Capital and Currency.

Including an attempt to show what it is that England loans and what our Government and Railroads borrow from her.

[A Rejected Communication.]

To the Editors of the Boston Daily Advertiser:—

Permit me to ask the favor that you will allow me to make a critical examination of an important sentence in the rejoinder of "W. E." to Mr. Wendell Phillips on "Capital and Currency," in your paper of the 18th inst. The sentence is as follows:—

"I said," says W. E., "that, in order to make the rate of interest permanently lower in this country, it would be necessary to make the supply of loanable capital larger than it now is, relatively to the demand for it, and that this could be done only by borrowing abroad, or by slow accumulation at home—in short, that capital, and not currency, was the thing needed to satisfy Mr. Phillips's desire, and that capital could not be created by any act of legislation."

The question which meets us at the very threshold of this investigation, and demands an answer, is, What is capital? Without this answer, and, in addition, an analysis of that which W. E. calls "loanable capital," we shall remain in ignorance as well of the nature of our conclusions as of our premises; we shall, indeed, not know what it is that we are talking about.

Capital has been defined by an eminent American economist as "the instrument by the aid of which production is directed to the uses of man," and exists, as he adds, in the form of land and its improvements, ships, ploughs, mental development, books, corn, roads, steam-engines, money, and that confidence between man and man which is known as credit. This latter has been characterized by a very acute and able Scotch economist, R. H. Patterson, as "our invisible capital." Let us now inquire what is the "loanable capital" to which W. E. refers, and the supply of which may, as he thinks, be increased "only by borrowing abroad or by slow accumulation at home;" and see if it is not mere credit, the "invisible capital" of Mr. Patterson. Let us trace out the manner of organizing and subsequently of working one of those greatest page 6 of all the credit institutions in the world, a London bank, and see if we cannot thereby shed some light upon the problem.

The stock subscribed for in a new bank in London is paid for almost entirely by means of checks drawn against deposits in the Bank of England, or other London banks, and which do not actually represent money in hand, but credits on the books of these banks. The operation, then, is but the mere transfer of the ownership of credits from individuals or corporations to the new bank, and these credits usually remain with the Bank of England, while they continue to be the property of the new bank. Customers now come to the new bank and ask loans or discounts on stocks, bonds, promissory notes, and bills of exchange, and credits are carried to their respective accounts on the books of the bank and are called deposits. Some parts of these deposits are transferred by means of checks to the creditors of these depositors, and of them some may remain with the bank as deposits to the credit of the new parties, while others are taken to other banks and deposited with them. But a small amount is drawn in notes or specie, and even of this a portion soon finds its way back to the new bank or goes to other banks. The "loanable capital" thus loaned, is, by the aid of checks, made to perform the same functions as circulating notes and specie", and by the aid of the London clearing house is kept revolving round in a circle among the banks, the balances being paid not by means of money, but simply by checks drawn upon the Bank of England, where all of the other bank's keep their accounts. Indeed, the deposits from day to day received from the public by the London banks and bankers consist of little else than the checks which transfer the ownership of deposits already held by the various city and country banks,^* the original sources of the production of which deposits are loans.

The deposits created by the new bank, as long as they are not drawn in either notes or specie, admit of new loans in this and other banks, as much so as if the first loan had not been made, and new "loanable capital" is called into existence and still further loans are made, creating new deposits

^* "To show how very small an amount of banking deposits are made in the form of money, we give the following statement, made by Sir John Lubbock, before the Statistical Society in June, 1865, in which he analyzed a sum of £19,000,000 paid into his bank by customers:—

Checks and bills	£18,395,000 or	97 per cent.
Bank of England notes	408,000	3 per cent.
Country notes	79,000	3 percent
Coin	118,000	3 per cent.

From which statement it appears that only three per cent, of banking deposits are paid in the form of money, that is, notes and coin together, and a little more than one-half per cent, in specie."—Patterson's Science of Finance, pp. 5, 6; Editburgh, 1868.

page 7 these latter being worked round in the same vicious circle through the clearing house, with the actual payment of but a small amount of money. How this results is well illustrated by the statement of The London and County Banking Company, December, 31, 1874:—

That institution had a capital of Reserve	£1,200,000
	600,000
	£1,800,000
Its loans were as follows:—
On call	£3,050.922
Discounted bills and advances	14,113.405
Drafts accepted	2,780,005
	£19,044,392

Besides which, it held government and other securities and real estate to the amount of £2,506,547, and cash (mostly deposits to its credit in the Bank of England) to the amount of £2,461,448—this latter item representing almost exactly the amount of its capital, reserve, undivided profits, and subscriptions to new shares, or, in a word, the whole of its worldly possessions. How then is it enabled to make such large loans, or to hold securities and other property to such an amount as £22,450,939, seeing that in addition to doing and having these things, it holds all of its own worldly possessions in hand, in cash, or in the Bank of England? Why, by means of a gradual growth of debits representing loans, which give rise to credits called deposits, the latter constituting "loanable capital," the steady "evolution" of which is rendered possible so long as these deposits are not demanded in notes or specie, but are transferred by means of checks and clearing-houses. With the London and County Banking Company these credits called deposits had, on December 31, 1874, reached an aggregate of £19,892,586.^*

These debits and credits, these loans and deposits are well nigh without any financial base whatever, for the reason that the base upon which they are supposed to rest is little else than credits (deposits) with the Bank of England, which themselves only rest upon the same specie and loan to the nation (national debt due the bank), upon which the Bank of England bases its own operations, regardless of those of the London and County Banking Company, and the other banks which keep their accounts with it. Once cancel both these debits and credits, use the one to pay the other, and the great volume of this "slow accumulation" of "loanable capital" would instantly collapse and shrink from some £24,912,387 to about £2,461,4481 Perform the same process with three or four other large London banks, and it would result in a total collapse of British finance, trade, commerce, and industry!

