A New Banking System Part 3

In this way, all the banks of each State might unite to establish a joint agency in every large city, throughout the country, for the redemption of all their bills. In doing so, they would not only certify, but make themselves responsible for, the solvency of each other's bills.

The banks might safely make _permanent_ arrangements of this kind with each other; because the _permanent_ solvency of all the banks might be relied on.

The permanent solvency of all the banks might be relied on, because, under this system, a bank (whose capital consists of mortgages), once solvent, is necessarily forever solvent, unless in contingencies so utterly improbable as not to need to be taken into account. In fact, in the ordinary course of things, every bank would be growing more and more solvent; because, in the ordinary course of things, the mortgaged property would be constantly rising in value, as the wealth and population of the country should increase. The exceptions to this rule would be so rare as to be unworthy of notice.

There is, therefore, no difficulty in putting the currency, furnished by each State, at par throughout the United States.

At the general agencies, in the great cities, the redemption would, doubtless, _so far as necessary_, be made in specie, _on demand_; because, at such points, especially in cities on the sea-board, there would always be an abundance of specie in the market as merchandise; and it would, therefore, be both for the convenience and interest of the banks to redeem in specie, on demand, rather than transfer a portion of their capital, and then pay interest on that capital until it should be redeemed, or bought back, with specie.

Often, however, and very likely even in the great majority of cases, a man from one State--as California, for example,--presenting Ma.s.sachusetts bills for redemption at a Ma.s.sachusetts agency--either in Boston, New York, or elsewhere--would prefer to have them redeemed with bills from his own State, California, rather than with specie.

If the system were adopted throughout the United States, the banks of each State would be likely to have agencies of this kind in all the great cities. Each of these agencies would exchange the bills of every other State for the bills of its own State; and thus the bills of each State would find their way home, without any demand for their redemption in specie having ever been made.

Where railroads were used as capital, all the banks in the United States could form one a.s.sociation, of the kind just mentioned, to establish agencies at all the great commercial points, for the redemption of their bills.

Of course each railroad would receive the bills of all other roads, for fare and freight.

Thus all railroad currency, under this system, would be put at par throughout the United States.

CHAPTER V.

THE SYSTEM AS A CREDIT SYSTEM.

SECTION 1.

Perhaps the merits of the system, as a credit system, cannot be better ill.u.s.trated than by comparing the amount of loanable capital it is capable of supplying, with the amount which the present "National" banks (so called) are capable of supplying.

If we thus compare the two systems, we shall find that the former is capable of supplying more than fifty times as much credit as the latter.

Thus the entire circulation authorized by all the "National" banks,[E]

is but three hundred and fifty-four millions of dollars ($354,000,000).

[E] Exclusive of the so-called "gold" banks, which are too few to be worthy of notice.

But the real estate and railroads of the country are probably worth twenty thousand millions of dollars ($20,000,000,000). This latter sum is fifty-six times greater than the former; and is all capable of being loaned in the form of currency.

Calling the population of the country forty millions (40,000,000), the "National" system is capable of supplying not quite _nine_ dollars ($9) of loanable capital to each individual of the whole population. The system proposed is capable of supplying five hundred dollars ($500) of loanable capital to each individual of the whole population.

Supposing one half the population (male and female) to be sixteen years of age and upwards, and to be capable of producing wealth, and to need capital for their industry, the "National" system would furnish not quite eighteen dollars ($18) for each one of them, on an average. The other system is capable of furnishing one thousand dollars ($1,000) for each one of them, on an average.

Supposing the adults (both male and female) of the country to be sixteen millions (16,000,000), the "National" system is capable of furnishing only twenty-two dollars and twelve and a half cents ($22.12-1/2) to each one of these persons, on an average. The system proposed is capable of furnishing twelve hundred and fifty dollars ($1,250) to each one, on an average.

Supposing the number of _male_ adults in the whole country to be eight millions (8,000,000), the "National" system is capable of furnishing only forty-four dollars and twenty-five cents ($44.25) to each one. The other system is capable of furnishing twenty-five hundred dollars ($2,500) to each one.

The present number of "National" banks is little less than two thousand (2,000). Calling the number two thousand (2,000), and supposing the $354,000,000 of circulation to be equally divided between them, each bank would be authorized to issue $177,000.

Under the proposed system, the real estate and railroads of the country are capable of furnishing one hundred thousand (100,000) banks, having each a capital of two hundred thousand dollars ($200,000); or it is capable of furnishing one hundred and twelve thousand nine hundred and ninety-four (112,994) banks, having each a capital ($177,000), equal, on an average, to the capital of the present "National" banks. That is, this system is capable of furnishing fifty-six times as many banks as the "National" system, having each the same capital, on an average, as the "National" banks.

Calling the number of the present "National" banks two thousand (2,000), and the population of the country forty millions (40,000,000), there is only one bank to 20,000 people, on an average; each bank being authorized to issue, on an average, a circulation of $177,000.

Under the proposed system, we could have one bank for every five hundred (500) persons; each bank being authorized to issue $200,000; or $23,000 each more than the "National" banks.

These figures give some idea of the comparative capacity of the two systems to furnish credit.

Under which of these two systems, now, would everybody, who needs credit, and deserves it, be most likely to get it? And to get all he needs to make his industry most productive? And to get it at the lowest rates of interest?

