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ITUAL BANKING
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THE RADICAL DEFICIENCY
OF THE PRESENT CIRCULATING
MEDIUM AND THE ADVANTAGES
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A FREE CURRENCY
BY
WILLIAM B. GREENE
PUBLISHED BY
THE REFORM LEAGUE OF DENVER, COLO.
1919
Price, 25 Cents
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MUTUAL BANKING
SHOWING
THE RADICAL DEFICIENCY
OF THE PRESENT CIRCULATING
MEDIUM AND THE ADVANTAGES
A FREE CURRENCY
BY
WILLIAM B. GREENE
PUBLISHED BY
THE REFORM LEAGUE OF DENVER, COLO.
19 19
EDITOR'S PREFACE.
THE payment of interest has been opposed by great thinkers in all
ages. Philosophers have demonstrated that it has no reason for being.
Ethical writers have shown that justice does not countenance it. Econ-
omists have proved it an unnecessary evil. Among its greatest oppo-
nents we find Aristotle, Berkeley and Proudbon. These three mighty
thinkers, though living at different times and in different countries,
neither using the same methods of research, or making deductions from
the same data, yet, from their various standpoints, reached the conclu-
sion that interest is neither wise, just or necessary. Not all the argu-
ments which any one of these writers employs are used, or would be ac-
cepted by either of the others, but to a considerable extent the three
reason identically, so that we find Berkeley, the Christian, agreeing
with the Pagan, Aristotle, and confirmed by Proudhon, the Rationalist.
Of this trio, however, Proudhon alone pointed out that interest could be
made to disappear, not by curtailing individual liberty, but only by ex-
tending it.
In the main the author of this work follows in Proudhon's path, de-
parting from it in some important particulars, but in general only so
modifying his master's work in finance, both critical and constructive,
as to make it applicable to the monetary system and economic methods
prevailing in the United States. His assault is upon the system of state
banks that was in existence when he wrote (nearly half a century ago),
and the system of mutual banks by which he proposed to replace it is
an adjustment to American routine of the essential principles embodied
in Proudhon's "Bank of the People." The reader will have little diffi-
culty in readjusting the arguments to the new conditions resulting from
the displacement of the state banks by the national banks.
Analytical examination of Greene's work will show that it is written
In elucidation and illumination of the discovery that, considered as a
whole, interest payment, as it exists in modern times, is not what it is
professed to be, the price paid for the use of borrowed capital, but the
premium paid for the insurance of credit. Paying interest is generally
accepted as equitable because it is looked upon as a reimbursement of
the holder of capital for foregoing the advantage of using his capital
himself. Though the so-called borrower really needs capital, and ulti-
mately gets it as a result of the transaction between himself and the
so-called lender, this transaction is really not one of borrowing and
lending, but simply a temporary exchange of well-known credit for
credit less well known, but equally good, and the interest paid is the
price of the insurance which the latter credit receives through the ex-
change. This, under a system of free competition in banking, would
fall to cost, or less than 1 per cent per annum. It is now maintained at
varying rates, averaging 5 or 6 per cent by giving a monopoly of this ex-
change of credits to banks, which, in addition to the perfectly sufficient
insurance afforded by the centralization of their customers' credit,
furnish a supposed extra security by pledging, in a prescribed form,
20O3553
MUTUAL BANKING.
capital belonging to themselves, thus enabling these banks to offer a
pretext for charging an exorbitant premium, the power to exact which
depends in reality solely upon this monopoly. This book aims at the
destruction of their monopoly by allowing perfect freedom in banking,
giving to all credit instruments the liberty of such circulation as they
can command upon their merits, and thereby enabling producers to
monetize their credit directly and at cost, instead of through the media-
tion of a prescribed and privileged commodity and at an exorbitant
price, as well as to increase the circulating power of their credit by
methods of organization and insurance similar to that which the author
proposes under the name of mutual banking.
The long-standing feud between the hard-money advocates and the
flatists has been possible only because each has persisted in looking at
only one side of the shield. The former demand a safe currency; the
latter desire the benefits of paper money, and each party ignores the
other's arguments. This feud the author brings to an end, by proposing
a paper currency secured by real property, thus combining the safety of
coin with the advantages of paper, and eliminating the evils of both.
Whenever a theory of financial reform is broached that involves the issue
of paper money, the failures of paper money experiments in the past are
brought up as a warning. But the experiments that failed after a fair
trial were characterized by one or more of three features which almost
inevitably bring disaster, and which mutual banking excludes:
1. The issue of money by a government, or under an exclusive priv-
ilege granted by one.
2. The legal tender privilege.
3. Redemption on demand.
When the power to issue money is confined to privileged banks, the
control of the volume of currency and the rate of interest resides in a
cabal, which will sooner or later use its power to drive producers into
bankruptcy. When the power to issue money is confined to government
itself, losses ultimately ruinous will be suffered through maladministra-
tion by incompetence, or by fraud, two factors whose operations, in com-
bination or in alternation, constitute the history of almost all govern-
mental undertakings.
The legal tender privilege adds no virtue to good money, and re-
moves the only effective cure for bad money the right to reject it. To
force bad money on people is as surely disastrous as to force bad food on
them. But to dwell at length on this point and on the redemption of
notes on demand would anticipate the author's argument.
H.C.
Denver, Colorado, March 1, 1919
MUTUAL
CHAPTER I.
THE USURY LAWS.*
ALL USURY LAWS appear to be arbitrary and unjust. Kent
paid for the use of all lands and houses is freely determined in the
contract between the landlord and tenant; freight is settled by the
contract between the shipowner, and the person hiring of him;
profit is determined in the contractor purchase and sale. But, when
we come to interest on money, principles suddenly change; here
the government intervenes and says to the capitalist, "You shall in
no case take more than 6 per cent interest on the amount of prin-
cipal you loan. If competition among capitalists brings down the
rate of interest to 3, 2, or 1 per cent, you have no remedy; but if, on
the other hand, competition among borrowers forces that rate up
to 7, 8 or 9 per cent, you are prohibited, under severe penalties, from
taking any advantage of the rise." Where is the morality of this
restriction? So long as the competition of the market is permitted
to operate without legislative interference, the charge for the use
of capital in all or any of its forms will be properly determined by
the contracts between capitalists and the persons with whom they
deal. If the capitalist charges too much, the borrower obtains
money at the proper rate from some other person; if the borrower
is unreasonable, the capitalist refuses to part with his money. If
lands, houses, bridges, canals, boats, wagons, are abundant in pro-
portion to the demand for them, the charge for the use of them will
be proportionally low; if they are scarce, it will be proportionally
high. Upon what ground can you justify the legislature in making
laws to restrict a particular class of capitalists, depriving them in-
vidiously of the benefit which they would naturally derive from a
system of unrestricted competition? If a man owns a sum of
money, he must not lend it for more than 6 per cent interest, but he
may buy houses, ships, lands, wagons, with it, and these he may
freely let out at 50 per cent, if he can find any person willing to pay
at that rate. Is not the distinction drawn by the legislature arbi-
trary, and therefore unjust? A man wishes to obtain certain lands,
*This work is a compilation of a series of newspaper articles, hence
they are somewhat disconnected, and an occasional repetition will be
found. EDITOR.
8 MUTUAL BANKING.
wagons, etc., and applies to you for money to buy them with; you
can lend the money for 6 per cent interest, and no more; but you
can purchase the articles the man desires, and let them out to him
at any rate of remuneration upon which you mutually agree.
Every sound argument in favor of the intervention of the legisla-
ture to fix by law the charge for the use of money bears with equal
force in favor of legislative intervention to fix by law the rent of
lands and houses, the freight of ships, the hire of horses and car-
riages, or the profit on merchandise sold. Legislative interference,
fixing the rate of interest by law, appears, therefore, to be both im-
politic and unjust.
EFFECT OF THE REPEAL OF THE USUBY LAWS.
But let logic have her perfect work. Suppose the usury laws
were repealed today, would justice prevail tomorrow? By no
means. The government says to you: "I leave you and your
neighbor to compete with each other; fight out your battles
between yourselves; I will have nothing more to do with your quar-
rels." You act upon this hint of the legislature; you enter into
competition with your neighbor. But you find the government has
lied to you; you find the legislature has no intention of letting you
and your neighbor settle your quarrels between yourselves. Far
from it; when the struggle attains its height, behold! the govern-
ment quietly steps up to your antagonist, and furnishes him with a
bowie knife and a revolver. How can you, an unarmed man, con-
tend with one to whom the legislature sees fit to furnish bowie
knives and revolvers? In fact, you enter the market with your
silver dollar, while another man enters the market with his silver
dollar. Your dollar is a plain silver dollar, nothing more or noth-
ing less ; but his doll ar is something very different, for, by perm ission
of the legislature, he can issue bank-bills to the amount of f 1.25
and loan money to the extent of double his or your capital. You tel
your customer that you can afford to lend your dollar, if he wil
return it after a certain time, with four cents for the use of it, but
that you cannot lend it for anything less. Your neighbor comes
between you and your customer, and says to him, "I can do better
by. you than that. Don't take his dollar on any such terms, for I
will lend you a dollar and charge you only three cents for the use
of it." Thus he gets your customer away from you; the worst of
it is that he still retains another dollar to seduce away the next
customer to whom you apply. Nay, more, when he has loaned out
his two dollars, he still has 25 cents in specie in his pocket to fall
back upon and carry to Texas in case of accident, while you, if you
succeed in lending your dollar, must go without money till your
debtor pays it back. Yet you and he entered the market, each with
a silver dollar; how is it that he thus obtains the advantage over
you in every transaction? The BACKING PRIVILEGE which the gov-
ernment has given him, is a murderous weapon against which you
cannot contend.
THE USURY LAWS.
THE USURY LAWS ARE NECESSARY UNDER PRESENT CIRCUMSTANCES.
A just balance and just weights! Very well; but if we have an
unjust balance, is it not necessary that the weights should be un-
just also? A just balance and unjust weights give false measure,
and just weights with an unjust balance give false measure in like
manner, but an unjust balance and unjust weights* may be so ad-
jusT-ed as to give true measure. Under our present system, the
lender who is not connected with the banks may be oppressed, but
the usury laws (unjust as they are when considered without rela-
tion to the false system under which we live) afford some protec-
tion, at least to the borrower. They are the unjust weights, which,
to a certain extent, justify the false balance. It would be well to
have a just balance and just weights; that is, it would be well to re-
peal the usury laws, and to abolish, not only the banking privilege,
but also, as we shall proceed to show, the exclusively specie basis of
the currency; but it will not do to put new wine into old bottles, nor
to mend old garments with new cloth. When the bank lends two dol-
lars, while it owns only one, it gets twice the interest it is actually
entitled to. Insist, if you will, upon retaining your peculiar priv-
ileges; but consent in the name of moderation and justice, to let me
protect myself by the usury laws; for they are not very severe
against you after all. The usury laws confine you to 6 per cent in-
terest on whatever you loan, but, as the banking laws enable you
to loan twice as much as you actually possess, you obtain 12 per
cent interest on all the capital you really own. You cannot com-
plain that in your case the usury laws violate, and without due
compensation, the right of property; for you only own one dollar,
and yet receive interest and transact business, as though you owned
two dollars. The usury laws are necessary, not to interfere in your
right to your own property, but to limit you in the abuse of the un-
just and exclusive privileges granted you by the legislature. The
antagonism between the usury and the banking laws is like the
division of Satan against Satan; and, through their internal con-
flict and opposition, the modern Hebrew kingdom may one day be
brought to destruction.
ARGUMENT IN FAVOR OF THE REPEAL OF THE USURY LAWS.
But let us now examine the great argument in favor of the
immediate repeal of the usury laws an argument which, according
to those who adduce it, is in every way unanswerable. It is said that
all the above considerations, though important and certainly to the
point, ought to have very little weight in our minds, and that for
the following reason: MEN DO, notwithstanding the present laws,
take exorbitant interest; and whatever usury laws may be passed,
they will continue so to do. If it be acknowledged that it is wrong
to take too high interest, that acknowledgement will not help the
*Take the STEELYARD for example.
10 MUTUAL BANKING.
matter, for, though we acknowledge the wrong, we are impotent to
prevent it. The usury laws merely add a new evil to one that was
bad enough when it was alone. Without a usury law, men will
take too high interest; for they have the power to do it as credit is
now organized, and no legislation can prevent them; with a usury
law they will continue to take unjust interest, and will have re-
course to expedients of questionable morality to evade the law. If
the taking of too high interest be an evil, is it not still a greater
evil for the community to demoralize itself by evading the laws; to
demoralize itself by allowing individuals to have recourse to sub-
terranean methods to accomplish an end they are determined to ac-
complish at all events an end which they cannot accomplish in the
light of day, because of the terror of the law? Thus argue the ad-
vocates of immediate repeal, and with much show of reason. There
are a hundred ways in which the usury laws may be evaded.
POWER OF CAPITAL IN THE COMMONWEALTH OF MASSACHUSETTS.
We think few persons are aware of the power of capital in this
Commonwealth. According to a pamphlet quoted by Mr. Kellogg,
containing a list of the wealthy men of Boston, and an estimate of
the value of their property, there are 234 individuals in this city who
are worth, in the aggregate, $71,855,000; the average wealth of
these individuals would be $321,781. In this book, no estimate
is made of the wealth of any individual whose property is supposed
to amount to less than $100,000. Let us be moderate in our estim-
ates, and suppose that there are, in all the towns and counties in
the state, (including Boston), 3,000 other individuals who are worth
$30,000 each, their aggregate wealth would amount to $90,000,000.
Add to this the $71,855,000 owned by the 224 men, and we have $161,-
855,000. These estimates are more or less incorrect, but they give
the nearest approximation to the truth that we can obtain at the
present time. The assessors' valuation of the property in the State
of Massachusetts in 1840* was $299,880,338. We find, therefore, by
the above estimates, that 3,224 individuals own more than half of
all the property in the State. If we suppose each of these 3,224 per-
sons to be the head of a family of five persons, we shall have in all
16,120 individuals. In 1840 the State contained a population of 737,-
700. Thus 16,120 persons own more property than the remaining
721,580; that is, three persons out of every hundred own more prop-
erty than the remaining ninety-seven. To be certain that we are
within the truth, let us say that six out of every hundred own more
property than the remaining ninety-four. These wealthy persons
are connected with each other, for the banks are the organization
of their mutual relation, and we think, human nature being what it
is, that their weight would be brought to bear still more powerfully
This was written before the valuation for 1850 was taken. As the
the question is one of principles rather than of figures, we have not con-
ceived it necessary to rewrite the paragraph.
THE USURY LAWS. 11
upon the community if the usury laws were repealed. These per-
sons might easily obtain complete control over the banks. They
might easily so arrange matters as to allow very little money to be
loaned by the banks to any but themselves, and thus they would
obtain the power over the money market which a monopoly always
gives to those who wield it that is, they would be able to ask and
to obtain pretty much what interest they pleased for their money.
Then there would be no remedy; the indignation of the community
would be of no avail. What good would it do you to be indig-
nant? You would go indignantly, and pay exorbitant interest,
because you would be hard pushed for money. You would get no
money at the bank, because it would be all taken up by the heavy
capitalists who control those institutions, or by their friends.
These would all get money at 6 per cent interest or less, and they
would get from you precisely that interest which your necessities
might enable them to exact. The usury laws furnish you with
some remedy for these evils; for, under those laws, the power of
demanding and obtaining illegal interest will be possible only
so long as public opinion sees fit to sanction evasions of the statute.
As long as the weight of the system is not intolerable to the com-
munity, every thing will move quietly; but as soon as the burden of
illegal interest becomes intolerable, the laws will be put in force in
obedience to the demand of the public, and the evil will be abated
to a certain extent. We confess that it is hard for the borrower
to be obliged to pay the broker, to pay also for the wear and tear of
the lender's conscience, but we think it would be worse for him if a
few lenders should obtain a monopoly of the market. And when
the usury laws are repealed, what earthly power will exist capable
of preventing them from exercising this monopoly? But here an in-
teresting question presents itself: "What is the limit of the power
of the lender over the borrower?
ACTUAL, VALUE AND LEGAL VALUE.
Let us first explain the difference between legal value and actual
value.* It is evident, that, if every bank-bill in the country should
suddenly be destroyed, no actual value would be destroyed, except
perhaps to the extent of the value of so much waste paper. The
holders of the bills would lose their money, but the banks would
gain the same amount, because they would no longer be liable to be
called upon to redeem their bills in specie. Legal value is the legal
claim which one man has upon property in the hands of another.
No matter how much legal value you destroy, you cannot by that
process banish a single dollar's worth of actual value, though you
may do a great injustice to individuals. But if you destroy the sil-
ver dollars in the banks, you inflict a great loss on the community;
for an importation of specie would have to be made to meet the exi-
*The reader is requested to notice this distinction between actual and
legal value, as we shall have occasion to refer to it again.
