Part 8

_First_: For the purpose of a definite idea of just what exchange is, let us remember that exchange includes every written promise or order to pay money that is used to substitute one credit for another credit, or to make one debt pay another debt.

_Second_: That Bills of Exchange (sometimes called drafts, or acceptances, indiscriminately) are promises or orders to pay money which are used to substitute one credit for another credit, or to make one debt pay another debt, at some distant city. If the cities are in the same country, the Bills of Exchange are called Domestic Exchange. If the cities are in different countries, the Bills of Exchange are called Foreign Exchange.

_Third_: Let us agree, gentlemen, that so far as we are concerned we should not, and shall not, consider the acceptance of any draft by a bank as legitimate, unless the draft has grown out of an actual sale and shipment of goods. In other words, what I want to impress upon you is that if the draft is the economic title to goods, which are moving from the producer to the consumer, the liability of a bank upon an acceptance is reduced to a minimum. Acceptances of drafts growing out of sales and shipments of goods will never be a source of dangerous expansion, because they will liquidate, or pay themselves out, as the goods will be wanted to eat, to wear, to use, or to go into other manufactures, almost immediately.

_Fourth_: I want to nail one fact down right here so that no one of you will ever overlook it, or forget it; and that fact is this: An acceptance is just as much a bank liability as a deposit subject to check, for if the seller and buyer, or the drawer and the drawee, don't pay the debt on the day named, the bank will have to pay it, just as much as it will have to pay the checks against its deposits, although the people who borrowed the deposits have not paid their notes. It is clear, therefore, that the same reserve should be carried to protect acceptances as deposits.

MR. LAWYER: I am convinced of that, and I think we cannot insist upon this conclusion too strongly for two reasons. First, the credit facilities for trading, or carrying on business, are increasing at a tremendous rate, and this particular form of credit is probably increasing at a greater pace just now than any other. Second, there is no form of credit more indirect, subtle and liable to mislead than this; therefore, it will require double diligence to keep it as good as gold. We must remember that since gold is our standard of value, gold alone is the touchstone of all credit, acceptances as well as deposits and bank notes.

MR. BANKER: There is no question whatever about that. If we want an absolutely sound and impregnable financial and banking system, we must meet checks and acceptances with gold just as well as bank notes, for they are all identical and the same thing--only in different forms--bank credit. Gentlemen, if you place our banks in a position where they can pay gold no one will ever ask for gold, except for some special purpose like that of export.

MR. MERCHANT: Is it not a fact that credit transactions in business are increasing every year?

MR. MANUFACTURER: Mr. Merchant, I presume you mean, relatively. That is, that the proportion of business transactions in credit as distinguished from cash is greater now than formerly.

MR. MERCHANT: That is precisely what I mean, of course. I am aware that there is on the average a great increase of business every year.

MR. BANKER: In some localities credit transactions are increasing, but in others they are practically at a standstill. For example, I suppose if you should take some country town in a cotton-growing district, the amount of cash used from August to January might be 75 per cent of all the transactions; for the planter pays the pickers and all the laborers cash, and they in turn pay the storekeeper; during other periods of the year, when accounts are running, the cash used is much smaller. The average amount of cash used gradually falls as the people come to use banks more and more, the bank checks taking the place of currency. Generally speaking, however, the average country community does about 60 per cent of its business with currency, while the medium sized cities, or towns, do possibly as much as 60 per cent of the business with checks. In the largest cities as much as 90 per cent of the business is done with checks, while the clearing houses settle their differences or balances with about 5 per cent of actual money, where money is used. Sometimes the differences or balances at the clearing houses are settled by checks or drafts on a financial center.

While we have no definite figures that justify a positive statement, it is generally estimated that about 90 per cent of all the business of the country is done with some form of credit instrument, checks, drafts, or bills of exchange.

MR. MERCHANT: Then all forms of exchange, promissory notes, checks, drafts and bills of exchange are really mediums of exchange in precisely the same sense that gold coin and currency are mediums of exchange.

MR. BANKER: Certainly they are all just as efficient as mediums of exchange, as gold coin and other forms of currency, although not as facile for small trade. But, in large transactions they are far more expeditious, more convenient, cost much less, and involve less risk. These are the reasons they are used instead of cash to so large an extent.

UNCLE SAM: Boys, from the attention that you have given this subject it is evident that you are mightily interested, for you have had to work a good deal harder to understand what you were talking about than usual. But we have arrived, we have really gotten somewhere, difficult as Exchange is generally thought to be.

Now, in order to fix in your minds just what progress we have made during these five talks, I want to review what we have accomplished, or agreed to.

