Voluntary Socialism

A SKETCH (1896)

by Francis Dashwood Tandy (1867-1913)

Chapter VIII.

Mutual Banks of Issue.

VS-8.1 It is all very well to prove that all laws in relation to the issuance of many [Online editor’s note: Sic, presumably for “money.” – RTL] are ethically unjustified, but how are we going to get along without them? Let us examine the various methods of exchange in vogue to-day, and see if we cannot again from them a hint of the direction we must take, in order to provide a safe currency without recourse to law.
VS-8.2 In mining camps, and other places where the employers of labor operate a “truck store,” an account is commonly opened with each employe. He is permitted to purchase goods at the store and have them charged to him, provided, of course, the value of his purchases does not exceed the wages due him. Here is a simple system of account fulfilling the function of money. It often becomes a little more complex than this. Frequently debts owed by one employe to another are paid by transferring the amount from one account to the other in the truck store. In these cases the exchanges are of a very simple nature and this system of account works splendidly.1
VS-8.2 There is only one reason why such a system as this might not be elaborated so as to include all the people in the world. But that objection is insurmountable. It is the tremendous complexity that would be involved in debiting one person, crediting another and seeing that no one overdrew his account. So great is this difficulty that, in order to avoid it, even where exchanges are quite simple, an expedient is resorted to.
VS-8.2 During the panic of 1893 the Kuner Pickle Company, of Denver, paid its employes, and the farmers of whom it brought its produce, in scrip; that is, pieces of paper which stated that the Pickle Company would receive them in payment of all debts due it. As this company was doing a large business with grocery stores, the holders of the scrip were able to purchase groceries with it, and the grocers used it to pay their debts to the Pickle Company.
VS-8.2 This is really the way in which most of the business of the country is conducted. For example, on Saturday, Smith, a bookkeeper, receives a check form his employer for his week’s wages. He takes this to the bank and deposits it to his credit. When his grocer presents his bill, Smith writes him a check. The grocer endorses this and pays it to the commission merchant, who, in turn, deposits it in the bank. So the transaction proceeds. At the end of the week the money may be placed to the credit of Smith’s employer, by means of a check from a man who owed him money. Here is the whole circle of exchange and the actual coin has never been taken from the bank. Even if the checks are deposited in different banks the result is practically the same. In this case the checks go to the clearing house, and only the balances at the end of each day are paid in cash. These balances are so small in proportion to the business done as to scarcely affect the argument.
VS-8.2 Surely the checks which have circulated like this are as much money as greenbacks, or any other paper currency. They circulate because the people who accept them have confidence, first, that that they can be redeemed in legal money, and second, that that legal money can be redeemed in goods which they need. Since 95 per cent. of the business of the country is transacted in some such manner as this, and only 5 per cent. by means of legal money – only a portion of which is coin – it is absurd to suppose that checks can be redeemed in coin, for there is less than $1 in coin for every $20 in checks. So the only reasonable basis of public confidence is the ability of the drawer of the check to redeem it in labor or in goods which are the embodiment of labor.
VS-8.2 The idea that all money must be redeemed in gold or silver is one of the worst of superstitions. As long as we adhere to this idea panics are inevitable. As soon as a demand is made for the redemption of a large amount of checks, at any one time, it is found that the supply of coin is utterly inadequate. As people believe that checks can be redeemed in no other manner, public confidence is destroyed. This results in forcing a large number of checks, etc., out of circulation, and causes a greater stringency in financial circles than the largest exports of gold. That credit money must be redeemed, if it is to be of any value whatsoever, has been already demonstrated, but why it should always be necessary to redeem it in one of two commodities, is something for which all the sophistry of modern political economists is incapable of offering even a reasonable explanation. When a man wishes to use money he purchases something with it, that is, he redeems it in merchandise. Coin is sometimes melted, in which case it ceases to be coin. It has been converted into merchandise by a different method, for gold and silver are always merchandise though not always money. If people realized that credit money would be good if directly redeemable in merchandise, that is, if it had the power of purchasing the goods they require without the intervention of coin, the solution of the financial question would be near at hand.