12 MUTUAL BANKING.
gencies of the currency, and this importation would have to be paid
for in goods and commodities which are of actual value. When a
ship goes down at sea with her cargo on board, so much actual value
is lost. But, on the other hand, when an owner loses his ship in
some unfortunate speculation, so that the ownership passes from
his hands into the hands of some other person, there may be no loss
of actual value, as in the case of shipwreck, for the loss may be a
mere change of ownership.
The national debt of England exceeds $4,000,000,000. If there
were enough gold sovereigns in the world to pay this debt, and these
sovereigns should be laid beside each other, touching each other,
and in a straight line, the line thus formed would be much more
than long enough to furnish a belt of gold extending around the
earth. Yet all this debt is mere legal value. If all the obligations
by which this debt is held were destroyed, the holders of the debt
would become poorer by the amount of legal value destroyed; but
those who are bound by the obligations (the tax-paying people of
England) would gain to the same amount. Destroy all this legal
value, and England would be as rich after the destruction as it was
before; because no actual value would have been affected. The
destruction of the legal value would merely cause a vast change in
the ownership of property; making some classes richer, and, of
course, others poorer to precisely the same extent; but if you should
destroy actual value to. the amount of this debt you would destroy
about thirteen times as much actual value (machinery, houses, im-
provements, products, etc.) as exist at present in the state of Mas-
sachusetts. The sudden destruction of $4,000,000,000 worth of actual
value would turn the British Islands into a desert. Many persons
are unable to account for the vitality of the English government.
The secret is partly as follows: The whole property of England is
taxed yearly, say three per cent, to pay the interest of the public
debt. The amount raised for this purpose is paid over to those who
own the obligations which constitute this legal value. The people
of England are thus divided into classes, one class is taxed and pays
the interest on the debt, the other class receives the interest and
lives upon it. The class which receives the interest knows very
well that a revolution would be followed by either a repudiation of
the national debt, or its immediate payment by means of a ruinous
tax on property. This class knows that the nation would be no
poorer if the debt were repudiated or paid. It knows that a large
portion of the people look upon the debt as being the result of aris-
tocratic obstinacy in carrying on aristocratic wars for the accom-
plishment of aristocratic purposes. When, therefore, the govern-
ment wants votes, it looks to this privileged class; when it wants
orators and writers, it looks to this same class; when it wants spe-
cial constables to put down insurrection, it applies to this same
class. The people of England pay yearly $120,000,000 (the interest
of the debt) to strengthen the hands of a conservative class, whose
THE USURY LAWS. 13
function it is to prevent all change, and therefore all improvement
in the condition of the empire. The owners of the public debt, the
pensioners, the holders of sinecure offices, the nobility, and the
functionaries of the Established Church, are the Spartans who
rule over the English Laconians, Helots, and Slaves. When such
powerful support is enlisted in favor of an iniquitous social order,
there is very little prospect left of any amelioration in the condition
of the people.
THE MATTER BROUGHT NEARER HOME.
But let us bring the matter nearer home. The assessors' valua-
tion of the property in the state of Massachusetts in 1790 was $44,-
034,349. In 1840 it was $399,880,338. The increase, therefore, during
fifty years, was $255.855,989. This is the increase of actual value.
If, now, the $44,034,349 which the state possessed in 1790 had been
owned by a class, and had been loaned to the community on six
months' notes, regularly renewed, at six per cent interest per an-
num, and the interest, as it fell due, had itself been continually put
out at interest on the same terms, that accumulated interest would
have amounted in fifty years to $885,524,246. This is the increase of
the legal value. A simple comparison will show us that the legal
value would have increased three times as fast as the actual value
has increased.
Suppose 5,000 men to own $30,000 each; suppose these men to
move, with their families, to some desolate place in the state,
where there is no opportunity for the profitable pursuit of the occu-
pations either of commerce, agriculture, or manufacturing. The
united capital of these 5,000 men would be $150,000,000. Suppose,
now, this capital to be safely invested in different parts of the
state; suppose these men to be, each of them, heads of families,
comprising, on an average, five persons each, this would give us, in
all, 25,000 individuals. A servant to each family would give us
5,000 persons more, and these added to the above number would
give us 30,000 in all. Suppose, now, that 5,000 mechanics shoe-
makers, bakers, butchers, etc. should settle with their families in
the neighborhood of these capitalists, in order to avail themselves
of their custom. Allowing five to a family, as before, we have 25,-
000 to add to the above number. We have, therefore, in all, a city
of 55,000 individuals, established in the most desolate part of the
state. The people in the rest of the state would have to pay to the
capitalists of this city six per cent on $150,000,000 every year; for
these capitalists have, by the supposition, this amount out at inter-
est on bond and mortgage, or otherwise. The yearly interest on
$150,000,000, at six per cent, is $9,000,000. These wealthy individuals
may do no useful work whatever, and, nevertheless, they levy a tax
of $9,000,000 per annum on the industry of the state. The tax would
be paid in this way. Some money would be brought to the new
city, and much produce; the produce would be sold for money to
14 MUTUAL BANKING.
the capitalists, and with the money thus obtained, added to the
other, the debtors would pay the interest due. The capitalists
would have their choice of the best the state produces, and the
mechanics of the city, who receive money from the capitalists, the
next choice. Now, how would all this be looked upon by the people
of the commonwealth? There would be a general rejoicing over
the excellent market for produce which had grown up in so unex-
pected a place, and the people would suppose the existence of this
city of financial horse-leeches to be one of the main pillars of the
prosperity of the state.
Each of these capitalists would receive yearly $1,800, the inter-
est on $30,000, on which to live. Suppose he lives on $900, the half
of his income, and lays the other half by to portion off his children
as they come to marriageable age, that they may start also with
$30,000 capital, even as he did. This $900 which he lays by every
year wonld have to be invested. The men of business, the men of
talent, in the state, would see it well invested for him. Some intel-
ligent man would discover that a new railroad, canal, or other pub-
lic work was needed; he would survey the ground, draw a plan of
the work, and make an estimate of the expenses; then he would go
to this new city and interest the capitalists in the matter. The capi-
talists would furnish money, the people of the state would furnish
labor; the people would dig the dirt, hew the wood, and draw the
water. The intelligent man who devised the plan would receive a
salary for superintending the work, the people would receive day's
wages, and the capitalists would own the whole; for did they not
furnish the money that paid for the construction? Taking a scien-
tific view of the matter, we may suppose the capitalists not to work
at all; for the mere fact of their controlling the money would insure
all these results. We suppose them, therefore, not to work at all;
we suppose them to receive, each of them, $1,800 a year; we suppose
them to live on one-half of this, or $900, and to lay up the other
half for their children. We suppose new-married couples to spring
up, in their proper season, out of these families, and that these new
couples start, also, each with a capital of $30,000. We ask now, is
there no danger of this new city's absorbing unto itself the greater
portion of the wealth of the state?
There is no city in this commonwealth that comes fully up to
this ideal of a faineant and parasite city; but there is no city in the
state in which this ideal is not more or less completely embodied.
Suppose, when Virginia was settled in 1607, England had sold
the whole territory of the United States to the first settlers for
$1,000, and had taken a mortgage for this sum on the whole prop-
erty. $1,000 at seven per cent per annum, on half-yearly notes, the
interest collected and reloaned as it fell due, would amount, in the
interval between 1607 and 1850, to $16,777,216,000. All the property
in the United States, several times over, would not pay this debt.
If the reader is interested in this matter of the comparative
THE USURY LAWS. 15
rate of increase of actual and legal value, let him consult the
treatise of Edward Kellogg on "Labor and Other Capital," where
he will find abundant information on all these points.
How many farmers are there who can give six per cent interest
and ultimately pay for a farm they have bought on credit?
THE ANSWER.
What answer, then, shall we return to the question relating to
the power of the lender over the borrower? We are forced to an-
swer, that the borrowing community is, under the existing system
of credit, VIRTUALLY, according to appearances, in the complete
control of the lending community. A considerable time must elapse
before this control is actually as well as virtually established, but
as the ship in the eddy of the maelstrom is bound to be ultimately
ingulfed, so the producer of actual value (if no change is introduced
in the system) is bound to be brought into ultimate complete sub-
jection to the holder of legal value.
CHAPTER II.
THE CURRENCY.
GOLD and silver are peculiarly adapted to act as a circulating
medium. They are: 1. Admitted by common consent to serve for
that purpose. 2. They contain within themselves actual intrinsic
value, equivalent to the sum for which they circulate, as security
against the withdrawal of this consent, or of the public estimation.
3. They lose less by the wear and tear and by the effect of time, than
almost any other commodities; and, 4. They are divisible into all
and any of the fractional parts into which value may be, or neces-
sarily is, divided. There is no occasion to notice particularly in this
place the many other advantages possessed by the precious metals.
But we must remember that when we exchange anything for specie
we barter one commodity for another. By the adoption of a circu-
lating medium we have facilitated barter, but we have not done
away with it we have not destroyed it. Specie is a valuable com-
modity and its adoption by society as a medium of exchange does
not destroy its character as a purchasable and salable article.
Let Peter own a horse; let James own a cow and a pig; let James's
cow and pig, taken together, be worth precisely as much as Peter's
horse; let Peter and James desire to make an exchange; now, what
shall prevent them from making the exchange by direct barter?
Again! let Peter own the horse; let James own the cow; and let
John own the pig. Peter cannot exchange his horse for the cow,
because he would lose by the transaction; neither and for the
same reason can he exchange it for the pig. The division of the
horse would result in the destruction of its value. The hide, it is
true, posesses an intrinsic value; and a dead horse makes excellent
manure for a grapevine; nevertheless, the division of a horse re-
sults in the destruction of its value as a living animal. But if
Peter barters his horse with Paul for an equivalent in wheat, what
shall prevent him from so dividing his wheat as to qualify himself
to offer to James an equivalent for his cow and to John an equiv-
alent for his pig? If Peter trades thus with James and John the
transaction is still barter, though the wheat serves as currency and
obviates the difficulty in making change. Now, if Paul has gold
and silver to dispose of instead of wheat, the gold and silver are
still commodities posessing intrinsic value, and every exchange
which Paul makes of these for other commodities is always a
transaction in barter. There is a great deal of mystification con-
nected with the subject of the currency; but if we remember that,
when we sell anything for specie, we BUY the specie, and that when
THE CURRENCY. 17
we buy anything with specie, we SELL the specie our ideas will
grow wonderfully clear.
THE DISADVANTAGES OF A SPECIE CURRENCY.
The governments of the different nations have made gold and
silver a legal tender in the payment of debts. Does this legislation
change the nature of the transactions where gold and silver are
exchanged for other desirable commodities? Not at all. Does it
transform the exchange into something other than barter? By no
means. But the exchangeable value of any article depends upon
its utility, and the difficulty of obtaining it. Now, the legislatures,
by making the precious metals a legal tender enhance their utility
in a remarkable manner. It is not their absolute utility, indeed, that
is enhanced, but their relative utility in the transactions of trade.
As soon as gold and silver are adopted as the legal tender, they are
invested with an altogether new utility. By means of this new
utility, whoever monopolizes the gold and silver of any country
and the currency, as we shall soon discover, is more easily monop-
olized than any other commodity obtains control thenceforth, over
the business of that country; for no man can pay his debts without
the permission of the party who monopolizes the article of legal
tender. Thus, since the courts recognize nothing as money in the
payment of debts except the article of legal tender, this party is
enabled to levy a tax on all transactions except such as take place
without the intervention of credit. 1
When a man is obliged to barter his commodity for money, in
order to have money to barter for such other commodities as he
may desire, he at once becomes subject to the impositions which
moneyed men know how to practice on one who wants and must
have money for the commodity he offers for sale. When a man is
called upon suddenly to raise money to pay a debt, the case is still
harder. Men whose property far exceeds the amount of their debts
in value men who have much more owing to them than they owe
to others are daily distressed for the want of money; for the want
of that intervening medium, which, even when it is obtained in
sufficient quantity for the present purposes, acts only as a mere in-
strument of exchange.
By adopting the precious metals as the legal tender in the pay-
ment of debts, society confers a new value upon them, which new
value is not inherent in the metals themselves. This new value
becomes a marketable commodity. Thus gold and silver become
a marketable commodity as (QUOAD) A MEDIUM OF EXCHANGE.
This ought not so to be. This new value has no natural measure,
because it is not a natural, but a social value. This new social
value is inestimable, it is incommensurable with any other known
value whatever. Thus money, instead of retaining its proper
relative position, becomes a superior species of commodity super-
ior not in degree, but in kind. Thus money becomes the absolute
18 MUTUAL BANKING.
king and the demigod of commodities.* Hence follow great social
and political evils. The medium of exchange was not established
for the purpose of creating a new, inestimable, marketable commo-
dity, but for the single end or purpose of facilitating exchanges.
Society established gold and silver as an instrument to mediate be-
tween marketable commodities; but what new instrument shall it
create to mediate between the old marketable commodities, and the
new commodity which it has itself called into being? And if it suc-
ceed in creating such new instrument, what mediator can it fa'nd for
this new instrument itself, etc.? Here the gulf yawns! No bridge
save that of TJSUKY has been thrown, as yet, over this gulf. Our
exposition is evidently on the brink of the infinite series; we are
marching rapidly forward to the abyss of absurdity. The logicians
know well what the sudden appearance of the infinite series in an
investigation signifies; it signifies the recognition of a phenomenon
and the assigning to it of a mere concomitant, to stand to it in the
place of cause. The phenomenon we here recognize is circulation
or exchange, and we ignore its cause, for we endeavor to account
for it by the movement of specie; which movement is neither circu-
lation nor the cause of circulation. But more of this hereafter. Let
us return to the subject with which we are more immediately con-
cerned; noting, meanwhile, that a specie currency is an absurdity.
THE EVILS OF A SPECIE CURRENCY USURY.
Society established gold and silver as a circulating medium, in
order that exchanges of commodities might be FACILITATED; but
society made a mistake in so doing; for by this very act it gave to a
certain class of men the power of saying what exchanges shall, and
what exchances shall not, be FACILITATED by means of this very
circulating medium. The monopolizers of the precious metals have
an undue power over the community; they can say whether money
shall, or shall not, be permitted to exercise its legitimate functions.
These men have a VETO on the action of money, and therefore on
exchanges of commodity; and they will not take off their VETO un-
til they have received usury, or, as it is more politely termed, inter-
est on their money. Here is the great objection to the present cur-
rency. Behold the manner in which the absurdity inherent in a
specie currency or, what is still worse, in a currency of paper
based upon specie manifests itself in actual operation! The me-
diating value which society hoped would facilitate exchanges be-
comes an absolute marketable commodity, itself transcending all
reach of mediation. The great natural difficulty which originally
stood in the way of exchanges is now the private property of a
class, and this class cultivate this difficulty, and make money out
of it, even as a farmer cultivates his farm and makes money by nis
labor. But there is a difference between the farmer and the usurer;
Money is merchandise just like any other merchandise, precisely as
the TRUMP is a card just like any other card.
THE CURRENCY. 19
for the farmer benefits the community as well as himself, while
every dollar made by the usurer is a dollar taken from the pocket
of some other individual, since the usurer cultivates nothing but an
actual obstruction.
THE MONOPOLY OF THE CURRENCY.
The exigencies of our exposition render it necessary that we
should state here three distinct points, as a basis for certain re-
marks that we propose to submit to the reader:
1. Let us suppose, in order to make a thorough estimate of the
amount of money circulating in Massachusetts, that each individ-
ual in the state man, woman, or child posesses $10 in specie, or in
the bills of specie-paying banks. The population of the state was,
in the year 1850, about 1,000,000. Our estimate will give us, there-
fore, about $10,000,000 as the total amount of the circulating medi-
um of the state. This is perhaps a very extravagant supposition;
but we desire to make a high estimate, as the greater the amount
of the circulating medium, the less will be the force of our objec-
tions against the existing currency. Now, since children seldom
control any money, our hypothesis apportions to each full-grown
person an average of $20 for the children constitute at least one-
half of the community; and since women, who constitute one-half
of the grown population, generally leave their money with their
husbands or fathers, it apportions to each full-grown man an aver-
age of $40. We feel confident that the reader will confess, after
consulting his pocket-book, that our estimate marks as high as the
circumstances of the case will warrant. But to be certain that we
do not fall below the truth, let us double the total sum and say that
the amount of money circulating in Massachusetts is, on an aver-
age, $20,000,000. This is our first point.
2. The valuation of the taxable property existing in the state
of Massachusetts, was, for the year 1850, about $600,000,000 or an
average of about $600 for every man, woman and child in the state;
or an average of about $2,400 for every family of four persons no
contemptible fortune for a workingman! Now, every person of
ordinary observation will recognize that this valuation is too high.
We are willing to confess that the wealth of the state is unjustly
distributed; but we are not willing to confess that the distribution
is of the absolutely flagrant character indicated by the valuation;
for if a man posessing a mere average amount of wealth, owns prop-
erty to the value of $600 and a like amount in addition for his wife
and for each of his children, where is the immense mass of wealth
which the average would apportion to those who actually own less
than $600; yes, to those who actually own nothing? We conceive
that it is not altogether impossible to penetrate the motives which
induced the Valuation Committee to mark the wealth of the State
as high as $600,000,000. Indeed we may take occasion as we proceed
with our observations to indicate those motives. But let us grant,
20 MUTUAL BANKING.
for the sake of argument, that the people of Massachusetts, taken as
a whole, do actually own property to the value of 600,000,000. Esti-
mating as we have done, the total value of the circulating medium
at 820,000,000, it would follow that there is one dollar of currency
for every thirty dollars of taxable property. This is our second
point.
