This section is from the "The Science Of Wealth" book, by Amasa Walker.
Fallacy 5th. That mixed-currency banks are particularly favorable to those who have little capital, and must, of necessity, depend upon credit, since they increase the facilities for obtaining capital.
Whatever impairs credit and increases the risk of loaning must be unfavorable to those who most need to borrow. Other things being equal, it must be easier to get credit in a community where only one in twenty fails than where one in five fails; the less the risk, the less the hesitation in giving credit. Now, does the credit money of a mixed currency diminish the risk of general credits? Far from it. Common-sense teaches, and statistics prove, that the hazards of credit must be just in proportion to the credit money of any country. Instead, therefore, of being favorable, it is adverse to all persons wanting the use of capital. The hazards of credit in the United States are at least four times as great as they would be under a value money currency.
The more credits are extended, the more difficult it is for persons of limited means to do any thing on their own account. Unless an interest can be secured in some large banking institution, business on a large scale is impossible, because the manufacturer or dealer will give long credit, if he can get credit at the banks. If it be true, as we have seen, that introducing credit into the currency extends all the indebtedness of the country, this must operate to the disadvantage of all men of limited capital.
That all this is quite unnecessary, is proved by the condition of things in the years 1863 to 1865, when no credits were given, all transactions being essentially on immediate payment. The war effected this, by destroying all confidence; but the fact that the business of the country was carried on without extensive credits shows that such were always unnecessary.
A mixed currency, far from being advantageous to persons needing credit, has an entirely opposite influence, and is constantly tending to reduce the number of those who can obtain sufficient to participate in the profits of business.
Fallacy 6th. That, without a mixed currency, banks could not exist, and all the advantages now derived from them would be lost.
Such is the general impression among the masses of the people. Propose to them the expulsion of the credit element; that is, to forbid the issue of notes beyond the specie in hand: the reply comes at once that there would be no object in banking, and we should have no banks.
This view of the matter arises from the fact that we have never had in the United States any banks that did not manufacture currency out of their credit. We have therefore come to regard the two things as inseparable. But this is an entirely erroneous view. Banking and currency-making are two perfectly distinct functions, though here uniformly united.
Banking may be carried on to any degree, and in the most profitable manner, without the issue of a single banknote. This is done in Great Britain, to a wonderful extent, by joint-stock and private banks. Only a very small proportion of all the banks in the United Kingdom issue their own notes; yet they make dividends so large as to astonish us.
As an illustration of this species of banking, we mention the fact, that, while the Bank of England, with a capital of fourteen millions, has deposits, public and private, of but twenty millions on an average, the three principal banks of London, with an aggregate paid-up capital of only
&2,320,000, have on deposit £46,158,105; and that, while the Bank of England declares a dividend of about six or seven per cent, these banks make an average profit of about thirty per cent, and furnish the commercial and manufacturing interest a much larger amount of capital than the Bank of England itself. And yet they manufacture not a dollar of currency. We present the following statement of their condition: —
Net profits Percentage Paid-up capital. Deposits. for 6 mos. per ann.
£2,320,000 £46,158,005 £342,713
Of all kinds of banks, with their branches, there are, in the United Kingdom, about five thousand, a small portion only of them being banks of issue. Yet, as a general rule, all make large dividends. Such as are regarded as "successful," divide from fifteen to twenty-five per cent. It is a curious and instructive fact, that, while the average rate of interest is there only half as great as in the United States, the bank dividends are much greater. The largest dividends are made by those banks which issue no notes whatever.
This fact gives sufficient proof, if any were needed, that, in order to make large dividends, it is not necessary for a well-established, well-managed bank to manufacture currency.
Banks belong to civilization. A bank is an institution intrusted by one class of persons with money to loan another class. The existence of such institutions implies the existence of capital and confidence; and these indicate culture and social elevation. Banks are labor-saving machines, of vast power and utility. Their legitimate purpose is simply to facilitate the use of money, to make it more effective in exchange, to give it greater activity in circulation. This they accomplish. A large amount of capital is collected in one building, fitted especially for the purpose. This gives greater security and convenience than if the same were scattered abroad in many hands, and accidental places of keeping. The lender knows where to go to dispose of his surplus funds; the borrower, where such funds can be obtained. The bank introduces these parties, who otherwise would probably remain Unknown to each other.