A Phase of the Money Problem Bankers Dare Not Discuss

BY ALBERT GRIFFIN Author of “The Keynote: Substitute Honest Money for Fictitious Credit,” “The Hocus Pocus Money Boon”

BECAUSE of limited space, this paper contains little more than principles, facts and conclusions, without argument—and the subject is considered from the practical man’s standpoint rather than that of the theorizer. The one monetary proposition to which all schools agree is that “money is the medium of exchange.” To be used as such is its one and only universally admitted purpose—and no other characteristic is essential. No matter of what it consists, whatever is willingly used by people as their medium of exchange is money, and should be so recognized by everyone—but unfortunately, the greater part of it is not.

There is honest money and dishonest money. None is strictly honest that is not as good as the best—for exchange purposes. Ideal money has the same exchange value at all times, and everywhere—and the best money is that which is nearest the ideal. Without discussing what it should consist of, I hold that the material ought to be more substantial than a banker’s “confidence” that he will always be able to pay the most of his debts with mere debits and credits. As business cannot be done without money, and as each person needs enough of it to enable him to exchange his services and products for the services and products of others, it goes without saying that there ought to be enough to supply each and all liberally—and that no man, or set of men, should be allowed to affect materially this supply for selfish purposes.

To most people, the soundness of the “quantitative theory” of money is self-evident. Concisely stated, it is that, whenever the quantity of money in circulation increases faster than the exchanges to be made with it, commodities tend to rise in price—and vice versa—which is but the application to money of the inexorable law of supply and demand. While the soundness of this theory is generally admitted, every business man knows that sometimes facts seem to disprove it. In 1890, when the failure of Baring Brothers so nearly precipitated a panic throughout this country, the quantity of visible money in circulation was increasing; and the same fact was true in April, 1893, when the proceedings agreed upon at the conference between Secretary Carlisle and prominent New York bankers precipitated a fearful panic on the next business day—and yet, in both of these cases, the apparent conflict resulted from the suppression of a part of the facts.

Now for the explanation: In comparing the size or weight of two masses the whole of each must be contrasted with the whole of the other, and in comparing two actively operating forces all of the factors of each must be considered together, without regard to names. But, strange to say, three-fourths of what is being used and paid for as money, and which really does the work of money, and does nothing else, is denied the right of being called money by some doctrinaires—and also by bankers, when talking to the public. Although between May 1 and October 1, 1903, the volume of metallic and paper money actually increased, this something which had been doing the work of money was contracted $500,000,000 in New York City alone—but as it was not called money its relation to the results was not generally recognized.

Deposit banks are little more than clearing-houses; and the laws permit their owners to pay nine-tenths of their debts with money literally made by themselves—out of nothing—which they coolly call “liquid capital,” or “bank credit,” although it is neither capital nor credit. The real nature and far-reaching effects of this modern practice are not clearly understood by one in twenty even of the bankers themselves—and none of them dares discuss it publicly. The most of those that do not fully understand it feel that there is something wrong about it; and those that do understand it know that, if people once begin to study “the system,” they will demand radical changes in it—or its entire abolition.

Government reports for 1904 put the volume of metallic and paper money then in existence at $2,829,273,316—or $31.16 per capita; and the Comptroller’s report shows that the banks whose reports he consolidated were earning interest on more than $6,278,000,000 of money that had no existence—or $76.47 per capita. This stuff is what, for a dozen years, I have called “hocus pocus money.” It consists of nothing but, in the language of Professor Sidgwick, rows of figures on bank books; and yet it affects business, prices and values, exactly as that amount of real money would. Invisible, intangible and mythical, it is nevertheless very real—filling the land with prosperity, joy and song today, and disaster, tears and despair tomorrow, it is the most potent economic power ever known. Business men gladly accept it as money. The courts treat it as money. And, although, for technical reasons, most political economists do not do so, I insist that, to all intents and purposes, it is money, and should be so recognized. Indeed, until this shall be done, it will be impossible to frame a monetary system that will always work equitably and beneficently.

Between 1896 and 1904, as officially reported, the increase in the volume of visible money was, in millions, $1,322,000,000—or $9.75 per capita; but the quantity of hocus pocus money in use increased $5,275,000,000—or $43.42 per capita—the quantity of both kinds then actually in use being $107.63 per capita. This shows that four-fifths of the increase in the medium of exchange consists merely of the right given favored people to draw checks on banks to pay which no real money has been deposited.

In 1888, 5,866 bank reports showed that they were then collecting interest on $3.41 for each dollar of their capital available for “commercial loans”; but last year’s reports of the 13,772 national, state and private banks and loan and trust companies show that their aggregate capital (including surplus, undivided profits and bank-notes) amounted to $2,927,000,000. This was everything their owners had put into their business, and of it $2,743,000,000 had been paid out for bonds, stocks, real estate, real estate mortgages, etc., leaving only $183,000,000 available for “commercial loans.” And yet their “loans and discounts” aggregated $6,431,000,000, or $35.07 of “commercial loans” for every dollar of their not otherwise invested capital. If this is not “getting something for nothing” on a stupendous scale, I should like to know what would be so considered.

