it to the Administration, if it so elected, to enforce the act and 
 put the national banks out of existence through receivershijjs. In 
 other words, the banks would not themselves take the responsibility 
 of a foreclosure upon the national banking system, with a contraction 
 of $700,000,000 in the currency afloat, which meant the sudden retire- 
 ment of 40 per cent of the money in the hands of the people. 
 
 This was the quiet sentiment of the national bank interests of the 
 country as understood and privately, yet individually, formulated at 
 the American Bankers' Association Convention in Boston in October. 
 While the bill was under discussion in the Senate it was changed 
 so rapidly that the financial world, except for a few leading experts, 
 lost personal interest in it, and refused to follow the matter in the 
 news of the day. But now that financiers have had time to read the 
 full text of the conference bill, as signed by the President, it is not 
 saying too much to declare that they are astonished at its breadth and 
 character, the evident sincerity of its purpose, and its freedom from 
 bias, prejudice, or experimental notion. 
 
 Singular as it may appear, the force, breadth, and character of this 
 bill are really due to the pressure put on Congress to produce a hill 
 before the Christmas holidays. At the last moments of the session 
 the several points in dispute were compromised by throwing them 
 upon the new Federal Reserve Board, yet to be appointed, just where 
 the power should be lodged. 
 
 In fact, the new banking bill puts in the hands of the Secretarv of 
 the Treasury and the Federal Reserve Board the construction, regu- 
 lation, and government of a reserve banking system to l)e built out 
 of the reserves of the national banks, gradually removed from the 
 reserve and central reserve cities, and gradually mingled with the 
 moneys of the United States Treasury'. These moneys, with the capi- 
 tal subscribed by the national or "member" banks, constitute a basis 
 for the rediscount of commercial paper from the member banks and the 
 issuance in this connection of a new national currency supplementing
 
 264 PRINCIPLES OF MONEY AND BANKING 
 
 the present currency, yet protected by a 40 per cent gold reserve 
 obtained from the banks and the Treasury; the whole system to be 
 knit together at home and expanded al^road, with i)ower in the Federal 
 Board to expand or contract at will, to officer and manage and regulate 
 and name the discount rates for the federal reserve banks with possibly 
 more money in their pockets than may be then held by the banks now 
 constituting the national banking system. 
 
 131. THE UNDERLYING PURPOSE OF THE ACT' 
 By C. W. BARRON 
 
 The "motif" underlying the Federal Reserve Act is not that 
 "which is nominated in the bond." "An elastic currency " could have 
 been had by an enactment of twenty lines. The "means of redis- 
 counting commercial paper" are already at hand and such discounts 
 exist to the extent of at least 100 millions in the national banking 
 system. It is not "to establish a more effective supervision of bank- 
 ing in the United States," for that could be accomplished by increas- 
 ing the appropriation and enlarging the salaries of the examiners, so 
 that men with larger experience and breadth of vision would perform 
 more effective supervision. 
 
 The purpose of the act most largely in its inception was "for 
 other purposes," and these "purposes" can never be wisely or effect- 
 ively carried out; if persisted in they spell disaster to the country. 
 
 The hidden purpose or "motif" which inaugurated this legisla- 
 tion, however in effect it may work out under wise administration, 
 is to cheapen money. 
 
 The whole primary discussion of this bank act was to make 
 money easier, to cheapen it to the farmer and producer and manu- 
 facturer and n^rchant. Senators and representatives both pro- 
 claimed within and without Washington that what they were seeking 
 was a financial system that would give us an average rate approaching 
 that of the Bank of France, where interest over a series of years aver- 
 ages between 3 and 4 per cent. They frankly said they hoped for 
 something under the 4 per cent rate. 
 
 The charge was that the centralization of reserves in New York 
 or Wall Street made money for bankers in that "den of iniquity," 
 taxed the country with irregular and high rates of interest, and 
 repressed commerce, investment, and prosperity. 
 
 ' Adapted from The Federal Reserve ^ c/, pp. lo-i i , 38. (Boston News Bureau 
 Co., 1914.)
 
 THE FEDERAL RESERVE SYSTEM 265 
 
 Therefore the proposal in outline was that New York should he 
 financially carved up; that the reser\'es of the national banks now 
 centralized in New York should be taken away and between three 
 and four hundred millions of the bank reserves which are now depos- 
 ited in that center by the 7,500 national banks over the country 
 should be removed to other centers of commerce and industry; and 
 thereupon should be built an elastic bankmg and currency system, 
 each center serving its own local community, but all interknit, each 
 with the other, for mutual support. 
 
 The old system produced concentration of bank reserves in New 
 York City, which Congress desired to decentralize. Wall Street was 
 not responsible for this centraHzation of banking power; the banks 
 of the country and the national bank act were responsible. The 
 New York banks never originated, but, of course, made money out 
 of it. It has been figured that they made one-third of i per cent per 
 annum upon these deposits, but this was not their great profit. The 
 profit came to the financial powers in New York who knew the ebb 
 and flow of currency, spring and fall, and changed their investments 
 as betwixt money, bonds, or stock according to the money currents. 
 New York, as a recipient holder of fluctuating bank reserves, was the 
 seat of financial power, and had control of rates and the distribution 
 of credit according as money flowed in or out. When money flowed 
 in after the country's planting or harvesting, New York bankers said 
 who should have it, and upon what merchandise and what stocks 
 and bonds it should be loaned. 
 
 The Federal Reserve Act is an act of decentraUzation. It seeks 
 the establishment of other financial centers co-ordinated through a 
 Federal Reserve Board at Washington. Finance and banks arc for 
 the people and human development. The people do not exist for the 
 banks or for potential and highly centralized finance. 
 
 A new age is upon us. It is the universal age; it is the age of 
 humanity; it is the age of decentralization of old powers that the 
 individual unit of humanity may enter in. 
 
 132. A GENERAL VIEW OF THE FEDERAL RESERVE SYSTEM* 
 By Cn.\RLES S, ILVMLIN 
 
 The Federal Reserve Act, in the first place, provides for a division 
 of the United States into 12 districts, each district containing appro.xi- 
 mately from 500 to 700 national banks. The national banks in each 
 
 ' Adapted from Federal Reserve Bulletin, July, 1915, pp. i.?9-40.
 
 266 PRINCIPLES OF MONEY AND BANKING 
 
 district unite in forming a new bank called the Federal reserve bank, 
 to which each national bank contril)utes 6 per cent of its paid-up 
 capital stock and surplus to provide the necessary capital. 
 
 The individual capital of these 12 Federal reserve banks varies, 
 respectively, from a little under 5 millions to a Httle over 20 millions 
 of dollars. The total capital of the 12 banks (not counting State 
 institutions which may ultimately become members) is a little over 
 100 millions of dollars. 
 
 In addition to the capital payments that must be made, each 
 national member bank is obliged to pay to its Federal reserve bank 
 a certain portion of its legal reserve, which portion, however, it still 
 counts as part of its reserve. These payments of reserve are spread 
 over a period of three years, and the total payments will amount to 
 over one- third of the total reserves held by the national member banks. 
 
 In addition, the Secretary of the Treasury may deposit the general 
 funds of the Treasury — excepting only certain trust funds — with the 
 Federal reserve banks, and disbursements of the government may be 
 made by checks drawn against such deposits. 
 
 The national banks in the 12 respective districts (and State banks 
 which may join the system later) are the only stockholders of the 
 Federal reserve banks, and their stock cannot be transferred or 
 hypothecated. The stock is entitled to a 6 per cent annual cumula- 
 tive dividend, and one-half the net earnings of the Federal reserve 
 banks may be paid into a surplus fund until it amounts to 40 per cent 
 of the paid-up capital stock. 
 
 All net earnings over and above this dividend and surplus are paid 
 to the United States as a franchise tax. 
 
 Each Federal reserve bank is managed by a board of directors, 
 consisting of nine members, of which three are appointed by the 
 Federal Reserve Board and six are elected by the member banks, 
 three of the six directors representing the banks and three consisting 
 of members who at the time of their election were actively engaged in 
 commerce, agriculture, or some other industrial pursuit. 
 
 These 1 2 Federal reserve banks are under the control and direction 
 of the Federal Reserve Board, consisting of the Secretary of the 
 Treasury and the Comptroller of the Currency, ex officio, and of five 
 other members appointed by the President and confirmed by the 
 Senate. 
 
 The Federal Reserve Board sits in Washington, D.C. It appoints, 
 as I before said, three directors on the board of each Federal reserve
 
 THE FKDERAL RESERVE SYSTEM 267 
 
 bank; it has general powers of supervision and examination of the 
 Federal reserve banks and the member banks; it may suspend or 
 remove, for cause, any director or officer of the Federal reserve banks; 
 it may suspend the operation of any Federal reserve bank and liqui- 
 date or reorganize such bank; it defines the paper which may be 
 rediscounted by Federal reserve banks; it has power to review and 
 determine the rates of discount established from time to time by the 
 Federal reserve banks for the discount of commercial paper offered 
 by the member banks; it regulates the open-market powers of the 
 Federal reserve banks; it has power to suspend every reserve require- 
 ment of the act if it deems such course necessary; and it has many 
 other specific powers which I need not mention here.' 
 
 Each Federal reserve bank is independent of every other. They 
 are empowered, however, with the permission of the Federal Reserve 
 Board, and at rates fixed by the board, to rediscount the discounted 
 paper of any of the other Federal reserve banks, and can be required 
 to do so by the affirmative vote of at least five members of the Federal 
 Reserve Board. 
 
 The act also creates a body known as the Federal Advisory Coun- 
 cil, one member of which is elected by each Federal reserve bank. 
 The duties of the council are to confer with the Federal Reserve 
 Board and to advise it as to matters connected with discount rates, 
 note issues, reserve conditions, open-market powers, and similar ques- 
 tions. 
 
 ■In connection with this selection reference is made to selections 103 and 
 104. — Editor.
 
 268 
 
 PRINCIPLES OK MONEY AND BANKING 
 
 
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 1
 
 270 PRINCIPLES OF MONEY AND BANKING 
 
 135. SUPERIORITY OF DISTRICT OVER CENTRAL BANK 
 
 PLAN' 
 
 By J. LAURENCE LAUGHLIN 
 
 The legislative struggle over the bill gathered mainly about the 
 question of central control. On the one hand, owing to a current 
 belief that a control over credits was possessed by the larger banks 
 of New York City, there were many who regarded government control 
 of banking credits as the only means for securing equality of treat- 
 ment. This attitude was a part of the present-day tendency to press 
 for increasing governmental interference with trade and industry. 
 While there was opposition to a central bank of private capital and 
 of private management, there was more or less support for a central 
 bank owned and controlled by the government. Thus, although there 
 was a well-preserved tradition in the Democratic ranks (based on 
 ignorance of the real services of the Second United States Bank, and 
 which did them little credit) against a central bank, and although 
 Democrats were supposed to dislike a centralization of political power, 
 yet the opposition to the plan of the National Monetary Commission 
 was clearly due, not so much to fear of a central bank, as to the fear 
 of a privately capitalized central institution which might be controlled 
 by the "interests." 
 
 On the other hand, sensible men of all parties reaUzed that it 
 would be impracticable to allow government officials, often poUtical 
 appointees, to do the actual work of technical banking, to grant 
 loans, to manage resources and investments — in short, to introduce 
 the government into the banking business. Political control was 
 obviously as dangerous as private financial control; and it would have 
 been destructively ineflQcient. 
 
 The solution of the matter finally adopted was, interestingly 
 enough, centralization by districts; that is, a centralization intended 
 to prevent scattering of reserves was obtained by establishing in each 
 district an institution itself quite similar, in powers within its juris- 
 diction, to the National Reserve Association of the Monetary Com- 
 mission. That is, the government was saved from going into the 
 banking business by granting local centralization with capital and 
 management supplied by the banks, and yet federated under a com- 
 mon authority in order to establish governmental direction and unity 
 of purpose. In its essence this plan retained the workings of local 
 
 ' Adapted from "The Banking and Currency Act of 1913", Journal of Politi- 
 cal Economy, XXII (1914), 310-12.
 
 THE FEDERAL RESERVE SYSTKM 271 
 
 self-government, together with the operation of technical banking l>y 
 those who supplied the ca])ital, under general direction. This final 
 adjustment which secured safe and efficient methods, as contrasted 
 with the chaotic proposals which might have been adopted, will be a 
 cause of permanent congratulation. 
 
 It is to be observed, moreover, that the solution adapted to our 
 conditions, in which a widely scattered system of individual banks 
 had to be retained, must be original with us. In no other country 
 were the conditions the same. The relation of a Central Bank in 
 European states to other banks was not one based on the existence of 
 a system of individualistic and numerous banks carrying on inde- 
 pendent operations. Therefore, while retaining self-management of 
 privately owned banks, co-operation was obtained by Reserve Banks 
 in local districts under management by bankers, while country-wide 
 and uniform action was gained by governmental direction through 
 a Federal Reserve Board. 
 
 The difficulty of sectional differences of interest working against 
 each other would, nevertheless, have to be met in the practical work- 
 ings of any plan. If there had been one central institution, pressure 
 would have been brought upon the central management to help out 
 one section of the country at the expense of another. Under a system 
 of regional banks each section gets the support of its own resources 
 first of all, an arrangement by which sectional antagonism is reduced 
 Jto the minimum. In addition, when one section is in trouble beyond 
 its own powers of recovery, then by aid of the Reserve Board one 
 Reserve Bank may come to the aid of another. Such a practice, it 
 is to be noted, has been going on in an extra-legal way in previous 
 years whenever banks of a large center have sought assistance from 
 New York. Such a practice was natural and inevitable. In the new 
 law such practice is openly recognized and legalized. 
 
 136. REASONS FOR CHOICE OF DISTRICTS' 
 
 The Organization Committee has issued the following statement 
 as a summary of its operations and conclusions: 
 
 The Federal Reserve Act directs the Reserve Bank Organization Com- 
 mittee to "designate not less than eight nor more than twelve cities to be 
 known as Federal Reserve cities," to "divide the continental United States, 
 excluding Alaska, into districts, each district to contain only one of such 
 
 ' Issued April 2, 1914. Taken from Monthly Letter of National City Bank, 
 New York, .\|)ril, 1914.
 
 272 rRlNCIl'LKS OF MONKY AND BANKING 
 
 Federal Reserve cities," and to apportion the districts "with due regard to 
 the convenience and customary course of business." 'J'he Act provides that 
 the districts may not necessarily be coterminus with any State or States. 
 
 In determining the Reserve districts and in designating the cities within 
 such districts where Federal Reserve Banks shall be severally located, the 
 Organization Committee has given full consideration to the important 
 factors bearing upon the subject. The Committee held public hearings in 
 eighteen of the leading cities from the Atlantic to the Pacific and from the 
 Great Lakes to the Gulf, and was materially assisted thereby in determining 
 the districts and the reserve cities. 
 
 Every reasonable opportunity has been afforded applicant cities to 
 furnish evidence to support their claims as locations for Federal Reserve 
 Banks. 
 
 More than 200 cities, through their Clearing-House Associations, 
 Chambers of Commerce, and other representatives, were heard. Of these, 
 37 cities asked to be designated as the headquarters of a Federal Reserve 
 Bank. 
 
 The majority of the Organization Committee, including its Chairman 
 and the Secretary of Agriculture, were present at all hearings, and steno- 
 graphic reports of the proceedings were made for more deUberate considera- 
 tion. Independent investigations were, in addition, made through the 
 Treasury Department, and the preference of each bank as to the location of 
 the Federal Reserve Bank with which it desired to be connected was ascer- 
 tained by an independent card ballot addressed to each of the 7,475 National 
 Banks throughout the country which had formally assented to the provisions 
 of the Federal Reserve Act. 
 
 Among the many factors which governed the Committee in determining 
 the respective districts and the selection of the cities which have been chosen 
 were: 
 
 First. — The ability of the member banks within the district to provide 
 the minimum capital of $4,000,000 required for the Federal Reserve- Bank, 
 on the basis of 6 per cent of the capital stock and surplus of member banks 
 within the district. 
 
 Second. — The mercantile, industrial, and financial connections existing 
 in each district and the relations between the various portions of the district 
 and the city selected for the location of the Federal Reserve Bank. 
 
 Third. — ^The probable ability of the Federal Reserve Bank in each dis- 
 trict, after organization and after the provisions of the Federal Reserve Act 
 shall have gone into effect, to meet the legitimate demands of business, 
 whether normal or abnormal, in accordance with the spriit and provisions 
 of the Federal Reserve Act. 
 
 Fourth. — ^The fair and equitable division of the available capital for the 
 Federal Reserve Banks among the districts created.
 
 THE FEDERAL RESERVE SYSTEM 273 
 
 • 
 
 Fifth. — The general geographical situation of the district; transporta- 
 tion lines and the facilities for speedy communication between the Federal 
 Reserve Bank and all portions of the district. 
 
 Sixth. — The population, area, and prevalent business activities of the 
 district, whether agricultural, manufacturing, mining, or commercial, its 
 record of growth and development in the past, and its prospects for the 
 future. 
 
 In determining the several districts, the Committee has endeavored to 
 follow state lines as closely as practicable, and wherever it has been found 
 necessary to deviate, the division has been along lines which are believed 
 to be most convenient and advantageous for the district affected. 
 
 137- CRITICISM OF THE DISTRICTS CHOSEN* 
 
 The plan of division indicated by the committee has already 
 received very severe criticism, this criticism being particularly 
 addressed to the folIoAving points: 
 
 1. The establishment of the maximum number of 12 districts, 
 notwithstanding that the advice of a large number of bankers and 
 business men had been in favor of the limitation of the number to the 
 minimum required by law. 
 
 2. The failure to create a single large overshadowing bank with a 
 capital of not less than $25,000,000 to $30,000,000, such a bank having 
 been strongly recommended on the ground that an institution of such 
 a size was necessary to control foreign exchange operations and to 
 direct the course of trade and monetary operations between the United 
 States and foreign countries. 
 
 3. The placing of too many districts on the Atlantic Coast while 
 the West was left relatively unsupplied witli districts and banks. 
 
 4. The faulty division of the country between the several districts 
 in certain particulars. Among these particulars are expressly men- 
 tioned (a) the selection of boundary lines that would include larger 
 and richer centers as tributary to smaller and weaker points at which 
 reserve banks were situated, {b) the artificial separation of certain por- 
 tions naturally tributary to a given city and their inclusion in a region 
 assigned to another city, (c) the erroneous assignment of certain 
 regions to cities w4th which they have comparatively poor or slow 
 transportation connections. 
 
 ' Adapted from "Washington Notes" in Journal of Political Fxonomy, XXII 
 (1914), 484-87.
 
 274 rRiNCiPLES OF monp:y ani^ hanking 
 
 • 
 
 These objections, as thus classified, practically summarize the 
 whole case against the plan of districting, but there is a distinct differ- 
 ence in the weight to be given to the various criticisms. As to whether 
 the maximum or minimum number of districts should have been 
 created, decided difference of opinion undoubtedly exists in respon- 
 sible circles, not a few persons taking the view that if possible the 1 2 
 districts should have been mapped out, assuming, of course, that each 
 could be assigned a capital adequate to the creation of a reasonably 
 strong bank in the district under consideration. This point may be 
 regarded therefore as essentially a question of difference in theory or 
 of attitude toward the banking organization question in general. 
 
 In the same way the failure or refusal to create a single bank of 
 predominant capital is not considered as affording ground for the 
 pessimistic criticisms that are voiced in some quarters. The New 
 York reserve bank actually provided for will have a much larger 
 capital than any other institution in the system, and, while its capital 
 is materially smaller than the combined capital and surplus of 
 several of the other institutions located in the city of New York, this 
 fact is not regarded as necessarily indicating anything ver>' definite 
 with reference to the effectiveness of the proposed plan. As a matter 
 of fact, the Bank of England is considerably below several other 
 institutions in London, so far as relates to aggregate resources. This 
 does not prevent the Bank of England from exercising a predominant 
 control over the prevailing rate of discount. A similar condition 
 exists in some of the Continental countries. It is beheved, therefore, 
 that the size allowed to the New York institution is amply sufficient 
 to permit the establishment of an effective bank. Moreover, too 
 little weight appears to have been allowed in current discussion to the 
 fact that the Federal Reserve Board will exercise a powerful central 
 control over the whole system and will undoubtedly succeed in uniting 
 the different institutions in a single and well-considered national 
 policy. 
 
 A different point of view is evidently entertained by careful 
 thinkers with respect to the actual districting. The third point, 
 already mentioned above, that too many districts have been placed 
 on the Atlantic Coast while the West is left relatively unsupplied is 
 regarded as having very considerable force. As things stand, the 
 Atlantic Coast districts are represented by the cities of Boston, New 
 York, Philadelphia, Richmond, and Atlanta. This is considered 
 clearly one too many, the urmecessary city and district being Rich-
 
 THE FEDERAL RESERVE SYSTEM 275 
 
 mond. By leaving out the Richmond district a much-needed dis- 
 trict which could have been used elsewhere would have been saved 
 with positive benefit to the other districts on the Atlantic Coast, which 
 are now too thickly packed together to admit of a healthy growth. 
 The belief prevailing in sound quarters is that the Atlanta district with 
 its very limited capital would have been better off had not the states 
 of North and South Carolina, which properly belong to it, been pared 
 away in order to provide a southern extension for the Richmond dis- 
 trict. In the same way, the northward e.xtension of the Richmond 
 district tended to force the northern boundary of the Philadelphia 
 district to the shores of New York harbor, thereby depriving Xew 
 York City of a portion of its natural territory, the northern rim of 
 New Jersey, while in like manner the rearrangement of boundaries 
 necessitated by the insertion of the Richmond district tended to pre- 
 vent the inclusion of western Connecticut with New York, and to 
 force other adjustments generally believed to be out of harmony with 
 the "convenience and customary course of business." 
 
 In a somewhat similar fashion the fourth criticism already men- 
 tioned is finding support among informed students of banking. This 
 criticism closely follows that which has been last considered. By 
 making Baltimore, for example, tributar}^ to Richmond, and New- 
 Orleans to Atlanta, an injury was done not only to local pride but also 
 to the convenient and customary cfbvelopment of trade relations. 
 The work done in this regard seems to make it unavoidable that there 
 should be a considerable reversal of the current of business in a num- 
 ber of districts, the clearing of checks and the obtaining of rediscounts 
 being carried on at points where under other conditions they would 
 never have been placed. Undoubtedly this kind of change will cause 
 some friction, but there seems to be little doubt that the amount of 
 it has been considerably exaggerated. Those who arc disposed to 
 place too much stress upon the effect of the districting overlook the 
 fact that the new system is simply superadded to existing banking 
 arrangements and that it in no way interferes with them. Even the 
 redistribution of reserves does not aflect them, since the gross amount 
 of required reserve is so reduced under the new banking act that banks 
 which have been in the habit of keeping reserve balances with the old 
 reserve cities could continue to do so without serious hardship under 
 the new law, even if these balances were not ct)untcd as reserves. They 
 would he as well olT as llu\- wire before. The criticism of the dis- 
 tricting really amounts in the last analysis to a statement that the
 
 276 PRINCIPLES OF MONEY AND BANKING 
 
 work has not been done as well as it might have been, and that if it 
 had been more carefully performed the operation of the new system 
 would have been somewhat smoother and easier to manage. 
 
 138. THE FEDERAL RESERVE BOARD' 
 By E. E. agger 
 
 Co-ordinating and controlling the whole system is the "Federal 
 Reserve Board." It is made up of seven members. The Secretary 
 of the Treasury and the Comptroller of the Currency are members 
 ex officio. Five members are appointed by the President by and with 
 the advice and consent of the Senate. Not more than one member 
 of the board can come from a single reserve district. At least two of 
 the presidential appointees must have had banking or financial 
 experience, but no member of the board may be an officer, director, 
 or stockholder of any bank. Except for the ex-officio members, and 
 for the first incumbents, whose terms \\\\\ run respectively, two, four, 
 six, eight, and ten years, the term of office will be ten years. But the 
 President may remove members for cause. While the Secretary of 
 the Treasury is the ex-officio chairman of the board- the President is 
 empowered to name one of his five appointees as "governor." The 
 governor and vice-govcnor are the chief executive officers of the whole 
 system. *" 
 
 The Federal Reserve Boar*is*an unusually powerful supervisory 
 and regulating body. It may suspend or remove any officer or direc- 
 tor of a federal reserve bank; it may require the writing off by such 
 bank of its bad debts, and may suspend a federal reserve bank or 
 take it over for purposes of reorganization or liquidation. It may 
 also readjust or abolish altogether the classification of central reserve 
 and reserve cities. 
 
 The member banks are represented in the central management by 
 a "Federal Advisory Council," made up of one representative from 
 each federal reserve district, chosen by the board of directors of the 
 federal reserve bank. This council meets quarterly at Washington 
 and at such other times and places as it may choose. While patterned 
 after the stockholders' committee of the Reichsbank, it is even less 
 powerful than the German prototj^e. It may merely call for infor- 
 mation from, and advise with, the Federal Reserve Board.^ 
 
 ' Adapted from "The Federal Reser\-e System," Political Science Quarterly, 
 XXIX (1914), 269-70. 
 
 ^Compare with selection No. 132. — Editor.
 
 THE FEDERAL RESERVE SYSTEM 277 
 
 139. FUNCTIONS OF THE RESERVE BANKS' 
 
 The question naturally suggests itself and must be frankly faced: 
 What is the proper place and function of the Federal Reserve Banks 
 in our banking and credit system ? On the one hand it is represented 
 that they are merely emergency banks to be resorted to for assistance 
 only in time of abnormal stress, while on the other it is claimed that 
 they are in essence simply additional banks which should comj)ete 
 with the member banks, especially with those of the greatest power. 
 The function of a reserve bank is not to be identified with either of 
 these extremes, although occasions may arise when either of such 
 courses may be imperative. Its duty plainly is not to await emer- 
 gencies but, by anticipation, to do what it can to prevent them. So 
 also if, at any time, commerce, industry, or agriculture is, in the 
 opinion of the Federal Reserve Board, burdened unduly with excessive 
 interest charges, it will be the clear and imperative duty of the Reser\'e 
 Board, acting through the discount-rate and open-market powers, to 
 secure a wider diffusion of credit facilities at reasonable rates. The 
 Federal Reserve Banks are the holders of a large part of the banking 
 reserves of the nation, the foundation of its banking structure. 
 Nothing should be permitted in the operation of the Reserve Banks 
 which would weaken this foundation. The resources of a Reserve 
 Bank, to be useful for its peculiar purposes, should always be readily 
 available. It follows, therefore, that they should be mainly invested 
 in such short-term liquid investments as can be easily converted into 
 cash as occasion may require. This conception of a Reserve Bank, 
 moreover, implies that its investments should be marshaled in a 
 steady succession of maturities, so that it may at all times as nearly 
 as possible prove equal to the situation. 
 
 The ready availalnlity of its resources is of supreme importance 
 in the conduct of a Reserve Bank. Only then can it become a safe 
 and at the same time flexible instrument of guidance and control, a 
 regulator of interest rates and conditions. Only then will it con- 
 stantly carry the promise of being able to protect business against the 
 harmful stimulus and consequences of ill-advised expansions of credit 
 on the one hand or against the menace of unnatural restrictions and 
 unnecessary contractions on the other, with exorbitant rales of interest 
 and artificial stringencies. It should at all times be a steadying 
 influence, leading when and where leadership is requisite, but never 
 
 'Quoted from First Annual Report of the Federal Reserve Board, December, 
 1914, pp. 17-18.
 
 278 PRINCirLMS OF MONEY AND HANKING 
 
 allowing itself to become an instrument for the promotion of the selfish 
 interest of any private or sectional group, be their aims and methods 
 open or disguised. It should never be lost to sight that the Reserve 
 Banks are invested with much of the quality of a pubUc trust. They 
 were created because of the existence of certain common needs and 
 interests, and they should be administered for the common welfare — 
 for the good of all. 
 
 The more complete adaptation of the credit mechanism and 
 facilities of the country to the needs of industry, commerce, and agri- 
 culture — with all their seasonal fluctuations and contingencies — 
 should be the constant aim of a Reserve Bank's management. To 
 provide and maintain a fluid condition of credit, such as will make 
 of the Reserve Banks at all times and under all conditions institutions 
 of accommodation in the larger and public sense of the term, is the 
 first responsibility of a Reserve Bank. 
 
 It should not, however, be assumed that because a bank is a 
 Reserve Bank its resources should be kept idle for use only in times 
 of difficulty, or, if used at all in ordinary times, used reluctantly and 
 sparingly. Neither should it be assumed that because a Reserv^e 
 Bank is a large and powerful bank all its resources should be in use 
 all the time or that it should enter into keen competition with mem- 
 ber banks, distributing accommodation with a free and lavish hand 
 in undertaking to quicken unwisely the pace of industry. Such a 
 policy would be sure, sooner or later, to invite disaster. Time and 
 experience will show what the seasonal variations in the credit 
 demands and facilities in each of the Reserve Banks of the several 
 districts will be and when and to what extent a Reserve Bank may, 
 without violating its special function as a guardian of banking reserves, 
 engage in banking and credit operations. The Reserve Banks have 
 expenses to meet, and while it would be a mistake to regard them 
 merely as profit-making concerns and to apply to them the ordinary 
 test of business success, there is no reason why they should not earn 
 their expenses, and a fair profit besides, without failing to exercise 
 their proper functions and exceeding the bounds of prudence in their 
 management. Moreover, the Reserve Banks can never become the 
 leading and important factors in the money market which they were 
 designed to be unless a considerable portion of their resources is regu- 
 larly and constantly employed. 
 
 There will be times when the great weight of their influence and 
 resources should be exerted to secure a freer extension of credit and
 
 THE fedi:r.\l reserve system 279 
 
 an easing of rates in order that the borrowing community shall be 
 able to obtain accommodation at the lowest rates warranted by exist- 
 ing conditions and be adequately protected against exorbitant rales 
 of interest. There will just as certainly, however, be other times when 
 prudence and a proper regard for the common good will require that 
 an opposite course should be pursued and accommodations curtailed. 
 Normally, therefore, a considerable proportion of its resources should 
 always be kept invested by a Reserve Bank in order that the release 
 or withdrawal from active employment of its banking funds may 
 always exercise a beneficial influence. This is merely saying thai to 
 influence the market a Reserve Bank must always be in the market, 
 and in this sense Reserve Banks will be active banking concerns when 
 once they have found their true position under the new banking con- 
 ditions. 
 
 It would be a mistake, therefore, and a serious limitation of ihcir 
 usefulness to regard the Reserve Banks simply as emergency banks. 
 Regulation in ordinary times, as well as protection in extraordinary' 
 times, may be expected to become the chief service which these insti- 
 tutions will perform. The Federal Reserve Board is fully alive to its 
 opportunities and responsibilities in this respect, but it must counsel 
 patience in awaiting the fruition of the new system. It will lake time 
 for the new banks to develop the technique of control and skill and 
 experience in its application. The ascertainment of the correct base 
 from which comprehensive operations should begin, the establishment 
 of a normal level from which expansions and contractions will freely 
 take place, will have a most important bearing upon the future devel- 
 opment and success of the system. Impatience to show results should 
 not be permitted to tempt those in charge of the Reserve Banks into 
 precipitate and unwise action. 
 
 The vast and complex structure of modern banking and crrdit 
 systems is one of extreme delicacy of balance and adjustment, and 
 it must never be overlooked that it is highly sensitive to all manner 
 of disturbances, as recent events have painfully demonstrated. The 
 banking systems of the larger nations are closely related to one 
 another, and financial distress or collajise at one point (|uickly trans- 
 mits shock to all others. Safety for us in critical times will depend on 
 the confidence our system commands, the strength of its reserves, and 
 its power to bring them into action promjitly and effect ivcly if needed. 
 
 In dealing with new districts and entirely changed banking 
 methods, time and experience alone can supply the data necessarj' for
 
 28o PRINCIPLES OF MONEY AND BANKING 
 
 charting the course to be pursued. This consideration, if nothing else, 
 would suggest the greatest patience and prudence, even if the European 
 horizon were less clouded than it is today. None the less, the Board 
 realizes that where extraordinary conditions warrant extraordinary' 
 measures it is the foremost duty of the Board and the banks to act 
 promptly and boldly. 
 
 140. THE DIRECTORS OF THE FEDERAL RESERVE BANKS' 
 By MILTON C. ELLIOT 
 
 The duties and responsibilities of the directors of Federal Reserve 
 Banks will be of the same general character, with an added degree 
 of responsibility, as the duties and responsibilities of directors of 
 national or member banks. 
 
 Section 4 of the Federal Reserve Act provides among other things 
 that— 
 
 Every Federal Reserve Bank shall be conducted under the supervision 
 and control of a board of directors. 
 
 The board of directors shall perform the duties usually appertaining 
 to the office of directors of banking associations and all such duties as are 
 prescribed by law. 
 
 Said board shall administer the affairs of said bank fairly and impar- 
 tially and without discrimination in favor of or against any member bank or 
 banks and shall, subject to the provisions of law and the orders of the 
 Federal Reserve Board, extend to each member bank such discounts, 
 advancements, and accommodations as may be safely and reasonably made 
 with due regard for the claims and demands of other member banks. 
 
 From this it will be observed that the Federal Reserve Banks are 
 to exercise the functions of banks and are not merely an association 
 of other banks. 
 
 When this section is read in connection with Section 13, relating 
 to rediscounts and other powers of Federal Reserve Banks, and with 
 Section 16, which provides in efifect that the United States Govern- 
 ment shall lend its credit through the issuance of Federal Reserve 
 notes to these banks, it is apparent that the duties and obligations of 
 the directors of Federal Reserve Banks are not honorary, but that 
 those who undertake these important obligations are factors in a 
 great co-ordinated system of banking. 
 
 ' Adapted from an address before the AmericanBankers'Association,May. 1914. 
 (Published in Monthly Letter of National City Bank, New York, June, 1914.)
 
 THE FEDERAL RESERVE SYSTEM 28 1 
 
 While the management of the Federal Reserve Banks will be 
 relieved from many of the problems and difficulties of individual 
 banks, and will deal primarily with certain definite depositors and 
 customers — the member banks, the responsibilities of their directors 
 will be increased by reason of the fact that they have at stake, not 
 only the investment of the depositors' funds, but the investment of 
 the national credit. 
 
 In working out a system which will insure conservative business 
 management of these banks Congress has undertaken to create a 
 board of directors which is representative of the interests involved. 
 
 It is provided that the board of each Federal Reserve Bank shall 
 consist of nine members; that one-third of this board, to be known as 
 class "C" directors, shall be selected by the Federal Reser\-e Board, 
 which is in effect the representative of the United States Government; 
 that one-Lhird shall be known as class "A" directors and shall consist 
 of three members who shall be chosen by and be representati\e of the 
 stockholding banks; and that the remaining one-third, to be known 
 as class "B " directors, shall consist of three members who at the time 
 of their election shall be actively engaged in their district in commerce, 
 agriculture, or some other industrial pursuit. The make-up of this 
 board of directors is therefore representative, first, of the United States 
 Government, second, of the stockholding banks, and third, of the busi- 
 ness representatives, who are in elTect the creditors of that part of the 
 public which deals with member banks. 
 
 In other words, it will be observed that class ".\" consists of rep- 
 resentatives of the banks or those who are intrusted with the funds of 
 the business public for investment; class "B " consists of representa- 
 tives of the public who are furnishing these funds, and class "C " con- 
 sists of the representatives of the Government, which undertakes to 
 supervise the proper and conservative investment of such funds. 
 
 It must be remembered, however, iliat while these three interests 
 are representative, tlie Board when organized is a unit, and that this 
 Board is charged witli the management and control of the alTairs of 
 such bank. The grouping or classification relates only to the manner 
 of election, and not to their status after election. 
 
 When by election In' the member banks or by ai)poinlment by the 
 Federal Reserve Board the candidates become members of the board 
 of directors of the Federal Reserve Banks, the duties and obligations 
 of each member are the same. It is true that the Chairman or 
 Federal Reserve Agent and the Deputy Chairman or Deputy Federal
 
 282 PRINCIPLES OF MONEY AND BANKING 
 
 Reserve Agent who are members of the board occupy dual capacities, 
 in that they are the local representatives of the Federal Reserve Board 
 in addition to being members of the board of directors. As members, 
 however, their duties are similar to those of class "A" and class "B" 
 directors. 
 
 In order to insure a thoroughly representative board. Congress has 
 provided that such boards shall not only consist of the three interests 
 referred to, namely, the Government, the banks, and the business 
 interests, but that in making this selection each district shall be divided 
 into three general groups or divisions, each group to contain, as nearly 
 as may be, one-third of the aggregate number of member banks of 
 similar capitalization. Each one of these groups will nominate and 
 elect one class "A" and one class "B" director, so that the directors 
 will be selected by and be representative of not only the stockholding 
 banks as a whole but of the several classes of banks included within each 
 district. This does not mean that the board shall necessarily consist 
 of officers or directors of the smallest banks as well as officers or 
 directors of the largest, but that each class of banks shall have an 
 opportunity to nominate and elect, together with banks of similar 
 capitalization, either from their own or from any other group, the 
 candidate best suited, in the opinion of such banks, to perform the 
 important duties assigned to the directors of Federal Reserve Banks. 
 By the terms of the law: Group No. i will contain approximately 
 one-third of the aggregate number of banks in a district and will be 
 composed of banks of the largest capitalization. Group No. 2 will 
 include approximately one-third of the aggregate number of banks in 
 a district and will embrace the banks having the next largest capi- 
 talization. Group No. 3 will include approximately one-third of the 
 aggregate number of banks in a district, being composed of those 
 having the smallest capitalization. 
 
 B. The Practical Working of the System 
 
 141. DEFECTS TO BE REMEDIED BY THE ACT^ 
 
 By J. LAURENCE LAUGHLIN 
 
 The defects in our banking and currency system which were 
 to be remedied by the new legislation may be very briefly summarized 
 as follows: an inelastic bank-note circulation; an even more dan- 
 
 ' Adapted from "The Banking and Currency Act of 1913," Journal of Political 
 Economy, XXII (1914), 302.
 
 THE fedi;ral rkserve system 2S3 
 
 gerously inelastic credit system; ineffective use of a large sujiply of 
 gold; a scattering of reserves and lack of co-operative action by banks 
 in times of stress; a rigid reserve system which induced panics; state 
 banks and trust companies doing a commercial l)usiness but in different 
 systems; an independent Treasury divorced from the money market 
 which imperiled bank reserves in times of difficulty; the drift of idle 
 funds to the call-loan market where they fed stock speculation, and 
 the want of American banking faciUties in other countries to aid our 
 foreign^trade. 
 
 142. THREE TYPES OF BANK NOTES IN THE FUTURE' 
 
 By THOMAS CO>fWAY and ERNEST M. PArfERSON 
 
 I. PARTIAL RETENTION OF PRESENT NOTES 
 
 The Federal Reserve Act does not compel the national banks to 
 retire their circulation. They may increase it or decrease it under 
 the old regulations and within the old limits if they see fit. More- 
 over, they are released by Section 17 of the act from the old require- 
 ment to purchase a stated amount of United States bonds before 
 being authorized to commence the banking business. 
 
 Retiring the national bank notes. — The first important change is 
 that, beginning two years after the passage of the act, that is to say, 
 on December 23, 1915, member banks may retire their circulation in 
 whole or in part, this privilege to remain open for a period of twenty 
 years thereafter, or until December 23, 1935. Any member bank 
 desiring to retire any or all of its circulating notes rnay file with the 
 Treasurer of the United States an application to sell for its account, 
 at par and accrued interest, its United States bonds, now held in trust 
 at Washington against the circulation that is to be retired. 
 
 Disposition of the United States bonds. — The Treasurer shall notify 
 the member banks of the amount of bonds sold for their account and 
 these banks shall then assign and transfer the bonds to the reserve 
 bank that has purchased them. The reserve bank shall then deposit 
 lawful money with the Treasurer of the United States for the purchase 
 of the bonds. The Treasurer shall deduct from this payment an 
 amount sufficient to redeem the outstanding national bank notes that 
 have in the past been secured by those bonds, and shall pay the 
 balance, if any remains, to the member bank that formerly owned 
 them. 
 
 ' Adapted from The Operation of the New Bank Act, pp. 132-48. (J. B. Lippin- 
 cott Co., 1914.)
 
 284 PRINCIPLES OF MONEY AND BANKING 
 
 The reserve banks are not allowed to purchase more than 
 $25,000,000 of these bonds in any one year, and even this amount may 
 be reduced if they choose to purchase bonds under the authorization 
 in Section 4.' There were outstanding on December 26, 1913, 
 $756,944,194 of national banks notes, against which were held 
 $16,147,911 of lawful money, and $743,173,000 of United States bonds. 
 If all the national banks make application regularly and the full 
 $25,000,000 be taken over by the Federal reserve banks each year, 
 the process will take nearly thirty years. e 
 
 The act specifically limits the retirement process to a period of 
 twenty years. Since, as we have seen, it would take nearly thirty 
 years, at the rate of $25,000,000 a year, to retire all the outstanding 
 notes, each bank would be left at the end of that long period with 
 approximately one-third of its bonds still on hand. If we deduct the 
 3 per cent and 4 per cent United States bonds now held in trust and 
 limit ourselves to the 2 per cent bonds, which amount to $685,996,700, 
 the retirement of all of them would take over twenty-seven years, 
 and at the end of twenty years the banks would be left with at least 
 $185,996,700 unprovided for. 
 
 Whether bankers will wish to continue their issues of notes as of old 
 is an uncertain matter. If United States bonds remain low in price 
 their cheapness may be a temptation, as in the past. The banks may 
 actually be encouraged to issue notes. If, however, they fear that 
 the purchases by the new reserve banks will be insufficient to sustain 
 the market, they may prefer to retire their issues as promptly as 
 possible. 
 
 n. RESERVE BANK BOND-SECURED NOTES 
 
 Reserve bank notes are to be the obligation of the Federal 
 reserve bank issuing them and "shall be in form prescribed by the 
 Secretary of the Treasury, and to the same tenor and effect as 
 national bank notes now provided by law. They shall be issued 
 and redeemed under the same terms and conditions as national 
 bank notes, except that they shall not be limited to the amount 
 of the capital stock of the Federal reserve bank issuing them." In 
 other words, each reserve bank may issue an amount of these notes 
 that is limited only by the deposit of the prescribed security. 
 
 Issues of bond-secured currency of the Federal reserve banks may 
 originate in two ways, although all of the notes will be alike in form 
 
 ' See below. — Editor.
 
 THE FEDERAL RESERVE SYSTEM 285 
 
 and in security. The first group will arise through the retirement of 
 the national bank notes. The reserve banks purchasing these notes 
 may deposit them in trust with the Treasurer of the United States, 
 receiving from the Comptroller of the Currency an amount of circulat- 
 ing notes equal to the par value of the bonds so deposited. There will 
 thus be no shrinkage in the volume of the currency, the amount of the 
 new reserve notes being equal to the national bank notes that are 
 retired. The net result will be to relieve the national banks of tiie 
 ownership of the bonds and their liability for the notes, and to trans- 
 fer both the bonds and the note liability to the reserve banks. 
 
 The second way in which the reserve bank notes may get into cir- 
 culation is under the provisions of Section 4. The eighth of the powers 
 conferred upon the reserve banks in that section stipulates that they 
 may, "upon deposit with the Treasurer of the United States of any 
 bonds of the United States in the manner provided by existing law 
 relating to national banks," receive from the Comptroller of the Cur- 
 rency circulating notes equal in amount to the par value of the bonds 
 so deposited. These notes are identical with the ones already 
 described, the only difference being that in the first case the bonds are 
 the ones that now secure the circulation of the national banks, while 
 in the second the bonds may not have been securing national bank 
 circulation at the time of purchase, and may have been bought from 
 other owners than national banks. 
 
 The significance of this provision lies in tlie fact that it creates a 
 market for United States bonds. This power of tlie reserve banks 
 may be of value in maintaining the price of the bonds, not only to the 
 advantage of the present holders of tliose bonds, but also to the advan- 
 tage of the government. It is also important because, if this power 
 is exercised, it will limit the amount of United States bonds that the 
 reserve banks may purchase from the national banks to retire their 
 circulation. The total amount they are permitted to purchase from 
 both sources may not exceed $25,000,000 per annum. Most of our 
 government bonds are in the hands of the national banks. The 
 owners of the balance, who are the trust companies, insurance com- 
 panies, and the general public, may, especially if the market declines, 
 dispose of their holdings to the reserve banks, which will be tempted 
 by the lower prices to make tlie purchases, since tliey may exchange 
 them at the Treasury Department for new 3 per cent bonds. This 
 may be done to such an extent as to lessen the rapidity with which 
 those banks could purchase from the national banks.
 
 286 PRINCIPLES OF MONEY AND BANKING 
 
 Refunding the 2 per cent bonds. — If the reserve banks do not wish 
 to keep these notes out, and wish to invest in United States securities 
 bearing more than 2 per cent interest, they may do so through an 
 arrangement for an exchange. "Upon application of any Federal 
 reserve bank, approved by the Federal Reserve Board, the Secretary 
 of the Treasury may issue in exchange for United States 2 per cent 
 gold bonds bearing the circulation privilege, but against which no cir- 
 culation is outstanding, one-year gold notes of the United States with- 
 out the circulation privilege, to an amount not exceeding one-half of the 
 2 per cent bonds so tendered for exchange, and thirty-year 3 per cent 
 gold bonds without the circulation privilege for the remainder of the 2 
 per cent bonds so tendered. ' ' The reserve bank may thus retire its note 
 issues in the same way as the national banks do now, and then make 
 an exchange in the manner described, getting 3 per cent securities in 
 return for those bearing 2 per cent. The burden of the additional 
 I per cent per annum interest charge will fall upon the government, 
 an arrangement that is entirely proper, since for years it has bor- 
 rowed at rates lower than are available for any other government in 
 the world, and has done it by requiring the national banks to buy 
 bonds as a prerequisite to securing a charter and issuing notes. 
 
 The stipulation that "not to exceed one-half of the new securities 
 shall be one-year gold notes" opens the way for a reduction in the 
 national debt, if receipts to the Federal government from the earnings 
 of the reserve banks or from any other source make such a reduction 
 possible. The reserve bank will be required, upon receipt of these 
 notes, to agree that as they mature year after year it will purchase 
 such an amount of new one-year 3 per cent gold notes as the Secretary 
 of the Treasury may tender to it, not to exceed, however, the amount 
 of such notes issued to the bank in the first instance in exchange for 
 the 2 per cent bonds. This obUgation to purchase notes shall continue 
 for a period not to exceed thirty years. At the end of that time, if 
 the Secretary of the Treasury and Congress do not find it possible to 
 retire these notos some provision for refunding them can be made. 
 
 III. FEDERAL RESERV'E (aSSEt) NOTES 
 
 The Federal reserve notes are to be issued as follows: Any reserve 
 bank may make application to the local Federal reserve agent (that 
 is, the chairman of its own board of directors) for such amounts of 
 these notes as it may require, at the same time offering, as collateral 
 security therefor, commercial paper and bills rediscounted by it for
 
 THE FEDERAL RESERVE SYSTEM 287 
 
 member banks. This security must be at least equal to the notes 
 received. Some of these securities may from time to time be with- 
 drawn, with the approval of the Reserve Board, if at the same time 
 other collateral of equal amount is substituted. The Reserve Board 
 may also at any time call for additional security. As the notes may 
 be issued for no other purpose than in exxhange for such collateral, 
 and since this collateral is in the form of rediscounted paper, it may 
 be said that the notes are issued only through rediscounting. 
 
 They will be in denominations of $5, Sio, $20, $50, and Sioo. As 
 there are no specifications as to the relative amounts of each, it is 
 probable that the kind needed will always be furnished. All expenses 
 incident to their issue and retirement must be met by the reserve bank 
 receiving them, which shall also pay on them a rate of interest to be 
 determined by the Reserve Board. Each note will bear the distinctive 
 number of the reserve bank through which it is issued. In anticipa- 
 tion of demand for them a quantity are to be prepared and deposited 
 in the Treasury or in the subtreasury or mint of the United States 
 nearest the place of business of each reserve bank, where they shall 
 be held subject to the order of the Comptroller of the Currency. 
 
 143. ELASTICITY OF NOTES UNDER THE NEW LAW 
 
 By FRED M. TAYLOR 
 
 I. SEASONAL ELASTICITY 
 
 First, does the Federal Reserve Act insure the expansibility needed 
 to supply adequate funds for crop-moving ? At this point it must at 
 once be admitted that the new currency does not meet the demands 
 of the case in quite the thoroughgoing way which earlier schemes 
 thought to be necessary. The ideal of the earlier plans was to provide 
 an adequate and easily utilized power of issue, located at the very 
 place where the need for expansion is felt, i.e., in the local bank. The 
 new law gives up this idea entirely. The local bank will not have 
 power to issue the new currency at all. In so far as its customers are 
 to get any benefit from that currency the benefit must come through 
 two channels which the country bank could use in getting the needed 
 funds, even if the currency had no exixmsibility, namely, (i) calling 
 in its balances kept with banks more centrally situated, and (2) bor- 
 rowing from such central banks. In otiier words, the new jujwer of 
 
 'Adapted from "Elasticity of Note Issue under the \e\v Law," Journal of 
 Political Economy, XXII (1914), 454-^10.
 
 288 PRINCIPLES OF MONEY AND BANKING 
 
 issue will help out in the crop-moving period merely because it will 
 put the reserve banks in a better position to respond to the call of 
 the country banks for the return of their own balances and for 
 advances on discounted paper. Judged from this point of view only, 
 the elasticity provided by the new law is doubtless adequate. If the 
 reserve banks have not kept themselves in a position to meet the calls 
 of their country members from money already in possession, they will 
 surely be able to put themselves into such a position by expanding 
 their issue of notes. In one sense, then, the new issue has adequate 
 expansibility for ordinary needs. There still perhaps remains a doubt 
 whether effective elasticity is after all assured, for it is not clear that 
 the country bank which needs money for crop-moving purposes will 
 have the wherewithal to get advances from the reserve bank — that 
 is, that it will have paper of the proper kind and in sufl&cient amount 
 for rediscount. However, it seems probable that the act as finally 
 passed has met this need by providing that agricultural paper shall 
 be admitted on rather more liberal terms than paper arising out of 
 ordinary commercial or manufacturing business. If this be so, it 
 would seem that the provisions of the new law for securing one phase 
 of seasonal elasticity — expansibiUty — are fairly adequate.' 
 
 Passing, now, to the other side of elasticity — i.e., contractility — 
 can we say as much ? Will the new issues promptly retire when their 
 special task is over ? Prima facie, the verdict is less favorable than 
 in the previous case. In general there are two principal processes by 
 which a note circulation may be contracted: (i) driving the notes out 
 of circulation, and (2) drawing them out. In so far as the former 
 process is depended upon, means are devised to make sure that the 
 notes shall persistently return to the issuer even against his will — 
 they shall have good homing power. By the second process it is made 
 to the advantage of the issuer of the notes to hasten their withdrawal 
 himself. 
 
 As respects insuring contractility by the former of these processes, 
 the act certainly cannot claim to promise high efficiency. The driving- 
 out process requires roughly the fulfilment of two conditions : (i) keep- 
 ing the charmels for the return of notes to the issuer fairly open, and 
 (2) supplying outsiders with a motive for sending the notes home. 
 As regards the former of these conditions, the new system probably 
 is all right. The return of the notes to the issuer seems not to be 
 impeded by the inconvenience and expensiveness of the process. All 
 
 'On this point, see selections Nos. 144 and 145. — Editor.
 
 THE FEDERAL RESERVE SYSTEM 289 
 
 member banks and all reserve banks must receive these notes, and 
 the reserve banks will probably have branches within easy reach of 
 any part of the district. Hence, any holder desiring to get notes 
 back to the issuing bank will find the process easy and the way open. 
 But good homing power requires more than this. It requires, namely, 
 that adequate motives be supplied to people generally, or, at least, 
 to banks generally, for seeing that the notes get back. It is not 
 enough that the track be smooth; people must desire to use it. Now, 
 earUer plans for securing elasticity relied on two principal motives for 
 inducing holders to send notes back to the issuer: (i) the desire of 
 such holders to make room for their own notes, and (2) tlieir desire to 
 exchange money which has various limitations imposed upon it for 
 money which is free from tliose limitations. It is plain that the new 
 system makes only a limited use of the former of these methods of 
 procedure. Within the district for which any particular reserve bank is 
 the central bank this particular force will be practically inoperative; 
 for the power to issue notes on the basis of common assets is not given 
 to any but reserve banks, and the profitableness of the power to issue 
 the old type of note has always proved too slow to induce banks 
 generally to take much trouble to get their notes into circulation. As 
 between the reserve banks of the different districts, however, this par- 
 ticular motive will, of course, be more or less in evidence, since these 
 reserve banks will all be competitors for this opportunity. But even 
 here more effective means for insuring the return of the notes from 
 outside banks are provided in other parts of the law. 
 
 As regards the second motive for returning idle notes — that is, the 
 desire to exchange a money subject to those limitations — the new act 
 does somewhat better than it does in respect to the first motive. It 
 is, indeed, true that, within their own district, no special disability, 
 like being forbidden to be paid out by other banks, is put on the new 
 notes. But they are always subject to the disability of not being 
 legal reserve money in the case of federal banks; and hence such banks 
 will be more or less disposed to return the notes issued by their own 
 reserve banks in order to exchange them for reserve money. It may 
 be doubted, however, whether in ordinary times this will prove a very 
 potent force, since country banks will usually keep reserves consider- 
 ably in excess of legal requirements, and so will not need to discrimi- 
 nate nicely between the two sorts of money. As between districts, 
 the case for the homing power of the new notes is rather stronger, 
 since reserve banks are prohil)ited from paying out the notes of other
 
 290 PRINCIPLES OF MONEY AND BANKING 
 
 reserve banks under penalty of a 10 per cent tax. Even here, however, 
 the provisions are none too adequate. While the notes of a particular 
 reserve bank must not be paid out by the reserve banks of other dis- 
 tricts, there is no prohibition against their being paid out by the 
 member banks of other districts; and it is doubtful whether there is 
 sufficient motive to induce said member banks of other districts to 
 send in these notes to their own reserve banks and so start them on 
 their homeward journey. The desire to exchange money which can- 
 not be used as reserve for that which can be would have some force; 
 but, under many circumstances, it would probably prove rather 
 inadequate. 
 
 Another disability which contributes to the homing power of a 
 bank note, and which is actually used in the case of our old notes, is 
 not used with this new note — I mean the fact that they are not 
 receivable for customs dues. The decision to omit this provision was 
 perhaps wise; but it throws out a potent motive for sending notes 
 home, and thus throws away an opportunity to make better provision 
 for their contractility. On the whole, it must be acknowledged that, 
 in so far as homing power is dependent on giving to outsiders strong 
 and persistent motives for sending notes home, the new law is not 
 altogether satisfactory. 
 
 We have seen that there is very little in the new system to secure 
 that the notes shall have good homing power — shall get home by what 
 we have called the driving-in process. Is the system better off as 
 respects the drawing-in process? Are matters so arranged that the 
 issuing bank will have the power and the desire to withdraw its notes — 
 or at least contract the currency proportionately — when the need for 
 the notes has fallen off ? As respects the first part — making sure that 
 the issuing bank shall have the power to retire its notes, or at any 
 rate to effect a corresponding contraction of the currency — the new 
 system is practically perfect, as indeed was the old one. That is, any 
 reserve bank desiring to contract its note obligations may at its dis- 
 cretion deposit with the federal reserve agent reserve notes, gold, or 
 lawful money. Obviously this, if not strictly a contraction of its note 
 circulation, at least brings about the desired contraction of the general 
 circulation. 
 
 When, however, we consider the provisions of the new law for 
 insuring that reserve banks shall desire to contract their circulation 
 when the special need has passed, we find that the law does not promise 
 quite so well. The favorite device for accomplishing this result has
 
 THE FEDER.\L RESERVE SYSTEM 291 
 
 been, of course, a tax on issues similar to the 5 per cent tax of the 
 German system. Apparently, the new law provides for something 
 equivalent to this in the shape of an interest charge by the Federal 
 Reserve Board, the rate to be fixed by said board. How far this 
 device will prove effective in practice is not safe to predict. In order 
 that it should induce the banks to contract their circulation, circum- 
 stances must have arisen under which the issuing bank would be earn- 
 ing on its outstanding notes a profit smaller than the tax itself. Now, 
 it does not seem certain that an excessive issue of notes would neces- 
 sarily bring about this condition. In the first place, in the absence of 
 good homing power, a volume of notes in excess of business needs 
 would not necessarily cause an accumulation of those notes in the 
 vaults of the bank issuing them. Secondly, so long as member banks 
 are free to keep their balances in banking institutions other than their 
 reserve banks an excess of notes would not necessarily cause the 
 general cash holdings of reserve banks to be abnormally large. For 
 so long as the ordinary New York banks are permitted to pay interest 
 on bankers' balances, country banks will to a considerable extent 
 keep their balances with these outside New York banks; and it seems 
 not unhkely that the excessive monetary stock thus accumulating in 
 New York City would, instead of getting into the hands of the New 
 York reserve bank, largely remain in the hands of the outside l)anking 
 institutions and be emjjloyed more or less as it has been in the past; 
 that is, in financing doubtful enterprises and supporting excessive 
 speculation. But if the reserve banks do not feel the pressure of 
 excessive issues in the shape of accumulations of notes or some form 
 of money in their own vaults, they may conceivably be able to invest 
 advantageously all the funds in their possession, and, in that case, the 
 rate of interest charged by the Federal Reserve Board will not furnish 
 an adequate motive for the retirement of their issues. Doubtless, how- 
 ever, this may in some degree be answered by sa>'ing that e\en an 
 excess which was felt only outside the reserve bank woukl, after all, 
 compel the reserve bank to contract its issues, since it would lower the 
 rate of discount so greatly that reserve banks could not profitably 
 invest their ordinary holdings, and consequently woukl wish to get 
 rid of the interest charge. Perhaps this is true; but it would by no 
 means insure the promi)t and full contraction which most reformers 
 have considered desirable. 
 
 From the foregoing it would seem that one of the devices for indu- 
 cing the reserve ])anks to contract their issues after the need for them
 
 292 PRINCIPLES OF MONEY AND BANKING 
 
 had passed — that is, charging interest upon such issues — is not certain, 
 at any rate, to prove adequate; it will not surely eliminate the winter 
 pletliora in New York City which is supposed to stimulate and sup- 
 port excessive stock speculation. But the new law contains another 
 provision which may be viewed as a device for supplying the issuing 
 banks with a motive for contracting their issues, namely, the require- 
 ment that such banks shall keep a gold reserve equal to 40 per cent 
 of their issues. Is this likely to prove effective? Probably not. 
 Whatever might be true in panicky times, it seems certain that in an 
 ordinary year the gold holdings of a reserve bank will be much above 
 40 per cent of its note issue. If this is true, the maintenance of this 
 40 per cent could become difficult only when the excess of money was 
 so great as to cause a dangerous exportation of gold from the countr\', 
 and this surely would show a very inadequate degree of contractility. 
 In short, the new law does not insure that issuing banks shall be 
 sufficiently disposed to draw in their notes any more than it insures 
 that outsiders will drive them in. It would seem, then, that the new 
 law does not promise to give to the note issue the degree of con- 
 tractility which has heretofore been considered desirable. In other 
 words, there is some point in the fear expressed by many bankers that 
 the new law will result in note inflation — at least in so far as the avoid- 
 ing of this danger is dependent on the contractility of the note issue. 
 Very likely, however, the possibility of such inflation is sufficiently 
 guarded against by other provisions of the law. 
 
 II. ELASTICITY IN TIME OF CRISIS 
 
 The banking panic, when fully develop'ed, gives rise to three diffi- 
 culties and so to three needs: (i) funds to relieve the antecedent 
 stringency which threatens a complete collapse of the credit structure; 
 (2) a circulating medium for ordinary trade when a general suspension 
 of payments by the banks has brought on a money famine; and (3) a 
 prompt and thoroughgoing contraction of the circulation in the depres- 
 sion which follows the panic. 
 
 I. There surely can be no doubt that, under the new law, the 
 availability of an issue sufficient in volume instantly to relieve the 
 antecedent stringency, and so to put a stop to a panic before it has 
 developed serious dimensions, is assured. In fact, it is not at all 
 improbable that, under the new system, the reserve banks wdll be able 
 to check the development of such a panic at the very outset without 
 increasing at all their note issues. But if this does not prove true —
 
 THE FEDERAL RESERVE SYSTEM 
 
 293 
 
 if it turns out that more currency is needed for this purpose — there 
 would seem to be no shadow of doubt that the new system will insure 
 the forthcoming of such currency both of a quality and in a quantity 
 which will be fully adequate to the task put upon it. (a) The notes 
 to be issued, being obligations of the federal Treasury, will be as accept- 
 able as gold on the eve of a panic, (b) There is no limit to the absolute 
 amount of these notes, (c) The practical Umit set by the requirement 
 that discounted paper shall be furnished as a basis for their issue is 
 of no real significance, since such pa])cr will undoubtedly be vastly 
 greater in volume than any need which could arise. Accordingly, 
 there can be no doubt that the new system provides all the expansi- 
 bility needed to abort, or reduce to comparative harmlessness, any 
 panic which might arise. 
 
 2. If panics should develop, however, and the banks be forced to 
 suspend specie payments, does the new law insure an expansion of 
 notes to meet the needs of ordinary trade ? Our verdict in such an 
 event would necessarily be less favorable. We should have to admit 
 that the new law does little or nothing to relieve such a situation. 
 Broadly speaking, the new money will be altogether too good to meet 
 this particular need. Banks that had reached a stage of panic suffi- 
 ciently intense to cause them to suspend payments — to hoard the 
 ordinary forms of money — would be sure to hoard money as good as 
 those notes are bound to be. That is, the new issue would immedi- 
 ately pass into hoards, as did the greenbacks which the Secretary of 
 the Treasury reissued during the panic of 1873, and, therefore, would 
 bring little if any reUef to the currency famine which had developed. 
 In fact, it is almost impossible to conceive any form of note fitted for 
 this particular task except one which was so bad that tliere was no 
 danger of its being hoarded. That is, the only proper way to meet 
 this particular need of a severe panic is to make sure that it docs not 
 arise at all; and, in this respect, the new law promises well. 
 
 3. We come, finally, to the third need which emergency elasticity 
 is supposed to meet, that is, a prompt and great contraction of the 
 circulation when the panic, if one should develop, has passed and the 
 inevitable business depression consequent upon such a panic has set 
 in. While we shall doubtless escape the extreme business inflations 
 of former ante-panic periods, nevertheless it can hardly be doubted 
 that, after an incipient panic, there will be some reaction, and conse- 
 quently a more or less plethoric condition of the currency will follow. 
 Will tlie new issue have sufficient contractility to meet this need ?
 
 294 PRINCIPLES OF MONEY AND BANKING 
 
 Earlier in this paper we have seen that the conditions attached to the 
 new issue are in general not favorable to contractility, in that they do 
 not provide for either the prompt driving home or the prompt drawing 
 home of the notes when the necessity for their issue is past. Out- 
 siders lack adeciuate motives for sending the notes home ; issuers lack 
 adequate motives for calling them home. The case for emergency 
 contractility, however, is somewhat better than the case for ordinary 
 contractility. First, it is probable that the homing power of the note 
 will prove greater at such a time than in an ordinary year, for, at such 
 a time, outside banks will not be able to find investments for their 
 funds, since speculative trading will disappear altogether and business 
 generally will be at a very low ebb. Again, it seems certain that the 
 issuing bank will, in this case, have more than the usual motive for 
 bringing about a contraction of the circulation. The chief reason why 
 such a bank may not be eager in ordinary times to hasten the retire- 
 ment of its notes is the fact that, provided the notes do not accumu- 
 late in its own vaults, such a bank will gain more by using the funds 
 in its possession to make loans than it would by using them to retire 
 notes, assuming that the interest charge made by the Federal Reserve 
 Board is not placed excessively high. But it is practically certain that, 
 in the depression which follows a panic, no reserve bank will have 
 opportunities for keeping all of its funds busy ; and since, in that case, 
 the interest charge, however small, will be a dead loss, the bank wUl 
 have adequate motives for effecting, as promptly as possible, an ade- 
 quate contraction of its note liabilities. This motive would be still 
 further strengthened should the glut prove sufficient to cause a decided 
 drain of gold, since, in that case, the reserve banks will find diffi- 
 culty in maintaining the required 40 per cent reserve. On the whole, 
 then, we seem warranted in affirming that, as respects emergency 
 elasticity, the new notes wUl give no serious disappointments. 
 
