The evolution of banking; a study of the development of the credit system

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1551
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XX

THE

EVOLUTION

ROBERT H.

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UNIVEKSIiY OF
CAL1I-0..,MA

SAN DiL'GO
-^

THE

Evolution of Banking

A STUDY OF THE DEVELOPMENT
OF THE CREDIT SYSTEM

BY

ROBERT H. HOWE

CHICAGO

CHARLES H. KERR & COMPANY

CO-OPERATIVE

Copyright 1915
By Robert H. Howe

JOHN F. HIGGINS

PRINTER AND BINDER

376-382 MONROE STREET
CHICAGO. ILLINOIS

DEDICATED TO THE MEMORY

OF

HENRY DEMAREST LLOYD

Foreword

It is needless to say that this book does not
contain all that might be written on the subject
of money; many interesting and instructive
phases of the subject have not been treated
at all, for the reason that few people will read
a bulky volume, and many cannot pay the cost
of one. It is published with the sole purpose
in view of stimulating thought and inquiry into
the subject of which it treats and which has
been nearly, if not entirely, neglected by the
leaders of advanced thought.

There is growing up in America a strong de-
mand to substitute collective ownership and
operation of certain industries in place of cor-
poration ownership and operation. This is
evidenced by the recent passage in various
states of Public Utilities Acts which empower
the cities and villages to purchase or construct
water works, electric light and power plants,
traction systems, pipe lines for the distribution
of gas, oil, heat or cold ; warehouses for storage
purposes, wharfs, etc., and empowering the
cities to issue bonds or certificates of indebted-
ness which are to be a lien on the property
5

FOREWORD

built or purchased and which are redeemable
out of the operating income.

These enabling acts will certainly be taken
advantage of in the near future. The present
Public Utilities owned by private interests and
operating under franchises are staggering
under a burden of stocks and bonds far beyond
the value of their properties, and in many cases
double the cost of reproduction.

In taking over these various activities an
attempt will certainly be made to unload this
mass of indebtedness, a large percentage of
which is fictitious, upon the public at par, and
issue in place thereof twenty or twenty-five
year Public Utility Bonds or Certificates bear-
ing 4 per cent or 5 per cent interest. This
would place upon the public a burden of debt
for principal and interest far in excess of the
value of the property taken. Under the pres-
ent laws it is not possible to take over these
properties or build others without issuing in-
terest-bearing obligations which will make the
cost to the public from two to four times the
value received.

If Congress would enact into legislation the
Currency Bill found at the close of this volume,
cities could take possession of these public
utility properties and pay no more than their

FOREWORD

actual value and never be obliged to pay one
cent of interest.

Currency is a tool which man invented for
use where there was an unequal exchange of
services or commodities.

Under a system of barter where each ex-
change was a complete and closed transaction
money was unknown and unneeded. The fol-
lowing quotation from Homer's Illiad depicts
a state where no money was used :

"From Lemnos Isle a numerous fleet had come
Freighted with wine * * * #
* * * * all the other Greeks
Hastened to purchase, some with brass and

some
With gleaming iron ; some with hides
Cattle or slaves."

But where there was an unequal exchange of
services or commodities between two persons
there would be the difference in the amount due
from one to the other and some evidence or token
would be required by the creditor from the
debtor.

In writing of this subject Aristotle said :

"But with regard to a future exchange (if

FOREWORD

we want nothing at present, that it may take
place when we do want something) money is,
as it were, our security, for it is necessary that
he who brings it should be able to get what he
wants."

To instance this in a simple manner let us
picture a shoemaker living in a house built on
a low, wet piece of ground which he desires
drained. He employs a neighbor to dig a ditch
that will carry off the surplus water. While
the ditch is being dug the shoemaker makes a
pair of shoes, and offers them to the ditch dig-
ger as compensation for his work. He refuses
the shoes because he has a good pair, but ac-
cepts the shoemaker's I. 0. U. The ditch dig-
ger, however, needs a coat and a tailor who
knows the shoemaker accepts the evidence of
his debt in payment for the coat. The tailor
in turn wants the roof of his house mended and
employs a carpenter to do the work and trans-
fers to him in payment for it the shoemaker's
I. 0. U. The carpenter needing a pair of shoes
gets a pair from the shoemaker and pays for
them by surrendering the evidence of the debt
which the shoemaker originally owed to the
ditch digger, and the shoemaker destroys it.

It will thus be seen that the debt contracted
by the shoemaker was the basis for the cur-

FOREWORD

rency by means of which the services of the
ditch digger, the tailor, the carpenter and the
shoemaker were exchanged, and when the debt
was paid the currency disappeared. It shows
also that where there is no debt there can be no
currency.

McLeod, in his Theory and Practice of Bank-
ing, says: "This currency is nothing more
than the evidence of service having been ren-
dered for which an equivalent has not been
received, but which may at any time be de-
manded. It is obvious that as soon as it has
been rendered, the evidence of its being due
must be given up to the debtor to be destroyed,
and it will be no longer current. And if any
man can render services to his neighbors, he
must in return receive either other services, or
the evidence of their being due ; and if he ren-
ders more services than he immediately re-
quires in return, he will accumulate a store of
this evidence for his future wants.

"These simple considerations at once show
the fundamental nature of a currency. It is
quite clear that its use is to measure and record
debts, and to facilitate their transfer from one
person to another; and whatever means be
adopted for this purpose, whether it be gold,
silver, paper, or anything else, is a currency.

10 FOREWORD

We may, therefore, lay down as our funda-
mental conception that CURRENCY AND
TRANSFERRABLE DEBT are convertible
terms; whatever represents transferrable debt
of any sort is CURRENCY, and whatever ma-
terial the currency may consist of, it repre-
sents transferrable debt and nothing else. ' '

CONTENTS

Introduction 13

English Tallies 16

Modern Banking 19

The Introduction of Bank Checks 22

The Cause of Bank Panics 31

The Bank of Venice 37

The Story of the Guernsey Market 50

Opposition by Private Bankers 60

Henry D. Lloyd on the Guernsey Financial
Plan 69

French Assignats 79

State Banks in America 96

Condition of American Banks 101

The Bank of the State of South Carolina . . . 108

The State Bank of Illinois 119

State Bank Issues in Michigan 129

Demonetization of the Silver Dollar in 1873 . . 139

The Federal Reserve Bank 149

The Fluctuating Value of Gold 159

Henry D. Lloyd on Money 165

Conclusion 174

The Evolution of Banking

INTRODUCTION

The most important factor in civilized life is
the production and exchange of commodities.
The creation and distribution of the wealth
necessary for the support and comfort of the
human family is the main object of all industry.
Money and its modern substitute, Bank Credit,
are agencies by which this industry and
commerce is carried on; but we must not, in
considering the subject, be blinded by the in-
tervention of Money and Bank Credit, and fail
to maintain a clear distinction between the
main object and the agency by means of which
we attain the desired end. Neither must we
delude ourselves into thinking that Money,
Banks and Bank Credit are the only agencies
by which men can exchange wealth.

Bank Panics occur which result in nearly a
complete stoppage of industry. We have all
the physical elements for the production of the
wealth that is needed to satisfy human wants.
Yet hundreds of thousands of willing workers,
both skilled and unskilled, are thrown out of
13

14 THE EVOLUTION OF BANKING

work almost over night. If idle factories, idle
land, and idle men are the inevitable result of
the modern financial system, it is the duty of
all to investigate the Banking and Money ques-
tion, and substitute a saner, more reliable, and
less expensive system than the present one.

The modern banking system has grown up
and developed along with the modern indus-
trial system. Though the two are inseparably
linked, the Banking system must be considered
as merely an adjunct to the commercial sys-
tem.

At the dawn of history, when mankind was
emerging from savagery, commodities were
produced by hand labor and exchanged by
means of barter. Human needs were few and
simple, and were easily satisfied.

To-day, commodities are almost entirely the
result of machine labor. Human needs have
multiplied and are supplied by a worldwide
commerce. But no matter how complex the
modern commercial system seems, the same fact
persists, and has persisted through the sweep
of the centuries, that we still carry on a system
of exchanging goods for other goods. Pro-
ducers do not now meet face to face, as they
once did, and exchange their product by direct
barter, but still the products of the rural dis-

THE EVOLUTION OF BANKING 15

tricts pay for the products of the manufactur-
ing districts. The same is true of the nations —
our exports pay for our imports. But this
inter-social exchange of commodities could not
have grown to its present immense proportions
had not some means been invented to facilitate
commerce.

In the hunting stage skins, and later, in the
pastoral stage, cattle were used as the Unit of
Calculation, by means of which values were
expressed and goods exchanged. Later, a vast
array of agricultural products and metals were
used as the basis for the exchange of commodi-
ties. They all served their purpose at the time
and place where they were used, but were dis-
carded from time to time, and better mediums
substituted : Cattle were eliminated because of
the differences in the age and condition of dif-
ferent members of the same flock, and also on
account of their liability to death and disease ;
agricultural products decayed and became
worthless; metals used as coins went through
the same process of elimination ; iron was used,
but was too cheap and liable to rust ; lead was
too soft to long retain the impression of the
mint, etc. But, however interesting and in-
structive this subject is, space does not permit
of a history here.

16 THE EVOLUTION OF BANKING

ENGLISH TALLIES

One of the most interesting instances of the
use of representative money is found in the
English Exchequer Tallies which circulated in
England for over six hundred years. These
were adopted as a means of financing the Eng-
lish Treasury by the fourth son of AVilliam the
Conqueror, who ascended the throne as Henry
I in the year 1100. The tallies were of wood
and were issued by Royal Warrant. All who
served the King or State were paid with them.
Supplies for the Royal Household and army
were purchased with them and they circulated
among the people as money and were used as
such in the exchanging of commodities. They
were four sided rods of hazel or linden wood
about an inch in diameter. The amount due
from the State to the creditor was designated
by notches cut into one of the flat sides of the
rod. £1,000 was represented by a notch as
broad as the palm of the hand; £100 by the
breadth of the thumb ; £20 by the thickness of
the little finger; £1 by that of a barley-corn;
for a shilling the least piece possible was cut
out ; and a penny merely by an incision without
any wood being taken away. The amount was
also written in ink on two opposite sides. The

THE EVOLUTION OF BANKING 17

rod was then split by knife and mallet length-
wise through the notches. One-half of the
stick, showing the inscription in ink and one-
half of the notches was given to the creditor
and one-half was placed in the treasury. They
circulated throughout the Kingdom as money
and the merchants and others used them in all
business transactions. They did not pretend to
be based on gold or silver. They were re-
deemed by the Government only by being ac-
cepted in the payment of taxes. When the time
came for the collection of taxes the Sheriff of
the County by proclamation called all who had
exchequer tallies to present them and obtain
allowance for them. They were matched with
the counter tallies and where the two edges
fitted into each other they were said to ** tally."

After being accepted in payment of taxes
they were broken in half and thus cancelled.

When the Bank of England was established
in 1694 there was about £14,000,000 ($70,000,-
000) in wooden tallies in circulation in Eng-
land. The Bank enjoyed the privilege of
issuing paper currency for the first time in
England, although it had been used in China
several hundred years previously.

To Sweden, however, belongs the credit of
first introducing paper bank notes in Europe.

18 THE EVOLUTION OF BANKING

The money of Sweden consisted of large plates
of pure copper, % of an inch thick, and was
very inconvenient to handle in large business
transactions. The two-daler piece was 7^^
inches square and weighed 3i/^ pounds. A mer-
chant on a collecting tour was obliged to take
a wheelbarrow or cart to bring his money
home. To remedy this inconvenience a Bank
of deposit was established at Stockholm and
the copper money was deposited and bank
notes given in exchange for it. These bank
notes were used all through the country in
making payments.

The Bank of England did not at first issue
notes for a less amount than £20 ($100) and
these were of little use for general business
purposes, so the Chancellor of the Exchequer
began the issue of £5 and £10 exchequer bills.
The use of the paper bank notes and the ex-
chequer bills gradually displaced the wooden
tallies in the more important business trans-
actions, but it was not until 1783 that their use
was abolished by act of parliament. In spite
of this act their use was not finally abandoned
by the government until 1826. Four years
later the heaps of them which had been ac-
cumulating for centuries were ordered burned
in the furnaces of the Houses of Parliament. A

THE EVOLUTION OF BANKING 19

defective or overheated flue started a conflagra-
tion which completely destroyed the buildings.

There is still preserved in the British Mu-
seum a tally which looks like a huge wooden
sabre. It was given by the British government
to the East India Company as security for a
loan of £25,000 ($125,000). The loan was
afterwards repaid.

In 1C97, when the capital of the Bank of
England was increased by a new subscription
of £1,000,000 ($5,000,000), eight hundred thou-
sand pounds, or four million dollars, of the
stock was paid for with wooden tallies at par.

MODERN BANKING

Modern banking can be said to have had its
origin with the establishment of the Bank of
England in 1694, and the Bank of Scotland
in 1695.

Previous to that date the Banks, such as The
Bank of Venice (1191-1797), Bank of Genoa
(1407-1797), Bank of Hamburg (1619), Bank of
Stockholm (1668-1754), and the Bank of Am-
sterdam (1609-1790) were Banks of Deposit.
Payments in business transactions during the
medieval period were made by means of coins,

20 THE EVOLUTION OF BANKING

but the inconvenience of handling and storing
a large number of coins, vrith the risk of loss
through overvalued or debased coins and the
risk of theft, led to the establishment of these
Banks of Deposit, where the coins were valued
for once and all and were then locked up in
the bank vaults and never withdrawn, but the
title to the same was transferred on the Books
of the Banks. This is in effect what the United
States Treasury is doing at the present time
when it issues gold and silver certificates to any-
one who deposits gold and silver coins or bul-
lion in the Treasury. The Banks of Deposit
made no loans, but their income was derived
from a charge that was made for each transfer
of funds on the books of the Bank.

Our modern banks are Banks of Discount as
distinguished from their predecessors, the
Banks of Deposit, and have given an enormous
impetus to commerce. They have been able to
do this because they can and do create credit
that circulates the same as money and in a far
more convenient, safe and economical form.

At the beginning of the banking era the pres-
ence or absence of banking facilities were of
little or no importance to the working class,
but these facilities were utilized by the mer-
chant or trading class.

THE EVOLUTION OF BANKING 21

The merchant was able to purchase goods
from, the producers in an amount far exceeding
his capital because he could give to the Bank
his note payable three or four months later,
and receive Bank Notes for the amount of his
note less the interest.

These Bank Notes circulated the same as
coins. They paid for goods and discharged all
kinds of financial obligations equally as vrell
as gold, and were far more convenient to han-
dle. They were redeemable in coin (Gold or
Silver) on demand, but the bank maintained
only a small reserve in gold for redemption
purposes. This led to a suspension of specie
payments by the Bank of England twice in its
career, the most important one continuing for
twenty-five years — 1797 to 1822 — but the busi-
ness of England, and of the Bank, continued
just the same.

Private Banks were established, but could
loan only their own or customers ' capital. They
could not loan their credit like the Bank of
England, as the latter, by its charter, had a
monopoly of the issue of Bank Notes.

22 THE EVOLUTION OF BANKING

THE INTRODUCTION OF
BANK CHECKS

About the year 1780 the London Bankers
introduced a simple and apparently unimpor-
tant change in their methods of transacting
their business, which destroyed the monop-
oly of the Bank of England. Instead of giving
their promissory notes or deposit receipts, they
entered on their ledgers the amount due their
customers and gave them books of blank forms
called checks. This method enabled the Bank-
ers to create a currency not contemplated by
the framers of the Bank Act. When the Bank
of England discovered it, they appealed to
Parliament to stop it, but they were told such
monopolies were out of fashion and their de-
mand was refused.

The Banks that began to be established in
the United States about the year 1800 followed
exactly the English methods. They received
their charters from the various States. These
charters gave them the right to accept deposits

THE EVOLUTION OP BANKING 23

and to discount notes for merchants and others
and granted them the privilege of issuing their
circulating notes to the amount of tvro, two
and one-half, and in some cases three times the
amount of their paid-up capital. These notes
were redeemable on demand in coin (Gold and
Silver), just as the Bank of England's notes
were, and a reserve was to be maintained in
the vault of the bank to the extent of from 25
per cent to 33 per cent of the bank 's notes that
were in circulation.

At first the liabilities of the banks for
notes in circulation far exceeded the liabilities
under the head of Deposits ; but, as the use of
bank checks in place of currency grew, the
ratio changed and has resulted in the present
condition, where the circulation liability of the
National Banks is about $750,000,000— while
the liability to depositors is upwards of $15,-
000,000,000. A most profoundly erroneous
impression is made on the mind of the public
by the published statements of the amount of
liabilities of the banks under the head of ''De-
posits." It is almost, if not quite, universally
believed that the so-called deposits are deposits
in actual cash, while the truth is, in so far as
the deposits exceed the cash on hand, they are
the proceeds of discounted commercial paper.

24 THE EVOLUTION OF BANKING

Banks do not loan money. They loan credit.
They create this credit and charge interest for
the use of it. It is universally admitted that
the old State Banks that created credit in the
form of bank notes, created currency — and our
modern system of creating credit in the form of
"Deposits" which circulate in the form of
bank checks, is doing exactly the same thing —
creating currency.

All this in effect nullifies the National Bank-
ing Act, which provides for National Bank
Currency based on U. S. Government Bonds,
and also the act levying an annual tax of 10
per cent on all State Bank Currency.

As the Banks of the United States, as a
whole, have a reserve fund in cash of only
about 10 per cent against their deposit liabili-
ties, it is evident that 90 per cent of the de-
posits that are our real circulating medium is
based on the real circulating capital of the
country; i. e., the wheat, corn, oats, cotton,
wool, iron, coal, sugar, linen, lumber, hides,
leather, carpets, furniture, shoes, clothing, and
other commodities that are in the process of
exchange. In other words, the banks are coin-
ing all classes of commodities into money.

The public little realizes to what an extent
Bank Credit, circulating in the form of bank

THE EVOLUTION OF BANKING 25

checks, has supplanted all other circulating
media. In 95 per cent of all the business done
in the United States, the payments are made
in bank checks and in only 5 per cent is any
cash used; and of this 5 per cent an infinites-
imal fraction only is gold.

The introduction of bank notes was useful in
weaning the public from the use of gold and
silver coins, and prepared the way for the in-
troduction of Bank Credit as the means of pay-
ment for commodities. As a result of this evo-
lutionary process, the checks drawn and paid
in the United States amount to between two
hundred billion and two hundred and fifty bil-
lion dollars a year.

It is clear that it would be a physical impos-
sibility to do this amount of business by the
use of gold coin. There is only about eight
billions of gold money in the world, of which
amount less than two billions of dollars are in
the United States.

The banks have created fifteen billions of
dollars of credit by discounting the notes of
merchants and manufacturers, and crediting
the proceeds to the borrower's account under
the head of Deposits. As a result, the bor-
rower is enabled to draw checks and pay his
debts with them. The credit thus started on

26 THE EVOLUTION OF BANKING

its journey flows through the channels of com-
merce, paying all manner of monetary obliga-
tions as efficaciously as though done with
gold. The merchant draws his check for the
exact amount of each account he wishes to pay.
He makes the checks payable to his creditors'
order and sends them through the mail without
risk of loss. The recipients of the checks de-
posit them to their credit in the bank and start
their checks out on the same debt paying er-
rand. The credit first extended to the mer-
chant in the course of the three or four months
that it is in existence, is the means of paying
debts to the amount of ten or twenty times the
amount originally borrowed. The borrower,
meanwhile, is constantly increasing the amount
to his credit in the bank by depositing his re-
ceipts from the sale of his merchandise, and
when the note falls due, he gives his check for
the note, and the debt and the credit — which
are counterparts of each other — are by this
means offset and both disappear.

Up to the present, nothing has been said of
the possible interest the wage worker, who is
without property or industrial capital, has in
the subject of Banking and Bank Credit.

As has been said in a previous paragraph, at
the beginning the facilities offered by a bank

THE EVOLUTION OF BANKING 27

were utilized by the merchant or trading class.
Production, at that time, was carried on al-
most exclusively by independent workmen who
owned the tools with which they worked. But
the invention of the steam engine, and the rise
of the factory system, separated the self-em-
ploying workmen from their tools, which had
become useless, and forced them into the fac-
tories as wage workers. Their labor power be-
came a commodity to be bought just the same as
coal, or oil, or any raw material necessary in
the manufacture of goods. Under our modern
industrial system, with its world-wide markets,
the manufacturers are absolutely dependent on
their ability to secure credit from the banks
to carry on their business. Just as far as their
ability to secure credit is curtailed or ceases,
their ability to employ labor and purchase raw
material is curtailed or ceases. Financial pan-
ics have occurred in the past; w^e are in the
midst of one now ; and they will keep on occur-
ring as long as the present industrial and
financial system continues. While the wage-
worker has no business dealings with a bank,
either as borrower or depositor, still the period-
ical financial disturbances result in the closing
of factories, workshops, mills, and mines, and
he, with millions of his fellow workers, suffers

28 THE EVOLUTION OF BANKING

from long periods of unemployment with all
the direful consequences.

The raw material that the manufacturer uses
does not necessarily deteriorate from non-use.
The uncut forest is more valuable, for the trees
have been growing during the year or two of
depression, or if cut, the lumber is better for
being well seasoned. The unmined coal is just
as good as ever ; but labor power must be nour-
ished or it wastes. The man may sink into the
vagabond or criminal, and wives and children
suffer from cold, hunger, and privation.

The subject of bank panics and periods of
industrial depression have never been given
the study they rightly deserve. In the physical
world, the eclipses of the sun and moon and
the precession of the equinoxes were phenom-
ena for which astronomers formerly could give
no adequate explanation, because their theories
were founded upon the utterly false premise
that the earth was flat and stationary. But the
Copernican theory of the revolution of the
earth upon its axis each twenty-four hours, and
its yearly, journey around the sun, cleared
away the mists of ignorance that surrounded
the subject of astronomy, and it "has since be-
come one of the most fascinating of sciences.
The same condition prevails today in the sci-

THE EVOLUTION OF BANKING 29

ence of political economy as prevailed in the
science of astronomy during the dark ages.
After two hundred years of theorizing, the pro-
fessors of political economy are unable to
predict a financial crisis or period of industrial
depression or offer an adequate explanation for
one when it appears. No wonder Gladstone
said that the surest way to the madhouse was
to study the money question.

The ancients made the mistake of believing
that the world was the center of the universe
and all of their calculations based upon that
error were valueless.

The modern political economists make a sim-
ilar error when they place the interests of the
possessing class in the center of their little
world of thought and ignore the interests of
the far larger and more important producing
class.

An American author of international repute,
after studying the subject of money for years,
wrote: "In every age, whole philosophies of
what was once supposed to be knowledge,
withers away, fit only to enrich the soil of
something better. An encyclopedia of the po-
litical economy of slavery would not be of
much value today. It is better to look into the
new facts of our day, and the rising aspirations

30 THE EVOLUTION OF BANKING

of the multitudes to become peoples, for the
truths of money — by what tools of exchange
we are to serve each other in the market — than
to wander through the teeming graveyards of
economic literature."

Between the years 1810 and 1860, there were
ten bank panics in the United States — an aver-
age of one each five years. Since the close of
the Civil War there have occurred the panics
of 1873, 1893, 1907, and 1913-14, and there have
been disturbances and depressions of trade and
industry of more or less marked intensity dur-
ing the entire period. In considering the panic
of 1873, and the years of depression following
it, the Director of the United States National
Bureau of Labor, in his report of 1886, found
that the most severe effects were felt in those
countries in which the employment of machin-
ery, the efficiency of labor, the cost and the
standard of living, and the extent of popular
education were the greatest. It was felt alike
in nations that had been involved in war, as
well as those that had maintained peace ; those
that had a currency based on gold; and those
having a paper currency based on promises to
pay that had not been kept ; free trade coun-
tries and those maintaining a protective tariff;
republics like the United States or France ; lim-

THE EVOLUTION OF BANKING 31

ited monarchies like England, and the auto-
cratically ruled Russia.

