INTRODUCTION: SCOPE AND ORGANIZATION

Events in the field of money and banking in recent years have resulted in a substantial shifting of interest in the subject on the part of both the general public and professional economist. The two most conspicuous occurrences are of course the final disappearance of the bimetallic controversy two decades ago and the recent thoroughgoing revision of the national banking system. But in addition to these important changes, many new subjects have pressed forward for attention, among which may be mentioned the development of agricultural credit facilities and of the numerous types of co-operative loan associations and the enormous growth of investment banking. These important developments have seemed to me to necessitate a considerable reorganization in the subject-matter of a general course in the principles of Money and Banking, as well as numerous changes in the relative emphasis to be placed on the various aspects of the subject.

Writers of the school of Dunbar and Walker and their followers were naturally primarily concerned with the financial problems that were uppermost in their time. Accordingly, on the money side they stressed the bimetallic and government paper-money controversies, and on the banking side the operation and regulation of "commercial" banking as exemplified under the national banking system. These questions were all approached from the standpoint of an active present interest and were consequently treated in a more or less controversial manner; that is to say, it seemed of paramount importance at the time to promote sound thinking to the end that "sound money" might be secured. These monetary controversies of a former generation are, however, not relevant to present-day practical interests; they have been superseded by new issues. In the present volume, therefore, the readings on money have been developed and arranged so as to place these controversies in a historical setting in their relationship to the whole development of monetary science. While in the banking field most of the problems of an earlier generation remain for present-day discussion, the important developments that have lately occurred also necessitate, as already indicated, substantial modifications in the methods of analysis.

But irrespective of these changes, it has long seemed to me that the field of Money and Banking has been unduly narrowed by most writers on the subject. The well-known functions of money as a common denominator of value, medium of exchange, etc., are not the only, nor, from some points of view, the most important, functions of money. The usual "scientific" analysis of money fails to indicate the enormous rôle that it plays in the everyday world of affairs, and furnishes a wholly inadequate basis for an understanding of the monetary controversies of history. Similarly, the usual text on banking confines the discussion to such banks as create media of exchange in the form of notes and checks. The present volume attempts to treat both money and banking from a much broader standpoint and to bring the general subject into more vital relationship with actual business affairs.

Part I is divided into eight chapters. It begins with the pecuniary organization of society, covers the origin of money and the use of the precious metals, and the history of paper money and bimetallism with particular reference to American experience, and ends with a descriptive analysis of the present system in the United States. It is in connection with chap. i, "The Pecuniary Organization of Society," that the chief departure is made from the customary treatment of money. This chapter is divided into three sections, as follows: (A) "The Nature and Functions of Money"; (B) "Money, Capital, and Wealth," and (C) "The Rôle of Money in Industrial Society." The first of these treats in classical fashion of the economic functions performed by money in industrial society. The second portrays the confusion that has always existed in the popular mind with reference to money and capital and wealth, while the third is designed to show the relation of the price system to the organization of industrial society in general and the psychological effects of this pecuniary organization on the daily activities of man. The general purpose of this first chapter taken as a whole is to pave the way for an appreciation of the monetary history which follows.

There is an economic side to all the monetary controversies through which we have passed, but there is also another side-one which from a practical standpoint has been of much greater importance. Debasements of the coinage, the demand for the retention of bimetallism, and the numerous paper-money agitations of history have all been vitally connected with the prevalent desire for more money, in the belief that more money means more wealth. Without this

popular confusion on the subject of money and wealth, paper money and bimetallism would never have invaded the field of politics. While we might have had issues of paper money as a means of war finance, such issues would probably have been promptly retired, and, similarly, we should doubtless have abolished bimetallism at an earlier date in the absence of any popular concern over the quantity of money. Under such circumstances, however, discussion of these subjects would have been primarily academic. Most text writers have in fact virtually assumed by their method of treatment that these controversies were mainly academic affairs. They are analyzed from the "scientific" point of view and the workings of economic laws are satisfactorily disclosed, but the tremendous rôle that money has played in society is not usually revealed. Viewed from a broader outlook, the history of money becomes one of the most interesting and human phases of social and economic progress.

A word should be said with reference to the treatment of paper money. It has been customary to discuss the history and principles of regulation of paper money without differentiating between government and bank paper. For instance, Jevons gives an indiscriminate list of the methods that have been employed in the regulation of paper money, some of them relating merely to government paper and others to bank paper. Any attempt to discuss the principles of bank paper money, however, appears to me futile until the student has studied the principles of banking. While, historically speaking, many of the government schemes involved the use of banks as agents, and while the motive for an issue by banks was often not different from that by a government direct, nevertheless the principles governing the regulation of issues by banks are very different from those applying to government issues. In this volume, therefore, bank paper money is not taken up until after the principles of banking have been discussed.