 Finally, as respects elasticity in general, though the note issue, 
 viewed by itself, does not seem quite fitted to satisfy the tests which 
 an old-fashioned advocate is inclined to impose upon it, yet, when 
 we take the new law as a whole, it seems not unreasonable to affirm 
 that it promises to accomplish, directly or indirectly, most of the ends 
 which we had hoped to attain through elasticity, and hence promises 
 to give us a system which in essentials is truly and adequately elastic.
 
 THE FEDERAL RESERVE SYSTEM 295 
 
 144. ELASTICITY OF CREDIT UNDER THE NEW LAW 
 By J. LAURENCE LAUGHLIN 
 
 How does the act touch the reserves and the rediscounts so that 
 it may bring about the much-desired elasticity of credit ? This is the 
 nerve center of the whole act. The pivotal provisions are those which 
 allow any member bank to have certain kinds of short-time i)aper 
 rediscounted at its Federal Reserve Bank. At this institution the 
 loan creates in favor of the borrowing bank a deposit-account. Then 
 the pith of the operation resides in the fact that all sums kept on 
 deposit at a Reserve Bank count as legal reserves for the given mem- 
 ber bank. That is, the rigidity of credit-banking in the past, the 
 destructive snatching for reserv^es, are displaced by a system which 
 allows good commercial paper — under certain limitations — to be con- 
 verted into lawful reserves. This is the process which directly 
 touches the lending power of a member bank to its customers. There- 
 fore in a time of panic — if any such arrives — there will be no reason 
 for a run on cash reserves, or, if there is a semblance of it, there will 
 be a quick and ready way by which the reserves can be replenished. 
 There can be no serious run on the cash by the public, because the 
 member bank can furnish at will reserve notes by making request for 
 them at the Reserve Bank and having them charged against its 
 deposit-account there. But it must still be kept in mind that banks 
 deal primarily in credit and only incidentally in money. A sale of 
 goods, which forms the basis of commercial paper, is thereby coined 
 into a means of payment, and gives rise to its own medium of exchange 
 without necessarily calling on any forms of money. And yet the 
 elasticity of the notes and of credit are, as they should be, linked 
 together. In short, both notes and deposits (on which checks can be 
 drawn) respond directly to the volume of commercial loans, and 
 these loans are directly related to the general volume of goods bought 
 and sold. Thus automatically the amount of notes and the deposits 
 adjust themselves to the needs of trade. This outcome is one which 
 no system of notes directly issued by a govcnmient could possil)ly 
 bring about. 
 
 Such being the provisions of the new act regarding elasticity of 
 credit, arc there any dangers of ex})ansion ? Fortunately the essential 
 
 • Adapted from "The Banking and Currency Act of 1913," Journal of Polilical 
 Economy, XXII (1914), 423-29.
 
 296 PRINCIPLES OF MONEY AND BANKING 
 
 functions of discount are not hemmed in by detailed legislative prohi- 
 bitions; fortunately, one must say, because discounting must always 
 remain a matter of judgment, and much must be left to the manage- 
 ment. Yet, on the other hand, this very freedom from restraint might 
 result, under imwise management, in inflation and danger. This is 
 inherent in the very nature of banking; since under any system, good 
 or bad, everything depends upon the kinds of loans made. 
 
 Those loans, it should be noted, which result in deposit-accounts 
 at Federal Reserve Banks (and which are not drawn down by requests 
 for notes), directly increase the reserves of member banks until trans- 
 ferred by check. Thus the lending power of the member bank is 
 more quickly and extensively enlarged by this process than by the 
 issue of notes. Herein lies the pivotal question of overexpansion. 
 Passing by the question of overexpansion through the issue of notes, 
 it is desired mainly to study here that arising only from the use of 
 deposit-accounts and checks, because these operations are less under- 
 stood and are more elusive. Here the possibihty of expansion is even 
 greater than in connection with notes, because the proceeds of a loan 
 at a Reserve Bank, if left there, at once count as reserves, and permit 
 another increase of loans. 
 
 To this possibility of serious expansion what are the checks to be 
 found in the bill ? They may briefly be listed as follows : 
 
 1. The Reserve Banks must carry against deposits reserves of 35 per 
 cent in gold or lawful money. But expansion will develop first in the mem- 
 ber banks; and they are not required to keep as large reserves against 
 deposits as before. They can make more profit with the same reserves by 
 carrying more loans. Thus there is no restriction here, except that of 
 refusal of loans by the Reserve Bank. 
 
 2. The Reserve Banks can use the rate of discount as a means of pre- 
 venting undue expansion. This is the real means of control over expansion 
 in Europe. The rate of discount must be raised early and not after the 
 expansion has arrived. Watch must be kept on the particular bank begin- 
 ning to expand its loans, and the treatment must be individually apphed 
 at the source. 
 
 3. A still more important check resides in the provision (sec. 13) that 
 Reserve Banks shall rediscount only "notes, drafts, and bills of exchange 
 arising out of actual commercial transactions," having a maturity of not 
 over 90 days, although a limited amount of hve-stock paper may have a 
 maturity not exceeding six months. The final definition of aU such paper 
 is left to the Reserve Board. But loans secured by investment security 
 cannot be rediscounted. The spirit of the act forbids loans for carrying
 
 THE FEDERAL RESER\'E SYSTEM 297 
 
 goods in storage for a higher price, and should confine loans to pa[>er based 
 on goods actually sold. Just how to define such paper lays a heavy respwnsi- 
 bUity on the Federal Board. On it will finally depend the kind of assets 
 allowed to Reserve Banks. 
 
 4. A real restriction exists in making rediscounts on only short-time 
 paper; but 90 days is somewhat too long for the best Uquidity of assets. 
 It was asserted, however, that country banks would gain no advantage by 
 the new system because they had httle or no short-time paper. The call of 
 the Comptroller of August 9, 1913, showed that the 6,736 country banks 
 held $1,735,000,000 loans having a maturity of 90 days or less and 
 $1,137,000,000 maturing over 90 days. That is, one-half has a maturity 
 of 90 days or less. In the city banks the ratio is 58 per cent 90 days or less 
 to 42 per cent over 90 days. There is obviously enough paper to allow 
 of expansion so far as quantity goes. The real check must be in passing on 
 the paper. 
 
 5. The exclusion of investment paper cuts off all possibility of expansion 
 by stock exchange speculation through the help of rediscounts at Reserve 
 Banks. 
 
 6. Rediscounts at the Reserve Banks must be indorsed by the borrow- 
 ing bank. Hence there will be some check here. 
 
 7. Also, no member bank may loan more than 10 per cent of its capital 
 and surplus to any one person or firm. That is much the same now. 
 
 8. A real check is found in the restriction of discounts on acceptances 
 to those based on importation or exportation of goods; and even these shall 
 not exceed one-half the paid-up capital and surplus of the borrowing member 
 bank. The omission of domestic acceptances is a serious handicap to the 
 desired discount market, but it works toward a restriction of potential 
 expansion.' 
 
 9. In practice the paper must pass rigid scrutiny in more than one step. 
 First, it must satisfy the member bank; secondly, it must be satisfactory 
 to the Reserve Bank; and, thirdly, if notes are wanted, it must pass the 
 judgment of the Agent of the Reserve Board. 
 
 10. The power of the Reserve Board to examine into the operations of 
 reserve banks, and the frequent or special examinations of member banks, 
 will give an important control over expansion, or unsound banking, if 
 legitimately used (sees. 21, 22, 23). 
 
 11. Again, it is to be noted that, in rediscounting, a large number of 
 individual banks will be related to each other in a co-operative fashion. 
 Something of an institutional character has been introduced, and it is pos- 
 sible to place responsibility here and there as was never possible before. 
 This development should gradually and by experience prove of importance 
 in controlling overexpansion. 
 
 ■ This has since been modified. Sec below, selection No. 154. — Editor.
 
 29« PRINCIPLES OF MONEY AND BANKING 
 
 It must be emphasized that the possiI)iUties of undue expansion 
 of credit cannot be removed by any legal provisions in an act. It 
 may create machinery, but the speed with which it will be run will 
 depend upon the judgment of the man at the throttle. Elasticity of 
 credit has been given us with all its possibilities of good to business, 
 together with all its possibilities for abuse. The whole safety of our 
 credit fabric, therefore, rests upon those who pass on the paper dis- 
 counted. Consequently, the success of the new system depends pri- 
 marily on the men selected to manage the several Reserve Banks. 
 In practical operation they are more important than those on the 
 Reserve Board. 
 
 145. AID IN THE MOVING OF CROPS UNDER THE 
 NEW SYSTEM^ 
 
 The first public deposits made by the Secretary of the Treasury 
 in the Federal reserve banks was on September 4-7, 19 15. In speak- 
 ing of these deposits the Secretary makes the following statement: 
 
 After a conference with my colleagues in the Federal Reserve Board I 
 have concluded that the best plan for extending aid to the cotton producers 
 of the South is to deposit the $30,000,000 in gold, concerning which I made 
 an announcement a short time ago, in the three Federal reserve banks 
 located at Richmond, Atlanta, and Dallas instead of in the member banks 
 of the Federal reserve system. 
 
 Five million dollars ($5,000,000) will be deposited immediately in each 
 of these banks, making a total initial deposit of $15,000,000. The Federal 
 reserve banks have the organization, the knowledge of local conditions, and 
 the powers under the Federal reserve act and the regulations of the Federal 
 Reserve Board through which the proposed aid may be most effectively 
 rendered. 
 
 Today the Board adopted regulations concerning "commodity paper." 
 Under these regulations all national banks and State banks which are mem- 
 bers of the Federal reserve system, which may lend money to farmers or 
 others on notes secured by cotton, properly warehoused and insured, at a 
 rate of interest, including commissions, not exceeding 6 per cent per annum, 
 may rediscount such notes with the Federal reserve bank of their district. 
 To illustrate how the proposed relief is available to the cotton producer the 
 following is given as an example : A borrower asks his local bank for a loan 
 on his note, secured by warehouse receipts for cotton. If the bank is satis- 
 fied that the cotton is in a responsible warehouse, properly insured, and that 
 the note is good, it may make the loan. If the local bank charges the bor- 
 
 ' From Federal Reserve Bulletin, October, 1915, p. 301.
 
 THE FEDERAL RESERVE SYSTEM 
 
 299 
 
 rower a rate of interest, including commission, not exceeding 6 per cent per 
 annum, it may indorse the note over to the Federal reserve bank of its dis- 
 trict, and the Federal reserve bank may advance to the local bank the full 
 amount of the loan. The rate of interest which the Federal reserve bank 
 will charge the local bank will be sufticicnlly low, say 3 per cent, to enable 
 the local bank to make loans at a rate of interest not exceeding 6 per cent 
 per annum and have a liberal margin of profit on such transactions. 
 
 It must not be inferred that the regulations adopted by the Federal 
 Reserve Board concerning commodity loans apply only to cotton. These 
 regulations apply to all nonpcrishable and staple commodities in all parts 
 of the country and, like credit facilities, are available to producers in all 
 parts of the country. 
 
 146. GREENBACKS AND THE FEDERAL RESERVE 
 SYSTEM' 
 
 By a. D. WELTON 
 
 At the meeting between the Conference of Governors of the 
 Federal reserve banks, the Executive Committee of the National 
 Bank Section, and the Committee on Federal Legislation in Washing- 
 ton last month, the representatives of the American Bankers' Associa- 
 tion proposed that the greenbacks be retired and canceled. A joint 
 committee was appointed to prepare and submit a plan for this pur- 
 pose. It was suggested that the $150,000,000 of gold which is held 
 as a reserve against the greenbacks be increased by $200,000,000 
 through the medium of a bond issue, in order to secure funds to i)ay 
 these obligations of the Government. The Federal reserve banks 
 would probably have to be designated as redemption agencies, and it 
 will doubtless also be necessary to make silver and gold certificates 
 legal tender as well as to fix a date after which greenbacks cannot be 
 used as reserve money. 
 
 It was proposed many times when the Federal Reserve Act was 
 in process of formulation that provision be made for the retirement of 
 the greenbacks. If this proposal was not summarily brushed aside 
 as neither desirable nor warranted, action was halted by the argument 
 that the inclusion of the proposal in the general plan for a new bank- 
 ing system would excite so much controversy and ajouse so much 
 antagonism that matters of greater importance would be placed in 
 jeopardy and the whole bill miglu fail. The greenbacks were let alone. 
 
 It was impossible to foresee what the monetary condition of the 
 country would be two years after the bill creating the Federal reserve 
 
 ' Adapted from J otirmil of American Hunkers' Association, VIII (19 16), 662-63.
 
 300 PRINCIPLES OF MONEY AND BANKING 
 
 system became a law. It is this condition that makes the suggestion 
 for the retirement and cancellation of the greenbacks logical and per- 
 tinent. More than any other factor in the currency system these 
 promises of the Government to pay prevent the Reserve Act from 
 bringing to realization what was its first and most important purpose, 
 providing an elastic currency. All the currency of all kinds that the 
 country had before the Reserve Act went into operation is still in 
 existence. 
 
 For issues of Federal reserve notes there has been small demand. 
 The amount of them now outstanding, chargeable as a net liability of 
 the reserve banks, is inconsequential. It is impossible to contract the 
 currency below the fixed element in it when the flow of gold is toward 
 this country and when business does not demand Federal reserve 
 notes. The currency is, therefore, not flexible. It does not expand 
 or contract according to the volume of business. It remains prac- 
 tically fixed when it would be much smaller if the quantity of it were 
 measured by the commercial demand. It was presumed that with 
 the natural growth of the nation's commerce it would grow up to the 
 fixed elements in the currency and the Federal reserve notes would 
 then provide all the elasticity needed. The influx of gold in conse- 
 quence of the war is one reason for failure in this direction. The 
 greenbacks, therefore, are water in the stock of currency, which is 
 inflated in consequence. 
 
 If the Federal Reserve Act is not speedily amended so that flexi- 
 bility may be provided and the necessary contraction in the currency 
 may take place, the chief purpose of the Act, to provide an elastic 
 currency, will have been defeated. The retirement of the greenbacks 
 seems to be the simplest method of providing the necessary contrac- 
 tion. It would cause no disturbance. If progress toward a sound 
 and scientific currency system is to continue, the sooner the green- 
 backs are out of the way the nearer will be this achievement. Just 
 at present the continued existence of this form of currency is prevent- 
 ing a fair test of the adequacy of the whole Federal reserve system. 
 
 147. REDISCOUNTING AND EXPANSIBILITY OF DEPOSITS' 
 By E. E. agger 
 
 Let us consider the provisions made in the new law for insuring 
 the "elasticity" of bank credit. The problem here is chiefly one of 
 maintaining a proper relation between reserves and liabilities. The 
 
 ' Adapted from "The Federal Reserve System," Political Science Quarterly, 
 XXIX (1914), 271-78.
 
 THE FEDERAL RESERVE SYSTEM 301 
 
 basic units of the system, namely, the member banks, are, within the 
 limits prescribed by the national banking law with respect to loans 
 to individuals, etc., free to expand deposits until their reserves fall 
 to the prescribed minimum. As the deposits in the federal reserve 
 banks themselves constitute the reser\-es for a considerable portion 
 of the deposit liabilities of member banks, the reserve requirements 
 for the federal reserve banks are properly more exacting. As the pur- 
 pose of prescribing reserves is to check expansion, the banks are pro- 
 hibited from making new loans, and incidentally from paying any 
 dividends, when reserves fall below the prescribed percentages. Yet 
 in order that the reserve requirements may not constitute an impass- 
 able "dead line" irrespective of the emergency, the Federal Reserve 
 Board is authorized to suspend all the reserve requirements for a 
 period of thirty days and, if necessary, to renew the suspension for 
 periods of fifteen days. But to prevent this emergency expedient 
 from resulting in turn in the evil of inflation, it is pro\'ided that 
 when the Federal Reserve Board suspends the reser\-e requirements it 
 must levy a graduated tax on the amounts by which the reserve may 
 be permitted to fall below the specified level, and the reserve banks 
 must then add such tax to the discount rates established by the 
 Federal Reserve Board. A more adjustable check on expansion that 
 can be applied before reserves drop to the danger point is found in the 
 authority vested in the Federal Reserve Board to re\iew and deter- 
 mine the rates of discount which the federal reserve banks may estab- 
 lish. How efficacious this authority will be remains to be seen. 
 Much will depend upon the extent to which the discount rates of the 
 federal reserve banks can be made to control the general market rates 
 in their several districts. 
 
 Consideration should now be given to the plan by which tlie new 
 system makes the centralized reserves and the notes of the reserve 
 banks available to the member banks. First, it may be noted that the 
 deposit balances in the reserve banks due to member banks are, 
 within the limits already noted, to be counted as reserves by the mem- 
 ber banks. This is of course a necessary corollar\' oj centralized 
 reserves. These deposits may be checked against member banks or 
 be simply drawn down in reserve notes or lawful money. The impor- 
 tant consideration for the member banks is therefore the maintenance 
 of an adequate balance with the federal reserve bank. 
 
 This is made possible by provisions for rediscounting. With the 
 indorsement of a memlier bank the federal reserve bank may discount
 
 302 PRINCIPLES OF MONEY AND BANKING 
 
 for such member bank certain notes, drafts, and bills of exchange. 
 On the whole, therefore, it may be concluded that as long as a member 
 bank keeps the required proportion of its reserves in lawful money in 
 its own vaults the question of obtaining hand-to-hand money or that 
 of strengthening reserves is simply one of having on hand an adequate 
 supply of bills acceptable for rediscounting. 
 
 In connection with rediscounting, however, one important ques- 
 tion remains. This relates to the provision made for one reserve dis- 
 trict to get the advantage of possibly reduntant reserves in other 
 districts. Students generally agree that nothing is so effective in 
 bringing about a free flow of funds as an open discount market. 
 With an open market under a system of centralized reserves 
 local banks need turn to the central banks only when the credit 
 on the basis of a given ratio of reserves has been entirely ab- 
 sorbed. Each bank buys or sells according to its own needs. If 
 the paper available be of the proper character, and if the inter- 
 banking relations are such as to inspire the necessary confidence, 
 this free flow of funds may not only characterize the country as a 
 whole, but may also enter as an important possibility in international 
 operations. Understanding the advantages of an open market, the 
 framers of the law have endeavored to provide at least some of the 
 facilities necessary to its creation. Member banks are permitted to 
 "accept" on commission drafts or bills of exchange growing out of 
 exports or imports having not more than six months' sight to run. 
 The amount so accepted, however, is limited to half the bank's paid-up 
 capital and surplus.' For bills with strong banks as the acceptors 
 there ought to be a wide demand. Such bills ought to flow wherever 
 the rate of discount is lowest. To facilitate this dispersion, the law 
 permits the federal reserve banks to discount these acceptances when 
 they have the indorsement of at least one member bank. But should 
 it be impossible to build up an open market, or should the possibilities 
 of such a market prove at any time inadequate, there is the provision 
 that the Federal Reserve Board may permit, and on vote of five mem- 
 bers may compel, the reserve banks to rediscount for each other. 
 Moreover, the Federal Reserve Board fixes the rates at which such 
 rediscounts are made. Thus under a system of district centralization 
 the effort is made to get the advantages of complete centralization. 
 
 ' For regulations of the Federal Reser\^e Board governing this business, see 
 selection No. 156. — Editor.
 
 THE FEDERAL RESERVE SYSTEM 303 
 
 148. DISCOUNT RATES ESTABLISHED 
 
 The following statement was issued by the Governor of the Federal 
 Reserve Board on November 14, 19 14, shortly after the inauguration 
 of the system: 
 
 Rates of rediscount have been established as follows: New York and 
 Philadelphia, 5§ per cent for bills and notes having a maturity of not over 
 thirty days, and 6 per cent for paper with a longer maturity; Boston, Cleve- 
 land, Richmond, Chicago, and St. Louis, 6 per cent for all maturities; 
 Atlanta, Minneapolis, Kansas City, Dallas, and San Francisco, 6 per cent 
 for bills and notes having a maturity of not more than thirty days, and 
 6i per cent for those having a longer maturity. 
 
 The Board took this action in accordance with the provisions of the 
 Federal Reserve Act which authorized it to review and determine rates of 
 discount fixed by each Federal Reserve Bank. Each of the banks was 
 requested by telegraph to suggest a rate of discount for opening, and all 
 of these repUes were tabulated. The answers showed a ver>' decided degree 
 of uniformity, and many of the rates have been confirmed as suggested, the 
 lowest suggested rate being 5 per cent whUe the highest was 7 per cent. 
 
 After full consideration of the facts in the situation, the Board felt it 
 incumbent to adopt a moderate and conservative policy at the outset, in 
 view of the fact that the exact conditions to which the banks will be 
 subjected in operation cannot be precisely foretold. It was felt that 
 the adoption of rates of rediscount which would adequately safeguard 
 the resources of the various institutions would be the wisest policy at the 
 beginning, in view of the disturbed conditions in the financial world. The 
 Federal Reserve Banks have the right, with the approval of the Board, at 
 any time to change the rates; and the present rates are, therefore, to be 
 regarded as provisional and subject to revision. The Board expects to be 
 governed entirely by experience as the new banks become firmly established 
 and accumulate data which can be used for its guidance in reaching con- 
 clusions.
 
 304 
 
 PRINCIPLES OF MONEY AND BANKINC; 
 
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 THE FEDERAL RESERVE SVSTKM 305 
 
 150. REDISCOUNTS BETWEEN FEDERAL RESERVE BANKS 
 
 The following statement was issued by the Federal Rcser\-c 
 Board on March 10, 1915: 
 
 In view of the possibility of an early demand for rediscounts between 
 Federal Reserve Banks, the Federal Reserve Board today fixed a rate of 
 rediscount for the present between Federal Reserve Banks of 3 J per cent 
 for paper up to thirty days and 4 per cent for paper of maturities over thirty 
 days and up to ninety days. 
 
 All appUcations for rediscounts are to be filed with the Federal Reserve 
 Board, the Board reserving the right to apportion the applications for 
 rediscount among other Federal Reserve Banks. 
 
 151. THE ADVANTAGES OF A DISCOUNT MARKET TO 
 BANKERS' 
 
 By FRANt A. VANDERLIP 
 
 Among other things it will be the function of the twelve regional 
 banks to loan to member banks through rediscounting for them. 
 Not sometimes, but always and under all circumstances, we are told, 
 the member banks will be able to rediscount at the federal reserve 
 bank. A banker who can look into the future and know with 
 absolute certainty that, under any circumstances, he can rediscount 
 commercial paper in his portfolio will have removed from his life a 
 good deal of fear. 
 
 Let us see what it means. It means that commercial paper will 
 become the most liquid asset in the bank's portfolio. According to 
 the practice of American banks, a loan once made to a commercial 
 borrower must remain in the bank's portfolio until the loan matures. 
 The exception to that is in the case of country banks which may redis- 
 count to a limited extent with their city correspondents; but the 
 large banks cannot rediscount. Not only is there no place for them 
 to go, but it would be considered an exhibition of weakness. Hence 
 a loan made to a commercial borrower by a large bank is a comjdete 
 absorption of that portion of the bank's loanable funds until the 
 maturity of the loan. If the banks in the future under this measure 
 can always borrow, then the t>i)e of commercial pajier that the bill 
 permits as collateral for such loans becomes the most li(|uid asset that 
 the bank could have. 
 
 ' Adapted from "Rediscount Function of Federal Reserve Banks," Procctdings 
 of the American Academy of Political aiid Social Science. I\' (loi 5-i4~>. 140-4--
 
 3o6 PRINCIPLES OF MONEY AND BANKING 
 
 Another result will, however, come from this. At the present 
 time, as I have said, a loan must be held until maturity. One of the 
 great needs of the country is a discount market, a market in which 
 we can buy and sell commercial j)aper that has been endorsed by 
 banks, so that the credit of the original maker is not taken much into 
 consideration. We need to create a situation so that banks will buy 
 and sell commercial paper in that market, so that they may buy one 
 day and sell perhaps another day soon after, as we now make call 
 loans one day and possibly call them the next day if our position 
 changes. The existence of a discount market of that character would, 
 I believe, be of the utmost importance to commerce as well as to the 
 banks of the country. It is impossible to have such a discount market 
 here without a central bank fully qualified to meet the responsibility 
 that a central bank should bear,' that is to say, in the last resort to 
 rediscount commercial paper. We are willing to invest our funds in 
 commercial paper under that condition. If we know that when we 
 need partially to liquidate our portfolio, and the market will not 
 repurchase commercial paper, we can go to the central bank and have 
 that paper rediscounted, we can afford to buy it. It is the ability to 
 go ultimately to the central bank for discounts that will create the 
 discount market. 
 
 The advantage of a discount market will be that we shall no 
 longer have to keep a great amount of funds in call loans based on 
 stock-exchange collateral. With a minimum reserve fixed by law, all 
 banks naturally run pretty close to that minimum. This means that 
 they must have some part of their loanable funds in a form in which 
 they can readily convert them into cash; that is what we call the line 
 of a secondary reserve. Today we are forced to carry this line of 
 secondary reserve in loans upon stock-exchange collateral because that 
 is the only type of loan which is immediately convertible into cash. 
 That type of loan is all right in ordinary times, because it is immedi- 
 ately convertible into cash. It is, however, exactly the opposite of 
 the ideal bank loan in that it has no self -liquidating quahty. The only 
 way the loan can be paid is by shifting it, either directly or through 
 the sale of the collateral. There is no self-liquidating quahty about 
 it, and while it is satisfactory in ordinary times, it is full of the gravest 
 danger at a time when it becomes impossible to shift it. If we redis- 
 
 ' This was written two months before the passage of the Federal Reserve Act, 
 when there was still controversy over the central bank. — Editor.
 
 THE FEDER.\L RESER\'E SYSTEM 307 
 
 count commercial paper in the way outlined, we shall no longer feel 
 under the necessity of carr\ing large amounts of stock loans; there 
 would be liberated for commercial uses here in New York several 
 hundred millions of dollars. Money now devoted to stock loans 
 belongs to the loanable funds of both New York and out-of-town 
 banks, for many out-of-town banks come into our call loan market, 
 their loans reaching two or three hundred millions. 
 
 A discount market will at times attract foreign capital, because 
 it will create paper of a form suitable for the use of foreign banks. 
 At present there is practically no loaning of foreign capital on Ameri- 
 can commercial paper. 
 
 That it is very desirable to create a central bank or banks that will 
 have power always to loan to member banks is ob\ious. If the 
 measure now before Congress will accomj^lish it, it will bring lower 
 commercial rates for the whole business community of the United 
 States. It will accomplish a leveling process; rates will go up some- 
 what in the cities and down in the country districts; that is to say, 
 there will no longer be the funds devoted to the very low-rate stock- 
 exchange loans that we now have, and those funds going into com- 
 mercial borrowing will tend to lower the general level of the commercial 
 rate. It will become easier to transfer funds from one community 
 where there is an overflow of loanable funds to another where there is 
 stram. All these results would be accomplished, not because banks 
 would continuously go to these central banks and borrow money, but 
 because they would have a place to which they could go as a last 
 resort. They would not want to go there normally; they would not 
 expect to borrow money at a low rate from the central banks and 
 reloan it at a higher rate; but the ability, in the last resort, to go there 
 would give a liquid character to commercial loans, and that liquid 
 character would bring the improvements that I have outlined. 
 
 152. THE NATURE AND ADVANTAGES OF BANK ACCEPT- 
 ANCES' 
 
 A bank acceptance consists of the extension of the bank's credit to 
 a customer by which the bank permits the use of its own credit by 
 its client for a consideration, such credit being cither secured or 
 unsecured, depending entirely upon the business character and 
 
 ' Adapted from a pamphlet on Bank Accepiatues, issued by the Guaranty 
 Trust Company, of New York. (Copyright, 1915.)
 
 3o8 PRINCIPLES OF MONEY AND BANKING 
 
 financial responsibility of the applicant. A bank acceptance may be 
 created as follows: 
 
 A B & Co. in New York buy of C D & Co. in Galveston a quantity of 
 merchandise. In order to reimburse C D & Co. in a convenient manner, 
 A B & Co. arrange with their bank to accept on presentation the drafts 
 of C D & Co., with documents for the merchandise attached. C D & Co. 
 thereupon, under the terms of the sale, draw on the bank, which accepts the 
 drafts, taking the documents. The draft thus becomes a hank acceptance. 
 Then ensues a credit operation between the bank and A B & Co. as to what 
 disposition is to be made of the documents and under what terms A B & Co. 
 shall receive the documents from the bank. (It must be borne in mind 
 that the bank is primarily liable upon its acceptance and the security for 
 its acceptance is the merchandise for which it so acted.) This is usually 
 easily adjusted. A B & Co. undertake by some means or other to provide 
 the bank with funds prior to maturity of the draft in order that the accept- 
 ance for which the bank stands responsible, at the request of A B & Co., 
 may be met. 
 
 There are certain distinct advantages both to banks and their 
 customers to be derived from the creation of acceptances. These 
 may be summarized as follows: 
 
 1. Bank customers can ordinarily borrow by this means more cheaply 
 than by their straight note. 
 
 2. The use of acceptances makes it possible for banks and trust com- 
 panies to properly and conveniently finance legitimate business transactions 
 of their customers without using any of the bank's funds or the use of any 
 additional fimds. 
 
 3. Banks having surplus money which cannot be readily employed at 
 the time can invest it in prime acceptances, which can either be held until 
 maturity or sold in the open market, should such action be found necessary. 
 
 4. Acceptances of well-known institutions will more and more be sought 
 as short-term investments and will be especially valuable for such a purpose, 
 principally on account of their ready marketability. 
 
 5. Banks and trust companies can accept for a commission the paper 
 issued by their best customers and sell it in the open market, thus adding 
 to their business another feature which can be a source of definite profit. 
 
 6. The presence of the name of the accepting bank makes prime to the 
 extent of the credit of the accepting bank the paper on which it appears. 
 This at once eliminates the necessity and bother of checking the drawer or 
 several endorsers upon paper, as the primary responsibility rests with the 
 accepting bank. If this is in good credit all other names on the paper 
 become proportionately of less interest. 
 
 7. With the development of the use of bank acceptances, the knowledge 
 of the relations that the borrower has with other institutions, which the 
 credit-extending banks will thus have, will create a condition of almost
 
 THE FEDERAL R1;S1:R\J-: SVSTli.M 
 
 309 
 
 automatic registration of paper, thus more than ever i)rolccling the banks 
 as well as the borrowers from the evil results of the overextension of credit. 
 
 153. PRO VISIONS GOVERNING BANKERS' ACCEPT.\NCES' 
 
 I. DKFIMTION 
 
 In this regulation the term "acceptance" is dcfmcd as a draft or bill 
 of exchange drawn to order, having a definite maturity, and payable in 
 
 ' Federal Reserve Board Circular No.iS, September 7, 1915, conlaiiiing amend- 
 ments to the act api)rovcd March 3, 1915.
 
 3IO PRINCII'LKS OF iMONKY ANh HANKING 
 
 dollars, in the United States, the obligation to pay which has been accepted 
 by an acknowledgment written or stamped and signed across the face of 
 the instrument by the party on whom it is drawn; such agreement to be 
 to the effect that the acceptor will pay at maturity according to the tenor 
 of such draft or bill without qualifying conditions. 
 
 n. STATUTORY REQUIREMENTS UNDER SECTIONS I3 AND I4 
 
 Section 13 of the Federal Reserve Act as amended provides that — 
 
 (a) Any Federal Reserve Bank may discount acceptances — 
 
 (i) Which are based on the importation or exportation of goods; 
 
 (2) Which have a maturity at time of discount of not more than 
 three months; and 
 
 (3) Which are indorsed by at least one member bank. 
 
 (b) The amount of acceptances so discounted shall at no time exceed 
 one-half the paid-up capital stock and surplus of the bank for which 
 the rediscounts are made (except by authority of the Federal 
 Reserve Board and of such general regulations as said Board may 
 prescribe, but not to exceed the capital stock and surplus of such 
 bank) . 
 
 (c) The aggregate of notes and bills bearing the signature or indorsement 
 of any one person, company, firm, or corporation rediscounted for 
 any one bank shall at no time exceed 10 per centum of the unim- 
 paired capital and surplus of said bank; but this restriction shall 
 not apply to the discount of bills of exchange drawn in good faith 
 against actually existing values. 
 
 Section 14 of the Federal Reserve Act permits Federal Reserve Banks, 
 under regulations to be prescribed by the Federal Reserve Board, to pur- 
 chase and sell in the open market bankers' acceptances with or without the 
 indorsement of a member bank. 
 
 III. RULING 
 
 The Federal Reserve Board, exercising its power of regulation with 
 reference to Paragraph II (b) hereof, rules as follows: 
 
 Any Federal Reserve Bank shall be permitted to discount for any 
 member bank "bankers' acceptances" as hereinafter defined up to an 
 amount not to exceed the capital stock and surplus of the bank for which 
 the rediscounts are made. 
 
 IV. ELIGIBILITY 
 
 The Federal Reserve Board has determined that, until further order, 
 to be eligible for discount under section 13, by Federal Reserve Banks, at 
 the rates to be established for bankers' acceptances: 
 
 (c) Acceptances must comply with the provisions of Paragraph II 
 (a), (b), (c) hereof.
 
 THE FEDERAL RESERVE SYSTEM 311 
 
 (b) Acceptances must have been made by a member bank, non-member 
 bank, trust company, or by some private banking firm, person, company, 
 or corporation engaged in the business of accepting or discounting. Such 
 acceptances will hereafter be referred to as "bankers," acceptances. 
 
 (c) A banker's (foreign) acceptance must be drawn by a purchaser or 
 seller or other person, firm, company, or corporation directly connected 
 with the importation or exportation of the goods involved in the transac- 
 tion in which the acceptance originated, or by a "banker." The bill must 
 not be renewed after Ihe goods have been surrendered to the purchaser or 
 consignee, except for such reasonable period as may have been agreed upon 
 at the time of the opening of the credit as a condition incidental to the 
 importation or exportation involved, provided that the bill must not con- 
 tain or be subject to any condition whereby the holder thereof is obligated 
 to renew the same at maturity. 
 
 (d) A banker's (foreign) acceptance must bear on its face or be accom- 
 panied by evidence in form satisfactory to a Federal Reserve Bank that 
 it originated in, or is based upon, a transaction or transactions involving the 
 importation or exportation of goods. Such evidence may consist of a 
 certificate on or accompanying the acceptance to the following effect: 
 
 "This acceptance is based upon a transaction involving the importa- 
 tion or exportation of goods. Reference Ko. . Name of acceptor 
 
 (e) Bankers' acceptances, other than those of member banks, shall be 
 eligible only after the acceptors shall have agreed in writing to furnish to 
 the Federal Reserve Banks of their respective districts, upon request, 
 information concerning the nature of the transactions against which accept- 
 ances (certified or bearing evidence under IV (d) hereof) have been made. 
 
 (/) A bill of exchange accepted by a "banker" may be considered as 
 drawn in good faith against "actually existing values," under II (c) hereof, 
 when the acceptor is secured by a lien on or by transfer of title to the goods 
 to be transported or by other adequate security. 
 
 (g) Except in so far as they may be drawn in good faith against actually 
 existing values, as under (/), the bills of any one drawer drawn on and 
 accepted by any firm, person, company, or corporation (other than a bank 
 or trust company) engaged in the business of discounting and accepting, 
 and discounted by a Federal Reserve Bank, shall at no time exceed in the 
 aggregate a sum equal to a definite percentage of the paiil-in capital of such 
 Federal Reserve Bank; such percentage to be fixed from time to time by 
 the Federal Reserve Board. 
 
 (//) The aggregate of acceptances of any firm, person, company, or 
 corporation (other than a bank or trust comj)any) engaged in the businv.-ss 
 of discounting or accepting, discounted or purchased by a Federal Reserve 
 Bank, shall at no time exceed a sum equal to a definite percentage of the
 
 312 PRINCIPLES OF MONEY AND BANKING 
 
 paid-in capital of such Federal Reserve Bank; such percentage to be fixed 
 from time to time by the Federal Reserve Board. 
 
 To be eligible for purchase by Federal Reserve Banks under section 14, 
 bankers' acceptances must comply with all requirements and be subject to 
 all limitations hereinbefore stated, except that they need not be indorsed 
 by a member bank: Provided, however, That no Federal Reserve Bank shall 
 purchase the acceptance of a "banker" other than a member bank which 
 docs not bear the indorsement of a member bank, unless a Federal Reserve 
 Bank has first secured a satisfactory statement of the financial condition 
 of the acceptor in form to be approved by the Federal Reserve Board. 
 
 v. POLICY AS TO PURCHASES 
 
 While it would appear impracticable to fix a maximum sum or percent- 
 age up to which Federal Reserve Banks may invest in bankers' acceptances, 
 both under section 13 and section 14, it will be necessary to watch carefully 
 the aggregate amount to be held from time to time. In framing their 
 pohcy with respect to transactions in acceptances. Federal Reserve Banks 
 will have to consider, not only the local demands to be expected from their 
 own members, but also requirements to be met in other districts. The plan 
 to be followed must in each case adapt itself to the constantly varying needs 
 of the country. 
 
 VI. ACCEPTANCE BY MEMBER BANKS 
 
 Any member bank may accept drafts or bills of exchange drawn upon 
 it, having not more than six months' sight to run and growing out of trans- 
 actions involving the importation or exportation of goods up to an amount 
 not exceeding the capital and surplus of such bank, provided that — 
 
 1. Every such bank shall possess an unimpaired surplus of not less than 
 20 per cent of its paid-in capital. 
 
 2. Every such bank shall file formal application with the Federal 
 Reserve Bank of its district, which shall report to the Federal Reserve 
 Board upon the standing of such applicant, stating also whether the business 
 and banking conditions prevailing in the district warrant the granting of 
 such applications in said district. 
 
 3. Every such application shall first have been approved by the Federal 
 Reserve Board. 
 
 Approval of any such application may be rescinded, and modifications 
 of this regulation may be made, by the Federal Reserve Board upon notice 
 of 90 days to the bank or banks thereby affected. 
 
 154. DOMESTIC ACCEPTANCES PROVIDED FOR' 
 
 The appended regulation is intended to cover the purchase in the 
 open market, not only of bankers' acceptances based on the importa- 
 
 ' Adapted from Federal Reserve Board Circular No. ig, November 29, 1915. 
 Paragraph numbering has been changed in attempting to avoid duplications in Cir- 
 culars Nos. 18 and ig. See selection No. 153. — Editor.
 
 THE FEDER.\L RESERVE SYSTEM 313 
 
 tion or exportation of goods, heretofore covered by Regulation R, 
 but also the purchase of certain domestic acceptances authorized by 
 certain State laws. 
 
 The Federal Reserve Board has determined that bankers' domestic 
 acceptances, as defined and restricted in the appended regulation, are 
 a very useful type of paper, and tlie Board has not felt justified, there- 
 fore, when admitting State banks and trust companies into the Federal 
 Reserve System, in stipulating that such domestic acceptances should 
 not be continued under reasonable limitations as a part of their 
 business. 
 
 Inasmuch as the making of these domestic acceptances has been 
 recognized by the Board as the exercise of a legitimate banking func- 
 tion when authorized by law, it was thought that they are of the char- 
 acter to make desirable investments for Federal Reserve Banks. The 
 Board has, therefore, issued the appended regulation, not only 
 embodying the authority given in Regulation R, series of 19 15, to 
 purchase bankers' acceptances based on the importation or exporta- 
 tion of goods, but also authorizing the purchase of bankers' domestic 
 acceptances within the limits prescribed in the appended regulations. 
 
 1. A banker's domestic acceptance must be based on a transaction 
 covering the shipment of goods, such transaction to be evidenced at the time 
 of acceptance by accompanying shipping documents, or must be secured by 
 a warehouse receipt covering readily marketable staples and issued by a 
 warehouse independent of the borrower, or by the pledge of goods actually 
 sold. 
 
 2. A banker's domestic acceptance must bear on its face or be accom- 
 panied by evidence in form satisfactory to the Federal Reserve Bank that 
 it is based on a transaction or is secured by a receipt or pknige. Such 
 evidence may consist of a certificate in general form similar to that 
 suggested in (d) Circular No. 18, governing foreign acceptances.' 
 
 3. Provision (e) in Circular No. 18 is also made applicable to domestic 
 acceptances. 
 
 4. The following provisions supersede (g) and (//) in Circular No. iS: 
 a) The aggregate of bills, domestic and foreign, of any one drawer, 
 
 drawn on and accepted by any bank or trust company and purchased or 
 discounted by a Federal Reserve Bank, shall at no time exceed 10 per cent 
 of the unimpaired capital and surplus of such bank or trust company, but 
 this restriction shall not apply to the purchase or discount of bills drawn in 
 good faith against actually existing values; that is, bills the acceptor of 
 which is secured by a hen on or by a transfer of title to the goods to be 
 transported, or by other adequate security, such as a warehouse receipt, 
 or the pledge of goods actually sold. 
 
 ' For tlie provisions of Circular No. 18, see selection No. 153. — Editor.
 
 314 PRINCIPLES OF MONEY ANIJ BANKING 
 
 b) The aggregate of bills, domestic and foreign, of any one drawer, 
 drawn on and accepted by any firm, person, company, or corporation (other 
 than a bank or trust company) engaged in the business of discounting or 
 accepting, and purchased or discounted by a Federal Reserve Bank, shall 
 at no time exceed a sum equal to a definite percentage of the paid-in capital 
 of such Federal Reserve Bank, such percentage to be fixed from time to 
 time by the Federal Reserve Board; but this restriction shall not apply 
 to the purchase or discount of bills drawn in good faith against actually 
 existing values; that is, bills the acceptor of which is secured by a lien on 
 or by a transfer of title to the goods to be transported or by other adequate 
 security, such as a warehouse receipt, or the pledge of goods actually sold. 
 
 c) The aggregate of bankers' acceptances, domestic and foreign, made 
 by any one firm, person, company, or corporation (other than a bank or 
 trust company) engaged in the business of discounting or accepting, pur- 
 chased or discounted by a Federal Reserve Bank, shall at no time exceed a 
 sum equal to a definite percentage of the paid-in capital of such Federal 
 Reserve Bank; such percentage to be fixed from time to time by the Federal 
 Reserve Board. 
 
 No Federal Reserve Bank shall purchase a domestic or foreign accept- 
 ance of a "banker" other than a member bank which does not bear the 
 indorsement of a member bank, unless there is furnished a satisfactory state- 
 ment of the financial condition of the acceptor in form to be approved by 
 the Federal Reserve Board. 
 
 POLICY AS TO PURCHASES 
 
 Federal Reserve Banks should bear in mind that preference should be 
 given wherever possible to acceptances indorsed by a member bank, dis- 
 counted under section 13, not only because of the additional protection that 
 such indorsement affords, but also because of the reason that acceptances 
 discounted under section 13 may be used as collateral security for the issue 
 of Federal Reserve notes. 
 
 155. FEDERAL RESERVE BANKS AND THE FOREIGN 
 EXCHANGES' 
 
 By E. E. agger 
 
 Important provisions are to be noted in connection with the 
 foreign exchanges and the international movements of gold. Most of 
 the foreign trade of the United States has heretofore been financed 
 by foreign bankers. The new system permits the home institutions 
 to enter the field for this business. Member banks are allowed 
 
 'Adapted from "The Federal Reserve System," Political Scietice Quarterly, 
 XXIX (1914), 279-Si.
 
 THE FEDERAL RESERVE SYSTEM 315 
 
 within certain limits to accept on commission drafts and bills of 
 exchange growing out of exports and imports, and these may be sold 
 in the open market or ultimately rediscounted at the federal reserve 
 banks.' National banks with a capital and surplus of Si, 000,000 or 
 more may, with the permission of the Federal Reserve Board, estab- 
 lish branches abroad. Similarly the reserve banks, when duly 
 authorized, may open accounts in foreign countries and may establish 
 branches for purchasing, selling, and collecting bills of exchange bear- 
 ing at least two names and maturing within ninety days. But the 
 extent to which American bankers will be able to supplant the foreigner 
 will depend, of course, largely upon the acceptability of bills drawn in 
 dollars. This will depend, among other things, upon the market rate 
 of discount in the United States in competition with the rates abroad. 
 If the new system successfully establishes American credit in the 
 world markets, a large part of the tribute that American commerce 
 now pays to foreign bankers will stay at home. 
 
 The provisions bearing on the foreign exchanges and gold move- 
 ments are of special interest. In addition to the dealings with their 
 member banks, the reserve banks are permitted to purchase and sell 
 in the open market, at home and abroad, cable transfers of funds, 
 bankers' acceptances, and bills of exchange of the kind that are 
 eligible for rediscount, with or without the indorsements of a member 
 bank. Furthermore, they may deal in gold coin and bullion, at home 
 and abroad, may make loans thereon, may exchange federal reserve 
 notes for gold in bullion and in coin, or for gold certificates, and they 
 may contract for loans of gold. Finally, under rules prescribed by 
 the Federal Reserve Board, they may buy and sell, at home and 
 abroad. United States bonds, and notes, bills, bonds, revenue war- 
 rants, etc., of the stated and minor political divisions. 
 
 The significance of these provisions can hardly be overestimated. 
 Taken together, they mean that in the foreign exchange market the 
 reserve banks will not only become competitors of existing banks but 
 also that they are likely to become the controlling factors in that 
 market. In normal times, owing to their extensive resources and 
 wide powers, they will markedly influence the general drift of the 
 exchanges, while in times of strain they ought to be in position to 
 render most helpful aid. Their buying of bills in the open market 
 will enable them to support the demand side when rates are low, and 
 
 ' Subsequent rulings of the Federal Reserve Board have greatly strengthened 
 the acceptance feature^ of the law. See selections Nos. 153 and 154. — Editor.
 
 310 PRINCIPLES OF MONEY AND BANKING 
 
 will at the same time enable them to throw exchanges on the market 
 when rates are high. European ex|:)erience has shown this to be a 
 most useful expedient in checking unnecessary gold movements. 
 Moreover, the full authority granted to the reserve banks to deal in, 
 to borrow, or to make loans against gold at home and abroad and to 
 buy and sell governmental securities, secures the possibility of creating 
 credits that can be used either as an offset for debts, the payment of 
 which would otherwise necessitate gold exports, or as a means of 
 obtaining gold to strengthen reserves at home. Furthermore, through 
 the final control of discount rates, if that control can in practice be 
 made effective, the Federal Reserve Board acting through the reserve 
 banks may check the outward flow of gold. If the nation's credit 
 position is strong enough, it may even attract gold to the home market 
 from abroad. As final guarantee to the world of the solidarity of the 
 whole system, the gold standard is reafl&rmed and the Secretary of the 
 Treasury is authorized to purchase gold if necessary with one-year 
 3 per cent notes or to borrow it on the security of United States bonds. 
 
 156. OPEN-MARKET OPERATIONS* 
 
 There remain still to be dealt with under "Open-Market Opera- 
 tions" the purchase and sale of "cable transfers" and bills of exchange, 
 both domestic and foreign, of the kinds and maturities by this Act 
 made eligible for rediscount, and bankers' acceptances payable in 
 foreign countries and in foreign currencies. The present circular and 
 regulation is intended to cover these items. The Board wishes par- 
 ticularly to call attention to the purpose of the open-market section 
 of the Federal Reserve Act. It enables the Federal Reserv^e Banks 
 to exert a steadying influence upon prevailing rates of interest by the 
 use of their purchasing power whenever conditions make such influence 
 desirable, and when, owing to the lack of appHcations for rediscounts, 
 they are unable to influence rates through the latter means. It also 
 affords to the Federal Reserve Banks the opportunity of purchasing 
 in the open market paper with a view to providing for their expenses 
 and dividends. The Board is of the opinion that the Federal Reserve 
 Banks should, when occasion warrants, stand ready to engage in open- 
 market transactions, as buyers or sellers, to the extent that it is neces- 
 sary to carry out the purposes of the Act. 
 
 ' Adapted from Federal Reserve Board Circular A'o. 20, December 4, 1915.
 
 THE FEDERAL RESERVE SYSTEM 317 
 
 General Open-Market Operation 
 i. definition 
 Open-market operations, as contemplated under the Federal Reserve 
 Act, are all those transactions authorized by section 14 of the Act which 
 involve dealings with persons or institutions — whether or not members of 
 the Federal Reserve System — and which do not require the indorsement 
 of a member bank. 
 
 n. CABLE TRANSFERS AND FOREIGN BILLS OF EXCHANGE 
 
 In order to carry on open-market transactions in cable transfers and 
 foreign bills of exchange (including foreign bankers' acceptances) — that is, 
 payments to be made in, or bills payable in, foreign countries — it will be 
 necessary for Federal Reserve Banks to open accounts with correspondents 
 or establish agencies in foreign countries. Such bills of exchange and 
 foreign acceptances must comply with the applicable requirements of sec- 
 tions 13 and 14. As the law prescribes that these connections are to be 
 established only with the consent of the Federal Reserve Board, Federal 
 Reserve Banks will be required to communicate with the Federal Reserve 
 Board whenever they are ready to enter these foreign fields. 
 
 The Federal Reserve Board realizes that in dealing in foreign exchange 
 the Federal Reserve Banks must necessarily have wide discretion in deter- 
 mining the rates at which they will buy or sell. It is not necessary that the 
 bills shall have been actually accepted at the time of purchase. The Federal 
 Reserve Board, however, will require that unaccepted "long bills," payable 
 in foreign countries, when purchased, unless secured by documents, shall 
 bear one satisfactory indorsement other than those of the drawer or acceptor, 
 preferably that of a banker. Federal Reserve Banks should exercise due 
 caution in dealing in foreign bills, and boards of directors should fix a limit 
 within which the acceptances or bills of a single firm may be taken. 
 
 m. DOMESTIC BILLS OF EXCHANGE 
 
 The Federal Reserve Board has determined that a domestic bill of 
 exchange, in order to be eligible for purchase under section 14 by a Federal 
 Reserve Bank, at the rate to be established for open-market operations — 
 
 a) Must be a bill the proceeds of which have been used, or arc to be 
 used, in producing, purchasing, carrying, or marketing goods in one or more 
 steps of production, manufacture, and distribution; but shall not be eligible 
 if its proceeds have been used, or are to be used, for a permanent or fixed 
 investment of any kind; for example, land, buildings, machinery, etc., or 
 for any investment of a merely speculative character. 
 
 b) Must have been drawn by a domestic or foreign firm, company, 
 corporation, or individual upon a firm, company, corporation, or individual 
 in the United States; but need not bear the indorsement of a member bank. 
 
 c) Must have been accepted by the drawee prior to the purchase by a
 
 3i8 PRTNCTPLi:S OF MONEY AND BANKING 
 
 Federal Reserve Bank unless accompanied and secured by approved ware- 
 house receipts, bills of lading, or other such documents covering readily 
 marketable goods. 
 
 rV. DOMESTIC BILLS — CONDITIONS OF PURCHASE 
 
 c) Before purchasing domestic bills of exchange, the I-'ederal Reserve 
 Bank must secure statements concerning the condition and standing of the 
 drawer of the paper, and, if possible, also of the acceptor of the bill, sufficient 
 to satisfy the bank as to the nature and quality of the paper to be purchased. 
 
 b) No Federal Reserve Bank will be permitted to purchase bills of any 
 one drawer, or issued upon any one maker, to an amount to exceed in the 
 aggregate a percentage of its capital, to be fixed from time to time by the 
 Federal Reserve Board, except when secured by approved warehouse 
 receipts, bills of lading, or other such documents covering readily market- 
 able goods. The aggregate amount drawn on any one acceptor, purchased 
 by Federal Reserve Banks, shall not exceed a reasonable percentage of the 
 stated net worth of the parties whose names appear upon the paper. 
 
 V. RATES 
 
 Federal Reserve Banks desiring to engage in open-market transactions 
 in domestic bills of exchange shall communicate to the Federal Reserve 
 Board the rate they desire to establish, for review and determination. 
 
 157. TIME DEPOSITS AND SAVINGS ACCOUNTS' 
 
 The Federal Reserve Board deems it advisable to define under the 
 following headings those deposits against which the Federal Reserve 
 Act requires a reserve of only 5 per cent to be maintained: 
 
 1. Time deposits, open accounts. 
 
 2. Savings accounts. 
 
 3. Certificates of deposit. 
 
 It was clearly not the intention of the Act to permit a reduction 
 of reserves to 5 per cent upon deposits which may be ordinarily 
 checked upon, but in respect to which a bank, by a blanket provision 
 in its by-laws, may at any time require a withdraw^al notice of not less 
 than 30 days to be given. Th€ reduction of the reserve to be carried 
 against time deposits is intended to apply only to deposits under 
 written agreement not to be withdrawn within 30 days from the date 
 as of which the reserve calculation is made. Therefore, on the date 
 
 ' Circular No. 6 and Regulation E of Federal Reserve Board, Januar\' 15, 
 1915. (Published in Monthly Letter of National City Bank, New York, February, 
 
 1915-)
 
 THE FEDERAL RESERVE SYSTEM 319 
 
 of calculating reserve, under the definitions contained in the accom- 
 panying regulation, no deposit may be deemed a time deposit, whether 
 on open account or on certificate — 
 
 a) If it is payable within 30 days, because of the approaching end of 
 the specified period for which it was deposited or because of receipt of 
 notice of the date on which withdrawal will be made. 
 
 b) If it may be withdrawn by check, within 30 days, although the bank 
 may have the right, by written contract or otherwise, to require a with- 
 drawal notice of not less than 30 days. 
 
 Nor may any certificate of deposit be considered a time certificate 
 if any part of the amount represented by it is subject to check or may 
 be withdrawn without the presentation of the certificate for proper 
 indorsement. 
 
 While savings accounts may at any time, by the action of the bank, 
 be converted into time deposits, they are, nevertheless, ordinarily 
 withdrawable on demand. In the absence of any statutory limitation 
 upon the sum which may be received by a bank from any one indi- 
 vidual as a savings account, the Board has no authority, for the pur- 
 pose of calculating reserves, to impose any such limitation, but it feels 
 strongly that in the interest of both the member banks and the Federal 
 Reserve System, the broad provisions of the Act in respect to time 
 deposits, savings accounts, and certificates of deposit, should not be 
 made the means of any large general reduction of reserves by a transfer 
 to those f onus of deposits which are in substance demand deposits; and 
 it is the purpose of the Board to countenance or permit a reduction of 
 reserves to 5 per cent only on dei)osits which are, in fact as well as in 
 form, entitled to such reduction witliin the spirit of the Act. 
 
 Banks carrying savings accounts must record them in separate 
 ledgers which do not contain ordinary checking accounts or other 
 items. Open time accounts and time certificates of deposit should 
 also be carried in separate ledgers, but if carried in the same ledger 
 with current checking accounts they must be grouped together so as 
 to be readily distinguished from the latter. 
 
 The Board desires to make it clear that the Act requires the full 
 reserve, at the rate prescribed for demand dcjwsils, to be carried 
 against all savings accounts and all lime ticposils whether on open 
 account or certificate, which are subject to check or which the bank 
 has ])een notified are to be withdrawn within 30 days.
 
 320 PRINCIPLES OF MONEY AND BANKING 
 
 REGULATION GOVERNING TIME AND SAVINGS DEPOSITS 
 
 Section 19 of the Federal Reserve Act provides, in part, as follows: 
 Demand deposits, within the meaning of this Act, shall comprise all 
 deposits payable within 30 liays, and time deposits shall comprise all de- 
 posits payable after 30 days, and all savings accounts and certificates of 
 deposit which are subject to not less than 30 days' notice before payment. 
 
 TIME DEPOSITS, OPEN ACCOUNTS 
 
 The term "time deposits, open accounts" shall be held to include 
 all accounts, not evidenced by certificates of deposit or savings pass- 
 books, in respect to which a written contract is entered into with the 
 depositor at the time the deposit is made that neither the whole nor 
 any part of such deposit may be withdrawn by check or otherwise. 
 
 SAVINGS ACCOUNTS 
 
 The term "savings accounts" shall be held to include those 
 accounts of the bank in respect to which, by its printed regulations, 
 accepted by the depositor at the time the account is opened — 
 
 a) The passbook, certificate, or other similar form of receipt must be 
 presented to the bank whenever a deposit or withdrawal is made. 
 
 b) The depositor may at any time be required by the bank to give 
 notice of an intended withdrawal not less than 30 days before a withdrawal 
 is made. 
 
 TIME CERTIFICATES OF DEPOSIT 
 
 A "time certificate of deposit" is defined as an instrument evi- 
 dencing the deposit with a bank, either with or without interest, of a 
 certain sum specified on the face of the certificate, payable in whole 
 or in part to the depositor or to his order — 
 
 a) On a certain date, specified on the certificate, not less than 30 days 
 after the date of the deposit, or 
 
 b) After the lapse of a certain specified time subsequent to the date of 
 the certificate, in no case less than 30 days, or 
 
 c) Upon written notice given a certain specified number of days, not 
 less than 30 days before the date of repayment, and 
 
 d) In all cases only upon presentation of the certificate at each with- 
 drawal for proper indorsement or surrender.
 
 THE FEDERAL RESERVE SYSTEM 
 
 321 
 
 158. COMBINED STATEMENTS OF FEDERAL RESER\E 
 BANKS- 
 RESOURCES 
 
 February 4, 1016 January 28, 1916 
 
 Total gold reserve 
 
 Legal tender notes, silver, etc 
 
 Total reserve 
 
 Bills discounted and loans: 
 
 Maturities within 30 days 
 
 Maturities \vithin 60 days 
 
 Maturities within 90 days 
 
 Over 90 days 
 
 Total 
 
 Investments 
 
 Federal Reserve notes, net 
 
 Due from Federal Reserve banks, net 
 
 All other resources 
 
 Total resources 
 
 LIABILITIES 
 
 Capital paid in 
 
 Government deposits 
 
 Reserve deposits, net 
 
 Federal Reserve notes, net 
 
 All other liabilities 
 
 Total liabilities 
 
 Gold reserve against net liabilities 
 
 Cash reserve against net liabilities 
 
 $342,004,000 
 14,637,000 
 
 $356,641,000 
 
 $ 17,355,000 
 
 20,740,000 
 
 10,391,000 
 
 2,837,000 
 
 51,323,000 
 
 45,197,000 
 33,710,000 
 15,223,000 
 11,903,000 
 
 5513,997,000 
 
 $349,861,000 
 15,496,000 
 
 5365,357,000 
 
 $ 19,003,000 
 
 18,518,000 
 
 12,185,000 
 
 3,509,000 
 
 $ 53,215,000 
 
 $ 41,974,000 
 
 36,469,000 
 
 10,761,000 
 
 9,994,000 
 
 $517,770,000 
 
 $ 54,907,000 
 
 29,850,000 
 
 419,137,000 
 
 9,966,000 
 
 137,000 
 
 $513,997,000 
 
 77-1% 
 80.4% 
 
 $ 54,892,000 
 
 27,760,000 
 
 424,664,000 
 
 10,313,000 
 
 141,000 
 
 $517,770,000 
 
 77-4% 
 80.8% 
 
 Rediscount and circtilation compare with last week as follows: 
 
 
 Federal Reserve Notes in 
 Circulation 
 
 Rediscounts 
 
 
 February 4 
 
 January iS 
 
 February 4 
 
 January 38 
 
 Boston 
 
 New York 
 
 Philadelphia 
 
 Cleveland 
 
 Richmond 
 
 $ 8,902,000 
 72,005,000 
 
 7,882,000 
 10,292,000 
 13,931,000 
 16,011,000 
 
 2,613,000 
 
 7,873,000 
 12,393,000 
 10,077,000 
 13,747,000 
 
 5,642,000 
 
 $ 8,995,000 
 69,055,000 
 
 8,002,000 
 10,306,000 
 14,055,000 
 15,935,000 
 
 2,633,000 
 
 8,009,000 
 12,390,000 
 10,120,000 
 14,003,000 
 
 5,721,000 
 
 $ 7,883,000 
 11,386,000 
 1 ,940,000 
 1,145,000 
 6,846,000 
 5,764.000 
 4,374,000 
 1,712,000 
 1,443,000 
 3,o()4,ooo 
 4,639,000 
 1,127,000 
 
 $ 7 ,6 1 1 ,000 
 10,663,000 
 2,296,000 
 1,291,000 
 6,898,000 
 6,490,000 
 
 Atlanta 
 
 Chicago 
 
 S,? 1 1,000 
 
 St. Louis 
 
 Minnca[M)lis 
 
 Kansas City 
 
 Dallas 
 
 1 ,896,000 
 
 I,5()Q,000 
 
 3,360,000 
 4,592,000 
 
 San Francisco 
 
 1,232,000 
 
 Total 
 
 $181,368,000 
 
 $179,224,000 
 
 $51,323,000 
 
 $53,215,000 
 
 
 
 "From Federal Reserve Bulletin, February, igi6.
 
 322 PRINCIPLES OF MONEY AND BANKING 
 
 159. CLEARINGS UNDER THE NEW SYSTEM- 
 
 The provisions of the Federal Reserve Act with respect to the 
 introduction of a system of clearings are found in section 16, where 
 it is provided that — 
 
 Every Federal Reserve Bank shall receive on deposit at par from mem- 
 ber banks or from Federal Reserve Banks checks and drafts drawn upon any 
 of its depositors, and when remitted by a Federal Reserve Bank, checks 
 and drafts drawn by any depositor in any other Federal Reserve Bank or 
 member bank upon funds to the credit of said depositor in said Reserve 
 Bank or member bank. Nothing herein contained shall be construed as 
 prohibiting a member bank from charging its actual expense incurred in 
 collecting and remitting funds, or for exchange sold to its patrons. The 
 Federal Reserve Bank shall, by rule, fix the charges to be collected by 
 the member bank from its patrons whose checks are cleared through the 
 Federal Reserve Bank and the charge which may be imposed for the service 
 of clearing or collection rendered by the Federal Reserve Bank. 
 
 The Federal Reserve Board shall make and promulgate from time to 
 time regulations governing the transfer of funds and charges therefor among 
 Federal Reserve Banks and their branches, and may at its discretion exer- 
 cise the functions of a clearing-house for such Federal Reserve Banks, or 
 may designate a Federal Reserve Bank to exercise such functions, and may 
 also require each such bank to exercise the functions of a clearing-house for 
 its member banks. 
 
 It is evident that this provision distinctly contemplates two 
 classes of work: 
 
 a) A clearing system providing for the clearing of items among 
 member banks which are stockholders and depositors in any Federal 
 Reserve Bank. 
 
 b) A clearing system which shall provide for clearing the trans- 
 actions of Federal Reserve Banks among themselves. 
 
 160. GOLD CLEARANCE FUND AT WASHINGTOxN^ 
 
 Provision has been made by the Federal Reserve Board for the 
 establishment of a gold clearance fund at Washington for the purpose 
 of effecting with as little delay and cost as possible settlements between 
 Federal Reserve Banks. This proposed plan of interbank settlement 
 is intended to complete and be adjusted to an intradistrict clearance 
 system, but its operations will be independent of the latter, 
 
 ' From First Annual Report of the Federal Reserve Board, p. 135. 
 ' From Federal Reserve Bulletins, May and December, 1915.
 
 THE FEDERAL RESERVE SYSTEM ^^2;^ 
 
 Gold coin and currency will be shipped to Wcishington or to a 
 subtreasury and turned over to the Treasurer of the United States, 
 who will issue gold order certificates payable to the Federal Reser\'e 
 Board or to any Federal Reserve Bank. The books of the gold settle- 
 ment fund will show exactly how much has been paid in at the outset 
 by each Federal Reserve Bank, and each bank will be informed of the 
 receipt of this amount. Gold order certificates so received will 1)6 
 placed in a safe and this safe in turn will be placed in the main vault 
 of the Treasury Department. 
 
 When the transfers are to be made from one bank to another as 
 the result of change in ownership, two signatures will be necessary- on 
 the order certificates. These order certificates will be prepared in 
 such a way as to require the signature of the governor or acting 
 governor of the Board and one additional person, who may be either 
 the secretary, the fiscal agent, or the supervisor of clearings. 
 
