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[pg 102] 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[pg 103] 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[pg 104] 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[pg 105] 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 dif[pg 106]ference; 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?

[pg 107]

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[pg 108] 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[pg 109] 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.

"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[pg 110] 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.

[pg 111]

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[pg 112] 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.

[pg 113]

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[pg 114] 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[pg 115] 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[pg 116] 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.[pg 117] 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.