VS-8.2 When any person goes to a banker to borrow money, the banker examines the security offered. If it is adequate the loan is made. As the borrower usually obtains his loan from the banker with whom he deposits his money, he often has the amount placed to his credit at the bank subject to check. Then the circle of exchange goes on revolving, often not a cent of the money is ever taken from the banker’s vaults. But even if the borrower receives the amount of the loan in cash, the banker gives him bank notes, greenbacks and other forms of credit money for the greater part of it, and only a very small amount in coin. In other words, as Mr. Hepburn says, “the banker merely swaps credit.” Furthermore, the borrower probably pays away this money in a few days and it is again deposited in the bank. So in reality the banker lends the “borrower” absolutely nothing. He simply lets him use the bank’s credit in exchange for his own, the soundness of which the banker has previously examined. He examines his customer’s credit, and finding it good, he proclaims this fact to the world, a transaction very similar to that of certifying a depositor’s check.
VS-8.2 If the borrower’s credit is good enough for the banker, why is it not good enough for the people? It is. All that is necessary is to put into operation machinery by which they can be assured that the idiudal’s credit is good. This is the keynote to the solution of the money question.
VS-8.2 “Now, the whole problem of the circulation consists in generalizing the bill of exchange; that is to say, in making the bill an anonymous title exchangeable forever, and redeemable at sight, but only in merchandise and services.
VS-8.2 “Or, to speak a language more comprehensible to financial adepts, the problem of the circulation consists in basing bank-paper, not upon specie, nor bullion, nor immovable property, which can never produce anything but a miserable oscillation between usury and bankruptcy, between the five-franc piece and the assignat; but by basing it upon products.
VS-8.2 “I conceive this generalization of the bill of exchange as follows:
VS-8.2 “A hundred thousand manufacturers, miners, merchants, commissioners, public carriers, agriculturalists, etc., throughout France, unite with each other in obedience to the summons of the government, and by simple authentic declaration, inserted in the “Moniteur” newspaper, bind themselves respectively and reciprocally to adhere to the statutes of the Bank of Exchange; which shall be no other than the Bank of France itself, with its constitution and attributes modified on the following basis:
VS-8.2 “1st. The Bank of France, become the Bank of Exchange, is an institution of public interest. It is placed under the guardianship of the State, and it is directed by delegates from all branches of industry.
VS-8.2 “2d. Every subscriber shall have an account open at the Bank of Exchange, for the discount of his business paper; and he shall be served to the same extent as he would have been under the conditions of discounting specie; that is, in the known measure of his faculties, the business he does, the positive guaranties, the real credit he might reasonably have enjoyed under the old system.
VS-8.2 “3d. The discount of ordinary commercial paper, whether of drafts, orders, bills of exchange, notes of demand, will be made in bills of the Bank of Exchange, of denominations of twenty-five, fifty, one hundred, and one thousand francs.
VS-8.2 “Specie will be used in making exchange only.
VS-8.2 “4th. The rate of discount will be fixed at ....... per cent., commission included, no matter how long the paper has to run. With the Bank of Exchange, all business will be finished on the spot.
VS-8.2 “6th. Provisionally, and by way of transition, gold and silver coin will be received in exchange for the paper of the bank, and at their nominal value.
VS-8.2 “Is this a paper currency?
VS-8.2 “I answer unhesitatingly, No; it is neither paper money, nor money of paper; it is neither government checks, nor even bank bills; it is not in the nature of anything that has hitherto been invented to make up for the scarcity of specie. It is the bill of exchange generalized.
VS-8.2 “The essence of the bill of exchange is constituted, first, By its being drawn from one place on another; second, By its representing a real value equal to the sum it expresses; third, By the promise or obligation on the part of the drawee to pay it when it falls due.
VS-8.2 “In three words, that which constitutes a bill of exchange is exchange, provision, acceptance.
