A Fraudulent StandardCHAPTER XI
THE PEOPLES CREDIT
THE real currency of Great Britain, the medium of exchange, the instrument by which 99 per cent. of all business obligations are settled, is the bank cheque, one of the most beneficial inventions of the human mind. It constitutes the simplest, cheapest, most efficient currency system ever devised. It offers the most perfect method for the mobilization of wealth yet known. But it has been made unnecessarily expensive to the borrower, and dangerous or fraudulent to the community by reason of the narrow and insecure legal-tender redemption basis, upon which it has been built. Under our legal-tender laws, bank cheques are payable on the demand of the payees in legal tender. And as we have already seen, in times of national crises the banks are utterly unable to cash the cheques drawn on them for any large amounts. They are therefore compelled to either close their doors or secure the Governments consent to use the national credit as they did in August, 1914. But the compulsory legal tender Act also limits the volume of credit which a bank can safely issue. The limit of credit accommodation which a bank can offer the public, is not the amount of wealth offered as security, after allowing an ample margin for depreciation, but only such classes of wealth as the bankers know will command at all times and conditions a ready and immediate sale for cash. Here, then, is the brake which our legal restrictions place upon the production and exchange of wealth. Production is limited not by its prime factors, but by our legaltender laws. And this is the reason that trade and industry are subjected to periodical transitions of prosperity to depression. If banks happen to be in possession of unusually large supplies of gold and legal tender, they are able to extend to the business community similarly abundant credit facilities. Then we may have prosperous times and industrial progress.
If, on the other hand, our foreign trade rivals draw heavily on our free gold market, thereby reducing our legal-tender basis, the banks are forced to call in loans and reduce their credit issues, and with this contraction of credit, all the trade and production dependent upon it is suspended, and then we have industrial stagnation ! There is no other reason for these periodical industrial troubles except the natural operation of our own foolish money laws. Further, the same laws are responsible not only for the frequent and often violent fluctuations in the bank rate, but for the imposition of interest charges on credit which in reality belongs not to the banks but to the public. This subject has been most ably discussed by Mr. Oswald Stoll in his wellknown book entitled The Peoples Credit.
Amongst the vast mass of financial literature that has appeared during the past thirty or forty years, most of which is a mere monotonous repetition of fallacies, theories and false conclusions, Mr. Stolls work is conspicuous for its honesty and fearless exposure of our banking methods. The author is evidently desirous of contributing to the development and industrial success of Great Britain and the Empire, and he correctly points the direction in which the development may best be secured. In criticizing our costly and inadequate financial methods, he has placed his finger on one of the weakest and the sorest spots in the whole of our economic system. His book should be read by every one who is interested in trade and commerce. To most people, Mr. Stolls conclusions will be a revelation. I know of no better endorsement of this book than the fact that the majority of our orthodox and financial writers and professorsmany of whom are the paid hirelings of the present banking monopolyeither ignore the book altogether or advise their readers to treat it with caution.
Mr. Stoll shows that the credit which the banks grant to their clientsusually under the guise of a favourand for the use of which they are permitted to charge anywhere from 5 per cent. to 10 per cent., belongs to the public. That this must be so will become apparent if we investigate any of these transactions. Suppose, for example, the reader to be the owner of £10,000 of 5 per cent. War Loan bonds, and desires the use of £5,000. He applies to his banker, who offers him the accommodation at 1 per cent. above the bank rate. The reader hands the bonds to his banker, together with a legal transfer of the bonds to the bank as security. Whereupon the banker places to the readers credit in the bank books, the sum of £5,000, which he is at liberty to cheque out as he desires. No doubt by this time the reader would feel the banker had done him a great service. At any rate, the average banker endeavours to impress this fact indelibly upon the mind of each of his clients, viz., that the granting of bank loans is neither obligatory on his part nor in the fulfilment of the right of any client. And the banker is undoubtedly correct. Our laws, as well as the whole deferential attitude of our successive Governments to the banking profession, confirm the belief that bankers belong to a select and legally privileged class who are under no obligations to render the public any services whatever, and if and when they choose to do so, the public must regard such services as favours and act accordingly. But now let us carefully examine the above transaction and see what the favour amounts to.