POLITICS IS NOT THE CAUSE

Panics have occurred in the United States
under Democratic and Republican administra-
tions; under a low tariff and under a high
protective tariff. Free trade would not be a
preventive here any more than it has been in
England. The frequency of elections is not the
cause, as witness Russia, where there are prac-
tically no elections held. Failure of crops can-
not be named as a cause, as the crop harvested
the present year (1914) was the largest in our
history. The failure of the State Banks before
the war was caused primarily by the inability
of the banks to redeem their circulating notes
in gold and silver on demand as agreed. It
was not caused b}^ the redundancy of the notes
as is so often alleged as the following figures
disclose :

1857—

Bank notes in circulation $214,778,000

Other money in circulation 242,300,000

Total $457,078,000

Population 28,916,000

Circulation per Capita $15.81

32 THE EVOLUTION OF BANKING

If to the above we add the Bank Deposits

which circulated by means of Bank checks, we

have

Total notes and money in circulation. . . .$457,078,000
Bank Deposits 230,251,000

Total $687,329,000

Circulation per Capita 23.75

1912—

General stock of money in the U. S.. $3,284,000,000.00

Population 95,237,000

Circulation per capita 34.45

If, to the above we add the Bank Deposits
which circulated by means of Bank Checks, we
have

General stock of money in the U. S. . $ 3,284,000,000.00
Bank Deposits 17,024,000,000.00

Total $20,308,000,000.00

Circulation per capita $213.20, or nine times

the circulation per capita of 1857.

Now let us compare the condition of the

Banks of the two years as to their ability to

redeem their liabilities in cash.

Condition of Banks in 1857 —

Circulating notes outstanding $214,778,000

Due Depositors 230,251,000

Demand Liabilities $445,029,000

Cash Reserve 111,554,000

or 25.6 per cent.

Condition of Banks in 1912.

Due Depositors $17,024,000,000

Cash Reserve 1,573,000,000

or 9.2 per cent.

THE EVOLUTION OF BANKING 33

These figures show in a startling manner
some very pertinent facts. One is that the
banks' percentage of cash reserve was three
times as great in 1857 as it was in 1912. And
yet the panic of 1857 was the worst that up
to that time had ever swept over the country.
Every bank in the United States suspended.

Another fact disclosed is that while the stock
of money in the United States increased from
$15.81 to $34.45 per capita, or 118 per cent, the
liability of banks to their depositors increased
from $7.96 to $178.75, or 2145 per cent. Or, in
other words, while the stock of money in the
United States a little more than doubled, the
liabilities of the banks to depositors multiplied
more than 20 times.

This explains why the banks demanded a
Federal Reserve Act and got it. The banks
are now in a position, in case of stress, to un-
load on the United States Treasury, through the
Federal Reserve Banks and Federal Reserve
Board, at their face value, a considerable por-
tion of their assets in the shape of notes, bills
of exchange, bonds, and other promises to pay,
and receive Federal Reserve Notes, which are
an obligation of the United States Government
and payable in gold on demand at the U. S.
Treasury at Washington, D. C, or in gold or

34 THE EVOLUTION OF BANKING

lawful money — greenbacks, silver dollars, etc.
(but not National Bank Notes), at any Federal
Reserve Bank.

The Banks, before the war, were forced to
close their doors because they could not keep
their promise to redeem their deposits and
bank bills in coin on demand.

The panic of 1873 found the public in a dif-
ferent frame of mind. The use of Greenbacks
and National Bank Currency had accustomed
them to the use of a paper currency based on
the credit of the federal government. They
therefore, did not demand the redemption of
their bank notes in coin, although they could
have done so. The demand was for the redemp-
tion of the deposits in currency and this was
impossible as the issue of Greenbacks was lim-
ited by the Act of Congress, and National Bank
Notes could only be issued upon the deposit of
government bonds with the United States
Treasurer. The Banks could not redeem their
deposits even in paper currency. The same
thing occurred in 1893, when 415 banks and
more than 15,000 merchants failed with a total
liability of over $500,000,000. Again, in 1907,
the banks were run down by the public and
resorted to various expedients and forced the
public to use certified checks, cashiers' checks,

THE EVOLUTION OF BANKING 35

and clearing house certificates in place of
money.

After over one hundred years of bitter ex-
perience, it has at length dawned upon the
minds of the American bankers that a bank
system that carries demand liabilities of from
four to ten times the amount of cash on hand
is an impossible system.

And the Federal Reserve Act, instead of pro-
viding for an increase in the cash reserve,
allows a decrease of 30 per cent. This decrease
in the reserve requirements gives the National
Banks the right to loan over $800,000,000 more
credit.

In case of a run on the banks the loans thus
made can be deposited with the United States
Treasurer and Federal Reserve Notes issued to
them to the amount of two and one-half times
the amount of gold the bank has on hand.
These Federal Reserve Notes are an obligation
of the United States Government payable in
gold on demand in Washington. There are
now $346,000,000 of Legal Tender Notes out-
standing, which are payable on demand in
gold, and the government has a reserve of only
$150,000,000 with which to redeem them if
asked. Where the gold is to come from to re-
deem the Federal Reserve Notes, which will

36 THE EVOLUTION OF BANKING

certainly be issued some time in the future, is
a question no one can answer.

If the present financial system continues, its
future history will be but a repetition of the
past. Panics and industrial depressions will
follow one another with all the misery they
entail.

A new system must take its place in which
labor will be the standard of value instead of
gold. The new financial legislation must be
formulated solely with the view of increasing
the production of commodities and their distri-
bution among the workers who engage in the
necessary labor. The interests of the possess-
ing class must be ignored and the interests of
the workers only considered.

THE EVOLUTION OF BANKING 37

THE BANK OF VENICE

The Bank of Venice was founded in the year
1171 through the necessities of the Venetian
Republic. The expenses of the Republic in its
war with the Emperor of Greece were so great
that the state was compelled to make a forced
loan from the wealthy citizens, who were prom-
ised an annual interest at the rate of 4 per
cent per annum. A Chamber of Commissions
was created from the contributors to manage
the loan, transfer the stock, and pay the inter-
est. The loan was increased later by other
loans upon the same terms. Each contributor
was credited on the public ledger with the
amount of his contribution, which he could
transfer to another either in whole or in part
whenever he desired. The convenience of
transfer, the prompt payment of the interest,
together with the security of the state, made
this public debt attractive to those having sur-
plus funds on hand and soon led to a rapid
circulation of the loan. No cash payments were
ever made on account of this loan. The repay-
ment of the loan to the creditors of the state
soon ceased to be considered either necessary
or desirable. The funds received through these
loans were used for public purposes and the

38 THE EVOLUTION OF BANKING

specie found its way back into circulation
through the various channels of public ex-
penditure.

The convenience of transferring a credit on
the books of the bank in payment of a debt
or for the purchase of goods was so great that
in the year 1423 it was decreed that all bills of
exchange, whether domestic or foreign, pay-
able in Venice, unless otherwise stipulated,
should be paid in the bank, and that all pay-
ment, in gross or in wholesale transactions,
should be effected in the bank. The practical
effect of this was to make all money in the
bank legal tender for all debts.

The merchants and traders of Venice depos-
ited the gold and silver coins that came into
their possession in the bank and received credit
at their value as bullion. This was a great
improvement over the old method of settling
the vast commerce of this maritime city by
means of payments in cash. The vessels arriv-
ing in Venice brought with them from all parts
of the then known world an endless diversity
of coins. Many of these were so worn that the
inscription was undecipherable. Others had
been clipped or sweated, and part of their orig-
inal value thus abstracted. Cities, principali-
ties, petty-nobles and patrician families exer-

THE EVOLUTION OF BANKING 39

cised independent rights of coinage and the
debasement of coinage both in weight and fine-
ness was all but universal. Large numbers of
counterfeits were in circulation. Attempts to
settle debts or pay for purchases or merchan-
dise frequently resulted in endless disputes
and wrangles.

The facilities offered by the bank simplified
the commercial transactions of the day and
created a great additional demand for funds of
the bank and brought large sums into the
public offices. The merchant class speedily took
advantage of the new method of payments ; the
demand for bank credit was greater than the
supply ; and during the whole existence of the
bank, credits on its books were worth a large
premium over coins. This extraordinary fact
that a credit on books of the bank with no
money in its vaults, which paid no interest
upon its deposits during the last four hundred
and fifty years of its existence, and which was
not bound to pay its depositors in cash, either
on demand or at any future time, should com-
mand a high premium over gold and silver, has
been the cause of considerable speculation.
This premium or agio, as it was called, rose to
30 per cent over coins and continued to fluctuate
near this high point until the government by

40 THE EVOLUTION OF BANKING

decree limited it to 20 per cent, at which point
it remained until the extinction of the Republic
by Napoleon and the French Army in 1797. The
government's attempt to limit the premium on
bank funds was rendered abortive by the intro-
duction of the sur agio or extra premium based
on the agio and the original sum together. This
additional premium ranged from 20 to 30 per
cent for a long period.

No adequate explanation for the agio seems to
be offered by anyone. One reason advanced is
the difference between the value of the ducat
and the coins then current in Venice. The
money of account of the bank was the ducat.
The Venetian ducat Avas of gold and was one
of the few coins then circulating that had not
been debased. When it left the mint it was full
■weight and of standard fineness, and was held in
high repute everywhere on account of its purity.
But this does not explain the agio, for the bank
never paid out any coins of any description, and
therefore the expectation of receiving gold
ducats from the bank on account of any claim
against it would meet with disappointment.
There were probably several causes operating
to create and maintain the premium on bank
deposits. One of them was the deplorable state
of the coinage then circulating in Italy, and the

THE EVOLUTION OF BANKING 41

evil was particularly aggravated in Venice,
where the multiplicity of coins was probably
unequaled anywhere in the world. The settle-
ment of debts and the payments for merchan-
dise could not fail to be, under such a system,
anything but a tedious and vexatious process.
It was necessary to scrutinize each coin sep-
arately as to its genuineness, weight and value.
The time consumed and the disputes arising as
to the values allowed for certain coins must
have been a source of irritation to the princi-
pals interested, especially where the amount
involved was a large one. Only the wealthiest
merchants could afford to keep an expert in
their employ, and the smaller merchants were
compelled to assume the risk of loss through
counterfeits and over-valued coins.

An added risk was that of robbery or defal-
cation, which is ever present w^here a large sum
of cash is kept on hand. The facilities offered
by the bank obviated these risks and annoy-
ances. If a merchant had a financial obligation
to meet he did not accumulate the funds in his
strong box, but carried them to the bank and
placed them to his credit. The coins were val-
ued by the skilled employes of the bank, and
when the day of settlement arrived the two
principals went to the bank together and the

42 THE EVOLUTION OF BANKING

transfer was made. These considerations nat-
urally caused a steady demand for the use of
money in bank. Another and probably the
strongest reason for the agio was an active de-
mand by the commercial classes, which is ever
present in all trade centers, for accommodations
with which to meet maturing obligations which
for some reasons they had not been able to pro-
vide. Punctuality in meeting his financial en-
gagements in order to maintain his credit was
as necessary to the merchant of Venice as it is
the merchants of today in America. There were
undoubtedly a considerable number of money
lenders in the city who kept their capital to
their credit in the bank. A merchant having a
bill of exchange to meet, and with insufficient
funds to his credit in the bank, would naturally
apply to one of those money lenders for an
accommodation, and would be willing to pay a
bonus to have transferred to his credit sufficient
funds to enable him to pay his maturing obliga-
tions and thereby protect his commercial stand-
ing. As the bank did not discount notes or loan
its credit in any way, this was his only alterna-
tive. By the edict of the council of Venice all
bills of exchange were payable in the bank, and
the creditor could refuse the coins then circulat-
ing in Venice. This method of settling accounts

THE EVOLUTION OF BANKING 43

brought an ever-increasing amount of business
to the city and largely increased the deposits of
the bank,

Mr. Lewis (London, 1676) tells of the sugges-
tion of a Venetian merchant intended to prevent
the high premium on credit in the bank. The
method suggested was to have the bank occa-
sionally, instead of transferring the credit,
tender the amount in gold or silver, and thus,
by raising a doubt in the mind of the public as
to what they would receive at the bank, prevent
the premium on the bank money from going to
an excessive figure. But this suggestion does
not seem to have been acted upon; in fact, it
would have probably been inoperative had it
been tried, as the recipient of the coins could
have deposited them to his credit and so in the
end nothing would have been gained.

Great care was exercised by the bank to pre-
vent errors or fraud. Every transfer was made
in the presence of two bookkeepers who kept
separate sets of books. The bank was closed one
day each week to check the transactions. The
bank was also closed for twenty days at a time
four times a year and the books balanced. Dur-
ing these bank holidays no paper matured or
could be protested until six days after the re-
opening of the bank.

44 THE EVOLUTION OF BANKING

The bank became such an indispensable ad-
junct to the commerce of the day that Venice
became practically the clearing house for the
merchants of Europe and maintained that posi-
tion for centuries. Bills of exchange came to
be used more and more and the concentration
of payments in the Bank of Venice kept a con-
tinual stream of coin flowing into the bank to
make the credits on the books with which these
payments must finally be met.

The bank's deposits increased, or rather the
public debt of Venice increased, until it was
sufficiently large to liquidate the financial obli-
gations of the traders as they matured from
day to day. All money deposited in the bank
was accounted an addition to the original loan,
and, as such, taken into the public treasury as
money loaned to the state. The treasury being
thus replenished, the Eepublic was enabled to
maintain its position among the nations of
Europe without burdening commerce or its
citizens with heavy taxes. There does not seem
to have been any thought given or plans laid
looking toward the ultimate extinction of the
public debt represented by the total amount of
deposits in the bank. There is every reason to
believe that such a proposition would have met
with universal opposition. The first step would

THE EVOLUTION OF BANKING 45

necessarily be to reluse to receive any further
deposits of coins. This would result in the
deposits already in the bank commanding a
still higher premium than had heretofore pre-
vailed. The Republic would then have to levy
taxes sufficient to meet the expenses of the
state, and leave a surplus each year that could
be applied to the gradual extinguishing of the
deposits. The increase in taxation would cer-
tainly have been opposed by the general public.
The denial to the merchants of Venice and
Europe of the facilities which they enjoyed
through the bank, of settling balances between
them and meeting the bills of exchange or
other maturing obligations, by the transfer of
credit in bank, would have unsettled the entire
commercial structure. The proposal to return
to the discarded method of payment of debts
in the heterogeneous coinage which in the past
had proven itself so inadequate to the needs of
commerce, would not have even been consid-
ered worthy of discussion. The histories of
Venice, so far as can be ascertained, do not
contain any evidence of objection or dissatis-
faction either by public speech or published
writings as to the bank or its methods.

So far as regards failing to make provision
for the final payment of the public debt, Venice

46 THE EVOLUTION OF BANKING

is no more subject to criticism than other na-
tions of the world that have since come into
existence. Walker, in his ''Science of Wealth,"
page 377, says: ''No large national debt has
ever been paid, or in any way discharged, ex-
cept by repudiation." "The debt of the old
French monarchy was wiped out with the 'as-
signats.' " The debt incurred in the Amer-
ican Revolution vanished in 'worthless con-
tinental money.' The present debts of Eng-
land, France, Austria, and other European
countries are so large, the constantly increas-
ing demand for more extensive and costly
armaments so pressing, so absolutely over-
whelming, that the hope of any payment of the
principal cannot be reasonably indulged. ' '

Experience finally demonstrated that the
bank as constituted did not supply all the
facilities needed by the merchants in the ever-
increasing commerce of the city. The inability
of the depositor to withdraw his money from
the bank after once depositing it, caused con-
siderable inconvenience to those who needed
the coins to use in small retail transactions, and
to those traveling to a foreign country and who
needed a stock of coin for personal use. To
meet these requirements the bank established a
second department of the bank, in which could

THE EVOLUTION OF BANKING 47

be deposited coin or bullion with the right of
withdrawal at pleasure, or transferring the
title if desirable. This department was utilized
by those having money in hand for which they
had no immediate use, and by foreign mer-
chants arriving in Venice for the purpose of
making purchases and who desired to await
the course of business before deciding what
disposition to make of it. The deposits in this
department of the bank were subject to with-
drawal on demand and thus bills of exchange
or other maturing obligations could be met in
coin if desired, whereas they were only payable
by the transfer of credits on the books of the
older institution. While this depository was
completely successful in its own special field,
it did not check the flow of money into the
older branch, as the demand for bank money
always exceeded the supply. A large sum of
specie accumulated in this depository, and while
the amount fluctuated considerably according
to the exigencies of business, a large percent-
age remained unmoved and was used as an
emergency fund by the government in times
of pressing need. This policy led to at least
two suspensions of specie payments by this
branch of the bank, notably from 1717 to 1739,
but the branch remained open and the deposits

48 THE EVOLUTION OF BANKING

were transferred as in the older branch. Dur-
ing the period of suspension the ti^o depart-
ments of the bank were practically merged into
one, so far as their operations were concerned,
the only difference being that, while the fund
in each was a public debt, the value of the
deposits in the older branch for commercial
purposes did not vary, the deposits in the cash
office fell at one time to a discount of 20 per
cent. At its earliest -opportunity the state re-
sumed specie payments and the business of each
department fell into its appropriate channel.

The Bank of Venice was closed by Napoleon
when he entered the city with his army in 1797,
but he failed to secure one penny of loot,
McLeod, in his ' ' Theory and Practice of Bank-
ing," page 290, says that it is one of the de-
lusions of historians and economists that the
Bank of Venice was established in 1171, but
that the organization took place in 1587, when
the merchants of the city were invited to de-
posit their monc}^ in an office managed by the
Commissioners of the Public Debts. These de-
posits could be withdrawn, but for four hundred
and sixteen years it had been transferred from
one account to anotlier of the merchants of Ven-
ice and Europe, and had by this means ex-
changed commodities and discharged debts to

THE EVOLUTION OF BANKING 49

the satisfaction of all concerned, and in a way
far more to the advantage of the public than
could possibly have been secured by the use of
coins.

McLeod forgot evidently that on page 286
of the same volume he had written the follow-
ing: "It is often said that the temples of
Greece, especially those of Delos and Delphi,
acted as great banks of deposit. It is true that
they received sums of money for safe custody,
but we do not think there is any evidence to
show that either they or the Greek money deal-
ers settled claims by transferring credits from
one account to another, ivliich is the essential
feature of "Banking." (The Italics are mine.
R. H. H.) This is what the bank of Venice did
precisely ; transferred credits from one account
to another during the entire six hundred and
twenty-six years of its existence. The Bank of
Venice was therefore an institution engaged in
the business of ''Banking," according to Mc-
Leod's own definition of the functions of a
bank.

50 THE EVOLUTION OF BANKING

THE STORY OF THE GUERNSEY MARKET

Gladstone once said that the surest way to
get into the insane asylum was to study the
money question. He could not have made that
statement had he been familiar with the simple
manner in which the inhabitants of one of Eng-
land's Channel Islands had solved the question
for themselves and in a way so direct and
logical that it is strange the political econ-
omists have paid so little attention to it.

At the close of the Napoleonic Wars the
Island of Guernsey was in a deplorable state,
both financially and physically. The sea walls
were in such a bad state that large areas had
been swept away and other tracts were in dan-
ger of inundation. The estimated cost to repair
and strengthen the sea walls was $50,000,
which the parishes adjoining the threatened
districts were too poor to supply.

The annual revenues, after providing for the
interest on the public debt and ordinary ad-
ministrative expenses left a surplus of only
$3,000 for unforeseen expenses and improve-
ments.

The roads leading to St. Peter, the principal

THE EVOLUTION OF BANKING 51

port, were too narrow for a horse and cart to
pass abreast. They were only four and a half
feet wide, unpaved and the rains tended to
render them deeper and narrower.

There were no public conveyances for the
use of visitors. There was not a four-wheeled
carriage in the Island.

The conditions of the thoroughfares of St.
Peter were no better. Narrow lanes were the
rule and the main street that led from the
country to the harbor was only seven feet wide
and lined on both sides by lofty buildings.

The impossibility of carts passing each other
in such a narrow passage resulted in congested
traffic at each end and accidents were numer-
ous and delays exasperating.

The population was decreasing — stagnation
of business causing the laboring class to emi-
grate and those in comfortable circumstances
were leaving in search of the conveniences and
pleasures the Island failed to afford.

The circulating medium consisted of badly
worn French and English coins. There was no
bank in the Island.

The Government of the Island is autonomous.
It has a Parliament, called the "States," which
is elected from the parishes, but its decisions
are subject to the Privy Council of Great Brit-

52 THE EVOLUTION OF BANKING

ain, to whom there is also the right of appeal.

The pressing need of a revenue led the States
to request the Privy Council to permit an
excise tax to be levied to one shilling per gal-
lon on spirituous liquors. This was granted for
a period of five years. The duty was renewed
in 1819 for a further period of ten years and in
1825 for fifteen years, or until 1844. One thou-
sand pounds per year of this duty was to be
used to liquidate the public debt.

As was usual in provincial towns in the early
part of the nineteenth century, a great part of
the retail trade of St. Peter was carried on in
a public market. This market was held in the
vacant space around the church. There was
no building provided and the traffickers were
subject to all the losses and exposures due to
heat, rain and cold.

A committee of the States on April 12, 1815,
brought in a recommendation to issue £6,000
($30,000) in one pound State notes, for the pur-
pose of providing a suitable market for the
use of the farmers and townsmen. The States
rejected this recommendation. However, later
in the same year the Finance Committee re-
ported money was badly needed for roads. The
States authorized the issue of £4,000 ($20,000)
in notes, which were to be redeemed out of the

THE EVOLUTION OF BANKING 53

liquor tax at various fixed dates during the
following three years.

It will thus be seen that while the issue of
notes was first urged on behalf of the market,
and they thus become known as Market House
Notes, the real security for their redemption
was the duty on liquor.

These notes bore no interest, but circulated
among the people and greatly stimulated trade
and commerce. The last of them were due
April 15, 1818, and the success attending their
issue and circulation resulted in a new issue of
£1,250 ($6,250), on June 18, 1818.

A meat market company which had pur-
chased a site and some buildings for £5,000
($25,000) had been given the privilege of
charging a certain price per head for all ani-
mals killed, upon condition that it would sell
the site to the States at any future time at the
price originally paid. The States took advan-
tage of the purchase clause on April 10, 1817,
borrowing the £5,000 at 4i/^ per cent interest,
a report of the committee to issue £1 notes
with which to make the purchase being re-
jected by a majority of one vote.

The advocates of a larger and better market
still persevered and were finally successful on

54 THE EVOLUTION OF BANKING

May 12, 1820, five years and one month after
the first request was denied.

The States provided for an issue of £5,500
($27,000) in States notes for the erecting of
the building, the notes to be redeemed from
the rents received for the stalls, to which the
States were to add £300 ($1,500) per year from
the duty on spirituous liquors, for a period of
ten years.

The building was completed and opened Sat-
urday, Oct. 12, 1822, with a general jubilation.
The cost of the building was about $21,000.

It was computed at the inception that the
Market stalls would bring a net annual rental
of £150, to which the States would add £300,
making a total of £450, or $2,250, and the notes
could all be redeemed and cancelled in ten
years, but the result far exceeded their an-
ticipation.

