uncle sam: mr. farmer isn't here yet. he left in such a huff the other night, possibly he is sore—no, he is not, here he comes.

mr. lawyer: when our meeting broke up last wednesday night, mr. banker had just outlined the different forms of credit, and i was very glad that he did, because it gave me an opportunity to read up on the subject and be prepared to listen intelligently, at least, to what any of you may say tonight.

mr. merchant: i did some investigating, too, and found the subject far more interesting than i supposed it could possibly be. indeed, that is true of any subject. your interest is always measured by your knowledge, and many matters that seem to us difficult to understand, become exceedingly simple as you get into them, and comprehend them. how often the apparently impossible task completely dissolves under persistent attacks.

mr. banker: i am more than pleased that you gentlemen have given your spare time to this subject. simple in function it is, but it is immeasurably great in its possibilities, extent and responsibilities from the standpoint of the banker.

just as we parted last wednesday i had described or defined the different forms of credit, so far as they enter into banking directly or indirectly. as i then stated, the first and simplest use of credit is that granted for the production of something to eat, wear or use—what we call consumable commodities, that is, credit granted to aid in production.

if mr. farmer over there should come into my bank now as he used to before he got rich, and ask[pg 119] for a thousand dollars to pay his expenses while he was planting, cultivating and harvesting his crop, and then in the fall should come again and ask me for three thousand dollars more to buy some steers and hogs with, because he thought he could make more money feeding than by selling his corn outright, and i had let him have the total amount of $4,000 from time to time as he wanted it, because i believed in his honesty and intelligence, and also because i regarded the venture as a good one, that would be granting credit for the production of beef and pork, food products—the very necessities of life.

just as soon as his steers and hogs had become fit for market, and had ceased to gain anything to speak of, by holding them and further feeding, he must sell or lose the cost of holding on the chance of a rise in the market. but even this delay must be temporary. virtually he is compelled to sell from the very nature of the case. when he sells his steers and hogs, suppose he should receive $5,000. first, he pays me the $4,000 and interest, and has about $1,000 profit on the transaction. you will all perceive and understand, that as i gave mr. farmer this credit of $4,000 from time to time, he gave me his promissory note for an equal amount, so that as fast as i granted credit he created a debt. i acquired the right to demand payment of $4,000 and he incurred the duty or obligation to pay $4,000.

so for every credit granted a corresponding debt is created; and if every debt is paid every credit will be canceled. though the credit granted to mr. farmer was for the production of the necessities of life, it was not the safest kind of a loan to make as we shall soon see—his personal responsibility aside of course; because after i had given the $1,000 he might have to replant his corn. the summer might be dry and the frost might come early and cut off his crop; but passing over these possible dangers to his crops, if we assume that his crop is the biggest he ever raised, and that that very fact makes it desirable to borrow the additional $3,000, pleuro-pneu[pg 120]monia might strike his cattle, and cholera might seize his hogs and the transaction might result in a loss of $1,000 instead of a profit of $1,000; or even a greater loss than $1,000.

it is these risks that the banker takes in making loans to farmers that justifies higher interest rates than are charged under some other circumstances. again it is these risks that lead a banker out of caution to take real estate loans in addition, to cover the accidents of crop raising, although the national bank act forbids making loans upon real estate.

mr. farmer: under such circumstances, i think it ought to be possible for a bank to take real estate loans. i believe it would help the farmer to get his money at a trifle lower rate of interest.

mr. banker: i agree with you, and provision should be made for just such cases; but the rule of the national bank should still prevail with regard to loans upon real estate so far as a regular business is concerned, unless the bank is doing a savings bank business or a trust company business, in which event it would be entirely proper to use such funds for that purpose.

mr. merchant: mr. banker, a moment ago you said that the loan to mr. farmer, apart from his personal standing, was not the safest kind of a loan to make. just what did you mean by that?

mr. banker: i am glad that you asked that question, for it should be explained right here. suppose that you, mr. merchant, should purchase $4,000 worth of pork and beef in the barrel, at some distant point, and should come to me for the money to pay for it. in all probability i should ask you for the bill of lading covering the shipment, and also insist upon your getting an insurance policy on the goods before giving you the money. in this case, i am loaning money upon the necessities of life, consumable commodities, and unless the insurance company fails, and the goods are destroyed, i cannot possibly lose a cent. i have, humanly speaking, eliminated all[pg 121] chances of loss. you will observe that if i should hold the bill of lading and the insurance policy, i have the title or ownership of the pork and beef, in any event. in such cases, comparatively speaking, the rate of interest ought to be the lowest possible, as far as the risk goes.

mr. manufacturer: but this kind of a transaction constitutes a comparatively small part of the commerce of the country.

mr. banker: yes, that is true, and if credit was limited to such transactions, credit crises would be very few, indeed, probably never would arise as a result of over trading under such circumstances; trade would be greatly hampered, and business curtailed to a destructive degree.