The first night we found out that our standard of value was gold. The second night we decided that our money was gold coin and that nothing else would do. The third night we found out that our currency was gold coin, token money, United States Notes and bond-secured notes; we also found out that the United States Notes and bond-secured bank notes were not fit for currency. The fourth night we determined that the only currency in addition to our gold coins and token coins worth considering for our purpose was a credit bank note, or bank credit currency. Tonight we have found out what Exchange is and that nine-tenths of our business is done in some form of it; but that we must keep it as good as gold by holding adequate reserves to protect this form of credit as well as any other.

Now, I call that going some.

MR. MANUFACTURER: Uncle Sam, last Wednesday evening, during our discussion, Mr. Banker frequently used the word "reserve" in connection with our currency, and insisted that the reserves should be such as to protect the currency, and tonight he has again used the word "reserve" in the same way in connection with exchange. While I know in a general way what he means, I am not at all sure that I comprehend fully what a reserve is in its true and broader sense.

MR. FARMER: Nor do I, and to confess the truth I am a little dazed on that very point, and I want to suggest that we spend the next night finding out what a bank reserve is. If all that Mr. Banker has been saying is true the reserve is certainly the hub of this wheel, and I want to tell you now that unless the hubs of your wheels are all right, you won't have much of a wagon when you get through.

MR. BANKER: That's right. Your reserves are the very heart of the whole question, the hub of the wheel.

UNCLE SAM: Well, then, we'll have reserves up next Wednesday, and let us hope that our reserves will never get down, at least to a dangerous point.

Good Night.

SIXTH NIGHT

VALUE, PRICE, WEALTH, PROPERTY, CREDIT

UNCLE SAM: Well, boys, what about reserves?

MR. LAWYER: Uncle Sam, soon after we departed the other night, I began to think over the subject of reserves; but soon found myself considering several other points, which, it seemed to me, we should take up before reserves. Therefore, without consulting you, I telephoned Mr. Merchant, Mr. Banker, Mr. Manufacturer, and I saw Mr. Laboringman and talked the matter over with him. We all agreed that there were several other points that we should discuss tonight instead of reserves. I knew that Mr. Farmer lived on a Rural Free Delivery route, and that I could reach him by noon the next day or Thursday morning; so here we are ready to talk about something else. And we came to this conclusion without even consulting you, for which possibly we ought all of us now to beg your pardon.

UNCLE SAM: Well, there you go again. Really, I feel as though I were in about the same position that one of my wisest Presidents, Abraham Lincoln, said he was in, with regard to his influence over his Cabinet. You will remember he once said, "I don't believe I have any influence with the present administration, anyway." Of course, we all know that was one of Honest Abe's sly drives, because he knew deep down in his soul that in the end he was always the master of ceremonies. However, what is it that you want to talk about? Of course, you understand, that under the circumstances, having made the arrangement to talk about reserve, "I am completely upsot."

MR. FARMER: Well, I'm the fellow that suggested that we talk about reserves tonight; but I am sure that the change made was most advisable. To use an ugly illustration, possibly ugly to this august assembly, we now have our horses representing the standard of value hitched up to our wagon which represents our currency and exchange, the things that carry the value, wealth, property, and all commodities that go by price, the trades having been made on credit, but calling for capital. I think with Mr. Lawyer that we had better find out just what these various words or terms mean before going any further. Otherwise we will certainly be using words whose meaning we do not know, or, at least, do not properly appreciate.

MR. MERCHANT: Now just what did you say; value, wealth, property, capital and credit? That all sounds very well, but I suggest that you include one more word that has always been a source of annoyance to me when I want to buy anything, and most unsatisfactory when I want to sell anything, and that is "price."

MR. FARMER: Oh, I had that in all right, but I will admit, in a sort of backhanded way.

MR. BANKER: All right, then, let us include price in the list; then the programme for tonight is, value, price, wealth, property, capital and credit.

MR. LABORINGMAN: Just what do you mean by the value of anything? That is, what is value anyway?

MR. MANUFACTURER: I have been studying over that very thing, and I believe I can give you a definition that will wash. The value of anything is measured by the use to which it is put, and is expressed in anything for which it is exchanged.

MR. FARMER: I have been mulling over this question of value a little myself, and I think that Mr. Manufacturer has that about right. I worked it out this way: I have an old horse down on the farm that I traded for, giving Hiram Johnson, my neighbor, a mule. That mule was a mighty handy animal. I could do anything with him on the farm, but he was a little too handy with his hind legs occasionally, so I traded him off to let him practice on my neighbor Johnson. Now the value of that mule was that horse that I got in exchange for it; and the value of that horse was the mule. So, too, if I traded a hog for a sheep the value of the hog is the sheep, and the value of the sheep is the hog.

