A New Banking System Part 2

But that gold and silver coins now stand, and that they can be made to stand, as currency, only at their true and natural values as metals, for uses in the arts; and that neither the use, nor disuse, of any possible amount of paper currency, in any one country--the United States, for example--can sensibly affect their values in that country, or raise them above, or reduce them below, their values in the markets of the world, the author hopes to demonstrate more fully at a future time, if it should be necessary to do so.

SECTION 3.

Another argument--or rather a.s.sertion--of those who say that any increase of the currency, by means of paper--though the paper be equal in value to gold--depreciates the value of the gold, or inflates prices relatively to gold, is this: They a.s.sert that, where no other circ.u.mstances intervene to affect the prices of particular commodities, such increase of the currency raises the prices of _all_ kinds of property--relatively to gold--in a degree precisely corresponding with the increase of the currency.

This is the universal a.s.sertion of those who oppose a _solvent_ paper currency; or a paper currency that is equal in value to gold.

But the a.s.sertion itself is wholly _untrue_. It is wholly _untrue_ that an abundant paper currency--that is equal in value to gold--raises the prices of _all_ commodities--relatively to gold--in a proportion corresponding to the increase of the currency. _Instead of doing so, it causes a rise only in agricultural commodities, and real estate; while it causes a great fall in the prices of manufactures generally._

Thus the increased currency produces _a directly opposite effect_ upon the prices of agricultural commodities and real estate, on the one hand, and upon manufactures, on the other.

The reasons are these:

Agriculture requires but very few exchanges, and can, therefore, be carried on with very little money. Manufactures, on the other hand, require a great many exchanges, and can, therefore, be carried on (except in a very feeble way), only by the aid of a great deal of money.

The consequence is, that the people of all those nations, that have but little money, are engaged mostly in agriculture. Very few of them are manufacturers. Being mostly engaged in agriculture, each one producing the same commodities with nearly all the others; and each one producing all he wants for his own consumption, there is no market, or very little market, for agricultural commodities; and such commodities, consequently, bear only a very small price.

Manufactured commodities, on the other hand, are very scarce and dear, for the sole reason that so few persons are engaged in producing them.

But let there be an increase of currency, and laborers at once leave agriculture, and become manufacturers.

As manufactured commodities usually bring much higher prices than agricultural, in proportion to the labor it costs to produce them, men usually leave agriculture, and go into manufacturing, to the full extent the increased currency will allow.

The consequence is that, under an abundant currency, manufactures become various, abundant, and cheap; where before they were scarce and dear.

But while, on the one hand, manufactures are thus becoming various, abundant, and cheap, agricultural commodities, on the other hand, are rising: and why? Not because the currency is depreciated, but simply because so many persons, who before--under a scanty currency--were engaged in agriculture, and produced all the agricultural commodities they needed, and perhaps more than they needed, for their own consumption, having now left agriculture, and become manufacturers, have become purchasers and consumers, instead of producers, of agricultural commodities.

Here the same cause--abundant currency--that has occasioned a _rise_ in the prices of agricultural commodities, has produced a _directly opposite effect_ upon manufactures. It has made the latter various, abundant, and cheap; where before they were scarce and dear.

On the other hand, when the currency contracts, manufacturing industry is in a great degree stopped; and the persons engaged in it are driven to agriculture as their only means of sustaining life. The consequence is, that manufactured commodities become scarce and dear, from non-production. At the same time, agricultural commodities become superabundant and cheap, from over-production and want of a market.

Thus an abundant currency, and a scanty currency, produce directly opposite effects upon the prices of agricultural commodities, on the one hand, and manufactures, on the other.

The _abundant_ currency makes manufactures various, abundant, and cheap, from increased production; while it raises the prices of agricultural commodities, by withdrawing laborers from the production of them, and also by creating a body of purchasers and consumers, to wit, the manufacturers.

On the other hand, a _scanty_ currency drives men from manufactures into agriculture, and thus causes manufactures to become scarce and dear, from non-production; and, at the same time, causes agricultural commodities to fall in price, from over-production, and want of a market.

