Part 9
"Now, it is clear that money produces a profit, and becomes capital, by the second of these methods. Money is used as capital by exchanging it for some goods or labor, the produce of which may be sold or exchanged again, for a greater sum than they cost."
MR. LAWYER: Mr. Banker, that is very simple and very clear, but it strikes me that a distinction which is of greater importance to us is the form that capital takes, and I would say, as preliminary to a distinction in the different forms of capital, that we should have a broad definition of what capital is, concretely expressed. _Capital is that part of the accumulated wealth of the country that is used for the purpose of profit. It is either Active, Passive, or Fixed._
The Active Capital is that portion of the wealth of the country which is employed in the production, transportation and distribution of consumable commodities, and is more accurately described as the commercial fund of the country.
The Passive Capital is that portion of the wealth of the country which is derived from the commercial fund in the form of earnings, profits, savings and income from investments, and is more accurately described as the investment fund of the country. It is represented by bonds, mortgages, and other investment securities.
The Fixed Capital is that portion of the wealth of the country which is represented by real estate, buildings and all permanent improvements, such as railroads, mill property, irrigation enterprises, etc.
_If we transfer the Active Capital, or commercial fund of the country, to the Passive Capital, or investment fund, or what is still more serious, convert it into Fixed Capital, we can no more keep the people working and producing new wealth than you can keep a steam engine producing power without coal and water._
What invariably happens in the so-called good times but almost invariably what, by experience, proves "boom" times, is that business men and in fact everybody, not only take all of their spare money, and go into speculations, but they exhaust their credit as well; and what they have to pay so far exceeds what they have to pay with, that when the chain of credit breaks at any one point, the whole fabric falls.
It then takes years, usually, to catch up and reconstruct and reach a normal condition in which, after "paying for the dead horses," so to speak, the profits on business, savings from labor and the income from rents and investments again begin to supply investment funds. For example, it took at least four years to get the American people to thinking naturally and normally, after the panic of 1907--and the fact is some "dead horses" have not been paid for yet; but generally speaking, we are now ready to turn a considerable sum from various sources into the investment fund of the country, or into bonds, construction of new work, and into fixed investments, lands, buildings, railroads and other permanent improvements.
MR. BANKER: I think that you will all perceive from what Mr. Lawyer has just said with regard to the various directions into which capital may be turned and the fatal mistake that is ever and ever recurring--the transfer of active or productive capital, or the commercial fund, into the investment fund, or fixed forms, is what invariably, as he said a moment ago, breaks the chain of credit at some point.
You can readily see, indeed it takes no argument to show, that nothing in the business world should be guarded so jealously as the commercial fund of the country, in order that credit may be maintained and labor steadily employed.
MR. LAWYER: Our discussion has brought us most naturally to the last word suggested for our consideration, and that is the word "credit." I remember what Daniel Webster once said in a speech when speaking on the continuance of the charter of the United States Bank in 1837. It was this: "Credit is the vital air of the system of modern commerce. It has done more, a thousand times, to enrich the nations than all the mines of all the world." And again in another place he says: "We owe more to credit and to commercial confidence than any nation which ever existed; and ten times more than any nation, except England. Credit and confidence have been the life of our system, and powerfully productive causes of all our prosperity. They have covered the seas with our commerce, replenished the treasury, paid off the national debt, excited and stimulated the manufacturing industry, encouraged labor to put forth the whole strength of its sinews, felled the forests and multiplied our numbers, and augmented the nation, so far beyond all example, as to leave us a phenomenon for other nations to look at with wonder."
MR. BANKER: That might have been true in 1837, but today other commercial nations could truthfully reverse that comment, for they have in some respects and in some places passed us in credit facilities--they have beaten us as it were at our own game, that is, in having worked out a more highly developed use of credit.
MR. MANUFACTURER: When you recall the fact that between 90 and 95 per cent of our business is carried on in some form of credit, you realize that we have become so accustomed to this marvelous device that we have lost appreciation of its power for human achievement and advancement.
MR. BANKER: You are right. Do you know that I regard credit as one of the three greatest instrumentalities of modern civilization?
MR. LAWYER: Well, no, I never thought of credit in that connection. That suggestion is so unusual that I am quite interested to know what you regard as the three and in what order of importance you would place them.
MR. BANKER: I regard the invention of printing as the greatest influence in the world's advancement, because it opened up the paths of knowledge to the poorest as well as the richest, and completely destroyed the supremacy of wealth in the acquisition of knowledge. We have observed what gigantic strides have been made during the past twenty years, and with what increasing and amazing facility information is now being disseminated, the progress of the last ten years outstripping the imagination itself. Everybody can now know everything, if they have the time and ability to acquire it.
