William Berkey
The Money Question

PAPER
MONETARY SYSTEM


CHAPTER VII.
THE NATIONAL BANKING SYSTEM.



SECRETARY CHASE, soon after he entered upon the discharge of the duties of Secretary of the Treasury, became enlisted in a scheme to destroy the old State banks and erect in their stead a system of National Banks whose circulation would be uniform throughout the country.  In his first report to Congress, in December, 1861, he recommended the passage of a law to accomplish this end.  A bill was immediately prepared by the Hon. E.G. Spaulding, chairman of the Sub-Committee of Ways and Means, but it became manifest that the machinery of such a system could not be put into operation in time to meet the demands upon the government, and Congress was obliged to pass a law authorizing the Secretary of the Treasury to issue Treasury notes (greenbacks.)

The admirable manner in which the greenback performed the uses of a medium of exchange and its great popularity rendered it tolerably certain that the people would never willingly abandon it to return to the use of State bank currency.  The money power was quick to perceive this, and also that in no other way than through the instrumentality of such a scheme as that proposed by Secretary Chase and his advisers could it hope to again obtain its former control over the currency of the country.  The National Banking scheme, therefore, which at first excited some opposition on the part of the old State banks, soon came to be regarded by the majority of them as of the highest importance.  In December, 1862, Secretary Chase, in his second annual report, again urged the passage of a National Banking law, for the purpose of establishing “one sound, uniform circulation of equal value throughout the country, upon the foundation of national credit, combined with private capital.”  There was no expectation or even pretense that the system could aid the government in any way in the war then pending.

On the 2d of February, 1863, Senator Sherman reported a National Currency Bank bill from the Finance Committee to the Senate.  It was taken up in the Senate on the 9th, and passed on the 12th by a vote of 22 to 21.  On the 13th it was sent to the House, but was not referred to the Committee on Ways and Means.  On the 19th it was taken up for consideration in the House, and was passed on the 20th by a vote of 78 to 64.  It was approved by the President and became a law February 25, 1863.

The brief time given to the consideration of this important act, establishing a consolidation in the interest of the money power, compared with which the monster that Jackson slew (the United States Bank) was a mere pigmy, cannot escape notice.  The people were absorbed in the war, and the money power had full sway in Congress.  The Hon. W.P. Noble, one of the few members who protested against the passage of the act, alluded to this fact in the opening of his speech against the bill in these terms :

“ Mr. Speaker, it is not because I expect, by anything I can say, to change a single vote upon this bill, that I now claim the attention of the House.  On the contrary I am satisfied, from the great and untiring efforts that are being made by the Secretary of the Treasury in its favor, that the passage of this bill is a foregone conclusion ;  not because it, or anything like it, is demanded by the people, but simply because it is a pet measure of the present head of that department.”

THE NATIONAL BANKING LAW.


The National Banking law provides :

First :  That any number of persons not less than five may form an association for carrying on the business of banking.

Second :  That any such association shall have corporate power, to have succession for the period of twenty years, to make contracts, to sue and be sued, etc.

Third :  The capital of such associations shall be not less than $50,000 in places whose population does not exceed six thousand ;  not less than $100,000 in places whose population exceeds six thousand ;  and not less than $200,000 in places whose population exceeds fifty thousand.

Fourth :1  The aggregate amount of circulation is fixed at $354,000,000, to be apportioned as follows :  $150,000,000 among the several States and territories according to representative population ;  $150,000,000 to be distributed by the Secretary of the Treasury according to his discretion ;  and the remaining $54,000,0002 to such States and territories, having less than their share, as may make application prior to July 12, 1871.

Fifth :  No association is authorized to commence business until it shall have deposited United States bonds to the amount of $30,000 with the Treasurer of the United States.

Sixth :  Every such association is entitled to receive from the Comptroller of the Currency circulating notes to the amount of ninety per cent. of the capital stock, if it does not exceed $500,000 ;  eighty per cent. if it exceeds $500,000, but does not exceed $1,000,000 ;  seventy-five per cent. if it exceeds $1,000,000, but does not exceed $3,000,000 ;  and Sixty per cent. if it exceeds $3,000,000.

No National Bank currency was issued until about the beginning of 1864.  It will be remembered that the $500,000,000 of 5-20 bonds were not sold until the latter part of 1863 ;  consequently matters were not yet ripe for the bullionists and bankers.  In 1864, however, their plans were sufficiently matured to enable them to run gold up to an enormous premium, in what Mr. Fessenden, who was then Secretary of the Treasury, considered a very “unpatriotic” manner.  For more than a year gold fluctuated between about 1.50 and 2.50, according to the success which attended the efforts of the gold operators in controlling the market.  Bonds of the government were bought during this period at as low a price as thirty-five cents on the dollar in gold.  This gave the bullionists, and bankers an excellent opportunity to lay in, at low figures, all the bonds that were needed to establish National Banks.

The amount of National Bank notes in circulation on January 1, 1864, was $280,000 ;  on July 1, 1864, it was $31,234,420 ;  and on July 1, 1865, it was $146,336,030.  Shortly after this the whole amount authorized by law was taken, and National Bank stock began to command a premium.  Thus was the National Banking system foisted upon the country at a time when it was neither needed nor desired, solely for the purpose of enabling the money power to again usurp the right of supplying the nation with a medium of exchange.  It only remains now to retire the greenback and resume specie payments, and the money power of the United States will be clothed with a more absolute control over the monetary affairs of the country than it ever had before.


