THE SUPERSTRUCTURE OF WEALTH
In our loose and indefinite way--as a result, maybe, of our defective
vision--we talk of a vast superstructure of credit erected on a tiny
gold basis. We gaze upon this mighty fabric and shake our heads
ominously. As we gaze we see the structure grow, extending upwards and
outwards, enlarging itself by some invisible and mysterious agency, and
when we cast our gaze to the foundations we see that it looks like a
towering edifice perched insecurely on a small, uneven piece of rock.
No wonder we have feared that when storms break the whole crazy thing
will come crashing down, scattering ruin and devastation in a vast
area around it. It seems to us like a structure built by a madman, in
defiance of the laws of architecture, and that there can be but one
end, sooner or later, to so fantastic a fabric.
So have we been told time and again that our superstructure of credit
has been built only for fair weather and not for foul.
Well, it has withstood much foul weather since the building of it
commenced generations ago. Storms have beaten against it, and to the
naked eye it has hardly swerved. The storms have made no rents in its
walls, and it still stands, growing visibly, pointing its rising apex
to the skies, and millions of people to this day--stolid, unimaginative
Britishers, maybe--enter within its portals fearlessly and without
suspicion of their peril. They heed not those who warn them that the
whole thing may fall about their heads at any moment, that it needs but
an earthquake, and all will be over in the twinkling of an eye.
“Foolish people!” these architectural guardians of safety cry. “We have
warned you, and you have heeded us not. Let your fate be upon your own
heads. Let him who is guided by the feeble, confusing light of his own
folly, suffer the doom of his folly. We, at least, have done our duty,
bravely, like voices crying unto the lost multitude, drunk with its
ignorance and conceit.”
Well! well! Perhaps, after all, this superstructure may have no
counterpart in reality. It may be but a fantastic dream, or nightmare,
after all, yet seemingly so vivid to our fearsomeness that we find
it almost impossible to believe that it can be but a creation of the
imagination.
Would it not be more accurate to say that we have erected in our
midst a vast superstructure of wealth? And cannot we say that this
superstructure is based, not upon a slight foundation of gold, but
upon the solid wealth of the nation, the empire, the world? If it can
be proved to our nervous eyes that this is the real superstructure,
after all, and not the one we have seen in disturbing visions, perhaps
we shall feel more secure against and less apprehensive of the force of
storms.
Let us look more closely at that balance sheet, for then we shall come
into actual physical contact with the composition of this awe-striking
structure. We will analyse the various ingredients which we shall
describe as the assets of a bank.
First of all, we see that the cash in hand and at the Bank of England
is nearly £6,000,000. This is legal tender, that which the law of the
land has enacted shall be absolute, permanent wealth, not subject to
the vagaries of fashion or sentiment.
Money at call and short notice is nearly as much--over five and a
half millions. This forms a portion of the loan deposits, and being
callable by the banks practically on demand, they show that a portion
of the deposits payable on demand can also be recalled on demand. The
equivalent of these loans, or deposits, the bank possesses in the
shape of wealth not in the absolute category of legal tender. They are
securities of the highest class, securities representing the credit or
wealth of the nation. While these securities are lying in the safes of
the banks they have been converted into temporary currency, and have
been fulfilling all the purposes of money in circulation. They have
been resurrected from dead into live capital. A similar process could
be gone through by selling the securities in the market. The owner
could convert them for his purposes into liquid capital. But he sells
them temporarily to the bank instead of permanently in the market,
and when he has employed his liquid capital temporarily, he repays
it to the bank. He rechanges it, as it were, into dead or illiquid
capital, until the moment comes when he desires to reconvert it into
live capital, or currency. The bank possesses the wealth in bonds; he
possesses the wealth in currency, and the bank’s gain consists of the
interest on the accommodation, and his gain in the profit accruing from
the active employment of his capital.
There is no more trust than a butcher has when he sells a leg of
mutton for 4_s._ 6_d._ on the nail. His dead leg of mutton he converts
into live legal tender currency. If he never sold his mutton he would
starve. If the housewife’s husband earned no more salary wherewith to
exchange it for future legs of mutton they would starve.
If the banker lent the borrower money without security, it would be
more truly credit, for he would have no wealth that was the equivalent
of the loan.
If he, at certain seasons, is compelled to call in these loans to
bill-brokers and others and cannot renew them--quite a frequent,
familiar operation--those who want to convert their dead wealth into
currency go to the Bank of England. Machinery similar to that employed
in the joint stock banks is put into operation there. The Bank takes in
the securities, debits itself with the amount it empowers the borrower
to withdraw in currency, and credits itself, not with words, but with
valuable bonds. It insists that these bonds shall be of the highest
value, and this insistence is inconsistent with the idea of what the
ordinary man regards as giving credit. Otherwise, there would be
greater trust in promises than in securities.
The objection borrowers have in going to the Bank of England is, they
have to pay more for the services rendered. In the phraseology of
Lombard Street, they have to pay higher interest for their loans, and
being ordinary mortals, not too full of the milk of self-sacrifice,
they prefer to go where they can deal more cheaply. This is precisely
the motive that sends the housewife to the cheap butcher. She might get
her leg of mutton a farthing a pound cheaper than if she went to the
dear, extortionate butcher.
