CURRENCY, BANKING, AND CREDIT
_The purpose of this chapter is to explain what money is, what
purposes it serves, how banks conduct their business, and how credit
facilitates trade._
[Sidenote: Money supplants barter.]
=The Origin of Money.=—The use of money is one of the marks of
civilization. In primitive communities money was unknown. Buying and
selling was by barter, the exchange of one commodity for another. The
man with too much corn exchanged corn for cattle or for a boat or for
skins with which to clothe himself. But exchange by barter is a slow and
clumsy method because it means that two persons must be found each of
whom wants exactly what the other has to sell, a thing which does not
easily happen. With the growth of trade, accordingly, it became
necessary to find a _medium of exchange_, in other words some single
commodity which is so readily exchangeable for all other commodities
that it can be used to facilitate buying and selling. Some of the
Indians of North America used the ends of shells, or wampum, for this
purpose. The early colonists in Virginia chose tobacco as a temporary
medium of exchange, it being in universal demand. People accepted
tobacco in exchange for things which they wished to sell, and gave
tobacco for things which they desired to buy. This was not because they
wanted tobacco for their own use but because of all commodities in the
colony tobacco was the most easy to exchange for other things at a
moment’s notice. No ordinary form of merchandise, however, makes an
entirely satisfactory medium of exchange and all of them in time gave
way to the precious metals, gold and silver, which are now everywhere
used for this purpose.[191]
[Sidenote: Money as a standard of value and a measure of deferred
payments.]
=The Functions which Money Serves.=—Money, however, serves not only as a
medium of exchange but as a standard of value and a measure for future
payments. Money is the common denominator by means of which we express
the value of different commodities. If money were not in existence, how
could we state the value of anything? It would be of little avail to say
that a suit of clothes is worth ten hats, for this would merely beg the
question: How much is a hat worth? Money performs the function of
providing a uniform scale into which all values can be translated. When
we say, therefore, that a suit of clothes is worth forty dollars and
that hats are worth four dollars apiece we are measuring both
commodities according to the same standard of value. Money also
facilitates the use of credit by providing a measure for deferred
payments. People cannot well agree to indefinite future obligations;
they must know exactly what a debt amounts to. The use of money enables
men to borrow today with the understanding that they will repay the same
amount at some future date.
[Sidenote: The qualities which money must have:]
=Characteristics of Money.=—Gold and silver are best adapted to
facilitate exchange because they possess, in high degree, certain
qualities which money must have in order to fulfil its functions
properly. What are these qualities? [Sidenote: 1. Value.] To serve
acceptably as money a substance must have, in the first place, some
value in itself; it must therefore have utility as a basis of value. A
worthless substance, which nobody wants, would not do. [Sidenote: 2.
Stability.] Second, it must not only have value but stability of value.
To serve efficiently as money a metal must not be subject to wide and
frequent fluctuations in what it is worth. A substance which might be
worth much today and little tomorrow would not be satisfactory. Gold and
silver, being produced in limited quantities, are more nearly stable in
value than any other metals, gold being particularly so. [Sidenote: 3.
Convenience.] Third, the metal used as money must possess relatively
high value in proportion to its bulk so that it can be easily passed
from hand to hand. There was a tradition in ancient Greece that Lycurgus
compelled the Lacedaemonians to use iron money in order that its weight
might deter them from overmuch trading. If iron were used as currency
today a dime would weigh more than a pound.[192] In a word the metal
used as money must be portable, easy to carry around. [Sidenote: 4.
Durability.] Fourth, it must be relatively indestructible, not subject
to rapid decay or rusting. Gold and silver satisfy this requirement, for
time does not destroy their value nor do they suffer much wear and tear
through handling. It is believed that some of the gold which is in the
coinage of European countries today served as money in the time of the
Romans. [Sidenote: 5. Uniformity.] Fifth, it must be homogeneous, that
is, it must not vary in quality, otherwise equal amounts of it would not
have the same value. In order that we may reckon things in terms of
money the units must be equal and similar so that twice one will always
make two. If we were to use diamonds as money, it would not always
happen that two stones would be worth exactly twice as much as one.
[Sidenote: 6. Divisibility.] Sixth, it must be easily divisible without
loss of value, for we need small units of money as well as large ones.
One great difficulty which primitive people found in using the skins of
animals as money was that they could not be cut into portions without
destroying their value altogether. Nobody would take, for example, a
quarter of a skin in payment for a basketful of corn. But gold and
silver can be divided at will and yet retain an exactly proportionate
value. [Sidenote: 7. Cognizability.] Finally, it must be a metal or
other substance the genuineness of which can be easily determined. If
every person who receives money had to scrutinize, weigh, and test it,
the processes of trade would be intolerably delayed.[193] Gold and
silver may not themselves be readily cognizable by the uninitiated, but
they are easy to stamp into coins with a stamp or design and this
impression cannot be easily counterfeited. The various countries of the
world adopted gold and silver as their chief media of exchange because
these metals fulfil in the largest degree the foregoing requirements.
For small units of currency nickel and bronze are utilized because
subsidiary coins of gold and silver would be too small.
[Sidenote: Gold is the American standard of values.]
=The Coinage of the United States.=—In the United States gold is the
standard of values. This does not mean that gold is circulated from hand
to hand in every transaction, but merely that all economic values are
expressed in terms of gold coin. The actual payments may be made in
paper notes, or in silver, nickel, or copper coins. The monetary system
of the United States is based upon the decimal system, which was adopted
in 1784 at the suggestion of Thomas Jefferson. This means that we reckon
in fractions and multiples of ten—ten cents one dime, ten dimes one
dollar, and ten dollars one eagle. For convenience there are also
additional coins, such as nickels, quarter dollars, half dollars, and
half-eagles. No gold dollars are now coined, as they were found to be
too small for convenience.[194] The mint has also ceased coining quarter
eagles but continues to make five, ten, and twenty dollar gold pieces
although these coins remain for the most part in the banks where they
are held as reserves. Very little gold coin is in circulation anywhere
in the world today. The coining of money is wholly within the
jurisdiction of the national government; no state is allowed to make or
issue coins. [Sidenote: The United States mints.] The making of coins
takes place at four mints, which are located at Philadelphia, New
Orleans, Denver, and San Francisco.[195] If you look at the reverse side
of a recently minted coin, you will find, near the base, a small letter
indicating the mint at which the coin was struck; if there is no such
letter, the coin was minted at Philadelphia.
[Sidenote: The ratio between gold and silver.]
