uncle sam: now, boys, let us see just what we have settled during the four nights we have been talking this matter over.

the first night we learned that gold was the standard of value, the whole world around.

the second night we agreed that gold coin was the only money we had.

the third night we agreed that the only currency that we had and ought to have was gold coin, the foundation and redeemer of all other currency and our token or subsidiary coins. we came to the conclusion and unanimously agreed that neither the united states notes nor bond-secured bank notes were fit for currency, because not related to business transactions in their origin, that they were unresponsive to the demands of trade, and were five times as expensive as the right kind of currency.

the fourth night we agreed that the only true or correct currency was a credit bank note, currently redeemed in gold coin.

in other words, we agreed that gold was our standard of value, gold coin our money, and that our currency should consist of gold coin, the subsidiary coins and bank credit currency.

tonight we want to find out, if we can, what exchange is. this is a mighty important question for probably 90 per cent or nine-tenths of all our business is transacted in some form of exchange. mr. lawyer, i want to put it up to you first. what is exchange?

mr. lawyer: well, uncle sam, the best definition i can give, is to take one thing for or in the place of another. it is illustrated in a way by the old saw, "a fair exchange[pg 85] is no robbery." that describes the act of exchange, but i imagine that what you have in mind is the system or practice of exchange, as carried on today. that practice or system is only a multiplication of transactions where one man takes one thing in place of another. in this connection it means to take one credit in place of another credit; to take one debt in place of another debt. as now developed and applied to the commerce of the world, i would say that the science of exchange is to substitute one credit for another credit, or to make one debt pay another debt.

a debt is what is due from one person to another person. i have a deposit with mr. banker there, and i owe mr. farmer $20 for a load of potatoes; if i draw a check upon mr. banker for $20 in favor of mr. farmer, and hand it to him, i have paid my debt to mr. farmer with mr. banker's debt to me.

mr. merchant: now, mr. lawyer, just hold on a minute until i find out a thing or two before we go any further. in fact, i am sure everyone here would like in the outset to find out the same things, except possibly uncle sam, who ought to know everything, and is probably omniscient, mr. banker, who deals in these things, and you, mr. lawyer, who are presumed to know about them, and must know them, as a matter of necessity in your practice. what i want to know is:

1. what is a promissory note?

2. what is a check?

3. what is a draft?

4. what is an acceptance?

5. what is a bill of exchange?

until we know precisely what these various terms signify, or mean in banking, when put into use, we shall soon be so far out at sea that we will not know what we are saying, because we do not know the meaning of the words we are using. this will be true of some of us at least. we must familiarize ourselves with these words, or terms.

[pg 86]

mr. banker: if you will allow me, i will try and explain and tell you what these various terms mean, and what use we make of these several instruments in writing.

first: a promissory note is a written promise to pay some one a sum of money. it may be either to pay it immediately, or on demand, or at some future day; to pay it either with or without interest; or to pay it at some particular place.

mr. merchant: it is just a written acknowledgment of a debt, isn't it?

mr. banker: it is a written acknowledgment of a debt, coupled with a promise to pay it. if a owes b $1,000, and gives his note for that amount, and b sells the note to c, the note has become exchange. it is not the usual form of what is called exchange, but is nevertheless just as truly exchange; for suppose that c owes a $1,000, he can then cancel the debt by delivering him the note for $1,000. c has paid his debt to a with a's debt to b.

second: a check is a written order on a bank to pay money on demand. it may be drawn to cash, or it may be drawn to bearer, or it may be drawn to the order of some one. if a owes b $1,000 and a has a deposit at a bank for that amount, a can cancel his debt to b by giving him a check on the bank for $1,000. the check is exchange, though not in the usual form of what is known as exchange, for a has canceled his debt to b by giving b the bank's debt to him.

third: a draft is a written order from one person to another to pay a third person a sum of money.

an acceptance is to write across the face of a draft, payable at a future time, the word "accepted," and the signature of the person accepting it.

if a is owing b $1,000 and c is owing a $1,000, the debt to b can be paid by a's draft upon c. the draft is identical in every respect with the check, the difference is in form only, and the use of them. a check is only used when the order to pay money is upon a bank. a[pg 87] draft may be, and often is used when the order to pay money is upon a bank. a check, properly or correctly speaking, is never used in an order to pay money upon an individual or corporation, but a draft is invariably used in such cases.

the transactions are identical in effect, though the conditions, or circumstances, are different. both the check and the draft are exchange.