And there are some people in the City who have whispered that the
Bank of England is extortionate. And those who have listened to them
have made grimaces not altogether unlike expressions of sympathy and
agreement.
Still keeping our attention on the balance sheet, and turning it for a
moment from the stern, unbending business men at the Bank of England,
we find that the legal tender and the call loans total over eleven
millions and a half, and the deposits are thirty-seven millions and a
half.
Next, investments exceed £6,000,000. The balance sheet says these
investments consist of Consols and other securities of, or guaranteed
by, the British Government, Indian, Colonial, and other securities.
I do not think any critics, not even financial journalists--for do not
the public ask their advice what to invest in?--will deny that here we
have the cream of investments. We could not, not the brainiest critic
of us all, imagine anything creamier. Why, these are the creamiest
things that make a hungry City editor’s mouth water. I dare say the
most humble of them would confess that if a kind-hearted employer would
only give him a few thousand pounds’ worth, he would not waste his
intellectual resources in writing another line of financial criticism.
He would be so content with this wealth that he could till his
death-moment repose in absolute idleness and enjoy contemplation of the
continued labours of less fortunate City journalists.
Here, then, is an aggregation of approximately £18,000,000 of
first-class wealth, or nearly 50 per cent. of the total pure and loan
deposits.
Bills discounted approach £7,000,000. I need not spend much labour in
analysing and describing what bills of discount are. Those who wish a
detailed description must consult other works dealing more fully with
elementals. It is sufficient to say here that these bills represent
also the best class of wealth, distinct, of course, from gilt-edged
securities, but wealth, nevertheless, of the highest character. They
represent produce, raw materials, manufactures of a vast and varied
character, and when the bank has in its possession these bills which it
has discounted, it practically has the varied wealth they represent.
Cheques are to be regarded as our national currency, bills of
exchange are to be regarded as international currency. Cheques are
wealth converted into national currency. When a bank discounts bills
it enables them to perform also all the functions of our national
currency. Until they are so discounted their functions are limited to
their international purposes.
This is one of the purposes served in re-discounting them with the
joint stock banks.
The great bill-broking firms and discount houses discount them on
behalf of customers and re-discount them with banks. It is in the
re-discounting that they make their profits and continue their
existence. They cannot tie up their capital in these investments.
They must re-discount them in order to liquefy them and restore their
capital. And all the vast wealth behind the bills thereby becomes
liquid capital that can continue fructifying instead of becoming
stagnant.
Now this wealth, I say, the banks indirectly possess. It is theirs.
They buy it. And if they buy it and it comes into their possession and
they exchange money for it, as merchants and tradesmen do, how do they
grant credit? When the wealth is eventually sold the proceeds go into
the coffers of the banks, and the banks hand over the promises to pay.
But the promises to pay are more tangible than the promises of the
schemer who flits from suburb to suburb and town to town living on what
is called credit.
Then there is the other composite wealth amounting to over £16,000,000.
These are advances to tradesmen, merchants, and other persons well
known to bank managers, who deposit some kind of wealth as security.
They are loans to all sorts of people who have pledged all sorts of
wealth with banks. This wealth, in other words, they have liquefied and
the banks have been paid consideration for liquefying it. People have
parted with the wealth, sold it, if you like, and it has been passed
over into the possession of the banks.
Adding these to the other loans we make a total of nearly £22,000,000,
which compose that portion of the deposits which we call loan deposits.
If we add the bills discounted as another form of loan the total is
raised to £28,700,000 out of a total of £37,600,000 of deposits. This
leaves a residue of £9,000,000 of pure deposits against which the bank
holds £6,000,000 of legal tender, or over 60 per cent. If we add the
£6,000,000 of investments, the total considerably exceeds the aggregate
of the pure deposits.
Ought the position to be made clearer to the public, to the
unsophisticated man in the street, by segregating the deposits and
showing their component elements? What is the objection? Will some
great bank start reform in this direction if it be earnestly and
sincerely desired to show the public exactly what the position of
affairs is; if it be sincerely desired to surround the groping man
in the street with a bright light? Why not extend reform here after
commencing with the segregation of a bank’s legal tender reserve?
I can imagine, however, that the refusal would be strenuous.
Are the pure deposits credit? If they are not credit, entirely distinct
from the loan deposits, but consist of money in some form or other
lodged with the banks, they cannot form a part of what is described
as the credit superstructure of the banks. The so-called credit
superstructure must be composed, then, of the loan deposits which are
at one and the same time loans by the bank, and loans to the bank. If
they are other people’s liabilities and at the same time the bank’s
liabilities, whose credit are they? The borrower trusts the bank and
the bank trusts the borrower; whose credit comes first? Who is the
first creator of the credit? It is as difficult to answer as the
question which came into the world first, the egg or the chicken?
No matter how we answer the conundrum, it seems to me indisputable that
what we gaze upon is a superstructure of wealth. And it is indisputable
that the banks furnish machinery vital to the progress of humanity. And
it seems to me vital to the interests of national well-being that every
resource should be ready to prevent the collapse of any sound banking
establishment.