VS-8.2 “As to the date of issue, or falling due; as to the designation of the places, persons, object – these are particular circumstances which do not relate to the essence of the title, but which serve merely to give it a determinate, personal, and local actuality.
VS-8.2 “Now, what is the bank paper which I propose to create?
VS-8.2 “It is the bill of exchange stripped of the circumstantial qualities of date, place, person, object, term of maturity, an reduced to its essential qualities, – exchange, acceptance, provision.
VS-8.2 “It is, to explain myself still more clearly, the bill of exchange, payable at sight and forever, drawn from every place in France upon every other place in France, made by one hundred thousand drawers, guaranteed by one hundred thousand indorsers, accepted by one hundred thousand subscribers drawn upon; having provision made for its payment in one hundred thousand workshops, manufactories, stores, etc., of the same one hundred thousand subscribers.
VS-8.2 “I say, therefore, that such a title unites every condition of solidity and security, and that it is susceptible of no depreciation.
VS-8.2 “It is eminently solid; since, on one side, it represents the ordinary, local, personal, actual paper of exchange, determined in its object, and representing a real value, a service rendered, merchandise delivered, or guaranteed by the contract, in solido, of one hundred thousand exchangers, who, by their mass, their independence, and at the same time by the unity and connection of their operations, offer millions of millions of probability of payment against one of non-payment. Gold is a thousand times less sure.
VS-8.2 “In fact, if, in the ordinary conditions of commerce, we may say that a bill of exchange made by a known merchant offers two chances of payment against one of non-payment, the same bill of exchange, if it is indorsed by three, four, or a greater number of merchants equally well known, there will be eight, sixteen, thirty-two, etc., to wager against one that three, four, five, etc., know merchants will not fail at the same time, since the favorable chances increase in geometrical proportion with the number of indorsers. What, then, ought to be the certainty of a bill of exchange made by one hundred thousand well-known subscribers, who are all of them interested to promote its circulation?
VS-8.2 “I add that this title is susceptible of no depreciation. The reason for this is found, first, in the perfect solidity of the mass of one hundred thousand signers. But there exists another reason, more direct, and, if possible, more reassuring: it is that the issues of the new paper can never be exaggerated like those of ordinary bank bills, treasury notes, paper money, assignats, etc.; for the issues take place against good commercial paper only, and on the regular, necessarily limited, measured, and proportionate process of discounting.
VS-8.2 “In the combination I propose, the paper (at once sign of credit and instrument of circulation) grows out of the best business paper, which itself represents products delivered, and by no means merchandise unsold. This paper, I affirm, can never be refused in payment, since it is subscribed beforehand by the mass of producers.
VS-8.2 “This paper offers so much the more security and convenience, inasmuch as it may be tried on a small scale, and with as few persons as you see fit, and that without the least violence, without the least peril.
VS-8.2 “Suppose the Bank of Exchange to start at first on a basis of 1,000 subscribers instead of 100,000: the amount of paper it would issue would be in proportion to the business of these 1,000 subscribers, and negotiable only among themselves. Afterwards, according as other persons should adhere to the bank, the proportion of bills would be as 5,000, 10,000, 50,000, etc.; and their circulation would grow with the number of subscribers, as a money peculiar to them. Then, when the whole of France should have adhered to the statutes of the new bank, the issue of paper would be equal, at every instant, to the totality of circulating values.
VS-8.2 “I do not conceive it necessary to insist longer. Men acquainted with banking will understand me without difficulty and will supply from their own minds the details of execution.
VS-8.2 “As for the vulgar, who judge of all things by the material aspect, nothing for them is so similar to an assignat as a bill of the Bank of Exchange. For the economist, who searches the ides to the bottom, nothing is so different. They are two titles, which, under the same manner, the same form, the same denomination, are diametrically opposed to each other.” (P. J. Proudhon, Banque d’Exchange, [Online editor’s note: Sic, for “Échange.” – RTL] p. 23.)