OF THE ORGANIZATION OF NATIONAL BANKS.


National Banks are established on the theory of combining private capital with public credit.  It will be found on examination, however, that this is purely a delusion.  Private capital is not an essential element in the establishment of a National Bank ;  private credit will do as well.  This may be illustrated in various ways.  Suppose A. owns $100,000 in 6 per cent. United States bonds.  B., C., D., E. and F., five persons, jointly borrow these bonds from A., agreeing to pay him the interest regularly as it matures, and return the same or like bonds at some specified time, say in five or ten years.  B., C., D., E. and F. organize a National Bank, deposit the bonds with the Treasurer of the United States, and obtain $90,000 of National Bank currency from the Comptroller.  So far as the bank or its currency is concerned, there is no element of private capital involved in the matter.  Its corporators or stockholders have not paid in a dollar for the capital stock of the concern.  A.’s bonds are not capital, because the people have already borrowed A.’s capital and are paying him six per cent. interest in gold for it.  Upon what capital then is the bank established ?  Upon no other capital clearly than the public credit represented by the $90,000 of bank currency lent to B., C., D., E. and F., without interest, on the strength of what the government owes A.

There are of course innumerable ways in which individuals can utilize their capital or credit in the establishment of National Banks.  The Hon. S.S. Marshall, of Illinois, in a speech on the floor of Congress, July 21, 1868, mentioned the following instance :  “ An association of gentlemen (in an Eastern State) raised $300,000 in currency.  They went to the office of the Register of the Treasury and exchanged their currency for $300,000 in six per cent. gold bearing bonds.  They then went to the office of the Comptroller of the Currency, in the same building, organized a National Bank, deposited their $300,000 in bonds and received for their bank $270,000 in national currency.  They had let the government have $30,000 in currency more than they received for banking purposes, and had on deposit $300,000, on which they received as interest from the government $18,000 a year in gold (and exempt from taxation.)  This was pretty good financiering for these bankers to receive $18,000 a year in gold—on the $30,000 in currency which they had thus loaned to the government.  But this is not the whole story.  They had their bank made a public depository.  They soon discovered that there was scarcely ever less than $1,000,000 of government money deposited within their vaults.  They did not like to see this vast sum lie idle.  They, therefore, took $1,000,000 of this government money and bought $1,000,000 of five-twenty bonds with it.  In other words they loaned $1,000,000 of the government’s own money to the government, and deposited the bonds received in the vaults of their bank, on which they received from the same government $60,000 a year in gold as interest.  Thus for the $30,000 in currency, which they originally loaned the government, they received annually in all $78,000 in gold.”  But this was by no means the limit to the legalized robbery which these gentlemen were capable of perpetrating under the National Banking law.  Since they had no scruples about investing the government deposit of $1,000,000 in 5-20 bonds and appropriating the interest to their own use, it is not at all likely that they would stop there, when, by simply depositing the $1,000,000 in 5-20 bonds with the Comptroller of the Currency, instead of in their bank vaults, they could draw eighty per cent. more currency, or by starting two new banks of $500,000 each, they could draw ninety per cent. more currency, to substitute for that amount of the original deposit of the government used by them.

The following table exhibits the number, nominal capital, etc., of the National Banks in existence September 1, 1873, together with the amount of their earnings, from March, 1873, to September, 1873 :


New England States.............
Middle States...................
Southern States.................
Western States.................
             Totals,
No. Banks
496
591
161
707
1955
Capital.
$157,014,832
192,234,009
33,259,530
105,592,580
$488,100,951
Surplus.
$38,303,887
53,431,089
3,600,607
22,778,265
$118,113,848
Not Earnings.
$10,103,736
12,565,331
2,246,024
8,206,909
$33,122,000

At this time, September, 1873, the National Bank circulation was as follows :



New England States
Middle States
Southern States
Western States
Pacific States and Territories .....
Total for States and Territories...
Amount of
Circulation.
$110,489,996
124,608,139
38,160,308
78,785,148
1,924,688
$353,968,279
Circulation
per capita.
$31.68
12.82
2.91
7.09
1.82
$9.18

The profits of the National Banks, according to their own reports, as set forth in the foregoing tables, are enormous.  This will appear from the following :

Nominal capital of National Banks in 1873... $488,100,951
Bank note circulation furnished by the govern-
ment, without interest.....................................353,968,279
Real capital....................................................$134,132,672
Surplus earnings.............................................118,113,848
Total real capital and surplus earnings ........ $252,246,520

Net earnings from March to September, 1873, (six months) $33,122,000.  The net earnings consequently amounted to 25½ per cent., or 51 per cent. a year on the real capital ($134,132,672);  or 13 per cent., or 26 per cent. a year on the real capital and surplus earnings added together ($252,246,520.)

These enormous profits operate as a tax on the medium of exchange of the nation, and enter into the price of all commodities.  They also enable the banks to control the circulating medium of the country, and explain why it is that periodically money leaves the channels of trade and becomes concentrated in the vaults of the banks.


THE PANIC OF 1873.