mr. manufacturer: that is certainly true. you men all know that i am a manufacturer of high class clothing. i want to give you an illustration of how business is being carried on today in the way of multiplying credit.

a manufacturer of woolen goods at lancashire, england, sold to a wholesale merchant on the other side, $10,000 worth of goods on three months' time. the wholesale merchant sold the goods for $12,000 to an english exporter on three months' time. the english exporter sold the goods to an american importer for $20,000, duty paid; the importer sold them to an american jobber for $22,000; the jobber sold them to me for $24,000. all these sales occurred within thirty days, and not a single man paid a cent of money on account of his purchases. by way of payment, this is what happened. i gave my note due in ninety days to the jobber, and he discounted it at his bank. the jobber gave his note due in ninety days to the importer, and the importer discounted it at his bank; the english exporter sent over a draft upon the american importer at ninety days sight, and he accepted it and it was returned to england, where the exporter discounted it at his bank. in the meantime, the wholesaler drew a draft on the exporter at ninety[pg 122] days sight, and he accepted the draft, whereupon the wholesaler discounted the draft at his bank. at the same time the manufacturer drew on the wholesaler at ninety days sight, and the draft was accepted by the wholesaler, and was discounted by the manufacturer at his bank. thus we see that goods which sold originally for only $10,000 went through five different hands and became the basis upon which credits were granted for $88,000, and debts were created for $88,000. every single debt was sold just as though it was so much woolen goods. every man had his money and not one of them had paid his debt, and yet every transaction was legitimate and in the ordinary course of business.

within sixty days i shall have turned these goods into clothes and sold and delivered them, giving my customers in turn credit upon my books, or will have accepted their promissory notes, which i may discount at my bank if i should need the money in my own business. now mark and note this. if i should deliver to the american jobber my check today, and he should send his check to the american importer and the american importer should send a draft to the english exporter, and the english exporter should deliver his check to the wholesaler, and the wholesaler should send his check to the manufacturer, debts amounting to $88,000 would have been paid and credit amounting to $88,000 would have been canceled; and yet not a single cent of cash in the form of coin or currency has been used.

every one of the checks, notes or drafts taken in the transaction is property, just as much as the note taken for a single sale of the goods would have been property. indeed, every one of the five notes or drafts was just as much property as the goods themselves were, and could be bought and sold just as well as the goods themselves could be bought and sold. now it must be evident to all of you that in the production, transportation and distribution of commodities, credit performs exactly the same function as money. so far, therefore, credit is[pg 123] in all respects equivalent to money. so long, therefore, as the operations through credit are successful, everything goes well.

mr. banker: precisely so, mr. manufacturer, so long as the operations are successful, everything goes well; but it is the sudden breaking of the chain of credit that brings or precipitates a disturbance.

macleod uses this language in referring to the destruction of confidence: "it is the sudden failure of confidence and extension of credit which produces what is called in commercial language, 'a pressure on the money market' and which causes money to be 'tight.' when money is said to be scarce, it does not mean that there is a smaller quantity of money actually in existence than before; there may be more, or there may be less in the country; no one can tell what the amount of money in existence is, but a great amount of credit which serves as a substitute, and was an equivalent of money, is either destroyed altogether, or is suddenly struck with paralysis, as it were, and deprived of its negotiable power, and therefore, practically useless. a vast amount of property is expelled from circulation, and money is suddenly called upon to fill the void."

it must be observed and noted right here, therefore, that streams of gold, of gold, i say, must be constantly and swiftly running through the channels of trade, and so intimately connected with a practically unlimited supply or an inexhaustible reserve of gold, in the form of a central reserve for the whole country, to immediately extinguish any conflagration of credit as soon as it breaks out, precisely as a flood of water extinguishes a fire when it first makes its appearance.

for the past ten or fifteen years, the banks of england have realized the necessity of pursuing this principle, by carrying their own individual reserves, and accordingly have been gradually accumulating cash reserves of their own, instead of depending upon the bank of england, except as a last resort.

[pg 124]

germany, too, within the past year, has suffered severely because adequate reserves have not been present in her channels of trade; and having discovered this weakness in her banking practices, appointed a commission to pass upon that and other questions. the commission reported that the individual banks should carry their own reserves; and herr havenstein, president of the imperial bank, a short time ago demanded that the banks of germany should carry their own cash reserves up to 15 per cent of their liabilities.

how much more important, then, gentlemen, must it be that we, when you consider the extent of our country, our vast and varied banking interests which are being carried on by 25,000 or 30,000 individual or independent banks, should require everyone of these banks to be in a position to test its credits with the touchstone of gold, and at the same time take the precaution of protecting itself by a central reserve of gold far beyond any possible demand that may be made upon it.

mr. merchant: mr. banker, from what you have been telling us it is perfectly clear that every promissory note, check, draft, or bill of exchange, which are acknowledgments of debt, are just as much property as land, houses, cattle, corn, iron, or anything else material that can be bought and sold. credit itself is merchandise and the subject of a gigantic commerce of its own.