VS-8.2 This scheme is not unlike the Sub-Treasury scheme of the Farmers’ Alliance. While I consider it to be economically correct, it possesses on feature to which I strongly object. That feature, while considered by many to be a source of strength, is really the rock upon which it would surely sink, as have many similar schemes. It is the proposal to place the whole business under the control of the State.2
VS-8.2 The Rhode Island land bank, the Argentine Republic land bank, John Law’s French land bank, the Michigan wild cat banks, all are evidences of the corrupting influence of State interference with finance. The founders of all these banks proposed – with various minor differences of detail – that the State should issue legal tender notes to the extent of 50 per cent. of the value of land, and receive a mortgage on the land in return. But the valuation of the land was left to men who held their offices on the strength of a political pull – not very good evidence either of integrity or common intelligence, to say nothing of financial ability – men who were under political obligations to some, and laboring under a load of enmity to others. The decision of these men was final. Their welfare never depended upon the soundness of their business methods, nor did the customers of the bank realize that they were individually responsible for the affairs of the enterprise. The officers held their positions for stated periods and the people were helpless till next election. The result was what might have been expected. Large sums were lent on land which possessed almost no value. The money at once depreciated in value. This depreciation was met by stricter legal tender laws. Men were made liable to imprisonment for refusing to accept these notes at their face value. Rather than submit to such tyranny, merchants closed their stores and business was entirely suspended.
VS-8.2 The scheme suggested by Col. Wm. B. Greene removes this objectionable feature. While he here makes land the sole basis of value, this is only done as a beginning. He proposed ultimately to extend the same privilege to all forms of good security – machinery, buildings, grain, etc. His idea is tabulated in a petition to the Legislature of Massachusetts, asking for a law embracing the following provisions:
VS-8.2 “1. The inhabitants, or any portion of the inhabitants, of any town or city in the Commonwealth, may organize themselves into a Mutual Banking Company.
VS-8.2 “2. Any person may become a member of the Mutual Banking Company of any particular town, by pledging real estate situated in that town, or in its immediate neighborhood, to the Mutual Bank of that town.
VS-8.2 “The Mutual Bank of any town may issue paper money to circulate as currency among persons willing to employ it as such.
VS-8.2 “Every member of a Mutual Banking Company shall himself, and be bound, in due legal form, on admission, to receive in payment of debts, at par, and from all persons, the bills issued, and to be issued, by the particular Mutual Bank to which he may beling; but no member shall be obliged to receive, or have in possession, bills of said Mutual Bank to an amount exceeding the whole value of the property pledged by him.
VS-8.2 “5. Any member may borrow the paper money of the bank to which he belongs, on his own note running to maturity (without indorsement), to an amount not to exceed one-half of the value of the property pledged by him.
VS-8.2 “6. The rate of interest at which said money shall be loaned by the bank shall be determined by, and shall, if possible, just meet and cover the bare expenses of the institution.
VS-8.2 “7. No money shall be loaned by the bank to persons who do not become members of the company by pledging real estate to the bank.
VS-8.2 “8. Any member, by paying his debts to the Mutual Bank to which he belongs, may have his property released from pledge, and be himself released from all obligations to said Mutual Bank, and to holders of the Mutual Bank money, as such.
VS-8.2 “9. No Mutual Bank shall receive other than Mutual bank paper money in payment of debts due to it except at a discount of one-half of one per cent.
VS-8.2 “10. The Mutual Banks of the several counties in the Commonwealth shall be authorized to enter into such arrangements with each other as shall enable them to receive each others’ bills in payment of debts; so that, for example, a Fitchburg man may pay his debts to the Barre Bank in Oxford money, or in such other Worcester-County money as may suit his convenience.” (W. B. Greene, Mutual Banking, pp. 44-45.)