The enormous contraction of the circulating medium of exchange and evidences of indebtedness of the government, which were used as such, inaugurated and carried on by McCulloch, together with the operations of the National Banking system, began to affect the industries of the country injuriously as early as 1867.  Mr. Spaulding estimated the amount of paper issues which served the purposes of currency, on the 30th of January, 1864, at $1,125,877,034, and to this amount is to be added several hundred millions of 7-30 Treasury notes issued in 1864 and 1865.  The greater part of this vast sum was called in by the government prior to 1868, and its place supplied in part by bank note currency and bank credit.  Business could no longer be done for cash, as was the case when the channels of trade were fully supplied with a medium of exchange, and business men were compelled, by reason of the growing scarcity of money, to resort, as in days before the war, to the banks and borrow bank credit.  During the year 1866 the banks increased their loans (inflated their credit) $107,600,000.  As contraction went on, bank loans increased, and it was only a question of time as to when the bubble of inflated bank credit would burst.

That McCulloch and the bankers generally anticipated financial distress amongst the people, and probably a commercial crash and money panic, is clear from the correspondence between Mr. Spaulding and Secretary McCulloch, in December, 1866, from which we take the following extracts :  Mr. Spaulding, in a letter dated at his banking house in Buffalo, December 4, 1866, to McCulloch, says :

“ You have no doubt now, to a large extent, control of the finances of the country (by virtue of the contraction act of April 12, 1866), and I think that you will, of necessity, contract moderately, so as to preserve a tolerably easy money market, in order to be able to fund the compound 6s and 7-30s into long gold bearing bonds between this and the 15th of July, 1868.  There may be occasional spasms and tightness for money with the speculators, but generally I shall look for plenty of money for legitimate business for at least a year to come.”

To this McCulloch replied, December 7, 1866 :

“ What we need is an increase of labor.  If we could have the productive industry of the country in full exercise, we could return to specie payments without any very large curtailment of United States notes.  My object has been to keep the market steady, and to work back to specie payments without a financial collapse.”

Whilst thus prating about “having the productive industry of the country in full exercise,” McCulloch was straining his authority as Secretary of the Treasury to deprive the productive industry of the country of its most essential tool, a medium of exchange, and give to the banks the entire control of its monetary affairs.  That a financial collapse or commercial crash did not immediately follow the sudden and complete retirement of the various forms of indebtedness of the government used as a currency, was due, first, to the productive strength of the country which had been enormously developed during and after the war, by reason of the abundance of money in circulation ;  second, to the large increase of bank note circulation, and the great inflation of bank credit which followed ;  and, third, to the large volume of greenback money in the hands of the people, which, not being burdened with interest, was as yet beyond the control of the banks.

In 1866 the best 60 day paper ruled in New York City at 5 to 7 per cent.  In January, 1867, the same paper rated at 8 to 10 per cent., and during the following summer a great many failures occurred.  The effects of McCulloch’s policy of contraction began to be seriously felt throughout the country.  In obedience to public sentiment, Congress was compelled, in January, 1868, to suspend the law authorizing the retirement of the legal tender notes (greenbacks.)  The amount of greenbacks outstanding at this time was $356,000,000.  Congress, however, took no action in reference to the enormous contraction of paper emissions in other forms.  The amount of paper emissions of the government which were actively employed as a tool of industry in the production and distribution of wealth in 1865 and 1866 was about $1,800,000,000.  When McCulloch, under the flimsy pretense of bringing the country back to “honest money,” set out to retire this vast volume of currency, what provision had been made by the government to supply its place ?  None whatever, except the establishment of National Banks, authorized to issue bank currency to the amount of $300,000,000.  The practical effect of McCulloch’s policy, therefore, was simply to deprive the nation of any other circulating medium than bank currency.  In view of these circumstances it is impossible to arrive at any other conclusion than that McCulloch had deliberately conspired with the money power to enrich the bondholders and to give the National Banks control of the monetary affairs of the nation.  The history of the world furnishes no parallel to this gigantic scheme, having for its object the robbery of a nation under cover of law, so successfully carried out by McCulloch and his associates.

The policy of contraction and the National Banking system together soon wrought a complete revolution in the business affairs of the country.  In 1865-66 the producing forces of the nation were in active operation, producing wealth as it had never been produced before.  “ The American people waked up each new morning to feel that there were great duties before them.”  Labor was fully employed at the very time that McCulloch was hypocritically prating about “the need of an increase of labor” and the necessity of having “the productive industry of the country in full exercise.”  Business was everywhere done cheaply, because it was done for cash, and, as McCulloch himself has since admitted, the people, “individually, were free from debt.”  The enormous productive strength of the country was in full exercise, and the immense burden of taxation imposed by the war was scarcely felt.  Indeed, the revenues of the government were so large during this period that the public debt was extinguished to the amount of about $500,000,000.