3. If Mr. Kellogg's statements are worthy of confidence, there
are in the city of Boston 224 individuals who are worth, in the ag-
gregate, 171,855,000, or property to the value of about three and
one-half times the amount of the whole circulating medium of the
commonwealth. This is our third point.
Having stated the three points upon which our reasoning is to
turn, we will now suppose that these individuals in Boston, or 224
other persons of equal wealth, residing either in Boston or in other
towns or cities in the state, see fit to combine together for the pur-
pose of bringing the whole property of the state (1600,000,000) into
their own possession. They may accomplish their object by the
following simple process: Let them gradually buy up desirable
real estate situated in various parts of the commonwealth, to the
value of $40,000,000 double the total amount of the circulating
medium. Then let them sell this real estate to different persons,
taking mortgages for half of its value on the property, and stipu-
lating that the payments on the mortgages shall be made, all of
them, on a certain specified day. Here is the whole story; for mark
the consequences! As the day for payment on the mortgages ap-
proaches, money will grow scarce, for the reason that the purchas-
ers of the real estate will be preparing themselves to meet the
claims upon them; money will, by consequence, rise rapidly in val-
ue; trade will be gradually blocked up; and men of undoubted
wealth will be closely pressed. If and they probably will not but
IF the purchasers of the real estate actually pay their debts when
the day comes round, then the 224 confederates will have all the
money of the state in their hands. Meanwhile the other ordinary
debts of the community debts which arise naturally will have to
be paid also; and money, the only legal tender, will be required in
order to effect their payment. But as no money will be obtainable,
these last debtors will fail and their property will be sold under the
hammer at a fraction of its true value to satisfy their creditors. But
who will buy this property? Who besides the 224 confederates will
have any available funds? These 224 individuals, by their opera-
tion, notwithstanding the losses they will inevitably meet with,
will thus obtain control, by means of their $40,000,000 a little less
than one-half of their aggregate property of the greater part of
the property of the state. There is no danger that so extensive an
operation will ever take place, for transactions like this would con-
vulse society to its foundations, and would necessarily be accom-
panied by repudiation, revolution and bloodshed. But similar
operations on a smaller scale are taking place every day. It is
THE CURRENCY. 21
stated in the reports published by the Valuation Committee that
the money loaned out at interest and returned as such to the
assessors for the year 1850, amounted in the single county of
Worcester, to more than $5,000,000 more than one-fourth of the
whole circulating medium of the commonwealth. What must have
been the consequence if all these debts had happened to fall due at
nearly the same time?
You cannot monopolize corn, iron and other commodities, as
you can money; for to do so, you would be obliged to stipulate in
your sales that payment shall be made to you in those commodities.
What a commotion would exist in the community if a company of
capitalists should attempt permanently to monopolize all the corn!
But money, by the nature of the case, SINCE IT is THE ONLY LEGAL
TENDER, is ALWAYS monopolized. This fact is the foundation of
the right of society to limit the rate of interest.
We conclude, therefore, that gold and silver do not furnish a
perfect medium of circulation; that they do not furnish facilities
for the exchange of ALL commodities. Gold and silver have a value
as MONEY; a value which is artificial, and created UNINTENTION-
ALLY by the act of society establishing the precious metals as a
legal tender. This new artificial value overrides all intrinsic actu-
al values, and suffers no mediation between itself and them. Now,
money, so far forth as it is mere money, ought to have NO VALUE;
and the objection to the use of the precious metals as currency is,
that as soon as they are adopted by society as a legal tender, there is
superadded to their natural value this new, artificial and unnatural
value. Gold and silver cannot facilitate the purchase of this new
value which is added to themselves; "a mediator is not a mediator
of one." USURY is the characteristic fact of the present system
of civilization; and usury depends for its existence upon this super-
added, social, unnatural value, which \? given artificially to the
material of the circulating medium. Destroy the value of this
material AS MONEY (not its utility or availability in exchange) and
you destroy the possibility of usury. Can this be done so long as
material is gold or silver? No.
Whatever is adopted as the medium of exchange should be free
from the above-named objections. It should serve the purpose of
facilitating ALL exchanges; it should have no value AS MONEY; it
should be of such a nature as to permit nothing marketable, noth-
ing that can be bought or sold, to transcend the sphere of its
mediation. It should exist in such quantity as to effect all ex-
changes which may be desirable. It should be co-existent in time
and place with such property as is destined for the market. It
should be sufficiently abundant and easy of acquirement, to answer
all the legitimate purposes of money. It should be capable of being
expanded to any extent that may be demanded by the wants of the
community; for if the currency be not sufficiently abundant, it re-
tards instead of facilitating exchanges. On the other hand, this
22 MUTUAL BANKING.
medium of exchange should be sufficiently difficult of acquirement
to keep it within just limits.
Can a currency be devised which shall fulfill all these condi-
tions? Can a currency be adopted which shall keep money always
just plenty enough, without suffering it ever to become too plenty?
Can such a currency be established on a firm, scientific foundation, so
that we may know beforehand that it will work well from the very
first moment of its establishment? Can a species of money be
found which shall posess EVERY quality which it is desirable that
money should have, while it posesses NO quality which it is desir-
able that money should not have? To all these questions we
answer, emphatically, YES!
CHAPTER III.
THE CURRENCY: ITS EVILS AND THEIR REMEDY.
BANK-BILLS are doubly guaranteed. On one side there is the
capital of the bank, which is liable for the redemption of the bills
in circulation; on the other side are the notes of the debtors of the
bank, which notes are (or ought to be, if the bank officers exercise
due caution and discretion) a sufficient guaranty for all the bills: for
no bills are issued by any bank, except upon notes whereby some re-
sponsible person is bound to restore to the bank, after a certain
lapse of time, money to the amount borne on the face of the bills.
If the notes given by the receivers of the bills are good, then the
bills themselves are also good. If we reflect a moment upon these
facts, we shall see that a bank of discount and circulation is in
reality, two banks in one. There is one bank which does business
on the specie capital really paid in; there is another and a very
different bank, which does business by issuing bills in exchange for
notes whereby the receivers of the bills give security that there
shall be paid back by a certain time, money to the amount of the
bills issued. Let us now investigate the nature of these two differ-
ent banks.
THE BUSINESS OF BANKING.
Peter goes into the banking business with one dollar capital,
and immediately issues bills to the amount of one dollar and
twenty-five cents. Let us say that he issues five bills, each of
which is to circulate for the amount of twenty-five cents. James
comes to the bank with four of Peter's bills, and says: "Here are
four of your new twenty-five cent notes which purport to be payable
on demand, and I will thank you to give me a silver dollar for them."
Peter redeems the bills and in so doing pays out his whole capital.
Afterward comes John, with the fifth note, and makes a demand
similar to that lately made by James. Peter answers, slowly and
hesitatingly: "I regret exceedingly the force of present circum-
stances; but I just paid out my whole capital to James. I am
under the painful necessity of requesting you to wait a little
longer for your money." John at once becomes indignant and
says: "Your bills state on their face that you will pay twenty-five
cents upon each one of them whenever they are presented. I present
one NOW. Give me the money, therefore, without more words, for
my business is urgent this morning." Peter answers: "I shall be
in a condition to redeem my bills by the day after tomorrow; but
for the meanwhile, my regard for the interest of the public forces
me unwillingly to suspend specie payments." "Suspend SPECIE pay-
ments!" says John. "What other kind of payment, under Heaven,
24 MUTUAL BANKING.
could you suspend? You agree to pay SPECIE; for specie is the only
legal tender and when you don't pay that, you don't pay anything.
When you don't pay that YOU BREAK. Why don't you own up at
once? But while I am about it I will give you a piece of my mind;
this extra note which you have issued beyond your capital is a vain
phantom, a hollow humbug and a fraud. And as for your bank,
you would better take in your sign; for you have broken." "These
be very bitter words," as said the hostess of the Boar's Head
Tavern at Eastcheap.
John is right. Peter's capital is all gone and the note for
twenty- eve cents, which professes to represent specie in Peter's
vaults, represent the tangibility of an empty vision, the shadow of
a vacuum. But which bank is it that is broken? Is it the bank
that does business on a specie capital, or the bank which does
business on the notes of the debtors to the bank? Evidently it is
the bank that does business on the specie capital that is broken; it
is the specie-paying bank that has ceased to exist.
John understands this very well notwithstanding his violent
language a moment since, he knows that his is the only bill which
Peter has in circulation, and that Peter owes, consequently, only
twenty-five cents; he knows also that the bank has owing to it one
dollar and twenty-five cents. Peter owes twenty-five cents and
has owing to him a dollar and twenty- five cents. John feels,
therefore, perfectly safe. What is John's security? Is it the spe-
cie capital? Not at all. James has taken the whole of that. He
has for his security the debts which are owing to the bank. Peter's
bank begins now to be placed in a sound, philosophical condition.
At first he promised to pay one dollar and twenty-five cents in
specie, while he actually posessed only one dollar with which to meet
the demands that might be made upon him. How could he have
made a more unreasonable promise, even if he had tried? Now
that he has suspended specie payments, he has escaped from the
unphilosophical situation in which he so rashly placed himself.
Peter's bank is still in operation it is by no means broken; his bills
are good, guaranteed, and worthy of considerable confidence; only
his bank is now a simple and not a complex bank, being no longer
two banks in one, for the specie-paying element has vanished in in-
finite darkness.
CURRENCY.
And here we may notice that Peter has solved, after a rough
manner indeed, one of the most difficult questions in political
economy. His bill for twenty-five cents is CURRENCY, and yet it is
not based upon specie, nor directly connected in any way with
specie. We would request the reader to be patient with us and not
make up his mind in regard to our statements until he has read to
the end of the chapter; it shall not be very long. Light breaks on
us here, which we would endeavor to impart to the reader. The
security for the bill is legal value, the security in actual value hav-
THE CURRENCY: ITS EVILS THEIR REMEDY. 25
ing been carried away by James that is, the security for the bill is
the legal claim which the bank has upon the property of its debt-
ors. We see, therefore, that LEGAL VALUE may be made a basis for
the issue of notes to serve as currency; we see, therefore, the faint
indication of a means whereby we may perhaps emancipate our-
selves from the bondage of hard money, and the worse bondage of
paper which pretends to be a representative of hard money.
Let the reader not be alarmed. We abominate banks that sus-
pend specie payment as much as he does. The run of our argu-
ment leads us through this desolate valley; but we shall soon
emerge into the clear day. Good may come out of this dark region,
although we never expected to find it here. For our part, how-
ever, we will freely confess, in private to the reader, that we have
lately been so accustomed to see good come out of Nazareth that
we have acquired the habit of never expecting it from any other
quarter. Let us spend a moment, therefore, in exploring this bank-
ing Nazareth.
We may notice in considering a bank that has suspended specie
payments: 1. The BANK OFFICERS, who are servants of the STOCK-
HOLDERS; 2. The BILLS which are issued by the bank-officers, and
which circulate in the community as money; and, 3. The NOTES of
the debtors of the bank, binding these debtors, which notes, depos-
ited in the safe, are security for the bills issued. Let us now take
for illustration, a non-specie-paying bank that shall be "perfect
after its kind;" that is a bank whose capital shall be, in ACTUAL
value, literally=0. Suppose there are 100 stockholders; suppose
$100,000 worth of bills to be in circulation and that 8100,000 LEGAL
value is secured to the bank by notes given by the bank's debtors.
These stockholders will be remarkable individuals, doing business
after a very singular fashion. For example: The stockholders
own stock in this bank; but as the whole joint stock equals zero,
each stock-holder evidently owns only the one-hundredth part of
nothing a species of property that counts much or little, according
to the skillfulness with which it is administered. The stockholders,
through the agency of the bank-officers, issue their paper, BEARING
NO INTEREST; exchanging it for other paper, furnished by those
who receive the bills, BEARING INTEREST AT THE RATE OF six
PER CENT PER ANNUM. The paper received by the bank binds the
debtor to the bank to pay interest; while the paper issued by the
bank puts it under no obligation to pay any interest at all. Thus
the stockholders doing business with no capital whatever, make six
per cent per annum on a pretended $100,000 of ACTUAL, value which
does not exist! Yet, meanwhile, these stockholders furnish the
community with an available currency; this fact ought always to
be borne in mind. Non-specie-paying banks, of course, make div-
idends. During the suspension of 1837 and 1838, all the banks of
Pennsylvania made dividends, although it was prohibited in the
charters of most of them. After the suspension which took place
26 MUTUAL BANKING.
in Philadelphia in October, 1839, most of the banks of that city re-
solved not to declare dividends until the pleasure of the legislature
could be known. By an act authorizing the continuance of the
suspension until the 15th of January, 1841, permission was granted
to make dividends, contrary to every principle of justice and equity.
We do not know why we speak especially of the Pennsylvania
banks in this connection; as we have yet to hear of the first bank,
either in Pennsylvania or in any other State, that has had the deli-
cacy to suspend the declaration of dividends merely because it sus-
pended specie payments.
THE MUTUAL, BANK.
Our non-specie-paying bank being in the interesting position
described, let us inquire whether it is not in the process of bringing
forth something which shall be entirely different from itself. We
ask first, why a non-specie-paying bank should be permitted to
make dividends. Its bills are perfectly good, whether the bank
have any capital or not, provided the officers exercise due discre-
tion in discounting notes; and it is evident that the stockholders
have no right to ask to be paid for the use of their capital, since the
capital in question ought to be specie, which they confess, by sus-
pending specie payments, that they do not furnish. But if no div-
idends are to be declared, what are we to do with the immense
amount of interest-money that will accumulate in the bank. Our
answer to this question is so simple that we are almost ashamed to
state it. Justice requires that all the interest-money accumulated
so much only excepted as is required to pay the expenses of the
institution and the average of loss by bad debts should be paid
back to the borrowers in the proportion of the business which they
have individually done with the bank. But since it would be by no
means easy, practically, to thus pay the extra interest-money back,
it would be better for the bank to turn the difficulty by lending its
money at precisely that rate of interest and no more, say one per
cent per annum, which would suffice to pay the expenses of the in-
stitution, including the average loss by bad debts. A bank of this
character would be a MUTUAL BANK. This is not the institution
we advocate and of which we propose to submit a plan to the
reader; but it will serve in this place for the purposes of illustra-
tion. A bank that suspends specie payments may present two evi-
dent advantages to the community first, it may furnish a cur-
rency; second, it may loan out its bills at one per cent interest per
annum. That such a bank may furnish currency is proved by
abundant experience, for suspending banks go right on with their
business, and that their money circulates well is proved by the fact
that such banks have hitherto seldom failed to declare good divi-
dends. That they may loan their money at one per cent interest
per annum is shown by the fact that the old banks do not pay more
than one per cent per annum for their expenses', including losses by
bad debts, and that the guaranty of the new bills consists in the
THE CURRENCY: ITS EVILS-THEIR REMEDY. 27
excellence of the notes furnished by the borrower, so that,
if there is anything to be paid for this guaranty, it ought to
be paid to the borrower himself, and not to any other person.
We will not prolong this exposition, since a multiplicity of words
would serve only to darken the subject. We invite the reader to
reflect for himself upon the matter and to form his own conclu-
sions. We repeat that we do not advocate a bank of the nature
here described, since we conceive that such an institution would be
eminently unsafe and dangerous, and for a hundred reasons among
which may be counted the inordinate power that would be con-
ferred on the bank's officers; but, as we said before, it may serve
for illustration. Neither do we propose this plan as a theoretical
solution of the difficulties noticed in the preceeding chapters as
inseparable from the existing currency. We reserve our own plan,
and shall submit it to the reader at the end of the next chapter.
CHAPTER IV.
MUTUAL BANKING.
IN the title-page of a book on ''Money and Banking,*" pub-
lished at Cincinnati, the name of William Beck appears, not as
author, but as publisher; yet there is internal evidence in the book
sufficient to prove that Mr. Beck is the author. But who was or is
Mr. Beck? What were his experience and history? Is he still liv-
ing? No one appears to know. He seems to stand like one of
Ossian's heroes, surrounded with clouds, solitude and mystery. In
the pages of Proudhon, socialism appears as an avenging fury,
clothed in garments dipped in the sulphur of the bottomless pit and
armed for the punishment of imbeciles, liars, scoundrels, cowards
and tyrants; in those of Mr. Beck, she presents herself as a con-
structive and beneficent genius, the rays of her heavenly glory
intercepted by a double veil of simplicity and modesty. Mr. Beck's
style has none of the infernal fire and profanity which cause the
reader of the "Contradictions Economiques" to shudder; you seek in
vain in his sentences for the vigor and intense self-consciousness of
Proudhon; yet the thoughts of Proudhon are there. One would
suppose from the naturalness of his manner, that he was altogether
ignorant of the novelty and true magnitude of his ideas.
