Part 5

UNCLE SAM: Well, it does really look to me as if I had been living in a fool's paradise. Those dear old greenbacks they have been about as much of a fraud as the dollar of our daddies. I do declare this whole thing makes me half sick. But if you are actually finding out what really ails me, I'll get over that pretty soon, and, boys, if we stick to this job, and play fair and honest, we'll have the best banking system in the world yet, and don't you forget it.

But you forgot to tell me about the safest and best banking system in the world because every bank note was secured by one of my Government bonds. That's what they've been telling me, you know. Now, what about that?

MR. BANKER: Well, I could not interfere with your confession that you had been living in a fool's paradise, and dreaming dreams about making something out of nothing, while your credit was in peril, and you were losing hundreds of millions and furnishing the country a currency that was costing the people five or six times as much as the right kind of currency would.

Now, a word about your bond-secured bank note illusion, and I will be through. Uncle Sam, you remember that during the war, you were looking around in every direction to find some new method for obtaining means to carry on the war. You had busted your credit wide open with your United States Note issue, and the question was how to find some new resource. Your Secretary of the Treasury, Mr. Chase, concocted this scheme of giving the banks the right of issuing notes if they purchased Government bonds, and deposited them to secure the payment of the notes. It is very strange, but he did not get much from this source, as there were only $98,896,488 of notes out when the war closed. However, the scheme was started, and has been going ever since, precisely as it was inaugurated, a bond investment scheme. The amount of notes in circulation has never borne any direct relation to the demands of trade, as you can see by the following facts: In 1880 the notes outstanding amounted to $352,000,000, and in 1891, eleven years afterwards, they amounted to only $162,000,000, or about $100,000,000 less, although the country was growing and business expanding all the while. We ought always to expand our currency during the fall months about $300,000,000, and we ought to contract it during the succeeding months, or during the springtime just as much. But a careful investigation shows that these bond-secured notes have decreased as often in the fall months as they have increased, and have increased in the spring months as often as they have decreased. This proves conclusively that the amount of notes outstanding has never borne any relation whatever to the requirements of trade. The scheme is today precisely what it was when first concocted, purely a bond investment affair.

UNCLE SAM: Well, well, now that is mighty strange, but my greatest Chief Justice, John Marshall, pointed out the necessity of having a currency directly related to the business of the country, when upholding the constitutionality of the Act incorporating the second United States Bank. He said: "The currency which it circulates by means of its trade with individuals is believed to make it a more fit instrument of government than it could otherwise be." One of my presidents, James A. Garfield, used this language: "_No currency can meet the wants of this country that is not founded on business._" Boys, both of these great men must have referred to credit currency, and declared that it was essential to our business.

MR. BANKER: Furthermore, Uncle Sam, these bond-secured Bank Notes are indirectly just that much more of a burden resting upon the United States Treasury, upon you, if you want to know the truth, as I explained to you last Wednesday night.

The fact is, these bond-secured Bank Notes are only another form of Government credit put into circulation through the disguise of Government bonds.

Every single criticism and objection that I have made tonight to the United States Notes are applicable equally to these bond-secured Bank Notes.

_First_: For all banking purposes, economically speaking, they are practically rigid and inflexible, at least so far as current needs go.

_Second_: These bond-secured notes do not spring into existence, or into being, as checks and drafts do in connection with some business transaction, but are tied up with a bond speculation.

_Third_: They cost those who use them as currency from five to six times as much as the right kind of currency would.

_Fourth_: If we adopt the right kind of a currency system, it will set free $750,000,000 of capital which is now tied up in these Government bonds, and this vast sum which would be realized from the sale of the bonds will assist to an amazing degree in supplying much needed capital to the commerce of the country.

MR. MERCHANT: How is that?

MR. BANKER: The banks could then sell all the bonds now deposited to secure these bond-secured Bank Notes. They amount to $750,000,000.

That these bond-secured Bank Notes are a monument of our stupendous folly, and have been a curse to the business interests of the country, I am sure no one here will attempt to deny.

MR. LAWYER: The Japanese, thinking that we were a smart people, copied this bond-secured bank scheme from us, but immediately discovered that it was worse than worthless and repudiated it. No one else has been foolish enough to adopt it.

MR. BANKER: I challenge anyone here to urge a single reason in favor of either the United States Notes, or the bond-secured Bank Notes, which are only another form of United States Notes. No one can meet the objections raised to them. In fact, there are two objections to the bond-secured notes, in addition to those urged against the United States Notes. First, as stated, they have tied up $750,000,000 in the bonds. Second, they have proved such a successful delusion as to prevent any sane legislation until sad experience has driven us to take the matter up seriously and compelled us to act.

