THEbaniiuig System 
 
 of the 
 
 Inited States 
 
 I 
 
 in 
 
 CO 
 
 
 ^:^D ITS RELiATION 
 
 aistdBhSINESS 
 COUNTRX 
 
LIBRARY 
 
 OF THE 
 
 UNIVERSITY OF CALIFORNIA. 
 
 Class 
 
Digitized by the Internet Archive 
 
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 IVIicrosoft Corporation 
 
 http://www.archive.org/details/bankingsystemofuOOdawerich 
 
THE 
 
 BANKING SYSTEM 
 
 UNITED STATES 
 
 ITS RELATION TO THE MONEY AND BUSINESS OF 
 THE COUNTRY. 
 
 CHARLES G. DAWES. 
 
 1894: 
 
 Rand, McNally & Company 
 
 CHICAGO. 
 
Copyright, 1894, by CHARLES G. DAWES. 
 
1)38 
 
 PREFACE. 
 
 The exact relations of our banking system 
 to the business prosperity and money of the 
 United States do not seem to be fully com- 
 prehended by our people. 
 
 The writer is a business man, to whom his 
 dealings with banks, in the ordinary course of 
 business, has suggested the preparation of this 
 little volume, in which he discusses that serv- 
 ice of banks to the community which to him 
 seems at once the most important, and, at the 
 same time, most commonly ignored. In his 
 judgment there can be no proper understand- 
 ing of the monetary problems of the day 
 unless the relation of the bank-credit money 
 of the country to the money of the Govern- 
 ment is fully comprehended. 
 
 Lincoln, Neb., October 29, 1894. 
 
 100059 
 
BANKING SYSTEM OF THE 
 UNITED STATES. 
 
 CHAPTER I. 
 
 THE BANK AND THE COMMUNITY. 
 
 From the standpoint from which we shall 
 consider a bank in its relation to the business 
 community, we shall not treat it as a private 
 corporation organized for profit, but will re- 
 gard it as in the nature of a public corporation, 
 its officers as public officers serving the busi- 
 ness community, its depositors, whose funds 
 are loaned by these officers to the community, 
 as demand creditors of the community, and its 
 borrowers as debtors of the depositors. From 
 this standpoint the capital of a bank may be 
 
 (7) 
 
8 BANKING SYSTEM OF UNITED STATES. 
 
 regarded as a kind of indemnity money, depos- 
 ited by the stockholders of the bank as a pledge 
 that the depositors in the community shall col- 
 lect from the borrowers in the community " on 
 demand." 
 
 As to the profits arising to the banking cor- 
 poration from this species of trusteeship for 
 the community, they are smaller than those of 
 any other class of private corporations which 
 deal with the community as a whole, and 
 which perform services for the community 
 which can be compared in value with those 
 performed by the banks. The tax upon the 
 community rejpresented by these profits is so 
 small, in comparison with the benefits derived 
 by the community from banks, and compared 
 with the risks incurred by banks for the sake 
 of the community, that it is not worthy of 
 extended consideration. The object of this 
 little volume is to demonstrate the value and 
 the vast importance of banks as the creators of 
 the great bulk of the money used by the busi- 
 ness community, and to point out some of the 
 
THE BANK AND THE COMMUNITY. 9 
 
 results arising out of the relations existing 
 between our banking system and the business 
 community, which are often overlooked. Be- 
 fore taking these matters up we will mention 
 a few of the better known services of the bank 
 to the community. 
 
 In the first place, a bank acts as an agent 
 for the active and enterprising members of the 
 community who borrow money for the sake of 
 carrying on the productive and mercantile 
 industries upon which so many members of 
 every community depend for their living. It 
 collects a multitude of small amounts from the 
 members of the community, which, if retained 
 by them, would be idle capital, and, under 
 proper restrictions, places the money in the 
 hands of those who put it to its best use. It 
 acts as the trustee for the accumulating and 
 saving portion of the community, affording 
 them the opportunity to place their money 
 where it is safe, and where at any time, unless 
 otherwise contracted, they can receive it on 
 demand. 
 
lO BANKING SYSTEM OF UNITED STATES. 
 
 By the use of a clearing-house and the 
 check system, banks enable a community to 
 carry on the bulk of their business without the 
 risk and trouble of handling actual money in 
 large sums. In returning the canceled checks 
 to a customer, and balancing monthly his bank 
 book, they furnish him with vouchers for pay- 
 ments made by him, signed by the party 
 receiving the payments. To quite a portion of 
 the community they act as bookkeepers, and 
 among smaller tradesmen, and some larger 
 ones, unfortunately, the stubs of the bank- 
 check book form their most reliable accounts. 
 
 They become trustees in a multitude of 
 transfers between parties residing in different 
 places where papers are to be delivered on 
 receipt of cash for remittance. They furnish 
 drafts and bills of exchange, enabling the 
 members of a community to cheaply and 
 safely transfer money to a distance. They 
 furnish information to business men, at home 
 and at a distance, as to the reliability of 
 prospective customers. Their favorable intro- 
 
THE BANK AND THE COMMUNITY. II 
 
 ductions facilitate business acquaintances. As 
 National banks they add to the circulating- 
 medium '^ National Bank Notes." These are 
 some of the services performed by banks for 
 the community. But we are yet to consider 
 their most important service. 
 
CHAPTER 11. 
 
 THE BANK-CREDIT MONEY OF THE UNITED 
 STATES. 
 
 According to the report of the Secretary 
 of the Treasury there is outstanding money 
 issued by the United States Government as 
 follows : 
 
 
 General 
 
 stock Coined 
 
 or Issued. 
 
 In Treasury. 
 
 Amount in 
 Circulation 
 Oct. 1, 1894. 
 
 
 $579,728,587 
 
 421,176,408 
 
 75,054,481 
 
 64,845,699 
 
 339*676,504 
 151,609,267 
 346,681,016 
 56,305,000 
 207,564,458 
 
 $79,602,339 
 
 16,809,713 
 55,260 
 9*^55,785 
 30,113.893 
 79.397,535 
 550,000 
 5,017,748 
 
 
 Standard silver dollars 
 
 58,'244!768 
 
 Gold certificates 
 
 64,790,439 
 
 
 
 Treasury notes (1890) 
 
 United States notes 
 
 121,495,374 
 267,283,481 
 
 Currency certificates (1872)... 
 National bank notes 
 
 55,755,000 
 202,546,710 
 
 Totals 
 
 $2,242,641,420 
 
 $587,602,438 
 
 $1,655,038,982 
 
 
 
 At the present time all of the money of 
 the Government circulates at par. In other 
 words, there is at present no form of money 
 
 (12) 
 
BANK-CREDIT MONEY. 1 3 
 
 at a discount. Considered from the stand- 
 point of intrinsic value alone, tlie gold dollar 
 is of course the most valuable, although its 
 value as money is no more than that of the 
 paper or silver dollar. There seems to be, 
 among our people, some confusion in ideas as 
 to what this parity in the purchasing power of 
 these different forms of money is due. Some 
 possess the erroneous idea that the '' stamp 
 of Government." determines the matter, and 
 that paper to which the '' stamp of Govern- 
 ment " is affixed, becomes ipso facto as valu- 
 able as the piece of gold bearing the same 
 stamp. 
 
 It is well to fix clearly in our minds the 
 true reason why there is no disparity in the 
 debt-paying and purchasing power of the 
 different forms of Government money. 
 
 The reason that every silver or paper 
 dollar, issued by our Government, has the 
 buying and debt-paying value of a gold 
 dollar, is because it has been declared by law 
 to be the established policy of the United 
 
14 BANKING SYSTEM OF UNITED STATES. 
 
 ^States to keep the metals, silver and gold, on 
 a parity, and because, in the fulfillment of 
 this policy, the Treasury Department of the 
 Government holds itself in readiness to re- 
 deem, and in actual practice does redeem, in 
 gold, upon demand, other forms of United 
 States money in circulation, including paper 
 and silver. 
 
 The amount of gold which has been held in 
 the Treasury, and which has been practically, 
 though perhaps not legally, applicable to the 
 redemption of its other forms of currency, has 
 not, since 1882, fallen below the sum of $100,- 
 000,000 until within the last two years. 
 
 Secretary of the Treasury Charles Foster, 
 in his annual report^ on the state of the 
 
 ^ In this same report (1892) Secretary Foster says 
 further: 
 
 " But if $100,000,000 in gold was a suitable or necessary 
 reserve in 1882 and in 1885, it would seem clear that a 
 greater reserve is necessary now. It should be remembered 
 that since 1882 we have added to our silver circulation the 
 sum of $259,016,182 in standard silver dollars coined under 
 the old silver act of 1878. These dollars are nearly all out- 
 
BANK-CREDIT MONEY. 1 5 
 
 finances of the United States for the fiscal 
 year ending June 30, 1892, says: ''In the 
 bank act of 1882 Congress gave expression 
 
 standing, and largely represented by silver certificates. We 
 have also increased the legal-tender paper circulation by 
 issuing about $120,000,000 of the Treasury notes authorized 
 by the act of July 14, 1890, and to this we are adding about 
 four millions each month in payment of silver bullion 
 purchased. 
 
 " It is true that silver certificates are not redeemable in 
 gold, and that the Treasury notes of 1890 are redeemable 
 in coin; but since it has been declared to be the established 
 policy of the United States to maintain the two metals, 
 silver and gold, on a parity with each other, it is obvious 
 that this large addition to our circulation has increased the 
 possible charge upon our gold reserve. In view, therefore, 
 of these increased and increasing liabilities, the reserve in 
 the Treasury for the redemption of the Government obliga- 
 tions should, in my opinion, be increased to the extent of at 
 least 20 per cent of the amount of Treasury notes issued, 
 and to be issued, under the act of July 14, 1890." 
 