MB. BECK'S BANK.
In Mr. Beck's plan for a Mutual Bank which consists in a
simple generalization of the system of credit in account that is well
described in the following extract from J. Stuart Mill's "Political
Economy" there is one fault only; but that fault is fatal; it is that
the people can never be induced to adopt the complicated method
of accounts which would be rendered necessary :
"A mode of making credit answer the purposes of money, by
which, when carried far enough, money may be very completely su-
perseded, consists in making payments by checks. The custom of
keeping the spare cash reserved for immediate use or against con-
tingent demands, in the hands of a banker and making all pay-
ments, except small ones, by orders on bankers, is in this country
spreading to a continually larger portion of the public. If the per-
son making the payment and the person receiving it kept their
money with the same banker, the payment would take place with-
out any intervention of money, by the mere transfer of its amount
""Money and Banking, or Their Nature and Effects Considered; To-
gether With a Plan for the Universal Diffusion of Their Legitimate
Benefits Without Their Evils." By A Citizen of Ohio. Cincinnati: Pub-
lished by William Beck, 1839.; 16mo, pp. 212.
MUTUAL BANKING. 29
in the banker's books from the credit of the payer to that of the re-
ceiver. If all persons in London kept their cash at the same bank-
er's and made all their payments by means of checks, no money
would be required or used for any transactions beginning and ter-
minating in London. This ideal limit is almost attained in fact, so
far as regards transactions between dealers. It is chiefly in the re-
tail transactions between dealers and consumers, and in the pay-
ment of wages, that money or bank-notes now pass and then only
when the amounts are small. In London, even shop-keepers of any
amount of capital, or extent of business, have generally an account
with a banker; which, besides the safety and convenience of the
practice, is to their advantage in another respect, by giving them
an understood claim to have their bills discounted in cases where
they could not otherwise expect it. As for the merchants and
larger dealers, they habitually make all payments in the course of
their business, by checks. They do not, however, all deal with the
same banker; and when A gives a check to B, B usually pays it, not
into the same, but into another bank. But the convenience of busi-
ness has given birth to an arrangement which makes all the bank-
ing-houses of the City of London, for certain purposes, virtually one
establishment. A banker does not send the checks which are paid
into his banking-house to the banks on which they are drawn and
demand money for them. There is a building called the Clearing
House, to which every city banker sends each afternoon, all the
checks on other bankers which he has received during the day; and
they are there exchanged for the checks on him which have come
into the hands of other bankers, the balances only being paid in
money. By this contrivance, all the business transactions of the
City of London during that day amounting often to millions of
pounds and a vast amount besides of country transactions, repre-
sented by bills which country bankers have drawn upon their Lon-
don correspondents, all liquidated by payments not exceeding, on
the average, 200,000." (Vol. ii., p. 47).
"Money," says Mr. Beck, "follows in the track of claim. Its
progress is the discharge and satisfaction of claim. The payment
of money is effectually the discharge of the debtor; but it is not
equally effectual in satisfaction of the creditor. Though it releases
the debtor, it still leaves the creditor to seek the real object of his
desire. It does not put him in possession of it, but of something
which enables him to obtain it. He must exchange this money by
purchase for the article he wants before that object is attained. In
payment of debts, it passes from claimant to claimant, discharging
and paying claims as it goes. Money follows claim; both contin-
ually revolving through all classes of society in repeated and per-
petual circles, constantly returning to their several stations, drawn
thither by operations of industry or of business.
"In the possession of money every one has his turn. It comes
to him in the shape of payment for his sales or his industry and
30 MUTUAL BANKING.
passes from him in the shape of payment or expenditure, again to
return at its proper time and on a proper occasion to serve the same
purposes as before.
"Now, I contend that as the progress of money lies in a circular
route, a certain system of account may be made to supply its place,
where its track and extent can, in that circle, be included and dis-
tinguished.
"By a CIRCLE, I mean that range of society which includes the
whole circulating movement of money, with the accompanying
causes and effects of its progress; viz, claims, debts and payments;
so that, if we wish to trace its path, every point of that path will be
contained within it. Such is the great circle of society. This con-
tains the whole body of debtors and the whole body of creditors. It
contains all the debtors to the creditors and all the creditors to
the debtors. All would be included in the jurisdiction of a powar
that by any possibility could preside over the whole. Creditors are
sellers; debtors are buyers. But no man continually sells without
sometimes buying, nor does any man continually buy without some-
times selling. The creditor who receives money from his debtor,
again expends this money upon others, who thereby, in their turns,
become creditors and receive their money back again. All these
movements are within the range of the one circle of society. Now,
it is evident that if an account were kept by a presiding power, the
goods which any person receives, being of equal value, would pay
for those which he had previously delivered; would replace him in
his original assests and cancel the obligation to him without the
aid of money. Hence, after the whole process, it would seem that
the intermediate passage and return of money were superfluous.
If the dealings are not directly backward and forward that is,
between one creditor and his debtor and back again from the same
debtor to the same creditor the effect will be the same; for as this
whole circle includes every creditor, every debtor and in fact every
individual in that society, so it contains every account to which the
claims of any creditor would apply, and every account to which the
same creditor would be indebted. The agency of the presiding
power would render it pro forma, the representative to every cred-
itor of his individual debtor; and to every debtor, the representa-
tive of his individual creditor. It would form a common center for
all claims by every creditor on his debtor. It would form the chan-
nel for the discharge of his debts and the receipt of his claims. It
would show the state of his account with society, and the balance,
if in favor, would be available as so much cash.
"This is what is meant by a CIRCLE. Such is the great circle of
society, the only one which is complete and perfect, and such are
the advantages contained in it.
"Hence the plan I propose is adapted to this circle, to exhibit
the revolving track of money within it; to contain the several
points of its progress; and, at each of these points, to perform its
MUTUAL BANKING. 31
duty and supply its place by the revolution of debits and credits in
account, instead of the revolutions of the actual material money."
There are many practical processes by which the business-
world make credit perform the functions of money, among which
may be especially noticed first, that by credit in account; and sec-
ond, that by bills of exchange. Mr, Beck thought out a Mutual
Bank by generalizing credit in account; Proudhon, by generalizing
the bill of exchange.
BILLS OF EXCHANGE.
Let it be supposed that there are ten shoe-manufacturers in Lynn,
who sell their shoes to ten shopkeepers in Boston ; let it be supposed,
also, that there are ten wholesale grocers in Boston who furnish
goods to ten retail grocers in Lynn. If the value of the shoes equals
the value of the groceries, the ten retail grocers in Lynn would
have no occasion to send money to Boston to pay their indebted-
ness to the wholesale grocers; neither would the ten shopkeepers
in Boston have occasion to send money to Lynn to discharge their
debt to the ten shoe manufacturers; for the Lynn retail grocers
might pay the money to the the Lynn shoe-maufacturers; these
shoe-manufacturers writing to the Boston shopkeepers, who are
their debtors, requesting them to pay the Boston wholesale grocers,
who are the creditors of the Lynn retail grocers. It is very possi-
ble that the transactions of all these persons with each other might
be settled in this way without the transmission of any money either
from Boston to Lynn, or from Lynn to Boston. The transfer of
debts in the process here indicated gives rise to what are called, in
mercantile language, drafts, or bills of exchange; though regular
bills of exchange are seldom drawn in this country, except against
foreign account. A bill of exchange reads generally somewhat as
follows:
"To Mr. E. F. days after sight, on this my FIRST bill of ex-
change (second and third of the same date and tenor not paid) pay to
A. B., without further advice from me, dollars, value received,
and charge the same to account of your obedient servant, C. D."
This form evidently implies that the bill is made out in tripli-
cates. The bill must also, of course be dated. A DRAFT is a bill of
exchange drawn up with the omission of some of the solemnity and
particularity of the regular bill.
Bills of exchange are useful, not only for the payment of debts
at distant places without transportation of the precious metals,
but also as a means by which a debt due from one person may be
made available for OBTAINING CREDIT from another. It is usual in
every trade to give a certain length of credit for goods bought
ninety days, six months, eight months, or a longer time, as may be
determined by the convenience of the parties, or by the custom of
the particular trade and place. If a man has sold goods to another
on six month's credit, he may draw a bill upon his debtor, payable
in six months, get his bill discounted at the bank and thus qualify
32 MUTUAL BANKING.
himself to purchase such things as he may require in hi& jusiness,
without waiting for the six months to expire. But bills of exchange
do more than this. They not only obviate, upon occasions, the
necessity for ready money; they not only enable a man to com-
mand ready money before the debts due to him arrive at maturity;
they often actually take place and perform the functions of money
itself. J. Stuart Mill, quoting from Mr, Thornton, says: "Let us
imagine a farmer in the country to discharge a debt of 10 to his
neighboring grocer, by giving him a bill for that sum, drawn on his
corn-factor in London, for grain sold in the metropolis; and the
grocer to transmit the bill he having previously indorsed it to a
neighboring sugar-baker in discharge of a like debt; and the sugar-
baker to send it when again indorsed, to a West India merchant in
an outport; and the West India merchant to deliver it to his coun-
try banker, who also indorses it and sends it into further circula-
lation. The bill will in this case have effected five payments, ex-
actly as if it were a 10 note payable to bearer on demand. A mul-
titude of bills pass between trader and trader in the country in the
manner which has been described, and they evidently form in the
strictest sense, a part of the circulating medium of the kingdom."
Mr. Mill adds: "Many bills, both domestic and foreign, are at
last presented for payment quite covered with indorsements, each
of which represents either a fresh discounting, or a pecuniary
transaction in which the bill has performed the functions of money.
Up to twenty years ago, the circulating medium of Lancashire for
sums above 5 was almost entirely composed of such bills."
In our explanation of the system of banking which results from
a generalization of the bill of exchange, we will let the master
speak for himself:
PBOUDHON'S BANK.
"We must destroy the royalty of gold; we must republicanize
specie, by making every product of labor ready money.
"Let no one be frightened beforehand. I by no means propose
to reproduce under a rejuvenated form, the old ideas of paper
money, money of paper, assignats, bank-bills, etc., etc.; for all these
palliatives have been known, tried and rejected long ago. These
representations on paper, by which men have believed themselves
able to replace the absent god, are, all of them, nothing other than
a homage paid to metal an adoration of metal, which has been
always present to men's minds, and which has always been taken
by them as the measure or evaluator of products.
"Everybody knows what a bill of exchange is. The creditor
requests the debtor to pay to him, or to his order, at such a place,
at such a date, such a sum of money.
'The promissory note is the bill of exchange inverted; the
debtor promises the creditor that he will pay, etc.
" 'The bill of exchange,' says the statute, 'is drawn from one
place on another. It is dated. It announces the sum to be paid;
MUTUAL BANKING. 33
the time and place where the payment is to be made; the value to
be furnished in specie, in merchandise, in account, or in other form.
It is to the order of a third person, or to the order of the drawer
himself. If it is by 1st, 2nd, 3rd, 4th, tc., it must be so stated.'
"The bill of exchange supposes, therefore, exchange, provision
and acceptance; that is to say, a value created and delivered by
the drawer; the existence, in the hands of the drawee, of the funds
destined to acquit the bill, and the promise on the part of the
drawee, to acquit it. When the bill of exchange is clothed with all
these formalities; when it represents a real service actually ren-
dered, or merchandise delivered; when the drawer and drawee are
known and solvent; when, in a word, it is clothed with all the
conditions necessary to guarantee the accomplishment of the obli-
gation, the bill of exchange is considered GOOD; it circulates in the
mercantile world like bank-paper, like specie. No one objects to
receiving it under pretext that a bill of exchange is nothing but
a piece of paper. Only since, at the end of its circulation, the bill
of exchange, before being destroyed, must be exchanged for specie
it pays to specie a sort of seigniorial duty, called DISCOUNT.
"That which, in general, renders the bill of exchange insecure,
is precisely this promise of final conversion into specie; and thus
the idea of metal, like a corrupting royalty, infects even the bill of
exchange and takes from it its certainty.
"Now, the whole problem of the circulation consists in general-
izing the bill of exchange; that is to say, in making of it an anony-
mous title, exchangeable forever, and redeemable at sight, but only
in merchandise and services.
"Or, to speak a language more comprehensible to financial
adepts, the problem of the circulation consists in BASING bank-
paper, not upon specie, nor bullion, nor immovable property, which
can never produce anything but a miserable oscillation between
usury and bankruptcy, between the five-franc piece and the as-
signat; but by basing it upon PRODUCTS.
"I conceive this generalization of the bill of exchange as fol-
lows:
"A hundred thousand manufacturers, miners, merchants, com-
missioners, public carriers, agriculturists, etc., throughout France,
unite with each other in obedience to the summons of the the gov-
ernment and by simple authentic declaration, inserted in the 'Mon-
iteur' newspaper, bind themselves respectively and reciprocally to
adhere to the statutes of the Bank of Exchange; which shall be
no other than the Bank of France itself, with its constitution and
attributes modified on the following basis:
"1st The Bank of France, become the Bank of Exchange, is
an institution of public interest. It is placed under the guardian-
ship of the state and is directed by delegates from all the branches
of industry.
"2nd. Every subscriber shall have an account open at the
34 MUTUAL BANKING.
Bank of Exchange for the discount of his business paper; and
he shall be served to the same extent as he would have been under
the conditions of discount in specie; that is, in the known measure
of his faculties, the business he does, the positive guarantees he
offers, the real credit he might reasonably have enjoyed under the
old system.
"3rd. The discount of ordinary commercial paper, whether of
drafts, orders, bills of exchange, notes on demand, will be made in
bills of the Bank of Exchange, of denominations of 25, 50, 100 and
1,000 francs.
"Specie will be used in making change only.
"4th. The rate of discount will be tixed at per cent, com-
mission included, no matter how long the paper has to run. With
the Bank of Exchange all business will be finished on the spot.
"5th. Every subscriber binds himself to receive in all payments,
from whomsoever it ay be and at par, the paper of the Bank of
Exchange.
"6th. Provisionally and by way of transition, gold and silver
coin will be received in exchange for the paper of the bank, and at
their nominal value.
"Is this a paper currency?
"I answer unhesitatingly, No! It is neither paper-money, nor
money of paper; it is neither government checks, nor even bank-
bills; it is not of the nature of anything that has been hitherto in-
vented to make up for the scarcity of the specie. It is the bill of
exchange generalized.
"The essence of the bill of exchange is constituted first, by its
being drawn from one place on another; second, by its representing
a real value equal to the sum it expresses; third, by the promise or
obligation on the part of the drawee to pay it when it falls due.
"In three words, that which constitutes the bill of exchange is
exchange, provision, acceptance.
"As to the date of issue, or of falling due; as to the designation
of the places, persons, object these are particular circumstances
which do not relate to the essence of the title, but which serve
merely to give it a determinate personal and local actuality.
"Now, what is the bank-paper I propose to create?
"It is the bill of exchange stripped of the circumstantial quali-
ties of date, place, person, object, term of maturity, and reduced to
its essential qualities exchange, acceptance, provision.
"It is, to explain myself still more clearly, the bill of exchange,
payable at sight and forever, drawn from every place in France
upon every other place In France, made by 100,000 drawers, guaran-
teed by 100,000 indorsers, accepted by the 100,000 subscribers drawn
upon; having provision made for its payment in the 100,000 work-
shops, manufactories, stores, etc., of the same 100,000 subscribers.
"I say, therefore, that such a title unites every condition of
solidity and security and that it is susceptible of no depreciation.
MUTUAL BASKING. 35
"It is eminently solid; since on one side it represents the ordi-
nary, local, personal, actual paper of exchange, determined in its
object and representing a real value, a service rendered, merchan-
dise delivered, or whose delivery is guaranteed and certain; while
on the other side it is guaranteed by the contract, in solido, of 100,-
000 exchangers, who, by their mass, their independence, and at the
same time by the unity and connection of their operations, offer
millions of millions of probability of payment against one of non-
payment. Gold is a thousand times less sure.
"In fact, if in the ordinary conditions of commerce, we may say
that a bill of exchange made by a known merchant offers two
chances of payment against one of non-payment, the same bill of
exchange, if it is indorsed by another known merchant, will offer
four chances of payment against one. If it is indorsed by three,
four or a greater number of merchants equally well known, there
will be eight, sixteen, thirty-two, etc., to wager against one that
three, four, five, etc., known merchants will not fail at the same
time, since the favorable chances increase in geometrical propor-
tion with the number of indorsers. What, then, ought to be the
certainty of a bill of exchange made by 100,000 well-known sub-
scribers, who are all of them interested to promote its circulation?
"I add that this title is susceptible of no depreciation. The
reason for this is found, first, in the perfect solidity of a mass of
100,000 signers. But there exists another reason, more direct, and if
possible, more reassuring; it is that the issues of the new paper can
never be exaggerated like those of ordinary bank-bills, treasury
notes, paper money, assignats, etc., for the issues take place against
good, commercial paper only, and in the regular, necessarily lim-
ited, measured and proportionate process of discounting.