MR. FARMER: How absolutely true that is. There are no less than ten magazines on my table at home. They cover every conceivable subject from electrical science, in which my son is deeply interested, to the fashion plates of the latest style of women's dresses, current events, current literature, fruit growing, intense farming, stock breeding, eugenics and euthenics.
MR. LAWYER: Hold on there, Mr. Farmer, or you'll prove conclusively that you fellows out in the country know more than we do in town.
MR. FARMER: Well, between you and me, I think that's so.
MR. BANKER: The second most powerful agent in the advancement of the human race is that instrumentality by which all the resources of the human mind have been developed and brought into requisition in meeting the ever-increasing demands of mankind throughout the world. It has destroyed the supremacy of money, and provided the means by which the most humble of the race can place his foot upon the ladder of opulence. That instrumentality is credit.
MR. LAWYER: I doubt whether such a proposition was ever thought of, certainly it has never been advanced to my knowledge before; but when you stop to think of it, I do not believe that anyone can successfully controvert that statement. Look about you, and imagine, if you can, what the condition of the people would have been without the advantage of credit. Who of all your acquaintances has not made his way to success by means of credit. Credit is certainly the gateway to opportunity, and opportunity is the everlasting hope of the world.
MR. BANKER: Mr. Lawyer, unless you stop your flow of eloquence upon this newly discovered means of human happiness, I will not get a chance to state the third greatest contributing cause to the uniform and universal development and advancement of mankind. It is steam and its modern companion electricity. Through the application of steam to ocean craft and railroads, transportation has brought the people of the whole world practically into one market zone, and we are now all eating the same food and wearing the same clothes, and to the last degree, every people, and broadly speaking, every man, is doing that which he can do most efficiently and profitably.
MR. MANUFACTURER: Mr. Banker, you have certainly opened up an entirely new strain of thought to me; and yet when you grasp the full force of the idea, and comprehend fully these three elements or forces: printing, the general transmission or diffusion of thought or knowledge; credit, the fullest use of all our talents by opening up a world of opportunity; and transportation, the fullest exchange of all the products of the mind and hand of man, you have actually covered the realm of human life up to date. And yet, who ever thought of placing this relative importance upon credit. We have been discussing the comparative importance of gun powder that brought the knight and soldier to a common level, the cotton gin, electricity, the telegraph, the telephone, chemistry, surgery, wireless, printing and steam, but whoever heard of credit in this connection?
MR. MERCHANT: What you say is distinctly true, but all these other things I can readily see are only additional facilities in making the three great fundamental instrumentalities for the advancement of the human race more efficient; and the more one thinks it over, the more impressive Mr. Banker's statement becomes.
_First_: Printing, the means of spreading knowledge;
_Second_: Credit, the fullest opportunity of developing and using the powers of mind and body;
_Third_: Steam and electricity, the means of distributing on land and sea the products of all mankind.
These three, printing, credit and power are certainly the three greatest forces of modern civilization.
MR. BANKER: Now, gentlemen, having convinced you as I assume I must have done, of the tremendous part that credit is playing in the world of today, let us try to find out and comprehend just what credit really is, and how it happens to be so essential to our present life.
The word "credit" means, "I believe," "I trust." That is, I believe in a man, in a man's character, and in his ability, and therefore I trust him to do something tomorrow, three months from now, six months from now, nine months from now, one year, or possibly a longer time, which he cannot do today. That is credit. What a limitless field of opportunity and then of speculation this confidence of man in man opens up. Credit is to money what steam is to water, and credit like steam must always be kept within control, and within safe bounds, as in the case of steam, or there will be an explosion of credit, a most direful thing. Now, there never will be an explosion or crisis in the world of credit, so long as credit is subjected constantly to the test of coin redemption, that is, the conversion of credit into money, gold. So long as credit can be extinguished by payment in gold, it is under control. But, gentlemen, when gold redemption becomes impossible, look out! Let me read what MacLeod says about that:
"It is unextinguished credit which produces those terrible monetary cataclysms which scatter ruin and desolation among nations. It is by the excessive creation of credit that overproduction is brought about, which causes those terrible catastrophes, called 'commercial crises,' and the inability of credit-shops to extinguish the credit they have created, commonly called the failures of banks, is the cause of the most terrible social calamities of modern times."