 From this statement of Secretary Foster, and from the 
 conduct of the Treasury Department since these words were 
 w^ritten, it may be assumed that no refusal of redemption 
 of other forms of money in gold would be made where 
 that refusal would have a tendency to create a disparity in 
 the value of the different moneys issued by the Government. 
 
 As a matter of fact, the recent large demands for 
 redemption in gold have been based on gold certificates, 
 United States notes, and Treasury notes. Yet, to all prac- 
 
l6 BANKING SYSTEM OF UNITED STATES. 
 
 to its belief that $100,000,000 in gold was a 
 suitable reserve by providing that, whenever 
 the amount of gold in the Treasury should 
 
 tical purposes, the Government is daily redeeming silver 
 certificates and silver dollars in gold, as is admirably- 
 explained by Professor J. Lawrence Laughlin of Chicago 
 in the following words: 
 
 "It may, perhaps, be asked why the silver dollars of 
 412^ grains, being worth intrinsically only 'from 86 to 89 
 cents, do not depreciate to that value. The Government 
 buys the silver, owns the coin, and holds all that it can 
 not induce the public to receive voluntarily; so that but 
 a part of the total coinage is out of the Treasury. And 
 most of the coins issued are returned for deposit and silver 
 certificates received in return. There being no free coin- 
 age, and no greater amount in circulation than satisfies the 
 demand for change, instead of small bills, the dollar-pieces 
 will circulate at their full value, on the principle of sub- 
 sidiary coin, even though over-valued, and the silver cer- 
 tificates practically go through a process of constant 
 redemption by being received for customs dues equally 
 with gold. When they become too great in quantity to be 
 needed for such purposes, then we may look for the depre- 
 ciation with good reason." 
 
 Professor Laughlin, having written these words in 18S4, 
 would probably readily agree that if the policy of the 
 Treasury Department, as stated by Secretary Foster, is 
 maintained, which, among other things, regards silver cer- 
 tificates as a possible charge on the gold reserve, we need 
 never look for any depreciation of silver certificates, not- 
 
 % 
 
BANK-CREDIT MONEY. 1 7 
 
 fall below that sum, the issue of gold certifi- 
 cates should cease. In 1885 the then Secretary 
 of the Treasury adopted the practice of report- 
 ing $100,000,000 of the gold in the Treasury 
 as a 'reserve for the redemption of United 
 States notes,' and recently the majority of the 
 Judiciary Committee of the present House of 
 Representatives expressed the opinion that, 
 under existing law, the maintenance of this 
 reserve is obligatory." Since Secretary Foster 
 wrote these words, however, the United 
 States Treasury, in following the declared 
 policy of keeping the metals on a parity, has 
 used the gold in the Treasury to redeem not 
 only the " United States Notes " above referred 
 to, but Treasury notes of 1890, which are " pay- 
 able in coin," and are based on a deposit of 
 uncoined silver bullion. In so doing, the 
 
 withstanding a possible over-supply of silver dollars and 
 certificates as regards customs payments, or the demand for 
 subsidiary money. We might, however, under such circum- 
 stances, expect the necessity of replenishing the Treasury 
 gold supply. 
 2 
 
1 8 BANKING SYSTEM OF UNITED STATES. 
 
 Treasury Department has very largely en- 
 croaclied upon what was called the " $100,000,- 
 000 gold reserve." Notwithstanding the fact 
 that a $50,000,000 issue of 5 per cent United 
 States bonds was sold by the Secretary of 
 the Treasury within the last year for the 
 purpose of strengthening the gold reserve, 
 that reserve has shrunk, under demands for 
 redemption of other forms of money, to the 
 present sum of about $60,000,000. 
 
 There is a strong analogy between the 
 United States and the relation of its currency 
 obligations to its gold reserve and a bank 
 and the relation of its deposits to its cavsh 
 resources. The Government assumes, in regard 
 to the demands for redemption of other forms 
 of money in gold, what the bank assumes in re- 
 gard to the demand for the redemption of its 
 deposits in cash — that the actual demand for 
 redemption will never be but a small fraction 
 of the possible demand. 
 
 When a bank continues to cash checks over 
 its counter, and thus stands ready to redeem 
 
BANK-CREDIT MONEY. 1 9 
 
 its deposits in cash, then all its deposits are 
 considered good by the community, and checks 
 drawn against them circulate on a par with 
 all other kinds of money. When a bank re- 
 fuses to cash properly drawn checks over its 
 counter, and thus refuses to redeem its de- 
 posits in cash, then the value of all its deposits 
 is lessened in purchasing power, and checks 
 never circulate against them except at a dis- 
 count, and generally not at all. Thus, as long 
 as the United States Treasurer stands ready 
 to cash Treasury notes, or United States notes, 
 or silver certificates in gold, over his counters 
 on demand, so long will all the money of the 
 United States circulate on a par with gold, 
 and be as good as gold. When, however, the 
 United States refuses this redemption, and 
 by its own act discriminates between its dif- 
 ferent forms of money, then will the forms 
 of money, other than gold and gold certifi- 
 cates, become discredited and depreciated in 
 value, as compared with gold, and gold money 
 will go out of active circulation. 
 
20 BANKING SYSTEM OF UNITED STATES. 
 
 In carrying out its policy to keep every one 
 of its dollars as good as a gold dollar, by readi- 
 ness to redeem other forms of currency in gold 
 on demand, this Government is at present hold- 
 ing, on a par with gold, if we include National 
 bank notes, over $1,000,000,000 of paper and 
 silver money which has, therefore, equal pur- 
 chasing and debt-paying power with gold. It 
 was in pursuance of this policy that Congress 
 repealed the Sherman law under which the 
 ''Treasury notes of 1890" were issued, and 
 which was adding about $4,000,000 per month 
 of Treasury notes to the already large amount 
 of other money held at par by the dwindling 
 gold reserve. 
 
 We have gone somewhat into detail in 
 speaking of the money issued by the United 
 States Government for reasons which will ap- 
 pear hereafter. Yet this $1,600,000,000 of 
 money does not constitute all of the money 
 which is used by the people of the United 
 States. In fact, it is by far the smallest 
 part of the total money which they use in 
 
 I 
 
BANK-CREDIT MONEY. 21 
 
 the daily transaction of their enormous busi- 
 ness. 
 
 According to the report of the Comptroller 
 of the United States Treasury for 1881, the re- 
 ceipts of the New York banks, on two different 
 days, consisted of 98 7-10 per cent in checks 
 and drafts, and only i 3-10 per cent of actual 
 cash. The ratio in the United States is given 
 at 94 6-10 per cent of checks and drafts to 
 5 4-10 per cent of actual money. In a later 
 report of the Comptroller (1890) the proportion 
 in New York of checks, drafts, and bills of 
 exchange to actual cash received was stated, 
 on two different dates, to be 96 4-100 per cent 
 and 95 64-100 per cent, and in the United 
 States at 92 5-10 per cent and 91 4-100 per cent. 
 In his report for 1893 (page 24) the Comptroller 
 speaks of cash transactions as amounting to 
 only 8 7-10 per cent of the total money trans- 
 actions of the country. Indeed, all authorities 
 agree that, on the average, over 90 per cent of 
 the total business transactions of the citizens 
 of the United States, involving payments of 
 
22 BANKING SYSTEM OF UNITED STATES. 
 
 money, are carried on with checks and drafts. 
 The $1,600,000,000 of Government money is 
 actually handled in business to an amount less 
 than 10 per cent of the total amount of money 
 involved in business transactions. 
 
 As checks and drafts are always drawn 
 against deposits, the relation of bank deposits 
 to the money used by the people of the 
 country is seen at once to be very important. 
 
 In the report of the Comptroller of the 
 Treasury of the United States for 1893, the 
 individual deposits of the State banks, loan 
 and trust companies, savings banks, and pri- 
 vate banks of the United States are given as 
 $3,070,462,680, and the individual deposits of 
 the National banks of the United vStates as 
 $1,465,446,904 (October 3, 1893). In these fig- 
 ures are not included the deposits classed in 
 bank statements under the head, " Due to 
 National Banks" and ''Due to State Banks." 
 
 Thus we see that the people of the United 
 States, irrespective of whatever actual cash 
 they may have on hand, have a purchasing 
 
BANK-CREDIT MONEY. 23 
 
 ability, expressed in deposits in solvent banks 
 and trust companies, amounting- to $4,535,909,- 
 584, or a sum nearly three times as great as 
 the total $1,600,000,000 cash which the United 
 States Government has placed in circulation. 
 The greater part of this sum is either subject 
 to check or issued as negotiable demand cer- 
 tificates. While deposits expressed in time 
 certificates and in savings bank balances are 
 not generally devoted to purchases by our 
 people, except under emergency, nevertheless 
 they are regarded as, and under ordinary 
 conditions are, in practice, a cash asset in the 
 hands of any man in relation to their power 
 to pay debts or purchase commodities. If 
 we are to comprehend the monetary situa- 
 tion and money supply in this country, and 
 its relation to the rise and fall in prices, 
 and the prosperity or depression of our busi- 
 ness interests, we must fix firmly in our 
 minds this great truth : that since bank-credit 
 currency (to-wit, checks and drafts drawn 
 against bank deposit balances) is accepted 
 
24 BANKING SYSTEM OF UNITED STATES. 
 
 on a par with. United States currency or 
 coin in payment of a debt, or of the pur- 
 chase price of a commodity, therefore the sup- 
 ply of money in the country regulating prices 
 can not be considered as United States coin 
 and currency alone, but must be considered as 
 including the total sum of bank credits which, 
 in relation to a commodity or debt, has the 
 same buying and debt-paying power as the 
 actual money of the Government.^ 
 
 'We must be careful, in considering the effect upon 
 prices of commodities, not to confuse the aggregate of bank 
 deposits and the aggregate circulation, at a given time, of 
 checks and drafts based upon deposits. It is the latter 
 which must be considered. An increase in bank deposits, 
 in itself, would make no difference in prices, if no checks 
 used in the purchase of commodities be drawn against such 
 deposits, 
 
 John Stuart Mill says: " Money left with a banker, and 
 not drawn against, or drawn against for other purposes than 
 buying commodities, has no effect on prices, any more than 
 credit which is not used. Credit which z's used to purchase 
 commodities affects prices in the same manner as money. 
 Money and credit are thus exactly on a par in their effect 
 on prices." 
 
