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Full text of "The evolution of banking; a study of the development of the credit system"

H6 

1551 
H85 
XX 



THE 



EVOLUTION 






ROBERT H. 




-> ■ » 1 \ I 

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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o 

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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 bank s 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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