A New Banking System_
Eighteen and Seventy Three_
>> _ Legally, the system (as the author claims, and is prepared to establish) stands upon the same principle as a patented machine; and is, therefore, already legalized by Congress; and cannot, unless by a breach of the public faith, any more be prohibited, or taxed, either by Congress or this State, than can the use of a patented machine.
The reader will understand that the ideas presented in the following pages admit of a much more thorough demonstration than can be given in so small a space. Such demonstration, if it should be necessary, the author hopes to give at a future time.
_Boston, March, 1873
The First of Chapters_
A New Banking System_
Under the banking system—an outline of which is hereafter given—the real estate of Boston alone—taken at only three-fourths its value, as estimated by the State valuation—is capable of furnishing three hundred millions of dollars of loanable capital.
Under the same system, the real estate of Massachusetts—taken at only three-fourths its estimated value—is capable of furnishing seven hundred and fifty millions of loanable capital.
The real estate of the Commonwealth, therefore, is capable of furnishing an amount of loanable capital more than twelve times as great as that of all the "National" Banks in the State; more than twice as great as that of all the "National" banks of the whole United States ($353,917,470); and equal to the entire amount ($750,000,000, or thereabouts) both of greenback and "National" bank currency of the United States.
It is capable of furnishing loanable capital equal to one thousand dollars for every male and female person, of sixteen years of age and upwards, within the Commonwealth; or two thousand five hundred dollars for every male adult.
It would scarcely be extravagant to say that it is capable of furnishing ample capital for every deserving enterprise, and every deserving man and woman, within the State; and also for all such other enterprises in other parts of the United States, and in foreign commerce, as Massachusetts men might desire to engage in.
Unless the same system, or some equivalent one, should be adopted in other States, the capital thus furnished in this State, could be loaned at high interest at the West and the South.
If adopted here earlier than in other States, it would enable the citizens of this State to act as pioneers in the most lucrative enterprises that are to be found in other parts of the country.
_All this capital is now lying dead, so far as being loaned is concerned.
_All this capital can be loaned in the form of currency, if so much can be used.
_All the profits of banking, under this system, would be clear profits, inasmuch as the use of the real estate as banking capital, would not interfere at all with its use for other purposes.
The use of this real estate as banking capital would break up all monopolies in banking, and in all other business depending upon bank loans. It would diffuse credit much more widely than it has ever been diffused. It would reduce interest to the lowest rates to which free competition could reduce it. It would give immense activity and power to industrial and commercial enterprise. It would multiply machinery, and do far more to increase production than any other system of credit and currency that has ever been invented. And being furnished at low rates of interest, would secure to producers a much larger share of the proceeds of their labor, than they now receive.
All this capital can be brought into use as fast as the titles to real estate can be ascertained, and the necessary papers be printed.
Legally, the system (as the author claims, and is prepared to establish) stands upon the same principle as a patented machine; and is, therefore, already legalized by Congress; and cannot, unless by a breach of the public faith, any more be prohibited, or taxed, either by Congress or this State, than can the use of a patented machine.
Every dollar of the currency furnished by this system would have the same value in the market as a dollar of gold; or so nearly the same value that the difference would be a matter of no appreciable importance.
The system would, therefore, restore specie payments at once, by furnishing a great amount of currency, that would be equal in value to specie.
The system would not inflate prices above their true and natural value, relatively to specie; for no possible amount of paper currency, every dollar of which is equal in value to specie, can inflate prices above their true and natural value, relatively to specie.
Whenever, if ever, the paper should not buy as much in the market as specie, it would be returned to the banks for redemption, and thus taken out of circulation. So that no more could be kept in circulation than should be necessary for the purchase and sale of property at specie prices.
The system would not tend to drive specie out of the country; although very little of it would be needed by the banks. It would rather tend to bring specie into the country, because it would immensely increase our production. We should, therefore, have much more to sell, and much less to buy. This would always give a balance in our favor, which would have to be paid in specie.
It is, however, a matter of no practical importance whether the system would bring specie into the country, or drive it out; for the volume and value of the currency would be substantially unaffected either by the influx or efflux of specie. Consequently industry, trade, and prices would be undisturbed either by the presence or absence of specie. The currency would represent property that could not be exported; that would always be here; that would always have a value as fixed and well known as that of specie; that would always be many times more abundant than specie can ever be; and that could always be delivered (in the absence of specie) in redemption of the currency. These attributes of the currency would render all financial contractions, revulsions, and disorders forever impossible.
