Seventeen Talks on the Banking Question / Between Uncle Sam and Mr. Farmer, Mr. Banker, Mr. Lawyer, Mr. Laboringman, Mr. Merchant, Mr. Manufacturer

by Charles N. Fowler

The one bank could then furnish the people of that community their deposit, or order credit, and their current credit, or currency at exactly the same cost to the bank; for the amount of the reserve will determine the cost of the note credit as well as the book credit. The bank being a country bank will carry a 15 per cent reserve, or $15,000 cash, to protect the deposit of $100,000 subject to check, and also a 15 per cent reserve, or $15,000 cash, to protect the $100,000 of demand notes outstanding. The actual cost to the bank in each case is 6 per cent on the reserve of $15,000 or $900 per annum.

If this bank should be located in the cotton-growing section of the country, and from August until January, the people needed more currency than at any other time of the year to pay for picking and handling the crop, and the customers of the bank came in and drew their checks for $50,000 and asked the bank for currency for that amount, and the bank should, as it ought to be able to do, under such circumstances change its deposit debt of $50,000 to a note debt of $50,000, so that instead of owing $100,000 in deposits, it owed only $50,000 in deposits, and instead of owing only $100,000 in notes, it owed $150,000, would it make any difference whatever to the bank except the trouble of making a few book entries?

In the springtime, probably, the situation would be just the reverse. The notes having served the convenience of the cotton-planters would be returned to the bank by various people, and deposited to the credit of the depositors, so that now the deposits are $150,000, and the notes outstanding, or note debts, are only $50,000; the total debt of the bank being precisely the same all the time, $200,000. It has made no difference whatever to the bank, but the customers of the bank, and all the people of that community, have been perfectly accommodated at the smallest possible expense to them. Now, if that bank had been compelled to go to some financial centre and buy that $150,000 of currency in the form of United States Notes, bond-secured bank notes, or the notes of a central bank, it would have cost the bank at the rate of 6 per cent per annum on $150,000, or $9,000; whereas, it has only cost the bank 6 per cent on the reserves carried to protect the $150,000, at the rate of $15,000 for each $100,000, or six per cent on $22,500. The cost to the bank you will see would be only $1,550, as against $9,000, if compelled to buy the currency, or would result in an actual saving to the bank of $7,450, an item, gentlemen, well worth saving.

Mr. Merchant: Mr. Banker, as I understand your contention from the illustration you have just completed, it is this, that there is absolutely no difference whatever, either in principle or in practice, between a bank book credit and a bank note credit, except as a mere matter of bookkeeping. That it is wholly immaterial whether there are 1,000 men walking about the streets of a town, each having a $10 bank note of the local bank in their pockets, or a thousand men walking about with check books from which they can issue 1,000 checks for $10 each. It is wholly a question of having a banking system that will adjust itself every hour of the day, and every day in the year, to the requirements of trade in that town, at the least possible expense to the people.

Mr. Banker: You comprehend my contention perfectly.

Mr. Lawyer: I will agree that your plan is structurally perfect to accomplish this purpose; but, before I can concede that the plan is all that can be desired, and all that we must insist upon having, I must know that your plan contemplates the current redemption of these bank notes in gold coin. For, as we have already agreed, our currency must be as good as gold coin, and this can only be demonstrated by daily gold coin redemption.

Mr. Banker: These bank notes or this Credit Currency will always be interchangeable with the deposits of the bank of issue, and, like the checks against the bank, will be daily redeemed over the counter of the bank, and also at some clearing house centre. The life of the notes will probably not exceed on the average thirty days. I hold that it is the duty of the bank to supply its customers with exactly that form of credit, either current credit in the form of notes, or book credits subject to check, which their business demands, and that both forms of credit must be kept as good as gold by giving gold if gold is demanded.

Mr. Lawyer: With this point of current gold redemption covered and settled, I am willing to agree that theoretically you have completely convinced me. Now, what have you to offer in support of your theory by the way of any practical illustrations?

Mr. Banker: I am glad that you have demanded illustration and proof by way of banking experience; but, before taking up the historical evidence in support of my condition, I want to define a Credit Currency, so that you will have a concrete idea, if I may express myself that way, in your mind.

I define a Credit Currency as follows: a note issued by a bank against its credit, without depositing United States Bonds, or any other kind of security, to guarantee its payment, is bank Credit Currency.