Remember, that these figures include all of the reported banks. Individual cases are incomparably worse. On December 2, 1899, the National City Bank, of New York City (the principal of the several hundred Standard Oil banks), had $6,709,216 of capital, surplus, etc.; its investments of capital aggregated $27,270,738; its available capital was therefore $20,561,519 less than nothing; and yet it was then actually earning interest on $60,906,034 of “loans and discounts,” making $81,467,553 of hocus pocus money. And remember further that, to make people more dependent on banks for this kind of money with which to do business, the volume of real money is kept as small as possible. This is the real reason why bankers engineered the contraction of the currency after the war and the demonetization of silver. But for them no class of business men would have consented to either of those economic crimes.

Here are a few more important facts:

1. Interest has to be paid to the banks on every dollar of hocus pocus money as long as it lives.

2. It lives, on an average, only about two months.

3. Every payment of a note or draft extinguishes the hocus pocus money involved in that transaction and contracts its volume that much, making it the most constantly and wildly fluctuating money ever known.

4. Whenever, for any reason, bankers fear a demand for an unusual amount of real money they make fewer “loans” and “call in” some that are outstanding, which destroys that part of the “liquid capital” that was in actual use as a medium of exchange and cramps the money market.

5. Bankers sometimes do these things unnecessarily, for the purpose of making a “bear market”; but it is also true that business conditions sometimes compel them to do so, as was the case in 1857 and 1873.

6. If the banks had on hand as much money as they reported (which is not always true), they, in 1888, owed $6.01 for every dollar they reported; and last year the proportion was $9.98 to $1. The sixty-two national banks in the central reserve cities are required to keep nearly 25 per cent. of their deposits on hand in cash; the 285 in the other reserve cities only 12½ per cent., and the 5,065 in non-reserve cities only 6 per cent. State bank requirements vary greatly, private banks and loan and trust companies are under few or no restrictions, and the loan and trust companies keep only about 2 per cent.

7. Less than one-tenth of the “deposits” in banks are real money—the others being mere promises of the banks to pay money to those who have bought (with notes) the right to draw checks against them—and it is simply impossible to so regulate the system as to prevent it from frequently working disastrously.

8. Contracting the volume of any kind of money that is willingly accepted by producers always causes suffering. Indeed, modern conditions require a large annual increase in the volume of money; and, with an insufficient supply of real money, it is not now possible to prevent the use of hocus pocus money.

9. It is well known that, when their interests seem to require it, great bankers defy the laws made to restrain them.

10. There ought to be places in which people can deposit money and know it will remain there until checked out by themselves.

For ten years I have called attention to the fact that there never has been, in this or any other country, a widespread commercial panic that was not caused solely by the sudden contraction of the hocus pocus money then being used by banks, and have challenged contradiction; but this challenge has never been accepted. Hocus pocus money is the one and only seriously disturbing factor that has always and everywhere preceded these catastrophes. Other causes aggravate them, but, with it eliminated, panics would be impossible, because it is this sudden, absolute destruction of the bank’s manufactured “liquid capital,” used by so many as their medium of exchange, which paralyzes their business operations and makes “the bottom drop out of the market,” as it were.

No words are lurid enough to portray properly the terrible evils and personal suffering that its use causes, and I submit that it is time people should begin to consider earnestly the question, Had we not better insist that some kind of real money shall be substituted for the unreal now in use, and thus permanently remove the cause that so often produces such baleful results? Conditions were never so favorable for doing this as they are now. No election is pending; the two great parties are lazily talking on similar platforms; all financial organs insist that the country is prospering; and, although people are deeply stirred, they are not excited.

The use of hocus pocus money, and its evil results, have increased steadily from the beginning of the deposit banking system. From time to time methods change, but every change increases the power and profits of the few—and the helplessness of the many. The gravest of these changes began to be felt about a decade ago. Leading bankers had always used some of their hocus pocus money for the promotion of their own schemes, but from that time the Rockefellers, Morgans and others have been systematically getting control of the principal deposit banking institutions, and using, not only a rapidly increasing proportion of their depositors’ real money, but also more of the hocus pocus money made possible by those deposits. Mr. Lawson and others have shown how this has been done on a gigantic scale, in specific cases, and of all unfossilized, sober-minded people I ask, can 999 business men afford to permit the thousandth man to continue appropriating to his own use the hocus pocus money their own deposits have made possible—and, in addition, help him to keep the volume of real money ruinously small? Indeed, would it not be idiotic folly to do so?

To me the problem appears to be: How can hocus pocus money be safely eliminated—or so restricted as to be harmless—and the quantity of real money so increased that all will, at all times, be able to exchange their products and services; that commercial panics and long periods of business depression will become impossible; and that a few men in each community will no longer have the power to ruin all who refuse to obey their orders?

Space will not permit me to tell here how this can be done, but I will say that, fortunately, this greatest and most overshadowing of the economic problems that confront humanity is the easiest of all to solve; that, as bankers are the controlling spirits in—or back of—nearly all trusts and combines, settling the money problems will make the solution of all the others easier; that it can be done without wronging anyone, or imposing additional burdens on the people; and that economic and social conditions would improve during the entire process.

But suppose that some of my conclusions may not be correct, does not the experience of the last hundred years prove, beyond controversy, that our banking and financial systems must be radically unsound in some very important particulars? And, if so, should we not insist upon their prompt improvement—or the substitution of better ones?

Every business man knows that, if the banks were required to keep larger reserves always on hand, they would be safer places of deposit. And they are equally well aware that the more real money there is in circulation the more prosperous and happy are the people. And the vitally important question is, not how far or how fast shall we go, but, shall we not begin to move steadily and determinedly in the direction of less danger and more permanent prosperity?