The following is:
_An Outline of the System.
The principle of the system is that the currency shall represent an invested dollar, instead of a specie dollar.
The currency will, therefore, be redeemable by an invested dollar, except when redeemed by specie, or by being received in payment of debts due the banks.
The best capital will probably be mortgages and railroads; and these will very likely be the only capital which it will ever be expedient to use.
Inasmuch as railroads could not be used as capital, without a modification of their present charters, mortgages are probably the best capital that is immediately available.
Supposing mortgages to be the capital, they will be put into joint stock, held by trustees, and divided into shares of one hundred dollars each.
This stock may be called the Productive Stock, and will be entitled to the dividends.
The dividends will consist of the interest on the mortgages, and the profits of banking.
The interest on the mortgages should be so high—say six or seven per cent—as to make the Productive Stock worth ordinarily par of specie in the market, independently of the profits of banking.
Another kind of stock, which may be called Circulating Stock, will be created, precisely equal in amount to the Productive Stock, and divided into shares of one dollar each.
This Circulating Stock will be represented by certificates, scrip, or bills, of various denominations, like our present bank bills—that is, representing one, two, three, five, ten, or more shares, of one dollar each.
These certificates, scrip, or bills of the Circulating Stock, will be issued for circulation as currency, as our bank bills are now.
In law, this Circulating Stock will be in the nature of a lien on the Productive Stock. It will be entitled to no dividends. Its value will consist, first, in its title to be received in payment of all dues to the bank; second, in its title to be redeemed, either in specie on demand, or in specie, with interest from the time of demand, before any dividends can be made to the bankers; and, third, in its title, when not redeemed with specie, to be redeemed (in sums of one hundred dollars each) by a transfer of a corresponding amount of the capital itself; that is, of the Productive Stock.
The holders of the Circulating Stock are, therefore, sure, first, to be able to use it (if they have occasion to do so) in payment of their dues to the bank; second, to get, in exchange for it, either specie on demand, or specie, with interest from the time of demand; or, third, a share of the capital itself, the Productive Stock; a stock worth par of specie in the market, and as merchantable as a share of railroad stock, or government stock, or any other stock whatever is now.
Whenever Productive Stock shall have been transferred in redemption of Circulating Stock, it (the Productive Stock) may be itself redeemed, or bought back, at pleasure, by the bankers, on their paying its face in specie, with interest (or dividends) from the time of the transfer; and must be so bought back, before any dividends can be paid to the original bankers.
The fulfilment of all these obligations, on the part of the bank, is secured by the fact that the capital and all the resources of the bank are in the hands of trustees, who are legally bound—before making any dividends to the bankers—to redeem all paper in the manner mentioned; and also to buy back all Productive Stock that shall have been transferred in redemption of the circulation.
Such are the general principles of the system. The details are too numerous to be given here. They will be found in the "Articles of Association of a Mortgage Stock Banking Company," which the author has drawn up and copyrighted.
The Second of Chapters_
Although the banks, under this system, make no absolute promise to pay specie on demand, the system nevertheless affords a much better practical guaranty for specie payments, than the old specie paying system (so called); and for these reasons, viz:
1. The banks would be so universally solvent, and so universally known to be solvent, that no runs would ever be made upon them for specie, through fear of their insolvency. They could, therefore, maintain specie payments with much less amounts of specie, than the old specie paying banks (so called) could do.
2. As there would be no fears of the insolvency of the banks, and as the paper would be more convenient than specie for purposes of trade, bills would rarely be presented for redemption—otherwise than in payment of debts due the banks—except in those cases where the holders desired to invest their money; and would therefore prefer a transfer of Productive Stock, to a payment in specie. If they wanted specie for exportation, they would buy it in the market (with the bills), as they would any other commodities for export. It would, therefore, usually be only when they wanted an investment, and could find none so good as the Productive Stock, that they would return their bills for redemption. And then they would return them, not really for the purpose of having them redeemed with specie, but in the hope of getting a transfer of Productive Stock, and holding it awhile, and drawing interest on it.
3. The banks would probably find it for their interest, as promoting the circulation of their bills, to pay, at all times, such small amounts of specie, as the public convenience might require.
4. If there should be any suspensions of specie payments, they would be only temporary ones, by here and there a bank separately, and not by all the banks simultaneously, as under the so called specie paying system. No general public inconvenience would therefore ever be felt from that cause.