=The Controversy over Bimetallism.=—In 1792, when the first American
mint was established, Congress provided by law that there should be two
monetary units, the gold dollar and the silver dollar—the ratio between
the two, in terms of weight, being fixed at fifteen to one. Any person
bringing gold or silver bullion to the mint was entitled to have it made
into coins at this ratio, which corresponded to the relative market
value of the two [Sidenote: In 1792.]metals in 1792. Silver eventually
cheapened in relation to gold, however, and in time only silver bullion
came to be coined. [Sidenote: In 1834.] So Congress in 1834 reduced the
weight of the gold dollar and made the ratio sixteen to one. This, in
turn, proved to be an under-valuation of silver, and no silver now came
to the mint to be coined.[196] [Sidenote: In 1873.] In 1873, after
silver dollars had practically dropped out of circulation Congress
abolished the free coinage of silver altogether.[197] Presently,
however, there was a popular demand for a resumption of silver coinage
and the minting of silver dollars was recommenced,[198] [Sidenote: In
1893.]but only on a limited scale; and in 1893 it was once more
abandoned.[199]
This action on the part of Congress raised a great hue and cry in
certain sections of the country, especially in the South and West. Free
coinage of silver was desired not only by owners of mines who had silver
to sell but by large numbers of farmers who believed that gold was
becoming too scarce to serve as the sole standard of value. Scarcity of
gold meant scarcity of money, and scarcity of money meant low prices for
wheat. If money were plentiful, prices would go higher, and the way to
get more money was to coin into dollars all the silver that would come
to the mint. That was the farmers’ argument.
=The “Cross of Gold” Campaign.=—The leaders of the Democratic party took
advantage of this widespread agricultural grievance. At the national
convention of that party, held at Chicago in the summer of 1896, Mr. W.
J. Bryan swept the delegates off their feet with his denunciation of the
“few financial magnates who corner the money of the world” and his plea
for the poor man’s dollar. “You shall not press upon the brow of labor
this crown of thorns”, he declaimed. “You shall not crucify mankind upon
a cross of gold.” The delegates, amid tumultuous cheering and
enthusiasm, thereupon nominated the young orator from Nebraska as their
candidate for President and made the free coinage of silver at a ratio
of “sixteen to one” a fundamental part of the Democratic platform in the
election campaign. But Bryan was overwhelmingly defeated and the clamor
for free silver soon subsided. [Sidenote: Final settlement of the
question in 1900.] In 1900 Congress passed the Currency Act, which
declared gold to be the sole standard and directed the secretary of the
treasury to maintain all other forms of currency at a parity with gold.
This means that every silver dollar, whether the silver which it
contains be worth a dollar or not, is guaranteed by the national
government to be worth a gold dollar.
[Sidenote: Our early experience with paper currency.]
=Paper Money.=—Our experience with paper money goes back to colonial
days when bills of credit were issued by Massachusetts to pay the costs
of the expedition against Quebec in 1690. But no great amounts were
issued until the Revolutionary War; then the various state governments
as well as the Continental Congress printed and issued notes to the par
value of nearly half a billion dollars. In the earlier years of the war
this paper currency circulated at its face value although there was no
gold or silver reserve behind it; but as the struggle dragged on and
notes by the million kept being issued they began to depreciate until
eventually this continental paper currency was worth only a fraction of
a cent per dollar. Hence the origin of the slang expression “not worth a
continental”. The notes for the most part were never redeemed; they
merely became worthless and passed out of circulation.
[Sidenote: What the constitution provides as regards paper money.]
Naturally this experience made the people averse to paper money and when
the constitution of the United States was framed it contained a
provision that “no state shall emit bills of credit (or) make anything
but gold and silver coin a tender in payment of debts”. It was strongly
urged that the national government should also be prohibited from
issuing paper money, but in the end it was decided not to make any
express prohibition, so the constitution is silent as regards the
authority of the national government to emit bills of credit. It neither
gives this power nor denies it. In due course, however, Congress
authorized the issue of legal-tender notes or greenbacks, and the
Supreme Court upheld its right to do this on the ground that the
constitution expressly gives Congress the power to borrow money and that
the issue of paper money is a reasonable method of borrowing. But
although the national government has itself the legal right to issue
paper money, either with or without a reserve behind it, most of the
paper money now in circulation is issued by the federal reserve board or
by the federal reserve banks under authority granted by Congress.
[Sidenote: The seven kinds of paper money in use.]
=Paper Notes now in Circulation.=—There are several kinds of paper notes
now in circulation.[200] These include silver certificates, gold
certificates, treasury notes, and greenbacks issued directly by the
national government, national bank notes, federal reserve notes, and
federal reserve bank notes. The provisions for the redemption of these
different types of paper money vary greatly, and each is protected by a
different reserve, but in actual fact the holder of any unit of paper
money can obtain gold for it if he so desires. This is true even of the
silver certificates which, strictly speaking, are redeemable only in
silver dollars. The arrangements under which the national banks, the
federal reserve banks, and the federal reserve board are permitted to
issue paper money will be discussed presently.
[Sidenote: Paper money has some advantages in convenience and
cheapness.]
Why do we have paper money? Chiefly because it is, in many respects,
more convenient for use than metallic money. In large amounts it is not
so bulky as silver or gold would be. There is also the advantage that
when paper money wears out it can be cheaply replaced. If gold coins
were continually in circulation from hand to hand, they would gradually
wear down and the monetary loss would be considerable. Hence it is
better to keep the gold in the bank vaults and circulate the paper,
which represents gold, in its stead. But a sound system of paper money
should always provide for the redemption of the notes, which means that
the notes should have an adequate reserve behind them. This reserve
should be in gold or in the equivalent of gold. [Sidenote: Inconvertible
paper money.] Unredeemable paper money, issued without an adequate
reserve behind it, leads practically always to depreciation and thereby
to heavy losses on the part of the people who have taken the money in
good faith. That was what happened in the case of the assignats of the
French Revolution, the continental currency in the American Revolution,
and the paper money of several European countries during the World
War.[201] It is folly to try to finance a war or any other national
enterprise by issuing fiat currency, as it is called, which is paper
currency with only the word of the government and no substantial reserve
behind it. Better tax the people outright than make them take money as
legal tender which is not worth what it purports to be.[202]
[Sidenote: Why not abolish money?]
Radicals sometimes say: “Let us do away with money altogether”. Instead
of money, they say, we might use “labor checks”, each check representing
a given amount of labor. One hour of labor, let us say, would then be
the standard of value instead of 23.2 grains of gold. This arrangement,
however, would not abolish money, but only change the nature of the
basis upon which the value of money is calculated. The labor checks
would be money in every sense of the word. There is only one way to
abolish money and that is to go back to barter.
THE BANKING SYSTEM
[Sidenote: Banks serve:]
=What Functions do Banks Perform?=—Banks are established and maintained
to satisfy certain needs which arise wherever men carry on extensive
trade with one another. [Sidenote: 1. As institutions of deposit.]] In
the first place when money is accumulated by people in the course of
their business some safe place is needed to keep it. Banks, therefore,
serve as institutions of deposit. [Sidenote: 2. As agencies for loaning
money.] In the second place, as business develops, it becomes necessary
for people to borrow money. Banks facilitate this borrowing. Their two
primary functions are to receive deposits and to make loans. But in
order that they may perform these two primary functions to the best
advantage the banks have assumed other subsidiary functions as well.
