Uncle Sam: Well, boys, when we parted last Wednesday night, it was agreed that we should take up for consideration and discussion tonight the question, "What is Currency?" And just before we left Mr. Lawyer read Webster's definition of Currency.  
Mr. Merchant: I am very glad that he did so because it gave me a start, and set me to thinking, and as a result I became very much interested in the subject.
 
Mr. Banker: I have made the question of currency a study now for several years, and regard it of prime importance in any financial and banking system; but especially so considering the peculiar conditions existing in this country with our vast extent of territory, and the many distinct commercial centers there are here, each specializing in some one kind of production or industry. But more particularly is a right form of currency essential in this country because of the great number of our individual, independent banks now exceeding 25,000.
 
Mr. Manufacturer: Well, Mr. Banker, it strikes me that you are getting a trifle on to a side line. Let us get right down to business, and see if we can make any progress in determining just what Currency is, what kind we have and what kind we ought to have, if any change is to be made.
 
To my mind, and I have put all the spare time I had upon the question, that definition when fully understood described currency perfectly, and will help us amazingly in arriving at a clear idea of just what currency is as well as what it is not. Let me restate a part of it, which I think covers all of it. "Currency is that which is in circulation, or is given and taken as having value, or as representing value." That is, currency may have value[Pg 47] in itself, as illustrated by our gold coin, or may only represent value, as illustrated by our gold certificate.
 
Again, the definition described another quality, when it said that "currency passes from person to person, or from hand to hand; general acceptance; circulation." To be a piece of currency then, a thing may or may not have actual value, as a gold coin, or as a gold certificate, which can be exchanged for the coin. But the thing must have general acceptance, that is, it must be received by the people generally, as a matter of course, and without hesitation, and without taking anything from it, or adding anything to it, such as a stamp, or a signature.
 
That is, a piece of currency having passed through a thousand hands, remains identically the same thing, except the ordinary wear to which it has been subjected.
 
Mr. Merchant: Mr. Banker, taking that explanation as correct, what would you say that our currency consists of?
 
Mr. Banker: Our currency consists of the following things:
 
First: Gold coin, which is generally accepted, and has actual full value.
 
Second: Gold certificates, which are generally accepted, but have no actual value.
 
Third: All token, or subsidiary coin, including the silver dollar.
 
Fourth: Silver certificates.
 
Fifth: United States Notes.
 
Sixth: Bond-secured National Bank Notes.
 
Mr. Merchant: I read an article recently in which checks and drafts were spoken of as currency. Can it be possible that they can properly be called "currency"?
 
Mr. Banker: Certainly not. They come under an entirely different head, and I hope we shall spend an evening considering them very soon. Checks and drafts never pass from person to person and from hand to hand and are not of general acceptance. Herein lies the mark of distinction. Checks and drafts do not pass from person[Pg 48] to person and from hand to hand and are always of special acceptance, that is, they are considered before they pass. They are taken according to the strength of the makers, acceptors and endorsers and usually pass only by endorsement. We must make no such mistake because it will lead to a confusion of ideas.
 
Mr. Merchant: Mr. Banker, you have just told us of what our currency consisted. Gold coin, gold certificates, token coins, silver certificates, United States Notes and our bond-secured Bank Notes. Taken altogether I presume you would call that our currency system. Do you call it a good system?
 
Mr. Banker: It is our currency system, but it is without doubt the worst currency system in the world, if you include only respectable commercial nations.
 
Mr. Merchant: Well, Mr. Banker, what is wrong with it?
 
Mr. Banker: To tell you what is wrong with our currency system, I would first have to tell you what a right kind of currency system is. And I will proceed to do so in a word. A right kind of currency system consists of three forms of currency only.
 
First: Gold coin, or the gold certificate.
 
Second: Token, or subsidiary coin.
 
Third: A credit bank note or bank credit currency.
 
All these forms of currency are absolutely essential to a right currency system, as I shall proceed to demonstrate.
 
First: Gold coin, or its substitute, the gold certificate, is the very foundation of a right currency system, because there must always be present, or immediately available, a sufficient amount of gold to prove, protect and redeem, if necessary, all other forms of currency.
 