 When transfers are made by the Federal Reserve Board, the 
 balances that accrue to the respective reserve banks may be paid by 
 indorsement and by return to the respective banks of a like amount 
 of such gold certificates held by the Federal Reserve Board, or by the 
 indorsement and delivery to the Treasurer of a like amount of such 
 certificates for which he will give in exchange bearer gold certificates, 
 which the Board may send to the banks by insured registered mail if 
 they want funds other than gold certificates, or in lieu of such pay- 
 ment the Treasurer may Ijy wire direct payment to be made by a 
 subtreasury ofllice, provided that funds are hehl in such office available 
 for the purpose. 
 
 The first actual clearing was on May 26, each Federal Reserve 
 Bank at that time being required to deposit Si, 000,000 in the fund 
 and an amount in addition equal to its inde])tedness to other Federal 
 Reserve Banks. 
 
 Dejiosits by the Federal Reserve Banks in this fund are counted 
 as legal reserve. On September 8, 1915, the Board authorized 
 accounts to be opened with the 12 Federal Reserve Agents. The fund 
 is now divided as follows: balances to the credit of Federal Reserve 
 Banks, S69, 240,000; balances to the credit of Federal Reserve Agents, 
 333,380,000.' 
 
 These amounts are now held by the Board in gold order certificates 
 in denominations of Sio,ooo. Deposits in the fund are, through the 
 courtesy of the Treasury Department, made by Federal Reserve 
 
 ' Xovembcr 18, 1915.
 
 324 PRINCIPLES OF MONEY AND BANKING 
 
 Banks through the subtreasuries. When a deposit is made at a sub- 
 treasury, advice is wired to the Treasurer of the United States at 
 Washington, who then causes gold certificates to be issued to the 
 Federal Reserve Board. When payments are made from the fund, 
 the operation is of course reversed. Transfers are, however, for the 
 most part on the books of the gold settlement fund by credits and 
 debits between the twelve banks or between banks and the Federal 
 Reserve Agents. 
 
 i6i. INTERDISTRICT COLLECTIONS' 
 By MILTON C. ELLIOT 
 
 Another great advantage which will accrue to the member banks 
 as a result of the establishment of this system is the collection of 
 foreign or out-of-town items. While the subject of clearing items for 
 so many banks and over so large a territory is one which in itself will 
 require most careful study in placing it in operation, and one which 
 might be made the subject of a discussion of some length, it must be 
 apparent to those familiar with it that the establishment of twelve 
 distinct Federal Reserve banks, serving member banks of twelve dis- 
 tinct districts, will furnish a machinery which will greatly reduce the 
 average time of making collections. To illustrate : Five banks in the 
 city of Columbus might on the same day receive for deposit five differ- 
 ent items drawn on the same bank in California. Under existing 
 conditions those five items might be sent to five different correspond- 
 ents and might each take a separate and distinct route in going from 
 Columbus to California, so that the return from the items drawn on 
 the same point might each be received at a different time. 
 
 This is manifest because one bank in Columbus might send it to 
 its correspondent in New York, which in turn might send it to its 
 correspondent in Chicago, which in turn might send it to its corre- 
 spondent elsewhere, and the item would normally be kept in transit 
 until it reached a bank which happened to be a correspondent of the 
 bank on which the item was drawn or else reached the city in which 
 the bank is located against which the item was drawn and is presented 
 by some other bank in that city. Another bank might send its item 
 for collection through an entirely different set of correspondent banks. 
 
 When the Federal Reserve banks have been established, however, 
 and the machinery has been worked out for the handling of such 
 
 ' Adapted from an address before the Ohio Bankers' Association, May, 19 14. 
 (Published in Monthly Letter of National City Bank, New York, June, 1914.)
 
 THE FEDERAL RESERVE SYSTEM 325 
 
 items, all the items from Columbus could go at once to the Federal 
 Reserve bank of its district in Cleveland, from the Federal Reserve 
 bank of Cleveland direct to the Federal Reserve bank of San Fran- 
 cisco, and assuming that they are drawn on member banks the 
 Federal Reserve bank of San Francisco would necessarily be a corre- 
 spondent of the bank in question. Consecjuently, the saving in the 
 average time of collection of foreign items will unquestionably be very 
 great and the loss of the use of funds in transit will be correspondingly 
 reduced. 
 
 C. Relation of the System to Other Banking Institutions 
 
 162. MEMBERSHIP OF STATE BANKS IN THE FEDERAL 
 RESERVE SYSTEM' 
 
 The Federal Reserve Board has prepared and issued regulations 
 (Circular No. 14, 19 15) relating to the membership of state banks in 
 the federal reserve system. Provision is made for the entrance of 
 state banks into the system at the Board's discretion, upon appUca- 
 tion, subject to various restrictions and conditions of examination. 
 The two outstanding points in the circular are that it permits the 
 withdrawal of state banks which may have become members, under 
 specified conditions, and that it permits such state banks as become 
 and continue members to e.xercise their statutory and charter rights 
 after entrance into the system just as before. This means that they 
 may continue to loan on real estate security without reference to the 
 restrictions imposed upon such loans under the National Bank act, 
 although the regulations pro\ide that a state bank which becomes a 
 member shall invest in such loans only to an e.xtent which will not 
 impair its liquid condition. The terms of the circular have been under 
 consideration by the Board more or less continuously ever since the 
 organization of the federal reserve banks, and are the outcome of 
 many consultations with bankers and experts. Legal advice, also, 
 has been sought in numerous quarters. While the interpretation of 
 the provision of the Federal Reserve act concerning membershij) of 
 state banks offers considerable difliiculty, it is believed that the plan 
 now proposed complies with the recjuirements of tlie law. 
 
 The question whether the admission of state banks witli power to 
 continue their real estate loans, and with permission to withdraw, 
 
 ' Adapted from "Washington Notes" in Journal of Political Economy, XXIII 
 (July, 1915), 717-19-
 
 326 I'RINCII'LKS OF MONEY AND BANKING 
 
 places them in a ])osition of advantage which might subject the 
 national banks to unduly severe competition, has been widely dis- 
 cussed, but it is thought that if such a danger exists it can be largely 
 avoided by exercising adequate care with reference to the admission 
 of banks to membership. No banks will be admitted unless they are 
 sufFiciently strong and well managed to insure their being eflfective 
 working members of the system, conducting their business upon a 
 high plane and observing all the requirements of sound management. 
 While it is not intended to duplicate state examinations more than 
 necessary, or to impose an undue l^urden of exj^ense upon member 
 banks, the Board's supervision is expected to be such as to insure the 
 maintenance of stable and generally uniform conditions of competi- 
 tion among all the banks of the system, whether state or national. 
 The circular and regulations provide for reliance upon state bank 
 examinations to the fullest extent that is possible, and for the making 
 of co-operative arrangements between state and national authorities 
 with reference to such examinations. This will lessen the expense of 
 overseeing the system, and will remove the possibility, which might 
 otherwise exist, that state banks might be constantly under examina- 
 tion by various classes of examiners. 
 
 There has been no effort to forecast the number of banks that will 
 probably enter the system in the near future under the provisions of 
 the circular and regulations. The Board states in its circular that it 
 is more concerned with the quality of the members than with their 
 number; and it is prepared to see a slow, steady increase in the 
 number of banks, each institution admitted being granted member- 
 ship only upon satisfactory^ evidence that it will be a source of strength 
 to the system. 
 
 It is probable that state bankers who have what to them seems 
 good ground for postponing action will continue to find reasons for 
 delay for some time to come, and will not bestir themselves to join 
 the system until a fresh motive is afforded them for so doing. If 
 the rediscount plan operates as it is expected to, state banks will get the 
 benefit of it indirectly by finding themselves able to dispose of their 
 paper on favorable terms in the open market without necessarily 
 going to a federal reserve bank for accommodation. It is rather to 
 be expected that the motive tending to lead state bankers to enter the 
 svstem will be found in the clearing function. If the clearance pro- 
 vision in the Federal Reserve act proves successful, it may be expected 
 that business will be transferred to the member banks by those who
 
 THE FEDERAL RESERVE SYSTEM 327 
 
 will appreciate the immense advantage open to them as a result of the 
 provision freeing them from the conditions to which thf\- lia\ i- hire- 
 tofore been subjected in regard to domestic exchange. 
 
 163. A STATE BANKER'S VIEW OF THE FEDERAL RESERVE 
 
 SYSTEM' 
 
 By frank N. BRIGGS 
 
 There are many reasons why state banks and trust companies 
 should act with great deliberation in reference to entering the new 
 federal reserve banking system, and I will undertake to mention a few 
 of them very briefly. 
 
 First, the law is made for national banks only. Until it shall be 
 so amended as to be helpful and not detrimental to state banks and 
 trust companies they should remain out of the system. 
 
 Second, those entering the new system will probably be subject 
 to double examinations, both state and national, double reports, con- 
 flicting laws, unusual expenses, and a curtailment of privileges now 
 enjoyed under state laws. 
 
 Third, at the present time state banks and trust companies are 
 able to supply needs in their various communities for the development 
 and promotion of business that cannot be supplied by national Ijanks. 
 This then brings us face to face with the best protection of the public 
 and the fullest development of the countr\'. The new law appears 
 to me to have been especially constructed and is now being adminis- 
 tered largely for the benefit of big business and big undertakings. 
 It has no functions thus far developed that a])peal personally and 
 directly to the small business man, merchant, small farmer, small 
 stock-raiser, small manufacturer, or plain ordinary- citizen. Of course, 
 by aiding *the large institutions the system will probably indirectly 
 aid the small ones. 
 
 In the fourth place commercial paper is the great and important 
 item to be used for rediscounts at the federal reserve banks. This can 
 be issued and is issued only by large concerns moving great quantities 
 of merchandise or products and receiving quick returns on the same 
 in cash. Theoretically this is fine, but unfortunately all of the busi- 
 ness of the country is not and cannot be turned over inside of thirty, 
 sixty, or ninety days. There should therefore be some financial insti- 
 
 ■ Adapted from an address before the Colorado Bankers' .Association. Chicago 
 Ijiiukcr, January 30,' 1915, pp. 7-8.
 
 328 PRINCIPLES OF MONEY AND BANKING 
 
 tutions in the country that can take on at least a limited amount of 
 such business which is sound, safe, and secure, but not as quickly 
 liquid as the preferred classes mentioned in the reserve bank act. 
 
 Fifth, customers of country banks know very little about making 
 statements, and it would be very difficult for a country bank to meet 
 the "red-tape" requirements of the federal reserve banks when dis- 
 counts are needed. A statement must be filed for the maker of each 
 note offered for rediscount, certain appHcation blanks must be filled 
 out and filed, and a great deal of necessary routine gone through before 
 a loan can be secured or paper rediscounted. I believe the small 
 member banks and non-member banks must rely, as heretofore, 
 largely upon their correspondents in the larger centers to supply them 
 with funds as needed for emergencies. Fortunately, such banks do 
 not need accommodations very often. 
 
 Sixth, it would be very dangerous to place the entire banking 
 business of the country under the control of a federal board at Wash- 
 ington. No other free country that I know of has ever succeeded in 
 forcing all banking institutions to come under absolute governmental 
 control. 
 
 Is it not unwise to take on the risks and the obligations entailed by 
 becoming members of the reserve system when it is not necessary to 
 do so ? While there are benefits and advantages to those banks that 
 are members of the system, these are more or less counterbalanced 
 at this time by the risks, curtailment of privileges, limitation of 
 functions, added expenses, and other disadvantages offered by the 
 system. 
 
 State banks and trust companies are in a very fortunate position, 
 both for themselves and for their patrons, in being able to stand aside 
 during the formative period — we might say the experimental stage — of 
 the new national banking system and steady the financial ship while 
 the national banks trim their sails and adjust their craft to suit the 
 current of the new stream. These twenty thousand or more state 
 banks and trust companies, remaining serene and undisturbed, are 
 able to take care of their business in the usual way, co-operating at all 
 times in a most friendly and patriotic spirit in bringing the new 
 national system to its highest efficiency and most perfect state of 
 usefulness.
 
 THE FEDERAL RESERVE SYSTEM 329 
 
 164. THE ATTITUDE OF THE FEDERAL RESERVE BOARD' 
 By CHARLES S. HAMLIN 
 
 We are anxious that the state banks generally shall come into the 
 system — some of them seem to be holding aloof and waiting. The 
 Federal Reserve Board has done evervthing in its power to liberalize 
 the regulations for the admission of state banks. I want to say 
 frankly that this system has succeeded, and will succeed, whether the 
 state banks come in or not, but the bigger the base the stronger the 
 edifice, and I believe it highly desirable that all state banks join 
 the system. About thirty of the large, strong banks have joined, and 
 there is quite a waiting list now of those who desire to come in, but I 
 want to make the prediction that if the state banks do not come into 
 the federal reserve system, sooner or later they will have to establish 
 a system of their own, and if they go to their state legislatures and 
 ask authority, the first question will be: "Why have you not entered 
 the federal reserve system?" Such a system would require special 
 legislation in several states, and would require years to put through. 
 I earnestly hope in the near future to see the state banks coming into 
 the federal reserve system, and I want to hold out this thought to 
 them, that if they come in now they will come in easily, because their 
 assets are hquid; but the time may come when the state bank wants 
 to come in quickly, and the bank may find its assets are not in a Hquid 
 condition and it will take time and trouble to get in. 
 
 Our regulations have been very moderate. We have interfered 
 very little with the powers of the state banks. The state banks which 
 come into the system can still loan on real estate when national banks 
 have never been permitted to do that except to a limited extent under 
 the Federal Reserve act. They can come in with all their branches 
 and do business side by side with national banks that are not author- 
 ized directly to have branches. We even accept the examination 
 of the state autliorities where we find that those examinations are 
 sound and good; that, certainly, is a great privilege for the state 
 banks. We even have gone so far that we say to the state bank that, 
 once in, you can withdraw on a year's notice; I tliink that is a privi- 
 lege the state banks must appreciate. But we do not believe that one 
 of them would look ])ack to see whether the door was open or closed 
 after it had once entered the system. 
 
 'Adapted from an (unpublished) address before the Western Economic Society, 
 November, 1915.
 
 330 PRINCIPLES OF MONEY AND BANKING 
 
 Somelimcs a l^ank president may say, "Why should a state bank 
 come in, if it is true that the system is a great success and we can 
 never have any more panics?" Now I think it is true that we will 
 never have any more panics, but that does not mean that individual 
 state banks will not have trouble in the future as they have had 
 trouble in the past. And when they do come — for I believe there 
 will be a long line of state banks at the first touch of stringency — 
 then they must take the last place in the line to be examined, and 
 it will take longer. But if you still ask, What use it is, because we 
 can never have a general conflagration again ? a man might just as 
 well get up when there is a motion to put in a system of hydrants 
 in a city, and say he read the other day the report that the hydrant 
 systems over the United States are so eflacient that the whole United 
 States could now never be burnt up. I think that would be almost 
 as sensible an answer as the one we occasionally receive. Now, 
 when times of stringency and tight money come, banks will not 
 be able to get the assistance outside of the system that they have 
 previously secured, even from the national banks. 
 
 I believe, however, that this question will be largely settled by the 
 customers of the bank. If a man were going into a small town to 
 start an elaborate business, requiring much capital and credit, and 
 he were to find two state banks there, one belonging to the federal 
 reserve system and one not belonging to it, would it take that man, 
 if he were prudent, long to decide where to put his deposits? I 
 believe that the people of the United States in the long run will see 
 to it that the banks they deal with sooner or later become memloers 
 of the federal reserve system. 
 
 165. NEW YORK'S NEW STATE BANKING LAW' 
 By THEO. H. price 
 
 In April, 19 14, the state of New York passed a new bank act, 
 designed for the rriost part to enable the state institutions to compete 
 with the banks in the Federal Reserve system. 
 
 The most important of these changes in the law have to do with 
 reserves and acceptances. 
 
 'Adapted from an article on "Commerce and Finance" in the Outlook, C\'I 
 (1914), 813-15.
 
 THE FEDERAL RESERVE SYSTEM 331 
 
 In the matter of reserves the proposed changes follow closely the 
 provisions of the Federal Reserve Bill. Under the new law the 
 reserves required will be: 
 
 Location State Banks Trust Companies 
 
 In a borough with a popu- Reserve 18 per cent, of Reserve 15 per cent, of 
 
 lation of 2,000,000 or which 12 per cent shall be which 10 per cent shall be 
 
 ov'er (i.e., Manhattan) on hand and 6 per cent on hand and 5 per cent 
 
 may be on deposit ma\- be on deposit 
 
 In a borough with a popu- Reserve 15 per cent, of Reserve 13 per cent, of 
 
 lation of over 1,000,000 which 10 per cent shall be which 8 per cent shall be 
 
 and not more than 2,- on hand and 5 per cent on hand and 5 per cent 
 
 000,000 and not having may be on deposit may be on deposit 
 an office in a larger bor- 
 ough 
 
 P^Isewhere in state Reserve t2 per cent, of Reserve 10 per cent, of 
 
 which 4 per cent shall be which 4 per cent shall be 
 
 on hand and 8 i)er cent on hand and 6 per cent 
 
 may be on deposit may be on dejxjsit, except 
 
 that in cities of less than 
 
 100,000 ix)pulation only 
 
 3 per cent need be on hand 
 
 At least one-half the reserves on hand shall consist of gold bullion, 
 gold coin, gold certificates, or United States notes, and the remainder 
 shall consist of lawful money of the United States or any other form 
 of currency authorized by the United States. State banks and trust 
 companies that become members of the Federal Reserve system may 
 keep the reserves permitted to be on dej^osil with the Federal Reserve 
 Bank. 
 
 Other reserve depositaries shall be designated by the Superin- 
 tendent of Banking. 
 
 The reduction in the reserves for which the new law provides will 
 undoubtedly work a great enlargement in the credit which the State 
 institutions will be al:)le to extend. In the provision which is made 
 for acceptances the greatest possibility of credit expansion is to be 
 found. In brief, this portion of the law permits Slate banks and trust 
 companies to accept drafts on them and payable within one year. 
 
 The liability of institutions in the Borough of Manhattan on 
 account of such acceptances for account of any one individual, lirm, 
 or corporation is limited to 25 per cent of their capital and surplus. 
 Banks and trust companies elsewhere may accept the drafts of any
 
 332 PRINCIPLKS OF MONKY AND BANKING 
 
 one individual, firm, or corporation up to 40 per cent of their capital 
 and surplus. The drafts so accepted must be drawn in good faith 
 against actually existing values, or, where they exceed 10 per cent of 
 the bank's capital and surplus, may be, to the extent of the excess so 
 authorized, secured by collateral having an ascertained market value 
 that is 15 per cent more than the obligation against which it is 
 hypothecated. 
 
 Under the new law State institutions may accept bills to the 
 extent of 25 per cent to 40 per cent of their aggregate capital and 
 surplus, "multiplied by the number of individuals, firms, and cor- 
 porations who desire and can arrange for this form of credit." 
 
 The bill contains many other interesting provisions. One of these 
 permits the formation of land banks with authority to issue debenture 
 bonds against guaranteed real estate mortgages. Another imposes 
 some rather drastic restrictions upon private and unincorporated 
 bankers. 
 
 It is unnecessary, however, to discuss these provisions; they are 
 chiefly of local interest. 
 
 The changes that are nation-wide in their importance are those 
 that relate to reserves and acceptances. There is reason to believe 
 that the other States of the Union have been awaiting New York's 
 action in regard to its banking system and will speedily follow suit 
 in changing their laws so that the State institutions throughout the 
 country may compete with the increased facilities which the National 
 banks will be able to offer under the Federal Reserve system. 
 
 The liberalization of the right to accept, for which the New York 
 law provides, will enable the State institution to grant far greater 
 facilities in this respect than the National banks can offer.' On the 
 other hand, the State institutions that do not become members of the 
 Federal Reserve system will be unable to avail themselves of the pro- 
 visions of the Federal Reserve bill in the matter of rediscounts and 
 Federal Reserve notes. 
 
 It seems probable, therefore, that the competition in the extension 
 of credits which is almost certain to come when the two systems are 
 fully organized will be one of rediscounts versus acceptances. The 
 extent to which either or both of these means of credit extension shall 
 be popularized and availed of will depend largely upon the education 
 of the public as to their respective merits. 
 
 ' This advantage has now been largely overcome by granting to Federal 
 Reserve Banks the right of accepting domestic bills of exchange. — Editor.
 
 THE FEDERAL RESERVE SYSTEM 333 
 
 In New York attempts are already being made to form one or two 
 institutions with large capital whose business shall be confined to the 
 purchase and sale of accepted bills. 
 
 The interdependence of the banks in the Federal Reserve system 
 and the facilities that they will enjoy in the matter of rediscounts and 
 the procurement of Federal Reserve notes will, of course, give them a 
 great advantage in times of stringency, but during periods of monetary 
 ease the State institutions will doubtless be able to attract much busi- 
 ness now controlled by the National banks. 
 
 It seems altogether likely that during the transitionary period the 
 competition between the State and Federal banks will be exceedingly 
 keen. 
 
 The appeal of the Federal system will be in its National solidarity 
 and the security which that solidarity implies, but the public will 
 have to be educated to appreciate the importance of this factor. 
 
 166. THE TRUST COMPANIES AND THE FEDERAL 
 RESERVE ACT' 
 
 In the process of carrying into effect the provisions of the Federal 
 Reserve act, the Federal Reser\'e Board has encountered an unex- 
 pected difficulty. The Federal Reserve act in subsection (k) of sec- 
 tion II provided that the Board might, when such action was not in 
 contravention of state or local law, grant to national banks the power 
 to exercise the functions of trustee, executor, administrator, and regis- 
 trar of stocks and bonds. Regulations stating the conditions under 
 which these powers might be applied for were not issued by the 
 Federal Reserve Board until February' 15, 1915, but, as soon as they 
 had been placed in circulation, a considerable number of applications 
 were at once filed. Trust companies in a number of slates, and state 
 banks in several others, believing that the competition to which the>- 
 would be subjected by national banks, should the latter be vested with 
 the right to exercise the desired powers, would be injurious, immedi- 
 ately undertook to secure action by state authorities designed to pre- 
 vent the extension of the functions referred to. In several states 
 legislation has already been enacted at the instance of state banks or 
 trust companies, or both, prohibiting the exercise of such functions, 
 and in several more there has been a refusal on the part of the state 
 legislatures to enact any measure removing the existing disabilities 
 
 ' Adapted from "Washington Notes" in Journal of PolilicaJ Economy, XXI 1 1 
 (1915), S11-12.
 
 334 PRINCIPLES OF MONEY AND BANKING 
 
 from national banks and permitling them to exercise the functions 
 referred to, should they be empowered so to do by the Federal Reserve 
 Board. In other states the contest is still in progress and bids fair 
 to continue active for a good while to come. On the other hand, a 
 number of states, particularly in the West and Middle West, have 
 already enacted enabling legislation under which national banks may 
 exercise the functions authorized by the Federal Reserve act, subject 
 to the supervision and control of the Federal Reserve Board. 
 
 The trust companies, recognizing that their opposition to the pro- 
 visons of the Federal Reserve act in this respect has been in part 
 ineffectual, have obtained adverse legal opinions and arranged to file 
 suit designed to test the constitutionality of the provision in the act 
 to which objection is thus taken. Such a suit will be designed to test 
 the question whether Congress has power to grant authority of the 
 kind specified to federal reserve banks or to any other corporation 
 whatever, and, should the decision be adverse to the power of Con- 
 gress, national banks would be unable to exercise the functions in 
 question even in those states in which local law was favorable, and in 
 which, therefore, it was manifest that the people were desirous that 
 national banks should be empowered and authorized to do such work. 
 
 The point at issue is one which involves more than the mere busi- 
 ness interests of the trust companies of the country, it being essential 
 to the question whether or not the effort of the framers of the act to 
 obtain a unification of the banking system shall or shall not be suc- 
 cessful. The act, as is well known, provided for the admission of 
 state banks as members of the federal reserve system upon a practical 
 equality of privilege with national banks. In order to offset the 
 favorable position thus given to state banks, and thereby to remove 
 any incentive that might otherwise exist for national banks to sur- 
 render their charters and recharter under state law (becoming mem- 
 bers of the federal reserve system at will, if so disposed), the Federal 
 Reserve act granted them the trust company powers which are now 
 under discussion. It was felt that by so doing national banks would 
 be enabled to exercise some of the profitable functions heretofore 
 exercised only by trust companies, and th;pt under these conditions 
 they could afford to bear the competition to which they would be sub- 
 jected through the entry of trust companies into the federal reserve 
 system, vested, as most of them are, with full commercial banking 
 powers in addition to their other rights. To hold that the Federal 
 Reserve act is unconstitutional in respect to the provisions cited
 
 THE FEDERAL RESERVE SYSTEM ;,35 
 
 would produce a state of affairs in which, while national hanks were 
 subjected to the rigid regulatitMis already applicable to them and 
 were prohibited from engaging in trust business, the trust companies 
 (already authorized to exercise so wide a range of functions) would 
 be able to present themselves to the public as qualified to compete 
 on equal terms with the national banks already in the system. This 
 makes it evident that the real question at issue in the trust company 
 discussion is the extent to which the Federal Reserve Board shall 
 be permitted to proceed with its effort to harmonize and unify the 
 banking system of the country by bringing about a general fede- 
 ration of all commercial banks under its jurisdiction. The P^ederal 
 Reserve Board has, however, taken no part in the actual legislative 
 discussion in the various states, contenting itself with merely 
 announcing that it was in sympathy with the cfTort to give elTect 
 to the trustee and executor provisions of the Federal Reserve act. 
 
 167. DEPARTMENT-STORE BANKING' 
 
 Is "department-store banking" to be the final outcome of the 
 forces now working toward increasing the functions that may be per- 
 formed by national banks and the counterforces that would extend 
 the powers of trust companies, if they are unable to keep their 
 monopoly of trust powers? Will each little town that now has only 
 a national or a state bank or a trust company possess in the future a 
 single institution with all the functions of a bank, with those of a 
 trust company added, a savings department, and a safe- deposit vault 
 in the basement ? If so, will not the inevitable tendency be to reduce 
 all such institutions to the same basis and i)crhai>s leave only one 
 kind of bank, all in the Federal Reserve system and all under Federal 
 supervision; in a word, all national banks? 
 
 These are the questions that some bankers have been turning over 
 in their heads and discussing since the irrepressible conllict between 
 national banks and trust companies over the question of trust powers 
 has come to a head in New York State. Forces are at work, growing 
 out of the enactment of the Federal Reserve Act, which tend to j)ut 
 all banking concerns on an even iooting, making each bank not only 
 that, but a savings institution and a trust comjiany as well. 
 
 The provisions in the Federal Reserve Act em[)owering the Federal 
 Reserve Board to grant to national banks trust comi)any and savings 
 bank powers, together with the provision for limited loans on real 
 
 ' Adapted from " Department-Store Banking," The Annalist, \ (^•^■'■y • ; 1
 
 336 PRINCIPLES Ol'" MONEY AND JiANKlNG 
 
 estate security, show a strong tendency to put all banks and trust 
 companies on a common level, except for the advantages that inure 
 especially to members of the Federal Reserve system. 
 
 Along with these considerations is the problem of getting the 
 State institutions into the Federal Reserve system. Federal Reserve 
 officials have admitted frankly that the system will not be fully suc- 
 cessful unless the bulk of the 20,000 state institutions in the country, 
 in addition to the 7,600 national banks, are brought into it. 
 
 168. THE FEDERAL RESERVE SYSTEM NOT A HARMONIZING 
 
 AGENCY' 
 
 By A. D. WELTON 
 
 Fifty years of experience under a banking system which confused 
 commercial banking with all other kinds and all other kinds with 
 commercial banking has left what seems to be an ineradicable trace 
 on the new banking system. National banks, facing competition 
 from state institutions not subjected to similar restraints, have 
 declined to welcome the provision which permits the Federal Reserve 
 Board to confer trust company powers on them. State banks have 
 objected to such an expansion of the powers of national banks, not 
 because they have any particular fear that commercial banking will 
 be contaminated, but they desire to keep the advantages they have 
 over their competitors. 
 
 In most of the states the laws permit state banks to do all kinds 
 of banking business, including the exercise of trust company func- 
 tions. How this came about is not material. The important thing 
 is that it came about and that it promotes the confusion of ideas about 
 the various kinds of banking business. Theoretically and ideally 
 commercial banks should confine themselves to commercial banking; 
 trust companies should confine themselves to fiduciary matters, and 
 savings business should be done by savings banks. Again, theoreti- 
 cally, if the various kinds of banking business are done by a single 
 institution the departments should not be mixed up with one another. 
 Practically, and because of the banking laws of the states and the 
 apparent desire of bankers to engage in all branches of banking, refor- 
 mation seems to be out of the question, but the situation contains no 
 reason for permitting national banks to step outside of the field of 
 commercial banking. The tendency to demand this and to permit 
 
 'Adapted from Journal of the American Bankers' Association, Ylll (1916), 
 C'S8-S9-
 
 THE fedi;ral ri:si:rve system 337 
 
 it finds its impulse in the desire of national banks to compete on equal 
 terms with state institutions. Moreover, in the towns and smaller 
 cities there is not enough banking business of a single kind for one 
 bank or trust company. To serve the community adequately one 
 bank must do various kinds of business. 
 
 Instead of harmonizing the different kinds of banks and the differ- 
 ent kinds of banking the Federal Reserve Act has apparently had the 
 opposite effect. Rivalry between state and national banks is keener 
 than ever and it springs from the difference in the laws under which 
 they are organized. Efforts to have state laws modified so as to 
 remove all doubt of their contravention by the application of section 
 II (k) of the Reserve Act have intensified the condition. The state 
 banks think they have more reason for not joining the system now than 
 they had a year ago.
 
 VIII 
 CO-OPERATIVE BANKING AGENCIES 
 
 Introduction 
 
 In previous chapters of this volume we have been considering 
 banking in its relation to the world of business, the national and state 
 banking associations being devoted almost exclusively to serving the 
 interests of men engaged in the management of the larger commercial 
 and industrial enterprises. There remain to be considered the bank- 
 ing requirements of and the banking facilities that have been pro- 
 vided for those classes of people whose incomes are small or who 
 work for wages and who use the funds borrowed mainly for con- 
 sumptive rather than productive purposes. We have already seen 
 that loans on collateral may be used for consumption puiposes, and 
 that such loans are often extended by the regularly organized banks. 
 We are here concerned, however, with loans to a class of people who 
 cannot deposit as security collateral that is acceptable to banks — 
 those who wish to borrow petty sums with which to meet temporary 
 needs or emergencies. 
 
 The question of the rate of interest that should be paid on con- 
 sumptive loans is practically as old as recorded history. The Bible 
 condemns all interest as being usury, and therefore unjust. The 
 biblical law came to be incorporated into the civil code, and it was 
 not until the beginning of the modern era that interest was legalized. 
 The philosophy underlying this prohibition of interest appears to have 
 been either a sympathetic regard for the poor or a recognition of 
 the economic impossibility of their paying interest. Funds were 
 borrowed at the time almost exclusively for consumptive purposes — 
 virtually to prevent starvation— and such loans were necessarily 
 almost in the nature of almsgiving. At any rate, to exact interest 
 from a poverty-stricken peasant class seemed to violate every prin- 
 ciple of common humanity. With the development of the borrowing 
 habit by the capitalist class, however, the situation appeared in a 
 very different light. When a borrower devoted the funds procured 
 to productive industry, it was readily seen that he was making a 
 gainful use of the loan and was therefore able to pay back the prin- 
 cipal with a bonus, and also that the lender was foregoing a like 
 
 338
 
 CO-OPERATIVE BANKING AGENCIES 339 
 
 gainful use of the capital, and was therefore entitled to a recompense. 
 Gradually loaning at interest became uni\ersally legalized; but even 
 to the present day we find survivals of the old idea in the usury 
 laws of the various states, which prohibit exorbitant interest rates, 
 that is, above a certain prescribed maximum. 
 
 In our cities an extensive and enormously prosperous business has 
 been develo])ed in the making of loans to the poorer classes on the 
 security of their current wages. While the risks in such a loaning 
 business are great, the rates charged are often far higher than war- 
 ranted by the conditions; and the poor have in fact ])een preyed u[)on 
 by a class of dishonest dealers, who ha\e taken advantage of the press- 
 ing financial needs and the ignorance of borrowers. 
 
 In recent years many institutions ha\e been developed to remedy 
 the evil of the loan sharks and to furnish funds to consumptive bor- 
 rowers at lower rates. In particular, banks organized on co-operative 
 principles possess many advantages in this connection. Such insti- 
 tutions have long played an important role in other countries, but it 
 is only within recent years that they have been established in -the 
 United States; indeed, their development here can be said tj) have 
 merely begun. 
 
 One form of co-operative institution, however — the building and 
 loan association — is well developed in this country, and has long 
 played an important part in accumulating the funds for home-building. 
 Looked at from one point of view the building and loan association 
 is a savings bank and its treatment might therefore have been reserved 
 for the following chapter. It has seemed best, however, to include 
 it here with the other forms of co-operative banking agencies; for in 
 addition to being a co-operative institution its purpose is to save for 
 consumptive rather than productive ends. 
 
 A. The Loan Sharks 
 
 169. THE SALARY LOAN BUSINESS IN NEW YORK CITV 
 
 By CLARENCE W. WASSAM 
 
 A loan on salar)- is the advance of money by an individual or 
 corjwration to a salaried cnij)loyee. The security- given by the 
 employee who obtains the money is an assignment of his wages due 
 
 'Adapted from The Salary Loan Hiisincss in \iil' York City, pp. 21-41. 
 (Publicalion of tlic Russell Sa^e Foundation. Copyright, The Charity Organiza- 
 tion Society of the City of New York, 1908.)
 
 340 PRINCIPLES OV MONEY AND BANKING 
 
 or lo become due. This transaction has been called a loan without 
 security, which in reality it is. In practice, however, in the majority 
 of cases the lender is in a secure position; he loans only to individuals 
 who have steady employment, and whose employers will recognize an 
 assignment. The loans are of small amount, varying from $io to 
 $35, and the borrower must have a weekly wage sufficient to pay the 
 full amount in case the company is required to pay the lender. The 
 attitude of diflferent employers toward the assignment of the wages 
 of their employees is a matter of careful record on the part of the 
 salary money lenders. If an employer will discharge a man when it 
 is known to him that he has assigned his salary, the employees of this 
 firm are considered good risks. It may appear to be a contradiction 
 of terms that a man in danger of losing his position will be a better 
 risk than one who is not in such danger, but the explanation is simple. 
 One of the chief points which all loan companies emphasize is that 
 the transaction will be perfectly confidential, and that the employer 
 shall never know of the assignment. When the employee has broken 
 the rule of the company and made the assignment of his wages, then 
 it is that the loan company threatens to notify the employer, and 
 rather than lose a good position the employee will pay the charges 
 demanded by the loan company. From a legal point of view this 
 threat is of little value, but in practice it is most effective. 
 
 The loan companies do not rely entirely upon intimidation and 
 fear in the collection of their money. They require the borrower to 
 sign a bill of sale of his salary' or authorize an attorney to do the same 
 for him. In case the matter is brought before a court it is contended 
 by the loan company that the transaction is not a loan of money but 
 a purchase of salary, like the purchase of any other commodity; and 
 since the transaction is one of purchase and sale there can be no claim 
 of usury. In the majority of cases the loan company demands in 
 addition to the assignment of the salary of the borrower the assign- 
 ment of from one to three other employees. These assigrmients 
 become effective if the borrower fails to meet his obligations. 
 
 A few illustrations will aid in the understanding of the transaction. 
 A salaried man is in need of money. He has a good position and 
 receives fair wages, but an emergency arises in which his income will 
 not meet the demands made upon him and he is compelled to secure 
 a small loan. He calls at a loan broker's oflSce and applies for a loan. 
 If his references are good and the firm by which he is employed has 
 a rule prohibiting any employee from making an assignment of his
 
 CO-OPERATIVE BANKING AGENCIES 341 
 
 wages under penalty of discharge, the money is secured without diffi- 
 culty. The necessary papers are signed, by which he agrees to pay 
 a certain amount each week until the debt is canceled. If he meets 
 the payments promptly, the transaction is closed, the borrower 
 receives a receipt in full and his signature from the papers signed, 
 and the documents themselves are destroyed. In case of failure to 
 meet a payment when due, he is at once notified that his part of the 
 agreement has not been fulfilled, that the promise of secrecy is no 
 longer binding, and unless the matter is settled at once his employer 
 will be notified. The danger of losing a good posit ion is generally suffi- 
 cient to force the payment of whatever the loan company demands. 
 When the borrower is employed by a private concern whose attitude 
 toward an assignment of the wages of an employee is unknown, or 
 when the loan company for any reason questions the security offered 
 by the borrower, from one to three endorsers are required as additional 
 security. Should the investigation of the applicant and the endorsers 
 prove favorable, the money is advanced. In this way the wages of 
 several different employees become surety for the loan. 
 
 .If for any reason the borrower defaults in his payments, within 
 three days a notice of assignment is filed upon the employer for each 
 of the assignees at the same time and for the same amount. 
 
 The reasons assigned for loans of this kind are numerous. It is 
 the opinion of a prominent money lender in the city that about 
 75 per cent of the individuals who borrow from loan companies are 
 men witli families who are temporarily in need and are helped out of 
 difficulty by a loan, and that 25 per cent are men who coukl get ak)ng 
 better without the money, as it is spent in gambling, intemperance 
 and vice. The managers of five different loan offices expressed the 
 opinion that a majority of persons who patronize their offices are 
 men with families who are honest and industrious, but who have 
 met with some temporary' emergency which the loan helped them 
 to overcome. 
 
 Sickness or death in the home is perhaps the most common cause 
 of temporary need. Another common cause is found in the custom 
 of demanding rentals in advance. This, coui)k'(i wilh the exj)cnse of 
 moving, frequently exceeds the savings of a household. It api)ears, 
 also, to be a common practice among clerks and young employees to 
 borrow a small amount of money when in need of a suit of clothes or 
 anything which requires an unusual expenditure. Life insurance 
 premiums, interest on mortgages, and similar obligations, Christmas
 
 342 PRINCIPLES OF MONEY AND BANKING 
 
 and birthday presents, are some of the less frequent but still not 
 uncommon o])jects for which money is secured from the loan brokers. 
 
 It is cxtremeh- difficult to ascertain the number of salary loan 
 offices in New York City. Some of them do not advertise and some 
 advertise under different names. Thirty different offices, however, 
 are known, and it is probable that the whole number is very much 
 larger. Based upon the minimum number of offices there would be 
 about $300,000 capital invested, which would make possible a business 
 of $1,200,000 annually, if the loans were made for an average of twelve 
 weeks. This is believed to be a very conservative estimate.' 
 
 The number of persons directly influenced by the loan business 
 includes not only the employee but his family as well. Assuming that 
 the average office has one thousand customers, there would be thirty 
 thousand employees who are making payments ever}' pay day to the 
 loan companies. There are some duplicates included in this number, 
 but they are more than overbalanced by the conservative estimate of 
 the number of ofiices. Inasmuch as a large majority of those who 
 borrow are married men with families, it is reasonable to conclude that 
 at least one hundred thousand individuals in New York City are 
 directly affected by the salary loan business. 
 
 The nature of the salary loan business necessitates a higher rate 
 of interest than that charged by the ordinary banking corporation. 
 In every state which has seriously attempted to regulate and not pro- 
 hibit loans on salary the legal rate has ranged from i| to 3 per cent 
 per month, depending upon the amount of the loan. It appears from 
 the following data, however, that the rates charged by these com- 
 panies are excessive and that the profits in the business are enormous. 
 
 Many instances could be cited to give an idea of the profitableness 
 of the salary loan business. The owner of a prominent office in the 
 city recently offered to guarantee a young man $10,000 net profit per 
 year if he would invest $8,000 in an ofiice. He said he was almost 
 certain that the returns would be much larger. A careful examina- 
 tion of the books of one of the ofl&ces in the city showed that in one 
 month a net gain of $541,00 was realized upon loans aggregating 
 $1,889.00, a clear profit of 28.64 per cent in one month. Based on 
 this rate of profit the annual net income from an ofiice with $10,000 
 capital would be $34,368. An owner of two large ofiices in the city 
 is authority for the statement that a friend of his began business in 
 
 • The number of loan offices as well as the volume of business has been sub- 
 stantially reduced in the last few years. — Editor.
 
 CO-OPERATIVE BANKING AGENCIES 
 
 343 
 
 New York City about three years ago with $25,000. Recently he 
 was offered $60,000 for his three offices, and in the meantime he had 
 placed $74,000 to his credit in thel)ank, making $110,000 clear profit, 
 in addition to his living exjjenses, in three \ears upon a cajiital of 
 $25,000. Several of the men who have a large number of offices and 
 
 TABLE SHOWING TOTAL CHARGES EXPRESSED IN TERMS OF 
 INTEREST RATE, UPON SELECTED LOANS >L\DE BY ONE 
 REPRESENTATIVE SALARY LOAN COMPANY 
 
 AN 
 
 Amount of Cashj 
 
 Received by the! 
 
 Borrower 
 
 Payments 
 
 Amount of 
 Kach 
 
 When Due 
 
 Total 
 Amount 
 Paid by 
 
 THE 
 
 Number Borrower 
 
 Amount 
 Paid in 
 Excess of 
 TiiE Amount 
 or Cash 
 Received 
 
 ANNUiVL 
 
 Interest 
 Rate 
 
 S17.00 
 21.50 
 26.00 
 26.00 
 34.00 
 34.00 
 30.00 
 40.00 
 40.00 
 
 Weekly 
 
 Bi-weekly 
 
 Weekly 
 
 Monthly 
 
 12 
 12 
 16 
 12 
 12 
 20 
 
 6 
 12 
 
 3 
 
 $24 00 
 30 00 
 39 20 
 36.00 
 48.00 
 
 53 00 
 
 54 00 
 54.00 
 60.00 
 
 $ 7 
 
 00 j 
 
 8 
 
 50 
 
 13 
 
 20 
 
 10 
 
 00 
 
 14 
 
 00 
 
 19 
 
 00 
 
 15 
 
 00 
 
 14 
 
 00 
 
 20 
 
 00 
 
 Pcreentnse 
 329 
 3«(' 
 3JO 
 308 
 329 
 277 
 286 
 280 
 300 
 
 are doing a ver>' extensive business began with a small amount of 
 capital and have been in the business only a short period of time. It 
 is the belief of a number of the emi)loyees of D. H. Tolman that he 
 began the business of loaning money on salaries a few years ago with 
 practically no capital, and today he is many times a millionaire with 
 offices in all the principal cities of the United States and Canada. 
 
 170. EFFORTS AT REMEDIATION' 
 By ARTHUR H. HAM 
 
 The evil of the loan shark is bad enough in connection with the 
 emergency borrowings of those in temporary- distress; but it is made 
 worse by virtue of the fact that many of the victims are victims of 
 their own improvidence and extravagance. This is shown by the 
 fact that the backbone of the usur>' l)usiness is furnished by city 
 employees and employees of large public service cori)orations whose 
 pa>- is regular and above the average, and whose positions arc more 
 
 ■Adapted from "Remedial Loans as Factors in Family Rehabililation," 
 Proceedings of the Nalional Conference of Charities and Correction, 191 1.
 
 344 PRINCIPLES OF MONEY AND BANKING 
 
 or less permanent. Many of these men have no cause to borrow 
 except a fancied need to which the loan shark caters by his alluring 
 and misleading advertisements. Once infected with the borrowing 
 germ, a man will often borrow from every possible source till at last 
 he gets into deep water, his family suffering as a result of his trans- 
 actions and he himself finally becoming a veritable slave with his 
 entire earning capacity mortgaged for months to come to the loan 
 shark. Such conditions in our cities have brought about the organi- 
 zation of remedial loan agencies founded on three distinct bases: (i) 
 philanthropic competition, (2) voluntary protective effort, and (3) 
 money-making desire. 
 
 The first class includes semi-philanthropic societies which have 
 been organized by prominent men desirous only of improving loaning 
 conditions and who are satisfied with a very moderate return on 
 their investment. An example is the Workingmen's Loan Association 
 of Boston, estabhshed in 1888 by Robert Treat Paine. 
 
 The second class includes co-operative savings and loan associa- 
 tions organized by the employees of certain large establishments for 
 the purpose of replacing the loan shark with an institution that offers 
 loans at reasonable rates and affords an opportunity to the workman 
 to deposit small portions of his earnings in a savings account which 
 returns him an interest greater than that paid by regular savings 
 institutions. An example of this is the Savings and Loan Association 
 of the Celluloid Club, Newark. 
 
 The third class is made up of companies formed to loan money at 
 reasonable rates by men seeking a good return on their investment 
 and who recognize the value as an advertisement of a plan which, 
 though largely money-making, is a great improvement over the loan 
 shark system. Because of their effect we are forced to include the 
 latter class among remedial loan agencies, yet we realize they fall far 
 short of the requirements of the ideal remedial loan society which the 
 Russell Sage Foundation and the National Federation of Remedial 
 Loan Associations are attempting to organize in ever}' large city in 
 the United States. 
 
 Extending financial aid to applicants is only one of the functions 
 of the Remedial Loan Society. It seeks also to secure adequate 
 legislation and its enforcement, to give publicity to loaning conditions 
 in its city, to secure settlements on an equitable basis for the victims 
 of the usurers, to discourage ill-advised borrowing, to give helpful 
 advice, to encourage thrift and saving, to secure employment for appli-
 
 CO-OPERATIVE BANKING AGENCIES 345 
 
 cants who are out of work, to fill the gap existing in our financial 
 world between the banks and the organized relief societies. By 
 extending relief to the deserving and by helpful advice the remedial 
 loan association aims to prevent its clients from starting on the down- 
 ward road which leads to dependence. 
 
 The remedial loan field extends to all families who by force of cir- 
 cumstances, by improvidence, by bad management, or by whatever 
 cause have fallen below the somewhat vague line of normal standard 
 of living. 
 
 The successful remedial loan agent must understand the needs and 
 resources of each applicant, and keeping in mind the factors which go 
 to make up a normal standard must thoroughly investigate the 
 elements of each applicant's distress. Unnecessar}' borrowing is 
 discouraged, legitimate borrowing is made inexpensive and a valuable 
 experience to the borrower. 
 
 171. THE LOAN SHARK CA^IPAIGN* 
 By MALCOLM W. DAVIS 
 
 The most extensive organization which is carr\'ing on the work 
 of driving the loan shark out of business at present is the National 
 Federation of Remedial Loan Associations, with which the Division 
 of Remedial Loans of the Russell Sage Foundation co-operates in 
 gathering information and in publishing bulletins on the progress and 
 phases of the work. Founded in 1909, this federation has grown 
 until it embraces thirty-one of the important cities from the Atlantic 
 to the Pacific Coast and has thirty-five companies in active operation. 
 New York, Syracuse, Rochester, Buffalo, and Utica, N.Y., Boston 
 and Worcester, Mass., Providence, R.I., Portland, Me., Newark and 
 Paterson, N.J., Washington, D.C., Baltimore, Md., Louisville, Ky., 
 Cleveland, Cincinnati, and Youngstown, Ohio, Indianapolis, Ind., 
 Chicago, 111., St. Louis and Kansas City, Mo., Detroit and Grand 
 Rapids, Mich., Minneapolis, St. Paul, and Duluth, Minn., Milwaukee, 
 Wis., Sioux City, la., San Francisco, Cal., and Seattle, Wash., are the 
 cities already officially connected by companies, while in Dallas, Tex., 
 Portland, Ore., Philadeljihia, Pa., Lynn, Mass., and Colorado Springs, 
 Colo., people are organizing companies, and in Jersey City, N.J., 
 Dayton, Ohio, Los Angeles and Oakland, Cal., and San Antonio and 
 Houston, Tex., they are actively interested and will undoubtedly 
 
 •Adapted from "The lx)an Sliark CampaiBn," Xrw ]'ork Evening Post, 
 April II, 19 14.
 
 346 PRINCIPLES OF MONEY AND BANKING 
 
 start companies soon. These companies generally loan small amounts 
 of money on mortgage of personal proj)erty as security, although a few 
 also accept pledges, endorsed notes, or salaries as a basis. The rates 
 of interest vary from | per cent a month in a few cases to 3 per 
 cent a month, with varying schedules of special fees for investigation 
 of claims and registration. 
 
 What these companies have done toward putting the loan shark 
 out of business may be indicated by the experience of one of them. 
 The Detroit company started its work in igo6, after the passage of 
 the Michigan law on loan agencies, and at that time there were over 
 twenty-five loan shark companies operating in the city. For a time 
 no effects of the reliable company's activity were discernible. Then 
 suddenly things began to happen, and within half a year company after 
 company closed up its office, until there remained only one concern 
 which loaned money on salaries, and which was not complying with 
 the law. There were two other companies which accepted the legal 
 limitations, but the rest were put out of business directly through the 
 efforts of the prosecuting attorney, whose first evidence was furnished 
 to him by the remedial loan company. 
 
 A common practice among employers has been to adopt a rule 
 discharging all employees who are found to be dealing with money 
 lenders. The remedial loan associations have sought to and in many 
 cases have succeeded in breaking down this practice by making the 
 employers see that they were doing harm by turning their men out 
 into the streets when they were found to have borrowed money with- 
 out any investigation of the reasons for the borrowing. 
 
 In addition to fostering a new spirit among employers, an impor- 
 tant part of the modern constructive campaign is the development of 
 co-operative loan societies among employees themselves. This is one 
 of the most effective ways of dealing with the problem of need 
 for money in emergencies on the part of a man who is dependent 
 on a salary. A great deal of the expense of an ordinary commercial 
 company is avoided in the employees' associations, for the men know 
 each other and the recommendation of a credit committee is sufficient 
 warrant for a loan without the costly investigation of personal cases 
 that a company has to make. The men themselves, contributing to 
 the association and managing it, feel a pride in it, and are able to use 
 it with dignity, while by making it a savings association as well, with 
 an office in the company's building ready at hand when the men draw 
 their pay envelopes, it can be made a powerful influence for thrift.
 
 CO-OPF.RATIVK HANKINCi Ai.KNClKS 347 
 
 172. THE MORRIS I'LAX OF LOAXIXO ON PERSONAL 
 RKSPOXSllilLlTV 
 
 There was established in New York on December 31, 1914, a bank 
 under the name of the Morris Plan Company of New York. The 
 Morris Plan had l)cen tried on a minor scale for about fifteen years. 
 The purpose of the bank is to make loans of small sums on the basis 
 of mere personal responsibility. 
 
 It aims to accommodate the man of small income who has no bank 
 account — that is, the man with an income of from twenty to thirty 
 dollars a week. Such a man when in need of a loan of from fifty to 
 one hundred dollars cannot get one from any bank merely on his note, 
 even tliough liis note be indorsed by one or more of his friends. One 
 reason is the smallness of the amount — too little for the bank to bother 
 with. And yet this poor man's note, with its indorsers, may be quite 
 as good in its relation to the amount involved as the note of some much 
 larger borrower who, having an account with a bank, can with no 
 difficulty secure a loan of some thousands of dollars. The man with a 
 small income when pressed for fifty or one hundred dollars finds his 
 usual recourse to be the loan shark or a lender on chattel mortgages. 
 A third recourse which ought to be open to him — that of credit at a 
 moderate rate of interest — has long been closed. 
 
 On the opening day there were 83 applicants for loans, on the 
 second day more than 100, the third day 200, the fourth day between 
 350 and 400, and on January 11 more than 1,000. During its first 
 two months, January and Februar>', the company made 50c) loans, 
 aggregating $61,780, an average of S121 .38 each. At the end of that 
 time there were but seven delinquencies in weekly payments, only two 
 of which were for as long as one week. Of the borrowers, 476 were 
 men and ^s women. The average weekly income of the borrowers was 
 $27 . 10. The favorite amount for loans was $100, of which there were 
 206; 132 loans of $50 were made. 
 
 The number of loans made by all the Morris-Plan institutions up 
 to December 31, 19 14, was 54,515- The average amount per loan was 
 $123.50. Losses from bad credits have been less than one-tenth of 
 I per cent. In less than 2 per cent of the loans ha\e the indorsers 
 been called upon to pay anything. Profits of the banks have been at 
 the rate of 7.8 j^er cent. 
 
 The plan of making the loans is simple. The applicant must 
 furnish references as to his character and must give information as to 
 ■ Adapted from llic Liliniry PiRi-sl, May 15. 1015.
 
 348 PRINCIPLES OF MONEY AND BANKING 
 
 his income. lie must have at least two indorsers or co-makers of 
 situation and income at least as good as his own. For each $50 
 borrowed he agrees to pay $i a week for 50 weeks. The interest is 
 deducted in advance, so that he receives but $47. Should he fail to 
 make a payment on time he is fined 5 cents and notified of his delin- 
 quency. If he gets a week behind, his co-makers are notified. They 
 may be relied upon to see that he catches up again if he can. Should 
 he fail to do so, the co-makers take his place in making the weekly 
 payments. 
 
 The profits of a Morris-Plan company are derived, not only from 
 lending its capital, but also from lending the prepaid interest, the 
 incoming payments and money corresponding to deposits — for the 
 plan has its investment as well as its borrowing side. 
 
 B. Co-operative Institutions 
 
 173. CO-OPERATIVE CREDIT UNIONS' 
 
 By ARTHUR H. HAM and LEONARD G. ROBINSON 
 
 I. HISTORICAL SUMMARY 
 
 The number of co-operative credit associations or Credit Unions 
 now in existence in all parts of the world has been estimated to be 
 more than 65,000, with a membership approximating 15,000,000 and 
 an annual business amounting to S7,ooo 000,000. 
 
 Impressive as these figures are, they are less striking than the eco- 
 nomic and social results which this form of co-operation has achieved 
 wherever it has found a foothold. It has regenerated and accelerated 
 agriculture, commerce, and industry. It has stamped out usur}- and 
 raised millions of human souls from the depths of despair to lives of 
 hopefulness and service. It has supplanted shiftlessness by industry'; 
 improvidence by thrift; intemperance by sobriety; selfishness by 
 neighborliness ; individual effort by concerted action — in fact, has 
 proved to be one of the most potent moral, educational, and social 
 forces in the history' of civilization and in the enrichment of the life 
 of the common people. 
 
 Credit unionism originated in Germany in 1849. Frederick 
 William Raiffeisen and Franz Hermann Schulze-Delitzsch were the 
 founders of the two systems of co-operative credit which are com- 
 monly known as the Raiffeisen system and the Schulze-Delitzsch 
 
 ' Adapted from A Credit Union Primer. (Di\ision of Remedial Loans, 
 Publication of the Russell Sage Foundation, 1914-)
 
 CO-OPERATIVE BANKING AGENCIES 349 
 
 system, respectively. All co-operative credit, wherever found. i> 
 patterned after one of these two systems. 
 
 It is estimated that the total number of RaitTeisen banks in Ger- 
 many today is 17,000, with a membership of 1,700,000, and loans 
 aggregating approximately 8500,000,000. In 191 1 the number of 
 Schulze-Delitzsch banks was 1,051, with a membership of 671,589 and 
 total loans of $1,106,165,207. 
 
 A modified form of the Schulze-Delitzsch system was introduced 
 into Italy in 1866 and the Raiffeisen system in 1883. Austria fol- 
 lowed in 1885 and France in 1892. Ireland has today over 200 
 co-operative banks. In 1909 Japan had 1,886 Credit Unions. They 
 are found also in Russia and India. Canada founded its first Credit 
 Union in 1900 and now has more than 150 organizations. Credit 
 Unions of various t\T5es are known to exist in many of the countries 
 of South America. 
 
 The wedge of credit unionism was driven into the United States 
 by the enactment of the Massachusetts Credit Union Law in 1909. 
 Since then legislation has been enacted in New York, Wisconsin, 
 Texas, Oregon, North Carolina, Utah, and Rhode Island. 
 
 II. REASONS FOR DEVTELOPMENT 
 
 The causes of the demand for Credit Unions in the United States 
 are not far to seek. Under present conditions in many parts of the 
 United States if the farmer needs new machinery, live stock, draft 
 animals, or supplies to enable him to live until the time of returns 
 from the harvest, he must buy upon credit at tlie dealers' prices or 
 mortgage his farm. The absence of adequate credit facilities in some 
 sections is one of the greatest drawbacks to the development of the 
 land. 
 
 The need of better credit facilities for the small tradesman to 
 enal)le him to conduct his business more efficiently and for tlie wage- 
 earner when he meets reverses, sickness, or other urgent need, is fully 
 demonstrated by the pernicious activity of the loan shark. One has 
 only to glance at the records of small loan agencies to be convinced 
 that by far the greater part of loans made, while they may be the 
 indirect result of improvidence, are due to wants that are real and 
 pressing. Not only is small borrowing often a legitimate and defen- 
 sible procedure occasioned by emergency needs that lay a heavy hand 
 upon the wage-earner, but it frequently is a prudent act commilted 
 in the spirit of economy. It enables a man to buy in large rather than
 
 3SO PRINCIPLES or MONEY AND BANKING 
 
 small quantities or for cash instead of upon the credit plan, which 
 allows the instalment agency to reaj:) an unconscionable profit at his 
 expense. 
 
 Savings banks, building and loan associations, etc., do not fulfil 
 the requirements of the situation, because they are not well adapted 
 for the promotion of thrift among the poor. And thrift depends upon 
 something besides the existence of a safe depository for surplus funds. 
 In order to be thrifty many a man requires something more than 
 agencies to receive his deposits and return them to him, when needed, 
 intact with interest: he requires an agency which will make its hours 
 of business conform to his convenience, which is conveniently located, 
 which does not require him to stand in line for a long time awaiting 
 his turn at the expense of his lunch hour and possibly of some of his 
 employer's time; he requires an agency to which he is not ashamed 
 to bring a dollar, fifty cents, or even a quarter; an agency which wall 
 constantly remind him of his resolution to save and which will reward 
 his thrift by extending credit to him upon easy terms of repayment 
 secured solely by his character and personal worth — credit which will 
 enable him to effect economies in purchasing and embarking in produc- 
 tive enterprises, and will protect him from the usurer. 
 
 This is the field of the Credit Union. By its proximity and con- 
 venience it persuades the man who has not been reached by the sav- 
 ings bank to become thrifty, and this without interfering with the 
 growth of ordinary banking institutions; instead, it actually increases 
 the field of the banks. It makes the accumulated capital available 
 to the persons who assisted in its accumulation. It does not become 
 a substitute for the building and loan association or the remedial loan 
 society; instead, it becomes a complement of these agencies, for the 
 basis of the security for its loans is not collateral but character. 
 
 Character is a recognized form of security. Most borrowers 
 possess such security and are entitled to credit upon this basis, but 
 to ascertain the credit to which they are entitled requires a more or 
 less intimate knowledge of their personal habits and of their financial 
 and domestic situation. Credit Unions are formed on the principle 
 that a man's best asset is his own associates' estimate of him. Their 
 advantage is obvious. They are composed of a small homogeneous 
 membership, mutually acquainted. Only those known to be honest 
 and industrious are admitted to membership, and loans are made only 
 to such members as have a legitimate need for the money^.
 
 CO-OPERATIVE BANKING AGENCIES 351 
 
 ni. PRINCIPLES AND ORGANIZATION 
 
 The main principles and most approved form of organization of 
 Credit Unions may be outlined as follows: 
 
 o) FUNCTIONS OF A CREDIT UNION 
 
 1. It encourages thrift by providing 'a safe, convenieat, and attractive 
 medium for the investment of the Siivings of its members through the 
 purchase of shares and the making of savings deposits. 
 
 2. It promotes industry by enabling its members to borrow for pro- 
 ductive and other beneficial purposes. 
 
 3. It eliminates usury by providing its members, when in urgent need, 
 with a source of credit at reasonable cost, which they could not otherwise 
 obtain. 
 
 4. It trains its members in business methods and self-government, 
 endows them with a sense of social responsibility, and educates them to a 
 fiUl realization of the value of co-operation. 
 
 b) BASIC PRINCIPLES 
 
 1. Equality. — All members share equally in privileges and ratably in 
 profits. 
 
 2. Democracy. — The one-man-one-vote principle is fundamental. Kacli 
 member has but one vote irrespective of the number of shares he may hold. 
 
 c) WHERE AND BY WHOM ORGANIZED 
 
 Any number of persons may combine to organize a Credit Union in a 
 city, town, or rural community. In states that have Credit Union legisla- 
 tion a certain number of the incorporators must be citizens of the Unile«l 
 States and of the state. Where a Credit Union is organized as an unin- 
 corporated or voluntary association this is not necessary. 
 
 d) BASIS OF B£EMBERSHIP 
 
 The basis of membership in a Credit Union must be some common 
 bond or community of interest. This may take a number of forms. It 
 may be a neighborhood. It may be common occupation, employment by 
 the same establishment, or membership in the same church, club, lodge, 
 labor union, or other organization. In rural communities the church, 
 parish, school district, or lociU grange furnishes a satisfactory foundation 
 for membership. • 
 
 e) QUALIFICATIONS FOR MEMBERSHIP 
 
 1. Identification with the basic unit upon which the Credit Union is 
 founded — the church, the club, the business establishment, etc. 
 
 2. Good moral character and a reputation for honesty, sobriety, and 
 industry.
 
 352 PRINCIPLKS OF MONEY AND BANKING 
 
 f) CAPITAL REQUIREMENTS 
 
 1. Capital consists of payments of members for shares and of unpaid 
 dividends credited thereon. 
 
 2. There should be no limit to total number of shares. 
 
 3. Limitation upon number of shares held by one person is wise. 
 
 4. Par value of $5 . 00 is desirable. 
 
 g) FUNDS IN ADDITION TO CAPITAL 
 
 A Credit Union may accept the savings deposits of its members, and 
 may borrow from members and others. 
 
 Interest on savings deposits should not be more than i per cent in 
 excess of savings bank rates in the community. 
 
 Borrowing by the Union is merely an emergency measure and should 
 be employed only when absolutely necessary to meet the credit demands 
 of its members. 
 
 h) EMPLOYMENT OF FUNDS 
 
 Except for the Guaranty Fund, which the law may require to be invested 
 in a particular manner, the funds of a Credit Union are primarily to be used 
 for the purpose of making loans to members. Surplus funds should be 
 deposited in banks or invested in prime securities. 
 
 i) WHO MAY BORROW 
 
 All members in good standing, except the Board of Directors, officers, 
 and members of the Credit Committee and Supervisory Committee. 
 
 j) PURPOSES FOR WHICH LOANS MAY BE GRANTED 
 
 "It is essential that a Credit Union should loan only for productive 
 purposes, purposes that will effect a saving, supply an urgent need, or that 
 will otherwise prove of benefit to the borrower." 
 
 k) RATE OF INTEREST ON LOANS 
 
 As a matter of principle the interest charged on loans should be no 
 greater than is required to pay the operating cost, a moderate rate of 
 interest on deposits, to provide for a reasonable reserve or guaranty fund, 
 and to pay a moderate dividend on shares. It is well to fix the maximum 
 interest rate in the By-Laws. This rate should as nearly as possible approxi- 
 mate the banking rate of interest. (In New York the maximum rate of 
 interest that a Credit Union may charge is 12 per cent per annum.) Care 
 should be taken that the total charges upon loans do not exceed the maxi- 
 mum allowed by law. 
 
 /) DURATION OF LOANS 
 
 The By-Laws may fix a general maximum, but the time of individual 
 loans should be fixed by the Credit Committee with due regard for the 
 nature of the employment in which the members are engaged, their ability 
 to repay, and the objects for which loans are made. A maximum of one
 
 CO-OPERATIVE BANKING AGENCIES ^53 
 
 year should be suflicient, even though il may be necessary at the expiration 
 of that time to renew a portion of the loan. 
 
 Loans should be repaid in weekly or monthly instalments or in a single 
 sum. This is to be determined in each instance by the Credit Committee. 
 
 m) SECURITY FOR LOANS 
 
 Ordinarily the security that a Credit Union demands for loans is the 
 promissory note of the borrower with one or more endorsements, supple- 
 mented by a lien upon the borrower's shares and deposits in the Credit 
 Union. The requirement of endorsements may be waived in some cases 
 if the loan is for a small amount. Large loans may also be made to mem- 
 bers upon security of mortgage of real or personal property, but unless the 
 Credit Union has an abundance of funds, preference should be given to the 
 smaller loans. 
 
 As a rule members only should be accepted as endorsers. In e.xccp- 
 tional cases non-members may be permitted to endorse for members. In 
 either case the endorsers must be acceptable to the Credit Committee. 
 The Credit Committee may, if it deems it necessar>% require additional 
 security upon any loan in the form of additional endorsements, a mortgage, 
 or other collateral. 
 