"a well-managed credit amounts to tenfold the funds of a merchant; and he gains as much by his credit as if he had ten times as much money." this maxim is generally received among all merchants. credit is, therefore, the greatest wealth to every man who carries on commerce.

demosthenes says: "there being two kinds of property, money and general credit, our greatest property is credit."

again he says: "if you were ignorant of this, that credit is the greatest capital of all toward the acquisition of wealth, you would be utterly ignorant."

[pg 125]

so melon says: "to the calculation of values in money, there must be added, the current credit of the merchant, and his possible credit."

so also dutot says: "since there has been regular commerce among men, those who have need of money have made bills, or promises to pay in money. the first use of credit, therefore, is to represent money by paper. this usage is very old; the first want of it gave rise to it. it multiplies specie considerably. it supplies it when it is wanted, and which would never be sufficient without this credit; because there is not sufficient gold and silver to circulate all the products of nature and art. so there is in commerce a much larger amount in bills than there is specie in the possession of the merchants."

mr. banker: while it is true, as a general principle, that by the sale and transfer of the same property, as we have seen in the case of the woolen goods, many credits are granted and a corresponding amount of debts are created, it is also true that a single debt in the form of a promissory note, check, draft or bill of exchange, may be the medium of exchanging or transferring many different pieces of property. this is just the reverse of the transaction that mr. manufacturer has explained to us.

mr. farmer: that is right. i want to tell you fellows something. one day about six months ago i was thinking of taking an automobile trip, but hesitated on account of the weather signs. i hung around town here for an hour or two and happened to drop into the office of a certain lawyer (i never go there any more now). we talked politics. while there, i asked him what he thought of the weather, and the political situation, and then went out. at the end of the month i got a bill from that lawyer for $50. i called upon the gentleman (i suppose i have got to call him a gentleman on account of his neighbor here) to find out what his bill meant, and he claimed that while we talked about politics, the presidential election prospects and the weather, that i had pumped him about[pg 126] some very important legal matters upon which he had given me valuable advice. upon my soul i never knew it, but what could i do. my only possible escape was to pay some other lawyer, possibly mr. lawyer over there, $100 to defend the case. as is the practice nowadays, i took the short cut and paid it by sending him my check. that lawyer indorsed and gave that check to a neighbor of mine for a jersey cow. my neighbor indorsed and gave the check to a country grocery store out there and paid his bill with it. the country storekeeper indorsed and gave the check to mr. merchant over there for $50 worth of boots and shoes. mr. merchant indorsed and gave the check to mr. manufacturer for $50 worth of clothing. mr. manufacturer indorsed and deposited that check with mr. banker, right here, who charged it up to my account. now, by jove, you wouldn't think that was possible, but here is the check with those five indorsements.

mr. manufacturer has just given us an instance where the same identical property worth only $10,000 in lancashire, england, was sold five times, and that credits amounting to $88,000 were being granted, and a corresponding amount of debts were created. now here is a case where my debt to that blasted lawyer acknowledged by my check, paid him $50; paid my neighbor for a jersey cow $50; paid the country grocery store for groceries $50; paid mr. merchant for boots and shoes $50; paid mr. manufacturer for clothing $50; paid the bank on account of mr. manufacturer's debt $50; or six separate debts in all, amounting to $300. and the joke is, i never ought to have given the check at all. this is the reverse side of the use of credit. the instance given by mr. manufacturer was one illustrating the tremendous expansion of credit. the instance i have given is one of the contraction of credit.

mr. banker: right on that point mr. macleod says that sixty years ago almost the entire circulating medium of lancashire, england, consisted of bills of exchange[pg 127] in no way different from mr. farmer's debt, and that they sometimes had as many as 115 indorsements upon them before they came to maturity. so that the useful effect of a bill of exchange is indicated by the number of indorsements upon it, supposing that every transfer is accompanied by an indorsement, which is not always the case. we see here the fundamental difference between bills of lading and bills of exchange, because the indorsements on the former denote the number of transfers of the same identical property; the indorsements on the latter denote the number of transfers of distinctly different property.

mr. merchant: mr. banker, in every form of credit granted so far and debts created, we have certainly been dealing only in a legitimate way with consumable commodities, the necessities of life, and ordinarily, if not always, this kind of credit will take care of itself. and yet the marvelous facility and power of credit has been illustrated so vividly, that i am sure all of us appreciate it and can readily see how it might be abused and lead to disaster if not confined to the actual production of articles of food, clothing and daily use, or, in a word, to the production of the necessities of life.

