Moneylending

“ But although, in this case, it is not capital, or purchasing power, that the borrower needs, but money as money, it is not only money that is transferred to him. The money carries its purchasing power, with it wherever it goes; and money thrown into the loan market really does, through its purchasing power, turn, over an increased portion of the capital of the country into the direction of loans. Though money alone was wanted, capital passes; and it may still be said with truth that it is by an addition to loanable capital that the rise of the rate of interest is met and corrected. ”

“ But the business of receiving money on deposit has always been, and is now, universally combined with that of lending it out. A banker does not hoard all the money deposited with him—he gives the greater portion out in loan. The lending of money is as much a part of his business as the receiving of deposits.”
You cannot go into a banker’s and say, “I{183} have come to open an account,” just as you would enter a grocer’s with, “Be so good as send me half a dozen tins of the best sardines.” ”

“ The lending of money without interest, was very common, before the introduction of trade and industry. Money then was considered as a barren stock, incapable of producing fruit; and whenever the quantity of it, in any country, exceeded the uses of circulation, the remainder was locked up in treasures. In that light, the exacting of interest for it appeared unreasonable.
Things are now changed: no money is ever locked up; and the regular payment of interest for it, when borrowed, is as essential to the obtaining of credit, as the confidence of being repaid the capital. ”

“ The short step from this to the common form of modern banking was made when merchants deposited their surplus cash with the money-changer, and he had thus a considerable stock, which he could lend so long as he kept sufficient reserve to meet the demands of depositors. It soon became unnecessary for money to pass at all in large transactions; a man could get a loan from a bank simply by having a deposit ascribed to him on the books, and could assign this loan to others as he chose to pay it out. ”

“ In fact, every banking association is assumed to be a corporation of money lenders. Under ordinary circumstances this corporation is able to loan to individuals whose credit is good all of its capital not otherwise employed in the machinery of the bank, a considerable portion of deposits from its customers, and to a certain extent its own credit in the commercial world. In the case of a national bank a portion of capital is loaned to the government in the purchase of bonds, which are the basis of its circulating notes. ”

“ If the foreigners refuse these, they are asked to make loans secured by the new bonds and notes. The rates of interest offered are so attractive that considerable sums are usually obtained, and the pressure of business activity continues further. Finally the day of reckoning arrives when some incident, usually unimportant in itself, first suggests to the lenders of money that their debtors whom they know to be overextended may not be able to pay their loans. The attempt to collect their loans produces a financial crisis which brings to an end the period of prosperity. ”

“ In our complex modern life, saving and investing take place in many ways. For example, money saved and deposited in a savings-bank finds its way out in a loan on mortgage to help build a house, a factory, or a store; or it pays for bonds, and the proceeds are put into a railroad or some public work, as a school-house, dock, street, etc. In any and all these cases the money deposited in the savings-bank goes ultimately to employ labor and pay wages. So money deposited in any other bank or trust company is loaned out to merchants, manufacturers, and others, and similarly goes to pay wages. ”

“ They have sometimes discounted these bills with their own capital, and if they can re-discount them at a slightly lower rate they gain a difference which at first seems but trifling, but with which they are quite content, because this system of lending first and borrowing again immediately enables them to turn their capital very frequently, and on a few thousand pounds of capital to discount hundreds of thousands of bills; as the transactions are so many, they can be content with a smaller profit on each. ”

“ Here the loan is made on the basis of an anticipated income. Here again the anticipated income is made possible only by the loan; one of the values that enters into the exchange exists only because the exchange is possible. None the less, the credit rests on value. It is a right to an anticipated income. The man who has made the loan has his security in the value which he has lent, plus the present worth of the extra income which the new idea is expected to create. ”

“ Rather than stop payment, he will, of course, make temporary sacrifices—will give high terms to whoever will furnish him with the desired means. If, by depositing securities with his banker, he can get a loan at an advanced rate of interest, well. If not, by offering an adequate temptation, he may mortgage his property to some one having good credit; who either gives bills, or draws on his banker for the sum agreed to. In either case, extra promises to pay are issued; or, if the difficulty is met by accommodation-bills, the same result follows. ”

“ Bank Loans Related to Currency and Loan Funds.—And note now that it is precisely because the business of a bank [Pg 138] is to furnish to its borrower a present purchasing power for his own use that the business of banking becomes the source of the larger part of the circulating medium of society. In their service to their customers the banks create currency; and in creating currency they create loan funds which, in the hands of the holders of them, are available like other currency for any purpose, either lending or other. ”

“ I am well aware that there were a good many persons who could not get all the loans they wanted; but the difficulty in such cases was not that there was not a sufficiency of money in the loan market, but that the security offered was not deemed satisfactory by the lenders. But not only lenders, but also borrowers, had become circumspect and timid, and thus there remained vast quantities of money in the banks which could not find safe and profitable employment. ”

“ And nothing can more surely aggravate the panic than to forbid the Bank of England to lend that money. Just when money is most scarce you happen to have an unusually large fund of this particular species of money, and you should lend it as fast as you can at such moments, for it is ready lending which cures panics, and non-lending or niggardly lending which aggravates them. ”