MR. LAWYER: Now, we have the other side of the picture. On the one hand, we have Daniel Webster painting the possibilities of human achievements through credit--its tremendous power for good, when under control, and, on the other hand, the words of MacLeod pointing out the awful danger, the tragical consequences of credit beyond control. The years of 1873, 1893 and 1907 are illustrations of what happens when credit has passed the boundaries of control.
MR. BANKER: Precisely so, and what we want to do is to prevent the recurrence of those commercial tragedies which interrupt the currents of prosperity, spreading desolation and death throughout the length and breadth of the land.
MR. LABORINGMAN: It is to be hoped that we can do it, for no class suffers so much as the working masses during these periods of disaster, depression and distress. Don't you see that if any one of us has succeeded in laying aside by painful saving a little nest egg, in some savings bank, that it is wiped out, and he has to begin all over again? And if one of us fellows has accumulated enough to start some little business of his own, ninety-nine times out of one hundred he is cleaned out, and through no fault whatever of his own.
MR. FARMER: In this very connection I want to call your attention to another thing, and that's this. These men who have the intelligence, ambition, perseverance and moral courage to pinch and save, even if they have to starve to get a start for themselves, constitute the true and the greatest ultimate source of wealth of this nation. They are the chaps that make two blades of grass grow where only one grew before. You don't want to forget that. They are not only the hope of every community in which they live, but they are a constant inspiration to the young.
MR. MANUFACTURER: Now, gentlemen, you are talking sense. If we can devise some scheme to keep business from running away with us, and running off the track, and down the embankment every few years, and plumb over the precipice, we'll be doing something worth while. In a word, what we want, it seems to me, is to keep business on a more even keel, if possible; and if we could only get control of credit, and keep it within reasonable limits, always subject to a current gold test, we will be in a fair way to accomplish it.
MR. BANKER: That is just what we are after; to find some way to keep credit within reasonable limits. You have struck the keynote of this whole question.
In the first place, I want to call your attention to the fact that there are several kinds of credit, and that we must familiarize ourselves with all of them, in order that we may know how to deal with them. A doctor, you know, is a mighty poor stick, if he cannot diagnose your case, and tell you just what ails you, and yet proceeds to give you some kind of medicine, any kind of medicine for the right or the wrong disease. Indeed, he's about the most dangerous individual to have in a community. Now, unless we can become convinced that we are proceeding along right lines, because we have actually discovered the evils from which we are suffering, we had better let things alone. But our case is not hopeless, for the disease from which we are suffering has a well-known specific antidote, and it is up to us to first find out what ails us, and then to administer it.
The treatment of the credit phase of the situation, or what may be in a way termed the mental aspect of the case, is probably as important as any other, and I will now try to analyze and describe credit, so that we can understand it, at least from my point of view.
There are five well defined forms of credit.
_First_: Credit granted to aid production.
_Second_: Credit to distribute production.
_Third_: Credit granted upon accommodation paper.
_Fourth_: Credit granted upon real estate.
_Fifth_: Credit granted to the Government, or forced by the Government.
UNCLE SAM: Say, Mr. Banker, do you know what time it is? Don't you see it's half past ten o'clock? It will take you till morning to tell all about credit, and I don't know but what it would take you until "Kingdom Come."
MR. LABORINGMAN: Well, I've got to be up at six o'clock in the morning, and be at my job by seven, and I want to go home. I move, we adjourn.
MR. FARMER: So do I, for I've four miles to go yet tonight.
MR. LAWYER: What difference does that make? The trolley goes right by your door, and you'll be there in twenty minutes.
MR. FARMER: That's all right, Mr. Lawyer, I don't get my breakfast at nine o'clock as you do, but I've got to be up in the morning at five o'clock to feed my stock. I'm a-going, so good night.
UNCLE SAM: This is a rather informal break-up, but I guess it will be of no use to call in the police, so good night.
SEVENTH NIGHT
COMMERCIAL CREDIT, LAND CREDIT, GOVERNMENT CREDIT
UNCLE SAM: Mr. Farmer isn't here yet. He left in such a huff the other night, possibly he is sore--no, he is not, here he comes.
MR. LAWYER: When our meeting broke up last Wednesday night, Mr. Banker had just outlined the different forms of credit, and I was very glad that he did, because it gave me an opportunity to read up on the subject and be prepared to listen intelligently, at least, to what any of you may say tonight.
MR. MERCHANT: I did some investigating, too, and found the subject far more interesting than I supposed it could possibly be. Indeed, that is true of any subject. Your interest is always measured by your knowledge, and many matters that seem to us difficult to understand, become exceedingly simple as you get into them, and comprehend them. How often the apparently impossible task completely dissolves under persistent attacks.