Second: Subsidiary coins are absolutely essential as a matter of convenience to carry on the small trade of the country.
 
Third: A credit bank note which will always spring into being, precisely as a check does, to perform some[Pg 49] special transaction, is the most efficient and most economic form of currency in the world, because it always just equals the demand for currency, and costs no more than a deposit account, subject to check.
 
Mr. Manufacturer: Just what do you mean when you say that a credit bank note currency will cost no more than a deposit account subject to check?
 
Mr. Banker: I mean just this, that if you had a deposit at a bank of $1,000, and the bank upon receiving your check for $1,000 could convert that book account, or book debt, into a note account, or note debt, by giving you its bank notes for $1,000, in exchange for your check, the bank note currency would cost only the interest on the reserve carried against the notes, which would be identical in amount with the reserve carried against the deposit.
 
To illustrate, if the bank were in the country it would carry 15 per cent reserve, if a National Bank, or $150 in cash against that deposit of $1,000. The interest on that $150 for one year at 6 per cent would be $9. Now, if that deposit were convertible into notes, and you kept the same reserve of 15 per cent against them, the thousand dollars in notes would cost only $9 per year, and could and would in turn be reconverted into a deposit, subject to check.
 
Not only does this form of currency cost only about one-sixth as much as our present currency in the form of United States Notes and bond-secured Bank Notes, but it is the only form of currency that will always be precisely equal to all the demands of trade. It will never be too great in amount. It will never be too small in amount. It will always just exactly equal the ever varying requirements of business and will always be as good as gold, because currently redeemed in gold.
 
The principle of converting bank book credits into bank note credits, in accordance with the requirements of the customers of a bank, is the bank credit currency principle[Pg 50] and there is not a single instance in the history of banking where it has ever been tried and failed.
 
Let this be laid down as one of the eternal laws of banking. Current coin redemption is the very soul and breath of life to bank credit.
 
Mr. Merchant: That is certainly most interesting and I must say a most impressive fact, if we can secure a currency, equal at all times to the requirements of trade, and always as good as gold coin, and at an expense of one-sixth of what our present currency costs us in the form of United States Notes and bond-secured Bank Notes. There are today outstanding $346,000,000 United States Notes and $750,000,000 of bond-secured Bank Notes, or about $1,100,000,000 in all. Now, since any bank must pay par, or 100 cents on the dollar, to get possession of either of these forms of currency, the cost of carrying either of them will be 6 per cent on the total of $1,100,000,000, or $66,000,000 per annum. Of course if the banks are compelled to use such an expensive form of currency, they will have to charge their customers accordingly, and in the end it comes out of me, Mr. Manufacturer and so on down the line, until, finally, the cost or burden reaches Mr. Farmer over there, or Mr. Laboringman over here.
 
Now, you assert that a credit currency would only cost the country one-sixth as much, or only eleven million per year, whereas the same amount of currency in United States Notes and bond-secured Bank Notes now cost us $66,000,000 a year, or $55,000,000 more than it should. Of course every cent of that must in the end come out of labor.
 
Mr. Banker: I said one-sixth for the country bank. The average reserve held by all the National Banks is 20 per cent, not 15 per cent. So that the unnecessary cost to the people of our present United States Notes and bond-secured Bank Notes is five times as much as it should be, or we are losing every year $53,000,000, every dollar of which must come out of labor.
 
Mr. Merchant: Now, let me see whether I understand[Pg 51] this matter correctly; to illustrate, let us suppose that your bank needed today $1,000 more currency than it has on hand to accommodate a customer. You would have to go out and buy it, and pay $1,000 for it, or obligate your bank to do so. With interest at 6 per cent it would average $60 per year to carry it, but if you could exchange your bank's notes, amounting to $1,000, for your customer's note of $1,000, and carry a reserve against your bank notes outstanding of say 20 per cent or $200, and interest is at 6 per cent, it would cost you only 6 per cent on $200, instead of 6 per cent on $1,000; or you would make a saving of $48 on the $1,000 of currency. Am I correct in my understanding of the difference of cost upon these two forms of currency?
 
