High finance

“ Such an arrangement of course favours extravagant credits, high prices, speculation, and crises, just as it did in the United States. It is rapidly giving way to a more complex organisation, in which the farmer has funds of his own, does his short-term borrowing at a bank, and pays cash for his purchases.
Without attempting to comment on intermediate grades of organisation we may consider briefly the manner in which trade and finance are conducted in the north coast countries. ”

“ Now this group in the past through their control direct or inter-related has been able to dominate the centers of credit, the money loaning institutions, such as the great banks and insurance companies. By this means they have been in a measure able to keep to themselves the great industrial exploitations dependent on the ability to finance in the hundreds of millions. More, they have been able to limit to narrow fields such men as myself and other newcomers, who wish to rise to the same financial advantage. ”

“ We need to make sure that the valve of aggregate monetary supply is well controlled, maintain moderate growth in M2 money supply, credit, and aggregate financing, ensure a reasonable, stable level of liquidity, and increase the proportion of direct finance, particularly equity finance. ”

“ Now such a decline of profits threatens worse consequences than the failure to realize expected dividends. For it arouses doubt concerning the security of outstanding credits. Business credit is based primarily upon the capitalized value of present and prospective profits, and the volume of credits outstanding at the zenith of prosperity is adjusted to the great expectations which prevail when the volume of trade is enormous, when prices are high, and when men of affairs are optimistic. ”

“ Next, my Remedy will benefit that great middle class whose savings go to make up the billions in the savings-banks, national banks, trust and insurance companies, which are used by the "System" to secure for themselves a hundred, a thousand, and ten thousand per cent. interest on their capital, while the owners of these billions must be content with two and a half to four per cent. per annum ”

“ It has already been shown that capital, saved by thrifty folk, is essential to industry as society is at present built and worked; and the financiers are the people who see to the management of these savings, their collection into the great reservoir of the money market, and their placing at the disposal of industry. ”

“ 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. ”

“ For, in my pictures of the three main phases of “finance”—the industrial, the life-insurance and the banking—he, as arch plotter in every kind of respectable skulduggery, was necessarily in the foreground. My original intention was to demolish the Power Trust—or, at least, to compel him to buy back all of its stock which he had worked off on the public. I had collected many interesting facts about it, facts typical of the conditions that “finance” has established in so many of our industries. ”

“ 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. ”

“ There can be no worthier purpose in the commercial world than the upbuilding of a great centre of credit designed to finance material enterprise, enrich the world, and extend the benefits of civilization to new lands and new people, based upon the credit supplied by the banker, the money provided by the speculator and investor, and the safeguards afforded by the Stock Exchange. ”

“ The biggest borrowers of money, in most countries, are the Governments, and so international finance is largely concerned with lending by the citizens of one country to the Governments of others, for the purpose of developing their wealth, building railways and harbours or otherwise increasing their power to produce.
Money thus saved and lent is capital. So finance is the machinery that handles capital, collects it from those who save it and lends it to those who want to use it and will pay a price for the loan of it. This price is called the rate of interest, or profit. ”

“ The conclusion was inevitable, that there have been no acknowledged or even known, fundamental principles of finance operating in any of the many systems of the many nations, and that the so-called money of the world is not now, nor ever was, money, in the scientific sense of that term. ”

“ Running through the above statement of the independent doctrine of finance, we see that three ideas are most prominent. First, a desire that the government supersede avaricious man and blind nature in the creation and distribution of money, in order that money may be a stable purchasing power. Second, a determination that money shall no longer be a commodity to be bought, and sold, and manipulated, a leech upon labor in the hands of a few, but a convenience of trade, accessible to the many at first cost. ”

“ 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. ”

“ Interest upon capital must be charged, and risk of fluctuation in the value of that which is to be received in payment added. Hence high prices, acting as a protection to the foreign producer, who receives nothing in exchange for the products of his skill and labor except a currency good, at a stable value, the world over It seems to me that nothing is clearer than that the greater part of the burden of existing prostration, for the want of a sound financial system, falls upon the working man, who must after all produce the wealth, and the salaried man, who superintends and conducts business. ”

“ When the interest rate is five per cent., the sacrifice of any unit of regular income permits the spending of twenty times that amount for present enjoyment. The advantages of these various methods tend to equilibrium. If the owners of developed productive agents hold them at too high a capitalized value, investors will apply their efforts and savings to duplicating these forms of wealth. ”