 174. THE BLESSINGS OF CO-OPERATIVE BANKS' 
 By henry W. WOLFF 
 
 Apart from the great gains on the economic side there are other 
 important considerations. Co-operation has its moral, educating side 
 as well, more beneficent than the economic. The training of this 
 co-operative power has succeeded where other educating methods have 
 failed, making the drunkard sober, the spendthrift saving, Uie ne'er- 
 do-well well conducted, turning the illiterate into a penman. What 
 an opportunity is there here for ministers of religion, for temperance 
 advocates, for philanthropists, for all who have the people's moral 
 welfare at heart! 
 
 Only we should do well to take to heart the teaching which we 
 owe to the experience of People's Banks abroad, and ground our own 
 institutions absolutely on self-helj), the more thorough the better. 
 Every dallying with greed, ever>' yielding to the spirit of patronage, 
 foreign experience has shown, adds a toe of clay to the huge hra/.en 
 Colossus, and thereby threatens to overthrow it in spite oi its size. 
 And the thing must grow from out of its own self, from the bottom 
 to the top. Committees and boards can do nothing. Large schemes 
 
 ' Adapted from People's Banks, p. 260. (Longmans, Green, & Co., 189.^.)
 
 354 PRINCIPLES OF MONEY AND BANKING 
 
 worked by public bodies are as much out of place. The workingman 
 and the farmer must become " the instruments of their own emanci- 
 pation." None of the systems that have succeeded abroad have been 
 organized from above. They have all risen from below, built up by 
 local association which, in submission to the advice pressed upon them 
 by Signor Luzzatti, have studied to keep themselves independent of 
 outside influence, self-contained, yet firmly connected among them- 
 selves by a bond of union — independti semper, isolali mail Nowhere, 
 moreover, has this work been "good fairy" work. Every shilling's 
 worth of success has been purchased by unremitting application, by 
 economy, gratuitous labor (so far as gratuitous labor was possible), 
 zeal, and caution. And experience has shown that it is not otherwise 
 to be obtained. There may be hindrances, and progress may at first 
 appear slow. But among ourselves the work is likely to succeed, as 
 it has succeeded abroad, under the principle of that apt motto chosen 
 as a watchword for the movement by one of its best leaders, M. Leon 
 d'Adrimont: "Vouloir — voila le grand mot de las cooperation, sa 
 raison d'etre, la garantie de son succes." 
 
 C. Building and Loan Associations 
 
 175. THE BUILDING AND LOAN MOVEMENT IN THE 
 UNITED STATES^ 
 
 By JAMES M. McKAY 
 
 BuUding and Loan Associations had their origin in England about 
 one hundred years ago. The original association was nothing more 
 or less than a home-builder's club, where each man paid into the com- 
 mon treasury a certain sum per month. The aim was to secure enough 
 members to make the monthly payments aggregate a sum sufficient to 
 build a modest home for one member. For instance, if the club had 
 a hundred members and each member paid the equivalent of $10 per 
 month, it would bring into the treasury a total sum of $1,000 monthly. 
 This money would be allotted to one member after another for the 
 purpose of buying homes, and the society would take a mortgage on 
 the home so procured to secure the future payments, each member 
 continuing to pay until all had been supplied with homes. The object 
 
 'Adapted from "The Building and Loan Movement in the United States," 
 Commercial and Financial Chronicle, Bankers' Convention Supplement, 1906-11, 
 pp. 213-15.
 
 CO-OPERATIVE BANKING AGENCIES .:;55 
 
 oi the club havinj^ been accomplished, the association would dissolve 
 and cease to exist. 
 
 At a very early period in the liistor>- of these associations the idea 
 of shares was introduced. By means of tliese the man who wanted 
 to invest more money, and thereby be enabled to build a better home 
 than his fellow-members, could be accommodated. Thus if the ordi- 
 nary fund to be allotted for building purposes was $i,ooo, a member 
 could, by doubling his payment, receive an advancement of $2,000 
 and have his payments cease at the same time as those of his fellow- 
 members. Or by increasing his payments 50 per cent, he could 
 receive $1,500 to build his house, and other sums in like manner, the 
 amount of money he could borrow from tlie society depending on the 
 number of shares subscribed for. The face value of the shares would, 
 of course, vary in different associations. In the eastern part of the 
 United States, especially in Pennsylvania, shares of the face value of 
 $200 each have always been the rule, while west of the Alleghenies 
 $100 shares are common. In the matter of shares the Building and 
 Loan Associations are directly opposed to tlie Mutual Savings Banks. 
 These latter have no capital stock at all, while in the former, as a rule, 
 there is nothing but capital stock, and the person who places his 
 money in a Building and Loan Association does so in the payment 
 of one or more of its shares of stock. Whenever his payments, with 
 his share of the profits, make his stock worth its face or par value, the 
 shares are said to be matured. 
 
 It will be seen from tlie very nature of the organization that 
 regularity of payment for a series of years must, in some way, be 
 secured, and in order to secure such regularity, a certain penalty or 
 fine was assessed against members who became delinquent. The 
 power of assessing fines was at first somewhat abused, but tlie present 
 tendency is toward their gradual ehmination altogether in some slates. 
 It would seem that regularity of payments might be accomplished 
 better by adding an extra profit to tlie man who persists rather than 
 by withholding part of the profits from the one who does not persist. 
 
 In the early associations there were various modes of determining 
 who should have the right to borrow from the society. Practically 
 all the members wanted to build and would be willing to pay tlie cus- 
 tomary rate of interest for tlie funds, and there were always some 
 who would be willing to pay more; hence the method which finally 
 obtained tlie most favor was to put the money up at auction at the 
 regular monthly meetings of the society and let the one who would
 
 356 PRINCU'LKS UF MONEY A.ND JJAXKING 
 
 pay the most for the funds have the use of them. The amount that 
 any member hid in excess of legal interest was called a premium, and 
 as the premium went into the common fund and inured to the benefit 
 of all the members, the legality of the i)remium has almost universally 
 been ui)hcld by the courts. In theory this was a fair and reasonable 
 way to determine who should take precedence in the right to borrow, 
 but it cannot be denied that premiums, like fines, became the subject 
 of abuse and worked a hardship in many cases. The national asso- 
 ciations that exploited the country from fifteen to twenty years ago 
 seized on the fines and premiums as two important features of their 
 system and made them the means of mulcting thousands of individuals 
 throughout the country. Premiums, I am glad to say, are, like fines, 
 a vanishing quantity. In principle there is no reason why a Building 
 and Loan Association should charge either more or less for its money 
 than other money-lending institutions are charging in the same com- 
 munity at the same time. 
 
 The payment of interest on the money advanced for home- 
 building, the premium bid by members over and above the legal rate 
 of interest, and the fines assessed against delinquents constituted from 
 the very first a handsome source of profit to these associations; hence 
 early in their history there were inducements to people to become 
 members, not only for the purpose of acquiring homes, but also on 
 account of the profits that accrued; and thus arose the two classes 
 of members, depositors and borrowers, which still exist in every 
 healthy, successful association. The introduction of the depositing 
 member was in no sense a departure from the original purpose of the 
 association, but was rather an additional means of securing the same 
 end, as the depositing member paid into the common treasurv^ the 
 same amount in proportion to his shares that the would-be borrower 
 paid, thus increasing the amount of funds to be allotted to home- 
 builders and making it easier and speedier for them to get their homes. 
 The investing or depositing member has always been an important 
 factor in these associations, and in our crowded industrial communities 
 today the chief problem of many associations is to attract enough 
 depositing members to supply the demand for loans. In order to 
 attract depositing members certain privileges are allowed in the way 
 of withdrawal of shares before they mature, but while the depositor 
 is a member he pays regularly on his shares. 
 
 In the early associations it will be seen that as soon as the last man 
 was provided with the funds to build his home the object of the club
 
 CO-01'i:i>L\Tl\ E BANKING AGENCIES 357 
 
 had been accomplished and the association was ready to disband. 
 In like manner, after the introduction of the depositing member, the 
 association ran a certain course and then would wind up its affairs, 
 the investors taking their shares in cash, while the borrowers had their 
 mortgages released and their homes freed from debt. These were 
 called terminating societies, because in a certain definite sense their 
 affairs were terminated. It was often found, however, that after the 
 original association was started others in the community wished to 
 become members at a later date. Originally this could not be done, 
 and the only recourse was to form a new association; but as this was 
 cumbersome and expensive, it was not long before associations were 
 formed which allowed members to join at stated internals, these inter- 
 vals being sometimes a year apart, sometimes six months, and some- 
 times three months, according to the number of new members that 
 could be secured. These were called serial associations, and each 
 group of members constituted a series. Each series was in reality a 
 terminating association, having its loans matured, the borrowers 
 having their mortgages canceled, and the investing members re- 
 ceiving the value of their shares in cash. The serial association had 
 many advantages over the terminating society; it became more of a 
 feature of the community, better methods of accounting were intro- 
 duced, and its officers became more experienced and, consequently, 
 more competent. 
 
 About the year 1870 in the city of Dayton, Ohio, there appeared 
 a modification of the serial plan, which has since become known as the 
 Dayton or permanent plan. In the serial association the man who 
 wanted to join at any time between the regular dates for opening a 
 series must either wait until the next series was opened or he must 
 pay back dues from the time the last series was opened. This was 
 not always convenient or advisable, and the permanent plan allowed 
 a person to become a member at any time and take as many shares 
 of stock as he would. Each member could thus mature his own 
 shares independently of anybody else, and each borrower could like- 
 wise pay off his own debt in the same way. Fines and premiums were 
 reduced; more liberal provisions for withdrawals were made and 
 members were permitted to retire at any lime, taking their share of 
 the net profit with them. The liberality of this plan appealed to the 
 general public, and it has superse4ed the terminating and the serial 
 plans almost entirely in Ohio, and many of its features are being 
 adopted in other states. It is still a battle royal whether the serial
 
 3S8 PRINCIPLES OF MONEY AND HANKING 
 
 or permanent plan is the better, and arguments on this point occur 
 at practically every meeting of the United States League of Local 
 Building and Loan Associations. It is worthy of note, however, that 
 while many associations have changed from the serial to the perma- 
 nent plan, the writer has yet to learn of one that has changed from the 
 permanent to the serial. 
 
 In every association, whether terminating, serial, or permanent, 
 at certain stated intervals the profits of the business are ascertained. 
 In the older associations it was the aim to keep these profits in a com- 
 mon fund until the time for final dissolution of the society. Any 
 losses that occurred were paid out of these accumulated profits, and 
 the payments of the members were continued until the amount of 
 such losses was made up to the society again. At a later date, and 
 largely for the purpose of accommodating withdrawing members, it 
 became the custom to apportion the profits more or less fully among 
 the members as a dividend. At first these dividends were usually 
 declared annually, but now semiannual dividends have become the 
 almost universal rule. In the terminating societies, however, a part 
 of the profits is still withheld until final dissolution in order to safe- 
 guard against loss. Likewise in most serial associations the profits 
 of each series are partly withheld until the series mature. In the 
 permanent association, however, the society is secured against loss by 
 means of a reserve fund, which is now obligatory in many states. 
 Each association is required to lay aside a certain percentage of 
 its net profits each year for this fund and the fund can be used 
 for the payment of losses only. In this particular the associations 
 are in line with the Mutual Savings Banks of New England and 
 the East. 
 
 These associations form an important factor in the savings busi- 
 ness of the country. They not only afford opportunity for the saving 
 of small sums at regular intervals, but they enforce the saving of such 
 sums as far as it is possible to do so. From a very modest beginning 
 some eighty years ago their business has increased until now, accord- 
 ing to the best information obtainable, their combined resources aggre- 
 gate $850,000,000. Pennsylvania leads the list, both in the number 
 of associations and in the amount of resources, with Ohio as a close 
 second. Wherever there is a large class of wage-earners there is a 
 good field for these institutions. An investigation of certain typical 
 associations by the Department of Labor at Washington, some eight
 
 CO-OI'KRATIVI-: HAXKIXG AGKNX"IES 359 
 
 years ago, developed the fact that fully 70 per cent of the membership 
 is made up of working people. Hence we find them not only in the 
 steel and iron mills of Pennsylvania, hut also in the factor>' towns of 
 Massachusetts, the cotton-spinning districts of the South, and the 
 growing cities of the Great Northwest. In enabling people to provide 
 homes for themselves these associations are rendering a service at 
 once unique and invaluable. There is nothing that gives the average 
 man or >voman quite so much satisfaction as the possession of a few 
 square rods of Mother Earth. 
 
 Wage-earning people are accustomed to pay rent, and it is not 
 difficult for them to add a few dollars to the monthly rental and ajiply 
 it on a home. Loans are made by the associations up to about two- 
 thirds of the value of the property loaned upon, and such loans are 
 usually repayable at the rate of one dollar per month on each hundred 
 dollars borrowed, with the privilege to the borrower to pay more at 
 any time. If the borrower should sell his property, the association 
 will, as a rule, accept payment of the balance due and release the 
 mortgage. If he does not sell, his regular payments will in time 
 extinguish the debt. Paying a debt in instalments is like attacking 
 an army in detail; you conquer one instalment after another until 
 the whole debt is annihilated. On account of the great amount of 
 clerical work involved, this form of loan has never found favor with 
 banks and trust companies, but it does find favor with the wage- 
 earning public. As a rule, the borrowers pay more than the required 
 payments. Our own association makes a loan which allows the 
 borrower ten years' time in which to pay his mortgage ofT, but the 
 average duration of these loans with us is but little more than 
 five years. 
 
 The Building and Loan Associations are managed by the members 
 themselves, who convene at their annual meeting, choose their Board 
 of Directors, listen to reports of the officers, and amend their own 
 regulations when necessary. In this way a certain amount of business 
 training is had which is not without its value. It has long been 
 recognized by social workers that one cannot directly help people 
 upward. All that can be done in such cases is to provide a way in 
 which people can help themselves. The writer knows of no agency 
 that furnishes to wage-earning peojile an opportunity for self-help 
 equal to that afforded by a well-regulated Building and Loan Asso- 
 ciation.
 
 360 PRINCIPLES or MONEY AND HANKING 
 
 176. LOCAL VERSUS NATIONAL ASSOCIATIONS' 
 By SEYMOUR DEXTER 
 
 There are two kinds of building and loan associations — the local 
 and the national. There is a wide difference in their character, how- 
 ever, and the advantages lie altogether with the former. While the 
 national associations have assumed the name of the true building and 
 loan association, they are no more entitled to use it as descriptive of 
 their business than a western farm mortgage and trust company or 
 an investment and loan company. The name assumed is a misnomer 
 except the word "national." While they have assumed some of the 
 methods of the true building and loan associations, as a whole their 
 manner of doing business is entirely unlike them; they have, as a rule, 
 eliminated from their scheme the modes and principles by which the 
 success of the building and loan association has been secured. 
 
 The true building and loan association is a comparatively small 
 affair; its operations are confined to the place where located, or the 
 immediate vicinity; most of its officers serve without pay; each 
 shareholder can know what the association is doing from month to 
 month, and upon what securities his money is being invested. The 
 shareholders can attend the annual meetings and vote in person for 
 the officers of their choice. There are no official places with salaries 
 of sufficient amount to entice the scheming and crafty, and no paid 
 solicitors for business to mislead the ignorant and unwary. 
 
 These elements of safety are eliminated in the national; the 
 motive for their organization is to furnish business and gain to those 
 who organize and conduct them. No capital is required to be invested 
 in the business. Their operations spread in time over many states; 
 the shareholders cannot know what the association is doing or how or 
 where their money is being invested. They cannot attend the annual 
 meetings and vote in person for officers; they simply intrust their 
 money to strangers to handle on a promise that it will be returned at 
 some time in the future with large interest. 
 
 Some of these associations will fall into the control of honest and 
 capable men and be successful, but the greatest number will sooner 
 or later come to failure and loss to the shareholders. 
 
 Whenever so line a field of operations presents itself to the schem- 
 ing and dishonest as the present system of the national building and 
 
 ' Adapted from an address, quoted in Bureau of Labor Bulletin IX, 
 pp. 1 499- 1 500.
 
 CO-OPERATIVE BANKING AGENXIES 361 
 
 loan association, we may rest assured that the scheming and dis- 
 honest will enter it and pluck their victims until restrained by proper 
 legal restrictions. 
 
 177. A FIXANCI.\L STATEMENT 
 
 CASH RECEIPTS 
 
 Cash on hand, April I, 191 5 S 167.48 
 
 Instalments "A" S9,52(S.34 
 
 D 2 ,400 00 
 
 Interest 3,074.32 
 
 Premium 51738 
 
 Fines 1 7 . 00 
 
 Loans repaid 2,750 00 
 
 Expenses (rents) 25. 00 
 
 Real estate contracts 1,291 . 52 
 
 19,603.56 
 
 Outstanding orders 3,166.80 
 
 Total $22,937.84 
 
 ASSETS 
 
 Real estate loans and contracts $162,809. 42 
 
 Stock loans 55,3:5.00 
 
 Tax certificates 68 1 . 03 
 
 Interest, taxes, etc., due and accrued 2,218. 29 
 
 Real estate owned by Association 628. 14 
 
 Oflice furniture 179.00 
 
 Cash on hand 2,184 22 
 
 Total $224,025 10 
 
 CASH DISBURSEMEKTS 
 
 Outstanding orders, April i, 1915 $ 2,099 08 
 
 Loans $ 2,750 00 
 
 Instalments withdrawn 3,170. 50 
 
 Interest 238 . 50 
 
 Expenses 858 . 04 
 
 Real estate contracts i37 5° 
 
 Matured stock 10,800 00 
 
 Contingent fund 700 00 
 
 18,654.54 
 
 Cash on hand 2,184. 22 
 
 Total 22,937.84 
 
 • 165th Quarterly Statement of Peoples' BuildinR and Loan Association, 
 Chicago.
 
 302 PRINCIPLES OF MONEY AND BANKING 
 
 LIABILITIES 
 
 Instalments "A" $174,611.56 
 
 "B" 7,425.00 
 
 Surplus 29,916. 10 
 
 Contingent fund 8,905 . 64 
 
 Outstanding orders 3,166. 80 
 
 Total $224,025. 10 
 
 178. THE APPEAL^ 
 
 Do you know: 
 
 1. That there are 608 building and loan associations in the State 
 of Illinois, with assets amounting to $90,572,343.45 ? 
 
 2. That there are 6,429 building and loan associations in the 
 United States with assets amounting to the immense sum of 
 $1,248,479,139.00? 
 
 3. That most of this huge sum is owned by people of small or 
 moderate means ? 
 
 4. That while banks have failed all over the country during the 
 recent hard times the building and loan associations have stood like 
 the rock of Gibraltar ? 
 
 5. That building and loan associations can only loan money on 
 improved real estate and only on first mortgages, making losses 
 almost impossible ? 
 
 6. That well-managed building and loan associations furnish the 
 safest place of deposit and give a higher rate of interest than any 
 similar investment ? 
 
 7. That The Swedish Home Building Association has for nearly 
 twenty years paid its depositors handsome dividends and furnishes 
 an absolutely safe place for your savings ? 
 
 ^ From Circular of The Swedish Home Bxiilding Association, Chicago.
 
 IX 
 
 AGRICULTURAL CREDIT 
 
 Introduction 
 
 During recent years there has developed in this country an 
 insistent agitation for the reduction of rates on agricultural loans 
 and for an improvement of the general conditions upon which 
 credit is extended to farmers. This demand for better agricultural 
 credit is in a way the old agitation for more and cheaper money which 
 lay at the basis of the greenbac*k and paper-money mo\ements of 
 earlier generations. The general prosperity that began in 1897 and 
 continued almost uninterruptedly for a decade had served to quiet 
 for a time the discontent of the farming community. Abundant 
 crops sold at constantly increasing prices had permitted many of the 
 farm mortgages to be paid off, and thus indirectly the old source of 
 complaint had been removed. But conditions must constantly 
 improve if dissatisfaction is to be permanently allayed. While able 
 to cancel their mortgage obligations, farmers came to realize that tJiey 
 were nevertheless paying high ("exorbitant") rates for money, and 
 that their business was thereby relatively handicapped. The publi- 
 cation a few years ago of a number of rather striking articles, which 
 indicated that farmers in many sections were pa\ing from 8 to 12 
 per cent for money as contrasted with rates in our industrial centers 
 of from 4 to 6 per cent, laid the basis for a vcn.- general feeling of 
 unjust discrimination against the farmers. And when it was pointed 
 out that in Europe farm loans may be had at rates of only 4 or 5 per 
 cent, this feeling of injustice was of course greatly intensified. It was 
 easy on the basis of these percentages to show that the farmers of the 
 country' were being compelled to pay annually many millions of dollars 
 in unnecessar)' interest. Something must therefore be done. 
 
 After the reorganization of the national banking system, which 
 serves mainly the larger industrial and commercial businesses of the 
 countr)^, the demand for legislation in the interests of agriculture 
 became insistent. The reports of the different commissions that were 
 sent to Europe to investigate agricultural credit there and the almost 
 
 3f>3
 
 364 PRINCIPLES OF MONEY AND BANKING 
 
 innumerable conferences that have been held on the subject in the last 
 four years have served to educate the country on the subject, while 
 practical results are shown in actual legislation in numerous states, 
 and pending legislation by the federal government. At the same time 
 our regular banking agencies, particularh the state banks, have 
 aUem])led to cultivate the farmer more assidiously than in the past, 
 and to improve the ordinary banking facilities for agricultural loans. 
 It begins to appear, therefore, that the farmers are achieving the 
 end sought. 
 
 Much of the agitation on the subject has sprung from false assump- 
 tions or has been based on an inadequate grasp of the principles under- 
 lying the rates of interest on various classes of loans. For a time many 
 proposals were advanced that the government should make loans 
 direct to the farmers at rates of i or 2 per cent; but sounder ideas 
 prevailed in this connection, and the advocates of self-reliance and 
 self-help appear to have won the day. Again, there has very often 
 been no distinction between loans for commercial and investment 
 purposes, the rates to farmers for purely investment loans being com- 
 pared with the rates to business for commercial funds. Similarly, 
 there has been little analysis of the relative supply of available funds 
 or of the varying risks involved in different sections of the country, 
 rates in sparsely settled western states being contrasted with those 
 of the central and eastern states where industry is further developed 
 and where credit has been more or less standardized. But while the 
 movement has thus been based in considerable measure on miscon- 
 ceptions, legislation on the subject fortunately appears to be pro- 
 ceeding in the main along conservative lines and undoubtedly will 
 be productive of much good. Our farmers have suffered much in 
 the past from the poor organization of agricultural credit, and the 
 agitation will doubtless result in a substantial improvement in farm 
 credit facilities. But perhaps an even greater gain will lie in the 
 improvement of the credit risks of the farming class in consequence 
 of the information that has been so generally disseminated with 
 reference to the principles underlying sound credit. 
 
 The selections below are grouped under two headings: "Short- 
 Time 'Commercial' Credit" and "Long-Time Investment Credit." 
 Loans made to farmers for the growing or harvesting of crops are 
 commercial in their nature. The funds may be liquidated out of the 
 sale of the crops produced thereby, in much the same way that com- 
 mercial loans to manufacturing or mercantile establishments are self-
 
 AGRICULTURAL CREDIT 3^5 
 
 liquidating. Our "commercial" banks have endeavored to supply 
 such credit to farmers, and in the main they have given fair satisfac- 
 tion. Perhaps the greatest improvement to be made in connection 
 with short-time credit to farmers must lie with the farmers themselves; 
 they must improve their credit risks if they would obtain credit on 
 more favorable terms. The organization among farmers of co- 
 operative credit unions such as those discussed in the previous 
 chapter also offers possibilities in connection with short-time agri- 
 cultural credit, though in the main farm life in this country is not 
 well adapted to this form of organization. 
 
 The greatest problem of agricultural credit is in connection 
 with the extending of long-time investment credit to farmers on the 
 basis of mortgage security. While the character of the risk on 
 loans for agricultural investment is frequently very bad, and while 
 the cases of extraordinarily high rates are usually justified by the 
 conditions, there has nevertheless been very inadequate organization 
 of the farm mortgage business, and rates have been unnecessarily 
 high, especially when the numerous incidental fees involved are con- 
 sidered. The development of mortgage associations and the use of 
 the amortization principle will doubtless prove of great benefit on the 
 investment side of agricultural credit. 
 
 A. Short-Time "Commercial" Credit 
 
 179. SHORT-TIME AGRICULTURAL LOANS IN THE UNITED 
 
 STATES' 
 
 By EDWIN WALTER KEMMERER 
 
 The United States, although the leading country' of the world in 
 the amount of its agricultural products and in the extent of its banking 
 business, is behind nearly every other progressive country of impor- 
 tance in the development of agricultural credit, i.e., short-time non- 
 mortgage credit. Our manufacturing and commercial businesses are 
 financed largely ])y means of such credit, and the capital invested in 
 these industries is thereby rendered manifoldly eflicienl. Not so with 
 agriculture. Most farmers ai)parently make little or no use of short- 
 time credit. There seems to be a wide acceptance in this country of 
 the dictum of Louis XIV, that "credit supports agriculture, as the 
 
 ' Adapted from "Agricultural Credit in the United States," American Eco- 
 nomic Review, II (191 2), 852-63.
 
 366 PRINCIPLES OF MONEY AND BANKING 
 
 cord supports the hanged." Is this a correct description of the situa- 
 tion ? If so, what is the explanation, and what remedies, if any, are 
 needed ? The object of this paper is to throw light upon the answer 
 to these questions. 
 
 First, as to existing banking facilities for agricultural credit and 
 their utilization by fanners. It is well known that the banking capital 
 of the country is concentrated to a great extent in our large cities, to 
 a greater extent than it would be if we had a well-developed system 
 of branch banks like Canada, and that the banks of these cities are 
 prevented by reason of their location from making many agricultural 
 loans, even if they were so inclined. Of the 7,301 national banks in 
 the United States on September i, 191 1, 192, or 2.6 per cent, were 
 located in the dozen largest cities of the country. The national banks 
 of these twelve cities, representing but 14 per cent of the population 
 of the country, had 37 per cent of the national banking capital (capi- 
 tal, surplus, and undivided profits), 33 per cent of the individual 
 deposits, and 40 per cent of the loans. It should be noted, however, 
 that since the act of 1900, authorizing the establishment of national 
 banks with capital of less than $50,000 in small towns, there has been 
 a continual and rapid increase in the number of national banks in 
 small communities. On September i, 191 1, out of the total of 7,301 
 national banks there were 1,966 with a capital of $25,000, and there- 
 fore presumably located in towns of less than 3,000 population, 372 
 with a capital between $25,000 and $50,000, and therefore presumably 
 in towns of less than 6,000 population, and 2,297 with a capital 
 between $50,000 and $100,000. Except for banks in towns not exceed- 
 ing 6,000 population, the law as amended in 1900 does not permit any 
 national bank to be organized with a capital less than $100,000. 
 
 Are the national banks which are accessible to farmers in a posi- 
 tion under the law to meet the farmers' needs ? The answer to this 
 question must be in the affirmative. Aside from the fact that 
 national banks are not permitted to make loans on real estate security,^ 
 there is no restriction in the national banking act which would inter- 
 fere with loans to farmers for agricultural purj^oses. Personal security 
 alone is legally acceptable; the range of possible collateral security is 
 practically unlimited, and there is no limitation fixed by law as to 
 the period of loans. National banks, therefore, have a very free hand 
 in regard to loans to farmers. 
 
 ' Note limited privilege of making such loans granted by sec. 24 of Federal 
 Reserve Act.
 
 AGRICULTURAL CREDIT 367 
 
 When we inquire concerning agricultural credit in banks under 
 state charters we find conditions var\ing witli the different states; 
 but, with a few minor qualifications, it may be said that the state 
 banking laws are free from restrictions that would hamper state banks 
 and trust companies in extending credit liberally to responsible 
 farmers. They are in a much better position in one respect to deal 
 with farmers than are national banks, that is, in the matter of accept- 
 ing real estate security. No state denies this privilege, and such 
 restrictions as exist upon its exercise are generally not onerous. 
 
 If commercial banks are comparatively unhampered by law in 
 making short-time loans to farmers, it may be asked: To what extent 
 are such loans made ? Unfortunately, practically no information is 
 available on this question. 
 
 So far as information can be secured, one gets but a confused 
 picture of widely var}'ing conditions as regards bank loans to farmers. 
 Although the farmers in any section of the country may not resort 
 to the banks for short-time credit, it does not follow that they are not 
 receiving such credit. As a matter of fact they are often receiving it 
 on a considerable scale and in the most ex-pensive way, i.e., in the form 
 of book credits with merchants. It is a common practice throughout 
 the country for farmers to run up book accounts with local merchants 
 during the spring and summer to be paid in the fall when the crops 
 are sold. When this is done on any considerable scale the farmer 
 probably pays more than bank interest under the guise of prices; and 
 this is particularly true when he obligates himself to sell his crops to 
 the creditor merchant. In the South this practice is carried to the 
 extreme in the familiar "store lien" system, which holds many farmers 
 in the cotton belt in a condition bordering on perpetual servitude. 
 The custom is for the farmer to buy supplies of the local general store 
 on credit for the year, agreeing to sell to the merchant his cotton crop 
 in the fall, thereby canceling the debt. A crop lien is generally given, 
 and the merchant often dictates the character and the amount of the 
 planting. The prices paid for cotton under this system are liable to 
 be exceptionally low and the prices paid by tlie farmer for his supphes 
 exceptionally high. The system has proven a curse to many sections 
 of the South. 
 
 The chief reasons for the backwardness of the United States as 
 compared with Europe with regard to agricultural credit may be 
 briefly summarized as follows: (i) our wonderful agricultural domain, 
 where good land could be had almost for the asking, and where for
 
 368 PRINClPLIvS OF MONEY AND BANKING 
 
 generations land was so cheap and labor and capital so dear that 
 intensive cultivation was generally unprofitable ; (2) the prosperity of 
 our farmers, who have not been forced by dire necessity to resort to 
 credit as were the farmers of Germany in the middle of the last cen- 
 tury when the Raiffeisen co-operative banks were first organized; 
 (3) the nomadic character of a considerable part of our agricultural 
 population, as it has moved continually westward in taking up new 
 lands, and more recently as it has been retracing its steps or moving 
 northward; (4) the isolation of our farmers in this country of large 
 farms and "magnificent distances"; (5) the rapid growth of manu- 
 facturing and commercial business of the country, and that largely in 
 the hands of the same class of people who control the bulk of the 
 banking business. 
 
 Add to these circumstances the obstacles which farmers always 
 encounter in the matter of credit, as compared with manufacturers 
 and merchants — obstacles such as the uncertainty of crops and the 
 strongly seasonal character of the farmer's credit demands — and we 
 have a sufficient explanation for the backwardness of agricultural 
 credit in this country. 
 
 To emphasize most of these causes, however, is to brand one's self 
 as belonging to a past generation. Our domain of free arable land is 
 practically gone; good farms must be bought, and for them ever- 
 increasing prices must be paid. 
 
 The era of hand cultivation is giving way to that of farm machinery 
 propelled by horse-power and even by steam, gasoline, or electricity, 
 with its resulting great increase in the efficiency of labor. 
 
 Another development which is making larger demands upon the 
 farmer for working capital is the increasing use of artificial fertilizers, 
 the expenditure for which in the United States approximately doubled 
 from 1890 to 1900. 
 
 As the result of such tendencies of the rapid depletion of our free 
 domain, farming in the United States is losing its old-time kinship 
 to mining and becoming more like manufacturing. More and better 
 machinery and more power are needed on most farms in the interest 
 of efficiency. This calls for short-time credit. 
 
 When seeking credit the farmer can now offer better security than 
 ever before. His markets are larger, better organized, more certain, 
 and more accessible. The risk of crop failure is less, thanks to the 
 wonderful progress of scientific agriculture. There are few pests 
 which cannot now be readily controlled by the intelligent farmer who
 
 AGRICULTUR.\L CREDIT 369 
 
 takes time by the forelock. The problem of moisture is growing less 
 serious every year with the improvements in irrigation, dry farming, 
 and the more scientific diversification of crops. 
 
 If the time is ripe for a greater use of bank credit in agriculture, 
 how is that credit to be obtained ? Broadly speaking, four methods 
 may be mentioned, only the last two of which are deserving of much 
 attention at the present time. They are: (i) establish government 
 agricultural banks; (2) adopt the Egj^Dtian plan of a government 
 guaranty to an agricultural bank established with private capital; 
 (3) encourage the farmers to organize co-operative credit societies on 
 some such plan as the RailTeisen or Schulze-Delitzsch banks of Ger- 
 many; (4) utilize more effectively in the interest of the farmer our 
 present banking machinery, and improve it where it is defective. 
 
 180. PRESENT FACILITIES FOR AGRICULTURAL CREDIT' 
 
 In 191 2 the United States Department of Agriculture in an 
 endeavor to ascertain the present status of agricultural credit in the 
 United States got out a questionnaire which was submitted to nine 
 thousand interested parties in widely scattered sections of the country. 
 Three thousand copies were sent to farmers, three thousand to country 
 bankers, and three thousand to merchants. The conclusions reached 
 may be summarized as follows: 
 
 I. Percentage of farmers able to give good security or indorsed note for a loan: 
 
 a) Farm-owners — 77 per cent 
 
 b) Farm- tenants — 46 per cent 
 
 II. Percentage of above able to secure short-titne loans: 
 
 a) Owners — 48 per cent 
 
 b) Tenants — 26 per cent 
 
 On the whole, short-time loans appeared to be easier to secure than 
 long-time loans. 
 
 III. Would borrowers use funds conservatively ami profitably? Those who 
 answered the question replied as follows: 
 
 a) 26 per cent stated farmers would not make good use of funds 
 6) 32 per cent said farmers would rnake good use of funds 
 
 IV. Extent of crop liens: 
 A. Cotton 
 
 o) Owners 
 
 1. 7 per cent reported no liens on cotton 
 
 2. 93 per cent reported as follows: 
 
 {i) In 1Q02, 52 per cent placed liens on cotton 
 {ii) In 191 2, 42 per cent placed liens on cotton 
 
 'Adapted from Report of U>iited Stales Department of Agriculture (191 2), 
 pp. 25-29.
 
 370 PRINCIPLES OF MONEY AND HANKING 
 
 b) Tenants 
 
 1. In 1902, 77 per cent placed liens on cotton 
 
 2. In 191 2, 74 per cent placed liens on cotton 
 B. Other crops 
 
 a) Owners 
 
 1. 29 per cent report no liens on crop 
 
 2. 71 per cent report 24 per cent placed liens on crop 
 
 b) Tenants 
 
 1. 17 per cent report no liens on crop 
 
 2. 83 per cent report that 40 per cent placed liens on crops 
 V. Extent of personal property mortgages: 
 
 a) Owners 
 
 1. 17 per cent report no liens on live stock, farm machinery, or 
 other personalty 
 
 2. 83 per cent report that 25 per cent do place such liens 
 
 VI. Use of warehouse receipts {grain, tobacco, cotton, and other products) : 
 
 a) 63 per cent stated that they do not exist 
 
 b) 37 per cent stated that 26 per cent of farmers use them for obtain- 
 ing credit 
 
 VII. Sources of credit: 
 
 a) Local banks supply 57 per cent in communities where banks 
 exist 
 
 b) Neighbors supply 16 per cent in communities where they con- 
 tribute anything to the supply of credit 
 
 c) Individual lenders in near-by cities and towns supply 12 per cent 
 where they supply any 
 
 d) Loan agents for outside capital supply 16 per cent in communities 
 where such loan agencies exist 
 
 e) Local general stores supply 25 per cent in places where they supply 
 any. Store credit, while rarely mentioned in discussions of rural 
 credit, is very important. Reports show those having unsecured 
 running accounts with local merchants as follows: 
 
 1. Owners, 59 per cent 
 
 2. Tenants, 53 per cent 
 
 It appears that owners get no store credit in only i per cent of the 
 communities. In these communities 2 per cent of tenants do get it. 
 /) Unclassified sources, where they exist, supply 13 per cent. "It 
 was reported by correspondents that in i per cent of the com- 
 munities there was no supply of credit by banks; in 11 per cent 
 of the communities no supply by neighbors; in 39 per cent of the 
 communities no supply by individual lenders in near-by cities and 
 towns; in 51 per cent of the communities no supply by loan agents 
 for outside capital; in 47 per cent of the communities no supply
 
 AGRICULTURAL CREDIT 37 1 
 
 by local general stores, and in 93 per cent of the communities 
 no supply from other sources 
 VIII. Range of amounts of loans, not including purchase money: 
 
 a) Owners, $2 74-$!, 767 
 
 b) Tenants, $io7-$473 
 
 IX. Would they form co-operative associations? 
 
 32 per cent reported that there are no farmers who would be willing 
 to form such associations, but the remainder of the correspond- 
 ents reported that about 40 per cent of the farmers stand ready 
 to organize such co-operative associations. 
 
 The foregoing is a brief and highly condensed statement of the 
 chief results of this investigation of local conditions relating to agri- 
 cultural credit. Numerous variations from the general facts appear 
 in the nine geographical divisions of the states, and still more so in 
 the different states themselves. 
 
 181. REASONS FOR POOR CREDIT IN THE SOUTff 
 By (MRS.) G. H. MATHIS 
 
 The reason for poor farming and poor credit in the South is 
 primarily inefficient farming — the one-crop system, and laziness or 
 idling away the time. The cotton crop requires a man's real labor 
 for only 160 days in the year, but those 160 days are scattered along 
 throughout the year, so that the laborer can't take up any other 
 employment. He is really idle 200 days in the year. The average 
 Alabama farmer earns $335 a year, and takes that on credit, three- 
 fourths of it, and ne^'er sees the money, so when the end of the year 
 comes he has only had his victuals and clothes. And of course he 
 is lying down on the job all the time because he doesn't see anything 
 in it. The system is wrong. 
 
 Now there is nothing on the face of the earth, in our climate or 
 in our soil, that forces us into a one-crop system. We can grow any- 
 thing on the face of the earth that will grow in Uie temperate zone. 
 If there is anything that you can't grow there I don't know what it is. 
 But still we do a whole lot of nonsensical things, and I will tell you 
 what I have told the people of Alabama a good many limes - it may 
 not sound ver\- nice, but it ajjplies to us — and that is, we southern 
 people can do more fool stunts to the square iiuli than any set of 
 
 ' Adapted from an address before Farm MortnaKe Bankers' Association, 
 St. Louis, 1915, published in United Slates Investor, XXVI (1915). 1983-84.
 
 372 TRlNCirLKS OF MONEY AND BANKING 
 
 people on earth. We just get right in our own way and keep a-standing 
 there. Why, you would meet yourself coming and going. It is the 
 truth. 
 
 Now, I will show you how ridiculous a great many of the things 
 we do are. In the first place we send here to St. Louis, Chicago, and 
 Kansas City, and we buy meat, ham, breakfast bacon, and all sorts of 
 hog meat, and we pay anywhere from twelve to thirty cents a pound, 
 and we can grow all we want at two and one-half cents. It is a fact. 
 Get our agricultural bulletin and see that we can. And we send and 
 buy beef and we pay all sorts of prices for it, ten, twenty, and some- 
 times forty cents a pound, and we can grow that same beef at four 
 cents or less. And then we send out West and we buy hay, and we 
 pay anywhere from $15 to $26 a ton, and $16 of that money is freight 
 and goes to the railroad, and $4 goes to the middleman who handles 
 it, and the fellow who grows the hay gets $6 a ton, and we don't 
 care a cent who gets the money, just so we get rid of it. And we can 
 grow that hay for $1 . 50 a ton. Now talk about us shipping hay into 
 Alabama; why we can't hardly keep from growing hay. We have to 
 work ourselves to death to keep from growing hay. We have to 
 kill the grass to grow the cotton to buy the grass, and we are like some- 
 one going around on a merry-go-round; we haven't had time to see 
 what else we could do. So, of course, that is another nonsensical 
 position for us to take, and there is no sense in it at all. And when it 
 comes to corn, we have got the world's record on corn beat. Alabama 
 is the natural home of corn — two hundred and thirty-two and one- 
 half bushels to the acre. Can you beat it ? 
 
 Well, now, we can do most anything we will try to do. Our 
 trouble is we do not try. That is clearly our trouble there. We have 
 gotten off at a tangent. Oh, it is ridiculous, and distressing too. It 
 would be very, very funny if it wasn't so awfully tragic for a great 
 many of our people to be going off that way. 
 
 If we practice diversified farming and spend our time in work 
 instead of idleness, we have no trouble. Farming is nowhere more 
 profitable than in Alabama. I have seen it proved for many years 
 that abundance of credit can be secured where people are using their 
 1)rains and are working throughout the year.
 
 AGRICULTURAL CREDIT 373 
 
 182. PLANS FOR IMPROVING FARM CREDIT WITH LOCAL 
 
 BANKS' 
 
 By C. W. THOMPSON 
 
 Three different plans are here presented by which farmers have 
 improved their personal credit with local banks. Each plan has 
 enabled farmers to borrow money at reduced rates of interest and on 
 more favorable terms of repayment than usual. The loans secured 
 under these plans were all used for the purchase of improved dairy 
 stock. However, it is believed that similar arrangements would 
 help farmers to improve their credit in connection with other farm 
 enterprises, such as cattle-breeding and hog-raising, or in securing 
 suitable farm equipment. 
 
 PLAN I 
 
 Under Plan I farmers enter into an agreement with local bankers 
 or with other persons who supply the loans to adopt a uniform and 
 approved system of dairy improvement. The security given by the 
 farmers is not difTerent from that ordinarily required. Those fur- 
 nishing the funds also buy the dairy stock, usually under the advice 
 of dairy specialists connected with the State or Federal Government. 
 The stock is sold to the farmers at actual cost plus a certain per- 
 centage (say 2 per cent) to cover incidental expenses. The lender 
 takes in payment the farmer's personal note with or without indorse- 
 ment, or with mortgage security on the stock purchased. 
 
 Under this plan, as worked out in certain localities in North 
 Dakota, the farmer has borrowed money on his personal note with 
 interest at 8 per cent, whereas the usual local rate is 10 or 12 per cent. 
 The notes were drawn for periods var>'ing from six months to a year, 
 but permitted renewals and partial pre]iaymenls on the principal. 
 
 The same general plan was carried out during the fall of 191 2 with 
 a group of farmers in southern Idaho. In that instance three or four 
 banks took up the work together, each agreeing to finance a carload 
 of dairy stock. 
 
 As a third example may be cited the work undertaken in a western 
 Nevada community in the summer of 1913. Here the linancial 
 backers of a local creamery sujii^lied the loans. The farmers gave 
 indorsed paper together with mortgages on the stock i)urchascd. 
 The creamery withheld a part of the returns from milk and cream 
 delivered. 
 
 ' Adapted from Bulletin 6^4-13; Ofl'icc of Markets and Rural Organization.
 
 374 PRINCIPLKS OF MONEY AND liANKING 
 
 There are regions, however, where such arrangements are not 
 sufficient to enable farmers as individuals to attract the necessary 
 capital. Some additional security is necessary to what each farmer 
 is able to furnish. 
 
 PLAN II 
 
 In the plan here described this additional security is obtained by 
 having the farmers collectively assume a certain guarantee of the 
 notes given by the members under the agreement. An illustration 
 of how this has worked out is afforded on an irrigation project in 
 southern Montana. Nineteen farmers organized an association in 
 dealing with a local bank. The trustees were authorized to guarantee 
 a limited amount to the bank on the joint and several liability of the 
 association members. By adding this guarantee to the security 
 offered by the individual farmers the latter were able to secure the 
 necessary capital for the purchase of two carloads of heifers which 
 were shipped in from another State in August, 1913. The local bank 
 placed $5,000 to the credit of the association at 8 per cent, whereas 
 the general bank rate is 10 per cent or, more frequently, 12 per cent. 
 In this instance two men from the association were sent to make the 
 purchase. After the stock had been secured, a proportionate share 
 of all outlay, such as freight, travel, and incidentals, was added to the 
 purchase price of each animal, and charges were made accordingly. 
 As in the illustration given from western Nevada, provision was made 
 for the periodic payment of the loans out of the dairy products. The 
 articles of agreement also provided that the purchaser should give 
 the animals proper care and breed them only in such a manner as 
 the trustees might approve. Such safeguards are a desirable feature 
 in any contract of this kind. 
 
 PLAN in 
 If, in place of the limited guarantee supplied by farmers them- 
 selves jointly, as described under Plan II, a similar guarantee from a 
 third party be substituted, the essential features of Plan III will be 
 the result. Such a plan was carried out in northwestern Wisconsin 
 in the spring of 1913 and in northeastern Minnesota in the winter 
 of 1914. The third party consisted of local business men who realized 
 their common interest with the farmers in the general improvement 
 of agricultural conditions in their territory. One agreement was made 
 between the farmers and trustees appointed by bankers and another 
 agreement between the trustees and business men. The latter sub-
 
 AGRICULTURAL CREDIT 375 
 
 scribed a certain percentage of the funds loaned, with the understand- 
 ing that the money was to be a guarantee fund to protect the bankers. 
 The tirst purchase made under this plan in northwestern Wisconsin 
 included several carloads of dairy stock, the advances from the banks 
 amounting to $9,475, 
 
 183. SHORT-TIME PERSONAL CREDIT AMONG JEWISH 
 FARMERS' 
 
 By LEONARD G. ROBINSON 
 
 Last year a poor Hebrew immigrant — let us call him X — bought a 
 small farm in Nassau, Rensselaer County, New York. Ten years in a 
 sweatshop had impaired his health, and he was advised by his physi- 
 cian to live in the country. By dint of pinching economy he had 
 saved up Si, 000. The farm he bought cost $3,000. He paid down 
 his $1,000 and gave a first mortgage for the balance of $2,000 at 6 
 per cent. With a bare farm on his hands he turned to the Jewish 
 Agricultural and Industrial Aid Society of New York. From that 
 society he received a loan of $1,000 to equip his farm. 
 
 Everything seemed to go along fairly well. But in the spring, 
 when in the midst of his plowing, X lost one of his horses. His first 
 thought was of the aid society. Time was very precious, however, 
 and every day counted just then. He therefore went to Y, from whom 
 he had purchased his first team. Yes, Y would be glad to sell him a 
 horse, but he must have at least half cash. X then went to Z, who, 
 he knew, lent money occasionally to the farmers in the neighborhood. 
 Z could let him have S50 for three months provided he signed a note 
 for $75 at 6 per cent. X had no alternative. He took the $50 and 
 bought a horse for Sioo, giving a note for the balance of S50 for three 
 months, also at 6 per cent. It therefore cost X $26.88 for the use of 
 $100 for three months, or at the rate of 107^ per cent per annum. 
 
 The following spring X again lost a horse. He saw three or four 
 of his neighbors, and within an hour he obtained a loan of $100, for 
 which he paid interest at the rate of 6 per cent per annum, or $1 .50 
 for the same accommodation for which he had j^aid $26,88 only the 
 season before. 
 
 What was it that caused the extraordinary change in this farmer's 
 ability to borrow ? The answer is co-operative credit. 
 
 'Adapted from "The Pioneer Credit Associations in the United States," 
 United States Bureau of Education Bulletin No. jo, 1913.
 
 376 PRINCIPLES OF MONEY AND BANKING 
 
 While the Jewish Agricultural and Industrial Aid Society had long 
 realized the need of short-time personal credit by the American 
 farmer, it was not until 1909 that we were prepared to attack the 
 proljlem in earnest. But the work has progressed with great rapidity, 
 and we have today 17 thriving credit unions — the first and so far the 
 only co-operative credit banks on American soil. Eight of them are 
 in New York, five in New Jersey, and four in Connecticut. Three 
 were organized in 191 1, five more in 191 2, and nine more this year. 
 The eight credit unions doing business last year reported on Decem- 
 ber 31 a total membership of 251. Their outstanding shares ($5 each) 
 were 865. They had been in operation for a period averaging 13 
 months, during which time they made 411 loans, aggregating $28,140, 
 nearly seven times their share capital. Their net profits for this 
 period amounted to $545 .48, or at the rate of about 12^ per cent per 
 annum on that capital. 
 
 One of the most marked benefits resulting from these credit unions 
 is the virtual stamping out of usury in the communities in which they 
 exist. The farmer, finding no difficulty in obtaining a moderate loan 
 for productive purposes quickly and cheaply, no longer has to depend 
 upon the generosity of his neighbors, the forbearance of the local 
 storekeeper, or the cupidity of the usurer. 
 
 Not the least important is the moral and educational value of 
 these credit unions. They teach their members business methods and 
 self-government. They imbue them with self-reliance and self- 
 respect. The}^ endow them with a high sense of mutual responsibility, 
 stimulate them to further efforts in the direction of co-operation and 
 mutual self-help, and make them better farmers and better citizens. 
 
 184. THE ARGUMENT FOR DIRECT GOVERNMENT LOANS TO 
 
 FARMERS^ 
 
 By E. R. BATHRICK 
 
 The argument for direct loans to farmers by the government is 
 based upon two fundamental propositions : 
 
 First, the conservation of agriculture, and, as a legitimate corol- 
 lary, the perpetuation of the food supply, is a vitally important 
 national policy, and so considered by all nations. I think we can 
 agree on that. 
 
 ' Adapted from Testimony at Joint Hearings before the Subcommittee on Bank- 
 ing and Currency, 63d Cong., 2d sess., 1914, pp. 865-86.
 
 AGRICULTURAL CREDIT 377 
 
 Second, this important national policy, so vital to all our people, 
 should not be relegated to a few private people for exploitation and 
 profit. 
 
 This much being agreed ui)on, I contend that the safest and best 
 way to carry out this policy for and on behalf of the peo])le of the 
 Nation is for the Nation to do it itself. Private persons do not act with 
 patriotic deference to public needs in the conduct of business where 
 their investments and livelihood are at stake. No exigency could be 
 greater than the failure of agriculture, and no greater danger to the 
 existence of government could arise than a short food supply. No 
 tenet of free government can fjuiet a hungry peoi)le, and, in the face 
 of such a contingency, the true government philosophies would avail 
 nothing. We do not stand close to such a condition now, but wc face 
 the steadily rising price of food, whereby many of our peojile are con- 
 fined to a pitiful selection of edibles. The condition as it applies to 
 production and consumption of food is bad enough, and we shall 
 not fulfil our best functions as legislators if we fail to choose the 
 speediest and most ef!icacious remedy. Ever>' leading nation on 
 earth is lending money procured by the sale of its bonds, or appropria- 
 tions from its tax funds to farmers, either directly to the borrower or 
 through mutual credit associations. Many of the nations, either by 
 Federal Government or by provincial or State government, are guar- 
 anteeing bonds or de])entures issued against farm mortgages. From 
 my research of authentic public documents and ofiicial rejwrts I have 
 compiled a total of expenditures of this character wherein the "faith 
 and credit " of these governments were pledged to the extent of nearly 
 $5,000,000,000. 
 
 My proposition is that the Government borrow money at not to 
 exceed 32- per cent and lend it to farmers direct or through farmers' 
 farm-credit associations, and not through capitalists' farm-credit 
 associations. I would not ask a law preventing anybody from lending 
 money to the farmers. I do not desire to confine lending lo farmers; 
 but if we will pass a bill which is a combination of farmers' self-help 
 and GovernniLMit aid, the capitalist lender will follow our terms and 
 interest rates without any law made for him at all. It is the ex|)eri- 
 ence all over the world that joint-stock mortgage banks will go into 
 the business at the lower rate. With organizations made up of 
 farmers the Government can encourage self-hel|) and co-operation 
 among farmers. But the capitalists can help themsehes, and in a 
 farm-credit bill it is not the pro\iiue of (Government to eiicourage
 
 378 PRINCIPLES OF MONEY AND BANKING 
 
 capitalists and assist them to make money out of agriculture. By my 
 bill we could force or rather assist the farmers in helping themselves 
 on both long- and short-time credit. 
 
 We would have mutual organizations for the purpose of carrying 
 out the national policy, but when you have an organization that is 
 gotten together solely for the purpose of making profits for city 
 investors we can neither carry out the national policy nor have war- 
 rant for doing anything for that kind of an institution. 
 
 We would not lend on every application. We would only lend 
 upon those who are willing to comply with our regulations respecting 
 the use of the money for agricultural purposes and for the purpose in 
 other ways to carry out the national policy. We, as a Government, 
 would not go into the loaning business to make money, although it 
 would be very profitable to all the people. It is the history of all 
 countries that if we were to do this thing that I ask to be done, in the 
 way I propose, joint-stock companies would, without our intervention 
 and without any law of our making, follow our rates of interest, and 
 the whole mortgage problem would soon be solved. If we were to 
 stop, the rates would immediately rise, but we should need only to 
 keep the Government plan alive to hold rates steady all over the 
 country. 
 
 Government loans would make a profit in two ways for all the 
 people. One way would be a cash profit from the margin on loans. 
 This cash profit would be sufficient annually without taxing the people 
 a penny to pay the entire cost of maintaining and constructing good 
 roads under the Shackleford good-roads bill, that is, $25,000,000. The 
 other profit would be also for all the people and expressed in a wide- 
 spread beneficence affecting not only agriculture but ever>'body in the 
 city as well. It would be giving these profits first hand and direct 
 by the quickest and best way it can be done and not by the slow 
 indirection of relegating our great national policy to the mercies of 
 profit-seeking banks. 
 
 The bank plan will make a profit for a few people, mostly for those 
 who have been lending money to farmers at high rates and who have 
 created these very conditions we are tr} ing now to cure.
 
 AGRICULTURAL CREDIT 379 
 
 B. Long-Time Investment Credit 
 
 185. FARM IMORTGAGE CREDIT IN THE UNITED STATES' 
 
 By C. W. THOMPSON 
 
 During the past two years the Department of Agriculture has 
 been making a special study of rural credits in the United States. 
 Information has been obtained bearing on both the conditions and 
 the facilities for supplying farm loans in the ditTerent states. I shall 
 endeavor to indicate briefly some of the results of this study with 
 special reference to farm mortgage credit. 
 
 The average cost of farm mortgage loans, for interest and com- 
 mission together, as indicated by a recent inquiry' made by the Office 
 of Market and Rural Organization, ranges from about 55 per cent in 
 New York, where commissions are seldom charged, to 10 per cent in 
 Montana, where the commission amounts to about i^ per cent, with 
 8f per cent interest. In Iowa, where the farm mortgage loan business 
 is pretty well standardized, the average cost for interest and com- 
 mission together is 5 . 9 per cent, comprising 5 . 6 per cent for interest 
 and a commission paid once for all in advance. In Missouri the aver- 
 age cost for these two items is 6 . 8, comprising 6 . 2 per cent for interest 
 and 0.6 per cent for commission. In Texas the average cost for 
 interest plus commission is 9 per cent, with a little more than 5 per 
 cent going for commission; and in Alabama interest and commission 
 together average nearly 9^ per cent, of which f per cent is for com- 
 mission. 
 
 In the State of Iowa there is relatively little variation from the 
 average rate, 6 per cent, the lowest figure reported from any locality 
 being 5 per cent interest with no commission charged, and the highest 
 figure, for interest plus commission, about 8 per cent. From Texas, 
 on the other hand, with an average of 9 per cent, we have reports from 
 different localities giving the prevailing cost for interest plus com- 
 mission as low as 7 per cent and as high as 13 per cent; and from 
 Alabama, with an average of 9I per cent, reports ranging from 7J to 
 15 per cent. In general, the lowest charges both for interest and 
 commission are found in the more developed agricultural sections of 
 the East and Middle West. The extreme figures apply in the South 
 and the Rocky Mountain states. 
 
 ' Adapted from an address before Farm Mortgage Bankers' Association, 
 St. Louis, 1915, published in United Slates Investor, XXVI (1915), 1994-95.
 
 380 i'Ri\(:n'ij;s of monky and bankixo 
 
 The most common term for farm mortj^aj^cs throughout the corn 
 belt is five years, with a good many loans made for three years and 
 some for as long a time as ten years. In the South the greater part 
 of the farm mortgage loans made Ijy banks from their own funds are 
 made for one year or less; loans made by insurance companies and 
 mortgage companies in the South, however, usually run for a longer 
 period — from three to ten years. In the Rocky Mountain and Pacific 
 states farm mortgage loans appear to be made rather more often for 
 a term of three years or over than for a shorter period, but the banks 
 at least make a considerable portion of their loans of farm mortgage 
 security for a period of one year or less. 
 
 The great majority of the banks making farm mortgage loans for 
 a term of three years or over give the borrower the privilege of paying 
 any part of the principal (in even hundreds) at any time or on 
 any interest date. Some banks, however, lend at a low^er rate of 
 interest where the contract does not carry the prepayment privilege. 
 Most of the banks, both in the South and in the West, which make 
 farm mortgage loans for one year or less report that they usually renew 
 satisfactory loans when desired; some of them require the payment 
 of a part of the principal, but the majority seem to be willing to renew 
 the whole amount so long as the security is good. 
 
 A general survey of conditions in the country as a whole would 
 seem to indicate that charges for interest and commissions are need- 
 lessly and unreasonably high in many localities. Farmers in these 
 localities are clearly in need of better access to the open investment 
 market. Such access would not only afford more reasonable rates 
 but would also enable the farmer to obtain mortgage loans for longer 
 periods than is ordinarily possible at the present time. 
 
 Farm mortgage loans are obtained, in general, from four important 
 sources, namely, banks, life insurance companies, mortgage or loan 
 companies, and private individuals. A word may be said with regard 
 to the relative importance of these agencies. 
 
 From reports furnished by the tw^enty-seven life insurance com- 
 panies in the United States having assets above $20,000,000 and two- 
 thirds of the smaller companies we have computed the amount of 
 farm mortgages held by these companies in each state, the total for 
 all states being $660,000,000. We have also estimated the amount 
 of farm mortgages held by banks (including trust companies), and, 
 on the basis of the thirteenth census figures, the total amount of farm 
 mortgage loans outstanding in each state.
 
 AGRICULTURAL CREDIT 38 1 
 
 For the United States as a whole the Hfe insurance company 
 mortgages reported up to the present lime (October 5, 19 15) represent 
 about one-fifth of the estimated total for all farm mortgages and the 
 mortgages held by banks a little more than one-fifth. The reports 
 yet to be received from some of the smaller companies, however, 
 promise to bring the insurance company total up pretty close to the 
 estimated bank total. 
 
 For the State of Georgia the figures show that the insurance com- 
 panies hold farm mortgages amounting to nearly one-half the esti- 
 mated state total and the banks a little more than one-fourth, leaving 
 only a quarter of the total for mortgage companies and pri\ate indi- 
 viduals. In a majority of the other southern states the insurance 
 companies are relatively unimportant as sources of farm mortgage 
 loans, though they have made considerable gains in this section of the 
 country even within the last two years. 
 
 For the Stale of Iowa the insurance company mortgages repre- 
 sent 7,2 per cent of the estimated total and the bank mortgages 22 
 per cent; for Missouri the insurance company mortgages represent 
 26 per cent and the bank mortgages 16 per cent. In Nebraska and 
 Kansas, however, the insurance companies are more important as 
 compared with the banks, reporting in each case more than one-third 
 of the estimated total, while the banks report only a little more than 
 one-twentieth. In Oklahoma, likewise, the insurance companies 
 report nearly 40 per cent -of the total and the banks only about 3 per 
 cent, and in Texas the banks have only 6 per cent of the total, as com- 
 pared with 18 per cent for the insurance companies. In Louisiana 
 and in California, on the other hand, the banks take care of more than 
 40 per cent of the estimated total farm mortgages, while the insurance 
 companies report less than 7 per cent. 
 
 Life insurance companies hold very few mortgages on farms in the 
 New England or the Middle Atlantic states; and a considerable por- 
 tion of the farm mortgages held ))>■ the banks in some of the New 
 England slates, at least, are mortgages on western lands. 
 
 No definite information is at hand relative to the amount of farm 
 mortgages permanently or temporarily held by mortgage and loan 
 companies, but the aggregate is without doubt ver>- large. A numl)er 
 of foreign companies are engaged in this business on a large scale. 
 Many mortgage companies are primarily mortgage brokers or com- 
 mission merchants, but many also have large funds jiermanently 
 invested in farm mortgages.
 
 382 PRINCIIMJ;S OF MONEY AND BANKING 
 
 The activities of the mortgage and loan companies as middlemen, 
 purchasing or negotiating mortgages for sale to other investors, have 
 already been mentioned. The banks, likewise, in many localities 
 negotiate large amounts of farm mortgages for insurance companies 
 and other outside investors, in addition to making loans from their 
 own funds. 
 
 The banks in North Dakota, for example, which hold farm mort- 
 gages to the amount of $5,000,000 (estimated), negotiate for other 
 investors about $40,000,000 in a year, or eight times their own per- 
 manent holdings. The banks in Nebraska, likewise, are estimated to 
 handle $33,000,000 in farm mortgage business for other investors, or 
 three times the amount of their permanent holdings ($11,000,000). 
 In general, the banks in most of the states west of the Mississippi 
 River engage rather extensively in the business of handling farm 
 mortgages for other investors. New England banks, on the other 
 hand, do practically no business of this kind, and the other states in 
 the northeastern section of the country do relatively little. In the 
 South, likewise, outside of the states of Georgia, Oklahoma, and 
 Texas, the volume of such business handled by the banks is relatively 
 small. 
 
 186. RATES ON FARM LOANS' 
 
 Substantially no statistics of rates of interest paid by farmers have 
 been collected in this country since the census of 1890; and conse- 
 quently it was especially desirable that in the questionnaire sent out 
 by the Department of Agriculture the correspondents be requested 
 to contribute information on this investigation and report with regard 
 to the subject. Six questions were framed, and these were answered 
 with undoubted understanding as to the meaning of the questions. 
 The results are of much interest. 
 
 The questions were expressed in dual form in such a way as to 
 call for an answer for agricultural loans and also for loans on town 
 and city real estate, the circumstances of the loans being otherwise 
 substantially the same. 
 
 The interest rates on the bulk of the purchase money throughout 
 the United States range from 6 to 8 per cent in the case of farms, 
 and also 6 to 8 per cent in the case of town and city real estate. Upon 
 taking account of the differences in rates of interest as between farm 
 
 ' From Report of United States Department of Agriculture, 191 2, p. 30.
 
 AGRICULTURAL CREDIT 383 
 
 and town property, it is discovered that in the case of purchase-monev 
 loans 10 per cent of the responses state that the rates are higher for 
 farms than for town and city real estate; ^^ per cent report that the 
 rates are lower for farms than for town and city real estate, and 57 
 per cent report that there is no difference in rates of interest on 
 purchase-money loans between the two classes. 
 
 Rates of interest do not determine the total cost of borrowing. 
 There are commisions, bonuses, and various costs and expenses that 
 are borne by the borrower, and these, if added to the rate of interest, 
 often considerably increase it. It was reported by 22 per cent of 
 the answering correspondents that no commissions were paid in their 
 communities; those who stated that commissions were paid dis- 
 agreed very considerably. The country- banker stated that the rate 
 of commission, when paid, was 2 per cent. The country- merchant 
 and persons of other occupations constituting another class of corre- 
 spondents reported 4 per cent, and the farmers reported 5 per cent. 
 These dififerences seem hardly capable of reconciliation. The terms 
 for which mortgages are made usually range from 3 to 5 years, and 
 consequently a commission of from 2 to 5 per cent adds appreciably 
 to the annual rate of interest. If paid by the borrower, the average 
 cost of abstracts was $11.40; where borrowers paid conveyancer for 
 drawing papers the cost was S4.70. In 94 per cent of cases the 
 borrower does pay cost of abstract. Sometimes the borrower was 
 required to pay the registration fee, and, when he did so, the average 
 cost was $1 .50. 
 
 187. EXPLANATION OF HIGH RATES TO FARMERS' 
 By H. S. \AN .\LSTINE 
 
 A year or two ago the Kansas Legislature appointed a commission 
 to investigate farm values and rural interest rates, and their report 
 is very enlightening. It shows that the average rate in the eastern 
 counties is from 5 to 6 per cent, while the average rate in the extreme 
 western counties is about 10 per cent. 
 
 Now this difference in rate is not because the money lender is 
 taking advantage of the necessities of the western Kansas farmer, 
 but is based wholly upon the value of the land as measured by the 
 yardstick of experience. 
 
 Adapted from an address before Farm MortgaRC Bankers' .Association, 
 St. Louis, 1Q15, published in United Stales Investor, XX\I (1915), i968-6g.
 