MR. MERCHANT: Hold on just a minute before you go any further, as I want to know whether anyone here can tell me what intrinsic value is. We heard so much about that during the campaign of 1896; and I want to know whether there is anything in it or not. I ran up against the same expression in one of the books that I thumbed away back in 1896. And today you sometimes hear men say that gold has intrinsic value. Now, according to your definition, if no one could use gold, or rather did not use it and you could not exchange it for anything else, it would not have value.

MR. BANKER: Precisely so. Nothing is more absolutely true than that. Gold, like everything else, gets its value from the demand for it, which comes from its use and its consequent exchangeability.

MR. LAWYER: That is undoubtedly true, all the value that gold has arises from its use and exchangeability, and its exchangeability arises from its universal use.

It may be said, possibly, that the value of anything is measured by the use to which it can be put; but I believe that it is all covered by the latter part of the definition given by Mr. Manufacturer: _The value of anything is any other thing for which it can be exchanged._ Anything has value when it is exchangeable; when it is not exchangeable it has no value. What is really more in keeping with our common everyday language, is the definition of the Roman Law, "The value of anything is what it can be sold for."

MR. BANKER: Yes, that is true in one sense, but I think we had better make a distinction between receiving money and something else. If you exchange anything for money, the amount of money received is more properly called its price.

MR. LAWYER: You are right; I think we should make just that distinction: "The value of anything is the thing you receive in exchange for it." _The price of anything is the money you receive in exchange for it._ Of course in everyday conversation, we are constantly using value and price indiscriminately. We ask, what is the value of something, when we want to know the price of it.

UNCLE SAM: Well, you have made short work of two topics or points raised already.

MR. FARMER: Yes, and if we keep our noses to the grindstone, our eyes on the sickle we are grinding, and our feet on the ground, we'll make headway right along.

MR. LABORINGMAN: I think anybody can understand this subject, at least so far anyway. We may get over our heads before we get through, but I know I'm all right yet.

UNCLE SAM: The great thing to do in a discussion of this kind is just what you do in any other matter. Talk common sense. Just talk horse sense. Do you know I flatter myself that the common sense of the American people is the wealth of the country?

MR. LAWYER: Wealth, did you say, Uncle Sam? Why that is just what we are going to talk about. It may be that common sense is the source of most of the wealth of the American people, but really, Uncle Sam, with all due deference to you, I do not think you can call it wealth. Aristotle said: "We call wealth everything whose value is measured by money."

MR. BANKER: That definition of Aristotle has never been improved upon, and today all students, scholars and economists have accepted it as correct. And, while others have talked without limit and written books without number about wealth, no one has improved upon what Aristotle said wealth was. Just keep this simple inquiry in your minds: "Can it be sold for money," and, remember that "whatever can be exchanged for money is wealth."

Let me illustrate just what I mean. If I have land, houses, cattle, horses, cotton, corn, or any other material thing that I can convert into money, they all constitute wealth. Again, if I were a lawyer, a doctor, farmer, bricklayer, engineer, musician, or painter, my services would be wealth because I can sell them or exchange them for money. Again, there is still another kind of wealth that may be described by the single word "rights," such as mortgages, bonds, stocks, bank notes, checks, drafts, bills of exchange, copyrights, patents, good will of a business, etc., all these various things are also wealth because they can be exchanged for money. They can all be bought and sold.

Let us remember this then, that all wealth is one of these three things:

_First_: Wealth is material, land, etc.

_Second_: Wealth is labor, work, etc.

_Third_: Wealth consists of rights, checks, notes, bonds, etc.

MR. LAWYER: Then, if I understand you correctly, you say a man is wealthy because he has a good deal that he can turn into money. Of course I am aware that a man may be considered wealthy in one community, and in another community the same man with the same amount of wealth may be considered a comparatively poor man--in other words, everything is relative. A man worth $50,000 in some small country town may be considered, and properly so, a very rich man; but on Fifth Avenue, New York, he would be considered a comparatively poor man, because it might take $50,000 to pay a year's rent for a house.

MR. LABORINGMAN: You bet I can see that point all right.

MR. FARMER: It seems to me as though you have made that perfectly clear, but I want to tell you boys that when I tried to study up on this question during the week, I got all balled up on the words property and wealth, for I cannot see the slightest difference between these two words.