5. If the banks should rarely, or never, pay specie on demand, that fact would bring no discredit upon their bills, and be no obstacle to their circulation at par with specie. It would be known that—unless bad notes had been discounted—all the bills issued by the banks, would be wanted to pay the debts due the banks. This would ordinarily be sufficient, of itself, to keep the bills at par with specie. It would also be known that, if specie were not paid on demand, it would either be paid afterwards, with interest from the time of demand; or Productive Stock, equal in value to specie in the market, would be transferred in redemption of the bills. The bills, therefore, would never depreciate in consequence of specie not being paid on demand; nor would any contraction of the currency ever be occasioned on that account.
For the reasons now given, the system is practically the best specie paying system that was ever invented. That is to say, it would require less specie to work it; and also less to keep its bills always at par with specie. In proportion to the amount of currency it would furnish, it would not require so much as one dollar in specie, where the so called specie paying system would require a hundred. It would also, by immensely increasing our production and exports, do far more than any other system, towards bringing specie into the country, and preventing its exportation.
If it should be charged that the system supplies no specie for exportation; the answer is, that it is really no part of the legitimate business of a bank to furnish specie for exportation. Its legitimate business is simply to furnish credit and currency for home industry and trade. And it can never furnish these constantly, and in adequate amounts, unless it can be freed from the obligation to supply specie on demand for exportation. Specie should, therefore, always be merely an article of merchandise in the market, like any other; and should have no special—or, at least, no important—connection with the business of banking, except as furnishing the measure of value. If a paper currency is made payable in specie, on demand, very little of it can ever be issued, or kept in circulation; and that little will be so irregular and inconstant in amount as to cause continual and irremediable derangements. But if a paper currency, instead of promising to pay specie on demand, promises only an alternative redemption, viz: specie on demand, or specie with interest from the time of demand, or other merchantable property of equal market value with specie—it can then be issued to an amount equal to such property; and yet keep its promises to the letter. It can, therefore, furnish all the credit and currency that can be needed; or at least many times more than the so called specie paying system ever did, or ever can, furnish. And then the interest, industry and trade of a nation will never be disturbed by the exportation of specie. And yet the standard of value will always be maintained.
The difference between the system here proposed, and the so called specie paying system—in respect to their respective capacities for furnishing credit and currency, and at the same time fulfilling their contracts to the letter—is as fifty to one, at the least, in favor of the former; probably much more than that.
Thus under the system now proposed, the real estate and railroads of the United States, at their present values, are capable of furnishing twenty thousand millions ($20,000,000,000) of paper currency; and furnishing it constantly, and without fluctuation, and every dollar of it will have an equal market value with gold. The contracts or certificates comprising it, can always be fulfilled to the letter; that is, the capital itself, (the Productive Stock,) represented by these certificates, can always be delivered, on demand, in redemption of the certificates, if the banks should be unable to redeem in specie.
On the other hand, it would be impossible to have so much as four hundred millions, ($400,000,000)—one fiftieth of the amount before mentioned—of so called specie paying paper currency; that is, a paper promising to pay specie on demand; and constantly able to fulfil its obligations.
It is of no appreciable importance that a paper currency should be payable on demand with specie. It is sufficient, if it be payable according to its terms, if only those terms are convenient and acceptable. For then the value of the currency will be known, and its contracts will be fulfilled to the letter. And when these contracts are fulfilled to the letter, then, to all practical purposes, specie payments are maintained. When, for example, a man promises to pay wheat, either on demand, or at a time specified, and he fulfils that contract to the letter, that, to all practical purposes, is specie payments; as much so as if the promise and payment had been made in coin. It is, therefore, the specific and literal fulfilment of contracts, that constitutes specie payments; and not the particular kind of property that is promised and paid.
The great secret, then, of having an abundant paper currency, and yet maintaining all the while specie payments, consists in having the paper represent property—like real estate, for example—that exists in large amounts, and can always be delivered, on demand, in redemption of the paper; and also in having this paper issued by the persons who actually own the property represented by it, and who can be compelled by law to deliver it in redemption of the paper. And the great secret—if it be a secret—of having only a scanty currency, and of not having specie payments, consists in having the paper issued by a government that cannot fulfil its contracts, and has no intention of fulfilling them; and by banks that are not even required to fulfil them.
It is somewhat remarkable that after ten years experiment, we have not yet learned these apparently self-evident truths.