 The variation in the total amount of bank clearings in 
 the United States is a very much better index of the varia- 
 
BANK-CREDIT MONEY. 25 
 
 Many of those who assume to discuss finan- 
 cial questions — particularly the silver ques- 
 tion — refuse to consider bank-credit currency 
 as related to prices, or to the purchasing or 
 debt-paying power of a dollar, saying "that 
 behind every check there must be the money 
 in the bank." The shallowness of such state- 
 ments is apparent in the light of the fact that 
 to pay off in cash the deposits of National, 
 State, and savings banks, and trust companies 
 in the United States, there would be required 
 nearly three times the amount of the entire 
 
 tion in prices than the variation in the aggregate amount of 
 bank deposits. This results from the fact that clearings, to 
 a certain extent, are the measure of the bank-credit money 
 in actual use in carrying on the business of the country, 
 while the aggregate bank deposits are the measure simply 
 of the purchasing power which may be devoted to the trans- 
 action of business, but of which a large portion may be 
 absolutely idle, and, therefore, not a factor in the establish- 
 ment of current prices. 
 
 While the aggregate of bank deposits after a panic may 
 soon reach the maximum existing before the panic, it is 
 uniformly the case that a very much longer period of time 
 is necessary to restore aggregate clearings of banks to the 
 old point. 
 
26 BANKING SYSTEM OF UNITED STATES. 
 
 gold, silver, and paper money of the United 
 States Government now in circulation. The 
 business of this country, if done through the 
 same hands as at present in cash alone, without 
 the use of bank-credit money, would demand, in 
 the one city of New York, the presence, every 
 three weeks, of all of the $i,6oo,o(x>,ooo money 
 issued by the United States Government. 
 
 How it should happen that the people of 
 the United States have deposited in banks 
 and trust companies nearly three times the 
 entire cash circulation in the United States 
 — in other words, how bank-credit money is 
 created — we will consider in our next chapter. 
 It is in giving to the country the greatest pro- 
 portion of the money needed to carry on its 
 business that banks render that service which 
 is of the most vital importance.^ 
 
 ^ Prof. F. W. Taussig, in the course of a very able 
 treatise upon the " Silver Situation in the United States" 
 (see Vol. 7 (1892), Publications of the American Economic 
 Association, pages 63-64), refers to bank-credit currency 
 in the following language : " The true way to state the con- 
 
BANK-CREDIT MONEY. 2/ 
 
 ditions on which, in our day, the general range of prices 
 depends, is to compare the quantity of commodities offered 
 for sale with the total volume of purchasmg power in 
 terms of money. In this volume of purchasing power the 
 largest item consists, in our day, not of actual money, but of 
 credit in various forms. 
 
 "In countries like England and the United States it 
 consists chiefly in the form of credit applied by deposit banks 
 — bank deposits and bank checks. That bank deposits and 
 checks are the means of payment in all large transactions, 
 and in many small ones; that the exchanges carried on 
 through them are greater than those carried on with any 
 other form of currency; that they are completed, through 
 the machinery of clearing-houses, with the use of an insig- 
 nificant amount of coin or notes — these are facts familiar 
 enough. Indeed, the effects of credit as a substitute for 
 money may have been explained in economic text-books so 
 fully that they may be assumed to be well understood; it is 
 the extent rather than the nature of the effects that needs 
 to be insisted upon. At any one time, and for considerable 
 lengths of time, the general range of prices, w4th a given 
 volume of transactions, depends not on the quantity of 
 money simply, but on the volume of credit used as purchas- 
 ing power; and of this volume of credit the chief item in 
 countries like England and the United States is bank cur- 
 rency in the form of deposits and checks. In such a state 
 of things the increase of other forces of currency can have, 
 in itself, only a minor effect." 
 
 W. Stanley Jevons, in his w^ork entitled "Money and 
 the Mechanism of Exchange," quotes from Prof. Cliffe 
 Leslie's article in the Fortfiightly Review for November, 
 1870, as follows: "The improvements in locomotion and 
 in commercial activity, which have so largely augmented the 
 
28 BANKING SYSTEM OF UNITED STATES. 
 
 money-making power of the Germans, have also quickened 
 prodigiously the circulation of money; and the develop- 
 ment of credit, likewise following industrial progress, has 
 added to the volume of the circulating medium a mass of 
 substitutes for money, which move with greater velocity. 
 A much smaller amount of money than formerly now suf- 
 fices to do a given amount of business or to raise prices to a 
 given range ; and to the increased amount of actual money 
 now current in Germany we must add a brisk circulation 
 of instruments of credit. Were the circulating medium 
 composed of coin alone, whatever the amount of the 
 precious metals issuing from the mines, or circulating in 
 other countries, and whatever the price of German com- 
 modities in market abroad, no rise in the prices of German 
 commodities at home could take place without additional 
 coin to sustain it," 
 
 John Stuart Mill, in his " Principles of Political Econ- 
 omy," says: " In a state of commerce in which much credit 
 is habitually given, general prices at any moment depend 
 much more upon the state of credit than upon the quantity 
 of money. For credit, though it is not productive power, 
 is purchasing power; and a person who, having credit, 
 avails himself of it in the purchase of goods, creates just as 
 much demand for the goods, and tends quite as much to 
 raise their price, as if he made an equal amount of pur- 
 chases with ready money. " 
 
CHAPTER III. 
 
 HOW BANK-CREDIT MONEY IS CREATED. 
 
 Every National bank in the country is 
 presumed, by law, to be on a conservative 
 and safe basis, so far as its ability to redeem 
 deposits is concerned, when it has on hand 
 in cash, and on deposit w^ith approved banks, 
 called reserve agents, 25 per cent of the 
 amount of its total deposits. 
 
 In cities of small population, a less pro- 
 portion of cash and cash resources to total 
 deposits is legally deemed consistent with 
 conservative banking. When the cash and 
 reserve accounts (called together ''cash re- 
 sources ") exceed to any extent the 25 per 
 cent limit, the bank, according to the gener- 
 ally accepted rule, can safely loan the excess. 
 In the determination of its ability to loan, 
 (29) 
 
30 BANKING SYSTEM OF UNITED STATES. 
 
 a bank does not ordinarily consider the rela- 
 tion of the amount of cash, in the vaults to 
 the amount of its credits with reserve agents, 
 for the reason that in usual practice the 
 reserve agent will ship cash when called for, 
 or the bank can sell for cash, to neighboring 
 banks, exchange drawn against its balance 
 with the reserve agent. It is the relation 
 of the sum of the cash and reserve balances 
 to deposits which determines whether or not 
 the bank is in a condition to loan. While 
 this is a well-known fact, the consequences 
 of it are often overlooked. 
 
 The fact that National and other banks 
 are allowed to loan on the strength of their 
 deposits in other banks, as well as on account 
 of cash actually in their vaults, means that, 
 considering banks as a whole, the actual cash 
 held by them, into which checks and drafts 
 are by their terms and by practice concur- 
 rently convertible, is much less than 25 
 per cent of the deposits. This fact, together 
 with the fact that one bank will credit, 
 
HOW BANK-CREDIT MONEY IS CREATED. 3 1 
 
 as a deposit redeemable in cash, a check on 
 another bank, means also that our banks add 
 to the purchasing power of the community, 
 or, in other words, create money for the com- 
 munity. In giving the following illustrations 
 of those operations of banks which result 
 in an increase of purchasing power to the 
 community, we do not wish our readers to 
 infer that, under similar circumstances, all 
 banks would act as do the banks which we 
 assume as existing for purposes of illustration. 
 Yet whether it be the policy of a bank to run 
 with a 25 per cent reserve, as do the banks in 
 our illustrations, or a 40 per cent reserve, the 
 general effects of loaning operations are the 
 same. 
 
 The instances we will give clearly demon- 
 strate the enormous influence of banks upon 
 the money supply or purchasing power of a 
 community. 
 
 We will suppose a National bank to be 
 organized at Chicago with $600,000 capital, all 
 of which, at the commencement of business, is 
 
32 BANKING SYSTEM OF UNITED STATES. 
 
 in the vaults in cash. ^' Let us assume that the 
 first action of the Chicago bank is to deposit 
 $300,000 of its capital in the New York bank 
 which has been approved by the Comptroller 
 of the Treasury of the United States as its 
 reserve agent, the latter bank having already 
 on hand 25 per cent of its deposits, in cash 
 and cash resources, at the time the deposit of 
 $300,000 is made by the Chicago bank. 
 
 The statement of the Chicago bank then 
 stands as follows: 
 
 ASSETS. LIABILITIES. 
 
 Due from approved re- Capital stock $600,000 
 
 serve agents $300,000 
 
 Cash in vaults 300,000 
 
 $600,000 $600,000 
 
 We will assume that during the next week 
 the Chicago bank receives $800,000 in deposits 
 and makes $1,000,000 of loans, retaining 50 per 
 cent of its deposits in cash resources. The 
 statement of the Chicago bank then stands as 
 follows : 
 
HOW BANK-CREDIT MONEY IS CREATED. 33 
 
 ASSETS. LIABILITIES. 
 
 Loans and discounts. .$ 1,000,000 Capital stock $ 600,000 
 
 Due from approved re- Deposits 800,000 
 
 serve agents in New 
 
 York 300,000 
 
 Cash in vaults 100,000 
 
 $1,400,000 $1,400,000 
 
 We will assume that of the $300,000 deposit 
 made by the Chicago bank, the New York 
 bank loans $225,000, reserving $75,000 in order 
 to still keep its cash reserve 25 per cent of 
 its deposits. We can now trace the increase 
 in the purchasing power of the country- 
 involved in these transactions, or, in other 
 words, ascertain the increase in bank-credit 
 money. 
 