 384 PRINCirLES OF MONF>Y AND BANKING 
 
 The man who wants the maximum security is willing to accept the 
 minimum interest rate, and lends his money in those localities where 
 the intrinsic value has been established by years of cultivation and 
 permanent settlement, while the money lender who wants a higher 
 rate risks his money on loans secured by lands in newer and less tried 
 localities, where the hazard and the rate are proportionally greater. 
 Statistics of other states show the same tendencies. In 1880 the 
 average rate in Iowa was 8 per cent, and in 1905, 5.18 per cent. It 
 is probable that the high average rates indicated by the reports of the 
 Federal Government are largely accounted for by the high rates pre- 
 vailing in western and southern localities now in process of develop- 
 ment. Also the high commissions indicated would perhaps not 
 appear unreasonable if the local conditions, the size of the loan, and 
 the quality of the security were analyzed. It often requires as much 
 work to negotiate a small loan as a large one, which makes the com- 
 mission on the small loan appear high in comparison with larger 
 loans. 
 
 188. THE WEAKNESS OF THE PRESENT MORTGAGE 
 SYSTEISP 
 
 By C. W. THOMPSON 
 
 Under the present system of marketing farm mortgages the mort- 
 gages themselves are generally sold direct, so that it is necessary to 
 find a purchaser who wants a mortgage of a given amount, running for 
 a given time and with given terms. This fact renders farm mortgage 
 investments less attractive to the small investor and also the large 
 investor who wishes to have his capital in such form that he can 
 readily turn it into cash on occasion, since the mortgages, drawn for 
 varying amounts and falling due at different times, will sell less readily 
 in the open market than would standardized securities. 
 
 The farmer himself is not generally in a position to find a purchaser 
 for his own mortgage. He lacks proper contact with the investment 
 world. He does not know the facts regarding securities in which the 
 investor is interested. Neither can he draw up loan papers and pass 
 on titles. Convenient facilities are necessar\' to perform all these 
 functions. Reliable and suitable standards must be maintained in 
 these matters. To this end the selection of farm mortgage loans must 
 
 ' Adapted from an address before Farm ^Mortgage Bankers' Association, 
 St. Louis, 1915, published in United Slates Investor, XXVI (1915), 1995.
 
 AGRICULTURAL CREDIT 385 
 
 be placed on a strictly quality basis. The farmer with security of 
 superior quality must not be compelled to pay commissions and 
 interest rates similar to those charged his neighbor whose security is 
 much inferior. A sound credit system must put a premium on mort- 
 gage security of superior quality. It is for the latter class of mortgage 
 loans that adequate provision should be made in order that they may 
 reach the open investment market. So long, however, as farm mort- 
 gage loans are offered for sale in their original form there will be a 
 large body of investors who cannot be reached. To meet the demands 
 of this class it is necessary-, not only to supply mortgage securities of 
 superior quality, but also to offer them for sale in the proper form. 
 Farm land bonds offer these advantages as compared with the original 
 mortgage notes: The bonds may be issued in even amounts; they 
 run for convenient periods of time; they afford a convenient means 
 for collecting the interest, and they relieve the investor of all concern 
 as to the keeping up of the farm land security. 
 
 189. LEGAL OBSTACLES PREVENT A WIDE ^lARKET FOR 
 FAR:M MORTGAGES' 
 
 By H. ^L IL\NSON 
 
 Farm mortgage bankers, who are familiar with the farm mortgage 
 investment laws of the eastern and New England states, have long 
 cherished the hope that the lawmakers of those states might be edu- 
 cated to lean more leniently toward the farm mortgages of other states 
 as investments for the funds of their estates, trust companies, and 
 savings banks. To introduce, or reopen, the subject the association 
 has sent out more than 1,200 letters to bank commissioners, trust 
 company and savings bank officials, legislators, and others in the East, 
 setting forth the association's point of view and to acquaint itself with 
 eastern sentiment on the subject. The results of this effort are not 
 at all discouraging. 
 
 190. THE TROUBLE WITH THE AVERAGE FARMER' 
 
 By a. L. ROGERS 
 
 Dear Professor: I have filled out the inclosed questions to the 
 best of my ability and according to the manner in which agricultural 
 credits have been handled in this section. The system has been chan- 
 ging year by year since the pioneer days of twenty-five years ago, land 
 
 ■ From UtiUed Slates Investor, XXVI (1915), 1967. 
 
 'Taken from Bullock, Agricultural Credit, pp. 11 2-14. (H. W. Wilson Co., 
 1915-)
 
 386 PRINCIPLES OF MONKY AND BANKING 
 
 values are becoming more settled, the possibilities of safe farming are 
 becoming Tnore detlnite, and therefore interest rates are gradually 
 getting lower as speculative conditions disappear. This is, at present, 
 a one-crop wheat-producing country; one-half the land is summer 
 fallowed each year; consequently there is but one pay-day each year, 
 and the farmer gets his credits on that basis. The whole system is 
 inef^cient and uneconomic. Very few of them have made much 
 money outside of the rise in values of their land. They are all farm- 
 ing on too big a scale. Under the present system they are destructive 
 as hell in their methods. They are going into debt buying more land, 
 gas traction-engines, and lo-bottom plows. No rotation or diversifi- 
 cation of crops, just wheat, wheat, wheat; simply mining the soils and 
 selling the surface of their farms. The greatest trouble with the 
 average farmer is he is getting too much credit; and the bankers and 
 merchants are due some consideration and also some condemnation 
 in taking long chances in their desire to help the farmer and develop 
 the country, even though they do it with the idea of making a profit. 
 One great trouble is the American farmer is not an agriculturist, but 
 a speculator in lands; he values the soil to exploit it, and not for its 
 true producing qualities. I need no better proof of this assertion than 
 statistics from the Middle and New England states, where you can 
 buy farms for less than the costs of improvements on them, I know 
 plenty of men of wealth who would be glad to make farm loans at 
 6 per cent on twenty-five or fifty years' time under the amortization 
 plan of retiring the principal and interest, but men of capital hesitate 
 in taking chances on the ignorant, shiftless, and speculative methods 
 of the average American farmer; the land would be worn out before 
 the mortgage becomes due. 
 
 There is an immutable law in loaning money : the greater the risk 
 the higher the rate; and whenever the American farmer qualifies 
 himself and his conditions the same as the German and French farmer 
 has done he will get just as good accommodations, but not until then. 
 Under the laws of compensation most ever^'one gets what is coming 
 to him. The rich man gets his ice in the summer and the poor man 
 gets his ice in the winter, but they all get ice. A bunch of farmers 
 came into my office the other day kicking on the rates of interest. 
 I informed them that not one of them was a genuine farmer; they were 
 simply speculators; they demanded loans up to almost the actual 
 value of the land, based on their earning capacity; they expected to 
 scratch around on the surface of the ground to make expenses and no
 
 AGRICULTURAL CREDIT 387 
 
 improvements, hoping and expecting that some sucker would come 
 along in a year or two and give them twice what they paid for it. 
 The money loaner expects and demands the highest rate of interest 
 he can write when he goes into that kind of a partnership. I further 
 informed these gentlemen that there would some day be an agricul- 
 tural people living in this section who would be entitled to a very 
 low rate of interest, but those people would not come to the market 
 in an automobile; they would stick to the dead axle wagon, and every 
 time they came to town it would be loaded with something to sell, 
 and when they went home they would haul back a load of manure 
 to strengthen their collateral, so that their land would be worth as 
 much when the mortgage became due as it was the day it was written, 
 and thereby justify a demand for lower rates of interest. A farmer 
 to make money has got to learn to tote both ways, but the biggest 
 load must go toward the market. The wheat farmer works hard two 
 months in the spring and two months in the fall, and the balance of 
 the time he sits around kicking the grain man, the transportation man, 
 the middleman, and the banker, when he should be milking cows and 
 feeding hogs and doing diversitied farming, thereby maintaining the 
 fertility of the soil and having something to sell when he comes to 
 town to buy his sui)plies. The silo will make a dairy country out of 
 eastern Washington and double the values and producing qualities of 
 the land. Some of the farmers are waking up to this fact, and more 
 will follow later on. 
 
 Long-time loans secured by mortgages on land should not be made 
 except for the purchase price or permanent improvements on same. 
 The farmers of this section can, at all times, get any reasonable amount 
 on their lands on three or five years' time at 8 per cent, with a i)rivilege 
 of paying Sioo, or any multiple thereof, on the principal at any 
 interest-payment period, and all papers generally become due in the 
 fall, after harvest, for their convenience. So much for long-time 
 credits. 
 
 191. THE LEGITIMATE PURPOSES OF MORTGAGE LOANS' 
 
 By EDMUND F. ADAMS 
 
 The purposes for which mortgage loans may be safely granted, 
 and, therefore, for which only they should be granted, are, first, 
 land; second, permanent productive improvements, such as ordinary 
 
 ' Adapted from "Credit Facililies for Rural Districts," SoitiiJ Cunrncy, \III 
 (1901), 167-68.
 
 388 PRlNCiri.ES OF MONEY AND BANKING 
 
 fencing, drainage, or irrigation; third, buildings reciuired for the shelter 
 of crops and stock or dwellings required in conducting the necessary 
 operations of the farm, and such as the owner could and would buy 
 if they were not on the farm and he could obtain them. No farmer 
 ought to borrow money to build a fine house, or expensive furniture, 
 or ornamentation, and no banker ought to lend it to him for those 
 purposes. It is risky to lend to pay off floating debt, except such as 
 has been caused by sudden calamity. The fact that a farmer desires 
 to build a house beyond his means or that he has incurred a floating 
 debt which he cannot pay is warning that he is unthrifty, and, there- 
 fore, unlikely to meet his engagements. He cannot expect to borrow 
 at low rates. If in any case this is not true, the burden of proof is 
 on the borrower. All mortgage loans are unsafe whose proceeds are 
 not so applied to the property pledged as to increase its income- 
 producing power. A loan to build a hotel would be proper and safe 
 when a loan of the same amount to build a fine farmhouse on the same 
 property would be improper and unsafe. Loans to a soil-robbing 
 farmer have always in them an element of danger, because the land 
 is constantly deteriorating. The safe limit of a mortgage loan on 
 farm land is such that the interest charge can be paid with one-half 
 the annual rental of at least five years, with covenants to protect the 
 land from deterioration from soil robbing. It is to the interests of 
 both borrower and lender that mortgage loans shall be made on very 
 long time, but always payable at the option of the borrower, at any 
 time, by instalments or otherwise. For loans, either mortgage or 
 temporary, made under the restrictions here outhned, there is and 
 always will be abundant capital available at rates of interest which 
 farmers can pay, provided only that farmers induce the enactment of 
 such legislation as shall make the flow of capital natural and inex- 
 pensive. For all hindrances, annoyances, or unusual difficulties in 
 enforcing payment, or overtaxation, the borrower must pay, as well 
 as for all risks which he creates by speculative operations. The laws 
 of many states enacted with the approval of farmers, so drive capital 
 away from them that they can hardly get it at any price. 
 
 The purposes for which mortgage loans are actually employed in 
 this country are stated in the mortgage volume of the Report of the 
 Census of i8go, pages 279, 280, and 896. The following extract will 
 give some idea of the variety of purposes: 
 
 "People mortgage their real estate to get married, to obtain 
 divorces, and to pay alimony; to pay their taxes, to pay rent, and to
 
 AGRICULTURAL CREDIT 389 
 
 pay the money-lender. They raise money by mortgage in order that 
 they may travel and that they may expend it in extravagant living; 
 they speculate with it and they re-lend it. Politicians pay their 
 political debts by means of mortgages. The guileless are deceived 
 into buying worthless patents. Wives pay the debts of their husbands 
 and educate them for the ministry. Men mortgage their real estate 
 to pay their physician, their undertaker, and their lawyers, to help 
 their friends and relatives, to make good their defalcations, to educate 
 their children and support their parents." 
 
 Of course money for such purposes must be well paid for, but while 
 there are many such loans, the great majority, of course, are for proper 
 business purposes. The census experts group some of the foregoing 
 and many others into a class which they term "Calamity Loans." 
 They estimate these as 5 . 40 per cent of the number of mortgage loans 
 and 1 . 95 per cent of the amount. 
 
 192. AGRICULTURAL CREDIT INSTITUTIONS' 
 By R. B. van CORTLANDT 
 
 Our present system of borrowing on land is by mortgages running 
 from three to five years, the entire principal coming due at one time. 
 This is expensive, involving renewals, and dangerous from the possi- 
 bility of the mortgage falling due at a time of restricted credit, so that 
 it cannot be renewed. On the continent of Europe this business is 
 handled by so-called land-mortgage banks, or rather associations. 
 These associations are formed along varying lines, some with stock 
 like the great French institution, the Credit Foncier; some having no 
 stock, like the German Landschaften; some being guaranteed by a 
 state or province, as in Austria, while the principal one in Hungary 
 combines ingeniously various features peculiar to itself. These insti- 
 tutions are formed along certain general fundamental lines as follows: 
 
 The mortgages granted are pledged for the security of bonds which 
 the institution issues and sells in the general market. These bonds 
 have no fixed maturity, but can be retired at par or some small pre- 
 mium at any time. When the borrower mortgages his land to the 
 bank, he agrees to pay a certain fixed sum semiannually. This is 
 called the "Annuity," and is composed of the annual interest plus an 
 amount, generally one-half per cent, toward the reduction of the prin- 
 cipal of the debt and known as "Amortization," and an additional 
 
 ' Adapted from North American Review, CXCIX (1914), 585-88.
 
 390 PRINCIPLES OF MONEY AND BANKING 
 
 amount, about one-quarter per cent, toward the expenses of the bank. 
 The borrower, therefore, at once begins to extinguish the principal 
 of the debt, and as each year the principal decreases, the interest, of 
 course, decreases also, and the annuity being fixed, the proportion of 
 it applicable toward the extinction of the mortgage increases. Thus 
 it happens that, beginning with a payment of one-half toward princi- 
 pal, the mortgage bearing 4 per cent to 4I per cent, which are the 
 general rates, the entire debt is extinguished in between fifty and 
 sixty years. 
 
 The borrower has the right at any time to pay off the mortgage, 
 a small penalty being generally exacted; but the lending institution 
 cannot require payment from the mortgagor, thus guarding against 
 any higher rate of interest being exacted during the life of the loan; 
 whereas, should interest rates fall, the borrower can anticipate the 
 payment of the mortgage and secure the benefit of the lower rate of 
 interest. If payment of a mortgage is anticipated, or when the semi- 
 annual payments are received by the bank, it enters the market and 
 buys or retires a corresponding amount of its bonds, so that its out- 
 standing bonds never exceed in the aggregate the total of the mort- 
 gages it holds against them. This has the advantage of making a 
 constant market for the bonds, and there is no necessity of sinking 
 funds for special mortgages, as they are under a general pledge. 
 These banks do not compete with commercial banks. 
 
 193. AN AMORTIZATION LOAN' 
 
 An amortization loan is illustrated by the table on pp. 391, 392. 
 
 At the end of the thirty years the borrower has paid, in principal 
 and interest, $2,100. Under the ordinary plan the borrower of $1,000 
 at 5 per cent would have paid out $2,500, exclusive of commissions 
 and legal expenses, which are saved under the Woodruff plan. 
 
 There are other advantages of importance also. Each semi- 
 annual payment is so small that the average farmer can borrow the 
 amount necessary from his local bank if he is temporarily out of funds. 
 As the amount of each payment will in no case exceed if per cent of 
 the value of the land, he should always be able to meet the payments 
 out of current proceeds of the land itself. On any interest date the 
 farmer is allowed to make partial payments on the principal, thus 
 shortening the duration of the loan. 
 
 ' Taken from circular describing plan of the Woodrufi Trust Company, 
 Joliet, 111.
 
 AGRICULTURAL CREDIT 
 
 391 
 
 Amount of Loan, Si.ooo. 00. Length of Term, 30 Ve.\rs. Rate of Interest, 
 5 Per Cent. Semiannual Payments, $35.00. 
 
 Semiannual 
 Periods 
 
 Interest at 
 S Per Cent 
 
 Paid on 
 Principal 
 
 Expenses and 
 Pro6ts 
 
 Total Semi- 
 lannual Payment 
 
 Amount of 
 
 Principal Still 
 
 Unpaid 
 
 $25.00000 
 24.81615 
 24.62770 
 
 24 -43455 
 24.23656 
 24.03362 
 23.82561 
 23.61241 
 
 23-39387 
 23.16986 
 22.94026 
 22.70492 
 22.46369 
 22.21643 
 21.96299 
 21.70322 
 
 21.43695 
 21. 16402 
 20.88427 
 20 59753 
 20.30362 
 20.00236 
 
 9-69356 
 !9-37705 
 [9.05263 
 
 8.72010 
 
 8.37925 
 ;8. 02988 
 7.67178 
 7.30472 
 6.92849 
 54285 
 
 14757 
 74241 
 32712 
 90145 
 46514 
 01791 
 
 3-55951 
 3.08965 
 2 . 60804 
 2. I 1439 
 I . 60840 
 1.08976 
 0.55816 
 0.01326 
 9 45474 
 8.88226 
 
 8-29547 
 7 . 69400 
 7.07750 
 
 7 35400 
 
 7-53785 
 7.72630 
 
 7 91945 
 8.11744 
 8.32038 
 8.52839 
 
 8.74159 
 8.96013 
 9. 18414 
 9 41374 
 9 . 64908 
 9.89031 
 
 0-13757 
 0.39101 
 0.65078 
 0.91705 
 I . 18998 
 I 46973 
 I 75647 
 2 . 05038 
 2.-35164 
 2 . 66044 
 97695 
 30137 
 63390 
 97475 
 32412 
 68222 
 04928 
 42551 
 81115 
 6 . 20643 
 6.61159 
 7.02688 
 
 7.45255 
 7 . 88886 
 8.33609 
 
 8 79449 
 
 9 26435 
 9 - 74596 
 
 20. 23961 
 20.74560 
 21 . 26424 
 21.79584 
 22.43074 
 22.89926 
 
 23 47174 
 24-05853 
 24.66000 
 25.27650 
 
 $2,646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2 . 646 
 2.646 
 
 $35 -00 
 35-00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35.00 
 35 00 
 35 00 
 35 00 
 35-00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35-00 
 3500 
 35 00 
 35 00 
 35-00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 35 00 
 
 $992 
 985 
 977 
 969 
 961 
 953 
 944 
 935 
 926 
 
 917 
 908 
 
 878 
 868 
 
 857 
 846 
 
 835 
 823 
 812 
 800 
 787 
 775 
 762 
 
 748 
 735 
 721 
 706 
 692 
 677 
 661 
 
 645 
 629 
 
 613 
 596 
 578 
 560 
 542 
 523 
 504 
 484 
 464 
 443 
 4:2 
 400 
 378 
 355 
 331 
 307 
 283 
 257 
 
 64600 
 10815 
 38185 
 46240 
 34496 
 02458 
 49619 
 75460 
 
 79447 
 61033 
 19659 
 54751 
 65720 
 
 51963 
 12862 
 
 47784 
 56079 
 37081 
 90108 
 14461 
 09423 
 74259 
 08215 
 10520 
 80383 
 16993 
 19518 
 87106 
 18884 
 13956 
 71405 
 90290 
 69647 
 08488 
 05800 
 60545 
 71659 
 38050 
 58601 
 32166 
 57570 
 33<>OQ 
 59049 
 
 32(>25 
 
 53041 
 18967 
 29041 
 81867 
 
 76014 
 IOOI4 
 
 82364
 
 392 
 
 I'RINCIPLKS OF MONEY AND BANKING 
 
 Amount of Loan, $1,000.00. Length of Term, 30 Years. Rate of Interest, 
 5 Per Cent. Semiannual Payments, $35.00. — Continued 
 
 Semiannual 
 Periods 
 
 Interest at 
 S Per Cent 
 
 Paid on 
 Principal 
 
 Expenses and 
 Profits 
 
 Total Semi- 
 annual Payment 
 
 Amount of 
 
 Principal Still 
 
 Unr^aid 
 
 52 
 
 53 
 
 54 
 
 55 
 
 S6 
 
 57 
 
 58 
 
 59 :■ 
 
 60 
 
 6 
 5 
 5 
 4 
 3 
 3 
 2 
 I 
 
 44559 
 79788 
 13398 
 45343 
 75596 
 04101 
 30819 
 
 55705 
 86922 
 
 25.90841 
 26.55612 
 27.22002 
 27.90052 
 28.59804 
 29.31299 
 30.04581 
 30.79695 
 31.48478 
 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 2.646 
 
 35 00 
 35-00 
 35-00 
 35 00 
 35 00 
 35 00 
 35-00 
 35 00 
 35 00 
 
 231-91523 
 205-35911 
 178.13909 
 150.23857 
 121.64053 
 
 92.32754 
 
 62.28173 
 
 31.48478 
 
 0.00000 
 
 Totals. . 
 
 $941 • 24 
 
 $r,ooo.oo 
 
 $158.76 
 
 $2,100.00 
 
 
 194. EUROPEAN SYSTEMS NOT NEEDED IN THE UNITED 
 
 STATES' 
 
 By- henry WALLACE 
 
 What can you do for the landowner in such states as Iowa or 
 Illinois ? Frankly, I don't see anything you can do that you are not 
 doing already. In Iowa, for example, loans on farms range from 5 
 per cent to 5I net, probably 6 to the farmer. When farmers in these 
 states quit investing in outside states they will take care of their bor- 
 rowing neighbors on a smaller margin of security than you will and 
 will eventually put you out of business. 
 
 The local banker, and often without expense, lends to the farmer 
 and takes a mortgage. The larger bank in the city takes it off his 
 hands, or the insurance companies East and West. In fact, these 
 companies are now eager for mortgages at 5 per cent net to them. In 
 short, with two- thirds of the banks in Iowa owned or at least controlled 
 by farmers, it seems to me that they have about all the credit they 
 need. 
 
 The rate of interest might be reduced i per cent, if it were practical 
 to organize landschaften in these corn states. In fact, we can readily 
 see how a few large landowners, by combining their credit and increas- 
 ing it by becoming mutually liable for the debts of their organization, 
 might secure a reduction of i per cent per annum. With our mLxed 
 population, however, this is not practical. The average loan in Iowa 
 — and I presume it is so in Illinois, eastern Kansas, and Nebraska — 
 is about $4,000, and the average farmer would gladly pay $40 a year 
 
 ' Adapted from United States Investor, XXVI (1915), 1986-87.
 
 AGRICULTURAL CREDIT 393 
 
 for liberty to do just as he pleases with the money, without asking 
 the advice or consent of his neighbor. He would regard independence 
 as cheap at that price. 
 
 What can be done for the tenant ? Nothing that I can sec until 
 the tenant becomes a somewhat permanent fixture in the community. 
 And he will not become a permanent fixture so long as he is renting on 
 a short lease, nor until his relations with the landlord are such that 
 he can take root in the conrmiunity and become part of the social order. 
 You cannot build a high civilization, nor any other thing, on a shifting, 
 changing population. When our population becomes stable, as the 
 populations of the older countries have become, and when landlords 
 and tenants are better acquainted with each other and have become 
 parts of the social system, it may then be possible to organize credit 
 associations under the Raiffeisen system, by which money can be 
 secured at lower rates and for longer periods than now. For then it 
 will not be so much a matter of importance what a man has as what 
 he is. 
 
 The poorest of the poor in the congested districts of Ireland can 
 borrow money from their credit banks at as low a rate as the best 
 farmer in Illinois and Iowa, but it is in the small amounts suited to his 
 needs, and because of limited or unlimited liability and supersision 
 by a committee. That time may come with us, but it is not now. 
 
 Can you imagine an Iowa farmer, even as a renter, allowing a 
 committee of his credit bank to determine whether the investment he 
 proposes to make of the borrowed money is a good investment for 
 productive purposes, whether he buys cattle at the right price, feeds 
 or cares for them properly, and when he shall sell them ? 
 
 What many farmers want is facilities for getting in debt. What 
 they need is facilities for getting out of debt. If mortgage companies 
 can provide a form of mortgage that will extend the time of payment 
 from five years to ten, fifteen, or twenty, it would be a mighty help to 
 men who have borrowed $50 to $100 an acre on lands in the corn belt. 
 
 195. A BETTER LEASING SYSTEM NEEDED' 
 By HENRY WALLACE 
 
 Cheap money, as it is proposed to furnish it on land security, 
 would simply increase the speculative fever and boost farm lands 
 until they would not pay i per cent on the investment. We have 
 
 ' Adapted from a letter to Commercial and Financial Chronicle, XCVII (1913), 
 10S2.
 
 394 PRINCIPLES OF MONEY AND BANKING 
 
 entirely too much speculation now. Nor would it help the renter, 
 comprising about 40 per cent of the farmers, a little bit, he having 
 no security to ofTer. 
 
 Ex-Secretary James Wilson and myself spent two months in Great 
 Britain last summer making an investigation of agricultural conditions 
 there. 
 
 The farm-credit systems of the Old World will not do here at all, 
 at least not now or in the near future, for the reason that they 
 involve unlimited liability, and, furthermore, on short-time loans 
 require supervision of the farmer who seeks the loan. They are a 
 splendid thing for the poor farmers in the Old Country, who are forced 
 by circumstances to assume unlimited liability, to limit loans to pro- 
 ductive purposes, and to require supervision by a committee of the 
 association. 
 
 Imagine a western farmer having a committee decide whether he 
 ought to buy a cow or not, to see that he buys the right kind of a cow, 
 gets her at the right price, and then feeds her right. Imagine an Iowa 
 farmer in order to secure a loan having a committee see whether or 
 not he should buy a lot of feeding steers, and then see that he feeds 
 them on the most approved methods. Neither would the western 
 farmer consent or be liable for the debts of a " landschaf ten associa- 
 tion." It is doubtful if he would do so even to the extent of his own 
 borrowing. 
 
 The real trouble with the western farmer is with our leasing 
 system, which in the majority of cases is simply a conspiracy between 
 the landlord and the tenant to rob the land and divide the loot. In 
 the Old Country the government provides for the maintenance of 
 soil fertility by giving the tenant the right to recover for any fertility 
 he has put in the soil which he has not had opportunity to recover. 
 On the other hand, it forbids the tenant to sell certain crops off the 
 land unless he restores to the land the manurial value of the crop sold. 
 For this reason tenants are not anxious to change farms and the land- 
 lord does not often want to make a change. 
 
 With long leases and the rights of the land and the tenant 
 secured there will be no need for any additional facilities for borrow- 
 ing money.
 
 AGRICULTURAL CREDIT 395 
 
 196. THE JEWISH AGRICULTURAL AND INDUSTRIAL AID 
 
 SOCIETY' 
 
 By GEORGE W. SIMON 
 
 In the matter of rural credits there are some who firmly hold that, 
 our people being different and conditions here being different, we 
 cannot transplant to this country the European rural credit systems; 
 that it is impractical and even impossible. It might be of interest, 
 therefore, and to some even a revelation, to learn that here in the 
 United States the French Credit Foncier system, or long-term rural 
 credit, has been in operation for the past twenty-four years, while the 
 German Raiffeisen system, or short-term rural credit, was established 
 in this country in 1909, and has been in actual operation since 191 1. 
 This work has been done under the auspices of a philanthropic organi- 
 zation, subsidized by the Baron de Hirsch Foundation, namely, the 
 Jewish Agricultural and Industrial Aid Society. 
 
 The Baron de Hirsch Fund was established in 1890, and from its 
 inception has made loans to Jewish farmers in the United States at a 
 moderate rate of interest and upon easy terms of repaj-ment. The 
 great increase in Jewish immigration to this country naturally 
 increased the demand upon the activities of the Fund, and new and 
 more urgent problems arose. In view of the growing importance of 
 the agricultural phase of the activities of the Fund, the Board of 
 Trustees found it necessary to create a special organization for that 
 purpose. Accordingly, in 1900, the Jewish Agricultural and Indus- 
 trial Aid Society was incorporated. The chief object of the society 
 is to render financial assistance to Jewish immigrants who wish to 
 become farmers, or to enable those who are already on farms to main- 
 tain their foothold. In view of the fact that our resources are limited, 
 we do not, as a rule, make loans on first mortgages, but on second, 
 and even third and fourth mortgages, supplemented sometimes by a 
 chattel mortgage or other collateral security. Loans are made either 
 toward the purchase of a farm or its equipment, or both. Loans arc 
 likewise made to those already on the farm to enable them to make 
 improvements, to buy additional equipment, or for like purposes. 
 
 During the fourteen years it has been in existence our society has 
 granted, in round numbers, 3,000 loans, aggregating $2,000,000. The 
 loans are made at 4 per cent interest, on long-term mortgages, running 
 on an average for ten years. The terms of repayment arc based 
 
 ' Ad;vi)tcd from an address before the Second National Confcrcnec on Markcl- 
 
 inj; and Farm Credits, April 17, 1914. (Unpublished.)
 
 396 PRINCIPLES OF MONEY AND BANKING 
 
 largely upon the ability of the farmer and the earning capacity of the 
 farm. The character of the farmer is taken into as much considera- 
 tion as the real estate security. The proof of the soundness of our 
 experiment is that, in spite of the inferior security which we accept, 
 our losses, during the fourteen years, were less than 2I per cent and 
 the repayments 30 per cent. The payments to the society for the 
 fiscal year ended December 31, 1913, amounted to $100,091 .04 on the 
 principal and $30,292 . 18 in interest. 
 
 Our society made loans in 32 states and in Canada; thus our 
 operations cover a much wider territory than that of all the European 
 land-credit banks combined. It proves that the rural credit system 
 is practical and adaptable in every state of the Union. The time of 
 free land being past, land is now a good security, provided we have 
 good farmers on it. I believe that land is worth as much as the man 
 who is on it, and we do have some good men on our farms. 
 
 Our experience has shown that, after receiving loans on second 
 and third mortgages on easy payments, our farmers were still strug- 
 gling against trying difficulties. There arose in our rural districts a 
 new class of money-lenders, who gradually preyed upon the farmers 
 until they had them completely in their power. Sometimes they are 
 the local storekeepers, sometimes "just neighbors." Like the hook- 
 worm prevailing in the South, these money-lenders infest the body 
 of our farmers and sap all their energy and strength. To free the 
 Jewish farming communities from these parasites we decided to 
 organize among them co-operative agricultural associations, by means 
 of which the farmers could help one another. 
 
 It was not very difficult to introduce these credit unions among 
 our farmers, for we had already organized the farmers into local 
 groups or societies. This we succeeded in doing through the activity 
 of our Educational Department, which issues the Jewish Farmer, a 
 monthly periodical published in Yiddish, the editorial staff of which 
 has charge of the extension work. The local societies were afterward 
 centralized into a Federation of Jewish Farmers of America. Through 
 this federation we spread the gospel of co-operation and introduced 
 the Raiffeisen system. 
 
 197. STATE RURAL CREDIT LEGISLATION' 
 
 Legislation dealing with rural credits has thus far been enacted in 
 some fourteen States. Briefly, and roughly, the State laws are 
 designed to make available the cash and credit of the State through 
 
 ' Adapted from the 0«//oo^, financial advertising section, February 23, 1916.
 
 AGRICULTURAL CREDIT 397 
 
 the creation of land banks, the stock of which is owned by loan asso- 
 ciations. Encouragement is given to building and loan, farmers' loan, 
 land and loan, and rural savings and loan associations, and credit 
 unions and co-operative banks are authorized. These institutions or 
 associations, which are purely mutual and co-operative, receive the 
 applications, grant the loans, execute the mortgages, and deposit them 
 with the land bank. The land bank, acting as between the State and 
 the borrower, deposits the collected mortgages with the State comp- 
 troller and issues against them bonds bearing a lower rate of interest 
 than the collateral. These bonds are considered legal investments for 
 savings banks and trust funds, and they are, no doubt, exempt from 
 personal taxation in the State of issue. The Land Bank of New York 
 has recently sold at par $50,000 of its 42 per cent bonds, secured by 
 deposit of $50,000 in first mortgages bearing a rate somewhat higher 
 than the bonds, probably 5 per cent. The mortgages were sent in 
 to the Land Bank by various New York State loan associations, and 
 they are said to have covered about $17,000 of farm and $33,000 of 
 city property. The borrowers repay through the loan association in 
 instalments covering a period of years. 
 
 198. WISCONSIN'S EXPERIMENT IN RURAL CREDIT' 
 By H. J. DREHER 
 
 The legislature of Wisconsin in its 1913 session enacted a land 
 mortgage association law, which in its substance provides as follows: 
 I. As to the organization of land mortgage associations: 
 
 a) Land mortgage associations with capital stock of not less than 
 $10,000, distributed among not less than fifteen stockholders, are created 
 for the sole purpose of loaning money to farmers for the improvement and 
 development of Wisconsin farms. An ultimate reserve of 20 per cent of 
 the capital stock is required. 
 
 b) The direction of these associations vests in a board of trustees, and 
 provisions are made for a loan committee and an auditing committee. The 
 auditing committee is elected by the stockholders and may suspend any 
 trustee, oflicer, or member of the committee on loans. The commissioner 
 has the right to attend all meetings of trustees and auditing committees. 
 
 c) All by-laws for the government of these associations and under which 
 the details of business arc transacted must be approved by the commissioner 
 of banking. 
 
 d) The associations arc regularly examined by examiners of the l)ank- 
 ing department and a double liability attaches to the stock. 
 
 ' Adapted from "Wisconsin's Exi^rimcnt in .Applying Its Rural Credit Laws." 
 Journal oj the American Bankers' Association, VTII (1915), 391-93-
 
 398 PRINCIPLES OF MONEY AND BANKING 
 
 2. As to mortgages securing bonds: 
 
 a) The form of mortgages and bonds is approved by the commissioner 
 of banking and the attorney-general of the state. 
 
 /)) Each mortgage must be a first lien upon the whole and undivided 
 fee of property in Wisconsin, and must contain provisions for proper soil 
 conservation, for the annual or semiannual reduction of the principal of 
 the mortgage, and for the payment of all taxes by the mortgagor and 
 insurance against loss by fire, tornado, and lightning. No mortgage shall 
 exceed 65 per cent in value of improved and 40 per cent in value of unim- 
 proved land, and shall not exceed in amount 15 per cent of the capital and 
 surplus of the association. 
 
 c) Each mortgage must contain a provision that money loaned for 
 purposes of erecting new buildings shall be expended under the control 
 of officers of the land mortgage association. 
 
 d) When property is transferred, the new owner assumes by law the 
 obligations of the mortgage. 
 
 3. As to valuation of lands: 
 
 a) Valuation made by two appraisers, residents of the same place as 
 the borrower, chosen by said borrower. 
 
 b) Valuation of appraiser must be certified by assessor of incomes, a 
 state official, as being not in excess of a true market value. 
 
 c) Appeal on appraised value may be made to state tax commission. 
 All mortgages taken under the provisions of this law against which 
 
 bonds are issued must be pledged with the state treasurer of Wisconsin, 
 who holds them, or like securities of equal value, during the life of out- 
 standing bonds. 
 
 The total amount of bonds outstanding shall at no time be greater than 
 the amount due on the mortgages pledged, plus any additional deposited 
 security, nor shall it at any one time exceed twenty times the amount of 
 the capital and surplus of the association. 
 
 The borrower shall pay periodically the following amounts: (i) the 
 agreed rate of interest; (2) an allowance for the expense of the land mort- 
 gage association in an amount not exceeding i per cent annually of the face 
 of the loan; (3) a payment to be made annually or at more frequent desig- 
 nated intervals upon the principal of not less than i per cent of the original 
 amount thereof. 
 
 Under this law two associations have been formed and are in suc- 
 cessful operation. Both are owned by men connected with banking 
 interests, and both are situated in cities which are tributary to cut- 
 over land, and are headquarters for the sale of the same. The loans 
 which have thus far been made are of the most conservative kind, the 
 mortgages not exceeding 40 per cent of the value of the property mort- 
 gaged. Approximately $100,000 of bonds have been marketed.
 
 AGRICULTURAL CREDIT 399 
 
 These have largely been purchased by investors in Milwaukee. The 
 bonds are eagerly sought. Entire issues are sold long before they have 
 been delivered. The investor realizes their strength, and their 
 issuance under state supervision adds to their ready salability. Cau- 
 tion has been exercised in the issuance of these bonds and likewise in 
 their marketing. There is little doubt but that extensive advertising 
 and a popularization of the bonds would create a demand for them 
 beyond the possibility of supply. 
 
 In these associations there are no great number of employees, no 
 heavy expenses to pay. Consequently there are no loans made which 
 are impelled by necessity or eagerness for profit. Loans are made 
 under the most advantageous conditions, the necessities of the bor- 
 rower alone determining the need and the amount. Conservatism 
 dominates. The sense of responsibility in the trustees, the exercise 
 of a judgment quickened by a sense of individual and pecuniary 
 interest which produces the best of judgments, insure safety to bor- 
 rower and investor alike. The interference of the state is but slight, 
 the activity of its officers being exercised only for the safeguarding and 
 timely examination of funds and securities. 
 
 From the standpoint of the borrower the system is admirable. 
 The settler is usually accustomed to amortized long-term mortgages 
 by reason of his experience with similar institutions in other lands. 
 He knows he is dealing with men who have a pecuniary interest in the 
 funds which they loan and which he desires. He knows that energ>- 
 and the results which are produced by hard and intelligent labor in 
 the development of his land will alone enable him to get the funds 
 necessary to make desired improvements or acquire needed additions. 
 This is an incentive of inestimable value in the development of new- 
 lands. 
 
 The rates of interest which the borrower pays in Wisconsin under 
 the system of rural credit in operation are 6 per cent, with three- 
 quarters of I per cent expenses in the other. These rates are equi- 
 table and without hardship to the borrower, and the commission is 
 undeniably reasonable. 
 
 Unless facts deduced from an operation of the act extending but 
 a comparatively brief period of time arc proved to be inaccurate, no 
 problem will arise by reason of inadequate supply of loanable funds. 
 As already indicated, investors in cities are keen to purchase the bonds 
 issued under the act. By reason of the fact that the bonds arc a 
 legal investment for trust funds great care is necessarily exercised to
 
 400 PRINCIPLES OF MONEY AND BANKING 
 
 insure utmost safety. Such care results in conservatism being exer- 
 cised in the making of loans to settlers and farmers. Conservatism 
 is of equal benefit to the borrower and the lender. 
 
 199. FEDERAL LEGISLATION ON RURAL CREDIT' 
 
 After a period of deliberation extending over some nine months, 
 the Joint Committee on Rural Credits, created by an act passed at the 
 close of the last session of Congress, March 3, 1914, has rendered its 
 report and submitted a new rural credits bill. The bill in question 
 was introduced in the House of Representatives on January 4, 19 16, as 
 H.R. 6838, while the formal report of the Commission was submitted 
 on the same date. 
 
 The new bill is the last of a long series of rural-credit measures, 
 and analysis of it shows that it is essentially based upon the so-called 
 HoUis-Bulkley bill, drafted during the summer of 1913 by a joint sub- 
 committee representing the committees of the House and Senate on 
 banking and currency. In the original Hollis-Bulkley bill the plan 
 proposed provided for the creation of a group of so-called "land 
 banks," and underlying and supporting them "farm loan associa- 
 tions." These farm loan associations might be organized with capitals 
 as low as $10,000, and were to make advances on first mortgages 
 secured by farm lands; and whenever such farm loan associations pre- 
 sented these mortgages to the land bank of the district in which they 
 were situated, such land bank was expected to purchase the mortgage 
 in question. The farm loan associations were thus provided with 
 further resources for lending to other borrowers, and were permitted 
 to extend such loans up to an amount equal to twenty times their 
 capital, if desired. The land banks, on the other hand, were expected 
 to obtain their funds by selling to the public bonds protected by the 
 farm mortgages which had been purchased from farm loan associa- 
 tions, the said mortgages being deposited in trust, so that the bonds 
 were thus real estate collateral securities. In order to supply an 
 immediate market for the bonds, it was provided that they might be 
 used as investments for postal savings funds, might be purchased by 
 national banks, and under certain conditions should be taken up by 
 the Treasury to the extent of $50,000,000 per annum. In the present 
 bill the same plan is retained as the basis, but with certain fundamental 
 modifications. Perhaps the most important of these is that the farm 
 
 'Adapted from "Washington Notes" in the Journal of Political Economy, 
 XXIV (1916), 184-86.
 
 AGRICULTURAL CREDIT 401 
 
 loan associations are now to be established without capital, being 
 " associations " in the broadest sense of the term. They are permitted 
 to sell mortgages to the land bank of the district in which they are 
 situated, but, as they lack capital, such a land bank could protect 
 itself in case of default of the mortgage only by falling back upon the 
 general liabiUty of the members of the association. The second 
 important modification is found in the fact that the land banks (whose 
 stock is to be bought by the government if not taken by private sub- 
 scription) are to be made government depositaries. This would mean 
 that the government might, to any extent that it felt disposed, supply 
 capital for the use of the land banks, although there is a provision that 
 the money thus deposited is not to be in\ested in mortgage loans. 
 It could, however, apparently be used in the purchase of farm loan 
 bonds or in covering defaults of interest or principal. The system is 
 placed under the general oversight of an organization to be known as 
 the Farm Loan Board, organized after a manner somewhat similar 
 to that adopted in the creation of the Federal Reser\-e Board. 
 
 As in the Hollis-Bulkley bill, it is provided in the new measure 
 that the mortgage loans are to be of very long termj thirty-six years 
 being estabUshed as the maximum, with provisions for amortization 
 payments annually. Should the new bill be successful in accom- 
 plishing its object, it would presumably result in moving the present 
 body of farm mortgages, made on short terms of three to five jears 
 for the most part, into the new system, as a result of which the present 
 holders of farm mortgages would find themselves driven to substitute 
 farm loan bonds for their mortgage holdings or else to find some other 
 form of investment. 
 
 It is noteworthy that although the Committee on Rural Credits 
 was directed to consider not only a plan for farm mortgage loans but 
 also a plan for so-called "personal credit^," it has accomplished 
 nothing, so far as is known, on the latter subject. There has been a 
 growth of the view that under existing conditions it is difficult to 
 provide for personal loans to farmers beyond what is now done 
 through the use of existing banking machinery. The section of the 
 Joint Committee on Rural Credits to which was assigned the work of 
 preparing a bill relating to personal credits has, at all events, thus far 
 furnished nothing, perhaps with the idea that the subject would be 
 better deferred until the problem of long-term credit has been dis- 
 posed of.
 
 X 
 
 INVESTMENT BANKING INSTITUTIONS 
 
 Introduction 
 
 In this chapter we are to consider a t\pe of financial institution 
 very different from those we have thus far been studying. In the 
 main the function of the commerical bank is to make loans for busi- 
 ness purposes by the use of its own capital, accumulated earnings, 
 and credit. Moreover, the loans made are for short periods only, and 
 the funds are supposed to be devoted to quickly liquidating commer- 
 cial operations. In contrast with this the function of the investment 
 institution is to collect funds from those who do not wish to assume the 
 responsibility of employing them productively and to turn them over 
 to those who do — to transfer the savings of society to the channels 
 of productive industry. They are unlike commercial institutions, 
 also, in that investment funds are put out for long periods of time 
 and are specifically devoted to capitalistic or slowly liquidating 
 enterprises. 
 
 Investment institutions are of two classes — the savings bank 
 and the bond house, now often called investment bank. At bottom 
 these institutions are performing a virtually identical function — that 
 of transferring funds from one class of people to another — but they 
 operate quite differently. The savings bank collects the scattered 
 savings of a community and loans them in turn to those who are in 
 need of funds for the development of business enterprises. These 
 loans are largely made by means of investments in the securities of 
 corporations, the bank feceiving the interest on the securities while 
 paying to its depositors a somewhat lower rate. The bond house, on 
 the other hand, starts at the opposite end. It undertakes to find a 
 market for the securities of corporations, that is, to place them in the 
 hands of investors. It purchases the bonds or stock certificates of a 
 corporation at one price and endeavors to sell to investors at a higher 
 price. Among the largest investors in the securities offered by bond 
 houses are the savings banks themselves, though a substantial and 
 constantly increasing proportion go directly to private investors. 
 Where the securities are sold to savings banks one might say that 
 
 402
 
 INVESTMENT BANKING INSTITUTIONS 403 
 
 the bond house and the savings banks arc engaged jointly in the trans- 
 fer of given funds from savers to borrowers — that their work begins 
 at opposite ends and that they meet part way in the process. 
 
 When viewed from the standpoint of organization and control, 
 savings banks are of many different t}pes. Many of them are organ- 
 ized on a mutual basis, and are hence ver>' similar to the co-operative 
 institutions discussed in chapter viii. Many of them are semi- 
 philanthropic in their nature; some are organized and operated by 
 the government ; while others are private enterprises conducted on 
 strictly business principles. The regular "commercial"' banks have 
 also entered the savings field, and the great majority of them now have 
 their savings departments. Insurance companies are also a form of 
 savings institution. 
 
 The bond houses, or investment banks, are likewise of numerous 
 types. Some assume in a large way the financial risks of industry, 
 while others are mere purveyors of securities for a price. The process 
 of bond distribution has come to involve several stages which are 
 now clearly differentiated, each involving its special problems. 
 The bond business has grown to enormous proportions, it being 
 estimated that in the neighborhood of $2,000,000,000 of bonds are 
 marketed annually in the United States. Investment institutions 
 are therefore quite as important in the conduct of modern business 
 as are commercial banks. In fact, they occupy a more commanding 
 position in the financial world, and it is in connection with these 
 institutions that the great problem of concentration and control, 
 or the "Money Trust," arise. Treatment of this phase of the sub- 
 ject, however, is reserved for the concluding chapter. 
 
 A. Savings Institutions 
 
 200. TYPES OF SAVINGS INSTITUTIONS' 
 By WILLIAM H. KNIFFEN, JR. 
 
 We may roughly classify savings institutions into: first, mutual 
 (trustee) or philanthropic; second, stock (including "savings and 
 trust companies"); third, co-operative or democratic, as exemplified 
 in the co-operative banks of Europe. The first are usually managed 
 
 •Adapted from The Savings Hunk and Its Practical Work, up. 52-61. (The 
 Bankers' Publishing Co., 1912)
 
 404 PRINCIPLES OF MONEY AND BANKING 
 
 by a self-perpetuating body of trustees who do not share the earn- 
 ings; the second are managed by the directors elected by the stock- 
 holders; the third are managed by officials elected by the members. 
 
 The distinguishing characteristic of the trustee savings bank is 
 mutuality. All the earnings, less reasonable administrative expenses 
 and the apportionment to surplus or guaranty fund, are divided 
 among the depositors in the form of interest. 
 
 If we were to trace the savings bank idea back to its origin we 
 should, in all probability, find that it had its beginning in the "sick 
 and aid" and other friendly societies which have existed for centuries 
 in many parts of Europe; for the savings bank is simply the cul- 
 mination of the attempts of thrifty people to provide for the rainy 
 day. Workmen in all parts of the world have organized societies 
 among themselves whose fundamental purpose has been to save a 
 part of their earnings for slack times, sickness, old age, and death. 
 Such organizations have been formed with no other purpose than to 
 accumulate a fund to properly celebrate Christmas and other holi- 
 days, or to finance, in an easy manner, an annual picnic or similar 
 occasion. A small amount of dues is usually required, and these 
 contributions, enhanced by the proceeds of an annual ball or outing, 
 provide the fund from which sick benefits, funeral funds, etc., are 
 paid. Some of these societies even go so far as to make a division 
 of the whole amount on hand at the close of the year and then begin 
 over again. The social features no doubt form an added attraction, 
 inasmuch as the opportunity for rest and recreation is an inducement 
 to join. The organization is often, even in this day, connected with a 
 church, and in many instances, if not all, is productive of much good. 
 
 It will readily be seen that any movement by which individuals 
 combine their resources for mutual investment for mutual advantage 
 is, in its essence, a savings bank. Building and loan associations, 
 industrial insurance, fraternal societies, labor organizations, and pen- 
 sion plans are all, in the final analysis, but modifications of the savings 
 bank idea. The difference between the savings banks and such organi- 
 zations lies in the fact that the savings bank never requires any fee 
 for joining or dues or fines for failure to contribute. The manage- 
 ment is perpetual, and, except in a few states, the members have no 
 voice in the selection of the managing officials, who do not change 
 except by death or resignation. 
 
 The stock savings bank, where it is a savings bank, and not a 
 bank of discount under a savings title, differs in no essential degree
 
 INVESTMENT BANKING INSTITUTIONS 405 
 
 from the mutual institution. The mutual bank belongs to the 
 depositors, the stock bank to the stockholders. The mutual bank 
 pays dividends to depositors only; the stock bank pays dividends 
 to both stockholders and depositors. The stock bank does not pre- 
 tend to be philanthropic in its management. It is purely a business 
 proposition, and where the investments are of the accepted savings 
 bank type, it can justly claim to be on a par with its mutual friends, 
 provided, of course, that it measure up to the standard in its man- 
 agement. 
 
 As is implied in the term "stock," it issues capital shares and 
 pays dividends thereon. It has, therefore, the added protection of 
 the stockholders' liability, which, together with the accumulated 
 surplus, affords the element of strength so necessary- in all financial 
 concerns. It usually pays the depositors a stipulated rate of interest, 
 and the profits beyond this belong to and are distributed to the stock- 
 holders as dividends. The partnership idea is entirely lacking, and 
 the depositors get what they bargain for, while the surplus goes to 
 those who invest, not necessarily their savings, but their capital, and 
 assume all risks of the business. It could not in law or equity "scale 
 down" its deposits to make good any losses — a feature peculiar to 
 the mutual institution. 
 
 In this respect one thing is certain : In so far as safety is concerned, 
 especially in a young bank, the stock bank with the stockholders' 
 liability is surely superior to the mutual unless the trustees of the 
 latter are of such high order and of such financial worth as to be able 
 and willing to assume the burden of any losses that may accrue until 
 the suq)lus or guaranty fund affords ample protection. This has not 
 usually been the case. 
 
 New Hampshire is the only state in which "guaranty savings 
 banks" will be found. These are a com])ination of mutual and stock — 
 a cross between the two. They do not transact a commercial business, 
 being strictly savings banks in their functions, yet having "special 
 deposits," which to all intents and purjioscs are capital stock. "'J'he 
 guaranty savings bank dilTers from the ordinary mutual savings bank 
 in that it has cai)ital stock, or special deposits, as they are called. It 
 pays a certain stipulated rate of interest to its general depositors and 
 any surplus of earnings above this dividend is available for dividends on 
 the capital stock or special deposits. These speci<il deposits constitute a 
 guaranty fund for the general depositors, and the charter ordinarily 
 stipulates that the special deposits shall ahcays equal 10 per tint ot the 
 deposits.
 
 4o6 PRINCIPLES OF MONEY ANlJ IJANKING 
 
 "The special depositors of a guaranty fund in any savings bank 
 incorporated and doing business under the guaranty system may 
 vote to increase the said guaranty fund at any meeting of the special 
 depositors called for that purpose. The amount of the increase or 
 addition to said fund may be subscribed for and taken by the special 
 depositors of said fund in proportion to their special deposits or by 
 other parties in case of failure of said special depositors to take and 
 pay for said increase or addition within ninety days. Said increase 
 or addition to the guaranty fund may be on such terms of preference 
 over the original fund, as to dividends, and in distribution of assets 
 as shall be determined by vote of the special depositors at the meeting 
 when such increase or addition is voted." 
 
 In thus agreeing to pay a stipulated rate of interest upon deposits 
 one of the fundamental principles of mutual savings banking is vio- 
 lated, and these "special deposits" are therefore in the nature of 
 capital stock. One of the underlying principles of the savings bank 
 is this: Interest to depositors shall only be paid as it is earned, and 
 only that which is earned can be paid. 
 
 This is not to say that "guaranty" institutions are not savings banks 
 in every sense of the word, but the strictly mutual feature is lacking 
 in the specializing of part of the deposits and paying a higher rate 
 of interest on these deposits. 
 
 20I. MUTUAL SAVINGS BANKS IN THE UNITED STATES' 
 
 The reports of the 634 mutual savings banks in the United States 
 as of June 30, 1914, show a total of 8,277,359 depositors and an average 
 deposit account of $473.05. The statement of total resources and 
 liabilities is as follows: 
 
 RESOURCES 
 
 Loans, including overdrafts $2,123,921,774.88 
 
 Bonds, securities, etc 1,855,476,712.85 
 
 Banking houses, furniture, and fixtures 39,678,148.65 
 
 Other real estate 13,196,801.91 
 
 Amount due from national banks 73,825,900.56 
 
 Amount due from state, etc., banks 98,006,679.33 
 
 Checks and cash items 2,489,863.59 
 
 Cash in bank 23,987,453.11 
 
 Resources not classified 22,406,139.17 
 
 Total $4,252,989,474.05 
 
 'Adapted from Annual Report of the Comptroller of the Currency, 1914, I, 
 87-88.
 
 INVESTMENT BANKING INSTITUTIONS 407 
 
 LIABILITIES 
 
 Surplus S 280,095,122.94 
 
 Undivided profits 55.503.9590i 
 
 Amount due to national banks 123,454.99 
 
 Amount due to state, etc., banks 31,784.51 
 
 Individual deposits 3,915,626,190.57 
 
 Other liabilities (including postal savings, 
 
 $13,962.27, and bills payable, $110,525) 1,608,962.03 
 
 Total $4,252,989,474.05 
 
 Mutual savings banks arc confined chiefly to manufacturing 
 centers and towns of the New England and Eastern States, there 
 being only 23 reporting institutions of this character in other sections 
 of the country, viz.: i in West Virginia, 3 in Ohio, 5 in Indiana, 5 in 
 Wisconsin, 8 in Minnesota, and i in California. 
 
 The average rate of interest paid to depositors in mutual savings 
 banks in 1914 was 3.86 per cent, against 3.94 per cent in 1913. The 
 highest rate is paid by the West Virginia banks, 4.5 per cent, and the 
 lowest average by the banks in Pennsylvania, 3.57 per cent. An 
 average of 4 per cent is paid depositors in mutual savings banks in 
 Massachusetts, Rhode Island, Delaware, Indiana, and California. 
 The average rate paid by mutual savings banks in the New England 
 States is 3.90 per cent, in the Eastern States 3.70 per cent, in the 
 Middle Western States 3.68 per cent, and by the one bank in Cali- 
 fornia 4 per cent. 
 
 202. STOCK SAVINGS BANKS IN THE UNITED STATES' 
 
 A large number of so-called savings banks transact chiefly a 
 commercial business and carry very few savings accounts. In those 
 states where savings-bank reports are not separately compiled by 
 the state banking departments, but classified with commercial banks, 
 care has been exercised in eliminating from the classification made 
 by this office all so-called savings banks which are chiefly banks of 
 discount and deposit, transacting only a minimum of savings-bank 
 business. 
 
 The resources and lial)ilities of the 1,466 reporting stock savings 
 banks were as follows: 
 
 ' Adapted from Annual Report of the Comptroller of the Ciirrcney, 1914, 1, S9-90.
 
 4o8 PRINCIPLES OF MONEY AND BANKING 
 
 RESOURCES 
 
 Loans secured by unencumbered and improved farm land. . $ 81,687,839.74 
 
 Loans secured by other real estate 397,148,757.22 
 
 Loans secured by bonds and stocks 63,654,596.86 
 
 Loans secured by other collateral 26,975,376.20 
 
 Time loans without collateral 111,304,613.25 
 
 Demand loans without collateral 21,801,526.69 
 
 Loans unclassified 127,053,539.76 
 
 Overdrafts 1,911,402.00 
 
 United States bonds 521,088.75 
 
 State, county, and municipal bonds 24,062,789.82 
 
 Railroad bonds 13,619,458.7 1 
 
 Other public- service bonds 4,923,590.42 
 
 Bank stocks 966,252.63 
 
 Railroad stocks 1,101,264.60 
 
 All other bonds, stocks, warrants, etc 103,505,060.90 
 
 Due from national banks 89,490,733.49 
 
 Due from banks other than national 24,269,751.23 
 
 LIABILITIES 
 
 Capital stock $ 89,423,876.57 
 
 Surplus and profits 59,392,603.42 
 
 Savmgs deposits $752,785,914.16 
 
 Time certificates of deposits 82,662,853.59 
 
 Demand deposits 185,516,890,71 
 
 Total mdividual deposits $1,020,965,658.46 
 
 The depositors in stock savmgs banks number 2,832,140, of which 
 2,228,020 are savings depositors and 604,120 have commercial 
 accounts. 
 
 203. SAVINGS IN NATIONAL BANKS' 
 
 Although a few of the national banks had had savings depart- 
 ments in 1903, there was considerable apprehension on the part of 
 many as to the legality of accepting savings deposits. 
 
 During that year Comptroller of the Currency Ridgely gave an 
 official opinion in answer to a request from a western banker relative 
 to whether a national bank could legally operate a savings depart- 
 ment: "In reply to your letter relative to the right of a national bank 
 to operate a savings department, you are respectfully informed that 
 
 ' From Annnd Reports of the Comptroller of the Currency, 1912 and 1913.
 
 INVESTMENT BANKING INSTITUTIONS 409 
 
 there does not appear to be anything in the National Bank Act which 
 authorizes or prohibits the operation of a savings department by a 
 national bank. 
 
 "Many national banks pay interest on deposits, the receipt of 
 such deposits being evidenced either by entries in the passbooks of 
 the depositors or by issue of certificate of deposit, as may be preferred. 
 Deposits of this character must be shown in the reports of the bank, 
 and loaned in the manner provided by the National Bank Act. This 
 would prevent a national bank from accepting real estate collaterals, 
 which are deemed judicious for savings banks. All deposits, however, 
 in a national bank are i)ayable on demand, except when the subject 
 of special contract, but the right of a bank to make a contract of that 
 nature is" a matter for judicial determination. 
 
 "The expediency of a national banking association organized for 
 the purpose of doing a business of discount and deposit engaging in 
 the business of a savings bank is one for consideration and determina- 
 tion by the board of directors." 
 
 By reason of the strong competition for deposits, and incidentally 
 the payment 'of higher rates of interest on savings than on other 
 accounts on the part o£ trust companies and other State banking 
 institutions, the establishment of savings departments or the pay- 
 ment of interest on savings accounts by national banks has notably 
 increased until at the present time about 45 per cent of the banks 
 have taken that action, as shown by the reports relating to the 
 number and volume of savings accounts. 
 
 On August 9, 19 13, the Comptroller reports the number of savings 
 depositors in national banks as 3,020,831, the aggregate of deposits 
 as $820,639,410.68, and the average deposit as $205.50. 
 
 204. THE REGULATION OF SAVINGS BANKS' 
 By homer HOYT 
 
 Legislation on the subject of savings banks varies greatly in dif- 
 ferent states; in some there is no legislation at all, while in others 
 we find excellent provisions for the safeguarding of the business. 
 In the eastern states particularly, where the mutual savings insti- 
 tutions have long been in existence, we hnd the best-developed laws 
 on the subject. The New York law has served as a model for that 
 
 'Adapted from an iin|mhlishcd thesis on "Savings Banks and the Treatment 
 of Savings Bank Deposits in the United States."
 
 4IO PRINCIPLES OF MONEY AND BANKING 
 
 of many other states, and it may therefore be taken as t>T)ical of the 
 best regulation we have. 
 
 A savings bank in New York is defined by the statutes as: "A 
 corporation duly authorized by the laws of this state to receive 
 money on deposit and pay such rates thereon and to invest the 
 same in such securities as may be prescribed by law." 
 
 Since savings banks are investment concerns, the easiest and 
 most effective way in which they can be safeguarded by law is to 
 restrict the investments which are lawful for a savings bank to make. 
 By refusing to sanction investments in doubtful enterprises and 
 stocks and bonds of a fluctuating or uncertain value laws can secure 
 the comparative safety of invested funds. New York has taken the 
 lead in such legislation. 
 
 In the restriction of investments there have been two opposite 
 forces at work. On the one hand there has been a tendency toward 
 restriction, to insure the absolute safety of savings bank deposits; 
 and, on the other hand, the call of the higher interest has proven very 
 seductive. It does not do to go too far on the side of restriction and 
 to narrow the field of investment to United States bonds, for then the 
 interest would be so low that few wage-earners would be encouraged 
 to save. The reward of saving should be as high as possible, and the 
 most lucrative bait should be offered at the outset to tempt the mar- 
 ginal depositor. It is far more dangerous, however, to go too far in 
 the other direction. Savings bank investments must be the safest 
 of all investments. It is believed that more depositors are attracted 
 by the consideration of safety than by offer of interest. Hence 
 industrial stocks and bonds paying 8 or 9 per cent, while possible 
 for the ordinary investor, are not conservative enough for the savings 
 bank. The operation of these opposite tendencies — the one constantly 
 to narrow the field and the other to widen it — has established an 
 equilibrium at about 3^ per cent and 4 per cent. At this rate it is 
 possible to secure a gilt-edged bond of a corporation which in all 
 probability will never pass the dividends or default payment. In 
 late years, however, it is becoming more difficult to maintain the 
 old 4 per cent interest rate in New York State. The interest rate on 
 high-grade bonds has steadily declined until those now for sale in 
 the market yield even less than 4 per cent. There are four reasons 
 to explain why the old savings banks have been able to continue 
 paying the high dividend of 4 per cent to depositors in spite of the 
 increasing difficulty of getting bonds which pay more than 4 per cent:
 
 INVESTMENT HAXKI.\(; INSTITUTIONS 411 
 
 1. The older banks have accumulated a large surplus from iheir invest- 
 ments in the bonds of several decades ago which bore a higher rate of 
 interest, the income from which creates a fund to be divided among 
 depositors. 
 
 2. The banks still carry many bonds purchased a number of years 
 ago which bear high interest rates. These bonds are rapidly coming to 
 maturity and are being replaced by bonds with a lower income yield. 
 
 3. The interest on a number of dormant accounts helps to maintain 
 the higher rate. 
 
 4. The practice of fixing dividend periods excludes many deposits, and 
 thus increases the rate for the rest. 
 
 The law in regard to the investment of funds may be summarized 
 as follows: 
 
 1. In the bonds of the United States and New York State. 
 
 2. In the bonds of other states which have not defaulted within ten 
 years. 
 
 3. In the municipal bonds of New York State municipalities. 
 
 4. In the bonds of any city in a state admitted to statehood prior to 
 1896, and which has not defaulted on any of its bonds since 1861. The 
 debt of such a city, however, must not exceed 7 per cent of its assessed 
 valuation. 
 
 5. In first mortgages on real estate in New York State. Such mort- 
 gages must not exceed 60 per cent of the value of the improved properly 
 or 40 per cent of the value of the unimproved property. 
 
 6. In the first mortgage bonds of strong railroads which have paid for 
 at least five years dividends at the rate of 4 per cent on their stock, but 
 the stock must be at least equal in amount to one-third the debt of the road. 
 
 7. In the first mortgage bonds of railroads in New York on the same 
 condition. Not more than 25 per cent of the deposits shall be invested in 
 railroad bonds and not more than 10 per cent in the bonds of any one road. 
 
 8. Cash to the extent of 10 per cent of the total deposits may be kept 
 on hand or on deposit with slate or national banks or trust companies. 
 
 9. The trustees may loan this cash if they prefer on collateral, but the 
 collateral must consist of such bonds as are enumerated in sections one to 
 seven above, and the loan must not exceed $90 to every Sioo of collateral 
 at its market value. 
 
 If the securities decline, the savings banks must demand payment of the 
 loan or an increase of the security. 
 
 Stated negatively the law is as follows: 
 
 1. A savings bank cannot loan money on notes, drafts, bills of exchange, 
 or on any personal security whatever. 
 
 2. A savings bank cannot buy stocks of any kind.
 
 412 PRINCIPLES OF MONEY AND BANKING 
 
 3. A savings bank cannot buy bonds or other securities of any indus- 
 trial, manufacturing, or street-railroad company. 
 
 4. A savings bank cannot buy or loan money on farm lands or on 
 mortgages outside of New York State. 
 
 5. A savings bank cannot buy any bonds that are not first mortgage 
 in whole or in part. Even such strong bonds as the New York Central or 
 Lake Shore debentures or collateral trust bonds cannot be bought. 
 
 6. A savings bank cannot buy any real estate, bond, or mortgage, 
 except after a full and complete examination of the property by a committee 
 of trustees. 
 
 Furthermore, it is a practice of the New York savings banks to 
 invest only in registered bonds. 
 