We now turn to what followed.  All evidences of indebtedness of the government used as a currency, except the greenback, had been retired—paid off or converted into long bonds bearing gold interest.  The National Banking system was in the full tide of successful operation.  By the act of July, 1870, an additional issue of bank notes, to the amount of $54,000,000, was authorized, making in all $354,000,000.  The entire issue authorized by law was in active employment, and bank stock commanded a high premium.  The circulating medium of the country in 1869 consisted of lawful money and bank currency as follows :

Legal tender notes .......................$356,000,000
National Bank Currency.................300,000,000
Fractional Currency about................ 37,000,000
.......................................................$693,000,000
To this add amount of National Bank currency
authorized by act of July, 1870......... 54,000,000
.......................................................$747,000,000

The National Banks of the principal cities were required by law to keep on hand in lawful money of the United States an amount equal to at least twenty-five per cent. of the aggregate amount of their notes in circulation and their deposits ;  and other associations fifteen per cent.  As bank deposits and loans increased, requiring a proportionate increase of the reserve of lawful money, it is manifest that a further contraction of the circulating medium followed.  The following table exhibits the inflation of bank credit that took place from 1866 to 1873 :

DATE.CIRCULATION.DEPOSITS.LOANS.
Jan. 1, 1866.................  $ 213,000,000   $ 513,600,000  $ 498,800,000
Jan. 1, 1867.................291,000,000555,100,000608,400,000
Jan. 1, 1868.................294,300,000531,800,000616,600,000
July 1, 1868.................294 900,000575,800,000655,700,000
Jan. 1, 1869................294,400,000568,500,000644,900,000
July 1, 1869.................292,700,000674,300,000686,300,000
Jan. 1, 1870.................292,800,000546,200,000688,800,000
July 1, 1870.................291,100,000542,100,000719,300,000
Jan. 1, 1871.................302,200,000561,900,000768,300,000
July 1, 1871.................307,760,000602,100,000789,400,000
Oct. 1, 1872... .............333,400,000625,700,000872,500,000
Sep.12, 1873.................339,000,000622,600,000940,200,000

Instead of $1,800,000,000 of paper currency, a large portion of which bore interest in the hands of the holders, filling the channels of trade, the business of the country was now carried on with bank currency and bank credit (about $1,000,000,000), involving the payment of an enormous tribute to the National Banks for its use.  The business of the country was no longer done for cash.  Money became scarce and commanded a high price, and the price of property fell in a corresponding ratio.  New business enterprises were no longer thought of.  Those already established, yielding small profits and requiring ready money for their successful operation, were obliged to succumb.  The ability of the nation to produce wealth was enormously diminished.  Taxes, which before were scarcely felt, now became a great burden.  Merchants and manufacturers who were obliged to pay interest for money and bank credit added the amount to the cost of their goods.  The retail dealer was obliged to do the same, and the cost of bank currency and bank credit, several times multiplied, had to be paid in the end by the consumer, whose ability to pay had, for the same reasons, been greatly diminished.  Such is the natural course of affairs under a system of currency furnished and controlled by banks of issue.  The same system had been tried for over sixty years prior to the war and had proved utterly unsound.  It had inflicted upon the country a commercial crash on an average every six years.  And the marvelous thing is, that notwithstanding all their bitter experience, the people of the United States should suffer such a system to be re-established in a more powerful and dangerous form than ever.  During this period the industries of the country were sustained and buoyed up in a manner that is worthy of special mention.  Congress had granted a large number of subsidies in the shape of lands to aid in the construction of railroads.  Bonds secured by mortgages on the lands granted by Congress had been negotiated, mostly abroad, to the amount of many hundreds of millions of dollars.  The funds thus acquired contributed largely to the support, of many industries, which otherwise would have been obliged to succumb to McCulloch’s policy.  Among other corporations thus subsidized was the Northern Pacific Railroad Company, owned and controlled by the banking house of Jay Cooke and Company.  It was confidently expected by Jay Cooke and Company that the bonds of the Northern Pacific Railroad Company could be negotiated abroad.  The Austrian and German bankers, to whom they were offered, however, sent over two experts to examine the road and the country through which it extended.  They reported adversely to taking the bonds.  Jay Cooke and Company then attempted to dispose of their bonds to the American public, through the aid of the religious press and the clergy of the country.  Their plan was only partially successful.  The times had become too stringent, and on the 18th of September, 1873, the banking house of Jay Cooke and Company failed.  The country had been ripe for a commercial crash for some time, and this brought matters to a crisis.  The failure of Jay Cooke and Company was immediately followed by the failure of a number of leading banks in New York City.  The Stock Exchange of that city also closed its doors for a period of ten days.  The premium on gold began to decline, and fell during the month to 75/8 per cent.  Greenbacks commanded a premium over certified checks of from ¼ to 3 per cent.  The suspension of payments by the banks of New York soon extended to all the principal cities and towns throughout the country.  Exchange on New York, which usually commanded a premium, was at a discount, if not entirely unavailable.  The suspension lasted about forty days, and the industrial interests of the country received a shock from which they have not yet recovered.