 It is as follows : 
 
 I St. An increase in New York of $225,000 
 purchasing power, loaned by the New York 
 bank to borrowers there, since but $75,000 of 
 the $300,000 deposited by the Chicago bank 
 is retained by the New York bank to protect 
 itself on the Chicago deposit, and since at 
 Chicago this $300,000 New York balance does 
 
34 BANKING SYSTEM OF UNITED STATES. 
 
 the work of an equal amount of 'cash in 
 assisting to hold good, under ordinary busi- 
 ness conditions, the $800,000 deposits of the 
 Chicago bank. 
 
 2d. An increase of $400,000 purchasing 
 power, or bank-credit money at Chicago. 
 This increase has been created in this way : 
 In making $1,000,000 loans, the Chicago bank, 
 in addition to loaning to its customers its 
 capital of $600,000, thus returning to the com- 
 munity all the purchasing power it possessed 
 before the organization of the bank, has also 
 loaned to them $400,000 of the $800,000 
 placed in the bank by depositors, thus adding 
 $400,000 to the purchasing power of the bor- 
 rowers. And yet, by this latter transaction, no 
 purchasing power has been taken away from 
 the depositors, since checks drawn against their 
 $800,000 deposits are accepted in payments on 
 a par with the gold, silver, and paper money 
 of the Government, the bank having pledged 
 itself to redeem them in cash on demand. 
 Thus we see that this Chicago bank, so con- 
 
HOW BANK-CREDIT MONEY IS CREATED. 35 
 
 servative as to hold in cash and reserve agents 
 one-half its total deposits, has yet, by these 
 simple transactions, increased the supply of 
 money which can be devoted to the purchase of 
 commodities, or the payment of debts, in the 
 sum of $400,000 at Chicago and $225,000 at 
 New York — a total of $625,000, being a sum 
 $25,000 in excess of its original capital of 
 $600,000. 
 
 Can there be a better illustration of the 
 wonderful influence of the banks of the 
 country on business and prices? 
 
 A simple example of the steps by which 
 banks increase the purchasing power of a com- 
 munity is the following: A customer of this 
 Chicago bank borrows $60,000, which, being 
 10 per cent of the capital stock, is the max- 
 imum amount which can be legally loaned to 
 one individual, giving his note with collaterals, 
 and receiving a credit upon his bank book of 
 $60,000, less the interest discount, as is the 
 general custom. He does not draw the actual 
 cash from the bank, but gives checks against 
 
36 BANKING SYSTEM OF UNITED STATES. 
 
 his balance, and these checks are re-depos- 
 ited by others, the check and clearing-house 
 system making the use of the actual cash 
 unnecessary as between the first borrower and 
 his creditors, and between his creditors and 
 those with whom they settle. Leaving out of 
 account the interest discount paid, the bank, 
 by this transaction, increases its deposits $60,- 
 000, and increases its loans and discounts 
 $60,000 — its assets and liabilities being thus 
 increased in the same amount. It increases 
 the purchasing power of. the community by 
 the sum of $60,000, but it has reduced its 
 loanable funds by $15,000 (to-wit, 25 per cent 
 of $60,000), which must be held in reserve, 
 either in cash or in other banks, as a protec- 
 tion against the possible calls for cash upon 
 the additional deposit of $60,000. The net 
 increase of purchasing power in the com- 
 munity by this transaction is therefore $45,000. 
 It has not found it necessary, in this transac- 
 tion, to draw any portion of its balance in 
 New York, or to pay out any cash. 
 
HOW BANK-CREDIT MONEY IS CREATED. 37 
 
 This creation of money (for such is the 
 true character of the transaction) is based 
 upon two assumptions: ist. That the bor- 
 rower is able to turn his note into cash at 
 maturity. 2d. That the bank is able to turn 
 the checks into cash upon demand. 
 
 We have already shown that bank deposits, 
 since they are the basis of checks and drafts, 
 have a great deal to do with the money of the 
 country. We now see that bank loans, since 
 they form the basis of a large part of bank 
 deposits, play a great part in determining the 
 money supply of our country. 
 
 Having considered the connection- between 
 the increase of loans and the increase in de- 
 posits, and the consequent increase in the pur- 
 chasing power of the community, let us now 
 consider the connection between a decrease in 
 deposits, and the resulting decrease in loans, 
 and decrease in the purchasing power in the 
 community. Let us take the case of a New 
 York bank which is called upon to ship $150,- 
 000 of currency to one of the banks of Chicago 
 
38 BANKING SYSTEM OF UNITED STATES. 
 
 depositing with it. Before the shipment we 
 will suppose the following to be a condensed 
 statement of the condition of the New York 
 bank: 
 
 ASSETS. LIABILITIES. 
 
 Loans and discounts... $1,000,000 Capital stock $ 250,000 
 
 Cash resources 250,000 Deposits -.. 1,000,000 
 
 $1,250,000 $1,250,000 
 
 At the time of paying the Chicago depositor 
 $150,000, the cavshier calls in $150,000 of loans, 
 which, for the sake of our illustration, we will 
 suppose are paid by checks on his own bank. 
 In calling in $150,000 loans, the bank takes 
 that much bank-credit money, or purchasing 
 power, from the community. Its loans and 
 discounts are reduced $150,000, its cash re- 
 sources $150,000, and its deposits $300,000, 
 leaving the statement of the bank as follows : 
 
 ASSETS. LIABILITIES. 
 
 Loans and discounts $850,000 Capital stock $250,000 
 
 Cash resources 100,000 Deposits 700,000 
 
 $950,000 $950,000 
 
 But we readily see that the bank must con- 
 tract its loans still more, since the remaining 
 
 ' See note at end of chapter, page 42. 
 
HOW BANK-CREDIT MONEY IS CREATED. 39 
 
 $100,000 cash resources lacks $75,000 of being 
 25 per cent of its remaining $700,000 deposits, 
 to-wit, $175,000. 
 
 Therefore the bank must still further con- 
 tract the purchasing power of the community 
 by creating again the proper ratio between 
 cash resources and deposits. Assuming again 
 that the borrowers pay the loans which are 
 called, by checks on the same bank, it is evi- 
 dent that in this case, to restore the 25 per 
 cent proportion of cash resources to deposits, 
 loans must still be contracted $300,000, decreas- 
 ing deposits $300,000, and taking that amount 
 of purchasing power away from the borrowers. 
 Whether the loans are paid by checks on the 
 bank calling them, or by checks on other 
 banks, the effect on the purchasing power of 
 the community is the same. The statement 
 then stands: 
 
 ASSETS. LIABILITIES. 
 
 Loans and discounts $550,000 Capital stock $250,000 
 
 Cash resources 100,000 Deposits 400,000 
 
 $650,000 $650,000 
 
40 BANKING SYSTEM OF UNITED STATES. 
 
 By these transactions, therefore, the pur- 
 chasing power in New York is diminished by 
 $450,000. This amount exactly equals the pos- 
 sible increase in purchasing power given to 
 Chicago, if the Chicago bank chooses to use 
 the $150,000 cash to its limit, as a basis for 
 creating bank-credit currency. It can loan 
 credits on its books (deposits) to an amount of 
 which the $150,000 cash is 25 per cent, to- wit, 
 $600,000. As the $150,000 deposit in New 
 York, before it was drawn by the Chicago 
 bank, was counted a cash asset, the possible 
 net gain in Chicago really consists of the 
 difference between $600,000 and $150,000, or 
 $450,000. 
 
 It is readily seen from this examination 
 into the method of the creation of bank-credit 
 money, which permits the purchasing power 
 created by loans, and expressed in a draft or 
 check on one bank to be deposited as a cash 
 asset in another, that deposits in banks eventu- 
 ally greatly exceed the total cash supply of the 
 country which is furnished by the Government. 
 
HOW BANK-CREDIT MONEY IS CREATED. 4I 
 
 We pointed out in a former chapter the extent 
 to which deposits have outgrown the cash 
 supply of the United States. The reason why 
 the exact nature of the effects resulting from 
 the ordinary transactions of banking, similar 
 to the ones forming the basis of our illustra- 
 tions, is not better understood, is because, as a 
 general rule, the increase and reduction of 
 loans and deposits and bank-credit currency 
 take place quietly, and in obedience to the 
 normal demands of business communities, 
 according as they need a greater or less amount 
 of money in the transaction of their legiti- 
 mate and ordinary business. The transfer of 
 currency and credits between banks and differ- 
 ent localities under normal conditions is 
 largely determined by the fluctuations in inter- 
 est rates in different localities, and in the com- 
 mon course of business these transfers offset 
 each other, and all goes well. Not until times 
 of panic come, when the banks of our country, 
 in keeping faith with the depositors, whom 
 they have promised to pay *'on demand," are 
 
42 BANKING SYSTEM OF UNITED STATES. 
 
 compelled not only to practically cease distrib- 
 uting purchasing and debt-paying power in the 
 shape of loans, but to destroy it by calling in 
 loans already outstanding, do we see the almost 
 unlimited dependence of our people upon our 
 banks, and the true value of banks as regula- 
 tors of the business machinery of the country. 
 
 'New York and Chicago are " Central Reserve" cities, 
 and their National Banks are required by law to keep 25 
 per cent of their deposits in cash in their vaults. The 
 illustration, therefore, would technically be more accurate 
 if the banks named were assumed to be in Omaha and New 
 York instead of Chicago and New York. 
 
CHAPTER IV. 
 
 THE RELATION OF BANK-CREDIT CURRENCY 
 TO PRICES AND GENERAL BUSINESS. 
 