 Practically all the cash of a New York mutual savings bank 
 except such amounts as may be required for current needs is kept 
 on deposit in the vaults of the trust companies. When a run begins 
 the bank is entitled to refuse to pay cash to depositors, except after 
 a sixty-day notice. This gives the savings banks time to transfer 
 their funds from the trust company into their own strong boxes. 
 In the panic of 1907 the rule was enforced in October. Thousands of 
 frightened depositors gave notice. After the expiration of the time 
 limit in December something like eight million dollars were drawn 
 out. At the same time savings bank deposits in trust companies 
 decreased from twenty-seven million dollars to eighteen million dol- 
 lars, showing that the savings banks drew on the trust companies 
 for the cash with which to pay depositors. 
 
 205. LIQUIDITY NEEDED IN SAVINGS BANK INVESTMENTS' 
 By GEORGE E. EDWARDS 
 
 During the last two decades there has been a rapid growth in 
 the deposit liabilities of savings institutions, caused, not entirely by 
 the deposits of the thrifty, but in a large measure by the deposit of 
 investment funds of the comparatively rich. To be prepared to meet 
 in times of stress the demands of both classes of deposits causes 
 much anxiety to savings bank managers. 
 
 There is, therefore, no question before the bankers of the country- 
 today commanding more thought and attention than the liquidity 
 of loans and investments. The savings banker is equally interested 
 with the commercial banker in securing for his depositor a full 
 
 'Adapted from "Liquidity of Savings-Bank Investments," Journal of Amer'.- 
 can Bankers^ Association, VIII (1915), 223-24.
 
 INVESTMENT BANKING INSTITUTIONS 413 
 
 measure of safety, and very properly should seek to increase the 
 usefulness of his institution, both to his customers and to his com- 
 munity. 
 
 Preserving in the highest degree the integrity of savings banks, 
 provisions should be made so that in times of emergency they can 
 expeditiously convert into cash the necessary portion of their securi- 
 ties and pay their depositors upon demand. Thercljy the usefulness 
 of the institutions will be increased. 
 
 When permanency of investment was the order of the day it 
 was only necessary to choose the safest class of securities, invest the 
 deposits, and await maturity. Panicky conditions taught savings 
 bankers new lessons. 
 
 It became necessary, therefore, for managers of savings banks to 
 study situations and give much more attention to the investment 
 market than they had when savings banks were in their infancy. 
 
 After the panic of 1837 the mutual savings banks, for the first 
 time, realized the importance of accumulating a permanent surj)lus 
 fund. Prior to that time the larger portion of their funds was invested 
 in State bank stocks, or in notes secured by such stocks as collateral. 
 They had been accumulating profits and ever}^ three years paying 
 them out to their depositors in the form of dividends. That panic 
 taught them the necessity of laying aside a certain proportion of 
 their earnings as a reserve fund to be used in the event of another 
 crisis, for if their securities depreciated in value such fund would have 
 to he first exhausted before there could be a general scaling down of 
 deposits. Then, too, they learned that distributing their risks would 
 be advantageous. Wisely they changed their policy, and such change 
 in a large measure protected them during the panic of 1857. 
 
 The financial upheaval of 1873, which affected all savings banks, 
 was not without its lesson. From it the Ijanks gained much knowledge 
 concerning mortgage loan investments. 
 
 At the first meeting of the Savings Banks Association of the State 
 of New York, held in 1894, the situation of the New York savings 
 banks during the panic of the previous year was discussed and 
 summed up as follows: 
 
 "After July 15th (1893) it was found tliat (he withdrawals were 
 constantly increasing, while the scarcity of currency made it exceed- 
 ingly difficult for ])anks of deposit to respond to the calls made upon 
 them. Large amounts were l)eing withdrawn from banks in New 
 York and Brooklyn, with a ra])i(lly increasing tendency on the i)art
 
 414 PRINCIPLES OF MONEY AND BANKING 
 
 of depositors to take alarm and create a run, while it was found 
 impossible, not only to sell securities except at a sacrifice, but, more 
 than all, to obtain the currency needed to pay the deposits. 
 
 "It was decided to at once advise the banks to enforce the pro- 
 vision in the Savings Bank Law made for just such an emergency as 
 then existed, and demand notice from depositors as was provided 
 for by the by-laws of each bank, it being suggested that a sixty-day 
 notice would be sufficient. This action resulted at once in a heavy 
 demand from depositors, though the rule was not put in force until 
 the time agreed upon had elapsed. Depositors gave notice of with- 
 drawal on the average of about 3 per cent of the deposits. 
 
 "Our experience during the late [1893] panic, together with the 
 rapid accumulation of moneys in our hands, showed conclusively that 
 something must be done, and that speedily, to scatter the risks now 
 being assumed. In many cases the entire debt of municipalities in 
 the State is being carried by the savings banks, while we are forced 
 to invest more and more in mortgage loans secured by real estate, 
 both at the cost of increased risk and added volume of an unavailable 
 security in case of financial depression." 
 
 The conditions so clearly set forth at this meeting were such that 
 steps had to be taken to bring savings bank investments abreast with 
 the necessities of the times, and from 1893 to 1898 the banks were 
 insistent in their demands upon the State legislature for an enlarge- 
 ment of the security list by permitting investments in railroad bonds. 
 The bank managers believed that in the event of financial stress this 
 class of securities would be readily marketable. Upon the enactment 
 of the desired law the banks bought largely of such securities, so that 
 today more than $289,000,000, or almost 12 per cent of their deposits, 
 is invested in railroad bonds by New York savings banks. 
 
 But the enlargement of the investment field did not produce the 
 situation which was so ardently desired by all good bankers. It did 
 not bring about the main requirement of good banking — ability to 
 pay liabilities upon demand. It did not do away with slow liquida- 
 tion of securities and the necessity of requiring notices of withdrawal 
 from depositors. 
 
 In 1907 Mr. Andrew J. Mills, of the T>ry Dock Savings Bank in 
 New York City, expressed the ideal as to savings bank investments — 
 the ideal which had been sought by savings bank managers since 1816. 
 He said there were three cardinal principles governing such invest- 
 ments:
 
 INVESTMENT BANKING INSTITUTIONS 415 
 
 First: Security as absolute as human judgment can determine. 
 
 Second: The first being assured, then the security yielding the 
 largest income. 
 
 Third: Availability, so that in case of necessity the security can 
 be disposed of without needless sacrifice. 
 
 The last includes the ability to pay on demand, for in the final 
 analysis it is the ability to pay depositors on demand that constitutes 
 good banking and inspires confidence. Your funds may be invested 
 in securities of the highest order, your loans made with the greatest 
 care, but if whenever there is a depression depositors are recjuired to 
 give notice of withdrawal their confidence is shaken and they will 
 eventually cease doing business with savings banks and deposit their 
 moneys with institutions which will pay without notice. 
 
 It has been stated that "panics do not develop from the fear of 
 depositors that they will not ultimately get their money from banks, 
 but from the fear that they will not be able to get it when they want 
 it." That is the fundamental of the depositor's confidence — that he 
 can get his money when he wants it. 
 
 It is the understanding of the depositor that his money is payable 
 upon demand and the presentation of his passbook. Confronted 
 with the requirement of a notice of withdrawal he learns that his 
 deposit is not payable on demand, but thirty or sixty days after 
 demand. 
 
 Not only in fairness to depositors, but as a matter of policy, 
 would it not be far wiser to invest a jiortion of our funds in short - 
 time loans, of the character generally referred to as liquid, and in time 
 of emergency depend upon such loans rather than upon the required 
 notices of withdrawal ? 
 
 It is a mistaken belief held by many that the notice of withdrawal 
 is for the purpose of discouraging the depositor from withdrawing 
 his funds. We know that that is not the reason. We know that the 
 bank recjuires time to convert its securities and thereby meet tlic 
 demands upon it. 
 
 // savings banks invest a certain proportion of their deposits in 
 short-time obligations which can be readily converted into cash in the 
 open market^ or if a proper amendment to the Federal Reserve Law is 
 made, no time within which to convert securities will be necessary, 
 notices of withdrawal will be a thing of the past, and dei)ositors in 
 savings banks, like depositors in other banks, can be paid upon 
 demand.
 
 4l6 PRINCIPLES OF MONEY AND BANKING 
 
 It is only recently that the word "liquid" has been attached to 
 securities. Until August of last year the call loan secured by stock 
 exchange collateral was thought to be easily convertible into cash 
 in the event of an emergency. Such, however, has not proven to be 
 the case. 
 
 Certain short-time loans would admirably meet with Mr. Mills's 
 three principles — as to security^ as to yielding good income, and as 
 to availability in case of necessity — without needless sacrifice. But 
 to make such securities available without sacrifice, amendments to 
 various laws governing savings banks are necessary. 
 
 With many different banking institutions handling savings depos- 
 its, some under strict State laws requiring investment in only the 
 highest class of securities, and others under laws which permit the 
 mixing of commercial deposits with savings deposits, without segre- 
 gation of investments, it may seem that anything approaching 
 uniformity in the investment laws is incapable of accomplishment. 
 
 Absolute uniformity probably cannot be secured, but conferences 
 and discussions between ourselves and with the lawmakers will bring 
 about a clearer understanding of the requirements, and secure at 
 least more uniform laws relative to savings bank investments, at the 
 same time providing ample reserves for the security and accommo- 
 dation of depositors. 
 
 The particular function of a commercial bank is to supply funds 
 to carry on the trade and commerce of the country. The particular 
 function of a savings bank, aside from the encouragement of thrift, 
 is to supply funds for the improvement and building up of communi- 
 ties and for other legitimate enterprises. The one furnishes credit 
 and the other capital. 
 
 There is a tendency on the part of some savings banks in different 
 sections of the country to disregard these fundamental principles of 
 banking. While the invested funds of savings banks are ultimately 
 deposited in commercial banks and used for commercial purposes, 
 nevertheless in investments savings banks should not encroach upon 
 the field of commercial banks. While avoiding such encroachment 
 and looking always to the safety of the funds in their care, savings 
 bank managers should carry at all times, as a secondary reserve, a 
 goodly percentage of short-time and readily convertible assets. 
 Regulation of the investments of savings banks should be developed 
 along these lines.
 
 INVESTMENT BANKING INSTITUTIONS 417 
 
 In New York the savings banks hold more than $469,000,000 of 
 bonds of the United States, States, municipalities, and other civil 
 divisions. At the present time securities of this class are decidedly 
 non-liquid, and would assuredly, in the event of an emergency, have 
 to be sold at a sacrifice in order to obtain currency. In the Eastern 
 States, of the vast sum of $2,200,000,000 on deposit, only $50,000 is 
 invested in two- and three-name paj^er which would probably be 
 acceptable for rediscount under the Federal Reserve Law. Prac- 
 tically the entire sum is in mortgage loans and bonds. It will be seen, 
 therefore, that under existing conditions the savings banks of the 
 East are substantially without liquid securities. 
 
 Some managers of savings banks have, however, invested in 
 securities which, in a degree, provide liquid assets. 
 
 The policy, for example, of a certain bank in this section of the 
 country is to invest a certain proportion of its funds in short-date 
 maturities, such as serial municipal bonds or railroad equiprtfent 
 obligations. 
 
 This policy supplies the bank with a large amount of cash every 
 year, amounting to approximately 5 per cent of its resources. In 
 addition the managers aim to have on hand usually about 6 per cent 
 in cash with an income of approximately 5 per cent of the resources. 
 By so doing they have a fairly large percentage of money coming in 
 every year. 
 
 It has also been the policy of this institution to earn,- a large 
 block of United States bonds — at present having nearly 7 per cent 
 of its resources invested in the 4's of 1925. These holdings, through 
 the circulating privilege which the bonds still enjoy, would supply 
 the bank quickly with an amount of currency equivalent to face 
 value by the loan or sale to a national bank with which it does busi- 
 ness. To this may be added its mortgage loan liquidations, which 
 often amount to about 5 per cent of the total amount of mortgage 
 loans. In these several items that bank has a comfortable percent- 
 age of liquid assets — about 25 per cent of its deposits. 
 
 In connection with the preparation of this paper an inquin.- was 
 made "as to whether it is a good policy for savings banks to invest 
 their funds in certain loans which could be readily turned into cash 
 in the event of an emergency, and what proportion of their securities 
 should be of a licjuid character." A digest of the rci>lics to this inquiry- 
 shows that the opinions as to the kind of securities in which savings
 
 4i8 PRINCIPLES OF MONEY AND BANKING 
 
 bank funds should be invested are varied, but that there is practical 
 unanimity of oi)inion that every bank should have a good percentage 
 of its funds invested in readily convertible securities. 
 
 206. SCHOOL SAVINGS BANKS' 
 By SARA LOUISA OBERHOLTZER 
 
 Through the school savings banks system in our public schools 
 the boys and girls in the United States have saved and placed to their 
 credit over five million dollars during the last twenty-five years. 
 The work has been forwarded very quietly, and without public 
 support. 
 
 Mr. John H. Thiry, a native of Belgium, where he was educated, 
 and later an instructor in schools, came to New York in 1859. He 
 was there engaged in the book business, buying and selling rare 
 books, preferably French and German ones. In 1870 he took up his 
 residence in the Dutch Kills section of Long Island City, devoting 
 himself to horticulture, chiefly grape culture. In 1884 he became one 
 of the school commissioners of the Long Island City public schools, 
 and in 1885 he instituted the school savings banks system in one of 
 the schools there. The system under his care soon extended to all the 
 public schools. It was simply the calling of the role for the collection 
 of the children's penny savings each Monday morning and placing 
 them in a bank to their individual credit. 
 
 The amount saved by the boys and girls soon attained considerable 
 size, and their development in self-responsibility, industrs^ and apt- 
 ness in study was remarked. The public schools in Islip, Amsterdam, 
 Jamaica, and a few other points, through Mr. Thiry's lead, adopted 
 the system. Mr. Thiry had his Scholar's Card copyrighted and 
 began printing statistics annually, giving the figures of the school 
 savings, combined with valuable information on the subject. 
 
 In 1889 the writer, through her literary work, became associated 
 with Mr. Thiry in this philanthropy, and presented the subject of 
 thrift teaching through the school savings banks system to Teachers' 
 Institutes, the Academy of Political and Social Science, the National 
 Council of Women, the World's and National Woman's Christian 
 Temperance Union, and other bodies, introducing the school savings 
 banks into a number of Pennsylvania public schools, reaching out 
 into other States, and to Canada and the Provinces. The privilege 
 
 ' Adapted from the Banking Law Journal, XXIX (1912), 797-98.
 
 INVESTMENT BANKING INSTITUTIONS 419 
 
 of the copyright card was given to her for the United States, and the 
 work has gone on quietly, steadily, and continuously, Mr. Thir>' 
 doing much for the cause, making up the statistics each year and 
 printing them for free distribution. The last of these statistical 
 tables, for which we collected the matter jointly, was printed Jan- 
 uary, 1910, and reports 1,168 schools using the school savings-bank 
 system, and that the scholars in these schools have saved since its 
 introduction $5,051,644.60. 
 
 School savings are now collected in some schools in almost every 
 State in the Union, and in Alaska and Porto Rico. It is almost 
 impossible to secure full statistics of the savings of the children in 
 all the schools using the system; we have not been able to make 
 them complete for several years. The work has been rather a lone 
 philanthropy, without financial support, except a slight appropria- 
 tion from the Woman's Christian Temperance Union. There are 
 W.C.T.U. aids in some of the States, their mission being to distribute 
 the school savings literature and assist in the extension of the work. 
 
 The Comptroller of the Currency at Washington is aiding this 
 year in collecting and compiling the statistics. He has sent out our 
 blanks for reports to the different schools using the school savings 
 system. 
 
 207. THE ARGUMENT FOR POSTAL SAVINGS BANKS' 
 By GEORGE VON L. MEYER 
 
 It behooves us as a Government to do ever>'thing that is possible 
 to encourage among our own people the habits of thrift. American 
 wastefulness and extravagance are well recognized, and we should 
 acquire to a greater extent the art of husbanding our resources and 
 of making a little go a great way. 
 
 Within the past seven years more than seven millions of foreigners 
 have come to our shores, and in twenty-five years 12,640,397 have 
 arrived. A great number of these people are setting us an example 
 of what small savings can do by sending to European countries 
 $72,000,000 in the last fiscal year. Within a period of six months — 
 from May 15 to November 15, 1907 — the amount which went out 
 to replenish foreign coffers was $49,621,000. These figures represent 
 only the amounts that have been forwarded through the medium of 
 
 'Adapted from "Postal Savings Banks," The Independent, LXIV (1908), 
 9-11.
 
 420 PRINCIPLES OF MONEY AND BANKING 
 
 postal money orders, and do not take into account the vast sums 
 which are remitted to foreign lands by Ijanks and express com- 
 panies. 
 
 A striking fact is that 92 per cent of the money on deposit in 
 savings banks is in eleven States of the Union — the New England 
 States (comprising Maine, New Hampshire, Vermont, Massachusetts, 
 Connecticut, and Rhode Island), New. York, Pennsylvania, Illinois, 
 Iowa, and California, thus leaving thirty-five States representing 
 deposits of only 8 per cent. This demonstrates plainly that the 
 opportunities for depositing money in savings banks has not been 
 sufl5ciently developed, especially in the South and West. 
 
 Every facility should be open to our people, and every man, 
 woman, and child should be able to deposit savings in any portion 
 of the country at any time of the day. This can be afforded by the 
 Post-Office Department, because the post-office is established in 
 every city, town, and village, there being exactly 61,814 post-offices. 
 The postal savings bank, besides encouraging economy and thrift, 
 would afford a place of deposit, free from any possibility of doubt 
 or suspicion, for vast sums of money which might otherwise be 
 hoarded and kept out of circulation through ignorance or lack of 
 confidence. Wherever it may be, this money has lost its proper 
 functions, and the business of the nation not only receives no benefit 
 from it, but even the prosperity of the country suffers, and may be 
 eventually destroyed. 
 
 The laboring man going home at the end of the week would 
 frequently put his money in the savings banks if the opportunity 
 were open to him, but he returns from his employment at a time of 
 the day when the banks are closed and the saloons are open. 
 
 As an evidence of good faith that there is no intention or desire 
 to compete with existing savings banks the rate of interest recom- 
 mended is 2 per cent, the amount of deposit being limited to $500 
 for any individual or society. The Government (Post-Office Depart- 
 ment) is a preferred creditor, and the Postmaster-General does not 
 ask that any Government bonds shall be given as collateral for the 
 deposits, as it is not desirable to absorb the bonds for that purpose, 
 but that they be left free for currency. The Post-Office Department, 
 would be secured as being a preferred creditor and by reason of the 
 liability of the stockholders of national banks for double the amount 
 of stock held by them, and the facility (through the Comptroller of 
 the Currency) of examining the banks at any time.
 
 INVESTMENT BANKING INSTITUTIONS 42 1 
 
 In answer to the j)oint which has been raised in a very few in- 
 stances, that this would tend to encourage depositors to take their 
 money from State or national banks, it is self-evident that any indi- 
 vidual who has the intelligence to go to a national or State bank 
 with his deposit does so for the advantage of having it subject to 
 payment by check, and in order to obtain accommodations in the 
 way of discounts of his own paper or that of his business clients. 
 No business accommodations of any kind or description would be 
 obtained at a postal savings bank, not even that of drawing the 
 money by check. 
 
 As to the effect it would have on savings banks, it requires but 
 very little thought to convince one that a dci)osilor who has his 
 money in a savings bank (where he is receiving 3 or 4 per cent) will 
 not withdraw it and place it with the postal savings bank, thus 
 reducing his interest by one-third or one-half, except possibly in times 
 of crises or flurries, such as we have e\']:)erienced lately; and at such 
 moments the great advantage of the postal savings banks would be 
 felt because of the guarantee of the Government behind the deposits. 
 The Government would be enabled to lead the money back instantly 
 into the channels of trade through the national banks in the same 
 locality, and be instrumental in overcoming sudden stringencies due 
 to large numbers of depositors taking their money out of circulation 
 or hoarding it. 
 
 208. SOME DETAILS OF THE POSTAL SAVINGS SYSTEM' 
 
 An account may be opened and accounts made by any person of 
 the age of ten years or mof e, in his or her own name, and by a married 
 woman in her own name, and free from any control or interference 
 by her husband; but no person may at the same time have more 
 than one Postal Savings account. 
 
 Deposits will be accepted only from individuals and no account 
 will be opened in the name of any coqioration, association, society, 
 firm, etc., or in the names of two or more persons jointly. No account 
 will be made in trust for another person (as is the case in many foreign 
 countries). 
 
 No person will be permitted to deposit more than Sioo in any 
 one calendar month, nor will the balance to the credit of any depositor 
 be allowed to exceed $500, e.xclusive of accumulated interest. 
 
 ' From Instructions Issued to Postmasters by the Postmaster-General.
 
 422 TRINCIPLES OF MONEY AND BANKING 
 
 No account may be opened for less than $i, nor will fractions of 
 one dollar be accepted for deposit at any time. 
 
 The interest rate shall be 2 per cent on deposits which have 
 remained for at least one year, and will be computed only from the 
 first of the month following the day on which the deposit was made. 
 
 Postal Savings deposits will be evidenced by certificates of deposit 
 issued in the name of the depositor. These will be non-transferable 
 and non-negotiable. 
 
 To enable any person to accumulate and deposit amounts less 
 than one dollar, depository offices will keep for sale postal savings 
 cards at 10 cents each and lo-cent Postal Savings stamps which may 
 be afl&xed to the cards. One card and nine stamps will be accepted 
 as a deposit of one dollar. 
 
 Postmasters at depository oflfices must deposit daily all moneys 
 received by them on account of Postal Savings business in local 
 banks which have qualified as depository banks under the Act of 
 Congress and the regulation adopted by the Board of Trustees, and 
 if no local bank has so qualified, deposits must be remitted daily by 
 registered mail to other banks most convenient to the locality, which 
 have qualified as depositories. 
 
 Any depositor may withdraw the whole or part of his funds by 
 surrendering at the depository office the savings certificates properly 
 endorsed. 
 
 When the Postmaster has not sufficient postal savings funds on 
 hand to pay demands for withdrawals, he must draw on the emer- 
 gency credit allowed him by the Postmaster-General. If the 
 emergency credit is insufficient to meet the demands, he must report 
 the fact at once to the Postmaster-General, the right being resers-ed 
 to defer payments until the necessary funds can be furnished to the 
 Postmaster. 
 
 Accounts are to be kept private; no person connected with the 
 Post-Office Department to give any information concerning them. 
 
 The deposits of postal funds in banks are to bear interest at the 
 rate of not less than 2j per cent. No bank, however, is allowed to 
 receive a sum greater than its capital and one-half of its surplus. 
 
 The Act requires that the Board of Trustees shall withdraw 5 
 per cent of the total receipts to be held as a reserve fund and at its 
 discretion may withdraw 30 per cent more for investment in bonds 
 and other securities of the United States. The remaining 65 per 
 cent is to be kept as a working balance and may only be withdra\\Ti 
 by order of the President under extraordinary public conditions. All
 
 INVESTMENT BANKING INSTITUTIONS 423 
 
 of the funds must be available, at all times, for the payment of 
 depositors. 
 
 The limit of $500 as the account of any one depositor does not, 
 however, limit the possibility of utilizing the postal savings banks 
 to any extent, for the law provides for the purchase, by depositors, 
 of United States Postal Savings bonds, bearing 2I per cent interest 
 and payable in twenty years. The provisions of the act with reference 
 to these bonds are as follows: 
 
 Sec. 10. That any depositor in a postal savings dep)ository may sur- 
 render his deposit or any part thereof, in sums of twenty dollars, forty 
 dollars, sixty dollars, eighty dollars, one hundred dollars, and multiples 
 of one hundred dollars and five hundred dollars, and receive in lieu of such 
 surrendered deposits, under such regulations as may be established by the 
 board of trustees, the amount of the surrendered deposits in United States 
 coupon or registered bonds of the denominations of twenty dollars, forty 
 dollars, sixty dollars, eighty dollars, one hundred dollars, and five hundred 
 dollars, which bonds shall bear interest at the rate of 2^ per centum per 
 annum, payable semiannually, and be redeemable at the pleasure of the 
 United States after one year from the date of their issue and payable 
 twenty years from such dale, and both principal and interest shall be 
 payable in United States gold coin of the present standard of value: Pro- 
 vided, That the bonds herein authorized shall be issued only (first) when 
 there are outstanding bonds of the United States subject to call, in which 
 case the proceeds of the bonds shall be applied to the redemption at par of 
 outstanding bonds of the United States subject to call, and (second) at 
 times when under authority of law other than that contained in this .\ct 
 the Government desires to issue bonds for the purpose of replenishing the 
 Treasury, in which case the issue of bonds under authority of this .\ct shall 
 be in lieu of the issue of a like amount of bonds issuable under authority of 
 
 law other than that contained in this Act Atul provided further, 
 
 That the bonds herein authorized shall be exempt from all taxes or duties 
 of the United States as well as from ta.xation in any form by or under 
 stale, municipal, or local authority: And provided further, That no bonds 
 authorized by this .Act shall be receivable by the Treasurer of the United 
 States as security for the issue of circulating notes by national banking 
 associations. 
 
 209. SUCCESS OF THE POSTVL SAVINGS SYSTEM' 
 
 The fiscal year 19 14 witnessed a steady, healthy, and substantial 
 growth of the Postal Savings System. On June 30 the number of 
 depositors was 388,511, and the amount on deposit to their credit 
 
 ' Adapted from the Annual Report of the rosimastcr General, 1914, pp. 27-59.
 
 424 PRINCIPLES OF MONEY AND BANKING 
 
 was $43,444,271, a gain for the year of 57,505 depositors and $9,625,- 
 401 in deposits. The average principal per depositor increased from 
 $102 to $111.82. Savings facilities were available at 9,639. post-offices 
 (of which 8,507 were of the presidential grade and 1,132 of the fourth 
 class) and at 708 branches and stations, making a total of 10,347 
 depositories in operation. 
 
 The proponents of the system, among other arguments advanced 
 in support of the enactment of the postal savings legislation, asserted 
 that it would encourage among the people the formation of habits of 
 economy and thrift. On June 30, 191 1, six months after the system 
 began operation, there were 11,918 depositors, and the average bal- 
 ance was $56.82. At the close of each six months' period thereafter 
 substantial increases in the number of depositors and the average 
 balance are shown, until, on June 30, 1914, there were 388,511 deposi- 
 tors, and the average balance was $111.82. These facts afford con- 
 clusive proof that the practical operations of postal savings in this 
 country have amply fulfilled the predictions of its advocates. 
 
 The safety and security afforded by the postal savings deposi- 
 tories have been a source of strength and protection to our people 
 in time of stress and the means of steadying financial conditions in 
 the United States. Many foreign-born citizens who have patronized 
 these institutions are resorting more freely to their use during the 
 present European crisis and will doubtless continue to do so even in 
 larger measure when normal business conditions shall have been 
 restored. 
 
 Evidence is conclusive, however, that the postal savings facility 
 would have served a greater usefulness and would have been the 
 means of restoring a much larger amount of money to business uses 
 were it not for the provisions of the law which limit the amount that 
 may be accepted from a depositor to $100 in a calendar month and 
 restrict his maximum deposit to $500. The inability of a prospective 
 patron to deposit all his accumulated savings results in confusion of 
 thought, which frequently leads to a refusal to deposit any part of 
 them. Such funds invariably go back into hiding and disuse. The 
 precautionary limitations of the law were no doubt inserted because 
 the service was new in this country and, in a sense, experimental. 
 While it is believed that the interest of the pubUc will be best served 
 by ultimately removing altogether the restrictions on the amount 
 that may be accepted on deposit, it is manifest that this condition 
 should be approached gradually and as experience in administering
 
 INVESTMENT BANKING LXSTITUTK )NS 425 
 
 the system indicates that additional steps may be taken toward the 
 desired goal. It is recommended, therefore, that the provision in 
 the postal savings act which limits the amount that may be accepted 
 from a depositor in a calendar month to Sioo be removed, and that 
 the maximum balance which may be accepted be increased, under 
 certain conditions, to $2,000, but limiting the amount on which 
 interest shall be paid to $1,000. 
 
 210. THE FUTURE OF SAVINGS BANKS' 
 Bv MILTON W. HARRISON 
 
 If space would allow, an interesting discussion may be had with 
 relation to the future of savings banking in the United States. Such 
 questions as: whether capitalized savings banks should establish 
 branches and sub-branches on a large scale so as to make it possible 
 for the wage-earner to more easily save his money; whether the 
 Postal Savings System should be extended; the desiraljility of munici- 
 pal savings banks for the sale of municipal bonds, thereby eliminating 
 the middleman's profits and a consequent saving to the municipality; 
 the question of the creation of Federal legislation and establishing 
 savings departments for Federal l)anks, would certainly be both \ital 
 and timely. 
 
 Only a few months ago a plan for a municipal savings bank was 
 offered by Adolph Lewisohn. The plan provided that the city estab- 
 lish ofBces of deposit, probably branches of the Bureau of City 
 Treasury in the Department of Finance or of some similar bureau 
 which might be created in that Department, for the puq:)ose of receiv- 
 ing deposits from persons desiring to invest their savings in the city's 
 credit; that depositors receive scrip or other evidence of the city's 
 obligation to return the deposits; that the return of the deposits be 
 secured either l)y the general credit of the city or by the pledge of 
 city bonds with some Ijoard or other ofTicial agency duly authorized; 
 that the city have the use of the funds on deposit for j)uri>oses for 
 which it might use the proceeds of corporate stock or other city bonds; 
 that the city pay from 2J per cent to 3^ per cent (var>'ing according 
 to money market and other conditions) interest on deposits and 
 redeem the scrip or repay the deposit on thirty or sixty days' notice, 
 or on demand, the city in that case, however, reserving the right to 
 
 ' Adapted from "Savings Banking in the United States," Journal of American 
 Bankers' Association, \'I1I (1916), 734.
 
 426 PRINCIPLES OF MONEY AND BANKING 
 
 require such thirty or sixty days' notice; that depositors of $ioo or 
 more have the right to convert their scrip into city bonds issued 
 directly to them. 
 
 211. LIFE INSURANCE COMPANIES AS INVESTMENT 
 INSTITUTIONS' 
 
 By a. S. JOHNSON 
 
 From a financial point of view the life insurance company is a 
 device for accumulating savings which shall be returned, not to the 
 man who saves, but to his heirs at his demise. Some of the insured, 
 it is true, die long before the sum of the premiums they have paid 
 equals the sum that the insurance company has agreed to pay at their 
 death. On the average, however, the insured live long enough so 
 that their premiums, together with the earnings of the capital which 
 those premiums form, are at least equal to the sums which the insur- 
 ance company pays out in death claims. 
 
 It is obvious that in a country like the United States, where life 
 insurance is exceedingly common, immense sums of money must be 
 collected by the companies every year to be held as a reserve against 
 death claims. As the business of life insurance is steadily growing, 
 the funds accumulated by these companies are also increasing. The 
 annual receipts of practically every important life insurance company 
 exceed the annual disbursements. Accordingly, a life insurance com- 
 pany may invest its funds without much regard to the possibility of 
 turning its investments into cash at short notice. It is important, 
 however, that the business should be conducted in a conservative 
 manner, since the failure of an insurance company would be a more 
 widely felt calamity than the failure of almost any other business 
 enterprise of equal magnitude. The loss would be borne in the end 
 largely by the dependents of propertyless men. 
 
 The reserves of life insurance companies are largely invested in 
 real estate mortgages, in state and municipal bonds, and in the bonds 
 of railway, commercial, and industrial corporations. Stock invest- 
 ments have often been made by insurance companies, but the practice 
 is now generally regarded with disfavor, since the values of stocks 
 are likely to show a wide range of fluctuation. 
 
 ' Adapted from Introduction to Economics, pp. 320-21. (D. C. Heath & Co., 
 1909.)
 
 INVESTMENT BANKING INSTITUTIONS 
 
 427 
 
 212. INVESTMENTS OF INSUIL\NCE COMPANIES' 
 By ROBERT LYNN COX 
 
 The table below is for all American companies whose figures were 
 tabulated in the Insurance Year Book for their respective dates. 
 
 ASSETS OF AMERICAN LIFE INSURANCE COMPANIES 
 
 December 31, 1904 December 31, igi4 
 
 Real estate ' $ 180,875,035 
 
 Real estate mortgages 
 
 Bonds 
 
 Stocks 
 
 Collateral loans 
 
 Policy loans and premium 
 
 notes 
 
 Cash 
 
 Deferred premiums 
 
 All other assets 
 
 671,577,813 
 
 1,067,027,851 
 
 172,582,975 
 
 42,715,261 
 
 189,738,779 
 104,027,124 
 
 45,879,455 
 24,636,705 
 
 $ 171,173,551 
 1,706,365,405 
 1,981,751,698 
 
 82,552,532 
 20,351,766 
 
 735,348,014 
 95,160,368 
 68,832,680 
 73,716,779 
 
 Total admitted assets $2,499,060,998 j $4,935,252,793 
 
 Some notable features in the above table attract the attention 
 at once. First, and most important of all, is the fact that in ten 
 years' time the assets of American companies have practically doubled 
 in amount. Great as was this increase in the family-protection funds 
 of the countr}', it only kept pace with the increase in national wealth, 
 which also about doubled during the same period. The next striking 
 fact is that investments in real estate mortgages are two and one-half 
 times as large, increasing from $671,000,000 to $1,706,000,000. On 
 examining the relations of the various classes of investments to each 
 other, as given in the column showing the percentage of assets invested 
 in the different kinds of securities, we find that during this period 
 the companies' holdings in real estate have decreased more than one- 
 half in ratio to other securities, and have actually decreased in amount 
 over $9,700,000. The percentage of investments in stocks is less than 
 one-fourth what it was ten years ago and in actual amount is about 
 $90,000,000 less. The percentage of collateral loans is less than one- 
 fourth what it was ten years ago and in actual amount over $22,000,- 
 000 less. Cash on hand also has been reduced one-half in percentage 
 and nearly $9,000,000 in amount. In short, the trend of the times 
 has been to reduce investments in stocks, collateral loans, and real 
 
 ' Adapted from InvrstvinU News, V, No. 2 (1916), 24.
 
 428 PRINCIPLES OF MONEY AND BANKING 
 
 estate, also to reduce the proportion of cash carried in offices and 
 banks and to materially increase the amount and proportion of 
 investments in real estate mortgages and policy loans. 
 
 In view of the fact that life insurance companies held over $1,700,- 
 000,000 in real estate mortgages and their ratio to other assets has 
 been steadily increasing, it seemed desirable to make a critical exami- 
 nation of these securities by a geographical distribution of amounts 
 loaned on farms compared with other real property, average interest 
 rates, etc. To this end we invited the co-operation of the life insur- 
 ance companies of the country and received responses giving data by 
 states and class of securities from 125 companies and tabulated the 
 investments of the only large company which declined to report. So 
 our tables include the mortgage loans of 126 companies whose real 
 estate mortgage loans amounted to 97 per cent of all such loans held 
 by American companies. The total loans, divided between farms and 
 other real property, but not separated by states, supplied by 22 other 
 companies, enables us to show the separation between farm and 
 other real property loans of 98^ per cent of all the outstanding mort- 
 gages of American companies. Of these 148 companies, 17 make 
 loans only on farm property, 15 only on real property in cities, towns, 
 or villages, while 116 loan on both farm and city properties. The 
 amount loaned by the 17 farm loan companies is $12,827,709. The 
 amount loaned by the 15 city loan companies is $426,260,163, and 
 the amount loaned by the 116 companies loaning on both is $1,158,- 
 014,595. There are 102 American companies whose figures are not 
 included, but as their combined mortgage loans amounted to but 
 $29,262,938, or if per cent of the total held by all American com- 
 panies, their absence will not affect materially the completeness of 
 this tabulation of life insurance mortgage investments. 
 
 The total mortgage loans of these 148 companies amounted to 
 $1,677,102,467, of which $654,650,505.72, or 39.03 per ceat, were on 
 United States farms; $993,480,170.03, or 59.24 per cent, were on 
 other real property in the United States, and the balance — $28,971,- 
 792.14, or 1.73 per cent — was loaned on real estate mortgages in 
 Porto Rico and foreign countries, most of it in Canada. 
 
 The proportion of mortgage loans on farms varies all the way 
 from thirteen-hundredths of i per cent in the ISIiddle Atlantic group 
 of States to 86 per cent in the Northwestern group, the average for 
 148 companies in America being 39.72 per cent of their total United 
 States mortgage loans. In the Eastern States the amount loaned on
 
 INVESTMENT BANKING INSTITUTIONS 
 
 429 
 
 farms is negligible, in the Central, Northern, and Southern groups 
 the farm loans rise to considerable amounts, but it is in the great 
 Southwestern and Northwestern sections, whose agricultural develop- 
 ment in the last fifty years has been so marvelous, that the great 
 bulk of the life insurance farm loans has been placed. On the other 
 hand, we find that over half of the loans on real property other than 
 farms have been placed in the populous commercial and manufac- 
 turing sections of the New England and IVIiddle Atlantic States, which 
 contain ver\' nearly half of such property values of the entire countr\'. 
 
 B. Investment Banks or Bond Houses 
 
 213. THE MARKETING OF BONDS' 
 
 By THEO. H. price 
 
 The process of bond distribution is carried on mainly by three 
 groups of men, or institutions. While there is much overlapping in 
 the functions performed, those engaged in the marketing of bonds 
 may be roughly differentiated as to the field in which they are most 
 conspicuously active. These three groups are: (i) the houses of 
 first purchase, (2) the underwriters, (3) the houses of distribution. 
 This may be conceived of as three concentric circles, thus: 
 
 ' Adapted from an article on "Commerce and Finance," Outlook, CVI (1914), 
 429-30, 598-601.
 
 430 PRINCIPLES OF MONEY AND BANKING 
 
 The houses of first purchase compose a group small numerically 
 but strong financially. Until recently it was supposed that member- 
 ship in the so-called "Money Trust" was a condition of inclusion 
 within this group. This idea is now exploded, for it is realized that 
 some of the houses in the inner group are both able and willing to act 
 with absolute independence. In New York there are perhaps seven 
 or eight firms who may be classified as "houses of first purchase" 
 for bond issues of five million dollars or over. In Boston there are 
 three, or possibly four, and in Chicago and Philadelphia two each. 
 
 In the cities named, as well as in St. Louis, Cleveland, Baltimore, 
 Pittsburgh, Cincinnati, Denver, and San Francisco, there are a num- 
 ber of concerns that are entirely competent to take the initiative 
 in handling relatively small issues, but when the amount involved 
 exceeds three or four millions it is generally found necessar>' to enlist 
 the services of one of the larger organizations. Under conditions as 
 they are and have been, few houses have had the enabling credit 
 and capital required to buy outright a large issue of bonds and the 
 prestige necessary to insure their subsequent distribution. The 
 would-be borrower cannot afford to deal with any concern not able 
 to promptly say Yes or No to his proposition, and large resources, 
 commanding position, and a reputation for success are essential to 
 any firm or corporation that would buy ten or twenty million dollars' 
 worth of bonds and thereafter market them profitably. 
 
 When such an issue has been bought, the buyer almost invariably 
 proceeds at once to minimize his risk in the transaction by distributing 
 it among the underwriters. The function of this group will be better 
 understood in the light of etymology. The distribution of risk which 
 is now called insurance was at first accomplished by an agreement 
 among merchants to share the hazard of each other's ventures. This 
 agreement, being expressed in writing, was signed by the various 
 parties thereto, and in so signing they wrote their names under it, 
 thus becoming underwriters or insurers. This is precisely what is 
 done in the underwriting of a bond issue, except that the principle 
 of co-operation is applied, not only to diminish risk, but to increase 
 the probability of a reasonable profit. To make this clear the illus- 
 tration of a concrete case is necessary. Let us assume that a firm of 
 bankers, having agreed to purchase $20,000,000 of 45 per cent bonds 
 at 90, determine to offer them to the public at 94 and to pay the 
 distributing houses who may finally dispose of them i| per cent for 
 their services and expenses in distribution. If and when the bonds are
 
 INVESTMENT BANKING INSTITUTIONS 431 
 
 sold the net price received by the houses of original purchase will be 
 92I, which would leave them 2^ per cent profit less expenses. It is, 
 however, quite possible that bonds will not be sold at 94, in which 
 case the original purchasers might find their money indefinitely tied 
 up or have to accept a substantial loss to release it. To guard against 
 this contingency, and before offering the bonds at 94, they proceed 
 to divide their possible profit with other houses or individuals who 
 are willing to share the risk and become underwriters. 
 
 These underwriters agree to buy the bonds at 91 if they are not 
 taken by the public at 94, less the distributor's commission of if per 
 cent, or 925 net. 
 
 If the sale is a success, the underwriters, having agreed to buy 
 at 91 the bonds sold at 92^, receive if per cent for the risk they have 
 assumed. If it is not a success, they must take the bonds at 91, and 
 the original purchasers are thus assured of i per cent profit on the 
 transaction, out of which all expenses must be paid. 
 
 For the chance of making if per cent on the amount of the com- 
 mitment, the underwriters face the possibility of haying to tie up 
 their capital indefinitely or accept a hea\y loss; and the losses so 
 accruing during the past two years would surprise the uninitiated 
 and disabuse them of the idea fostered by financial novels and the 
 drama that participation in a Wall Street syndicate implies a certainty 
 of profit. In the selection of underwriters care is generally taken to 
 secure concerns or individuals whose opinions are influential in invest- 
 ment finance. This is done on the assumption that an underwriter 
 who is assured of if per cent profit, if the sale is successful, will do 
 what he can to make it so. As a matter of fact, however, this theory 
 is not to be relied upon in practice, so far as the American markets 
 are concerned. It is thought to be an important factor in French 
 finance, from which it is supposed the idea of the "underwriting 
 syndicate" was derived, but in the United States sentiment is prop- 
 erly ojjposed to it upon the ground that no one can disinterestedly 
 advise the purchase of securities by the sale of which he will profit. 
 
 The duties and responsibilities of the underwriters are therefore 
 comparatively simple and need not be further enlarged upon. There 
 remain to be considered the "Houses of Distribution," as a result 
 of whose activities the bond finally passes into the hands of the 
 investor. These houses are very numerous. Some of them have large 
 capital and great organizations, and others which distribute many 
 securities depend entirely upon their "connections" and a clientele
 
 432 PRINCIPLES OF MONEY AND BANKING 
 
 with whom their relations may be social as well as financial. Many 
 investors prefer to deal with a firm whose senior partner is never too 
 busy to give them his personal attention, and the son or son-in-law 
 of an influential officer in an insurance company or savings bank 
 often becomes a partner in a small bond house for the patronage he 
 is supposed to command. 
 
 Outside the "Houses of Distribution" proper are various groups 
 of investors who generally act somewhat in accord. Such groups 
 include: 
 
 1. An insurance company and its directors, who, if rich men, will 
 probably buy for their own account some portion of a bond issue 
 that their company has taken. 
 
 2. A firm of bankers or a bank in a smaller city that supplies a 
 local investment demand. 
 
 3. A European group or syndicate that acts as a secondary' dis- 
 tributor or buys securities against which it issues its owti debentures, 
 as in the case of the Scotch trust companies and the investment 
 associations of Holland. 
 
 4. Individual trustees or law>^ers charged with the investment of 
 large estates, who are generally willing to anticipate their requirements 
 if anything specially choice is for sale. 
 
 5. Trust companies and their correlated banks, whose purchases 
 may be either for the trust funds of the former or as an investment 
 for the deposits of both. 
 
 6. Savings banks, which, taken as a class, are the largest institu- 
 tional buyers of the classes of bonds to which they are restricted by 
 the laws of the various States. 
 
 The list of the various subsidiary groups among which the dis- 
 tributor of bonds finds his best market might be extended almost 
 indefinitely, but those described will give a reasonably clear idea of 
 what may be called the headwaters of the investment stream that 
 must be kept continually flowing into the bond market. 
 
 A general description of the works of the larger houses is as follows : 
 Each of them maintains offices in New York, Boston, Chicago, 
 and London. Each of them employs about eighty salesmen, whose 
 salary, expenses, and commissions average probably $6,000 a year 
 apiece. Their American offices are all connected by private wires, 
 and it is no uncommon thing for them to dispose of $5,000,000 worth 
 of bonds in a day. To do this it is, of course, necessary that they 
 should be in constant touch with institutions, brokers, or groups
 
 INVESTMENT BANKING INSTITUTIONS 433 
 
 who can act quickly and l)uy in quantity, and with such buyers they 
 are generally willing to divide part of their profit, the practice being 
 to allow a deduction of from one-quarter to three-quarters of i per 
 cent, depending somewhat on the amount purchased. 
 
 The sale of a large issue of bonds is an incident that in many of 
 its aspects is quite dramatic. 
 
 The purchase, in the first instance, has been quietly negotiated. 
 The transaction having been underwritten, the "Houses of First 
 Purchase " proceeds to enlist the services of one or more of the " Houses 
 of Distribution." 
 
 If the issue is a very large one, it is generally considered expedient 
 to associate at least three, and sometimes four or five, distributing 
 concerns in the business. They are selected with regard to the terri- 
 tory they cover. One may be strongest in New England, another in 
 New York City, another in the Middle West, and still another in the 
 Marj'land and Pennsylvania districts. If the bonds belong to the class 
 that can be sold abroad, a foreign house or one with strong connec- 
 tions in London, Amsterdam, and Frankfort may also be employed. 
 The offering is generally made over the names of the associated houses, 
 but a division of territory is privately agreed upon and each distributor 
 is alloted the quantity that he expects to dispose of in a particular 
 district. Some days before the sale is advertised the larger buyers of 
 bonds in each district are canvassed and given opportunity to say 
 what quantities they will buy or care to have "put down" to them, 
 less their usual commission. Preliminary notices of the impending 
 issue find their way into the newspapers. Public interest in the mat- 
 ter is aroused and frequently advance applications for large amounts 
 are received.- 
 
 Sometimes the bonds are bought and sold on the so-called "curb" 
 markets in New York, Boston, and elsewhere for delivery "if and 
 when issued." Such transactions may antedate the actual issue for 
 weeks, and the price established is often above that at which it is 
 expected the bonds will be oiTered. The effect of such quotations in 
 quickening public interest in the prospective sale is amazing. 
 
 Finally the advertisement appears, coupled with the announce- 
 ment that no applications received after a certain day and hour can 
 be considered, and the right is reserved to reject any application and 
 to allot less than the amount applied for. 
 
 Occasionally it happens that all the bonds have been sold before 
 the advertisement is published, in which case it is supplemented by
 
 434 PRINCIPLES OF MONEY AND BANKING 
 
 the statement that "this advertisement is published as a matter of 
 record only, all the issue having been sold." 
 
 The publication of the advertisement under such circumstances 
 is, of course, entirely unnecessary, and it is designed only to call 
 attention to the success of the offering and add to the prestige of the 
 houses concerned. 
 
 Firms that have regard for their reputation will not, however, 
 offer bonds by advertisement unless they have previously sold a very 
 large portion of the issue. 
 
 The public is capricious, and to offer an issue and not sell it would 
 seriously injure the prestige of the issuing house. 
 
 Nearly all the work of salesmanship is therefore done before 
 advertisement or in connection with securities that are not advertised 
 at all, being bought from one investor and sold to another. This 
 latter class of business has enormously increased of late. Many bond 
 houses make a practice of exchanging new securities for older ones 
 that are perhaps better "seasoned" and therefore sell on a lower 
 interest basis. This practice, of course, involves constant trading. 
 
 214. THE PRACTICAL OPERATION OF BOND HOUSES' 
 By LAWRENCE CHAMBERLAIN 
 
 The purchasing function. — ^If a municipal loan is offered, the 
 purchase is a comparatively simple matter, provided the municipality 
 is well known to the fraternity. Then no preliminary investigation 
 is required; a bid is made for the loan at the current market rates 
 and acceptance on award is subject to the approval of the bidder's 
 attorney in all respects affecting the validity of the obligation. 
 
 If the municipality is not well known to the bidder, a quaHlied 
 representative will, or should be, sent to learn at first hand the 
 physical and financial condition of the city and to form an estimate 
 of its probable future wiUingness and ability to meet its present and 
 future obligations. 
 
 If a corporation loan is offered, it will probably be submitted at 
 the offices of the bankers by a representative of the company or by a 
 promoter. If the applicant is of a social turn of mind, he will prob- 
 ably not lack company of his kind in the anteroom. Competition, 
 fortunately, is keen. 
 
 'Adapted from Principles oj Bond Investment, pp. 516-22. (Henry Holt & 
 Co., 1911.)
 
 INVESTMENT BANKING INSTITUTIONS 435 
 
 The first step in the process of elimination (there is more elimina- 
 tion than acceptance) is to discard the propositions of companies 
 that conduct a kind of business unfamiliar to the bankers. Except 
 under unusually favorable circumstances the highest grade of bond 
 houses will not purchase bonds of industrial corporations, mining or 
 irrigation companies, etc. 
 
 The next step is to discard loans that have not a claim on property 
 worth, under the most unfavorable conditions, more than the amount 
 of the obligation. Most corporations will bond themselves in as large 
 a sum as their bankers will permit. Loans are continually being 
 rejected because of insufiicient equity in property values. 
 
 The third step is to discard those propositions which do not give 
 reasonable assurance of earning at all times at least 50 per cent more 
 than all fixed charges, after making extremely liberal estimates for 
 future increased operating expenses. 
 
 The fourth step is to decline loans to companies conducted by 
 men or with methods which do not meet with approval. 
 
 If the house is satisfied by interview and correspondence in mat- 
 ters of the above nature, and if a suitable price can be agreed upon, 
 then engineers and accountants may be sent to the plant and offices 
 to make a thorough examination; and the members of the firm, with 
 counsel, meet officers of the company and their attorneys to settle 
 the matters of form. On acceptance of an issue a careful banking 
 house may demand representation on the directorate of the company 
 until such time as the company shall have discharged its bonded 
 obligation. 
 
 There is a difference in the degree of care exercised by various 
 houses. The ultra-conservative will not permit their names to be 
 associated with "construction propositions." They will consider for 
 purchase the obligations of only seasoned companies with established 
 earning power. 
 
 The reactionary effect of the stringent requirements of bond 
 houses is of inestimable benefit to corporation finance, but its good 
 influence has a wider sphere; it embraces municipal corjwrations and 
 municipal finance. American bond houses have put municipal bond 
 buying on an entirely different plane from what it was in 1875. In 
 this they have been helped by, and have helped, the development of 
 municipal bond law. In these days cities and towns that have had 
 much e.xperience placing bonds will be certain in advance of their 
 advertisements for bids that the loan has hcvn issued in c<Miformity
 
 436 PRINCIPLES OF MONEY AND BANKING 
 
 with the exacting requirements of the bond attorneys. Certain 
 strong Canadian houses command such respect in their country that 
 they have been able to direct the legislation of the Western provinces 
 to the end that the Western loans may be more acceptable to the 
 investors in the Eastern provinces and in England. 
 
 The advisory function. — This advisory and directive function is 
 more prominently operative in bond selling than in bond buying. It 
 has its source in the statistical departments which ever}^ house of 
 quality must maintain. It finds its chief expression, as already 
 stated, in tabloid investment lessons, printed in the advertising col- 
 umns of newspapers and periodicals, or with somewhat greater fulness 
 in pamphlets and monographs. If a prospective client has an invest- 
 ment policy that is apparently not suited to his particular needs, the 
 home office may tactfully direct his attention by letter or through 
 their representative in his territory to a means by which he may 
 better his position. Some bond houses maintain a daily news sheet 
 for the benefit of their salesmen in which are printed, not only pertinent 
 items of current interest, but timely discussions of different problems. 
 
 The banking function. — Illustrative of the relation between house 
 and client, there has arisen the demand that banking departments- 
 be established for the safe-keeping of funds destined, upon enlarge- 
 ment, to go into investment, and also to accommodate those who 
 wish to purchase securities before they have sufficient funds to pay 
 in full for them. From the necessities of these two situations it is 
 only a short step to the conduct on a small scale of a bank deposit 
 subject to check. But properly and ordinarily the banking depart- 
 ment of a bond house is conducted as a matter of accommodation to 
 its customers and not primarily to do a general banking business. 
 From these beginnings it sometimes has happened that a full-fledged 
 bank has been evolved, in which the savings, deposit, and trust 
 functions of the bank have balanced, nominally at least, the sales 
 function of the bond house, but an exception of this sort would only 
 prove the rule. Although bond houses are banks, technically, and are 
 entitled to their common designation, "bankers," nevertheless, on 
 the principle that security selling is not best undertaken by obligor 
 companies, but is properly left to the bond houses which make it a 
 profession, so the general banking business is best left to banks proper. 
 
 The bond houses as fiscal agents. — Because of purchasmg, advisor}', 
 and banking functions bond houses are called upon to act as fiscal 
 agents for corporations, municipalities, and even states. The long-
 
 INVESTMENT BANKING INSTITUTIONS 437 
 
 standing friendly banking relations of the older firms with the 
 Western cities recall the fact that interest, and sometimes the prin- 
 cipal, of the loans of these cities are payable at the offices of the bond 
 house. Here and there an Eastern institution is met that will not 
 buy Western municipals which are not payable in the East. This is 
 not so much to save the cost of conversion into New York funds, for 
 that might be arranged in the price, as because of the inconvenience 
 and possible loss of interest in shipping the bonds West for collection. 
 Some of the older bond houses act as depositories for Western cities. 
 In general the conduct of the bond houses as fiscal agents has merited 
 the trust placed in them. 
 
 It is natural that private corporations will look to the bond houses 
 as their financial agents. The disposition of a company's funded loans 
 is not merely a matter of merchandising; it is natural that the rela- 
 tionship begun by the purchase of bonds and banking representation 
 on the directorate shall be continued indefinitely in the thought of 
 future financial needs. Just as the great railroad systems have their 
 long-established financial connections with certain large houses, so 
 the public-service and other private corporations form alliances with 
 the bond houses. The continuance of such relations implies conform- 
 ity on the part of the obligor corporations with the policy of the bond 
 houses. This also tends toward a betterment of financial conditions 
 throughout the country. 
 
 The selling function. — American banking houses are not elee- 
 mosynary. Whatever may be their usefulness in the community, it 
 is the result of that enlightened self-interest which used to be expressed 
 in the phrase "Honesty is the best policy." Their reason for being 
 is to make money by selling bonds, and the competition is getting 
 keener every day. Many of the ordinary efi"ects of competition are 
 noticeable in the bond business. There is standardization of wares 
 and j)olicies, there is diminution in ratio of profits. But two ordinary 
 effects of competition are conspicuously absent. There is no deteri- 
 oration of the product and no tendency toward consolidation among 
 the vendors. 
 
 There are some who profess to see in tlie gradual e\'olution of the 
 bond business a tendency to relinquish direct selling from house to 
 client through traveling salesmen in favor of distribution on a com- 
 mission basis, through local independent bankers. This may come. 
 If it should, it would be one of tlie evil elTects of competition. It 
 would relieve the "retail" houses of a large part of that sense of
 
 438 PRINCIPLES OF MONEY AND BANKING 
 
 personal responsibility which they now feel. They would be in a 
 position analogous to that of the wholesale houses at present. Inves- 
 tors would have to accept offerings from those who had no part in 
 the investigation which preceded the original purchase of the issue, 
 and who, presumably, would not have the capital or organization of 
 distribution to "protect the market" for the benefit of those who 
 might wish subsequently to sell their securities. 
 
 The protective function. — There is a radical difference in the atti- 
 tude of bond houses in this matter of repurchasing securities of clients 
 to whom they have sold them. Some take the stand that a sale is a 
 sale, and the responsibility of a house that has acted in good faith 
 ceases upon delivery of the bond and the receipt of payment. This 
 position is logical and just, but again competition steps in to benefit 
 the customer. Other houses say: "We shall put out our issues as 
 nearly as possible on a plane of marketability with active listed 
 securities. We make no promises, but, except in times of panic, when 
 it may be impossible to raise money to satisfy everj^body, we hope 
 and expect to be so situated as to buy back at the fair market price 
 the securities we have sold." 
 
 But the protective function of the bond house is most important 
 in respect to the moral responsibility of "seeing the clients through" 
 default, reorganization, and rehabilitation in the extremely rare cases 
 in which trouble arises. In some instances losses amounting to hun- 
 dreds of thousands of dollars have been made good; in many instances 
 the firms have volunteered to pay interest which has been suspended; 
 in every case a reputable bond house will feel called upon to take the 
 active leadership, at its own expense, in upholding the mortgage rights 
 or other legal claims of the bond holders. 
 
 With the enUghtened aid of bond houses the creditor class will 
 do well to take as much pains in the investment of its wealth as in 
 the acquisition of it. Buyers of corporation bonds should exercise 
 as much care in the selection of a financial adviser as in the choice 
 of a security. They should seek a bond house with a strong person- 
 ality, strong convictions on investment matters, and the capital and 
 equipment to back them up.
 
 INVESTMENT BANKING INSTITUTIONS 439 
 
 215. THE BASIS OF BOND VALUES' 
 By THEO. H. price 
 
 In this diagram the basic factors and the technical and mathe- 
 matical elements are grouped on the longer sides of the triangle. To 
 the psychological division of the problem less space is given, as it 
 deals with influences that will be impermanent if the essentials of 
 security exist. Conversely, it is quite possible for those who under- 
 stand the psychology of the investment market to take advantage of 
 the public at an adventitious moment and induce them to buy bonds 
 that lack the intrinsic qualities of safety. 
 
 ■ <>> 
 
 
 Buttrtssed by 
 
 Responsibility of Borrowers Legality of Issue 
 
 Nature of Lien, if any Political Stability 
 
 \'alue of Security Pledged Reality and Morality of Social Service 
 
 Amount and Permanency of Income Honesty and Economy of Management 
 
 Fair Play to Public, Employers, and Competitors 
 
 For this reason the reputation of the bankers who are sponsors 
 for the securities is the most important of the psychic or intangible 
 factors, and as such will be considered later on. 
 
 The technical and mathematical determinants of bond values 
 can be only partially enumerated and briefly discussed here. They 
 embrace nearly the whole field of human experience and science. 
 
 Volumes which carr>' one well into higher mathematics have been 
 written about sinking funds and amortization. The duties of trustees 
 and the words in which the promise to pay is phrased have been made 
 
 ' Adapted from an article on "Commerce and Finance," Oullook, CVI (1914)1 
 327-28.
 
 440 PRINCIPLES OF MONEY AND BANKING 
 
 the subject of much Utigation and many law books. There are many 
 other details of the problem that might be mentioned to make plain 
 the need of specialists in coping with it. 
 
 But these specialists must include not only lawyers and mathe- 
 maticians; there must be men of broad sympathy, wide experience 
 in business, acute power of analysis, and well-balanced optimism to 
 pass upon the rights of enterprise to credit through the medium of 
 bonds. The great bankers who control the water gates through 
 which the public's money flows to irrigate the fields of industry have 
 their obligations to the borrower as well as to the lender, to the worker 
 as well as to the capitalist. 
 
 If the test of deservedness be made too acid, and the pessimism 
 born of experience is not tempered by the optimism of hope and 
 imagination, the banker will fall short of the full duty which his 
 opportunities impose. It is the gift of imagination and the quahty 
 of constructive optimism that differentiate the banker from the money 
 lender, and the greatness and influence of the late Pierpont Morgan . 
 lay chiefly in his ability to visualize the picture of the future upon 
 the canvas of the present, and in his helpful belief in his fellow-men 
 and his country. 
 
 The instrument of credit that is called a bond provides a means 
 whereby the immobile or undeveloped assets of a deserving enter- 
 prise may be pledged to secure the money which should be used to 
 extend still further the field of beneficent activity. So regarded, the 
 bond may be properly utilized by any political entity or business 
 organization that can demonstrate that it is possessed of the requisite 
 and the honorable good faith which is the first essential of credit. 
 
 Almost ever}'thing that human industry has produced or for 
 which society has need has been or may be made the basis of a bond 
 issue. 
 
 It is entirely clear that skill and trained experience of the highest 
 character are necessary to discriminate as between good and bad 
 bonds. It is equally clear that when skill and experience have elimi- 
 nated the bad bonds and accepted the good bonds money must be 
 provided en bloc to buy them. Next, the machiner}'- of introduction, 
 advertisement, salesmanship, and distribution must be put in motion 
 to pass the bonds .along to the ultimate investor, so that a normal 
 level may be maintained in the distributing reservoirs of capital.
 
 XI 
 
 THE INTERRELATIONS OF FINANCIAL 
 OPER.\TIONS 
 
 Introduction 
 
 The purpose of this concluding, chapter is, first, to indicate the 
 interlacing and ramifications of the various forms of financial opera- 
 tions in the United States and to point out the consequences of the 
 prevalent confusion that has existed with reference to the true func- 
 tions of the different tv'pes of banking institutions; secondly, to 
 show how the Federal Reserve System is designed to correct the 
 weaknesses that have developed in our banking system in connec- 
 tion with the confusion of investment and commercial principles; 
 and, thirdly, to outline the great problem of financial concentration 
 and control, popularly called the "Money Trust." 
 
 The material here presented is directly related at many points 
 to the principles developed in preceding chapters. The very first 
 selection, for instance, has already been foreshadowed in chapter iv, 
 in the reading on "Collateral Loans and Stock Exchange Specula- 
 tion"; but attention is here directed to the manifold relations that 
 exist between commercial banks and the securities' markets and to the 
 problems that arise in connection therewith. Similarly, the use of 
 the funds of "commercial" banks for investment purjwses was defi- 
 nitely pointed out in our analysis of the loans of "commercial" 
 banks. Here, however, we are showing the extent of and the reasons 
 for this practice, together with its effects, upon the financial system 
 in general. Again, in our study of the Federal Reserve Act numerous 
 provisions were noted which touched the field of investment; but 
 here we are discussing the provisions that have most conspicuously 
 been designed to differentiate commercial from investment opera- 
 tions. In a word, this chapter is l)uilt upon the general analysis of 
 credit and banking that has been made in Part II of this volume and 
 is designed to suggest the constructive reforms that are being dis- 
 cussed at the present time. 
 
 The readings under "C. Financial Concentration and Control" 
 reveal the tremendous role that the investment banker, or financier, 
 plays in the modern lousiness world and the problems that have 
 
 441
 
 442 PRINCIPLES OF MONEY AND BANKING 
 
 arisen in connection with the use of this enormous power. The 
 development of large-scale business and the uniting of independent 
 concerns into gigantic combinations, which have characterized our 
 transportation and manufacturing industries during the past twenty 
 years, have been paralleled in the banking world. Indeed, the two 
 movements have developed hand in hand, and each has been neces- 
 sary to the other: large-scale industry required the development of 
 financial institutions commensurate with their needs, and, conversely, 
 the growth of large banking institutions made it possible to accumu- 
 late the capital required by modern industries. 
 
 The public has been greatly agitated in recent years over what is 
 termed the greatest of all monopolies, the "Money Trust." A 
 government committee has made an investigation into the extent 
 of financial concentration and control in this country, and a very 
 able defense of current practices has been presented by the finan- 
 ciers of Wall Street. While results of the investigation clearly do 
 not substantiate the charges that have been made, most students 
 are agreed that the system that has developed gives to the financial 
 interests an enormous power which, if wielded with sinister intent, or 
 merely with unwisdom, would be fraught with tremendous conse- 
 quences throughout the entire industrial system. The concluding 
 selection of the volume points out the economic functions that are 
 served by the modern financier and indicates the abuses that arise 
 in connection with the exercise of these legitimate functions. The 
 problem here would seem to be the same as with trusts or large-scale 
 industries in general — to conserve the undoubtedly good features 
 while eliminating the abuses that develop. 
 
 A. Investment Operations of Commercial Banks 
 
 216. THE RELATION OF THE BANKS TO STOCK 
 EXCHANGE SECURITIES' 
 
 By JACOB H. HOLLANDER 
 
 In the United States the money market, in the form of bank loans, 
 may be regarded as impinging upon the stock exchange at five distinct 
 points : 
 
 I. Stock-exchange securities are used as collateral to secure mer- 
 cantile discounts and personal loans in the insufficiency of commercial 
 or personal credit. 
 
 'Adapted from Bank Loans and Stock Exchange Speculation, pp. 4-26. 
 (National ^Monetary Commission, 191 1.)
 
 THE INTERRELATIONS OF FINANCIAL OPERATIONS 443 
 
 2. In the interval between original sale and ultimate absoqHion by 
 investors newly issued corjDorate securities are used by underwriting 
 syndicates and syndicate participants to secure bank advances. 
 
 3. Banking institutions invest in stock-exchange securities 
 such part of their resources as are not employed in loans and dis- 
 counts in consideration of interest return and in anticipation, semi- 
 speculatively, of appreciation in market value. 
 