But whether, on the one hand, agricultural commodities are rising, and manufactured commodities are falling, under an abundant currency; or whether, on the other hand, manufactured commodities are rising, and agricultural commodities are falling, under a scanty currency, the value of the currency itself, dollar for dollar, remains the same in both cases.

The value of the currency, in either of these cases; is fixed, not at all by the amount in circulation, but by its value relatively to gold.

And the value of gold, in any particular country, is fixed by its value as a metal, and its value in the markets of the world; and not at all by any greater or less quant.i.ty of paper that may be in circulation in that country.

SECTION 4.

But it is not alone agricultural _products_ that rise in price under an abundant currency. Real estate also, of all kinds--agricultural, manufacturing, and commercial--rises under an abundant currency, and falls under a scanty currency. The reasons are these:

_Agricultural_ real estate rises under an abundant currency, because agricultural products rise under such a currency, as already explained.

_Manufacturing_ real estate rises under an abundant currency, simply because--money being the great instrumentality of manufacturing industry--that industry is active and profitable under an abundant currency. _Commercial_ real estate rises under an abundant currency, because, under such a currency, commerce, the exchange and distribution of agricultural and manufactured commodities, is active and profitable.

_Railroads_, also, rise under an abundant currency, because, under such a currency, the transportation of freight and pa.s.sengers is increased.

On the other hand, all kinds of real estate fall in price under a scanty currency, for these reasons, to wit: Agricultural real estate falls, because, manufactures having been in a great measure stopped, and the manufacturers driven into agriculture, there is little market for agricultural products, and those products bring only a small price.

Manufacturing real estate falls, because, manufacturing industry having become impossible for lack of money, manufacturing real estate is lying dead, or unproductive. Commercial real estate falls, because commerce, the exchange and distribution of agricultural and manufactured commodities, has ceased. Railroads fall in price, because, owing to the suspension of manufactures and commerce, there is little transportation of either freight or pa.s.sengers.

Thus it will be seen that an abundant currency creates a great rise in agricultural products, and in all kinds of real estate--agricultural, manufacturing, and commercial, (including railroads); and, at the same time, causes manufactured commodities to become various, abundant, and cheap. While, on the other hand, a scanty currency causes agricultural commodities, and all kinds of real estate, to fall in price; and, at the same time, makes manufactured commodities scarce and dear.

It is a particularly noticeable fact, that those who claim that an abundant paper currency inflates the prices of _all_ commodities, relatively to gold, never find it convenient to speak of the variety, abundance, and cheapness of manufactures, that exist under an abundant currency; but only of the high prices of agricultural commodities, and real estate.

The whole subject of prices--a subject that is very little understood, and that has been forever misrepresented, in order to justify restraints upon the currency, and keep it in a few hands--deserves a more extensive discussion; but the special purposes of this pamphlet do not admit of it here. But enough has probably now been said, to show that the great changes that take place in prices, under an abundant currency, on the one hand, and a scanty currency, on the other, are not occasioned at all by any change in the value of the currency itself--dollar for dollar--provided the currency be equal in value to coin.

Enough, also, it is hoped, has been said, to show to all holders of either agricultural, manufacturing, or commercial real estate (including railroads), that the greater or less value of their property depends almost wholly upon the abundance or scarcity of currency; and that, inasmuch as, under the system proposed, they have the power, in their own hands, of creating probably all the currency that can possibly be used in manufactures and commerce, they have no one but themselves to blame, if they suffer the value of their property to be destroyed by any such narrow and tyrannical systems of currency and credit as those that now prevail, or those that have always heretofore prevailed.

By using their real estate as banking capital, they can not only get an income from it, in the shape of interest on money, but by supplying capital to mechanics and merchants, they create a large cla.s.s who will pay high prices for agricultural products, and high prices and rents for manufacturing and commercial real estate; and who will also supply them, in return, with manufactured commodities of the greatest variety, abundance, and cheapness.