"In the combination I propose, the paper (at once sign of credit
and instrument of circulation) grows out of the best business-
paper, which itself represents products delivered, and by no means
merchandise unsold. This paper, I affirm, can never be refused in
payment, since it is subscribed beforehand by the mass of pro-
ducers.
"This paper offers so much the more security and convenience,
inasmuch as it may be tried on a small scale, and with as few per-
sons as you see fit, and that without the least violence, without the
least peril.
"Suppose the Bank of Exchange to start at first on a basis of
1,000 subscribers instead of 100,000; the amount of paper it would
issue would be in proportion to the business of these 1,000 subscrib-
ers, and negotiable only among themselves. Afterwards, according
as other persons should adhere to the bank, the proportion of bills
would be as 5,000, 10,000, 50,000, etc., and their circulation would
grow with the number of subscribers, as a money peculiar to them.
Then, when the whole of France should have adhered to the stat-
36 MUTUAL BANKING.
utes of the new bank, the issue of paper would be equal, at every
instant, to the the totality of circulating values.
'I do not conceive it necessary to insist longer. Men acquainted
with banking will understand me without difficulty, and will sup-
ply from their own minds the details of execution.
"As for the vulgar, who judge of all things by the material aspect,
nothing for them is so similar to an assignat as a bill of the Bank of
Exchange. For the economist, who searches the idea to the bot-
tom, nothing is so different. They are two titles, which, under the
same matter, the same form, the same denomination, are diamet-
rically opposed to each other." (Organization du Credit de la
Circulation Banque d 'Exchange; p. 23).
KEMARKS.
We have several objections to Proudhon's bank. We propose
them with diffidence, as Proudhon has undoubtedly prepared an
adequate answer to them. Nevertheless, as he has not given that
answer in his writings, we have a right to state them. They are as
follows:
1st. We ask M. Proudhon how he would punish arbitrary con-
duct, partiality, favoritism and self-sufficiency, on the part of the
officers of his bank. When we go to the mutual bank to borrow
money, we desire to be treated politely and to receive fair play.
2nd. We ask him how he would prevent intriguing members
from caballing to obtain control of the direction; or how he would
prevent such intrigues from bringing forth evil results.
3rd. We ask him how he would prevent the same property,
through the operation of successive sales, from being represented,
at the same time, by several different bills of exchange, all of
which are liable to be presented for discount. For example: Sup-
pose Peter sells John $100 worth of pork at six months credit and
takes a bill at six months for it; and that John sells afterward this
same pork to James at a like credit, taking a like bill; what shall
prevent both Peter and John from presenting their bills for dis-
count? Both bills are REAL bills, resulting from sales actually
effected. Neither of them can be characterized as fictitious paper,
and meanwhile, only one represents actual property. The same
barrel of pork, by being sold and resold at credit one hundred times
will give rise to one hundred real bills. But is it not absurd to
say that the bank is safe in discounting all this paper, for the rea-
son that it is entirely composed of real bills, when we know only
one of them represents the barrel of pork? It follows, therefore,
that not every real bill is adequately guaranteed. How, then, can
Proudhon be certain that his issues of bank-paper "will never be
exaggerated?"
4th. We ask him how he would cause his bank to operate to
the decentralization of the money power.
For ourselves, we submit (and for the reason that it is necessary
to have some system that obviates the foregoing objections) that
MUTUAL BANKING. 37
the issues of mutual money ought at least, here in New England,
the theory of Proudhon to the contrary notwithstanding to be re-
lated to a basis of determinate actual property.
Our plan for a Mutual Bank is as follows:
1st. Any person, by pledging actual property to the bank, may
become a member of the Mutual Banking Company.
2nd. Any member may borrow the paper money of the bank on
his own note running to maturity (without indorsement) to an
amount not to exceed one-half of the value of the property by him-
self pledged.
3rd. Each member binds himself in legal form, on admission,
to receive in all payments, from whomsoever it may be and at par,
the paper of the Mutual Bank.
4th. The rate of interest at which said money shall be loaned
shall be determined by, and shall if possible, just meet and cover,
the bare expenses of the institution. As for interest in the com-
mon acceptation of the word, its rate shall be at the Mutual Bank
precisely 0.
5th. No money shall be loaned to any persons who are not
members of the company; that is, no money shall be loaned, ex-
cept on a pledge of actual property.
6th. Any member, by paying his debts to the bank, may have
his property released from pledge, and be himself released from all
obligations to the bank, or to the holders of the bank's money, as
such.
7th. As for the bank, it shall never redeem any of its notes in
specie; nor shall it ever receive specie in payments, or the bills of
specie-paying banks, except at a discount of one-half of one per
cent.
Ships and houses that are insured, machinery, in short, anything
that may be sold under the hammer, may be made a basis for the
issue of mutual money. Mutual Banking opens the way to no
monopoly; for it simply elevates every species of property to the
rank which has hitherto been exclusively occupied by gold and sil-
ver. It may be well (we think it will be necessary) to begin with
real estate; we do not say it would be well to end there!
CHAPTER V.
PETITION FOB A GENERAL MUTUAL BANKING LAW.
To the Honorable the Senate and House of Representatives of the
Commonwealth of Massachusetts.
THIS prayer of your petitioners humbly showeth, that the
farmers, mechanics and other actual producers, whose names are
hereunto subscribed, believe the present organization of the cur-
rency to be unjust and oppressive. They, therefore, respectfully
request your honorable body to republicanize gold, silver and bank-
bills, by the enactment of a GENERAL MUTUAL BANKING LAW.
A law, embracing the following provisions, would be eminently
satisfactory to your petitioners:
1. The inhabitants or any portion of the inhabitants, of any
town or city in the Commonwealth may organize themselves into a
Mutual Banking Company.
2. Any person may become a member of the Mutual Banking
Company of any particular town, by pledging REAL ESTATE situ-
ated in that town, or in its immediate neighborhood, to the Mutual
Bank of that town.
3. The Mutual Bank of any town may issue PAPER-MONEY to
circulate as currency among persons willing to employ it as such.
4. Every member of a Mutual Banking Company shall bind
himself, and be bound, in due legal form, on admission, to receive
in payment of debts, at par, and from all persons, the bills issued,
and to be issued, by the particular Mutual Bank to which he may
belong; but no member shall be obliged to receive, or have in pos-
session, bills of said Mutual Bank to an amount exceeding the
whole value of the property pledged by him.
5. Any member may borrow the paper money of the bank to
which he belongs, on his own note running to maturity (without
indorsement), to an amount not to exceed one-half of the value of
the property pledged by him.
6. The rate of interest at which said money shall be loaned by
the bank, shall be determined by, and shall, if possible, just meet
and cover the bare expenses of the institution.
7. No money shall be loaned by the bank to persons who do
not become members of the company by pledging real estate to the
bank.
8. Any member, by paying his debts to the Mutual Bank to
which he belongs, may have his property released from pledge, and
be himself released from all obligations to said Mutual Bank, and
to holders of the Mutual-Bank money, as such.
PETITION FOR A MUTUAL BANKING LAW. 39
9. No Mutual Bank shall receive other than Mutual-Bank
paper-money in payment of debts due to it, except at a discount of
one-half of one per cent.
10. The Mutual Banks of the several counties in the Common-
wealth shall he authorized to enter into such arrangements with
each other as shall enable them to receive each other's bills in pay-
ments of debts; so that, for example, a Fitchburg man may pay his
debts to the Barre Bank in Oxford money, or in such other Worces-
ter-county money as may suit his convenience.
Let A, B, C, D and E take a mortgage upon real estate owned
by F, to cover a value of, say, $600; in consideration of which
mortgage, let A, B, C, D and E, who are timber-dealers, hardware
merchants, carpenters, masons, painters, etc., furnish planks,
boards, shingles, nails, hinges, locks, carpenters' and masons' labor,
etc., to the value of $600, to F, who is building a house. Let the
mortgage have six months to run. A, B, C, D and E are perfectly safe;
for either F pays at the end of the six months, and then the whole
transaction is closed; or F does not pay, and then they sell the real
estate mortgaged by him, which is worth much more than $600, and
pay themselves, thus closing the transaction. This transaction,
generalized, gives the Mutual Bank, and furnishes a currency
based upon products and services, entirely independent of hard
money, or paper based on hard money. For A, B, C, D and E may
give to F, instead of boards, nails, shingles, etc., 600 certificates of
his mortgage, said certificates being receivable by them for services
and products, each one in lieu of a silver dollar; each certificate
being, therefore, in all purchases from them, equivalent to a one-
dollar bill. If A, B, C, D and E agree to receive these certificates,
each one in lieu of a silver dollar, for the redemption of the mort-
gage; if, moreover, they agree to receive them, each one in lieu of a
silver dollar, from whomsoever it may be, in all payments then A,
B, C, D and E are a banking company that issues mutual money;
and as they never issue money except upon a mortgage of property of
double the value of the money issued, their transactions are always
absolutely safe, and their money is always absolutely good.
Any community that embraces members of all trades and pro-
fessions may totally abolish the use of hard money, and of paper
based on hard money, substituting mutual money in its stead; and
they may always substitute mutual money in the stead of hard
money and bank bills, to the precise extent of their ability to live
within themselves on their own resources.
THE BATE OF INTEREST.
As interest-money charged by Mutual Banks covers nothing
but the expenses of the institutions, such banks may lend money, at
A KATE OF LESS THAN ONE PEB CENT PEB ANNUM, to persons offer -
ng good security.
40 MUTUAL BANKING.
ADVANTAGES OF MUTUAL BANKING.
It may be asked "What advantage does mutual banking hold
out to individuals who have no real estate to offer in pledge?" We
answer this question by another: What advantage do the existing
banks hold out to individuals who desire to borrow, but are unable
to offer adequate security? If we knew of a plan whereby, through
an act of the legislature, every member of the community might be
made rich, we would destroy this petition, and draw up another
embodying that plan. Meanwhile, we affirm that no system was
ever devised so beneficial to the poor as the system of mutual bank-
ing; for if a man having nothing to offer in pledge, has a friend who
is a farmer, or other holder of real estate, and that friend is willing
to furnish security for him, he can borrow money at the mutual
bank at a rate of 1 per cent interest a year; whereas, if he should
borrow at the existing banks, he would be obliged to pay 6 per cent.
Again, as mutual banking will make money exceedingly plenty, it
will cause a rise in the rate of wages, thus benefiting the man who
has no property but his bodily strength; and it will not cause a
proportionate increase in the price of the necessaries of life: for the
price of provisions, etc., depends on supply and demand; and
mutual banking operates, not directly on supply and demand, but
to the diminution of the rate of interest on the medium of exchange.
Mutual banking will indeed cause a certain rise in the price of com-
modities by creating a new demand; for, with mutual money, the
poorer classes will be able to purchase articles which, under the
present currency, they never dream of buying.
But certain mechanics and farmers say, "We borrow no money,
and therefore pay no interest. How, then, does this thing concern
us?" Hearken, my friends! let us reason together. I have an im-
pression on my mind that it is precisely the class who have no deal-
ings with the banks, and derive no advantages from them, that
ultimately pay all the interest money that is paid. When a manu-
facturer borrows money to carry on his business, he counts the in-
terest he pays as a part of his expenses, and therefore adds the amount
of interest to the price of his goods. The consumer who buys the
goods pays the interest when he pays for the goods; and who is the
consumer, if not the mechanic and the farmer? If a manufacturer
could borrow money at 1 percent, he could afford to undersell all his
competitors, to the manifest advantage of the farmer and mechanic.
The manufacturer would neither gain nor lose; the farmer and
mechanic, who have no dealings with the bank, would gain the
whole difference; and the bank which, were it not for the compe-
tition of the Mutual Bank, would have loaned the money at 6 per
cent interest would lose the whole difference. It is the indirect
relation of the bank to the farmer and mechanic, and not its direct
relation to the manufacturer and merchant, that enables it to make
money. When foreign competition prevents the manufacturer from
keeping up the price of his goods, the farmer and mechanic, who
PETITION FOR A MUTUAL BANKING LAW. 41
are consumers, do not pay the interest-money: but still the interest
is paid by the class that derive no benefit from the banks; for, in
this case, the manufacturer will save himself from loss by cutting
down the wages of his workmen who are producers. Wages fluc-
tuate, rising and falling (other things being equal) as the rate of
interest falls or rises. If the farmer, mechanic and operative are
not interested in the matter of banking, we know not who is.
MUTUAL, MONEY IS GENEKALLY COMPETENT TO FORCE ITS OWN
WAY INTO GENERAL CIRCULATION.
Let us suppose the Mutual Bank to be at first established in a
single town, and its circulation to be confined within the limits of
that town. The trader who sells the produce of that town in the
city and buys there such commodities tea, coffee, sugar, calico,
etc. as are required for the consumption of his neighbors, sells and
buys on credit. He does not pay the farmer cash for his produce;
he does not sell that produce for cash in the city; neither does he
buy his groceries, etc., for cash from the city merchant: but he
buys of the farmer at, say, eight months' credit; and he sells to
the city merchant at, say, six months' credit. He finds, more-
over, as a general thing, that the exports of the town which pass
through his hands very nearly balance the imports that he brings
into the town for sale; so that, in reality, the exports butter,
cheese, pork, beef, eggs, etc. pay for the imports coffee, sugar,
etc. And how, indeed, could it be otherwise? It is not to be sup-
posed that the town has silver mines and a mint; and, if the people
pay for their imports in money, it will be because they have be-
come enabled so to do by selling their produce for money. It fol-
lows, therefore, that the people in a country town do not make the
money, whereby they pay for store-goods, off each other, but that
they make it by selling their produce out of the town. There are,
therefore, two kinds of trading going on at the same time in the
town one trade of the inhabitants with each other; and another
of the inhabitants, through the store, with individuals living out of
town. And these two kinds of trade are perfectly distinct from
each other. The mutual money would serve all the purposes of the
internal trade; leaving the hard money, and paper based on hard
money, to serve exclusively for the purposes of trade that reaches
out of the town. The mutual money will not prevent a single dol-
lar of hard money, or paper based on hard money, from coming
into the town; for such hard money comes into the town, not in
consequence of exchanges made between the inhabitants them-
selves, but in consequence of produce sold abroad.* So long as
produce is sold out of the town, so long will the inhabitants be able
to buy commodities that are produced out of the town; and they
*These remarks may be generalized, and applied to the commerce
which is carried on between nations.
42 MUTUAL BANKING.
will be able to make purchases to the precise extent that they are
able to make sales. The mutual money will therefore prove to
them an unmixed benefit; it will be entirely independent of the old
money, and will open to them a new trade entirely independent of
the old trade. So far as it can be made available, it will unques-
tionably prove itself to be a Rood thing; and, where it cannot be
made available, the inhabitants will only be deprived of a benefit
that they could not have enjoyed mutual money or no mutual
money. Besides, the comparative cost of the mutual money is al-
most nothing; for it can be issued to any amount on good security,
at the mere cost of printing, and the expense of looking after the
safety of the mortgages. If the mutual money should happen, at
any particular time, not to be issued to any great extent, it would
not be as though an immense mass of value was remaining idle; for
interest on the mutual money is precisely 0. The mutual money is
not itself actual value, but a mere medium for the exchange of act-
ual values a mere medium for the facilitation of barter.
We have remarked, that when the trader, who does the out-of-
town business of the inhabitants, buys coffee, sugar, etc., he does
not pay cash for them, but buys them at, say, six months' credit.
Now, the existing system of credit causes, by its very nature, peri-
odical crises in commercial affairs. When one of these crises oc-
curs, the trader will say to the city merchant, "I owe you so much
for groceries; but i have no money, for times are hard: I will give
you, however, my note for the debt. Now, we leave it to the reader,
would not the city merchant prefer to take the mutual money of
the town to which the trader belongs, money that holds real estate
and produce in that town, rather than the private note of a trader
who may fail within a week?
If, under the existing system, all transactions were settled on
the spot in cash, things might be different; but as almost all trans-
actions are conducted on the credit system, and as the credit system
necessarily involves periodical commercial crises, the mutual
money will find very little difficulty in ultimately forcing itself into
general circulation. The Mutual Bank is like the stone cut from
the mountain without hands, for let it be once established in a sin-
gle village, no matter how obscure, and it will grow till it covers
the whole earth. Nevertheless, it would be better to obviate all
difficulty by starting the Mutual Bank on a sufficiently extensive
scale at the very beginning.
THE MEASURE OP VALUE.
The bill of a Mutual Bank is not a standard of value, since it
is itself measured and determined in value by the silver dollar. If
the dollar rises in value, the bill of the Mutual Bank rises also,
since it is receivable in lieu of a silver dollar. The bills of a Mutual
Bank are not standards of value, but mere instruments of exchange;
and as the value of mutual money is determined, not by the demand
and supply of mutual money, but by the demand and supply of the
PETITION FOR A MUTUAL BANKING LAW. 43
precious metals, the Mutual Bank may issue bills to any extent, and
those bills will not be liable to any depreciation from excess of supply.