The "Treasurer's account of the Market"
for the year 1827, as published, shows a net
revenue from the stalls for that year as £608,
or over four times the anticipated revenues.

Had the Guernseymen stopped here, the suc-
cess achieved would have been sufficiently
illuminating to guide other communities in the
way of financing public enterprises without re-
course to interest bearing bonds. But they did

THE EVOLUTION OF BANKING 55

not Stop. In 1820 they issued £4,000 ($20,000)
in one pound notes and paid off the floating
debt. A year later an issue of £580 was used
to purchase a house occupying a site needed
for the new market. Later in the same year
£4,500 ($22,500) was issued to redeem an out-
standing interest bearing public debt.

In 1824 £5,000 ($25,000) in one pound notes
were issued to repay the 4^/2 per cent loan
made in 1817 with which to purchase the land
upon which the Market house was built.

In 1826 about £10,000 ($50,000) in notes were
issued, some of it for the neighboring Isle of
Sark, the balance for Elizabeth College, schools
and other purposes.

In 1827 £11,000 in one pound notes were au-
thorized to be used in widening and improving
Rue de la Fountaine, a street adjoining the
market. This involved the destruction of old
buildings and their replacement by new ones
and the rents were pledged to redeem the
notes.

This was followed during 1828 and 1829 with
further issues, among which was one appropria-
tion of £8,500 for the benefit of Elizabeth Col-
lege and £11,000 for street improvements.

A threatened epidemic of cholera in 1834
caused an appropriation of £1,000, to be voted

56 THE EVOLUTION OF BANKING

to defray the costs of preventive measures.
This vras issued in one pound notes.

Here we have the history covering a period
of twenty years, during which time approxi-
mately £80,000 ($400,000) of non-interest bear-
ing circulating notes were issued and which
had no metallic basis, but the redemption of
which was secured by rents from stalls, build-
ings and the excise tax. The worn and mu-
tilated notes were replaced by new ones. They
circulated without question and were the
source of great benefit and convenience to all
classes.

While the total issued was £80,000, there
never was at any time more than £55,000 in cir-
culation. While new issues were provided for
new purposes, old issues were being redeemed
by the application of surplus revenues that had
been pledged to that purpose.

The public benefits derived by the Island of
Guernsey through this method of financing can
be appreciated by a knowledge of the fact that
during the fifteen years between 1815 and 1830,
not only had there been expended $100,000.00
on old and new breakwaters, piers, etc., but
there had been two streets in the town widened,
paved and sewered, sixty-eight miles of good
country roads built, in addition to the Market

THE EVOLUTION OF BANKING 57

house, which had cost, for land and building,
£12,748, or $60,000.

The following is an interesting extract from
the address of Daniel de Lisle Brock of Dec.
23, 1829 :

"AVith the gratitude for the means placed at
their disposal the States feel an honest pride
in the recital of the manner in which those
means have been applied. First, considering
the danger arising from the bad state of the
sea embankments, and the hardship of subject-
ing particular parishes to a charge for the
general safety to which they were unequal, the
States took on themselves the present repairs,
and the future maintenance of those embank-
ments. This essential object connected with
the paved slips or avenues to the beach, has
been attended with an expense of $75,000,
without including five or six thousand for a
breakwater to defend the line of houses at
Glatney, on the north side of the town.

"Independently of the sums contributed by
government towards the military roads, about
$150,000 have been expended by the Island on
the roads, so that in lieu of those before de-
scribed, there are now fifty-one miles of roads
of the first class, as good as those of any coun-

58 THE EVOLUTION OF BANKING

try, with excellent footways on all of them and
seventeen miles of the second class.

"Not only the main harbor, piers, quays,
buoys and sea marks have been attended to,
and at a great expense, but, in order to facili-
tate the exportations of the granite from the
north of the Island, the harbor of St. Sampson
has been rendered secure and convenient by a
new breakwater and quay.

''The situation and state of the town were
thought to preclude all hopes of much ameliora-
tion, but the widening of High street, and other
streets, the reducing of the precipitous ascent
to the Government and Court Houses, the clear-
ing away of the unsightly buildings that ob-
structed the view and approach to those public
edifices, the new sewers, pavements and, above
all, the Public Markets and new Fountain
street, attest the solicitude of the States toward
the town, and surprise those who return to it
after a few years ' absence. And to those the en-
larging and improving of the Court House and
Record Office, where the public have daily ac-
cess, and where are kept the contracts and
registry of all the real property of the Island.
Add, also, the new college, which, with the lay-
ing out of its grounds, the roads round its
precincts, contributes to the embellishment of
the town, induces families from other places to
settle in the Island, on account of their chil-
dren, and affords to the inhabitants the ready
means of a good education.

"The advantage from all these improvements

THE EVOLLTION OF BANKING 59

has not been confined to their utility, or to the
increased activity given to industry, and the
circulation of money by the public expendi-
ture; they have excited in all classes a similar
spirit of improvement, which displays itself in
the embellishment of the premises already built
upon, and, above all, in the number of the hand-
some dwellings since erected. In the town par-
ish alone, 401 houses have been built since the
year 1819 at an expense of upwards of $1,000,-
000, and few towns do now present a more
animated scenery around them, or one where
ornament and comfort are more generally
united; the same comfort and improvements
are witnessed in every direction, and at the
greatest distance from town. And thus it is
that the public works have not only given life
and activity to every species of industry by
the immediate effects of their utility, as for
example to the building of a number of mills
in the Island, before supplied with most of its
flour from abroad, and now enabled to manu-
facture it for exportation, but, and still more
by the consequent impulse communicated on
all sides, prompting the wealthy to lay out for
private mansions greater sums than were ex-
pended for public works and creating a perma-
nent source of employment, by the future ex-
penses which the repairs and occupations of
those mansions will require. The extent of
benefits conferred is sufficiently attested by the
concurrent testimony of inhabitants and stran-
gers."

60 THE EVOLUTION OF BANKING

OPPOSITION BY PRIVATE BANKERS

At the time the notes were first issued the
currency of the Island consisted of a mixed,
badly worn coinage — French and English.
There was no bank on the island and none was
established until the notes had been circulating
for over ten years. Consequently there had
been no opposition from privately owned bank-
ing corporations.

In 1826 three members of the States, two of
them members of the finance committee, ob-
jected to the improvements contemplated in the
widening of a street unless the consent of the
King was first secured. Their resolution to this
effect was overwhelmingly defeated.

The next year the Guernsey Banking Com-
pany was established with one of the three
objectors as vice president. On the 10th of
April, 1829, the above-mentioned objectors with
three more complained directly to the British
Government. The complaint was referred back
to the States for reply. The answer drafted
by Daniel de Lisle Brock is well worth reading,
even though penned nearly a century ago, and
was evidently so convincing that the opposi-
tion ceased for a while.

But in 1830 the Commercial Bank was started

THE EVOLUTION OF BANKING 61

and claimed equal right with the Old Bank and
even with the States to issue notes, Daniel de
Lisle Brock summoned the States to consider
the matter, evidently with the intention of
obtaining an injunction against the issue of
notes by the Bank. He defended the rights of
the States as against private individuals, as
the following quotation from his address will
show:

"If there is one incontcstible principle it is
that all matters relating to the current coin of
the country have their source in the supreme
prerogative, and that no one has the right to
arrogate to himself the power of circulating a
private coinage on which he imprints for his
own profit an arbitrary value. If this is true
for metal coin still more so is it for paper
money, which in itself has no value whatever."

The second bank should have kept, and still
ought to keep, to the legitimate business of
banking transactions. It appeared to have for
its principal object the issue of paper money.
The Bank makes no secret of its pretensions:
there are, it says, three parties for issuing
paper money ; this issue cannot rise above
$450,000 since the circulation in the country
does not allow for more, the States ought to
have only one-third of the issue, the two banks
the remaining two-thirds. This is a fine way of

62 THE EVOLUTION OF BANKING

making the division, and very convenient for
the Commercial Bank. It would even have
some show^ of justice if the parties had equal
rights, and if the public had no interest in the
matter ; but the rights are not equal — the bank
has none to put forward, that of the States is
incontestible : they exercise it for the welfare
and advantage of the whole Island which they
represent. Consequently the public has the
greatest interest in preserving for the States
the power of issuing paper money without in-
terruption. Let the bank reply to the questions
already put ; let it say what inducement it can
offer the public to drive out of circulation
the States Notes, the profits on which benefits
all, especially the productive classes, and sub-
stitute for it Bank notes, the profit on which
benefits only the individuals of the unpro-
ductive classes? Now is the time to ask the
proprietors themselves and ascertain whether
in starting a bank they ever had the intention
of letting it work to the detriment of their
countrJ^

"The Public Treasury is the heart of the
State — did they ever wish, do they today wish
to strike it with a dagger? The Bank should
feel that it is not enough to intend not to in-
jure, but that it is necessary to abandon any

THE EVOLUTION OF BANKING 63

such step which, even without its wish, would
be prejudicial to the interests of the country.
It should recognize that as regards the circula-
tion of paper money, the States have for a long
time and for the common good, been in posses-
sion of the ground which it seems to wish to
invade which, however, it cannot occupy with-
out injustice."

The debate was lengthy and animated and
was around a proposition as published in the
Comet of 22nd of September, 1836 :

"That in execution of the numerous ameliora-
tions that have taken place during the last 20
or 30 years, the States having put into circula-
tion about $275,000 in one pound notes, as a
financial measure in favor of the public gen-
erally, if they are of opinion to defend the
rights of the States against those who wish,
for the advantage of a few individuals only, to
hinder the circulation of the States Notes, for
the purpose of substituting those of private
individuals in lieu thereof; and whether it
would not be proper to make an appeal to all
the inhabitants, who are the friends of their
country, to invite them to afford their assist-
ance in supporting with all their might the

notes belonging to the States

If they are of opinion to name a Committee
that shall be authorized in a special manner to
defend the rights and interests of the States,
and of the public — to do their utmost by every
conciliatory measure in their power, and, above

64 THE EVOLUTION OF BANKING

all, to agree to an arrangement that shall
screen the States from all interruption in the
circulation of their Notes, which have been is-
sued for the benefit and advantage of the pub-
lic, with the design of gradually diminishing
the number annually. And in the event of such
an arrangement not taking place, to adopt
every measure and make every necessary sacri-
fice for supporting the circulation of the States
Notes. And, finally, should the case require it,
to propose to the States the adoption of those
ulterior measures deemed requisite by the Com-
mittee, for the general interests of the Island."

This was carried by a decisive majority.

The victory of the States seemed complete.
One would believe that the matter was settled
for all time and that the private bank notes
would be withdrawn from circulation, leaving
the issuance of the circulating medium in the
hands of the people — but such proved not to be
the case.

What happened during the interval between
the meeting of Sept. 21, 1836 and Oct. 9, 1836,
no one can tell. The records are absolutely
blank on the subject. All that is known is
that on the latter date Daniel de Lisle Brock
signed an agreement with the banks to the
following effect: $75,000 of the States' one
pound notes would be withdrawn from circula-
tion and converted into a bank loan drawing

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THE EVOLUTION OF BANKING 65

3 per cent interest. The States pledged them-
selves not to have at any time more than $200,-
000 in circulation, and cease collecting the
notes of the Banks in cash (Gold and Silver).
As a result of this agreement the States with-
drew from circulation $75,000 and burdened
the people with an annual tax of $2,250, to pay
the interest on that amount, and gave over to
the private banks the monopoly of the money
of the Island in excess of $200,000 to be issued
for their personal profit and the banks sus-
pended specie payment so far as the redemp-
tion of their notes held by the Public Treasury
was concerned.*

There are still circulating in the Island One
Pound States Notes to the amount of $200,000.
These notes have been in circulation over
ninety years at no cost for the interest. Had
they been converted into bank loan as was the
$75,000 in notes the inhabitants would have

♦Under date of January 11th, 1915, Mr. J. LePelley, As-
sistant Supervisor, writes to Theo. H. Lunde, of Cliicago,
as follows :

"To prevent a panic, the States had passed an 'Ordinance'
making all notes, bank and State, legal tender, in effect
guaranteeing the notes of the banks and limiting their
issues to those notes issued previous to August 4th,
1914.

"Thanks to the measures taken, the banks here opened on
August 4th, without the days of closure that they had to
institute in the mother country.

"I do not anticipate any further interference with the
agreement between tlie banks and the States; the feeling
appears to be that after nearly 80 years they have acquired
vested interests."

66 THE EVOLUTION OF BANKING

paid the bankers over $550,000 in interest and
still owe the original amount of over $200,000,
and the interest vrill run on and on for-
ever if the people never w^ake up to the inbecil-
ity of issuing an interest bearing debt to supply
themselves vi^ith a circulating medium.

As it is, they have paid $2,250 a year for
interest since 1836. This has amounted up
to the present time to $180,000 on a debt of
$75,000 and which debt they still owe the bank.

It would be interesting to know the amount
of notes the Banks have in circulation at the
present time and what profit they have made
on them.

There is now, and has been for fifty years,
$346,000,000 legal tender notes outstanding in
the United States. Had these notes been con-
verted into interest bearing bonds, as the bank-
ers desired, the people of the United States
would have paid as interest about $700,000,-
000.00 without receiving a particle of benefit
and would still be owing the bondholders the
original $346,000,000.00.

The argument advanced by some political
economists that the issue of the Guernsey
States' notes merely drove an equal amount of
gold out of circulation is a fallacious one. The
deplorable condition of the Island reported in

THE EVOLUTION OF BANKING 67

public documents is evidence that there was an
insufficient amount of money in circulation to
bring together the unemployed labor and the
raw material which existed in abundance.

The issuance of the new money was followed
immediately by an activity in all lines of in-
dustry— idle men were employed and building
materials were purchased — houses were built —
roads widened, paved and sewered. Old houses
were demolished and better ones built in their
stead.

The notes were destroyed quarterly as they
were received in payment of rent for space in
the building. Some of the notes were received
from the "States" as an appropriation out of
the tax levy by the local governing authorities,
as the following extract from the Treasurer's
Report, published in "Jacob's Annals of Guern-
sey," Part 1, 1830, shows :

TREASURER'S ACCOUNT OF THE MARKET.

Receipts.

1827—

Balance from last quarter.

Net produce of the first quarter. . .
Net produce of the second quarter.
Net produce of the third quarter. .
Net produce of the fourth quarter.
Annual contribution of the States.

Total 1,008. 5. 11.

£

8.

d.

99.

14.

0.

110.

12.

6.

282.

10.

5.

115.

5.

11.

400.

0.

0.

68 THE EVOLUTION OF BANKING

Expenditures
1827—

State Notes destroyed.

£ s. d.

May 30 500. 0. 0.

August 2 110. 0. 0.

November 1 283. 0. 0.

1828—

February 15 115. 0. 0.

Balance to new account 5. 11.

Total 1,008. 5. 11.

In view of these facts the history and expe-
rience of the Guernsey Islanders should be read
by every voter in America.

The commerce of this country is no longer
carried on by means of gold and silver coins.
It is not even carried on by means of currency.
The cash transactions only amount to five per
cent of the w^hole. The balance, 95 per cent,
is paid in bank checks. These latter total more
than two hundred billion dollars each year.
All this immense sum is based on bank credits.

It is very evident that whoever can control
the bank credits can control all business and
thereby are enabled to levy tribute on every
transaction.

They can assure success to some by extending
credit and drive others out of business by re-
fusing credit. Such a power in the hands of a

THE EVOLUTION OF BANKING 69

class would result in an Economic Monarchy
from which the public could not hope to escape.
Congress must enact such legislation as will
expand the functions of the Treasury and the
Postal Banks and through them issue all money
and credit for all public purposes.

FROM AN UNPUBLISHED MANUSCRIPT
BY HENRY D. LLOYD

"Professor Jevons says there is no mj^stery
about the operation of the paper money issued
to build the Guernsey market house. It simply
4rovc an equal amount of gold out of circula-
tion and was therefore a forced loan on which
no interest had to be paid. No evidence is
given to support this, which is probably as-
serted because the bullion theory presupposes
such effects in such cases. If the market house
had been built without the issue of any money
by the use of a system of book accounts, or if
there had been a sort of communism in the
Island, would the construction of the market
house have been accompanied by the with-
drawal of four thousand pounds from circula-
tion? If the gold in circulation was fully em-
ployed, if the men who built the market were
idle and there was no commercial demand for
the stone and other stuff used, how could the

70 THE EVOLUTION OP BANKING

bringing together of all these things to produce
a new utility and new source of wealth pro-
duction have the effect of driving four thou-
sand pounds out of circulation? Would not
the new activity and prosperity on the contrary
have such an effect on the general trade and
industry as to greatly stimulate the circula-
tion of the gold besides keeping in circulation
the new money? Jevons' statement seems to
proceed on the theory that no matter what
the amount of the gold circulation may be it is
enough for all the currency purposes. No ac-
count is taken of the fact that hoarding and
traveling and other subtractions, as, for in-
stance, a determination on the part of capital-
ists not to use their money in industrial
undertakings until some financial policy has
been settled to their liking or their interest —
as the capitalists of the United States did dur-
ing the Bryan campaign — may reduce the stock
of gold in circulation below the needs of the
people. Then prices would fall and money flow
in and the equilibrium be restored? Yes, if
everything in this world were fluid to intelli-
gence, and the needs of the people and all civil-
ization were but one market, with its frequent-
ers able to know always the movements in every
part, of prices and goods, supply and demand.

THE EVOLUTION OF BANKING 71

This currency theory is like that of the mobility
of labor, which proves that when there is a
slackening in the demand for labor in one place,
the laborer has only to go to another. Still,
laborers willing to work starve because they
can not find this other work oi* can not get to
it. Of course on the theory that the supply of
gold, whatever it is, will always do the business
of the world as this business ought to be done,
once it is accepted, puts out of the forum any
arguments that more money might be needed.
This theory leaves the enquirer perplexed as
to why the people that hold it should be so
eager in their quest for gold in Mashonaland
and the Transvaal. The gold they already
have must be enough by the theory to do their
business. Prices and the movements of indus-
try have adjusted themselves to this specie
basis. It is not hard to detect here the same
metaphysical and theological preconception
which we find all through the writings of most
of the economists. No doubt it is true that
prices and all commercial affairs will adjust
themselves to the amount of specie, and that
if it is the only money it will distribute itself,
as the bullionists say, throughout the world in
proportion to the demand for it. The process
will require a great deal longer time in the slow

72 THE EVOLUTION OF BANKING

moving world, than in their very rapid minds,
but it will get itself done. But that this is a
beneficent process, that it is for the best, that
the results vindicate the "laws of trade" as
like the other forces that are making this the
best of all possible worlds — these, which are the
underlying implications, are absolutely unveri-
fied and unverifiable. "When this reasoning is
examined in the light of science and culture it
becomes plain that here is the same reactionary
argument which has been used all through his-
tory in one shape or another by the priests,
kings, nobles, the invested classes, the ''Chiv-
alry" who were in the saddle and could ride
down their defenseless brethren, by the stupid,
to oppose change. Those who were conserva-
tive from selfishness, and those who were so
from dullness, have always met reform with
this argument. In the ordained nature of
things — that nature which the bullionists tell
us distributes the stock of specie as it should
be distributed — matters would go right and as
a matter of fact were going as nearly right as
could be expected, considering that the indi-
vidual regeneration of men was so incomplete.
Such is the talk with which the creative genius
of the world has been discouraged ever since
time began. One other counter attack can be

THE EVOLUTION OP BANKING 73

made on this position of Jevons. If this was
a forced loan, and if gold was driven out of
circulation, then, judging by results, forced
loans and driving gold out of circulation are
good things to effect. Let us have more of
them and less of this clerical economy.

If at the price of forced loans and banished
gold we can put the unemployed at work, and
can incorporate iron and sand and timber and
stone into institutions of lasting power to shel-
ter and aid and enrich, if by paper money and
paper laws we can put an end in this way to
poverty and idleness and emancipate the people
from the burdens of perpetual debt and inter-
est, and the eternal meddling in their legisla-
tion, lives and industry of the "money power"
— that is of the money lenders, and bond gath-
erers— by all means let us go on with more of
this kind of finance. The people of Guernsey
could have issued bonds to build their market
house. They could have bound themselves for
thirty years to pay interest in gold and at the
end have had to renew the loan for thirty years
more. They could have made the bonds for
$30,000, while they received only $25,000. That
would have been the "issue price." When the
market house was sixty or seventy years old,
and about ready to be pulled down, they would

74 THE EVOLUTION OF BANKING

have still owed as much as ever, though in the
meantime they had paid back $90,000 in inter-
est— three times as much as they had borrowed.
Meanwhile every attempt to improve the cur-
rency or to change the regulations of the mar-
ket or to make any alterations in their ways,
that could by any ingenuity or timidity be con-
strued as involving danger to the bondholder,
or any threat of revolution or financial dis-
honor would have been the signal for the de-
scent on them of a torrent of abuse from the
press and pulpit and professors of the world;
their legislatures would have been haunted by
armies of lobbyists trying to get new issues of
bonds on one pretext or another; their elec-
tions would have been taken in charge by the
"honest money" men, and the principal activ-
ity of their common councils and executive
officers would become the contrivance of new
forms of profit-producing government-made
privileges for these guardians of their morals
and economic welfare. As it is the Guernsey
market house stands today free from the bur-
den of ever having paid one day's interest, and
unstained by the intrigues of lobbyists or priv-
ilege hunters, a monument to the ** beneficence"
of a creative intelligence among the people
which can set them to co-operating with each

THE EVOLUTION OF BANKING 75

other in an exchange which is of, by and for
the people, and embodies itself in work which
lasts to bless future generations, an asset in-
stead of a debt.

If the Guernsey operation was a "forced
loan" on which no interest was paid, as Jevons
says, it hardly seems to require argument that
the forced loan was a very profitable thing. All
taxation is a forced loan, but when it is taken
by the people from themselves to be spent by
themselves for their own benefit, and so wisely
that it does yield the benefits planned for, the
sting is all taken out of the **begging-the-
question" phrase "forced loan." It was a
good bargain for the people to use their own
money without interest for a few years if there-
by they saved themselves the payment of inter-
est to London for an indefinite number of years.
The number of instances in which people have
got under a bonded debt and got out again, in
which they have been able to pay up and get
a release and look upon themselves without
the appendage of a tail of bonds, is so small
that there is very little hope that a people who
once begin to give bonds will ever be free
again.

If it is true that when the market house
money was issued, it drove an equal amount of

76 THE EVOLUTION OF BANKING

gold out of circulation, it must also be true
that when this paper was destroyed, the gold
came back. All, therefore, that the people had
to give for a market house which stands for-
ever, was a few years' absence of 4,000 Pounds
Sterling of gold. The gold was not missed ; as
it went out, the market house went up; now
the people have both their market house and
the gold, according to Jevons' own theory. If
gold can do so much good by leaving a place,
the oftener it goes the better.

If the Guernsey market house had been built
by the usual methods of loans from bankers
and contracts with profit-hunting Captains of
Industry, the bankers would have had to be
paid their price for effecting the application
to this work of the loanable capital. But by
the method the people adopted, they saved this
charge, and it is always a very heavy one. In
their turn the contractors would have had to
be paid their commissions or profits. These are
very heavy. But the people, by making them-
selves their own contractors, saved this. If it
was a forced loan, it was not so large a loan as
the other process would have necessitated, and
it was no more forced than that. If both meth-
ods, that by taxation, syndicating of bankers
and contractors, and that by the issue of money

THE EVOLUTION OF BANKING 77

for services and popular self-direction are both
forced loans, it is manifest that the one kind
of forced loan is infinitely superior to the other.
One is a forced loan which distributes wealth,
the other concentrates it ; one increases popular
powers of self-help, the other diminishes it;
one is quickly paid and settled, the other is al-
most interminable and, experience shows, often
grows the more burdensome the more has been
paid on it. A forced loan collected by the peo-
ple from the people and spent among the people
is a co-operation ; one that is made with the in-
termediation of bankers and other financial
functionaries is a servitude putting the people
under tribute to absentee rulers.