How is it then, that a country, the instrument of payment of which is of such an inflated and ticklish nature, is able to lend so much "money," so much "loanable capital" to almost the whole world beside? The answer is, that the carrying of these loans is rendered possible by reason of this system of bank credit, while bills of exchange drawn against merchandise shipped to the borrowing or other countries, or against interest due on former loans, prevent the shipment of money—the latter being the actual form of capital which the borrowing country needs, no country having plenty of which, ever being under the necessity of becominy a borrower. Thus does the rest of the world get none of the thing it most needs, but merely goods, for which it does not then pay; or a funding of the interest which it then owes, or both; the individual consumers of the goods or the debtors for interest paying, however, while the borrowers have their indebtedness carried by and through the credits in favor of foreigners, created by means of goods then or pre page 9 viously purchased, and which are soon wholly consumed, while the debt for them remains a permanent charge upon their country at compound interest. All the while the borrowing country amuses itself with the idea that it is getting money for the reason that the individual borrowers of these credits obtain payment in bills of exchange for which in their own country they get money or bank credit; while at the same time, the lending country could not stand up under the effects of parting with so many goods without payment, did not bank credit at home supply an available substitute for it.

The evidence of the inability of Great Britain to loan actual money in any great amount, to foreign countries, is found in the fact that the transfer of the $15,500,000 indemnity under the Geneva award, which she had to pay to our government, she, for prudential reasons, effected gradually by means of bills of exchange and securities instead of money, the thing which was to be paid; and the further fact that the Bank of England served notice upon Mr. Boutwell that in case he attempted to draw specie from London for certain loans there negotiated, that institution would step in and break up his combinations and contracts; in other words, cut off the supply of loans—the "loanable capital"—from the banks and bankers who were about to buy the bonds, because these bank loans were not to be allowed to float round among the London banks in the form of deposits, but were to be drawn in specie for shipment.^* The lesson to be learned from these facts is, that Great Britain with all her boasted wealth and power never willingly gives up that most royal of all things, Money, that species of capital which commands on the instant, indeed calls into being, almost all other forms of capital; without a struggle and the attempt or desire to force off instead something which she values less.

Seeing now, as we do, what is the nature of the great bulk of the instrument of payment in Great Britain, may we not ask, why our legal tender note, our democratic currency, backed as it is by the whole credit and all of the resources of a great and wealthy country, and which freely

^* " When the negotiations were going on in London for the sale of the largest amount of United States bonds that have ever been sold there at one time, it was foreseen by the Bank of England that a quantity of coin would accumulate as the proceeds of these bonds to the credit of the government of the United States. As a matter of fact, there was an accumulation of about $21,000,000. The Bank of England, foreseeing that there would be an accumulation of coin to the credit of the United States which might be taken away bodily in specie, gave notice to the officers of the Treasury Department of the United States that the power of that institution would be arrayed against the whole proceeding unless we gave a pledge that the coin should not be removed, and that we would reinvest it in the bonds of the United States as they were offered in the markets of London. We were compelled to do it."—Speech of Hon. G. S. Boutwell in U. S. Senate, January 22, 1874.

page 10 circulates among the whole people, is not quite as good as it? Why is it not better, since it has at once this broad and firm foundation, and is not open to the charge of being an instrument for centralizing power in the hands of a few, who can manufacture, borrow, inflate, contract, and manipulate such a monopolist credit currency as that of Great Britain? It is indeed better, and is as truly capital, and when once it is made at all times interconvertible, at the pleasure of the holder, with U. S. bonds bearing a fixed rate of interest, not exceeding 3.65 per cent., it will be the most nearly perfect in the world. Then will its volume be neither more nor less than is demanded by the industry, commerce, and trade of the whole people, and not only will these people, but the State, be saved from immense taxation, in the form of interest now paid to a few domestic manufacturers of credit, but we shall be emancipated from our long and disastrous dependence upon Great Britain for credit, "loanable capital" which seldom comes to the country in any form but that of merchandise or extended interest or dividends. Our own national and full-volumed money circulating throughout the country, and setting an unemployed people to work, will gather up, as a saving fund, billions of millions of minutes, which would otherwise be lost, and without a single stagnant product, or an unoccupied arm, we shall soon be enabled to produce in one year, in addition to our present product, more merchandise than all that we have borrowed from Great Britain within half a century. An "act of legislation" which shall bring such fruits will indeed be one which will "create" both capital and wealth, and will shower blessings upon 43,000,000 of human beings, drive pauperism from out the land, by leading to a more equitable distribution of God's gifts to man, and result in a higher, a truer, and a more enduring civilization.

Will then Massachusetts, and New England generally, still continue to stand in the way of at least a trial of such a law? If they do they will assume an immense, a dreadful responsibility, which sooner or later they will be forced to acknowledge, when surrounded by yet still greater ruin, they are obliged to try that law, and trying it, they realize the beneficence of its workings amongst the people, and the independence and power it confers upon the State, an independence the celebration of which will in no sense be a mockery, as must be that of any other, while our government is at the mercy of foreign credit-mongers.