And, for like reasons, mutual money will not be liable to rise in
value if it happens at any time to be scarce in the market. The
issues of mutual money are therefore susceptible of any contrac-
tion or expansion which may be necessary to meet the wants of the
community, and such contraction or expansion cannot by any pos-
sibility be attended with any evil consequence whatever: for the
silver dollar, which is the standard of value, will remain through-
out at the natural valuation determined for it by the general de-
mand and supply of gold and silver throughout the whole world.
The bills of Mutual Banks act merely as a medium of ex-
change: they do not and cannot pretend to be measures or stand-
ards of value. The medium of exchange is one thing; the
measure of value is another; and the standard of value still an-
other. The dollar is the measure of value. Silver and gold, at a
certain degree of fineness, are the standard of value. The bill of a
Mutual Bank is a bill of exchange, drawn by all the members of the
mutual banking company upon themselves, indorsed and accepted
by themselves, payable at sight, but only in services and products.
The members of the company bind themselves to receive their own
money at par; that is, in lieu of as many silver dollars as are de-
noted by the denomination on the face of the bill. Services and
products are to be estimated in dollars, and exchanged for each
other without the intervention of specie.*
Mutual money, which neither is nor can be merchandise, es-
capes the law of supply and demand, which is applicable to mer-
chandise only.
THE KEGULATOB OF VALUE.
The utility of an article is one thing; its exchangeable value
is another; and the cost of its production is still another. But the
amount of labor expended in production, though not the measure,
is, in the long run, the regulator of value; for every new invention
which abridges labor, and enables an individual or company to
offer an increased supply of valuable articles in the market brings
with it an increase of competition. For, supposing that one dollar
constitutes a fair day's wages, and that one man by a certain pro-
cess can produce an article valued in the market at one
*"I now undertake to affirm positively, and without the least fear
that I can be answered, what heretofore I have but suggested that a
paper issued by the government, with the simple promise to receive it in
all its dues, leaving its creditors to take it or gold and silver at their
option, would, to the extent that it would circulate, form a perfect
paper-circulation, which could not be abused by the government; that
it would be as steady and uniform in value as the metals themselves;
and that, if by possibility, it should depreciate, the loss would fall, not
on the people, but on the government itself," etc. J. C. CALHOUN:
Speech in reply to Mr. Webster on the Sub-Treasury Bill, March 22, 1838.
44 MUTUAL BANKING.
dollar in half a day's labor, other men will take ad-
vantage of the same process, and undersell the first man,
in order to get possession of the market. Thus, by the effect
of competition, the price of the article will probably be ultimately
reduced to fifty cents. Labor is the true regulator of value; for
every laboring man who comes into competition with others in-
creases the supply of the products of labor, and thus diminishes
their value; while at the same time, and because he is a living
man, he increases the demand for those products to precisely the
same extent, and thus restores the balance: for the laborer must be
housed, clothed and subsisted by the products of his labor. Thus
the addition of a laboring man, or of any number of laboring men,
to the mass of producers, ought to have no effect either upon the
price of labor, or upon that of commodities; since, if the laborer by
his presence increases the productive power, he at the same time
increases the demand for consumption. We know that things do
not always fall out thus in practice; but the irregularity is ex-
plained by the fact that the laborer, who ought himself to have the
produce of his labor, or its equivalent in exchange, has, by the
present false organization of credit, his wages abstracted from him.
Want and over-production arise sometimes from mistakes in the di-
rection of labor, but generally from that false organization of
credit which now obtains throughout the civilized world. There is
a market price of commodities, depending on supply and demand,
and a natural price, depending on the cost of production; and the
market price is in a state of continual oscillation, being sometimes
above, and sometimes below, the natural price: but in the long run,
the average of a series of years being taken, it coincides with it. It
is probable that, under a true organization of credit, the natural
price and market price would coincide at every moment.* Under
the present system, there are no articles whose market and natural
prices coincide so nearly and so constantly as those of the precious
metals; and it is for this reason that they have been adopted by the
various nations as standards of value.
When Adam Smith and Malthust say that labor is a measure of
*The theory that the laborer should receive sufficient wages to buy
back his product, and thus prevent over-production, was discovered al-
most simultaneously by a number of writers about fifty years ago. The
value of this discovery to economics is as great as Newton's was to
physics, or Darwin's to biology. EDITOR.
tMalthns says (we quote the substance, and very possibly the exact
words, though we have not the book by us): "If a man is born into a
world already occupied, and his family is not able to support him, or if
society has no demand for his labor, that man has no right to claim any
nourishment whatever; he is really one too many on the earth. At the
great banquet of nature there is no plate laid for him. Nature com-
mands him to take himself away; and she will by no means delay in
putting her own order into execution."
PETITION FOE A MUTUAL BANKING LAW. 45
value, they speak, not of the labor which an article cost, or ought to
have cost, in its production, but of the quantity of labor which the
article may purchase or command. It is very well, for those who
mistake the philosophy of speculation on human misfortune and
necessities for social science, to assume for measure of value the
amount of labor which different commodities can command. Con-
sidered from this point of view, the price of commodities is regu-
lated, not in the labor expended in their production, but by the
distress and want of the laboring class. There is no device of the
political economists so infernal as the one which ranks labor as a
commodity, varying in value according to supply and demand.
Neither is there any device so unphilosophical; since the ratio of
the supply of labor to the demand for it is unvarying: for every
producer is also a consumer, and rightfully, to the precise extent of
the amount of his products; the laborer who saves up his wages
being, so far as society is concerned, and in the long run, a consum-
er of those wages. The supply and demand for labor is virtually
unvarying; and its price ought, therefore, to be constant, Labor
is said to be value, not because it is itself merchandise, but because
of the values it contains, as it were, in solution, or, to use the cor-
rect metaphysical term, in potentia. The value of labor is a
figurative expression, and a fiction, like the productiveness of cap-
ital. Labor, like liberty, love, ambition, genius, is something
vague and indeterminate in its nature, and is rendered definite by
its object only; misdirected labor produces no value. Labor is said
to be valuable, not because it can itself be valued, but because the
products of labor may be truly valuable. When we say "John's
labor is worth a dollar a day," it is as though we said, "The daily
product of John's labor is worth a dollar." To speak of labor as
merchandise is treason; for such speech denies the true dignity of
man, who is the king of the earth. Where labor is merchandise in
fact (not by a mere inaccuracy of language) there man is merchan-
dise also, whether it be in England or South Carolina.
THE WAY IK WHICH THE AFFAIRS OF THE MUTUAL BANK MAY BE
CLOSED.
When the company votes to issue no more money, the bills it
has already issued will be returned upon it; for, since the bills
were issued in discounting notes running to maturity, the debtors
of the bank, as their notes mature, will pay in the bills they have
received. When the debtors have paid their debts to the bank,
then the bills are all in, every debtor has discharged his mortgage,
and the affairs of the bank are closed. If- any debtor fails to pay,
the bank sells the property mortgaged, and pays itself. The bank
lends at a rate of interest that covers its bare expenses: it makes,
therefore, no profits, and, consequently, aan declare no dividends.
It is by its nature incapable of owing anything: it has, therefore,
no debts to settle. When the bank's debtors have paid their debts
46 MUTUAL BANKING.
to the bank, then nobody owes anything to the bank, and the bank
owes nothing to anybody.
In case some of the debtors of the bank redeem their notes, not
in bills of the Mutual Bank, but in bills of specie-paying banks,
then those bills of specie-paying banks will be at once presented for
redemption at the institutions that issued them; and an amount of
specie will come into the hands of the Mutual Bank, precisely
equal to the amount of its own bills still in circulation; for since
the Mutual Bank never issues money, except in discounting notes
running to maturity, the notes of the debtors to the bank precisely
cover the amount of the bank's money in circulation. When this
specie conies into the hands of the bank, it deposits it at once in
some other institution; which institution assumes the responsibility
of redeeming at sight such of the bills of the closed bank as may be
at any time thereafter presented for redemption. And such institu-
tion will gladly assume this responsibility, since it is probable that
many of the bills will be lost or destroyed, and therefore never pre-
sented for redemption; and such loss or destruction will be a clear
gain to the institution assuming the responsibility, since it has spe-
cie turned over to it for the redemption of every one of the bills
that remains out.
Finally: let us conceive, for a moment, of the manifold imper-
fections of the existing system of banking. In Massachusetts, the
banks had out, in the year 1849, nine and one-half dollars of paper*
for every one dollar of specie in their vaults wherewith to redeem
them. Can any thing be more absurd than the solemn promise made
by the banks to redeem nine and one-half paper-dollars with one
dollar in specie? They may get along very well with this promise
in a time of profound calm; but what would they do on occasions of
panic?t
The paper issued under the existing system is an article of mer-
chandise, varying in price with the variations of supply and de-
mand: it is, therefore, unfit to serve as a medium of exchange.
The banks depend on the merchants; so that, when the mer-
chant is poor, it falls out that the bank is always still poorer. Of
what use is the bank, if it calls in its issues in hard times the very
occasions when increased issues are demanded by the wants of the
community?
The existing bank reproduces the aristocratic organizations; it
has its Spartan element of privileged stockholders, its Laconian
element of obsequious speculators, and, on the outside, a multitude
of Helots who are excluded from its advantages. Answer us, read-
*Counting, of course, the certificates of deposit which are convertible
Into specie on demand.
^Notwithstanding the fact that this work was written in criticism of
the banking system in vogue in 1850, most people persist in calling it a
"revival of the old wild-cat banks that existed before the war." EDITOR
PETITION FOE A MUTUAL BANKING LAW. 47
er: If we are able, at this time, to bring forward the existing bank-
ing system as a new thing, and should recommend its adoption, would
you not laugh in our face, and characterize our proposition as ridic-
ulous? Yet the existing system has an actual and practical being,
in spite of all its imperfections: nay, more, it is the ruling element
of the present civilization of the Christian world; it has substituted
itself, or is now substituting itself, in the place of monarchies and
nobilities. Who is the noble of the present day, if not the man who
lends money at interest? Who is the emperor, if not Pereire or
Baron Rothschild? Now, if the present system of banking is capa-
ble of actual existence, how much more capable of actual existence
is the system of mutual banking! Mutual banking combines all
the good elements of the method now in operation, and is capable
of securing a thousand benefits which the present method cannot
compass, and is, moreover, free from all its disadvantages!
CHAPTER VI.
THE PROVINCIAL LAND BANK.*
"!N THE year 1714," says Governor Hutchinson, in his "His-
tory of Massachusetts," a certain "party had projected a private
bank; or, rather, had taken up a project published in London in
the year 1684; but this not being generally known in America, a
merchant of Boston was the reputed father of it. There was noth-
ing more in it than issuing bills of credit, which all the members of
the company promised to receive as money, but at no certain value
compared with silver and gold; and real estate to a sufficient value
were to be bound as a security that the company should perform
their engagements. They were soliciting the sanction of the Gen-
eral Court, and an act of government to incorporate them. This
party generally consisted of persons in difficult or involved circum-
stances in trade; or such as were possessed of real estates; but had
little or no ready money at command; or men of no substance at all;
and we may well enough suppose the party to be very numerous.
Some, no doubt, joined them from mistaken principles, and an ap-
prehension that it was a scheme beneficial to the public; and some
for party's sake and public applause.
"Three of the representatives from Boston Mr. Cooke; Mr.
Noyes, a gentlemen in great esteem with the inhabitants in gen-
eral; and Mr. Payne were the supporters of the party. Mr.
Hutchinson, the other (an attempt to leave him out of the House
not succeeding), was sent from the House to the Council, where his
opposition would be of less consequence. The governor was no
favorer of the scheme; but the lieutenant-governor a gentleman
of no great fortune, and whose stipend from the government was
trifling engaged in the cause with great zeal.
"A third party, though very opposite to the private bank, yet
were no enemies to bills of credit. They were in favor of loan-bills
from the government to any of the inhabitants who would mort-
gage their estates as a security for the repayment of the bills with
interest in a term of years: the interest to be paid annually, and
applied to the support of government. This was an easy
way of paying public charges; which, no doubt, they won-
dered that in so many ages the wisdom of other govern-
ments had never discovered. The principal men of the
Council were in favor of it; and, it being thought by the first
*It is worthy of note that the present-day historians, who take such
pains to show their Intimate knowledge of the financial plans of remote
times, studiously avoid mentioning this one. EDITOR.
THE PROVINCIAL LAND BANK. 49
party the least of two evils, they fell in with the scheme; and, after
that, the country was divided between the public and private bank.
The House of Representatives was nearly equally divided, but
rather favorers of the private bank, from the great influence of the
Boston members in the House, and a great number of persons of the
towri out of it. The controversy had a universal spread, and di-
vided towns, parishes, and particular families.
"At length, after a long struggle, the party for the public bank
prevailed in the General Court for a loan of 50,000 in bills of credit,
which were put into the hands of trustees, and let for five years
only, to any of the inhabitants, at 5 per cent interest, one-fifth part
of the principal to be paid annually. This lessened the number of
the party for the private bank; but it increased the zeal, and raised
a strong resentment, in those that remained." (Thomas Hutchin-
son: "History of Massachusetts," vol. ii., p 188).
It is utterly inconceivable that any company of sane men should
have seriously proposed to issue paper money destitute of all fixed
and determinate value as compared with gold and silver, imagining
that such money would circulate as currency. If paper money has
"no certain value compared with silver and gold," it has no certain
value compared with any commodity whatever; that is, it has no
certain value at all: for, since gold and silver have a determinate
value as compared with exchangeable commodities, all paper money
that may be estimated in terms of marketable commodities, may be
estimated in terms of silver and gold. Our author will permit us to
suspect that his uncompromising hostility, not only to the land-
bank, but also to everything else of a democratic tendency, blinded
his eyes to the true nature of the institution he describes. Our sus-
picion is strengthened when we read that the paper money in ques-
tion was to have a determinate value, since it was to have been se-
cured by a pledge of "real estate to a sufficient value." The pro-
jectors of the scheme probably intended that the members of the
company should redeem their bills from the bill-holders by receiv-
ing them, in all payments, in lieu of determinate and specified
amounts of gold and silver; and such a method of redemption
would have given the bills "a certain value as compared with sil-
ver and gold."*
In view of this extract from Governor Hutchinson's history, we
*"North Carolina, just after the Revolution, issued a large amount
of paper, which was made receivable in dues to her. It was also made a
legal tender; which, of course, was not obligatory after the adoption of
the Federal Constitution. A large amount, say between four and five
hundred thousand dollars, remained in circulation after that period, and
continued to circulate for more than twenty years, at par with gold and
silver during the whole time, with no other advantage than being received
in the revenue of the State, which was much less than one hundred thou-
sand dollars per annum." JOHN C. CAI.HOUN: Speech on the bill author-
izing an issue of treasury notes, Sept. 19, 1837.
53 MUTUAL BANKING.
abandon all claims to novelty or originality as regards our own
scheme for a Mutual Bank. We think it very probable that our
theory dates back to "the project published in London in the year
1684:" but we affirm nothing positively on this head, since we are
altogether ignorant of the details, not only of the provincial project,
but also of the original London plan. We have no information in
regard to these matters, except that which is now submitted to the
reader.
Our author says, on a subsequent page:
"In 1739, a great part of the Province was disposed to favor
what was called the land bank or manufactory scheme; which was
begun, or rather revived, in this year, and produced such great and
lasting mischiefs, that a particular relation of the rise, progress
and overthrow of it may be of use to discourage any attempts of the
like nature in future ages." ("History of Massachusetts," vol. ii.,
352).
It appears that after an interval of twenty-five years, the land-
bank scheme rose once again above the surface of the political and
financial waters. Governor Hutchinson says that this scheme pro-
duced "great and lasting mischiefs." Let us see what these "mis-
chiefs" were:
"The project of the bank of 1714 was revived. The projector of
that bank now put himself at the head of seven or eight hundred
persons, some few of rank and good estate, but generally of low
condition among the plebeians, and of small estate, and many of
them perhaps insolvent. This notable company were to give credit
to 150,000 lawful money, to be issued in bills; each person to mort-
gage a real estate in proportion to the sums he subscribed and took
out, or to give bond with two sureties: but personal security was
not to be taken for more than 100 from any one person. Ten direc-
tors and a treasurer were to be chosen by the company. Every
subscriber or partner was to pay 3 per cent interest [per annum!
for the sum taken out, and 5 per cent of the principal;* and he that
did not pay bills might pay the produce and manufacture of the
Province at such rates as the directors from time to time should
set: and they [the bills] should commonly pass in lawful money.
The pretence was, that, by thus furnishing a medium and instru-
ment of trade, not only the inhabitants in general would be better
able to procure the Province bills of credit for their taxes, but
trade, foreign and inland, would revive and flourish, The fate of
the project was thought to depend on the opinion which the Gen-
eral Court should form of it. It was necessary, therefore, to have a
house of representatives well disposed. Besides the 800 persons
subscribers, the needy part of the Province in general favored the
scheme. One of their votes will go as far in elections as one of the
most opulent. The former are most numerous; and it appeared
*Thus the whole principal would be paid up In twenty years.
THE PROVINCIAL LAND BANK. 51
that by far the majority of representatives for 1740 were subscrib-
ers to or favorers of the scheme, and they have ever since been dis-
tinguished by the name of the Land-Bank House.