The people may rest assured of one thing:
they will never have a currency which will be
for the people until it is of the people. Not
until they have mastered the work which cur-
rency must do and the principles on which it
should be provided will there be a good money,
good morally and economically. As long as the
supply of currency is left to **God" it will be
like the other work of inferior nature, the sport
of accident and mistake, and the product of the
grosser laws of matter and force. Not until it
is taken in hand by the highest will that has
to do with social affairs — the will of conscious

78 THE EVOLUTION OF BANKING

and conscientious men — will it rise in its de-
velopment above the slow and torturing evolu-
tion by which the lower forms of life have been
evolved. Its perfect social development will
not come until it has been brought under the
jurisdiction of the people, when there comes
to be such a body. As long as the forms and
uses of money are fixed by individuals or
classes, so long will these have a class and sinis-
ter purpose and effect.

Money represents service. There is no such
thing as "cold cash." Every dollar is a warm,
throbbing, living product of somebody's toil.
It is because the real significance of money is
forgotten, and we come to regard it as so much
gold metal, to be used irresponsibly by any-
body who happens to have possession of it, that
money becomes a tap-root of every kind of evil.

Money,therefore, is a sacrament, represent-
ing the real communion of man with man. He
who uses it any other way "drinks to himself
damnation. ' '

THE EVOLUTION OF BANKING 79

FRENCH ASSIGNATS

One of the most prominent examples of the
use of paper credit was the assignats issued
during the French Revolution. These have
often been referred to by those who uphold the
superiority of a metal coinage to show the
utter fallacy of anything serving as money but
gold and silver. The gradual depreciation of
the assignats and their final disappearance are
quoted as proof positive of their utter worth-
lessness from the very beginning.

The assignats were brought into existence
while France was in the throes of the revolu-
tion. The nation under the monarchy had
become bankrupt. Steeped in debt, and with an
insufficient revenue to pay current expenses,
the finances of the nation were in an alarming
condition. Very little money was in circula-
tion. Trade was stagnant and labor was unem-
ployed. The credit of the nation was so low
that no more loans could be made. The States
General was convened and declared itself to be
the National Assembly and proceeded to legis-
late in behalf of the masses. It consisted of
270 of the nobility, 291 of the clergy and 584
of the third estate, or representatives of the
people. The nobility and clergy united to de-

80 THE EVOLUTION OF BANKING

mand that they should legislate as a separate
and superior body, with the intention to curb
and veto the third estate. The latter openly
and firmly resisted. They insisted that the
States General should sit, not as three bodies,
but as one. The deadlock lasted nearly two
months, but finally the clergy, more politic
than the nobles, gave way and joined the third
estate. The nobility, humiliated and impotent,
were compelled to capitulate.

In the meanwhile, France, and especially
Paris, was becoming exasperated at the delay.
Work was scarce, and food even scarcer. A
mob of hungry and desperate citizens attacked
and captured the Bastile and murdered its
Governor and also the Mayor of Paris. An-
other mob made its way to Versailles and
forced Louis XVI, Marie Antoinette, and the Na-
tional Assembly to take up their abode in Paris.
Famine and destitution was widespread. Count-
less numbers were in want for the food and the
common necessaries needed to support life.

The revolution was at its height, but the
Revolutionary party had no money, not enough
to pay its expenses from day to day. It had no
credit and every source of revenue was ex-
hausted.

The Catholic church owned more than one-

THE EVOLUTION OF BANKING 81

third of the entire real property of France. It
consisted of princely estates in the country,
sumptuous palaces and buildings in the towns,
and had a value of about four thousand million
francs and yielded an annual income of about
two hundred millions. This represented the
accumulation of thirteen hundred years. On
the 2d day of December, 1789, it was declared
that "all the lands of the clergy belonged to
the state."

Two weeks later a bill was passed authoriz-
ing the issue of bills of credit called "as-
signats," or mortgages based upon the lands
confiscated from the clergy.

The first issue consisted of 400,000,000 francs
and an equal amount in value of the lands Avas
pledged for their redemption.

The church and clergy denounced these acts
as robbery.

In June, 1790, another issue of 400,000,000
francs was authorized, based as before on the
confiscated lands of the church. The church
and clergy seeing their lands being swallowed
up in the maelstrom of the revolution began a
campaign of disputes, threats, and finally or-
ganized opposition. Joining with the nobility,
whose lands and estates were valued at nearly
as much as those held by the church, and which

82 THE EVOLITTION OF BANKING

were also confiscated, they made war on the
revolution. Under the cry of '*God and the
King" they rallied the ignorant and supersti-
tious peasantry. Religious fanaticism, coupled
with their devotion to their feudal masters,
caused the misguided yeomanry to lay down
their lives by the tens of thousands. The hor-
rors of the civil war in La Vendee are un-
equaled in the annals of human history.

A coalition was formed between the Catholic
clergy and the emigrant nobility to defeat, if
possible, the revolution and restore the confis-
cated lands to the church and the aristocracy.

The first anniversary of the fall of the Bastile
was the occasion when the king accepted the
new constitution and took the oath to support
and defend it. The constitution gave the Na-
tional Assembly the right to confiscate the
lands of the clergy. It was a declaration to the
world that the rights of man were supreme in
France and that kingly, aristocratic and eccle-
siastic power had been overthrown. A major-
ity of the clergy, of whom there were about
175,000 in France at the time, refused to take
the oath to support the constitution. Those
who refused were treated as enemies of the
revolution, denied their priestly functions, and
deprived of support. They organized and

THE EVOLUTION OF BANKING 83

made every altar, vestry and confessional a
rallying point of revolt. Aristocrats at home
and abroad assisted in the work and the kings
of Europe, scenting danger to their thrones
from the spread of republican ideas, began to
combine with a view to interference. Specu-
lators in food joined with the nobility and
clergy. Famine was widespread and food was
difficult to procure even by those who had
money. Against these three evils — anarchy,
famine and counter-revolution — the govern-
ment of France had to fight its way. The as-
signat was its savior, just as the continental
currency had saved the American revolution
fifteen years before.

The coalesced kings of Europe began their
preparations for the invasion of France with
the intention of partitioning it among them-
selves just as Poland had been.

To resist foreign invasion, an army was
needed. The republic raised the army and it
was armed, equipped and fed by means of the
assignats. They were its sole financial reliance.

In the midst of the utter confusion that
reigned, the king and his family attempted to
escape from France and take refuge with the
army of the king of Prussia, but was captured
and brought back a prisoner.

84 THE EVOLUTION OF BANKING

War was inevitable. To prepare for the im-
pending struggle, which was certain to be a
titanic one,, an issue of 800,000,000 of francs in
assignats was authorized.

Mirabeau, who previously had used his im-
mense influence against them, declared that
this was not a matter of choice, but a measure
demanded by necessity.

The assembly, in legalizing the issue, de-
clared that all debts of the government should
be paid in them and that as fast as they were
paid back to the government for taxes or in
payment for land, they should be destroyed,
and that no more would be issued than there
remained of the public domain as security for
their redemption, and that the amount in circu-
lation should at no time exceed twelve hundred
million of francs.

The marshaling of the armies of Europe on
the frontiers of France intent on invasion, and
the known hostility of the king, the nobility
and the non-juring clergy, drove the people to
a frenzy, and, on the 10th of August, 1792,
they deposed and imprisoned the king.

The march of invasion began and threw
France into a frenzy of patriotic and revolu-
tionary zeal. The south and the west of France
was ravaged by civil war between the revolu-

THE EVOLUTION OF BANKING 85

tionary forces on the one hand and the pious
peasants who still retained their loyalty to the
feudal lords, led by priests and nobles, on the
other.

France was a huge military camp. Peaceful
pursuits were almost wholly abandoned and
the citizens almost en masse threw themselves
upon the foreign invaders and drove them from
the soil of France. Belgium was overrun and
declared a republic. The estates of the nobil-
ity were confiscated and were added to the
estates taken from the Catholic church and thus
made to strengthen the credit of the republic.

The Legislative Assembly that succeeded the
National Assembly took its seat October 1, 1791,
and from the beginning was torn by factions. It
consisted almost entirely of middle class repre-
sentatives. The extreme right was composed of
a few who were only mildly revolutionary and
who, while professing to be satisfied with the
changes — such as the abolition of serfdom,
wrought by the Revolution, desired a king on
the throne with limited powers. The center, or
Girondists, were extreme republicans. Eloquent,
cultured, and many of them very rich, they de-
sired, as Carlyle expresses it, a republic of the
virtues in which they would rule, but were
doomed to the harsh fate of seeing a republic

86 THE EVOLUTION OP BANKING

of the strengths, virtuous or otherwise, in which
others ruled. They represented the elements in
society of that time that can fairly be compared
with the elements which made up the Progressive
Party in America. The left, or Mountain Party,
while few in numbers, were strong in their
hatred for the old regime and were impatient
over the long debates and hair splitting theories
of the other members of the assembly.

They were essentially men of action and were
the idols of the working class, who had fought
and suffered so much for the Revolution. To
them oratory, with high sounding phrases and
fine spun theories, was no substitute for food.
The masses of the people were cold, hungry, and
ragged, and the Revolution meant nothing if
these conditions were to continue, no matter what
political form it took.

Bitterness, hatred and the desire for revenge
resulted from the clash of these factions. The
first faction to disappear was the extreme right,
leaving the field to the Girondists and the Moun-
tain.

The king was accused, tried and beheaded.
The two contending factions faced each other
for the battle.

The Girondists were well meaning, but weak
in that they were unable to understand the

THE EVOLUTION OF BANKING 87

forces that brought on the Revolution. The
Mountain was strong in its uncompromising sin-
gleness of purpose. To them hunger, cold and
wretchedness were concrete realities and not
mere abstract theories. The convention was over-
whelmed again and again by the Parisian mob
crying for bread.

The Mountain gained in strength while the
Girondists lost, and at length the convention cre-
ated the Revolutionary Tribunal and the Com-
mittee of Public Safety. This sounded the doom
of the Girondists. Arrested, tried and guillo-
tined, their numbers dwindled. Many of them
sought safety in flight, but were hunted like
wild beasts. Some succeeded in escaping to other
countries, but the unfortunate ones were caught
and beheaded.

The Reign of Terror was in full swing with
Robespierre as its leader. The Mountain Party
was divided. Rabid members denounced the
moderates, and accusations of treason were
launched upon the flimsiest pretext. To be ac-
cused meant certain death, as the trials were
travesties on justice. One by one the leaders
of the Revolution were exterminated.

During these months of terror the Conven-
tion sat paralyzed with fear. At length, with
a courage born of desperation, they declared

THE EVOLUTION OF BANKING

Robespierre an outlaw to be guillotined without
trial. He was seized, but rescued by the Paris
mob, retaken and beheaded on July 26, 1794.

The amount of assignats from the time that
the first issue was authorized in December, 1789,
was increased from time to time until the amount
in circulation January 1, 1794, was 5,536,000,000
francs or $1,107,000,000. The value of the lands
confiscated from the nobility and clergy and held
as security for their redemption was 15,000,-
000,000 francs, or $3,000,000,000. This hasty re-
view of the events of the four fateful years gives
but a faint idea of the tremendous burden
thrown upon the people of France. With a
Revolutionary government in control of affairs,
beset by armed foes from without and traitors
at home, it performed prodigies of valor. In
spite of all the internal dissensions it maintained
thirteen armies in the field, comprising more than
one million of men, and single handed defeated
the allied armies of five European nations, all
of whom were on the soil of France at the same
time. It defeated the armies of the reactionary
elements at home that waged Civil War for the
purpose of re-establishing the feudal system and
restoring the lands to the nobility and clergy.

During this titanic struggle, gold and sil-
ver had disappeared. The paper assignat was

THE EVOLUTION OF BANKING 89

the oiily money. Without it the Revolution
would have been helpless and impotent. With
it the Revolution overcame its enemies at home
and abroad. Every means that chicanery or dis-
honesty could devise were used by the enemies
of the Republic to discredit and destroy the
assignat.

The Clergy denounced to eternal pains every
communicant of the church who sustained the
spoliation of the church, and the nobility and
clergy united in denouncing the assignat as based
upon theft, sacrilegious robbery and impious
outrage upon the charities of the church.

They declared that their lands had been ap-
propriated by the Revolution without any of the
forms of law, and in such flagrant outrage of
all recognized codes of property that the civil-
ized world held, that the titles still remained in
the clergy and nobility.

They pledged their lives, their religion and
their honor never to cease agitation and war on
the Assignat, its credit, and the robbery on which
it was based. But in spite of the opposition the
Revolution was stronger than its enemies. The
successes of its armies, armed, equipped and
maintained in the field through the use of the
Assignat, carried fear into every nation in Eu-
rope.

90 THE EVOLUTION OF BANKING

Failing to destroy the credit of the assignat
by appeals to passion and prejudice they sought
to accomplish the same result by stealth.

Shortly after the third issue of assignats in
September, 1790, adventurers in Belgium and
priests in Switzerland began to issue counter-
feits that so closely resembled the genuine notes
as to deceive any one except an expert. But
these two countries were too small to offer the
necessary opportunity for extended operations.
London offered a field where the manufacture
could be carried on without fear of interruption.

Seventeen establishments were in full blast
in London, employing four hundred men en-
gaged in the production of false and forged as-
signats.

In May, 1795, it was found that there were
in circulation between 12,000,000,000 and 15,-
000,000,000 francs of forged assignats. At that
time the assignats in circulation that were is-
sued by the Revolutionary government amounted
to 7,860,000,000 francs. Two out of every three
of the bills in circulation were fraudulent, but
were so perfect an imitation that it was next to
impossible to detect the difference. No paper
currency ever issued could be maintained under
such conditions. The wholesale business of
printing and circulating the forged assignats was

THE EVOLUTION OF BANKING 91

carried on under the direction of Count d ' Artois
(a brother of Louis XVI and afterwards Charles
the Tenth). He was assisted by Count Puisaye
and Bishop Dol and by a host of Catholic priests
still residing in France.

Catholicism was the dominant religion in
France and in every parish there were numer-
ous communicants who felt that an outrage had
been committed on the Church in confiscating
its lands and who were willing assistants in the
work of circulating the counterfeits. The noble
and priestly scoundrels who were engaged in
this infamous traffic quieted their consciences
by claiming that the assignats issued by the gov-
ernment were based upon land confiscated from
the church, which act they denounced as rob-
bery and that genuine notes had no foundation
in law or morals. They claimed the right under
the laws of war to recover the property taken
from them and to weaken the enemy by any
means in their power.

Rumors that large amounts of assignats were
being forged and circulated reached the ears
of the revolutionary leaders, but they at first
refused to credit them. To admit it would bring
all outstanding issues into discredit. Every de-
vice known to the stock jobbers and speculators
was used against the assignats. The rumor that

92 THE EVOLmON OF BANKING

forgeries were in circulation and the subsequent
denials caused wide fluctuation in prices and
enabled the speculators to reap large profits.

Eumors of impending defeat of the Revolu-
tion and the return of the confiscated lands to
their former owaiers were also widely circulated.
The forces of reaction, the stock jobbers, gam-
blers, priests and nobles, together with the fact
that could no longer be denied that less than one-
half of the assignats in circulation were genu-
ine, caused the people to begin to lose faith, and
this mental condition it was impossible to con-
trol. The end was in sight.

With the downfall and death of Robespierre
the Revolution may be said to have ended. The
assignats fell to six cents on the dollar.

The reactionists secured power and began a
relentless warfare on the radical element. They
revoked the decree that expelled the nobility
and clergy from France and restored to the non-
juring clergy their rights to worship in the
churches of which they had been deprived. Paris
was in a ferment, and mobs with the cry for
bread and work tried to stay the counter-revolu-
tion. They attacked the Convention, but were
defeated and dispersed. They were disarmed
and the arms taken from them were used against
them with bloodthirsty ferocity.

THE EVOLUTION OF BANKING 93

The Convention by a general act restored the
confiscated lands to the families of all persons
condemned by the Revolution so far as such
lands had not passed into the possession of
purchasers under the decree upon which the as-
signats were issued.

This took from under the assignats the basis
for their redemption and left them without sup-
port except that they could be used to a certain
extent in the payment of taxes and in payment
for unclaimed lands not restored to the former
owners who had disappeared and could not be
located. But the value of these lands did not
exceed the one hundredth part of the amount in
circulation.

The Convention submitted a new constitution
to the people, which was accepted by them, but
which did not please the Royalists. They com-
bined with the Sections of Paris to overthrow it,
but Napoleon was given charge of the armed
forces of the Convention and with his "Whiff
of Grape Shot" secured the control of France
to the middle class.

During the fifteen months between the death
of Robespierre and the victory of Napoleon there
were 5,000,000,000 francs of assignats issued
without regard to the obligations they created.
The Directory was given a credit of 3,000,000,-

94 THE EVOLUTION OF BANKING

000 francs for expenses, but they could not
realize one franc in coin for one hundred as-
signats. They were compelled to rely on forced
loans and on the war indemnities Napoleon's
victories wrung from the conquered nations of
Europe. The discredit of the assignats was com-
plete.

The Directory tried to substitute for them a
paper currency known as Mandats. They were
based on the lands that actually belonged to the
nation. They were legal tender and receivable
for all public dues. It was intended to pur-
chase with them the outstanding assignats at
their market value, which was about one cent or
less on the dollar. Land was worth only about
one-half what it was in 1790 and the Mandat
fell accordingly. They fluctuated between 80
and 15 cents on the dollar, and never circulated,
but were bought up by land speculators.

Their issue was a failure. Their career lasted
only four months, from March 16th to July
16th, 1796. After that they were ignored, the
government refusing to receive them for taxes
or payments on land except at the current rate,
which was from five to eight cents on the dollar.

This closes a brief history of the paper money
issued by the revolutionary forces in France be-
tween 1789 and 1795. It ought to satisfy any

THE EVOLUTION OP BANKING 95

reasonable mind that the failure was not due
to any inherent defect in a paper money as such,
but was on account of the extraordinary condi-
tions that prevailed and to the malicious and
infamous methods used by powerful elements
and which were finally successful.

But the Revolution, with the financial aid of
the assignats based on land confiscated from the
idle classes, overthrew the monarchy and es-
tablished constitutional liberty and civil
equality. It freed twenty-five million serfs, and
6,000,000 owners of the soil took the place of a
landed aristocracy of 150,000.

96 THE EVOLUTION OF BANKING

STATE BANKS IN AMERICA

Before the Civil War the state banks oper-
ated under charters granted by the State in
which the bank was located. Bank charters
were considered as one of the spoils of partisan
politics and were often granted by the party in
power to politicians as a reward for party
activity.

In some instances the state held a portion of
the capital stock. The State of South Carolina
owned all of the capital stock of the Bank of
the State of South Carolina and its officers and
directors were elected by the Legislature.

The banks received deposits, discounted mer-
chants' notes, and loaned money to land own-
ers on mortgage security and dealt in domestic
and foreign exchange. They had the right to
issue circulating notes to the amount of two or
three times their capital stock. Their bills were
redeemable on demand in coin — that is, gold or
silver, whichever was most convenient. A re-
serve of about 33 1-3 per cent was maintained
by the better class of banks, but others kept
but 10 per cent or even less.

THE EVOLUTION OF BANKING 97

There was no adequate supervision and the
laws enacted for their control were loosely en-
forced. Some of the charters were secured by
unscrupulous men who ignored or evaded the
laws and who issued bank notes without the
capital stock being paid in full, and in the case
of some banks no capital at all was provided.
They made loans to themselves or their friends
and relatives on insufficient security, main-
tained only a small reserve, and at the first sign
of trouble the bank broke, leaving unpaid de-
positors and noteholders, and bringing other
banks and bank notes into disrepute.

Other charters were granted to men who
were well meaning and honest but weak and
inexperienced, and who were easily induced to
loan the credit of the bank for hazardous and
speculative enterprises. These banks failed as
the others did.

There were, at the outbreak of the Civil War,
about 1500 state banks in existence issuing
bank bills. The bills of no two banks were
similar in makeup and design, and the bills of
1250 of these banks were counterfeited. There
were nearly 5000 alterations and imitations of
various kinds, and in addition bills of nearly
1700 banks were circulating that purported to

98 THE EVOLLTION OF BANKING

be issued by banks located in towns that really
had no existence — and many bills were issued
by institutions having little or no paid up cap-
ital, and which never expected to redeem them.

Is it any wonder that this was called the era
of "Wild Cat" and ''Coon Box" banks and
that the money was dubbed "Wild-Cat," "Red-
dog" and "Stump-tail" money?

But even if no charters had fallen into the
hands of weak or unscrupulous men, but had all
been secured by shrewd and capable men of
high character and who were faithful to every
trust reposed in them, and no counterfeit, or
altered bills, or bills of fictitious banks had
been in circulation, the system was bound to
fail by reason of a fundamental error in the
structure.

The charters of these state banks gave them
the right to issue circulating bills to the amount
of twice, and in some cases, three times the
capital of the bank and to receive deposits,
which liabilities they were obligated to redeem
in coin, i. e., gold or silver on demand.

The condition of the banks in the panic years
of 1837 and 1857 is shown in the Report of the
Controller of the Currency for 1911 — page 814,
table 106 — and is as follows :

THE EVOLUTION OF BANKING 99

Panic Year of 1837:

Circulating notes outstanding $149,185,000.00

Specie on hand to redeem same 37,915,000.00

Reserve, 25 per cent.

Circulating notes outstanding $149,185,000.00

Due depositors 127,397,000.00

Total demand liabilities $276,582,000.00

On hand to redeem the same:

Specie $ 37,915,000.00

Bills of other banks 36,533,000.00

Specie funds 5,306,000.00

Total $ 79,754,000.00

Reserve, 29 per cent.

Panic year of 1857:

Circulating notes outstanding $214,778,000.00

Specie on hand to redeem same 58,349,000.00

Reserve, 27 per cent.

Circulating notes outstanding $214,778,000.00

Due depositors 230,251,000.00

Total $445,129,000.00

On hand to redeem the same:

Specie $ 58,349,000.00

Specie funds 25,081,000.00

Bills of other banks 28,124,000.00

Total $111,554,000.00

Reserve, 25 per cent.

Of course these banks had other assets, but

they were in the form of notes, real estate,

mortgages, etc. But these could not be used

during a panic, as months and perhaps years

would ensue before they could be realized on.

100 THE EVOLUTION OF BANKING

"When a run on a bank occurred the specie on
hand would be withdrawn and hoarded by the
public, and when the reserve was exhausted,
the bank closed its doors. This result was in-
evitable. While a cash reserve of 25 or 30 per
cent was undoubtedly sufficient to transact an
ordinary day 's business in the bank, panic days
are extraordinary days and no debtor, bank or
merchant can pay on demand one dollar of
debts with thirty cents or less in mone3^

The banks brought ruin on themselves by
promising to do what they knew they could not
do if called upon.

The year 1847 was called a good year — ex-
ports amounted to $158,000,000 — and the net
gain by this country in specie importations was
$22,000,000. And yet the condition of the
banks was not extraordinarily different from
the panic year of 1837, which preceded it, and
the panic year of 1857, which followed. The
year of 1847 could and would have been a
panic year if the noteholders and depositors
had made a run on the banks and demanded
the specie which they were entitled to accord-
ing to the banks' promises.