To the great mass of the people, who judge of the prosperity of the country by the activity observable in its business affairs, the panic of 1873 was wholly unexpected and came like a clap of thunder from a cloudless sky.  The harvest of the year was about over, and the crops were good.  The mining and manufacturing interests seemed to be flourishing, and to all external appearances there was abundant evidence of general prosperity.  But, beneath the surface, matters presented a very different appearance.  The industries of the country had been laboring from year to year since 1866 under an increasing burden imposed by the banks.  Business had ceased to be done for cash, and business men everywhere were carrying a load, more or less, of credit—struggling on from year to year in the hope that the coming spring or the coming fall would in some way bring a change that would afford relief.  A temporary spurt in business might relieve an individual here and there ;  but under such a system of money there could be no general relief.  A commercial crash was inevitable.  The reason of this is easily explained.  The average growth of national wealth is about three and one-half per cent. per annum.  Individual wealth cannot increase more rapidly than that.  The higher gains of some are counterbalanced by the lower gains or absolute losses of others.  As money is an essential tool in the production and distribution of wealth, it is important that it should be abundant and rule at low rates of interest.  But under a system of banks of issue money scarcely circulates at all.  It is locked up in bank vaults, and in its stead the public is obliged to use bank currency.  Bank currency can only be obtained by the payment of a high rate of interest.  It is, therefore, far more expensive than even gold and silver.  These metals simply cost their equivalent in labor or products.  When once obtained they will circulate in the channels of trade, whilst they remain in the country, unburdened with interest.  Individuals may acquire a surplus and lend it to others, but this is an individual transaction.  The gold or silver thus lent is put to use by the borrowers and passes into the channels of circulation free of interest.  The same is true of legal tender paper money issued by the government.  It costs its face value in labor or products to obtain it from the government.  It enters into circulation unencumbered by interest.  Individuals may acquire a surplus of legal tender paper money and lend it to others.  As in the case of gold or silver, this is purely an individual transaction.  Neither gold nor legal tender paper money can accumulate value except when employed.  But bank currency constitutes a peculiar medium of exchange, very different in its nature from gold money or legal tender paper money.  Bank currency is not money.  Bank notes are simply evidences of indebtedness of the banks which issue them—promises to pay money.  They enter into circulation encumbered with interest, and continue to accumulate value for the bank which issues them, whether they are performing the uses of money or not.  For the sake of illustration, say that A., a manufacturer, borrows a $100 bank note from a National Bank for sixty days at six per cent. interest.  He uses this note in the prosecution of his business, and adds the interest which he is obliged to pay to the bank to the cost of the article manufactured by him.  At the expiration of sixty days, A., unable to return the identical note borrowed by him, pays the bank with a $100 greenback.  This in turn is lent by the bank to B., and so on indefinitely.  The bank is thus enabled to realize compound interest indefinitely on the original note lent to A., which was not money but simply credit—no matter what becomes of it, whether it is occupying the channels of circulation or rotting at the bottom of the ocean.  It is apparent, therefore, that when the nation uses a medium of exchange consisting of bank currency it is obliged to pay compound interest for its use.  As must be manifest this is a great burden upon the industries of the nation.  The more this kind of currency is inflated the heavier will be the burden imposed upon the industries of the country.  A great deal is said by the money power and their organs in regard to the evils of inflation, whenever it is proposed to increase the issue of legal tender paper money, but nothing is ever said about the real danger, which invariably attends the inflation of bank currency and hank credit.  By reference to the table given on page 255, showing the deposits and loans of the banks from 1866 to 1873, it will be seen that the banks inflated their credit from $498,800,000 in 1866 to $940,200,000 in 1873.  This immense sum of inflated credit, bearing compound interest, entered into and ramified all the industries of the country, and added immensely to the cost of production.

The following table exhibits the discounts on six months’ notes for a term of sixty years.  We copy it, along with the following explanatory remarks, from Kellogg :  “ A thousand dollars in money are taken, and with this sum a note payable at six months is discounted.  When the first note is paid, a second note having six months to run is discounted with its proceeds, and a third note with the proceeds of the second.  This calculation is continued on six months’ notes for sixty years.  The table shows the accumulation on $1,000 for sixty years, at the various rates of 1, 2, 3, 4, 5, 6, 7, 8, 12, 18, 24 and 30 per cent. per annum, taking off the discount, as is always done by banks and brokers.

“ The highest rate calculated is thirty per cent. per annum, or two and a half per month, a rate not nearly so high as is often paid in Wall street.

“ In the foregoing table it appears that interest at one per cent. would transfer $824 worth of the products of labor to the capitalists to pay for the use of $1,000 for the sixty years ;  at six per cent., $37,671.58 ;  at seven per cent., $70,898.92 ;  and at thirty per cent., $294,956,058,207.37.  In any community the rise of the rate of interest on all the money used, whether for a longer or a shorter period, transfers from producers to capitalists a sum proportioned to the increase of the rate per cent., as demonstrated in this table.”

The power of money at interest to accumulate value is not fully understood or appreciated by the public.  The following extract, which will further serve to illustrate this point, is taken from an able lecture delivered by Wallace P. Groom, Esq., editor and publisher of the New York Mercantile Journal, on the subject of the “Currency Needs of Commerce:”

“ Many carelessly infer that the increase of money at six per cent. is just twice as rapid as at three per cent., but in reality the increase is vastly more rapid than this.  In one hundred years, at six per cent., the increase on any given sum is about eighteen times as much as at three per cent.