Mr. Banker: Yes, you are absolutely right. No one could state the principle better than you have.
 
Mr. Merchant: Well, then, it is clear, that if there is a saving of $48 a thousand on $1,100,000,000, we are wasting annually on that one item alone $52,800,000.
 
Mr. Manufacturer: But, gentlemen, let me call your attention to another fact. This country is losing several times as much as that every year on the average, because of our present rigid form of currency. Just as soon as there is any fear anywhere in this great country about a bank of any consequence, or about the business generally in the country, every banker from Dan to Beersheba begins to grab currency in whatever form he can get it, because he knows the amount is fixed and limited. It is not nearly so much a run on the banks by the depositors, as it is a run by the bankers on each other, just to accumulate cash. Everything comes to a dead stop, just as it did in 1907, and it always will under present conditions. Now, it seems to be perfectly plain that if the banks could convert their book credits into note credits, they could immediately meet the demand for cash, and so avert these commercial catastrophes, which set us back years. You know we are just now beginning to realize that we are getting over the panic of 1907.
 
[Pg 52]
 
Gentlemen, instead of the panic of 1907 costing us $53,000,000 a year, it costs the people of the United States more than ten times as much as that every year. God only knows what these commercial tragedies mean in the life of a nation like ours, and it is up to us to prevent them, if possible, and it must be possible. It looks to me as though Mr. Banker was on the right track.
 
Uncle Sam: Well, you fellows have got to show me a thing or two, before we make the proposed changes, because I am from Missouri, as well as from forty-seven other unsuspecting states, and don't you forget it. In the first place, I want you to show me why my I.O.U.'s or the United States Note, so-called Greenbacks, are not a good currency. In the second place, I want you to show me why the present National Bank Notes, which are secured by my bonds, dollar for dollar, are not the best currency in the world. I have been told this for the last fifty years, and if it is not true, it is about time I waked up.
 
Mr. Banker: Well, Uncle Sam, they've been fooling you, for both the United States Notes and these bond-secured Bank Notes are the worst form of currency in the world, and I can prove it.
 
Uncle Sam: Well, you will have to prove it, that's all.
 
Mr. Banker: In the outset, I will tackle the United States Note, and incidentally, I will state all the other objections to them, as well as the objections to them as currency.
 
First: They are demand obligations against you amounting to $346,000,000, and you must stand ready at all times to redeem them in gold. This fact always has and always will imperil your credit. It was the same greenbacks that sent your credit down to 35 cents on the dollar during the war, and again they came within an ace of wrecking your credit in 1894 when the gold in the treasury went down, down and down, until there was only $41,000,000 left, between you and national dishonor. Don't you remember that you then sold $262,000,000 of your bonds to protect your credit which was being sapped[Pg 53] by these very same United States Notes? Pretty expensive business that, when you could have had a currency that the banks of the country, and not you, would have been compelled to redeem in gold whenever necessary.
 
You will no doubt remember that in 1879 when you began to keep your promise, and redeem these greenbacks in coin, and make your old due bills as good as gold, you issued $100,000,000 of bonds for a corresponding amount of gold to establish your reserve or guarantee fund, in order that you might keep your promise good in the future. If you add this $100,000,000 to the other $262,000,000 you have issued since to protect your credit against these United States Notes, you will find that you have issued altogether $362,000,000 of your bonds, or $16,000,000 more than the total amount of the greenbacks, $346,000,000, and that you have also obligated yourself to pay interest on these bonds from first to last amounting to $362,000,000 more. Now, the astounding fact is that these old due bills, these I.O.U.'s, these United States Notes, or so-called greenbacks, are still out and you still owe them, just as you did in 1879, when you began keeping your promise to redeem them in gold.
 
One of your expert clerks in the Treasury Department at Washington, the Chief of the Loan and Currency Division, published a calculation in the Congressional Record of April 29, 1908, Page 5638, that showed that, if the greenbacks had been funded on the 1st day of January, 1879, into 4 per cent 30 year bonds, and canceled and destroyed, the total cost to the Government for principal and interest to July 1, 1907, would have been $741,897,340, whereas the total cost and liability actually incurred on account of them has been $1,081,881,562; the difference in favor of converting into bonds being $339,984,222.
 
