Financial situation

“ A steady and constant Revenue drawn from sources that represent the prosperity of the nation,—a Revenue that grows with the growth of national wealth, and is so adjusted to the expenditures, [Pg 445] that a constant and considerable surplus is annually left in the Treasury above all the necessary current demands, a surplus that keeps the Treasury strong, that holds it above the fear of sudden panic, that makes it impregnable against all private combinations, that makes it a terror to all stock-jobbing and gold-gambling,—this is financial health. ”

“ Suddenly, agriculture raised her drooping head, for commerce beckoned her to prosperity. Your people began to pay their debts and to become rich. Public credit was restored; the Treasury began to fill readily. Sources of revenue were explored, certain of continually increasing, equally certain of being never exhausted, except by folly and madness. Indeed, sir, so perfect was the financial machinery that it admitted of no improvement. ”

“ In the course of my task I shall describe such parts of the general financial structure as will place my readers, especially those unfamiliar with its more complicated conditions, in a mental state to comprehend the methods by which the savings they think are safely guarded in the banks, trust and insurance companies, are so manipulated by the votaries of frenzied finance as to be in constant jeopardy. ”

“ The objections usually urged against credit-money are considered and found untenable, the claim that interest naturally accrues to capital is disputed at each successive stand-point, and in the concluding remarks an explanation is given of the present excess of supply over the demand of commodities and service, confirming the conclusion that the correction of this abnormal state is contingent upon the financial measure suggested. ”

“ Under this system all the various revenue officials and tax assessors and gatherers would be dispensed with, and a vast system of economy inaugurated, which, in a few years, would transpose us from a borrowing to a loaning nation, making us the financial example for all the world. ”

“ Every effort is offset by the cost of that endeavor, and unless the result of the effort be more than its cost, its aim, viz., the increase of net worth, is not accomplished.
Relation between Profit and Loss and Financial Elements.—These income-producing efforts are the agencies that bring about the changes in the values of assets and liabilities. Expenses and costs are incurred for the purpose of securing income. Every expense or cost that is settled causes a diminution of business assets, usually of the asset cash. ”

“ What are called financial crises are merely an extension of this critical condition to the larger business community. Financial panics which sometimes follow upon financial crises are a precipitate of this critical condition. ”

“ That’s important. The fact is, financial firms play an essential role in our economy. They provide capital and credit to families purchasing homes, students attending college, businesses looking to start up or expand. ”

“ Into the rigging and launching of almost every big financial operation in the United States during the last twenty years, double-dealing, sharp practice, and jobbery have entered; and, what is more, the men interested have participated in and profited thereby. ”

“ I've practically no capital to enlarge the business, and I don't care to mortgage what I have and pay a high rate of interest when, just at the critical moment, we might have a commercial crisis and I would then lose everything. ”

“ The financial organization is the medium by which the various parts of the industrial and commercial organism are held in harmony. It is by the financial organization that capital is collected and distributed, that the friction of exchanges is reduced to a minimum, and that time is economized, through credit, between production and consumption. The financial system furnishes three indicators—prices, the rate of discount, and the foreign exchanges—through which we may read the operation of economic forces now that their magnitude makes it impossible to inspect them directly. ”

“ Whether we regard the distressed condition of our labourers at home, or look to the disturbed state of affairs abroad, the importance of closely and earnestly considering what may be the wisest course to take, in order to improve our finances, must be equally apparent. ”

“ Some types of undertakings are more subject to the effects of wasting assets than others. Concerns dealing in investments, insurance of all kinds, brokerage and commission, manufacturers’ agents, banking and financial houses, professional firms, and the like, only a small portion of whose capital is tied up in fixed assets, are comparatively unaffected by the charge for depreciation. ”

“ Each determines his expenditure as if the whole of the joint stock were his own. Consequently, in a multitude of partners, where the diminution effected by each separate act of expenditure is insensible, the motive for economy entirely vanishes. ”

“ The capital of those who live on the interest of their own fortunes, has generally sought and found some fixed investment, such as the public funds, mortgages, or the bonds of public companies, which investment, except under peculiar temptations or necessities, is not changed.
§ 3.⁠Fluctuations in the rate of interest arise from variations either in the demand for loans, or in the supply. The supply is liable to variation, though less so than the demand. ”

“ When the treatment of a man's business surplus is spoken of as an investment problem, it is meant, of course, not his working capital, which should be kept in liquid form for immediate needs, but that portion of his surplus which is set aside for emergencies. ”

“ Under the operation of the present system, by which prices are constantly falling and money is constantly increasing in value, the surplus earnings of the people are flowing in a steady stream into the vaults of money-lending institutions, and into the pockets of creditors. ”

“ In other words, a low rate of interest, instead of being, as Child imagined, a cause of national wealth, by which he meant the accumulation of capital, might more truly be said to be a consequence of such accumulation ”

“ The net output thus obtained is obviously for each industry the only fund from which first, wages, salaries, interest on capital, rent, royalties and profits are, or can be, paid, and secondly, taxes, rates, depreciation, advertisement and sales expenses. ”

“ The distribution of provisions, money, and merchandise in just proportions, according to times and places, is the true secret of finance and the source of wealth, provided those who administer it have foresight enough to suffer a present apparent loss, in order really to obtain immense profits in the future. ”

“ In finance the most striking effect in America has, on the first view of it, certainly been good. It has enabled the Government to obtain and to keep a vast surplus of revenue over expenditure. Even before the civil war it did this—from 1837 to 1857. ”