mr. farmer: i object to your including that lawyer's bill as one of the necessities of life.

mr. lawyer: i beg your pardon, but we lawyers are a necessity. possibly necessary evils, but nevertheless, i insist that we are necessary.

mr. banker: passing over this little quarrel between mr. farmer and mr. lawyer, mr. merchant has hit upon the vital distinction that should always be maintained in commercial banking as distinguished from investment banking as we shall soon see.

mr. lawyer: there is not one man in a thousand that comprehends the distinction that you have just called our attention to, and i include the bankers when i say that, too. i did not appreciate it myself a week ago, but it is fundamental and must not be overlooked. i want[pg 128] to call your attention to one form of credit that does not grow out of actual transactions in the production and distribution of consumable commodity, and that is accommodation paper.

mr. laboringman: accommodation paper? it strikes me as though that was just the kind of paper i wanted. i certainly will take any accommodation that mr. banker over there will give me.

mr. lawyer: speaking of accommodation paper, mr. macleod says: "we now come to a species of credit which will demand great attention, because it is the curse and plague spot of commerce, and it has been the great cause of those frightful commercial crises which seem to occur periodically; and yet, though there can be no doubt that it is in many cases essentially fraudulent, yet it is of so subtle a nature as to defy all powers of legislation to cope with it."

the obvious distinction between accommodation paper and promissory notes or bills of exchange here referred to, and all legitimate commercial paper, is this: the accommodation paper represents a future transaction, something to be done, while the true commercial paper represents a past transaction, or something that has been done; for example, goods that had been manufactured and are ready for sale or have been sold and shipped.

mr. banker: mr. lawyer, will you allow me to illustrate that distinction?

mr. lawyer: certainly.

mr. banker: if mr. manufacturer there should make ten different sales of clothing of $5,000 each, and then send out ten drafts to his ten customers, who accepted them and returned them, these ten drafts would be called real bills of exchange, or let us call them true commercial bills, because the ten men have purchased and agreed to pay for the goods received by them. should the ten men have sent their promissory notes to mr. manufacturer, they would be identically the same thing as the[pg 129] drafts which they had accepted, and answer identically the same purpose.

the real beneficiaries in these ten transactions are the ten purchasers of the goods which they have received; and if mr. manufacturer should sell me these ten bills of exchange or promissory notes as the case might be, with his indorsement, the ten men would all individually regard themselves as primarily liable; and they will, therefore, each of them, prepare to pay his note when it comes due, although mr. manufacturer is the guarantor. but if mr. manufacturer should go to these same ten men and ask each of them as a favor or accommodation to him to accept the draft or indorse his note for the same amount of $5,000, each due in 90 days, no goods having been purchased by any one of them, all these drafts would be accommodation paper, and no one of these men would look upon his note as his debt, and therefore would expect that mr. manufacturer would take care of the paper when it came due.

in the latter case, mr. manufacturer, having gotten the money and the ten men having no interest in the transaction, except as an accommodation to mr. manufacturer in the form of a favor, mr. manufacturer becomes the real maker of the ten notes, and the ten men who are indorsers are, as i have said, without any interest in the transaction, except that of accommodation acceptors.

mr. macleod has described this whole transaction so fully and forcibly i want to read it to you: "there is in fact only one real principal debtor and ten sureties. now these ten accommodation acceptors are probably ignorant of each other's proceeding. they only give their names on the express understanding that they are not to be called upon to meet the bill: and accordingly they make no provision to do so. if anyone of them is called upon to meet his bill, he immediately has a legal remedy against the drawer (or the note maker). in the case of real bills, then, the bank would have ten persons who would each take care to be in a position to meet his own engagement;[pg 130] in the case of accommodation paper there is only one person to meet the ten engagements. furthermore, if one of the ten real acceptors fails in his engagement, the bank can safely press the drawer: but if the drawer of the accommodation bill fails to meet one of the ten acceptances, and the bank suddenly discovers that it is an accommodation bill, and they are under large advances to the drawer, they dare not for their own safety press the acceptor, because he will, of course, have immediate recourse against his debtor, and the whole fabric will probably tumble down like a house of cards. hence the chances of disaster are much greater when there is only one person to meet so many engagements, than when there are so many each bound to meet his own.

"we see, then, that the real danger to a bank in being led into discounting accommodation paper is that the position of principal and surety is reversed. they are deceived as to who the real debtor is, and who the real surety is, being precisely the reverse to what they appear to be, which makes a great difference in the security to the holder of the bills...." in carrying on a legitimate extension of credit, the bank never permits the advance to exceed a certain definite limit; but it never can tell to what length it may be inveigled to discounting accommodation paper until some commercial reverse happens, when it may discover its customer has been carrying on some great speculative operation with capital borrowed from it alone....