MR. BANKER: I am more than pleased that you gentlemen have given your spare time to this subject. Simple in function it is, but it is immeasurably great in its possibilities, extent and responsibilities from the standpoint of the banker.
Just as we parted last Wednesday I had described or defined the different forms of credit, so far as they enter into banking directly or indirectly. As I then stated, the first and simplest use of credit is that granted for the production of something to eat, wear or use--what we call consumable commodities, that is, credit granted to aid in production.
If Mr. Farmer over there should come into my bank now as he used to before he got rich, and ask for a thousand dollars to pay his expenses while he was planting, cultivating and harvesting his crop, and then in the fall should come again and ask me for three thousand dollars more to buy some steers and hogs with, because he thought he could make more money feeding than by selling his corn outright, and I had let him have the total amount of $4,000 from time to time as he wanted it, because I believed in his honesty and intelligence, and also because I regarded the venture as a good one, that would be granting credit for the production of beef and pork, food products--the very necessities of life.
Just as soon as his steers and hogs had become fit for market, and had ceased to gain anything to speak of, by holding them and further feeding, he must sell or lose the cost of holding on the chance of a rise in the market. But even this delay must be temporary. Virtually he is compelled to sell from the very nature of the case. When he sells his steers and hogs, suppose he should receive $5,000. First, he pays me the $4,000 and interest, and has about $1,000 profit on the transaction. You will all perceive and understand, that as I gave Mr. Farmer this credit of $4,000 from time to time, he gave me his promissory note for an equal amount, so that as fast as I granted credit he created a debt. I acquired the right to demand payment of $4,000 and he incurred the duty or obligation to pay $4,000.
So for every credit granted a corresponding debt is created; and if every debt is paid every credit will be canceled. Though the credit granted to Mr. Farmer was for the production of the necessities of life, it was not the safest kind of a loan to make as we shall soon see--his personal responsibility aside of course; because after I had given the $1,000 he might have to replant his corn. The summer might be dry and the frost might come early and cut off his crop; but passing over these possible dangers to his crops, if we assume that his crop is the biggest he ever raised, and that that very fact makes it desirable to borrow the additional $3,000, pleuro-pneumonia might strike his cattle, and cholera might seize his hogs and the transaction might result in a loss of $1,000 instead of a profit of $1,000; or even a greater loss than $1,000.
It is these risks that the banker takes in making loans to farmers that justifies higher interest rates than are charged under some other circumstances. Again it is these risks that lead a banker out of caution to take real estate loans in addition, to cover the accidents of crop raising, although the National Bank Act forbids making loans upon real estate.
MR. FARMER: Under such circumstances, I think it ought to be possible for a bank to take real estate loans. I believe it would help the farmer to get his money at a trifle lower rate of interest.
MR. BANKER: I agree with you, and provision should be made for just such cases; but the rule of the National Bank should still prevail with regard to loans upon real estate so far as a regular business is concerned, unless the bank is doing a savings bank business or a trust company business, in which event it would be entirely proper to use such funds for that purpose.
MR. MERCHANT: Mr. Banker, a moment ago you said that the loan to Mr. Farmer, apart from his personal standing, was not the safest kind of a loan to make. Just what did you mean by that?
MR. BANKER: I am glad that you asked that question, for it should be explained right here. Suppose that you, Mr. Merchant, should purchase $4,000 worth of pork and beef in the barrel, at some distant point, and should come to me for the money to pay for it. In all probability I should ask you for the bill of lading covering the shipment, and also insist upon your getting an insurance policy on the goods before giving you the money. In this case, I am loaning money upon the necessities of life, consumable commodities, and unless the insurance company fails, and the goods are destroyed, I cannot possibly lose a cent. I have, humanly speaking, eliminated all chances of loss. You will observe that if I should hold the bill of lading and the insurance policy, I have the title or ownership of the pork and beef, in any event. In such cases, comparatively speaking, the rate of interest ought to be the lowest possible, as far as the risk goes.
MR. MANUFACTURER: But this kind of a transaction constitutes a comparatively small part of the commerce of the country.
MR. BANKER: Yes, that is true, and if credit was limited to such transactions, credit crises would be very few, indeed, probably never would arise as a result of over trading under such circumstances; trade would be greatly hampered, and business curtailed to a destructive degree.
MR. MANUFACTURER: That is certainly true. You men all know that I am a manufacturer of high class clothing. I want to give you an illustration of how business is being carried on today in the way of multiplying credit.