 In these days, when all exchanges are made 
 in terms of money, there is of course no other 
 one thing in the business world in which 
 people are more interested than in the prices 
 of commodities, measured in the terms of the 
 money of the land. As prices rise and fall, so 
 do the hopes and wealth of the business man. 
 In the relation of the price of a certain com- 
 modity, which must be paid the wholesaler, to 
 that price which can be demanded from the 
 customer, lie the profits of the great multitude 
 of tradesmen. In the relation of the prices of 
 raw material to the prices which the manufact- 
 ured article will demand from the public, 
 depend the profits of the manufacturer and the 
 
 (43) 
 
44 BANKING SYSTEM OF UNITED STATES. 
 
 wages of the laborer. The relation of the price 
 of to-day to the price of to-morrow, and its 
 effect upon the relations of debtor and cred- 
 itor, is always one of the continuing problems 
 of a commercial age. The laws and conditions 
 which govern the fluctuations in prices are 
 always those which engage the earnest atten- 
 tion of business men. Were the supply of 
 money inflexible in amount and uniform in 
 
 f value, the price of an article would depend 
 simply upon the relation of the demand for the 
 article to its supply. But it is evident that 
 in addition to the demand for, and supply of, 
 
 ^an article, its price must depend also upon the 
 demand for, and supply of, money, in terms of 
 which the price must be expressed. 
 
 This being true, the fluctuations in the 
 money supply of a country have as direct an 
 effect on prices as the fluctuations in the de- 
 mand for, and supply of, an article. To deter- 
 mine, therefore, the true effect which mone- 
 tary conditions are having upon prices of com- 
 modities, we must look to the fluctuations in 
 
ITS RELATION TO GENERAL BUSINESS. 45 
 
 the money supply, and to the cause of the 
 fluctuations. And we must remember, also, 
 that the supply of money regulating prices 
 must, as we stated in a former chapter, be con- 
 sidered as including the total sum of all bank 
 credits which, in relation to a commodity, have 
 the same buying power as money. 
 
 When we admit this we see immediately 
 that the fluctuation in prices, caused by fluc- 
 tuations in money supply, is largely deter- 
 mined by the nature of the fluctuations in 
 the amount of bank-credit currency in circu- 
 lation. From the reasoning employed in our 
 preceding chapter it is easily seen that the 
 banks have such power to expand the circu- 
 lation of bank-credit money by making loans 
 in obedience to demands for money that, 
 under ordinary conditions, an increase in the 
 demand for money will be met with a cor- 
 responding increase of bank-credit money — 
 the tendency thus being to keep the purchas- 
 ing or debt-paying value of a dollar uniform. 
 Accordingly when business does not need 
 
 w^ 
 
46 BANKING SYSTEM OF UNITED STATES. 
 
 such an amount of money, the community pays 
 off its loans to save interest, and there occurs 
 the reduction, both in loans and deposits, 
 which we have before shown means a decrease 
 in the total amount of purchasing power of 
 the people. We can see, therefore, that under 
 normal conditions the increase or decrease 
 in bank-credit currency has a tendency to 
 keep the purchasing power of a dollar stable, 
 since these increases or decreases in money 
 supply correspond with the increases or 
 decreases in the demand for money. Owing 
 to the fact, however, that in times of easy 
 money, loans are unfortunately made in obedi- 
 ence to speculative demands, as well as in 
 accordance with the legitimate demands of 
 business, prices during a period of expanding^ 
 loans have a tendency to rise higher than 
 they would if loans were confined to the^ 
 supplying of legitimate business alone. In 
 such times, prices have a tendency to become 
 fictitious. During a period of contracting 
 loans, prices have a tendency to remain 
 
ITS RELATION TO GENERAL BUSINESS. 4/ 
 
 stationary, or to fall. Under a forced con- 
 traction of loans, prices fall with extreme 
 rapidity. There is a remarkable correspond- 
 ence between the rise and fall in prices and 
 the increase and decrease in the bank loans 
 of the United States, which latter, of course, 
 is the best index of the increase or decrease 
 in the bank-credit money of the country. 
 During the year 1893 we had a remarkable "^ 
 illustration of the extreme sensitiveness of 
 prices to a contraction of loans and a decline 
 in bank deposits. 
 
 According to the report of the Comptroller 
 of the Currency for 1893, the deposits in the 
 National banks of the country, between May 
 4 and October 4, 1893, were reduced to the 
 enormous extent of $378,119,563. The con- 
 traction in loans, made necessary by the with- 
 draw^al of these deposits, was $318,767,691 ; the 
 contraction in balances on deposit with other 
 banks was $51,198,856; the contraction in 
 stocks and securities was $2,177,912. The 
 banks also took out $31,265,616 of new circula- 
 
48 BANKING SYSTEM OF UNITED STATES. 
 
 tion, and borrowed in various ways $36,615,092. 
 All this contraction, added circulation, and 
 borrowing was made necessary by the with- 
 drawal of National bank deposits alone. The 
 enormous loss in purchasing power of the com- 
 munity, caused by the panic of 1893, is difficult 
 to estimate, owing to the fact that it is impos- 
 sible to ascertain from the very complete sta- 
 tistics regarding National banks collected by 
 the Comptroller, or in any other way, the pro- 
 portion of deposits which were paid out in 
 money and hoarded, and the proportion of the 
 decrease in deposits which resulted in the can- 
 celing of deposits against loans — an operation 
 which, while it lessens the possible demands 
 upon a bank, actually nets the bank no cash, 
 and destroys in large proportions the purchas- 
 ing power or bank-credit money of the com- 
 munity in the manner shown in the preceding 
 chapter. This much is certain, at least, that 
 the contraction of National bank loans, in this 
 period, of $318,767,691, represented a net loss of 
 that much purchasing power in the United 
 
ITS RELATION TO GENERAL BUSINESS. 49 
 
 States. To this loss must be added another 
 enormous loss, resulting from the decrease in 
 private and savings banks deposits and loans. 
 In his report for 1893, the Comptroller says: 
 '' The fright among depositors of the present 
 year appears to have affected all classes of 
 banking institutions alike. The shrinkage of 
 deposits of National banks, from May 4th to 
 July 12th last, exceeded $190,000,000. In order 
 to ascertain the extent of the shrinkage in 
 banks other than National, the Comptroller re- 
 quested each State officer, charged with the 
 supervision of banks organized under State 
 authority, to submit a statement showing simi- 
 lar information with respect to that class of 
 banks. Replies were received from the officers 
 of twenty-three States and two Territories, 
 indicating that the loss to banks of this char- 
 acter corresponded with that shown by the 
 returns from National banks. Generally no 
 information was given with respect to savings 
 banks, and much less regarding private 
 banks." 
 
50 BANKING SYSTEM OF UNITED STATES. 
 
 Remembering that the deposits in other 
 banks, here referred to by the Comptroller, 
 are about double the deposits of the National 
 banks of the country, we feel justified in as- 
 suming, after making due allowance for the 
 fact that the deposits of banks other than 
 National are not subject to check to such an 
 extent as are those of National banks, that the 
 loss in purchasing power, or bank-credit cur- 
 rency, due to the withdrawal of deposits in 
 banks other than the National, was at least $350,- 
 000,000, making the total reduction of bank- 
 credit money, due to the panic of 1893, aggre- V^ 
 gate at least the sum of $668,000,000. We feel 
 that this sum falls far short of expressing the 
 actual loss in bank-credit money, or purchas- 
 ing power, caused by the panic of 1893. The 
 low range to which the prices of commodities 
 in the United States were reduced, during the 
 year 1893, was caused by this great decrease in 
 bank-credit currency. The great extent to 
 which they were reduced, and the rapidity 
 with which they fell, is well known. 
 
CHAPTER V. 
 
 THE RELATION OF BANK-CREDIT CURRENCY TO 
 THE SILVER QUESTION. 
 
 The great desideratum, in the matter of 
 money, is to obtain a money whose purchasing 
 and debt-paying power remains as stable as 
 possible. As stated before, the value of 
 money is determined by the same law of sup- 
 ply and demand which operates in the case 
 of ordinary commodities. While such a thing 
 as a dollar of absolutely uniform purchasing 
 and debt-paying power is unattainable, it is 
 in the power of Government to prevent a very 
 great change or fluctuation in the value of a 
 dollar by wise and proper laws. Perhaps tho 
 questions of greater importance involved in 
 the present discussion of the silver question 
 are as to the effect of free-silver coinage law 
 (sO 
 
52 BANKING SYSTEM OF UNITED STATES. 
 
 Upon general business conditions, and upon a 
 contract for a time payment of money, or, in 
 other words, upon the debtor and creditor 
 classes. The effect upon the laborer and the 
 price of labor, caused by an enhancement or 
 depreciation in the value of a dollar used 
 simply as a medium of exchange, is not of so 
 great importance, since the prices of labor and 
 the prices of commodities, into which labor is 
 exchangeable through money, are affected 
 equally and alike by the change in the stand- 
 ard of measure. If the price of labor, through 
 an enhancement in money, falls, the price of 
 other commodities falls. If the price of labor 
 rises through a depreciation in the standard, 
 the price of other commodities rises also.^ 
 
 ' Hon. J. K. Upton, in an able work entitled " Money 
 in Politics," pages 144-145, has the following remarks and 
 table: " To those who believe that the aggregate exchange 
 value of a circulating medium can be increased or dimin- 
 ished by the will of Congress, or any human agency, is 
 commended the fact that after sixteen years of legisla- 
 tive effort, by which the face value of the circulation was 
 reduced more than $300,000,000, the coin value was reduced 
 
ITS RELATION TO SILVER QUESTION. 53 
 
 Therefore the chief evil, apart from the injury 
 done general business, which results from a 
 disturbance in the value of the standard as 
 measured in commodities, is found in its dis- 
 turbance of the relation between the debtor 
 
 less than $6,000,000. The great law of demand and supply- 
 fixed the amount needed and mocked the futile efforts of 
 those who tried to overrule it. The following statement 
 shows in tabular form the changes which took place in the 
 amount and valuation of the paper circulation for the years 
 named: 
 
 Statement Showing the Amount in Millions of Outstand- 
 ing Paper Circulation, and its Value in Coin, Together 
 WITH the Value in Coin of One Dollar in Paper, at the 
 Close of Each Fiscal Year, From 1865 to 1879, Inclusive. 
 