 4. Bond houses and stockbrokers engaged in the sale of invest- 
 ment securities obtain bank loans as working capital upon unsold 
 holdings. 
 
 5. Speculative purchases of stock-exchange securities are financed 
 partly by time loans, but in the main by demand loans obtained 
 from banking institutions and secured by such securities as collateral. 
 
 Let us consider these in turn. 
 
 1. The stock-exchange securities in this case represent in the 
 main: (a) individual loans by those who are without commercial or 
 personal credit or who are unwilling to use it even though they pos- 
 sess it; (b) supplementary business loans by those who have exhausted 
 the maximum commercial credit which their customary banks have 
 found it possible to accord, and (c) loans made by corporations who 
 have been unwilling or unable to market their own obligations and 
 are driven to use these in j^art to secure urgently needed borrowings. 
 
 No question has ever been raised as to the utility of this feature 
 of our banking system. It is obviously advantageous that those 
 engaged in business activity, or individual effort, who happen to be 
 owners of stocks or bonds, should be able upon proper occasion to 
 secure temporary advances of credit thereon without the waste and 
 friction of forced sale. The banks here simply serve as jxawnshops 
 for securities. Capital is made more mobile without sacrifice of pro- 
 ductivity, and both the business community and the investing public 
 are benefited. 
 
 2. The ordinary .procedure in modern corporate financiering is 
 for the borrowing corjDoration to enter into an engagement with a 
 banking institution, pul)lic or private, for the guaranteed flotation, 
 commonly at a stipulated price, of the proposed issue. In the intcr\-al 
 between the preliminary engagement and the consummated arrange- 
 ment the purchasing institution will have secured from other insti- 
 tutions or individuals subscriptions to participate in the purchase 
 covering all but such part as it may itself desire to retain. Such 
 subscriptions will have been made to some extent by savings banks,
 
 444 PRINCIPLES OF MONEY AND BANKING 
 
 insurance companies, and trustees for direct investment puryjoses, 
 but in the main by junior banking and brokerage houses to meet 
 customers' demands. If times be favorable and the securities popular 
 the issue is likely to be absorbed by the public in response to the 
 advertised offering made by the contracting house or the syndicate 
 manager, if for no other reason than to accredit the issue, and rein- 
 forced by the elaborate selling organization that the ordinary bond 
 house has developed. In such event, prompt absorption of the issue 
 by actual investors, there will be no occasion for banking intervention. 
 The funds requisite will be withdrawn from individual savings ac- 
 counts and bank deposits and the purchased securities will find their 
 way into strong boxes. 
 
 If, however, general economic conditions are unfavorable, either 
 the trade purchasers or the underwriting participants, or both, will 
 find themselves with unsold blocks of securities on hand. These 
 may be taken up at once by those ultimately responsible, or, more 
 likely, the unsold quota will remain under the control of the manager 
 until with the expiration of an agreed or reasonable time — often 
 extended and re-extended — the distribution of the unsold remainder 
 among the subscribers is consummated. 
 
 Under such circumstances prompt recourse will be had to banking 
 institutions for advances of credit upon the unsold or undistributed 
 securities. The stage at which recourse is had to the banks and the 
 extent to which credit advances are sought varies with the nature of 
 the contract, the resources of the purchasing house, and the progress 
 of the distribution. If the issuing corporation requires early pay- 
 ment, the obligations in temporary form, or even the purchase option, 
 may be used by the purchaser as collateral for a bank loan. If the 
 loan be undersubscribed, the part left over will be similarly h}'pothe- 
 cated; or if the subscription be full but the absorption incomplete, 
 the undigested parts, either in the custody of the syndicate manager 
 or distributed among the separate participants, will be used as bank- 
 ing collateral. Ordinarily such advances are made by the banks at 
 the rates prevailing for call money, or upon even more favorable 
 terms in the case of underwriting syndicates having strong banking 
 connection. 
 
 If corporate enterprise is to secure with economy the additional 
 capital necessary from time to time for growth and expansion, if 
 accumulated savings are to find productive employment with prompt- 
 ness and certainty, some such relationship between corporate borrow-
 
 THE INTERRELATIONS OF FINANCIAL OPERATIONS 445 
 
 ing and the existing banking organization of the United States meets 
 this requirement of business enterprise with moderate success. Such 
 evils as from time to time disclose themselves seem inevitably incident 
 to the alternating fever and quiescence of modern economic organi- 
 zation. In flush times, when promoters abound and banks become 
 less prudent, the availability of corporate securities as bank collateral 
 undoubtedly serves as an artificial stimulus to evoke projects that 
 are unnecessary or unwise. The way is opened for a perilous process 
 of pyramiding that leads swiftly to reckless involvement. 
 
 A further criticism is that such bank loans tend to encroach upon 
 the accommodations that can be afforded ordinary business activity. 
 The times in which the banks are most heavily involved in syndicate 
 underwritings are periods of business activity rather than quiet. It 
 is then that corporate projects take amplest shape and flotation fol- 
 lows quickly upon flotation. During the upswing the absorption is 
 so rapid, the profits so alluring, and the pubHc service so plausible 
 that banking conserv^atism is put to the test merely in distinguishing 
 accommodation from excess and enterprise from venture. A bank's 
 mercantile customers ordinarily have the first claim upon its facilities. 
 But in periods of business calm not all of its resources will be so em- 
 ployed and — in lieu of the even less profitable avenue of emplojinent 
 in stock-exchange loans — advances upon syndicate collateral are very 
 acceptable. Such loans are nominally payable on demand, but in 
 reality they are much less liquid than the ordinary call loan. Such 
 practice gives rise to serious problems and is unfortunate, but it 
 appears to be a necessary result of the daring nature of modern busi- 
 ness. Publicity and improved means of control are required to safe- 
 guard the situation. 
 
 3. The motives leading to investments by banks in stock-exchange 
 securities are in some cases specific and obvious. The financial insti- 
 tutions of Baltimore, for instance, find it profitable to invest largely 
 in Baltimore City bonds, because such securities are not only exempt 
 from state and local taxation but, by a curious series of implied agree- 
 ments, administrative rulings, and legal enactments, carrs- with ihcm 
 a corresponding tax-deducting power, to the extent of largely relieving 
 some of the institutions from capital taxation. iVIore common is a 
 bank's investment in a particular State's or municipality's bonds in 
 the hope, or even as the condition, of becoming its public depository 
 or of securing some public or semi-public account. This may even 
 extend to a private corporation, whose profitable banking account
 
 446 PRINCIPLES OF MONEY AND BANKING 
 
 can be more certainly retained by participation in its financing. 
 Finally, some part of a bank's securities represent the foreclosure of 
 hypothecated securities, acquired by the institution for its own ulti- 
 mate protection. 
 
 But these instances explain only a fractional i)art of the aggregate 
 holdings and do not touch the essential consideration, which is, that 
 a bank buys securities because it can find no other profitable invest- 
 ment during recurring periods when business is quiescent for such of 
 its surplus funds as it would otherwise employ in its regular channels. 
 
 When reserves become congested and the local demand for money 
 is exhausted, neither the call money market in New York nor the 
 masked rediscount of country bank paper nor the availability through 
 brokerage houses of the promissory paper of a limited number of 
 widely known mercantile and industrial establishments will absorb 
 the excess, and recourse is had to the bond market. 
 
 From whatever point of view regarded, this apparent necessity 
 under which American banks now labor of tying up large parts of 
 their loanable funds in stock-exchange securities is unfortunate.' It 
 offers an unhealthy stimulus to corporate financiering by supplying a 
 temporary and fictitious market for investment securities. It invites 
 speculative gains and losses by the fluctuation in market price in the 
 interval between purchase and liquidation. It curtails mercantile 
 accommodation by the bank's reluctance to liquidate such securities 
 in a declining market, and it injects an additional element of risk into 
 banking stability in the temptation to invest in less seasoned and more 
 productive bonds. 
 
 4. The modern stockbroker is engaged in two kinds of activity — 
 the purchase and sale of investment securities and the conduct of 
 speculative operations for principals or in personal behalf. Ordinarily 
 both classes of business are conducted by the same house, but there 
 are many bond houses who do not invite speculative accounts and, 
 on the other hand, many commission houses figure inappreciably in 
 the investment market. 
 
 In so far as the activities of the stockbroker relate to the purchase 
 and outright sale of investment securities, he is a dealer in merchan- 
 dise. Accordingly, his vaults, like the shelves of the merchant or the 
 warehouse of the manufacturer, are at all times stocked with invest- 
 ment wares awaiting the dem.ands of his investing clientele. 
 
 ' This was written, of course, before the passage of the Federal Reserve Act. — 
 Editor.
 
 THE IXTERRELATIOXS OF FIXANXIAL OPERATION'S 447 
 
 In addition to undistributed syndicate holdings, the ordinan* 
 bond house is the owner, by actual i)urchase and payment, of blocks 
 of securities acquired for purjjoses of sale at profit, and the actual 
 distribution of which is pressed with all the energy and skill of com- 
 mercial vending. 
 
 Advances of credit upon the unsold part of this stock in trade are 
 sought from the banks in supj)lement of the broker's own working 
 capital. The relation of the stockbroker to the banks is, in this 
 particular, like that of any other lousiness man. Restriction of credit 
 on such security would find an exact parallel in the case of a merchant 
 denied credit upon unsold wares or a manufacturer upon undistributed 
 produce. 
 
 This service is rendered with reasonable adequacy by our present 
 banking system. Bond houses suffer something in common with all 
 mercantile enterprise from the inelasticity of bank credits in periods 
 of economic expansion, Ijut the treatment accorded is often preferential 
 and the discomfort on the whole less acute. 
 
 5. Speculative purchases of stock-exchange securities have resulted 
 from the accumulation of funds in central reserve cities, notably New 
 York, through the practice under the National Banking laws of 
 redepositing reserves and of habitually allowing 2 per cent interest 
 upon country bank deposits subject to call. 
 
 It is not possible for the New York banks to emi)loy all such 
 deposits in mercantile loans and discounts, even were it sound bank- 
 ing to lend call money on time loans. The only method of profitable 
 use is demand loans, and the only large market is offered by specu- 
 lative operators on the stock and produce exchanges.' 
 
 We have here all the conditions favorable to artificial stimulation 
 of stock-exchange speculation. At periods of seasonal dulness, and, 
 even more, at times of business reaction, the irresistible lure of pay- 
 ment for idle money attracts the surplus funds of the interior banks 
 to New York, there to be j)ressed upon the call money market for 
 what it will bring, and, finding regular employment only in stock- 
 exchange operations, to encourage speculative commitments at the 
 very time when cjuiescence is in order. As there is unwholesome 
 stimulation, so there is sudden and wasteful liciuidation. When 
 reviving business leads the interior banks to reduce their New York 
 balances, the depositary banks meet the strain by calling loans, with 
 
 ' For the method by wliich such loans are made see selection No. 39.
 
 448 PRINCIPLES OF MONEY AND BANKING 
 
 the result that the speculative movement for the rise is reversed and 
 a repressive influence cast upon general business. 
 
 It is certain that a measure of stock-exchange speculation would 
 persist even if the resources of the New York banks were alone 
 available for financing it, but the extent of such accommodation, 
 even when supplemented by the demand loans made available by 
 individual capitalists, would be limited and the cost of securing it 
 would be greater. Individual speculation would be less in amount 
 and narrower in distribution. Most of all, the periods of speculation, 
 in so far as determined by the cheapness of money, would vary logi- 
 cally with the movement of general business, instead of, as at present, 
 running in vicious opposition thereto. 
 
 217. INVESTMENT LOANS OF COMMERCIAL BANKS' 
 By C. W. BARRON 
 
 The best estimates that we can get privately of bankers is that 
 the real commercial loans in the national banks do not exceed three 
 billions, or one-half the loan account. 
 
 While the paper appears in the form of commercial loans, a con- 
 siderable part is for fixed forms of property and for as distinctively 
 industrial expansion as are stocks and bonds. And why should it 
 not be? 
 
 A merchant with sufiicient capital to do his own banking may 
 have several hundred thousand dollars cash in the bank, owe no 
 money, and have a million dollars in accounts on his books, or notes 
 in his box representing commercial loans due him. His business 
 expands and he desires to put a half-million or a million into a new 
 factory. Will he issue stocks or bonds or make any permanent bor- 
 rowing for this ? Certainly not. He notifies the bank he will want a 
 half -million or more money covering certain months. The bank's 
 response is, of course, that he can have all the riioney he wants and 
 give any kind of a note on time or demand. His cash balance is 
 worthy of his credit. His borrowing is, therefore, not necessary 
 commercial borrowing, but commercial borrowing is forced by his 
 construction. 
 
 The state banks and trust companies csLvry far less commercial 
 paper than the national banks. On page 5 1 of the Report of the Comp- 
 troller of the Currency for 19 13 will be found a record of not only the 
 
 'Adapted from The Federal Reserve Act, pp. 68-73. (Boston News Publish- 
 ing Co., 1914-)
 
 THE INTERRELATIONS OF FINANCIAL OPERATIONS 449 
 
 7,473 national banks but of 18,5 20 state banks, trust companies, private 
 bankers, and savings banks in respect to the character of their loans. 
 Out of a total of $14,600,000,000 loans based largely on demand 
 deposits, $3,500,000,000 are secured by real estate and mortgages, 
 and $4,500,000,000 by other collateral, and $8,000,000,000 on fixed 
 forms of property. The "other loans" are $6,500,000,000, including, 
 of course, the so-called $3,000,000,000 commercial loans in the national 
 banks as noted above. Of these the real commercial loans are some- 
 where between three billions and six billions. Private estimates of 
 bankers with far better knowledge of the real situation than is pos- 
 sessed by the government officials vary all the way between these 
 two figures. 
 
 We have for some time estimated that the real commercial loans 
 for the transactions of commerce in this country do not exceed five 
 billions and that between nine and ten millions of bank loans are on 
 fixed forms of property. 
 
 This represents property in process of digestion by investors. 
 When the amount is large, or the investment fund is light, it is termed 
 overinvestment or indigestion of securities. Nearly two-thirds of 
 our bank loans represent constructive industry, stocks, bonds, and 
 fixed forms of property in process of digestion, and only one-third 
 represent commercial transactions.' 
 
 218. THE MISUSE OF COMMERCIAL BANK FUNDS^ 
 By H. M. GEIGER 
 
 We have all been too busy to keep books accurately on a big 
 scale. Consequently no one can tell us exactly what proportion of 
 our assets represents permanent investment; what percentage we use 
 for development and construction, or what sum is absolutely neces- 
 sary to carry on the rapid-fire exchanges of industry and commerce. 
 
 Roughly, we know that certain sums are deposited in savings 
 banks, trust companies, and in the savings departments or time cer- 
 tificates of deposit of national banks. With some degree of approxi- 
 mation we can guess that these funds are available for more or less 
 permanent investment in stocks, bonds, investment notes, or other 
 securities which will not be paid in full until a long period of time has 
 
 'See selections Nos. 32 and 37. — Editor. 
 
 'Adapted from a pamphlet entitled Financial Readjustments (1915), pp. 2-5. 
 (Copyright by the author.)
 
 450 PRINCIPLES OF MONEY AND BANKING 
 
 elapsed. But we have no exact account of our "commercial" and 
 our "investment" funds in general. 
 
 Even without this information, however, the daily practice of 
 business constitutes sufficient proof in itself that the combined total 
 of all "investment funds" as represented by the resources of savings, 
 trust, and insurance companies, private investors and investment 
 banks, are not sufficient to meet the demands created by our indus- 
 trial expansion. The extraordinary expansion of civilization in Amer- 
 ica during the past century has made use of every penny of available 
 capital, has borrowed five or six billions from Europe, and has still 
 been driven to make merciless inroads on what we should have been 
 taught to respect as our "commercial" fund. This is not a cause for 
 sorrow or of worry. The money has been well used. Our fathers 
 found a wilderness. Since then the wilderness has not only been 
 reduced to a fairly well cultivated area of farms, cities, mines, and 
 factories, but the nation as a whole has kept pace with the unprece- 
 dented commercial and industrial progress of the older civilizations 
 of Europe, which had all the fundamentals of their culture built and 
 paid for when we were surveying roads through forests and following 
 Indian trails across the Western plains. 
 
 Our one error was in mistaking the proper functions of our com- 
 mercial banks. 
 
 Stated bluntly, a majority of the resources of national banks are 
 tied up in loans of a more or less permanent character. Truly, the 
 notes are usually made for periods of four or six months, but it is the 
 understanding between the banker and the borrower in many instances 
 that these notes shall be renewed indefinitely, provided certain peri- 
 odical reductions are made and the interest discounted in advance. 
 Moreover, the country is filled with manufacturers who expect bankers 
 not only to finance their temporary needs, but who have also built 
 their plants on capital borrowed and reborrowed, again and again, 
 from banks. 
 
 This practice has been one of the most prolific causes of industrial 
 failures in the United States. Dun's and Bradstreet's reports for 
 many years show that go per cent of all failures are due to lack of 
 capital. In very many instances excellent enterprises were under- 
 taken at periods when it was easy to secure loans from banks, only to 
 fail in the midst of their development because some contingency forced 
 the bank to withdraw its support and demand the payment of its 
 loans.
 
 THE INTERRELATIONS OF FINANCIAL OPERATIONS 451 
 
 So, while the practice of loaning ''demand" deposits to borrowers 
 who are not prepared to pay except at the end of a long period has 
 caused many sleepless nights for bankers, it has also produced innu- 
 merable tragic failures for enterprising men who have seen their 
 plans shrivel up and disappear under the sheriff's hammer to satisfy 
 a note that had been "called." 
 
 219. THE ADVANTAGE OF THE DRAFT OVER THE PROISHS- 
 SORY NOTE IN COMMERCIAL BANKING- 
 
 By EARLE p. CARMAN 
 
 The usual method of obtaining credit for commercial purposes is 
 by borrowing on the promissory note, and the usual method of extend- 
 ing commercial credit is on open book account. Let us examine both 
 methods. 
 
 The promissory note is not a distinctive commercial instrument. 
 It bears nothing on its face to indicate the purpose for which the 
 funds it represents have been used or are to be used. Ver^' often it 
 is simply an accommodation credit instrument and has nothing 
 behind it except the general resources of the borrower. Quite fre- 
 quently it is an investment credit instrument, representing non- 
 convertible property. A prominent banker of western Pennsylvania 
 recently issued promissory notes for the puq^ose of obtaining invest- 
 ment funds, to the extent of several million dollars, and with the 
 usual disastrous result. 
 
 When used for commercial puqwses, the promissory note usually 
 represents a combination of commercial credit and investment credit. 
 In other words, the proceeds of the note are usually used jxirtly to 
 pay for commodities of trade which will be resold and partly to pay 
 for permanent fixtures or improvements which will never be resold 
 while the business of the borrower continues. 
 
 But the aggregate amount of commercial credit tied up and made 
 inconvertible by the use of promissory notes representing mixed 
 commercial and investment credits is probably small in comparison 
 to the aggregate amount of commercial credit represented by book 
 accounts, which are both immobile and nonconvcrtible. This vicious 
 system of extending comnicrcial credit is (|uite unknown in any of 
 
 'Adapted from "The Change of Credit Methods Made Necessary by the 
 Federal Reserve Act," Commercial and Financial Chronicle, April 24, 1915, pp. 
 1396-98.
 
 452 TRINCIPLES OF MONEY AND BANKING 
 
 the other leading countries. It has everything against it and nothing 
 in its favor, either as regards the seller, the buyer, or the general 
 credit situation. 
 
 As regards the seller, it compels him to limit his sales on credit 
 by the capital employed in his business, and his profits are restricted 
 accordingly. If he extended credit only in such form that it could 
 be converted into cash, he could sell all the goods that the trade would 
 consume, and his profits would be limited only by the laws of supply 
 and demand and his maximum capacity. 
 
 As regards the buyer, it is obvious that commercial credit extended 
 to him in convertible form would be limited only by his legitimate 
 needs and ultimate ability to pay, while credit extended to him through 
 the nonconvertible book account is limited by the capital of the seller 
 and many other extraneous considerations. 
 
 As regards the general credit situation, the book account has the 
 same effect as the non-convertible promissory note, which has already 
 been described. 
 
 Need any more be said to show that the mixed promissory note 
 and the open book account are unsound and impracticable mediums 
 of commercial credit, and that their general use is a serious handicap 
 to commercial progress ? 
 
 The European method of extending commercial credit is free 
 from any of the evils mentioned and is simple and uniform. It 
 consists merely of the use of the draft or bill of exchange in all cases 
 where we use the book account and promissory note. The period of 
 credit to be extended is agreed upon by the parties, and when the 
 seller ships his goods he draws a draft against the buyer, payable in 
 thirty, sixty, or ninety days, as the case may be, for the amount of 
 the invoice, which is usually attached with the bill of lading to the 
 draft. The draft and shipping papers may be forwarded to the pur- 
 chaser either directly or through the banks, as may be deemed advis- 
 able. When they are received, the purchaser detaches and retains 
 the shipping papers, affixes his signature to the draft under the word 
 "Accepted," and returns it to the seller or the bank presenting it, as 
 the case may be. It thus becomes a bill of exchange which can be 
 discounted and thereby converted into cash at any time.
 
 THE INTERRELATIONS OF FINANCIAL OPER.\TIONS 453 
 
 220. THE ADVANTAGES OF THE PROMISSORY NOTE OR 
 SINGLE-NAME BORROWING' 
 
 By J. B. FORGAN 
 
 Commercial paper or a commercial note used to be a note given 
 by a firm or corporation that bought goods from another firm or 
 corporation. This note was discounted by the firm that got it, with 
 their indorsement. The manufacturers gave credit to the jobbers 
 and the jobbers gave credit to the retailers. The jobber paid the 
 manufacturer by a note and the retailer paid the jobber by a note. 
 This was extended all through the commercial life. 
 
 That practice still prevails in England. A large concern like 
 Marshall Field & Company, except that they never give anything 
 but checks, I believe, but any firm in their line doing business in the 
 old way, instead of going to their bank and borrowing money on their 
 own note, would go to the manufacturer and would arrange that he 
 should draw on them at sixty or ninety days. The draft would be 
 made when the goods were shipped and the firm would accept it. If 
 the firm's credit were not sufficiently strong for its paper to go into 
 the market, it would go to its bank and get it to accept for it. 
 
 Eventually we developed away from that. Today any jobbing 
 house or manufacturer or pretty nearly any respectable retail house 
 that has not credit of its own sufficient to go to its bank and discount 
 its own paper and pay cash for its bills is on a black list. 
 
 The poorest paper we have, and we have very little of it in Chi- 
 cago, is the paper given by the purchaser of goods for the goods. 
 There are a few lines of business where the old system is kept up, but 
 these are very few. 
 
 The best paper we have is the paper of the strongest houses 
 who have credit of their own, who make their own paper, go direct 
 to their banks with it or to a broker, place it on the market, get the 
 cash, and use the cash discount. 
 
 The system of cash discounts has produced this. The best 
 thing the wholesale houses and manufacturing concerns, in the ex- 
 change of credit information among them, can say about their 
 customers is that they always take the cash discount. If they ha\-e 
 anything to say against the customer, it is that the latter docs not 
 take the cash discount. 
 
 ' From "Testimony before Committee Charged with Organizing Federal 
 Reserve Banks," Bankers' Magazine, LXXXVIII (1914), 280-83.
 
 454 PRINCIPLES OF MONEY AND BANKING 
 
 You can easily sec that the expansion is not nearly so great. 
 If the concern that takes the ore out of the ground is going to get 
 the ore to the furnace on credit and take the furnace's note for it, and 
 if the furnace is going to sell its iron production to the manufacturer 
 and take his note, and if the manufacturer is going to sell to the 
 iron jobber and take his note, and the iron jobber sell to the retailer 
 and take his note, you have five or six notes afloat at the same time 
 representing the same goods. If you reduce all that business to a 
 cash basis and have the ore producer, the furnace man, and so on, 
 only borrowing what he requires at his own bank to carry on his 
 business, there is much less flotation and expansion of credit than in 
 the other way. 
 
 They carry this expansion to such an extent in England that a 
 tailor does not expect to be paid by anybody inside of a year. We 
 do not have such a credit system as that. We pay our biUs. We are 
 much nearer a cash basis than any foreign country. This will have to 
 be recognized. The paper that is issued for commercial purposes 
 must be understood to be used for commercial purposes. If a concern 
 like the International Harvester Company places its paper on the 
 market and uses the money in its business, it is used for commercial 
 purposes and it will have to be construed in that liberal line. 
 
 221. INVESTMENT BANKING AND BUSINESS INFLATION' 
 
 About twenty-five years ago Lord Revelstoke, at the head of the 
 great firm of Baring Brothers, was visiting a German watering place 
 where he met one of our leading American bankers. Naturally their 
 conversation drifted into a discussion of the financial situation, and 
 in the course of the talk Lord Revelstoke remarked that he intended 
 during the next ten or fifteen years to enter extensively into modern 
 financial banking. From that time the character of the business of 
 the Barings began to change, and from being the greatest merchants 
 in commercial credits they put their resources more and more into 
 fixed forms of investment, into speculative ventures in securities, and 
 into the promotion of financial enterprises. What was the result? 
 In 1890 the world was startled by rumors reflecting upon the credit 
 of this house, hitherto considered invincible, and its failure was only 
 averted by the most strenuous efforts of the Bank of England, with 
 the aid of the strongest bankers of London. 
 
 ^From the Wall Street Journal, October 29, 1904. Quoted in Cleveland, The 
 Bank and the Treasury.
 
 THE INTERRELATIONS OF FINANCIAL OPERATIONS 455 
 
 We refer to this striking chapter in financial history simply 
 because it illustrates one of the peculiar dangers of our own times. 
 Unquestionably the special temptation to which our banks are now 
 subjected is the temptation to turn from commercial to financial 
 banking; to change from the buying and selling of commercial credit 
 to investments in securities and loans extended to promote financial 
 enterprise; in short, to change their business from that of commercial 
 banks to that of finance companies. 
 
 The process of concentration in banking which is going on would 
 possess Httle danger were it not accompanied in so large a degree by 
 this change. The house of the Barings was a striking example of 
 concentration in banking. Its business encircled the globe; its 
 wealth was enormous, and so great were its transactions that even at 
 the time of its trouble in 1890 its holdings of paper amounted to 
 $100,000,000. But when it began to divert itg interest and began 
 to throw the weight of its prestige and resources into the field of 
 investment, speculation, and promotion, then the power of its con- 
 centration of capital became a menace to the world. In the same way 
 concentration in banking, which is going on at such rapid rate in New 
 York, would not be open to much or any criticism if such concentra- 
 tion was employed for the purpose of facilitating the commerce of the 
 country instead of being used in purely financial undertakings. 
 
 222. WHY "COMMERCIAL" BANKS BECAME INVESTMENT 
 
 BANKS' 
 
 By LOUIS D. BRANDEIS 
 
 The enormous profits from promotions, underwritings, and 
 security purchases in the investment field have led to a revolutionary 
 change in the conduct of our leading banking institutions. It was 
 ol)vious that control by the investment bankers of the dei)osits in 
 banks and trust companies was an essential clement in their securing 
 these huge i)rofits. And the bank officers naturally asked, "Why, 
 then, should not the banks and trust companies share in so profitable 
 a field ? Why should not they themselves become investment bankers 
 too, with all the new functions incident to 'Big Business'?" To do 
 so would involve a departure from the legitimate sphere of the bank- 
 ing business, which is the making of tem]x)rary loans to business 
 
 ' .\clapted from Other People's Money, and How the Bankers Use It, pp. 26-27. 
 (Frederick \. Stokes Co., 1914. Originally published in Harper's Weekly.)
 
 456 PRINCIPLES OF MONEY AND BANKING 
 
 concerns. But the temptation was irresistible. The invasion of the 
 investment banker into the bank's field of operation was followed by a 
 counter-invasion by the bank into the realm of the investment banker. 
 Most prominent among the banks were the National City and the 
 First National of New York. But theirs was not a hostile invasion. 
 The contending forces met as allies, joined forces to control the busi- 
 ness of the country, and to '^ divide the spoils." The alliance was 
 cemented by voting trusts, by interlocking directorates, and by joint 
 ownerships. There resulted the fullest "co-operation"; and ever 
 more railroads, public-service corporations, and industrial concerns 
 were brought into complete subjection. 
 
 223. EFFECTS OF INDUSTRIAL EXPANSION ON DEMAND 
 DEPOSITS OF COMMERICAL BANKS' 
 
 By FREDERICK A. CLEVELAND 
 
 Between 1899 and 1902, owing to the tremendous expansion of 
 business, deposit accounts of commercial banks increased over $4,000,- 
 000,000, or more than double the entire monetary stock of the country. 
 During the same years the specie reserve of banks remained practically 
 unchanged. Moreover, the capital of these institutions had not been 
 proportionately increased. 
 
 What has been the cause of this enormous expansion of bank 
 credit ? The answer must at once come to the mind of any observer 
 of finance that the principal reason for the expansion of deposits 
 (bank credit accounts) and the accompanying expansion of loans 
 (commercial paper held by banks) is to be found in the great move- 
 ment which has been the significant feature in financial affairs of the 
 last half-dozen years, the movement to aggregate industrial estab- 
 lishments into single great corporate units and to convert the evidence 
 of ownership into corporate securities which have entered actively 
 into the stream of financial operations. Vast amounts of new securi- 
 ties have been created in these half-dozen years, based in a large 
 measure upon properties which were before held as fixed investments 
 by individuals; or, if standing in form of corporate property, the 
 securities of these corporations were more closely held, and in but 
 small measure entered into the financial operations of the day. This 
 movement, tending to convert the evidences of ownership of a great 
 
 ' Adapted from The Bank and the Treasury, pp. 5-1 1. (Longmans, Green, & 
 Co., 1908.)
 
 THE INTERRELATIONS OF FINANCL\L OPERATIONS 457 
 
 amount of fixed property into a form which has been considered as 
 bank collateral, and which has been made the basis of loans and of 
 corresponding increases of deposits, is undoubtedly the most important 
 single cause for the increase of more than four billion dollars in bank 
 credit obligations to depositors and a corresponding increase in 
 commercial paper held by banks in this country during the brief 
 period of three or four years. 
 
 Attention may be called to the fact that the depression from 1893 
 to 1896 was, as were other similar periods, one of financial reorgani- 
 zation — one during which new economies were introduced into our 
 industrial establishments. During this period of depression also the 
 water had been gradually squeezed out of previously inflated capital- 
 izations; again the nation had come to rely, for its "cash" as well as 
 for its income, on profits from legitimate business. With this better 
 industrial equipment we were able to sell pig iron at a profit at $10 
 to $12 a ton; steel rails were sold with a liberal return to capital at 
 $17.50 per ton, and bar iron entered a profitable market at 95 cents 
 per hundred. 
 
 After business had been reorganized on a lower basis of capital 
 liabilities, thousands of commodities were produced with profit at 
 prices such that they began to find their way into foreign marts and, 
 in competition with foreign-made goods, undersold them. Europe 
 was startled at our newly developed commercial strength. Our 
 appearance with shiploads of products that others could not manu- 
 facture at competitive prices made the world realize that in the 
 Western continent were resources and industrial estabUshments that 
 in an open market with free competition might bid defiance to all 
 Europe. Under such circumstances bills of exchange drawn against 
 the sale of American goods formed a true basis for commercial bank 
 loans. 
 
 What was the result, however, when the commercial bank 
 extended its support to the capitalization of new promotions and 
 became the chief factor in the "industrial speculation" that grew 
 out of this sudden national awakening? Instead of limiting the 
 commercial banking business to the service of a commercial constitu- 
 ency, instead of devoting the funds of commercial banks to the 
 accommodation of producers and merchants, a system of undensTiting 
 new flotations was inaugurated. This was not a novel experience. 
 Similar practice is recalled by the ex-Assistant Secretary of the Treas- 
 ury, l)y reference to the "real estate" restriction in the National Bank
 
 458 PRINCIPLES OF MONEY AND BANKING 
 
 Act. Back of the law forbiddinj^ the banks to loan on real-estate 
 securities may be seen the long periods of industrial depression and 
 financial reorganization following the panics of 1825, 1837, and 1847. 
 
 Each period of prosperity immediately preceding these crises had 
 been one of capitalization of new promotions. At that time, however, 
 speculation was based on the possibilites of increasing profits to be 
 derived from the development of agricultural resources. Westward 
 immigration had appropriated for use large areas, a new empire of 
 grain lands for which new transportation development had opened a 
 market to the seaboard. New cotton, tobacco, and hemp lands 
 enlarged this area to such an extent that the territory appropriated 
 but still undeveloped was larger than the old Atlantic slope to which 
 capital had before confined its investments. In these new areas all 
 other demands gave way to the clamor for new capital, and the com- 
 mercial banks attempted to supply this demand. 
 
 The failure of some eight hundred commercial banking institu- 
 tions during 1837 and 1838 was the result of this kind of bank-credit 
 employment; the failure of nearly fifteen hundred banks during the 
 next three decades of State banking based on investment securities 
 brought to the mind of practical bankers the character and purpose 
 of the commercial bank. In 1903 and 1904, while Europe was going 
 through the throes of financial reorganization, our farmers were 
 blessed with large crops and high prices; a kind and bountiful Provi- 
 dence filled the granaries and the storehouses of the great West and 
 South, permitting us to levy tribute on a distressed world. Tempora- 
 rily judgment of our financial folly was suspended, but the instru- 
 ments of self-destruction were still in the hands of an unthinking 
 speculative public. These instruments of destruction were placed in 
 the hands of speculators by commercial banks in the great financial 
 centers. They were not used alone in self-destruction, but they 
 carried merchant and manufacturer with them. 
 
 224. RESULTS OF INVESTMENT LOANING BY COMMERCL\L 
 
 BANKS' 
 
 By WILLIAM A. SCOTT 
 
 When commercial banks create their own demand obligations, 
 either in the form of checking accounts or notes against investment 
 securities, they are creating an obligation which they may not be 
 
 'Adapted from "Investment vs. Commercial Banking," Proceedings of the 
 Second Annual Convention of the Investment Bankers' Association of America, 1913, 
 pp. 81-84.
 
 THE IXTERRELATIOXS OF FIXAXCIAL OPERATIOXS 459 
 
 able to meet. When they exchange credit accounts for commercial 
 securities, the ordinary processes of commerce bring into their pos- 
 session day by day the means of meeting the obligations which they 
 create; but when they create such obligations against investment 
 securities the funds regularly coming into their possession for the 
 meeting of such obligations are quite inadequate for the purpose. 
 The enterprises which these investment securities represent, however 
 productive they may be, bring into existence only after a series of 
 years an amount of produce sufficient to bflset the original investment. 
 If such an enterprise produces a profit of 10 per cent a year, it takes 
 ten years to reproduce itself. If only 5 per cent profit per annum is 
 produced, twenty years are required. The demand obligations created 
 by the banks, however, must be met long before these periods of time 
 elapse. 
 
 The result of such loans is overexpansion or inflation of credit, 
 that is, the banks have created obligations against themselves which 
 they are not able to meet in the normal course of business. So long 
 as business is prosperous all goes well; but as soon as there is a break 
 somewhere in the industrial system and borrowers for investment 
 uses are unable to pay, serious trouble follows; The only means by 
 which the banks can meet such obligations when they mature is by 
 the sale on the market of the securities in their possession not yet due, 
 and while an individual bank may be able to transfer such securities 
 to another institution, and the banks of a country as a whole some- 
 times may be able to transfer them to the banks of other countries, 
 the danger is always present that such transfers cannot be made, and 
 even if they can be, only at a great sacrifice. Forced liquidation, in 
 other words, is a necessary outcome of overexpansion of credit 
 caused by the exchange of investment securities for checking accounts, 
 and if such forced liquidation is general throughout a country and 
 attempted on a large scale, it can only be accomplished through the 
 agency of the bankruptcy courts, and when these function on a large 
 scale, commercial crisis is inevitable. 
 
 The fact that the paper of customers is drawn for thirty, sixty, 
 ninety days, four or six months enables the banker to force this 
 liquidation process upon customers, but this fact does not protect 
 the country from the consequences of such liquidation. Sacrifice of 
 property, fall in prices, commercial failures on a large scale, and a 
 general readjustment of commercial and industrial relations cannot 
 thus l)e avoided.
 
 46o TRINCIPLES OF MONEY AND BANKING 
 
 B. The Federal Reserve System and Investment Operations 
 
 225. EFFECT OF THE NEW SYSTEM ON STOCK 
 EXCHANGE SPECULATION' 
 
 By THOMAS CONWAY and ERNEST M. PATTERSON 
 
 The effect of the Federal Reserve Act upon stock exchange specu- 
 lation in New York City will be watched with the greatest interest 
 by everyone interested in banking. Some will look with concern lest 
 the new law, by suddenly depriving stock and investment markets 
 of funds, will create disorganization, palsying new construction which 
 must be financed through sale of securities, and unsettling the value 
 of collateral upon which thousands of business men have negotiated 
 loans to carry on their enterprises. Others will be interested to see 
 whether New York's power and prestige will be diverted to other 
 centers with the localization of funds in these new districts. Everyone 
 will be interested to know whether it will destroy the efficacy of the 
 so-called "Money Trust," which is founded primarily upon the con- 
 trol of a comparatively small number of banking institutions that 
 hold these bankers' deposits from the other sections of the country. 
 
 It is impossible to answer any of these questions authoritatively. 
 It would appear that the day of exceedingly cheap money for stock 
 exchange uses is past. Without a law which renders an enormous 
 amount of money idle, thereby enabling the New York banks to 
 attract it to New York with a 2 per cent interest rate, it will be im- 
 possible for the New York institutions to offer call money at an average 
 rate of about 2I per cent, as has been the case within the last ten 
 years. 
 
 The stock speculator and the investment banker who are carrying 
 securities until such time as they can dispose of them will have to 
 pay rates of interest approximating those which have prevailed abroad 
 and which are determined by commercial borrowers. Call loans will 
 probably be offered at attractive rates in Umited amount, but the 
 great bulk of money will probably be secured at interest rates of 
 4 per cent or over. Certain New York bankers expressed the opinion 
 before the Congressional committee that it would be impossible to 
 deprive New York of funds for stock exchange uses so long as the 
 borrowers were willing to pay a good rate of interest. A compara- 
 
 ' Adapted from The Operation of the New Bank Ad, pp. 364-66. (J. B. Lippin- 
 cott Co., 1914.) \
 
 THE INTERRELATIONS OF FINANCL\L OPEIL\TIOXS 461 
 
 tively small number of New York City banks now have funds of 1 5,000 
 other banks. These gentlemen predicted that these institutions could 
 induce the out-of-town banks to rediscount commercial paper at, say, 
 3 or 4 per cent, which might then be the rate, forwarding the proceeds 
 to New York to be loaned out upon stock exchange collateral at, say, 
 5 or 6 per cent. The profits to be derived from this transaction are, 
 in their opinion, so obvious as to tempt many bankers. Such a prac- 
 tice, if it should develop to any large degree, would be unfortunate, 
 for by indirection it would work an evasion of the plain intent of 
 the act. 
 
 Looked at from another standpoint, however, the matter does 
 not seem to be as serious as might appear on the surface. There is 
 abundant testimony to support the statement that it is very difficult 
 to carry on profitable speculative operations on a large scale with 
 high interest rates; but so long as the money is not being used to 
 conduct feverish and undesirable speculation, from a national stand- 
 point, there is no reason why New York should not be allowed to 
 attract it. 
 
 226. THE FEDERAL RESERVE SYSTEM AND INDUSTRIAL 
 
 EXPANSION' 
 
 By C. W. BARRON 
 
 The expansion that is made possible by the economizing and 
 lowering of bank reserves under the new bank law must go primarily 
 to constructive industry. With the lowering of interest rates there will 
 be rising prices for stocks and bonds until the returns are so low that 
 money is invited into the constructive field. Afterward it will require 
 all the power of the Federal Reserve Board to hold Wall Street and 
 the expansive building industry of the country in check. 
 
 Overinvestment in stocks and bonds is an absolute requisite in 
 the construction and upbuilding of this country. When high interest 
 rates arc maintained, as in the past year, construction slows down, 
 and the moment there is a restoration of confidence, or prospects for 
 higher investment prices, as at the opening of 1914, there is a sudden 
 outpouring of investment moneys. The undigested bonds are taken 
 from the banks and the bank loans by the hundred million. 
 
 We have money enough and credit enough to carry our commercial 
 transactions and four or iivc years of overinvestment. We need at 
 
 ' Adapted from The Federal Reserve Act, pp. 68-73. (Boston News Publishing 
 Co., 1914.)
 
 462 PRIXCIPLES OF MONEY AND HAXKIXO 
 
 least three years of construction or overinvestment to be carried in 
 bank loans before properties are in shape for difjestion by investors. 
 But do we need more than five years? And will there be danger 
 under the new bank act in a few years of finding that we are six or 
 seven years overinvested, our credit reserves exhausted, and our 
 currency base endangered ? 
 
 That question can be answered only by the new Federal Reserve 
 Board, and after all they may have very little to say about it at first. 
 After rediscounting enough commercial bills to earn dividends on the 
 new Reserve Bank shares and to insure against contraction, they must 
 rest their activities in this direction. 
 
 A steady bank rate and the assurance of relief when needed will 
 alone be sufficient to give confidence for construction expansion 
 outside the railroads. 
 
 With confidence credit comes fully forth, and with full credit 
 there is little need for currency or Treasury reserves. Until one or 
 the other is called for, the Federal Board can have little control unless 
 it undertakes to regulate the future in finance and raise the money 
 rate and curtail credit when confidence is in full swing. 
 
 The lending outside the reserve system based on demand promises 
 will be greater than within the system, and especially so as regards 
 construction and stocks and bonds. Here will be the first sign of 
 trouble in future years. 
 
 227. COMMERCIAL PAPER UNDER THE NEW SYSTEM^ 
 By EUGENE E. AGGER 
 
 As a basis of the projected discount market, the act provides for 
 three kinds of paper as follows: (c) commercial paper, namely, 
 "notes, drafts, and bills of exchange arising out of actual commercial 
 transactions," that is, paper "issued or drawn for agricultural, indus- 
 . trial, or commercial purposes, or the proceeds of which have been used 
 or are to be used for such purposes"; (b) commodity paper, namely, 
 paper secured by "staple agricultural products or other goods, wares, 
 or merchandise"; and, lastly, (c) acceptances growing out of exports 
 and imports. But while the act itself imposes certain requirements 
 on the paper eligible for rediscount at, or for purchase by, the Federal 
 Reserve Banks, it imposes on the Federal Reserve Board the responsi- 
 bility of determining in detail the character of such paper. 
 
 ' Adapted from "Commercial Paper and the Federal Reserve Board," Aiuiah 
 of the American Academy of Political and Social Science, LXIII (1916), 106-09.
 
 THE IXTERRELATIOXS OF EIXAXCIAL OPERATIOXS 463 
 
 In view of the peculiar development of American credit methods 
 in the past, there arose, after the passage of the Federal Reserve Act, 
 the liveliest discussion as to the manner in which the Reser\'e Board 
 should exercise the responsibility thus entrusted to it. Owing to the 
 specific provisions of the act there was no serious difference of opinion 
 about commodity paper and about acceptances growing out of exports 
 and imports. But with respect to the "notes, drafts, and bills of 
 exchange arising out of actual commercial transactions" the dis- 
 cussion waxed warm. The issue was drawn between what is known 
 as "single-name paper" and what, on the other hand, is known as 
 "double- name paper." There is no occasion in this place for referring 
 to the sundry interesting representations made by both sides. Suffice 
 it to say that the question involved, first, the desirability of including 
 single-name paper at all, and, second, assuming a definition of char- 
 acter broad enough to include it, the further question as to whether 
 for discount purposes there should not be a discrimination against 
 single-name paper in favor of double-name paper. In view of the 
 widespread dependence upon single-name paper in the United States, 
 however, there was also much difference of opinion as to whether the 
 two-name system could be successfully propagated here. 
 
 After setting forth clearly the essentials of the question the com- 
 mittee of banking experts which had been selected to study the whole 
 question of the organization of reser\'e banks came to the conclusion 
 that it was clearly the intention of Congress to include in the paper 
 eligible for rediscount single-name paper having the prescribed quali- 
 fications. It based its conclusion on the fact that the act specifically 
 mentioned not only instruments the proceeds of which had been 
 used for agricultural, industrial, and commercial transactions, but 
 also those which were to be used for such purposes. A two-name bill 
 assumes a transaction completed; hence a contemplated transaction 
 could hardly give rise to a two-name bill. But the committee pointed 
 out that while single-name paper was to be included there must be 
 no doubt about the use of the proceeds for strictly commercial purposes. 
 
 The committee then discussed the means that might be employed 
 for preventing the use of the proceeds of rediscountcd paper for the 
 forbidden purposes of obtaining current capital and of financing 
 speculation. It pointed out that in practice it would be impossible 
 as well as unnecessary to insure the use in the permitted directions of 
 the particular sums advanced by the banks on rediscounted paper 
 as long as there was the assurance that "an ecjual sum drawn from
 
 464 PRINCIPLES OF MONEY AND BANKING 
 
 the liquid resources of the concern receiving the advance is so applied." 
 In other words, according to the committee it is a question simply as 
 to whether the person or firm getting the advance "is engaged in 
 actual business of the kind referred to and is in liquid condition." 
 That the committee favored, however, as full a restriction of single- 
 name paper as possible is indicated in the statement that "wherever 
 possible the proportion of single-name paper allowed to figure in the 
 rediscounts of a Federal Reserve Bank should be confined to the lowest 
 basis consistent with the welfare and convenience of the business 
 community." 
 
 The committee also suggested means of accelerating the develop- 
 ment of two-name paper and, at the same time, of restricting single- 
 name paper. It looked with favor on a "differential rate" slightly 
 in favor of double-name paper. It suggested the possibility of 
 "restricting the total amount of single-name paper admitted to 
 rediscount to a given percentage of the gross rediscounts of the 
 Reserve Bank in question." Along this same line the committee 
 deemed worthy of mention also that note brokers might be required 
 under certain conditions personally to endorse the single-name paper 
 which they offer for sale to the banks of the Reserve System. 
 
 At the conclusion of its discussion of this subject the committee 
 summed up its recommendations and enumerated the points that it 
 considered essential in determining the practice of the reserve banks. 
 Single-name paper must of course be considered eligible, but the com- 
 mittee stated that owing to the possibility of using single-name paper 
 for purposes of speculation the responsibiUty must devolve on 
 the member banks to see to it that funds originally derived from the 
 sale of single-name paper are properly applied. Furthermore, the 
 committee believed that the drawer of single-name paper should 
 secure his financial responsibiUty by a proper statement and that, 
 when presented for rediscount, his paper should have, in addition to 
 the member bank's endorsement, a statement signed by an officer of 
 the bank that to his "best knowledge and belief" the proceeds of the 
 paper had been or were to be used for business of a strictly current 
 nature and not for what might be construed as merely an investment. 
 
 As to two-name paper, the committee believed that by a customary 
 credit statement the responsibility of either maker or endorser should 
 be reasonably assured by the member bank presenting the paper for 
 rediscount, and, further, that in the original discount the practice 
 ought to be to require that at least one of the parties involved file a
 
 THE INTERRELATIOKS OF FINANCIAL OPER.\TIONS 465 
 
 statement with the member bank. Lastly, the committee recom- 
 mended separate schedules and statements for the two kinds of paper. 
 The action taken by the Resers'e Board itself in connection with 
 the paper eligible for rediscount and with that eligible for the open 
 market operations of the reserve banks is to be found in a series of 
 circulars and regulations issued by the Board from time to time, as 
 circumstances seemed to demand. 
 
 228. REGULATIONS REGARDING COMMERCIAL PAPER' 
 I. GENERAL PRINCIPLES 
 
 The Federal Reserve Board, under section 13 of the Federal 
 Reserve Act, has the right to determine or define the character of 
 paper eligible for discount, to wit, "notes, drafts, and bills of exchange 
 arising out of actual commercial transactions; that is, notes, drafts, 
 and bills of exchange issued or drawn for agricultural, industrial, or 
 commercial purposes, or the proceeds of which have been used or are to 
 be used for such purposes." 
 
 Bearing in mind the requirements of the present situation, the 
 Federal Reserve Board believes that it would be inadvisable at this 
 time to issue regulations placing a narrow or restricted interpretation 
 upon the section defining the character of paper eligible for discount. 
 It has, therefore, been decided not at this time to enter upon the 
 discussion of the question of single- or double-name paper, but to 
 admit both forms of bills to rediscount with the Federal Reserve 
 Banks. 
 
 The Federal Reserve Board proposes, however, to prescribe the 
 following basic principles for the guidance of Federal Reserve Banks 
 and member banks. 
 
 a) No biU shall be admitted to rediscount by Federal Reserve Banks 
 the proceeds of which have been or are to be applied to permanent invest- 
 ment, and Regulation No. 2 has been formulated with the intention of 
 giving effect to this principle, and is herewith inclosed. 
 
 b) Maturities of discounted bills should be well distributed. It is the 
 well-established practice of European reserve banks to invest only in obli- 
 gations maturing within a short time. It is a general rule not to purchase 
 paper having more than 90 days to run. The maturities of these notes 
 and bills are so well distributed as to enable those banks within a short time 
 to strengthen their hold on the general money market by collecting at 
 
 'Adapted from Federal Reserve Board Circular No. ij, November 10, 1914, 
 and Regulation B, January 25, 1915.
 
 466 PRINCIPLES OF MONEY AND HA X KING 
 
 maturily or by reinvesting at a higher rate a very substantial proportion 
 of their assets. Acting on this principle, the Federal Reserve Banks should 
 be in position to hquidate, whenever such a course is necessary, substantially 
 one-third of all their investments within a period of 30 days. Departure 
 from this principle will endanger the safety of the system. It is observance 
 of this principle that affords justification for permitting member banks to 
 count balances with Federal Reserve Banks as the equivalent of cash 
 reserves. 
 
 c) Bills should be essentially self -liquidating. 
 
 Safety requires not only that bills' held by the Federal Reserve 
 Banks should be of short and well-distributed maturities, but, in 
 addition, should be of such character that it is reasonably certain 
 that they can be collected when they mature. They ought to be 
 essentially "self-liquidating," or, in other words, should represent in 
 every case some distinct step or stage in the productive or distributive 
 process — -the progression of goods from producer to consumer. The 
 more nearly these steps approach the final consumer the smaller will 
 be the amount involved in each transaction as represented by the bill, 
 and the more automatically self-liquidating will be its character. 
 
 Double-name paper drawn on a purchaser against an actual sale 
 of goods affords, from the economic point of view, prima facie evi- 
 dence of the character of the transaction from which it arose. Single- 
 name notes, now so freely used in the United States, may represent 
 the same kind of transactions as those bearing two names. Inasmuch, 
 however, as the single-name paper does not show on its face the 
 character of the transaction out of which it arose — an admitted 
 weakness of this form of paper — it is incumbent upon each Federal 
 Reserve Bank to insist that the character of the business and the 
 general status of the concern supplying such paper should be carefully 
 examined in order that the discounting bank may be certain that no 
 such single-name paper has been issued for purposes excluded by the 
 act, such as investments of a permanent or speculative nature. Only 
 careful inquiry on these points will render it safe and proper for a 
 Federal Reserve Bank to consider such paper a " self -liquidating " ' 
 investment at maturity. 
 
 II. STATUTORY REQUIREMENTS 
 
 The Federal Reserve Act provides that a bill, other than an 
 acceptance, to be eligible for rediscount by a member bank with a 
 
 'For brevity's sake the words "bills" and "notes" whenever used in these 
 paragraphs include bills, notes, and drafts, as specified in the act.
 
 THE INTERRELATIONS OF FINANCIAL OPERATIONS 467 
 
 Federal Reserve Bank, must comply wilh the following statutory 
 requirements: 
 
 a) It must be indorsed by a mcmbtT bank, accompanied by a waiver 
 of demand, notice, and protest. 
 
 b) It must have a maturity at the lime of discount of not more than 90 
 days, except as provided by Regulation C, accompanying Circular No. 4, 
 Series of 1915. 
 
 c) It must have arisen out of actual commercial transactions; that is, 
 be a bill which has been issued or drawn for agricultural, industrial, or 
 commercial purposes, or the proceeds of which have been or are to be used 
 for such purposes. 
 
 d) It must not have been issued for carrying or trading in stocks, 
 bonds, or other investment securities except bonds and notes of the Gov- 
 ernment of the United States; but the pledge of goods as security for a 
 bill is not prohibited. 
 
 III. CHARACTER OF PAPER ELIGIBLE 
 
 The Federal Reserve Board, exercising its statutory right to 
 define the character of a bill eligible for rediscount at a Federal 
 Reserve Bank, has determined: 
 
 a) That it must be a bill the proceeds of which have been used or are 
 to be used in producing, purchasing, carrying, or marketing goods in one 
 or more of the steps of the process of i)roduclion, manufacture, and dis- 
 tribution. 
 
 b) That no bill is "eligible" the proceeds of which have been usctl or 
 are to be used: 
 
 (i) For permanent or fixed investments of any kind, such as land, 
 buildings, machinery (including therein additions, alterations, 
 or other permanent improvements, except such as are properly 
 to be regarded as costs of operation). It may be considered as 
 sufiicient evidence of compliance with this requirement if the 
 borrower shows, by statement or otherwise, that he has a 
 reasonable excess of quick assets over his current liabilities on 
 open accounts, short-term notes, or otherwise; 
 
 (2) For investments of a merely speculative character, whether 
 made in goods or otherwise. 
 
 IV. METIKJD OF CERTIFYING ELIGIBILITY 
 
 Any member bank applying for rediscount of a bill after July 15, 
 1915, must certify in its letter of application, over the signature of a 
 duly authorized officer, that to the best of its knowledge and belief
 
 468 PRINCIPLES OF MONEY AND BANKING 
 
 the bill was issued for one of the purposes mentioned in the above 
 paragraphs and conforms to section 13 of the Federal Reserve Act 
 and to this regulation. 
 
 It is recommended that every member bank maintain a file 
 which shall contain original signed statements of the financial con- 
 dition of borrowers, or true copies thereof, certified by a member 
 bank or by a notary public, designating where the original statement 
 is on file. Statements should contain all the information essential 
 to a clear and correct knowledge of the borrower's credit and of his 
 method of borrowing. A schedule specifying certain information, 
 which it is desirable that such statements should include, is hereto 
 appended. 
 
 Member banks shall certify in their letters of application for 
 rediscount whether the paper offered for rediscount is depositor's or 
 purchased paper, or paper rediscounted for other member banks, and 
 whether statements are on file. When it does not appear that such 
 statements are on file, except as hereinafter provided under (i), (2), 
 and (3) below, the Federal Reserve Bank shall satisfy itself as to the 
 eligibility of the paper offered for rediscount, and member banks will 
 be expected to use such statement forms, identifying stamps, etc., as 
 may be prescribed by the respective Federal Reserve Banks. 
 
 Any member bank rediscounting with a Federal Reserve Bank 
 paper acquired from another member bank, with the indorsement of 
 such member bank, may accept such member's certification regarding 
 the character of the paper and the existence of the necessary state- 
 ments. • 
 
 Statements of the borrower's financial condition may be waived 
 where bills offered for rediscount have been discounted by member 
 banks for any of their depositors in the following cases: 
 
 (i) If the bill bears the signatures of the purchaser and the seller of 
 the goods and presents prima facie evidence that it was issued for goods 
 actually piurchased or sold; or 
 
 (2) If the aggregate amount of obligations of such depositor actually 
 rediscounted and offered for rediscount does not exceed $5,000, but in no 
 event a sum in excess of 10 per centum of the paid-in capital of the member 
 bank; or 
 
 (3) If the bill be specifically secured by approved warehouse receipts 
 covering readily marketable staples: 
 
 Provided, however, That the bank shall certify to these conditions on 
 the application blank in a manner to be designated by the respective 
 Federal Reserve Banks.
 
 THE INTERRELATIONS OF FINANCIAL OPERATIONS 469 
 
 V. SIX months' agricultural paper' 
 
 Each Federal Reserve Bank may receive for discount bills which 
 have a maturity of more than three but less than sLx months, in an 
 aggregate amount equal to a percentage of its capitdl stock to be 
 fixed from time to time for each Federal Reserve Bank by the Federal 
 Reserve Board. 
 
 Provided, however, That such bills are drawn or issued for agri- 
 cultural purposes or are based on live stock; that is, that their pro- 
 ceeds have been used or are to be used for agricultural purposes, 
 including the breeding, raising, fattening, or marketing of live stock; 
 and 
 
 Provided, further. That such bUls comply in all other respects with 
 each and every provision of Regulation B (above). 
 
 229. TRADE ACCEPTANCES^ 
 
 I. DEFINITION 
 
 In this regulation the term "trade acceptance" is defined as a 
 bill of exchange of the character hereinafter described, drawn to order, 
 having a definite maturity and payable in dollars in the United States, 
 the obligation to pay which has been accepted by an acknowledgment, 
 written or stamped and signed across the face of the instrument by 
 the company, firm, corporation, or person upon whom it is drawn; 
 such agreement to be to the effect that the acceptor will pay at 
 maturity, according to its tenor, such draft or bill without qualifying 
 conditions. 
 
 II. CHARACTER OF PAPER ELIGIBLE 
 
 A trade acceptance to be eligible for rediscount, .under section 13, 
 with a Federal Reserve Bank at the rate to be established for trade 
 acceptances — 
 
 c) Must be indorsed by a member bank, accompanied by waiver of 
 demand notice and protest. 
 
 b) Must have a maturity at the time of discount of not more than 90 
 days. 
 
 c) Must be accepted by the purchaser of goods sold to him by the 
 drawer of the bill, and the bill must have been drawn against indebtedness 
 expressly incurred by the acceptor in the purchase of such goods. 
 
 'Regulation C, January 25, 1915. 
 
 'Adapted from Federal Reserve Board, Circular No. 16, ]\i\y 15, 1915.
 
 470 PKixciPLKS or mon1-:y and banking 
 
 III. MKTIIOU OF CERTIFYING ELIGIBILITY 
 
 A trade acceptance must l^ear on its face or be accompanied by 
 evidence in form satisfactory to the Federal Reserve Bank that it 
 was drawn by the seller of the goods on the j)urchaser of such goods. 
 Such evidence may consist of a certificate on or accompanying the 
 acceptance, to the following effect: "The obligation of the acceptor 
 of this bill arises out of the i)urchase of goods from the drawer." 
 Such certificate may be accepted by the Federal Reserve Bank as 
 sufficient evidence; provided, however, that the Federal Reserve 
 Bank, in its discretion, may inquire into the exact nature of the 
 transaction underlying the acceptance. 
 
 230. THE ADVANTAGES OF THE TRADE ACCEPTANCE' 
 
 There can be no question of the desirability of developing trade 
 acceptances in the United States in the interests^ of banking, com- 
 merce, and industry. In all modern banking systems the acceptance 
 is the most desirable form of investment, and it is the most satisfactory 
 method of settlement in the business world. 
 
 The directors of the National Association of Credit IVIen have 
 recorded their belief "that trade acceptances present conveniences 
 and economies which should appeal to the encouragement and sup- 
 port of commercial credit grantors," and that "the trade acceptance 
 system would eliminate certain serious evils which have developed 
 with the increase of commercial credits on an open-account system, 
 and of which the unearned discounts, the abuse of sales terms, and 
 the assignment of accounts receivable are the more prominent." 
 
 Acceptance is of benefit to the seller of goods in a great many 
 ways, among which the following are noteworthy: 
 
 1. It completes the transaction, joining the payment with the 
 shipment or invoice. 
 
 2. It eliminates open book accounts, and substitutes bills receiv- 
 able, or actual cash from discounted bills, in the assets of the seller. 
 
 3. It gives to the seller additional credit facilities, in that such 
 business paper discounted does not necessarily count in the amount 
 of credit extended or authorized. 
 
 4. By reason of its "double-name" aspect it has a broader and 
 better market, and lessens interest rates for the seller. 
 
 5. It assures promptness and avoids unjustified extensions. 
 
 ' Adapted from Federal Reserve Bulletin, IMarch, 1916, pp. loo-ioi.
 
 THE INTERRELATIONS OF FINANCIAL OPERATIONS 471 
 
 6. It promotes economy and efficiency of operation by establishing 
 co-operation. 
 
 Acceptances are advantageous to the purchaser (i) in eUminating 
 open accounts; (2) in closing the transaction at the time of purchase; 
 (3) in providing pa^Tnent coincident with purchase; (4) in facilitating 
 adjustments and settlements. 
 
 C. Financial Concentration and Control 
 
 231. OUR FINANCIAL OLIGARCHY' 
 By LOUIS I). liRANDEIS 
 
 The dominant element in our financial oligarchy is the in\cstmcnt 
 banker. Associated banks, trust companies, and life insurance com- 
 panies are his tools. Controlled railroads, public-service and indus- 
 trial corporations are his subjects. Though properly but middlemen, 
 these bankers bestride as masters America's business world, so that 
 practically no large enterprise can be undertaken successfully without 
 their participation or approval. These bankers are, of course, able 
 men possessed of large fortunes; but the most potent factor in their 
 control of business is not the possession of extraordinary ability or 
 huge wealth. The key to their power is combination — concentration, 
 intensive and comprehensive — advancing on three distinct lines: 
 
 First: There is the obvious consolidation of banks and trust 
 companies; the less obvious affiliations — through stock holdings, vot- 
 ing trusts, and interlocking directorates — of banking institutions 
 which are not legally connected; and the joint transactions, gentle- 
 men's agreements, and "banking ethics" which eliminate competition 
 among the investment bankers. 
 
 Second: There is the consolidation of railroads into huge systems, 
 the large combinations of public-service corporations and the forma- 
 tion of industrial trusts, which, by making businesses so "big" that 
 local, independent banking concerns cannot alone supply the necessary 
 funds, has created dependence upon the associated New York bankers. 
 
 But combination, however intensive, along these lines only could 
 not have produced the Money Trust; another and more potent factor 
 of combination was added. 
 
 Third: Investment bankers, like J. P. Morgan & Co., dealers in 
 bonds, stocks, and notes, encroached upon the functions of the three 
 
 ' Adapted from Other People's Money, and How the Bankers Use It, pp. 4-22. 
 (Frederick .\. Stokes Co., 1914. Originally i)ul)lisliccl in IIiirf>ir's Weekly.)
 
 472 PRINCIPLES OF MONEY AND BANKING 
 
 Other classes of corporations with which their business brought them 
 into contact. They became the directing power in railroads, public- 
 service and industrial companies through which our great business 
 operations are conducted — the makers of bonds and stocks. They 
 became the directing power in the life insurance companies and other 
 corporate reservoirs of the people's savings — the buyers of bonds and 
 stocks. They became the directing power also in banks and trust 
 companies — the depositaries of the quick capital of the country — the 
 life-blood of business, with which they and others carried on their 
 operations. Thus four distinct functions, each essential to business, 
 and each exercised, originally, by a distinct set of men, became united 
 in the investment banker. It is to this union of business functions 
 that the existence of the Money Trust is mainly due. 
 
 The investment bankers were not content merely to deal in 
 securities, enormous as was that field in itself. They desired to 
 manufacture them also. They became promoters, or allied themselves 
 with promoters. Thus it was that J. P. Morgan & Co. formed the 
 Steel Trust, the Harvester Trust, and the Shipping Trust. And, 
 adding the duties of undertaker to those of midwife, the investment 
 bankers became, in times of corporate disaster, members of security- 
 holders' "Protective Committees"; then they participated as "Reor- 
 ganization Managers" in the reincarnation of the unsuccessful 
 corporations, and ultimately became directors. It was in this wa}' 
 that the Morgan associates acquired their hold upon the Southern Rail- 
 way, the Northern Pacific, the Reading, the Erie, the Pere ISIarquette, 
 the Chicago & Great Western, and the Cincinnati, Hamilton & Day- 
 ton, Often they insured the continuance of such control by the 
 device of the voting trust; but even where no voting trust was 
 created a secure hold was acquired upon reorganization. It was in 
 this way also that Kuhn, Loeb & Co. became potent in the Union 
 Pacific and in the Baltimore & Ohio. 
 