It is evident that
(1) The possession or ownership of the £10,000 War bonds is what enables the banker to give the reader his £5,000 of credit.
(2) This credit is not the property of the banker but of the reader, and was his own property before he asked the banker to favour him.
(3) The issue of this credit has cost the bank nothing, since it has not parted with a single halfpenny of its own assets. In fact, the bank has loaned nothing.
(4) The transaction has cost the reader (a) the temporary loss of his bonds until the loan is repaid, (b) and also the interest charges.
(5) The bank has increased its net assets by the difference between the value of the bonds less the amount of the credit chequed out, and is financially stronger than before it made the loan.
(6) The bank has gained on all points, (a) by obtaining the use of securities belonging to their client as the basis for further loans, (b) by the use of any credit balance not chequed out by the client, (c) by the interest charged for allowing the reader to use his own credit.
So much for the bank favours.
Reader, do you wonder that bank shares are always at a premium ? Do you wonder that the banking business, classified in economics as unproductive, is one of the most lucrative businesses in the world ?
Surely never was there a better game of heads I win and tails you lose !
Mr. Stolls contention is, that since the basis of bank credit (wealth) belongs to the people, the credit issued against it also belongs to them, and it is the duty of Parliament to secure to the public the free use of such credit. The contention is unanswerable. Unless the Government is prepared to assert that the vested interests of bank shareholders are of greater importance than the interests of all other classesnay, of the national welfare itselfthey will be bound eventually to do away with the present monstrous monopoly and provide the public with a national banking system. Where is the justification for the bank charges upon loans since these so-called loans consist merely of the credit possessed by the banks clients ? It is certainly not an insurance charge against risk, because the character and amount of the securities pledged amply provides for all emergencies. Nor can it be said that the banks are lending cash for credit. It is true that a borrower might draw cash, but the banker holds securities belonging to the borrower sufficient to procure more cash than his client is at all likely to draw out. The fiction with which the public mind is sometimes doped, that the banker is loaning some of his own hoards of gold which is his capital and has therefore a right to charge interest, is, of course, too absurd to require more than a passing mention.
Considering that the bankers are drawing interest upon far more credit than all the gold and legal tender in the country, it is evident that Mr. Stolls contention is correct.
The one valid reason for the bankers position is, that they have the only credit organization which commands the public confidence, thanks to the stupidity and indifference of British statesmen !
Our banks constitute a state-supported, private monopoly, which has grown up under specially favoured laws and customs. Parliament has made laws compelling the public to use certain legalized tokens of exchange without bothering itself as to the supply of such tokens. This supply has hitherto been allowed to fall under the control of privately owned companies who have the right to tax the community to any extent it is able and willing to bear. The result is that the public is permitted to employ its own credit only by consent of the bankers, and only to such limits as they choose to allow, on condition that it pays them a tax on such creditamounting to millions of pounds annually, and this amazing monopoly exists merely because no British minister has yet had either the courage or the statesmanship to provide the nation with its own credit organizations ! But the present position of affairs cannot continue. The force of circumstances will compel Parliament to destroy this monopoly and to release credit from its enslavement to gold, and thus enable the people to vastly increase the amount of their annual wealth production. Our monetary laws and banking methods will be seen to have been the chief hindrance to our industrial progress and trade advancement.
As to the limitations which our legal-tender laws have imposed upon the bankers, in their endeavours to provide the public with a sufficiency of credit, probably the clearest illustration is contained in an address delivered by Sir Edward Holden (Managing Director of the London City and Midland Banking Co.) before the Liverpool Bankers Institute, December 18, 1907, entitled The Depreciation of Securities in Relation to Gold. Sir Edward illustrated the condition of the banks by a triangle, showing that credit was restricted by gold, regardless of the enormous wealth possessed by the nation in other forms. He first stateswhat is often forgottenthat loans create bank credits (thereby endorsing Mr. Stolls main contention), and if we regard all the banks in London as one, the business of banking becomes little more than a matter of book-keepingthe transfer of credit from one person to another. He then proceeds as follows :
The right side of the triangle (Fig. 3) represents the loans of the whole of the banks, and the left side represents the credits created by these loans, and the base the cash balance or reserve. If, then, you draw a line from the left of the base, and equal to the base, you get the cash credits in existence. If the loans and credits as represented by the two sides of the triangle were the only two elements which bankers had to take into consideration, then there would be no necessity for them to restrict their loans at all, and traders could increase their businesses and obtain loans ad libitum.