"this is the rationale of accommodation paper; and here we see how entirely it differs from real commercial paper. because with real commercial paper, and bona fide customers, though losses may come, still directly the loss occurs, there is an end of it. but with accommodation paper the prospect of a loss is the very cause of a greater one being made, and so perpetually in an ever-widening circle till at last the canker may eat into a banker's assets to any amount almost."

"the insurmountable objection, therefore, to this spe[pg 131]cies of paper, is the dangerous and boundless facility it affords for raising money for speculative purposes."

mr. merchant: that is absolutely true. accommodation paper and speculation go hand in hand. they are twin sisters. siamese twin sisters. pardon me, if i take a moment to demonstrate its terrors by relating the experience of a friend of mine who was led into an irrigation scheme:

"my friend was in the grocery business in a western town and had a stock of groceries worth $75,000, and he had $25,000 cash in the bank. the dam and water ditch was to cost $100,000. my friend sold off a part of his goods, realizing $25,000 of additional cash. he moved the balance of his goods out to the point where the dam was to be located, forty miles away, and began operations. he succeeded in finishing the dam after paying out for work all that he had, and in securing indorsers up to $100,000 upon accommodation paper in the city where he had carried on the grocery business. two hundred thousand dollars had been paid for groceries and clothing. the laborers had gone to his store and obtained food and clothing during the two years he was engaged in constructing the work, and they had consumed all their wages in living, and more, too. he put an issue of bonds on the dam but could not sell them; therefore he could not pay the banks. his indorsers could not pay the banks, and most of them were ruined because of their indorsements for accommodation purposes. he was wiped out. he turned over everything to the bank, bonds and all. the banks had to carry those bonds ten years before they could sell them."

mr. banker: mr. merchant, you have given a splendid illustration of the result of accommodation paper, but you have proved far more than you set out to demonstrate. you have not only shown the ruin wrought by the $100,000 of accommodation paper, but also the extreme danger accompanying accommodation paper, when the proceeds go into a real estate investment or improvement;[pg 132] especially an irrigation enterprise that usually requires a long time to reach results. the same is true with regard to railroad investments, town lots, or any kind of real estate investments. your friend put into that grocery store from first to last $200,000 worth of groceries and clothing, and the laborers who did the work ate up the groceries and wore out the clothing.

mr. merchant: that is just what they did, for he simply gave them credit at the store for their wages, and they were charged for what they bought, and at the end of two years, the $200,000 worth of groceries and clothing were consumed and converted into that dam and ditch. he used to say he was ruined by the dam ditch.

mr. banker: now you have proved another thing by your illustration and that is this. when the $200,000 worth of food and clothing represented by two years' work of 100 men were converted into a real estate improvement, instead of into consumable commodities, the necessities of life, you have, so to speak, destroyed that much commercial capital, by converting or changing it into fixed capital. this is true because your friend could not begin and build another dam, for he had no money with which to do it.

mr. merchant: but, mr. banker, he could sell his bonds.

mr. banker: if he could, yes, but you just said he could not, and that he turned everything over to the bankers and that they carried the bonds for ten years. now suppose that a flood should have come and taken out his dam and destroyed his irrigation ditch, it would then be perfectly clear to all of us, would it not, that $200,000 worth of food and clothing had gone down the stream and had been forever lost; completely wiped out, just as completely as if the goods had been consumed by fire.

mr. merchant: that is perfectly plain, but suppose that he could have sold the bonds, he would have gotten his money back, would he not?

[pg 133]

mr. banker: yes, we would say in that case, that he had gotten his money back, but he could not get the $200,000 of food and clothing back, for they are in the dam and ditch. the $200,000 he gets for his bonds, if he sold them for that price, is an entirely different $200,000, as you must admit after a moment's thought. your friend had groceries and clothing which he could sell for $200,000 in money. now, suppose that you had had at the same time, $200,000 in your business. your $200,000 with the $200,000 your friend had put into the dam, when finished would amount to $400,000. now, if he had come to you to dispose of his bonds, and you had thought well enough of them to sell out your business and buy them, your $200,000 bonds would represent the food and clothing in the dam and ditch, and are no longer cash capital any more than a farm is cash capital, and it might take you longer to sell your irrigation bonds than to sell a farm. you said it took the bank ten years to get rid of them.

mr. merchant: oh, i see that now. we have simply converted $200,000 of cash capital into $200,000 of passive or fixed capital. before he built the ditch he had $200,000 and before i sold out my grocery business i had $200,000, making $400,000 of cash capital. now he has $200,000 of cash capital and i have $200,000 of fixed capital, possibly an eternal investment in the bonds. that is what you would call a permanent investment, i suppose, for it might take me twenty years to demonstrate the value of the enterprise as it did the bankers.

mr. banker: now, mr. merchant, i want you to mark and remember this; in fact, i want all of you gentlemen to set this down in your memories so that it can never be dislodged. these irrigation bonds would continue as passive or fixed capital until the earnings or sale of the property, covered by the ditch, should not only pay the interest upon them, but should pay off the principal as well, even if it took a thousand years to accomplish this result.