UNCLE SAM: Well, boys, so far as I am concerned, I am thoroughly convinced that you don't want any of my I.O.U.'s for currency. Nor do we want any bond-secured Bank Notes, which are really only another form of my I.O.U.'s. But I am still from Missouri, as I have not yet been convinced what we ought to do by way of a substitute. Mr. Banker has told us something about credit currency, and he declares that it is the only real thing in the way of currency.

Now, I suggest that we take that matter up next Wednesday night, and decide definitely whether we want to adopt that principle, and substitute that system, or some other. What do you all say to that?

MR. MERCHANT: I think that should be the programme. In the meantime, let us all dig into the question and go to the very bottom of it, and if possible stump Mr. Banker.

MR. BANKER: All right, gentlemen, I am ready for you, and if I don't convince you that the only thing for us to do is to adopt a credit currency system, I will retire in favor of anybody you name. Possibly you'll select Nelson W. Aldrich.

UNCLE SAM: No, you won't do anything of the kind. We'll look around a long time before we'll take him on. It is my candid opinion that he don't know a thing on earth about the question. I have known Nelse about thirty years. He came to my house after he had been engaged in the grocery jobbing business, and he has been a jobber ever since. A man who could stay in Congress for thirty years, declaring that we had the best banking system in the world, would not recognize an economic principle, on a cloudless day, walking down the middle of Pennsylvania avenue at noon time. Now, as I said, Nelse has always been a jobber, and he would detect a crooked political deal crawling down a gutter, lizard-like, in the densest fog at midnight. He was prominent in a way in my home town, but it was only as a broker in senatorial favors. He kept books with the rest of his associates, his fellow senators. He was the clearing house of the United States Senate. That's all. He would be the very last man in the United States, the very last to join in clear, intelligent, unselfish, patriotic thinking. He just couldn't do it. Why, boys, he had rather go down a ram's horn than a gun barrel. He likes the twisting sensation. We don't want him at any price. Mark my word. What we want is honesty, intelligence, patriotism, unselfish devotion to duty and some good hard work.

Let us hope that we shall find a way out.

Good Night.

FOURTH NIGHT

BANK CREDIT CURRENCY

UNCLE SAM: When we parted last Wednesday night, we had an understanding that everybody would give all the time he could to looking up Credit Currency. Now, I think before we take up that subject, it might be well to recall and review what we've settled among ourselves up to the present time.

_First_: We learned that gold is our standard of value.

_Second_: We all agreed that our money consisted of our gold coin alone.

_Third_: We agreed that our money, which consists of gold coin, is identical in amount with our gold currency; that they are one and the same thing.

_Fourth_: We found that we had at present a large amount of other currency, consisting of subsidiary coins (including the silver dollar), the United States Notes and our bond-secured Bank Notes.

_Fifth_: We came to the conclusion, however, after our last talk, that neither the United States Notes nor the bond-secured Bank Notes were fit for currency; and, in our quest for the best substitute possible, Mr. Banker proposed a Credit Currency currently redeemed in gold coin as the form of currency best suited to our condition. Indeed he asserted that it was the only form of currency we should think of.

I have gone over the road we have traveled so far and called attention to all the mile posts so that we should become perfectly familiar with them; for unless there is a complete harmony between our conclusions reached from time to time, our talks will in the end lead us to no practical results.

At our last talk it was decided, you will remember, that both on account of the peril to my credit, and because the United States Notes and the bond-secured Bank Notes were unfit for currency, we should tonight consider Credit Currency as a substitute.

MR. MERCHANT: Uncle Sam, I am more than gratified that you have called our attention tonight to just those things we have agreed upon, because unless we keep all these points constantly in mind, we will have trouble in the end in reconciling our views. On the other hand, it has began to dawn on me that possibly what we have always considered beyond our comprehension may after all prove a comparatively simple matter, because I have discovered, since our talks began, that truth here as in all other subjects is simple when we arrive at and comprehend it. Our great problem in this connection is to disentangle the great or fundamental truths and make each one stand out in bold relief. So far, I think we have succeeded to a remarkable degree.

MR. MANUFACTURER: We must have done so, for we have not yet struck a single point upon which we have not unanimously agreed. Let us hope that we shall be as successful in the future. At present, I must say I am a little dubious about the results of tonight's discussion, for I have run up against a snag or two, which I half fear will stump Mr. Banker, when he tries to pull them. However, he has been pretty successful so far in holding his own, and he may surprise us tonight.

MR. BANKER: I have no desire, or hope, of surprising you, but I have perfect confidence in convincing all of you, that there is only one system of currency for us to adopt, or even think of adopting, and that is a pure Credit Currency.

