William Nelson Black.

Ultimate finance : a true theory of co-operation online

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the men who have not can often
better afford to pay for the use of
money than to do without, and that
it is a property of wealth to i^roduce
wealth. This we may be sure would
be a discovery soon made. It would
be revealed by the first of the neigh-
boring farmers who had not been
fortunate in getting together a
surplus, but whose crop for the



season had yet suffered a blight. The
unhappy farmer would find himself
in a dilemma. He would see a threat
of impending starvation if he could
not succeed in reinforcing his own
resources from the resources of some
of his neighbors. Naturally, then,
he would go to a neighbor, and ask a
loan, promising to return the money
after the next harvest. He would
promise even to give a bonus for the
use of the money during the year.
But the neighbor, though a chari-
table man, might not be willing to
trust his money to the hands of his
needy apphcant. He could see the
advantage of the bonus offered, but
crops are liable to blight, and the
disaster that made the loan necessary
could occur again. Then he would
ask security, and accept a lien on his
neighbor's JFarm. This is the incep-
tion of the banking system, the origi-
nal transaction from which every-
thing else has grown and fructified.
But it is only the inception, the first
sign of activity in a principle after-
ward to become most prolific in
results.

Advance one step further, and
observe the evolution of the idea.
The hoarding agriculturist has made
his loan, the needy agriculturist has
found relief from privation, or a
worse distress, by making use of the
inert resources of his well provided
neighbor ; and at the end of the year
he returns the amount borrowed
with the stipulated bonus for its use.
The lender finds himself richer for
the transaction by just the amount of
this bonus, and both men have there-
fore been benefited. But tne lender
has received a suggestion. It was
only a portion of his hoarded resour-
ces which he had loaned, and this
portion, in conferring a benefit on
his neighbor, has become fruitful.
All the remainder has lain inert and
useless, a source of no profit to the
owner, and a source of no rehef to
some possibly needy person who
could have turned it to his advan-
tage. It has also been exposed to



ULTIMATE FINANCE.



23



danger. Then why should not the
holder of the surplus look around
and find still other men who are in
need of his assistance? There is both
philanthrophy and jDrofit in the sug-
gestion, and we know of no law that
forbids the co-operation of these two
forces, one moral and the other
physical. No other two yoke-fellows
in the world are better mated.

The next step of the money lender,
then, can be seen in advance. He
decides that he will find other men
who are in need, and to whom he
may entrust his surplus. He was
hving, it will be remembered, long
before the age of Shakespeare, and
had never read the advice of Polo-
nius to his son in relation to borrow-
ing and lending, advice that would
forever make the great dramatic jDoet
seem like a poor economist were it
not for the vocation and expectations
of Laertes, the person to whom it
was given. He sets himself, there-
fore, to his task. But just here he
XQcets with an obstruction. Perhaps
all his neighbors are prosperous,
some, like himself, having a siu'plus
on their hands ; and the remainder,
happy in an abundant harvest, not
wanting assistance. He sees no op-
portunity, therefore, to make his
resources useful at home. But
perhaps he will be more fortunate in
the neighboring town. He will make
the efi'ort at all events, and if he does
not succeed he will be none the
poorer for his venture. To the town
then he goes, but here he meets with
still other obstructions. He will find
plenty of men who need his assist-
ance ; he has but to stand upon the
street corner and cry his wishes
aloud to bring around him a throng
of customers. Needy tradesmen,
young men just starting in life, and
old men at the last extremity of some
misconceived venture, are all solici-
tious to obtain his co-operation. But
he does not know that all who seek
to make loans are honest. He does
not know, either, even when their
honesty can be trusted, that they



can offer him sufficient security for
the repayment of his money. Evi-
dently, then, he must find some
trustworthy person to whom the
complicated affairs of the town are
familiar, and permit him to act as his
agent. This third person will demand
some compensation for his services.
He should be a man of deep local
insight into industrial and mercantile
affairs, of good judgment, and of
unquestioned probity. Such qualifi-
cations are not common ; and they
cannot be utilized when found with-
out price. But perhaps the parties
desiring loans will be willing to make
up the amount of the compensation
required. It seems only a reasonable
expectation.