 Year Ending 
 June 30. 
 
 1865 
 
 1866 
 
 1867 
 
 1868 
 
 1869 
 
 1870 
 
 1871 
 
 1872 
 
 1873 
 
 1874 
 
 1875 
 
 1876 
 
 1877 
 
 1878... 
 
 1879, January ist 
 
 Amount 
 
 of Circulation. 
 
 Millions. 
 
 983 
 
 827 
 770 
 756 
 745 
 748 
 738 
 750 
 781 
 773 
 738 
 698 
 688 
 686 
 
 Coin Value of 
 
 Circulation. 
 
 Millions. 
 
 697 
 589 
 587 
 540 
 552 
 633 
 665 
 646 
 648 
 711 
 674 
 656 
 662 
 684 
 686 
 
 Coin Value of 
 
 One Dollar 
 
 of Paper. 
 
 • 71 
 
 .66 
 
 •71 
 .70 
 
 •73 
 
 •85 
 
 •89 , 
 
 •87K 
 
 .86K 
 
 .91 
 
 .87 
 
 •95 ^ 
 •99M 
 
54 BANKING SYSTEM OF UNITED STATES. 
 
 and creditor, between whom there is a contract 
 calling for a second transfer of money after a 
 certain time. If money appreciates in value, 
 it takes more goods to get the money to pay 
 the debt with than the money borrowed could 
 buy, and the debtor is wronged. If money 
 depreciates, it takes less goods, and the cred- 
 itor is wronged. The question, however, of 
 the increase or decrease of the amount of the 
 standard money — gold — does not play such an 
 important part in burdening or relieving the 
 debtor class, as many of the advocates of free 
 silver would have us believe. 
 
 A characteristic of free-silver arguments, 
 which seems to be common, is an apparent 
 assumption that the purchasing power of a 
 dollar in a gold-standard country, whether 
 that dollar be expressed in a legal-tender 
 note, a silver coin, or a bank draft, is wholly 
 determined by the value of gold, without the 
 value of the gold being affected by the con- 
 current use of the silver and paper money, 
 which does the work of gold money. Tables 
 
ITS RELATION TO SILVER QUESTION. 55 
 
 are given to show the ratio of gold increase 
 to population increase, the amount of gold 
 increase to increase in property values and 
 business transactions, the implication being 
 that the failure to pass a free-silver coin- 
 age law throws upon gold a burden which 
 has been growing faster in proportion than 
 the supply of gold has been increasing, 
 thereby adding enormously to the value of 
 gold, and therefore to the value of money, 
 thus working an injustice to the debtor 
 class. Until this argument is analyzed, it 
 seems strong. 
 
 Its chief error consists in this : That it fails 
 to take into consideration bank-credit money, 
 which is the most influential kind of money 
 in determining the ease or difficulty with 
 which debts are paid. This kind of an argu- 
 ment seems to be based upon a false premise. 
 That false premise is that a gold standard is 
 something that stands off by itself, as it were, 
 and that any increase or decrease in its 
 amount increases or decreases the value of 
 
56 BANKING SYSTEM OF UNITED STATES. 
 
 every dollar in circulation in the proportion 
 of the amount of increase or decrease of 
 gold to the total amount of gold. 
 
 Always assuming that the Government 
 of the United States maintains in its Treasury, 
 as under its present policy, the comparatively 
 small amount of gold necessary to meet any 
 demands for redemption of its other currency, 
 which, in the light of experience and existing 
 conditions, may be made, the fact is that, 
 under our money system, the increase in the 
 ^world's gold supply, or our own gold supply, 
 cuts very little figure in the determination of 
 the purchasing or debt-paying value of a dollar. 
 
 No system of logic can disprove the propo- 
 sition that the value of money depends upon 
 the law of supply and demand. If, therefore, 
 the supply of money is increased by bank- 
 credit currency, the value of money measured 
 in -commodities, including gold money, is 
 decreased; and correspondingly, when bank- 
 credit currency is contracted, and the total 
 supply of money is thus diminished, the 
 
ITS RELATION TO SILVER QUESTION. 5/ 
 
 value of all money, including gold money, is 
 increased. 
 
 When we remember that the proportion of 
 bank-credit money used in business is ordina- 
 rily over ten times the amount of cash money, 
 we can see that the fluctuations in bank-credit 
 money have a greater effect upon the purchas- 
 ing and debt-paying power of actual money 
 than any other one cause. The effect of the 
 annual increase or decrease in the output of 
 gold at the mines, or as money, pales into 
 insignificance in comparison. Thus we see 
 that where the banking business is extended, 
 as it is in this country, and where the Govern- 
 ment, for the purpose of keeping ample the 
 money supply, injects its credit, with proper 
 restrictions, into the currency, as in this coun- 
 try, the fact that we use a gold standard, and 
 are on a gold basis, and repealed the Sherman 
 law, which was becoming a menace to our 
 ability to keep on a gold basis, does not justify 
 any one in assuming that a crime against the 
 debtor class is being committed. 
 
58 BANKING SYSTEM OF UNITED STATES. 
 
 The more the money question is studied, 
 the more does the fact become apparent that, 
 where such an immense volume of business 
 is transacted through the banks, the most 
 important factor which goes to make up the 
 purchasing and debt-paying power of that 
 most uncertain measure, the dollar, is the 
 t^ondition of the banks, and the relation of 
 vpublic confidence to the banks, upon which the 
 banking business is based. Common experi- 
 ence teaches us this truth. When does money 
 become more valuable, and goods, measured in 
 money, less valuable, than in a bank panic, 
 when depositors are ''running on the banks"? 
 When deposits, which form the largest basis 
 for bank-credit money, are withdrawn, the 
 value of a dollar, under the operation of the 
 law of supply and demand, increases, and the 
 prices of wheat, corn, pork, iron, and other 
 commodities go down almost with a rush. 
 
 Advocates of the free coinage of silver give 
 tables covering many years, by which they 
 attempt to show, by a decrease in cost of wheat 
 
ITS RELATION TO SILVER QUESTION. 59 
 
 and corn, etc., an increase in the value of a 
 dollar in a gold-standard country, or, as they 
 unjustly term it, an increase in the value of 
 " gold," using it as synonymous with money. 
 
 The impossibility of gauging accurately the 
 value of a commodity like gold, which is sub- 
 ject to the law of supply and demand, by its 
 average equivalent in other commodities also 
 subject to their laws of supply and demand, 
 especially when the value of gold money is 
 influenced by the supply and demand of other 
 money doing the work concurrently with gold 
 and in place of gold, the volume of which 
 other money fluctuates constantly, has always 
 seemed to us very manifest. And when we 
 contemplate the immense fluctuation which 
 has occurred in the purchasing and debt-pay- 
 ing power of a dollar, during this last year, in 
 this '' gold standard " country, we are still more 
 inclined to doubt the reliability of these tables, 
 whose makers have assumed such a scientific 
 air. 
 
 The fact of the matter is that, when public 
 
6o BANKING SYSTEM OF UNITED STATES. 
 
 •confidence in the banking institutions of this 
 country exists, the bank-credit currency, being 
 flexible, is, as one might almost say, automat- 
 ically regulated in volume according to the 
 needs of business ; and this fact has much more 
 of an effect in keeping stable the value of a 
 dollar than the arbitrary amount of increase or 
 decrease in the annual output of either gold or 
 silver, in their relation to population or prop- 
 erty increase, can ever have. When panic 
 conditions are absent, and when money is 
 being loaned by our banks in amounts neces- 
 sary to supply the needs of business, we sel- 
 dom hear any complaint about falling prices 
 and the " robbery of the debtor." 
 
 When, after a panic, confidence in banking 
 institutions has been restored, money com- 
 mences to flow out from the banks in loans, 
 and bank-credit currency slowly expands to 
 meet the demands of a recuperating and grow- 
 ing business. A panic, such as we have just 
 passed through in 1893, is, as has often been 
 s^''' said, the result of overtrading. Credits which, 
 
ITS RELATION TO SILVER QUESTION. 6l 
 
 with the aid of banks and the naturally ven- 
 turesome disposition of the ordinary man, 
 always increase and grow faster than govern- 
 ments ever issue money, eventually become so 
 out of proportion to values, and the amount of 
 money in circulation, that their scaling down 
 can not be accomplished without creating 
 widespread distrust, which attacks the worthy 
 along with the unworthy, and withdraws from 
 business, money, just at the time it is most 
 needed in the re-adjustment of too expanded 
 credits. It is considered an able argument by 
 some to point out the immense expansion of 
 credits — both governmental, railroad, and pri- 
 vate — reaching into the tens of billions of dol- 
 lars, and then to point out the disproportion of 
 debts, to be paid in money, to the amount of 
 money which is available to pay them, espe- 
 cially of gold, using this as an argument to 
 show the necessity of more money. Unfortu- 
 nately, the more money governments issue or 
 coin, the greater becomes the proportionate 
 growth of credits. History conclusively shows 
 
62 BANKING SYSTEM OF UNITED STATES. 
 
 that an inflation of the currency, or, in other 
 words, any large amount of money in circula- 
 tion in excess of the ordinar). amount, is fol- 
 / lowed by what is called an era of speculation, 
 in which great bubbles of credit are blown, the 
 bursting of which inevitably brings a panic 
 with all its dire results. In other words, if, 
 with the idea of lessening the disproportion 
 between credits and money in times of general 
 business prosperity, you increase the amount 
 of money in circulation, instead of using the 
 increased amount of money in the liquidation 
 of existing indebtedness, society uses it as a 
 basis for the creation of additional credits, 
 bringing about a worse state of affairs than 
 before. The only time when a sudden increase 
 of money in large sums is beneficial to a com- 
 munity is when the process of liquidation has 
 commenced, when the bubble is burst, and 
 when an increase of money operates to build 
 up a stronger foundation for the castle of busi- 
 ness rather than to build fancy turrets on its 
 top. When we leave out of account the credit 
 
ITS RELATION TO SILVER QUESTION. 63 
 
 substitutes for money, so enormous is the 
 amount of governmental, railroad, and private 
 debts of the world that, for all practical pur- 
 poses, the sum of all the gold and silver in the 
 world is as inadequate to pay them as either 
 gold or silver alone. 
 