Let us assume that two men, A and B, who are of equal and unquestioned standing in some country town, start in the banking business at the same time.

A begins by taking the deposits of his neighbors, and continues until he has received $100,000, and has loaned the same out to the people of the community. He now owes $100,000 subject to check, and he has $100,000 owing to him, as he has loaned out all his deposits.

B starts a banking business, but upon an entirely different plan, or basis. He takes no deposits in the ordinary way, but if anyone comes to him desiring to borrow, or sell him promissory notes, he will lend his credit, and take all good notes and checks offered him, and in exchange give his own notes in such denominations and form as are suitable for circulation as currency, until he has exchanged $100,000 of his notes for $100,000 of the notes of the same people who have borrowed the $100,000 from the other banker.

Now, this is not a strange thing for B to do, because the bankers of Scotland did this for one hundred and forty years before they took deposits subject to check.

Now, let us return to A and B. As a matter of course, some of these notes of B will be deposited in A's bank, and B will have taken in some of the checks on A's bank. At 10 o'clock each morning A and B meet; A presents B's notes for redemption and B presents checks upon A for redemption, and the one pays the other the difference. Sometimes the balance is due to A and sometimes it is due to B. At the end of six months or a year, it will be at a stand off. A has paid B as much as B has paid A.

Now, can anyone of you men here tell me what difference there is in the transactions of A and B, except this, that the notes of B amounting to $100,000 payable to bearer on demand are outstanding, while the deposits at A's bank amounting to $100,000 and payable to order are outstanding. Those notes of B's amounting to $100,000 are a bank Credit Currency. They are issued against, or upon B's credit. They pass from person to person, from hand to hand and are currently redeemed every day. While the deposits at A's bank amounting to $100,000 are against A's credit, and the checks against them are redeemed every day. It is perfectly evident that if the capital of A and B combined is ample to meet the business requirements of that town, the form of credit offered by them will also adapt itself to the peculiar needs of each citizen. In other words, on a limited scale, you have a perfect banking system in that country town; bank credit being given to each person in precisely the form he wants it.

Now, let us go a step further. Let A and B unite and incorporate the A-B Bank with a paid-up capital of $100,000, each man paying in $50,000 and the bank, so organized, taking over the liabilities.

The one bank could then furnish the people of that community their deposit, or order credit, and their current credit, or currency at exactly the same cost to the bank; for the amount of the reserve will determine the cost of the note credit as well as the book credit. The bank being a country bank will carry a 15 per cent reserve, or $15,000 cash, to protect the deposit of $100,000 subject to check, and also a 15 per cent reserve, or $15,000 cash, to protect the $100,000 of demand notes outstanding. The actual cost to the bank in each case is 6 per cent on the reserve of $15,000 or $900 per annum.

If this bank should be located in the cotton-growing section of the country, and from August until January, the people needed more currency than at any other time of the year to pay for picking and handling the crop, and the customers of the bank came in and drew their checks for $50,000 and asked the bank for currency for that amount, and the bank should, as it ought to be able to do, under such circumstances change its deposit debt of $50,000 to a note debt of $50,000, so that instead of owing $100,000 in deposits, it owed only $50,000 in deposits, and instead of owing only $100,000 in notes, it owed $150,000, would it make any difference whatever to the bank except the trouble of making a few book entries?

In the springtime, probably, the situation would be just the reverse. The notes having served the convenience of the cotton-planters would be returned to the bank by various people, and deposited to the credit of the depositors, so that now the deposits are $150,000, and the notes outstanding, or note debts, are only $50,000; the total debt of the bank being precisely the same all the time, $200,000. It has made no difference whatever to the bank, but the customers of the bank, and all the people of that community, have been perfectly accommodated at the smallest possible expense to them. Now, if that bank had been compelled to go to some financial centre and buy that $150,000 of currency in the form of United States Notes, bond-secured bank notes, or the notes of a central bank, it would have cost the bank at the rate of 6 per cent per annum on $150,000, or $9,000; whereas, it has only cost the bank 6 per cent on the reserves carried to protect the $150,000, at the rate of $15,000 for each $100,000, or six per cent on $22,500. The cost to the bank you will see would be only $1,550, as against $9,000, if compelled to buy the currency, or would result in an actual saving to the bank of $7,450, an item, gentlemen, well worth saving.

MR. MERCHANT: Mr. Banker, as I understand your contention from the illustration you have just completed, it is this, that there is absolutely no difference whatever, either in principle or in practice, between a bank book credit and a bank note credit, except as a mere matter of bookkeeping. That it is wholly immaterial whether there are 1,000 men walking about the streets of a town, each having a $10 bank note of the local bank in their pockets, or a thousand men walking about with check books from which they can issue 1,000 checks for $10 each. It is wholly a question of having a banking system that will adjust itself every hour of the day, and every day in the year, to the requirements of trade in that town, at the least possible expense to the people.