fourth: when a draft has been accepted, it becomes the promissory note of the one accepting it, as he promises to pay it on the day named in the draft. an accepted draft is only another form of a promissory note, for if a owes b $1,000, and b draws upon a for that amount, and a accepts the draft, a is in precisely the same position as he would have been if he had sent b his promissory note for $1,000.

in the banking world a draft, after it has been accepted, is often called and known as an "acceptance."

fifth: a bill of exchange in its ordinary or usual sense, is an order of one person upon another to pay a third person a sum of money.

mr. manufacturer: that is precisely what you said a draft was.

mr. banker: just wait a moment, please, until i finish, and you will note the difference. the bill of exchange is the medium of settling accounts or debts between parties residing at a distance from each other, without the intervention of money by exchanging checks or drafts.

mr. manufacturer: then they are identically the same thing except a bill of exchange acquires its name from the fact that it settles debts at a distance.

mr. banker: that is the exact distinction, if one is to be made at all, and i think it will be well for us to make this distinction to save confusion in our conversation, although in the ordinary and usual language of the street, or the business world, the terms, or words, "draft,"[pg 88] "acceptance" and "bill of exchange" are used indiscriminately the one for the other.

if the definition of mr. lawyer stands, and i think it is a very good one, when he said "the science of exchange is to make one debt pay another debt," the science of bills of exchange is to make one debt pay another debt at a distant point. this is not a distinction fully without a difference, because it helps us to classify the transactions and distinguish them in a way as we go along.

a simple illustration is this: a, who lives in boston, owes b, who lives in san francisco, $1,000, and c, who lives in san francisco, owes d, who lives in boston, $1,000. b and d could exchange drafts with each other; then b and d could collect each other's drafts. but b could sell his draft on a to c for $1,000 and c could pay his debt of $1,000 to d by forwarding him the draft on a. d would then collect the draft on a. it will be seen at once that this transaction has saved the expense of sending $1,000 in money from boston to san francisco, and also of sending $1,000 in money from san francisco to boston at great expense by express. this transaction between boston and san francisco is known and called a transaction in domestic exchange.

if a, who lives in new york, owes b, who lives in london, $1,000, and if c, who lives in london, owes d, who lives in new york, $1,000, b, the resident of london, can draw on a in new york, and sell the draft to c, who resides in london, and c could pay his debt to d, who resides in new york, by forwarding b's draft to d, who resides in new york. d could then collect the draft from a. it is perfectly clear that by means of this transaction, the expense of sending $1,000 in gold from new york to london, and also the expense of sending $1,000 in gold from london to new york, has been saved.

this draft would be foreign exchange, because the cities are in two different countries.

mr. merchant: according to your illustration, mr.[pg 89] banker, if our sales of cotton, grain and meat to great britain should amount to $1,000,000,000 a year, and the sales of great britain to us of woolens, silks, cotton and cloth and other manufacturies should amount to $1,000,000,000, we would not have to transmit a single dollar of gold either way, because the debts would just cancel each other. if the debtors in the united states could find out who the debtors in great britain were, then they could exchange debts with each other. the debts of the two countries would just offset each other.

mr. banker: that is absolutely true, and it is entirely possible that the $2,000,000,000 worth of goods in the two countries could be bought and sold without moving a single dollar's worth of gold either way across the atlantic.

mr. manufacturer: well, that is just what we want to do and save the expense and trouble of transmitting the money, and it is up to you, mr. banker, to explain just how we are to accomplish this trick or feat, because it will save a tremendous expense, if this can be done.

mr. banker: yes, and will bring other advantages to the business interests of the country of almost incalculable importance, as we shall soon see. now, the question is how to gain these ends. two things must be accomplished in this connection, if we are to profit by every advantage that can possibly be taken in our trade with each other, as well as in our trade with other countries.

first: the bills of exchange must be of such a high character as to invite those, who need them to pay debts with, to take them unhesitatingly.

second: the bills of exchange must become known to those who may want to use them to pay debts with, instead of shipping the actual money.

mr. merchant: of course, you gentlemen are aware that our debts abroad are being settled in just this way today to a very large extent, and i do not think that you need worry very much about the bills of exchange not becoming known to those who need them to pay debts with,[pg 90] if they are made of such a high character as to command a market, for the market will at once develop and make itself felt. that is, i mean a general market for bills of exchange of unquestioned character. the only thing for us to do is to give our bills of exchange such a standing as to command ready and general acceptance in the commercial world. how can we do that?