Now, don't you think, Uncle Sam, that as a matter of business you'd better get rid of these demand debts, these United States Notes?
 
Second: Don't let this most important fact escape your[Pg 54] attention either; that if you should be called upon to use your credit extensively, as would be necessary in case of a great war, these demand notes would be a very black cloud upon your credit, and your loans would cost you vastly more, on account of the interest you would have to pay, because they were still outstanding. I hope that you are not hugging that sweet delusion that war is impossible.
 
Third: These United States Notes, as you are aware, are made legal reserves for the national banks, who hold them against their deposits. Now, if your credit goes to pieces, the credit of the banks will go with it of course; because precisely to the extent that the banks hold these debts of yours as reserves, they are driving gold out of the country, and therefore instead of being better able to help you, they will attack your credit by demanding gold from you for these old demand debts.
 
You are also, of course, familiar with Gresham's law, so-called, under the operation of which, the poorer money always drives out the better. I assert without any fear whatever of successful contradiction, that if you had paid off these United States Notes in 1879, you would not only have saved $340,000,000 by so doing, but that today there would be in the United States in our banks, and in circulation among the people, $346,000,000 more gold than we now have. In other words, instead of our gold amounting to $1,850,000,000, it would now amount to $2,196,000,000.
 
Uncle Sam: Well, you have certainly demonstrated that I have made some very expensive mistakes. Let's see just what the net result of this blundering has been. I have lost $340,000,000 on account of the greenbacks and I have lost the great advantage of having $346,000,000 more gold to further strengthen the commercial credit of the country; and yet, I still owe every cent of these due bills and what seems to me equally certain is this: that if I should get into a great war, these very greenbacks will make me more trouble by injuring my credit[Pg 55] in the future to a much greater extent than they ever have done at any time in the past. There is no doubt whatever about that. By the eternal, something must be done to get me out of this apparently bottomless pit.
 
But you have not told us yet why these I.O.U.'s of mine, or United States Notes, are not fit for currency, as you declare. You know that you sort of hurt my feelings, and for half a minute I was fighting mad, but as I said I am from forty-seven states, besides Missouri, and therefore I am ready to be shown.
 
Mr. Banker: I am coming to their use as currency right now. There are three distinct reasons why the United States Notes are a bad form of currency.
 
First: Any Government issue of bills, or of I.O.U.'s such as these are, must be very limited, if they are kept as good as gold.
 
Second: The United States Notes do not spring into existence in connection with business transactions, as the right kind of a currency always does.
 
Third: It costs those who use it, as currency, five times as much as currency should.
 
It is precisely as Mr. Manufacturer over there asserted a moment ago. Any system of currency that is of necessity limited in amount, and fixed as these United States Notes must be from the very nature of the case, breeds panics, because everybody realizing that the amount is limited, begins to scramble for cash upon the first intimation that there is any business trouble brewing. For this reason, they are utterly unfit as a system of currency.
 
Again, a right currency system is the natural product of business, and the amount of the currency will always rise and fall with the demands of trade. This can never be the case with the United States Notes, and they are on that account utterly unfit for currency.
 
And finally, certainly, if they cost the users of currency five times as much as the right kind of currency would, then we should replace them at once with the right kind[Pg 56] of currency. Now, let me illustrate and demonstrate this.
 
If, over at my bank, we are compelled to furnish an average of $10,000 in currency a week, our average expense for the year will undoubtedly be $10,000 invested for that purpose. And if money is worth 6 per cent interest, it will cost us $600 to supply that amount of currency. If we can buy United States Notes as cheap as any other kind of currency, and we should carry them in stock, they will cost us $600 per annum. Now, our bank, being a country bank, we carry 15 per cent of all our deposits to meet current demands. Is it not a perfectly simple and self-evident fact that if instead of being compelled to buy this $10,000 of United States Notes every week, and so keep $10,000 invested all the year around at a cost to us of $600, the interest on $10,000, we could convert $10,000 of our deposit debts into $10,000 note debts of the bank it would only cost us 6 per cent on $1,500, the amount we are carrying as reserve against our deposits of $10,000, or only $90. In other words, we would save $510 on the transaction. Of course, if we have to pay out $510 more in the one way than in the other, we will have to get it back from Mr. Merchant here, Mr. Manufacturer, Mr. Lawyer, Mr. Farmer and Mr. Laboringman; and if we should collect it from Mr. Merchant and Mr. Lawyer, they will in turn take it out of Mr. Farmer and Mr. Laboringman.
 
