The Pamphlet Collection of Sir Robert Stout: Volume 4
Capital and Currency. — Including an attempt to show what it is that England loans and what our Government and Railroads borrow from her
Capital and Currency.
Including an attempt to show what it is that England loans and what our Government and Railroads borrow from her.
To the Editors of the Boston Daily Advertiser:—
Permit me to ask the favor that you will allow me to make a critical examination of an important sentence in the rejoinder of "W. E." to Mr. Wendell Phillips on "Capital and Currency," in your paper of the 18th inst. The sentence is as follows:—
"I said," says W. E., "that, in order to make the rate of interest permanently lower in this country, it would be necessary to make the supply of loanable capital larger than it now is, relatively to the demand for it, and that this could be done only by borrowing abroad, or by slow accumulation at home—in short, that capital, and not currency, was the thing needed to satisfy Mr. Phillips's desire, and that capital could not be created by any act of legislation."
The question which meets us at the very threshold of this investigation, and demands an answer, is, What is capital? Without this answer, and, in addition, an analysis of that which W. E. calls "loanable capital," we shall remain in ignorance as well of the nature of our conclusions as of our premises; we shall, indeed, not know what it is that we are talking about.
Capital has been defined by an eminent American economist as "the instrument by the aid of which production is directed to the uses of man," and exists, as he adds, in the form of land and its improvements, ships, ploughs, mental development, books, corn, roads, steam-engines, money, and that confidence between man and man which is known as credit. This latter has been characterized by a very acute and able Scotch economist, R. H. Patterson, as "our invisible capital." Let us now inquire what is the "loanable capital" to which W. E. refers, and the supply of which may, as he thinks, be increased "only by borrowing abroad or by slow accumulation at home;" and see if it is not mere credit, the "invisible capital" of Mr. Patterson. Let us trace out the manner of organizing and subsequently of working one of those greatest page 6 of all the credit institutions in the world, a London bank, and see if we cannot thereby shed some light upon the problem.
The stock subscribed for in a new bank in London is paid for almost entirely by means of checks drawn against deposits in the Bank of England, or other London banks, and which do not actually represent money in hand, but credits on the books of these banks. The operation, then, is but the mere transfer of the ownership of credits from individuals or corporations to the new bank, and these credits usually remain with the Bank of England, while they continue to be the property of the new bank. Customers now come to the new bank and ask loans or discounts on stocks, bonds, promissory notes, and bills of exchange, and credits are carried to their respective accounts on the books of the bank and are called deposits. Some parts of these deposits are transferred by means of checks to the creditors of these depositors, and of them some may remain with the bank as deposits to the credit of the new parties, while others are taken to other banks and deposited with them. But a small amount is drawn in notes or specie, and even of this a portion soon finds its way back to the new bank or goes to other banks. The "loanable capital" thus loaned, is, by the aid of checks, made to perform the same functions as circulating notes and specie", and by the aid of the London clearing house is kept revolving round in a circle among the banks, the balances being paid not by means of money, but simply by checks drawn upon the Bank of England, where all of the other bank's keep their accounts. Indeed, the deposits from day to day received from the public by the London banks and bankers consist of little else than the checks which transfer the ownership of deposits already held by the various city and country banks,* the original sources of the production of which deposits are loans.
* "To show how very small an amount of banking deposits are made in the form of money, we give the following statement, made by Sir John Lubbock, before the Statistical Society in June, 1865, in which he analyzed a sum of £19,000,000 paid into his bank by customers:—
|Checks and bills||£18,395,000 or||97 per cent.|
|Bank of England notes||408,000||3 per cent.|
|Country notes||79,000||3 percent|
|Coin||118,000||3 per cent.|
From which statement it appears that only three per cent, of banking deposits are paid in the form of money, that is, notes and coin together, and a little more than one-half per cent, in specie."—Patterson's Science of Finance, pp. 5, 6; Editburgh, 1868.