“ If one dollar be invested and the interest added to the principal annually, at the rates named, we shall have the following result as the accumulation of one hundred years :

“ There are probably few, however familiar with the subject of the rapid increase of capital put out at interest, who would not be startled at the statement that the cost of the outfit of Christopher Columbus in his first voyage of discovery, put at interest at six per cent., would by this time have amounted to more than the entire money value of this continent, together with the accumulations from the industry of those who have lived on it.  If any doubt this, let them reckon the amount, estimating the entire outfit to have cost only the small sum of five thousand dollars, and remembering that money doubles, at six per cent., in a little less than twelve years—or accurately in eleven years, ten months and twenty-one days.  Allowing it to double every twelve years, this five thousand dollars at interest at six per cent-, since 1492, it will be found, will have amounted to $17,895,700,000,000 ;  which, estimating the population of the entire continent of America (North and South) to be eighty-five millions, or seventeen million families (averaging five members each), would give more than a million dollars as the possession of every one of these.  The interest upon a million of dollars at six per cent. is sixty thousand dollars, which would now be the princely annual income of each of these seventeen million families from the accumulations up to this time upon so small a sum as that named for the outfit of the discoverer.”

But it must not be forgotten that banks of issue do not lend capital or money, but simply credit ;  and in this consists the great injustice of the system.  A single class is clothed with authority to emit bills of credit, and compel all other classes to use them as a circulating medium and pay compound interest for their use.  The fact that the government issues the National Bank notes to the banks does not change their nature.  It is simply equivalent to the government guaranteeing their payment.  The notes themselves represent the credit of the institutions which issue them.  There is no sound reason why the government should confer this privilege upon the bondholder and the banker, and not upon the farmer, the merchant or the manufacturer.  On the other hand it is in violation of the plainest principles of equity, as well as public policy, for the government to bestow such a privilege upon any class.

How long it takes the money power, through the machinery of banks of issue, to rob the people of their annual increase of wealth (31 per cent.) is not a matter of speculation.  The experience of sixty years demonstrates that the system will bring about a commercial crash on an average every six years.  A commercial crash is simply a general settlement and a re-distribution of property rendered necessary by the natural operations of the system—by the manner in which the people are obliged to conduct their affairs.

The enormous cost of a medium of exchange, consisting of bank currency and bank credit, may be arrived at approximately in several ways.  On the 1st of September, 1875, there were in operation 2,087 National Banks.  The net earnings of the banks for the previous six months amounted to about $30,000,000, or $60,000,000 for the year.  The officers of the banks, including presidents cashiers, tellers, bookkeepers, clerks, attorneys, notaries, etc., constitute an army of non-producers.  Averaging the number at ten for each bank would give 20,000 persons.  The chief officers of a bank are usually large stockholders, and the subordinate positions are mostly filled by their relatives, and in no other business, perhaps, do salaries rate so high.  Averaging the salaries at $2,000 per year each for 20,000 persons will give a total of $40,000,000, which, added to the net earnings, gives a grand total of $100,000,000 a year.  Or, again, the aggregate loans and discounts of the National Banks on the first day of October, 1875, amounted to $980,222,951.  At ten per cent. interest the amount paid for this sum would be over $98,000,000.  To this add the interest paid by the people on the bonds deposited with the Treasurer of the United States—about $390,000,000—at six per cent. in gold—about $27,000,000, and it will give a grand total of $127,000,000.  From this it appears that the people are paying annually to the banks the enormous sum of about $127,000,000, a sum greater than the interest on the public debt, for the use of some $350,000,000 of bank currency.  This burden is entirely unnecessary.  A medium of exchange could and ought to be furnished by the government ;  or, in the language of Jefferson, “bank currency should be suppressed and the circulation restored to the nation to whom it belongs.”  The people would then have a medium of exchange unencumbered with interest, and, what is vastly more important, one that would occupy the channels of circulation, subject only to the natural laws of trade.


THE PROSTRATION OF INDUSTRY.


The prostration of all forms of industry which followed the panic of 1873 still continues.  Indeed, matters are growing worse.  The following table exhibits the number of failures, with the aggregate amount of liabilities, which have taken place since 1863 :

IN THE NORTHERLY STATES.

Year.
1863....................
1864 ....................
1865 ....................
1866..................
1867..........
1868........
1869....................
Number of
Failures
495......
520.............
530..........
632.. ...
2,386............
2,197.............
2,411.............
Aggregate
Liabilities.
$7,899,000
8,579,000
17,625,000
47,333,000
86,218,000
57,275,000
65,246,000
IN THE WHOLE COUNTRY.
1870.............
1871....................
1872.....
1873....................
1874....................
1875 .....................
1876 (first quarter)
3,551.............
2,915.............
4,069.............
5,181.............
5,695.............
7,404 .............
2,806.............
88,242,000
85,252,000
121,056,000
228,490,000
151,689,000
195,289,000
64,644,000

The failures during 1875, it will be seen, numbered 7,404.  The failures for the first quarter of 1875 numbered 1,733 ;  and for the first quarter of 1876, 2,806, or an increase of over 60 per cent. over the corresponding quarter of last year.  At the same rate the failures this year will reach about 12,000.