 But the banker's participation in the management of corporations 
 was not limited to cases of promotion or reorganization. An urgent or 
 extensive need of new money was considered a sufficient reason for 
 the banker's entering a board of directors. Often without even such 
 excuse the investment banker has secured a place upon the Board of 
 Directors through his powerful influence or the control of his cus- 
 tomers' proxies. Such seems to have been the fatal entrance of Mr. 
 Morgan into the management of the then prosperous New York,
 
 THE INTERRELATIONS OF FINANCIAL OPERATIONS 473 
 
 New Haven & Hartford Railroad in 1892. When once a banker has 
 entered the Board — whatever may have been the occasion — his grip 
 proves tenacious and his influence usually supreme, for he controls 
 the supply of new money. 
 
 The investment banker is naturally on the lookout for good 
 bargains in bonds and stocks. Like other merchants, he wants to 
 buy his merchandise cheap. But when he becomes director of a 
 corporation he occupies a position which prevents the transaction 
 by which he acquires its corporate securities from being properly 
 called a bargain. Can there be real bargaining where the same man 
 is on both sides of a trade? The investment banker, through his 
 controlling influence on the Board of Directors, decides that the cor- 
 poration shall issue and sell the securities, decides the price at which 
 it shall sell them, and decides that it shall sell the securities to himself. 
 The fact that there are other directors besides the banker on the 
 Board does not, in practice, prevent this being the result. The 
 banker, who holds the purse strings, becomes usually the dominant 
 spirit. Through voting trusteeships, exclusive financial agencies, 
 membership on executive or fmance committees, or by mere director- 
 ships, J. P. Morgan & Co. and their associates held such financial 
 power in at least 32 transportation systems, public-utility corpora- 
 tions, and industrial companies — companies with an aggregate capital- 
 ization of $17,273,000,000, Mainly for corporations so controlled 
 J. P. Morgan & Co. procured the public marketing in ten years of 
 security issues aggregating $1,950,000,000. This huge sum does not 
 include any issues marketed privately, nor any issues, however 
 marketed, of intrastate corporations. Kuhn, Loeb & Co. and a few 
 other investment bankers exercise similar control over many other 
 corporations. 
 
 Such control of railroads, public-service and industrial corpora- 
 tions assures to the investment bankers an ample supply of securities 
 at attractive prices; and merchandise well bought is half sold. But 
 these bond and stock merchants arc not disposed to take even a slight 
 risk as to their ability to market their goods. They saw that if they 
 could control the security-buyers, as well as llie security-makers, 
 investment would, indeed, l)e "a happy hunting-ground''; and they 
 have made it so. 
 
 The numerous small investors cannot, in the strict sense, be 
 controlled; but their dependence upon the bankers insures their
 
 474 PRINCIPLES OF MONEY AND HANKING 
 
 being duly influenced. A large part, however, of all bonds issued 
 and of many stocks are bought by the prominent corporate investors; 
 and most prominent among these are the life insurance companies, 
 the trust companies, and the banks. The purchase of a security by 
 these institutions not only relieves the banker of the merchandise, 
 but recommends it strongly to the small investor, who believes that 
 these institutions are wisely managed. These controlled corporate 
 investors are not only large customers, but may be particularly 
 accommodating ones. Individual investors are moody. They buy 
 only when they want to do so. They are sometimes inconveniently 
 reluctant. Corporate investors, if controlled, may be made to 
 buy when the bankers need a market. It was natural that the 
 investment bankers proceeded to get control of the great life 
 insurance companies, as well as of the trust companies and the 
 banks. 
 
 The goose that lays golden eggs has been considered a most 
 valuable possession. But even more profitable is the privilege of 
 taking the golden eggs laid by somebody else's goose. The invest- 
 ment bankers and their associates now enjoy that privilege. They 
 control the people through the people's own money. If the bankers' 
 power were commensurate only with their wealth, they would have 
 relatively little influence on American business. Vast fortunes like 
 those of the Astors are no doubt regrettable. They are inconsistent 
 with democracy. They are unsocial. And they seem particularly 
 unjust when they represent largely unearned increment. But the 
 wealth of the Astors does not endanger poUtical or industrial liberty. 
 It is insignificant in amount as compared with the aggregate wealth of 
 America, or even of New York City. It lacks significance largely 
 because its owners have only the income from their own wealth. 
 The Astor wealth is static. The wealth of the Morgan associates is 
 dynamic. The power and the growth of power of our financial 
 oUgarchs come from wielding the savings and quick capital of others. 
 In two of the three great life insurance companies the influence of 
 J. P. Morgan & Co. and their associates is exerted without any 
 individual investment by them whatsoever. Even in the Equitable, 
 where Mr. Morgan bought an actual majority of all the outstanding 
 stock, his investment amounts to little more than one-half of i per 
 cent of the assets of the company. The fetters which bind the people 
 are forged from the people's own gold.
 
 THE INTERRELATIONS OF FINANCIAL OPERATIONS 475 
 
 But the reservoir of other people's money, from which the invest- 
 ment bankers now draw their greatest power, is not the Ufe insurance 
 companies, but the banks and trust companies. Bank deposits repre- 
 sent the really quick capital of the nation. They are the life-blood 
 of businesses. Their effective force is much greater than that of an 
 equal amount of wealth permanently invested. The 34 banks and 
 trust companies which the Pujo Committee declared to be directly 
 controlled by the Morgan associates held $1,983,000,000 in deposits. 
 Control of these institutions means the ability to lend a large part of 
 these funds, directly and indirectly, to themselves, and, what is often 
 even more important, the power to prevent the funds being lent to 
 any rival interests. These huge deposits can, in the discretion of those 
 in control, be used to meet the temporary needs of their subject 
 corporations. When bonds and stocks are issued to finance perma- 
 nently these corporations, the bank deposits can, in large part, be 
 loaned by the investment bankers in control to themselves and their 
 associates, so that securities bought may be carried by them until 
 sold to investors. Or these bank deposits may be loaned to allied 
 bankers, or jobbers in securities, or to speculators, to enable them to 
 carry the bonds or stocks. Easy money tends to make securities rise 
 in the market. Tight money nearly always makes them fall. The 
 control by the leading investment bankers over the banks and trust 
 companies is so great that they can often determine, for a time, the 
 market for money by lending or refusing to lend on the stock exchange. 
 In this way, among others, they have power to affect the general 
 trend of prices in bonds and stocks. Their power over a particular 
 security is even greater. Its sale on the market may depend upon 
 whether the security is favored or discriminated against, when offered 
 to the bank and trust companies, as collateral for loans. 
 
 Furthermore, it is the investment banker's access to other people's 
 money in controlled banks and trust companies which alone enables 
 any individual banking concern to take so large a part of the annual 
 output of bonds and stocks. The banker's own capital, however large, 
 would soon be exhausted. And even the loanable funds of the banks 
 would often l^c exhausted but for the large deposits made in those 
 banks by the life insurance, railroad, public-ser\ice, and industrial 
 corporations which the bankers also control. 
 
 But the power of tlie investment banker over other people's 
 money is often more direct and effective than that exerted through
 
 476 PRINCIPLES OF MONEY AND liANKING 
 
 controlled banks and trust companies. J. P. Morgan & Co. achieve 
 the supposedly impossible feat of having their cake and eating it too. 
 They buy the bonds and stocks of controlled railroads and industrial 
 concerns, and pay the purchase price, and still do not part with their 
 money. This is accomplished by the simple device of becoming the 
 bank of deposit of the controlled corporations instead of having the 
 company deposit in some merely controlled bank in whose operations 
 others have at least some share. When J. P. Morgan & Co. buy an 
 issue of securities, the purchase money, instead of being paid over to 
 the corporation, is retained by the banker for the corporation, to be 
 drawn upon only as the funds are needed by the corporation. And 
 as the securities are issued in large blocks, and the money raised is 
 often not all spent until long thereafter, the aggregate of the balances 
 remaining in the banker's hands are huge. Thus J. P. Morgan & Co. 
 (including their Philadelphia house, called Drexel & Co.) held on 
 November i, 1912, deposits aggregating $162,491,819.65. 
 
 232. THE SATELLITES OF THE "MONEY TRUST'" 
 By the PUJO COMMITTEE 
 
 Beyond these inner groups and subgroups are banks and bankers 
 throughout the country who co-operate with them in underwTiting 
 or guaranteeing the sale of the securities offered to the public, and who 
 also act as distributors of such securities. It was impossible to learn 
 the identity of the corporations, owing to the unwiUingness of the 
 members of the inner group to disclose the names of their under- 
 writers, but sufficient appears to justify the statement that there are 
 at least hundreds of them and that they extend into many of the cities 
 throughout this and foreign countries. 
 
 The patronage thus proceeding from the inner group and its 
 subgroups is of great value to these banks and bankers, who are 
 thus tied by self-interest to the great issuing houses and may be 
 regarded as a part of this vast financial organization. Such patronage 
 yields no inconsiderable part of the income of these banks and bankers 
 without much risk on account of the facilities of the principal groups 
 for placing issues of securities through their domination of great 
 banks and trust companies and their other domestic affiliations and 
 
 ' Adapted from Report of the Committee Appointed to Investigate the Con- 
 centration of Control of Money and Credit, 62d Cong., 3d sess., No. 1593, pp. 
 132-33-
 
 THE INTERRELATIONS OF FINANCIAL OPERATIONS 477 
 
 their foreigA connections. The underwriting commissions on issues 
 made by this inner group are easily earned and do not ordinarily 
 involve the underwTiters in the purchase o£ the underwTitten securities. 
 Their interest in the transaction is generally adjusted, unless they 
 choose to purchase part of the securities, by the pa\Tnent to them of a 
 commission. There are, however, occasions on which this is not the 
 case. The underwriters are then required to take the securities. 
 Bankers and brokers are so anxious to be permitted to participate in 
 these transactions under the lead of the inner group that as a rule 
 they join when invited to do so, regardless of their approval of the 
 particular business, lest by refusing they should thereafter cease to 
 be invited. 
 
 In the case of the New York subway financing of $170,000,000 
 of bonds by Messrs. Morgan & Co. and their associates, Mr. Davison 
 estimated that there were 100 to 125 such undervNTiters who were 
 apparently glad to agree that Messrs. Morgan & Co., the First 
 National Bank, and the National City Bank should receive 3 per 
 cent, equal to $5,100,000, for forming this syndicate, thus reheving 
 themselves from all liability, whilst the underwriters assumed the 
 risk of what the bonds would realize and of being required to take 
 their share of the unsold portion. 
 
 The possibihty of competition between these banking houses in 
 the purchase of securities is further removed by the understanding 
 between them and others that one will not seek, by offering better 
 terms, to take away from another a customer which it has heretofore 
 served, and by corollary of this, namely, that where given bankers 
 have once satisfactorily united in bringing out an issue of a corpora- 
 tion they shall also unite in bringing out any subsequent issue of the 
 same corporation. This is described as a principle of banking ethics. 
 
 233. THE DEFENSE OF FINANCIAL CONCENTRATION' 
 By J. P. MORGAN & CO. 
 
 We venture to point out that such "concentration" as has taken 
 place in New York and other financial centers has been due, not to 
 the purpose and activities of men, but primarily to the operation of 
 our antiquated banking system, which automatically compels interior 
 banks to "concentrate" in New York City hundreds of millions of 
 
 ' Adapted from a letter in response to the invitation of the Pujo Committee, 
 February 25, 1913, pp. 3-26.
 
 478 PRINCIPLES OF MONEY AND BANKING 
 
 reserve funds, and, next, to economic laws which in every country 
 create some one city as the great financial center, and which draw to 
 it, in enormous volume, investment funds for the development of 
 industrial enterprises throughout the country. 
 
 Just as grain and cotton and manufactures are commodities sub- 
 ject to the unchanging laws of supply and demand, so, in the same way, 
 money and credits are commodities subject to the same unvarying 
 laws, but far more intensely; for while bulky merchandise is not 
 always immediately transferable upon demand, money and credits 
 are so liquid as to be transferable by telegraph all over the world. 
 Since the beginning of organized industry and commerce covering more 
 than two centuries in England, France, and Germany and one hun- 
 dred years in America, men never yet have succeeded in overriding 
 economic law; and, further, such an achievement is impossible, even 
 though one were wiUing to attribute sinister motives to the leading 
 men of business in the chief cities of this country. 
 
 In the preamble to the House Resolution under which your 
 Committee acts we find this statement: "Whereas it has been fur- 
 ther charged and is generally believed [the italics are our own] that 
 these same groups of financiers are enabled to regulate the interest 
 rates for money, to create, avert, and compose panics, etc." The 
 factors which determine interest rates are not local in their source, 
 but are world-wide, being determined and — owing to the freedom of 
 international exchange — being regulated by the average demand for 
 credit throughout the world's money markets. If any man or group 
 of men had the ability and resources — which they have not — to with- 
 hold credits in any one market, like New York, the situation would 
 ordinarily be promptly relieved by the automatic inflow of credits 
 from some altogether foreign source. 
 
 We regret that a belief so incredible, so abhorrent, and so harmful 
 to the country as that the panic of 1907 was actually due to the 
 machinations of certain powerful men should for a moment have 
 found lodgment anywhere. 
 
 No one will deny that men frequently are selfish, ambitious, and 
 reckless, but in order to sustain the theory that the panic of IQ07 
 was "engineered" one must attribute some motive for their assumed 
 achievements. And by no process of reasoning can such motive be 
 imagined, because of the fact that men possessing even a fraction of 
 the influence and resources attributed to them always are the ones 
 holding the largest amounts of fixed investments which, by disturbed
 
 THE INTERRELATIONS OF FINANCIAL OPERATIONS 479 
 
 financial conditions, always suffer most severely. It is impossible, 
 therefore, to imagine a motiv'e on the part of such persons as would 
 lead to a campaign of self-destruction. 
 
 The resolution under which your Committee acts further states 
 that a comparatively small group of men "have wielded a power 
 over the business, commerce, credits, and finances of the country 
 that is despotic and perilous and is daily becoming more perilous to 
 the public welfare." 
 
 For the maintenance of such an impossible economic theory there 
 have been spread before your Committee elaborate tables of so-called 
 interlocking directorates from which exceedingly mistaken inferences 
 have been publicly drawn. In these tables it is shown that iSo 
 bankers and bank directors serve upon the boards of corporations 
 having resources aggregating twenty-five billion dollars, and it is 
 implied that this vast aggregate of the country's wealth is at the 
 disposal of these 180 men. But such an implication rests solely upon 
 the untenable theory that these men, living in different parts of the 
 country, in many cases personally unacquainted with each other, and 
 in most cases associated only in occasional transactions, vote always 
 for the same policies and control with united purpose the directorates 
 of the 132 corporations on which they serve. The testimony failed to 
 establish any concerted policy or harmony of action binding these 
 180 men together, and as a matter of fact no such poUcy exists. The 
 absurdity of the assumption of such control becomes more apparent 
 when one considers that on the average these directors represent 
 only one-quarter of the memberships of their boards. It is prepos- 
 terous to suppose that every "interlocking" director has full control 
 in every organization with which he is connected, and that the ma- 
 jority of directors who are not "interlocking" are mere figureheads, 
 subject to the will of a small minority of their boards. 
 
 Perhaps the greatest harm in the presentation referred to lay in 
 the further unwarranted inference, to which has been given wide 
 publicity, that the vast sum of $25,000,000,000 was in cash or liquid 
 form, subject to the selfish use or abuse of individuals. Such an idea 
 excites the public mind to demand the correction of a fancied situation 
 which does not exist. 
 
 The steady growth in the size of banks in New York and Chicago 
 and the frequent merger of two or more banks into one institution 
 have erroneously been designated before your Committee as "con- 
 centration." This steady growth and these mergers, however, are a
 
 48o PRINCIPLES OF MONEY AND BANKING 
 
 development due simply to the demand for larger banking facilities 
 to care for the growth of the country's business. As our cities double 
 and treble in size and importance, as railroads extend and industrial 
 plants expand, not only is it natural, but it is necessary, that our 
 banking institutions should grow in order to care for the increased 
 demands put upon them. Perhaps it is not known as well as it should 
 be that in New York City the largest banks are far inferior in size 
 to banks in the commercial capitals of other and much smaller coun- 
 tries. The largest bank in New York City today has resources 
 amounting to only three-fifths of the resources of the largest bank 
 in England, to only one-fourth of the resources of the largest bank in 
 France, and to less than one-fifth of the resources of the largest bank 
 in Germany, As the Committee is aware, in New York City there 
 are only three banks with resources in excess of $200,000,000, while 
 there are ten such institutions in London, five in BerHn, and four 
 in Paris. 
 
 It is also perhaps not sufi&ciently recognized that, even as it is, 
 American banks have not fully kept pace with the development 
 of American business. Hundreds of the financial transactions of 
 today are so large that no single bank commands sufficient resources 
 to handle them. This is especially true with respect to the great 
 public utilities which are essential for the development and welfare 
 of the community. Even our largest banks are seldom able separately 
 to extend the credit which such undertakings require, no one national 
 bank being permitted by law to loan in excess of 10 per cent of its 
 capital and surplus to any one individual or concern. When it is 
 remembered that literally hundreds of corporations in this country 
 are now obliged to borrow annually sums of a milUon dollars and 
 upward apiece, it is obvious that the size of our banks must grow to 
 keep pace with this demand. 
 
 Likewise, with respect to the tendency to co-operation among 
 banks, noted especially since the panic of 1907, we beHeve that 
 further statistics of interest on this point can be made available, such 
 facts going to show, first, that since 1907 co-operation has been more 
 active by reason of the lesson which banks in all large cities then 
 learned, that, for self-preservation, they could not — as is possible in 
 other countries — rely upon a strong and elastic banking system, but 
 must gain such protection by concurrent action; and, second, that such 
 co-operation is simply a further result of the necessity for handling 
 great transactions. There are not a few railroad bond issues each
 
 THE INTERRKLATIONS OF FINANCL\L OPERATIONS 481 
 
 exceeding $100,000,000; the American Telephone and Telegraph Co. 
 recently has announced one of $70,000,000. The two traction com- 
 panies operating the subways in Greater New York are planning to 
 bring out aggregate issues of $220,000,000. The Attorney-General's 
 recent approval of the Union Pacific settlement calls for a single 
 commitment on the part of bankers of $126,000,000. So that, if 
 transactions of such magnitude are to be carried on, the country 
 obviously requires, not only the larger individual banks, but demands 
 also that those banks shall co-operate to perform efficiently the 
 country's business. A step backward along this line would mean a 
 halt in industrial progress that would affect every wage-earner from 
 the Atlantic to the Pacific. 
 
 We lay perhaps especial stress upon this point, because of what 
 seemed to us a readiness upon the part of your Committee to adopt 
 the idea that in such co-operation by bankers there lies the germ of 
 something sinister and dangerous, and that, to quote once more from 
 House Resolution No. 504, such co-operation has been developed to 
 the extent that "these groups of individuals" can "prevent compe- 
 tition with the enterprises in which they are interested, to the detri- 
 ment of interstate commerce and of the general pubHc." So far as 
 our observation and experience go, we can make the positive statement 
 that, except under unfavorable money-market conditions, we have 
 never heard of any responsible and deserving individual, firm, or 
 corporation being unable to secure ample credit. 
 
 Many questions were asked before your Committee as to the 
 wisdom in having representatives of private banking houses sit upon 
 the boards of corporations whose securities the same bankers fre- 
 quently offer for sale. This practice, which has been in vogue abroad 
 ever since the creation of limited companies, has arisen, not from a 
 desire on the part of the banker to manage the daily affairs of the 
 corporation or to purchase its securities more cheaply than he other- 
 wise could, but rather because of his moral responsibility as sponsor 
 of the corporation's securities, to keep an eye upon its policies and 
 to protect the interests of investors in the securities of that corpora- 
 tion. For a private banker to sit upon such a directorate is in most 
 instances a duty, not a privilege. Inquiry will readily develop the 
 fact that the members of the leading banking houses in tliis countr\ — 
 and it was the leading houses only against which animadversions 
 were directed — are besought continually to act as directors in various 
 corporations, whose securities they may handle, and that in general
 
 482 PRINCIPLES OF MONEY AND BANKING 
 
 they enter only those boards which the opinion of the investing public 
 requires them to enter, as an evidence of good faith that they are 
 willing to have their names publicly associated with the management. 
 
 Yet, before your Committee, this natural and eminently desirable 
 relationship was made to appear almost sinister, and no testimony 
 whatever was adduced to show the actual working of such relation- 
 ships. It is easy to overlook the fact that practically all the railroad 
 and industrial development of this country has taken place, initially, 
 through the medium of the great banking houses. Were it not for 
 the opportunities provided by these houses, it is difficult to imagine 
 how the great transportation systems and industrial plants of the 
 country could have been created. 
 
 Another line of your inquiry, certainly pertinent to the general 
 subject, was as to whether "the marketing of the securities that 
 from time to time have been issued by interstate railroads and indus- 
 trial corporations has been by competitive bidding or otherwise." On 
 this matter we are pleased to submit certain considerations which, 
 we are confident, are borne out by the facts: First, in general and 
 over a period of time the sale of such securities is invariably subject 
 to the competition of market conditions. We have not heard of an 
 instance where any corporation failed to secure the benefit of a price 
 for its issues as excellent as conditions at the time warranted. Sec- 
 ond, in most of the leading commercial securities state public-service 
 commissions pass with great care upon the prices at which the 
 securities of all transportation and public-utility corporations are 
 sold. Third, competitive bidding, in the sense of having railroad and 
 industrial securities ofifered practically at public auction, as in the 
 case of municipal securities, is seldom or never practiced. 
 
 The reasons against such practice are plain. Such corporate 
 issues have neither the security, the steadiness, nor the general con- 
 fidence possessed by municipal bonds, and while in good times it 
 is possible that they might be subscribed for at public auction, in 
 bad times there would be no one to bid for them. It is practically 
 inconceivable that a municipality should go bankrupt and make 
 permanent default of its obligations. Quite otherwise is the case 
 with railroad or industrial corporations. Should these latter appeal 
 directly to the proverbially timid investor, there can be little question 
 that in times of stress support would be totally lacking. We should 
 have the spectacle of numberless corporations failing for lack of strong 
 financial or banking support.
 
 THE INTERRELATIONS OF FINANCIAL OPERATIONS 483 
 
 Still another consideration inducing large corporations to appoint 
 fiscal agents is that frequently such corporations are obliged to under- 
 take operations of such magnitude and complexity over a series of 
 years that they must invoke uninterruptedly the best financial advice 
 obtainable. An operation like that of the Pennsylvania and Long 
 Island railroads in tunneling respectively the Hudson and East 
 rivers, and building an enormous terminal in the heart of New York, 
 involved the expenditure of, say, $200,000,000, and, from inception to 
 completion, occupied the best part of a decade. The unwisdom of 
 embarking upon such a development and of relying through good 
 times and bad, panic periods and otherwise, upon the sale of S200,- 
 000,000 of bonds by auction to the public, could hardly be charac- 
 terized, even if it were conceivable. 
 
 As the final point of this memorandum we venture to submit the 
 consideration that in a strong public opinion, such as exists in this 
 country, there lies the greatest safeguard of the community. The 
 public, that is, the depositors, are the ones who entrust bankers with 
 such influence and power as they today have in every civilized land, 
 and the public is unlikely to entrust that power to weak or evil hands. 
 Your counsel asked more than one witness whether the present power 
 held by bankers in this country would not be a menace if it lay in 
 evil hands. Such an inquiry answers itself. All power — physical, 
 intellectual, financial, or political — is dangerous in evil hands. If 
 Congress were to fall into evil hands the results might be deplorable. 
 But to us it seems as little likely that the citizens of this country will 
 fill Congress with rascals as it is that they will entrust the leadership 
 of their business and financial affairs to a set of clever rogues. The 
 only genuine power which an individual, or a group of individuals, 
 can gain is that arising from the confidence reposed in him or them 
 by the community. Every town, large or small, seems to choose a 
 limited number of men (merchants, manufacturers, lawyers, and 
 bankers) to represent it in the management of its chief local 
 industries. Those men are entrusted with such heavy responsi- 
 bilities because of the confidence which their records have estab- 
 lished, and only so long as their records are unblemished do they 
 retain such trusts. 
 
 These are axioms which it seems almost idle to repeat. They 
 apply to all business, but more emphatically, we believe, to banking 
 than to any other form of commerce. To banking the confidence of 
 the community is the breath from which it draws its fife.
 
 484 PRINCIPLES OF MONEY AND BANKING 
 
 234. RESULTS OF THE MONEY TRUST INVESTIGATION' 
 
 The Federal Money Trust Committee has completed its work, 
 and its report will now be received by Congress. It is to be regretted 
 that the committee was unable to arrive at anything like unanimity 
 in this report, and it is questionable if it will be of any value in formu- 
 lating suitable currency legislation. It has long been recognized that 
 Chairman Pujo and his gallant band were compelled to be but spec- 
 tators in the investigations, while their attorney formulated the 
 report to which the signatures of the members were to be attached. 
 
 Three reports in all were submitted; the first or majority report, 
 in which the discovery of a modified trust is reported, is signed by 
 all the Democratic members of the committee; a principal minority 
 report, denying the existence of a money trust, but recognizing a 
 "dangerous concentration of credit," is signed by three Republican 
 members; one Republican member is unable to agree with either 
 report, and submits an individual report, in which he pays tribute to 
 the New York financial institutions. 
 
 The majority report, in describing its view of present financial 
 conditions, says that the committee "is satisfied from proofs submit- 
 ted that there is an established and well-defined identity and com- 
 munity of interest between a few leaders of finance, created and held 
 together through stock ownership, interlocking directorates, partner- 
 ships and joint account transactions, and other forms of domination 
 over banks, trust companies, raihoads, and public- service and indus- 
 trial corporations which has resulted in a great and rapidly growing 
 concentration of the control of money and credit in the hands of 
 these few men. 
 
 "If by the term 'money trust' is meant a combination or arrange- 
 ment created and existing pursuant to a definite agreement between 
 designated persons with the avowed and accomplished object of con- 
 centrating unto themselves the control of money and credit, we are 
 unable to say that the existence of a money trust has been established 
 in that broad, bald sense of the term, although the committee regrets 
 to find that, even adopting that extreme definition, surprisingly many 
 of the elements of such a combination exist." 
 
 In order to restore a condition of financial equilibrium, the com- 
 mittee has drawn up two legislative measures, which it asks to be 
 enacted into law. These measures are designed to wipe out "inter- 
 locking" directorates and stock holdings among banks, and prevent 
 
 'Adapted from an editorial in the Amerkan Banker, LXXVIII (1913), 679.
 
 THE INTERRELATIONS OF FINANCIAL OPERATIONS 485 
 
 the consolidation of two or more National banks, except under 
 the approval of the Comptroller of the Currency. Twenty-two 
 new regulations in all are to be added to the restrictions of National 
 banks, including the prohibition of a person being a director in 
 more than one National bank, the holding of stock of one 
 bank by another bank, the prohibition of security underwriting by 
 National banks, borrowing by a National bank director from the 
 bank of which he is a director, except with certain conditions, and 
 the Umiting of the number of directors of National banks. 
 
 It also provides for the incorporation of all clearing-houses, which 
 are to be periodically examined by public authorities, and to accept 
 for membership "every properly managed bank or trust company." 
 
 235. PROHIBITION OF INTERLOCKING DIRECTORATES BY 
 THE CLAYTON ACT' 
 
 Section 8 of the Clayton law, passed October 15, 1914, provides 
 that no person shall at the same time be a director or other officer or 
 employee of more than one bank, banking association, or trust com- 
 pany organized or operating under the laws of the United States, 
 either of which has deposits, capital, surplus, and undivided profits 
 aggregating more than S5, 000,000; and no private banker or person 
 who is a director in any bank or trust company organized or operating 
 under the laws of a state having deposits, capital, surplus, and undi- 
 vided profits aggregating more than $5,000,000 shall be eligible to 
 be a director in any bank or banking association organized or operating 
 under the laws of the United States. 
 
 The law further provides that no bank, banking association, or 
 trust company operating under the laws of the United States which 
 is located in a city of more than 200,000 population shall have as a 
 director, officer, or employee any private banker, or any director, 
 officer, or employee of any other bank, banking association, or trust 
 company located in the same city. 
 
 There are three exceptions to the prohibition against interlocking 
 directorates, besides the qualifications respecting the size of institu- 
 tions and the population of the places where located. These are: (i) 
 the prohibition docs not apply to mutual savings banks which have 
 no capital stock; (2) tlie director, officer, or employee may be an 
 
 •Adapted from "Clayton Act Makes Many Changes in National Bank 
 Directorates," Journal of American Bankers' Association, \'III (1916), pp. 687-S8.
 
 486 PRINCIPLES OF MONEY AND BANKING 
 
 officer where the entire capital stock of one is owned by the stock- 
 holder in the other; and (3) the prohibition does not apply to a Class 
 A director in a Federal reserve bank who serves as a director, officer, 
 or employee in a member bank. 
 
 Although the Clayton law does not become operative until 
 October 15, stockholders of many national banks took action designed 
 to comply with the new law at the annual meetings held on January' 
 II. As a result numerous changes were made in the boards of direc- 
 tors, particularly in the case of the large banks located in New York, 
 Chicago, Philadelphia, and Boston. 
 
 Chief among the changes made in the directorates of New York 
 national banks was the elimination of four bank presidents from the 
 board of the National Bank of Commerce. The board was reduced 
 from twenty-five to twenty-one members, the retiring directors being: 
 Frank A. Vanderlip of the National City, Albert H. Wiggin of the 
 Chase National, Francis L. Hine of the First National, and William A. 
 Simonson of the Second National. 
 
 Mr. Vanderlip also announced his resignation from the boards of 
 the American Security and Trust Company and the Riggs National 
 Bank of Washington and of the Farmers Loan and Trust Company 
 of New York. 
 
 A. Barton Hepburn, chairman of the board of the Chase National, 
 resigned from the board of the First National and from the board of 
 a Newark institution. 
 
 The most radical changes which the Clayton law will enforce will 
 be in the case of the Bankers Trust Company of New York, the 
 directorate of which consists of fourteen national bankers out of a 
 total of twenty-eight. At the January meeting the stockholders took 
 no action, and it was announced that the personnel of the board 
 would be readjusted gradually in compliance with the law sometime 
 before October 15. 
 
 The full effect of the law will, of course, not be felt until October 
 15, when it becomes operative, but bankers who have given the mat- 
 ter consideration deplore the fact that their institutions \\ill be 
 forced to lose the services of some of their very best and most expe- 
 rienced directors. This is true of the small banks as well as of the 
 large. 
 
 The injustice of the law is commented upon, especially in cases 
 where a banker serves on the boards of institutions not competing. 
 There are many instances where a banker is a director of a trust
 
 THE INTERRELATIONS OF FINANCUL OPER.\TIONS 487 
 
 company and a national bank, their business being essentially different 
 in character. Moreover, there are numerous cases where a director 
 serves on boards of banks or trust companies located in distant cities, 
 each catering to a community of its own, and not competing with 
 the other in any way. 
 
 Attention has also been directed to the fact that as the law is 
 worded a national banker in New York, for instance, may serA-e on 
 several boards of out-of-town state banks, while he is prohibited from 
 being a director of any other national institution. This, it is con- 
 tended, is an unjust discrimination in favor of state banks, for the 
 reason that they will be in a position to obtain the services of high- 
 grade national bankers, while their competing national banks are 
 denied the opportunity of electing these men to their boards. 
 
 236. THE ECONOMIC FUNCTIONS OF THE FINANCIER IN 
 MODERN INDUSTRY' 
 
 By JOHN A. HOBSON 
 
 The structure of modern capitalism tends to throw an ever- 
 increasing power into the hands of the men who operate the monetary 
 machinery of industrial communities, the financial class. For large 
 enterprises the financier has always been a necessary man: in the 
 ancient and the mediaeval world he found large svuns of money to 
 meet the emergencies of kings and great nobles, ecclesiastical or civil, 
 to furnish military or naval expeditions, and to facilitate the larger 
 forms of commercial enterprises which needed capital. Small finan- 
 ciers, as usurers or money-lenders, have at all times lived upon the 
 irregularities and misfortunes of the farming, artisan, and small 
 trading classes. But not until the development of modern industrial 
 methods required a large, free, various flow of capital into many 
 channels of productive employment did the financier show signs of 
 assuming the seat of authority he now occupies in our economic 
 system. Every important step in the growth of industrial structure 
 has favored the segregation of a financial from a more general 
 capitalist class, and has given it a larger and a more profitable control 
 over the course of industry. 
 
 The elaborate differentiation of industrial processes into separate 
 businesses, the concatenation of a long series of different businesses 
 contributing directly to the production of each class of commodities, 
 
 ' Adapted from The Evoltilion of Modern Capilalism, pp. 235-57. (Walter 
 Scott Publishing Co., Ltd., 1898.)
 
 488 PRINCIPLES OF MONEY AND BANKING 
 
 the relation of each member of this series to dependent or subsidiary 
 businesses, each of which is itself a member of another series of 
 separately ordered processes, the interdependence of the most widely 
 divergent manufacturing or commercial processes through the use of 
 some common source of mechanical power, or some instrument of 
 transport, the expansion of local into national and world markets 
 which bring what were formerly separate self-sufficing industrial 
 systems into unity — the working of such an industrial organization 
 implies a delicate and intricate mechanism of adjustments. In 
 order that such a system may work properly and economically there 
 must be an automatic apparatus for the application of economic 
 stimuli and the generation of productive power at points of industrial 
 deficiency, and a corresponding application of repressive checks at 
 points of industrial excess: industrial power must be distributed in 
 some general form throughout the entire organism to be transmuted 
 into special kinds of productive energy where there is need. 
 
 This growing necessity of modern industry has reacted in two 
 important ways upon the economic structure — first, by producing a 
 radical change in the structure of the business unit, and, secondly, in 
 giving rise to "a class of pecuniary experts whose business is the 
 strategic management of the interstitial relations of the system." 
 
 The quick rise of new manufacturing and commercial business 
 demanded a freer movement of capital than the older business could 
 easily procure; old-established private businesses sought to expand; 
 men with keen wits capable of seizing opportunities rose "from the 
 ranks" and needed the use of capital; vast new forms of enterprise 
 in railroads, mining, etc., demanded larger capital than private finance 
 could furnish. Hence the need of a reformation of business structure 
 upon a basis of co-operative capital, drawn from innumerable private 
 sources, welded into large masses and utilized for profitable industry 
 by able directors of large business enterprises. The widespread 
 increase of wealth from new industrial methods enabled far more 
 people than before to efiect private savings; the economy of large- 
 scale production precluded them from setting up in business for 
 themselves upon the small capital they thus commanded, while 
 improved methods of commercial intelligence greatly widened the 
 area of secure investment, tending more and more to separate capital 
 from the presence and direct control of its owners, and to place it at 
 the disposal of big business men who paid interest to its owners for 
 its use.
 
 THE INTERRELATIONS OF FLNANCIAL OPERATIONS 489 
 
 Thus il has come to pass that in every field of capitaHst industry 
 joint-stock enterprise has been rapidly displacing privately owned 
 businesses. So long as the new class of small investors had only the 
 alternative of effecting loans or mortgages at small fixed rates of 
 interest, or of incurring "unlimited liability" by investment which 
 they could neither watch effectively nor easily withdraw, the growth 
 of co-operative capital became very rapid and widespread. The 
 application of this new capitaUst structure, first to public loans, then 
 to railroad, shipping, mining, and banking enterprises, the enormous 
 expansion of public or "company" development in the supply of 
 municipal services, and, finally, the extension to industrial companies 
 of every sort and size, have revolutionized the character of modern 
 economics and politics. Countless thousands of citizens in America 
 or Great Britain are part owners of lands, railroads, minerals, fac- 
 tories, municipal plants, and public revenues in all parts of the civilized 
 or semicivilizcd world. Primarily, this signifies a divorcement of 
 political from economic interests for large sections of these nations; 
 politically they are members of a single nation with an area of influence 
 and interest thus circumscribed; economically they are to an ever- 
 growing extent cosmopolitans. 
 
 The modern financier may be regarded as the product of the 
 joint-stock company, or corporate form of industry, which is now 
 virtually in possession of the entire field of capitalism in the mining, 
 transport, banking, and large manufacturing industries. The limits 
 of the sound and useful service of the promoters and financiers in 
 constructing and in floating a company consist in a just calculation 
 on actuarial and other bases of the future earning capacity of the 
 business, its capitalization upon these bases, and the distribution of 
 the stocks and shares and their marketing in forms most convenient 
 to the investing public, who are informed of the true nature of the 
 business into which they put their money. An agreed and recognized 
 rate of commission for such work of financial construction and pro- 
 motion, with a further commission for underwriting, paid either by 
 the vendors or by the company, or both, would be the gain of the 
 promoter and financier most conformable to reasonable business 
 methods. Placing a business upon a basis where it can command more 
 working capital and more bank credit increases its competitive, and 
 in some instances even its industrial, efficiency, and is entitled to 
 payment for this service.
 
 490 PRINCIPLES OF MONEY AND BANKING 
 
 But the actual operation of the promoter and financier in con- 
 struction of companies and the nature of the gains which accrue to 
 them are not normally confined within these limits. The vendors, 
 promoters, and underwriters of a company are not unnaturally given 
 to calculating in the first place how much they individually and 
 collectively can get out of the business enterprise, or, in other words, 
 how little they can leave to the ordinary investing public whose 
 capital they want to attract. It is their profit and not the interest 
 upon the shares of investors that is the originating motive of most 
 companies, as we have seen. 
 
 Now, they may take these profits in three different ways. By 
 overvaluation of the earning capacities of the various plants of 
 amalgamating businesses, of the patents, and especially of the good- 
 will and other invisible assets, they may bloat out the capital value 
 of the company to the utmost, distributing among themselves in 
 vendors' and promoters' shares and in other payments as much of 
 the more vendible stocks as they can conceal, substituting in this 
 capitaHzation the consideration of immediate vendibility for future 
 earning capacity. So far as they can succeed in raising the immediate 
 market value of the stocks they have allotted to themselves for 
 services or obtained by the ordinary method of subscription, it will 
 be to their interest to unload these stocks upon the market before 
 the inflated capitalization of the market is effectively exposed. 
 
 The motive and effect of these financial arts are to create a false 
 confidence on the part of the ordinary capitalist or investing public 
 which expresses itself in a temporary boom of watered stocks. 
 
 This of course does not exhaust the functions of the promoter, 
 especially where an amalgamation or the formation of a "trust" is 
 the object of the company. Here there is much scope for strategic 
 work of a preparatory nature; rival interests must be fused upon 
 terms advantageous to the trust-makers, with much use of bluft", 
 intrigue, threats, bribes, and actual processes of "freezing out." 
 When strong businesses "stand out" they can often obtain an exor- 
 bitant price for consenting to come in, and this exorbitance is a large 
 factor in the overcapitalization of the company. 
 
 Most financiers or money-dealers, however, are not chiefly engaged 
 in promoting companies, but in getting profits from handling the 
 stocks and shares upon the market. As in company construction, so 
 here the business rests on a real foundation of utility or productivity. 
 This utility consists in using skilled foresight, so as to direct the flow
 
 THE INTERRELATIONS OF FINANCLVL OPER.\TIONS 491 
 
 of industrial capital into the most serviceable industrial channels. 
 For the rises and falls of stocks and shares, so far as they are naturally 
 induced, and rest upon sound business information, are the financial 
 machinery directing the creation of the various quantities of concrete 
 capital required to co-operate with labor in the most efficient work- 
 ing of the various industries. The really useful skill of stockbrokers, 
 billbrokers, bankers, and other financiers who handle slocks and 
 shares, buying or selling them, discounting them or advancing money 
 on their security, consists in intimate knowledge of the industrial and 
 commercial facts that give value to the pieces of paper which they 
 handle — in other words, a knowledge of the relative strength and 
 weakness of the various trades and of the particular businesses which 
 operate in them. It is their function to stimulate and direct the flow 
 of credit, and through credit of actual industrial power, from failing 
 to thriving trades, and from ill-ordered and unprofitable to well- 
 ordered and profitable businesses. To assist in putting capital where 
 it is most wanted is thus the social function of these orders of finan- 
 ciers. The performance of this work requires, not only large and 
 accurate knowledge of fact, but high cjualities of combination and of 
 constructive imagination in interpreting the probable course of future 
 movements. Dealing in the most mobile, changeful, and divisible 
 forms of vendible goods, the money market is of all markets the 
 most complex and at the same time the most unified in its structure, 
 and it admits of a high order of specialization. Groups of brokers or 
 financiers attach themselves to particular classes of stocks, the classi- 
 fication being partly local — e.g.. South African mines or American 
 railroads. 
 
 The "legitimate" business of this finance is to operate the ma- 
 chinery for the distribution of capital by accurate registration and 
 calculation of price movements. Since the limits of calculation 
 are often very narrow, the element of chance or speculation 
 must enter in as a necessary ingredient of the business so far as 
 any individual operation is concerned. But while the ignorance of 
 most amateur investors converts their investments into mere acts 
 of gambling, the professional financier is not properly a gambler. 
 When he departs from "legitimate" finance it is not primarily to 
 gamble but to manipulate prices, so as to assist his calculations. 
 Instead of merely predicting price changes he endeavors to produce 
 them. If he is able in any way to cause and to regulate fluctuations 
 of prices in any class of securities, he can buy at the bottom and sell
 
 492 PKINCIPLKS 01' MONEY AND BANKING 
 
 at the top, an obviously advantageous methofl; if he can sit for 
 some time upon a class of stocks, rocking the values up and down at 
 will, he may be able to extract from the ordinary investing public a 
 larger quantity of money than could be got by any single coup of 
 company promotion. Any group of financiers furnished with large 
 enough resources may fasten upon a stock, using it either to milk the 
 innocent investing public by preconcerted price movements which 
 deceive them into buying and selling at a loss, or to corner the stock 
 and squeeze other financiers not "in the know" by forcing them to 
 buy stock at monopoly prices in order to fulfil their engagements. 
 But the financiers, who are themselves promoters or directors of a 
 company and have retained large blocks of shares, can play this 
 profitable game at a great advantage. Instead of overcapitalizing a 
 company at construction and clearing out by a single act of "unload- 
 ing," they may retain their shares and use them for what is euphemis- 
 tically termed "speculating" on the bourse, but what is in reality an 
 alternate "rigging and depressing of prices." Superior or early access 
 to information affecting the movement of prices gives them their 
 first advantage; this they may supplement by manipulating public 
 opinion through the press; finally, their financial position and control 
 of movements enable them more effectively than outsiders to bull 
 •and bear the market. An intrinsically unsound business, with incal- 
 culable or fluctuating assets, best lends itself to such operations. A 
 classical example in modern finance is the South African Chartered 
 Company, a wildly speculative venture of such magnitude and super- 
 ficial possibilities, so well adapted to political and sentimental appeals, 
 as to enable its crafty organizers to plan and execute price movements 
 of enormous range. The advantage enjoyed by financiers "in the 
 know" are well illustrated by the record of the holding of Chartered 
 Shares before and after the Jameson Raid by Messrs. Rhodes, Beit, 
 Rudd, and their intimates in South African finance. 
 
 These operations of financiers in managing the play of mobile 
 stocks resembles the keeping of gaming tables; from their standpoint 
 it is business; from that of their clients it is gambling; under normal 
 circumstances and in the long run there is Uttle risk for them — they 
 must win; the amateurs who play with them must lose. 
 
 The skilled financier, who makes large gains by "speculative" 
 business in floating companies and planning coups upon the Stock 
 Exchange, desires, if he retains any "conservative instinct," to pos-
 
 THE INTERRELATIONS OF I-INANCIAL OPERATIONS 493 
 
 sess some substantial, profitable stake in the world of finance, some 
 considerable investment in real estate or in regularly remunerative 
 businesses: such holding substantiates his credit, gives him social 
 position and respectability, and so assists his speculative opera- 
 tions, besides furnishing a soft bed on which to fall in the event 
 of some knockdown blow. The master of modern finance does not 
 therefore use all his resources in speculative business, nor does he 
 find it to his interest to impart mobility to every form of investment. 
 In his career he enjoys exceptional opportunities of making or dis- 
 covering genuinely profitable investment based upon the control of 
 rich natural resources or other protective support. The directors of 
 the Standard Oil Trust or of the East Rand Mines or De Beers do not 
 "gamble" with such stocks, nor do they let out of their hands at any 
 time the control of these profitable businesses: they only speculate 
 with the suqjlus gains which spring from such "monopolies" and 
 with the cumulative profits of their well-directed speculations. 
 
 The financial class, then, as distinguished from the main body 
 of capitalists or amateur investors, grafts upon its legitimate and 
 useful function of determining and directing the most productive 
 flow of capital three methods of private gain, each of which is a 
 corruption and abuse of its true function. 
 
 Planning and promoting companies based, not upon economy of 
 industrial or financial working, but upon an artfully enhanced vendi- 
 bility of shares, they cause a waste of general capital by obtaining 
 an excessive subscription to the company and diverting the excess 
 into their own pockets, thus imparting insecurity to otherwise sound 
 businesses, damaging their credit, and impeding their productive 
 operations. To this waste must, of course, be added the injury 
 wrought by floating "bogus" companies which have no actual 
 foundation in the business world; the wise prevalence of these crim- 
 inal adventures not only wastes capital, but, disturbing public con- 
 fidence, further impedes the easy, natural flow of capital throughout 
 the industrial organism. 
 
 Creating or stimulating fluctuations of prices in order to contrive 
 corners or to practice concerted coups is an even more injurious 
 dislocation of the social machinery of finance; it is a falsification of 
 the automatic register of values expressly designed to determine the 
 most productive application of capital. 
 
 Finally, the creation, absorption, and supreme control of the most 
 profitable forms of natural monopoly and other abnormally pros-
 
 494 PRINCIPLES OF MONEY AND BANKING 
 
 perous businesses impart a strength and solidity to the new financial 
 oUgarchy which enables it to fasten its hold still more firmly on the 
 necks of the proletariat of capital, who thus, cut off more and more 
 from secure investments, are driven into the "gambling hells" of 
 speculative stocks and shares kept by these masters of finance. 
 
 The multitude and magnitude of these interferences with the 
 delicate adjustments of the financial machinery directing the flow of 
 capital involve other indirect consequences of importance. They 
 impart debility and irregularity to the actual processes of production 
 and of commerce under the new order of capitalism. The business 
 of a company whose stock, overappreciated upon construction, is 
 allowed afterward to slide, or is made tlie sport of gamblers who 
 toss it up and down for private financial purposes, is rendered insecure: 
 the actual flow of capital into it, plundered at the source, is insufl&cient 
 for its full expansion; attempts to "support the market," by earning 
 good profits through economy of "costs" or other unsound business 
 finance drive the company into difl&culties, force it to call up more of 
 its capital, weakening its general credit, while special emergencies 
 impel it to seek advances from bankers and other accommodations. 
 
 As "credit" becomes more and more the vital force of modern 
 business, the class that controls credit becomes more powerful and 
 takes for itself as "earnings" a larger proportion of the product of 
 industry. If, however, "credit" were left to the free competition of 
 a large number of bankers and financiers, this control w^ould not 
 imply mastery. In order to comprehend the power of finance we 
 must look a little closer at its structure. In no other business opera- 
 tion is the advantage of a large over a small capital so obvious: no- 
 where else is the force making for concentration of business so evident. 
 If any limit exists to the "law of increasing returns" in banking, 
 insurance, and finance it is not easily discernible. Great operations 
 of public or private finance, the floating of public loans or great 
 industrial combinations, the contrivance and executions of great 
 movements in the stock and share markets, can only be conducted 
 with the suddenness and secrecy which are requisite to safety and 
 success by financial businesses of the first order of magnitude. Great 
 businesses alone can stand their ground against the larger shocks to 
 the general credit of a nation, or can rely upon their political influence 
 to secure governmental aid in cases of real emergency. Thus it arises 
 that a large proportion of the most profitable business of financiers is
 
 THE INTERRELATIONS OF FLNANCIAL OPERATIONS 495 
 
 never exposed to effective competition, and the prices they receive 
 for their services are "monopoly" prices: either it is business which 
 they initiate and organize, and for which they charge "what the busi- 
 ness will bear," or it is business whose size and delicacy forbid close 
 bargaining, or, finally, it is money-lending, in which advantage can be 
 taken of the urgent needs of the applicant for loans. 
 
 A study of the origins and careers of the great American financiers 
 discloses three chief sources of financial power: railroads, industrial 
 trusts, and banking, and the union in the same hands of the control of 
 these three economic functions is an instructive testimony to the 
 nature of the new power. The railroad kings and the great industrial 
 trust-makers are drawn by economic necessities into general finance. 
 The control exercised by American railroads over agriculture, irri- 
 gation, mining, city development, has led railroad men into the pro- 
 motion of all sorts of business enterprises more or less dependent 
 upon railroads, while the tortuous financial history of most roads 
 has necessitated a constant recourse to the general machinery of 
 finance. Though the same is not equally true of the man who makes 
 his pile by the successful operation of an industrial trust, another 
 economic necessity drives him into general finance. The profitable 
 management of a trust depends primarily upon regulation of capital. 
 It is thus impossible ex hypothesi for a trust-maker to find full, con- 
 tinuous employment for the high profits he makes by extending the 
 plant and working capital of his own business: such a policy would 
 be evidently suicidal. He must look outside his own business for 
 fields of profitable investments for his profits. If he occupies himself, 
 as sometimes he does, in organizing other industrial trusts in busi- 
 nesses related to his own, his success yields new profits which must 
 seek employment further afield. Thus the profits arising from specific 
 monopolies in the transport or the manufacturing world arc logically 
 forced into the more general regions of finance. They form a large 
 and growing fund of free capital which naturally associates itself with 
 the free funds held by bankers, and operates by the ways we have 
 described in fastening a general control of finance upon business that 
 enables the financial class to extract a larger share of the general 
 wealth.
 
 INDEXES
 
 INDEX TO PART I 
 
 [Explanalion of references in Index: Each part of the book is diWded into 
 chapters, designated by Roman numerals; into sections under each chapter, desig- 
 nated by capital letters; and into selections numbered consecutiv-ely throughout 
 each part of the book. Thus, a reference in the index as follows: "Contents, 
 chap, iv, D," means that by turning to the contents the reader will find in the 
 chapter and section mentioned various selections on the topic in question. Refer- 
 ence to "Xo. 135" means that the topic is treated in selection No. 135. Reference 
 to "p. 238 " means that the topic is mentioned on that page.] 
 
 Assignats and mandats, No. 90. 
 
 Banking s>-ndicate. See S>'Tidicate. 
 Barter, inconvenience of, No. i. 
 Bimetallism, Contents, chap, iv, pp. 
 
 99, 221, 359; international. Contents, 
 
 chap, iv, D. 
 Bland-Allison act, Nos. 124, 129. 
 
 Coinage: principles of. Contents, chap. 
 
 ii, D; United States, Nos. 48, 49. 
 Coins: abrasion of, p. 84; gold, pp. 277, 
 
 279; foreign, p. 281; minor, pp. 277, 
 
 279; silver, p. 278; subsidiary, pp. 
 
 277, 279, 281; token, Nos. 79, 104. 
 Compensated dollar, Nos. 149, 150. 
 Compensatory action, p. 98, No. 68. 
 Counterfeiting, p. 84. 
 Creditors, viewpoint of. No. 1 28. 
 Crime of 1873, Nos. 120-122. 
 Currency: debasement of. Contents, 
 
 chap, iv; colonial, Nos. 39, 91, 92; 
 
 confederate, Nos. 98, 99; continental, 
 
 Nos. 93-97. 
 Cyanide process, pp. 72, 255. 
 
 Debtors, viewpoint of. No. 127, pp. 
 
 211, 225. 
 Deferred payments, standard of, Nos. 
 
 7, 26, pp. 97, loi, 258, 259. 
 Dollar. See Compensated dollar; 
 
 Trade dollar. 
 
 Endless chain, pp. 237-38, 251. 
 Exchange, medium of. Sec Medium of 
 exchange. 
 
 "Financial Disease," No. 134. 
 
 Gold: certificates, pp. 278, 280; cross 
 of, No. 137; production of. No. 142. 
 Sec also Coins; Metals. 
 
 Greenbacks, Nos. 100-103, Contents, 
 chap. V, C, Nos. 131, 139, pp. 137, 138, 
 210, 237, 238, 276, 278, 280. 
 
 Gresham's Law, p. 98; and bimetallism, 
 No. 66; and debasements, No. 59; 
 qualified, No. 67. 
 
 Index numbers, pp. 100, 270, Nos. 144- 
 46. 
 
 Latin Monetary Union, p. 98, No. 82. 
 Legal tender of United States money. 
 
 Sec Money. 
 Limping standard, p. 99. 
 
 Mandats. See Assignats. 
 
 Measure of value, p. 7. 
 
 Medium of exchange: functions of , No. 
 4; origin of, Nos. 34, 35. 
 
 Mercantilism, Contents, chap, i, B (2). 
 
 Metals: precious. Contents, chap, ii, C; 
 production of. No. 44, p. 212; ratio 
 of, p. 114, Nos. 64, 65. See also 
 Gold; Silver. 
 
 Mint, United States, Nos. 48, 49, 73; 
 tolerance of, p. 83. 
 
 Monetary chronology. No. 42. 
 
 Monetary functions, p. 3; differen- 
 tiation of. No. 8. 
 
 Monetary stock. United States, No. 1 54. 
 
 Money: and business organization, Nos. 
 28, 29; and capital, p. 3, Nos. 23, 27; 
 and prices. No. 6, pp. 96, 254, 255, 
 Contents, chap, vii; and regulation 
 of trade, Contents, chap, i, B (2); 
 and wealth, p. 4, N'o. 20; definition 
 of. No. 2; government paper. Con- 
 tents, chap, v; laws of, token, No. 
 79; love of, Contents, chap. i. B (i); 
 legal tender of United States, No. 
 153; origin and development of. Con- 
 tents, chap, ii; primitive. Contents, 
 chap, ii, A, B; redemption of United 
 States, No. 152; representative, Nos. 
 85, 152; requisites of, No. 36; r6lc 
 of, p. 4, Contents, chap, i, C; suj)- 
 ply of, required, No. 25; value of, 
 No. 61. Sec also Paper money; 
 Token monev. 
 
 499
 
 Soo 
 
 PRINCIPLES OF MONEY AND BANKING 
 
 Monometallism, p. qg. 
 Multiple standard, pp. loo, 259, Nos. 
 143, 147, 148. 
 
 Panic of 1893, Nos. 133, 134. 
 
 Paper money, Contents, chap, v; by 
 
 denominations. No. 155. 
 Pecuniary organization, p. 4, Contents, 
 
 chap. i. 
 Price: as organizing force, p. 4, Nos. 
 
 30, 31; levels, control of, Contents, 
 
 chap. vii. 
 Prices and money. See Money and 
 
 prices. 
 
 Redemption of United States Money. 
 
 See Money. 
 Representative money: origin of. No. 
 
 85; redemption of, No. 152. 
 Resumption of specie payments, Nos. 
 
 108, 109. 
 
 Seignorage, No. 55. 
 
 Sherman act. No. 129. 
 
 Silver: coin, p. 276; certificates, pp. 228, 
 
 278, 280; movement of. Contents, 
 
 chap. vi. See also Metals. 
 
 Standard: double, p. 49; gold exchange, 
 p. 99; irredeemable paper, p. 100; 
 limping, p. 89; of deferred payments, 
 Nos. 7, 26, pp. 97, loi, 258, 259; 
 parallel, p. 99; single, p. 99. See also 
 Deferred payments; Midtiple stand- 
 ard. 
 
 Standard question. Contents, chaps, iv, 
 v, vi, vii, pp. 96, 134, 210, 258, 
 No. 80. 
 
 Syndicate, banking. No. 135, p. 238. 
 
 Tabular standard. See Multiple stand- 
 ard. 
 
 Token money, laws of. No. 79; private 
 issue of. No. 104. 
 
 Trade dollar, No. 123. 
 
 Treasury notes. No. 125, pp. 237, 238; 
 redemption of, No. 131, p. 280; re- 
 tirement of. No. 140, p. 278. 
 
 United States notes. See Greenbacks. 
 
 Value, measure of. See Measure of 
 value.
 
 INDEX TO PART II 
 
 Acceptance: bank, p. 55, Nos. 152, 153; 
 
 domestic, No. 154; trade, p. 34, Nos. 
 
 229, 230. 
 Agricultural credit. Contents, chap. ix. 
 Aldrich bill, p. 261. 
 Aldrich-Vreeland act, p. 260. 
 Amortization principle, p. 390, No. 
 
 193- 
 Asset currency, Contents, chap, vi, 
 D (3). 
 
 Bank: competition, Nos. 58, 81, pp. 
 94-95, 197; failures, causes of. No. 
 109, p. 224. 
 
 — notes; circulation of, p. 126; nature 
 of, p. 54, Nos. 21, 22; redemption of, 
 Nos. 92, 124; regulation of. Contents, 
 chap, vi, D; under Federal Reserve 
 system, Nos. 142-43. 
 
 — private, pp. 7, 197, Nos. 98, 99. 
 
 — relations between. Contents, chap. v. 
 
 — safety fund. No. 122. 
 
 — statements, Nos. 19, 20, 24, 158. 
 
 — wildcat, p. 241. Sec also Acceptance; 
 Goldsmith bankers; Loans; Postal 
 savings banks: Savings banks; State 
 banks; SufTolk bank systems; Treas- 
 ury and the banks. 
 
 Banking: forms and service of, Con- 
 tents, chap, i; functions of, Nos. 21, 
 22. 
 
 — operations and accounts of, chap, 
 iv. A; interrelations of, chap. xi. 
 
 — regulation of, Contents, chap. vi. 
 Sec also Canadian banking; Com- 
 mercial banking; Co-operative bank- 
 ing agencies; Free banking system; 
 Investment banking; National bank- 
 ing system. 
 
 Bill of exchange, p. 34; documentar>-, 
 p. 72. 
 
 Bond houses. Contents, chap, x, B, 
 chap, xi, C. 
 
 Building and loan associations. Con- 
 tents, chap, viii, C. 
 
 Call loans. Sec Loans. 
 
 Canadian banking: rcdem[)ti()n of 
 notes, p. 250. 
 
 Checks: cashier's, pp. 34, 35; certified, 
 p. 55; personal, p. 35; use of in 
 United States, No. 16. Sec also 
 Clearing-houses; Collections. 
 
 Clearing-houses, pp. 95, 100, loi. Con- 
 tents, chap, v, .^ (2), Nos. 94,95, 159. 
 
 Collateral. See Loans. 
 
 Collections, Nos. 52, 53; under Federal 
 Reserve system. No. 161. 
 
 Commercial banking: principles of, 
 Contents, chap, v; under Federal 
 Reserve system. Contents, chap, 
 xi, B; versus investment banking, 
 No. I, Contents, chap, xi, A. 
 
 Commercial paper. See Loans. 
 
 Commerical-paper houses. No. 35. 
 
 Comptroller of currency, powers of, 
 p. 203. 
 
 Concentration, fmancial. See Finan- 
 cial concentration. 
 
 Co-operative banking agencies, Con- 
 tents, chap. viii. 
 
 Correspondent banks, No. 54. 
 
 Credit: commercial, p. 20, Nos. 10, 12; 
 department, No. ^^i elasticity of, 
 Nos. 91, 144, 147, 151; instruments 
 of. Contents, chap, iii; nature and 
 functions of. Contents, chap, ii; 
 unions. No. 173. See also Agri- 
 cultural credit. 
 
 Credit Foncier, p. 389. 
 
 Crises. See Cyclical variations. 
 
 Currency princi|)le, No. 118. 
 
 Cyclical variations. Contents, chap. 
 V, B (2), C. 
 
 Deposits: interest on, Nos. 58, 65, 87, 
 93; nature of, p. 55, Nos. 21, 22, 
 pp. 126, 127; time. No. 157. 
 
 Directorates. See Interlocking directo- 
 rates. 
 
 Discount: nature of, p. 55; Nos. 21, 
 22; market. No. 151; rates, Nos. 
 148, 149. 
 
 Draft, trade. See Acceptance. 
 
 Elastic currency. See Bank notes; 
 Seasonal variations. 
 
 Exchange: domestic, No. 63, pp. 317, 
 318; foreign. No. 155; rates of, in 
 Chicago, No. 154. See also liill of 
 exchange; Medium of exchange. 
 
 Federal Reserve banks, p. 207; capital 
 
 of, p. 207. 
 Federal Reserve Board, powers of, 
 
 pp. 203-204. 
 
 SOI
 
 502 
 
 PRINCIPLES OF MONEY AND BANKING 
 
 Federal Reserve system, Contents, 
 chap, vii; and greenbacks. No. 146; 
 and investment operations. Contents, 
 chap, xi, B; control of, Nos. 101-2; 
 reserve requirements of, p. 208. 
 
 Financial concentration, Nos. 55, 56, 
 57, Contents, chap, xi, C. 
 
 Financial operations, interrelations of, 
 Contents, chap. xi. 
 
 Financial statement. No. 34. 
 
 Free banking system, Nos. 97, 121. 
 
 Gold clearance fund. No. 160. 
 Goldsmith bankers. No. 4. 
 Government loans to farmers. No. 184. 
 
 Hoarding, in 1893, No. 84. 
 
 Independent treasury. See Treasury 
 and the banks. 
 
 Instruments, negotiable, Nos. 17, 18. 
 
 Interest on deposits. See deposits. 
 
 Interest rates: in New York, No. 41; 
 on consumption loans, p. 338; to 
 farmers, p. 363, Nos. 180, 186, 187. 
 
 Interlocking directorates, p. 472, Nos. 
 
 232-35- 
 Investment banking, No. i. Contents, 
 chaps. X, xi, C; credit, p. 20, No. 9; 
 loans of commerical banks. No. 32, 
 Contents, chap, xi, A, B. 
 
 Landschaften, p. 389. 
 
 Loan sharks, Nos. 169-71. 
 
 Loans: analysis of, Contents, chap, iv, 
 B, p. 51; call, p. 100, No. 38; col- 
 lateral, Nos. 36-40; between banks, 
 Contents,' chap v; commercial-paper, 
 Nos. 29-32, 227, 228; commer- 
 cial V. investment, No. 32; govern- 
 ment, to farmers. No. 184; real-estate, 
 p. 211, Nos. 107, 108; restrictions on, 
 No. 106. 
 
 Louisiana bank act, p. 245. 
 
 Money trust, pp. 4, 441, Nos. 231, 235. 
 Morris plan. No. 172. 
 
 National banking system, No. 125, 
 
 P- 259- 
 Negotiable instruments, Nos. 17, 18. 
 
 Note: promissory, p. 32; broker. No. 
 35- 
 
 Open-market operations. No. 156. 
 
 Panics. See Cyclical variations. 
 Postal savings banks, Nos. 207-209. 
 Private bank. Sec Bank. 
 
 Raiffeisen system, p. 348. 
 
 Rediscounting: under national bank- 
 ing system, Nos. 59, 60; under 
 Federal Reserve system, Nos. 147, 
 
 150, 151- 
 
 Reserve, concentration of: during 
 panics. No. 89; function of. No. 25; 
 interdependence of, Nos. 44, 81; of 
 New York banks, No. 42; regulation 
 of, No. 105. See also Financial con- 
 centration. 
 
 Reserve requirements. No. 104, p. 208. 
 
 Rural credit. See Agricultural credit. 
 
 Savings banks, chap, x, A. 
 
 Savings in national banks, Nos. 157, 
 
 203. 
 Schulze-Delitzsch, p. 348. 
 Seasonal variations, Contents, chap, v, 
 
 B 2 (a), Nos. 75, 145. 
 Speculation. See Stock-exchange spec- 
 ulation. 
 State banks, p. 6; loans of. No. 28; 
 
 regulation of. Contents, chap, vi, C; 
 
 and Federal Reserve system, Nos. 
 
 162-65. 
 Stock-exchange speculation, Nos. 39, 
 
 55, 58, 6s, 79, 81, 216, p. 457, Nos. 
 
 225, 226. 
 Suffolk bank system, pp. 251-52. 
 Trade draft. See Acceptance. 
 
 Treasury and the banks, Nos. 69-71, 
 
 90, 145- 
 Trust companies, Nos. 43, 112, 116; 
 and Federal Reserve system, No. 
 166. 
 
 Usury, p. 338. 
 
 Vreeland-Aldrich act, p. 260.
 
 "I mill 
 
 ^^ 001 023 768 3 
 
 CENTRAL UNIVERSITY LIBRARY 
 University of California, San Diego 
 
 DATE DUE 
 
 my 10 1979 
 
 May 2 iqyq 
 
 CI 39 
 
 UCSD Libr.