The stock exchange.—The last mentioned forms of indebtedness so easily become matters of everyday purchase and sale as to lead to the business of stock brokerage, found everywhere in greater or less extent. In large cities the brokers naturally unite for convenience of business in the so-called stock exchange, in which the market price of all current forms of indebtedness or deferred payments is fixed from day to day, or from hour to hour, by the higgling of the market, just as the price of produce is fixed in the produce exchange. Naturally, as in the case of produce, a fictitious business, purely speculative, grows up around the legitimate dealing [pg 163] in stocks and bonds. Other forms of deferred payments enter less into the business of the brokers, because the market value of any particular mortgage or individual note cannot be easily determined outside the immediate neighborhood where it is made. The chief way in which these enter the general brokers' market is through the stock or bonds of large brokers' companies, sometimes called guaranty loan companies. In this way the universal extension of credit through deferred payments finally has its effect upon the general confidence. The broker's business grows legitimately out of the need of ready transfer of claims, for the sake of larger use of the floating capital of the country, and readiness of investment in more fixed forms. It adds, however, to the dangers of extended credit by making more easy the gratification of present wants through expectation of future ability. The broker makes his gain, without reference to the final settlement, by taking a commission upon the loan. His interest leads to an overestimate of the borrower's ability, and cases are not infrequent where appraisers of real estate have been hired by brokers to misrepresent the value of property, for the sake of securing improper loans.
Every period of expanding credit in speculative movements has furnished proofs of this tendency. A standing example is furnished in mining stocks, in which the temptation to misrepresent prospects by “salting” and false assays is proverbial. Almost as notorious are the misrepresentations associated with bonds of newly established cities or other municipalities. Not all such misrepresentation is intended fraud, but the immediate [pg 164] interest of the broker clouds his judgment as to conditions of final settlement. With little to lose and everything to gain in the immediate transaction, his judgment is necessarily biased. The merely speculative buying and selling of stocks by margins has little to do with the general character of indebtedness, except to increase somewhat the risks of legitimate brokerage. The “bulls and bears” on exchange make their gains by fluctuations in market values, and, like all gamblers, delight in producing false impressions upon their opponents in the game. This fact adds to the uncertainty of all standing credit, and so increases the natural rate of interest. This effect upon interest will be noticed in considering the nature of interest and conditions affecting it.
“Borrowed money.”—In all the forms of deferred payment, except standing accounts, it is customary to represent the amount of the debt as “borrowed money,” no matter how the transaction occurs. When a farmer buys his farm with a promise to pay five years hence, his note is said to represent so much “borrowed money,” while in fact he has simply borrowed the farm. The reason is, that the farm is represented by its value in dollars, and the promise is to return that value in dollars at the end of five years.
The same is true, in fact, of all purchases on credit. Even when the purchase is made by means of a note at the bank, the actual transfer of property is from the owner of the farm to its prospective owner, the bank simply acting as agent, and interposing its credit or capital only to promote the exchange. In many instances [pg 165] no money in any form is used, and where it is employed at some stage of the transaction, it is used, as in any other exchange, simply as a machine of transfer. Even the final settlement is likely to be made through the ordinary channels of trade, without the intervention of money in any of its forms. The deferred payment takes its place when the time of payment comes in the ordinary everyday transactions of the universal credit system, illustrated in banking. Even if the farm is paid for by instalments, those instalments are simply ordinary transactions in trade, the farmer transferring the check which he receives from the sale of his steers or his wheat to the former owner of the farm. The money involved is simply money of account, referring to a well understood standard of value. The importance of this standard in reference to deferred payments has already been referred to. It cannot be overestimated. But any estimate of the currency needed, or to be needed for the transaction of business, founded upon the amount of deferred payments, is wholly fallacious.
It is equally wrong to suppose that the bankers are the principal money-lenders. The real lenders are those who have sold their produce, the use of their tools or their time, at a price to be paid next week, next month or next year. Every man who has wages due him is as truly a money-lender, to the extent of the wages due, as any banker who accepts a promise to pay in the future for service or value given in the present. Even where the borrowed articles have been consumed or wasted, the promise to pay is simply a promise to return so much of value as the articles received were estimated to be [pg 166] worth. This may be easily seen in thinking of a running account at the store for the ordinary supplies of the family. It may amount to five hundred dollars, if one's credit is sufficient, and seem only the actual articles used, and yet to be paid for; but if settled by a note fixing a future definite time of payment, the debt at once becomes in thought borrowed money, though no change whatever has been made in the actual facts. If the same purchases had been made by means of credit at the bank, gained by discounting a personal note, the same articles exactly would have been borrowed, the bank instead of the merchant being the lender. In all probability the bank has been the means in the first case of enabling the merchant to meet these current wants on credit, for he himself has gained the credit of the bank by discounting his own note. In either case the bank has been the means of serving both the borrower and the lender. It is simply a machine for accommodating both.
Legal tender.—All forms of deferred payments imply the possible intervention in final settlement of the force of government. While the great mass of promises to pay are met without an appeal to laws or courts, the whole is put in such form by customs of society as to involve the possibility of such arbitration. Government takes no note of debts which cannot be proved in court, and the forms of legal proof are well settled. All the formalities of credit in systems of book-keeping, forms of notes and bonds, and wording of stock certificates imply the possibility of final adjustment in a court of equity. For this reason, governments establish [pg 167] some form of currency as the representative of value, which must be accepted by the creditor in complete satisfaction of a debt. This is naturally what custom has established as the standard of value, but anything else may be substituted if the government so decides. Thus, Massachusetts once made bullets legal tender at a certain price, up to a certain number. Our government now makes copper cents and nickels legal tender to the value of twenty-five cents.
The current notes of the government are usually legal tender, unless otherwise stipulated, whatever their current value. This means simply that the government through its courts secures the collection of bona fide debts, in terms of value defined by law or by contract. The assurance of final settlement, given in this way by the government, is one principal element in extending credit on time. Without such machinery credit would be confined to intimate acquaintances and very limited time.
Expanding credit.—All the machinery of credit tends to bring the floating capital of a country within the reach of great enterprises. If a body of men have faith in some great undertaking, like a continental railroad or a Panama canal, their faith in the enterprise is easily made a basis for the faith of others. Even the small accumulations, the savings of day laborers, may be turned to account in such great enterprises if the popular expectation of success is thoroughly aroused. The greater the undertaking, the greater is the general faith under skilful leadership.
The same principle applies to undertakings of less [pg 168] national character, like immense factories or combinations in a trust. The stock of such enterprises is often widely distributed, and when profits are fairly begun, even upon a small scale, the chances of gain on the value of the stock are made more prominent than the actual profits of the enterprise. It is not uncommon to find enterprises starting with the expectation that a large portion of this stock will be paid for out of the profits of the business and the profits on a portion of the stock to be sold. This is especially true when business is reviving after a period of depression. It is one of the first symptoms of the return of a speculative spirit. With the rise of such enterprises there is almost sure to be an advance in prices of real estate, though it follows later.
The starting of a railroad line involves the purchase of station sites, and almost surely the laying out of villages at intervals along the line. The promoters of the railroad are likely to be promoters of town sites as well. And this increased demand for farms and lots brings a larger faith in the future of these locations. Everyone who can save a little from his income hopes to increase that little indefinitely by investment in the chances of increased value of a lot or a home. Under such circumstances the machinery of credit moves easily, and one does not hesitate to extend his credit to the utmost for the purchase of what is increasing in value each day. The result is a temptation to larger expenditures.