But there is another element, and a most important one, to be taken into consideration, and it is the fact that all the credits as represented by the left-hand side of the triangle and the line drawn from the base, are practically payable on demand and in gold, assuming, of course, that Bank of England notes represent gold. Every banker must, therefore, make up his mind by what amount his credits are liable to be diminished, both in ordinary and extraordinary times, and when he has thus made up his mind, he ought to keep that amount of available resources in gold, or in a means of obtaining gold.
Let us consider, then, that the base of the triangle consists of gold, and it is the ratio of the base of the triangle to the total credits (both created and cash credits) which restricts bankers from increasing unduly their loans. If business increases unduly, and if bankers continue to increase the loan side of the triangle, of course concurrently increasing their credits, and not being able to increase the gold base of the triangle, then evidently they are getting into danger, and the only judicious course which they can pursue is to curtail their loans, curtailing an undue increase of business, which curtail these credits, and thus re-establish the ratio.
You see here the direct connection between trade on the one hand and gold on the other, and that it is not so much the production of gold as the amount of gold which can be obtained for the purpose of increasing the bankers reserves. I venture to think that the above explanation will enable you to come to the conclusion that, if the gold base of the triangle cannot be increased, then the danger spot is the loan.
I want you to remember that the banking system of every country has its triangle, and that the principles enunciated above exist in every triangle of every system based on gold in the world ; that being so, it is clear, generally speaking, that the business of the world is carried on by means of loans, that loans create credits, that the stand-by for the protection of credits is gold, and that therefore, gold controls trade.
It may happen that the trade of one country grows by leaps and bounds, the loans and credits, of course, following, while the trade of other countries remains normal. What, then, takes place ? The gold base of the triangle of the former becomes too small, and it is necessary to enlarge it. How is the increase effected ? It is effected by the representative bank of the more prosperous country attacking the gold basis of the triangles of other countries, and the instrument by which the attack is made is the rate of discount. By this means gold will be attracted from the bases of the triangles of other countries, and unless those bases are too great for the adequate protection of the credits, the representative banks of those countries will meet the attack by also putting up their rates. But it may happen that the trade of every country has increased by leaps and bounds, and that all loans and credits have also increased. Then the fight begins with each country putting up its rate, first to prevent its base being diminished, and secondly, to increase it if possible. Hence we have the English rate at 7 per cent., the German rate at 7½ per cent., the Austrian rate at 6 per cent., the French rate at 4 per cent., the Italian rate at 5½ per cent., the Russian rate at 7½ per cent., but as the United States have no Central Bank, there is no official rate for that country.
Here is a frank avowal on the part of the worlds leading banker, that trade and commerce are ever at the mercy of the manipulators of gold, that long-continued industrial prosperity is impossible because of the restrictions imposed upon exchange by our legal tender system, and that the gold basis is a brake upon the wheels of industry, which is continually checking the pace of production ! Here also is the explanation of the phenomenon that periods of prosperity are inevitably followed by periods of depression !
Increased trade demands increased banking facilitiesincreased loansbut the moment credit is increased to meet this demand, the gold reserves are strained, the bank rate is raised, loans are called in, the brake is applied to the wheels of industry, production is checked, employees are discharged, enterprise is discouraged, and the extra demand for money and credit, which prosperous times require, is choked off. In short, our financial system destroys prosperity, and reduces trade to the amount of gold available. So that the mechanism of exchange, instead of facilitating trade, actually checks it ! It first stimulates industry and then destroys it. The gold basis has become both the life and death of trade!