In 1837 the banks had four times the amount
of bills outstanding that they had specie to
redeem them with, while in 1847 they had three

THE EVOLUTION OF BANKING 101

times as many ; and when we take into consid-
eration the total amount of demand liabilities
and the quick cash assets on hand to redeem
them with, the difference between the two
years is only the margin between 31 per cent
and 29 per cent.

CONDITION OF AMERICAN BANKS

(Taken from the Report of the Controller of

the Currency for the year 1911, Page 814.)

PANIC YEAR OF 1837.

Condition of Banks. 788 Banks Reporting.

Circulating notes outstanding $149,185,890.00

Due to depositors 127,397,185.00

Total amount payable in coin on

demand $276,583,075.00

Specie and bills of other banks on
hand with which to pay above lia-
bilities 79,835,267.00

or 29 per cent.

GOOD YEAR OF 1847.

Condition of Banks. 715 Banks Reporting.

Circulating notes outstanding $105,519,000.00

Due to depositors 91 ,792,000.00

Total amount payable in coin on

demand $197,311,000.00

Specie and bills of other banks on
hand with which to pay above lia-
bilities 62,093,000.00

or 31 per cent.

102 THE EVOLUTION OF BANKING

PANIC YEAR OF 1857.

Condition of the Banks. 1416 Banks Reporting.

Circulating notes outstanding $214,778,822.00

Due to depositors 230,351,352.00

Total amount payable in coin on

demand $445,130,174.00

Bills of other banks and specie on
hand with which to pay above lia-
bilities $111,555,487.00

or 25 per cent.

YEAR OF 1863.

The National Banking Act was passed in this year
and the Civil War had been in progress for two
years.

Condition of the Banks. 1466 Banks Reporting.

Circulating notes outstanding $238,677,218.00

Due to depositors 393,686,226.00

Total amount payable in coin on

demand $632,363,444.00

Bills of other banks and specie on
hand with which to pay above lia-
bilities $205,563,215.00

or 32 per cent.

THE EVOLUTION OF BANKING 103

PANIC YEAR OF 1873.

Condition of National Banks on Sept. 12, 1873. 1976
Banks Reporting.

The monetary panic of that year began five days
later, on September 17, and the disastrous effects
were felt in this country and Europe for many years
afterward.

(See Report of the Controller of the Currency for
1911, Page 333.)

Due depositors $622,685,563.00

Due U. S. treasurer 15,927,827.00

Total amount payable in currency

on demand $638,613,390.00

Cash and clearing house checks on

on hand $219,723,752.00

Due from U. S. treasurer 20,610,000.00

Total $240,333,752.00

or 37 per cent.

YEAR OF 1883.

Condition of the National Banks on October 2. 2501
Banks Reporting.

Due depositors $1,049,437,700.00

Due U. S. treasurer 14,164,455.00

Total amount payable in cash on
demand $1,063,602,155.00

Cash and clearing house checks $ 297,963,590.00

Due from U. S. treasurer 26,566,712.00

Total $ 324,520,302.00

or 30 per cent.

104 THE EVOLUTION OF BANKING

PANIC YEAR OF 1893.

Condition of the National Banks May 4, 1893. 3830
Banks Reporting.

Due depositors $1,749,930,817.00

Due U. S. treasurer 13,950,982.00

Total $1,763,881,799.00

Cash and clearing house checks on

hand $ 446,749,173.00

Due from U. S. treasurer 21,154,880.00

Total $ 467,903,953.00

or 26 per cent.

PANIC YEAR OF 1903.

Condition of the National Banks Sept. 9, 1903. 5042
Banks Reporting.

Due depositors $3,156,333,499.00

Due U. S. treasurer 146,615,000.00

Total $3,302,948,499.00

Cash and clearing house checks on

hand $ 730,096,062.00

Due from U. S. treasurer 21,342,184.00

Total $ 751,438,184.00

or 23 per cent.

THE EVOLUTION OF BANKING 105

PANIC YEAR OF 1907.

Condition of the National Banks May 20, 1907. 6429
Banks Reporting.

Due depositors $4,322,880,141.00

Due U. S. treasurer 180,678,309.00

Total $4,503,558,450.00

Cash and clearing house checks on

hand $ 994,995,887.00

Due from U. S. treasurer 31,673,714.00

Total $1,026,669,601.00

or 23 per cent.

YEAR OF 1910.

Condition of the National Banks June 30, 1910. 7145
Banks Reporting.

Due depositors $5,287,216,312.00

Due U. S. treasurer 54,541,348.00

Total $5,341,757,660.00

Cash and clearing house checks on

hand $1,294,107,094.00

Due from U. S. treasurer 42,433,572.00

Total $1,336,540,666.00

or 25 per cent.

106 THE EVOLUTION OF BANKING

YEAR OF 1911.

Condition of the National Banks June 7, 1911. 7277
Banks Reporting.

Due depositors $5,477,991,156.00

Due U. S. treasurer 48,455,641.00

Total $5,526,446,797.00

Cash and clearing house checks on

hand $1,239,542,218.00

Due from U. S. treasurer 42,525,336.00

Total $1,282,067,554.00

or 23 per cent.

Condition of National, State, Savings, and Private

Banks and Loan and Trust Companies. (Table

86, Page 786, Report of the Controller

of the Currency, 1911.)

Due individual depositors $ 8,307,913,874.00

Due savings depositors 5,445,724,306.00

Due U. S. treasurer 48,455,641.00

Cert's of deposit outstanding 1,894,840,264.00

Certified checks outstanding 161,596,617.00

Cashiers' checks 96,199,647.00

Total due to the public $15,954,730,349.00

Cash on hand:

Gold coin $ 232,842,276.00

Gold certificates 623,583,300.00

Silver dollars 24,923,135.00

Silver certificates 194,474,846.00

Fractional silver, etc 34,852,572.00

U. S. legal tender notes 248,334,727.00

National bank notes 105,240,916.00

Clearing house checks 363,576,911.00

Cash not classified 89,889,296.00

Total cash $ 1,917,717,979.00

or 12 per cent.

THE EVOLUTION OF BANKING 107

The circulation statement issued by the Sec-
retary of the Treasury shows the stock of
money in the United States on March 1, 1912,
to be $3,621,117,239.00, or 22.7 per cent of what
the banks owe the public. The banks owe the
public four and one-half times as much as they
could pay in cash on demand even if they had
all the money in the United States in their
vaults, while as a matter of fact they have less
than half of it.

But these figures are capable of still further
analysis. There are in the United States over
25,000 banks. Of this number about 7,300 are
national banks and between 18,000 and 19,000
are state or private banks. By deducting the
amount of the deposits and cash of the national
banks from the totals as shown in the above
table we will ascertain the condition of the
banks other than national banks.

Total amount due the public by all
banks $15,954,730,349.00

Less amount due the public by na-
tional banks 5,526,446,797.00

Balance due the public from
18,000 banks other than national
banks $10,428,283,552.00

Total cash on hand in all banks $ 1,917,717,979.00

Less cash on hand in national banks 1,282,067,554.00

Total cash on hand in 18,000 banks

other than national banks $ 635,650,425.00

or a cash reserve of only 6 per cent.

108 THE EVOLUTION OF BANKING

THE BANK OF THE STATE OF SOUTH
CAROLINA

The financial history of the United States
from the time of the adoption of the coinage
act in 1792 to 1860 ought to convince the most
skeptical of the impossibility of an expanding
nation maintaining a specie basis for its com-
mercial transactions. It also exposes com-
pletely the fallacy that a legal enactment can
establish a fixed and unchangeable price for
gold and silver and that the relative value of
these two metals will also remain unchanged.

This coinage act fixed the mint price of the
two precious metals in the money of account,
and also fixed the relative value of gold and
silver. It declared the value of one pound of
gold to be the same as fifteen pounds of silver.
Col well says: "In this congress acted in ac-
cordance with prevalent opinions of the day,
opinions not entirely surrendered by many,
even at this time. It is obvious, however, that
the proportion of gold and silver cannot be
settled by statutory regulation. It must remain
subject to the course of trade, and whatsoever
else infiuences the market price of one or the
other of these two metals. ' '

This enactment undervalued gold, and it con-

THE EVOLUTION OF BANKING 109

sequently ceased to circulate in any consider-
able quantities. Between 1802 and 1810 the
market price of gold was 20 per cent higher
than the mint price. Shrewd business men
would not take bullion with which they could
pay one hundred and twenty dollars of their
debts, to the mint and have it coined into ten
gold coins worth ten dollars each and thereby
lose twenty dollars of their debt-paying ca-
pacity.

The high price of gold was due in a large
measure to the Napoleonic wars which acted
as a drain on the gold of the United States and
England, and caused the Bank of England to
suspend specie payments for a period of twen-
ty-five years.

An attempt was made to correct this error
in the mint price of the precious metals in 1834,
when the mint price of gold was raised 6i/^ per
cent. For a while after this change was made
gold and silver circulated fairly well and the
coinage of gold quadrupled. But the influx of
new gold due to the discoveries in California
and Australia caused gold to fall in value below
the mint price, and silver became the under-
valued metal, and all full weight silver coins
disappeared, leaving as our only silver coins
with which to transact retail trade, foreign and

110 THE EVOLUTION OF BANKING

domestic coins so worn through use that they
had lost from 5 to 20 per cent of their value.
In 1860 one thousand silver dollars of full
weight were worth in the market as bullion
$1,045.00 and they were promptly consigned to
the melting pot and exported. In 1870 one
thousand silver dollars were worth $1,027 ; in
1872, $1,022 ; in 1873, $1,003. There were prac-
tically no silver dollars being coined, and the
few that were coined speedily disappeared
from circulation. During this period, from
1792 to 1873, only a little more than eight mil-
lions of silver dollars were coined, or an aver-
age of $100,000 a year for the eighty-one years
that the mints were open to the free coinage
of silver. This amount would scarcely have
been sufficient for the needs of the expanding
commerce had they all remained in circulation.
In addition to this error of trying to fix a
permanent price for gold and silver, business
was further complicated by reason of the for-
eign coins that were circulating as a medium
of exchange. The volume of these foreign
coins was sufficiently large that congress was
compelled to recognize the fact and fix the
values at which they should be received at the
public offices of the United States. The for-
eign coins recognized as current in the United

THE EVOLUTION OF BANKING 111

States, and made legal tender, were the gold
coins of Great Britain, France, Portugal, Spain
and her dominions, Brazil, Mexico, and Colum-
bia. The silver coins recognized vrere the five
franc piece, the silver dollars of Mexico, Peru,
Chile, Bolivia, Brazil, Central America, and the
Spanish milled dollar or piece of eight, as it
was also called.

The condition of the circulating medium of
the United States after the revolution bears a
strong resemblance to the conditions prevailing
in the Republic of Venice at the time of the
establishment of the Bank of Venice.

It would be strange indeed if the citizens of
this nation did not try to evolve some system
of banking and currency which would relieve
them of the annoyances and losses that were
inevitable under the conditions that they found
themselves in. They had before them the ex-
ample of the Bank of England, which received
deposits, discounted notes for merchants and
others, and issued bank notes, which, together
with the deposits, were declared to be redeema-
ble in gold on demand, and for which purpose
coin reserves were maintained that were
deemed sufficient to keep the bills at par with
gold in all business transactions.

The various states began issuing charters for

112 THE EVOLUTION OF BANKING

banks. Some of these charters fell into the
hands of men who, by reason of their character
and ability, could be depended on to make care-
ful use of their trust. Others were obtained by
men that were easily led into loaning the money
of the bank on hazardous and speculative en-
terprises, and again others were secured by
unscrupulous individuals of which there are
always a number in any community. But all
of these banks, whether managed by the wise,
the weak, or the dangerous men, were liable
to failure some time or other by reason of the
fundamental error in making all of their de-
posits and issues of currency payable in coin on
demand, a promise incapable of fulfillment.
This was proven by the fact that specie pay-
ment was suspended by the banks of the United
States ten times between 1809 and 1860, a
period of fifty-one years, or an average of one
panic every five years. Is it any wonder that
this period has been designated as one of "wild-
cat banking"?

Some of the banks, particularly those located
in New England and New York, were fairly
well managed and successful, but a large num-
ber in the western and southern states were
managed in such a way as to be open to the
severest criticism.

THE EVOLUTION OF BANKING 113

Some of the states of the Union established
banks which were owned wholly or in part by
the state itself, and in some states the banks
so established were failures, and in the ease of
other states the success was such as to alto-
gether set at rest the question of whether or
not the state can successfully conduct a bank-
ing business.

The most notable instance of the success of
the bank owned entirely by a state was the
Bank of the State of South Carolina, estab-
lished in 1812. The deplorable condition of
commerce in South Carolina, caused mainly by
the war with England and the suspension of
specie payments, together with the high price
of gold and the consequent disappearance of
coin, left the citizens without adequate means
of exchange with which to carry on their com-
mercial transactions, and the state decided to
organize a bank as a measure of relief.

The capital of the bank consisted of all the
funds and securities which the state had in its
possession at the time, and also debts of what-
ever kind that were due to the state. This
gave the bank a capital to begin with of a little
over one hundred thousand dollars. During
the next seven or eight years the eaiptal was
increased to about $1,200,000. There was no

114 THE EVOLUTION OF BANKING

part of the capital contributed by any individ-
ual, as was the case in Indiana, where the state
owned one-half of the stock and individuals
owned the other half. In South Carolina the
state was the sole owner and the president of
the bank and the board of directors were
elected annually by the legislature.

The bank transacted a regular banking busi-
ness. It received deposits, and it discounted
notes at the rate of 6 per cent interest, when
endorsed by two or more good names. It also
loaned money on real estate security at 7 per
cent interest, the loans being limited to not
more than one-third the value of the land, and
not more than two thousand dollars could be
loaned to one person. The mortgages were for
one year only, but could be renewed from year
to year upon payment of 10 per cent of the
principal. These loans were apportioned
equally among the legislative districts. Circu-
lating notes were issued by the bank, but the
amount was limited to twice the amount of the
capital. The bank had the exclusive right to
issue notes for five dollars or less and some
were issued for the small amount of six and
one-quarter cents. Three branches were main-
tained, but were not profitable; but the state
believed that the convenience of the public was

THE EVOLUTION OF BANKING 115

of sufficient consequence to offset the pecuniary
loss sustained. Beside the capital of the bank,
the depositors and note holders had as an addi-
tional security, the credit of the entire state,
which was pledged to cover all possible losses.

The bank was conducted with ability and
integrity. "While it had made some losses,
and in addition maintained the unprofitable
branches, its statement in 1843 showed a total
profit to the state of over $3,672,000.00. It had
also repeatedly made advances of money to the
state (at one time more than a half million dol-
lars) without interest.

One notable instance where the bank was
signal service to the people was after the great
fire of 1838, which destroyed the greater part
of the city of Charleston. The state issued
$2,000,000 of bonds to relieve the sufferers.
The bank sold the bonds in London and loaned
the money on land in the burnt district and the
people were thus enabled to rebuild their homes.

In his message to the legislature, Nov. 24,
1852, Governor Means, in discussing the man-
agement of the bank, says : * ' This institution
has proved itself to be highly useful and safe
as a fiscal agent of the state, and has aided
materially in sustaining our people during the
severe monetary crisis through which we have

116 THE EVOLUTION OF BANKING

passed. As all human institutions are imper-
fect, no doubt some instances of mismanage-
ment have occurred in the conduct of its
affairs. I believe that the only mismanagement
that has been complained of, is an over in-
dulgence of some of its debtors. I have not
been able to learn, however, that the bank has
sustained any losses from this cause.

"In some instances a long indulgence has se-
cured the final payment of the debt, and at the
same time enabled the debtor to secure a com-
petence for his family when the sudden calling
in of the debt would have resulted in heavy
losses to the bank and brought ruin and bank-
ruptcy upon the debtor I know

that great fears are entertained as to the polit-
ical power which a strong bank of the state
could wield. But these are rather imaginary
than real, if you will reflect that it will be en-
tirely under the control of the legislature. Its
officers are elected annually and, of course,
could be removed if found exerting any influ-
ence at variance with the true interests of the
people. All the arguments which go to estab-
lish our fears that a corrupting influence might
be exercised upon the politics of the state will
apply equally to private banks.

"If there is any real danger of such influ-

THE EVOLUTION OF BANKING 117

cnccs from moneyed monopolies, it is far better
that they should be under control of the state
than that they should control the state."

The Bank of the State of South Carolina dur-
ing the sixty years of existence was able to
maintain itself during all the financial panics
that swept over the country. Its credit was so
good that, while private banks were forced to
suspend, its notes were hoarded the same as
gold by the frightened people. It passed un-
scathed through the wreck of southern institu-
tions caused by the war of the rebellion.

As part of the financial legislation during
the war of the rebellion, congress levied an
annual tax of 10 per cent on the currency is-
sued by the banks chartered by the different
states. This was for the puri)ose of stimulating
the establishment of national banks and there-
by making a market for the United States
bonds. These bonds could then be deposited
with the United States treasurer, who was
authorized to issue national bank notes to the
extent of 90 per cent of the face value of the
bonds. This act wiped out the state bank notes
completely. The Bank of the State of South
Carolina went into voluntary liquidation in
1870 and paid its depositors and note holders in
full. No one, during its existence of sixty years,

118 THE EVOLUTION OF BANKING

lost a single dollar ou account of the bank.
It is to be regretted that the people of South
Carolina were not fortunate enough to have as
governor at the time of the destruction of
Charleston a man as wise financially as the gov-
ernor of Guernsey, If they had, they would
never have committed the blunder of issuing
two millions of bonds to the bankers of Lon-
don, and burdening themselves with the inter-
est charge for twenty, thirty, or perhaps forty
years which tho»2 bonds necessitated. Their
own bank, properly utilized, could have sup-
plied all the money needed to reconstruct their
city. The money could have been issued as
buildings were erected, just as was done in
Guernsey. The redemption of the money would
have been in its acceptance by the state in pay-
ment of taxes, and by the bank in the yearly
payments on the mortgages given as security
for the money when it was issued. When the
last mortgage was paid, the last of the money
would have been redeemed. It was a piece of
financial folly for the state to borrow the gold
in London and import it for the purpose of
erecting buildings. The idle men and the mate-
rials were on hand, and the state should have
issued the money necessary to bring these
latent forces into activity.

1

THE EVOLUTION OF BANKING 119

STATE BANK OF ILLINOIS

The Constitution of the State of Illinois per-
mitted the general assembly to establish and
regulate a state bank and its branches if they
desired. Accordingly the legislature on March
22, 1819, incorporated a bank and provided for
ten branches. Its capital was to be $4,000,000 —
one-half of which was to be subscribed by the
state and one-half by individuals. Ten branches
could be established and were to begin business
as soon as $15,000 was paid in. Not a dollar of
stock was ever subscribed and the attempt was
a failure.

In 1821 the charter was repealed and a new
bank to be owned and operated by the state was
incorporated for ten years. Its charter was a du-
plicate in its essential particulars of the charter
of the bank of the state of South Carolina, which
had then been in operation about ten years.

All of the capital stock, which was to be $500,-
000, was to be owned by the state. The presi-
dent and directors of the bank were to be elected
biennially by the senate and lower house in joint
session. Its principal office was located at Van-
dalia, which was then the capital of the state.
The state was divided into five districts and a

120 THE EVOLUTION OF BANKING

branch bank was to be established in each one.
All the funds of the state and all money re-
ceived from the United States for school pur-
poses, together with all specie and land office
money that came into the treasury, were to be
deposited in the bank. The bank was author-
ized to issue notes to double the amount of the
money so deposited and to redeem them upon
demand in gold or silver. Very little specie
was in circulation and almost none came into
the bank. One branch bank received only two
dollars in specie during its whole existence and
these were retained as curiosities.

Two thousand dollars was appropriated to
start the bank. This was used to pay the cost
of printing $300,000 in notes of from one to
twenty dollars each. These notes were to bear
two per cent interest. They were to be re-
ceived by the bank, the state, or any county
at par. The salaries of all the state officers were
to be paid in them. Any creditor was obliged
to accept them at par for any debt due.

The notes were to be distributed to the branch
banks in proportion to the number of the in-
habitants in the district and were to be loaned
as fast as applied for. Loans for one hundred
dollars or less were to be secured by notes with
one endorser. Loans of over one hundred dol-

THE EVOLUTION OF BANKING 121

lars were to be secured by mortgage on real
estate. No loan was to be for more than $1,000,
at six per cent interest, and could be re-
newed annually upon payment of ten per cent
of the principal. The banks were to transact
no business but loaning notes except that they
could exchange their notes at par for gold and
silver and land office paper. One-tenth of the
bank's notes were to be retired annually. The
faith and credit of the state of Illinois, together
with its lands and its revenue, both present and
future, were pledged to redeem the bank's notes
within ten years.

There is a sharp contrast between the man-
agement and history of the State Bank of Illi-
nois and that of the Bank of the State of South
Carolina. While the latter was managed with
prudence and with a strict sense of commercial
honor, the Illinois bank became almost at once
a cesspool of political corruption.

Under the charter the officials had the right
to borrow $51,350, or more than one-sixth of the
total issue of the bank's notes, and promptly
took advantage of their privilege, and every per-
son who could get a friend or relative to en-
dorse his note borrowed his hundred dollars just
as promptly. The directors found a sure road to
popularity in loaning to anybody who desired

122 THE EVOLUTION OF BANKING

it, and as they either were or expected to be can-
didates for office, little care was exercised as to
security or certainty of pajTnent.

The directors of the bank and its branches
being themselves heavy borrowers from the bank
were at no pains to maintain the credit of its
notes. The governor of the state in his message
of 1826 said they used their "right to borrow
to the full extent of the law and thus became
more interested than any other class in the com-
munity in impairing the credit of the institution
and depreciating its notes as the means of facili-
tating the discharge of the debts they had con-
tracted with it, and hence those gentlemen have
been generally, if not universally, found among
the warmest advocates for depreciating those
notes, scaling the bank debts and various other
expedients whose inevitable effects would be the
revolting injustice of requiring the balance of
the community to be taxed for the payment of
their debts. ' '

There being little or no silver coin in the state
the people adopted the expedient of cutting the
bills into small pieces for use in transactions in-
volving fractions of a dollar.

The promised redemption of the bank bills
in specie on demand was a physical impossi-
bility and by 1823 they were worth only fifty

THE EVOLUTION OF BANKING 123

cents on the dollar. The state was obliged to
double the salaries of the officials and the mem-
bers of the legislature. Later the value of the
notes were fixed at three to one of specie and as
the state was obliged to accept the notes at par
for all its taxes, etc., the result was a deficit in
the public treasury.

The state auditor was obliged to issue audit-
ors' warrants for state expenses payable at some
uncertain date in the future and these, together
with the bank notes, fell as low as twenty-five
cents on the dollar.

In the meantime, although these depreciated
bank notes could be used at par in the payment
of debts due to the bank, Ford's History of Illi-
nois tells us that "few persons pretended to pay
their debts to the bank. More than half of
those who had borrowed considered what they
had gotten from it was so much clear gain, and
never intended to pay it from the first. ' ' From
the beginning the management showed either ig-
norance or vieiousness resulting in violations of
the charter provisions and defalcations. Ex-
penses exceeded the income, loans were made
without sccurit}' and the papers and accounts
were in confusion.

The legislature finally enacted a law which
among other things made it the duty of the

124 THE EVOLUTION OF BANKING

cashier to burn all notes on hand not needed for
expenses in the public square in the presence
of the governor and other officers. Auditors'
warrants were receivable for bank debts. The
bank was no longer to receive deposits of indi-
viduals and any on hand were to be returned
to depositors. The offices of president and di-
rectors of branch banks were abolished and cash-
iers appointed by the governor were to manage
the branches. All manner of expedients were
tried and inducements offered to facilitate the
collection of the debts due the banks, with very
little success.