[pg 134]

mr. laboringman: that is nothing but a straight real estate loan as far as i can see, and not a very good one at that.

mr. banker: that is just what it is, and for the very same reason a banker should no more buy such bonds or loan on such securities, his commercial deposits than he should loan money on real estate. the principle is the same. if we bankers loan on cotton, cattle, hogs, wheat, corn, or manufactured goods of any kind, we know there is a constant and ready market at some price for these things, for they are all in current demand at some price, somewhere, while a real estate loan, however good it may be, is not what we call a quick asset, or liquid asset; that is, something that you can turn into money at once. a commercial bank should never take a real estate loan, except as additional security for money advanced for some legitimate commercial purpose as distinguished from an investment. the commercial funds should be used for the production of crops, or goods of some kind, and if a real estate mortgage is taken in addition, it should be only within reasonable limits, for it is the easiest thing in the world to tie up all a bank's capital and deposits in real estate loans; that is, to turn the capital and deposits into passive or fixed capital, mortgages or real estate, which might be selling readily in boom times, but which are utterly unsalable when the break comes.

mr. laboringman: what do you mean by tying up the capital and deposits of a bank in mortgages and real estate?

mr. banker: i will explain that to you in such a way that i am sure you cannot fail to understand and appreciate it. suppose that i had $100,000 in cash in my bank to meet the demands of my depositors; but should give it to farmers in exchange for mortgages upon their farms. i could not pay my depositors the mortgages; they want money. i might not be able, and probably would not be able, to sell the mortgages in time to pay the depositors[pg 135] their money; and if money happened to be scarce, possibly not for a long time would i be able to pay them their money. i would have that $100,000 tied up in mortgages. this is granting credit on land. now, these mortgages will continue in existence until the farmers can make enough out of their crops to pay the interest upon them from year to year, and finally to pay them off; it may take ten or twenty years. if i had loaned $100,000 on cotton or cattle, the products of the farm, they could have been converted immediately into money at some price to meet the demands of my depositors.

mr. laboringman: i see now that you bankers must keep the money you receive from us depositors, either in cash or in something you can instantly convert into money, and when you don't do that, you have tied it up, as you say; and if we happen to find it out we are apt to want our money; and if we all want it at the same time, you call it a run on your bank. now when you say a banker is ready for a run, you mean, as i now understand it, that he has all his deposits on hand in cash, or has all his deposits invested in something that he can turn into cash: good notes that have been taken in the course of business, that is, in the production and transportation of consumable commodities, the necessaries of life. of course, anybody must understand that if a bank bought a lot of farms or a lot of farm mortgages (and it might be worse off if it bought city mortgages with our deposits), he could not convert them or turn them into money on demand. i am on to this thing now; neither mortgages nor land can be considered what you described a minute ago as quick assets, or as liquid assets, because you cannot convert them into money practically on demand.

mr. farmer: i grasp that idea now myself. do you know i have always thought, until within an hour, that we farmers ought to be able to get something to pay out in the shape of currency that represented our land, or in exchange for a mortgage, just because i knew a mort[pg 136]gage was good or worth its face; but i see now that a bank must not only have something that is good and worth its face, but it must be exchangeable for, and convertible into, real money or gold, at any time, or the bank must shut up. and you can't turn all our farms into some form of currency, and expect the banks to redeem it any more than you can sell a farm every hour. i have been trying to sell one farm for ten years. now i see that would not make very good currency. since i cannot sell it, the only way for me to convert that farm into cash capital is to take the net earnings, and lay them aside until they equal its value or what it cost me; that might not be within twenty years, as i might not be able to save for that purpose more than 3 per cent or 4 per cent a year which, at compound interest, would about make it. it is perfectly clear to me, now, that real estate is not a proper basis for a currency, which must be currently redeemed in gold. it cannot be done; that is a sure thing.

mr. lawyer: mr. farmer, you have reasoned out for yourself a thing that has fooled many a man, and the world has had many bitter experiences trying to do the very thing you now so clearly see cannot be done; that is, make currency out of real estate, or, rather, as you would say, make money out of real estate, when, as we have already seen, gold is the only money we have or can have, so long as gold is our standard of value.

jevons, a great english writer, has well said: "land is doubtless one of the best kind of security for the ultimate repayment of a debt; and it is therefore very suitable when money is lent for a long time. but representative bank notes purport to be equivalent to gold, payable on demand, and nothing is less readily convertible into gold in an emergency than land."