"Men of estates and the principal merchants of the Province
abhorred the project, and refused to receive the bills; but great
numbers of shop-keepers who had lived for a long time on the
fraud of a depreciating currency, and many small traders, gave
credit to the bills. The directors, it was said, by a vote of the com-
pany, became traders,* and issued just such bills as they thought
proper, without any fund or security for their ever being redeemed.
They purchased every sort of commodity, ever so much a drug, for
the sake of pushing off their bills; and, by one means or other, a
large sum perhaps fifty or sixty thousand pounds was floated.
To lessen the temptation to receive the bills, a company of mer-
chants agreed to issue their notes, or bills, redeemable in silver and
gold at distant periods, much like the scheme in 1733, and attended
with no better effect. The governor exerted himself to blast this
fraudulent undertaking the land-bank. Not only such civil and
military officers as were directors or partners, but all who received
or paid any of the bills were displaced. The governor negatived the
person chosen speaker of the House, being a director of the bank;
and afterwards negatived thirteen of the newly elected counsellors,
who were directors or partners in, or favorers of, the scheme. But
all was insufficient to suppress it. Perhaps the major part in num-
ber of the inhabitants of the Province openly or secretly, were well-
wishers of it. One of the directors afterwards acknowledged to me
that, although he entered into the company with a view to the
public interest, yet, when he found what power and influence they
had in all public concerns, he was convinced it was more than be-
longed to them, more than they could make a good use of, and
therefore unwarrantable. Many of the more sensible, discreet per-
sons of the Province saw a general confusion at hand. The author-
ity of the Parliament to control all public and private persons and
proceedings in the Colonies, was at that day questioned by nobody.
Application was therefore made to Parliament for an act to sup-
press the company; which, notwithstanding the opposition made by
their agent, was very easily obtained, and therein it was declared
that the act of the Sixth of King George I., chapter xviii., did,
does and shall extend to the colonies and plantations of America.
It was said the act of George I., when it was passed, had no relation
to America; but another act, twenty years after, gave it force, even
from the passing it, which it never could have had without. This
was said to be an instance of the transcendent power of Parlia-
ment. Although the company was dissolved, yet the act of Parlia-
ment gave the possessors of the bills a right of action against every
*See foregoing paragraph where it is said that debts to the bank
might be paid in manufactures and produce.
52 MUTUAL BANKING.
partner or director for the sums expressed, WITH INTEREST. The
company was in a maze. At a general meeting, some, it is said,
were for running all hazards, although the act subjected them to a
prcemunire; but the directors had more prudence, and advised them
to declare that they considered themselves dissolved, and meet only
to consult upon some method of redeeming their bills of the posses-
sors, which every man engaged to endeavor in proportion to his in-
terest, and to pay in to the directors, or some of them, to burn or
destroy. Had the company issued their bills at the value expressed
on the face of them, they would have had no reason to complain at
being obliged to redeem them at the same rate, but as this was not
the case in general, and many of the possessors of the bills had ac-
quired them for half their value, as expressed equity could not
be done; and, so far as respected the company, perhaps, the Parlia-
ment was not very anxious; the loss they sustained being but a just
penalty for their unwarrantable undertaking, if it had been proper-
ly applied. Had not the Parliament interposed, the Province
would have been in the utmost confusion, and the authority of
government entirely in the Land-Bank Company." (p. 353.)
The "mischiefs" occasioned by this land-bank seems to have
been political, rather than economical, for our author nowhere
affirms that the bill holders, not members of the company lost any-
thing by the institution. W would remark that there are certain
"mischiefs" which are regarded not without indulgence by poster-
ity. Governor Hutchinson ought to have explained more in detail
the nature of the evils he complains of; and also to have told us
why he, a declared enemy of popular institutions, opposed the ad-
vocates of the bank so uncompromisingly. Mutualism operates, by
i ts very nature, to render political government founded on arbi-
trary force, superfluous; that is, it operates to the decentralization
of the political power, and to the transformation of the state, by
substituting self-government in the stead of government ab extra*
The Land-Bank of 1740, which embodied the mutual principle, op-
erated vigorously in opposition to the government. Can we wonder
that it had to be killed by an arbitrary stretch "of the supreme
power of Parliament," and by an ex post facto law bearing
outrageously on the individual members of the company? For our
part, we admire the energy the confidence in the principle of mu-
tualism of those members who proposed to go on in spite of
Parliament, "although the act subjected them to a prcemunire."
If they had gone on, they would simply have anticipated the Amer-
ican Revolution by some thirty years.
But where is the warning to future ages? According to Gov-
ernor Hutchinson's own statement, the fault of the bank was, that
it would have succeeded TOO WELL if it had had a fair trial; nay,
*Thls is also Proudhon's theory; which he felicitously called "the
dissolution of government in the economic organism." EDITOR.
THE PROVINCIAL LAND BANK. 53
that it would have succeeded in spite of all obstacles had it not
been for the exertion of "the transcendent power of Parliament."
Where is the bank of these degenerate days that has shown any-
thing like the samepowerof endurance? Some of the existing banks
find it difficult to live with the power of government exerted in
their favor!
The attempt of the Land-Bank Company to republicanize gold
and silver, and to make all commodities circulate as ready money
was, without question, premature. But our author misapprehends
the matter, mistaking a transformation of the circulating medium for
a mercantile scheme. The "vote of the company whereby the direc-
tors became traders," was an act for transforming the currency.
We do not justify it altogether; for it put the welfare of the cause
at too great hazard; but it was, nevertheless, not totally out of
harmony with the general system. We remark in conclusion, that
the depreciation in the provincial currency was occasioned, not by
"land-bank," that is, by mutual paper which the Parliament
forced the issuers, by an arbitrary, vindictive, and tyrannical law,
to redeem WITH INTEREST but it was occasioned by government
paper, "professing to be ultimately redeemable in gold and silver."*
All arguments, therefore, against mutual money, derived from the
colonial currency, are foreign to the purpose.
The main objections against mutual banking are as follows: 1.
It is a novelty, and therefore a chimera of the inventor's brain; 2.
It is an old story, borrowed from provincial history, and therefore
of no account!
How would you have us answer objections like these? Things
new or old may be either good or evil. Every financial scheme
should stand or fall by its own intrinsic merits, and not be judged
from extraneous considerations.
*"We are told that there is no instance of a government paper that
did not depreciate. In reply I affirm that there is none assuming the
form I propose (notes receivable by government in payment of dues)
that ever did depreciate. Whenever a paper receivable in the dues of
government had anything like a fair trial, it has succeeded. Instance
the case of North Carolina referred to in my opening remarks. The
drafts of the treasury at this moment, with all their incumbrance, are
nearly at par with gold and silver; and I might add the instance
alluded to by the distinguished senator from Kentucky, in which he
admits, that as soon as the excess of the issues of the Commonwealth
Bank of Kentucky were reduced to the proper point, its notes rose to par.
The case of Russia might also be mentioned. In 1827 she had a fixed
paper-circulation in the form of bank-notes, but which were incon-
vertible, of upward of $120,000,000, estimated in the metallic ruble, and
which had for years remained without fluctuation; having nothing to
sustain it but that it was received in the dues of government, and
that, too, with a revenue of only about 590,000,000 annually." JOHN O.
CALHOUN: Speech on his amendment to separate the government from
the banks, Oct. 3, 1837.
CHAPTER VII.
The most concise and expressive definition of the term "capi-
tal," which we have seen in the writings of the political econo-
mists, is the one furnished by J. Stuart Mill, in his table of con-
tents. He says: "Capital is wealth appropriated to reproductive
employment." There is, indeed, a certain ambiguity attached to
the word wealth ; but let that pass; we accept the definition. A
tailor has f5 in money, which he proposes to employ in his business.
This money is unquestionably capital, since it is wealth appropri-
ated to reproductive employment: but it may be expended in the
purchase of cloth, in the payment of journeymen's wages, or in a
hundred other ways; what kind of capital, then, is it? It is evi-
dently, disengaged capital. Let us say that the tailor takes his
money and expends it for cloth; this cloth is also devoted to repro-
ductive employment, and is therefore still capital; but what kind of
capital? Evidently, engaged capital. He makes this cloth into a
coat; which coat is more valuable than the cloth, since it is the re-
sult of human labor bestowed upon the cloth. But the coat is no
longer capital; for it is no longer (so far, at least, as the occupation
of the tailor is concerned), capable of being appropriated to repro-
ductive employment; what is it, then? It is that for the creation
of which the capital was originally appropriated; it is product.
The tailor takes this coat and sells it in the market for $8; which
dollars become to him a new disengaged capital. The circle is com-
plete; the coat becomes engaged capital to the purchaser; and the
money is disengaged capital, with which the tailor may commence
another operation. Money is disengaged capital, and disengaged
capital is money. Capital passes, therefore, through various forms;
first it is disengaged capital, then it becomes engaged capital, then
it becomes product, afterwards it is transformed again into disen-
gaged capital, thus recommencing its circular progress.
The community is happy and prosperous when all professions
of men easily exchange with each other the products of their labor;
that is, the community is happy and prosperous when money circu-
lates freely, and each man is able with facility to transform his
product into disengaged capital, for with disengaged capital, or
money, men may command such of the products of labor as they
desire, to the extent, at least, of the purchasing power of their
money.
The community is unhappy, unprosperous, miserable, when
money is scarce, when exchanges are effected with difficulty. For
notice, that, in the present state of the world, there is never real
over-production to any appreciable extent; for, whenever the baker
MONEY. 55
has too much bread, there are always laborers who could produce
that of which the baker has too little, and who are themselves in
want of bread. It is when the tailor and baker cannot exchange,
that there is want and over-production on both sides. Whatever,
therefore, has power to withdraw the currency from circulation,
has power, also, to cause trade to stagnate; power to overwhelm
the community with misery; power to carry want, and its correla-
tive, over-production, into every artisan's house and workshop.
For the transformation of product into disengaged capital, is one of
the regular steps of production; and whatever withdraws the dis-
engaged capital, or money, from circulation, at once renders this
step impossible, and thus puts a drag on all production.
THERE ARE VARIOUS KINDS OF MONEY.
But all money is not the same money. There is one money of
gold, another of silver, another of brass, another of leather, and
another of paper: and there is a difference in the glory of these
different kinds of money. There is one money that is a commodity,
having its exchangeable value determined by the law of supply and
demand, which money may be called (though somewhat barbarous-
ly) merchandise-money; as for instance, gold, silver, brass, bank-
bills, etc.; there is another money, which is not a commodity,
whose exchangeable value is altogether independent of the law of
supply and demand, and which may be called mutual money.
Mr. Edward Kellogg says: "Money becomes worthless when-
ever it ceases to be capable of accumulating an income which can
be exchanged for articles of actual value. The value of money as
much depends upon its power of being loaned for an income, as the
value of a farm depends upon its natural power to produce." And
again: "Money is valuable in proportion to its power to accum-
ulate value by interest."* Mr. Kellogg is mistaken. Money
is a commodity in a twofold way, and has therefore a twofold val-
ue and a twofold price one value as an article that can be ex-
changed for other commodities, and another value as an article
that can be loaned out at interest; one price which is determined
by the supply and demand of the precious metals, and another
price (the rate of interest) which is determined by the distress of
the borrowing community. Mr. Kellogg speaks as though this last
value and last price were the only ones deserving consideration;
but this is by no means the case: for this last value and price are so
far from being essential to the nature of money, that the Mutual
Bank will one day utterly abolish them. The natural value of the
silver dollar depends upon the demand and supply of the metal of
which it is composed and not upon its artificial power to accumu-
late value by interest. Legislation has created usury; and the
*People who raise the cry of "cheap money" fall into the same error;
money that circulates freely at par, whether interest-bearing or not, Is
neither cheap or dear. EDITOR.
56 MUTUAL BANKING.
Mutual Bank can destroy it. Usury is a result of the legislation
which establishes a particular commodity as the sole article of
legal tender; and, when all commodities are made to be ready
money through the operation of mutual banking, usury will vanish.
CONVERTIBLE PAPER-MONEY RENDERS THE STANDARD OF VALUE
UNCERTAIN.
To show the effect of variations in the volume of the existing
circulating medium, not only on foreign commerce, but also on the
private interests of each individual member of the community,
we will, at the risk of being tedious, have recourse to an illustra-
tion. Let us suppose that the whole number of dollars (either in
specie or convertible paper) in circulation, at a particular time, is
equal to Y; and that the sum of all these dollars will buy a certain
determinate quantity of land, means of transportation, merchan-
dise, etc, which may be represented by x; for, if money may be
taken as the measure and standard of value for commodities, then
conversely, commodities may be taken as the standard and measure
of value for money. Let us say, therefore, that the whole mass of
the circulating medium is equal to Y; and that its value, estimated
in terms of land, ships, houses, merchandise, etc., is equal to x. If,
now, the quantity of specie and convertible paper we have sup-
posed to be in circulation be suddenly doubled, so that the whole
mass becomes equal in volume to 2Y, the value of the whole mass
will undergo no change, but will still be equal to x, neither
more nor less. This is truly wonderful! Some young mathema-
tician, fresh from his algebra, will hasten to contradict us, and say
that the value of the whole mass will be equal to 2x, or perhaps to
x divided by 2, but it is the young mathematician who is in error, as
may easily be made manifest. The multiplication of the whole
number of dollars by 2 causes money to be twice as easy to be ob-
tained as it was before. Such multiplication causes, therefore,
each individual dollar to fall to one-half its former value; and this
for the simple reason that the price of silver dollars, or their equiv-
alents in convertible paper, depends upon the ratio of the supply of
such dollars to the demand for them, and that every increase in the
supply causes therefore a proportionate decrease in the price. The
variation in the volume does not cause a variation in the value of
the volume, but causes a variation in the price of the individual
dollar. Again, if one-half the money in circulation be suddenly
withdrawn, so that the whole volume shall equal }Y, the value of
the new volume will be exactly equal to x, for the reason that the
difficulty in procuring money will be doubled, since the supply will
be diminished one-half, causing each individual dollar to rise to
double its former value. The value of the whole mass in circula-
tion is independent of the variations of the volume; for every in-
crease in the volume causes a proportionate decrease in the value
of the individual dollar, and every decrease in the volume causes
proportionate increase in the value of the individual dollar. If the
MONEY. 57
mass of our existing circulating medium were increased a hundred-
fold, the multiplication would have no effect other than that of
reducing the value of the individual dollar to that of the existing
individual cent. If gold were as plenty as iron, it would command
no higher price than iron. If our money were composed of iron, we
should be obliged to hire an ox-cart for the transportation of $100;
and it would be as difficult, under such conditions, to obtain a cart-
load of iron, as it is now to obtain its value in our present currency.
A fall or rise in the price of money, and a rise or fall in the
price of all other commodities besides money, are precisely the same
economical phenomenon.
The effect of a change in the volume of the currency is there-
fore not a change in the value of the whole volume, but a change in
the value of the individual silver dollar, this change being indi-
cated by a variation in the price of commodities; a fall in the price
of the silver dollar being indicated by a rise in the price of commo-
dities, and a rise in the price of the dollar being indicated by
a fall in the price of commodities. "The value of money," says J.
Stuart Mill, other things being the same, "varies inversely as its
quantity; every increase of quantity lowering its value, and every
diminution raising it in a ratio exactly equivalent. That an increase
of the quantity of money raises prices, and a diminution lowers
them, is the most elementary proposition in the theory of the cur-
rency; and, without it, we should have no key to any of the others."
Let us use this key for the purpose of unlocking the practical
mysteries attached to variations in the volume of the existing cur-
rency. The banks, since they exercise control over the volume of
the currency by means of the power they possess of increasing or
diminishing, at pleasure, the amount of paper money in circula-
tion, exercise control also over the value of every individual dollar
in every private man's pocket. They make great issues, and money
becomes plenty; that is to say, every other commodity becomes
dear. The capitalist sells what he has to sell while prices are high.
The banks draw in their issues, and money becomes scarce; that is,
all other commodities become cheap. The community is distressed
for money. Individuals are forced to sell property to raise money
to pay their debts, and to sell at a loss on account of the state of
the market. Then the capitalist buys what he desires to buy while
prices are low. These operations are the upper and the nether mill-
stones, between which the hopes of the people are ground to pow-
der. THE EVILS OF CONVERTIBLE PAPEB MONEY.
Paper professing to be convertible into silver and gold, by over-
stocking the home-market with money, makes specie to be in less
demand in this country than it is abroad, and renders profitable an
undue exportation of gold and silver; thus occasioning a chronic
drain of the precious metals.*
*Persons of little foresight rejoice in the high price of commodl-
58 MUTUAL BANKING.
It increases the volume of the currency, and therefore decreases
the value of the individual silver dollar; thus causing an enhance-
ment in the price of all domestic commodities; giving an unnatural
advantage in our own markets to foreign manufacturers, who live
in the enjoyment of a more valuable currency and presenting irre-
sistible inducements to our own merchants to purchase abroad
rather than at home.