In 1829 it was enacted that all public officers
in debt to the bank should not receive their sala-
ries until their debts were paid. Debtors to the
bank were given three years extension — one-
third of the debt to be paid each year, which, if
paid promptly, was to be without interest and a
ten per cent discount on the amount of the prin-
cipal. This latter discount was afterwards in-
creased to twenty-five per cent. This liberality
may perhaps be explained by the fact that the
members of the legislature were themselves the
largest debtors.

In 1831 it was decided to close the bank. A
loan was authorized to be applied to the pay-
ment of expenses and the redemption of the bank

THE EVOLUTION OF BANKING 125

notes. All bank notes on hand were to be burned
and all received afterwards were to be burned
at the end of each quarter.

All debts due the bank were turned over to
the attorney general for collection and he was
instructed to sell all the bank property.

The financial loss to the state of Illinois
through the mismanagement of the bank was in
round figures probably $500,000 — a huge sum
for a sparsely settled frontier state. What the
loss was to individuals is something that is in-
calculable.

From 1831 to 1835 there were no banks in
Illinois, but in the latter year the legislature
decided to re-establish a state bank. The bill
passed the lower house by a majority of one vote.
The same was true of the senate.

The charter was for twenty-five years and the
capital was to be $1,500,000, of which the state
reserved the right to subscribe $100,000-.

It was to have six branches and could issue
its notes to the amount of two and one-half times
its paid in capital. It was to redeem in specie
any of its notes on demand — a failure to do so
for a period of ten days would result in the re-
peal of its charter.

It was also empowered to borrow up to $1,-

126 THE EVOLUTION OF BANKING

000,000 and to reloan it on real estate security
at not to exceed ten per cent interest.

The stock of the bank was quickly subscribed
and the bank started business. One of its first
acts was to loan $800,000 to a firm of speculators
who were trying to get control of the lead in-
dustry of Galena. Land booms began to appear
and every one who had a little money or who
could borrow some engaged in land and town
lot speculation.

The mania for speculation was rampant in Illi-
nois as well as the other northern and western
states. The legislature was swept off its feet
and voted a loan of $8,000,000 to be spent for in-
ternal improvements, such as canals, railroads
and river improvements. It also authorized a
$2,000,000 increase of the capital stock of the
bank to be subscribed wholly by the state.

A bank at Shawneetown was also allowed to
increase its capital stock $1,400,000, of which the
state agreed to take $1,000,000.

Two years after the bank was established
the panic of 1837 swept over the country and
the bank, together with practically every other
bank in the United States, suspended specie
payments. The charter should have been for-
feited, but the finances of the state and the bank

THE EVOLUTION OF BANKING 127

were so interwoven that to liquidate the bank
assets would entail a heavj'^ loss on the state.

The economic conditions in Illinois were dupli-
cated in all of the border states and many of
the eastern ones also. A graphic description of
conditions in Michigan during this period is
given by Judge Cooley in another chapter.

The financial condition of Illinois was so bad
by the year 1842 that the officers of the state,
the judges and the members of the legislature
were in dire need. No salaries had been paid
and there was no money in the treasury to even
paj'" the postage on public documents. The in-
terest on the state bonds of nearly $14,000,000
exceeded the total revenue of the state and no
attempt was made to pay it. The bonds were
quoted as low as 14 cents on the dollar.

In February, 1842, seven years after it started,
the State Bank of Illinois failed. It had $3,-
000,000 of its bills in circulation. This spread
ruin and disaster all over the state. There was
practically no specie in circulation and people
were obliged to resort to barter to obtain the
necessaries of life.

February 25, 1843, an act was passed to put
the bank in liquidation and this ended the his-
tory of banks which the state owned wholly or
in part.

128 THE EVOLUTION OF BANKING

The salient points in the foregoing are :
First: The credit of the state was used by
individuals for purposes of speculation and ex-
ploitation. Public credit should be used only
for public purposes.

Second: The utter folly of promising to re-
deem the currency necessary to carry on legit-
imate modern commerce, in specie on demand.
The meagre quantity of gold in existence in com-
parison to the immense and growing volume of
trade makes it absolutely certain that the prom-
ise will be broken when the demand is made that
it be fulfilled.

THE EVOLUTION OF BANKING 129

STATE BANK ISSUES IN MICHIGAN

BY JUDGE THOMAS M. COOLEY.

The tide of immigration into Michigan was at
this time at its highest, and the highways, espe-
cially from New York, around Lake Erie, into
the territory, were crowded with vehicles loaded
with immigrants. The tide of speculation
throughout the country was also swelling to
enormous proportions, and was probably greater
nowhere else than in the state of Michigan, if
indeed in any other sections it reached a like
magnitude. The speculation was particularly
wild in the case of lands. The land bought from
the government one day for $1.25 per acre was
held at twice or three times that sum the next,
and in many cases actually sold at prices greatly
exceeding this increased valuation.

Villages on paper were being laid out in every
part of the state ; some in the belief on the part
of proprietors that they were soon to become
large and important towns, but many of them
also with a view simply to take advantage of the
prevailing delusion here and elsewhere to sell
lands just bought at the government price for
ten, twenty, fiftj^ or a hundred times what it had
cost. There seemed to be no possible limit to
public credulity on the subject, and men were

130 THE EVOLUTION OF BANKING

apparently becoming rich on an expenditure of a
few hundred dollars in buying wild lands.

Under such circumstances the greatest need
of the day seemed to be banks, and the fifteen
then existing in the territory, with a capital
stock aggregating about two millions — there be-
ing one in almost every town of importance —
appeared to be totally inadquate to supply the
public demand for banking facilities. More
money was required to enable the people to carry
on the enormous transactions that from day to
day they engaged in, the most of them purely
speculative; but nevertheless, at the time, seem-
ing to a large proportion of those who were par-
ties to them, to be not only substantial but alto-
gether reasonable, since the inflow of immigra-
tion and the extensive system of railroads and
canals planned for the state, and then well under
way, were expected speedily to make of Michi-
gan a populous as well as a prosperous common-
wealth.

Under these circumstances, the legislature of
1837 pased a general act entitled "An act to
organize and regulate banking associations."
The act provided that whenever any persons resi-
dent in any of the counties of the state should
be desirous of forming an association for trans-
acting banking business, they should make a

THE EVOLUTION OF BANKING 131

written application to the treasurer and clerk
of the county, setting forth the amount of capital
proposed and the place of location; and on the
application by at least twelve freeholders of the
county, it was made the duty of the treasurer
and clerk to cause public notice to be given for
thirty days, upon the expiration of which time
the organization of the bank might proceed, books
being opened for the subscription of the capital
stock, which was not to be less than fifty thou-
sand nor more than three hundred thousand dol-
lars. The bank was not to commence operations
until the whole amount of the capital stock was
subscribed, nor until 30 per centum of the
amount was paid in legal money. Ten per cent
was to be paid on making subscription, the
county treasurer to receive the same, but to pay
it over to the cashier when the bank should be
organized. * * *

The issue of notes or bills for circulation as
money was limited to twice and a half of the
amount of the capital stock then paid in and
actually possessed, and the loans and discounts
were also limited to the same amount. * * •
The bills were to be paid on demand, and if not
paid within thirty days after demand at the
banking house, the corporation was to be dis-
solved. * * *

132 THE EVOLUTION OP BANKING

Immediate proceedings were taken in every
section of the state to organize banks under the
authority granted by this act. Many of these
were undoubtedly organized by men of sufficient
means, who proposed to conduct a just, honor-
able and legitimate banking business in places
needing then, or in immediate prospect, the
facilities their bank would afford. Nor could it
be said that in all other cases wrong to the public
was in contemplation. The organizers saw in
the prevailing delusion by which in many cases
they were as much carried away as the public
in general, an opportunity to make short the
road to wealth by availing themselves of the
privilege to issue currency, and they complied
with the forms required by law so far as they
found indispensable, but expecting even when
they evaded compliance that the bills they put
out would be redeemed in due course of busi-
ness from the gains they were sure to make.

The capital they pretended to have at first
they would have in fact shortly, and then they
could honestly meet all obligations. But prob-
ably no banks ever organized in such numbers
were based on such utterly worthless securities
as were these. The lands mortgaged as security,
even when they were lands which were held for
prospective farming purposes, were valued, ac-

THE EVOLUTION OF BANKING 133

cording to the ideas then prevailing, at ten,
twenty, or even fifty times the value they proved
to possess when the great collapse came. And
it is safe to say that in very many cases the
lands even to this day have never reached a
moiety of the value at which securities were then
accepted upon them by the county officers.

Some of the banks were located at points of
little or no business importance ; places not hav-
ing the slightest need of a bank, and whose very
names suggest that they may have been selected
as localities because it was easier to give the se-
curities on nominal village property at such
places than it was upon lands known to have a
substantial value.

No less than forty-nine banks were organ-
ized under this act before the third day of April,
1838, when the legislature intervened by an act
which suspended the provisions of the law as to
the creation of any new associations, except to
allow one to be formed in the county of Chip-
pewa. The aggregate capital of these forty-nine
banks, as given in the articles of association, was
about four million dollars. The amount actually
paid in was in a great many cases merely nom-
inal. The provision for the immediate payment
of 10 per cent of the capital stock was evaded
in various ways; sometimes by the payment of

134 THE EVOLUTION OF BANKING

a small sum which was immediately drawn out
and paid back again, and so on over and over
until the required amount was thus made up;
sometimes by the issue of a certificate reciting a
payment of specie never in fact paid ; sometimes
by accommodations between the organizers
of banks, whereby, after the required pay-
ment had been made to one, the sum paid in
w^as sent to the location of another bank and
used for making payment there, and so on in-
definitely among those in the same section of the
state.

The general fact was that as to the required
securities and as to the payment of money upon
the capital stock, the provisions of law were ren-
dered perfectly nugatory, first by the securities
being of merely nominal value as compared with
the amount of capital stock, and next by ficti-
tious payments of money by the stockholders;
and when the banks were fully organized, they
were often literally shams, representing no real
capital whatever, but nevertheless flooding the
state with bills for the benefit of those who had
become stockholders for the purpose of the crazy
speculations which were then pervading the
state.

Hon. Alpheus Felch, who was bank commis-
sioner at this period, has given in his official re-

THE EVOLUTION OF BANKING 135

ports, and in other publications, a graphic ac-
count of the conditions of things as he found
them on attempting to examine into the affairs
of these banks; how their managers undertook
to deceive and mislead the public and the state
authorities as to their real condition, and how
actively they bestirred themselves in forward-
ing money from place to place in order that they
might in succession be able to make a showing
of capital which did not in fact exist. The gen-
eral fact was that the banks had no real sub-
stance, and the moment the great revulsion came
in business affairs through the country — a re-
vulsion more extreme in Michigan than almost
anywhere else — they necessarily suspended such
specie payments as they had attempted to make
theretofore, and the whole system suffered an
utter collapse.

At the January term of the Supreme Court in
1844, on a suit brought upon a draft drawn by
a cashier of one of these institutions, it was de-
cided that the act for their organization was un-
constitutional. The decision, of course, rendered
worthless all the obligations thad had previously
been taken, and discharged the officers from per-
sonal responsibility. The banks, which had come
to be known as ' ' wild cats, ' ' were utterly swept
out of existence. Those which had attempted

136 THE EVOLUTION OF BANKING

to meet their obligations had been in a state of
suspension for a considerable time with legisla-
tive permission, but further effort at recupera-
tion was now abandoned.

As soon as it became apparent that the banks
organized under the general banking law were
wanting in substantial basis, the holders of the
bills made haste to get rid of them for anything
of value they could obtain therefore, and the
discount of 5 or 10 per cent that they were
compelled to submit to, soon increased to twenty
or thirty or fifty, until it became impossible to
dispose of them at all. The population of Michi-
gan at this time was about two hundred thou-
sand, and the losses suffered from the worth-
less currency were enormous. A number
of the chartered banks had been as badly
managed as the "wild eats," and went
down with them, while those that succeeded in
preserving their credit were obliged for a time
to avail themselves of legislative permission to
suspend specie payments. Good currency, suffi-
cient to met the demands of business, it was
almost impossible to obtain. Specie had alto-
gether disappeared from circulation. The Safe-
ty-Fund Banks of New York, and the State Bank
of Indiana, had the general confidence of the
people, and their bills were met with oftener

THE EVOLUTION OF BANKING 137

than any others, but banks located in other
states and of doubtful standing not infrequently
succeeded in keeping large amounts of their bills
afloat through arrangement with Michigan deal-
ers, whereby the latter, in consideration of ex-
ceptionally favorable loans, made public an-
nouncement that they would receive the bills
of the former in payment for whatever they
sold, and upon debts.

Advertisements to this effect were often met
with in the newspapers. Such announcements,
however, in many cases, indicated only that the
dealer had more confidence in a particular cur-
rency than was felt generally, and expected by
bidding for it to increase the amount of his
trade, and the prices he could charge for what
he sold. But the fact sometimes doubtless was
that he thought he could speedily exchange for
something of value the bills in which he had no
confidence, and which he would not keep over
night if the exchange could be sooner made.

The issues of Michigan banks as compared with
the population and business of the state were
then very limited, scarcely exceeding in the ag-
gregate one dollar to an inhabitant. In 1841
the state, in anticipation of a state loan, author-
ized an issue of treasury notes in the simili-
tude of bank bills, and receivable for taxes, but

138 THE EVOLUTION OF BANKING

these were soon retired. Naturally a general
practice of barter and exchange in the common
transactions between man and man sprung up,
and this went quite beyond what we are accus-
tomed to see at the present day in new settle-
ments, even in the most remote and inaccessible
parts of the country. Every country store was
a place of exchange, where the merchant dis-
posed of his goods for wheat and other grains,
wool, hides, peltry, butter and nearly everything
that the farmer had to dispose of. The miller
took his toll in kind for grinding grain; the
blacksmith accepted pay in potatoes or produce,
and so on; and the farmers exchanged work
when additional labor was required in the cul-
tivation of their lands, the harvesting of their
crops or the erection of buildings. Business men
of good standing in many cases issued small
notes known as " shinplasters, " which had con-
siderable circulation, and from which the losses
by bankruptcy were, in the aggregate, quite
heavy.

THE EVOLUTION OF BANKING 139

DEMONETIZATION OF THE SILVER
DOLLAR IN 1873

On December 16, 1872, a bill relating to mints,
assay offices and coinage was reported to the
House from the Senate by Sherman. It had been
prepared two years before by the agent of the
foreign bankers, the New York Chamber of Com-
merce, and John J. Knox — who was the Comp-
troller of the Currency. It provided for a thor-
ough change in our silver coinage ; on the plea
of equalizing it with that of France. Sherman
said the bill had passed the Senate at the last
session, and he proposed to modify only a single
section. He wished the Senate to pass it without
reading. Senator Casserly of California opposed
the bill. It was ordered printed and read.
When it was put upon its passage in the Senate,
January 17, 1873, Sherman added seventeen
amendments instead of one. The house disa-
greed with his amendments; he then moved a
conference committee of which he was the head,
and, while the bill was being considered by the
committee, he introduced the following amend-
ment which was passed : ' ' That any owner of sil-
ver bullion may deposit the same at any mint, to
be formed into bars or into dollars of 420 grains
Troy, designated as trade dollars, and no deposit

140 THE EVOLUTION OF BANKING

of silver for other coinage shall he received."

These few words abolished the coinage of the
old 41214 grain silver dollar by merely omitting
that coin from the enumeration the coins of the
United States. It was entitled "an act revis-
ing and amending the laws relative to the mints,
assay offices and coinage of the United States"
and bore on its face no suggestion of any change
more serious than that of regulating the petty
details of mint management.

While the bill was under consideration in the
House, except a mere allusion by Mr. Hooper
and Mr. Potter, there is not a single word in
the discussion that took place, then or after-
ward, in the House or in the Senate, indicating
that anybody understood that a change was to
be made in the standard of value in the United
States. The discussion that took place pertained
to other matters, such as minor coins, and
whether the eagle should be retained on frac-
tional silver pieces or not, etc.

This law created the TRADE DOLLAR, but
limited its legal tender power to any sum not
exceeding five dollars in any one pajinent.
Even this slight legal tender power was abol-
ished by an act July 13, 1876, which provided
"that the dollar shall not hereafter be legal
tender." As to whether the Congressmen and

THE EVOLUTION OF BANKESTG 141

Senators who voted to pass the bill were ignor-
ant as to the effect its passage w^ould have on
the coinage or not, the following quotations
ought to set the matter at rest. Extract from
speech by Hon. W. D. Kelly, Chairman of the
Committee on Coinage, made in the House of
Congress, March 9, 1878. "In connection with
the charge that I advocated the bill which de-
monetized the standard silver dollar, I say that,
though Chairman of the Committee on Coin-
age, I was as ignorant of the fact that it would
demonetize the silver dollar, or of its dropping
the silver from our system of coins, as were
those distinguished senators, Messrs. Blaine and
Voorhies, who were then members of the House,
and each of whom, a few days since, interrogated
the other: 'Did you know it w^as dropped when
the bill was passed?' 'No,' said Mr. Blaine ;
'did you?' 'No,' said Mr. Voorhies. 'I do not
think that there were three members of the
House that knew it. I doubt whether Mr.
Hooper, who in my absence from the Commit-
tee on Coinage, and attendance on the Commit-
tee of Ways and Means, managed the bill, knew
it. I say this in justice to him." (Congressional
Record, volume 7, part 2, Forty-fifth Congress,
second session, page 1605.)

Extract from speech delivered in the House

142 THE EVOLUTION OF BANKING

of Representatives by Mr. Holman, July 13, 1876 :
''I have before me the record of the proceed-
ings of the House on the passage of that meas-
ure, a record which no man can read without
being convinced that the measure and the method
of its passage through this House was a 'Co-
lossal Swindle. ' I assert that the measure never
had the sanction of this House and did not pos-
sess the moral force of law." (Congressional
Record, volume 4, part 6, Forty-fourth Congress,
First Session, appendix, page 193.) Again on
August 5, 1876, he said : ' ' The original bill was
simply a bill to organize a bureau of mines and
coinage. The bill which finally passed the House
and ultimately became a law was certainly not
read in this House. It was never considered
before this House as it was passed. Up to the
time the bill came before this House for final
pasage, the measure had simply been one to es-
tablish a bureau of mines. It came from the
Committee on Coinage, Weights and Measures.
The substitute which finally became a law was
never read, and is subject to the charge made
against it by the gentleman from Missouri (Mr.
Bland) that it was passed by the House without
a knowledge of its provisions, especially upon
that of coinage. I myself asked the question
of ]Mr. Hooper whether it changed the law in

THE EVOLUTION OF BANKING 143

regard to coinage, and the answer of Mr. Hooper
left the impression on the whole House that the
subject of the coinage was not affected by the
bill." (Congressional Record, volume 4, part 6,
Forty-fourth Congress, first session, page 5237.)
Senator Conkling, in the Senate, March 30, 1876,
during the remarks of Senator Bogy on the bill
(S. 264) to amend the laws relating to the legal
tender of silver coin, in surprise, inquired : ' * Will
the Senator allow me to ask him or some other
Senator a question? Is it true that there is now
by law no American dollar? And, if so, is it
true that the effect of this bill is to make half
dollars and quarter dollars the only silver coin
which can be used as a legal tender?"

Mr. Bright, of Tennessee, said of the law:
"It passed by fraud in the house, never having
been printed in advance, being a substitute for
the printed bill, never having been read at the
clerk's desk, the reading having been dispensed
with by an impression that the bill made no
material alteration in the coinage laws, it was
passed without discussion, debate having been
cut off by operation of the previous question.
It was passed, to my certain information, under
such circumstances that the fraud escaped the
attention of some of the most watchful as well
as the ablest statesmen in Congress at the time. ' '

144 THE EVOLUTION OP BANKING

(Congressional Record, volume 7, part 1, second
session, Forty-fifth Congress, page 584.)

General Garfield, in a speech made at Spring-
field, Ohio, during the fall of 1877, said: ''Per-
haps I ought to be ashamed to say so, but it is
the truth to say that at that time being Chair-
man of the Committee on Appropriation, and
having my hands over full during all that time
with work, I never read the bill. I took it upon
the faith of a prominent Democrat and a prom-
inent Republican, and I do not know that I voted
at all. There was no demand for the yeas and
nays, and no one opposed the biU that I know
of. It was put through as dozens of bills are,
as my friends and I know, in Congress on the
faith of the report of the chairman of commit-
tee."

Senator Allison said on February 15, 1878:
"But when the secret history of this bill of 1873
comes to be told, it will disclose the fact that the
House of Representatives intended to coin both
gold and silver, and intended to place both
metals on the French relation instead of on our
own, which was the true scientific position with
reference to this subject in 1873, but that the
bill afterward was doctored. It was changed
after discussion, and the dollar of 420 grains
was substituted for it." (Congressional Ree-

THE EVOLUTION OF BANKING 145

ord, volume 7, part 2, Forty-fifth Congress, sec-
ond session, page 1058.) Senator Beck, in a
speech made in the Senate, January 10, 1878,
said: ''It (the bill demonetizing silver) never
was understood by either House of Congress, I
say that with full knowdedge of the facts. No
newspaper reporter — and they are the most vigi-
lant men I ever saw in obtaining information —
discovered that it had been done." (Congres-
sional Record, volume 7, part 1, Forty-fifty
Congress, second session, page 260.)

Mr. Thurman said : "I cannot say what took
place in the House, but I know when the bill
was pending in the Senate, we thought it was
simply a bill to reform the mint, regulate coin-
age, and fix up one thing and another, and there
is not a single man in the Senate, I think, un-
less a member of the Committee from which the
bill came, who had the slightest idea that it was
even a squint toward demonetization," On
January 14, 1875, the same date that he signed
the Resumption Act, President Grant ( during
whose first administration the silver dollar was
demonetized) sent a special message to Congress,
advising the establishment of mints at Chicago,
St. Louis and Omaha for the coinage of silver
dollars. It is then evident that the President
did not know that a bill passed three years previ-

146 THE EVOLUTION OF BANKING

ously had demonetized the U. S. silver dollar.

Here we certainly have a strange state of facts
to explain. The whole of official "Washington,
from President down through the Cabinet, Sen-
ate, House of Eepresentatives, officials of the
mint, newspaper reporters and correspondents
appear to have been totally ignorant of the pas-
sage of a bill that abolished the coinage of the
silver dollar, which had been coined continuously
since 1792, In the discussion of this subject,
charges that corrupt means were used to secure
this result have been advanced, as the most rea-
sonable explanation. The immense amount of
money necessary and the vast army of individu-
als who would have to be influenced secretly,
render this explanation to be a most unreason-
able one. There were at that time in Wash-
ington, Senators representing the silver produc-
ing states of the far West, whose economic in-
terests would prompt them to guard with watch-
ful eye the market for the product of the silver
mines of their states.

An examination of the market quotations for
silver bullion during the period under discus-
sion reveals the fact that in the year 1860 one
thousand silver dollars thrown into the melting
pot could be used as bullion to pay debts to the
amount of one thousand and forty-five dollars.

THE EVOLUTION OF BANKING 147

In the year 1870 the same number of silver dol-
lars after melting were worth one thousand and
twenty-seven dollars and in 1872 one thousand
and twenty-two dollars. Here then lies the se-
cret to the indifference and apathy of the offi-
cials and the lay public to the subject. "Why
should the owner of silver bullion take it to the
mint w^hen its debt paying power would be re-
duced on the average from three to four and one-
half per cent after being coined. This also ac-
counts for the disappearance from circulation of
the small amount of silver that was coined. It
found its way to the melting pot and was ex-
ported in the shape of bullion.