The proposed system is as much superior to the old specie paying system (so called)--in respect to the amount of loanable capital it is capable of supplying--as it is to the present "National" system.

SECTION 2.

But the proposed system has one other feature, which is likely to be of great practical importance, and which gives it a still further superiority--as a credit system--over the so-called specie paying system. It is this:

The old specie paying system (so called) could add to the loanable capital of the country, _only by so much currency as it could keep in circulation, over and above the amount of specie that it was necessary to keep on hand for its redemption_. But the amount of loanable capital which the proposed system can supply, hardly depends at all upon the amount of its currency that can be kept in circulation. It can supply about the same amount of loanable capital, even though its currency should be returned for redemption immediately after it is issued. It can do this, because the banks, _by paying interest on the currency returned for redemption_--or, what is the same thing, by paying dividends on the PRODUCTIVE STOCK transferred in redemption of the currency--can postpone the payment of specie to such time as it shall be convenient for them to pay it.

All that would be necessary to make loans practicable on this basis, would be, that the banks should receive a higher rate of interest on their loans than they would have to pay on the currency returned for redemption; that is, on the PRODUCTIVE STOCK transferred in redemption of the currency.

The rate of interest _received_ by the banks, on the loans made by them, would need to be so much higher than that _paid_ by them, on currency returned for redemption, as to make it an object for them to loan more of their currency than could be kept in circulation. Subject to this condition, the banks could loan their entire capitals, whether much or little of it could be kept in circulation.

For example, suppose the banks should pay _six_ per cent. interest on currency returned for redemption--(or as dividends on the PRODUCTIVE STOCK transferred in redemption of such currency)--they could then loan their currency at _nine_ per cent. and still make _three_ per cent.

profits, even though the currency loaned should come back for redemption immediately after it was issued.

But this is not all. Even though the banks should _pay_, on currency returned for redemption, precisely the same rate of interest they _received_ on loans--say _six_ per cent.--they could still do business, if their currency should, on an average, continue in circulation _one half the time for which it was loaned_; for then the banks would get three per cent. net on their loans, and this would make their business a paying one.

But the banks would probably do much better than this; for bank credits would supersede all private credits; and the diversity and amount of production would be so great that an immense amount of currency would be constantly required to make the necessary exchanges. And whatever amount should be necessary for making these exchanges, would, of course, remain in circulation. However much currency, therefore, should be issued, it is probable that, on an average, it would remain in circulation more than half the time for which it was loaned.

Or if the banks should pay _six_ per cent. interest on currency returned for redemption; and should then loan money, for _six_ months, at _eight_ per cent. interest; and this currency should remain in circulation but one month; the banks would then get eight per cent. for the one month, and two per cent. net for the other five months; which would be equal to three per cent. for the whole six months. Or if the currency should remain in circulation two months, the banks would then get eight per cent. for the two months, and two per cent. net for the other four months; which would be equal to four per cent. for the whole six months.

Or if the currency should remain in circulation three months, the banks would then get eight per cent. for three months, and two per cent. net for the other three months; which would be equal to five per cent. for the whole six months. Or if the currency should remain in circulation four months, the banks would then get eight per cent. for the four months, and two per cent. net for the other two months; which would be equal to six per cent. for the whole six months. Or if the currency should remain in circulation five months, the banks would then get eight per cent. for the five months, and two per cent. net for the other month; which would be equal to seven per cent. for the whole six months.

The banks would soon ascertain, by experiment, how long their currency was likely to remain in circulation; and what rate of interest it was therefore necessary for them to charge to make their business a paying one. And that rate, whatever it might be, the borrowers would have to pay. Subject to this condition, the banks could always loan their entire capitals.

CHAPTER VI.

AMOUNT OF CURRENCY NEEDED.

It is of no use to say that we do not need so much currency as the proposed system would supply; because, first, if we should not need it, we shall not use it. Every dollar of paper will represent specific property that can be delivered on demand in redemption of it, and that will have the same market value as gold. The paper dollar, therefore, will have the same market value as the gold dollar, or as a dollar's worth of any other property; and no one will part with it, unless he gets in exchange for it something that will serve his particular wants better; and no one will accept it, unless it will serve his particular wants better than the thing he parts with. No more paper, therefore, can circulate, than is wanted for the purchase and sale of commodities at their true and natural values, as measured by gold.

Secondly, we do not know at all how much currency we do need. That is something that can be determined only by experiment. We know that, heretofore, whenever currency has been increased, industry and traffic have increased to a corresponding extent. And they would unquestionably increase to an extent far beyond any thing the world has ever seen, if only they were aided and permitted by an adequate currency.

We, as yet, know very little what wealth mankind are capable of creating. It is only within a hundred years, or a little more, that any considerable portion of them have really begun to invent machinery, and learned that it is only by machinery that they can create any considerable wealth. But they have not yet learned--at least, they profess not to have learned--that money is indispensable to the practical employment of machinery; that it is as impossible to operate machinery without money, as it is to operate it without wind, water, or steam. When they shall have learned, and practically accepted, this great fact, and shall have provided themselves with money, wealth will speedily become universal. And it is only those who would deplore such a result, or those who are too stupid to see the palpable and necessary connection between money and manufacturing industry, who resist the indefinite increase of money.