MR. BANKER: You comprehend my contention perfectly.

MR. LAWYER: I will agree that your plan is structurally perfect to accomplish this purpose; but, before I can concede that the plan is all that can be desired, and all that we must insist upon having, I must know that your plan contemplates the current redemption of these bank notes in gold coin. For, as we have already agreed, our currency must be as good as gold coin, and this can only be demonstrated by daily gold coin redemption.

MR. BANKER: These bank notes or this Credit Currency will always be interchangeable with the deposits of the bank of issue, and, like the checks against the bank, will be daily redeemed over the counter of the bank, and also at some clearing house centre. The life of the notes will probably not exceed on the average thirty days. I hold that it is the duty of the bank to supply its customers with exactly that form of credit, either current credit in the form of notes, or book credits subject to check, which their business demands, and that both forms of credit must be kept as good as gold by giving gold if gold is demanded.

MR. LAWYER: With this point of current gold redemption covered and settled, I am willing to agree that theoretically you have completely convinced me. Now, what have you to offer in support of your theory by the way of any practical illustrations?

MR. BANKER: I am glad that you have demanded illustration and proof by way of banking experience; but, before taking up the historical evidence in support of my condition, I want to define a Credit Currency, so that you will have a concrete idea, if I may express myself that way, in your mind.

I define a Credit Currency as follows: _a note issued by a bank against its credit, without depositing United States Bonds, or any other kind of security, to guarantee its payment, is bank Credit Currency_.

In speaking of the marvelous prosperity of Scotland, MacLeod used this language in 1860 about the effect of Credit Currency in Scotland, where it has now been in use 217 years.

"All these marvelous results which have raised Scotland from the lowest state of barbarism up to her proud position in the space of 170 years are the children of pure credit."

The great achievement of the Scotch system of credit notes is exceedingly well stated by Mr. Charles A. Conant in these words:

1. It has provided Scotland with an elastic currency adapted to the condition of her industries and adequate in volume to their changing needs.

2. It has enabled the people to carry on numerous commercial and agricultural transactions for which they could not have found the necessary quantity of coin, and has economized the locking up of capital in the precious metal.

3. It has made the use of notes of small denomination familiar and popular, and has taught the people the distinction between bank notes as the representatives of credit, and the precious metals as the measures of value.

4. It has brought into active use the available savings and capital of the country.

5. It has afforded an opportunity for entering upon business to thousands of poor, but honest men, and enabled them to lay the foundation of a comfortable home, and in many cases of a fortune.

6. It has convinced the people so conclusively of the value and safety of the banking currency system that no serious panic has ever lasted beyond a few days, or has ever affected any of the banks, except those which were justly the subject of distrust.

Horace White, describing the Scotch system, says:

"Notes are issued in denominations of five dollars, or one pound, and upwards. They are exchanged daily at the Edinburgh Clearing House, and settlements are made between banks by drafts on London. The notes remain in circulation on the average eighteen days after issue, the whole circulation being redeemed twenty times each year. Noteholders have a prior lien on the assets."

That is, if a bank should fail, the noteholders are paid first, and before anyone else gets anything.

MR. MERCHANT: What is that? Did you say that the noteholder had a first lien on the assets of the Scotch Bank: that is, that the noteholders are paid in full before anyone else gets anything?

MR. BANKER: Yes, sir, and for the very best reasons in the world.

MR. LAWYER: Certainly, the noteholders should have a first lien upon the assets of the bank issuing them, because bank notes are a public convenience. Bank deposits, on the other hand, primarily are a private convenience. It is a matter of public importance that bank notes should flow through the channels of trade, pass from person to person and hand to hand unquestioned by any member of the public, and have ready as well as general acceptance. The man who selects his bank for the purpose of making deposits has time to investigate and decide deliberately which one he will choose. While a man in a transaction must accept the currency of the country offhand. At all events, it is a matter of the greatest public importance that he should do so without hesitation, and yet be protected, be absolutely safe in doing so.

MR. MERCHANT: Come to think it over, I believe you are absolutely right. Our present bank notes are made a first lien upon the assets of the bank issuing them. We were talking about that the other day over at the bank, and while I had never thought of it before, the cashier of the bank explained the matter fully to me, and gave the same reason for making bank notes a first lien that Mr. Lawyer has. When I told him that I did not quite understand the thing as he did, he satisfied me completely by using his own bank as an illustration.