LETTER IV
My dear Judd:
We are studying our money system, with the idea of understanding how it causes the rich to grow richer and the poor poorer.
Money, in its relation to the price of goods, is like a pair of scales in balance. If you add to the weight in the right-hand pan, it will go down; also, the same thing will happen if you take away the weight in the other pan. A bushel of wheat is worth, let us say, one dollar; and if anything should happen to double the quantity of wheat in the world, the price of wheat would go to half a dollar. On the other hand suppose that without changing the amount of wheat in the world, you were to cut in half the amount of money in the world; then the same thing would happen, the cost of a bushel of wheat would go to half a dollar. By reducing the money supply, you lower prices, and make “tight” money; by increasing the money supply, you raise prices, and make “soft” money.
Now, the people of our country are divided into two classes, those who own money, and those who owe it; the creditor class and the debtor class. It is evident that there is a conflict of interest between these two classes, as to how much money shall be put into circulation. If the money supply is increased, money is cheaper, and wages go up, so it is easier to get money and pay your debts. But the creditor loses correspondingly, because he cannot buy so much goods with the money he gets; thus, for the government to put more money into circulation, is to cancel a percentage of all debts. But on the other hand, if the amount of money in circulation should be reduced, money will be harder to get, and it will buy more goods; thus all creditors will be getting more than is really due them, and a great many debtors will be ruined, because they cannot pay this extra amount.
All through our history there has been a struggle between these two classes. Whichever side controls the government, will shift the currency supply to favor itself. And which side has controlled? The answer is, the rich; they have had the money to subsidize political parties and name candidates and carry elections. Here is a rule of politics, Judd, which I set down for you to paste in your hat and study while you are sawing timbers and mixing cement:
Out of fifteen presidential elections since the civil war, fourteen were carried by that party which had the biggest campaign fund.
The struggle has centered about what is called the “gold standard.” All money of our government is supposed to be exchangeable for gold. Prior to 1873, silver also counted as a standard; but in that year silver was “demonetized,” and of course that made money very “tight.” The “Crime of ’73,” this action of the creditor class was called; it produced a frightful panic, and tens of thousands of men were ruined, and hundreds driven to suicide. Since poverty breeds poverty, the great mass of the descendants of these people are still poor, and are told in the churches that it is the Will of God, and in the newspapers that it is Economic Law.
In 1893 we had another severe panic; I was a boy then, and remember it well. Millions of men were out of work and starving, and the mass of discontent piled up, and three years later we had the Bryan “free silver” campaign. I was just beginning to think about politics, and if today I can be patient with the mass of our deluded workingmen and farmers, voting for “Coolidge and Prosperity,” it is because I recollect exactly how I was bamboozled in 1896, so that I would have voted for “McKinley and Prosperity,” had I been of age. Mark Hanna, the millionaire corruptionist and banker-boss who paid McKinley’s personal debts and set him up for our puppet-president, raised a campaign fund of $16,750,000, and bought that election for his puppet, quite openly and obviously; so Bryan, who had only $675,000 for his campaign fund, did not succeed in his scheme of making silver money, and letting all the business men off with half payments to the bankers. So here again you see how the “actions of men” kept the rich rich and the poor poor; and God had nothing to do with it—unless you believe that God was buying votes for Mark Hanna!
The maintaining of the “gold standard” as in 1896 would by now have put the bankers in possession of the entire wealth of our country; and that was what the bankers intended. But an accident happened—the discovery of new gold, and the development of large-scale, commercial mining of low-grade ore. So we got the very thing Bryan had wanted—more money in circulation; and so the bankers have got only one third of our wealth, and a mortgage on another third. Also, they have their Federal Reserve System, whereby they manipulate the currency; they can make “free silver” today, and “gold standard” tomorrow, and when the next smash-up comes, they will sweep the board clean.
