If the money lenders could all act in concert, so as never to raise the rate of interest beyond what industry would bear, they would doubtless promote their own interests by so doing. But as no such concert among them is practicable, each one acts by himself, and takes advantage of the general competition among borrowers, and grasps at the most he can get for the time being, because he knows that, if he does not, some body else will. In this way the greed of the money lenders themselves finally destroys the very industry, which their own capital had created.
Under the author’s system of currency, this cause of the suspension of credit and industry could never exist; for there would always be such an abundance, and even superabundance, of currency to be loaned, that the rate of interest could never be raised. Currency, in any possible amount that could be used, would always be seeking borrowers at the lowest rate at which the business of banking could be profitably done.
A third cause of our suspensions of credit is, that under our present system of currency, there are several times, perhaps many times, as much indebtedness outstanding, as there is of real credit; or as there is of real credit needed for doing the same business. In other words, substantially the same debt is due several, perhaps many, times over, by as many different individuals; when, under a proper system of currency, a single one only of these individuals would have needed to contract the debt.
To illustrate this idea, let us suppose that A is a wool grower in Vermont, and that he sells his wool, on credit, to B, who is a manufacturer at Lowell; that B sells his woollen goods, on credit, to C, who is a jobber of woollens in Boston; that C sells a piece of woollen goods, on credit, to D, who is a general retailer in New Hampshire; that D sells woollen for a coat, on credit, to E, who is a tanner in New Hampshire; that E sells leather, on credit, to F, who is a leather dealer in Boston; that F sells leather, on credit, to G, who is a shoe manufacturer in Lynn; that G sells shoes, on credit, to H, who is a shoe dealer in Boston; that H sells shoes, on credit, to I, who is a jobber in Tennessee; that I sells shoes, on credit, to J, who is a retailer in Tennessee; that J sells a pair of shoes, on credit, to K, who is a farmer in Tennessee.
Each of these persons, except K, we will suppose, has capital enough of his own to carry on his business, if he could only sell for cash, instead of on credit. But K, having no credit at bank, where he ought to have it, if he is worthy of credit at all, is under the necessity of getting credit of retailers, among the rest, of J, for a pair of shoes, of the value of one dollar. J, being under the necessity of giving credit to K, is himself compelled to get credit with I, the jobber in Tennessee. And I, being under the necessity to give credit to J, is himself compelled to get credit with II, the shoe dealer in Boston. And H, being under the necessity of giving credit to J, is himself compelled to get credit of G, the shoe manufacturer in Lynn. And thus the indebtedness runs back to A, the wool grower, who, from selling his wool on credit, may have been obliged to get credit of some retailer, who again was obliged to get credit with some jobber, who was obliged to get credit with some manufacturer, and so on, until the credit stopped in the hands of some one, who could wait for his money until it should come from K, through all the line of intermediate debtors and creditors.
This dollar, which was at last credited by J to K, in the shape of a pair of shoes, is in reality one of those dollars, which were originally credited by A to B, in the shape of wool; all of which have now become scattered over the country by the same process of repeated credits, by which this dollar came at last into the hands of K.
Here, then, were ten, twelve, or more times as much indebtedness created, as there was of real credit given, or needed. K was the only one of the whole number, who really needed credit. If he could have obtained it at bank, where he ought to have obtained it, he would have paid cash, and all this unnecessary indebtedness would have been avoided. But there was no bank in his neighborhood, where he could get credit, and he was therefore obliged to get credit with the retailer. The retailer was obliged to get credit with the jobber, the jobber with the manufacturer, and so on.
Under the author’s system of currency, all this unnecessary indebtedness would be avoided. Banks would be so numerous, that every body, who needed and deserved credit, could get it at bank; and all traffic between man and man would be cash. And thus all that superfluous indebtedness, (over real credit,) which now furnishes perhaps four fifths, or perhaps nine tenths, of all the materials for a “panic,” or “crisis,” or general suspension of credit, would be avoided. And such an event could never occur again.
A fourth cause of the suspensions of credit, that now occur, is that the credit itself, that now exists, is, in its very nature, unsound, by reason of the basis of each credit not being definitely known to the creditor himself. That is to say, no specific property is holden for a specific debt, as in the case of a mortgage. Every thing, in this respect, is loose. The creditor, in each case, has only a general confidence, based upon circumstances, and not upon any intimate knowledge, that all of his debtor’s miscellaneous assets will prove adequate to meet all of his miscellaneous liabilities.
This looseness is carried to a great extent, and necessarily grows out of our present system of currency. Our banks are so inadequate to supply directly all the credit that is needed, that nine tenths, or perhaps nineteen twentieths, of all credit is given by men who are themselves debtors. The same individual gets credit, on the one hand, from every one who will give him credit, and then himself gives credit, on the other hand, to all who will offer him such profits as, in his opinion, will justify the risk—a risk, which, in many cases, is all the more adventurous, because he knows that it must really be run by his creditors, rather than by himself.
In this chaotic mass of indebtedness, no specific property is holden for any specific debt. Every man’s solvency depends upon the solvency of other persons, whose real conditions are unknown to him. The banks depend for their solvency upon the solvency of their debtors; and these latter upon the solvency of their debtors; and these latter upon the solvency of still other debtors; and so on indefinitely. To add to the confusion, every man’s debtors are entangled with every other man’s debtors, by an almost infinity of cross credits, whose ramifications no one can trace. The debtors of many creditors being scattered all over the country, where the law can give the creditors no practical protection. Thus nearly all credit proceeds avowedly upon the principle of risk—even of great risk—and not of certainty.
Under the author’s system of currency, credit would scarcely partake of the character of risk in any degree. In the first place, the banks would be, of themselves, absolutely solvent, and not dependent upon the solvency of their debtors. Next their debtors would be solvent, and known by the banks to be so; because substantially all temporary credit would be obtained at bank, and all trade between man and man be cash. As each man, who should get credit at all, would get it at bank, and generally get all his credit at a single bank, the bank would of course make itself acquainted with his precise condition. And the debt would be virtually a sole mortgage covering his whole property. Thus every debt would be virtually a mortgage upon specific property. With scarcely a qualification, therefore, it might be said that all credit would be perfectly sound. Not even wars, nor political convulsions of any kind, would have any effect upon the stability of such credit. Consequently wars and political convulsions would neither interrupt industry, nor obstruct commerce, nor strike down prices, in any such degree as they do now.
What folly is it to build our industry, as we do now, upon great rickety fabrics of indebtedness—five, ten, or perhaps twenty times larger than they need be, (five, ten, or twenty times as much indebtedness, as of real credit,) every part bound to every other part, in the universal entanglement of indebtedness, and every part trembling and creaking with the weakness of every other part, and the whole standing poised,