Mr. Merchant: That is perfectly plain, but suppose that he could have sold the bonds, he would have gotten his money back, would he not?
Mr. Banker: Yes, we would say in that case, that he had gotten his money back, but he could not get the $200,000 of food and clothing back, for they are in the dam and ditch. The $200,000 he gets for his bonds, if he sold them for that price, is an entirely different $200,000, as you must admit after a moment's thought. Your friend had groceries and clothing which he could sell for $200,000 in money. Now, suppose that you had had at the same time, $200,000 in your business. Your $200,000 with the $200,000 your friend had put into the dam, when finished would amount to $400,000. Now, if he had come to you to dispose of his bonds, and you had thought well enough of them to sell out your business and buy them, your $200,000 bonds would represent the food and clothing in the dam and ditch, and are no longer cash capital any more than a farm is cash capital, and it might take you longer to sell your irrigation bonds than to sell a farm. You said it took the bank ten years to get rid of them.
Mr. Merchant: Oh, I see that now. We have simply converted $200,000 of cash capital into $200,000 of passive or fixed capital. Before he built the ditch he had $200,000 and before I sold out my grocery business I had $200,000, making $400,000 of cash capital. Now he has $200,000 of cash capital and I have $200,000 of fixed capital, possibly an eternal investment in the bonds. That is what you would call a permanent investment, I suppose, for it might take me twenty years to demonstrate the value of the enterprise as it did the bankers.
Mr. Banker: Now, Mr. Merchant, I want you to mark and remember this; in fact, I want all of you gentlemen to set this down in your memories so that it can never be dislodged. These irrigation bonds would continue as passive or fixed capital until the earnings or sale of the property, covered by the ditch, should not only pay the interest upon them, but should pay off the principal as well, even if it took a thousand years to accomplish this result.
Mr. Laboringman: That is nothing but a straight real estate loan as far as I can see, and not a very good one at that.
Mr. Banker: That is just what it is, and for the very same reason a banker should no more buy such bonds or loan on such securities, his commercial deposits than he should loan money on real estate. The principle is the same. If we bankers loan on cotton, cattle, hogs, wheat, corn, or manufactured goods of any kind, we know there is a constant and ready market at some price for these things, for they are all in current demand at some price, somewhere, while a real estate loan, however good it may be, is not what we call a quick asset, or liquid asset; that is, something that you can turn into money at once. A commercial bank should never take a real estate loan, except as additional security for money advanced for some legitimate commercial purpose as distinguished from an investment. The commercial funds should be used for the production of crops, or goods of some kind, and if a real estate mortgage is taken in addition, it should be only within reasonable limits, for it is the easiest thing in the world to tie up all a bank's capital and deposits in real estate loans; that is, to turn the capital and deposits into passive or fixed capital, mortgages or real estate, which might be selling readily in boom times, but which are utterly unsalable when the break comes.
Mr. Laboringman: What do you mean by tying up the capital and deposits of a bank in mortgages and real estate?
Mr. Banker: I will explain that to you in such a way that I am sure you cannot fail to understand and appreciate it. Suppose that I had $100,000 in cash in my bank to meet the demands of my depositors; but should give it to farmers in exchange for mortgages upon their farms. I could not pay my depositors the mortgages; they want money. I might not be able, and probably would not be able, to sell the mortgages in time to pay the depositors their money; and if money happened to be scarce, possibly not for a long time would I be able to pay them their money. I would have that $100,000 tied up in mortgages. This is granting credit on land. Now, these mortgages will continue in existence until the farmers can make enough out of their crops to pay the interest upon them from year to year, and finally to pay them off; it may take ten or twenty years. If I had loaned $100,000 on cotton or cattle, the products of the farm, they could have been converted immediately into money at some price to meet the demands of my depositors.