During the eighty years that intervened be-
tween 1792 and 1872 there were only 7,800,000
silver dollars coined, or an average of about
100,000 dollars a year, and these did not stay
long in circulation. Previous to the Civil War
the circulation was almost entirely in the f^rm
of bills issued by the state banks and after the
outbreak of the rebellion legal tender green-
backs, national bank notes, and postal currency
supplied the medium needed in cash transactions.
The people had been educated to the use of paper
money and found it far more convenient to han-
dle than coins, especially where the transactions
were for large amounts. For a dozen years

148 THE EVOLUTION OF BANKING

there had been no coins in circulation, and there
had never been a large amount used at any time.
It is easy enough to conceive that the vast ma-
jority of the citizens knew nothing of the sub-
ject, and even if the matter had been discussed
in Congress, it is doubtful whether much in-
terest would have been aroused.

There never was a time in the United States
when a large supply of currency would not have
been of great assistance to commerce and indus-
try. The owners of the silver mines and silver
bullion were not interested in the need by the
merchant and the laborer of a circulating me-
dium so long as their commodity brought a
higher price in the market than at the mint.
But when the discovery of vast deposits of rich
silver ores and the application of economical
methods of extracting the values had reduced
the market price of their commodity to a point
lower than its former mint price, they suddenly
became solicitous for the welfare of the debtor
class and the working man.

The doors of the mint have been closed to the
free coinage of silver. May they never be re-
opened. Let us close the doors of the mint to
the free coinage of gold, and then, and not till
then, will we know its value as a commodity in
comparison to all other commodities.

THE EVOLUTION OF BANKING 149

THE FEDERAL RESERVE BANK

The Act establishing the Federal Reserve
Board was signed by the President December
23, 1913. Three days prior to that date Pro-
fessor J. Laurence Laughlin of the University
of Chicago addressed the City Club of Chicago.
His address was published in the Bulletin issued
by the Cl\ib, and under the sub-heading "Passed
by a Happy Fluke ' ' occur these words :

' ' Isn 't it something like a political miracle, to
think that in the Lower House 286 men should
have voted for it as against 84, when outside
of the Banking and Currency Committee there
were probably not ten men in that House who
knew anything about the fundamentals of the
bill! (Laughter and applause.)

"That is the greatest political miracle of re-
cent times."

Read this in connection with the following ex-
tract from the Communist Manifesto :

"The executive of the modern State is but a
committee for managing the common affairs of
the whole bourgcoise (capitalist class)."

Again, Professor Laughlin says:

"The curious thing is that through all the
campaign, through all the discussions on the
floors of both Houses of Congress, practically

150 THE EVOLUTION OF BANKING

no attention has been paid to, and there has
been general acceptance of, the provisions which,
in my judgment, are nine-tenths of this achieve-
ment. I say it is a political miracle that the
real fundamental parts of this bill seem not to
have caused any public discussion, but to have
been accepted with the other parts of this bill
as it passed the Senate last night. I want to
emphasize, therefore, the relative unimportance
of the question regarding notes and the quan-
tity of money circulating in the hands of the
public, as compared with the other thing, which
is of enormous importance, namely, the organi-
zation of credit.

"In 1907 you gentlemen here in Chicago heard
a great deal about the scarcity of money. The
old fallacy persists all the way down that we
are causing panics if there is a scarcity of money ;
or that panics can be cured by issue of money.

"Now, in this typical business situation in
1907, if a firm wanted assistance for a short
period, of time, if it needed $200,000 in order
to meet its obligations, did it make any difference
whether there was more money circulating in
the hands of the public ? That was not the thing.
We were not lacking in a medium of exchange,
not even at the height of the panic. If that
firm could go to the bank and get a loan for
$200,000, the first entry in the books of that
bank gives the borrower a credit by a deposit
account of $200,000 — the loan on the right hand
and the deposit on the left; for the bank does
a very simple business, no different from any

THE EVOLUTION OF BANKING 151

shop in Chicago. The bank buys the right to
receive a certain sum of money in the future and
gives the borrower the right to draw on demand.
A deposit account is as much a demand obliga-
tion as a note. So far as the profit to tlie hank
is concerned, it makes no difference wlietlier it
grants tliis liability to the borrower in the form
of a deposit account or gives out its own obliga-
tion in the form of notes. If, in the panic of
1907, that man wanted to meet an obligation, is
there any one here who supposes that he could
not transfer that claim on his deposit account
by a check that would meet his obligations in the
markets of Chicago?"

The Federal Reserve Act was passed to pro-
tect the banks from the inevitable result of their
own promises to do what they could not do —
pay their depositors in cash on demand.

The position of the banks today is the same
position as the state banks occupied before the
Civil War so far as their demand liabilities are
concerned. The only change that has taken
place is in the psychology of the mob.

In England, from the beginning of the bank-
ing era down to the present time, the failure
to redeem in coin on demand has always been
an act of insolvency. To remain open for busi-
ness was only possible through the suspension
by Parliament of the Bank Act. The same was
true in America before 1860. Charters granted to

152 THE EVOLUTION OF BANKING

State Banks nearly all carried a forfeiture clause
for failure to redeem in coin on demand, but
suspensions were sometimes legalized by special
act of the legislature that granted the charter.

During the panic of 1893 the banks of Amer-
ica for the first time defiantly remained open
while refusing to pay checks against deposits,
and have persisted in the same conduct in emer-
gencies ever since. It was to strengthen this
weak spot that the Federal Reserve Act was ee-
cured.

The cash reserves kept by the banks are main-
ly valuable in that they inspire confidence in the
minds of the public. During normal times when
there is no excitement the cash lies dormant in
the vault, but it cannot be said to be idle, as a
volume of credit of from six to ten times its
amount based upon it is in circulation. But in
abnormal times, when the public refuses to ac-
cept the transfer of bank credit in lieu of pay-
ments in cash, the danger becomes immediately
apparent.

The cash on hand begins to dwindle. De-
mands increase, while the daily deposits consist
almost entirely of checks, the customers hoard-
ing the cash that is received in the course of
business. The banks refuse to make new loans
and insist on the payment, both of maturing ob-

THE EVOLUTION OF BANKING 153

ligations and such loans as have been made pay-
able on demand.

This does little good so far as the general situ-
ation of the banks is concerned. Bank loans are
not repaid with money, but by checks against
credit in bank. To secure this credit the debtor
must sell some property or commodity to some
one who can pay for it at once. To secure such
a customer during times of stress prices are
slashed and goods sold far below the cost of pro-
duction. Market quotations of stocks and bonds
tumble under a deluge of offers to sell.

Eight here it may be observed that bank de-
positors fall into one of two classes — creditor
depositors or debtor depositors. The creditor de-
positor has a balance to his credit and owes noth-
ing. The debtor depositor has a balan?ce, but
owes the bank a note which he must pay and
which his balance is not sufficient to meet. He
must therefore sell something he owns even at
a runinous sacrifice. The sale results merely in
a transfer of bank credit from the account of
the purchaser to the account of the seller. Then
the credit on one side and the note on the other
offset and mutually cancel each other. The loans
and discounts on one side of the ledger and the
deposits on the other decrease by the amount of
the notes paid. It is thus very apparent that

154 THE EVOLUTION OF BANKING

during the panic the falling off of bank deposits
is not due entirely to the withdrawing of cash,
but is in a large measure due to the cancelling
of credit.

This process carried to its logical conclusion
would end in the entire disappearance of the
$17,000,000,000 of deposits in so far as they were
the results of credits extended by the banks and
do not represent the deposit of cash.

In a panic the banks are besieged by crowds
of excited depositors demanding the withdrawal
of their deposits. They accept without ques-
tion what is paid to them. They receive gold
certificates, silver certificates, trcasuiy notes
of 1890, National Bank Notes, legal tenders or
federal reserve notes, without discrimination.
"What they receive is a promise to pay, differing
in form only from their credit on the bank
ledger.

Professor Laughlin says: "A deposit account
is as much a demand obligation as a note. So
far as the profit to tJie hank is concerned it
makes no difference whether it grants this lia-
bility to the borrower in the form of a deposit
account or gives out its o-\vn obligation in the
form of notes. ' ' The statement contained in this
paragraph is true; but if the words "so far as
the profit to the bank is concerned ' ' were elirain-

THE EVOLUTION OF BANKING 155

ated, the balance of the paragraph following
them would be untrue.

It is just here that the psychology of the mob
is revealed.. Suppose the banks adopted the
methods in vogue before bank checks came into
use, and issued their circulating notes to the
amount of their present loans and discounts of
about $15,000,000,000 instead of crediting them
as now under the head of "Deposits." The
banks would be just as solvent. The relation
between the banks and the public would have
undergone no change. The public would have
in its possession demand obligations against the
banks to the amount of $15,000,000,000 in the
form of circulating notes. The banks would
have in their possession notes of individuals,
firms and corporations to an equal amount plus
the amount of the banks' capital and surplus.
Their published statements would not show any
liabilities for "Deposits." Their demand lia-
bilities would be for "notes in circulation."

But consider the effect of such a condition on
the minds of the public. If a panic started the
banks would be swamped by crowds demanding
the redemption of the bank bills, just as they did
before the war. They would not be satisfied as
now to exchange a "promise to pay" in one form
for a "promise to pay" in another form. They

156 THE EVOLUTION OF BANKING

would demand that the bills be redeemed in gold.
Some of the bills would be in the hands of debt-
ors to the bank, but to call in loans would not
help any. The payments would be made in bank
notes and these could not be used to redeem other
bank notes.

The publication of bank statements, as at pres-
ent, showing billions of dollars of deposits, has
a quieting effect on the general public. They
look upon the possession of these deposits by the
banks as a source of strength. On the contrary,
if this amount was represented by a mass of
bank notes in circulation, the effect would be the
very opposite. And yet the condition in both
cases would be identical.

The Federal Reserve Banks offer a temporary
haven of refuge in case of a run on the banks
similar to those that occurred in 1873, 1893 and
1907, and which exhausted the cash reserves com-
pletely, and this is practicaly the only purpose
it ever was intended to serve.

By means of this new Currency Act mem-
ber banks can secure Federal Reserve Currency
to the extent of two and one-half times the
amount of gold they may have on hand by de-
positing as security notes, drafts and bills of ex-
change arising out of actual commercial transac-

THE EVOLUTION OF BANKING 157

tions. These notes are a first and paramount
lien on all the assets of the issuing bank.

They are obligations of the United States and
redeemable in gold by the Treasury Department
at Washington, D. C, or in gold or lawful money
(Legal Tenders) at any Federal Eeserve Bank.

The Act of March 14, 1900, bound the United
States to maintain the parity of all forms of
money issued or coined by the United States.
Under this act the United States at present
would be obliged to redeem in gold about $1,-
800,000,000 of outstanding obligations if the de-
mand were made. These consist of National
Bank notes, of which there are $814,000,000 ; sil-
ver dollars, $565,000,000 ; greenbacks, $346,000,-
000, and on May 1, 1915, there were $53,000,000
Federal Reserve notes in circulation. There is
in the United States Treasury to redeem all this
a reserve fund of $150,000,000, or about 9 per
cent plus a relatively small amount in the work-
ing cash balance. To this $1,800,000,000 must
be added the amount of Federal Reserve notes,
which may be issued in the future, the amount of
which cannot be accurately estimated. There is
in the United States at the present time $1,889,-
000,000 in gold, approximately one-half of which
is held by the banks, the balance being in circu-
lation. There is here a potential basis for the

158 THE EVOLUTION OF BANKING

issue of over $2,000,000,000 in Federal Reserve
notes.

It is only a question of time or events that
will force the fiction of a gold basis to be aban-
doned. The sole basis of value is labor. The
value of any commodity is the average socially-
necessary labor time needed to produce it.

"Trade in general being nothing else but the
exchange of labor for labor, the value of all
things is, as I have said before, most justly meas-
ured by labor." — Benjamin Franklin, 1727.

"Money should be merely a receipt, an evi-
dence that the holder of it has either contributed
certain value to the national stock of wealth or
that he has acquired a right to the same value
from someone who has contributed it." — John
Gray, 1831.

"Labor alone, therefore, never varying in its
own value, is the ultimate and real stand-
ard by which the value of all commodities can
at aU times and places be estimated and com-
pared. It is their real price; money is their
nominal price only." — Adam SmitJi, '' Wealth of
Nations."

THE EVOLUTION OF BANKING 159

THE FLUCTUATING VALUE OF GOLD

No statistics showing the comparative cost of
producing gold at different periods appear to
be available.

The modern improvements in the methods of
mining, milling, and treating gold and silver
ores have been so great that the cost of pro-
duction must be now a fraction of what it was
before the introduction of the stamp mill.

The Spanish and Mexican methods of ex-
tracting the values were of the crudest char-
acter— only the surface veins were worked and
these only to a shallow depth, as there were no
facilities for draining or ventilating the mines.
The ore was brought to the surface in sacks
carried on the backs of enslaved Indians or
convicts.

There was no hoisting machinery and the
ladders used were trees from which the limbs
had been lopped off fairly close to the trunk.

The milling was done in an arastra. This
consisted of a space perhaps twenty feet or so
in diameter, enclosed by a low stone wall. The
floor of the arastra was flagged with flat, smooth
stones. In the center was a capstan, with cap-
stan bars extending beyond the enclosing wall,
to which mules or oxen were hitched. Large,

160 THE EVOLUTION OF BANKING

heavy blocks of stone were attached to the cap-
stan bars by chains and the ore w^as dumped
in and the mules or oxen were started on their
ceaseless rounds. The heavy blocks of stone
crushed and pulverized the ore and released
the metals contained therein. A small stream
of water flowing in on one side and overflowing
at the other side carried away the tailings.
Quicksilver scattered over the floor of the
arastra caught and held the gold and silver, but
it is needless to say that a large proportion of
the values were lost by this crude method.

When we compare the Mexican arastra with
the modern stamp mill driven by steam or elec-
tricity and the use of hoisting, ventilating and
pumping apparatus, rock drills driven by com-
pressed air and the cyanide process for extract-
ing the last cent of value, it is well within
reason to believe that gold is now produced at
a fraction of the former cost.

Ever since money was invented there has
been a continual effort to increase its volume.

The almost universal practice of debasing the
coinage during the medieval period was not
because of the dishonesty of kings or govern-
ments, but in a large measure on account of
the necessity for more coins to transact the
growing commerce of the age. Without in-

THE EVOLUTION OF BANKING 161

creasing the volume and use of money, barter
could never have developed into commerce.

In this development gold has played an im-
portant and useful role. But the time has ar-
rived when it must give way to a better and
more scientific medium.

The employment of labor in producing the
wealth needed to support the race should not
depend upon the accidents of nature in placing
the veins of gold-bearing ore where they can
be reached and, also, upon the further accident
of their being discovered.

It is not reasonable to suppose that if nature,
in her niggardliness, had failed to create the
metals, gold and silver, that the inventive
genius of man would have failed to supply some
other medium of exchange. The truth is that
man has, through the use of the credit system,
devised a means whereby commodities have
been produced and exchanged to an extent that
would have been impossible by the use of gold
and silver alone.

It is also true that efforts to increase the
volume of money have in some cases in the past
ended in disaster. But those failures prove
nothing except that the nature and function of
money was not understood. This being the
fact, the experiments were bound to be failures.

162 THE EVOLUTION OF BANKING

Money represents service. It is a credit in
the hands of its possessor. It is evidence of an
exchange where the service on one side has
been postponed by agreement. It is evidence
of a debt owed by the issuer. It is good money
and will pass current if the issuer is known to
be solvent and able to redeem. It is bad money
if there is a doubt as to the ability or intention
of the issuer to redeem as agreed. Gold is not
a good money. It is a commodity and fluc-
tuates in value. Its minimum value is fixed by
the coinage laws of nations^ The value of an
ounce of gold at the United States mint is
$20.67, regardless of the cost of production.

If mountains of gold ore were discovered
where the cost of extracting the gold was only
one dollar a ton, the fortunate owner could still
take the product to the mint and have it minted
into coins with the same debt-paying power as
formerly, and could continue to do so until the
coinage laws were changed to fit the new condi-
tions.

In the meantime, the fall in the value of gold
could only be recorded in the rise in«^ he market
price of all other commodities.

If a traveler from Altruria should land in
America and, in reply to his inquiries, be told
that wheat was selling at one dollar a bushel,

THE EVOLUTION OF BANKING 163

corn at fifty cents a bushel, eggs at twenty-five
cents a dozen, and that gold was minted at
twenty dollars an ounce, he could easily see
that an ounce of gold would buy twenty bushels
of wheat or forty bushels of corn or eighty
dozen of eggs. And, if on arriving on a second
visit, he was told that wheat was two dollars a
bushel, corn one dollar a bushel, and eggs fifty
cents a dozen, he would conclude that com-
modities had risen one hundred per cent. But
when he found that gold was still being minted
at the old rate of twenty dollars an ounce, and
that an ounce of gold would buy only one-half
of the commodities it formerly would, it would
be obvious that the value of commodities had
not risen 100 per cent, but that gold had fallen
50 per cent in its purchasing power.

This, in effect, is what happened after the
discovery of America.

The product of the mines of Mexico and
Peru was sent to Europe and Humboldt esti-
mates that general prices had risen by the 18th
century 294 per cent. The purchasing power
of the precious metals had fallen to one-third
of what it had formerly been. Arthur Young
computed the rise in the price of commodities
to be 280 per cent during the same period,
while Jacob claimed a rise of 450 per cent.

164 THE EVOLUTION OF BANKING

Professor Jevons, in his "Money and the
Mechanism of Exchange," says fhat gold "be-
tween 1789 and 1809 fell in the ratio of 100 to
54, or by 46 per cent. From 1809 to 1849 it
rose again in the extraordinary ratio of 100 to
245, or by 145 per cent, rendering government
annuities and all fixed payments, extending
over this period, almost two and a half times as
valuable as they were in 1809. Since 1849 the
value of gold has again fallen to the extent of
at least 20 per cent ; and a careful study of the
fluctuation of prices shows that fluctuations of
from 10 to 25 per cent occur in every credit
cycle."

THE EVOLUTION OF BANKING 165

MONEY

(INTER\^EW WITH MR. HENRY D. LLOYD IN THE
CHICAGO CHRONICLE, JANUARY 10, 1897.)

' ' I have no theory, ' ' said Mr. Lloyd, ' ' no new
kind of money to propose. But as a student
of events I have my ideas of the tendency of
monetary systems as they exist today, and am
endeavoring to suggest remedies for evils whose
existence or imminence all close observers must
admit.

"The financial system in England and the
United States presents many points of similar-
ity. In fact, we have borrowed the ideas of
English financiers — have originated practically
nothing, but have been mere slavish imitators.
The present English sj'stem dates from the Bank
of England Act of 1694; the American system
originated with greenbackism in the early years
of the war of the rebellion. The English de-
monetized silver in 1816, and the bank act of
1844 made the unpardonable mistake of caus-
ing the circulation of paper money to fluctuate
with the amount of gold and silver on hand.
This system put the cart before the horse, by
making the amount of industry dependent upon
the volume of the currency, whereas the true
system is the opposite — the graduation of the

166 THE EVOLUTION OF BANKING

amount of currency according to the value of
the productive industry of the country. This
system has been the parent of panics, A finan-
cial panic is worse than a war. Its dead and
wounded are found in every household through-
out the length and breadth of the land. There
has long been a condition of perpetual panic.
We have been passing, as it were, from one fit
to another with little time intervening for re-
cuperation and recovery.

"Apart from the exchanges necessary in the
retail trade the uses of money are but few. In
large business transactions currency is used
only ill the settlement of balances. Credit does
99 per cent of the business of the country. The
real problem, therefore, of the present time is
the very serious dislocation of the credit sys-
tem, which has resulted in a perfect paroxysm
of panics. Money itself is only important as
far as it affects credit. The banks do business
on a preposterous and impossible pretense of
paying all depositors on demand. This is ab-
surd. The strongest of these concerns would
be forced to the wall if suddenly called upon to
fulfill their contract with depositors. They
could not procure the money.

"In order to do business it is necessary that
the banks should have an ample reserve fund.

THE EVOLUTION OF BANKING 167

Under existing circumstances a large cash bal-
ance must be kept. The railroad corporations
and individuals engaged in trade are the chief
elements that require ready money. Their obli-
gations to laborers and tradesmen must be dis-
charged in cash. Aside from these avenues lit-
tle actual money is needed, and it is not neces-
sary that this little should be gold. Civiliza-
tion has used up all the supply of gold for its
reserves. There is not gold enough in the world
for the uses of business, nor yet for the bank
reserves. Many times the exigencies of business
compel the banks to withdraw their reserves,
and the public finds that there is not enough of
either credit or currency for its uses. Hence the
nervousness, often recurring, that results in
withdrawals of deposits and subsequent panics.
' ' The fact that the New York Clearing House
Association has been compelled four times with-
in the past twenty years to issue its certificates
to make good the balances of the banks is an evi-
dence of the unwisdom of the existing system.
But right here is the germ of the currency of
the future. By the issue of these certificates
all manner of securities representing valuable
commodities are transformed into currency. It
is the coinage of commodities for the purpose
of creating money for the use of the banks in

168 THE EVOLUTION OF BANKING

time of panic. How easy it would be to apply
a like principle for supplying the people of the
whole country with money as they require it!

"One of the most successful attempts at the
coinage of commodities took place in the colony
of Pennsylvania. During the period between
1720 and 1770 — fifty years — the colony issued
$3,000,000 in currency on the security of the
lands and commodities — on leases or land — for a
given period, varying from five to ten years.
Benjamin Franklin, who was the originator of
the plan, called it the coinage of land. The
success of the experiment — for it was success-
ful in the highest degree — is a striking refuta-
tion of the present claims that such a plan is im-
practicable.

' ' A similar experiment was tried in the Island
of Guernsey, with equal success. The people
wanted to build a market house, but they had
no money. Labor, lumber, stone, etc., there was
in abundance. The authorities in this emergency
issued paper notes of one pound each, which
were given in exchange for the work and mate-
rial needed. These notes were made receivable
for the rent of stalls in the market, and had a
ready circulation among the people. Each year
a portion of the notes was returned to the cor-
poration for rents and other dues, and as fast

THE EVOLUTION OF BANKING 169

as received were publicly burned. At the end
of ten years all the notes had been thus returned
and destroyed, and the market house, costing
some $25,000 — a considerable sum for a poor
community — stands today a monument to the
ability of a people to break loose from gold and
silver. The same system has been resorted to
on other occasions in various places, and always
with like good results, and it can easily be
adopted by any government to the extent of the
taxes levied upon and received from the peo-
ple.