mr. farmer: and we cannot have any more currency than we can redeem daily in gold. therefore we can't make currency out of all of our real estate, even our agricultural land, which is according to our last census[pg 137] worth sixteen billions or $160 for every man, woman and child in the united states. the average value per acre is $15.57. now, at first thought, anyone would say that it would be safe to issue money for this value, or sixteen billion dollars; but who would redeem it? that is the question. one hundred and sixty dollars for every man, woman and child. that would certainly be absurd; and yet i have always thought that we could do that very thing until tonight. i see how it is, currency must be currently redeemed in our standard of value, or it will become first worth less than 100 cents on the dollar, and if the thing goes far enough, it would actually become practically worthless, although it might be based upon valuable real estate. how perfectly simple and plain this all is now.

mr. lawyer: indeed, it is simple and plain, but do you know that that scheme of making currency or money out of real estate, or converting real estate into currency or money, was tried twice in france upon a most gigantic scale? first, john law, in 1717, worked out a scheme whereby he tied the government of france to a land enterprise in the united states, the "mississippi scheme," covering a large french grant, and through his plan issued money, government money, that represented about one-quarter cash and the balance real estate. but everybody has heard of john law and the "mississippi bubble," so i won't say any more about that. nearly a century afterward the same scheme was tried again, and strange as it may seem, in france, too.

from 1789 to 1796, during the french revolution, the credit of the french government was added to vast real estate holdings, so that the security was doubled, such as it was. i have just looked this matter up with a good deal of care, and the best description i found was substantially as follows:

assignats were a form of paper money issued in france from 1789 to 1796. assignats were so termed because land was assigned to the holders of them. the[pg 138] financial strait of the french government in 1789 was extreme; coin was scarce, loans were not taken up, taxes had ceased to be paid, production and the country were threatened with bankruptcy. in this emergency assignats were issued to provide a substitute for metallic currency. these assignats were originally of the nature of mortgage bonds on the national lands. these lands consisted of the church property confiscated on the motion of mirabeau by the constitutional assembly on nov. 2, 1789, and the crown lands which had been taken over by the nation on oct. 7th. subsequently the lands of the emigres, the princes and royal followers, 30,000 of the nobility who were exiled from the soil of france, were added to the list of lands against which the assignats were issued.

these assignats were first to be paid to creditors of the state; with them the creditors could purchase national land, the assignats having for this purpose a preference over other forms of money. if the creditor did not care to purchase land, it was supposed that he could obtain the face value for them from those who desired land. those assignats which were returned to the state as purchase money were to be canceled, and the whole issue, it was argued, would consequently disappear, as the national lands were distributed.

a first issue was 400,000,000 francs or ($80,000,000) worth of assignats, each note being 100 francs or $20 value and bearing interest daily, at 5 per cent. they were to be redeemed by the product of the sales, and from certain other sources, at the rate of 120,000,000 francs ($24,000,000) in 1791; 100,000,000 francs ($20,000,000) in 1792; 80,000,000 francs ($16,000,000) in 1793 and 1794, and the balance in 1795. the success of this first issue was undoubted, as all such first issues are.

mirabeau was a strenuous advocate of the assignats. "they represent," he said, "real property, the most secure of all possessions, the soil on which we tread. there cannot be a greater error than the fear so gener[pg 139]ally prevalent as to the overissue of assignats, reabsorbed progressively in the purchase of the national domain; this paper money can never become redundant."

in 1790 the interest was reduced to 3 per cent, and as the treasury had again become exhausted, a further issue was decided upon; it was also decreed that the assignats were to be accepted as legal tender, all public departments being instructed to receive them as the equivalent of metal money. the second issue amounted to 800,000,000 francs ($160,000,000) and carried no interest. it was solemnly declared in the decree authorizing the issue that the maximum issue was never to exceed one billion two hundred million francs (1,200,000,000) ($240,000,000). this pledge, however, was soon broken, and further issues brought the total up to three billion seven hundred and fifty million francs (3,750,000,000) ($750,000,000). the consequence of these further issues was instant depreciation, and the note of 100 francs ($20) sank to less than 20 francs ($4) in coin. recourse was then had to protective legislation. the first step was to decree the penalty of six years' imprisonment against any person who should sell specie for a more considerable quantity of assignats, or should stipulate a different price for commodities, according as payment was to be made in specie or assignats. for the second offense, the penalty was to be twenty years' imprisonment (august 1, 1793). for this the death penalty was ultimately substituted (may 10, 1794). this severe provision was, however, repealed after the fall of robespierre. notwithstanding these precautions, the value of the assignats still declined, till the proportion of specie had become that of sixty to one. then came the passing, by the convention, on may 3, 1793, of the absurd maximum. the decree required all farmers and corn dealers to declare the quantity of corn in their possession and to sell it only in recognized markets. no person was to be allowed to lay in more than one month's supply, a maximum price was fixed above[pg 140] which no one was to buy or sell under severe penalties. these measures were soon stultified by further issues and by june, 1794, the total number of issued assignats aggregated nearly eight billion francs ($1,600,000,000), of which only two billion four hundred and sixty-four million francs had returned to the treasury to be destroyed. the extension of the maximum price to all commodities only increased the confusion. trade was completely paralyzed and all manufacturing establishments were closed down. attempts by the convention (legislature) to increase the value of the assignats were of no avail. too many causes operated in favor of the depreciation; the enormous issue, the uncertainty as to their value, if the revolution should fail; the relation they bore both to specie and commodities which retained their value and refused to be exchanged for money of constantly diminishing power. even between the assignats themselves there were differences. the royal assignats themselves, which had been issued under louis xvi had depreciated less than the republican ones. they were worth from 8 per cent to 15 per cent more, a fact due to the hope that in case of a counter-revolution they would be less likely to be discredited.