It is, therefore, mere suicide for the holders of real estate, who have the power of supplying an indefinite amount of capital for mechanics and merchants--and who can make themselves and everybody else rich by supplying it--to suffer that power to be usurped by any such small body of men as those who now monopolize it, through mere favoritism, corruption, and tyranny, on the part of the government, and not because they have any claim to it.

CHAPTER IV.

SECURITY OF THE SYSTEM.

Supposing the property mortgaged to be ample, the system, as a system, is absolutely secure. The currency would be absolutely incapable of insolvency; for there could never be a dollar of the currency in circulation, without a dollar of capital (Productive Stock) in bank, which _must_ be transferred in redemption of it, unless redemption be made in specie.

The capital _alone_, be it observed--independently of the notes discounted--must always be sufficient to redeem the entire circulation; for the circulation can never exceed the capital (Productive Stock). But the notes discounted are also holden by the trustees, and the proceeds of them must be applied to the redemption of the circulation. Supposing, therefore, the capital to be sufficient, and the notes discounted to be solvent, the redemption of the circulation is doubly secured.

What guarantee, then, have the public, for the sufficiency of the mortgages? They have these, viz.:

1. The mortgages, composing the capital of a bank, will be matters of public record, and everybody, _in the neighborhood_, will have the means of judging for himself of the sufficiency of the property holden. If the property should be insufficient, the bank would be discredited at once; for the abundance of solvent currency would be so great, that no one would have any inducement to take that which was insolvent or doubtful.

2. By the Articles of a.s.sociation, all the mortgages that make up the capital of a bank, are made mutually responsible for each other; because, if any one mortgage proves insufficient, no dividend can afterwards be paid to any of the bankers (mortgagors), until that deficiency shall have been made good by the company. The effect of this provision will be, to make all the founders of a bank look carefully to the sufficiency of each other's mortgages; because no man will be willing to put in a good mortgage of his own, on equal terms with a bad mortgage of another man's, when he knows that his own mortgage will have to contribute to making good any deficiency of the other. The result will be, that the mortgages, that go to make up the capital of any one bank, _will be either all good, or all bad_. If they are _all good_, the solvency of the bank will be apparent to all _in the vicinity_; and the credit of the bank will at once be established _at home_. If the mortgages are _all bad_, that fact, also, will be apparent to everybody _in the vicinity_, and the bank is at once discredited _at home_.

From the foregoing considerations, it is evident that nothing is easier than for a _good_ bank to establish its credit, _at home_; and that nothing is more certain than that a _bad_ bank would be discredited, _at home_, from the outset, and could get no circulation at all.

It is also evident that a bank, that has no credit at home, could get none abroad. There is, therefore, no danger of the public being swindled by bad banks.

A bank that is well founded, and that has established its credit at home, has so many ways of establishing its credit abroad, that there is no need that they be all specified here. The mode that seems most likely to be adopted, is the following, viz.:

When the capital shall consist of mortgages, it will be very easy for all the banks, in any one State, to make their solvency known _to each other_. There would be so many banks, that some _system_ would naturally be adopted for this purpose.

Perhaps this system would be, that a standing committee, appointed by the banks, would be established in each State, to whom each bank in the State would be required to produce satisfactory evidence of its solvency, before its bills should be received by the other banks of the State.

When the banks, or any considerable number of the banks, of any particular State--Ma.s.sachusetts, for instance,--shall have made themselves so far acquainted with each other's solvency, as to be ready to receive each other's bills, they will be ready to make a still further arrangement for their mutual benefit, viz: To unite in establishing one general agency in Boston, another in New York, and others in Philadelphia, Baltimore, Cincinnati, Chicago, St. Louis, New Orleans, San Francisco, &c., &c., where the bills of all these Ma.s.sachusetts banks would be redeemed, either from a common fund contributed for the purpose, or in such other way as might be found best. And thus the bills of all the Ma.s.sachusetts banks would be placed at par at all the great commercial points.

Each bank, belonging to the a.s.sociation, might print on the back of its bills, "_Redeemable at the Ma.s.sachusetts Agencies in Boston, New York, Philadelphia, &c._"