"The banks of the country are trying to de-
vise means for the prevention of panics. In
1893 the finances of New York and Boston were
threatened with large withdrawals of deposits.
The times were panicky and all conditions por-
tended a money stringency. The banks ab-
solutely refused to pay out money, even upon
checks against deposits. They did not formally
suspend business; they simply refused to pay
out money on demand, as had been their cus-
tom, and many rich men, with ample funds on
deposit, were unable to procure enough currency
to pay their expenses at the World's Fair held
in Chicago. The business community approved
the course of the bankers, and after the flurry
had passed the old customs were restored. This

170 THE EVOLUTION OF BANKING

action doubtless prevented a widespread and dis-
astrous panic,

"It is not generally known, but it is a fact
nevertheless, that at the time of the failure of
the Baring Brothers' Bank in London the Bank
of England was on the verge of failure. Not-
withstanding all the safeguards which the gov-
ernment had placed around the institution its
reserve was fast disappearing, and but for
timely assistance would have vanished altogether.
The Bank of France came to its rescue with a
loan of 3,000,000 Pounds Sterling, and the gov-
ernment, through Lord Salisbury, then premier,
extended a helping hand, and a financial catas-
trophe without a parallel in the history of mod-
ern civilization was averted,

"The closer union of the banks of the United
States recently manifest is evidence of a desire
on their part to prevent the recurrence of panics.
That they may arrive at adequate means is sin-
cerely to be hoped, yet there must be a radical
change in the banking system before perfect
safety can be attained,

"Much as the sub-treasury scheme of the
western farmers was derided during the agita-
tion of several years ago, it was a rational one,
and may eventually form a part of our fiscal
system. The plan contemplated the loan by the

THE EVOLUTION OF BANKING 171

government — perhaps it should be called an ad-
vance— of a portion of the value of farm prod-
ucts, such as wheat, corn, vegetables and seeds,
that could be stored in warehouses just as whisky
is stored today, and sold by the government in
case of forfeiture, but which in any event would
bring an ample return for the money advanced.
These commodities, of course, should be nego-
tiated at the option of the government. The
system, to be sure, would lead to government
control of the warehouses of the country. I
hope it would. The outrages perpetrated by the
warehouse men upon the producing classes are so
grievous as to demand some radical measure of
relief. The system, in essence, is that under-
lying the clearing house certificates used so fre-
quently among financiers — the issue of money
based upon something of tangible value — and
the practice would be attended with little risk.
The warehouses could be placed under a sys-
tem of inspection similar to that in the bonded
warehouses in which whisky is now stored, and
as the government need advance no more than
75 per cent of the value of the commodities, the
security would be ample against any possible
fluctuations in the market price.

" It is claimed that the system I propose would
create an army of federal office holders. I do

172 THE EVOLUTION OF BANKING

not regard this as an evil. It is time the govern-
ment gave something to the people instead of
lavishing its bounty upon the monopolists. "We
have had too many exhibitions of favoritism
toward the class that seeks to control all com-
merce and to dictate to labor. Give the poor
man a chance, even though it might multiply
the number of officeholders. One thing is cer-
tain ; if the present monetary system based only
on gold is continued it will result in a rapid
succession of panics. It is the part of a wise
people to read the signs of the times, and adopt
in advance such means as will give them com-
fort, happiness and independence.

"At first I was disposed to look with favor
upon the free silver movement, but observation
has convinced me that it is reactionary, revolu-
tionary, mischievous and full of disaster. While
I think demonetization was a crime, the remedy
is not to go back to the status quo ante, but to
go onward to a better system. There was never
a successful system of bimetallism that tied the
two metals together at other than their market
value. The only alternative of the free silver
men is to choose between two panics. If silver
is coined at its market value it will necessarily
contract the currency by depreciating the pur-
chasing power of the silver already coined. If

THE EVOLUTION OF BANKING 173

the present ratio is to be maintained, free coin-
age will drive all the gold from circulation, and
again contraction will be the result. The free
coinage men remind me of the cowbird, w^hich
steals the nest of other feathered creatures only
to befoul them.

"Money is merely an intermediary between
the producer and the consumer. Many as are
the difficulties in the way of the proper arrange-
ments of fiscal affairs, I have every confidence
in the wisdom of the people. If they are only
left alone they will find a way out. The trou-
ble at present is that everything is monopolized.
We are living, as it were, in a condition of in-
dustrial closure. The people are not able — are
not permitted — to use their labor to their own
best advantage.

"To sum up. I care nothing for any sj'stem
of economics that does not include co-operation
and anti-monopoh^ Call it socialism if you will,
I do not care. It is the only system that will
bring ultimate and entire relief from the ex-
isting evils. The people of the community are as
able to co-operate as the people of a corporation.

"Co-operation is a positive idea; anti-monop-
oly is negative. With the institution of these
will come a system of finance and of all other
things that will go toward making a paradise

174 THE EVOLUTION OF BANKING

of this world of ours. The perpetual fear of
poverty and panics is absurd — a delusion. The
people will not submit to it long. There is too
much going to waste — of food and all other
things that contribute to the comfort and happi-
ness of men — to permit of the people believing
there is any good reason in nature for the pov-
erty that grinds and the want that kills."

CONCLUSION

The division of Labor caused the invention of
money. As soon as money was invented and
came into use to any considerable extent,
means were taken to introduce substitutes or
representatives which were of nominal value.

The earliest mediums of exchange used were
the skins of animals. When these were too
bulky and inconvenient to handle, a small
irregular piece was cut out of the skin. This
was the token that the skin from which it had
been cut belonged to the holder of the small
bit of leather, and ownership was proved by
fitting it into the place from which it had been
cut.

Leather money was used by the Cartha-
ginians and Romans and was in circulation in

THE EVOLUTION OP BANKING 175

Russia as late as the reign of Peter the Great.

Paper money was in circulation in China four
or five hundred years before it was issued by
the Bank of England, and the Emperor of Tar-
tary issued both paper and leather money
during the fourteenth century.

The use of skins as a medium of payment
was nearly universal in the early history of
America. The transactions of the Hudson Bay
Company were based on "skins." One beaver
skin was supposed to be worth two shillings;
twenty skins would pay for a gun worth about
forty shillings. Sometimes a gun was sold by
standing it upright on the ground and piling
skins beside it until the pile reached as high as
the muzzle of the gun. All kinds of skins were
included and the pile would contain not only
coon, beaver and deer skins, but often sea otter,
arctic fox and other rare and valuable furs.
This method of dealing with the Indians and
trappers undoubtedly explains why the guns
of that period had such extraordinarily long
barrels.

During Colonial days in America not only
were beaver and coon skins used as money,
but also musket balls. Wampum, which was
made by the Indians out of shells and which
they strung in the shape of belts, was another

176 THE EVOLUTION OF BANKING

medium of exchange and was made legal tender
in Massachusetts to the amount of forty shil-
lings. Cows were also legal tender for taxes,
but, as might be expected, the thrifty New
Englanders always paid with the scrawniest
specimens.

In Virginia and Maryland, on account of the
scarcity of coin, corn and tobacco were used
in payment of debts — the tobacco at the rate
of three shillings per pound, and a refusal to
accept carried a penalty of three years at hard
labor. Women brought over from England by
the London Company were sold to the settlers
as wives for one hundred pounds of tobacco.
The price was afterwards raised to one hundred
and fifty pounds.

In the West Indies raw produce, such as
sugar, rum, molasses, ginger, indigo and to-
bacco, was similarly used. In Newfoundland
dried codfish was used at a very recent period.
Every country of Europe and Asia gives evi-
dence of the use of vegetable and manufactured
products as money.

Wheat from the time of ancient Greece to
the present has been used, and in Norway it
was deposited in banks and borrowed and lent.

Along the shores of the Mediterranean olive
oil and in some places almonds were used, as

THE EVOLUTION OF BANKING 177

was also salt in Abysinnia, Mexico and Su-
matra, and in the latter country cubes of
beeswax.

In Western China and Thibet tea pressed
into small, hard cubes, called ''brick tea,"
passes current. Fiji Islanders have a currency
in whales' teeth and one red one is of the same
value as twenty white ones.

In passing from barter, or the use of vegeta-
ble or manufactured articles, to metallic coins
as money, an evident attempt was made to con-
nect the coin, either by shape or design, with
the article it v/as supposed to represent. In
China cloth and knives having to a certain
extent been used as a standard of value, the
earliest coins were made to resemble pieces of
cloth or knives. In ancient Rome the substitu-
tion of coins for cattle was marked by the
impressing upon the coin a design of an ox
or sow.

The transportation of any considerable
amount of gold or silver coins was attended
with a large amount of labor and risk, and this
was obviated by depositing the coins in bank
and transferring the title by means of a bill of
exchange.

The Bank of Venice and the various banks
of deposit in Europe are prominent milestones

178 THE EVOLUTION OF BANKING

which mark the path of progress from primitive
barter to an ideal financial system. The expe-
rience thus gained aided in the further exten-
sion of the use of book accounts in transferring
credits or offsetting debts.

The traders of medieval Europe had a method
of offsetting debts that closely resembles the
modern system of clearing checks by banks
today. The great fairs that were formerly
held all through Europe during the middle
ages were attended by traders from many
countries, who came with long caravans, and
exchanged the merchandise manufactured in
their country for the goods brought to the fair
by the traders from other countries.

The retail trade in these fairs bore only a
small proportion to the whole volume, the
largest share of the trade being in bulk between
traders. At the close of the fair they met in a
large room for the purpose of settling their
accounts. This was accomplished by mutually
offsetting their debts and credits with each
other, only the differences, which were usually
small, being paid in cash. Boisguilbert tells of
one fair held at Lyons, France, at the close of
which debts to the amount of 80,000,000 francs
were thus balanced against each other without
the use of a single coin.

THE EVOLUTION OF BANKING 179

About the year 1775 or 1780, after the use of
bank checks was introduced, the clerks of some
of the London bankers instead of going to each
bank to collect the money on the checks, made
an arrangement with each other to meet at a
certain place and "swap" their checks, after-
wards paying the difference only in cash. The
safety and convenience of this method led a
few of the London bankers — then all private
bankers — to rent a room where their clerks
could meet privately and exchange their
checks, notes, and bills. It was kept a profound
secret from the public, and a number of bank-
ers refused to join, as they believed it to be a
very questionable business arrangement. But
as time Avent on the economy of time, as well as
work, together with the elimination of the risk
consequent on uselessly transporting coins
daily through the street from one bank to the
other, and then back again, won the day, and
since then the Clearing House has become a
highly respectable institution.

The Clearing House, as at first established,
was a great labor-saving institution, and saved
the use of money between banks in the pay-
ment of checks, except for the balances, which
average only about 5 per cent of the total.

But even this 5 per cent is not now paid in

180 THE EVOLUTION OF BANKING

the majority of Clearing Houses. In London
all the member banks, and the Clearing House
itself, keep an account with the Bank of Eng-
land, and the differences are settled by means
of checks, which transfer the amounts from one
account to the other on the books of the Bank
of England.

It will thus be seen that the immense com-
merce of England is carried on by means of
book accounts, bills of exchange, and checks,
and these latter are paid and cancelled without
the use of a single coin or bank bill. This also
includes the country banks of England, who
are also members and whose checks are cleared
through the Clearing House.

The same is true to a large extent in this
country. "While in some Clearing Houses in
America balances are presumably paid in cash,
they are in a large number of cases ''traded" —
the banks having credit balances giving orders
on the Clearing House to the debtor banks
with which to pay their debit balances.

These orders are paid for by a cashier's
check, which goes through the Clearing House
the next day.

In the Philadelphia Clearing House no money
whatever is used, as they have adopted the
London system of paying balances by check.

I

THE EVOLUTION OF BANKING 181

In the smaller towns the banks exchange checks
with one another and the difference is settled
by giving a bank draft on Chicago or New
York. In times of panic the New York and
Chicago Clearing Houses revert to the use of
Clearing House certificates in place of money
in paying balances.

It ought to be patent to any one watching
the current of events that money in the gener-
ally accepted sense is becoming obsolete as a
means of exchanging services or commodities.
This work, formerly done with, a vast amount
of labor and risk, is now being done in an enor-
mously increased volume, in a convenient, safe
and economical manner, by means of book ac-
counts, bills of exchange, checks and the
clearing system.

The coins of America have almost entirely
disappeared from circulation with the excep-
tion of the silver coins used in retail trade,
and these are merely tokens and are worth as
bullion only about one-half their nominal value.
The same is true of the nickel five cent pieces
and the copper cents. These coins are used
merely as counters.

With the elimination of gold coins the last
vestige of commodity money will have finally

182 THE EVOLUTION OF BANKING

disappeared, at least so far as America is con-
cerned.

Any commodity which fluctuates in value
either from the effect of a diminishing or in-
creasing supply, or from the increase or de-
crease in the cost of production, is a poor
instrument by which to measure the relative
exchange value of other commodities with itself
or with each other.

The labor time necessary to produce an
article will ultimately be the standard by which
its exchange value will be estimated.

Any financial legislation in the future must
be based on a full knowledge of the history of
money and banking. It must be in harmony
with the evolutionary tendencies ascertained by
a study of their development. Society must be
protected from disastrous results, such as were
caused by errors in the past, so far as human
intelligence can be depended upon.

Some day society will take the place of the
capitalist as the organizer and director of in-
dustry, and then production can and will be
carried on for use and not for profit.

Constructive financial legislation can be in-
augurated now which will hasten the day when
the exploitation of the working class will cease
and make the change from private ownership

THE EVOLUTION OF BANKING 183

of the means of life to collective ownership easy
and frictionless.

To gain this desirable end by a gradual
process, it will be necessary for the United
States government to expand the functions of
the Treasury Department and the Postal Sav-
ings Bank and through them supply money and
credit to public bodies, in such amounts and
under such conditions as will enable public
works to be inaugurated without the aid of
private capital or credit.

With the machinery of credit in the hands
of the people, no more interest-bearing bonds
need be issued and the burden of interest would
be removed.

There have been issued during the past ten
years $3,500,000,000 in municipal obligations
and about $2,500,000,000 during the previous
ten years, some of which have matured.

There are probably now $5,000,000,000 of
these bonds still outstanding in addition to the
$1,146,626,000 United States government bonds.
This calls for at least $250,000,000 yearly for
interest. During the year 1913 $403,000,000
and in 1914 $474,000,000 were marketed. The
first four months of the present year saw an
additional $148,128,400 added to the amount
outstanding.

184 THE EVOLUTION OP BANKING

The amount of credit borrowed through the
use of bonds by states, counties, cities, school
boards, and road, bridge, and drainage com-
missioners approaches $500,000,000 a year.
This means an additional charge for interest
each year of $25,000,000. The interest now
paid on the outstanding municipal and govern-
ment bonds is equivalent to the average yearly
wages of nearly 500,000 workers.

This can be saved by proper legislation along
the following lines :

The Postal Savings Bank law should be
amended to permit the opening of checking
accounts by individuals, firms, corporations or
public officers, and the limitations on the
amount which may be on deposit to the credit
of any one removed.

Postal Savings Banks should be located in
convenient places easily reached by the public,
with as many branches as may be needed in any
city or town, and a campaign of publicity be
inaugurated, with a view to bringing the use
of the Postal Savings Bank to the attention of
the people.

No deposit in a Postal Savings Bank should
be re-deposited in any privately owned bank.

All sums to the credit of the United States
disbursing officers should be placed to their

THE EVOLUTION OF BANKING 185

credit in the Postal Savings Bank, to be
checked against by them.

Drafts should be drawn by any Postal Sav-
ings Bank upon any other Postal Savings Bank
within the jurisdiction of the United States at
par, no charge being made for exchange or for
services rendered, except what is necessary to
cover the actual expense involved.

No interest should be paid on deposits.

All Postal Savings Banks should become
members of the local Clearing House Associa-
tion.

In addition to the above a bill in harmony
with the provisions contained in the one with
which this volume closes should be enacted
into law.

"When the people themselves supply the
credit they need for all their present collective
activities, without the intervention of bond
syndicates and bankers, they will have learned
a most valuable lesson in finance. They can
then go on adding one enterprise after another
as fast as the growing intelligence of the voters
demand.

The money or credit issued to establish or
purchase income-producing enterprises could
be redeemed out of the surplus revenues, and
after the debt created had been paid the

186 THE EVOLUTION OF BANKING

charges for service could then be reduced and
labor conditions improved.

Where the credit had been given to aid
in establishing non-income-producing improve-
ments, such as parks, roads, schools, etc., 4 or 5
per cent of the principal amount could be
redeemed each year out of the general tax levy
until the debt was cancelled.

The credit advanced could be either in the
form of a credit entered on the ledger of a
Postal Bank, and transferred by checks, or in
the form of United States notes for purposes
of circulation.

A BILL to Provide a Self-Redeeming" Legal
Tender Paper Currency, at Cost, for All Pub-
lic Functions and for the General Use of the
People of the United States of America.

FORMULATED BY W. W. CLAY OF CHICAGO.

(a) fiscal department:
Be It Enacted by the Senate and House of Repre-
sentatives of the United States of America in
Congress Assembled:

That within ninety days after the passage of this
act, the Government of the United States shall estab-
lish a Fiscal Department, under the jurisdiction of
its Treasury Department, with all clerical or other
machinery that may be necessary to transact its
business, and with proper and sufficient appropria-
tion of funds to maintain the same.

The Fiscal Department of the United States shall
be in the nature of a Bank of Issue and its pur-
pose shall be to provide Money for the Public Needs
of the People of the United States, and to Unify
All Forms of Currency now in circulation by the
authority of the United States (except Federal Re-
serve Currency).

(b) nature of united states money:

All Money Issues of the Fiscal Department shall
be in Paper Currency, which shall be printed by
the Bureau of Printing and Engraving, and prop-
erly attested.

This Currency Shall Be Lawful Money of the
United States, and Shall Be Called United States
Currency.

It shall be in general form and design similar to
the present United States Notes, and it shall be
issued in denominations that may, from time to

187

188 THE EVOLUTION OF BANKING

time, seem best suited to the needs of the People
of the United States.

United States Currency Shall Be an Evidence of
Monetary Credit in the Person of Lawful Holders,
and Shall Be Receivable at Face Value in Liquida-
tion of All Debts and Dues, Public and Private
(Without Exception), Within the Territorial Juris-
diction of the United States.

(C) UNIFICATION THRU LEGALTENDERIZING:

For the Purpose of Unification, from and after
the passage of this Act, all United States Notes,
National (banknote) Cuirency, Gold certificates, and
Silver certificates shall be Full Legal Tender for all
debts and dues. Public and Private, Without Ex-
ception, thruout the territorial jurisdiction of the
t/wiied jSia^es, and except National (Banknote) Cur-
rency, Shall Be Available as Reserves in National
Banks: But while in circulation, each particular
kind aforesaid, shall preserve all the qualifications
it now possesses, in regard to redemption in such
other forms of Money, as Gold or Silver, which the
conditions on its face, or the present laws of the
land, provide.

(d) unification thru exchange:

All such various notes "currency" or "certificates"
that now are, or that hereafter may be possessed
or collected by the United States, thru its treasury,
sub-treasuries, post offices, custom houses, or any
and all other receiving departments of the United
States, together with all gold coin, shall be immedi-
ately sent to the Fiscal Department of the United
States Treasury, and be exchanged for United States
Currency of equal sums and approximately corre-
sponding denominations.

Any banks, corporations or individuals having
such notes, currency or certificates may have them
exchanged for United States Currency on applica-
tion to the Fiscal Department.

The Owner of any mutilated or wornout Notes,

THE EVOLUTION OF BANKING 189

Currency, or Certificates, may also have them ex-
changed for United States Currency in like manner.

No such "notes," "currency" or "certificates" when
so collected or exchanged shall be re-issued or paid
out by the Government of the United States or any
of its Departments, and all present laws for re-
issuing or re-circulating of same are hereby repealed
and declared null and void.

All such Notes, or Certificates, in any manner
received or exchanged for, thru the operation of this
Act, Shall at Once Be Destroyed.

All National (banknote) Currency shall be held
for the redemption of the U. S. Bonds against which
they were issued.

(E) CURRENCY FOR GOVERNMENT PURPOSES:

United States Currency shall furthermore be cre-
ated for, and issued into circulation, by the various
departments of Government, for all Public Purposes
that require, or may require, expenditure of Public
funds, and for which appropriations may be made.
The same being provided by the Fiscal Department
as earned and needed.

All such new United States Currency -must first
go into circulation by being earned for full value
received in the performance of Public Functions,
and when returned thru payment of services by the
Government, or thru Government revenues, must be
destroyed as having completed its cycle.

(F) TO PREVENT POSSIBLE REDUNDANCY:

Return demands on money issued for Government
purposes shall be made and arranged thru the usual
channels for Government Revenues, so that such
revenues shall, as nearly as possible, equal the out-
lay. But in cases similar to those now demanding
extraordinary outlay, and for which the Government
has heretofore issued interest-bearing bonds to ob-
tain funds, the revenue collections shall be at a
rate of 4 per cent per annum and continued until a

190 THE EVOLUTION OF BANKING

sum equal to that paid out shall have been returned,
and the Cycle of Any Issue Thus Completed.
(G) CURRENCY FOR STATES, ETC.:

The Fiscal Department of the United States shall
also extend its facilities for supplying currency to
States, and upon guarantee of States, to their re-
spective Cities, Towns or other Political Units,
whose ability to return the same in twenty-five year-
ly installments of 4 per cent each is fairly demon-
strated; a proper public use for the money pro-
vided ; the legal consent by vote of the People in such
political unit obtained; and a promise to return the
currency advanced (in installments as above) prop-
erly acknowledged with suitable penalties and se-
curities.

As the currency is received back by the Fiscal De-
partment in the installments above provided, its
cycle will have been com^pleted; and It Shall Be
Destroyed. But these advances may be paid back,
wholly or in part, in such other forms of money
herein declared full legal tender by this Act, which
shall be disposed of as provided for such moneys.

(H) CURRENCY FOR PURCHASING PUBLIC BONDS:

The Fiscal Department Shall issue Currency and
the Treasury Department shall purchase with such
Currency all Public Bonds Now Outstanding That
May Be Offered, of the United States, Cities, or
Other Political Units that may have met the interest
provided by their respective bonds. These bonds to
be paid for at par, plus accrued interest. The Treas-
ury Department shall collect the interest on such
bonds and destroy or otherwise dispose of the money
paid in, as provided for such moneys.

When the bonds so purchased become due, and all
interest requirements have been satisfied, the Po-
litical Unit involved may redeem or renew the same
on the 4 per cent yearly installment plan provided
for the payment of political unit obligations set
forth in Section G.

For any bonds of political units not purchased un-

THE EVOLUTION OF BANKING 191

der this clause, the Fiscal Department may provide
currency for the payment thereof under the gen-
eral provisions of Section G if the same is accept-
able to the several holders of such bonds ; not exceed-
ing par value.

(i) finally:

Nothing in this Bill Contained Shall Be Construed
into a Repudiation or Revocation of the Rights of
Redemption in Gold or Silver Coin, as the Case May
Be, of Any hjotv Existing Form of Money or Other
Obligations, Thru Which Lawful Demands May at
Present Be Made for Such Gold or Silver Coin.

192 TtlE EVOLUTION OF BANKING

BIBLIOGRAPHY.

The following list of works is, of course, not in-
tended as a complete bibliography of the subject,
but merely indicates the principal sources from
which the information in this book has been com-
piled:

Assignats and Mandats, Stephen D. Dillaye.

Banking Systems of the World, William Matthews
Handy.

Communist Manifesto, The, Karl Marx and Fred-
erick Engels.

Critique of Political Economy, A, Karl Marx.

Currency and Banking, Bonamy Price.

Example of Communal Currency, An, J. Theodore
Harris.

French Eevolution, The, Carlyle.

High Cost of Living, The, Karl Kautsky.

History of American Currency, Wm. G. Sumner.

Inaugural Address as President of Institute of
Bankers, London, Sir John Lubbock.

Modern Banks of Issue, Charles A. Conant.

Money and Its Substitutes, Horace White.

Money and Social Problems, J. Wilson Harper.

Money and the Mechanism of Exchange, W. Stan-
ley Jevons.

Money of the New Conscience, Henry Demarest
Lloyd.

Our Money Wars, Samuel Leavitt.

Paper Money Inflation in France, Andrew D.
White.

Recent Economic Changes, D. A. Wells.

Science of Wealth, The, Amasa Walker.

Theory and Practice of Banking, Henry Dunning
McLeod.

Ways and Means of Payment, Stephen Colwell.

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