|That institution had a capital of Reserve||£1,200,000|
|Its loans were as follows:—|
|Discounted bills and advances||14,113.405|
Besides which, it held government and other securities and real estate to the amount of £2,506,547, and cash (mostly deposits to its credit in the Bank of England) to the amount of £2,461,448—this latter item representing almost exactly the amount of its capital, reserve, undivided profits, and subscriptions to new shares, or, in a word, the whole of its worldly possessions. How then is it enabled to make such large loans, or to hold securities and other property to such an amount as £22,450,939, seeing that in addition to doing and having these things, it holds all of its own worldly possessions in hand, in cash, or in the Bank of England? Why, by means of a gradual growth of debits representing loans, which give rise to credits called deposits, the latter constituting "loanable capital," the steady "evolution" of which is rendered possible so long as these deposits are not demanded in notes or specie, but are transferred by means of checks and clearing-houses. With the London and County Banking Company these credits called deposits had, on December 31, 1874, reached an aggregate of £19,892,586.*
* Bank loans and the resulting deposits accumulate in business centres in proportion to the ability of those centres to work bank credits through checks and clearing-houses, without demanding circulating notes or specie. In small towns doing business with rural populations they do not accumulate largely, because a demand for circulating notes or specie, almost the only circulating mediums there used, soon follows loans and draws upon the actual resources of the banks. In other words, these rural banks bank mainly upon their own resources, and not upon their credit, as city banks so largely do. In France these loans and deposits do not accumulate because the people generally use money and not checks in their business affairs. M. Pinard, Manager of the Comptoir d'Escompte, of Paris, testified before the French Commission of Inquiry, 1865-68, that the greatest efforts had been made by that institution to induce French merchants and shopkeepers to adopt English habits in respect to the use of checks and the keeping of bank accounts, but in vain; their prejudices were invincible; "it was no use reasoning with them, they would not do it, because they would not." . The private deposits in the Bank of France and its branches, May 20, 1875, were but $73,823,260, while the deposits in the banks of New York City, June 5, 1875—nearly all private—were $233,424,100. The private loans and discounts of the Bank of France and its branches, May 20, 1875, were but $118,243,800, while those of the bants of New York City were $281,401,100. Our country, being one of vast area compared with its population, cannot build up and work a genera! system of inflated bank credit like that of Great Britain, and must therefore, if for no other and better reason, have a full volume of "current money of the realm," as France has, or stagnate and annually waste labor-power worth thousands of millions of dollars, and at the same time be dependent upon foreigners for "loanable capital." While on May 1, 1875, the National Banks of the United States had—
|Their loans and discounts were||$964,574,114|
These debits and credits, these loans and deposits are well nigh without any financial base whatever, for the reason that the base upon which they are supposed to rest is little else than credits (deposits) with the Bank of England, which themselves only rest upon the same specie and loan to the nation (national debt due the bank), upon which the Bank of England bases its own operations, regardless of those of the London and County Banking Company, and the other banks which keep their accounts with it. Once cancel both these debits and credits, use the one to pay the other, and the great volume of this "slow accumulation" of "loanable capital" would instantly collapse and shrink from some £24,912,387 to about £2,461,4481 Perform the same process with three or four other large London banks, and it would result in a total collapse of British finance, trade, commerce, and industry!
How is it then, that a country, the instrument of payment of which is of such an inflated and ticklish nature, is able to lend so much "money," so much "loanable capital" to almost the whole world beside? The answer is, that the carrying of these loans is rendered possible by reason of this system of bank credit, while bills of exchange drawn against merchandise shipped to the borrowing or other countries, or against interest due on former loans, prevent the shipment of money—the latter being the actual form of capital which the borrowing country needs, no country having plenty of which, ever being under the necessity of becominy a borrower. Thus does the rest of the world get none of the thing it most needs, but merely goods, for which it does not then pay; or a funding of the interest which it then owes, or both; the individual consumers of the goods or the debtors for interest paying, however, while the borrowers have their indebtedness carried by and through the credits in favor of foreigners, created by means of goods then or pre page 9 viously purchased, and which are soon wholly consumed, while the debt for them remains a permanent charge upon their country at compound interest. All the while the borrowing country amuses itself with the idea that it is getting money for the reason that the individual borrowers of these credits obtain payment in bills of exchange for which in their own country they get money or bank credit; while at the same time, the lending country could not stand up under the effects of parting with so many goods without payment, did not bank credit at home supply an available substitute for it.
The evidence of the inability of Great Britain to loan actual money in any great amount, to foreign countries, is found in the fact that the transfer of the $15,500,000 indemnity under the Geneva award, which she had to pay to our government, she, for prudential reasons, effected gradually by means of bills of exchange and securities instead of money, the thing which was to be paid; and the further fact that the Bank of England served notice upon Mr. Boutwell that in case he attempted to draw specie from London for certain loans there negotiated, that institution would step in and break up his combinations and contracts; in other words, cut off the supply of loans—the "loanable capital"—from the banks and bankers who were about to buy the bonds, because these bank loans were not to be allowed to float round among the London banks in the form of deposits, but were to be drawn in specie for shipment.* The lesson to be learned from these facts is, that Great Britain with all her boasted wealth and power never willingly gives up that most royal of all things, Money, that species of capital which commands on the instant, indeed calls into being, almost all other forms of capital; without a struggle and the attempt or desire to force off instead something which she values less.
* " When the negotiations were going on in London for the sale of the largest amount of United States bonds that have ever been sold there at one time, it was foreseen by the Bank of England that a quantity of coin would accumulate as the proceeds of these bonds to the credit of the government of the United States. As a matter of fact, there was an accumulation of about $21,000,000. The Bank of England, foreseeing that there would be an accumulation of coin to the credit of the United States which might be taken away bodily in specie, gave notice to the officers of the Treasury Department of the United States that the power of that institution would be arrayed against the whole proceeding unless we gave a pledge that the coin should not be removed, and that we would reinvest it in the bonds of the United States as they were offered in the markets of London. We were compelled to do it."—Speech of Hon. G. S. Boutwell in U. S. Senate, January 22, 1874.
Will then Massachusetts, and New England generally, still continue to stand in the way of at least a trial of such a law? If they do they will assume an immense, a dreadful responsibility, which sooner or later they will be forced to acknowledge, when surrounded by yet still greater ruin, they are obliged to try that law, and trying it, they realize the beneficence of its workings amongst the people, and the independence and power it confers upon the State, an independence the celebration of which will in no sense be a mockery, as must be that of any other, while our government is at the mercy of foreign credit-mongers.
Henry Carey Baird.Tesmont House, Boston,
March 25, 1875.