[Sidenote: 3. Sometimes also as issuers of paper money.] Frequently they
issue bank notes, or the bank’s own promises to pay, for use in general
circulation. [Sidenote: 4. To transfer funds from one place to another.]
They sell drafts or bills of exchange, thus enabling people to transfer
funds from one city or country to another without the trouble and risk
of sending the actual money. As a rule they provide safe-deposit vaults
in which customers, on payment of a small sum, are permitted to keep
their valuables. These vaults are fire-proof and burglar-proof. Banks
also collect money which may be due to a customer from someone
elsewhere. They help the national and state governments to sell their
bonds. Frequently they act as trustees, holding property for children
until they grow up or for other persons who are unable to look after the
property for themselves. Without banks it would be difficult, if not
impossible, to carry on the operations of modern business.
=The Early American Banking System.=—The national constitution contains
no mention of banks or banking. Hence it was assumed that the power to
charter banks would rest with the states. The states assumed this
authority but the national government desired to exercise it also, and
during the first thirty years of its existence established two great
banks, both of which became unpopular and ultimately went out of
existence. The first Bank of the United States, established in 1791,
ceased to do business in 1811; the second bank, chartered in 1816,
incurred the wrath of President Andrew Jackson and went to the wall in
1836.[203] From this date to the Civil War the state banks, of which a
large number were established in all parts of the country, had the field
to themselves.
=The National Banking Act of 1863.=—During the Civil War, however, the
national government encountered great difficulty in raising funds. When
it issued bonds the people would not buy them readily. The state banks
showed very little interest in marketing them. So Congress, in this
emergency, decided to establish a system of national banks in order to
facilitate the sale of war bonds. The National Banking Act, passed in
that year, laid a heavy tax upon the paper money of all state banks,
with intent to drive this currency out of circulation. It then provided
that any bank chartered by the national government might issue untaxed
paper money provided it bought United States bonds to a designated
amount and deposited these bonds in Washington as security. In other
words the Act of 1863 aimed to provide a uniform system of bank notes
throughout the country, these notes to be backed by government bonds.
The plan worked well and its main provisions have been retained to this
day.
[Sidenote: Present organization of the national banks.]
National banks are owned by private individuals who subscribe the
capital stock. These stockholders, or shareholders, elect the bank’s
officers, who in turn manage the business. The profits go to the
shareholders in the form of annual dividends. Each national bank must
buy a designated amount of United States bonds and these bonds are
deposited in Washington. In return the bank receives an equal amount of
paper notes, with its own name engraved thereon, and these notes the
bank pays out over its counters, thus putting them in general
circulation. If the bank should become insolvent, the government would
redeem the notes since it holds the bonds as security. [Sidenote: Their
functions.] The national banks receive money on deposit, make loans, and
perform the various other banking functions. They are strictly regulated
by national law; they must make periodic reports and are frequently
inspected by officials from Washington. [Sidenote: Their reserves.] One
requirement is that they shall always maintain a certain “reserve” so
that they may be in a position to make all payments which may be called
for by their customers. The supervision of the national banks is in the
hands of an official known as the Comptroller of the Currency, who is
appointed by the President.
[Sidenote: State banks and trust companies.]
In addition to the national banks there are state banks and trust
companies throughout the country operating under state charters. These
institutions do not issue paper money but perform all the other banking
functions.[204] Their business is regulated by the laws of the state in
which they are located and they are supervised by state officials. The
laws relating to state banks and trust companies differ considerably
from state to state.
[Sidenote: Defects of the national banking system due to the
concentration of reserves and lack of flexibility.]
=The Federal Reserve Banks.=—Although the national banking system worked
pretty well for fifty years after its establishment, certain defects
came to be recognized. One of these defects, in actual practice, was the
necessity of always keeping available a “reserve” amounting to a certain
percentage of each bank’s total deposits. It was not necessary to keep
this reserve in the bank’s own vaults; a part of it might be placed upon
deposit in larger banks where it would draw interest. As matters turned
out, a considerable portion of the reserves was usually deposited with
large banks in New York City. In times when business was good and money
plentiful, this arrangement worked very well, but when periods of
business depression arrived and money became scarce every small bank
naturally drew upon its reserve deposits in the larger banks, which
found difficulty in paying them all at the same time. Moreover, it was
found from experience that during times of business prosperity the
country needed a large increase in paper money while the national
banking system, as established in 1863, proved too rigid to meet the
business needs of the country.
[Sidenote: How the Federal Reserve system remedies these defects.]
In 1913, accordingly, Congress made provision for the establishment of a
Federal Reserve system which does not displace but supplements the
operations of the national banks. By an act passed in that year
provision was made for the establishment of twelve federal reserve
districts, with a federal reserve bank in each. The capital stock of
each federal reserve bank is contributed by national or state banks
within the districts, these contributors being then known as “member
banks”. The national government also subscribes a part of the capital
stock when necessary. [Sidenote: The Federal Reserve Board.] Each
federal reserve bank is controlled by officials, some of whom are
elected by the member banks and some appointed by the national
government through a body known as the Federal Reserve Board. This board
is composed of the Secretary of the Treasury, the Comptroller of the
Currency, and five other members appointed by the President.
[Sidenote: Functions of the Federal Reserve Banks.]
These federal reserve institutions are bankers’ banks. They do business
with banks only, not with individuals. They receive deposits from banks
and lend money to banks. The member banks now keep with them a portion
of their reserves. In this way the reserves are mobilized at twelve
different financial centers where they can be readily drawn upon.[205]
The Federal Reserve Board has authority to increase or decrease the
percentage of reserves which the member banks are required to maintain,
thus giving the reserve system a large degree of flexibility. Whenever a
member bank needs additional paper money for circulation it goes to the
federal reserve bank of its district and deposits any sound
“collateral”, that is to say, any acceptable security, and receives
federal reserve notes of like value in return. This collateral may be in
the form of government bonds or it may be, and more often is,
“commercial paper”. [Sidenote: How they give flexibility to the whole
banking system of the country.] By commercial paper is meant the notes
or other obligations of corporations and individuals which have been
given to the member banks in return for loans made to such corporations
and individuals. The federal reserve banks are authorized to issue
_federal reserve notes_, to an unlimited extent on the security of this
collateral provided they also keep a gold reserve amounting to forty per
cent of the total notes issued. In addition they are empowered to issue
_federal reserve bank notes_ secured by United States bonds in the same
way as national bank notes are secured. It is expected that in time the
national bank notes will go out of existence altogether, their place
being taken by these federal reserve bank notes.
[Sidenote: Value of the Federal Reserve system.]