VS-8.2 This money would be as nearly perfect as it is possible to make it. Every member of the bank, being pledged to accept the notes at par, would practically be an indorser of those notes and, as Proudhon has shown, this would make the bank absolutely secure. Every borrower would have a personal interest in seeing that no loans were made except upon the best security. Should any customer find that risky loans were being made, he would hasten to pay off his mortgage and release himself from all further responsibility. He would then go to the opposition bank across the street and get what money he needed from it. A bank whose currency showed signs of depreciation would not be able to carry on business five minutes, in which case, who would be the losers? The holders of the bills would demand their redemption by the members of the bank, either in goods or in the bills of more substantial banks. Failing this, they would seize all the securities and sell them to the highest bidder, and so redeem the notes. The only losers would be those who were endeavoring to cheat the public by dishonest methods of banking.
VS-8.2 It will be observed that Mutual Bank money need not necessarily be redeemed in the property mortgaged to the bank. When any customer of a bank receives the money for goods, he redeems the money in those goods. When he takes this money to the bank to release his property from the mortgage, eh cancels both the money and his obligation to the bank. The security he gives will only be called into requisition if his other means of redeeming the notes fail.
VS-8.2 In order that the notes of the various banks might gain a wider circulation, clearing-houses would be established. These clearing-houses would stand in the same relation to the bank as the banks would to the individuals. Each bank belonging to a clearing-house would pledge itself to accept all notes bearing the clearing-house indorsement. So every bank would have the same interest in stopping any lax methods in the clearing-house, as the individual member would have in seeing that his bank was doing business in a legitimate manner. The clearing-house would in this manner be a source of extra security to the public, as well as a means of extending the circulation of the notes.
VS-8.2 Every attempt to issue money on poor security would be checked at once by the selfish business interests of the members of the banks. By working through the idea of individual responsibility, we make selfishness of the greatest use.
VS-8.2 If one of these banks were to charge interest, there being nothing to stop other banks from opening, it would gain no patronage. When men can use their own credit for the mere cost of bookkeeping and insurance, they are not going to pay a banker 6 per cent. per annum to let them use his. Thus competition, relentless and universal, may abolish interest by giving us a sound currency, in sufficient volume to meet all requirements.
VS-8.2 When the present financial system broke down in 1893, recourse was had all over the country to various modifications of this system. In nearly every large city clearing-house certificates were issued to meet the emergencies of the times. These certificates were based upon security far poorer than that proposed in connection with the Mutual Banks. Yet they performed, to a large extent, the functions of money at one of the most critical periods of our financial history. Scrip, similar to that mentioned as having been issued by the Kuner Pickle Co., was circulated in many parts of the United States, and that in spite of the fact that it was absolutely illegal for anyone to issue it. In ma[n]y cases it was suppressed by the government, but still a large amount was in circulation for a time, and that time, though short, was when confidence was very much shaken and the chances of failure were a hundred times greater than under normal conditions. Surely a system which can stand such a test is at any rate worthy of a fair trial.
VS-8.2 The orthodox argument against such a system, that an increase in the volume of money necessarily necessarily causes a depreciation of its purchasing power, has already been answered. There are only two reasons why money depreciates in value. One is that the security on which it is based is less than its face value. The other, a fluctuation of the value by which the money is measured. One is a depreciation of the basis, the other of the standard, of value.
VS-8.2 This plan surely provides for an ample basis, as it demands that notes shall only be issued to half the value of the property pledged. But so far nothing has been said about the standard of value by which Mutual Bank notes are to be measured. There is no reason why Mutual Bank notes may not be measured by any standard whatsoever. The notes may read, “This note will be received by the members of the First Mutual Bank in payment of all debts due to them, to the value of 100 grains of gold,” or “to the extent of ten pounds of steel,” or to the extend [sic] of any certain amount of any given commodity.
VS-8.2 The advisability of having a standard as nearly stable as possible has already been pointed out. Under free competition there would be more prospect of discovering what that standard is, than under our present system, in which gold is rigidly adhered to. That gold fluctuates in value is not denied by none. Whether it fluctuates less than any other commodity can best be determined by a little experimenting. Such experiments are impossible to-day, but would be easy under free conditions.