In times prior to the war, when bank currency was nominally redeemable in specie, the banks did not hesitate to expand their circulation as soon as a general settlement had been effected and “confidence had been restored” through the instrumentality of the Sheriff, which usually took about one year.  Business then began to improve, and the banks and the people together soon started on another era of inflation and speculation, only to wind up in a few years in another crash.  But now a different condition of affairs exists.  Gold bears a premium over the lawful money of the country, because it is a full legal tender, whilst lawful money (greenbacks) is only a partial tender.  It is true in ante-war times bank currency was at a discount as compared with gold, but then it was issued at par and the loss fell upon the people.  Now, however, specie payments have been decreed to take place January 1, 1879, and the banks do not intend to redeem their notes in specie until the government has first furnished them with the specie.  Consequently they are calling in their circulation.  This contributes largely to the general depression.  All transactions, since the passage of the law decreeing forced specie resumption, except of the most limited character, both in respect to time and amount, have naturally ceased.  Money is appreciating in value by operation of law, and property of all kinds is depreciating in a corresponding ratio.  No one, with forced specie resumption in view, will invest either in property or business.  Money is borrowed only in cases of great urgency, or for a short period for purposes of speculation.  As production diminishes the people grow poorer and failures multiply.  The producing forces of the nation are paralyzed for the want of a healthy circulation of money, and general bankruptcy and ruin are inevitable.  As for the money power, it awaits the final convulsion with serene composure.  The fall in the price of all commodities renders living cheap to all who have an income.  As their investments are mostly exempt from taxation, they are not concerned about the burdens of government.  The appreciation in the value of money and bonds, as compared with property of all kinds, which is silently going on, is adding enormously to their wealth, and when the crisis arrives they will be enabled to reap where they have not sown and gather in a rich harvest.


EXTRAVAGANCE.


When the panic of 1873 occurred the bullionists and the money power generally raised the old cry of extravagance and over production.  The same cry has been used to account for every crash that has occurred during the present century.  The charge of extravagance scarcely requires refutation.  The producing classes as a rule are anything but extravagant.  The farmers, with the help of their wives, sons and daughters, as is well known, are enabled only by hard labor and strict economy to come out ahead at the end of each year.  The same is true of the mechanics, the trades people, the laborers, and the toiling masses generally.  The only extravagance that has developed itself to any extent in the United States is among those who, by means of corrupt legislation and a false monetary system, are enabled to riot in wealth stolen from the people.


OVER PRODUCTION.


The cry of over production is equally groundless.  Human ingenuity is being constantly taxed to increase and cheapen production, in order that the good things of life may be within the reach of all.  The production of commodities is governed entirely by the laws of supply and demand.  When it happens, as at the present time, that productive industry in many forms becomes paralyzed, on account of the want of a healthy circulation of money in the channels of trade, large classes are deprived of the means of supplying their wants, and the markets become suddenly gorged with certain commodities.  For the sake of illustration we give the following table exhibiting the comparative production of five staple articles in 1860 and 1870, five years after the termination of the war :

1860.1870.Decrease.
Cotton, 2,200,000,000 lbs. 1,200,000,000 lbs.    49 per cent.
Hemp, 149,000,000 " 25,000,000 lbs    14
Rice, 187,000,000 73,000,000 "    60
Silk, 12,000 4,000 " 66 
Tobacco, 434,000,000 262,000,000 "    40
Total, 2,970,012,000 1,560,004,000    52

During this period the manufacturing establishments of the country increased in number from 140,433 to 252,148, and their products from $1,885,861,676 to $4,232,325,442 ;  and the population of the country increased from 31,443,321 to 38,558,371.

That over production can produce a commercial crash is now acknowledged by all political economists, whose opinions are entitled to any weight, to be an exploded fallacy.  John Stuart Mill, in his work on political economy, says :

“ A general over-supply or excess of all commodities above the demand, so far as demand consists in means of payment, is thus shown to be an impossibility.  I have already described the state of the markets for commodities which accompanies what is termed a commercial crisis.  At such times there is really an excess of all commodities above the money demand—in other words, there is an under-supply of money.  But it is a great error to suppose that a commercial crisis is the result of a general excess of production.”

And E. Peshine Smith, a distinguished American political economist, disposes of the question as follows :

“ In treating of supply and demand, no reference has been made to the notion, by which some writers have been bewildered, of a general over production in commodities.  The proposition that any good thing has ever been produced in excess of the wants of humanity will not bear a moment’s examination ;  nor is there the slightest reason to apprehend that such an event is likely to occur.  The truth of the matter may be quite as correctly rendered by the statement that the supply of other commodities is deficient, as that any particular one is redundant.  Where has it been, in any community, sufficiently numerous to permit the application of the general considerations in which political economy deals, that any product of industry has been offered in such a quantity as to surpass what the comfort of all its members would require ?  The trouble is, that many of those who would gladly be consumers have not produced enough to enable them to be.  The true remedy for what is called over production in any article is an increased production of other things.”

When Congress convened in December, 1873, there was a strong public sentiment in favor of increasing the amount of legal tender paper money.  The people as a body have never failed, when an opportunity offered, to signify their preference for legal tender Treasury notes.  This is undoubtedly to be attributed to “the instinctive sagacity of the people,” to use Benton’s language, “which is an overmatch for book-learning ;  and which being the result of common sense, is usually right ;  and being disinterested, is always honest.”  In obedience to this sentiment Congress passed a bill authorizing the Secretary of the Treasury to reissue $44,000,000 of legal tender Treasury notes which had been retired under the policy of contraction.  This step would undoubtedly have afforded great relief to the oppressed industries of the country, but it would have been only temporary.  In a short time the whole amount would have been absorbed by the banks.  Individuals here and there would have been benefited, but in the end the nation would have been as poorly off as ever.  The money power, however, was unwilling to have its plans interfered with to even this extent ;  a howl was at once set up by their organs against inflation, and a large delegation of bankers, requiring a special train of cars, at once proceeded to Washington to induce the President to interpose his veto.  They succeeded as usual, and on the 22d of April, 1874, the bill was returned to Congress with the President’s veto.  Five months prior to this President Grant, in his annual message, argued that the panic was due to the great contraction of the currency that had taken place, and referred to the greenback in the following eulogistic terms.  He said :  “ The experience of the present panic has proved that the currency of the country, based as it is upon the credit of the country, is the best that has ever been devised.  Usually in times of each trials, currency has become worthless, or so much depreciated in value as to inflate the values of all the necessaries of life as compared with the currency.  Every one holding it has been anxious to dispose of it on any terms.  Now we witness the reverse.  Holders of currency hoard it as they did gold in former experiences of a like nature.”