Since their establishment in 1913 the work of these federal reserve
banks has been of great value. They have enabled the banking operations
of the country to expand and contract in accordance with changes in
business conditions, thus obviating serious danger of financial panics.
In helping the government to float the various Liberty Loans they
rendered great service. There is no doubt that the system has improved
and strengthened the banking facilities of the country.[206] This will
appear more clearly when the relations of banking and credit are
discussed a few pages further on.
[Sidenote: Commercial and savings banks distinguished.]
=The Practical Operations of Banking.=—There are some elementary things
connected with the practical operations of banking which everyone ought
to know. Generally speaking, there are two kinds of banks, commercial
banks and savings banks; or, in some cases the same bank may have two
departments, a commercial department and a savings department. Both
commercial and savings banks receive deposits; the former may or may not
pay interest according to the amount of the deposit and the length of
time it is left in the bank; the latter always pay interest if money is
left on deposit a prescribed length of time. When money is deposited in
a commercial bank the depositor is said to have an “account” and he may
issue checks up to the amount of his deposit. [Sidenote: Bank checks.] A
check is an order, addressed to the bank, and calling for the payment of
a designated sum. This check may be cashed at the bank on which it is
drawn, or the person who receives it may have it cashed at the bank
where he has his account. Banks cash checks for their own customers no
matter what bank the checks happen to be drawn upon.
One result of this is that every bank at the close of each day’s
business will have on hand a large number of checks drawn against other
banks. [Sidenote: The clearing house system.] It receives payment on
these checks through the medium of the “clearing house”, an institution
which is maintained by the banks in every large city. To the nearest
clearing house a clerk takes each morning all the checks on other banks
that have come in during the previous day. These are sorted out and
exchanged for checks drawn on the bank itself which are held by other
banks. Whatever difference there happens to be is paid in cash.
[Sidenote: How bank loans are made.]
When any person desires to borrow money from a bank he gives his note,
which is a promise to repay the bank at a designated time. The bank may
ask the borrower to obtain an endorsement upon his note, that is, to
have some responsible person put his name on the back of it, which means
that the endorser assumes liability for the amount of the note if it is
not paid by the maker on time. Or the bank may ask the borrower to
deposit “collateral” as security for the payment of the note. This
collateral may be in the form of bonds, stocks, mortgages, or any other
intangible property that has sufficient value. The bank holds this
collateral until the loan is repaid.
[Sidenote: The process of “discounting.”]
When a bank lends money and takes a man’s note, with or without
collateral, it is said to discount the note. It gives the borrower the
face value of his note less the interest, whatever it is, calculated at
the current rate. Thus if the rate is six per cent and the person gives
his note for one thousand dollars payable in six months, the bank would
hand him $970 in money. Business men obtain large sums of money from the
banks by getting their notes discounted; they borrow money in this way
to buy goods and then pay off their notes when the goods are sold. Such
notes are called “commercial paper”.
[Sidenote: “Rediscounting.”]
Now the federal reserve banks help the member banks by “rediscounting”
this commercial paper for them. Suppose a small bank has loaned on notes
all the money it has to spare. Then it receives applications from its
customers for more loans. What does it do? It takes a bundle of business
men’s notes, or commercial paper, from its vaults and sends this to the
nearest federal reserve bank. The latter does just what the member bank
did in the first instance; it deducts the discount at current rates and
gives the balance to the member bank in money, that is, in federal
reserve notes. The member banks are enabled, in this way, to loan a
great deal more money than would be the case if there were no way of
getting their commercial paper “rediscounted”.
[Sidenote: How the banks transfer funds.]
Drafts or bills of exchange are used to make payments at distant points.
If a person lives in San Francisco and wishes to pay a small bill in New
York, he will probably go to the post office and buy a postal money
order; but if the amount is large, he may find it more convenient and
cheaper to go to a bank in San Francisco and buy a draft on some New
York bank. This draft he then sends to New York in payment of his bill.
A draft payable in a foreign country is usually called a bill of
exchange. From any American bank one can buy a bill of exchange payable
in Paris, Madras, Hong Kong, or elsewhere. When the money of one country
is worth more than that of another, as is the case throughout the world
at the present time, allowance is made for this difference. Bills of
exchange are “cleared” through the great clearing houses in London or
New York, and any balances are paid by the shipment of gold.
THE CREDIT SYSTEM
[Sidenote: The five chief instruments of credit.]
=What is Credit?=—Credit is simply the giving and taking of promises in
place of money. The most common form is “book credit”, which means that
wholesalers and retail merchants give out goods with nothing but charge
accounts on their books to show for it. These accounts are merely the
records of credit which has been extended to customers. But in many
transactions something more than a book record is desired, in which case
the person giving the credit may ask for a “promissory note”. This is a
written promise to pay a designated sum either on demand or at a
definite date. Bank checks are also instruments of credit; so are drafts
and bills of exchange. Anything that expresses or implies a promise to
pay a sum of money is an evidence of credit.
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THE RELATION OF MONEY AND PRICES
The general relation between the amount of money in
circulation and the course of prices is shown by the
two statistical diagrams on the other side of this
page.
It will be noticed that per capita circulation began
to decline in 1921. Prices also commenced to fall
during that year, and if the table of prices were
extended to cover the last year or two it would show
the price-lines moving downward. The data for
continuing the lines of the lower diagram may be
found in the publications of the United States
Bureau of Labor Statistics.
MONEY IN CIRCULATION PER CAPITA (_Figures for first day of month_)
══════╤══════╤══════╤══════╤══════╤══════╤══════╤══════╤══════╤══════
1913│ 1914│ 1915│ 1916│ 1917│ 1918│ 1919│ 1920│ 1921│Month
──────┼──────┼──────┼──────┼──────┼──────┼──────┼──────┼──────┼──────
$34.72│$35.11│$35.50│$38.48│$43.00│$48.76│$55.70│$55.89│$59.12│Jan.
34.71│ 35.00│ 34.84│ 38.67│ 43.50│ 47.23│ 53.58│ 54.94│ 57.19│Feb.
34.56│ 35.04│ 34.55│ 38.54│ 44.26│ 48.37│ 53.76│ 56.16│ 57.73│Mar.
34.46│ 34.99│ 34.74│ 38.41│ 45.34│ 49.70│ 54.56│ 56.30│ 56.60│Apr.
34.56│ 35.20│ 34.78│ 38.28│ 45.61│ 50.37│ 54.64│ 56.44│ 56.31│May
34.54│ 35.19│ 35.07│ 38.36│ 45.49│ 49.63│ 54.29│ 57.42│ 55.43│June
34.64│ 34.53│ 35.59│ 39.23│ 46.57│ 50.86│ 54.28│ 57.18│ 53.42│July
34.44│ 33.96│ 35.33│ 39.00│ 46.53│ 52.44│ 54.40│ 57.43│ 53.00│Aug.