As a matter of fact, Judd, the “gold standard” has been nothing but a pious memory since the World War; the gambling game has run away with the players, and no sensible man believes that the world’s debts can ever be paid, in gold or in anything else. Our Federal Reserve notes, which make up most of our paper money, no longer carry the promise to pay in gold, or in anything—look at one and see. There are “silver certificates,” that promise you a silver dollar, but the others promise nothing. One sort of “paper” is pyramided on another sort of “paper”—stocks and bonds and promissory notes and bills of exchange and certificates of deposit and personal checks, all take the place of currency, and become the basis of new loans and credits and promises to pay at some future date. The outstanding greenbacks, about a third of a billion dollars, become the basis of ten billion dollars of imaginary money; and there are over three billions of Federal Reserve notes outstanding, and nearly a billion of national banknotes, all secured by nothing but paper; and there are 25 billions of government bonds, to say nothing of all state and county and municipal bonds, and some 19 billions owed to us by foreign nations, all of which paper the banks have put off on us; and we are adding to the foreign credit a billion a year, for the reason that we cannot keep our industries going otherwise. Moreover, we have worked out a system of selling automobiles and houses and furniture on instalment payments, and there are six or seven billions of such credits now outstanding, all backed by the banks.
Such is our “banking system,” Judd; and at every step of every process you find the banker paying low interest rates for what he borrows, and collecting high rates for what he lends; at every stage the government belongs to the banker, not merely to collect his money for him, but to fix the rates against you, and even against itself. Thus, after generations of agitation, we succeeded in getting postal savings banks, to protect the money of the very poor; the government pays the poor at the rate of 2% for this money—and accepts only $2,500, even at this low rate! The rest of the money it needs, the government borrows from the bankers at from 3½% to 5¼%! For those Federal Reserve notes which the government allows the big bankers to lend out to you, the banks pay the government about 2½%; and what do they charge for the money they lend to you? Well, I am paying seven, and have sometimes paid eight; God grant that you may never be really poor, Judd, and have to pay what the poor devils pay! It happened a few years ago, by some freak of chance, that we got an honest Comptroller of the Currency—the official who is supposed to control the banks; he found he couldn’t and they got rid of him in a hurry—but not before he issued a report, which would have given you the facts, had not the newspapers suppressed it. He said:
“Sworn reports, made by the banks themselves, show that on September 2, 1915, 2,743 national banks, out of a total of 7,613, were guilty of usury. This at a time when the Federal Reserve banks were offering money freely to national banks in every part of the country at rates varying from 3½ to 5%.”
In Oklahoma, where the legal rate of interest is 6% with 10% as the maximum under special contract, harassed farmers paid all the way from 12 to 2400%, with 40% as the average. In the case of one bank, the comptroller proved that not a single solitary loan had been made under 15%. He cited one particular case that he asked to be regarded as typical. In the spring the farmer went to the bank and arranged for a loan of $200. Out of his necessity he was compelled to pay 55% interest charge. Unable to meet the note at maturity, he had to agree to 100% interest in order to get the renewal. The next renewal forced him up to 125%. For four years the thing went on, and all the drudgery of the father and the mother and the six children could never keep down the terrible interest or wipe out the principal. As a finish, the bank swooped down and sold him out; the wretched man, barefoot and hungry, went to work clearing a swamp, caught pneumonia and died; the county buried him, and neighbors raised a purse to send the widow and children back to friends in Arkansas.
And what do the banks make out of such exploitation? Well, take one case; the great First National Bank of New York earned 140% on its capital in 1925; its stock has gone up to $2950 for a share having a par value of $100. According to the “Financial Age,” a Wall Street paper, 49 New York banks averaged 50% dividends in 1925.
All right, Judd; and now here are three sentences for you to paste in your hat and learn by heart.
First: Credit is the life blood of industry, and the control of credit is the control of all society.
Second: The private control of credit is the modern form of slavery.
And Third: The American banking system is the most perfect contrivance yet devised by the human brain for making the rich richer and the poor poorer.