In this new assistant to the
ojDulent agriculturist we discover the
first banker. He is the most success-
ful philanthropist that the world has
ever known ; yet in certain profligate
stages of social evolution he has been
about the worst abused member of
society. He has been badly compro-
mised by profligate oldest sons not
yet come to their estate, and by
adventurers of varied capabilities and
degrees. But what is his real func-
tion in society 1 Studied in this early
period of his career we see that he
is simply gathering together the
hidden and hoarded surplus of
individuals, and turning it over to
the service of society. Without his
assistance this surplus could be of
comparatively little utility. Men are
too generally strangers to know each
other's needs or resources. Dispersed
and scattered through the country
they are unknown to the denizens of
the towns ; and, if living in the towns,
their pursuits are varied, their affairs
often compromised, and their methods
sometimes mysterious, well calculated
to inspire distrust. Who but the bank-
er could ever bring them together in
such a manner that they can co-
operate, and make the seed sown in
accumulation productive? Here, then,
at the beginning of the banking
system, we see the banker an indis-



24



ULTIMATE FINANCE.



pensable factor in the titilization of
wealth, and consequently in its
growth. "We see him also engaged
at a work which can be called little
less than benevolent in its results
to the individual members of society.

Following upon the advent of the
banker comes a long train of conse-
quences of which the end is yet in the
dim future. Once recognized as a
factor in the negotiation of loans he
soon seems to stand at the fountain
of all the monetary streams that
flow, and to control the gates by
which the waters are regulated. He
cannot control the funds that enter
into production day by day, nor the
smaller exchanges of the market.
Industry and trade antedated his
coming, and prepared the foundation
for the superstructure which he has
reared. His control, therefore, is
neither absolute nor initial. But his
institutions are rapidly becoming the
representatives of all the surplus
wealth of the community, or, to
speak more accurately, the surplus
wealth of all the individuals who
draw incomes in excess of their per-
sonal needs. The community can
have no surplus. The suri^lus of one
man is the lu-gent need of another ;
and the banks hold a medial position
for its distribution in such manner
that it may contribute to the re-
sources of society. In the execution
of their office here they do indeed
exert a very large control ; and their
power to prevent the waste of re-
sources is incalculable.

But before proceeding with this
phase of the subject let us go back
again and observe what would be
likely to happen after the entrance of
the intermediary into the negotiation
of loans. The first transaction under
his management and advice may have
been concluded beneath a green tree,
or along some public highway. Or,
the agriculturist, known for his
thrift, may have been sought out in
his corn field, and the compact was
possibly made and signed over a
stump. Either place of business



would have been consistent with the
customs of the time ; but it is not to
be supposed that the intermediary
long remained an itinerant. We say
long in this case meaning not rela-
tively long, taking the duration of aU.
time as the standard for measure-
ment. It is to be presumed that he
would soon have found the negotia-
tion of loans so profitable that he
would see the propriety of selecting
a headquarters where he could meet
customei^ who were desirous of avail-
ing themselves of his services. But
the evolution of social institutions is
slow, and centuries may have passed
between the time when the first
banking transaction was completed
and the time that saw the virtual es-
tablishment of the first bank. But
the final period woxdd come ; and the
intermediary, still busied, perhaps^
with some other pursuit, such as gold
smithing, would find himself en-
sconced in comfortable quarters and
widely known as a negotiator of loans.
Then would come a new step in de-
velopment. In his double vocation
he would see the need of strong
boxes and burglar proof rooms to
protect not only his commodities as
a fabricant but the money of cus-
tomers held temporarily in hand
while the terms were undergoing ar
rangement. This would offer a new
suggestion. Why should he not re-
ceive money on deposit equal to the
amount of the securities that he could
offer for its safe keeping, and receive
a small bonus for the service? The
money would be much safer in his
hands than it would be in the stock-
ing or strong box of the agricultur-
ist, or the till of the shopkeeper.
There could be no question that he
would soon find customers. They
would come from far and from near,
not only to bring their money for
safe keeping but to enable the inter-
mediary to put it to use more prompt-
ly for their own benefit. He would
soon find, indeed, that he was build-
ing more wisely than he knew. He
would discover in the amount on.