It operates to give control over the currency to certain organ-
ized bodies of men, enabling them to exercise partiality, and loan
capital to their relatives and favorites; thus encouraging incapac-
ity, and depressing merit; and therefore demoralizing the people
who are led to believe that legitimate business, which should be
founded altogether upon capital, industry and talent, partakes of
the nature of court- favor and gambling.
It operates to encourage unwise speculation; and, by furnishing
artificial facilities to rash, scheming and incompetent persons, in-
duces the burying of immense masses of capital in unremunerative
enterprises.
It reduces the value of our own currency below the level of the
value of money throughout the world, rendering over-importation
inevitable, causing our markets to be overstocked with foreign
goods, and thus making the ordinary production of the country to
present all the calamitous effects of over-production.
It operates inevitably to involve the country and individuals
doing business in the country, in foreign debts, It operates also, by
blinding the people to the true nature of money, and encouraging
them to raise funds for the commencement and completion of haz-
ardous enterprises by the sale of scrip and bonds abroad, to mort-
gage the country, and the produce of its industry, to foreign hold-
ers of obligations against us, etc.
ADVANTAGES OF A MUTUAL CUKRENCY.
Mutual Banks would furnish an ad equate currency; for whether
money were hard or easy, all legitimate paper would be discounted
by them. At present, banks draw in their issues when money is
scarce (the very time when a large issue is desirable), because they
are afraid there will be a run upon them for specie; but Mutual
Banks, having no fear of a run upon them as they have no metal-
lic capital, and never pretend to pay specie for their bills can al-
ways discount good paper.
It may appear to some readers, notwithstanding the explana-
ties that is, In the low price or plentlfulness of money not reflecting
that, when money is too plenty, the sap and vitality of the country flow
forth in a constant stream to enrich foreign lands. An excessive supply
of money causes a deceitful appearance of prosperity, and favors tempo-
rarily a few manufacturers, traders and mechanics; but it is always a
source of unnumbered calamities to the whole country.
MONEY. 59
tions already given*, that we go altogether farther than we are
warranted when we affirm that the creation of an immense mass of
mutual money would produce no depreciation in the price of the sil-
ver dollar. The difficulty experienced in understanding this matter
results from incorrect notions respecting the standard of value, the
measure of value, and the nature of money. This may be made
evident by illustration. The yard is a measure of length; and a
piece of wood, or a rod of glass or metal, is a corresponding stand-
ard of length. The yard, or measure, being ideal, is unvarying; but
all the standards we have mentioned contract or expand by heat or
cold, so that they vary (to an almost imperceptible degree, perhaps)
at every moment. It is almost impossible to measure off a yard, or
any other given length, with mathematical accuracy. The meas-
ure of value is the dollar; the standard of value, as fixed by law, is
silver or gold at a certain degree of fineness. Corn, land, or any
other merchantable commodity might serve as a standard of value,
but silver and gold form a more perfect standard, on account of
their being less liable to variation; and they have accordingly been
adopted, by the common consent of all nations, to serve as such.
The dollar, as simple measure of value, has like the yard, which is
a measure of length an ideal existence only. In Naples, the ducat
is the measure of value; but the Neapolitans have no specific coin
of that denomination. Now, it is evident that the bill of a Mutual
Bank is like a note of hand, or like an ordinary bank bill, neither a
measure, nor a standard of value. It is (1) not a measure; for, un-
like all measures, it has an actual, and not a merely ideal existence.
The bill of a Mutual Bank, being receivable in lieu of a specified
number of silver dollars presupposes the existence of the silver dol-
lar as measure of value, and acknowledges itself as amenable to
that measure. The silver dollar differs from a bill of a Mutual
Bank receivable in lieu of a silver dollar, as the measure differs
from the thing measured. The bill of a Mutual Bank is (2) not a
standard of value, because it has in itself no intrinsic value, like
silver and gold; its value being legal, and not actual. A stick has
actual length, and therefore may serve as a standard of length;
silver has actual intrinsic value, and may therefore serve as a
standard of value; but the bill of a Mutual Bank, having a legal
value only, and not an actual one, cannot serve as a standard of
value, but is referred, on the contrary, to silver and gold as that
standard, without which it would itself be utterly unintelligible.
If ordinary bank bills represented specie actually existing in
the vaults of the banks, no mere issue or withdrawal of them
could effect a fall or rise in the value of money; for every issue of a
dollar-bill would correspond to the locking up of a specie dollar in
*Perhaps on account of those explanations. As heat melts wax, and
hardens clay, so the same general principles, as applied to merchandise
money and to mutual money, give opposite results.
60 MUTUAL BANKING
the bank's vaults; and every cancelling of a dollar-bill would cor-
respond to the issue by the banks of a specie dollar. It is by the ex-
ercise of banking privileges that is, by the issue of bills purporting
to be, but which are not, convertible that the banks effect a de-
preciation in the price of the silver dollar. It is this fiction (by
which legal value is assimilated to, and becomes, to all business in-
tents and purposes, actual value) that enables bank-notes to depre-
ciate the silver dollar. Substitute verity in the place of fiction,
either by permitting the banks to issue no more paper than they
have specie in their vaults, or by effecting an entire divorce between
bank-paper and its pretended specie basis, and the power of paper
to depreciate specie is at an end. So long as the fiction is kept up,
the silver dollar is depreciated, and tends to emigrate for the pur-
pose of traveling in foreign parts; but the moment the fiction is de-
stroyed, the power of paper over metal ceases. By its intrinsic
nature specie is merchandise, having its value determined, as such,
by supply and demand; but on the contrary, paper-money is, by its
intrinsic nature, not merchandise, but the means whereby merchan-
dise is exchanged, and as such ought always to be commensurate in
quantity with the amount of merchandise to be exchanged, be that
amount great or small. Mutual money is measured by specie, but
is in no way assimilated to it; and therefore its issue can have no
effect whatever to cause a rise or fall in the price of the precious
metals.
CHAPTER VIII.
CREDIT.
We are obliged to make a supposition by no means flattering
to the individual presented to the reader. Let us suppose, there-
fore, that some miserable mortal, who is utterly devoid of any per-
sonal good quality to recommend him, makes his advent on the
stage of action, and demands credit. Are there circumstances
under which he can obtain it? Most certainly. Though he pos-
sesses neither energy, morality nor business capacity, yet if he
owns a farm worth $2,000, which he is willing to mortgage as secur-
ity for $ 1,500 that he desires to borrow, he will be considered as
eminently deserving of credit. He is neither industrious, punctual,
capable, nor virtuous; but he owns a farm clear of debt worth
$2,000 and verily he shall raise the $1,500!
Personal credit is one thing; real credit is another and a very
different thing. In one case, it is the man who receives credit; in
the other, it is the property, the thing. Personal credit is in the
nature of partnership; real credit is in the nature of a sale, with a
reserved right of repurchase under conditions. By personal credit,
two men or more are brought into voluntary mutual relations ; by real
credit, a certain amount of fixed property is transformed, under
certain conditions and for a certain time, into circulating medium;
that is, a certain amount of engaged capital is temporarily trans-
formed into disengaged capital.
THE USURY LAWS.
We have already spoken of the absurdity of the usury laws.
But let that pass; we will speak of it again.
A young man goes to a capitalist, saying: "If you will lend me
$100, 1 will go into a certain business, and make $1,500 in the course
of the present year; and my profits will thus enable me to pay you
back the money you lend me, and another $100 for the use of it. In-
deed it is nothing more than fair that I should pay you as much as
I offer; for, after all, there is a great risk in the business, and you
do me a greater favor than I do you." The capitalist answers: "I
cannot lend you money on such terms; for the transaction would
be illegal; nevertheless, I am willing to help you all I can, if I can
devise a way. What do you say to my buying such rooms and
machinery as you require, and letting them to you on the terms you
propose? For, though I cannot charge more than 6 per cent on
money loaned, I can let buildings, whose total value is only $100, at
a rate of $100 per annum, and violate no law. Or, again, as I shall
be obliged to furnish you with the raw material consumed in your
62 MUTUAL BANKING.
business, what do you say to our entering into a partnership, so ar-
ranging the terms of agreement that the profits will be divided in
fact, as they would be in the case that I loaned you $100 at 100 per cent
interest per annum?" The young man will probably permit the cap-
italist to arrange the transaction in any form he pleases, provided
the money is actually forthcoming. If the usury laws speak any
intelligible language to the capitalist, it is this: "The legislature
does not intend that you shall lend money to any young man to
help in his business, where the insurance upon the money you trust
in his hands, and which is subjected to the risk of his transactions,
amounts to more than 6 per cent per annum on the amount loaned."
And, in this speech, the deep wisdom of the legislature is mani-
fested! Why six, rather than five or seven? Why any restriction
at all?
Now for the other side (for we have thusifar spoken of the
usury laws as they bear on mere personal credit): If a man bor-
rows 11,500 on the mortgage of a farm, worth, in the estimation of
the creditor himself, $2,000, why should he pay 6 per cent interest on
the money borrowed? What does this interest cover? Insurance?
Not at all; for the money is perfectly safe, as the security given is
confessedly ample; the insurance is 0. Does the interest cover the
damage which the creditor suffers by being kept out of his money
for the time specified in the contract? This cannot be the fact for
the damage is also since a man who lends out money at interest,
on perfect security, counts the total amount of interest as clear
gain, and would much prefer letting the money at % per cent to
permitting it to remain idle. The rate of interest upon money lent
on perfect security is commensurate, not with the risk the creditor
runs of losing his money for that risk is 0; not to the inconven-
ience to which the creditor is put by letting the money go out of his
hands for that inconvenience is also 0,* since the creditor lends
only such money as he himself does not wish to use; but it is com-
mensurate with the distress of the borrower. One per cent per
annum interest on money lent on perfect security is, therefore, too
high a rate; and all levying of interest-money on perfect security
is profoundedly immoral,t since such interest-money is the fruit of
the speculation of one man upon the misfortune of another. Yet
the legislature permits one citizen to speculate upon the misfortune
of another to the amount of six-hundredths per annum of the ex-
tent to which he gets him into his power! This is the morality of
the usury laws in their bearing on real credit.
*If, however, the inconvenience is anything, the lender ought to be
indemnified; but such indemnification is not properly interest.
tPerhaps, we ought rather to say, "would be profoundly immoral in a
more perfect social order." We suppose that must be considered right.
In our present chaotic state, which is best on the whole, or which taking
men's passion as they are is unavoidable.
CREDIT. 63
LEGITIMATE CBEDIT.
All the questions connected with credit, the usury laws, etc.,
may be forever set at rest by the establishment of Mutual Banks.
Whoever goes to the mutual bank, and offers real property in
pledge, may always obtain money; for the Mutual Bank can issue
money to any extent; and that money will always be good, since it
is all of it based on actual property, that may be sold under the
hammer. The interest will always be at a less rate than 1 per cent
per annum, since it covers, not the insurance of the money loaned,
there being no such insurance required, as the risk is 0; since it
covers, not the damage which is done the bank by keeping it out of
its money, as that damage is also 0, the bank having always an un-
limited supply remaining on hand, so long as it has a printing-press
and paper; since it covers, plainly and simply, the mere expenses of
the institution clerk-hire, rent, paper, printing, etc. And it is fair
that such expenses should be paid under the form of a rate of interest;
for thus each one contributes to bear the expenses of the bank, and
in the precise proportion of the benefits he individually experiences
from it. Thus the interest, properly so called, is 0; and we venture
to predict that the Mutual Bank will one day give all the real
credit that will be given; for since this bank will give such at per
cent interest per annum, it will be difficult for other institutions to
compete with it for any length of time. The day is coming when
everything that is bought will be paid for on the spot, and in mu-
tual money; when all payments will be made, all wages settled, on
the spot. The Mutual Bank will never, of course, give personal
credit; for it can issue bills only on real credit. It cannot enter
into partnership with anybody; for, if it issues bills where there is
no real guarantee furnished for their repayment, it vitiates the cur-
rency, and renders itself unstable. Personal credit will one day be
given by individuals only; that is, capitalists will one day enter
into partnership with enterprising and capable men who are with-
out capital, and the profits will be divided between the parties ac-
cording as their contract of partnership may run. Whoever, in the
times of the Mutual Bank, has property, will have money also; and
the laborer who has no property will find it very easy to get it; for
every capitalist will seek to secure him as a partner. All services
will then be paid for in ready money; and the demand for labor will
be increased three, four and five fold.
As for credit of the kind that is idolized by the present genera-
tion, credit which organizes society on feudal principles, confused
credit, the Mutual Bank will obliterate it from the face of the
earth. Money furnished under the existing system to individuals
and corporations is principally applied to speculative purposes, ad-
vantageous, perhaps, to those individuals and corporations, if the
speculations answer; but generally disadvantageous to the com-
munity, whether they answer or whether they fail. If they answer,
they generally end in a monopoly of trade, great or small, and in
64 MUTUAL BANKING.
consequent high prices; if they fail, the loss falls on the community.
Under the existing system, there is little safety for the merchant.
The utmost degree of caution practicable in business has never
yet enabled a company or individual to proceed for any long time
without incurring bad debts.
The existing organization of credit is the daughter of hard
money, begotten upon it incestuously by that insufficiency of circu-
lating medium which results from laws making specie the sole legal
tender. The immediate consequences of confused credit are want
of confidence, loss of time, commercial frauds, fruitless and re-
peated applications for payment, complicated with irregular and
ruinous expenses. The ultimate consequences are compositions,
bad debts, expensive accommodation-loans, lawsuits, insolvency,
bankruptcy, separation of classes, hostility, hunger, extravagance,
distress, riots, civil war, and, finally, revolution. The natural con-
sequences of mutual banking are, first of all, the creation of order,
and the definite establishment of due organization in the social
body; and, ultimately, the cure of all the evils which flow from the
present incoherence and disruption in the relations of production
and commerce.
CONCLUSION.
The expensive character of the existing circulating medium is
evident on the most superficial inspection. The assessor's valua-
tion for 1830, of the total taxable property then existing in the Com-
monwealth of Massachusetts, was $208,360,407; the valuation for
1840 was $299,878,329. We may safely estimate, that the valuation
for 1850 will be to that of 1840 as that of 1840 was to that of 1830.
Performing these calculations, we find that the total amount of tax-
able property possessed by the people of Massachusetts in the pres-
ent year, is about $431,588,724.* The excess of this last valuation
over that of 1840 i. e., $131,710,395 is the net gain, the clear profit,
of the total labor of the people in the ten years under consideration.
The average profit for each year was, therefore, $13,171,039. In the
year 1849, the banks of Massachusetts paid their tax to the state,
their losses on bad debts, their rents, their officers and lawyers,
and then made dividends of more than SEVEN PER CENT on their
capitals. The people, must, therefore, in the course of that year
(1840) have paid interest money to the banks to the amount of at
least 10 per cent on the whole banking capital of the state. At the
close of the year 1848, the banking capital in the state amounted to
$32,683,330. Ten per cent on $32,683,330 is $3,268,333 the amount the
people paid, during the year 1849, for the use of a currency. If the
material of the currency had been iron, $3,268,333 would probably
have paid the expenses of the carting and counting. What, then, is
the utility of our present paper money? We have estimated the
total profits of the whole labor of the people of the Commonwealth
for the year 1849, at $13,171,039. It appears, therefore, that the total
profits of nearly one-fourth part of the whole population of the
state were devoted to the single purpose of paying for the use of a
currency.
Mutual Banks would have furnished a much better currency at
less than one-tenth of this expense.
The bills of a Mutual Bank cannot reasonably pretend to be
standards or measures of value; and this fact is put forth as a
recommendation of the mutual money to favorable consideration.
The silver dollar is the measure and standard of value; and the
bills of a Mutual Bank recognize the prior existence of this meas-
ure, since they are receivable in lieu of so many silver dollars. The
bill of a Mutual Bank is not a measure of value, since it is itself
measured and determined in value by the silver dollar. If the
dollar rises in value, the bill of the Mutual Bank rises also,
since it is receivable in lieu of a silver dollar. The bills
*According to the report of the Valuation Committee, it appears to
have been (in the year 1850) $600,000,000 a much larger sum.
66 MUTUAL BANKING.
of a Mutual Bank are not measures of value, but mere instruments
of exchange; and, as the value of the mutual money is determined,
not by the demand and supply of the mutual money, but by the de-
mand and supply of the precious metals, the Mutual Bank may is-
sue bills to any extent, and those bills will not be liable to any de-
preciation from excess of supply. And for like reasons, the mutual
money will not be liable to rise in value if it happens at any time to
be scarce in the market. The issues of said mutual money are
therefore susceptible of any contraction or expansion which may be
necessary to meet the wants of the community; and such contrac-
tion or expansion cannot, by any possibility, be attended with any
evil consequence whatever; for the silver dollar, which is the
standard of value, will remain throughout at the natural valuation
determined for it by the general demand and supply of gold and
silver throughout the whole world.
In order that the silver dollar, which is the standard and meas-
ure of value, may not be driven out of circulation, the Mutual
Bank which has no vault for specie other than the pockets of the
people ought to issue no bill of a denomination less than five
dollars.
THE END.
A 000018577 7