“ But when business is brisk and the prices of commodities are rising, more bills are drawn, and as the fund with which they are discounted is not limitless, it follows that the increasing demand upon that fund sends up the rate. ”

“ The great injury and evil of changing money value comes, however, through fixed money contracts. The enormous amount of bonded indebtedness, railroad, municipal, county, state, and national, makes the slightest change of money value of vast importance, and added to these is the aggregate volume of commercial and private debts. ”

“ Moreover, the settled prices prevailing throughout the country allow of assured calculations and precautions as to business ventures, and permit such a ratio to be established between expenses and income, that at the end of the fiscal year a profit, not a loss, may be counted upon. ”

“ Herein flows the lifeblood of material existence. The economic mechanism is intricate and its parts interdependent, and has suffered the shocks and jars incident to abnormal demands, credit inflations, and price upheavals. ”

“ And further, I apprehend that their confidence of being helped out in the event of ill-fortune, will mainly depend on their opinion of their own individual credit, with, perhaps, some consideration, not of the quantity of the currency, but of the general state of the loan market. They are aware that, in case of a commercial crisis, they shall have difficulty in obtaining advances. ”

“ Discount rates rise higher than usual, securities and commodities fall in price, and as old orders are completed working forces are reduced; but there is no epidemic of bankruptcies, no run upon banks, and no spasmodic interruption of the ordinary business processes. ”

“ Eliminating from interest the element of insurance, and regarding only interest proper, or the return for the use of capital, is it not a general truth that interest is high where and when wages are high, and low where and when wages are low? ”

“ In other words, the forces affecting the distribution of wealth, in so far as they are legal and moral in character, at least, may affect the price-situation, without altering utility schedules. Some social factors, as changes in mode and fashion, will work through the utility schedules, but others will not. One big variable affecting prices which need not, in idea, at least, affect utility schedules at all, and whose main influence is anyhow not directed through them, is the volume of business confidence. This factor we shall analyze in our discussion of credit, infra. ”

“ By tracing the usual course of interest rates and of business conditions throughout one of these cycles, a general idea can be formed of the way in which the joint influences operate to produce price movements. To what extent the course of interest rates is a cause as well as a result of changing business conditions, we shall not attempt here to estimate, but will be content to note carefully the general course which rates for money pursue throughout the cycles. Immediately after a financial crisis, which usually closes an era of great business prosperity, money rates become abnormally easy. ”

“ When insisting that we needed more currency, they evidently did not consider that during a crisis business contracts itself; that people reduce their expenses; that demand falls off, and thereby production is necessarily discouraged; that capital becomes more than ordinarily timid in its investments; that enterprise grows very circumspect, and confines itself to the safest ventures ”

“ The profits of stock in different employments, having been shewn to bear a proportion to each other, and to have a tendency to vary all in the same degree and in the same direction, it remains for us to consider what is the cause of the permanent variations in the rate of profit, and the consequent permanent alterations in the rate of interest. ”

“ In this very dynamic aspect of modern life, one observes a tremendous increase in demand for the costly and enervating indulgencies of conspicuous expenditure and a more than proportionate decrease in the productive powers which contribute to the synchronous supply of the staples of life. Here, indeed, resides a fundamental problem in national cost accounting. ”

“ The economy still follows the absolute height of the expenditure. Later on when the volume of business has increased, the importance of the business expenses dwindles; increases in the expenditure totals matter little so long as the transactions and returns can be sufficiently increased. ”

“ The fact that at the present moment loans are comparatively easy in the money market has been referred to as contradicting this view. It does not contradict it at all. The crisis has crippled enterprise generally, and especially speculative enterprise. ”

“ So far as material conditions are concerned, I must admit that the money crisis weighs heavily upon us. The most disagreeable feature of the present state of affairs is the dreadful scarcity of money. It is impossible to convert anything into cash ”

“ Money accumulating in bank at low rates of interest was often made the basis of observations on the great gain from manufactures, and was pounced upon as evidence of lack of sympathy with the spirit of the time, which was grounded in the deepest needs of the people. ”

“ And so it goes in every business but finance—finance, the most important of all, the business into which is merged all other businesses, the business of taking and preserving the results of all other businesses, of all other human endeavor. ”

“ To inquire searchingly into every nook and cranny of the business, to construct, as it were, for each part a separate balance-sheet of profit and loss, to expand in those directions where further development promises good results, and to curtail activity where loss is already evident, is the very essence of good management. Here, it will be observed, we are using language very similar to that in which we described the principles which govern a business man's expenditure. ”

“ The whole amount of our national riches—the capital of this and of every other country—has been formed by the same slow but certain process of individual savings, and the accumulations of savings, stimulating new industry, and yielding new accumulations. ”

“ The decisive argument in this connection is the fact, upon which we have just touched, that savings are supplied largely by people who are relatively rich, and who become richer when the rate of interest rises. ”

“ It is clear, that when the rate of interest is increased, the gains of money-lenders are augmented, and the money gained will buy a greater quantity of property and [Pg 90] labor. The increased gains of the lender must be paid by the borrowers, by the productions of their own or of others' labor. ”

“ It should insist that our finance and currency concern not alone the large traders, merchants and bankers of our land, but that they are intimately and every day related to the well-being of our people in all conditions of life, and that, therefore, if any adjustments are necessary they should be made in such manner as shall certainly [32] maintain the soundness of our people’s earnings and the security of their savings. ”