34.48│ 35.03│ 35.89│ 39.59│ 45.96│ 52.95│ 54.03│ 58.22│ 52.41│Sept.
34.80│ 37.15│ 36.88│ 40.62│ 46.10│ 54.47│ 54.58│ 58.95│ 52.45│Oct.
34.90│ 37.31│ 37.51│ 41.18│ 47.03│ 55.84│ 54.63│ 59.77│ 52.71│Nov.
35.03│ 36.40│ 38.04│ 41.73│ 48.50│ 56.23│ 55.65│ 59.41│ │Dec.
──────┼──────┼──────┼──────┼──────┼──────┼──────┼──────┼──────┼──────
34.65│ 35.41│ 35.73│ 39.34│ 45.66│ 51.40│ 54.51│ 57.34│ .....│Average
34.62│ 35.32│ 35.51│ 39.12│ 45.40│ 50.96│ 54.41│ 57.15│ 55.12│11
│ │ │ │ │ │ │ │ │mos.
──────┴──────┴──────┴──────┴──────┴──────┴──────┴──────┴──────┴──────
COURSE OF WHOLESALE AND RETAIL PRICES[207] IN THE UNITED STATES
JANUARY, 1913, TO MAY, 1920
[Average Prices, 1913 = 100]
------------------------------------------------------------------------
=The Relation of Credit to Money.=—A large part of the world’s business
is done on credit. If all debts had to be paid tomorrow, there would not
be enough money in the world to pay one cent on the dollar. But all
debts do not fall due at once, and a huge credit system is able to stand
with comparative safety upon a relatively small amount of gold.
[Sidenote: There is a limit to the expansion of credit.] There is a
limit, however, to the expansion of credit and this limit is roughly
determined by the amount of gold available to be held as a reserve.
Hence it is that when the volume of gold increases, credit usually
expands also. With their reserves full to overflowing the banks are more
ready to lend money on notes, and the rate of discount goes down.
Conversely, as the volume of gold declines, credit usually contracts.
The rate of discount then goes up and business men find it harder to
borrow money upon commercial paper. In the one case we speak of an
inflation or expansion in money and credit; in the other we speak of a
contraction or deflation.
=Credit and Prices.=—The general level of prices depends upon the value
of money. The price of a thing is merely its value expressed in terms of
money. To say that prices have gone up is to say exactly the same thing
as that the value of money has gone down.[208] The general level of
prices, to put the matter in another way, is determined by the _demand_
for goods on the one hand and the _supply_ of goods on the other. The
demand for goods, however, is represented by the amount of gold currency
available plus the amount of credit which is built upon this gold. The
credit, as has been seen, bears a definite relation to the gold.
[Sidenote: How the general level of prices is determined.] Hence it can
fairly be said that the amount of gold is an index of demand for goods
or services. So, if the supply of goods remains approximately the same,
any large increase in the available amount of gold would send prices up;
and conversely, if the supply of goods is greatly increased, while the
available amount of gold remains approximately the same, prices would go
down.
[Sidenote: The quantity theory of money and prices.]
This is the so-called quantity theory of the relation between money,
credit, and prices and it holds good in a general way although it does
not work out as simply as it reads. The adjustment of supply and demand
sometimes takes place very slowly. The volume of credit which can be
built upon a given reserve of gold is not absolutely fixed, moreover; in
some circumstances it may be more extensive than in others. [Sidenote:
Defects of the quantity theory as shown by recent experience.] During
the World War, for example, credit ran away from the gold reserve in all
the European countries. Enormous amounts of paper money were issued with
very little gold in reserve to protect them. Due to reduced production,
the supply of ordinary goods sharply declined. A combination of these
two things, inflation of credit (_i. e._, potential demand for goods)
and decreased production, sent prices sky-high.[209] In the United
States credit was also inflated during the war and prices went up,
though not to the same extent as in Europe. Since 1920 the process of
“deflating” credit has been going on. This process of deflation is
guided by the federal reserve banks, which are able to contract the
volume of credit by charging higher rates for rediscount.
=The Advantages and Dangers of Credit.=—It is probable that at least
two-thirds of the buying and selling in the world is done on credit.
Nearly all large transactions are put through by the use of credit for
short or long terms. Credit affords many advantages to modern industry
and commerce; without it, indeed, our whole economic system would break
down. [Sidenote: Four functions which credit permits.] A few of these
advantages may be mentioned: (_a_) It economizes the use of gold and
silver, by doing away with the necessity of passing gold and silver coin
from hand to hand at every transaction. (_b_) It enables large payments
to be made at distant points without an actual shipment of metallic
money. (_c_) It permits men to engage in business operations beyond
their own means by borrowing capital and using it productively. (_d_) It
enables people to invest their savings (by depositing in savings banks,
lending money on mortgages, buying bonds or stocks, etc.) so as to
secure a profitable rate of interest without great risk.
[Sidenote: Credit may also harm.]
But there are also some disadvantages. The credit system often
encourages extravagance in that people are tempted to buy goods which
they eventually find it hard to pay for; it tends to encourage
speculation which frequently results in heavy losses; and it sometimes
enables promoters to obtain capital when there is little or no chance of
their being successful. By strict governmental supervision, however, the
advantages can be retained and most of the dangers eliminated.
=The Stock Exchange.=—A word should be said about the place where
instruments of credit are most commonly bought and sold, namely, the
stock exchange. As its name implies, this is a market in which men buy
and sell stocks, bonds, and other securities.[210] There is a stock
exchange in every large city. The buying and selling is done through
brokers, who are members of the exchange and who receive a small
commission for their work, this commission being paid by the persons for
whom they buy or sell. A broker, at your request, will buy or sell on
the exchange any security that is listed there. The amount of the
purchase may be paid in full, or, if the buyer desires, a partial
payment of five, ten, or twenty per cent may be made. [Sidenote: Trading
on margin.] This is called “buying on margin”. The current prices of all
securities are kept posted on the exchange; they go up and down from day
to day in keeping with market conditions. Shrewd investors try to buy
when prices are low and to sell when prices are high, but in this they
are not always successful. Many fortunes have been made—and lost—on the
stock exchange.
General References
F. W. TAUSSIG, _Principles of Economics_, Vol. I, pp. 227-235 (Coinage);
236-251 (Quantity of Money and Prices); 265-273 (Bimetallism); 348-359
(Banking Operations); 375-385 (The Banking System of the United States);
ISAAC LIPPINCOTT, _Economic Development of the United States_, pp.
550-580;
H. R. BURCH, _American Economic Life_, pp. 336-371;
W. A. SCOTT, _Money and Banking_, pp. 1-116;
W. S. JEVONS, _Money and the Mechanism of Exchange_, pp. 3-41;
MARSHALL, WRIGHT, and FIELD, _Materials for the Study of Elementary
Economics_, pp. 443-546;
C. J. BULLOCK, _Introduction to the Study of Economics_, pp. 224-246;
D. R. DEWEY, _Financial History of the United States_, especially pp.
383-413;
EVERETT KIMBALL, _National Government of the United States_, pp.