“ We build railways, put millions into steel plants, "boom" land sites, and form combinations of all kinds, employing the credit facilities granted by the banks, or throwing the securities on the stock market. We "water" the stock or, if that be forbidden by law, we drive the market quotations to a high point, because we think that this is warranted by prospective earnings. ”

“ The high price of public stocks and indeed of all species of stocks, the reduction of the public debt, the unimpaired credit of the general government, and the large amount of existing bank-stock in the United States leave no doubt of the practicability of obtaining the necessary loans on reasonable terms. ”

“ 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. ”

“ But the market value of wealth, or of real capital, expressed in current prices, may rise or fall so greatly within a short time that there may be extraordinary increases or decreases in credit facilities producing illusions and consequences that lead to painful corrections, particularly when there is the fictitious appearance of increased capital that is really only a development of over-expanded credit. ”

“ 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. ”

“ Nearly half a century has elapsed since this essay was written; finance has made great progress, particularly in the United States, where, under peculiar circumstances, a succession of violent convulsions ended in building up a completely new system of currency and banking ”

“ They gather loanable funds, reduce hoarding, make money move more rapidly, and create a central market between borrowers and lenders for the sale of credit. While not creating more physical wealth directly, they add to the efficiency of wealth ”

“ In times of continued business prosperity very high rates are demanded for the use of money, because the liquid capital of the country, to a large extent, has been converted into fixt forms, in the development of new mines, the building of new factories and railroads, and in the improvement and extension of existing properties. These high rates have the effect of reducing the price level of investment securities because people having such securities are apt to sell them in order to lend the money so released, thus maintaining the parity between the yields upon free and invested capital. ”

“ 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. ”

“ With higher interest, the value of land, railroads, and other durable capital will be lower because the value depends on future earnings or future services, and these are now discounted at a higher rate.*36 The borrower, in paying back an equal purchasing power over consumable goods and services, is paying back a much higher purchasing power over such things as land, houses, and factories—a much higher purchasing power over future income—than he borrowed. ”

“ These loans, being drawn from capital (in lieu of taxes, which would generally have been paid from income, and made up in part or altogether by increased economy) must, according to the principles we have laid down, tend to impoverish the country: yet the years in which expenditure of this sort has been on the greatest scale, have often been years of great apparent prosperity: the wealth and resources of the country, instead of diminishing, have given every sign of rapid increase during the process, and of greatly expanded dimensions after its close. ”

“ When banks lend on collateral security of corporation stocks to the buyers of those stocks, they are, in effect, financing the corporation itself. [483] Industries differ widely in the extent to which they depend on the money market for their finances. The difference depends often less on the nature of the industry than on the type of the industrial organization. An individual farmer cannot get the bulk of his credit that way! ”

“ All this capital is now lent at interest, and made available for production. Capital thus circumstanced forms a large portion of the productive resources of any commercial country; and is naturally attracted to those producers or traders who, being in the greatest business, have the means of employing it to most advantage; because such are both the most desirous to obtain it, and able to give the best security. Although, therefore, the productive funds of the country are not increased by credit, they are called into a more complete state of productive activity. ”

“ But though a funded debt is not, in the first instance, an absolute increase of capital or an augmentation of real wealth, yet by serving as a new power in the operations of industry it has, within certain bounds, a tendency to increase the real wealth of a community, in like manner as money borrowed by a thrifty farmer, to be laid out in the improvement of his farm, may in the end add to his stock of real riches. ”

“ The profit is shared between the banker, who receives interest, and a succession of borrowers, mostly for short periods, who, after paying the interest, gain a profit in addition, or a convenience equivalent to profit. The capital itself in the long run becomes entirely wages, and, when replaced by the sale of the produce, becomes wages again; thus affording a perpetual fund, of the value of $200,000,000, for the maintenance of productive labor, and increasing the annual produce of the country by all that can be produced through the means of a capital of that value. ”

“ The credit, which is rendered as secure as possible in all its stages by the accumulating securities of the drawer, acceptor, and endorsers of a bill of exchange, brings capital into activity,—it carries it directly to those channels in which it may be profitably employed,—it conducts it to those channels by a systematic mode of payment for its use, which we call interest, or discount;—and it therefore carries forward accumulation to its highest point of productiveness. ”

“ Money travels rapidly from hand to hand, from one pocketbook to another, from bank to bank, to borrower or drawer, in constant circulation.
"Has any one of your economists calculated how many times an active one-dollar multiplies itself in a year from the time it is first issued from the Treasury? How much does it earn in interest, compound interest, commissions, bonuses, dividends, and profit gain from constantly being shifted from person to person, bank to bank, and loan to loan? ”