Treatises on banking are usually devoted solely and as a matter of course to what is commonly called "commercial" banking. Indeed, banking and "commercial" banking have been very generally regarded as synonymous terms. Bagehot remarks, for instance, that the Rothschilds are great capitalists but not bankers, while Dunbar in

'True, the public has frequently been concerned over falling or rising pricelevels. Creditors have wished falling prices, or at least opposed a depreciation of the standard, while debtors have frequently desired a cheaper standard of deferred payments. But this question of changing price-levels has been very closely associated in the popular mind with the volume of the currency.

his little classic makes a similar distinction when he says: "In order to be a bank at the present day, an establishment must carry on the purchase of rights to demand money in the future, or securities, and it must also use in some form or other its own engagements for the payment of money upon demand." This conception of banking also finds support in the definition of a bank given in the internal-revenue act of 1866. According to this interpretation savings institutions holding time deposits are not engaged in banking; nor are the great investment houses which annually transfer from investors to borrowers funds amounting to many hundreds of millions of dollars to be regarded as banks. It is obvious, however, that the business world holds no such narrow conception of the banking business. The so-called "commercial" bank with its demand obligations is merely one type of banking institution; and to exclude all other kinds of financial operations is to narrow the field to an extent that gives but a one-sided view of the problems of banking as a whole.

The study of banking has usually been approached by way of the discussion of money as a medium of exchange; hence the customary treatment of money and banking together. It is this method of approach to the subject that is doubtless responsible for the attempt to confine banking within the narrow limits indicated above, for it is only the banks which issue notes and give demand deposits that create media of exchange. While the "economic" function of banks in furnishing society with media of exchange is of fundamental importance and should not be minimized or overlooked, it is at the same time quite as important to consider the "business" function of banks. From the point of view of the business world the chief purpose of banks is to make loans to borrowers. The business man regards his bank as a place to which he may go for assistance when in need-it is a sort of partner in his business venture. The fact that in giving him a loan the bank is creating an inexpensive medium of exchange for the transfer of commodities is from his standpoint of no moment. Similarly, the banker himself views his bank merely as a profit-making institution, the underlying economic function being but an after-reflection at best. Now, since it is the business men and bankers who use, manage, and direct institutions, the problems of banking cannot be fully apprehended unless we understand the business point of view. Since the business view of banking, with all its psychological aspects, is at bottom responsible for the whole problem of credit organization and control, it is important that the

analysis of banking should primarily proceed from the point of view of the actual business world. The underlying "economic" aspects are not overlooked or minimized by this method of approach; on the contrary, the reliability of notes and checks as media of exchange is only the better understood by virtue of such an analysis.

Again, in the customary treatment of banking, legal distinctions have frequently been confused with economic ones. A bank which creates demand obligations in exchange for future rights is said to be engaged in commercial operations; hence the designation of our national and state banks as "commercial banks." Now to classify a transaction as "commercial" should indicate, it would seem, the economic nature of the operation; and this, indeed, is the intent when one says, for instance, that national banks are commercial banks. They are supposed to serve the needs of commerce, that is, to facilitate the production and marketing of consumers' goods, and are not designed to promote investment or the creation of capital goods. Commercial transactions are in their very nature short-time operations, for consumers' goods move rapidly from one class of middlemen to another. Hence loans for commercial purposes may and should be short-time loans. Such quickly liquidating loans are obviously necessary for a bank which makes its obligations payable on demand. The theory underlying the commercial bank is unquestionably sound. But in practice a large percentage of the loans that give rise to demand deposits are in no direct way related to commercial enterprises. Overemphasis on the demand nature of the deposit has too frequently been accompanied by an underemphasis, if not a total ignoring, of the actual uses to which the funds borrowed on short time are devoted.

In fact, short-time borrowings from "commercial" banks are probably more often devoted to non-commercial than to commercial purposes. For instance, the funds from some short-time loans are used for consumptive purposes. In a far greater number of cases, however, they are devoted to speculation and long-time investment. The mere facts that these loans are of short duration, that they give rise to demand deposits, and that collateral security is usually required do not make them commercial loans, even if they are granted by so-called commercial banks. The very fact that collateral is required is evidence enough that they are not of a commercial nature. Genuine commercial loans require no collateral security, for the reason that such loans are self-liquidating.