Various plans have been proposed for changing our money system by increasing the issues of bank-notes. One of these plans is to repeal the present prohibitory tax on State bank-notes, which would, of course, result in the issue of such notes to any extent that was profitable.
Several other plans propose to increase the issue of national bank-notes by removing some of the present restrictions, and allowing the banks to pledge other securities than United States bonds as a guarantee of their circulation, or by allowing their capital to serve, in part, as such guarantee.
All of these plans are merely makeshifts, and merit little attention. Considered, however, only as makeshifts, and with reference solely to the claims they advance, they are of no permanent benefit to the public. They only allow the banks to make a profit that should go to the community. It is claimed that the money volume will be made more elastic by these issues. This claim does not appear to be justified by an analysis of most of them, and, so far as it holds good in any of them, it is a most dangerous feature. If the issues are made profitable to the banks,—and otherwise there would, of course, be no issues, as they are not compulsory,—then the banks would undoubtedly increase them to the full limit allowed by law at any time. If they were limited so as to be profitable only when interest rates were high, then, when times were prosperous, prices rising, and profits large, the interest rate would be high, and the increased issues would enhance the "boom." When, however, the inevitable reaction came, and prices began to fall, and credit to be withdrawn,—the time, most of all, when more money would be needed,—the banks would not only be helpless to increase their issues, but would very likely reduce them, because of the increased risk at such times, and the fact that, in times of depression and declining prices, interest rates are apt to be low also.
Elasticity of volume is a most necessary feature of a money system, when it is rigidly controlled, to make money value constant; but it would be a most dangerous feature when the control was governed by the desire only to make the most profit. It would simply result in a greater fluctuation of money value than there is now.
We have, so far, examined these various plans for amending our faulty money system rather in regard to the truth of their pretences than in regard to the requirements of an honest money. In this latter respect, all the plans ignore the necessity for an invariable standard of value, and provide no method for controlling the volume of money, and adjusting it to the demand, as might be done, to some extent, even with the gold standard. The general decline of prices could not be prevented, though some of the fluctuations might.
The fact must be faced, that any attempt to increase the volume of money in this country, and thereby raise our prices above those of other countries, or to maintain our prices in gold constant, while those of other countries are declining, can result only in the export of gold. This might not happen at once, for it takes time for Gresham's law to operate, but it would be inevitable. It would probably be delayed somewhat by foreign speculation in our securities,—always a powerful factor in determining the value of our money,—but it would come; and the resulting depression would be all the greater for the delay and the height of the prosperity that preceded it.
So long as our money is based on a metal that forms a part of the money of other countries, under a free coinage system, so long will the value of our money fluctuate under the influence of foreign monetary legislation, wars, panics, and a hundred forces beyond our control.
Only by divorcing our money from that of other countries can we control it, and only by controlling it can it be made honest money.