VS-8.2 There is nothing inconsistent between a gold standard and Mutual Banks. If gold can hold its own, when subject to competition, it will certainly continue to be used as a standard, but if it is unable to stand this test, it will be immediately abandoned for something better. The possible fluctuation from this cause could be no greater than it is to-day, but might be far less.
VS-8.2 Free competition having proved gold, let us say, to be the most stable of all commodities, and so caused it to be adopted as the standard of value, any person will accept a note, of the face value of 100 grains of gold, at par, as long as he knows that it will be redeemed in commodities to that extent, by the issuers of the note.
VS-8.2 It has been shown that notes which were not based upon good and well recognized security would be driven out of circulation at once by competition. So the only notes which could be issued would be those which were incapable of depreciation or fluctuation, save such as is caused by the fluctuation in the value of the commodity in which they are measured. Even this fluctuation would be probably less than it is to-day. So we may say, Mutual Bank notes are practically incapable of depreciation, no matter what their volume, because they must always be based upon good security. Being incapable of depreciation, and the possible supply being limited only by the total amount of wealth in the community, these notes would form the most perfect currency the world has ever known. Yet they are practically prohibited by the law which says, “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.” (United States, Act of 8th Feb., 1875, Sec. 19. See also Sec. 3412 and 3413, Revised Statutes of the United States, 1878.) In addition to this nearly every State has a law like the following:
VS-8.2 “SECTION 866, GENERAL STATUTES OF COLORADO. If any person, number of persons, or corporation in this State, without special leave form the legislative assembly, shall emit or utter any bill of credit, make, sign, draw, or endorse any bond, promissory note or writing, bill of exchange or order, to be used as a general circulating medium and in, lieu of money or other currency, every such person or persons, or members of such corporation assenting to such proceedings, being thereof duly convicted, shall pay a fine not exceeding five hundred dollars, or be imprisoned not exceeding one year. Provided, however, That the provisions of this section shall not apply to the issuance or circulation of any certificate or order for the delivery of silver bullion, signed or accepted by any reliable depositary in this State actually having under is control the silver bullion called for in any such certificate or order.” (Session Laws of Colorado, 1893, pp. 124-125.)
VS-8.2 “But how will the supply of Mutual Bank notes be regulated?” asks the captious critic. In the same manner, my dear sir, as the supply of any other commodity. We have seen in Chapter 6, that the supply of all commodities has a tendency under free conditions to equal the demand. This is as true of money as of anything else. Establish free conditions and the supply will regulate itself.
VS-8.2 “But,” the critic again objects, “you have denied that the value of money varies as the supply varies. It is the variation of the value in relation to the supply that causes this equilibrium between supply and demand.” I have said nothing of the kind. I said that the purchasing power of money is not necessarily affected by the supply. But the supply does directly affect the rate of interest, and the interest is the source from which the banker – the dealer in money – derives his income.
VS-8.2 When an extra demand for money is felt, it is manifest in an increase in the rate of interest. This will cause the banker to put more money upon the market, and so the arte of interest will be reduced. Similarly, when the demand is supplied, the rate of interest will fall. As soon as it falls below the labor cost, some bankers will seek more remunerative occupations, the issue of money will decrease and the rate of interest will rise. Thus the rate of interest will ever have a tendency – under free conditions – to remain at the point which just pays the banker for his services, and the supply of money will adapt itself to the demand.

VS-8.n1.1 1 I trust no one will misunderstand me by supposing that I defend the “truck-system.” I am merely using it as an example, in order to point out some economic truths.
VS-8.n2.1 2 I am informed by those who have studied Proudhon’s untranslated works, that he was not really in favor of placing the Bank of Exchange under State control. He merely tabulated the scheme given above for educational purposes during a political campaign. He afterwards started a similar bank without State aid, but this was stopped, almost before it was organized, by the imprisonment of its founder. [Online editor’s note: Proudhon was imprisoned in 1849 for criticising Louis Bonaparte. – RTL]

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