 The truth of the matter is that no man 
 lives, no government exists, which can devise 
 an absolutely equitable currency system. No 
 inflexible system can be ample enough to 
 accommodate itself successfully to what are 
 known as panic times, and not lead to over- 
 speculation in other times. The crying need 
 of the day is for a currency so flexible in the 
 hands of the Government that, when bank- 
 credit currency is diminished by widespread 
 withdrawal of deposits, and life-blood is being 
 drawn from business, it can be increased by 
 the Government under some such plan as 
 exists in England to-day, or under some other 
 proper restrictions, and in some way used to 
 lessen the awful process of such a liquida- 
 tion as that of 1873 and 1893. 
 
64 ^NKING SYSTEM OF UNITED STATES. 
 
 The need of the existence of such a power 
 in our Government is shown by the enforced 
 creation of a substitute for money, in the 
 shape of clearing-house certificates, by the 
 New York and Boston clearing-houses dur- 
 ing the last summer. That this is the ques- 
 tion of the day, and not the simpler one of 
 a standard, is easily shown. Populists and 
 others, seeing the evil effects of our too 
 inflexible currency, have assumed these evil 
 effects have largely arisen from the demone- 
 tization of silver, and the lack of that contra- 
 diction in ideas, a '' double standard." 
 
 To convince ns that the increase of money, 
 incident to the passage of a free-silver coin- 
 age law, will not correct all the evils to which 
 the debtor is subject under our present sys- 
 tem, we have but to remember that in the 
 short period of five months of the year 1893 
 there was destroyed, by the panic in the 
 United States, bank-credit money to the 
 amount of at least $668,000,000, a sum equal 
 to the total silver production, at the present 
 
ITS RELATION TO SILVER QUESTION. 65 
 
 rate, of all the silver mines in the United 
 States for over nine years, not sparing any 
 for use in the arts. 
 
 An intelligent debtor soon comes to tinder 
 stand that those influences and forces which 
 tend to unsettle general confidence in mone- 
 tary conditions, are the causes which lead to 
 his greatest oppression and loss. Such causes 
 tend not only to stimulate creditors (includ- 
 ing bank depositors) into calling for their 
 principal, but to frighten others from loan- 
 ing and investing, thus making re-borrowing 
 impossible, and necessitating often the sale 
 of securities and property at a great sacrifice, 
 since they must be sold when the public are 
 afraid to buy. 
 
 Of all influences which are injurious to 
 debtors, those which tend to bring about a 
 change of monetary standards are the worst, 
 especially in the United States, where such 
 a large amount of silver and gold is circu- 
 lating side by side as at present. Under the 
 operation of Gresham's law, which is that, 
 
66 BANKING SYSTEM OF UNITED STATES. 
 
 under such conditions, the cheaper money 
 will drive the dearer money out of circula- 
 tion, there would be driven out of our circu- 
 lation, by a lapse on the part of our Govern- 
 ment from the present gold standard to the 
 cheaper silver standard, our entire gold cir- 
 culation, amounting to about $500,000,000. 
 
 A change of standards unsettles credits; 
 it unsettles banking; it unsettles business ; it 
 unsettles international exchanges unless all 
 nations act as a unit in the change. We 
 are unable to see how a change of standards, 
 in the United States alone, can prove of 
 either temporary or eventual benefit to the 
 debtor. 
 
CHAPTER VI. 
 
 ONE PRESENT NEED OF OUR NATIONAL BANK- 
 ING SYSTEM. 
 
 It has been our effort to point out in this 
 little volume the extent of the dependence 
 of the prosperity of our nation and our people 
 upon the normal operation of our present 
 banking system. The most disastrous blow 
 which the business interests of our country 
 can receive, consists in the weakening of the 
 confidence of the depositors in the ability of 
 our banks to redeem deposits. 
 
 Under our present laws and business 
 methods, banking and industrial panics have 
 occurred together. If it were not for the 
 necessity upon the banks of paying fright- 
 ened depositors during an industrial panic, 
 the solvent and worthy institutions of the 
 (67) 
 
68 BANKING SYSTEM OF UNITED STATES. 
 
 country would never be forced into liquida- 
 tion because of an inability to turn unques- 
 tioned collaterals into cash. Under our system 
 of doing business, times of liquidation must 
 periodically occur wben too expanded credits 
 must be adjusted to true values. It should 
 never be admitted, however, that these peri- 
 ods of general liquidation must be accom- 
 panied, as they have generally been heretofore 
 in this country, by runs on the banks and 
 the withdrawal of active capital from business 
 to go into old stockings or safety-deposit 
 boxes, at a time when it is most needed in 
 the general re-adjustment of credits. Could 
 banks, in times of business liquidation, be 
 assured that they would not have unusual 
 demands for deposits, they could successfully 
 maintain thoroughly solvent individuals or 
 corporations from financial destruction, which 
 sometimes comes to them from demands for 
 quick payments from frightened creditors. 
 To so build up the confidence of the people 
 in the safety of National banks as deposi- 
 
ONE PRESENT NEED. 69 
 
 tories that, in times of business panic, de- 
 posits would not be withdrawn — to make 
 such a thing as a bank panic impossible — is, 
 perhaps, something which is difficult of 
 accomplishment. 
 
 There is one law, however, which has already 
 been considered somewhat in Congress, the 
 passage of which, in a proper form, seems to 
 us of vital importance. That law is one which 
 should levy a tax upon National banks for the 
 purpose of creating a fund to be held by the 
 United States Treasury for the re-imburse- 
 ment of depositors in failed National banks. 
 National banking statistics show that a fund 
 of the necessary amount would soon be created 
 by a comparatively small tax upon each 
 National bank. The Government, in the inter- 
 ests of the fund, would, of course, take an 
 assignment of the claims of depositors against 
 the assets of the failed institution. The levy 
 of the annual tax on each bank for the crea- 
 tion of such a fund should most equitably be 
 based upon the average line of deposits of the 
 
70 BANKING SYSTEM OF UNITED STATES. 
 
 bank for the preceding year. This system 
 would seem to be more equitable than to base 
 the tax upon the capital of the bank, or in any 
 other arbitrary way. It must certainly be 
 admitted that the establishment of such a fund 
 would have a tendency to prevent the mad 
 rushes of small and large depositors during 
 times of panic for money, which they hoard 
 away in safety-deposit boxes or other hiding 
 places. A certain loss of deposits will always 
 necessarily be incident to industrial panics ; 
 but we will all agree that the deposit losses 
 which are most acutely felt by the business 
 community consist of those which are paid out 
 over the counter in cash to panic-stricken cus- 
 tomers, who do not draw their deposits because 
 of other demands upon them, but because they 
 fear the loss of their money if they allow it to 
 remain. 
 
 Such a law might contain provisions for a 
 more rigid system of National bank examina- 
 tion, and still further contract the powers of 
 the active officials in their rights of borrow- 
 
ONE PRESENT NEED. /I 
 
 ing from the bank under their management. 
 Such a law would probably have the effect of 
 increasing the deposits in National banks, and 
 thus offer to them compensations for the tax 
 levied upon them for the creation of the fund. 
 If the effect of such a law would be to ren- 
 der bank deposits more stable under all condi- 
 tions, as in our judgment would be the case, 
 no law could be of more value and importance 
 to the debtor, or to the creditor, or to the com- 
 munity at large. If such a law had been in 
 force for several years prior to and during 1893, 
 there might have been now in prosperous 
 existence, hundreds of the then solvent busi- 
 ness institutions and individuals ruined by the 
 panic of that year. Besides the great impor- 
 tance of the law, as related to the general 
 prosperity of the country, it is meritorious, as 
 preventing the keen suffering in those locali- 
 ties where bank failures occur, and where the 
 hard-earned savings of the community, under 
 our present laws, are often swept entirely 
 away. By such a law, losses are distributed 
 
72 BANKING SYSTEM OF UNITED STATES. 
 
 as by insurance, the beneficial effects of which 
 need no argument. 
 
 To the passage of such a law in proper 
 form, we trust the efforts of Congress will be 
 directed. 
 
APPENDIX. 
 
 In submitting the preceding pages to a friend 
 for criticism, the writer received such a concise 
 and able statement of objections to his views 
 that he gives it here, together with his answer. 
 
 The criticism, which I have divided for purpose 
 of reference into two parts, reads as follows: 
 
 Part A. — "The propositions open for discus- 
 sion would, of course, be those which relate to 
 the relative power, in determining prices, of 
 money, and the various forms of credits which, by 
 the operations of banking, are made to take the 
 place of currency or circulation. Granting that 
 the amount of these is very much larger than the 
 amount of real money, do they become, therefore, 
 potent in the ratio of these amounts in controll- 
 ing and determining prices ? But prices are the 
 measure of the value of money, meaning neither 
 
 (73) 
 
74 APPENDIX. 
 
 more nor less than the scale of exchange of money 
 for commodities. The question, then, may take 
 the form: Does the gross amount of bank and 
 other credits fix the value of money ? We must 
 be careful to distinguish here between intrinsic 
 value and the rate of interest — the former is 
 what we are now dealing with. 
 
