No attempt will be made in this chapter to enter upon the disputed questions regarding money, but only to point out undenied and undeniable facts in connection with its use and abuse.
Coin, whether gold or silver, is used all over the world as the medium of exchange. But gold and silver available for the purpose of coin are limited in amount and totally inadequate to serve as mediums of exchange without the assistance of other devices. Thus banks of issue are organized for the purpose of issuing paper money. This money is upon its face redeemable in coin, but banks of issue, relying upon the probability that all paper issued will not be redeemed on the same day, issue far more paper money than they have reserve in coin. In England, this reserve is notably small.
Business, too, is conducted largely on credit; that is to say, the trader buys goods not with coin, but with notes or promises to pay gold, relying upon the probability that he will sell the goods before his notes come due and thus be able to meet his notes with the proceeds derived from the sale of the goods purchased with these notes.
Industries, railroad companies, and transportation companies also use credit for the purpose of building and running their roads and factories. This credit takes the shape of permanent bonds and temporary accommodations of the same character as the notes used by private traders. The total number of bonds outstanding at par amount to-day in the United States alone to $13,500,000,000.[115] It is through the ability of railroad companies to issue bonds and credit notes that they are enabled in prosperous periods to extend their roads and factories.
Farmers also borrow largely upon their farms for the purchase of implements, live stock, improvements, etc. Recent figures of bonded indebtedness are not to be obtained; but they figure in the billions.
Again, cash payments are no longer made in coin; they are for the most part made by check. Checks are not paid in coin; they are cleared through clearing houses; the banks in every financial center belong to a clearing house through which they daily settle with one another, paying only differences of accounts in cash. Thus, in 1906, the total transactions of fifty-five banks in New York city amounted to over $103,000,000,000; yet the balances paid in money during the year only amounted to about $3,000,000,000—a proportion of 3.69. So that through the clearing-house system instead of exchanging gold to an amount of $103,000,000,000 the whole business was transacted with only 3.69 per cent thereof in coin.
The above figures tend to show how small a relation is borne by coin to the total exchanges of the world. Indeed, although coin is still the ultimate medium of exchange, commercial and industrial transactions are conducted for the most part through an enormous system of credit built upon a comparatively small amount of coin.
The importance of this is considerable, for it puts those who have coin and those who handle coin in a position which enables them to control the industrial and commercial activities of the Nation. This feature of our money system occasions what are called "financial crises" as distinguished from commercial crises. Commercial crises and industrial crises are due to overproduction. Financial crises are produced for the most part by a breaking down of credit.
Credit may be broken down in many ways. A breakdown may be due to inability on the part of those who handle coin to meet their obligations in coin. It may, however, be due to the unwillingness of those who have and handle money to put this money at the disposal of the industrial public. It is sometimes occasioned by both.
Money is indispensable to the working of the industrial system. It may be regarded as the blood of the industrial system because no farmer can operate his farm, no factory owner his factory, no railroad company its road without money or the equivalent of money—credit. And if money can be compared with the blood in the human body, the banking system must be regarded as its heart; the organ that keeps money in circulation, accommodates circulation to the needs of the body, furnishes the economic body with as much as at periods of exercise it needs; and moderates its circulation when at periods of repose the economic body is less in need of it. It is hardly necessary to point out the extreme importance under these conditions that the heart of this system act for the benefit of the system, and have at no time an interest of its own to act independently of the system or in a manner hostile to it. Now this is exactly the evil of existing monetary conditions. Those who have and handle money have an interest of their own to serve. While it is generally to their interest to use money in making the community prosperous, it is at certain critical periods to their interest on the contrary to withhold money. This is the point upon which emphasis must be put. Let us, with a view to understanding this, consider into how few hands the control of coin tends to be concentrated; and how easy it is for these few to serve their own interests at the expense of the public by withholding coin at moments of utmost need.