the directory was guilty of even greater abuses in dealing with the assignats.

by 1796 the issue had reached the enormous figure of forty-five billion francs ($9,000,000,000), and even this gigantic total was swollen still more by the numerous counterfeits introduced into france by the neighboring countries. the assignats had now become totally valueless, the abolition of the maximum the previous year, 1795, had produced no effect; and, though by various payments into the treasury, the total number had been reduced to about twenty-four billion francs ($4,800,000,000), their face value was about thirty to one of coin. at this value they were converted into eight hundred million francs ($160,000,000) of land warrants or mandats territoriaux, which were to constitute a mortgage[pg 141] on all the lands of the republic. these mandats were no more successful than the assignats; and even on the very day of their issues were at a discount of 82 per cent. they had an existence of six months, and were finally received back by the state at about the 70th part of their face value in coin. that is, the state gave one dollar in coin for seventy dollars in the paper.

this experience of france has been the experience of practically the entire world, italy, russia, germany, great britain. the south american countries are now going through it. even the very best of them, brazil and argentina, although their notes are not backed up by the land as those of france were, have suffered the same consequences of their folly. they are the notes issued by the government against their own credit. they were issued as fiat money, but are gradually being retired just as the assignats were as depreciated currency.

mr. banker: well, we haven't anything on the south american countries to speak of ourselves from colonial times down to the present day.

uncle sam: now, mr. banker, just hold up; you can't get into that tale of woe tonight, for i always have a bad dream when i think of it; a veritable nightmare. we must quit for tonight. mr. farmer over there has gone to sleep on my hands already.

mr. farmer: no, he hasn't; not on your life, and i hope it's a very long life, uncle sam.

mr. laboringman: mr. farmer, you are the first man i ever saw who snores when he is awake. you snored loud enough to wake the dead. your snoring actually kept me from going to sleep.

uncle sam: well, boys, let me see whether i can recollect just what points we have made tonight.

first: there is credit, which is the result of confidence and trust. it is the right to demand payment.

second: for every credit granted, a debt is created.

[pg 142]

third: if every debt is paid every credit will be canceled.

fourth: credit is never excessive no matter what its absolute quantity is, so long as it always returns into itself; that is, cancels itself.

fifth: credit from a commercial point of view, when granted to create consumable commodities, the necessaries of life, is filling its proper function.

sixth: credit granted to facilitate the sale, transfer and distribution of consumable commodities, the necessaries of life, is filling its proper function from a commercial point of view.

seventh: credit extended in the form of acceptances of checks, drafts or bills of exchange, growing out of the actual production and distribution of the necessaries of life, is filling its proper function from a commercial point of view.

eighth: credit obtained through accommodation acceptances or indorsements is a bane to and peril of commerce, especially if such credit is used in real estate investments, and more particularly in speculation.

ninth: credit granted upon real estate securities should depend entirely upon the investment fund of the country for its cancelation. so far as such credit is canceled by appropriating the commercial fund of the country, labor will be thrown out of employment, production and consumption will cease to a corresponding degree, and this will measure the amount of human suffering that is sure to follow.

tenth: real estate is not a proper basis for currency, because it is not a consumable commodity with a ready market where it can be converted into gold and because the value of real estate from the standpoint of our currency needs is unlimited and therefore necessarily not convertible into gold coin which is always essential to a sound currency.

the history of credit granted to our government or forced by our government from the people will furnish[pg 143] plenty of food for our appetites, humble our pride, and recall most sickening experiences one week from tonight. don't you think so, mr. banker?

mr. banker: i certainly do.

mr. lawyer: so do i. and even then we cannot do the subject half justice; but i suppose that we must get through some time.

uncle sam: i see that mr. farmer is now wide awake, but that mr. laboringman over there is starting for the land of nod, because mr. farmer is not keeping him awake by his snoring, so i think i'd better say good night.