MR. LAWYER: Well, I think there is a very great difference; and I think I can demonstrate to you by an illustration right in your own neighborhood just what the distinction is between these two words. You will remember, Mr. Farmer, when that mill located over on Carroll River, and that big dam was put in, Mr. Adams, a man whom you and I both know very well, owned all the land in that neighborhood. You will remember that he proceeded to borrow money and build houses for the employees who wanted to come and work in the mill. I think he built as many as 150 houses for that purpose. You will remember the dam washed out and that they did not rebuild it; and as a consequence the mill closed down. The result was the employees all left, and Mr. Adams was involved to a very large extent, I think something over $200,000 all told. Now he still has the property, but the insurance company has the mortgages--in fact, Mr. Adams has a great deal more property now than he had before the mill located there, because he has the land and the 150 houses, but he has a good deal less wealth. For when the mill located there, Mr. Adams' wealth exceeded $100,000, but after the mill closed he could not rent or sell the houses to anyone. Now the evident result was that he had increased the amount of his property, for he had 150 houses, but he actually had no wealth left. His property was what we lawyers call corporeal property, that is, material property, land, and buildings. The insurance companies which held the mortgages had a very different kind of property, called by the lawyers incorporeal property, that is, not material property but an interest in the real or material property.

I think you will all agree that while Mr. Adams still has all his property, all the wealth there is left belongs to the insurance company which holds the mortgages.

MR. MERCHANT: Mr. Lawyer, is it not true that you could and would say that a man had a lot of property if he owns say 100,000 acres of land worth only 25 cents an acre, even if it was not salable at all?

MR. LAWYER: Yes, I think that is true, and illustrates in another way that there is or may be a real difference between property and wealth; however, it may be said that in conversation we often use the words wealth and property without much, if any, distinction. It seems to me that we should note this particular difference. _Wealth consists of property convertible into money, and therefore implies exchangeability, while property may not mean wealth at all, because the property has no exchangeable value._

MR. BANKER: Mr. Lawyer, I think that that last statement of yours will assist Mr. Farmer very greatly in understanding the real difference between wealth and property. The difference is certainly very evident.

MR. FARMER: Yes, I have caught on. There may be a very great difference between wealth and property, although we are in the habit of using these two words without any reference to the special meaning that really attaches to them. In our conversation we use them indiscriminately, and I don't know as that makes any difference; but for our purposes, that is, for the purposes of these discussions, I think it is very important that we should know the difference; because something may arise that will compel a recognition of the real difference between these two words.

MR. BANKER: I was just going to remark that the very difference between these two words suggests one of the other words we have agreed to consider tonight, and that is the word "capital"; for capital is a form of wealth, although all wealth is not capital.

Wealth, as we have seen, consists:

(1) Of material things, such as houses, land, etc.;

(2) Of productive power, called labor, etc.;

(3) Of rights, such as checks, notes, bonds, etc.

The owner of these things may use some of them for his convenience. He may so use some of them as to produce a profit. Now, when anything is traded with, or so used as to produce a profit, or as we often say used productively, it is called capital.

Stephens defines capital thus: "Capital, the source whence any profit or revenue flows."

So Senior says: "Economists are agreed that _whatever_ gives a profit is properly called _capital_."

Again M.D. Fontenay says: "Wherever there is a _revenue_, you perceive _capital_."

MacLeod says: "Capital is an economic quantity used for the purpose of profit." I would suggest that we say _Capital is anything used for the purpose of profit_.

MacLeod uses this language also: "If a person has a sum of money, he may expend it on his household requirements; or in gratifying his personal taste by buying books, or statues, or pictures, etc. Money spent in this way is not _capital_.

"But if he buys goods of any sort for the purpose of selling them again with a _profit_: Then the money so employed is '_capital_,' and the goods so purchased are also _capital_, because they are intended to be sold with a '_profit_.'

"So money let out at interest is _capital_.

"In a similar way any material thing may be used as capital. If a landlord lets out his land for the purpose of profit, it is capital.

"All modern economists class personal skill, ability, energy and character, as wealth, because persons can make a profit by their use. Hence they may be used as capital, as well as material objects.

"If a man digs in his garden for his own amusement such labor is not capital; or if he sings or acts or gives gratuitous lectures on any subject to his friends, such labor is not capital.

"But if he sells his labor in any capacity for money: then such labor is capital for him. Thus Huskisson says: 'that he had always maintained that labor is the poor man's capital.' So Mr. Cardwell addressing his constituents said 'labor is the poor man's capital.' And a writer in a daily paper, speaking of agricultural laborers, said: 'The only capital they possess is their labor, which they bring into the market to supply their daily wants.'

"So if a man expends money in learning a profession such as that of an advocate, physician, engineer, or a profession of any sort which he practices for profit, the money laid out in acquiring such knowledge is capital: and his skill, ability and knowledge are also capital. He makes an income which is measurable and taxable, just in the same way as if he had made profits by selling goods.

"Now, there are two fundamentally distinct ways in which capital may increase:

"1. By direct and actual increase of quantity; thus flocks, and herds, and all the fruits of the earth increase by adding to their number and quantity.

"2. By exchange.

"That is by exchanging something which has a low value in a place, for something which has a higher value.