460-479;
HORACE WHITE, _Money and Banking_ (5th edition), _passim_;
F. A. FETTER, _Modern Economic Problems_, pp. 31-163.
Group Problems
=1. How money and credit are related to prices.= The meaning of
“prices”. The quantity theory of money. Relation of money to credit.
Reserves for paper money. Bank reserves. Discounting and rediscounting.
How inflation of money and credit affects prices. Index numbers.
American experience during the years 1914-1921. =References=: F. W.
TAUSSIG, _Principles of Economics_, Vol. I, pp. 427-445; C. J. BULLOCK,
_Introduction to the Study of Economics_, pp. 242-278; IRVING FISHER,
_The Purchasing Power of Money_, pp. 8-32; _Ibid._, _Stabilizing the
Dollar_, pp. 1-12; J. A. HOBSON, _Gold, Prices, and Wages_, _passim_;
DAVID KINLEY, _Money_, pp. 199-223.
=2. The American banking system=: how it is organized and how it
functions. D. R. DEWEY, _Financial History of the United States_, pp.
320-328; 383-390; F. W. TAUSSIG, _Principles of Economics_, Vol. I, pp.
375-399; C. F. DUNBAR, _Theory and History of Banking_, pp. 132-153; C.
A. CONANT, _A History of Modern Banks of Issue_, pp. 396-447; E. W.
KEMMERER, _The A, B, C of the Federal Reserve System_, pp. 28-65; H. P.
WILLIS, _The Federal Reserve System_, _passim_; A. B. HEPBURN, _History
of the Currency and Coinage of the United States_, pp. 411-418; 511-544.
=3. The controversy over free silver and its lessons for the future.= D.
R. DEWEY, _Financial History of the United States_, pp. 101-104;
210-212; 403-413; 436-437; 468; F. W. TAUSSIG, _Principles of
Economics_, Vol. I, pp. 265-273; J. L. LAUGHLIN, _History of Bimetallism
in the United States_, especially pp. 266-280.
Short Studies
1. =The early history of money.= W. S. JEVONS, _Money and the Mechanism
of Exchange_, pp. 19-30; DAVID KINLEY, _Money_, pp. 14-26.
2. =The quantity theory of money.= F. W. TAUSSIG, _Principles of
Economics_, Vol. I, pp. 236-251.
3. =American and foreign banking systems compared.= E. R. A. SELIGMAN,
_Principles of Economics_, pp. 524-550; or F. W. TAUSSIG, _Principles of
Economics_, Vol. I, pp. 360-385.
4. =Can the dollar be stabilized?= MARSHALL, WRIGHT, and FIELD,
_Materials for the Study of Elementary Economics_, pp. 474-483; IRVING
FISHER, _Stabilizing the Dollar_, especially pp. 12-30.
5. =The free-silver campaign of 1896.= C. A. BEARD, _Contemporary
American History_, pp. 164-198; D. R. DEWEY, _National Problems_, pp.
220-237; 314-328.
6. =Banking operations and accounts.= C. F. DUNBAR, _History and Theory
of Banking_, pp. 20-38.
7. =American institutions for saving and investment.= F. A. FETTER,
_Modern Economic Problems_, pp. 146-166.
8. =Financial panics.= F. W. TAUSSIG, _Principles of Economics_, Vol. I,
pp. 400-426.
9. =The high cost of living.= J. H. HAMMOND and J. W. JENKS, _Great
American Issues_, pp. 143-159.
10. =Economic crises.= T. N. CARVER, _Principles of National Economy_,
pp. 427-442.
Questions
1. Are the qualities of money given in this book in the order of their
importance? If not, rearrange them so. Can you think of any other
essential qualities? What objections would there be to the use of
platinum as money? Pearls? Porcelain?
2. Gold dollars are not coined in the United States at all. How is it,
then, that the gold dollar can be the legal standard of value?
3. Name all the different kinds of money that are circulated in the
United States (including paper money) and tell when the issue of each
kind was first authorized. Examine the money you have with you. Tell
where each coin was minted. In the case of bills what is the security
behind each? Can you detect counterfeit bills? How?
4. Why was the action of Congress in demonetizing silver called “the
crime of 1873”?
5. At the Democratic National Convention of 1890 Mr. Bryan said: “You
shall not crucify mankind upon a cross of gold.” Explain in full what he
meant. Was there any good reason for believing that the free coinage of
silver at a ratio of sixteen to one would (_a_) increase prices; (_b_)
give relief to the debtor class; (_c_) benefit the wage earner?
6. Explain the process by which, under a dual system of coinage, the
metal which is over-valued at the mint will drive the other out of
circulation. Is it correct to say that “cheap money drives out dear
money”?
7. If you were engaged in business as a manufacturer, name all the
different dealings that you might have with a bank.
8. Explain what is meant by each of the following terms: demand note;
endorser; trustee; commercial paper; rate of discount; rediscounting;
collateral; deflation; coupon bond; preferred stock; broker; buying
stock on margin.
9. Show how the volume of credit helps to determine prices and how the
volume of credit is related to the amount of gold coin in hand. Why does
the quantity theory of money not work out with mathematical accuracy in
practice?
10. Does the argument in McCulloch _vs._ Maryland impress you as
logical? Does the decision mean that officials of national banks and of
federal reserve banks are exempt from state taxes? Does it mean that
when a national bank occupies a leased building the landlord pays no
taxes to the city?
Topics for Debate
1. All banking institutions should be brought under the supervision of
the federal government.
2. A “compensated” dollar (adjusted to the general level of prices)
should be established as a measure of deferred payments.
3. The national and state governments should guarantee depositors
against loss in all banks chartered by the nation and the states,
respectively.
-----
Footnote 178:
The employer, in fact, was often a corporation with neither body nor
soul. The factories were in charge of managers whose function was to
earn profits, not to look after the well-being of the employees.
Footnote 179:
In America the unions also serve as schools of citizenship. They
gather together into their membership men and women of all races and
creeds, and they encourage their members to become American citizens.
Footnote 180:
The labor union movement began in England because it was there that
the Industrial Revolution first brought in the factory system. At the
outset the formation of unions was bitterly opposed by the employers
and laws were enacted declaring such organizations to be illegal. In
the closing years of the eighteenth century any English worker who
joined an organization, in order to secure better wages or fewer hours
of labor, was liable to be arrested and punished by the courts. In due
course the labor organization movement spread to America, where also
it encountered strong opposition during the first half of the
nineteenth century. Attempts to secure better wages by forming labor
associations were held to be conspiracies in restraint of trade and
those who openly took part in the organization movement were
frequently imprisoned. After 1830, however, the opposition began to
grow less intense and by 1870 it had become generally recognized that
labor organizations were here to stay. In one state after another they
began to receive legal recognition and today the right of the workers
to organize for the promotion of their own interests is not denied in
any part of the country.