Public indignation at this betrayal of the interests of the people by the President found vent at the polls at the next general election, and a Democratic House of Representatives was elected by an overwhelming majority.

When Congress met in December, 1874, it was apparent that some measure, looking to the relief of the oppressed industries of the country, must be adopted.  The result of the election also occasioned great consternation among the bullionists and bondholders.  Their plans had not been fully carried out.  Specie resumption had not yet been attained.  They could manage Congress as it was then constituted, but their influence with a new Congress was not so well assured.  An act to force specie resumption was at once prepared and entrusted to that subservient tool of the money power, Senator Sherman.  It was introduced in the Senate at an early period in the session, was passed by both houses and was signed by the President on the 14th of January, 1875.  In order to deceive the public, banking was made free, a measure that had been contemplated from the beginning, and which, as has since been fully demonstrated, could contribute nothing to the relief of the public.  The banks at the time had abundance of currency, and there were several millions of bank note circulation assigned to States having less than their quota, not yet taken.  It is now possible for the bondholders to inflate the bank currency of the country to the full amount of the bonded indebtedness of the Federal Government, about $1,700,000,000.  That advantage is not taken of this act to increase the bank note circulation is due entirely to the specie resumption act.  Banks, on the contrary, are withdrawing their circulation and going out of business.  Two hundred National Banks have already withdrawn their circulation, as is disclosed by the records of the office of the Comptroller of the Currency, and four hundred more are engaged in doing the same.  The amount of National Bank note circulation withdrawn during the past year is $13,482,546, and the legal tender notes held on deposit for the redemption of National Bank notes in process of retirement amount to $27,098,429, making in all a contraction of $40,580,975.  During the same period the greenback circulation has been contracted $11,244,752, and the fractional currency $2,758,278.


AN EXTRAORDINARY ACT.


The specie resumption act, passed in January, 1875, provided for the retirement of the fractional currency issued by the government.  Long before specie payments are resumed the nation will be deprived of a circulating medium of any kind.  Under the specie basis system of banking, as it existed before the war, the people were frequently driven, in times of great stringency, to use the notes of individuals, firms and corporations, which circulated under the name of shinplasters, and cities, towns and boroughs were obliged to issue promises to pay, which were commonly known as scrip.  To prevent the people, in the approaching stringency, from availing themselves of even this method of relief and to give the National Banks absolute control over the circulating medium of the country, an act, approved February 8, 1875, was passed by Congress, which imposes a penalty of ten per cent. on any individual, firm, association, city, town or municipal corporation, except National Banks, that shall issue or use such notes.  This bill was smuggled through Congress under the title of an act “ To amend existing customs and internal revenue laws and for other purposes,” and, reads as follows :  “ Section 19.  That every person, firm, association other than National Bank associations, and every corporation, State bank, or State banking association, shall pay a tax of ten per centum on the amount of their own notes used for circulation and paid out by them.”

“ Section 20.  That every such person, firm, association, corporation, State bank, or State banking association, and also every National Banking association, shall pay a like tax of ten per centum on the amount of notes of any person, firm, association other than a National Banking association, or of any corporation, State bank, or State banking association, or of any town, city, or municipal corporation, used for circulation and paid out by them.”  The National Banks evidently expect, in due time, to furnish the entire circulation of the nation, including fractional currency.

When specie resumption takes place it will be found that the greenbacks will all be in the possession of the banks.  The reserve held by the National Banks, on the first day of October, 1875, amounted to $235,000,000.  They have still over two years to gather in the greenbacks that are still out standing.  On the 1st of January, 1879, the government will be called upon to pay the sum of $300,000,000 in specie to redeem the greenbacks.  The banks will then be in possession of abundant specie, furnished at the expense of the people, to enable them to begin banking on a genuine specie basis, in the manner in which banking was conducted prior to the war.  In the meantime the nation will be entirely stripped of a medium of exchange, involving an almost entire cessation of production, attended by general ruin and bankruptcy.  The suffering, want and misery, which the people of the United States will be called upon to endure, during the next few years, on account of the machinations of the money power, will be terrible beyond that experienced by any nation in modern times, not even excepting the experience of the people of Great Britain, under like circumstances, in 1819-25.  (See next chapter.)  Beyond that it is idle to speculate, for then there will probably be no National Banks, unless the liberties of the American people shall, in the meantime, have been entirely subverted.




1 By the act of January 14, 1875, this section was repealed.

2 $54,000,000 additional bank notes were authorized by the act of July, 1870.