Mr. Farmer: You bet they will. We always get the gaff in the end.
 
Mr. Laboringman: Where do I come in? I don't come in anywhere except to carry the load, as usual. I come out at the little end of the horn, as always heretofore.
 
Uncle Sam: Well, fellows, you see, don't you, that everything gets back, sooner or later, to the producer? He carries the load.
 
Mr. Merchant: But we carry the worry.
 
Mr. Banker: I wish you did. You would have an easy time then, but—
 
[Pg 57]
 
Mr. Laboringman: You needn't say "but" to me. You have it on all of us. There is no doubt about that. However, Mr. Banker, I'm not going back on you, for you have helped me out of several tight pinches.
 
Uncle Sam: Well, it does really look to me as if I had been living in a fool's paradise. Those dear old greenbacks they have been about as much of a fraud as the dollar of our daddies. I do declare this whole thing makes me half sick. But if you are actually finding out what really ails me, I'll get over that pretty soon, and, boys, if we stick to this job, and play fair and honest, we'll have the best banking system in the world yet, and don't you forget it.
 
But you forgot to tell me about the safest and best banking system in the world because every bank note was secured by one of my Government bonds. That's what they've been telling me, you know. Now, what about that?
 
Mr. Banker: Well, I could not interfere with your confession that you had been living in a fool's paradise, and dreaming dreams about making something out of nothing, while your credit was in peril, and you were losing hundreds of millions and furnishing the country a currency that was costing the people five or six times as much as the right kind of currency would.
 
Now, a word about your bond-secured bank note illusion, and I will be through. Uncle Sam, you remember that during the war, you were looking around in every direction to find some new method for obtaining means to carry on the war. You had busted your credit wide open with your United States Note issue, and the question was how to find some new resource. Your Secretary of the Treasury, Mr. Chase, concocted this scheme of giving the banks the right of issuing notes if they purchased Government bonds, and deposited them to secure the payment of the notes. It is very strange, but he did not get much from this source, as there were only $98,896,488 of notes out when the war closed. However, the scheme was started, and has been going ever since, precisely as it was[Pg 58] inaugurated, a bond investment scheme. The amount of notes in circulation has never borne any direct relation to the demands of trade, as you can see by the following facts: In 1880 the notes outstanding amounted to $352,000,000, and in 1891, eleven years afterwards, they amounted to only $162,000,000, or about $100,000,000 less, although the country was growing and business expanding all the while. We ought always to expand our currency during the fall months about $300,000,000, and we ought to contract it during the succeeding months, or during the springtime just as much. But a careful investigation shows that these bond-secured notes have decreased as often in the fall months as they have increased, and have increased in the spring months as often as they have decreased. This proves conclusively that the amount of notes outstanding has never borne any relation whatever to the requirements of trade. The scheme is today precisely what it was when first concocted, purely a bond investment affair.
 
Uncle Sam: Well, well, now that is mighty strange, but my greatest Chief Justice, John Marshall, pointed out the necessity of having a currency directly related to the business of the country, when upholding the constitutionality of the Act incorporating the second United States Bank. He said: "The currency which it circulates by means of its trade with individuals is believed to make it a more fit instrument of government than it could otherwise be." One of my presidents, James A. Garfield, used this language: "No currency can meet the wants of this country that is not founded on business." Boys, both of these great men must have referred to credit currency, and declared that it was essential to our business.
 
Mr. Banker: Furthermore, Uncle Sam, these bond-secured Bank Notes are indirectly just that much more of a burden resting upon the United States Treasury, upon you, if you want to know the truth, as I explained to you last Wednesday night.
 