ULTIMATE FINANCE.



25-



hand that, instead of asking payment
for his services as custodian, he conld
afford to offer a small bonus for the
privilege of holdingitin his possession.
This brings us through the evolu-
tionary period of banks of discount
and deposit. But the utility of the
banking system must not be measured
at the time when it becomes the chief
agent for handling the surplus wealth
held by the different members of the
community, and for the beneficent
use of what, without its co-operation,
would be largely hoarded and useless
to the pubhc. By its achievements
in even this service it has kept count-
less forces in motion for the material
advancement of society. It has built
cities and towns where there would
be only swamp lands and malaria. It
has covered the ocean with ships,
founded colleges and schools, and es
tablished our modern industrial sys-
tem on a basis of imparalleled breadth
and variety. But its service barely
more than begins at this stage of
progress, and in what now follows
the reader will understand why this
chapter was begun with a disquisition
on money, or a medium of exchange.
This is an agent which many j)hiloso-
phers seem to think entirely disas-
sociated from banking functions, and
subject to orders from some transcen-
dental authority, which, definitely to
their own conceptions but vaguely
enough to the conceptions of men
better grounded in first principles,
they denominate the Government. It
is because of this misconception that
the true significance of a medium of
exchange should be clearly com-
prehended, and that no detail should
be neglected in studying the evolu-
tion of our financial system. It has
been demonstrated by all experience
that it is an absolute impossibility
for government to control a medium
of exchange. This is true, because a
medium of exchange is inseparably
connected with bank deposits ; and
there are few truths in our economic
code that should be more promptly
recognized.



Let us investigate, then, after the
old method. Go back to a period not
so distant as the time when banks
were first instituted, but to the first
years when they became fully fledged
banks of discount and deposit, the
period when bankers began to pay
interest to depositors. What will we
first observe? A depositor enters the
banking room and places a bag of
money on the table. It contains, say,
£1,000 English curreucy, and after it
is counted the customer receives a
receipt for the amount. But this
£1,000 represents ijossibly the entire
surplus of the depositor, and though
he may hope and expect to keep the
account good, and even to increase
the amount by future deposits, he
may be compelled to draw from time
to time to meet emergencies. But
this may be found inconvenient. The
depositor may have come down from
Northumberland, and the banking
house is in London. He could hardly
be expected to come all the way to
the city in a lumbering stage coach
every time he wants to draw the trifle
of £50. Then he must have some
visible sign of the deposit available
for small sums, more easily certi-
fied than his receipt, and the banker
gives him a check book. He may
write a check for £50, then, whenever
it suits his convenience and the
tradesmen in Northmnberland will
receive this check in jjayment for
merchandise and utilize it again with
their correspondents in London.
What is the check, then, but a me-
dium of exchange.

But captious hair splitting men
will see a weakness in this illustra-
tion. The check they will say is not
in any sense to be regarded as a
medium of exchange, or a currency.
It is only the visible sign of the
money which is lying in the bank in
London. But the money is not lying
in the London bank, unless the
banker has miscalculated his oppor-
tunities. It has been loaned at
a higher rate of interest than it costs,
and either the money itself, or its-



-26



ULTIMATE riNASCE.



«qmvalent, is rendering good service
in some other field. The money has
escaped; and the banker has duph-
cated its power as a mediutn of
exchange! It is now contributing
two thousand pounds to the circulat-
ing medium where it formerly had
only the power of one thousand
pounds.