 "Your argument seems to be this: If the forms 
 of credit used in trade are a hundred to one greater 
 than the real money in circulation, the intrinsic 
 value of the money is of almost no importance, 
 for the influence of the circulating credits is a 
 hundred times more, upon prices. 
 
 Part B. — "Let us test this: Suppose a gov- 
 ernment, not having the historical lessons about 
 debasing the coin before its eyes, should so de- 
 base its gold and silver money as to make it prac- 
 tically a pewter coinage of the same size, etc., 
 what would be the result ? Would you say that, as 
 the coin is only in nominal amount one-hundredth 
 as much as the forms of circulating credits, there- 
 fore the debasing is of little comparative impor- 
 tance ? What is each note or bill of exchange but 
 
APPENDIX. 75 
 
 a promise to pay the legal money ? Its value (the 
 note or bill) is only so many of the standard units. 
 If those units have been diminished in value, all 
 your notes and bills have suffered the same dete- 
 rioration. If the coin has been reduced to one- 
 hundredth of its value, the gross amount of all out- 
 standing forms of credit has been reduced in like 
 ratio. You may have cut down a million in coin 
 to ten thousand. Can you say that the loss is 
 only 990,000 out of a gross circulation of 101,000,- 
 000? No; 3^ou have, by the same act, taken the 
 99 per cent out of the value of every note and 
 bill of the whole hundred millions. 
 
 "As a question of exchange, it seems to me to 
 be essentially the same as if your notes and bills 
 were payable in another commodity, say wheat. 
 If wheat has gone down from $1 to 50 cents a 
 bushel during the life of your paper, the makers 
 will only pay half as much to take it up. It is 
 this relation of all promises to pay to the vahie of 
 the luiit in which payment is to be made which 
 seems to me to make it fatally erroneous to treat 
 these promises to pay as if 'real monc}*.' In 
 every ' corner ' of a market the tremendous nature 
 
76 APPENDIX. 
 
 of the transaction and its consequences is deter- 
 mined by the price of the article^ though there 
 may be very few bushels actually in the elevators, 
 etc. This seems to be the heart and soul of the 
 whole theory of a standard. If, by any means, 
 natural or artificial, the value of the standard is 
 changed, you affect, in the same ratio, the value of 
 all outstanding contracts to pay in that standard." 
 
 Answer: 
 
 I. To that part of criticism marked "A " — 
 
 You state that " Granting that the amount of 
 these (/. e. banking credits) is very much larger 
 than the amount of real money, do they become, 
 therefore, potent in the ratio of these amounts in 
 controlling and determining prices ? " Farther 
 on: "We must be careful to distinguish here 
 between intrinsic value and the rate of interest — 
 the former is what we are now dealing with." 
 
 Here, in effect, I think, you ask a distinction to 
 be made, for the sake of argument, that is not 
 made in the transaction of business by the com- 
 munity. If, in purchasing a commodity, I pay 
 
APPENDIX. TJ 
 
 with an instrument of credit, such as a bill of ex- 
 change, which does the work in the transaction of 
 an equal amount of the standard money — gold — 
 from an economic standpoint the resulting effect 
 upon prices, caused by the transaction, is the same 
 as if gold money had been used. The fact that 
 the business community accepts indifferently 
 either gold money, which is intrinsically valuable, 
 or a bank draft, which is not intrinsically valuable, 
 and makes no distinction betw^een them, makes, in 
 the resultant effect upon prices, the drafts more 
 of a factor than the standard money. And any 
 increase in the money supply or purchasing power 
 in use, if it may be so expressed, whether it be 
 credit money in the form of checks, or gold 
 money, has its direct effect in fixing the value of 
 money as measured in commodities. The prin- 
 ciple involved in the relation of the various forms 
 of credit to prices for which we contend is well 
 established. John Stuart Mill, in his " Principles 
 of Political Economy," states it in the following 
 strong language: '* In a state of commerce in 
 which much credit is habitually given, general 
 prices at any moment depend much more upon 
 
78 APPENDIX. 
 
 the state of credit than upon the quantity of 
 money. For credit, though it is not productive 
 power, is purchasing power; and a person who, 
 having credit, avails himself of it in the purchase 
 of goods, creates just as much demand for the 
 goods, and tends quite as much to raise their 
 price as if he made an equal amount of purchase 
 with ready money." 
 
 Now, taking your own statement — " but prices 
 are the measure of the value of money, mean- 
 ing neither more nor less than the scale of 
 exchange of money for commodities" — in connec- 
 tion with the well-recognized principle here 
 stated by Mill, I answer your question — "Does 
 the gross amount of bank and other credits fix 
 the value of money?" — as follows: 
 
 The supply of money, regulating, in accord- 
 ance with the demand, its value, includes bank- 
 credit money, as defined before, as well as 
 actual money (to-wit, money issued by the Gov- 
 ernment). Therefore the value of all money, 
 expressed in commodities, is fixed more by the 
 gross amount of bank credits in commercial use 
 as money (since they constitute the bulk of our 
 
APPENDIX. 79 
 
 money) than it is by the amount of standard 
 money in use, provided always that the par of 
 exchange is theoretically and practically main- 
 tained, as under present conditions. To make a 
 distinction in the effect upon prices, and there- 
 fore in the effect upon the value of money, 
 between increases or decreases in the supply of 
 actual money, and in the supply of credit sub- 
 stitutes for money, is impossible. The sum of 
 the two fixes the value of money as measured 
 in commodities. An increase or decrease in the 
 supply of either affects the value of all in an 
 amount equal to the proportion of the amount 
 of increase or decrease to the sum of the two. 
 
 2. To that part of criticism marked " B " — 
 
 Relative to the part of your criticism which I 
 have marked " B," you state: "What is each 
 note or bill of exchange but a promise to pay the 
 legal money ? Its value (the note or bill) is only 
 so many of the standard units. If those units 
 have been diminished in value, all your notes and 
 bills have suffered the same deterioration." 
 
 I agree fully with you that the debasing of the 
 
8o APPENDIX. 
 
 Standard debases or reduces in value outstanding- 
 forms of credit circulation or substitutes for 
 money. Where we differ is as to what must be 
 considered in determining how much the *' stand- 
 ard units " have been diminished in value. My 
 contention is that where credit substitutes for the 
 " standard units " do the work in redeeming these 
 notes or bills of exchange, as well as *' standard 
 units " themselves would do it, under the law of 
 supply and demand the amount of credit sub- 
 stitutes in existence affect the value of the stand- 
 ard units, and therefore the value of these units 
 is determined by the relation of the factor of de- 
 basement to the sum of "standard units" and 
 credit substitutes, not simply, as you suggest, upon 
 the relation of the factor of debasement to the 
 amount of " standard units " alone. 
 
 In order to make myself clear I accept your 
 illustration as to wheat. You say: "As a question 
 of exchange it seems to me to be essentially the 
 same as if your notes and bills were payable in 
 another commodity, say wheat. If wheat has 
 gone down from $i to 50 cents a bushel during 
 the life of your paper, the makers will only pay 
 
APPENDIX. 8 1 
 
 half as much to take it up. It is this relation of 
 all promises to pay to the value of the unit in 
 which payment is to be juade, which seems to me 
 to make it fatally erroneous to treat these promises 
 to pay as if ' real money.' In ' every corner ' of a 
 market the tremendous nature of the transaction 
 and its consequences is determined by the prices 
 of the article, though there may be very few 
 bushels actually in the elevators, etc." 
 
 Now, in my following illustration, wheat may 
 be regarded as gold, and corn as credit substitutes 
 for gold. Suppose the community, as you suggest, 
 made its notes and bills payable in the commodity 
 wheat. Suppose, however, that through a new 
 system of grinding in a mill called a bank, corn 
 was made equally as desirable to the people as a 
 medium of exchange as wheat — so desirable that, 
 though not legally bound to do so, they would 
 accept payments of their contracts in corn as readi- 
 ly as in wheat, knowing that, if they desired, they 
 could turn corn into wheat "upon demand " at the 
 same mill. It is evident, I think, under such rela- 
 tions, that the fluctuations in the supply of corn 
 in existence would affect the price of wheat, and 
 
 6 
 
82 APPENDIX. 
 
 that it would be the total amount of wheat and 
 corn iri existence which would be the chief factor 
 in determining the ease or difficulty with which 
 contracts payable " in wheat " were complied with. 
 No business man, under such conditions, would 
 attempt to forecast the price of wheat without 
 fully considering the situation of the corn supply. 
 While, as you suggest, the debasement in the price 
 of wheat from f i to 50 cents is quite a benefit 
 to the makers of contracts payable in wheat, yet 
 that debasement could occur either from a great 
 increase in the supply of wheat, or a great in- 
 crease in the supply of corn, or a great increase in 
 the supply of both together. 
 
 In the light of this argument I will qualify the 
 following proposition in your letter: " This seems 
 to be the heart and soul of the whole theory of a 
 standard. If, by any means, natural or artificial, 
 the value of the standard is changed, you affect 
 in the same ratio the value of all outstanding con- 
 tracts to pay in that standard." 
 
 My qualification is that where, as under our 
 present system, a promise to pay in the standard, 
 called a check, is accepted as readily as the stand- 
 
APPENDIX. 83 
 
 ard itself, in payment of another promise to pay- 
 called a promissory note, or as purchase price of 
 a commodity, the amount of checks (or substitutes 
 for the standard) have more of an effect on the 
 value of the standard (since they are more 
 used than the standard) than the amount of 
 the standard has upon the value of the checks. 
 And as regards promissory notes, the ease or 
 difficulty with which they are paid, or rather the 
 amount of commodities at a given time necessary 
 to pay them, is determined by the sum of the 
 standard, and of circulating substitutes for the 
 standard, whether these substitutes be issued 
 by the Government or through the operations of 
 banks. 
 
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