The palpable fact is that the advocates of the present "National" currency system,—that is, the stockholders in the present "National" banks,—do not wish for specie payments. They wish only to maintain, in their own hands, a monopoly of banking, and, as far as possible also, a monopoly of all business depending upon bank loans. They wish, therefore, to keep the volume of the currency down to its present amount. As an excuse for this, they profess a great desire for specie payments; and at the same time practice the imposture of declaring that specie payments will be impossible, if the amount of the currency be increased.
But all this is sheer falsehood and fraud. It is, of course, impossible to have specie payments, so long as the only currency issued is issued by a government that has nothing to redeem with, and has no intention of redeeming; and by banks that are not even required to redeem. But there is no obstacle to our having twenty times as much currency as we now have, and yet having specie payments—or the literal fulfilment of contracts—if we will but suffer the business of banking to go into the hands of those who have property with which to redeem, and can be compelled by law to redeem.
It is with government paper, and bank paper, as it is with the paper of private persons; that is, it is worth just what can be delivered in redemption of it, and no more. We all understand that the notes of the Astors, and Stewarts, and Vanderbilts, though issued by millions, and tens of millions, are really worth their nominal values. And why? Solely because the makers of them have the property with which to redeem them in full, and can be made to redeem them in full. We also all understand that the notes of Sam Jones, and Jim Smith, and Bill Nokes, though issued for only five dollars, are not worth two cents on the dollar. And why? Solely because they have nothing to pay with; and cannot be made to pay.
Suppose, now, that these notes of Sam Jones, and Jim Smith, and Bill Nokes, for five dollars, were the only currency allowed by law; and that they were worth in the market but two cents on the dollar. And suppose that the few holders of these notes, wishing to make the most of them, at the expense of the rights of everybody else, should keep up a constant howl for specie payments; and should protest against any issue of the notes of the Astors, the Stewarts, and the Vanderbilts, upon the ground that such issue would inflate the currency, and postpone specie payments! What would we think of men capable of uttering such absurdities? Would we in charity to their weakness, call them idiots? or would we in justice to their villainy, denounce them as impostors and cheats of the most transcendent and amazing impudence? And what would we think of the wits of forty millions of people, who could be duped by such preposterous falsehoods?
And yet this is scarcely an exaggerated picture of the fraud that has been practiced upon the people for the last ten years. A few men have secured to themselves the monopoly of a few irredeemable notes; and not wishing to have any competition, either in the business of banking, or in any business depending upon bank loans, they cry out for specie payments; and declare that no solvent or redeemable notes must be put into circulation, in competition with their insolvent and irredeemable ones, lest the currency be inflated, and specie payments be postponed!
And this imposture is likely to be palmed off upon the people in the future, as it has been in the past, if they are such dunces as to permit it to be done.
It is perfectly evident, then, that specie payments—or the literal fulfilment of contracts—does not depend at all upon the amount of paper in circulation as currency; but solely upon the fact whether, on the one hand, it be issued by those who have property with which to redeem it, and can be made to redeem it; or whether, on the other hand, it be issued by those who cannot redeem it, and cannot be made to redeem it.
When the people shall understand these simple, manifest truths, they will soon put an end to the monopoly, extortion, fraud, and tyranny of the existing "National" system.
The "National" system, so called, is, in reality, no national system at all; except in the mere facts that it is called the national system, and was established by the national government. It is, in truth, only a private system; a mere privilege conferred upon a few, to enable them to control prices, property, and labor; and thus to swindle, plunder, and oppress all the rest of the people.
The Third of Chapters_
No Inflation of Prices_
Every dollar's worth of vendible property in the world is equal in value to a dollar in gold. And if it were possible that every dollar's worth of such property, in the world, could be represented, in the market, by a contract on paper, promising to deliver it on demand; and if every dollar's worth could be delivered on demand, in redemption of the paper that represented it, the world could then have an amount of currency equal to the entire property of the world.
The First of Sections_
In reality there is no such thing as an inflation of prices, relatively to gold. There is such a thing as a depreciated paper currency. That is to say, there is such a thing as a paper currency, that is called by the same names as gold—to wit, money, dollars, &c.—but that cannot be redeemed in full; and therefore has not the same value as gold. Such a currency does not circulate at its nominal, but only at its real, value. And when such a currency is in circulation, and prices are measured by it, instead of gold, they are said to be inflated, relatively to gold. But, in reality, the prices of property are not thereby inflated at all relatively to gold. It is only the measuring of prices by a currency, that is called by the same names as gold, but that is really inferior in value to gold, that causes the apparent, not real, inflation of prices, relatively to gold.