Still this reasoning will not be
thought quite satisfactory. It will
be claimed that the transaction rests
on a stamped currency foundation,
and that the check can do the work
' of money only because it represented
the money, wluch is still an entity,
though it might be difficult to disco-
ver its location. But banks receive
deposits, whether called by that name
or not, of other substances than
money, and on these deposits they
keep in circulation bank paper of
various kinds to an amount of untold
bniions. In these latter days of a
highly developed banking system the
amount of these securities is enor-
mous. Think of the bank or bank-
able paper which rests on real estate
or other mortgages, on stocks, on
notes, and it might almost be said
on mercantile transactions not yet
brought to a fruition, in circulation
in the United States. It is doubtful
if all the gold and silver currency in
the country, together with all the
legal tender notes, would stand in
comparison with bank paper, and
paper maintained through the agency
of banks, as , one to one hundred.
This proportion may be somewhat
exaggerated, but not enough to make
it worth while to try and reach a
closer estimate. The preponderance
of bank circulation, or of bankable
paper that may be converted into a
medium of exchange, is overwhel-
ming ; and it does all the work of a
■currency except the payment of small
dues. The chief reason why it is not
used for this purpose is because its
use would be found inconvenient.
Do we not find proof here that, as
:financial intelligence increases and
commercial methods are perfected,



we are outgrowing the image and
superscription of Csesar? We shall
certainly be justified in making an
affirmative-answer.

But of course this line of argument
will still meet with objections. We
shall be told that bank paper does
the work of a currency only because
it is the representative of a currency,
and can be converted into money at
the option of the holder. But it
would be pleasant to hear an expla-
nation of the process of conversion.
It would sound not unUke an expla-
nation of the feat of pouring the
contents of a two gallon demijohn
into a pint measure without causing
the smaller vessel to overflow. We
deny the force of the objection in
toto. The majority of bank paper, an
overwhelming majority of such paper,
does the work of a currency not
because it is the representative of
money, and may be converted into
money, but because it is the repre-
sentative of property and needs no
conversion. It represents stocks,
bonds, mortgages on real estate,
secured notes, and various other
inventions, and is only put in terms
of money because money has been
provided with the numerals and
denominations which, as heretofore
explained, form the memoranda of
exchange. Bank paper bears the
figures that are borne by the stan-
dard silver doUar, only many times
multiphed. It tells us how many
j)Ounds of cotton are exchangable
against so many yards of woven
cloth, and this is the only kind of
service that can be rendered by any
currency. The industrial age is here.
At every point we see the evidence
that men are out-growing the swad-
dling clothes that have so long
hindred their footsteps, and putting
on new garments to enable them-
selves to run to and fro without
hindrance. In their new garb they
will demand enlarged liberty. The
very advent of the banking system
sounded the knell of communal
processes in controlling the ma-



DLTIMATE FINANCE.



27



•chinery of exchange ; and though
many generations, many centuries
even, have passed since it began to
germinate there was never any rea-
sonable chance for doubt upon the
final event. True to its instincts
government has endeavoured to bind
the new giant to its service at various
times and places. It has even clothed
him in its livery, and compelled him
to associate among its footmen. But
the absurdity of the attempt is be-
coming continually more and more
evident.

Properly understood, the supply
of a currency for an industrial and
mercantile community is a banking-
function ; and though the giant of
abuse may throw his heavy bulk
athwart the way, and by various
devices try to screen the light that
is dawning, the truth is beginniE.g to
prevail. The opposition to progress
is not a manifestation to cause sur-
prise. The science of political eco-
nomy, more important than any other
science for securing the welfare of
the race, is of all studies the least
generally apprehended or pursued.
To confess the truth it is an infant
and undeveloped science ; and here is
the first cause for the long failure to
reach higher and firmer ground. But
there is a second cause possibly still
more potent than the first. No
country has yet escaped from the
incubus of a governing class. In a
republic like the United States the
power of this class is i-educed to a
minimum, and there are few who
care to see it maintained. But it
still lives, and it is not without
influence sometimes in suppressing
and sometimes in misdirecting the as-
pirations of men. It is the cue of this
class to magnify the functions of
government, and to attempt to give
it the lead and direction. Thereby
comes personal emolument, influence,
position, and power; and the par-
venue may become more susceptible
than the born prince to seductive
xireams. But let us not for a moment
■withdraw our eyes from the chief



