This section is from the "The Science Of Wealth" book, by Amasa Walker.
We also see why it is that such banks must be constantly desirous of increasing their loans, by issuing their own credit in the shape of circulation and deposits. The more they can get out, the larger the income. This is the motive power that ensures the constant expansion of a mixed currency to its highest possible limit. The banks will always increase their indebtedness when they can, and only contract it when they must.
These facts show, too, why a mixed currency exists at all; viz., because those who create it make a profit both on their capital and credit, and as much on the latter as the former.
But still another view of the currency is necessary, to show the preponderance of the credit over the value element in the actual currency: —
1860. Circulation, as before........$207,102,477
Specie, or value.......... 83,594,537
This will give eighteen cents and one mill on the dollar as the value element, and eighty-one cents and nine mills as the credit element, in the entire currency; credit being to value as more than five to one.
But yet another view of the system is necessary, if we would understand the true position of the banks in relation to each other, in case of an actual demand for specie, occasioned by want of confidence or demand for exportation.
Immediate liabilities of the banks of the United States, 1860: —
Due other banks....... 55,932,918
Immediate resources: —
Cash items......... 19,331,521
Notes of other banks...... 25,502,567
Due by other banks......
Excess of immediate liabilities over immediate re-
Diagram No. 2 presents to the eye the facts just stated, and shows the real position of the banks in reference to the convertibility of their currency.
It appears that the banks owed over three hundred and thirty-five millions on demand, which they had no means in their possession to discharge, but for which they held the following ultimate resources: —
Real estate.............. 30,782,131
Other investments........... 11,123,171
This relation between the excess of immediate liabilities and the mass of ultimate resources, is exhibited in Currency Diagram No. 3.
From this view of the matter, we find that the banks had a surplus of four hundred and sixty-six millions for the payment, the final payment, of their immediate liabilities.
It is, therefore, quite clear that these notes and deposits are sufficiently secure, if the loans and other property of the bank prove to be reliable. But this is not the main point of interest.
The grand problem of mixed currency is to realize enough, at the necessary time, out of Fig. 1, to meet the demands of Fig. 2; that is, from eight hundred and four millions of stock, loans, &c., to meet the three hundred and thirty-five millions of instant obligations. The latter is all payable on demand. The former is, in part, a permanent investment; and, in part, falls due from one day to six months ahead.
The question, then, upon which the convertibility of the currency depends, is as follows: Will the obligations constituting the item of " loans" be paid in fast enough to meet the excess of immediate liabilities over immediate resources? That question we shall answer in the sequel.