The fact is, these bond-secured Bank Notes are only[Pg 59] another form of Government credit put into circulation through the disguise of Government bonds.
 
Every single criticism and objection that I have made tonight to the United States Notes are applicable equally to these bond-secured Bank Notes.
 
First: For all banking purposes, economically speaking, they are practically rigid and inflexible, at least so far as current needs go.
 
Second: These bond-secured notes do not spring into existence, or into being, as checks and drafts do in connection with some business transaction, but are tied up with a bond speculation.
 
Third: They cost those who use them as currency from five to six times as much as the right kind of currency would.
 
Fourth: If we adopt the right kind of a currency system, it will set free $750,000,000 of capital which is now tied up in these Government bonds, and this vast sum which would be realized from the sale of the bonds will assist to an amazing degree in supplying much needed capital to the commerce of the country.
 
Mr. Merchant: How is that?
 
Mr. Banker: The banks could then sell all the bonds now deposited to secure these bond-secured Bank Notes. They amount to $750,000,000.
 
That these bond-secured Bank Notes are a monument of our stupendous folly, and have been a curse to the business interests of the country, I am sure no one here will attempt to deny.
 
Mr. Lawyer: The Japanese, thinking that we were a smart people, copied this bond-secured bank scheme from us, but immediately discovered that it was worse than worthless and repudiated it. No one else has been foolish enough to adopt it.
 
Mr. Banker: I challenge anyone here to urge a single reason in favor of either the United States Notes, or the bond-secured Bank Notes, which are only another form of United States Notes. No one can meet the objections[Pg 60] raised to them. In fact, there are two objections to the bond-secured notes, in addition to those urged against the United States Notes. First, as stated, they have tied up $750,000,000 in the bonds. Second, they have proved such a successful delusion as to prevent any sane legislation until sad experience has driven us to take the matter up seriously and compelled us to act.
 
Uncle Sam: Well, boys, so far as I am concerned, I am thoroughly convinced that you don't want any of my I.O.U.'s for currency. Nor do we want any bond-secured Bank Notes, which are really only another form of my I.O.U.'s. But I am still from Missouri, as I have not yet been convinced what we ought to do by way of a substitute. Mr. Banker has told us something about credit currency, and he declares that it is the only real thing in the way of currency.
 
Now, I suggest that we take that matter up next Wednesday night, and decide definitely whether we want to adopt that principle, and substitute that system, or some other. What do you all say to that?
 
Mr. Merchant: I think that should be the programme. In the meantime, let us all dig into the question and go to the very bottom of it, and if possible stump Mr. Banker.
 
Mr. Banker: All right, gentlemen, I am ready for you, and if I don't convince you that the only thing for us to do is to adopt a credit currency system, I will retire in favor of anybody you name. Possibly you'll select Nelson W. Aldrich.
 
Uncle Sam: No, you won't do anything of the kind. We'll look around a long time before we'll take him on. It is my candid opinion that he don't know a thing on earth about the question. I have known Nelse about thirty years. He came to my house after he had been engaged in the grocery jobbing business, and he has been a jobber ever since. A man who could stay in Congress for thirty years, declaring that we had the best banking system in the world, would not recognize an economic principle, on a cloudless day, walking down the middle of[Pg 61] Pennsylvania avenue at noon time. Now, as I said, Nelse has always been a jobber, and he would detect a crooked political deal crawling down a gutter, lizard-like, in the densest fog at midnight. He was prominent in a way in my home town, but it was only as a broker in senatorial favors. He kept books with the rest of his associates, his fellow senators. He was the clearing house of the United States Senate. That's all. He would be the very last man in the United States, the very last to join in clear, intelligent, unselfish, patriotic thinking. He just couldn't do it. Why, boys, he had rather go down a ram's horn than a gun barrel. He likes the twisting sensation. We don't want him at any price. Mark my word. What we want is honesty, intelligence, patriotism, unselfish devotion to duty and some good hard work.
 
Let us hope that we shall find a way out.
 
Good Night.