purpose for which men labor, and
while it remains in view it ought not
to be difficult to separate the
functions which belong to industry
and commerce from those made
necessary for the protection of
society. Princes may tell us that
money was intended to organize,
maintain, and mobilize armies, and
that it should be created and con-
trolled by the men who make war or
peace, and know the extent of their
necessities ; but we know that
its chief purpose, imder the ideal
conditions towards which the highest
republican civilization is tending, will
be merely to measure the exchange-
able value of products. By whom
then should it be controlled if not by
those who are trained to industrial
and mercantile pursuits ? The atten-
tion of such men is directed con-
tinually towards the market, and
they know its needs. >

It may be objected that this rea-
soning attacks the constitutional
power of the United States to coin
money. The objection, however,
would have little force because it is
not denied that it might be expedient
for the community to regulate the
form of that portion of the medium
of exchange which remains perman-
ently in circulation and is used for
the payment of small dues. Such
regulation is not necessary. The
wampum of the North American abo-
rigines shows that money is the expe-
dient of commerce, and not the in-
vention of government. It would
have grown into being in substan-
tially, or inherently, its present form
had there never been a law passed
providing for its coinage. It is not
the creature of law, but of necessity.
Still, it is desirable to have a uniform
currency; and this probably could not
be obtained except through the co-
operation of the law. It remains a
question whether the Government is
the proper manufacturer of the ob-
ject which its regulations have
defined. But this is not a vital
question. The purpose here is merely



28



ULTIMATE FINANCE.



to show the impolicy, inconsistency,
and at the same time futility of any
attempt on the part of the govern-
ment at regulating the Tolume of the
circulating medium. The banks
should have the privilege of putting
afloat all the money for which they
find a demand, and can secure in cir-
culation. We may be sure that they
will print no more than they can use
profitably.

In the three functions of the bank-
ing system, then, comprehended by
discounts, deposits, and the issue of
a circulating medium, we find in op-
eration the three most potent forces
for the direct accumulation of wealth
that have yet been put in motion. In
making serviceable the surplus wealth
in the hands of individuals the bank-
ing system lays the foundations of a
structure of almost undefinable ex-
tent ; but when to this is added the
resources of deposits, and the direct-
ly following and consequent spectacle
of an enormous capital put into active
circulation and made to contribute to
the demands of exchange, the summit
of the edifice towers so high that it
becomes almost invisible. There can
be Uttle doubt that the astonishing
progress of the last hundred years,
not merely in the accumulation of
wealth but in the arts and in the de-
velopment of applied science, has
been chiefly due to the stimulus of-
fered by the banking system. It
represents the arterial structiu'e of
the social body, carrying life from
the heart to the extremities and from
tbe extremities back again to the
heart. None but practical men, or
careful students, made familiar with
its x^rocesses by experience or obser-
vation, can begin to estimate the
measure, of its utility. It represents
the Aladdin of modem society, and
more than realizes the dreams of the
Alchemists who sought to transmute
the baser metals into gold. The
banks know how to do better. They
transmute even gold, inert without
their magnetic touch, into the sinews
of industry.



Upon the whole, the banking i
tem is of so much importance in
relations to wealth that, whate
changes are impending in the st:
tural features of fbaance, we she
be careful to see that it is in no
spect weakened. It should
strengthened rather in every part
lar. It represents a special funct
which should be kept carefi
specialized and distinct. In the fi
evolution of finance it wiU stand e
more completely than now as
representative of an exchange
service. Through its agency ev
contribution to the general fund
be made to yield the choicest frui
personal benefits.



CHAPTER IV.

THE KELATION OP INSURANCE TO AC
MULATION.

It is not commonly underst(
that insurance is a large factor in
production of wealth. A person ■?
attempts to borrow money on an
insured property cannot fail to (
cover that it is a powerful facto]
maintaining values ; but the act
taking out an insurance policy
prevent losses by fire, shipwreck,
any other of the various casual;


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Online LibraryWilliam Nelson BlackUltimate finance : a true theory of co-operation → online text (page 12 of 19)