A New Banking System / The Needful Capital for Rebuilding the Burnt District

by Lysander Spooner

Section 2.

But the proposed system has one other feature, which is likely to be of great practical importance, and which gives it a still further superiority—as a credit system—over the so-called specie paying system. It is this:

The old specie paying system (so called) could add to the loanable capital of the country, only by so much currency as it could keep in circulation, over and above the amount of specie that it was necessary to keep on hand for its redemption. But the amount of loanable capital which the proposed system can supply, hardly depends at all upon the amount of its currency that can be kept in circulation. It can supply about the same amount of loanable capital, even though its currency should be returned for redemption immediately after it is issued. It can do this, because the banks, by paying interest on the currency returned for redemption—or, what is the same thing, by paying dividends on the Productive Stock transferred in redemption of the currency—can postpone the payment of specie to such time as it shall be convenient for them to pay it.

All that would be necessary to make loans practicable on this basis, would be, that the banks should receive a higher rate of interest on their loans than they would have to pay on the currency returned for redemption; that is, on the Productive Stock transferred in redemption of the currency.

The rate of interest received by the banks, on the loans made by them, would need to be so much higher than that paid by them, on currency returned for redemption, as to make it an object for them to loan more of their currency than could be kept in circulation. Subject to this condition, the banks could loan their entire capitals, whether much or little of it could be kept in circulation.

For example, suppose the banks should pay six per cent. interest on currency returned for redemption—(or as dividends on the Productive Stock transferred in redemption of such currency)—they could then loan their currency at nine per cent. and still make three per cent. profits, even though the currency loaned should come back for redemption immediately after it was issued.

But this is not all. Even though the banks should pay, on currency returned for redemption, precisely the same rate of interest they received on loans—say six per cent.—they could still do business, if their currency should, on an average, continue in circulation one half the time for which it was loaned; for then the banks would get three per cent. net on their loans, and this would make their business a paying one.

But the banks would probably do much better than this; for bank credits would supersede all private credits; and the diversity and amount of production would be so great that an immense amount of currency would be constantly required to make the necessary exchanges. And whatever amount should be necessary for making these exchanges, would, of course, remain in circulation. However much currency, therefore, should be issued, it is probable that, on an average, it would remain in circulation more than half the time for which it was loaned.

Or if the banks should pay six per cent. interest on currency returned for redemption; and should then loan money, for six months, at eight per cent. interest; and this currency should remain in circulation but one month; the banks would then get eight per cent. for the one month, and two per cent. net for the other five months; which would be equal to three per cent. for the whole six months. Or if the currency should remain in circulation two months, the banks would then get eight per cent. for the two months, and two per cent. net for the other four months; which would be equal to four per cent. for the whole six months. Or if the currency should remain in circulation three months, the banks would then get eight per cent. for three months, and two per cent. net for the other three months; which would be equal to five per cent. for the whole six months. Or if the currency should remain in circulation four months, the banks would then get eight per cent. for the four months, and two per cent. net for the other two months; which would be equal to six per cent. for the whole six months. Or if the currency should remain in circulation five months, the banks would then get eight per cent. for the five months, and two per cent. net for the other month; which would be equal to seven per cent. for the whole six months.

The banks would soon ascertain, by experiment, how long their currency was likely to remain in circulation; and what rate of interest it was therefore necessary for them to charge to make their business a paying one. And that rate, whatever it might be, the borrowers would have to pay. Subject to this condition, the banks could always loan their entire capitals.