Footnote 181:
Most writers use the term “trade union” to include only such labor
organizations as are composed of men and women who work in the same
trade or occupation; but some employ the term to include all labor
organizations whose object is collective action in the interest of
their members.
Footnote 182:
Although this program does not contain anything that savors of
violence, or of arbitrary control of industry by the workers, or of
dictatorial methods towards the public it sometimes happens that
individual labor organizations or their leaders are guilty of these
things. While professing disapproval of violence, the labor leaders
have on occasions (though not as a rule) tolerated it. Labor leaders,
moreover, in some cases have exacted money from employers under threat
of calling men off their jobs; the Brindell case in New York City is a
recent illustration. On some notable occasions labor leaders have been
convicted and sent to jail for resorting to organized terrorism
against employers. All this, however, does not condemn the program of
labor organizations as a whole. No body of men, particularly when it
numbers several million members, can in fairness be judged by the
wrongful acts of a few.
Footnote 183:
It should be borne in mind that not everyone who desires to work at a
particular trade is entitled to membership in the trade union. He must
apply for admission to membership and the initiation fee for
membership is often as high as a hundred dollars or more. Moreover, he
must satisfy the union that he is properly skilled in the trade, if
the trade requires skill. Some unions, commonly called “open unions,”
take in practically all who apply; but these unions exist, for the
most part, in unskilled trades only.
Footnote 184:
In New Zealand, for example. For a time it was looked upon as a great
success in that country, but in recent years it has not prevented
numerous strikes.
Footnote 185:
This was the sequel to a strike on the part of the Kansas coal miners,
which threatened to leave the people without fuel for the winter. When
the strikers refused to return to work a call was sent out for
volunteers and men of all occupations came forward to work in the
mines. When the emergency was past the legislature decided that the
rights of the public ought to be protected in the future against both
employers and workmen.
Footnote 186:
These include all industries affecting food, clothing, fuel, and
transportation.
Footnote 187:
“The children were kept working for fourteen, and even sixteen, hours
a day; they were beaten for the slightest mistake or offence; and
sometimes they were tortured by the overseers, who would tie them to a
beam close over the whirling machines by way of teaching them to hold
their feet up, or would rivet irons on their ankles and hips to teach
them not to try to run away. Locked in the factory while they worked,
and in neighboring barracks while they slept, these pitiful martyrs
were as absolutely abandoned by their kind as though they had been
adult convicts on the way to Botany Bay, or negro slaves on the middle
passage.” G. H. PERRIS, _The Industrial History of Modern England_, p.
207.
Footnote 188:
Congress has established a Bureau of Child Welfare in the Department
of Labor with the duty of encouraging the enactment of laws to protect
children.
Footnote 189:
The Supreme Court has decided that this action also is
unconstitutional.
Footnote 190:
ROBINSON and BEARD, _Outlines of European History_, II, 640.
Footnote 191:
Many sorts of merchandise have been used as money at one time or
another. In early times cattle often served as the standard of value.
This was undoubtedly the case among our Indo-European ancestors, as is
shown by the survival of certain words in the English language at the
present time. The word “pecuniary,” for example, comes from the Latin
“pecunia,” meaning money, which is in turn from “pecus,” cattle. The
word “fee” is merely a rendition of the old German word “Vieh,” which
also means cattle.
Footnote 192:
The Chinese use copper money, which they call “cash.” The coins have a
hole in the center so that they can be carried on a string like beads.
Footnote 193:
That was what had to be done in the old days before gold and silver
were stamped into coins of known weight and fineness. You remember the
Scriptural story of the patriarch Abraham’s weighing out the four
hundred shekels of silver to pay the sons of Heth for Sarah’s grave.
If not, read it in Genesis, xxiii, 2-19.
Footnote 194:
The weight of the gold dollar, as fixed by law, is 23.2 grains of pure
gold.
Footnote 195:
Anyone may take gold to these mints and have it coined. Pure gold
would be too soft for use as money, however; so an alloy of silver is
mixed with it. The mixed metals are then heated and rolled into
strips. These strips are next put into a stamping machine which forms
them into so many little gold cakes, ready to be placed in another
machine which stamps an impression upon them. In the case of gold and
silver coins the edges are “milled” to prevent their being clipped or
scraped by dishonest people. In the United States this is in the form
of a raised and serrated edge; in European countries an inscription is
often printed on the edges of the coins. The German twenty-mark piece
before the war had the legend, “Gott mit uns,” in this form. The
silver, nickel, and copper for American currency is bought by the mint
and made into coins at a profit. This profit is called seigniorage and
it is sufficient to make all the mints self-supporting. The amount of
metal in a nickel, for instance, costs only a fraction of five cents.
When coins are lost or destroyed—by shipwreck, fire, etc.—the
government is just so much to the good, and a great many coins are
permanently lost or destroyed every year.
Footnote 196:
With a dual system of coinage the ratio at the mint must be exactly
that of the open market, otherwise the metal which the mint overvalues
is the only one which will come in to be coined. If mine-owners who
produce silver, for example, can get more gold in exchange for it in
the open market than they can get dollars for it at the mint, they
will naturally exchange it in the open market. But it is difficult to
keep the legal ratio in exact accord with the market value because the
latter fluctuates somewhat from year to year.
Footnote 197:
In this same year a severe commercial panic took place and the action
of the government in demonetizing silver was blamed for it. Hence the
frequent reference in later years to “the crime of 1873.”
Footnote 198:
Provision for the coinage of silver on a limited scale was made by the
Bland Act (1878) and the Sherman Act (1890). These acts merely
provided that the Treasury should buy so much silver each year and
coin it, a very different thing from free coinage.
Footnote 199:
Curiously enough there was another financial panic in 1893; but this
had nothing whatever to do with the stoppage of silver coining.
Footnote 200:
The paper money is made at the Bureau of Engraving in Washington, not
at the mints. Every working day in the year this Bureau turns out a
million dollars or more in notes. A special kind of paper, made by a
secret process, is used, and in the manufacture of this paper small
strands of red silk are imbedded in the fabric. The notes are printed
from mechanical copies of engraved plates, the originals of which are
made by hand. It takes several expert engravers a whole year or more
to make one of these originals, with its portrait, seal, symbols, and
myriad of fine lines. All these precautions are taken to prevent
counterfeiting. On its way through the presses the bills are counted
and checked many times to make sure that none go astray or are
pocketed by employees. So carefully is this done that only once in the
last twenty years has a single bill been unaccounted for. When a paper
note is permanently lost or destroyed after being issued Uncle Sam is
very much the gainer, for it costs him, on the average, only about one
cent to print a dollar bill. If the bill is only torn or partly
destroyed, the government will redeem it. Full face value is given if
at least three-fifths of the original bill is presented, or half the
face value if two-fifths is handed in. If less than two-fifths of the
bill is presented, it will not be redeemed except by proving the
circumstances under which the rest of the bill was destroyed. When
bills get dirty or worn the banks send them back to the Treasury. Some
years ago the practice was to burn them in the furnace; but there was
a rumor that charred pieces of the bills were in the habit of flying
off through the chimney to be found by people who presented them for
redemption. Now the worn money is put into a macerator or chewing
machine, which masticates them to a pulp at the rate of about a
million dollars a mouthful.
