Deposit banks are little more than clearing-houses; and the laws permit their owners to pay nine-tenths of their debts with money literally made by themselves—out of nothing—which they coolly call “liquid capital,” or “bank credit,” although it is neither capital nor credit. The real nature and far-reaching effects of this modern practice are not clearly understood by one in twenty even of the bankers themselves—and none of them dares discuss it publicly. The most of those that do not fully understand it feel that there is something wrong about it; and those that do understand it know that, if people once begin to study “the system,” they will demand radical changes in it—or its entire abolition.
Government reports for 1904 put the volume of metallic and paper money then in existence at $2,829,273,316—or $31.16 per capita; and the Comptroller’s report shows that the banks whose reports he consolidated were earning interest on more than $6,278,000,000 of money that had no existence—or $76.47 per capita. This stuff is what, for a dozen years, I have called “hocus pocus money.” It consists of nothing but, in the language of Professor Sidgwick, rows of figures on bank books; and yet it affects business, prices and values, exactly as that amount of real money would. Invisible, intangible and mythical, it is nevertheless very real—filling the land with prosperity, joy and song today, and disaster, tears and despair tomorrow, it is the most potent economic power ever known. Business men gladly accept it as money. The courts treat it as money. And, although, for technical reasons, most political economists do not do so, I insist that, to all intents and purposes, it is money, and should be so recognized. Indeed, until this shall be done, it will be impossible to frame a monetary system that will always work equitably and beneficently.
Between 1896 and 1904, as officially reported, the increase in the volume of visible money was, in millions, $1,322,000,000—or $9.75 per capita; but the quantity of hocus pocus money in use increased $5,275,000,000—or $43.42 per capita—the quantity of both kinds then actually in use being $107.63 per capita. This shows that four-fifths of the increase in the medium of exchange consists merely of the right given favored people to draw checks on banks to pay which no real money has been deposited.
In 1888, 5,866 bank reports showed that they were then collecting interest on $3.41 for each dollar of their capital available for “commercial loans”; but last year’s reports of the 13,772 national, state and private banks and loan and trust companies show that their aggregate capital (including surplus, undivided profits and bank-notes) amounted to $2,927,000,000. This was everything their owners had put into their business, and of it $2,743,000,000 had been paid out for bonds, stocks, real estate, real estate mortgages, etc., leaving only $183,000,000 available for “commercial loans.” And yet their “loans and discounts” aggregated $6,431,000,000, or $35.07 of “commercial loans” for every dollar of their not otherwise invested capital. If this is not “getting something for nothing” on a stupendous scale, I should like to know what would be so considered.
Remember, that these figures include all of the reported banks. Individual cases are incomparably worse. On December 2, 1899, the National City Bank, of New York City (the principal of the several hundred Standard Oil banks), had $6,709,216 of capital, surplus, etc.; its investments of capital aggregated $27,270,738; its available capital was therefore $20,561,519 less than nothing; and yet it was then actually earning interest on $60,906,034 of “loans and discounts,” making $81,467,553 of hocus pocus money. And remember further that, to make people more dependent on banks for this kind of money with which to do business, the volume of real money is kept as small as possible. This is the real reason why bankers engineered the contraction of the currency after the war and the demonetization of silver. But for them no class of business men would have consented to either of those economic crimes.
Here are a few more important facts:
1. Interest has to be paid to the banks on every dollar of hocus pocus money as long as it lives.
2. It lives, on an average, only about two months.
3. Every payment of a note or draft extinguishes the hocus pocus money involved in that transaction and contracts its volume that much, making it the most constantly and wildly fluctuating money ever known.
4. Whenever, for any reason, bankers fear a demand for an unusual amount of real money they make fewer “loans” and “call in” some that are outstanding, which destroys that part of the “liquid capital” that was in actual use as a medium of exchange and cramps the money market.