mr. banker: that can be accomplished in a very simple, easy and natural way, if we will only adopt it. let me illustrate what i mean.

today, a, living in this country, sells a bill of goods, say for $50,000, to some one in great britain; the purchaser in great britain arranges with his bank to accept a 60 or 90 day bill drawn on it by the american shipper. such drafts are drawn on well-known bankers, and when accepted become virtually a time-deposit at the bank, and therefore can always be disposed of at the lowest current rate of interest. this arrangement is a very great advantage to the english business man, as it enables him to use the high credit of the bank in carrying on his business.

at the present time our national banks are not authorized to accept drafts made in this way, but if they were authorized to do so, the credit of our banks would be given to the drafts made by one business man upon another whether the drafts were domestic or foreign. such an obligation is the most desirable one for a bank or an investor to hold, as a temporary investment for the following reasons:

first: the draft arises out of a transaction where goods passing from buyer to seller are equal in value to the face of the draft. the goods are actually in transit, and the draft is economically a title to the goods.

second: the seller is invariably good, or at least thought to be.

third: the buyer is invariably good, or thought to be.

fourth: the bank accepting the draft is invariably good, or believed to be. but above and beyond that no[pg 91] bank will engage in such a transaction, without making itself absolutely safe in some way.

mr. merchant: mr. banker, if we should adopt that principle in this country, we would at once make every dollar's worth of goods in transit, or ready for shipment, a liquid asset, practically a cash asset, as we shall see, for the american merchant and manufacturer; because a large amount of capital would at once be attracted to this field for steady employment, or temporary investment.

mr. manufacturer: there is nothing so essential to relieve the constant strain upon individual credit and mobilize the really liquid wealth of the country, as the creation of the kind of paper you have just described. think of it for a moment; there are the goods in transit, the shipper, the buyer and the banker back of the paper that will be coming due within the next sixty or ninety days. you can hardly imagine anything safer, and more quickly convertible into cash.

money available for the purchase of such paper would come from many sources, among them the following:

first: corporations would immediately be organized to deal in such paper.

second: all strong business houses, merchants and manufacturers would prefer to hold such paper instead of stocks or bonds, for their surplus funds during their slack seasons.

third: bankers of all classes, both in the country and city, would find such paper preferable to any other form of investment for a secondary reserve, and for their surplus funds during slack periods in their respective sections.

fourth: if acceptances are limited as they should be to goods in transit, or on the road to consumption, the adoption of this principle will mark, indeed will accentuate, the strong, the fundamental difference between liquid assets and the more fixed forms of investment, such as bonds and stocks. banking capital employed in[pg 92] this way can far more readily adjust itself to the exigent demands of liquidation in the case of a panic, or a commercial crisis.

fifth: undoubtedly, to a very large degree, foreign capital would be attracted to our market for this kind of paper, because its strength and liquidity has already been proved to the bankers and capitalists on the other side of the atlantic. and whenever capital was required, the rate of interest would be such as to be inviting. in other words, the rates of interest would rise, correspondingly with our needs, and the entire commercial world would be our possible market for the commercial paper representing the economic title to the five or six billions of finished goods that are always passing from the producer to the consumers in this country, and to the consumers abroad.

mr. banker: undoubtedly, we should soon have right here a general market to take care of all this kind of paper; and it ought to become soon the strongest and broadest market in the world for this kind of an investment, considering our vast commercial resources. all of our bills of exchange would be drawn in dollars, not francs, marks or pounds sterling, and we would put upon them the stamp of the eagle, and not the lion and the unicorn.

uncle sam: i like that. it stirs my blood, warms the cockles of my american heart. that's business.

mr. manufacturer: i understand that for such bills of exchange, those accepted by banks, there has grown up in london, paris, berlin, amsterdam and many other european centers, a large market, known as a discount market. indeed, that this form of paper constitutes a very essential feature of the commercial transactions of all european financial centers.

mr. banker: that is true, and unless we follow them and adopt the same principle, and facilitate in the same way the protection, transportation and distribution of our commodities, needed for current consumption, we[pg 93] will continue to work under a very great handicap, as compared with our foreign competitors. moreover, we will again find it difficult, if not impossible, to adjust ourselves to those periods of contraction which must come from time to time, without almost immeasurable losses, and the consequent stagnation in business that is sure to follow.