“ Practically every form of investment in which a man is capable of indulging involves the lending and borrowing of money, the interest exacted being the profit which the lender receives for the use of his capital. The existence of the professional lender, as apart from the ordinary facilities for borrowing money on good security, is obviously due to the fact that it is not every borrower who is in a position to give good security for a loan. ”

“ First of all, let me state the simple fact that when you deposit money in a bank the bank does not put the money into a safe deposit vault. It invests your money in many different forms of credit—bonds, commercial paper, mortgages and many other kinds of loans. In other words, the bank puts your money to work to keep the wheels of industry and of agriculture turning around. A comparatively small part of the money you put into the bank is kept in currency—an amount which in normal times is wholly sufficient to cover the cash needs of the average citizen. ”

“ But when railway shares and bonds, based upon lines of road which were constructed through the rich regions of the Union lying between the Atlantic and the Mississippi river, came upon the market in large amounts, affording ample security for investment and loans, the great banks of Wall Street were quick to appreciate the advantages of loans made upon such undoubted values, which were at all times convertible into cash on the stock exchange. In times of pressure, commercial paper is an inferior asset for a bank, all of whose obligations are payable on demand. ”

“ This compensation is fixed by the competition of the market. The rate of interest is no further lowered by this operation, than inasmuch as it brings together the lender and the borrower in a safe and expeditious manner. The lender incurs less risk, and a larger proportion, therefore, of the holders of capital are willing to be lenders.
When a banker, in addition to his other functions, is also an issuer of paper money, he gains an advantage similar to that which the London bankers derive from their deposits. ”

“ It can hardly be said that there is any profit in loaning money itself; for the interest obtained is generally no more than a fair price or equivalent for the crops, rents, or other incomes, which the property that might be purchased with the money, would yield. But in the loan of credit, there is an actual profit of the whole amount that is received as interest, after paying the trouble and risk of banking. ”

“ Speculative debtors, on the other hand, always thrive on depreciating currency, paying their debts in what costs less exertion. Under appreciating currency, the creditors gain, be they bankers or workmen.
Banking.—The peculiar convenience for saving found by experience in the use of each of these methods of settlement in exchange leads to a natural commingling of all. Coins serve some purposes best, and accounts have a limited range; notes of hand are often desirable, and paper money, if safe, is universally convenient. ”

“ But for their loans, they deal with whatever bank gives them the best rate, or has the funds to spare. In time of tight money, they shift their loans with great frequency. They borrow also from one another. "Money" is "worth money" in New York, and idle funds will be lent by whomever has them for whatever the market will pay, on collateral security on call. When a broker deposits money in his bank borrowed from another bank or another broker, he gets a deposit credit which does get into Kinley's figures—he deposits a certified check, or a bank draft. ”

“ The recognized system of lending upon approved security for a fair and moderate rate of interest removes the irksome, galling sense of obligation, and enables any man to borrow with a feeling that if he receives an obligation he is also conferring one; that if he makes ten per cent, by trading, or a good stipend by his degree, he will divide his profits fairly with the man who served him, and that he110 is helping him in his turn to keep his money together for the sake of his children after him. ”

“ It is at bottom a mutual buying and selling of debts. There is of course a daily balance on one side or the other between every two of these banks, which must be settled in money, because it would never happen in practice that each should owe the other precisely the same sum on any one day; but substantially and almost exclusively the exchange at the Clearing-House is a simple trade in credit-claims. Each bank pays its debts by credits. A merchant is a dealer in commodities, a laborer is a dealer in services, and a banker is a dealer in credits. ”

“ Moreover, the loanable value of money varies under Supply and Demand just like other values; there are always those who want to borrow, and always those who want to lend; both parties must be assumed to know their own minds, and to be equally competent to make their own bargains; it is a case of mutual exchange for a mutual benefit, like all other trade; and the current rate of interest is determined at any one time by the actual free exchanges between borrowers and lenders. ”

“ A legitimate, useful, profitable use of money is to accommodate strangers who come with money that will not circulate in the country. The exchanger gives them current money; they pay a consideration for the convenience; and out of this comes the legitimate profit to be divided between lender and borrower. The rule which applies to one fruitful use of money will apply to a thousand, and, between wise lending and honest borrowing, swamp and forest become field and garden, and mountains wave with corn. ”

“ As to internal loans, on which, after all, we must chiefly depend, there are two things that operate against them, to any [Pg 236] large amount; the want of a sufficient number of men, with sufficient moneyed capitals to lend the sums required, and the want of confidence in those who are able to lend, to make them willing to part with their money. It may be added, that they can employ it to greater advantage in traffic, than by merely lending it on interest. ”

“ But any estimate of the currency needed, or to be needed for the transaction of business, founded upon the amount of deferred payments, is wholly fallacious.
It is equally wrong to suppose that the bankers are the principal money-lenders. The real lenders are those who have sold their produce, the use of their tools or their time, at a price to be paid next week, next month or next year. Every man who has wages due him is as truly a money-lender, to the extent of the wages due, as any banker who accepts a promise to pay in the future for service or value given in the present. ”