To measure prices by a currency that is called by the same names as gold, but that is really inferior in value to gold, and then—because those prices are nominally higher than gold prices—to say that they are inflated, relatively to gold, is a perfect absurdity.
If we were to call a foot measure a yard, and were then to say that all cloth measured by it became thereby stretched to three times its length, relatively to a true yard-stick, we should simply make ourselves ridiculous. We should not thereby prove that the foot measure had really stretched the cloth, but only that it had taxed our brains beyond their capacity.
It is only irredeemable paper—irredeemable in whole or in part,—that ever appears to inflate prices, relatively to gold. But that it really causes no inflation of prices, relatively to gold, is proved by the fact that it no more inflates the prices of other property, than it does the price of gold itself. Thus we say that irredeemable paper, that is worth but fifty cents on the dollar, inflates the prices of commodities in general to twice their real value. By this we mean, that they are inflated to twice their value relatively to gold. And why do we say this? Solely because it takes twice as many of these irredeemable paper dollars to buy any commodity,—a barrel of flour for example,—as it would if the paper were equal in value to gold. But it also takes twice as many of these irredeemable paper dollars to buy gold itself, as it would if the paper were equal in value to gold. There is, therefore, just as much reason for saying that the paper inflates the price of gold, as there is for saying that it inflates the price of flour. It inflates neither. It is, itself, worth but fifty cents on the dollar; and it, therefore, takes twice as much of it to buy either flour or gold, as it would if the paper were of equal value with gold.
The value of the coins—in any nation that is open to free commerce with the rest of the world—is fixed by their value in the markets of the world; and can neither be reduced below that value, in that nation, by any possible amount of paper currency, nor raised above that value, by the entire disuse of a paper currency. Any increase of the currency, therefore, by means of paper representing other property than the coins—but having an equal value with the coins—is an absolute bona fide increase of the currency to that extent; and not a mere depreciation of it, as so many are in the habit of asserting.
Practically and commercially speaking, a dollar is not necessarily a specific thing, made of silver, or gold, or any other single metal, or substance. It is only such a quantum of market value as exists in a given piece of silver or gold. And it is the same quantum of value, whether it exist in gold, silver, houses, lands, cattle, horses, wool, cotton, wheat, iron, coal, or any other commodity that men desire for use, and buy and sell in the market.
Every dollar's worth of vendible property in the world is equal in value to a dollar in gold. And if it were possible that every dollar's worth of such property, in the world, could be represented, in the market, by a contract on paper, promising to deliver it on demand; and if every dollar's worth could be delivered on demand, in redemption of the paper that represented it, the world could then have an amount of currency equal to the entire property of the world. And yet clearly every dollar of paper would be equal in value to a dollar of gold; specie payments—or the literal fulfilment of contracts—could forever be maintained; and yet there could be no inflation of prices, relatively to gold. Such a currency would no more inflate the price of one thing, than of another. It would as much inflate the price of gold, as of any thing else. Gold would stand at its true and natural value as a metal; and all other things would also stand at their true and natural values, for their respective uses.
On this principle, if every dollar's worth of vendible property in the United States could be represented by a paper currency; and if the property could all be delivered on demand, in redemption of the paper, such a currency would not inflate the prices of property at all, relatively to gold. Gold would still stand at its true and natural value as a metal, or at its value in the markets of the world. And all the property represented by the paper, would simply be measured by the gold, and would stand at its true and natural value, relatively to the gold.
We could then have some thirty thousand millions ($30,000,000,) of paper currency,—taking our property at its present valuation. And yet every dollar of it would be equal to a dollar of gold; and there could evidently be no inflation of prices, relatively to gold. No more of the currency could be kept in circulation, than should be necessary or convenient for the purchase and sale of property at specie prices.
It is probably not practicable to represent the entire property of the country by such contracts on paper as would be convenient and acceptable as a currency. This is especially true of the personal property; although large portions even of this are being constantly represented by such contracts as bank notes, private promissory notes, checks, drafts, and bills of exchange; all of which are in the nature of currency; that is, they serve for the time as a substitute for specie; although some of them do not acquire any extensive, or even general, circulation.
But that it is perfectly practicable to represent nearly all the real estate of the country—including the railroads—by such contracts on paper as will be perfectly convenient and acceptable as a currency; and that every dollar of it can be kept always at par with specie throughout the entire country—that all this is perfectly practicable, the author offers the system already presented in proof.