mr. merchant: i appreciate what mr. banker has just said. i am confident from my observation during the panics of 1893 and 1907 that our greatest injury came from the shock to business due to the fact that there seemed to be no real relief from the strain until there was an actual breakdown all along the line. now it is evident that if a large amount of capital were employed in the economic titles, as it were, to our consumable commodities in the form of bills of exchange and the market for them extended to the financial centers of europe, as seems probable, indeed certain, whenever the rate of interest was high enough, we should pass through any future strain, without the usual tragic results. of course this added facility to the investment of our bills of exchange will not be a cure-all, but it will certainly correct an obvious and a very great defect in our present method of doing business.

mr. banker: certainly it will not be a cure-all, because it is only an added facility in our credit system, and therefore must be provided for precisely as a corresponding amount of loans should be. you see, don't you, that an acceptance by a bank is practically the same thing as a loan to the buyer and seller of the goods jointly, or to one of them with the other as an endorser. the only difference is this: that if a loan is made the money would be placed at once to the credit of one of them, subject to his check, while the acceptance is an agreement to pay the amount on a future day. the bank must take precisely the same precaution in securing or protecting itself, and should carry identically[pg 94] the same reserve against acceptances that it does against its deposits subject to check.

mr. lawyer: that is true, for if the buyer and seller fail to make good, and meet the draft, the bank must pay it precisely as a bank must pay the checks of its depositors, even though the borrowers of those deposits do not pay their promissory notes when due. in reality and in fact the results are identically the same, therefore i agree with you, mr. banker, that a bank should carry the same reserve against its acceptance liability as against its deposit liability.

mr. manufacturer: mr. banker, have bills of exchange and bank acceptances been used very long, or are they something quite new and modern?

mr. banker: the lord only knows how ancient they are. however, it is undoubtedly true that the use of them, especially acceptances, has grown enormously in recent years. for it is now a universal practice at all financial centers throughout europe.

the bank liabilities of the whole world were only $16,000,000,000 in 1890, while today they are upwards of $50,000,000,000, possibly as much as $55,000,000,000. this almost appalling increase is due not only to the growth of international trade and the expansion of the credit system in foreign trade, but to domestic production as well. of course an acceptance is the natural counterpart of a bill of exchange.

bills of exchange, or something accomplishing the same purpose, were in use among the greeks. the history of the subject is buried in much obscurity.

it is stated upon high authority that among the bankers of the roman world there existed a certain method or means of effecting payments abroad.

mr. lawyer: here is what one author, wilbur aldrich, says:

"from the beginning of the christian era the jews became dispersed and, shut out from other trades and occupations, became usurers, or money-lenders at inter[pg 95]est, a business which by the canon law was forbidden to christians. the jews were united by such strong ties that their business assumed almost a corporate aspect. they bought, sold and transferred for collection part of the many debts constantly owed to them, and became practically an international exchange community. their practice gradually evolved the bill of exchange.

"rivals of the jews, and more given to money changing, lombard and other italians naturally also became exchangers. many large italian houses included whole families, and had branches in many cities widely separated. the financiers from each city in italy and from associated leagues of such cities, frequently united for exchange purposes. italian finance thus grew into a great system of international exchange. among the great fairs of the middle ages, under the influence of the italians, some became connected chiefly with the business of exchange; piazenca, the most noted of the fairs of exchange, was practically a clearing house for foreign exchanges.

"the bill of exchange was already in frequent use in the middle of the thirteenth century, but at this time its form was that of a document certified before a notary. at the end of the fourteenth century, it had approached the form now in use. it should be added that the bill of exchange was drawn only by the money changers and the bankers that had branches or agents.

"the business of bill broking grew up in england towards the end of the fourteenth century. the issuance of bills of exchange, based upon genuine business sales of goods, was recognized as a legitimate source of gain by the canonists; or the ecclesiastic lawyers."

mr. banker: you see, mr. manufacturer, from what mr. lawyer has just read, bills of exchange, in practically the same form that we now have them, have been in use about 500 years. however, we are not now so much interested in a post mortem of the bill of exchange as we are in its place in our commerce. what we[pg 96] are most interested in is, just what part the bill of exchange is playing in the trade and commerce of today. what we want to get clearly fixed in our minds is what it is, and what it does, as distinguished from other instruments of trade.

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[pg 97] 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[pg 98] 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[pg 99] 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[pg 100] 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.