Footnote 201:
The German paper mark, for example, depreciated to less than
one-fiftieth of its face value in gold; the Austrian crown depreciated
even more. Even more striking has been the depreciation of the Russian
paper rouble which has fallen more than a thousand-fold.
Footnote 202:
Money which, according to law, must be accepted in payment of debts,
is called legal tender. Gold coin, silver dollars, and certain notes
are legal tender up to any amount. Half dollars, quarters, and dimes
must be accepted in payment up to the amount of ten dollars. Nickels
and pennies are legal tender to the amount of twenty-five cents only.
Footnote 203:
The establishment of this second bank led to the raising of a very
important constitutional question. The constitution, as has been said,
contains not a word about banks. Hence the power to establish banks
might be assumed to remain entirely with the states in view of the
rule that powers not delegated to the nation by the constitution, nor
prohibited by it to the states, are reserved to the states
respectively, or to the people. Congress having gone ahead, however,
and established a bank, the State of Maryland proceeded to levy a tax
on the bank’s paper money. This tax the cashier of the Baltimore
branch of the bank, McCulloch, refused to pay, whereupon he was held
liable by the courts of Maryland and appealed to the Supreme Court.
The latter tribunal went into the whole issue thoroughly and rendered
one of the most important legal decisions ever given in this country.
The decision in McCulloch _vs._ Maryland was that Congress, having
been given by the constitution the express power to collect taxes, to
borrow money, and “to make all laws which shall be necessary and
proper for carrying into execution the foregoing powers,” was thereby
vested with implied authority to establish banks as a means of
facilitating the collection of taxes or the borrowing of money. This
being so, the Supreme Court decided, no state can be permitted to
interfere with an instrumentality through which the national
government is legally carrying on its work. They must not interfere by
taxation or otherwise. “The power to tax involves the power to
destroy,” declared Chief Justice Marshall in rendering this decision.
If the states could tax one agency employed by the national government
in the execution of its powers, the chief justice explained, they
could tax every other one. They could tax the post office, the custom
houses, the forts, the ships of war. By taxing these things heavily
enough they could cripple the national government and eventually drive
it out of existence altogether. The court was unanimous in affirming
that Congress had the right to establish banks and that with such
action no state could interfere.
Footnote 204:
Trust companies were established to act as trustees or guardians of
funds belonging to widows, orphans, and others who could not look out
for their own investments. Then they began the practice of accepting
deposits from others and paying interest on these deposits, whereas
national banks and most of the regular state banks usually paid no
interest to their depositors. Gradually the trust companies became
banks in every sense of the term, and they have gradually increased in
number during recent years. As a rule they can do a wider range of
business than is permitted to national or state banks.
Footnote 205:
The locations of these twelve federal reserve banks are as follows:
Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago,
St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.
Footnote 206:
A further addition to the banking facilities of the United States was
made in 1916, when Congress inaugurated the federal farm loan bank
system. This is under the control of a federal farm loan board
composed of the Secretary of the Treasury and four other persons
appointed by the President. Two systems of lending money on mortgages
are provided under the supervision of this board, one working through
twelve farm land banks situated in different parts of the country and
the other through joint stock land banks. Provision is also made for
the forming of farm loan associations composed of farmers who wish to
borrow money on the security of their lands. See also p. 348.
Footnote 207:
Retail prices represent prices of the principal articles of Food;
wholesale prices include articles of all kinds.
Figures from the U.S. Bureau of Labor Statistics.
Footnote 208:
For this reason it is often said that gold is not a good measure of
deferred payments. For example, if somebody were to give you a note
for a thousand dollars, payable five years from now in gold coin, the
amount of goods which you will be able to buy with the proceeds of
this note when it is paid may be much greater, or much less, than what
you could buy today. Thus you would get your money back, but it would
not have the same purchasing power, and purchasing power is what
counts. To determine the actual purchasing power of gold at different
dates, figures known as “index numbers” are compiled by various
economic organizations. Index numbers are compiled in this way: Take a
certain amount of various things which are in common use, say a barrel
of flour, ten pounds of butter, a bushel of potatoes, so much steel,
leather, lumber, and other commodities,—make the list long enough to
cover the general range of prices. Add together the current prices of
these things today and you have an index number. Ten years from now,
if you take exactly the same amounts of exactly the same commodities
and add together the prices, you will have another index number. By
comparing them you can say that the purchasing power of money has gone
up or gone down, as the case may be. The index number more than
doubled during the years 1914 to 1919; that is to say, the purchasing
power of money was cut in two.
Footnote 209:
People are in the habit of thinking that the high cost of living is
due largely to “profiteering” and monopoly. To some extent, no doubt,
this is true. But the three most important factors in the high cost of
living are: (_a_) the inflation of money and credit; (_b_) decreased
production; and (_c_) heavy taxes. It is these things that give the
profiteers and monopolists their opportunity.
Footnote 210:
Bonds are promises to pay a certain principal sum at the expiry of a
certain term of years. They are issued by governments and by business
corporations. They bear interest annually or semi-annually. In the
case of registered bonds the name of the bondholder is inscribed on
the books of the government or company and a check for the interest is
sent to him. Coupon bonds, on the other hand, are payable to bearer
and small tickets or coupons must be cut off by the holder and
presented on each interest date. Stocks are merely shares in a
business corporation and do not carry an obligation to pay a definite
sum at any given time. There are two kinds of stock, preferred and
common. The preferred stock is entitled to a stated dividend; the
common stock takes what is left of the net profits if there are any.
Bonds, as a rule, yield a smaller return than preferred stock, because
the security is better. The man who holds common stock takes the
greatest risk of all and for this reason expects the largest rate of
dividend. When you invest money the income which you get from it is
proportioned to the risk which you take. An absolutely safe investment
like government bonds brings in only four or five per cent annually;
the preferred stock of railroads or industrial corporations may yield
six or seven per cent; the common stock of some companies pays as high
as eight or ten per cent. When you find that an investment promises a
large income you may be sure that the risk is proportionately large.
All sorts of “get rich quick” schemes are placed before the public by
promoters who promise high rates on “safe” investments. Such
investments are not safe; if they were, the banks and large
capitalists would put their money into them. To protect the public
from these frauds, some states have passed “blue-sky laws,” which
require that every stock-selling concern shall be investigated by the
state authorities before it is allowed to take money from the people.